First American Financial

April 3, 2013

TO OUR STOCKHOLDERS

2012 was a successful year for First American. Strong refinance and commercial activity, combined with the
beginning stages of recovery for the residential purchase market, drove our total revenue to $4.5 billion, a 19
percent increase over 2011. Additionally, the leverage we gained from the streamlined, cost-efficient operations
we built over the past few years pushed our net income to $2.77 per share, up from $0.73 last year.

Of greatest note was the improvement in our title margins and the company’s return on equity. In mid-2010, we
set the challenging goal for our title segment to deliver a pretax margin of 8 to 10 percent by year-end 2012. I’m
proud to say that we exceeded this, delivering an 11.3 percent margin – our best margin since the 2006 peak of
the mortgage cycle, when the nation’s mortgage originations were double what they were in 2012. We also set a
goal for the company to achieve a return on equity of 10 to 12 percent. I’m pleased to report that we surpassed
this, as well, ending the year with a 13.8 percent return.

Throughout the year, we stayed focused on the company’s long-term objectives, which include pursuing
profitable growth, improving the customer experience, developing our employees, and continuing to operate
efficiently. Our focus on these priorities contributed to a 94 percent total return to stockholders in 2012,
including the doubling of our annual dividend to $0.48 per share. In short, it was great year for stockholders.

SEGMENT HIGHLIGHTS

Title Insurance and Services

2012 revenues for our Title Insurance and Services segment totaled $4.2 billion, up 19 percent from the prior
year. Continued low interest rates and the federal government’s Home Affordable Refinance Program (HARP)
helped to keep the refinance market strong. Our purchase business, which generates a higher title premium per
transaction as compared to refinance transactions, started to grow again – a positive sign that the real estate
market is recovering. Our commercial business was also strong, with revenues up 24 percent year-over-year.

Our title production was improved by new technologies and processes put into place in 2012. For example, we
implemented a significant enhancement to our title production platform that enables further automation of the
title underwriting process. Defined business rules now let us complete the title search and exam process more
efficiently and consistently. As a result, we were able to process the increase in open orders during the year
without adding to our production personnel expenses. In an effort to further enhance underwriting, we also
established a special team that has successfully employed advanced methods and tools to identify transactions
impacted by constantly changing fraud practices.

In 2012, we completed an effort to significantly expand our title plant footprint. Our title plants – searchable
databases that contain transaction and ownership information on real property – now cover more than 500
counties, or 70 percent of U.S. real estate transactions, solidly positioning us as the largest provider of this type
of data. Our title operations use these databases within our title search process, reducing cost and risk through
improved accuracy. We also generate revenue through the sale of this information to third-party title providers
and other real estate-related businesses across the nation.

Specialty Insurance

Our Specialty Insurance segment’s revenues rose to $315 million in 2012, a healthy increase of 10 percent from
2011. This growth, combined with a favorable loss ratio and continued expense management, resulted in a
segment pretax margin of 15.1 percent, up from 13.9 percent in the prior year.

Within this segment, both our home warranty and property and casualty businesses benefitted from the
improving purchase market. The home warranty group realized increased sales through our real estate channel,
while continuing its direct-to-consumer purchase and renewal efforts. Our property and casualty business made
enhancements to its marketing strategy that are expected to drive premium growth over the next several years.

CAPITAL MANAGEMENT

Throughout the year, our approach to capital management remained consistent as we focused on investing in our
core business, making strategic acquisitions, and returning capital to our stockholders.

Our improved profitability, coupled with a decline in paid title claims, drove a meaningful increase in our
operating cash flow to $430 million, up over 200 percent relative to last year. Given our strong cash flow and
outlook for the business, we doubled our annual dividend in 2012 to $0.48 per share.

During the year, we also strengthened our financial flexibility. In April, the company entered into a new, four-
year $600 million revolving credit facility to enhance our liquidity position. And in early 2013, we completed a
$250 million offering of 10-year, 4.3 percent senior notes, which we used to fully pay down our credit facility.

During 2012, we sold our remaining position in CoreLogic common stock for a net gain of $40.4 million. At year
end, the company’s debt-to-capital ratio was a conservative 9 percent, or 12 percent on a pro forma basis
following the recent debt offering. We entered 2013 with significantly improved financial flexibility to execute
on our growth and capital management strategies.

LEADERSHIP

I would like to acknowledge two gentlemen for their valuable contributions to First American as they now retire
from our board of directors. Lewis (Pete) Douglas Jr., known for his wit, wisdom and deep insight, helped to
shape First American for nearly five decades. The Hon. William G. Davis helped us to navigate the Canadian
marketplace during more than 20 years on our board. We thank them both for their skillful guidance and support
of First American.

We are pleased to welcome Tony Anderson and Mark Oman to our board. Tony joined us in November, after
serving in key positions at Ernst & Young LLP for 35 years. His financial background and leadership experience
will prove valuable as we focus on our company’s growth strategies. Mark joined our board in March, 2013,
following more than 30 years with Wells Fargo & Company. His insights into the mortgage industry and the
needs of our customers will help us in our efforts to grow our core businesses and improve our customers’
experience.

A significant management change also took place in March, 2013, as Mark Seaton was promoted to chief
financial officer of First American Financial Corporation. Mark began his career with us in 2006, most recently
serving as senior vice president of finance. His experience overseeing our company’s financial planning,
treasury, investment, and investor relations activities, along with his strategic-planning abilities, makes Mark an
ideal choice for the CFO role. He succeeds Max Valdes, who has served the company well for 25 years. Max has
exhibited strong leadership and played a critical role in implementing many of the initiatives that led to our
company’s improved financial performance. While his good counsel will be missed, we’re pleased that Max will
remain with First American through March of 2014 to assist with the transition.

OBJECTIVES

2012 was a pivotal year for First American. It was the first full year in which we shifted from streamlining and
stabilizing our operations to now focusing on our company’s growth. Throughout its history, First American has
taken a prudent, long-term view of the market and set our corporate objectives accordingly. The multi-year
approach we’re taking with our current priorities follows suit.

Grow our Company
We’re focused on growing our company by increasing profitable market share within key customer groups and
geographic markets. As part of this effort, we’ve initiated an aggressive recruitment campaign to attract the top
customer-focused employees to our company. We expect this to pay dividends in 2013 and for years to come.
We’re also taking steps to strengthen our customer relationships, and have integrated enhanced methods for
measuring and monitoring our activities that increase accountability and encourage sales.

We’re pursuing strategic acquisitions within our core title and settlement services businesses. Acquisitions made
in 2012, for example, increased our presence in Texas, California, and Minnesota. Additionally, our purchase of
the leading mortgage processing business in Australia provides a foundation to help us grow our business in that
market.

Improve the Customer Experience
We continue to make it easier for customers to do business with us through customer-facing technology
solutions. Our innovative myFirstAm™ technology, with approximately 20,000 active users, helps to streamline
real estate professionals’ interaction with us via desktop computer or mobile device. Similarly, our AgentNet®
technology, a one-stop portal that enhances interaction and productivity with our title agents, is now integrated
with all of the industry’s leading production software. We’ve also implemented training programs across the
organization that are designed to help our people provide a truly superior customer experience. By making
processes better and easier for our customers, we’re increasing our ability to earn and keep their business.

Develop our Employees
We remain committed to being the industry’s employer of choice, recruiting and retaining the best people in the
business. To do so, we’ve enhanced our skill-building programs, leadership development training, and company-
driven eLearning courses. And late in 2012, we launched a new, progressive employee Intranet that is rapidly
increasing communication and best-practice sharing, while streamlining processes, across the company.

Operate Efficiently and Profitably
For several years preceding 2012, we took substantive steps to successfully drive efficiencies and manage
expenses across the company. While our focus is now on growing the company, we continue to control costs and
operate efficiently, giving us the leverage to deliver strong profit margins. When the market normalizes and
purchase transactions dominate the title order mix, we believe there is even more opportunity for margin
improvement.

LOOKING AHEAD

The Mortgage Bankers Association forecasts that the mortgage origination market will drop 18 percent in 2013
to $1.4 trillion. But the impact of this decline on First American will likely be significantly offset by the change
in order mix – the number of purchase transactions on which we earn higher premiums is going up, while lower-
premium refinance activity is slowing. We believe market conditions will continue to improve with mortgage
interest rates still near all-time lows, housing affordability near an all-time high, delinquency and foreclosure
activity continuing to decline, and home values rising. We expect continued strength in the commercial market, a
relatively high-margin business for our title company, as well.

While these conditions are favorable for our company, there is still uncertainty in the long-term interest rate
environment and the regulatory landscape, which could slow the housing market. Regardless of how the market
environment unfolds, however, we remain confident that we are well positioned to operate efficiently and
profitably.

I want to acknowledge all of our employees for their hard work over the past few years to create the efficient and
effective operations we enjoy today, and for the many new initiatives they’re now working on to move our
company forward. As I write this letter, I’m also proud to share that Forbes® recently included First American in
its list of the 100 most trustworthy companies in America. All of us at First American are honored to be
recognized as good stewards of our company.

Throughout 2013, we’ll continue to focus on our priorities to grow our company, improve the customer
experience, develop our employees, and operate efficiently and profitably. And we remain committed to being
the premier title and settlement services company in the U.S. and key markets abroad.

Together with the board of directors, I thank you for your support and look forward to the opportunities ahead.

Dennis J. Gilmore
Chief Executive Officer

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

È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

FORM 10-K

SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012

OR

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934
For the transition period from

to

Commission file number 001-34580

(Exact name of registrant as specified in its charter)

Incorporated in Delaware
(State or other jurisdiction of
incorporation or organization)

26-1911571
(I.R.S. Employer
Identification No.)

1 First American Way, Santa Ana, California 92707-5913
(Address of principal executive offices) (Zip Code)
(714) 250-3000
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Common
(Title of each class)

New York Stock Exchange
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes È No ‘

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes ‘ No È

Indicate by check mark whether 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 È No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes È No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) 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 or any amendment to this Form 10-K. ‘

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer È
Non-accelerated filer ‘ (Do not check if a smaller reporting company)Smaller reporting company ‘
Indicate by check mark whether

is a shell company (as defined in Rule 12b-2 of

Accelerated filer ‘

the registrant

the

Act). Yes ‘ No È

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of

June 30, 2012 was $1,749,148,774.

On February 19, 2013, there were 107,545,474 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement with respect to the 2013 annual meeting of the stockholders are
incorporated by reference in Part III of this report. The definitive proxy statement or an amendment to this Form 10-K will be
filed no later than 120 days after the close of registrant’s fiscal year.

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

INFORMATION INCLUDED IN REPORT

PART I

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 2.

Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 6.

Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . .

Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 8.

Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . .

Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

6

15

21

21

21

25

26

28

30

54

55

136

136

136

137

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

137

2

CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING BUT NOT LIMITED

TO THOSE RELATING TO:

•

•

•

•

•

THE COMPANY’S PURSUIT OF GROWTH OPPORTUNITIES IN ITS CORE BUSINESS AND
MAKING OF INVESTMENTS DESIGNED TO IMPROVE THE CUSTOMER EXPERIENCE;

THE EFFECT OF A DECREASE IN PRODUCTS OR SERVICES PURCHASED BY OR FOR THE
BENEFIT OF THE COMPANY’S MOST SIGNIFICANT CUSTOMERS;

FUTURE ACTIONS TO BE TAKEN IN CONNECTION WITH THE COMPANY’S REVIEW OF ITS
AGENCY RELATIONSHIPS;

THE COMPANY’S CONTINUED PRACTICE OF ASSUMING AND CEDING LARGE TITLE
INSURANCE RISKS THROUGH REINSURANCE;

THE COMPETITIVE IMPORTANCE OF PRICE AND QUALITY AND TIMELINESS OF SERVICE;

• CONTINUED PRICE AND AGENCY SPLIT ADJUSTMENTS;

•

•

•

•

•

•

•

•

•

THE ADEQUACY OF THE ALLOWANCE AGAINST PROBABLE LOAN LOSSES;

THE LIKELIHOOD OF CHANGES IN EXPECTED ULTIMATE LOSSES AND CORRESPONDING
LOSS RATES AND RELATED ASSUMPTIONS;

THE EFFECT OF LAWSUITS, REGULATORY AUDITS AND INVESTIGATIONS AND OTHER LEGAL
PROCEEDINGS ON THE COMPANY’S FINANCIAL CONDITION, RESULTS OF OPERATIONS OR
CASH FLOWS;

FUTURE PAYMENT OF DIVIDENDS;

THE HOLDING OF AND EXPECTED CASH FLOW FROM DEBT SECURITIES AND ASSUMPTIONS
RELATING THERETO;

POTENTIAL FUTURE IMPAIRMENT CHARGES AND RELATED ASSUMPTIONS;

THE EFFECT OF PENDING ACCOUNTING PRONOUNCEMENTS ON THE COMPANY’S
FINANCIAL STATEMENTS;

EXPENSE MANAGEMENT EFFORTS;

THE COMPANY’S CONTINUED MONITORING OF ORDER VOLUMES AND RELATED STAFFING
LEVELS, AND ADJUSTMENTS TO STAFFING LEVELS AS NECESSARY;

• ULTIMATE LOSS EMERGENCE AND CLAIMS RESERVES FOR THE GUARANTEED VALUATION

PRODUCT OFFERED IN CANADA;

• UNCERTAINTY AND VOLATILITY IN THE CURRENT ECONOMIC ENVIRONMENT AND ITS

EFFECT ON TITLE CLAIMS;

•

•

•

•

•

•

THE VARIANCE BETWEEN ACTUAL CLAIMS EXPERIENCE AND PROJECTIONS AND FUTURE
RESERVE ADJUSTMENTS BASED ON UPDATED ESTIMATES OF FUTURE CLAIMS;

IMPROVEMENT OF SPECIALTY INSURANCE PROFIT MARGINS AS REVENUES INCREASE;

THE SUFFICIENCY OF THE COMPANY’S RESOURCES TO SATISFY OPERATIONAL CASH
REQUIREMENTS;

THE TIMING OF CLAIM, PENSION AND SUPPLEMENTAL BENEFIT PLAN PAYMENTS;

EXPECTED MATURITY DATES OF CERTAIN ASSETS AND LIABILITIES THAT ARE SENSITIVE TO
CHANGES IN INTEREST RATES;

THE UNITED STATES GOVERNMENT’S COMMITMENT TO ENSURING THAT FANNIE MAE AND
FREDDIE MAC HAVE SUFFICIENT CAPITAL TO PERFORM UNDER GUARANTEES ISSUED AND
TO MEET THEIR DEBT OBLIGATIONS;

3

•

•

ASSUMPTIONS UNDERLYING GOODWILL VALUATIONS;

THE REALIZATION OF TAX BENEFITS ASSOCIATED WITH CERTAIN LOSSES, POTENTIAL TAX
PROVISIONS IN CONNECTION WITH THE EARNINGS OF FOREIGN SUBSIDIARIES AND THE
ADEQUACY OF TAX AND RELATED INTEREST ESTIMATES IN CONNECTION WITH
EXAMINATIONS BY TAX AUTHORITIES;

• NET ACTUARIAL LOSS AND PRIOR SERVICE CREDIT RELATING TO PENSION PLANS;

•

EXPECTED BENEFIT AND PENSION PLAN CONTRIBUTIONS, PAYMENTS AND INVESTMENT
STRATEGY AND ASSET AND LIABILITY ASSUMPTIONS;

• COMPENSATION COST RECOGNITION ASSOCIATED WITH UNVESTED RESTRICTED STOCK

UNITS; AND

•

RESERVES FOR POTENTIAL LIABILITIES TO BE SHARED BETWEEN THE COMPANY AND
CORELOGIC, INC. IN CONNECTION WITH THEIR SEPARATION,

ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. THESE FORWARD-LOOKING STATEMENTS MAY CONTAIN THE WORDS “BELIEVE,”
“ANTICIPATE,” “EXPECT,” “PLAN,” “PREDICT,” “ESTIMATE,” “PROJECT,” “WILL BE,” “WILL
CONTINUE,” “WILL LIKELY RESULT,” OR OTHER SIMILAR WORDS AND PHRASES.

RISKS AND UNCERTAINTIES EXIST THAT MAY CAUSE RESULTS TO DIFFER MATERIALLY FROM
THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE THE
ANTICIPATED RESULTS TO DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS INCLUDE:

•

INTEREST RATE FLUCTUATIONS;

• CHANGES IN THE PERFORMANCE OF THE REAL ESTATE MARKETS;

•

VOLATILITY IN THE CAPITAL MARKETS;

• UNFAVORABLE ECONOMIC CONDITIONS;

•

•

IMPAIRMENTS IN THE COMPANY’S GOODWILL OR OTHER INTANGIBLE ASSETS;

FAILURES AT FINANCIAL INSTITUTIONS WHERE THE COMPANY DEPOSITS FUNDS;

• CHANGES IN APPLICABLE GOVERNMENT REGULATIONS;

• HEIGHTENED SCRUTINY BY LEGISLATORS AND REGULATORS OF THE COMPANY’S TITLE
INSURANCE AND SERVICES SEGMENT AND CERTAIN OTHER OF THE COMPANY’S
BUSINESSES;

•

•

•

•

REGULATION OF TITLE INSURANCE RATES;

REFORM OF GOVERNMENT-SPONSORED MORTGAGE ENTERPRISES;

LIMITATIONS ON ACCESS TO PUBLIC RECORDS AND OTHER DATA;

PRODUCT MIGRATION;

• CHANGES IN RELATIONSHIPS WITH LARGE MORTGAGE LENDERS;

• CHANGES IN MEASURES OF THE STRENGTH OF THE COMPANY’S TITLE INSURANCE

UNDERWRITERS, INCLUDING RATINGS AND STATUTORY CAPITAL AND SURPLUS;

•

•

LOSSES IN THE COMPANY’S INVESTMENT PORTFOLIO;

EXPENSES OF AND FUNDING OBLIGATIONS TO THE PENSION PLAN;

• MATERIAL VARIANCE BETWEEN ACTUAL AND EXPECTED CLAIMS EXPERIENCE;

4

• DEFALCATIONS, INCREASED CLAIMS OR OTHER COSTS AND EXPENSES ATTRIBUTABLE TO

THE COMPANY’S USE OF TITLE AGENTS;

•

•

•

SYSTEMS INTERRUPTIONS AND INTRUSIONS, WIRE TRANSFER ERRORS OR UNAUTHORIZED
DATA DISCLOSURES;

INABILITY TO REALIZE THE BENEFITS OF THE COMPANY’S OFFSHORE STRATEGY;

INABILITY OF THE COMPANY’S SUBSIDIARIES TO PAY DIVIDENDS OR REPAY FUNDS; AND

• OTHER FACTORS DESCRIBED IN THIS ANNUAL REPORT ON FORM 10-K.

THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE THEY ARE MADE. THE
COMPANY DOES NOT UNDERTAKE TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT
CIRCUMSTANCES OR EVENTS THAT OCCUR AFTER THE DATE THE FORWARD-LOOKING
STATEMENTS ARE MADE.

5

Item 1. Business

The Company

PART I

First American Financial Corporation (the “Company”) was incorporated in the state of Delaware in January
2008 to serve as the holding company of The First American Corporation’s (“TFAC’s”) financial services
businesses following the spin-off of those businesses from TFAC (the “Separation”). The Separation was
consummated on June 1, 2010, at which time the Company’s common stock was listed on the New York Stock
Exchange under the ticker symbol “FAF.” The businesses operated by the Company’s subsidiaries have, in some
instances, been in existence since the late 1800s.

The Company has its executive offices at 1 First American Way, Santa Ana, California 92707-5913. The

Company’s telephone number is (714) 250-3000.

General

The Company, through its subsidiaries, is engaged in the business of providing financial services through its
title insurance and services segment and its specialty insurance segment. The title insurance and services segment
provides title insurance, closing and/or escrow services and similar or related services domestically and
internationally in connection with residential and commercial real estate transactions. It also maintains, manages
and provides access to title plant records and images and provides banking, trust and investment advisory
services. The specialty insurance segment issues property and casualty insurance policies and sells home
warranty products. In addition, our corporate function consists of certain financing facilities as well as the
corporate services that support our business operations. Financial information regarding these business segments
and the corporate function is included in “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of Part II of this report.

The substantial majority of our business is dependent upon activity in the real estate and mortgage markets,
which are cyclical and seasonal. During the most recent real estate and mortgage cycle, we primarily emphasized
expense control and operational efficiency. However, we believe the markets have experienced a degree of
improvement and, consequently, in conjunction with our continuing efforts pertaining to operating efficiency, we
have modified our strategy to pursue opportunities to grow our core business and make investments designed to
improve our customer’s experience with our products and services.

Title Insurance and Services Segment

Our title insurance and services segment issues title insurance policies on residential and commercial
property in the United States and offers similar or related products and services internationally. This segment
also provides closing and/or escrow services; accommodates tax-deferred exchanges of real estate; maintains,
manages and provides access to title plant records and images; and provides banking, trust and investment
advisory services. In 2012, 2011, and 2010 the Company derived 92.5%, 92.7%, and 92.5% of its consolidated
revenues, respectively, from this segment.

Overview of Title Insurance Industry

In many instances mortgage lenders and purchasers of real estate desire to be protected from loss or damage

in the event of defects in the title they acquire. Title insurance is a means of providing such protection.

6

Title Policies. Title insurance policies insure the interests of owners or lenders against defects in the title
to real property. These defects include adverse ownership claims, liens, encumbrances or other matters affecting
title. Title insurance policies generally are issued on the basis of a title report, which is typically prepared after a
search of one or more of public records, maps, documents and prior title policies to ascertain the existence of
easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of,
real property. In certain limited instances, a visual inspection of the property is also made. To facilitate the
preparation of title reports, copies and/or abstracts of public records, maps, documents and prior title policies
may be compiled and indexed to specific properties in an area. This compilation is known as a “title plant.”

The beneficiaries of title insurance policies usually are real estate buyers and mortgage lenders. A title
insurance policy indemnifies the named insured and certain successors in interest against title defects, liens and
encumbrances existing as of the date of the policy and not specifically excepted from its provisions. The policy
typically provides coverage for the real property mortgage lender in the amount of its outstanding mortgage loan
balance and for the buyer in the amount of the purchase price of the property. In some cases the policy might
provide insurance in a greater amount where the buyer anticipates constructing improvements on the property.
Coverage under a title insurance policy issued to a mortgage lender generally terminates upon repayment of the
mortgage loan. Coverage under a title insurance policy issued to a buyer generally terminates upon the sale of the
insured property.

Before issuing title policies, title insurers typically seek to limit their risk of loss by accurately performing
title searches and examinations. The major expenses of a title company typically relate to such searches and
examinations, the preparation of preliminary reports or commitments and the maintenance of title plants, and not
from claim losses as in the case of property and casualty insurers.

The Closing Process. Title insurance is essential to the real estate closing process in most transactions
involving real property mortgage lenders. In a typical residential real estate sale transaction where title insurance
is issued, a real estate broker, lawyer, developer, lender or closer involved in the transaction orders the title
insurance on behalf of an insured. Once the order has been placed, a title insurance company or an agent typically
conducts a title search to determine the current status of the title to the property. When the search is complete, the
title insurer or agent prepares, issues and circulates a commitment or preliminary report to the parties to the
transaction. The commitment or preliminary report identifies the conditions, exceptions and/or limitations that
the title insurer intends to attach to the policy and identifies items appearing on the title that must be eliminated
prior to closing.

The closing function, sometimes called an escrow in the western United States, is, depending on the local
custom in the region, performed by a lawyer, an escrow company or a title insurance company or agent, generally
referred to as a “closer.” Once documentation has been prepared and signed, and any required mortgage lender
payoff demands are obtained, the transaction closes. The closer records the appropriate title documents and
arranges the transfer of funds to pay off prior loans and extinguish the liens securing such loans. Title policies are
then issued, typically insuring the priority of the mortgage of the real property mortgage lender in the amount of
its mortgage loan and the buyer in the amount of the purchase price. The time between the opening of the title
order and the issuance of the title policy is usually between 30 and 90 days. Before a closing takes place,
however, the closer typically requests that the title insurer or agent provide an update to the commitment to
discover any adverse matters affecting title and, if any are found, works with the seller to eliminate them so that
the title insurer or agent issues the title policy subject only to those exceptions to coverage which are acceptable
to the title insurer, the buyer and the buyer’s lender.

Issuing the Policy: Direct vs. Agency. A title insurance policy can be issued directly by a title insurer or
indirectly on behalf of a title insurer through agents, which may not themselves be licensed as insurers and which
usually operate independently of the title insurer and often issue policies for more than one insurer. Where the
policy is issued by a title insurer, the search is performed by or on behalf of the title insurer, and the premium is
collected and retained by the title insurer. Where the policy is issued by an agent, the agent typically performs the

7

search, examines the title, collects the premium and retains a portion of the premium. The agent remits the
remainder of the premium to the title insurer as compensation for the insurer bearing the risk of loss in the event
a claim is made under the policy and for other services the insurer may provide. The percentage of the premium
retained by an agent varies from region to region. A title insurer is obligated to pay title claims in accordance
with the terms of its policies, regardless of whether it issues its policy directly or indirectly through an agent.
Under certain circumstances the title insurer may seek recovery of all or a portion of this loss from the agent or
the agent’s insurance carrier.

Premiums. The premium for title insurance is typically due and earned in full when the real estate
transaction is closed. Premiums generally are calculated with reference to the policy amount. The premium
charged by a title insurer or an agent is subject to regulation in most areas. Such regulations vary from state to
state.

Our Title Insurance Operations

Overview. We conduct our title insurance and closing business through a network of direct operations and
agents. Through this network, we issue policies in the 49 states that permit the issuance of title insurance policies
and the District of Columbia. We also offer title insurance, closing services and similar or related products and
services, either directly or through third parties in foreign countries, including Canada, the United Kingdom,
Australia and various other established and emerging markets as described in the “International Operations”
section below.

Customers, Sales and Marketing. We believe that

two institutions, Wells Fargo & Company and
JPMorgan Chase & Co., together with their affiliates, originate or are involved in over 35% of the mortgages in
the United States. Each of these institutions purchases title insurance policies and other products and services
from us. These institutions also benefit from products and services which are purchased for their benefit by
others, such as title insurance policies purchased by borrowers as a condition to the making of a loan. The refusal
of one or more of these or other significant lending institutions to purchase products and services from us or to
accept our products and services that are to be purchased for their benefit could have a material adverse effect on
the title insurance and services segment.

We distribute our title insurance policies and related products and services (directly as well as through our
agents) through various channels. In our “distributed” channel, the direct distribution of our policies and related
products and services occurs through local sales representatives located at numerous offices throughout the
United States where real estate transactions are handled. Title insurance policies issued and other products and
services delivered through this channel are primarily delivered in connection with sales and refinances of
residential real property, although commercial transactions are also handled through this channel. We also
distribute our title policies and related products and services through centralized channels,
including a
“commercial” channel that is focused on transactions involving commercial real estate, a “national lender”
channel dedicated to refinance transactions involving large financial institutions, a “default” channel related to
defaults and other pre-foreclosure activity, as well as foreclosures, and a “homebuilders” channel focused on
newly constructed residential property.

Within each channel, our marketing efforts are focused on the primary sources of business referrals. For the
distributed business, these are real estate agents and brokers, mortgage brokers, real estate attorneys, mortgage
originators, homebuilders and escrow service providers. For the commercial channel we market primarily to
investors, including real estate investment trusts, insurance companies and asset managers, as well as to law
firms, commercial banks, investment banks, mortgage brokers and the owners of commercial real estate. In the
national lender channel and the default channel our marketing efforts are focused on mortgage originators and
servicers as well as governmental sponsored enterprises. We market primarily to homebuilders in the centralized
the efforts of our sales force with general
homebuilder channel. In some instances we may supplement
marketing, including advertising in various trade and professional journals. Our marketing efforts emphasize the
quality and timeliness of our services, our financial strength, process innovation and our national presence.

8

Underwriting. Before a title insurance policy is issued, a number of underwriting decisions are made. For
example, matters of record revealed during the title search may require a determination as to whether an
exception should be taken in the policy. We believe that it is important for the underwriting function to operate
efficiently and effectively at all decision-making levels so that transactions may proceed in a timely manner. To
perform this function, we have underwriters at the regional, divisional and corporate levels with varying levels of
underwriting authority.

Agency Operations. As described above, we also issue title insurance policies through a network of agents.
Our agreements with our agents state the conditions under which the agent is authorized to issue title insurance
policies on our behalf. The agency agreement also prescribes the circumstances under which the agent may be
liable to us if a policy loss occurs. Such agency agreements typically are terminable without cause after a
specified notice period has been met and are terminable immediately for cause. As is standard in our industry,
our agents typically operate with a substantial degree of independence from us and frequently act as agents for
other title insurers. We evaluate the profitability of our agency relationships on an ongoing basis, including a
review of premium splits, deductibles and claims. As a result, from time to time we may terminate or renegotiate
the terms of some of our agency relationships.

In determining whether to engage an independent agent, we often obtain information about the agent,
including the agent’s experience and background. We maintain loss experience records for each agent and also
maintain agent representatives and agent auditors. Our agents typically are subject to audit or examination. In
addition to routine examinations, other examinations may be triggered if certain “warning signs” are evident.
Adverse findings in an agency audit may result in various actions, including, if warranted, termination of the
agency relationship.

International Operations. We provide products and services in numerous countries outside of the United
States, and our international operations accounted for approximately 7.9% of our title insurance and services
segment revenues in 2012. Today we have direct operations and a physical presence in several countries
including Canada, the United Kingdom and Australia. Additionally, through local companies we have provided
products and services in many other countries. While reliable data are not available, we believe that we have the
largest market share for title insurance outside of the United States. The Company’s revenues from external
customers and long-lived assets are broken down between domestic and foreign operations in Note 23 Segment
Financial Information to the consolidated financial statements included in “Item 8. Financial Statements and
Supplementary Data” of Part II of this report.

Our range of international products and services is designed to lower our clients’ risk profiles and reduce
their operating costs through enhanced operational efficiencies. In established markets, primarily British
Commonwealth countries, we have combined title insurance with customized processing offerings to enhance the
speed and efficiency of the mortgage and conveyancing processes. In these markets we also offer products
designed to mitigate risk and otherwise facilitate real estate transactions.

Our international operations present risks that may not exist to the same extent in our domestic operations,
including those associated with differences in the nature of the products provided, the scope of coverage provided
by those products and the manner in which risk is underwritten. Limited claims experience in foreign
jurisdictions makes it more difficult to set prices and reserve rates. There may also be risks associated with
differences in legal systems and/or unforeseen regulatory changes.

Title Plants. Our collection of title plants constitutes one of our principal assets. A title search is typically
conducted by searching the abstracted information from public records or utilizing a title plant holding
information abstracted from public records. While public title records generally are indexed by reference to the
names of the parties to a given recorded document, our title plants primarily arrange their records on a
geographic basis. Because of this difference, title plant records generally may be searched more efficiently,
which we believe reduces the risk of errors associated with the search. Many of our title plants also index prior

9

policies, adding to searching efficiency. Certain locations utilize jointly owned plants or utilize a plant under a
joint user agreement with other title companies. In addition to these ownership interests, we are in the business of
maintaining, managing and providing access to title plant records and images that may be owned by us or other
parties. We believe that our title plants, whether wholly or partially owned or utilized under a joint user
agreement, are among the best in the industry.

Reserves for Claims and Losses. We provide for losses associated with title insurance policies and other
risk based products based upon our historical experience and other factors by a charge to expense when the
related premium revenue is recognized. The resulting reserve for incurred but not reported claims together with
the reserve for known claims reflects management’s best estimate of the total costs required to settle all claims
reported to us and claims incurred but not reported, and are considered to be adequate for such purpose. Each
period the reasonableness of the estimated reserves is assessed; if the estimate requires adjustment, such an
adjustment is recorded.

Reinsurance and Coinsurance. We plan to continue our practice of assuming and ceding large title
insurance risks through reinsurance. In reinsurance arrangements, the primary insurer retains a certain amount of
risk under a policy and cedes the remainder of the risk under the policy to the reinsurer. The primary insurer pays
the reinsurer a premium in exchange for accepting this risk of loss. The primary insurer generally remains liable
to its insured for the total risk, but is reinsured under the terms of the reinsurance agreement. Prior to 2010, our
title insurance arrangements primarily involved other industry participants. Beginning in January of 2010, we
established a global reinsurance program involving treaty reinsurance provided by a global syndicate of highly
rated non-industry reinsurers. Subject to certain limitations, the program generally covers claims made while the
program is in effect.

We also serve as a coinsurer in connection with certain transactions. In a coinsurance scenario, two or more
insurers are selected by the insured and typically issue separate policies with respect to the subject property, with
each coinsurer liable to the extent provided in the policy that it issues.

Competition. The business of providing title insurance and related products and services is highly
competitive. The number of competing companies and the size of such companies vary in the different areas in
which we conduct business. Generally, in areas of major real estate activity, such as metropolitan and suburban
localities, we compete with many other title insurers and agents. Our major nationwide competitors in our
principal markets include Fidelity National Financial, Inc., Stewart Title Guaranty Company, Old Republic
International Corporation, Lender Processing Services, Inc. and their affiliates. In addition to these national
competitors, small nationwide, regional and local competitors, as well as numerous agency operations throughout
the country, provide aggressive competition on the local level. We are currently the second largest provider of
title insurance in the United States, based on the most recent American Land Title Association market share data.

We believe that competition for title insurance and related products and services is based primarily on the
price of the title insurance policy (except in states where a uniform price has been established by a regulator) and
the price, quality and timeliness of the related products and services. Customer service is an important
competitive factor because parties to real estate transactions are usually concerned with time schedules and costs
associated with delays in closing transactions. In certain transactions, such as those involving commercial
properties, financial strength is also important. As part of our on-going strategy, we regularly evaluate our
pricing and agent splits, and based on competitive, market and regulatory conditions and claims history, among
other factors, intend to continue to adjust our prices and agent splits as and where appropriate.

Trust and Investment Advisory Services. Our federal savings bank subsidiary offers trust and investment
advisory services, deposit services and asset management services. As of December 31, 2012, this company
managed $1.3 billion of assets, administered fiduciary and custodial assets having a market value in excess of
$2.8 billion, had assets of $1.6 billion, deposits of $1.5 billion and stockholder’s equity of $137.6 million.

10

Lending and Deposit Products. During the third quarter of 2011, we began the multi-year process of
winding-down the operations of our industrial bank, First Security Business Bank. Prior to initiating the wind-
down, our industrial bank subsidiary accepted deposits and used these deposits to purchase or originate loans
secured by commercial properties primarily in Southern California. Currently, the industrial bank continues to
accept and service deposits and to service its existing loan portfolio, but is no longer originating or purchasing
new loans. As of December 31, 2012, the industrial bank had approximately $82.4 million of deposits and $107.3
million of loans outstanding.

The industrial bank did not originate or purchase any loans in 2012. The average loan balance outstanding at
December 31, 2012, was $563 thousand. Loans were made only on a secured basis, at loan-to-value percentages
generally less than 70 percent. The majority of the industrial bank’s loans were made on a fixed-to-floating rate
basis. The average yield on the industrial bank’s loan portfolio for the year ended December 31, 2012, was 6.31
percent. A number of factors are included in the determination of average yield, principal among which are loan
fees and closing points amortized to income, prepayment penalties recorded as income, and amortization of
discounts on purchased loans. The industrial bank’s average loan to value was approximately 43 percent at
December 31, 2012.

The performance of the industrial bank’s loan portfolio is evaluated on an ongoing basis by management of
the industrial bank. The industrial bank generally places a loan on non-accrual status when more than three
contractual payments are missed, which usually represent past due payments of between 60 to 90 days or more.
The industrial bank’s general policy is to reverse from income previously accrued but unpaid interest. While a
loan is classified under non-accrual status and the future collectability of the recorded loan balance is doubtful,
collections of interest and principal are generally applied as a reduction to principal outstanding. Income on such
loans is subsequently recognized only to the extent that cash is received and future collection of principal is
probable. Loans may be returned to accrual status when all principal and interest amounts contractually due
(including arrearages) are reasonably assured of repayment within an acceptable period of time. Interest income
on non-accrual loans that would have been recognized during the year ended December 31, 2012, if all of such
loans had been current in accordance with their original terms, totaled $138 thousand.

The following table sets forth the amount of the industrial bank’s non-performing loans as of the dates

indicated.

Year Ended December 31,

2012

2011

2010

2009

2008

(in thousands)

Nonperforming Assets:

Loans accounted for on a non-accrual basis . . . . . . . . . . . . . . . .

$2,597

$4,910

$2,441

$603

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,597

$4,910

$2,441

$603

$—

$—

Based on a variety of factors concerning the creditworthiness of its borrowers,

the industrial bank

determined that it had five non-performing assets as of December 31, 2012.

The industrial bank’s allowance for loan losses is established through charges to earnings in the form of
provision for loan losses. Loan losses are charged to, and recoveries are credited to, the allowance for loan losses.
The provision for loan losses is determined after considering various factors, such as loan loss experience,
maturity of the portfolio, size of the portfolio, borrower credit history, the existing allowance for loan losses,
current charges and recoveries to the allowance for loan losses, the overall quality of the loan portfolio, and
current economic conditions, as determined by management of the industrial bank, regulatory agencies and
independent credit review specialists. While many of these factors are essentially a matter of judgment and may
not be reduced to a mathematical formula, we believe that, in light of the collateral securing its loan portfolio, the
industrial bank’s current allowance for loan losses is an adequate allowance against probable losses incurred as
of December 31, 2012.

11

The following table provides certain information with respect to the industrial bank’s allowance for loan

losses as well as charge-off and recovery activity.

Year Ended December 31,

2012

2011

2010

2009

2008

(in thousands, except percentages)

Allowance for Loan Losses:

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,171

$3,271

$2,071

$1,600

$1,488

Charge-offs:

Real estate—mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assigned lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recoveries:

Real estate—mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assigned lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net (charge-offs) recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

278
—

278

—
—

—

—
—

—
—

—

—
—

—

—
—

—

—
—

—

—
—

—

—
—

—

—
—

—

—
—

—

—
900

—
1,200

—
471

—
112

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,893

$4,171

$3,271

$2,071

$1,600

Ratio of net charge-offs during the year to average loans

outstanding during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.23% — % — % — % — %

The adequacy of the industrial bank’s allowance for loan losses is based on formula allocations and specific
allocations. Formula allocations are made on a percentage basis, which is dependent on the underlying collateral,
the type of loan, general economic conditions and historical losses. Specific allocations are made as problem or
potential problem loans are identified and are based upon an evaluation by the industrial bank’s management of
the status of such loans. Specific allocations may be revised from time to time as the status of problem or
potential problem loans changes.

The following table shows the allocation of the industrial bank’s allowance for loan losses and the percent

of loans in each category to total loans at the dates indicated.

Year Ended December 31,

2012

2011

2010

2009

2008

Allowance

% of
Loans Allowance

% of
Loans Allowance

% of
Loans Allowance

% of
Loans Allowance

% of
Loans

(in thousands, except percentages)

Loan Categories:

Real estate-mortgage . . $3,893
Other . . . . . . . . . . . . . . .

— —

100

$4,171

100

$3,271

100

$2,071

100

$1,600

100

— —

— —

— —

— —

$3,893

100

$4,171

100

$3,271

100

$2,071

100

$1,600

100

Specialty Insurance Segment

Property and Casualty Insurance. Our property and casualty insurance business provides insurance
coverage to residential homeowners and renters for liability losses and typical hazards such as fire, theft,
vandalism and other types of property damage. We are licensed to issue policies in all 50 states and the District
of Columbia and actively issue policies in 43 states. In our largest market, California, we also offer preferred risk
auto insurance to better compete with other carriers offering bundled home and auto insurance. We market our
property and casualty insurance business using both direct distribution channels, including cross-selling through

12

our existing closing-service activities, and through a network of independent brokers. Reinsurance is used
extensively to limit risk associated with natural disasters such as windstorms, winter storms, wildfires and
earthquakes.

Home Warranties. Our home warranty business provides residential service contracts that cover
residential systems, such as heating and air conditioning systems, and certain appliances against failures that
occur as the result of normal usage during the coverage period. Most of these policies are issued on resale
residences, although policies are also available in some instances for new homes. Coverage is typically for one
year and is renewable annually at the option of the contract holder and upon our approval. Coverage and pricing
typically vary by geographic region. Fees for the warranties generally are paid at the closing of the home
purchase or directly by the consumer. Renewal premiums may be paid by a number of different options. In
addition, the contract holder is responsible for a service fee for each trade call. First year warranties primarily are
marketed through real estate brokers and agents, although we also market directly to consumers. We generally
sell renewals directly to consumers. Our home warranty business currently operates in 39 states and the District
of Columbia.

Corporate

The Company’s corporate function consists primarily of certain financing facilities as well as the corporate

services that support our business operations.

Regulation

Many of our subsidiaries are subject to extensive regulation by applicable domestic or foreign regulatory
agencies. The extent of such regulation varies based on the industry involved, the nature of the business
conducted by the subsidiary (for example, licensed title insurers are subject to a heightened level of regulation
compared to underwritten title companies), the subsidiary’s jurisdiction of organization and the jurisdictions in
which it operates. In addition, the Company is subject to regulation as both an insurance holding company and a
savings and loan holding company.

Our domestic subsidiaries that operate in the title insurance industry or the property and casualty insurance
industry are subject to regulation by state insurance regulators. Each of our underwriters, or insurers, is regulated
primarily by the insurance department or equivalent governmental body within the jurisdiction of its
organization, which oversees compliance with the laws and regulations pertaining to such insurer. For example,
our primary title insurance underwriter is a California corporation and, accordingly, is primarily regulated by the
California Department of Insurance. Insurance regulations pertaining to insurers typically place limits on, among
other matters, the ability of the insurer to pay dividends to its parent company or to enter into transactions with
affiliates. They also may require approval of the insurance commissioner prior to a third party directly or
indirectly acquiring “control” of the insurer.

In addition, our insurers are subject to the laws of other jurisdictions in which they transact business, which
laws typically establish supervisory agencies with broad administrative powers relating to issuing and revoking
licenses to transact business, regulating trade practices, licensing agents, approving policy forms, accounting
practices and financial practices, establishing requirements pertaining to reserves and capital and surplus as
regards policyholders, requiring the deferral of a portion of all premiums in a reserve for the protection of
policyholders and the segregation of investments in a corresponding amount, establishing parameters regarding
suitable investments for reserves, capital and surplus, and approving rate schedules. The manner in which rates
are established or changed ranges from states which promulgate rates, to states where individual companies or
associations of companies prepare rate filings which are submitted for approval, to a few states in which rate
changes do not need to be filed for approval. In addition, each of our insurers is subject to periodic examination
by regulatory authorities both within its jurisdiction of organization as well as the other jurisdictions where it is
licensed to conduct business.

13

Our foreign insurance subsidiaries are regulated primarily by regulatory authorities in the regions, provinces
and/or countries in which they operate and secondarily by the domestic regulator of First American Title
Insurance Company as a part of the First American insurance holding company system. Each of these regions,
provinces and countries has established a regulatory framework with respect to the oversight of compliance with
its laws and regulations. Therefore, our foreign insurance subsidiaries are generally subject to regulatory review,
examination, investigation and enforcement in a similar manner as our domestic insurance subsidiaries, subject to
local variations.

Our underwritten title companies and property and casualty insurance agencies are also subject to certain
regulation by insurance regulatory or banking authorities, including, but not limited to, minimum net worth
requirements, licensing requirements, statistical reporting requirements, rate filing requirements and marketing
restrictions.

In addition to state-level regulation, our domestic subsidiaries that operate in the insurance business, as well
as our home warranty subsidiaries and certain other subsidiaries are subject to regulation by federal agencies,
including the Consumer Financial Protection Bureau (“CFPB”). The CFPB has broad authority to regulate,
among other areas, the mortgage and real estate markets in matters pertaining to consumers. This authority
includes the enforcement of the Real Estate Settlement Procedures Act formerly placed with the Department of
Housing and Urban Development. In addition to other activities, the CFPB has proposed regulations related to,
among other things, the simplification of financing documentation and the required delivery of documentation by
the lender to consumers in connection with the closing of a real estate transaction.

In addition, our home warranty and settlement services businesses are subject to regulation in some states by
insurance authorities or other applicable regulatory entities. Our federal savings bank and industrial bank are both
subject to regulation by the Federal Deposit Insurance Corporation. Our federal savings bank is regulated by the
Office of the Comptroller of the Currency, with the Federal Reserve Board supervising its parent holding
companies. The industrial bank is regulated by the California Department of Financial Institutions.

Investment Policies

The Company’s investment portfolio activities such as policy setting, compliance reporting, portfolio
reviews, and strategy are overseen by an investment committee made up of certain senior executives.
Additionally, the Company’s regulated subsidiaries, including title insurance underwriters, property and casualty
insurance companies and banking entities, have established and maintain an investment committee to oversee
their own investment portfolios. The Company’s investment policies are designed to comply with regulatory
requirements and to align the investment portfolio strategy with strategic objectives. For example, our federal
savings bank is required to maintain at least 65 percent of its asset portfolio in loans or securities that are secured
by real estate. Our federal savings bank currently does not make real estate loans, and therefore fulfills this
regulatory requirement through investments in mortgage-backed securities. In addition, applicable law imposes
certain restrictions upon the types and amounts of investments that may be made by our regulated insurance
subsidiaries.

The Company’s investment policies further provide that investments are to be managed to balance earnings,
liquidity, regulatory and risk objectives, and that investments should not expose the Company to excessive levels
of credit risk, interest risk or liquidity risk.

As of December 31, 2012, our debt and equity investment securities portfolio consists of approximately 93
percent of fixed income securities. As of that date, over 70 percent of our fixed income investments are held in
securities that are United States government-backed or rated AAA, and approximately 99 percent of the fixed
income portfolio is rated or classified as investment grade. Percentages are based on the amortized cost basis of
the securities. Credit ratings are based on Standard & Poor’s and Moody’s published ratings. If a security was
rated differently by both rating agencies, the lower of the two ratings was selected.

14

In addition to our debt and equity investment securities portfolio, we maintain certain money-market and
other short-term investments. We also hold strategic equity investments in companies engaged in our businesses
or similar or related businesses.

Employees

As of December 31, 2012, the Company employed 17,312 people on either a part-time or full-time basis.

Available Information

The Company maintains a website, www.firstam.com, which includes financial information and other
information for investors,
including open and closed title insurance orders (which typically are posted
approximately 12 days after the end of each calendar month). The Company’s Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge
through the “Investors” page of the website as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to, the Securities and Exchange Commission. The Company’s website and
the information contained therein or connected thereto are not intended to be incorporated into this Annual
Report on Form 10-K, or any other filing with the Securities and Exchange Commission unless the Company
expressly incorporates such materials.

Item 1A. Risk Factors

You should carefully consider each of the following risk factors and the other information contained in this
Annual Report on Form 10-K. The Company faces risks other than those listed here, including those that are
unknown to the Company and others of which the Company may be aware but, at present, considers immaterial.
Because of the following factors, as well as other variables affecting the Company’s operating results, past
financial performance may not be a reliable indicator of future performance, and historical trends should not be
used to anticipate results or trends in future periods.

1. Conditions in the real estate market generally impact the demand for a substantial portion of the

Company’s products and services and the Company’s claims experience

Demand for a substantial portion of the Company’s products and services generally decreases as the number
of real estate transactions in which its products and services are purchased decreases. The number of real estate
transactions in which the Company’s products and services are purchased decreases in the following situations:

• when mortgage interest rates are high or rising;

• when the availability of credit, including commercial and residential mortgage funding, is limited; and

• when real estate values are declining.

These circumstances, particularly declining real estate values and the increase in foreclosures that often results
therefrom, also tend to adversely impact the Company’s title claims experience.

2. Unfavorable economic conditions may have a material adverse effect on the Company

Uncertainty and negative trends in general economic conditions in the United States and abroad, including
significant tightening of credit markets and a general decline in the value of real property, historically have
created a difficult operating environment for the Company’s businesses and other companies in its industries. In
addition, the Company holds investments in entities, such as title agencies, settlement service providers and
property and casualty insurance companies, and instruments, such as mortgage-backed securities, which may be
negatively impacted by these conditions. The Company also owns a federal savings bank into which it deposits
some of its own funds and some funds held in trust for third parties. This bank invests those funds and any

15

realized losses incurred will be reflected in the Company’s consolidated results. The likelihood of such losses,
which generally would not occur if the Company were to deposit these funds in an unaffiliated entity, increases
when economic conditions are unfavorable. Depending upon the ultimate severity and duration of any economic
downturn, the resulting effects on the Company could be materially adverse, including a significant reduction in
revenues, earnings and cash flows, challenges to the Company’s ability to satisfy covenants or otherwise meet its
obligations under debt facilities, difficulties in obtaining access to capital, challenges to the Company’s ability to
pay dividends at currently anticipated levels, deterioration in the value of its investments and increased credit risk
from customers and others with obligations to the Company.

3. Unfavorable economic or other conditions could cause the Company to write off a portion of its

goodwill and other intangible assets

The Company performs an impairment test of the carrying value of goodwill and other indefinite-lived
intangible assets annually in the fourth quarter, or sooner if circumstances indicate a possible impairment. Finite-
lived intangible assets are subject to impairment tests on a periodic basis. Factors that may be considered in
connection with this review include, without limitation, underperformance relative to historical or projected
future operating results, reductions in the Company’s stock price and market capitalization, increased cost of
capital and negative macroeconomic, industry and company-specific trends. These and other factors could lead to
a conclusion that goodwill or other intangible assets are no longer fully recoverable, in which case the Company
would be required to write off the portion believed to be unrecoverable. Total goodwill and other intangible
assets reflected on the Company’s consolidated balance sheet as of December 31, 2012 are $0.9 billion. Any
substantial goodwill and other intangible asset impairments that may be required could have a material adverse
effect on the Company’s results of operations, financial condition and liquidity.

4. Failures at financial institutions at which the Company deposits funds could adversely affect the

Company

The Company deposits substantial funds in financial institutions. These funds include amounts owned by
third parties, such as escrow deposits. Should one or more of the financial institutions at which deposits are
maintained fail, there is no guarantee that the Company would recover the funds deposited, whether through
Federal Deposit Insurance Corporation coverage or otherwise. In the event of any such failure, the Company also
could be held liable for the funds owned by third parties.

5. Changes in government regulation could prohibit or limit the Company’s operations, make it more
burdensome to conduct such operations or result in decreased demand for the Company’s products and
services

Many of the Company’s businesses, including its title insurance, property and casualty insurance, home
warranty, banking, trust and investment businesses, are regulated by various federal, state, local and foreign
governmental agencies. These and other of the Company’s businesses also operate within statutory guidelines.
The industry in which the Company operates and the markets into which it sells its products are also regulated
and subject to statutory guidelines. Changes in the applicable regulatory environment, statutory guidelines or
interpretations of existing regulations or statutes, enhanced governmental oversight or efforts by governmental
agencies to cause customers to refrain from using the Company’s products or services could prohibit or limit its
future operations or make it more burdensome to conduct such operations or result in decreased demand for the
Company’s products and services. The impact of these changes would be more significant if they involve
jurisdictions in which the Company generates a greater portion of its title premiums, such as the states of
Arizona, California, Florida, Michigan, New York, Ohio, Pennsylvania and Texas and the province of Ontario,
Canada. These changes may compel the Company to reduce its prices, may restrict its ability to implement price
increases or acquire assets or businesses, may limit the manner in which the Company conducts its business or
otherwise may have a negative impact on its ability to generate revenues, earnings and cash flows.

16

6. Scrutiny of the Company’s businesses and the industries in which it operates by governmental entities

and others could adversely affect its operations and financial condition

The real estate settlement services industry, an industry in which the Company generates a substantial
portion of its revenue and earnings, is subject to heightened scrutiny by regulators, legislators, the media and
plaintiffs’ attorneys. Though often directed at the industry generally, these groups may also focus their attention
directly on the Company’s businesses. In either case, this scrutiny may result in changes which could adversely
affect the Company’s operations and, therefore, its financial condition and liquidity.

Governmental entities have routinely inquired into certain practices in the real estate settlement services
industry to determine whether certain of the Company’s businesses or its competitors have violated applicable
laws, which include, among others, the insurance codes of the various jurisdictions and the Real Estate
Settlement Procedures Act and similar state, federal and foreign laws. Departments of insurance in the various
states, federal regulators and applicable regulators in international jurisdictions, either separately or together, also
periodically conduct targeted inquiries into the practices of title insurance companies and other settlement
services providers in their respective jurisdictions.

Further, from time to time plaintiffs’ lawyers may target the Company and other members of the Company’s
industry with lawsuits claiming legal violations or other wrongful conduct. These lawsuits may involve large
groups of plaintiffs and claims for substantial damages. Any of these types of inquiries or proceedings may result
in a finding of a violation of the law or other wrongful conduct and may result in the payment of fines or
damages or the imposition of restrictions on the Company’s conduct which could impact its operations and
financial condition. Moreover, these laws and standards of conduct often are ambiguous and, thus, it may be
difficult to ensure compliance. This ambiguity may force the Company to mitigate its risk by settling claims or
by ending practices that generate revenues, earnings and cash flows.

7. Regulation of title insurance rates could adversely affect the Company’s results of operations

Title insurance rates are subject to extensive regulation, which varies from state to state. In many states the
approval of the applicable state insurance regulator is required prior to implementing a rate change. This
regulation could hinder the Company’s ability to promptly adapt to changing market dynamics through price
adjustments, which could adversely affect its results of operations, particularly in a rapidly declining market.

8. Reform of government-sponsored enterprises could negatively impact the Company

Historically a substantial proportion of home loans originated in the United States were sold to and, generally,
resold in a securitized form by, the Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac). As a condition to the purchase of a home loan Fannie Mae and Freddie
Mac generally required the purchase of title insurance for their benefit and, as applicable, the benefit of the holders
of home loans they may have securitized. The federal government currently is considering various alternatives to
reform Fannie Mae and Freddie Mac. The role, if any, that these enterprises or other enterprises fulfilling a similar
function will play in the mortgage process following the adoption of any reforms is not currently known. The timing
of the adoption and, thereafter, the implementation of the reforms is similarly unknown. Due to the significance of
the role of these enterprises, the mortgage process itself may substantially change as a result of these reforms and
related discussions. It is possible that these entities, as reformed, or the successors to these entities may require
changes to the way title insurance is priced or delivered, changes to standard policy terms or other changes which
may make the title insurance business less profitable. These reforms may also alter the home loan market, such as
by causing higher mortgage interest rates due to decreased governmental support of mortgage-backed securities.
These consequences could be materially adverse to the Company and its financial condition.

9. The Company may find it difficult to acquire necessary data

Certain data used and supplied by the Company are subject to regulation by various federal, state and local
regulatory authorities. Compliance with existing federal, state and local laws and regulations with respect to such

17

data has not had a material adverse effect on the Company’s results of operations, financial condition or liquidity
to date. Nonetheless, federal, state and local laws and regulations in the United States designed to protect the
public from the misuse of personal information in the marketplace and adverse publicity or potential litigation
concerning the commercial use of such information may affect the Company’s operations and could result in
substantial regulatory compliance expense, litigation expense and a loss of revenue. The suppliers of data to the
Company face similar burdens and, consequently, the Company may find it financially burdensome to acquire
necessary data.

10. Product migration may result in decreased revenue

Customers of many real estate settlement services the Company provides increasingly require these services
to be delivered faster, cheaper and more efficiently. Many of the traditional products it provides are labor and
time intensive. As these customer pressures increase, the Company may be forced to replace traditional products
with automated products that can be delivered electronically and with limited human processing. Because many
of these traditional products have higher prices than corresponding automated products, the Company’s revenues
may decline.

11. Changes in the Company’s relationships with large mortgage lenders could adversely affect the

Company

A relatively small number of lenders originate a majority of the mortgages in the United States and Canada.
Due to the consolidated nature of the industry, the Company derives a significant percentage of its revenues from
a relatively small base of lenders, and their borrowers, which enhances the negotiating power of these lenders
with respect to the pricing and the terms on which they purchase the Company’s products and other matters.
the Company’s revenues and profitability. Changes in the
These circumstances could adversely affect
Company’s relationship with any of these lenders, the loss of all or a portion of the business the Company
derives from these lenders or any refusal of these lenders to accept the Company’s policies could have a material
adverse effect on the Company.

12. A downgrade by ratings agencies, reductions in statutory capital and surplus maintained by the
Company’s title insurance underwriters or a deterioration in other measures of financial strength may
negatively affect the Company’s results of operations and competitive position

Certain of the Company’s customers use measurements of the financial strength of the Company’s title
insurance underwriters, including, among others, ratings provided by ratings agencies and levels of statutory
capital and surplus maintained by those underwriters, in determining the amount of a policy they will accept and
the amount of reinsurance required. Each of the major ratings agencies currently rates the Company’s title
insurance operations. The Company’s principal title insurance underwriter’s financial strength ratings are “A3”
by Moody’s Investor Services, Inc., “A-” by Fitch Ratings Ltd., “BBB+” by Standard & Poor’s Ratings Services
and “A-” by A.M. Best Company, Inc. These ratings provide the agencies’ perspectives on the financial strength,
operating performance and cash generating ability of those operations. These agencies continually review these
ratings and the ratings are subject to change. Statutory capital and surplus, or the amount by which statutory
assets exceed statutory liabilities, is also a measure of financial strength. The Company’s principal title insurance
underwriter maintained approximately $959.0 million of total statutory capital and surplus as of December 31,
2012. Accordingly, if the ratings or statutory capital and surplus of these title insurance underwriters are reduced
from their current levels, or if there is a deterioration in other measures of financial strength, the Company’s
results of operations, competitive position and liquidity could be adversely affected.

13. The Company’s investment portfolio is subject to certain risks and could experience losses

The Company maintains a substantial investment portfolio, primarily consisting of fixed income securities
(including mortgage-backed securities). The investment portfolio also includes money-market and other short-
term investments, as well as some preferred and common stock. Securities in the Company’s investment

18

portfolio are subject to certain economic and financial market risks, such as credit risk, interest rate (including
call, prepayment and extension) risk and/or liquidity risk. The risk of loss associated with the portfolio is
increased during periods of instability in credit markets and economic conditions. If the carrying value of the
investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, the
Company will be required to write down the value of the investments, which could have a material adverse effect
on the Company’s results of operations, statutory surplus and financial condition.

14. The Company’s pension plan is currently underfunded and pension expenses and funding obligations

could increase significantly as a result of weak performance of financial markets and its effect on plan assets

The Company is responsible for the obligations of its defined benefit pension plan, which it assumed from
its former parent, The First American Corporation, on June 1, 2010 in connection with the spin-off transaction
which was consummated on that date. The plan was closed to new entrants effective December 31, 2001 and
amended to “freeze” all benefit accruals as of April 30, 2008. The Company’s future funding obligations for this
plan depend upon, among other factors, the future performance of assets held in trust for the plan and interest
rates. The pension plan was underfunded as of December 31, 2012 by approximately $130.2 million and the
Company may need to make significant contributions to the plan. In addition, pension expenses and funding
requirements may also be greater than currently anticipated if the market values of the assets held by the pension
plan decline or if the other assumptions regarding plan earnings, expenses and interest rates require adjustment.
The Company’s obligations under this plan could have a material adverse effect on its results of operations,
financial condition and liquidity.

15. Actual claims experience could materially vary from the expected claims experience reflected in the

Company’s reserve for incurred but not reported claims

The Company maintains a reserve for incurred but not reported (“IBNR”) claims pertaining to its title,
escrow and other insurance and guarantee products. The majority of this reserve pertains to title insurance
policies, which are long-duration contracts with the majority of the claims reported within the first few years
following the issuance of the policy. Generally, 75 to 85 percent of claim amounts become known in the first six
years of the policy life, and the majority of IBNR reserves relate to the six most recent policy years. A material
change in expected ultimate losses and corresponding loss rates for policy years older than six years, while
possible, is not considered reasonably likely. However, changes in expected ultimate losses and corresponding
loss rates for recent policy years are considered likely and could result in a material adjustment to the IBNR
reserves. Based on historical experience, management believes a 50 basis point change to the loss rates for the
most recent policy years, positive or negative, is reasonably likely given the long duration nature of a title
insurance policy. For example, if the expected ultimate losses for each of the last six policy years increased or
decreased by 50 basis points, the resulting impact on the Company’s IBNR reserve would be an increase or
decrease, as the case may be, of $110.5 million. The estimates made by management in determining the
appropriate level of IBNR reserves could ultimately prove to be materially different from actual claims
experience.

16. The issuance of the Company’s title insurance policies and related activities by title agents, which

operate with substantial independence from the Company, could adversely affect the Company

The Company’s title insurance subsidiaries issue a significant portion of their policies through title agents
that operate with a substantial degree of independence from the Company. While these title agents are subject to
certain contractual limitations that are designed to limit the Company’s risk with respect to their activities, there
is no guarantee that the agents will fulfill their contractual obligations to the Company. In addition, regulators are
increasingly seeking to hold the Company responsible for the actions of these title agents and, under certain
circumstances, the Company may be held liable directly to third parties for actions (including defalcations) or
omissions of these agents. As a result, the Company’s use of title agents could result in increased claims on the
Company’s policies issued through agents and an increase in other costs and expenses.

19

17. Systems interruptions and intrusions, wire transfer errors and unauthorized data disclosures may
impair the delivery of the Company’s products and services, harm the Company’s reputation and result in
material claims for damages

System interruptions and intrusions may impair the delivery of the Company’s products and services,
resulting in a loss of customers and a corresponding loss in revenue. The Company’s businesses depend heavily
upon computer systems located in its data centers. Certain events beyond the Company’s control, including
natural disasters, telecommunications failures and intrusions into the Company’s systems by third parties could
temporarily or permanently interrupt the delivery of products and services. These interruptions also may interfere
with suppliers’ ability to provide necessary data and employees’ ability to attend work and perform their
responsibilities. The Company also relies on its systems, employees and domestic and international banks to
transfer funds. These transfers are susceptible to user input error, fraud, system interruptions or intrusions,
incorrect processing and similar errors that could result in lost funds that may be significant. As part of its
business, the Company maintains non-public personal information on consumers. There can be no assurance that
unauthorized disclosure will not occur either through system intrusions or the actions of third parties or
employees. Unauthorized disclosures could adversely affect the Company’s reputation and expose it to material
claims for damages.

18. The Company may not be able to realize the benefits of its offshore strategy

The Company utilizes lower cost labor in foreign countries, such as India and the Philippines, among others.
These countries are subject to relatively high degrees of political and social instability and may lack the
infrastructure to withstand natural disasters. Such disruptions could decrease efficiency and increase the
Company’s costs in these countries. Weakness of the United States dollar in relation to the currencies used in
these foreign countries may also reduce the savings achievable through this strategy. Furthermore, the practice of
utilizing labor based in foreign countries is subject to heightened scrutiny in the United States and, as a result,
some of the Company’s customers may require it to use labor based in the United States. Laws or regulations that
require the Company to use labor based in the United States or effectively increase the cost of the Company’s
foreign labor also could be enacted. The Company may not be able to pass on these increased costs to its
customers.

19. As a holding company,

the Company depends on distributions from its subsidiaries, and if
distributions from its subsidiaries are materially impaired, the Company’s ability to declare and pay dividends
may be adversely affected; in addition, insurance and other regulations limit the amount of dividends, loans
and advances available from the Company’s insurance subsidiaries

The Company is a holding company whose primary assets are investments in its operating subsidiaries. The
Company’s ability to pay dividends is dependent on the ability of its subsidiaries to pay dividends or repay funds.
If the Company’s operating subsidiaries are not able to pay dividends or repay funds, the Company may not be
able to fulfill parent company obligations and/or declare and pay dividends to its stockholders. Moreover,
pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the
amount of dividends, loans and advances available is limited. As of December 31, 2012, under such regulations,
the maximum amount of dividends, loans and advances available in 2013 from these insurance subsidiaries,
without prior approval from applicable regulators, was $405.4 million.

20

20. Certain provisions of the Company’s bylaws and certificate of incorporation may reduce the
the Company’s

likelihood of any unsolicited acquisition proposal or potential change of control
stockholders might consider favorable

that

The Company’s bylaws and certificate of incorporation contain provisions that could be considered “anti-
takeover” provisions because they make it harder for a third-party to acquire the Company without the consent of
the Company’s incumbent board of directors. Under these provisions:

•

•

•

•

•

election of the Company’s board of directors is staggered such that only one-third of the directors are
elected by the stockholders each year and the directors serve three year terms prior to reelection;

stockholders may not remove directors without cause, change the size of the board of directors or,
except as may be provided for in the terms of preferred stock the Company issues in the future, fill
vacancies on the board of directors;

stockholders may act only at stockholder meetings and not by written consent;

stockholders must comply with advance notice provisions for nominating directors or presenting other
proposals at stockholder meetings; and

the Company’s board of directors may without stockholder approval
determine their rights and terms, including voting rights, or adopt a stockholder rights plan.

issue preferred shares and

While the Company believes that they are appropriate, these provisions, which may only be amended by the
affirmative vote of the holders of approximately 67 percent of the Company’s issued voting shares, could have
the effect of discouraging an unsolicited acquisition proposal or delaying, deferring or preventing a change of
control transaction that might involve a premium price or otherwise be considered favorably by the Company’s
stockholders.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

We maintain our executive offices at MacArthur Place in Santa Ana, California. This office campus consists
of five office buildings, a technology center and a two-story parking structure, totaling approximately 490,000
square feet. Three office buildings, totaling approximately 210,000 square feet, and the fixtures thereto and
underlying land, are subject to a deed of trust and security agreement securing payment of a promissory note
evidencing a loan made in October 2003, to our principal title insurance subsidiary in the original sum of $55
million. This loan is payable in monthly installments of principal and interest, is fully amortizing and matures
November 1, 2023. The outstanding principal balance of this loan was $36.9 million as of December 31, 2012.
The technology center referred to above is primarily utilized and maintained by the Company but also houses
physically segregated servers belonging to and maintained by an unrelated third party.

One of our subsidiaries in the title insurance and services segment leases an aggregate of approximately
126,000 square feet of office space in four buildings of the International Technology Park in Bangalore, India
pursuant to various lease agreements. Most of the space is leased pursuant to agreements that expire in 2014 and
the current term of the other lease expires in 2015.

The office facilities we occupy are, in all material respects, in good condition and adequate for their

intended use.

Item 3. Legal Proceedings

The Company and its subsidiaries are parties to a number of non-ordinary course lawsuits. Frequently these

lawsuits are similar in nature to other lawsuits pending against the Company’s competitors.

21

For those non-ordinary course lawsuits where the Company has determined that a loss is both probable and
reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on
known facts has been recorded. Actual losses may materially differ from the amounts recorded.

For a substantial majority of these lawsuits, however, it is not possible to assess the probability of loss. Most
of these lawsuits are putative class actions which require a plaintiff to satisfy a number of procedural
requirements before proceeding to trial. These requirements include, among others, demonstration to a court that
the law proscribes in some manner the Company’s activities, the making of factual allegations sufficient to
suggest that the Company’s activities exceeded the limits of the law and a determination by the court—known as
class certification—that the law permits a group of individuals to pursue the case together as a class. In certain
instances the Company may also be able to compel the plaintiff to arbitrate its claim on an individual basis. If
these procedural requirements are not met, either the lawsuit cannot proceed or, as is the case with class
certification or compelled arbitration, the plaintiffs lose the financial incentive to proceed with the case (or the
amount at issue effectively becomes de minimus). Frequently, a court’s determination as to these procedural
requirements is subject to appeal to a higher court. As a result of, among other factors, ambiguities and
inconsistencies in the myriad laws applicable to the Company’s business and the uniqueness of the factual issues
presented in any given lawsuit, the Company often cannot determine the probability of loss until a court has
finally determined that a plaintiff has satisfied applicable procedural requirements.

Furthermore, because most of these lawsuits are putative class actions, it is often impossible to estimate the
possible loss or a range of loss amounts, even where the Company has determined that a loss is reasonably
possible. Generally class actions involve a large number of people and the effort to determine which people
satisfy the requirements to become plaintiffs—or class members—is often time consuming and burdensome.
Moreover, these lawsuits raise complex factual issues which result in uncertainty as to their outcome and,
ultimately, make it difficult for the Company to estimate the amount of damages which a plaintiff might
successfully prove. In addition, many of the Company’s businesses are regulated by various federal, state, local
and foreign governmental agencies and are subject to numerous statutory guidelines. These regulations and
statutory guidelines often are complex, inconsistent or ambiguous, which results in additional uncertainty as to
the outcome of a given lawsuit—including the amount of damages a plaintiff might be afforded—or makes it
difficult to analogize experience in one case or jurisdiction to another case or jurisdiction.

Most of the non-ordinary course lawsuits to which the Company and its subsidiaries are parties challenge
practices in the Company’s title insurance business, though a limited number of cases also pertain to the
Company’s other businesses. These lawsuits include, among others, cases alleging, among other assertions, that
the Company, one of its subsidiaries and/or one of its agents:

•

charged an improper rate for title insurance in a refinance transaction, including

• Hamilton v. First American Title Insurance Company, et al., filed on August 25, 2008 and pending

in the Superior Court of the State of North Carolina, Wake County,

• Haskins v. First American Title Insurance Company, filed on September 29, 2010 and pending in

the United States District Court of New Jersey,

•

•

•

Lang v. First American Title Insurance Company of New York, filed on March 9, 2012 and pending
in the United States District Court of New York,

Levine v. First American Title Insurance Company, filed on February 26, 2009 and pending in the
United States District Court of Pennsylvania,

Lewis v. First American Title Insurance Company, filed on November 28, 2006 and pending in the
United States District Court for the District of Idaho,

• Mitchell-Tracey v. First American Title Insurance Company, et al., filed on April 30, 2012 and

pending in the United States District Court for the Northern District of Maryland,

22

• Raffone v. First American Title Insurance Company, filed on February 14, 2004 and pending in the

Circuit Court, Nassau County, Florida, and

•

Slapikas v. First American Title Insurance Company, filed on December 19, 2005 and pending in
the United States District Court for the Western District of Pennsylvania.

All of these lawsuits are putative class actions. A court has only granted class certification in Hamilton,
Lewis, Raffone and Slapikas. For the reasons stated above, the Company has been unable to assess the
probability of loss or estimate the possible loss or the range of loss or, where the Company has been
able to make an estimate, the Company believes the amount is immaterial to the financial statements as
a whole.

•

purchased minority interests in title insurance agents as an inducement
to refer title insurance
underwriting business to the Company or gave items of value to title insurance agents and others for
referrals of business, in each case in violation of the Real Estate Settlement Procedures Act, including

•

Edwards v. First American Financial Corporation, filed on June 12, 2007 and pending in the United
States District Court for the Central District of California.

In Edwards a narrow class has been certified. For the reasons stated above, the Company has been
unable to assess the probability of loss or estimate the possible loss or the range of loss.

•

conspired with its competitors to fix prices or otherwise engaged in anticompetitive behavior, including

• Klein v. First American Title Insurance Company, et al., filed on July 10, 2012 and pending in the

United States District Court for the District of Columbia.

Klein is a putative class action for which a class has not been certified. For the reasons described
above, the Company has not yet been able to assess the probability of loss or estimate the possible loss
or the range of loss.

•

engaged in the unauthorized practice of law, including

• Gale v. First American Title Insurance Company, et al., filed on October 16, 2006 and pending in

the United States District Court of Connecticut, and

• Katin v. First American Signature Services, Inc., et al., filed on May 9, 2007 and pending in the

United States District Court of Massachusetts.

Katin is a putative class action for which a class has not been certified. The class originally certified in
Gale was subsequently decertified. For the reasons described above, the Company has not yet been able
to assess the probability of loss or estimate the possible loss or the range of loss.

•

failed to pay required compensation and provide required rest periods, including

• Bartko v. First American Title Insurance Company, filed on November 8, 2011, and pending in the

Superior Court of the State of California, Los Angeles.

Bartko is a putative class action for which a class has not been certified. For the reasons described
above, the Company has not yet been able to assess the probability of loss or estimate the possible loss
or the range of loss.

•

overcharged or improperly charged fees for products and services provided in connection with the
closing of real estate transactions, denied home warranty claims, recorded telephone calls, acted as an
unauthorized trustee and gave items of value to developers, builders and others as inducements to refer
business in violation of certain other laws, such as consumer protection laws and laws generally
prohibiting unfair business practices, and certain obligations, including

23

• Carrera v. First American Home Buyers Protection Corporation, filed on September 23, 2009 and

pending in the Superior Court of the State of California, County of Los Angeles,

• Chassen v. First American Financial Corporation, et al., filed on January 22, 2009 and pending in

the United States District Court of New Jersey,

• Coleman v. First American Home Buyers Protection Corporation, et al., filed on August 24, 2009

and pending in the Superior Court of the State of California, County of Los Angeles,

•

Eide v. First American Title Company, filed on February 26, 2010 and pending in the Superior
Court of the State of California, County of Kern,

• Gunning v. First American Title Insurance Company, filed on July 14, 2008 and pending in the

United States District Court for the Eastern District of Kentucky,

• Kaufman v. First American Financial Corporation, et al., filed on December 21, 2007 and pending

in the Superior Court of the State of California, County of Los Angeles,

• Kirk v. First American Financial Corporation, filed on June 15, 2006 and pending in the Superior

Court of the State of California, County of Los Angeles,

• Muehling v. First American Title Company, filed on December 11, 2012 and pending in the

Superior Court of the State of California, County of Alameda,

•

•

•

Sjobring v. First American Financial Corporation, et al., filed on February 25, 2005 and pending in
the Superior Court of the State of California, County of Los Angeles,

Smith v. First American Title Insurance Company, filed on November 23, 2011 and pending in the
United States District Court for the Western District of Washington,

Tavenner v. Talon Group, filed on August 18, 2009 and pending in the United States District Court
for the Western District of Washington, and

• Wilmot v. First American Financial Corporation, et al., filed on April 20, 2007 and pending in the

Superior Court of the State of California, County of Los Angeles.

All of these lawsuits, except Kirk, Sjobring, and Tavenner, are putative class actions for which a class
has not been certified. In Sjobring a class was certified but that certification was subsequently vacated.
For the reasons described above, the Company has not yet been able to assess the probability of loss or
estimate the possible loss or the range of loss.

While some of the lawsuits described above may be material to the Company’s operating results in any
particular period if an unfavorable outcome results, the Company does not believe that any of these lawsuits will
have a material adverse effect on the Company’s overall financial condition or liquidity.

The Company also is a party to non-ordinary course lawsuits other than those described above. With respect
to these lawsuits, the Company has determined either that a loss is not reasonably possible or that the estimated
loss or range of loss, if any, is not material to the financial statements as a whole.

The Company’s title insurance, property and casualty insurance, home warranty, banking, thrift, trust and
investment advisory businesses are regulated by various federal, state and local governmental agencies. Many of
the Company’s other businesses operate within statutory guidelines. Consequently, the Company may from time
to time be subject to examination or investigation by such governmental agencies. Currently, governmental
agencies are examining or investigating certain of the Company’s operations. These exams or investigations
include inquiries into, among other matters, pricing and rate setting practices in the title insurance industry,
competition in the title insurance industry, real estate settlement service customer acquisition and retention
practices and agency relationships. With respect to matters where the Company has determined that a loss is both
probable and reasonably estimable, the Company has recorded a liability representing its best estimate of the
financial exposure based on known facts. While the ultimate disposition of each such exam or investigation is not

24

yet determinable, the Company does not believe that individually or in the aggregate they will have a material
adverse effect on the Company’s financial condition, results of operations or cash flows. These exams or
investigations could, however, result in changes to the Company’s business practices which could ultimately
have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

The Company and its subsidiaries also are involved in numerous ongoing routine legal and regulatory
proceedings related to their operations. While the ultimate disposition of each proceeding is not determinable, the
ultimate resolution of any of such proceedings, individually or in the aggregate, could have a material adverse
effect on the Company’s financial condition, results of operations or cash flows in the period of disposition.

Item 4. Mine Safety Disclosures

Not applicable.

25

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Common Stock Market Prices and Dividends

The Company’s common stock trades on the New York Stock Exchange (ticker symbol FAF). The

approximate number of record holders of common stock on February 19, 2013, was 2,894.

High and low stock prices and dividends declared for 2012 and 2011 are set forth in the table below.

Period

Quarter Ended March 31 . . . . . . . . . .
Quarter Ended June 30 . . . . . . . . . . . .
Quarter Ended September 30 . . . . . . .
Quarter Ended December 31 . . . . . . .

2012

2011

High-low range

$12.45-$16.96
$15.17-$17.91
$16.40-$22.49
$21.35-$24.98

Cash
dividends

$0.08
$0.08
$0.08
$0.12

High-low range

Cash dividends

$14.45-$17.37
$14.50-$16.68
$12.45-$16.36
$10.51-$13.72

$0.06
$0.06
$0.06
$0.06

We expect that the Company will continue to pay quarterly cash dividends at or above the current level. The
timing, declaration and payment of future dividends, however, falls within the discretion of the Company’s board
of directors and will depend upon many factors, including the Company’s financial condition and earnings, the
capital requirements of our businesses, industry practice, restrictions imposed by applicable law and any other
factors the board of directors deems relevant from time to time. In addition, the ability to pay dividends also is
potentially affected by the restrictions described in Note 2 Statutory Restrictions on Investments and
Stockholders’ Equity to the consolidated financial statements included in “Item 8. Financial Statements and
Supplementary Data” of Part II of this report.

Unregistered Sales of Equity Securities

During the year ended December 31, 2012, the Company did not issue any unregistered common stock.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Pursuant to the share repurchase program initially announced by the Company on March 16, 2011, which
has no expiration date, the Company may repurchase up to $150.0 million of the Company’s issued and
outstanding common stock. In 2012, the Company did not repurchase any shares under this plan. Cumulatively
the Company has repurchased $2.5 million (including commissions) of its shares and has the authority to
repurchase an additional $147.5 million (including commissions) under the plan.

Stock Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or
“filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that it is
specifically incorporated by reference into such filing.

26

The following graph compares the cumulative total stockholder return on the Company’s common stock with
the corresponding cumulative total returns of the Russell 2000 Financial Services Index and a peer group index for
the period from June 2, 2010, the first day the Company’s common stock traded in the regular way market on the
New York Stock Exchange, through December 31, 2012. The comparison assumes an investment of $100 on
June 2, 2010 and reinvestment of dividends. This historical performance is not indicative of future performance.

Comparison of Cumulative Total Returns
Among First American Financial Corporation,
Custom Peer Group, and Russell 2000 Financial Services Index

$200

$190

$180

$170

$160

$150

$140

$130

$120

$110

$100

$90

$80

$70

$60

Jun-10

Dec-10

Dec-11

Dec-12

First American Financial Corp

Custom Peer Group

Russell 2000 Fin Svcs Index

Comparison of Cumulative Total Return

First
American Financial
Corporation
(FAF) (1)

Custom Peer
Group (1)(2)

Russell 2000
Financial
Services Index (1)

June 2, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . .
December 31, 2012 . . . . . . . . . . . . . . . . . . . . . .

$100
$104
$ 90
$174

$100
$105
$110
$129

$100
$112
$109
$132

(1) As calculated by Bloomberg Financial Services, to include reinvestment of dividends.
(2) The peer group consists of the following companies: American Financial Group, Inc.; Assurant, Inc.;
Cincinnati Financial Corporation; Fidelity National Financial, Inc.; The Hanover Insurance Group, Inc.;
Kemper Corporation; Lender Processing Services, Inc.; Mercury General Corporation; Old Republic
International Corp.; White Mountains Insurance Group Ltd.; and W.R. Berkley Corporation each of which
operates in a business similar to a business operated by the Company. The compensation committee of the
Company utilizes the compensation practices of these companies as benchmarks in setting the compensation
of its executive officers.

27

Item 6. Selected Financial Data

The selected historical consolidated financial data for First American Financial Corporation (the
“Company”) as of and for the five-year period ended December 31, 2012, have been derived from the
Company’s consolidated and combined financial statements. The selected historical consolidated financial data
should be read in conjunction with the Consolidated Financial Statements and Notes thereto, “Item 1—
Business,” and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”

The Company became a publicly traded company in connection with its spin-off from its prior parent, The
First American Corporation (“TFAC”), on June 1, 2010 (the “Separation”). The Company’s historical financial
statements prior to June 1, 2010 have been derived from the consolidated financial statements of TFAC and
represent carve-out stand-alone combined financial statements. The combined financial statements prior to
June 1, 2010 include items attributable to the Company and allocations of general corporate expenses from
TFAC. As a result, the Company’s selected historical consolidated financial data prior to June 1, 2010 do not
necessarily reflect what its financial position or results of operations would have been if it had been operated as
a stand-alone public entity during the periods covered prior to June 1, 2010, and may not be indicative of the
Company’s future results of operations and financial position. See Note 1 Description of the Company to the
consolidated financial statements for further discussion of the Separation and basis of presentation.

First American Financial Corporation and Subsidiary Companies

Year Ended December 31,

2012

2011

2010

2009

2008

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to the Company . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . . .
Allocated portion of TFAC debt (Note A) . . . . . . .
Stockholders’ equity or TFAC’s invested equity

(Note B)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average stockholders’ equity or TFAC’s
invested equity . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on common shares (Note C) . . . . . . . . .
Per share of common stock (Note D)—

Net income (loss) attributable to the Company:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stockholders’ equity or TFAC’s invested

equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . .
Number of common shares outstanding (Note E)—

Weighted average during the year:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other Operating Data (unaudited):

Title orders opened (Note F) . . . . . . . . . . . . . . .
Title orders closed (Note F)
. . . . . . . . . . . . . . .
Number of employees (Note G)
. . . . . . . . . . . .

(in thousands, except percentages, per share amounts and employee data)
$4,367,725
$3,906,612
$4,541,821
$ (72,482)
$ 128,956
$ 301,728

$3,820,574
78,579
$

$4,046,834
$ 134,277

687
$
$ 301,041
$6,050,847
$ 229,760
$

303
$
$
78,276
$5,362,210
$ 299,975

— $

— $

1,127
$
$ 127,829
$5,821,612
$ 293,817

11,888
$
$ 122,389
$5,530,281
$ 119,313
— $ 140,000

11,523
$
$ (84,005)
$5,720,757
$ 153,969
$ 140,000

$2,348,065

$2,028,600

$1,980,017

$2,019,800

$1,891,841

13.8%

3.9%

6.4%

37,612

$

24,784

$

18,553

$

6.3%
— $

(4.4)%
—

2.83
2.77

21.90
0.36

$
$

$
$

0.74
0.73

19.24
0.24

$
$

$
$

1.22
1.20

18.96
0.18

$
$

$
$

1.18
1.18

$
$

(0.81)
(0.81)

19.42

$
— $

18.19
—

$

$
$

$
$

105,197
106,914
105,410

1,254
918
16,117

104,134
106,177
104,457

1,469
1,079
16,879

104,006
104,006
104,006

1,771
1,301
13,963

104,006
104,006
104,006

1,780
1,239
15,147

106,307
108,542
107,239

1,635
1,192
17,312

28

Note A—Prior to the Separation, a portion of TFAC’s combined debt, in the amount of $140.0 million, was
allocated to the Company based on amounts directly incurred for the Company’s benefit. In connection with the
Separation, the Company borrowed $200.0 million under its revolving credit facility and transferred such funds
to CoreLogic, which fully satisfied the Company’s $140.0 million allocated portion of TFAC debt.

Note B—Stockholders’ equity refers to the stockholders of the Company and excludes noncontrolling
interests. TFAC’s invested equity refers to the net assets of the Company which reflects TFAC’s investment in
the Company prior to the Separation and excludes noncontrolling interests.

Note C—The Company did not declare and/or pay dividends prior to the Separation as it was not a stand-

alone publicly traded company until the Separation.

Note D—Per share information relating to net income is based on weighted-average number of shares
outstanding for the years presented. Per share information relating to stockholders’ equity is based on shares
outstanding at the end of each year.

Note E—Number of common shares outstanding for years 2010 and prior were computed using the number
of shares of common stock outstanding immediately following the Separation, as if such shares were outstanding
for the entire period prior to the Separation.

Note F—Title order volumes are those processed by the direct domestic title operations of the Company and

do not include orders processed by agents.

Note G—Number of employees is based on actual employee headcount. The increase in headcount in 2010
was due to certain offshore functions being performed internally by the Company that prior to the Separation
were performed by TFAC. This increase in headcount is substantially related to employees employed outside of
the United States.

29

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Spin-off

The Company became a publicly traded company following its spin-off from its prior parent, The First
American Corporation (“TFAC”) on June 1, 2010 (the “Separation”). On that date, TFAC distributed all of the
Company’s outstanding shares to the record date shareholders of TFAC on a one-for-one basis (the
“Distribution”). After the Distribution, the Company owns TFAC’s financial services businesses and TFAC,
which reincorporated and assumed the name CoreLogic, Inc. (“CoreLogic”), continues to own its information
solutions businesses. The Company’s common stock trades on the New York Stock Exchange under the “FAF”
ticker symbol and CoreLogic’s common stock trades on the New York Stock Exchange under the ticker symbol
“CLGX.”

To effect the Separation, TFAC and the Company entered into a Separation and Distribution Agreement (the
“Separation and Distribution Agreement”) that governs the rights and obligations of the Company and CoreLogic
regarding the Distribution. It also governs the relationship between the Company and CoreLogic subsequent to
the completion of the Separation and provides for the allocation between the Company and CoreLogic of
TFAC’s assets and liabilities. The Separation and Distribution Agreement identifies assets, liabilities and
contracts that were allocated between CoreLogic and the Company as part of the Separation and describes the
transfers, assumptions and assignments of these assets, liabilities and contracts. In particular, the Separation and
Distribution Agreement provides that, subject to the terms and conditions contained therein:

• All of the assets and liabilities primarily related to the Company’s business—primarily the business and
operations of TFAC’s title insurance and services segment and specialty insurance segment—have been
retained by or transferred to the Company;

• All of the assets and liabilities primarily related to CoreLogic’s business—primarily the business and
operations of TFAC’s data and analytic solutions, information and outsourcing solutions and risk
mitigation and business solutions segments—have been retained by or transferred to CoreLogic;

• On the record date for the Distribution, TFAC issued to the Company and its principal title insurance
subsidiary, First American Title Insurance Company (“FATICO”), a number of shares of its common
stock that resulted in the Company and FATICO collectively owning 12.9 million shares of CoreLogic’s
common stock immediately following the Separation, all of which have subsequently been sold. See
Note 19 Transactions with CoreLogic/TFAC to the consolidated financial statements for further
discussion of the CoreLogic stock;

•

The Company effectively assumed $200.0 million of the outstanding liability for indebtedness under
TFAC’s senior secured credit facility through the Company’s borrowing and transferring to CoreLogic
of $200.0 million under the Company’s credit facility in connection with the Separation. See Note 10
Notes and Contracts Payable to the consolidated financial statements for further discussion of the
Company’s credit facility.

The Separation resulted in a net distribution from the Company to TFAC of $151.4 million. In connection
with such distribution, the Company assumed $22.1 million of accumulated other comprehensive loss, net of tax,
which was primarily related to the Company’s assumption of the unfunded portion of the defined benefit pension
obligation associated with participants who were employees of the businesses retained by CoreLogic. See Note
14 Employee Benefit Plans to the consolidated financial statements for additional discussion of the defined
benefit pension plan.

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with generally accepted accounting
principles and reflect the consolidated operations of the Company as a separate, stand-alone publicly traded

30

company subsequent to June 1, 2010. The consolidated financial statements include the accounts of First
American Financial Corporation and all controlled subsidiaries. All significant intercompany transactions and
balances have been eliminated. Investments in which the Company exercises significant influence, but does not
control and is not the primary beneficiary, are accounted for using the equity method. Investments in which the
Company does not exercise significant influence over the investee are accounted for under the cost method.

Principles of Combination and Basis of Presentation

The Company’s historical financial statements prior to June 1, 2010 have been prepared in accordance with
generally accepted accounting principles and have been derived from the consolidated financial statements of
TFAC and represent carve-out stand-alone combined financial statements. The combined financial statements
prior to June 1, 2010 include items attributable to the Company and allocations of general corporate expenses
from TFAC.

compliance,

communications,

facilities, procurement,

The Company’s historical financial statements prior to June 1, 2010 include assets, liabilities, revenues and
expenses directly attributable to the Company’s operations. The Company’s historical financial statements prior
to June 1, 2010 reflect allocations of corporate expenses from TFAC for certain functions provided by TFAC,
including, but not limited to, general corporate expenses related to finance, legal, information technology, human
resources,
and share-based
compensation. These expenses have been allocated to the Company on the basis of direct usage when
identifiable, with the remainder allocated on the basis of net revenue, domestic headcount or assets or a
combination of such drivers. The Company considers the basis on which the expenses have been allocated to be a
reasonable reflection of the utilization of services provided to or the benefit received by the Company during the
periods presented. The Company’s historical financial statements prior to June 1, 2010 do not reflect the debt or
interest expense it might have incurred if it had been a stand-alone entity. In addition, the Company expects to
incur other expenses, not reflected in its historical financial statements prior to June 1, 2010, as a result of being a
separate publicly traded company. As a result, the Company’s historical financial statements prior to June 1,
2010 do not necessarily reflect what its financial position or results of operations would have been if it had been
operated as a stand-alone public entity during the periods covered prior to June 1, 2010, and may not be
indicative of the Company’s future results of operations and financial position.

employee benefits,

Reportable Segments

The Company consists of the following reportable segments and a corporate function:

•

•

The Company’s title insurance and services segment issues title insurance policies on residential and
commercial property in the United States and offers similar or related products and services
internationally. This segment also provides escrow and closing services; accommodates tax-deferred
exchanges of real estate; maintains, manages and provides access to title plant records and images and
provides banking, trust and investment advisory services. The Company, through its principal title
insurance subsidiary and such subsidiary’s affiliates, transacts its title insurance business through a
network of direct operations and agents. Through this network, the Company issues policies in the 49
states that permit the issuance of title insurance policies and the District of Columbia. The Company
also offers title insurance and other insurance and guarantee products, as well as related settlement
services in foreign countries, including Canada, the United Kingdom, Australia and various other
established and emerging markets.

The Company’s specialty insurance segment issues property and casualty insurance policies and sells
home warranty products. The property and casualty insurance business provides insurance coverage to
residential homeowners and renters for liability losses and typical hazards such as fire, theft, vandalism
and other types of property damage. This business is licensed to issue policies in all 50 states and
actively issues policies in 43 states. In its largest market, California, it also offers preferred risk auto
insurance to better compete with other carriers offering bundled home and auto insurance. The home

31

warranty business provides residential service contracts that cover residential systems and appliances
against failures that occur as the result of normal usage during the coverage period. This business
currently operates in 39 states and the District of Columbia.

The corporate division consists of certain financing facilities as well as the corporate services that support

the Company’s business operations.

Critical Accounting Policies and Estimates

The Company’s management considers the accounting policies described below to be critical in preparing
the Company’s consolidated financial statements. These policies require management to make estimates and
judgments that affect
liabilities, revenues, expenses and related
disclosures of contingencies. See Note 1 Description of the Company to the consolidated financial statements for
a more detailed description of the Company’s accounting policies.

the reported amounts of certain assets,

Revenue recognition. Title premiums on policies issued directly by the Company are recognized on the
effective date of the title policy and escrow fees are recorded upon close of the escrow. Revenues from title
policies issued by independent agents are recorded when notice of issuance is received from the agent, which is
generally when cash payment is received by the Company. Revenues earned by the Company’s title plant
management business are recognized at the time of delivery, as the Company has no significant ongoing
obligation after delivery.

Direct premiums of the Company’s specialty insurance segment include revenues from home warranty
contracts which are generally recognized ratably over the 12-month duration of the contracts, and revenues from
property and casualty insurance policies which are also recognized ratably over the 12-month duration of the
policies.

Interest on loans of the Company’s thrift subsidiary is recognized on the outstanding principal balance on
the accrual basis. Revenues earned by the other products in the Company’s trust and banking operations are
recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.

Provision for policy losses. The Company provides for title insurance losses by a charge to expense when
the related premium revenue is recognized. The amount charged to expense is generally determined by applying
a rate (the loss provision rate) to total title insurance premiums and escrow fees. The Company’s management
estimates the loss provision rate at the beginning of each year and reassesses the rate quarterly to ensure that the
resulting incurred but not reported (“IBNR”) loss reserve and known claims reserve included in the Company’s
consolidated balance sheets together reflect management’s best estimate of the total costs required to settle all
IBNR and known claims. If the ending IBNR reserve is not considered adequate, an adjustment is recorded.

The process of assessing the loss provision rate and the resulting IBNR reserve involves evaluation of the
results of both an in-house actuarial review and independent actuarial analysis. The Company’s in-house actuary
performs a reserve analysis utilizing generally accepted actuarial methods that incorporate cumulative historical
claims experience and information provided by in-house claims and operations personnel. Current economic and
business trends are also reviewed and used in the reserve analysis. These include real estate and mortgage
markets conditions, changes in residential and commercial real estate values, and changes in the levels of defaults
and foreclosures that may affect claims levels and patterns of emergence, as well as any company-specific factors
that may be relevant to past and future claims experience. Results from the analysis include, but are not limited
to, a range of IBNR reserve estimates and a single point estimate for IBNR as of the balance sheet date.

For recent policy years at early stages of development (generally the last three years), IBNR is estimated
using a combination of expected loss rate and multiplicative loss development factor calculations. For more
mature policy years (generally, policy years aged more than three years), IBNR generally is estimated using

32

multiplicative loss development factor calculations. The expected loss rate method estimates IBNR by applying
an expected loss rate to total title insurance premiums and escrow fees, and adjusting for policy year maturity
using the estimated loss development patterns. Multiplicative loss development factor calculations estimate
IBNR by applying factors derived from loss development patterns to losses realized to date. The expected loss
rate and loss development patterns are based on historical experience and the relationship of the history to the
applicable policy years.

The Company utilizes an independent third party actuary who produces a report with estimates and
projections of the same financial items described above. The third party actuary’s analysis uses generally
accepted actuarial methods that may in whole or in part be different from those used by the in-house actuary. The
third party actuary’s report is used to assess the reasonableness of the in-house analysis.

The Company’s management uses the IBNR point estimate from the in-house actuary’s analysis and other
relevant information it may have concerning claims to determine what it considers to be the best estimate of the
total amount required for the IBNR reserve.

Title insurance policies are long-duration contracts with the majority of the claims reported to the Company
within the first few years following the issuance of the policy. Generally, 75 to 85 percent of claim amounts
become known in the first six years of the policy life, and the majority of IBNR reserves relate to the six most
recent policy years. A material change in expected ultimate losses and corresponding loss rates for policy years
older than six years, while possible, is not considered reasonably likely by the Company. However, changes in
expected ultimate losses and corresponding loss rates for recent policy years are considered likely and could
result in a material adjustment to the IBNR reserves. Based on historical experience, the Company believes that a
50 basis point change to one or more of the loss rates for the most recent policy years, positive or negative, is
reasonably likely given the long duration nature of a title insurance policy. If the expected ultimate losses for
each of the last six policy years increased or decreased by 50 basis points, the resulting impact on the IBNR
reserve would be an increase or decrease, as the case may be, of $110.5 million. The estimates made by
management in determining the appropriate level of IBNR reserves could ultimately prove to be materially
different from actual claims experience.

The Company provides for property and casualty insurance losses when the insured event occurs. The
Company provides for claims losses relating to its home warranty business based on the average cost per claim as
applied to the total of new claims incurred. The average cost per home warranty claim is calculated using the
average of the most recent 12 months of claims experience.

A summary of the Company’s loss reserves, broken down into its components of known title claims,

incurred but not reported and non-title claims, follows:

(in thousands except percentages)

December 31, 2012

December 31, 2011

Known title claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IBNR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$133,070
805,430

13.6% $ 162,019
816,603
82.5%

Total title claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-title claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

938,500
37,962

96.1%
3.9%

978,622
36,054

15.9%
80.5%

96.4%
3.6%

Total loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$976,462

100.0% $1,014,676

100.0%

33

Fair Value of Investment Portfolio. The Company classifies the fair value of its debt and equity securities
using a three-level hierarchy for fair value measurements that distinguishes between market participant
assumptions developed based on market data obtained from sources independent of the reporting entity
(observable inputs) and the reporting entity’s own assumptions about market participant assumptions developed
based on the best information available in the circumstances (unobservable inputs). The hierarchy level assigned
to each security in the Company’s available-for-sale portfolio is based on management’s assessment of the
transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. The
three hierarchy levels are defined as follows:

Level 1—Valuations based on unadjusted quoted market prices in active markets for identical securities.

Level 2—Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for
similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are
observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant
measurement, and involve management judgment.

to the overall fair value

If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial
security’s hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.
The valuation techniques and inputs used to estimate the fair value of the Company’s debt and equity securities
are summarized as follows:

Fair value of debt securities

The fair value of debt securities was based on the market values obtained from independent pricing services
that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other
market information and price quotes from well-established independent broker-dealers. The independent pricing
services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain
quotes from market makers or broker-dealers that they recognize to be market participants. The pricing services
utilize the market approach in determining the fair value of the debt securities held by the Company. The
Company obtains an understanding of the valuation models and assumptions utilized by the services and has
controls in place to determine that the values provided represent fair value. The Company’s validation procedures
include comparing prices received from the pricing services to quotes received from other third party sources for
certain securities with market prices that are readily verifiable. If the price comparison results in differences over
a predefined threshold, the Company will assess the reasonableness of the changes relative to prior periods given
the prevailing market conditions and assess changes in the issuers’ credit worthiness, performance of any
underlying collateral and prices of the instrument relative to similar issuances. To date, the Company has not
made any material adjustments to the fair value measurements provided by the pricing services.

Typical inputs and assumptions to pricing models used to value the Company’s U.S. Treasury bonds,
municipal bonds, foreign bonds, governmental agency bonds, governmental agency mortgage-backed securities
and corporate debt securities include, but are not limited to, benchmark yields, reported trades, broker-dealer
quotes, credit spreads, credit ratings, bond insurance (if applicable), benchmark securities, bids, offers, reference
data and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include
the structure of issuance, characteristics of the issuer, collateral attributes and prepayment speeds. The fair value
of non-agency mortgage-backed securities was obtained from the independent pricing service referenced above
and subject to the Company’s validation procedures discussed above. However, due to the fact that these
securities were not actively traded, there were fewer observable inputs available requiring the pricing service to
use more judgment in determining the fair value of the securities, therefore the Company classified non-agency
mortgage-backed securities as Level 3.

The significant unobservable inputs used in the fair value measurement of the Company’s non-agency
mortgage-backed securities are prepayment rates, default rates and loss severity in the event of default.
Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher)

34

fair value measurement. Generally, a change in the assumption used for default rates is accompanied by a
directionally similar change in the assumption used for the loss severity and a directionally opposite change in
the assumption used for prepayment rates.

Other-than-temporary impairment–debt securities

If the Company intends to sell a debt security in an unrealized loss position or determines that it is more
likely than not that the Company will be required to sell a debt security before it recovers its amortized cost
basis, the debt security is other-than-temporarily impaired and it is written down to fair value with all losses
recognized in earnings. As of December 31, 2012, the Company does not intend to sell any debt securities in an
unrealized loss position and it is not more likely than not that the Company will be required to sell debt securities
before recovery of their amortized cost basis.

If the Company does not expect to recover the amortized cost basis of a debt security with declines in fair
value (even if the Company does not intend to sell the debt security and it is not more likely than not that the
Company will be required to sell the debt security before the recovery of its remaining amortized cost basis), the
losses the Company considers to be the credit portion of the other-than-temporary impairment loss (“credit loss”)
is recognized in earnings and the non-credit portion is recognized in other comprehensive income. The credit loss
is the difference between the present value of the cash flows expected to be collected and the amortized cost
basis of the debt security. The cash flows expected to be collected are discounted at the rate implicit in the
security immediately prior to the recognition of the other-than-temporary impairment.

Expected future cash flows for debt securities are based on qualitative and quantitative factors specific to
each security, including the probability of default and the estimated timing and amount of recovery. The detailed
inputs used to project expected future cash flows may be different depending on the nature of the individual debt
security. Specifically, the cash flows expected to be collected for each non-agency mortgage-backed security are
estimated by analyzing loan-level detail to estimate future cash flows from the underlying assets, which are then
applied to the security based on the underlying contractual provisions of the securitization trust that issued the
security (e.g. subordination levels, remaining payment terms, etc.). The Company uses third-party software to
determine how the underlying collateral cash flows will be distributed to each security issued from the
securitization trust. The primary assumptions used in estimating future collateral cash flows are prepayment
speeds, default rates and loss severity. In developing these assumptions, the Company considers the financial
condition of the borrower, loan to value ratio, loan type and geographical location of the underlying property.
The Company utilizes publicly available information related to specific assets, generally available market data
such as forward interest rate curves and a third party’s securities, loans and property data and market analytics
tools.

The table below summarizes the primary assumptions used at December 31, 2012 in estimating the cash

flows expected to be collected for these securities.

Prepayment speeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Default rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss severity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.9%
3.3%
22.8%

8.5%—11.2%
1.6%— 6.8%
3.3%—35.8%

Weighted average

Range

Fair value of equity securities

The fair value of equity securities, including preferred and common stocks, was based on quoted market

prices for identical assets that are readily and regularly available in an active market.

Other-than-temporary impairment–equity securities

When a decline in the fair value of an equity security (including common and preferred stock) is considered
to be other-than-temporary, such security is written down to its fair value. When assessing if a decline in value is

35

other-than-temporary, the factors considered include the length of time and extent to which fair value has been
below cost, the probability that the Company will be unable to collect all amounts due under the contractual
terms of the security, the seniority and duration of the securities, issuer-specific news and other developments,
the financial condition and prospects of the issuer (including credit ratings), macro-economic changes (including
the outlook for industry sectors, which includes government policy initiatives) and the Company’s ability and
intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

When an equity security has been in an unrealized loss position for greater than twelve months, the
Company’s review of the security includes the above noted factors as well as the evidence, if any exists, that
supports the Company’s view that the security will recover its value in the foreseeable future, typically within the
next twelve months. If objective, substantial evidence does not indicate a likely recovery during that timeframe,
the Company’s policy is that such losses are considered other-than-temporary and therefore an impairment loss is
recorded.

Impairment testing for goodwill. The Company is required to perform an annual goodwill impairment
assessment for each reporting unit. The Company’s four reporting units are title insurance, home warranty,
property and casualty insurance and trust and other services. The Company has elected to perform this annual
assessment in the fourth quarter of each fiscal year or sooner if circumstances indicate possible impairment.
Based on current guidance, the Company has the option to perform a qualitative assessment to determine if the
fair value is more likely than not (i.e. a likelihood of greater than 50%) less than the carrying amount as a basis
for determining whether it is necessary to perform a quantitative impairment test, or may choose to forego the
qualitative assessment and perform the quantitative impairment test. The qualitative factors considered in this
assessment may include macroeconomic conditions,
industry and market considerations, overall financial
performance as well as other relevant events and circumstances as determined by the Company. The Company
evaluates the weight of each factor to determine whether it is more likely than not that impairment may exist. If
the results of the qualitative assessment indicate the more likely than not threshold was not met, the Company
may choose not to perform the quantitative impairment test. If however, the more likely than not threshold is
met, the Company performs the quantitative test as required and discussed below.

Management’s quantitative impairment

testing process includes two steps. The first step (“Step 1”)
compares the fair value of each reporting unit to its carrying amount. The fair value of each reporting unit is
determined by using discounted cash flow analysis and market approach valuations. If the fair value of the
reporting unit exceeds its carrying amount, the goodwill is not considered impaired and no additional analysis is
required. However, if the carrying amount is greater than the fair value, a second step (“Step 2”) must be
completed to determine if the fair value of the goodwill exceeds the carrying amount of goodwill.

Step 2 involves calculating an implied fair value of goodwill for each reporting unit for which the first step
indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of
goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the
reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets,
liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the
implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no
impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the
goodwill, an impairment loss is recorded for the excess. An impairment loss cannot exceed the carrying value of
goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of
goodwill impairment losses is not permitted.

The quantitative impairment test for goodwill utilizes a variety of valuation techniques, all of which require
the Company to make estimates and judgments. Fair value is determined by employing an expected present value
technique, which utilizes multiple cash flow scenarios that reflect a range of possible outcomes and an
appropriate discount rate. The use of comparative market multiples (the “market approach”) compares the
reporting unit to other comparable companies (if such comparables are present in the marketplace) based on

36

valuation multiples to arrive at a fair value. The Company also uses certain of these valuation techniques in
accounting for business combinations, primarily in the determination of the fair value of acquired assets and
liabilities. In assessing the fair value, the Company utilizes the results of the valuations (including the market
approach to the extent comparables are available) and considers the range of fair values determined under all
methods and the extent to which the fair value exceeds the carrying amount of the equity or asset.

The valuation of each reporting unit includes the use of assumptions and estimates of many critical factors,
including revenue growth rates and operating margins, discount rates and future market conditions, determination
of market multiples and the establishment of a control premium, among others. Forecasts of future operations are
based, in part, on operating results and the Company’s expectations as to future market conditions. These types
of analyses contain uncertainties because they require the Company to make assumptions and to apply judgments
to estimate industry economic factors and the profitability of future business strategies. However, if actual results
are not consistent with the Company’s estimates and assumptions, the Company may be exposed to future
impairment losses that could be material.

The Company’s assessments for 2012, 2011 and 2010 did not indicate impairment in any of its reporting

units.

Impairment testing for other indefinite-lived intangible assets. The Company’s other indefinite-lived
intangible assets consist of licenses which are not amortized but rather tested for impairment by comparing the
fair value of the license with its carrying value at least annually or when an indicator of potential impairment has
occurred. Management’s impairment test involves calculating the fair value by using a discounted cash flow
analysis and market approach valuations. If the fair value of the asset exceeds its carrying amount, the asset is not
considered impaired and no additional analysis is required. However, if the carrying amount is greater than the
fair value, an impairment loss is recorded equal to the excess. The impairment loss establishes a new basis and
the subsequent reversal of impairment losses is not permitted.

Impairment testing for long-lived assets. Management uses estimated future cash flows (undiscounted and
excluding interest) to measure the recoverability of long-lived assets held and used, including intangible assets
with finite lives, whenever events or changes in circumstances indicate that the carrying value of an asset may
not be fully recoverable. At such time impairment in value of a long-lived asset is identified, the impairment is
measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.

Income taxes. The Company accounts for income taxes under the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The
Company evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of
existing temporary differences, the period in which they are expected to be recovered and expected levels of
taxable income. A valuation allowance to reduce deferred tax assets is established when it is considered more
likely than not that some or all of the deferred tax assets will not be realized.

The Company recognizes the effect of income tax positions only if sustaining those positions is considered
more likely than not. Changes in recognition or measurement of uncertain tax positions are reflected in the period
in which a change in judgment occurs. The Company recognizes interest and penalties, if any, related to
uncertain tax positions in tax expense.

Depreciation and amortization lives for assets. Management is required to estimate the useful lives of
several asset classes, including capitalized data, internally developed software and other intangible assets. The
estimation of useful lives requires a significant amount of judgment related to matters such as future changes in
technology, legal issues related to allowable uses of data and other matters.

37

Share-based compensation. The Company measures the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized in the
Company’s financial statements over the requisite service period of the award using the straight-line method for
awards that contain only a service condition and the graded vesting method for awards that contain a
performance or market condition. The share-based compensation expense recognized is based on the number of
shares ultimately expected to vest, net of forfeitures. Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company’s primary means of providing share-based compensation is through the granting of restricted
stock units (“RSUs”). RSUs granted generally have graded vesting and include a service condition; and for
certain key employees and executives may also include either a performance or market condition. RSUs receive
dividend equivalents in the form of RSUs having the same vesting requirements as the RSUs initially granted.

As of December 31, 2012, all stock options issued under the Company’s plans are vested and no share-based

compensation expense related to such stock options remains to be recognized.

In addition, the Company has an employee stock purchase plan that allows eligible employees to purchase
common stock of the Company at 85.0% of the closing price on the last day of each month. The Company
recognizes an expense in the amount equal to the discount.

Employee benefit plans. The Company recognizes the overfunded or underfunded status of defined benefit
postretirement plans as an asset or liability on its consolidated balance sheets and recognizes changes in the
funded status in the year in which changes occur, through accumulated other comprehensive loss. The funded
status is measured as the difference between the fair value of plan assets and benefit obligation (the projected
benefit obligation for pension plans and the accumulated postretirement benefit obligation for the other
postretirement plans). Actuarial gains and losses and prior service costs and credits that have not been recognized
as a component of net periodic benefit cost previously are recorded as a component of accumulated other
comprehensive loss. Plan assets and obligations are measured as of December 31.

Recently Adopted Accounting Pronouncements

In October 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance related to
accounting for costs associated with acquiring or renewing insurance contracts. The updated guidance modifies
the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new
and renewal contracts. Under the updated guidance only costs based on successful efforts (that is, acquiring a
new or renewal contract) including direct-response advertising costs are eligible for capitalization. The updated
guidance is effective for the interim and annual periods beginning after December 15, 2011. The adoption of the
guidance, on a prospective basis, did not have a material impact on the Company’s consolidated financial
statements.

In May 2011, the FASB issued updated guidance that is intended to improve the comparability of fair value
measurements presented and disclosed in financial statements prepared in accordance with U.S. generally
accepted accounting principles and International Financial Reporting Standards. The amendments are of two
types: (i) those that clarify the FASB’s intent about the application of existing fair value measurement and
disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value
or for disclosing information about fair value measurements. The updated guidance is effective for interim and
annual periods beginning after December 15, 2011. Except for the disclosure requirements, the adoption of the
guidance had no impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued updated guidance that is intended to increase the prominence of other
comprehensive income in financial statements. The updated guidance eliminates the option to present the
components of other comprehensive income as part of the statement of changes in stockholders’ equity, and
requires either consecutive presentation of the statement of net income and other comprehensive income or in a

38

single continuous statement of comprehensive income. The updated guidance is effective for interim and annual
reporting periods beginning after December 15, 2011. The adoption of the guidance had no impact on the
Company’s consolidated financial statements.

Pending Accounting Pronouncements

In February 2013, the FASB issued updated guidance requiring entities to present either in a single note or
parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each
component of accumulated other comprehensive income based on its source and the income statement line items
affected by the reclassification. If the component is not required to be reclassified to net income in its entirety,
entities would instead cross reference to the related footnote for additional information. The updated guidance is
effective prospectively for interim and annual reporting periods beginning after December 15, 2012, with early
adoption permitted. Except for the disclosure requirements, management does not expect the adoption of this
guidance to have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued updated guidance that is intended to reduce the cost and complexity of
performing an impairment test for indefinite-lived intangible assets, other than goodwill, by simplifying how an
entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-
lived asset categories. The updated guidance permits entities to first assess qualitative factors to determine
whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining
whether it is necessary to perform the quantitative impairment test in accordance with current guidance. The
updated guidance is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012, with early adoption permitted. Management did not early adopt this guidance and does not
expect this guidance to have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued updated guidance requiring entities to disclose both gross information
and net information about both instruments and transactions eligible for offset in the statement of financial
position and instruments and transactions subject to an agreement similar to a master netting arrangement. The
updated guidance is effective for interim and annual reporting periods beginning on or after January 1, 2013.
Management does not expect the adoption of this guidance to have a material impact on the Company’s
consolidated financial statements.

Results of Operations

Overview

A substantial portion of the revenues for the Company’s title insurance and services segment results from
the sale, refinancing and foreclosure of residential and commercial real estate. In the specialty insurance segment,
revenues associated with the initial year of coverage in both the home warranty and property and casualty
operations are impacted by volatility in real estate transactions. Traditionally, the greatest volume of real estate
activity, particularly residential resale, has occurred in the spring and summer months. However, changes in
interest rates, as well as other economic factors, can cause fluctuations in the traditional pattern of real estate
activity.

A low interest rate environment typically has a favorable impact on many of the Company’s businesses.
However, in recent years mortgage credit has been generally tight, which together with the uncertainty in general
economic conditions, has impacted the demand for most of the Company’s products and services. During 2012,
primarily due to the improvement in both the general economy and availability of mortgage credit, coupled with
the historically low interest rate environment, the Company observed a sizable increase in mortgage activity.

According to the Mortgage Bankers Association’s January 15, 2013 Mortgage Finance Forecast (the “MBA
Forecast”), residential mortgage originations in the United States (based on the total dollar value of the
transactions) increased 38.7% in 2012 when compared with 2011. According to the MBA Forecast, the dollar
amount of purchase originations and refinance originations increased 24.5% and 45.3%, respectively, in 2012

39

Revenues

Direct premiums and
escrow fees . . . . .
Agent premiums . . .
Information and

other
Investment

. . . . . . . . . .

Net realized

investment
gains . . . . . . . . . .

Net other-than-
temporary
impairment losses
recognized in
earnings . . . . . . . .

Expenses

Personnel costs . . . .
Premiums retained

when compared with 2011. Residential mortgage originations in the United States decreased 19.7% in 2011 when
compared with 2010 according to the MBA Forecast. This decrease reflected decreases in purchase originations
and refinance originations of 14.6% and 21.9%, respectively.

During the first quarter of 2012, the Company changed the allocation of certain expenses within its
reportable segments and corporate division to reflect the performance of the Company’s reportable segments as
reported to the chief operating decision maker. The expenses that were impacted as a result of the change in
allocation include shared services expenses, benefit plan expense and interest expense. Prior year segment data
has been conformed to the current presentation. For the years ended December 31, 2011 and 2010, income before
income taxes for the Company’s reportable segments was impacted as follows: increases of $14.9 million and
$25.1 million, respectively, to the title insurance and services segment, increases of $0.7 million and $0.9
million, respectively, to the specialty insurance segment, and decreases of $15.6 million and $26.0 million,
respectively, to the corporate division.

Title Insurance and Services

2012

2011

2010

2012 vs. 2011

2011 vs. 2010

$ Change % Change

$ Change % Change

(in thousands, except percentages)

$1,745,687
1,709,905

$1,360,512
1,491,943

$1,391,093
1,517,704

$385,175
217,962

28.3
14.6

$(30,581)
(25,761)

(2.2)
(1.7)

643,433

619,951

628,494

23,482

income . . . . . . . . .

77,257

75,875

77,461

1,382

3.8

1.8

(8,543)

(1.4)

(1,586)

(2.0)

27,802

1,906

8,694

25,896

N/M 1

(6,788)

(78.1)

(3,564)
4,200,520

(9,068)
3,541,119

(7,912)
3,615,534

5,504
659,401

1,233,203

1,085,871

1,102,470

147,332

60.7
18.6

13.6

14.6

(1,156)
(74,415)

(14.6)
(2.1)

(16,599)

(1.5)

(26,992)

(2.2)

by agents . . . . . . .

1,370,193

1,195,282

1,222,274

174,911

Other operating

expenses . . . . . . .

Provision for policy
losses and other
claims . . . . . . . . .

Depreciation and

amortization . . . .
Premium taxes . . . . .
Interest . . . . . . . . . . .

769,477

702,508

742,823

66,969

9.5

(40,315)

(5.4)

237,427

270,697

180,821

(33,270)

(12.3)

89,876

49.7

67,610
46,283
2,646
3,726,839

69,259
40,972
2,949
3,367,538

72,783
33,645
6,132
3,360,948

(1,649)
5,311
(303)
359,301

(2.4)
13.0
(10.3)
10.7

(3,524)
7,327
(3,183)
6,590

(4.8)
21.8
(51.9)
0.2

Income before

income taxes . . . . . . . .

$ 473,681

$ 173,581

$ 254,586

$300,100

172.9

$(81,005)

(31.8)

Margins . . . . . . . . . . . . . .

11.3%

4.9%

7.0%

6.4% 130.6

(2.1)% (30.0)

(1) Not meaningful

40

Direct premiums and escrow fees increased 28.3% in 2012 from 2011 and decreased 2.2% in 2011 from
2010. The increase in 2012 from 2011 was primarily due to an increase in the number of title orders closed by the
Company’s direct operations, which reflected the increase in mortgage originations, partially offset by a decrease
in average revenues per order closed. The decrease in average revenues per order closed in 2012 compared to
2011 was primarily attributable to an increase in the mix of direct revenues generated from lower premium
refinance transactions. The decrease in direct premiums and escrow fees in 2011 from 2010 was primarily due to
a decline in the number of title orders closed by the Company’s direct operations, which reflected the decline in
mortgage originations, offset in part by an increase in the average revenues per order closed. The increase in the
average revenues per order closed was primarily due to an increase in the mix of revenues from higher premium
commercial activity year over year, as well as an increase in the average revenues per commercial order closed in
2011 when compared to 2010. The average revenues per order closed were $1,465, $1,483 and $1,289 for 2012,
2011 and 2010, respectively. The Company’s direct title operations closed 1,191,500, 917,500 and 1,079,000
domestic title orders during 2012, 2011 and 2010, respectively.

Agent premiums increased 14.6% in 2012 from 2011 and decreased 1.7% in 2011 from 2010. Agent
premiums are recorded when notice of issuance is received from the agent, which is generally when cash
payment is received by the Company. As a result, there is generally a one quarter delay between the agent’s
issuance of a title policy and the Company’s recognition of agent premiums. Therefore, full year agent premiums
primarily reflect mortgage origination activity from the fourth quarter of the prior year through the third quarter
of the current year. The increase in 2012 from 2011 was consistent with the 28.3% growth in direct premiums
and escrow fees for the same period. The decrease in 2011 from 2010 was primarily due to the same factors
impacting direct title operations. The Company evaluates the profitability of its agency relationships on an
ongoing basis, including a review of premium splits, deductibles and claims. As a result, from time to time the
Company may terminate or renegotiate the terms of some of its agency relationships.

Information and other revenues primarily consist of revenues generated from fees associated with title
search and related reports, title and other real property records and images, and other non-insured settlement
services. These revenues generally trend with direct premiums and escrow fees but are typically less volatile
since a portion of the revenues are subscription based and do not fluctuate with transaction volumes.

Information and other revenues increased 3.8% in 2012 from 2011 and decreased 1.4% in 2011 from 2010.
The increase in 2012 from 2011 was primarily attributable to higher demand for the Company’s title plant
information and default information products as a result of the increase in domestic mortgage origination activity,
partially offset by lower demand for title related services in Canada due to a decline in mortgage transactions
resulting primarily from a recent tightening of lending requirements. The decrease in 2011 from 2010 was
primarily attributable to the same factors affecting the direct title operations, offset in part by a 3.4% increase in
international revenue, which was primarily attributable to the Company’s Canadian operations.

Investment income increased 1.8% in 2012 from 2011 and decreased 2.0% in 2011 from 2010. The increase
in 2012 compared to 2011 was primarily due to higher equity earnings from non-consolidated subsidiaries and
increased dividend income, offset by lower interest income from the investment portfolio due to lower yields.
The decrease in 2011 compared to 2010 was primarily attributable to lower interest income from the investment
portfolio due to lower yields.

Net realized investment gains for the title insurance and services segment totaled $27.8 million, $1.9 million
and $8.7 million for 2012, 2011 and 2010, respectively. The gains for 2012, 2011 and 2010 were primarily from
the sale of debt and equity securities. The gains recognized in 2012, 2011 and 2010 were partially offset by $6.6
million, $6.9 million and $3.4 million, respectively, in impairment losses recognized on certain non-marketable
investments and notes receivable as well as other long-term investments. The 2012 net realized investment gains
included $15.0 million in gains resulting from the sale of CoreLogic common stock during the third quarter of
2012.

41

Net other-than-temporary impairment losses for the title insurance and services segment totaled $3.6
million, $9.1 million and $7.9 million for 2012, 2011 and 2010, respectively. The majority of the net other-than-
temporary impairment
losses recognized in 2012, 2011 and 2010 related to the Company’s non-agency
mortgage-backed securities portfolio.

The title insurance and services segment (primarily direct operations) is labor intensive; accordingly, a
major expense component is personnel costs. This expense component is affected by two competing factors: the
need to monitor personnel changes to match the level of corresponding or anticipated new orders and the need to
provide quality service.

Personnel costs increased 13.6% in 2012 from 2011 and decreased 1.5% in 2011 from 2010. The increase in
2012 compared with 2011 was primarily attributable to higher incentive compensation driven by improved
revenues and profitability and higher staffing levels required to support increased order volume. The decrease in
2011 compared with 2010 was primarily attributable to a reduction in domestic employees and decreased
expenses related to the Company’s employee benefit plans. These expense reductions were partially offset by
increased commissions in the commercial division, which were the result of increased commercial revenues, and
increased severance expense associated with a reduction in employees.

The Company continues to closely monitor order volumes and related staffing levels and will adjust staffing
levels as considered necessary. The Company’s direct
title operations opened 1,635,000, 1,254,100 and
1,469,100 domestic title orders in 2012, 2011 and 2010, respectively, representing an increase of 30.4% in 2012
from 2011 and a decrease of 14.6% in 2011 from 2010.

A summary of premiums retained by agents and agent premiums is as follows:

2012

2011

2010

Premiums retained by agents . . . . . . . . . . . . . . . . . . . . . . .

(in thousands, except percentages)
$1,195,282

$1,370,193

$1,222,274

Agent premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,709,905

$1,491,943

$1,517,704

% retained by agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

80.1%

80.1%

80.5%

The premium split between underwriter and agents is in accordance with the respective agency contracts and
can vary from region to region due to divergences in real estate closing practices, as well as rating structures. As
a result, the percentage of title premiums retained by agents varies due to the geographical mix of revenues from
agency operations. The percentage of title premiums retained by agents decreased in 2011 when compared with
2010 due to the cancellation and/or modification of certain agency relationships with unfavorable splits and a
more favorable geographic mix of agency revenues. In 2011, the agent retention percentage was also impacted by
a large commercial deal that closed in the first quarter with a favorable agent split.

Other operating expenses (principally related to direct operations) increased 9.5% in 2012 from 2011 and
decreased 5.4% in 2011 from 2010. The increase in 2012 from 2011 was primarily attributable to increased
production related expenses and higher temporary labor driven by the increase in order volumes, partially offset
by a decline in legal expenses. The decrease in 2011 from 2010 was primarily attributable to lower furniture and
equipment related lease costs due to several lease buyouts that occurred during 2010, lower office related
expenses resulting from the Company’s consolidation and/or closure of certain title offices, and a reduction in
consulting expenses. These decreases were partially offset by an increase in production related expenses in the
Company’s commercial, default and international businesses, and by higher legal expenses. The increased
production related costs in the Company’s commercial and international businesses were due to higher
transaction volumes, while the increase in the default business was due to product mix.

The provision for policy losses and other claims, expressed as a percentage of title insurance premiums and

escrow fees, was 6.9%, 9.5% and 6.2% for the years ended December 31, 2012, 2011 and 2010, respectively.

42

The current year rate of 6.9% reflected an ultimate loss rate of 5.1% for the current policy year and a net
increase in the loss reserve estimates for prior policy years of $62.1 million. The increase in loss reserve
estimates for prior policy years reflected claims development above expected levels during 2012, primarily from
domestic lenders policies and international business, including the guaranteed valuation product offered in
Canada. The reserve strengthening associated with domestic lenders policies was $25.6 million and was
primarily attributable to policy years 2005 through 2007. This strengthening was primarily due to an increase in
claims frequency experienced during 2012, partially offset by a slight decrease in severity. The reserve
strengthening associated with the international business, excluding the guaranteed valuation product, was $15.6
million and was primarily related to increased severity experienced during 2012 for policy years 2003 through
2011. The reserve strengthening associated with the guaranteed valuation product was $11.8 million and
reflected an increase in claims frequency experienced during the first half of 2012. The increase in frequency
primarily related to policy years 2008 and 2009. There is substantial uncertainty as to the ultimate loss
emergence for the guaranteed valuation product due to the following factors, among others, (i) claims associated
with this product are generally made only after a foreclosure on the related property and foreclosure rates in
Canada are difficult to predict and (ii) limited historical loss data exists as a result of the relatively recent
introduction of this product in 2003. While the Company believes its claims reserve attributable to the guaranteed
valuation product is adequate, this uncertainty increases the potential for adverse loss development relative to this
product.

As of December 31, 2012, the title insurance and services segment’s IBNR reserve was $805.4 million,
which reflected management’s best estimate. The Company’s internal actuary determined a range of reasonable
estimates of $700.9 million to $967.8 million. The range limits are $104.5 million below and $162.4 million
above management’s best estimate, respectively, and represent an estimate of the range of variation among
reasonable estimates of the IBNR reserve. Actuarial estimates are sensitive to assumptions used in models, as
well as the structures of the models themselves, and to changes in claims payment and incurral patterns, which
can vary materially due to economic conditions, among other factors.

The prior year rate of 9.5% reflected an ultimate loss rate of 5.6% for policy year 2011 and included a $45.3
million reserve strengthening adjustment related to the Company’s guaranteed valuation product offered in
Canada, a $32.2 million charge in connection with the settlement of Bank of America’s lawsuit against the
Company and $34.2 million in unfavorable development for certain prior policy years, primarily 2007. The
reserve strengthening adjustment related to the guaranteed valuation product reflected a significant increase in
claim frequency experienced in the first quarter of 2011. More specifically, the number of claims reported in the
first quarter of 2011, when annualized, increased approximately 150% when compared with the number of claims
reported in 2010. The increase in frequency primarily related to policy years 2005 through 2009 (reflecting the
relatively long claims development lag for the guaranteed valuation product). These policy years began showing
evidence of higher claims frequencies than prior policy years during the first quarter of 2011. In addition, adverse
loss development in 2011 included higher-than-expected claims emergence for commercial and lenders policies,
particularly for policy years 2005 through 2007. Management believes that these policy years have higher
ultimate loss ratios than historical averages, and that they also have experienced accelerated reporting and
payment of claims, particularly on lenders policies. Reasons for higher loss levels and acceleration of claims
reporting and payment include adverse underwriting conditions in real estate markets during 2005 through 2007,
declines in real estate prices, increased levels of foreclosures and increased mechanics lien exposure due to
failures of development projects. For additional discussion regarding the Bank of America lawsuit see Note 21
Litigation and Regulatory Contingencies to the consolidated financial statements.

The 2010 rate of 6.2% reflected an expected ultimate loss rate of 4.9% for policy year 2010, with a net
upward adjustment to the reserve for prior policy years. The changes in estimates resulted primarily from higher
than expected claims emergence experienced during 2010 for policies issued prior to 2009, and lower than
expected claims emergence experienced during 2010 for policy year 2009. Adverse development on prior policy
years was primarily related to increases in claims on lenders policies, due to an increased level of foreclosures
and lower residential housing price levels.

43

The current economic environment continues to show potential for volatility over the short
term,
particularly in regard to real estate prices and mortgage defaults, which affect title claims. Relevant contributing
factors include continuing elevated foreclosure volume, general economic uncertainty and government actions
that may mitigate or exacerbate recent trends. Other factors, including factors not yet identified, may also
influence claims development. At this point, real estate and financial market conditions appear to be stabilizing
and improving in some respects, yet significant uncertainty remains, particularly in regard to governmental
regulatory changes and fiscal policies which affect economic conditions broadly. The current environment
continues to create an increased potential for actual claims experience to vary significantly from projections, in
either direction, which would directly affect the claims provision. If actual claims vary significantly from
expected, reserves may be adjusted to reflect updated estimates of future claims.

The volume and timing of title insurance claims are subject to cyclical influences from real estate and
mortgage markets. Title policies issued to lenders constitute a large portion of the Company’s title insurance
volume. These policies insure lenders against losses on mortgage loans due to title defects in the collateral
property. Even if an underlying title defect exists that could result in a claim, often the lender must realize an
actual loss, or at least be likely to realize an actual loss, for title insurance liability to exist. As a result, title
insurance claims exposure is sensitive to lenders’ losses on mortgage loans, and is affected in turn by external
factors that affect mortgage loan losses, particularly macroeconomic factors.

A general decline in real estate prices can expose lenders to greater risk of losses on mortgage loans, as
loan-to-value ratios increase and defaults and foreclosures increase. The current environment may continue to
have increased potential for claims on lenders’ title policies, particularly if defaults and foreclosures remain at
elevated levels. Title insurance claims exposure for a given policy year is also affected by the quality of
mortgage loan underwriting during the corresponding origination year. The Company believes that sensitivity of
claims to external conditions in real estate and mortgage markets is an inherent feature of title insurance’s
business economics that applies broadly to the title insurance industry. Lenders have experienced high losses on
mortgage loans from prior years, including loans that were originated during the years 2005 through 2007. These
losses have led to higher title insurance claims on lenders policies, and also have accelerated the reporting of
claims that would have been realized later under more normal conditions.

Loss ratios (projected to ultimate value) for policy years 2005 through 2008 are higher than loss ratios for
policy years 1992 through 2004. The major causes of the higher loss ratios for those four policy years are
believed to be confined mostly to that underwriting period. These causes included: rapidly increasing residential
real estate prices which led to an increase in the incidences of fraud, lower mortgage loan underwriting standards
and a higher concentration than usual of subprime mortgage loan originations.

The projected ultimate loss ratios, as of December 31, 2012, for policy years 2012, 2011 and 2010 were
5.1%, 5.0% and 4.7%, respectively, which are lower than the ratios for 2005 through 2008. These projections
were based in part on an assumption that more favorable underwriting conditions existed in 2009 through 2012
than in 2005 through 2008, including tighter loan underwriting standards and lower housing prices. Current
claims data from policy years 2009 through 2012, while still at an early stage of development, supports this
assumption.

Insurers generally are not subject to state income or franchise taxes. However, in lieu thereof, a premium tax
is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state;
accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The
Company’s noninsurance subsidiaries are subject to state income tax and do not pay premium tax. Accordingly,
the Company’s total tax burden at the state level for the title insurance and services segment is composed of a
combination of premium taxes and state income taxes. Premium taxes as a percentage of title insurance
premiums and escrow fees were 1.3%, 1.4% and 1.2% for the years ended December 31, 2012, 2011 and 2010,
respectively.

44

In general, the title insurance business is a lower profit margin business when compared to the Company’s
specialty insurance segment. The lower profit margins reflect the high cost of performing the essential services
required before insuring title, whereas the corresponding revenues are subject to regulatory and competitive
pricing restraints. Due to this relatively high proportion of fixed costs, title insurance profit margins generally
improve as closed order volumes increase. Title insurance profit margins are affected by the composition
(residential or commercial) and type (resale, refinancing or new construction) of real estate activity. In addition,
profit margins from refinance transactions vary depending on whether they are centrally processed or locally
processed. Profit margins from resale, new construction and centrally processed refinance transactions are
generally higher than from locally processed refinance transactions because in many states there are premium
discounts on, and cancellation rates are higher for, refinance transactions. Title insurance profit margins are also
affected by the percentage of title insurance premiums generated by agency operations. Profit margins from
direct operations are generally higher than from agency operations due primarily to the large portion of the
premium that is retained by the agent. The pre-tax margins were 11.3%, 4.9% and 7.0% for the years ended
December 31, 2012, 2011 and 2010, respectively.

Specialty Insurance

Revenues

Direct premiums . . . . . . . . .
Information and other . . . . .
Investment income . . . . . . .
Net realized investment

gains . . . . . . . . . . . . . . . . .

Expenses

Personnel costs . . . . . . . . . .
Other operating expenses . .
Provision for policy losses

2012

2011

2010

2012 vs. 2011

2011 vs. 2010

$ Change % Change

$ Change % Change

(in thousands, except percentages)

$296,053
1,605
8,923

$273,665
1,531
10,380

$272,405
458
11,876

$22,388
74
(1,457)

8.2
4.8
(14.0)

$ 1,260
1,073
(1,496)

0.5
234.3
(12.6)

8,590

1,406

1,827

7,184

N/M 1

(421)

(23.0)

315,171

286,982

286,566

28,189

9.8

416

0.1

55,453
42,395

50,737
38,066

51,257
42,226

4,716
4,329

and other claims . . . . . . . .

160,290

149,439

140,053

10,851

Depreciation and

amortization . . . . . . . . . . .
Premium taxes . . . . . . . . . . .

4,553
5,021

4,197
4,691

5,341
4,135

356
330

267,712

247,130

243,012

20,582

Income before income taxes . . . .

$ 47,459

$ 39,852

$ 43,554

$ 7,607

Margins . . . . . . . . . . . . . . . . . . . .

15.1%

13.9%

15.2%

1.2%

(1) Not meaningful

9.3
11.4

7.3

8.5
7.0

8.3

19.1

8.6

(520)
(4,160)

(1.0)
(9.9)

9,386

6.7

(1,144)
556

4,118

$(3,702)

(21.4)
13.4

1.7

(8.5)

(1.3)% (8.6)

Direct premiums increased 8.2% in 2012 from 2011 and 0.5% in 2011 from 2010. The increase in 2012
from 2011 was primarily due to an increase in the number of home warranty policies issued through the home
warranty division’s real estate channel and renewals. The property and casualty division also experienced growth
in the number of policies issued during 2012. The increase in 2011 from 2010 was due to an increase in volume
from the home warranty division, partially offset by a decline in volume in the property and casualty division.

Investment income decreased 14.0% in 2012 from 2011 and 12.6% in 2011 from 2010. These decreases
primarily reflected a decrease in interest income earned from the investment portfolio reflecting a decline in
yields.

Net realized investment gains for the specialty insurance segment totaled gains of $8.6 million in 2012, $1.4

million in 2011 and $1.8 million in 2010. The gains were primarily driven by the sale of debt and equity securities.

45

Personnel costs and other operating expenses increased 10.2% in 2012 from 2011 and decreased 5.0% in
2011 from 2010. The increase in 2012 from 2011 was primarily due to increased salary expense associated with
higher employee headcount, increased incentive compensation, increased commissions associated with increased
volume in the home warranty and property and casualty businesses and increased amortization of deferred
acquisition costs. The decrease in 2011 from 2010 was primarily due to reduced marketing costs in the home
warranty division.

The provision for home warranty claims, expressed as a percentage of home warranty premiums, was 55.8%
in 2012, 56.1% in 2011and 50.6% in 2010. The loss rate in 2012 was essentially unchanged from 2011. The
increase in rate in 2011 from 2010 was primarily due to an increase in business coming from the direct to
consumer channel in 2011, which typically has a higher loss ratio than the traditional real estate channel.

The provision for property and casualty claims, expressed as a percentage of property and casualty
insurance premiums, was 51.1% in 2012, 52.0% in 2011 and 53.0% in 2010. The decrease in rate in 2012 from
2011 was primarily due to a reduction in seasonal claim events. The decrease in rate in 2011 from 2010 was due
to a reduction in seasonal claim events, partially offset by an increase in the frequency and severity of routine or
non-event core losses.

Premium taxes as a percentage of specialty insurance segment premiums were 1.7% in 2012 and 2011, and

1.5% in 2010.

A large part of the revenues for the specialty insurance businesses are generated by renewals and are not
dependent on the level of real estate activity. With the exception of loss expense, the majority of the expenses for
this segment are variable in nature and therefore generally fluctuate consistent with revenue fluctuations.
Accordingly, profit margins for this segment (before loss expense) are relatively constant, although as a result of
some fixed expenses, profit margins (before loss expense) should nominally improve as revenues increase. Pre-
tax margins were 15.1%, 13.9% and 15.2% for 2012, 2011 and 2010, respectively.

Corporate

Revenues

Investment income . . . . . . . .
Net realized investment

gains (losses) . . . . . . . . . .

Expenses

Personnel costs . . . . . . . . . . .
Other operating expenses . . .
Depreciation and

amortization . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . .

2012

2011

2010

2012 vs. 2011

2011 vs. 2010

$ Change % Change

$ Change % Change

(in thousands, except percentages)

$ 5,363

$

159 $ 6,731

$ 5,204

N/M 1

$ (6,572)

(97.6)

24,529

29,892

46,210
24,462

2,787
9,782

83,241

(3,811)

(3,652)

(423)

28,340

6,308

33,544

N/M 1

N/M 1

(3,388)

N/M 1

(9,960)

(157.9)

41,760
21,303

3,433
13,377

79,873

52,956
26,308

2,518
10,560

92,342

4,450
3,159

10.7
14.8

(11,196)
(5,005)

(21.1)
(19.0)

(646)
(3,595)

3,368

(18.8)
(26.9)

4.2

36.1

915
2,817

36.3
26.7

(12,469)

(13.5)

$ 2,509

2.9

Loss before income taxes . . . . . . .

$(53,349) $(83,525) $(86,034) $30,176

(1) Not meaningful

46

Investment income totaled $5.4 million, $0.2 million and $6.7 million in 2012, 2011 and 2010, respectively.
The variance in investment income for all three years is primarily attributable to fluctuations in earnings on
investments associated with the Company’s deferred compensation plan.

Net realized investment gains totaled $24.5 million in 2012, which included $25.8 million in gains resulting
from the sale of CoreLogic stock during the third quarter of 2012. Net realized investment losses totaled $3.8
million and $0.4 million in 2011 and 2010, respectively. The loss in 2011 was primarily related to the
impairment of a non-marketable investment and the sale of a corporate fixed asset.

Corporate personnel costs and other operating expenses were $70.7 million, $63.1 million and $79.3 million
in 2012, 2011 and 2010, respectively. The increase in 2012 from 2011 was primarily attributable to increased
costs associated with the Company’s deferred compensation plan, and, to a lesser extent, increased expenses
allocated to the corporate division. The decrease in 2011 from 2010 was primarily attributable to decreased costs
associated with the Company’s deferred compensation plan and decreased professional services expense. The
higher professional services expense in 2010 was related to the Separation.

Interest expense decreased $3.6 million in 2012 from 2011 and increased $2.8 million in 2011 from 2010.
Interest expense decreased in 2012 from 2011 primarily due to the refinancing of the Company’s credit facility to
a lower interest rate in April 2012, a lower average outstanding balance on the credit facility and the pay down in
December 2011 of an intercompany note payable to the title insurance and services segment. Interest expense
prior to the Separation primarily related to draws made in 2008 used for the operations of the Company’s
businesses in the amount of $140.0 million under TFAC’s credit agreement that was allocated to the Company.
In connection with the Separation, the Company borrowed $200.0 million under its credit facility and paid off the
allocated portion of TFAC’s debt. Interest expense increased in 2011 from 2010 because the Company’s credit
facility bears interest at a higher rate than the allocated portion of TFAC’s debt. Interest expense related to
intercompany notes payable to the title insurance and services and specialty segments was $3.2 million, $4.2
million and $2.7 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Eliminations

Eliminations primarily represent interest income and related interest expense associated with intercompany
notes between the Company’s segments, which are eliminated in the consolidated financial statements. The
Company’s inter-segment eliminations were not material for the years ended December 31, 2012, 2011 and 2010.

Income Taxes

Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A

reconciliation of this difference is as follows:

Year ended December 31,
2011

2012

2010

Taxes calculated at federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit
. . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends received deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in liability for tax positions . . . . . . . . . . . . . . . . . . . . . . . .
Exclusion of certain meals and entertainment expenses . . . . . . . . .
Change in capital loss valuation allowance . . . . . . . . . . . . . . . . . .
Foreign taxes in excess of federal rate . . . . . . . . . . . . . . . . . . . . . .
Foreign tax credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$163,592
9,525
(995)
2,033
2,414
(5,276)
1,434
(2,921)
(4,128)

(in thousands)
$45,603
2,499
(140)
2,548
2,245
—
1,740
—
(2,781)

$ 74,237
3,340
(250)
4,626
2,889
(14,683)
9,802
—
3,189

$165,678

$51,714

$ 83,150

47

The Company’s effective income tax rate (income tax expense as a percentage of income before income
taxes) was 35.4% for 2012, 39.7% for 2011and 39.2% for 2010. The differences in the effective tax rates were
primarily due to changes in the ratio of permanent differences to income before income taxes, changes in state
and foreign income taxes resulting from fluctuations in the Company’s noninsurance and foreign subsidiaries’
contribution to pretax profits, and changes in the liability related to tax positions reported on the Company’s tax
returns. The effective tax rates for 2012 and 2010 included the release of valuation allowances recorded against
capital losses. In addition, the effective tax rate for 2012 reflected the generation of foreign tax credits.

Net Income and Net Income Attributable to the Company

Net income and per share information are summarized as follows:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to noncontrolling interests . . . . . .

2012

2011

2010

(in thousands, except per share amounts)
$128,956
$ 78,579
$301,728
1,127
303
687

Net income attributable to the Company . . . . . . . . . . . . . . . . . . .

$301,041

$ 78,276

$127,829

Net income per share attributable to the Company’s

stockholders:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

2.83

2.77

$

$

0.74

0.73

$

$

1.22

1.20

Weighted-average common shares outstanding:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

106,307

105,197

104,134

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

108,542

106,914

106,177

Per share information for 2010 was computed using the number of shares of common stock outstanding
immediately following the Separation, as if such shares were outstanding for the entire period prior to the
Separation. See Note 13 Earnings Per Share to the consolidated financial statements for further discussion of
earnings per share.

Liquidity and Capital Resources

Cash Requirements. The Company generates cash primarily from the sale of its products and services and
investment income. The Company’s current cash requirements include operating expenses, taxes, payments of
principal and interest on its debt, capital expenditures, potential business acquisitions and dividends on its
common stock. Management forecasts the cash needs of the holding company and its primary subsidiaries and
regularly reviews their short-term and long-term projected sources and uses of funds, as well as the asset,
liability, investment and cash flow assumptions underlying such forecasts. Due to the Company’s ability to
generate cash flows from operations and its liquid-asset position, management believes that its resources are
sufficient to satisfy its anticipated operational cash requirements and obligations for at least the next twelve
months.

The substantial majority of the Company’s business is dependent upon activity in the real estate and
mortgage markets, which are cyclical and seasonal. Periods of increasing interest rates and reduced mortgage
financing availability generally have an adverse effect on residential real estate activity and therefore typically
decrease the Company’s revenues. In contrast, periods of declining interest rates and increased mortgage
financing availability generally have a positive effect on residential real estate activity which typically increases
the Company’s revenues. Residential purchase activity is typically slower in the winter months with increased
volumes in the spring and summer months. Residential refinance activity is typically more volatile than purchase

48

activity and is highly impacted by changes in interest rates. Commercial real estate volumes are less sensitive to
changes in interest rates, but fluctuate based on local supply and demand conditions for space and mortgage
financing availability.

Cash provided by operating activities amounted to $429.7 million, $136.7 million and $157.0 million for the
years ended December 31, 2012, 2011 and 2010, respectively, after claim payments, net of recoveries, of $446.0
million, $503.4 million and $456.2 million, respectively. The principal nonoperating uses of cash and cash
equivalents for the year ended December 31, 2012 were purchases of debt and equity securities, repayment of
debt, capital expenditures, and dividends paid to common stockholders. The principal nonoperating uses of cash
and cash equivalents for the year ended December 31, 2011 were purchases of debt and equity securities,
decreases in demand deposits at the Company’s banking operations, repayment of debt, capital expenditures and
dividends paid to common stockholders. The most significant nonoperating sources of cash and cash equivalents
for the year ended December 31, 2012 were proceeds from the sales and maturities of debt and equity securities,
increases in the deposit balances at the Company’s banking operations and proceeds from the issuance of debt.
The most significant nonoperating sources of cash and cash equivalents for the year ended December 31, 2011
were proceeds from the sales and maturities of debt and equity securities, early payoff of the note receivable
from CoreLogic, payments collected related to loans receivable and proceeds from the issuance of new debt. The
net effect of all activities on total cash and cash equivalents was an increase of $208.9 million for 2012, a
decrease of $310.4 million for 2011, and an increase of $97.4 million for 2010.

The Company continually assesses its capital allocation strategy, including decisions relating to dividends,
share repurchases, capital expenditures, acquisitions and investments. In October of 2012, the Company’s board
of directors declared a quarterly cash dividend of $0.12 per common share, representing a 50% increase from the
prior level of $0.08 per common share. Management expects that the Company will continue to pay quarterly
cash dividends at or above the current level. The timing, declaration and payment of future dividends, however,
falls within the discretion of the Company’s board of directors and will depend upon many factors, including the
Company’s financial condition and earnings, the capital requirements of the Company’s businesses, industry
practice, restrictions imposed by applicable law and any other factors the board of directors deems relevant from
time to time.

In March 2011, the Company’s board of directors approved a stock repurchase plan which authorizes the
repurchase of up to $150.0 million of the Company’s common stock, of which $147.5 million remains as of
December 31, 2012. Purchases may be made from time to time by the Company in the open market at prevailing
market prices or in privately negotiated transactions. The Company did not repurchase any shares of its common
stock during the year ended December 31, 2012.

Holding Company. First American Financial Corporation is a holding company that conducts all of its
operations through its subsidiaries. The holding company’s current cash requirements include payments of
principal and interest on its debt, taxes, payments in connection with employee benefit plans, dividends on its
common stock and other expenses. The holding company is dependent upon dividends and other payments from
its operating subsidiaries to meet its cash requirements. The Company’s target is to maintain a cash balance at the
holding company equal to at least twelve months of estimated cash requirements. At certain points in time, the
actual cash balance at the holding company may vary from this target due to, among other potential factors, the
timing and amount of cash payments made and dividend payments received. Pursuant to insurance and other
regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and
advances available to the holding company is limited, principally for the protection of policyholders. As of
December 31, 2012, under such regulations, the maximum amount of dividends, loans and advances available to
the holding company from its insurance subsidiaries in 2013, without prior approval from applicable regulators,
was $405.4 million. Such restrictions have not had, nor are they expected to have, an impact on the holding
company’s ability to meet its cash obligations.

As of December 31, 2012, the holding company’s primary sources of liquidity include $163.5 million of
cash and $440.0 million available on the Company’s $600.0 million revolving credit facility described below. In
January 2013, the Company issued $250.0 million of senior notes and used a portion of the proceeds to repay all

49

amounts outstanding under the revolving credit facility. See Note 24 Subsequent Events to the consolidated
financial statements for further discussion of the Company’s senior notes. Management believes that its liquidity
at the holding company is sufficient to satisfy its anticipated cash requirements and obligations for at least the
next twelve months.

Financing. On April 17, 2012,

the Company entered into a senior secured credit agreement with
JPMorgan Chase Bank, N.A. (“JPMorgan”) in its capacity as administrative agent and the lenders party thereto.
The credit agreement is comprised of a $600.0 million revolving credit facility. Unless terminated earlier, the
revolving loan commitments will terminate on April 17, 2016. The agreement replaced the Company’s $400.0
million senior secured credit agreement that had been in place since April 2010. In connection with the closing,
the Company paid off the $200.0 million outstanding balance under the prior agreement and borrowed $200.0
million under the new agreement. Proceeds under the credit agreement may be used for general corporate
purposes. At December 31, 2012, the Company had outstanding borrowings of $160.0 million under the facility
and the interest rate associated with amounts borrowed under the facility was 2.21%. Those borrowings have
since been repaid as discussed further below.

On November 14, 2012, the Company entered into an amendment to its credit agreement dated as of
April 17, 2012. Among other things,
the amendment permanently released the collateral and guarantees
associated with the facility, decreased the maximum total debt to total capitalization ratio from 35 percent to 30
percent, and increased the total stockholders’ equity that the Company is required to maintain by an amount
equal to half of the Company’s consolidated positive net income for each fiscal quarter.

In the event that the rating by Standard & Poor’s Ratings Group (“S&P”) is below BBB- (or there is no
rating from S&P) and, in addition, such rating by Moody’s Investor Services, Inc. (“Moody’s”) is lower than
Baa3 (or there is no rating from Moody’s), then the loan commitments are subject to mandatory reduction from
(a) 50 percent of the net proceeds of certain equity issuances by any of the Company or certain subsidiaries of the
Company (collectively, the “Designated Parties”), and (b) 50 percent of the net proceeds of certain debt incurred
or issued by any of the Designated Parties, provided that the commitment reductions described above are only
required to the extent necessary to reduce the total loan commitments to $300.0 million. The Company is only
required to prepay loans to the extent that, after giving effect to any mandatory commitment reduction, the
aggregate principal amount of all outstanding loans exceeds the remaining total loan commitments.

At the Company’s election, borrowings under the credit agreement bear interest at (a) a base rate plus an
applicable spread or (b) an adjusted LIBOR rate plus an applicable spread. The base rate is generally the greatest
of (x) 0.50 percent in excess of the federal funds rate, (y) JPMorgan’s prime rate, and (z) one-month LIBOR plus
one percent. The adjusted LIBOR rate is generally LIBOR times JPMorgan’s statutory reserve rate for
Eurocurrency funding. The applicable spread varies depending upon the rating assigned by Moody’s and S&P.
The minimum applicable spread for base rate borrowings is 0.75 percent and the maximum is 1.50 percent. The
minimum applicable spread for adjusted LIBOR rate borrowings is 1.75 percent and the maximum is 2.50
percent. The Company may select interest periods of one, two, three or six months or (if agreed to by all lenders)
such other number of months for Eurodollar borrowings of loans.

The credit agreement includes representations and warranties, reporting covenants, affirmative covenants,
negative covenants, financial covenants and events of default customary for financings of this type. Upon the
occurrence of certain insolvency and bankruptcy events of default the loans automatically accelerate. As of
December 31, 2012, the Company was in compliance with the financial covenants under the credit agreement.

On January 29, 2013, the Company issued $250.0 million of 4.30 percent 10 year senior unsecured notes
due in 2023. The notes were priced at 99.638 percent to yield 4.345 percent. Interest is due semi-annually on
February 1 and August 1, beginning August 1, 2013. The Company used a portion of the net proceeds from the
sale to repay all borrowings outstanding under the credit agreement, increasing the unused capacity under the
agreement to the full $600.0 million size of the facility.

50

In addition to amounts available under the credit facility, certain subsidiaries of the Company are parties to
master repurchase agreements which are used as part of the Company’s liquidity management activities and to
support its risk management activities. In particular, securities loaned or sold under repurchase agreements are
used as short-term funding sources. During 2012, the Company financed securities for funds received totaling
$39.1 million under these agreements. As of December 31, 2012, no amounts remained outstanding under these
agreements.

Notes and contracts payable as a percentage of total capitalization was 8.9% and 12.8% at December 31,
2012 and 2011, respectively. Notes and contracts payable are more fully described in Note 10 Notes and
Contracts Payable to the consolidated financial statements.

Investment Portfolio. The Company’s investment portfolio is primarily held at its insurance and banking
subsidiaries. The Company maintains a high quality, liquid investment portfolio. As of December 31, 2012, the
Company’s debt and equity investment securities portfolio consists of approximately 93% of fixed income
securities. As of that date, over 70% of the Company’s fixed income investments are held in securities that are
United States government-backed or rated AAA, and approximately 99% of the fixed income portfolio is rated or
classified as investment grade. Percentages are based on the amortized cost basis of the securities. Credit ratings
are based on S&P and Moody’s published ratings. If a security was rated differently by both rating agencies, the
lower of the two ratings was selected.

The table below outlines the composition of the investment portfolio currently in an unrealized loss position
by credit rating (percentages are based on the amortized cost basis of the investments). Credit ratings are based
on S&P and Moody’s published ratings and are exclusive of insurance effects. If a security was rated differently
by both rating agencies, the lower of the two ratings was selected:

December 31, 2012
US Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A-Ratings
or
Higher

BBB+
to BBB-
Ratings

Non-
Investment
Grade/Not
Rated

100.0%
100.0%
99.3%
100.0%
100.0%
0.0%
46.5% 53.5%
0.0% 100.0%

0.0%
0.0%
0.0%
0.0%
0.0%
0.7%
0.0%
0.0%
0.0%
0.0%
0.0% 100.0%
0.0%
0.0%

88.8%

5.3%

5.9%

In connection with the Separation, TFAC issued to the Company and FATICO a number of shares of its
common stock that resulted in the Company and FATICO collectively owning 12.9 million shares of
CoreLogic’s common stock immediately following the Separation. During 2011 the Company sold 4.0 million
shares for an aggregate cash price of $75.8 million and during 2012 the Company and FATICO sold the
remaining 8.9 million shares for an aggregate cash price of $207.9 million. At December 31, 2012, the Company
no longer owns any CoreLogic common stock.

In addition to its debt and equity investment securities portfolio, the Company maintains certain money-

market and other short-term investments.

Capital expenditures. Capital expenditures primarily consist of additions to property and equipment,
capitalized software development costs and additions to title plants. Capital expenditures were $83.9 million,
$75.4 million and $88.7 million for the years ended December 31, 2012, 2011 and 2010, respectively. The

51

increase in 2012 over 2011 was primarily related to higher capitalized software development costs in 2012 when
compared to 2011. The decrease in 2011 from 2010 was primarily attributable to a lower level of title plant
additions in 2011 when compared to 2010.

Contractual obligations. A summary, by due date, of the Company’s total contractual obligations at

December 31, 2012, is as follows:

Notes and contracts payable . . . . .
Interest on notes and contracts

payable . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . .
Claim losses . . . . . . . . . . . . . . . . .
Pension and supplemental

benefit plans . . . . . . . . . . . . . . .

Total

Less than 1
year

1-3 years

3-5 years

More than
5 years

$ 229,760

$

8,437

(in thousands)
$ 28,694

$169,615

$ 23,014

26,722
230,695
1,411,193
976,462

7,428
79,562
1,394,293
237,616

11,570
101,802
15,603
242,290

3,883
37,927
1,297
144,292

3,841
11,404
—
352,264

505,792

42,963

73,469

47,412

341,948

$3,380,624

$1,770,299

$473,428

$404,426

$732,471

The timing of claim payments is estimated and is not set contractually. Nonetheless, based on historical
claims experience, the Company anticipates the above payment patterns. Changes in future claim settlement
patterns, judicial decisions, legislation, economic conditions and other factors could affect the timing and amount
of actual claim payments. The timing and amount of payments in connection with pension and supplemental
benefit plans are based on the Company’s current estimate and requires the use of significant assumptions.
Changes in significant assumptions could affect the amount and timing of pension and supplemental benefit plan
payments. See Note 14 Employee Benefit Plans to the consolidated financial statements for additional discussion
of management’s significant assumptions. The Company is not able to reasonably estimate the timing of
payments, or the amount by which the liability for the Company’s uncertain tax positions will increase or
decrease over time; therefore the liability of $47.9 million has not been included in the contractual obligations
table. See Note 12 Income Taxes to the consolidated financial statements for additional discussion of the
Company’s liability for uncertain tax positions.

Off-balance sheet arrangements. The Company administers escrow deposits and trust assets as a service to
its customers. Escrow deposits totaled $4.2 billion and $3.1 billion at December 31, 2012 and 2011, respectively,
of which $1.2 billion and $0.9 billion, respectively, were held at the Company’s federal savings bank subsidiary,
First American Trust, FSB. The escrow deposits held at First American Trust, FSB, are included in the
accompanying consolidated balance sheets in cash and cash equivalents and debt and equity securities, with
offsetting liabilities included in deposits. The remaining escrow deposits were held at third-party financial
institutions.

Trust assets totaled $2.8 billion at December 31, 2012 and 2011, and were held or managed by First
American Trust, FSB. Escrow deposits held at third-party financial institutions and trust assets are not the
Company’s assets under U.S. generally accepted accounting principles and, therefore, are not included in the
accompanying consolidated balance sheets. However, the Company could be held contingently liable for the
disposition of these assets.

In conducting its operations, the Company often holds customers’ assets in escrow, pending completion of
real estate transactions. As a result of holding these customers’ assets in escrow, the Company has ongoing
programs for realizing economic benefits, including investment programs, borrowing agreements, and vendor
services arrangements with various financial institutions. The effects of these programs are included in the
consolidated financial statements as income or a reduction in expense, as appropriate, based on the nature of the
arrangement and benefit received.

52

The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the
Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a
facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to
property identified by the customer to be acquired with such proceeds. Upon the completion of such exchange,
the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to
the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred
to the customer. Like-kind exchange funds held by the Company totaled $1.4 billion and $0.6 billion at
December 31, 2012 and 2011, respectively. The like-kind exchange deposits were held at third-party financial
institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not
considered assets of the Company and, therefore, are not included in the accompanying consolidated balance
sheets. All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit
Insurance Corporation. The Company could be held contingently liable to the customer for the transfers of
property, disbursements of proceeds and the return on the proceeds.

At December 31, 2012 and 2011, the Company was contingently liable for guarantees of indebtedness owed
by affiliates and third parties to banks and others totaling $23.2 million and $24.2 million, respectively. The
guarantee arrangements relate to promissory notes and other contracts, and contingently require the Company to
make payments to the guaranteed party based on the failure of debtors to make scheduled payments according to
the terms of the notes and contracts. The Company’s maximum potential amount of future payments under these
guarantees totaled $23.2 million and $24.2 million at December 31, 2012 and 2011, respectively, and is limited
in duration to the terms of the underlying indebtedness. The Company has not incurred any costs as a result of
these guarantees and has not recorded a liability on its consolidated balance sheets related to these guarantees at
December 31, 2012 and 2011.

53

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company has interest rate risk associated with certain financial instruments. The Company monitors its
risk associated with fluctuations in interest rates and makes investment decisions to manage accordingly. The
Company does not currently use derivative financial instruments in any material amount to hedge these risks.
The table below provides information about certain assets and liabilities as of December 31, 2012 that are
sensitive to changes in interest rates and presents cash flows and the related weighted average interest rates by
expected maturity dates.

2013

2014

2015

2016

2017

Thereafter

Total

Fair Value

(in thousands, except percentages)

Assets
Deposits with savings and loan

associations and banks

Book value . . . . . . . . . . . . . . . . . . . . $ 71,196
Average interest rate . . . . . . . . . . . . .

0.84%

Debt securities

$

71,196 $

71,400

Amortized cost . . . . . . . . . . . . . . . . . $ 57,987 77,085 157,647 179,088 176,104 1,965,364 $2,613,275 $2,651,881
Average interest rate . . . . . . . . . . . . .

4.11% 3.28% 2.71% 2.88% 2.75%

2.75%

Notes receivable

Book value . . . . . . . . . . . . . . . . . . . . $
Average interest rate . . . . . . . . . . . . .

2,075

4,529

931

1,247

666

5.18% 4.27% 4.28% 5.03% 5.41%

3,996 $
6.02%

13,444 $

11,376

Loans receivable

Book value . . . . . . . . . . . . . . . . . . . . $
Average interest rate . . . . . . . . . . . . .

Liabilities
Interest bearing escrow deposits

1,093

1,296

6,686

3,618

6,844

92,455 $ 111,992 $ 111,925

5.93% 5.63% 5.78% 6.67% 6.98%

6.28%

Book value . . . . . . . . . . . . . . . . . . . . $908,957
Average interest rate . . . . . . . . . . . . .

0.17%

Variable rate deposits

Book value . . . . . . . . . . . . . . . . . . . . $ 25,067
Average interest rate . . . . . . . . . . . . .

0.60%

Fixed rate deposits

Book value . . . . . . . . . . . . . . . . . . . . $ 20,315
Average interest rate . . . . . . . . . . . . .

$ 908,957 $ 908,957

$

$

25,067 $

25,067

37,215 $

37,597

9,831

5,773

1,296

1.25% 1.39% 2.24% 1.92%

Notes and contracts payable

Book value . . . . . . . . . . . . . . . . . . . . $
Average interest rate . . . . . . . . . . . . .

8,437 13,373

15,321 164,198

5,417

23,014 $ 229,760 $ 233,071

2.87% 2.85% 2.78% 2.73% 5.24%

5.27%

Equity Price Risk

The Company is also subject to equity price risk related to its equity securities portfolio. The Company
manages its equity price risk through an investment committee made up of certain senior executives which is
advised by an experienced investment management staff.

Foreign Currency Risk

Although the Company has exchange rate risk for its operations in certain foreign countries, this risk is not
material to the Company’s financial condition or results of operations. The Company does not hedge its foreign
exchange risk.

Credit Risk

The Company’s corporate, municipal, foreign, non-agency mortgage-backed and, to a lesser extent, its
agency securities are subject to credit risk. The Company manages its credit risk through actively monitoring

54

issuer financial reports, credit spreads, security pricing and credit rating migration. Further, diversification and
concentration limits by asset type and per issuer are established and monitored by the Company’s investment
committee.

The Company’s non-agency mortgage-backed securities credit risk is analyzed by monitoring servicer
reports and through utilization of sophisticated cash flow models to measure the default characteristics of the
underlying collateral pools.

The Company holds a large concentration in U.S. government agency securities,

including agency
mortgage-backed securities. In the event of discontinued U.S. government support of its federal agencies,
material credit risk could be observed in the portfolio. The Company views that scenario as unlikely but possible.
The federal government currently is considering various alternatives to reform the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The nature and
timing of the reforms is unknown, however the federal government reiterated its commitment to ensuring that
Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future
and the ability to meet any of their debt obligations.

The Company’s overall investment securities portfolio maintains an average credit quality of AA.

Item 8.

Financial Statements and Supplementary Data

Separate financial statements for subsidiaries not consolidated and 50% or less owned persons accounted for

by the equity method have been omitted because they would not constitute a significant subsidiary.

55

INDEX

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements:

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unaudited Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statement Schedules:

I.
II.
III.
IV.
V.

Summary of Investments—Other than Investments in Related Parties . . . . . . . . . . . . . . . . .
Condensed Financial Information of Registrant
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page No.

57

58
59
60
61
62
63
123

124
125
130
132
133

Financial statement schedules not listed are either omitted because they are not applicable or the required

information is shown in the consolidated financial statements or in the notes thereto.

56

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
First American Financial Corporation:

respects,

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all
material
the financial position of First American Financial Corporation and its subsidiaries at
December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for these financial statements and financial statement
schedules, for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal
Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedules, and on the Company’s internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.

As discussed in Note 1, amounts recorded for allocations of certain expenses directly attributable to the
operations of First American Financial Corporation prior to June 1, 2010 are not necessarily representative of the
amounts that would have been reflected in the financial statements had the Company operated as a separate,
stand-alone entity.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Los Angeles, California
February 28, 2013

57

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)

ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts and accrued income receivable, less allowances of $30,917 and $30,504 . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments:

Deposits with savings and loan associations and banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities, includes pledged securities of $105,849 and $149,922 . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Title plants and other indexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LIABILITIES AND EQUITY
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personnel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension costs and other retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Due to CoreLogic, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for known and incurred but not reported claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2012

2011

$ 627,208
259,779
14,093

$ 418,299
227,847
12,304

71,196
2,651,881
197,920
192,563

56,201
2,201,911
184,000
200,805

3,113,560

2,642,917

107,352
343,450
521,741
—
845,857
57,095
160,712

139,191
337,578
513,998
39,617
818,420
59,994
152,045

$6,050,847

$5,362,210

$1,411,193

$1,093,236

27,854
176,478
483,272
132,899

820,503

53,510
170,663
976,462
36,987
229,760

27,525
137,024
432,456
130,802

727,807

35,951
155,626
1,014,676
—
299,975

3,699,078

3,327,271

Commitments and contingencies (Note 18)
Stockholders’ equity:

Preferred stock, $0.00001 par value, Authorized—500 shares; Outstanding—none . . . . . . . . . . . . . .
Common stock, $0.00001 par value: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Authorized—300,000 shares; Outstanding—107,239 shares and 105,410 shares as of

December 31, 2012 and 2011, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

1
2,111,605
387,015
(150,556)

2,348,065
3,704

1
2,081,242
124,816
(177,459)

2,028,600
6,339

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,351,769

2,034,939

$6,050,847

$5,362,210

See Notes to Consolidated Financial Statements

58

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

Revenues:

Direct premiums and escrow fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agent premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . .
Net other-than-temporary impairment (“OTTI”) losses recognized

in earnings:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total OTTI losses on equity securities . . . . . . . . . . . . . . . . . . .
Total OTTI losses on debt securities . . . . . . . . . . . . . . . . . . . . .
Portion of OTTI losses on debt securities recognized in other

comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2012

2011

2010

$2,041,740
1,709,905
645,023
88,181
60,536

$1,634,177
1,491,943
621,483
82,153
(114)

$1,663,498
1,517,704
628,962
94,262
10,209

—
(1,757)

(1,807)

(3,564)

—
(12,748)

3,680

(9,068)

(1,722)
(8,497)

2,196

(8,023)

4,541,821

3,820,574

3,906,612

Expenses:

Personnel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums retained by agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for policy losses and other claims . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,334,866
1,370,193
836,319
397,717
74,950
51,304
9,066

1,178,368
1,195,282
761,878
420,136
76,889
45,663
12,065

1,206,683
1,222,274
811,372
320,874
80,642
37,780
14,881

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to noncontrolling interests . . . . . . . . . . . .

4,074,415

3,690,281

3,694,506

467,406
165,678

301,728
687

130,293
51,714

78,579
303

212,106
83,150

128,956
1,127

Net income attributable to the Company . . . . . . . . . . . . . . . . . . . . . . . . .

$ 301,041

$

78,276

$ 127,829

Net income per share attributable to the Company’s stockholders:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

2.83

2.77

0.36

$

$

$

0.74

0.73

0.24

$

$

$

1.22

1.20

0.18

Weighted-average common shares outstanding:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

106,307

105,197

104,134

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

108,542

106,914

106,177

See Notes to Consolidated Financial Statements

59

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

Year Ended December 31,

2012

2011

2010

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$301,728

$ 78,579

$128,956

Other comprehensive income (loss), net of tax:

Unrealized gain (loss) on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on securities for which credit-related portion was

31,445

(12,316)

2,489

recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension benefit adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,902
5,131
(13,571)

2,144
(6,167)
(12,034)

4,820
5,705
(10,629)

Total other comprehensive income(loss), net of tax . . . . . . . . . . . . . . . . . . . . . .

26,907

(28,373)

2,385

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive income attributable to noncontrolling interests . . . . . . . .

328,635
691

50,206
233

131,341
5,177

Comprehensive income attributable to the Company . . . . . . . . . . . . . . . . . . . . .

$327,944

$ 49,973

$126,164

See Notes to Consolidated Financial Statements

60

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)

First American Financial Corporation Stockholders

Shares

Common
stock

Additional
paid-in
capital

Retained
earnings

TFAC’s
invested
equity

Accumulated
other
comprehensive
loss

Total
stockholders’
equity

Noncontrolling
interests

Total

— $— $

— $ — $ 2,167,291

$(147,491)

$2,019,800

$13,051

$2,032,851

Balance at December 31, 2009 . . . . . . . . .
Net income earned prior to June 1, 2010

separation . . . . . . . . . . . . . . . . . . . . . . .
Net contributions from TFAC . . . . . . . . .
Distribution to TFAC upon separation . . .
Capitalization as a result of separation

from TFAC . . . . . . . . . . . . . . . . . . . . . .

Issuance of common stock at

—
—
—

—

—
—
—

—

—
—
—

—
—
—

36,777
2,097
(156,570)

—
—
(22,051)

36,777
2,097
(178,621)

2,047,528

— (2,047,528)

separation . . . . . . . . . . . . . . . . . . . . . . . 104,006

1

(1)

—

Net income earned following June 1,

2010 separation . . . . . . . . . . . . . . . . . .
Dividends on common shares . . . . . . . . .
Shares issued in connection with share-

based compensation plans . . . . . . . . . .
Share-based compensation expense . . . . .
Purchase of subsidiary shares from /other
decreases in noncontrolling interests . .

Sale of subsidiary shares to /other

increases in noncontrolling interests . .

Distributions to noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . .

Other comprehensive income (Note

20)

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—

—
—

451 —
—
—

—

—

—

—

—

—

—

—

— 91,052
— (18,553)

2,855
6,852

(136)

—

—

—

(425)
—

—

—

—

—

Balance at December 31, 2010 . . . . . . . . . 104,457
Net income for 2011 . . . . . . . . . . . . . . . . .
—
Contribution from TFAC as a result of

1

—

2,057,098

72,074
— 78,276

separation . . . . . . . . . . . . . . . . . . . . . . .
Dividends on common shares . . . . . . . . .
Purchase of Company shares . . . . . . . . . .
Shares issued in connection with share-

based compensation plans . . . . . . . . . .
Share-based compensation expense . . . . .
Purchase of subsidiary shares from /other
decreases in noncontrolling interests . .

Sale of subsidiary shares to /other

increases in noncontrolling interests . .

Distributions to noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . .

Other comprehensive income

(Note 20)

. . . . . . . . . . . . . . . . . . . . . . .

—
—
—
—
(204) —

1,157 —
—

—

—

—

—

—

—

—

—

—

1

—
—

5,164

—

— (24,784)

(2,502)

—

2,958
14,981

3,543

—

—

—

(750)
—

—

—

—

—

2,081,242 124,816
— 301,041
— (37,612)

Balance at December 31, 2011 . . . . . . . . . 105,410
—
Net income for 2012 . . . . . . . . . . . . . . . . .
Dividends on common shares . . . . . . . . .
—
Shares issued in connection with share-

based compensation plans . . . . . . . . . .
Share-based compensation expense . . . . .
Purchase of subsidiary shares from /other
decreases in noncontrolling interests . .

Sale of subsidiary shares to /other

increases in noncontrolling interests . .

Distributions to noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . .

Contributions from noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . .

Other comprehensive income (Note

20)

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,829 —
—

—

16,270
14,839

(1,230)
—

—

—

—

—

—

—

—

—

—

—

(746)

—

—

—

—

—

—

—

—

—

—

—
—

—
—

(2,067)

—

—

—

—
—

—
—
—

—
—

—

—

—

—

—
—
—

—
—

—

—

—

—

—

147
—
—

—

—

980
—

—
—

36,924
2,097
(178,621)

—

—

92,032
(18,553)

2,430
6,852

—

—

91,052
(18,553)

2,430
6,852

(2,203)

(3,501)

(5,704)

—

—

110

110

(1,133)

(1,133)

20,386

1,980,017
78,276

4,050

13,704
303

24,436

1,993,721
78,579

5,164
(24,784)
(2,502)

2,208
14,981

—
—
—

—
—

5,164
(24,784)
(2,502)

2,208
14,981

3,543

(7,699)

(4,156)

—

—

436

(335)

436

(335)

(28,303)

2,028,600
301,041
(37,612)

15,040
14,839

(70)

(28,373)

6,339
687
—

—
—

2,034,939
301,728
(37,612)

15,040
14,839

(746)

(2,656)

(3,402)

—

—

—

22

(913)

221

4

22

(913)

221

26,907

—

—

—
—

—
—

—

—

—

20,386

(149,156)

—

—
—
—

—
—

—

—

—

(28,303)

(177,459)

—
—

—
—

—

—

—

—

Balance at December 31, 2012 . . . . . . . . . 107,239

$ 1

$2,111,605 $387,015 $

— $(150,556)

$2,348,065

$ 3,704

$2,351,769

See Notes to Consolidated Financial Statements

61

26,903

26,903

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Year Ended December 31,

2012

2011

2010

$

301,728

$

78,579

$

128,956

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Adjustments to reconcile net income to cash provided by operating activities:
Provision for policy losses and other claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net OTTI losses recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends from equity method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities excluding effects of acquisitions and noncash transactions:
Claims paid, including assets acquired, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . .
Net change in income tax accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in accounts and accrued income receivable . . . . . . . . . . . . . . . . . . .
Increase (decrease) in accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . .
Net change in due to CoreLogic/TFAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH FLOWS FROM INVESTING ACTIVITIES:

Net cash effect of acquisitions/dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of debt and equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of debt and equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of Company owned life insurance . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from notes receivable from CoreLogic/TFAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Origination and purchases of loans and participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

397,717
74,950
(2,372)
(60,536)
3,564
14,839
(13,664)
11,585

(445,986)
64,486
(29,398)
71,980
11,999
14,844
13,939

429,675

(32,476)
(14,405)
(1,796,314)
954,626
491,674
—
6,591
—
—
31,839
(83,892)
7,767

Cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(434,590)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net change in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of note payable to TFAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt to TFAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions from noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds in connection with share-based compensation plans . . . . . . . . . . . . . . . . . . . . .
Purchase of subsidiary shares from/other decreases in noncontrolling interests . . . . . . . . . . .
Sale of subsidiary shares to/other increases in noncontrolling interests . . . . . . . . . . . . . . . . .
Purchase of Company shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash distribution to TFAC upon separation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash provided by (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents—Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

317,957
440,065
—

(510,544)

—
221
(913)
2,372
12,668
(3,402)
—
—
(44,705)
—

213,719
105

208,909
418,299

420,136
76,889
(1,145)
114
9,068
14,981
(8,099)
11,991

(503,434)
21,856
5,367
(32,073)
18,595
10,907
12,942

136,674

(2,706)
3,773
(1,005,804)
672,095
322,009

—
3,860
18,787
(13,534)
35,869
(69,797)
9,345

(26,103)

(389,320)
24,185
—
(23,117)
—
—
(335)
1,145
1,152
(4,156)
—
(2,502)
(25,216)
—

(418,164)
(2,854)

(310,447)
728,746

320,874
80,642
(1,080)
(10,209)
8,023
15,163
(8,376)
8,257

(456,225)
60,290
4,730
5,890
(11,392)
(1,802)
13,266

157,007

(12,145)
16,092
(1,532,801)
699,342
597,838
19,602
13,429
2,830
(9,090)
9,461
(88,725)
8,832

(275,335)

328,983
213,462
29,087
(40,958)
(169,572)

—
(1,133)
1,080
2,430
(3,746)
110
—
(12,502)
(130,000)

217,241
(1,464)

97,449
631,297

Cash and cash equivalents—End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

627,208

$

418,299

$

728,746

SUPPLEMENTAL INFORMATION:

Cash paid during the year for: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncash investing and financing activities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed in connection with acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net noncash contribution from TFAC as a result of separation . . . . . . . . . . . . . . . . . . .
Net noncash capital contribution from TFAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$
$

$
$
$

8,909
45,375
87,324

$
$
$

12,631
38,136
23,862

$
$
$

16,717
41,060
21,771

3,518

$
— $
— $

2,450
5,164

$
$
— $

1,100
2,097
(26,570)

See Notes to Consolidated Financial Statements

62

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Description of the Company:

First American Financial Corporation (the “Company”), through its subsidiaries, is engaged in the business
of providing financial services. The Company consists of the following reportable segments and a corporate
function:

•

•

The Company’s title insurance and services segment issues title insurance policies on residential and
commercial property in the United States and offers similar or related products and services
internationally. This segment also provides escrow and closing services; accommodates tax-deferred
exchanges of real estate; maintains, manages and provides access to title plant records and images and
provides banking, trust and investment advisory services. The Company, through its principal title
insurance subsidiary and such subsidiary’s affiliates, transacts its title insurance business through a
network of direct operations and agents. Through this network, the Company issues policies in the 49
states that permit the issuance of title insurance policies and the District of Columbia. The Company
also offers title insurance and other insurance and guarantee products, as well as related settlement
services in foreign countries, including Canada, the United Kingdom, Australia and various other
established and emerging markets.

The Company’s specialty insurance segment issues property and casualty insurance policies and sells
home warranty products. The property and casualty insurance business provides insurance coverage to
residential homeowners and renters for liability losses and typical hazards such as fire, theft, vandalism
and other types of property damage. This business is licensed to issue policies in all 50 states and
actively issues policies in 43 states. In its largest market, California, it also offers preferred risk auto
insurance to better compete with other carriers offering bundled home and auto insurance. The home
warranty business provides residential service contracts that cover residential systems and appliances
against failures that occur as the result of normal usage during the coverage period. This business
currently operates in 39 states and the District of Columbia.

The corporate division consists of certain financing facilities as well as the corporate services that support

the Company’s business operations.

Spin-off

The Company became a publicly traded company following its spin-off from its prior parent, The First
American Corporation (“TFAC”) on June 1, 2010 (the “Separation”). On that date, TFAC distributed all of the
Company’s outstanding shares to the record date shareholders of TFAC on a one-for-one basis (the
“Distribution”). After the Distribution, the Company owns TFAC’s financial services businesses and TFAC,
which reincorporated and assumed the name CoreLogic, Inc. (“CoreLogic”), continues to own its information
solutions businesses. The Company’s common stock trades on the New York Stock Exchange under the “FAF”
ticker symbol and CoreLogic’s common stock trades on the New York Stock Exchange under the ticker symbol
“CLGX.”

To effect the Separation, TFAC and the Company entered into a Separation and Distribution Agreement (the
“Separation and Distribution Agreement”) that governs the rights and obligations of the Company and CoreLogic
regarding the Distribution. It also governs the relationship between the Company and CoreLogic subsequent to
the completion of the Separation and provides for the allocation between the Company and CoreLogic of
TFAC’s assets and liabilities. The Separation and Distribution Agreement identifies assets, liabilities and
contracts that were allocated between CoreLogic and the Company as part of the Separation and describes the
transfers, assumptions and assignments of these assets, liabilities and contracts. In particular, the Separation and
Distribution Agreement provides that, subject to the terms and conditions contained therein:

63

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

• All of the assets and liabilities primarily related to the Company’s business—primarily the business and
operations of TFAC’s title insurance and services segment and specialty insurance segment—have been
retained by or transferred to the Company;

• All of the assets and liabilities primarily related to CoreLogic’s business—primarily the business and
operations of TFAC’s data and analytic solutions, information and outsourcing solutions and risk
mitigation and business solutions segments—have been retained by or transferred to CoreLogic;

• On the record date for the Distribution, TFAC issued to the Company and its principal title insurance
subsidiary, First American Title Insurance Company (“FATICO”), a number of shares of its common
stock that resulted in the Company and FATICO collectively owning 12.9 million shares of CoreLogic’s
common stock immediately following the Separation, all of which have subsequently been sold. See
Note 19 Transactions with CoreLogic/TFAC to the consolidated financial statements for further
discussion of the CoreLogic stock;

•

The Company effectively assumed $200.0 million of the outstanding liability for indebtedness under
TFAC’s senior secured credit facility through the Company’s borrowing and transferring to CoreLogic
of $200.0 million under the Company’s credit facility in connection with the Separation. See Note 10
Notes and Contracts Payable to the consolidated financial statements for further discussion of the
Company’s credit facility.

The Separation resulted in a net distribution from the Company to TFAC of $151.4 million. In connection
with such distribution, the Company assumed $22.1 million of accumulated other comprehensive loss, net of tax,
which was primarily related to the Company’s assumption of the unfunded portion of the defined benefit pension
obligation associated with participants who were employees of the businesses retained by CoreLogic. See Note
14 Employee Benefit Plans to the consolidated financial statements for additional discussion of the defined
benefit pension plan.

Significant Accounting Policies:

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with generally accepted accounting
principles and reflect the consolidated operations of the Company as a separate, stand-alone publicly traded
company subsequent to June 1, 2010. The consolidated financial statements include the accounts of First
American Financial Corporation and all controlled subsidiaries. All significant intercompany transactions and
balances have been eliminated. Investments in which the Company exercises significant influence, but does not
control and is not the primary beneficiary, are accounted for using the equity method. Investments in which the
Company does not exercise significant influence over the investee are accounted for under the cost method.

Principles of Combination and Basis of Presentation

The Company’s historical financial statements prior to June 1, 2010 have been prepared in accordance with
generally accepted accounting principles and have been derived from the consolidated financial statements of
TFAC and represent carve-out stand-alone combined financial statements. The combined financial statements
prior to June 1, 2010 include items attributable to the Company and allocations of general corporate expenses
from TFAC.

The Company’s historical financial statements prior to June 1, 2010 include assets, liabilities, revenues and
expenses directly attributable to the Company’s operations. The Company’s historical financial statements prior
to June 1, 2010 reflect allocations of corporate expenses from TFAC for certain functions provided by TFAC,

64

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

compliance,

communications,

employee benefits,

facilities, procurement,

including, but not limited to, general corporate expenses related to finance, legal, information technology, human
resources,
and share-based
compensation. These expenses have been allocated to the Company on the basis of direct usage when
identifiable, with the remainder allocated on the basis of net revenue, domestic headcount or assets or a
combination of such drivers. The Company considers the basis on which the expenses have been allocated to be a
reasonable reflection of the utilization of services provided to or the benefit received by the Company during the
periods presented. The Company’s historical financial statements prior to June 1, 2010 do not reflect the debt or
interest expense it might have incurred if it had been a stand-alone entity. In addition, the Company expects to
incur other expenses, not reflected in its historical financial statements prior to June 1, 2010, as a result of being a
separate publicly traded company. As a result, the Company’s historical financial statements prior to June 1,
2010 do not necessarily reflect what its financial position or results of operations would have been if it had been
operated as a stand-alone public entity during the periods covered prior to June 1, 2010, and may not be
indicative of the Company’s future results of operations and financial position.

Reclassification

Certain 2010 and 2011 amounts have been reclassified to conform to the 2012 presentation.

During the first quarter of 2012, the Company changed the allocation of certain expenses within its
reportable segments and corporate division to reflect the performance of the Company’s reportable segments as
reported to the chief operating decision maker. The expenses that were impacted as a result of the change in
allocation include shared services expenses, benefit plan expense and interest expense. Prior year segment data
has been conformed to the current presentation. For the years ended December 31, 2011 and 2010, income before
income taxes for the Company’s reportable segments was impacted as follows: increases of $14.9 million and
$25.1 million, respectively, to the title insurance and services segment, increases of $0.7 million and $0.9
million, respectively, to the specialty insurance segment, and decreases of $15.6 million and $26.0 million,
respectively, to the corporate division.

The consolidated statements of cash flows for the years ended December 31, 2011 and 2010 were corrected
to reflect adjustments that increased cash provided by operating activities and decreased the effect of exchange
rate changes on cash by $2.9 million and $1.5 million, respectively. In addition, for the years ended December
31, 2011 and 2010 an adjustment was made to correct the classification of net purchase of subsidiary shares from
/other decreases in noncontrolling interests which decreased cash used for investing activities and increased cash
used for financing activities by $4.2 million in 2011, and in 2010, decreased cash used for investing activities and
decreased cash provided by financing activities by $3.6 million. These adjustments had no impact on the net
change in cash and cash equivalents and were not considered material, individually or in the aggregate, to
previously issued financial statements.

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the statements. Actual results could differ from the
estimates and assumptions used.

Cash and cash equivalents

The Company considers cash equivalents to be all short-term investments that have an initial maturity of 90

days or less and are not restricted for statutory deposit or premium reserve requirements.

65

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounts and accrued income receivable

Accounts and accrued income receivable are generally due within thirty days and are recorded net of an
allowance for doubtful accounts. We consider accounts outstanding longer than the contractual payment terms as
past due. We determine our allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, previous loss history, a specific customer’s ability to pay its obligations to us,
and the condition of the general economy and industry as a whole. Amounts are charged off in the period they are
deemed to be uncollectible.

Investments

Deposits with savings and loan associations and banks are short-term investments with initial maturities of

generally more than 90 days.

Debt securities are carried at fair value and consist primarily of investments in obligations of the United

States Treasury, various corporations, certain state and political subdivisions and mortgage-backed securities.

The Company maintains investments in debt securities in accordance with certain statutory requirements for
the funding of statutory premium reserves and state deposits. At December 31, 2012 and 2011, the fair value of
such investments totaled $105.8 million and $149.9 million, respectively. See Note 2 Statutory Restrictions on
Investments and Stockholders’ Equity to the consolidated financial statements for additional discussion of the
Company’s statutory restrictions.

Equity securities are carried at fair value and consist primarily of investments in exchange traded funds,

mutual funds and marketable common and preferred stocks of corporate entities.

The Company classifies its publicly traded debt and equity securities as available-for-sale and carries them
at fair value with unrealized gains or losses classified as a component of accumulated other comprehensive loss.
See Note 3 Debt and Equity Securities to the consolidated financial statements for additional discussion of the
Company’s accounting policies pertaining to its debt and equity securities, including other-than-temporary
impairment and fair value measurement.

Other long-term investments consist primarily of investments in affiliates, which are accounted for under
the equity method of accounting or the cost method of accounting, investments in real estate and notes
receivable. For the year ended December 31, 2012, the Company recognized $7.8 million of impairment losses
on other long-term investments, including $7.1 million related to investments in affiliates and $0.7 million
related to notes receivable. For the year ended December 31, 2011, the Company recognized $8.6 million of
impairment losses on other long-term investments, including $6.3 million related to investments in affiliates and
$2.3 million related to notes receivable. For the year ended December 31, 2010, the Company recognized $3.9
million of impairment losses on other long-term investments, including $3.2 million related to a note receivable
and $0.7 million related to other investments. In making the determination as to whether an individual investment
was impaired, the Company assessed the then-current and expected financial condition of each relevant entity,
including, but not limited to, the anticipated ability of the entity to make its contractually required payments to
the Company (with respect to debt obligations to us), the results of valuation work performed with respect to the
entity, the entity’s anticipated ability to generate sufficient cash flows and the market conditions in the industry
in which the entity was operating.

Loss reserves are established for notes receivable based upon an estimate of probable losses for the
individual notes. A loss reserve is established on an individual note when it is deemed probable that the Company

66

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

will be unable to collect all amounts due in accordance with the contractual terms of the note. The loss reserve is
based upon the Company’s assessment of the borrower’s overall financial condition, resources and payment
record; and, if appropriate, the realizable value of any collateral. These estimates consider all available evidence
including the expected future cash flows, estimated fair value of collateral on secured notes, general economic
conditions and trends, and other relevant factors, as appropriate. Notes are placed on non-accrual status when
management determines that the collectibility of contractual amounts is not reasonably assured.

Loans receivable

The performance of the Company’s loan portfolio is evaluated on an ongoing basis by management. Loans
receivable are impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans
receivable are measured at the present value of expected future cash flows discounted at the loan’s effective
interest rate. As a practical expedient, the loan may be valued based on its observable market price or the fair
value of the collateral, if the loan is collateral-dependent. No indications of material impairment of loans
receivable were identified during the three-year period ended December 31, 2012.

Loans, including impaired loans, are generally classified as non-accrual if they miss more than three
contractual payments, which usually represent past due between 60 to 90 days or more. The Company’s general
policy is to reverse from income previously accrued but unpaid interest. While a loan is classified under non-
accrual status and the future collectability of the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to principal outstanding. Income on such loans is subsequently
recognized only to the extent that cash is received and future collection of principal is probable. Loans may be
returned to accrual status when all principal and interest amounts contractually due (including arrearages) are
reasonably assured of repayment within an acceptable period of time. Interest income on non-accrual loans that
would have been recognized during the years ended December 31, 2012, 2011 and 2010, if all of such loans had
been current in accordance with their original terms, totaled $138 thousand, $163 thousand, and $113 thousand,
respectively.

The allowance for loan losses is established through charges to earnings in the form of a provision for loan
losses. Loan losses are charged to, and recoveries are credited to, the allowance for loan losses. The provision for
loan losses is determined after considering various factors, such as loan loss experience, maturity of the portfolio,
size of the portfolio, borrower credit history, the existing allowance for loan losses, current charges and
recoveries to the allowance for loan losses, the overall quality of the loan portfolio, and current economic
conditions, as determined by management, regulatory agencies and independent credit review specialists. While
many of these factors are essentially a matter of judgment and may not be reduced to a mathematical formula, the
Company believes that, in light of the collateral securing its loan portfolio, the current allowance for loan losses
is an adequate allowance against probable losses incurred as of December 31, 2012.

The adequacy of the allowance for loan losses is based on formula allocations and specific allocations.
Formula allocations are made on a percentage basis, which is dependent on the underlying collateral, the type of
loan and general economic conditions. Specific allocations are made as problem or potential problem loans are
identified and are based upon an evaluation by management of the status of such loans. Specific allocations may
be revised from time to time as the status of problem or potential problem loans changes.

Property and equipment

Property and equipment includes computer software acquired or developed for internal use and for use with
the Company’s products. Software development costs, which include capitalized interest costs and certain

67

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

payroll-related costs of employees directly associated with developing software, in addition to incremental
payments to third parties, are capitalized from the time technological feasibility is established until the software
is ready for use.

Depreciation on buildings and on furniture and equipment is computed using the straight-line method over
estimated useful lives of 16 to 40 years and 3 to 10 years, respectively. Capitalized software costs are amortized
using the straight-line method over estimated useful lives of 3 to 15 years. Leasehold improvements are
amortized over useful lives that are consistent with the lease term.

Title plants and other indexes

Title plants and other indexes includes title plants of $520.7 million and capitalized real estate data, net of
$1.0 million at December 31, 2012 and title plants of $512.6 million and capitalized real estate data, net of $1.4
million at December 31, 2011. Title plants are carried at original cost, with the costs of daily maintenance
(updating) charged to expense as incurred. Because properly maintained title plants have indefinite lives and do
not diminish in value with the passage of time, no provision has been made for depreciation or amortization. The
Company analyzes its title plants at least annually for impairment. This analysis includes, but is not limited to,
the effects of obsolescence, duplication, demand and other economic factors. Capitalized real estate data is
amortized using the straight-line method over estimated useful lives of 5 to 15 years.

Goodwill

The Company is required to perform an annual goodwill impairment assessment for each reporting unit. The
Company’s four reporting units are title insurance, home warranty, property and casualty insurance and trust and
other services. The Company has elected to perform this annual assessment in the fourth quarter of each fiscal
year or sooner if circumstances indicate possible impairment. Based on current guidance, the Company has the
option to perform a qualitative assessment to determine if the fair value is more likely than not (i.e. a likelihood
of greater than 50%) less than the carrying amount as a basis for determining whether it is necessary to perform a
quantitative impairment test, or may choose to forego the qualitative assessment and perform the quantitative
impairment test. The qualitative factors considered in this assessment may include macroeconomic conditions,
industry and market considerations, overall financial performance as well as other relevant events and
circumstances as determined by the Company. The Company evaluates the weight of each factor to determine
whether it is more likely than not that impairment may exist. If the results of the qualitative assessment indicate
the more likely than not threshold was not met, the Company may choose not to perform the quantitative
impairment test. If however, the more likely than not threshold is met, the Company performs the quantitative
test as required and discussed below.

Management’s quantitative impairment

testing process includes two steps. The first step (“Step 1”)
compares the fair value of each reporting unit to its carrying amount. The fair value of each reporting unit is
determined by using discounted cash flow analysis and market approach valuations. If the fair value of the
reporting unit exceeds its carrying amount, the goodwill is not considered impaired and no additional analysis is
required. However, if the carrying amount is greater than the fair value, a second step (“Step 2”) must be
completed to determine if the fair value of the goodwill exceeds the carrying amount of goodwill.

Step 2 involves calculating an implied fair value of goodwill for each reporting unit for which the first step
indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of
goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the

68

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets,
liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the
implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no
impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the
goodwill, an impairment loss is recorded for the excess. An impairment loss cannot exceed the carrying value of
goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of
goodwill impairment losses is not permitted.

The quantitative impairment test for goodwill utilizes a variety of valuation techniques, all of which require
the Company to make estimates and judgments. Fair value is determined by employing an expected present value
technique, which utilizes multiple cash flow scenarios that reflect a range of possible outcomes and an
appropriate discount rate. The use of comparative market multiples (the “market approach”) compares the
reporting unit to other comparable companies (if such comparables are present in the marketplace) based on
valuation multiples to arrive at a fair value. The Company also uses certain of these valuation techniques in
accounting for business combinations, primarily in the determination of the fair value of acquired assets and
liabilities. In assessing the fair value, the Company utilizes the results of the valuations (including the market
approach to the extent comparables are available) and considers the range of fair values determined under all
methods and the extent to which the fair value exceeds the carrying amount of the equity or asset.

The valuation of each reporting unit includes the use of assumptions and estimates of many critical factors,
including revenue growth rates and operating margins, discount rates and future market conditions, determination
of market multiples and the establishment of a control premium, among others. Forecasts of future operations are
based, in part, on operating results and the Company’s expectations as to future market conditions. These types
of analyses contain uncertainties because they require the Company to make assumptions and to apply judgments
to estimate industry economic factors and the profitability of future business strategies. However, if actual results
are not consistent with the Company’s estimates and assumptions, the Company may be exposed to future
impairment losses that could be material.

Other intangible assets

The Company’s intangible assets consist of covenants not to compete, customer lists, trademarks, patents
and licenses. Each of these intangible assets, excluding licenses, is amortized on a straight-line basis over their
useful lives ranging from 2 to 20 years and is subject to impairment tests when there is an indication of a
triggering event or abandonment. Licenses are an intangible asset with an indefinite life and are therefore not
amortized but rather tested for impairment by comparing the fair value of the license with its carrying value at
least annually and when an indicator of potential impairment has occurred.

Long-lived assets

Long-lived assets held and used include property and equipment, capitalized software and other intangible
assets with a finite life. Management uses estimated future cash flows (undiscounted and excluding interest) to
measure the recoverability of long-lived assets held and used whenever events or changes in circumstances
indicate that the carrying value of an asset may not be fully recoverable. If the undiscounted cash flow analysis
indicates a long-lived asset is not recoverable, the impairment loss recorded is the excess of the carrying amount
of the asset over its fair value.

In addition, the Company carries long-lived assets held for sale at the lower of cost or market as of the date
that certain criteria have been met. As of December 31, 2012 and 2011 the Company had no material long-lived
assets classified as held for sale.

69

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Reserve for known and incurred but not reported claims

The Company provides for title insurance losses by a charge to expense when the related premium revenue
is recognized. The amount charged to expense is generally determined by applying a rate (the loss provision rate)
to total title insurance premiums and escrow fees. The Company’s management estimates the loss provision rate
at the beginning of each year and reassesses the rate quarterly to ensure that the resulting incurred but not
reported (“IBNR”) loss reserve and known claims reserve included in the Company’s consolidated balance sheets
together reflect management’s best estimate of the total costs required to settle all IBNR and known claims. If the
ending IBNR reserve is not considered adequate, an adjustment is recorded.

The process of assessing the loss provision rate and the resulting IBNR reserve involves evaluation of the
results of both an in-house actuarial review and independent actuarial analysis. The Company’s in-house actuary
performs a reserve analysis utilizing generally accepted actuarial methods that incorporate cumulative historical
claims experience and information provided by in-house claims and operations personnel. Current economic and
business trends are also reviewed and used in the reserve analysis. These include real estate and mortgage
markets conditions, changes in residential and commercial real estate values, and changes in the levels of defaults
and foreclosures that may affect claims levels and patterns of emergence, as well as any company-specific factors
that may be relevant to past and future claims experience. Results from the analysis include, but are not limited
to, a range of IBNR reserve estimates and a single point estimate for IBNR as of the balance sheet date.

For recent policy years at early stages of development (generally the last three years), IBNR is estimated
using a combination of expected loss rate and multiplicative loss development factor calculations. For more
mature policy years (generally, policy years aged more than three years), IBNR generally is estimated using
multiplicative loss development factor calculations. The expected loss rate method estimates IBNR by applying
an expected loss rate to total title insurance premiums and escrow fees, and adjusting for policy year maturity
using the estimated loss development patterns. Multiplicative loss development factor calculations estimate
IBNR by applying factors derived from loss development patterns to losses realized to date. The expected loss
rate and loss development patterns are based on historical experience and the relationship of the history to the
applicable policy years.

The Company utilizes an independent third party actuary who produces a report with estimates and
projections of the same financial items described above. The third party actuary’s analysis uses generally
accepted actuarial methods that may in whole or in part be different from those used by the Company’s in-house
actuary. The third party actuary’s report is used to assess the reasonableness of the Company’s in-house analysis.

The Company’s management uses the IBNR point estimate from the Company’s in-house actuary’s analysis
and other relevant information it may have concerning claims to determine what it considers to be the best
estimate of the total amount required for the IBNR reserve.

Title insurance policies are long-duration contracts with the majority of the claims reported to the Company
within the first few years following the issuance of the policy. Generally, 75 to 85 percent of claim amounts
become known in the first six years of the policy life, and the majority of IBNR reserves relate to the six most
recent policy years. A material change in expected ultimate losses and corresponding loss rates for policy years
older than six years, while possible, is not considered reasonably likely by the Company. However, changes in
expected ultimate losses and corresponding loss rates for recent policy years are considered likely and could
result in a material adjustment to the IBNR reserves. Based on historical experience, the Company believes that a
50 basis point change to one or more of the loss rates for the most recent policy years, positive or negative, is
reasonably likely given the long duration nature of a title insurance policy. If the expected ultimate losses for

70

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

each of the last six policy years increased or decreased by 50 basis points, the resulting impact on the IBNR
reserve would be an increase or decrease, as the case may be, of $110.5 million. The estimates made by
management in determining the appropriate level of IBNR reserves could ultimately prove to be materially
different from actual claims experience.

The Company provides for property and casualty insurance losses when the insured event occurs. The
Company provides for claims losses relating to its home warranty business based on the average cost per claim as
applied to the total of new claims incurred. The average cost per home warranty claim is calculated using the
average of the most recent 12 months of claims experience.

Invested Equity

Invested equity refers to the net assets of the Company which reflects TFAC’s investment in the Company

prior to the Separation and excludes noncontrolling interests.

Revenues

Title premiums on policies issued directly by the Company are recognized on the effective date of the title
policy and escrow fees are recorded upon close of the escrow. Revenues from title policies issued by independent
agents are recorded when notice of issuance is received from the agent, which is generally when cash payment is
received by the Company. Revenues earned by the Company’s title plant management business are recognized at
the time of delivery, as the Company has no significant ongoing obligation after delivery.

Direct premiums of the Company’s specialty insurance segment include revenues from home warranty
contracts which are generally recognized ratably over the 12-month duration of the contracts, and revenues from
property and casualty insurance policies which are also recognized ratably over the 12-month duration of the
policies.

Interest on loans receivable is recognized on the outstanding principal balance on the accrual basis.
Revenues earned by the other products in the Company’s trust and banking operations are recognized at the time
of delivery, as the Company has no significant ongoing obligation after delivery.

Premium taxes

Title insurance, property and casualty insurance and home warranty companies, like other types of insurers,
are generally not subject to state income or franchise taxes. However, in lieu thereof, most states impose a tax
based primarily on insurance premiums written. This premium tax is reported as a separate line item in the
consolidated statements of income in order to provide a more meaningful disclosure of the taxation of the
Company.

Legal fees

The Company records legal fees in other operating expenses in the period incurred.

Income taxes

The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary

71

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the need
to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary
differences, the period in which they are expected to be recovered and expected levels of taxable income. A
valuation allowance to reduce deferred tax assets is established when it is considered more likely than not that
some or all of the deferred tax assets will not be realized.

The Company recognizes the effect of income tax positions only if sustaining those positions is considered
more likely than not. Changes in recognition or measurement of uncertain tax positions are reflected in the period
in which a change in judgment occurs. The Company recognizes interest and penalties, if any, related to
uncertain tax positions in tax expense.

Share-based compensation

The Company measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The cost is recognized in the Company’s financial
statements over the requisite service period of the award using the straight-line method for awards that contain
only a service condition and the graded vesting method for awards that contain a performance or market
condition. The share-based compensation expense recognized is based on the number of shares ultimately
expected to vest, net of forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.

The Company’s primary means of providing share-based compensation is through the granting of restricted
stock units (“RSUs”). RSUs granted generally have graded vesting and include a service condition; and for
certain key employees and executives, may also include either a performance or market condition. RSUs receive
dividend equivalents in the form of RSUs having the same vesting requirements as the RSUs initially granted.

As of December 31, 2012, all stock options issued under the Company’s plans are vested and no share-based

compensation expense related to such stock options remains to be recognized.

In addition, the Company has an employee stock purchase plan that allows eligible employees to purchase
common stock of the Company at 85.0% of the closing price on the last day of each month. The Company
recognizes an expense in the amount equal to the discount.

Earnings per share

Basic earnings per share is computed by dividing net income available to the Company’s stockholders by
the weighted-average number of common shares outstanding. The computation of diluted earnings per share is
similar to the computation of basic earnings per share, except that the weighted-average number of common
shares outstanding is increased to include the number of additional common shares that would have been
outstanding if dilutive stock options had been exercised and RSUs were vested. The dilutive effect of stock
options and unvested RSUs is computed using the treasury stock method, which assumes any proceeds that could
be obtained upon the exercise of stock options and vesting of RSUs would be used to purchase common shares at
the average market price for the period. The assumed proceeds include the purchase price the grantee pays, the
hypothetical windfall
the Company receives upon assumed exercise or vesting and the
hypothetical average unrecognized compensation expense for the period. The Company calculates the assumed
proceeds from excess tax benefits based on the “as-if” deferred tax assets calculated under share based
compensation standards.

tax benefit

that

72

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Certain unvested RSUs contain nonforfeitable rights to dividends as they are eligible to participate in
undistributed earnings without meeting service condition requirements. These awards are considered
participating securities under the guidance which requires the use of the two-class method when computing basic
and diluted earnings per share. The two-class method reduces earnings allocated to common stockholders by
dividends and undistributed earnings allocated to participating securities.

Per share information for 2010 was computed using the number of shares of common stock outstanding

immediately following the Separation, as if such shares were outstanding for the entire period.

Employee benefit plans

The Company recognizes the overfunded or underfunded status of defined benefit postretirement plans as an
asset or liability on its consolidated balance sheets and recognizes changes in the funded status in the year in
which changes occur, through accumulated other comprehensive loss. The funded status is measured as the
difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for
pension plans and the accumulated postretirement benefit obligation for the other postretirement plans). Actuarial
gains and losses and prior service costs and credits that have not been recognized as a component of net periodic
benefit cost previously are recorded as a component of accumulated other comprehensive loss. Plan assets and
obligations are measured as of December 31.

The Company informally funds its nonqualified deferred compensation plan through tax-advantaged
investments known as variable universal life insurance. The Company’s deferred compensation plan assets are
included as a component of other assets and the Company’s deferred compensation plan liability is included as a
component of pension costs and other retirement plans on the consolidated balance sheets. The income earned on
the Company’s deferred compensation plan assets is included as a component of investment income and the
income earned by the deferred compensation plan participants is included as a component of personnel costs on
the consolidated statements of income.

Foreign currency

The Company operates in foreign countries, including Canada, the United Kingdom and various other
established and emerging markets. The functional currencies of the Company’s foreign subsidiaries are generally
their respective local currencies. The financial statements of the foreign subsidiaries are translated into U.S.
dollars as follows: assets and liabilities at the exchange rate as of the balance sheet date, equity at the historical
rates of exchange, and income and expense amounts at average rates prevailing throughout
the period.
Translation adjustments resulting from the translation of the subsidiaries’ accounts are included in accumulated
other comprehensive loss as a separate component of stockholders’ equity. Gains and losses resulting from
foreign currency transactions are included within other operating expenses.

Reinsurance

the
The Company assumes and cedes large title insurance risks through reinsurance. Additionally,
Company’s property and casualty insurance business uses reinsurance to limit risk associated with natural
disasters such as windstorms, winter storms, wildfires and earthquakes. In reinsurance arrangements, the primary
insurer retains a certain amount of risk under a policy and cedes the remainder of the risk under the policy to the
reinsurer. The primary insurer pays the reinsurer a premium in exchange for accepting this risk of loss. The
primary insurer generally remains liable to its insured for the total risk, but is reinsured under the terms of the
reinsurance agreement. The amount of premiums assumed and ceded is recorded as a component of direct

73

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

premiums and escrow fees on the Company’s income statement. The total amount of premiums assumed and
ceded in connection with reinsurance was less than 1.0% of consolidated premium and escrow fees for each of
the three years ended December 31, 2012. Payments and recoveries on reinsured losses for the Company’s title
insurance and property and casualty businesses were immaterial during the three years ended December 31,
2012.

Escrow deposits and trust assets

The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits
totaled $4.2 billion and $3.1 billion at December 31, 2012 and 2011, respectively, of which $1.2 billion and $0.9
billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB.
The escrow deposits held at First American Trust, FSB, are included in the accompanying consolidated balance
sheets in cash and cash equivalents and debt and equity securities, with offsetting liabilities included in deposits.
The remaining escrow deposits were held at third-party financial institutions.

Trust assets totaled $2.8 billion at December 31, 2012 and 2011, and were held or managed by First
American Trust, FSB. Escrow deposits held at third-party financial institutions and trust assets are not considered
assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets.
However, the Company could be held contingently liable for the disposition of these assets.

In conducting its operations, the Company often holds customers’ assets in escrow, pending completion of
real estate transactions. As a result of holding these customers’ assets in escrow, the Company has ongoing
programs for realizing economic benefits, including investment programs, borrowing agreements, and vendor
services arrangements with various financial institutions. The effects of these programs are included in the
consolidated financial statements as income or a reduction in expense, as appropriate, based on the nature of the
arrangement and benefit received.

Like-kind exchanges

The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the
Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a
facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to
property identified by the customer to be acquired with such proceeds. Upon the completion of such exchange,
the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to
the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred
to the customer. Like-kind exchange funds held by the Company totaled $1.4 billion and $0.6 billion at
December 31, 2012 and 2011, respectively. The like-kind exchange deposits were held at third-party financial
institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not
considered assets of the Company and, therefore, are not included in the accompanying consolidated balance
sheets. All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit
Insurance Corporation. The Company could be held contingently liable to the customer for the transfers of
property, disbursements of proceeds and the return on the proceeds.

Recently Adopted Accounting Pronouncements:

In October 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance related to
accounting for costs associated with acquiring or renewing insurance contracts. The updated guidance modifies
the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new

74

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and renewal contracts. Under the updated guidance only costs based on successful efforts (that is, acquiring a
new or renewal contract) including direct-response advertising costs are eligible for capitalization. The updated
guidance is effective for the interim and annual periods beginning after December 15, 2011. The adoption of the
guidance, on a prospective basis, did not have a material impact on the Company’s consolidated financial
statements.

In May 2011, the FASB issued updated guidance that is intended to improve the comparability of fair value
measurements presented and disclosed in financial statements prepared in accordance with U.S. generally
accepted accounting principles and International Financial Reporting Standards. The amendments are of two
types: (i) those that clarify the FASB’s intent about the application of existing fair value measurement and
disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value
or for disclosing information about fair value measurements. The updated guidance is effective for interim and
annual periods beginning after December 15, 2011. Except for the disclosure requirements, the adoption of the
guidance had no impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued updated guidance that is intended to increase the prominence of other
comprehensive income in financial statements. The updated guidance eliminates the option to present the
components of other comprehensive income as part of the statement of changes in stockholders’ equity, and
requires either consecutive presentation of the statement of net income and other comprehensive income or in a
single continuous statement of comprehensive income. The updated guidance is effective for interim and annual
reporting periods beginning after December 15, 2011. The adoption of the guidance had no impact on the
Company’s consolidated financial statements.

Pending Accounting Pronouncements:

In February 2013, the FASB issued updated guidance requiring entities to present either in a single note or
parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each
component of accumulated other comprehensive income based on its source and the income statement line items
affected by the reclassification. If the component is not required to be reclassified to net income in its entirety,
entities would instead cross reference to the related footnote for additional information. The updated guidance is
effective prospectively for interim and annual reporting periods beginning after December 15, 2012, with early
adoption permitted. Except for the disclosure requirements, management does not expect the adoption of this
guidance to have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued updated guidance that is intended to reduce the cost and complexity of
performing an impairment test for indefinite-lived intangible assets, other than goodwill, by simplifying how an
entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-
lived asset categories. The updated guidance permits entities to first assess qualitative factors to determine
whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining
whether it is necessary to perform the quantitative impairment test in accordance with current guidance. The
updated guidance is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012, with early adoption permitted. Management did not early adopt this guidance and does not
expect this guidance to have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued updated guidance requiring entities to disclose both gross information
and net information about both instruments and transactions eligible for offset in the statement of financial
position and instruments and transactions subject to an agreement similar to a master netting arrangement. The

75

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

updated guidance is effective for interim and annual reporting periods beginning on or after January 1, 2013.
Management does not expect the adoption of this guidance to have a material impact on the Company’s
consolidated financial statements.

NOTE 2. Statutory Restrictions on Investments and Stockholders’ Equity:

Investments totaling $111.9 million and $152.5 million were on deposit with state treasurers in accordance

with statutory requirements for the protection of policyholders at December 31, 2012 and 2011, respectively.

Pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the
amount of dividends, loans and advances available to the Company is limited, principally for the protection of
policyholders. As of December 31, 2012, under such regulations, the maximum amount of dividends, loans and
advances available to the Company from its insurance subsidiaries in 2013, without prior approval from
applicable regulators, was $405.4 million.

The Company’s principal title insurance subsidiary, FATICO, maintained total statutory capital and surplus
of $959.0 million and $834.1 million as of December 31, 2012 and 2011, respectively. Statutory net income for
the years ended December 31, 2012, 2011 and 2010 was $301.9 million, $92.3 million and $42.4 million,
respectively. FATICO was in compliance with the minimum statutory capital and surplus requirements as of
December 31, 2012.

FATICO is domiciled in California and its statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the California Insurance Department. The National
Association of Insurance Commissioners’ (“NAIC”) Accounting Practices and Procedures Manual (“NAIC
SAP”) has been adopted as a component of prescribed or permitted practices by the state of California. The state
of California has adopted certain prescribed accounting practices that differ from those found in NAIC SAP.
Specifically, 1) the timing of amounts released from the statutory premium reserve under California’s required
practice differs from NAIC SAP resulting in total statutory capital and surplus that was lower by approximately
$204.1 million and approximately $227.5 million at December 31, 2012 and 2011, respectively, than if reported
in accordance with NAIC SAP and 2) the amount of title plant assets admitted under California’s required
practice differs from NAIC SAP, resulting in total statutory capital and surplus that was lower by approximately
$19.0 million and approximately $10.1 million at December 31, 2012 and 2011, respectively, than if reported in
accordance with NAIC SAP. Additionally, the state of California has granted a permitted accounting practice to
FATICO that differs from NAIC SAP; specifically, the determination to not record a bulk reserve within the
known claims reserve differs from NAIC SAP resulting in total statutory capital and surplus that was higher by
$101.4 million at December 31, 2012, than if reported in accordance with NAIC SAP. FATICO did not record a
bulk reserve within known claims reserve at December 31, 2011.

Statutory accounting principles differ in some respects from generally accepted accounting principles, and
these differences include, but are not limited to, non-admission of certain assets (principally limitations on
deferred tax assets, capitalized furniture and other equipment, premiums and other receivables 90 days past due,
assets acquired in connection with claim settlements other than real estate or mortgage loans secured by real
estate and limitations on goodwill), reporting of bonds at amortized cost, deferral of premiums received as
statutory premium reserve and supplemental reserve (if applicable) and exclusion of incurred but not reported
claims reserve.

76

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3. Debt and Equity Securities:

The amortized cost and estimated fair value of investments in debt securities, all of which are classified as

available-for-sale, are as follows:

(in thousands)

December 31, 2012
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . . . . . . .
Governmental agency mortgage-backed

securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency mortgage-backed securities (1) . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . .

December 31, 2011
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . . . . . . .
Governmental agency mortgage-backed

securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency mortgage-backed securities (1) . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . .

Amortized
cost

Gross unrealized

gains

losses

Estimated
fair value

Other-than-
temporary
impairments
in AOCI

$

$

80,651
361,912
236,630
324,323

$ 1,574
14,516
2,312
1,445

(50) $
(606)
(197)
(318)

82,175
375,822
238,745
325,450

$ —
—
—
—

1,271,408
26,656
311,695

11,259
—
14,941

(1,135)
(4,810)
(325)

1,281,532
21,846
326,311

—
23,054
—

$2,613,275

$46,047

$ (7,441) $2,651,881

$23,054

$

71,995
329,935
212,200
195,784

$ 2,236
19,263
3,026
1,970

$ — $

(75)
(206)
(1)

74,231
349,123
215,020
197,753

$ —
—
—
—

1,066,656
42,089
248,921

10,816
478
10,407

(925)
(11,933)
(725)

1,076,547
30,634
258,603

—
31,600
—

$2,167,580

$48,196

$(13,865) $2,201,911

$31,600

(1) At December 31, 2012, the $26.7 million amortized cost is net of $3.6 million in other-than-temporary
impairments determined to be credit related which have been recognized in earnings for the year ended
December 31, 2012. At December 31, 2011, the $42.1 million amortized cost is net of $9.1 million in other-
than-temporary impairments determined to be credit related which have been recognized in earnings for the
year ended December 31, 2011. At December 31, 2012, the $4.8 million gross unrealized losses include
$4.4 million of unrealized losses for securities determined to be other-than-temporarily impaired and $0.4
million of unrealized losses for securities for which an other-than-temporary impairment has not been
recognized. At December 31, 2011, the $11.9 million gross unrealized losses include $11.4 million of
unrealized losses for securities determined to be other-than-temporarily impaired and $0.5 million of
unrealized losses for securities for which an other-than-temporary impairment has not been recognized. The
$23.1 million and $31.6 million other-than-temporary impairments recorded in accumulated other
comprehensive income (loss) (“AOCI”) through December 31, 2012 and December 31, 2011, respectively,
represent the amount of other-than-temporary impairment losses recognized in AOCI which were not
included in earnings due to the fact that the losses were not considered to be credit related. Other-than-
temporary impairments were recognized in AOCI for non-agency mortgage-backed securities only.

77

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The cost and estimated fair value of investments in equity securities, all of which are classified as available-

for-sale, are as follows:

(in thousands)

December 31, 2012
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31, 2011
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross unrealized

Cost

gains

losses

Estimated
fair value

$ 13,326
177,844

$ 752
6,447

$191,170

$7,199

$

$

(41)
(408)

$ 14,037
183,883

(449)

$197,920

$

7,007
224,880

$ 678
3,793

$

(17)
(52,341)

$

7,668
176,332

$231,887

$4,471

$(52,358)

$184,000

(1) CoreLogic common stock with a cost basis of $167.6 million and an estimated fair value of $115.5 million
is included in common stocks at December 31, 2011. See Note 19 Transactions with CoreLogic/TFAC to
the consolidated financial statements for additional discussion of the CoreLogic common stock.

The Company had the following net unrealized gains (losses) as of December 31, 2012, 2011 and 2010:

Debt securities for which an OTTI has been

recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities—all other . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As of
December 31,
2012

As of
December 31,
2011

(in thousands)

As of
December 31,
2010

$ (4,435)
43,041
6,750

$45,356

$(10,937)
45,268
(47,887)

$(13,556)

$(10,175)
2,318
2,462

$ (5,395)

Sales of debt and equity securities resulted in realized gains of $70.1 million, $12.4 million and $15.2
million and realized losses of $0.3 million, $1.4 million and $2.6 million for the years ended December 31, 2012,
2011 and 2010, respectively.

78

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company had the following gross unrealized losses as of December 31, 2012 and December 31, 2011:

(in thousands)

December 31, 2012
Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . .
Governmental agency mortgage-backed

securities . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency mortgage-backed securities . .
Corporate debt securities . . . . . . . . . . . . . .

Total debt securities . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .

Less than 12 months

12 months or longer

Total

Estimated
fair value

Unrealized
losses

Estimated
fair value

Unrealized
losses

Estimated
fair value

Unrealized
losses

$

$ 27,219
60,229
58,262
60,882

(50) $ — $ — $ 27,219
60,680
(557)
59,293
(183)
60,882
(318)

451
1,031
—

(49)
(14)
—

135,354
6,544
35,537

384,027
34,258

(889)
(1,498)
(227)

(3,722)
(447)

22,112
15,302
996

39,892
98

(246)
(3,312)
(98)

(3,719)
(2)

157,466
21,846
36,533

423,919
34,356

$

(50)
(606)
(197)
(318)

(1,135)
(4,810)
(325)

(7,441)
(449)

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$418,285

$ (4,169) $39,990

$ (3,721) $458,275

$ (7,890)

December 31, 2011
Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . .
Governmental agency mortgage-backed

securities . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency mortgage-backed securities . .
Corporate debt securities . . . . . . . . . . . . . .

Total debt securities . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .

$ — $ — $ — $ — $ — $ —

3,141
30,508
13,828

280,114
—
36,707

364,298
131,768

(34)
(206)
(1)

(793)
—
(695)

(1,729)
(52,358)

1,896
690
4,150

43,835
26,500
1,290

78,361
—

(41)
—
—

(132)
(11,933)
(30)

(12,136)
—

5,037
31,198
17,978

323,949
26,500
37,997

442,659
131,768

(75)
(206)
(1)

(925)
(11,933)
(725)

(13,865)
(52,358)

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$496,066

$(54,087) $78,361

$(12,136) $574,427

$(66,223)

79

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Substantially all securities in the Company’s non-agency mortgage-backed portfolio are senior tranches and
all were investment grade at the time of purchase, however all have been downgraded to below investment grade
since initial purchase. The table below summarizes the composition of the Company’s non-agency mortgage-
backed securities by collateral type, year of issuance and current credit ratings. Percentages are based on the
amortized cost basis of the securities and credit ratings are based on Standard & Poor’s Ratings Group (“S&P”)
and Moody’s Investors Service, Inc. (“Moody’s”) published ratings. If a security was rated differently by either
rating agency, the lower of the two ratings was selected. All amounts and ratings are as of December 31, 2012.

(in thousands, except percentages and number of securities)

Non-agency mortgage- backed securities:
Prime single family residential:

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Alt-A single family residential:

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number
of
Securities

Amortized
Cost

Estimated
Fair
Value

Non-
Investment
Grade/Not
Rated

1
3
1

1

6

$ 4,516
11,196
2,902

$ 3,501
9,273
2,528

8,042

6,544

$26,656

$21,846

100.0%
100.0%
100.0%

100.0%

100.0%

80

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The amortized cost and estimated fair value of debt securities at December 31, 2012, by contractual

maturities, are as follows:

(in thousands)

U.S. Treasury bonds

Due in one
year or less

Due after
one
through
five years

Due after
five
through
ten years

Due after
ten years

Total

Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . .

$ 6,140
$ 6,257

$ 49,848
$ 50,952

$ 21,370
$ 21,606

$
$

3,293
3,360

$
$

80,651
82,175

Municipal bonds

Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . .

$ 2,445
$ 2,459

$ 89,689
$ 91,428

$122,993
$129,286

$146,785
$152,649

$ 361,912
$ 375,822

Foreign bonds

Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . .

$41,991
$42,189

$181,304
$183,069

$ 13,335
$ 13,487

$ — $ 236,630
$ — $ 238,745

Governmental agency bonds

Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . .

$
$

106
106

$124,134
$124,803

$176,996
$177,705

$ 23,087
$ 22,836

$ 324,323
$ 325,450

Corporate debt securities

Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . .

$ 7,305
$ 7,345

$152,501
$156,665

$139,827
$148,980

$ 12,062
$ 13,321

$ 311,695
$ 326,311

Total debt securities excluding mortgage-backed

securities

Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . .

$57,987
$58,356

$597,476
$606,917

$474,521
$491,064

$185,227
$192,166

$1,315,211
$1,348,503

Total mortgage-backed securities

Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . .

Total debt securities

Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . .

Other-than-temporary impairment—debt securities

$1,298,064
$1,303,378

$2,613,275
$2,651,881

If the Company intends to sell a debt security in an unrealized loss position or determines that it is more
likely than not that the Company will be required to sell a debt security before it recovers its amortized cost
basis, the debt security is other-than-temporarily impaired and it is written down to fair value with all losses
recognized in earnings. As of December 31, 2012, the Company does not intend to sell any debt securities in an
unrealized loss position and it is not more likely than not that the Company will be required to sell debt securities
before recovery of their amortized cost basis.

If the Company does not expect to recover the amortized cost basis of a debt security with declines in fair
value (even if the Company does not intend to sell the debt security and it is not more likely than not that the
Company will be required to sell the debt security before the recovery of its remaining amortized cost basis), the
losses the Company considers to be the credit portion of the other-than-temporary impairment loss (“credit loss”)
is recognized in earnings and the non-credit portion is recognized in other comprehensive income. The credit loss

81

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

is the difference between the present value of the cash flows expected to be collected and the amortized cost
basis of the debt security. The cash flows expected to be collected are discounted at the rate implicit in the
security immediately prior to the recognition of the other-than-temporary impairment.

Expected future cash flows for debt securities are based on qualitative and quantitative factors specific to
each security, including the probability of default and the estimated timing and amount of recovery. The detailed
inputs used to project expected future cash flows may be different depending on the nature of the individual debt
security.

The Company determines if a non-agency mortgage-backed security in a loss position is other-than-
temporarily impaired by comparing the present value of the cash flows expected to be collected from the security
to its amortized cost basis. If the present value of the cash flows expected to be collected exceed the amortized
cost of the security, the Company concludes that the security is not other-than-temporarily impaired. The
Company performs this analysis on all non-agency mortgage-backed securities in its portfolio that are in an
unrealized loss position. For the securities that were determined not to be other-than-temporarily impaired at
December 31, 2012, the present value of the cash flows expected to be collected exceeded the amortized cost of
each security.

Cash flows expected to be collected for each non-agency mortgage-backed security are estimated by
analyzing loan-level detail to estimate future cash flows from the underlying assets, which are then applied to the
security based on the underlying contractual provisions of the securitization trust that issued the security (e.g.
subordination levels, remaining payment terms, etc.). The Company uses third-party software to determine how
the underlying collateral cash flows will be distributed to each security issued from the securitization trust. The
primary assumptions used in estimating future collateral cash flows are prepayment speeds, default rates and loss
severity. In developing these assumptions, the Company considers the financial condition of the borrower, loan
to value ratio, loan type and geographical location of the underlying property. The Company utilizes publicly
available information related to specific assets, generally available market data such as forward interest rate
curves and a third party’s securities, loans and property data and market analytics tools.

The table below summarizes the primary assumptions used at December 31, 2012 in estimating the cash

flows expected to be collected for these securities.

Prepayment speeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Default rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss severity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.9%
3.3%
22.8%

8.5% – 11.2%
1.6% – 6.8%
3.3% – 35.8%

Weighted average

Range

As a result of the Company’s security-level review, it recognized other-than-temporary impairment losses
considered to be credit related on its non-agency mortgage-backed securities of $3.6 million, $9.1 million and
$6.3 million in earnings for the years ended December 31, 2012, 2011 and 2010, respectively. It is possible that
the Company could recognize additional other-than-temporary impairment losses on some securities it owns at
December 31, 2012 if future events or information cause it to determine that a decline in value is other-than-
temporary.

82

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the change in the credit portion of the other-than-temporary impairments
recognized in earnings on debt securities for which a portion of the other-than-temporary impairments related to
other factors was recognized in other comprehensive income (loss) for the years ended December 31, 2012, 2011,
and 2010.

Cumulative credit loss on debt securities held at

beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Addition to credit loss for which an other-than-temporary
impairment was previously recognized . . . . . . . . . . . . .
Addition to credit loss for which an other-than-temporary
impairment was not previously recognized . . . . . . . . . .

Accumulated losses on securities that were sold during

December 31,

2012

2011

2010

(in thousands)

$33,656

$24,590

$18,437

3,564

7,667

6,169

—

1,401

132

the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9,449)

(2)

(148)

Cumulative credit loss on debt securities held as of

December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$27,771

$33,656

$24,590

Other-than-temporary impairment—equity securities

When a decline in the fair value of an equity security, including common and preferred stock, is considered
to be other-than-temporary, such equity security is written down to its fair value. When assessing if a decline in
value is other-than-temporary, the factors considered include the length of time and extent to which fair value has
been below cost, the probability that the Company will be unable to collect all amounts due under the contractual
terms of the security, the seniority of the securities, issuer-specific news and other developments, the financial
condition and prospects of the issuer (including credit ratings), macro-economic changes (including the outlook
for industry sectors, which includes government policy initiatives) and the Company’s ability and intent to hold
the investment for a period of time sufficient to allow for any anticipated recovery.

When an equity security has been in an unrealized loss position for greater than twelve months, the
Company’s review of the security includes the above noted factors as well as the evidence, if any exists, that
supports the Company’s view that the security will recover its value in the foreseeable future, typically within the
next twelve months. If objective, substantial evidence does not indicate a likely recovery during that timeframe,
the Company’s policy is that such losses are considered other-than-temporary and therefore an impairment loss is
recorded. For the years ended December 31, 2012 and 2011, the Company did not record other-than-temporary
impairment charges related to its equity securities. The Company recorded other-than-temporary impairment of
$1.7 million for the year ended December 31, 2010 related to the Company’s preferred equity securities.

Fair value measurement

The Company classifies the fair value of its debt and equity securities using a three-level hierarchy for fair
value measurements that distinguishes between market participant assumptions developed based on market data
obtained from sources independent of the reporting entity (observable inputs) and the reporting entity’s own
assumptions about market participant assumptions developed based on the best information available in the
circumstances (unobservable inputs). The hierarchy level assigned to each security in the Company’s available-
for-sale portfolio is based on management’s assessment of the transparency and reliability of the inputs used in
the valuation of such instrument at the measurement date. The three hierarchy levels are defined as follows:

Level 1—Valuations based on unadjusted quoted market prices in active markets for identical securities.

83

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Level 2—Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for
similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are
observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant
measurement, and involve management judgment.

to the overall fair value

If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial
security’s hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.
The valuation techniques and inputs used to estimate the fair value of the Company’s debt and equity securities
are summarized as follows:

Debt Securities

The fair value of debt securities was based on the market values obtained from independent pricing services
that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other
market information and price quotes from well-established independent broker-dealers. The independent pricing
services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain
quotes from market makers or broker-dealers that they recognize to be market participants. The pricing services
utilize the market approach in determining the fair value of the debt securities held by the Company. The
Company obtains an understanding of the valuation models and assumptions utilized by the services and has
controls in place to determine that the values provided represent fair value. The Company’s validation procedures
include comparing prices received from the pricing services to quotes received from other third party sources for
certain securities with market prices that are readily verifiable. If the price comparison results in differences over
a predefined threshold, the Company will assess the reasonableness of the changes relative to prior periods given
the prevailing market conditions and assess changes in the issuers’ credit worthiness, performance of any
underlying collateral and prices of the instrument relative to similar issuances. To date, the Company has not
made any material adjustments to the fair value measurements provided by the pricing services.

Typical inputs and assumptions to pricing models used to value the Company’s U.S. Treasury bonds,
governmental agency bonds, governmental agency mortgage-backed securities, municipal bonds, foreign bonds
and corporate debt securities include, but are not limited to, benchmark yields, reported trades, broker-dealer
quotes, credit spreads, credit ratings, bond insurance (if applicable), benchmark securities, bids, offers, reference
data and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include
the structure of issuance, characteristics of the issuer, collateral attributes and prepayment speeds. The fair value
of non-agency mortgage-backed securities was obtained from the independent pricing service referenced above
and subject to the Company’s validation procedures discussed above. However, due to the fact that these
securities were not actively traded, there were fewer observable inputs available requiring the pricing service to
use more judgment in determining the fair value of the securities, therefore the Company classified non-agency
mortgage-backed securities as Level 3.

The significant unobservable inputs used in the fair value measurement of the Company’s non-agency
mortgage-backed securities are prepayment rates, default rates and loss severity in the event of default.
Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher)
fair value measurement. Generally, a change in the assumption used for default rates is accompanied by a
directionally similar change in the assumption used for the loss severity and a directionally opposite change in
the assumption used for prepayment rates.

84

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Equity Securities

The fair value of equity securities, including preferred and common stocks, were based on quoted market

prices for identical assets that are readily and regularly available in an active market.

The following table presents the Company’s available-for-sale investments measured at fair value on a
recurring basis as of December 31, 2012 and December 31, 2011, classified using the three-level hierarchy for
fair value measurements:

(in thousands)

Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . . . . . . . . . . .
Governmental agency mortgage- backed securities . . .
Non-agency mortgage-backed securities . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . .

Equity securities:
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . . . . . . . . . . .
Governmental agency mortgage- backed securities . . .
Non-agency mortgage-backed securities . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . .

Equity securities:
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Estimated fair value as
of December 31, 2012

Level 1

Level 2

Level 3

$

82,175
375,822
238,745
325,450
1,281,532
21,846
326,311

2,651,881

$ — $
—
—
—
—
—
—

82,175
375,822
238,745
325,450
1,281,532

—
326,311

$ —
—
—
—
—
21,846
—

—

2,630,035

21,846

14,037
183,883

197,920

14,037
183,883

197,920

—
—

—

—
—

—

$2,849,801

$197,920

$2,630,035

$21,846

Estimated fair value as
of December 31, 2011

Level 1

Level 2

Level 3

$

74,231
349,123
215,020
197,753
1,076,547
30,634
258,603

2,201,911

$ — $
—
—
—
—
—
—

74,231
349,123
215,020
197,753
1,076,547

—
258,603

$ —
—
—
—
—
30,634
—

—

2,171,277

30,634

7,668
176,332

184,000

7,668
176,332

184,000

—
—

—

—
—

—

$2,385,911

$184,000

$2,171,277

$30,634

The Company did not have any transfers in and out of Level 1 and Level 2 measurements during the years
ended December 31, 2012 and 2011. The Company’s policy is to recognize transfers between levels in the fair
value hierarchy at the end of the reporting period.

85

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents a summary of the changes in fair value of Level 3 available-for-sale

investments for the years ended December 31, 2012 and 2011:

(in thousands)

Year Ended
December 31,
2012

Year Ended
December 31,
2011

Fair value at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$30,634

$47,534

Total gains/(losses) (realized and unrealized):
Included in earnings:

Realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other-than-temporary impairment losses recognized in

earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(3,564)
6,645
(5,553)
(6,316)
—
—

(191)

(9,068)
4,784
(9,945)
(2,480)
—
—

Fair value as of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$21,846

$30,634

Unrealized gains (losses) included in earnings for the period relating to
Level 3 available-for-sale investments that were still held at the end
of the period:

Net other-than-temporary impairment losses recognized in

earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (3,564)

$ (9,068)

The Company did not purchase any non-agency mortgage-backed securities during the years ended

December 31, 2012 and 2011.

NOTE 4.

Financing Receivables:

Financing receivables are summarized as follows:

December 31,

2012

2011

(in thousands)

Loans receivable, net:
Real estate–mortgage

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

8,768
102,626
598

$ 12,028
130,724
1,403

Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Participations sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees, net

111,992
(3,893)
(761)
14

144,155
(4,171)
(861)
68

Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

107,352

139,191

86

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other long-term investments:
Notes receivable—secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable—unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2012

2011

(in thousands)

11,358
2,086
(2,278)

11,166

14,776
4,207
(3,402)

15,581

Total financing receivables, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

$118,518

$154,772

Real estate loans are collateralized by properties located primarily in Southern California. The average yield
on the loan portfolio was 6.31% and 6.51% for the years ended December 31, 2012 and 2011, respectively.
Average yields are affected by prepayment penalties recorded as income, prepayment speeds, loan fees amortized
to income and the market interest rates.

During the third quarter of 2011,

the Company began the multi-year process of winding-down the
operations of its industrial bank, First Security Business Bank (“FSBB”). Prior to initiating the wind-down,
FSBB accepted deposits and used these deposits to purchase or originate loans secured by commercial properties
primarily in Southern California. Currently, FSBB continues to accept and service deposits and to service its
existing loan portfolio, but is no longer originating or purchasing new loans.

Aging analysis of loans and notes receivable at December 31, 2012, is as follows:

Total

Current

30-59 days
past due

60-89 days
past due

(in thousands)

90 days or
more
past due

Non-accrual
status

Loans Receivable:

Multi-family residential . . .
. . . . . . . . . . . .
Commercial
Other . . . . . . . . . . . . . . . . . .

$
8,768
102,626
598

$

8,768
99,911
556

$111,992

$109,235

$ —
—
—

$ —

Notes Receivable:

Secured . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . .

$ 11,358
2,086

$ 13,444

$

$

6,517
319

6,836

$3,912
—

$3,912

$ —
160
—

$ 160

$ 72
—

$ 72

$ —
—
—

$ —

$ 16
811

$ 827

$ —
2,555
42

$2,597

$ 841
956

$1,797

Aging analysis of loans and notes receivables at December 31, 2011, is as follows:

Total

Current

30-59 days
past due

60-89 days
past due

(in thousands)

90 days or
more
past due

Non-accrual
status

Loans Receivable:

Multi-family residential . . .
Commercial
. . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . .

$ 12,028
130,724
1,403

$ 12,028
123,736
1,403

$144,155

$137,167

$ —
1,918
—

$1,918

$ —
170
—

$ 170

$ —
—
—

$ —

$ —
4,900
—

$4,900

87

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Total

Current

30-59 days
past due

60-89 days
past due

(in thousands)

90 days or
more
past due

Non-accrual
status

Notes Receivable:

Secured . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . .

$14,776
4,207

$10,712
108

$18,983

$10,820

$—
—

$—

$—
—

$—

$—
—

$—

$4,064
4,099

$8,163

The aggregate annual maturities for loans receivable and notes receivable at December 31, 2012, are as

follows:

Year

Loans
Receivable

Notes
Receivable

(in thousands)

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

1,093
1,296
6,686
3,618
6,844
92,455

$ 2,075
4,529
931
1,247
666
3,996

$111,992

$13,444

NOTE 5. Property and Equipment:

Property and equipment consists of the following:

December 31,

2012

2011

(in thousands)

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 30,111
274,352
169,412
379,151

$ 32,023
289,999
165,655
338,333

Accumulated depreciation and amortization . . . . . . . . . . . . . . . . .

853,026
(509,576)

826,010
(488,432)

$ 343,450

$ 337,578

88

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 6. Goodwill:

A reconciliation of the changes in the carrying amount of goodwill by operating segment, for the years

ended December 31, 2012 and 2011, is as follows:

Balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other net adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance as of December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other net adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Title
Insurance
and Services

$765,266
2,678
3,711

771,655
23,382
4,055

Specialty
Insurance

(in thousands)
$46,765

—
—

46,765
—
—

Total

$812,031
2,678
3,711

818,420
23,382
4,055

Balance as of December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . .

$799,092

$46,765

$845,857

The activity in the above reconciliation for other net adjustments primarily relates to foreign currency

exchange and post acquisition adjustments.

The Company’s 2012, 2011 and 2010 assessments did not indicate impairment in any of its reporting units.
There is no accumulated impairment for goodwill as the Company has never recognized any impairment for its
reporting units.

NOTE 7. Other Intangible Assets:

Other intangible assets consist of the following:

December 31,

2012

2011

(in thousands)

Finite-lived intangible assets:

Customer lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covenants not to compete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 77,981
26,842
10,070
2,840

$ 69,763
29,441
9,551
2,840

Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

117,733
(78,495)

111,595
(69,397)

39,238

42,198

Indefinite-lived intangible assets:

Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,857

17,796

$ 57,095

$ 59,994

Amortization expense for finite-lived intangible assets was $12.0 million, $13.9 million and $14.5 million

for the years ended December 31, 2012, 2011 and 2010, respectively.

89

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Estimated amortization expense for finite-lived intangible assets for the next five years is as follows:

Year

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$11,916
$ 7,887
$ 4,660
$ 3,615
$ 2,072

NOTE 8. Deposits:

Escrow, passbook and investment certificate accounts are summarized as follows:

December 31,

2012

2011

(in thousands, except
percentages)

Escrow accounts:

Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 908,957
439,954

$ 744,917
277,707

Passbook accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,067

26,840

1,348,911

1,022,624

Certificate accounts:

Less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
One to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,315
16,900

37,215

23,239
20,533

43,772

$1,411,193

$1,093,236

Annualized interest rates:

Escrow accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Passbook accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Certificate accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.17%

0.60%

1.46%

0.25%

0.65%

1.81%

NOTE 9. Reserve for Known and Incurred But Not Reported Claims:

Activity in the reserve for known and incurred but not reported claims is summarized as follows:

Balance at beginning of year . . . . . . . . . . . . . . . .
Provision related to:

Current year . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . .

90

December 31,

2012

2011

2010

$1,014,676

(in thousands)
$1,108,238

$1,227,757

323,910
73,807

397,717

308,868
111,268

420,136

289,220
31,654

320,874

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Payments, net of recoveries, related to:

Current year . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012

160,138
285,848

445,986

10,055

December 31,
2011

(in thousands)

149,004
354,430

503,434

(10,264)

2010

136,445
319,780

456,225

15,832

Balance at end of year . . . . . . . . . . . . . . . . . . . . . .

$976,462

$1,014,676

$1,108,238

“Other” primarily represents reclassifications to the reserve for foreign currency gains/losses and assets
acquired in connection with claim settlements. Claims activity associated with reinsurance is not material and,
therefore, not presented separately. Current year payments include $144.1 million, $135.1 million and $123.6
million in 2012, 2011 and 2010, respectively, that primarily relate to the Company’s specialty insurance segment.
Prior years payments include $16.7 million, $20.5 million and $18.6 million in 2012, 2011 and 2010,
respectively, that relate to the Company’s specialty insurance segment.

The provision for title insurance losses, expressed as a percentage of title insurance premiums and escrow

fees, was 6.9%, 9.5% and 6.2% for the years ended December 31, 2012, 2011 and 2010, respectively.

The current year rate of 6.9% reflected an ultimate loss rate of 5.1% for the current policy year and a net
increase in the loss reserve estimates for prior policy years of $62.1 million. The increase in loss reserve
estimates for prior policy years reflected claims development above expected levels during 2012, primarily from
domestic lenders policies and international business, including the guaranteed valuation product offered in
Canada. The reserve strengthening associated with domestic lenders policies was $25.6 million and was
primarily attributable to policy years 2005 through 2007. This strengthening was primarily due to an increase in
claims frequency experienced during 2012, partially offset by a slight decrease in severity. The reserve
strengthening associated with the international business, excluding the guaranteed valuation product, was $15.6
million and was primarily related to increased severity experienced during 2012 for policy years 2003 through
2011. The reserve strengthening associated with the guaranteed valuation product was $11.8 million and
reflected an increase in claims frequency experienced during the first half of 2012. The increase in frequency
primarily related to policy years 2008 and 2009. There is substantial uncertainty as to the ultimate loss
emergence for the guaranteed valuation product due to the following factors, among others, (i) claims associated
with this product are generally made only after a foreclosure on the related property and foreclosure rates in
Canada are difficult to predict and (ii) limited historical loss data exists as a result of the relatively recent
introduction of this product in 2003. While the Company believes its claims reserve attributable to the guaranteed
valuation product is adequate, this uncertainty increases the potential for adverse loss development relative to this
product.

As of December 31, 2012, the title insurance and services segment’s IBNR reserve was $805.4 million,
which reflected management’s best estimate. The Company’s internal actuary determined a range of reasonable
estimates of $700.9 million to $967.8 million. The range limits are $104.5 million below and $162.4 million
above management’s best estimate, respectively, and represent an estimate of the range of variation among
reasonable estimates of the IBNR reserve. Actuarial estimates are sensitive to assumptions used in models, as
well as the structures of the models themselves, and to changes in claims payment and incurral patterns, which
can vary materially due to economic conditions, among other factors.

91

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The prior year rate of 9.5% reflected an ultimate loss rate of 5.6% for policy year 2011 and included a $45.3
million reserve strengthening adjustment related to the Company’s guaranteed valuation product offered in
Canada, a $32.2 million charge in connection with the settlement of Bank of America’s lawsuit against the
Company and $34.2 million in unfavorable development for certain prior policy years, primarily 2007. The
reserve strengthening adjustment related to the guaranteed valuation product reflected a significant increase in
claim frequency experienced in the first quarter of 2011. More specifically, the number of claims reported in the
first quarter of 2011, when annualized, increased approximately 150% when compared with the number of claims
reported in 2010. The increase in frequency primarily related to policy years 2005 through 2009 (reflecting the
relatively long claims development lag for the guaranteed valuation product). These policy years began showing
evidence of higher claims frequencies than prior policy years during the first quarter of 2011. In addition, adverse
loss development in 2011 included higher-than-expected claims emergence for commercial and lenders policies,
particularly for policy years 2005 through 2007. Management believes that these policy years have higher
ultimate loss ratios than historical averages, and that they also have experienced accelerated reporting and
payment of claims, particularly on lenders policies. Reasons for higher loss levels and acceleration of claims
reporting and payment include adverse underwriting conditions in real estate markets during 2005 through 2007,
declines in real estate prices, increased levels of foreclosures and increased mechanics lien exposure due to
failures of development projects. For additional discussion regarding the Bank of America lawsuit see Note 21
Litigation and Regulatory Contingencies to the consolidated financial statements.

The 2010 rate of 6.2% reflected an expected ultimate loss rate of 4.9% for policy year 2010, with a net
upward adjustment to the reserve for prior policy years. The changes in estimates resulted primarily from higher
than expected claims emergence experienced during 2010 for policies issued prior to 2009, and lower than
expected claims emergence experienced during 2010 for policy year 2009. Adverse development on prior policy
years was primarily related to increases in claims on lenders policies, due to an increased level of foreclosures
and lower residential housing price levels.

The current economic environment continues to show potential for volatility over the short
term,
particularly in regard to real estate prices and mortgage defaults, which affect title claims. Relevant contributing
factors include continuing elevated foreclosure volume, general economic uncertainty and government actions
that may mitigate or exacerbate recent trends. Other factors, including factors not yet identified, may also
influence claims development. At this point, real estate and financial market conditions appear to be stabilizing
and improving in some respects, yet significant uncertainty remains, particularly in regard to governmental
regulatory changes and fiscal policies which affect economic conditions broadly. The current environment
continues to create an increased potential for actual claims experience to vary significantly from projections, in
either direction, which would directly affect the claims provision. If actual claims vary significantly from
expected, reserves may be adjusted to reflect updated estimates of future claims.

The volume and timing of title insurance claims are subject to cyclical influences from real estate and
mortgage markets. Title policies issued to lenders constitute a large portion of the Company’s title insurance
volume. These policies insure lenders against losses on mortgage loans due to title defects in the collateral
property. Even if an underlying title defect exists that could result in a claim, often the lender must realize an
actual loss, or at least be likely to realize an actual loss, for title insurance liability to exist. As a result, title
insurance claims exposure is sensitive to lenders’ losses on mortgage loans, and is affected in turn by external
factors that affect mortgage loan losses, particularly macroeconomic factors.

A general decline in real estate prices can expose lenders to greater risk of losses on mortgage loans, as
loan-to-value ratios increase and defaults and foreclosures increase. The current environment may continue to
have increased potential for claims on lenders’ title policies, particularly if defaults and foreclosures remain at

92

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

elevated levels. Title insurance claims exposure for a given policy year is also affected by the quality of
mortgage loan underwriting during the corresponding origination year. The Company believes that sensitivity of
claims to external conditions in real estate and mortgage markets is an inherent feature of title insurance’s
business economics that applies broadly to the title insurance industry. Lenders have experienced high losses on
mortgage loans from prior years, including loans that were originated during the years 2005 through 2007. These
losses have led to higher title insurance claims on lenders policies, and also have accelerated the reporting of
claims that would have been realized later under more normal conditions.

Loss ratios (projected to ultimate value) for policy years 2005 through 2008 are higher than loss ratios for
policy years 1992 through 2004. The major causes of the higher loss ratios for those four policy years are
believed to be confined mostly to that underwriting period. These causes included: rapidly increasing residential
real estate prices which led to an increase in the incidences of fraud, lower mortgage loan underwriting standards
and a higher concentration than usual of subprime mortgage loan originations.

The projected ultimate loss ratios, as of December 31, 2012, for policy years 2012, 2011 and 2010 were
5.1%, 5.0% and 4.7%, respectively, which are lower than the ratios for 2005 through 2008. These projections
were based in part on an assumption that more favorable underwriting conditions existed in 2009 through 2012
than in 2005 through 2008, including tighter loan underwriting standards and lower housing prices. Current
claims data from policy years 2009 through 2012, while still at an early stage of development, supports this
assumption.

A summary of the Company’s loss reserves, broken down into its components of known title claims,

incurred but not reported claims and non-title claims, follows:

(in thousands, except percentages)

December 31,
2012

December 31,
2011

Known title claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IBNR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$133,070
805,430

13.6% $ 162,019
82.5% 816,603

Total title claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-title claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

938,500
37,962

96.1% 978,622
36,054
3.9%

15.9%
80.5%

96.4%
3.6%

Total loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$976,462

100.0% $1,014,676

100.0%

NOTE 10. Notes and Contracts Payable:

Line of credit borrowings due April 17, 2016, weighted-average interest rate of 2.21%

and 3.06% at December 31, 2012 and 2011, respectively . . . . . . . . . . . . . . . . . . . . . . . .
Trust deed notes with maturities through 2032, collateralized by land and buildings with a
net book value of $53,123 and $54,583 at December 31, 2012 and 2011, respectively,
weighted-average interest rate of 5.44% and 5.43%, at December 31, 2012 and 2011,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other notes and contracts payable with maturities through 2020, weighted-average

December 31,

2012

2011

(in thousands)

$160,000

$200,000

41,749

44,802

interest rate of 2.84% and 2.02% at December 31, 2012 and 2011, respectively . . . . . . .

28,011

55,173

$229,760

$299,975

93

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The weighted-average interest rate for the Company’s notes and contracts payable was 2.87% and 3.23% at

December 31, 2012 and 2011, respectively.

On April 17, 2012, the Company entered into a senior secured credit agreement with JPMorgan Chase Bank,
N.A. (“JPMorgan”) in its capacity as administrative agent and the lenders party thereto. The credit agreement is
comprised of a $600.0 million revolving credit
the revolving loan
commitments will terminate on April 17, 2016. The agreement replaced the Company’s $400.0 million senior
secured credit agreement that had been in place since April 2010. In connection with the closing, the Company
paid off the $200.0 million outstanding balance under the prior agreement and borrowed $200.0 million under the
new agreement. Proceeds under the credit agreement may be used for general corporate purposes. At
December 31, 2012, the Company had outstanding borrowings of $160.0 million under the facility and the
interest rate associated with amounts borrowed under the facility was 2.21%. Those borrowings have since been
repaid as discussed further below.

facility. Unless terminated earlier,

On November 14, 2012, the Company entered into an amendment to its credit agreement dated as of
April 17, 2012. Among other things,
the amendment permanently released the collateral and guarantees
associated with the facility, decreased the maximum total debt to total capitalization ratio from 35 percent to 30
percent, and increased the total stockholders’ equity that the Company is required to maintain by an amount
equal to half of the Company’s consolidated positive net income for each fiscal quarter.

In the event that the rating by S&P is below BBB- (or there is no rating from S&P) and, in addition, such
rating by Moody’s is lower than Baa3 (or there is no rating from Moody’s), then the loan commitments are
subject to mandatory reduction from (a) 50 percent of the net proceeds of certain equity issuances by any of the
Company or certain subsidiaries of the Company (collectively, the “Designated Parties”), and (b) 50 percent of
the net proceeds of certain debt incurred or issued by any of the Designated Parties, provided that the
commitment reductions described above are only required to the extent necessary to reduce the total loan
commitments to $300.0 million. The Company is only required to prepay loans to the extent that, after giving
effect to any mandatory commitment reduction, the aggregate principal amount of all outstanding loans exceeds
the remaining total loan commitments.

At the Company’s election, borrowings under the credit agreement bear interest at (a) a base rate plus an
applicable spread or (b) an adjusted LIBOR rate plus an applicable spread. The base rate is generally the greatest
of (x) 0.50 percent in excess of the federal funds rate, (y) JPMorgan’s prime rate, and (z) one-month LIBOR plus
one percent. The adjusted LIBOR rate is generally LIBOR times JPMorgan’s statutory reserve rate for
Eurocurrency funding. The applicable spread varies depending upon the rating assigned by Moody’s and S&P.
The minimum applicable spread for base rate borrowings is 0.75 percent and the maximum is 1.50 percent. The
minimum applicable spread for adjusted LIBOR rate borrowings is 1.75 percent and the maximum is 2.50
percent. The Company may select interest periods of one, two, three or six months or (if agreed to by all lenders)
such other number of months for Eurodollar borrowings of loans.

The credit agreement includes representations and warranties, reporting covenants, affirmative covenants,
negative covenants, financial covenants and events of default customary for financings of this type. Upon the
occurrence of certain insolvency and bankruptcy events of default the loans automatically accelerate. As of
December 31, 2012, the Company was in compliance with the financial covenants under the credit agreement.

On January 29, 2013, the Company issued $250.0 million of 4.30 percent 10 year senior unsecured notes
due in 2023. The notes were priced at 99.638 percent to yield 4.345 percent. Interest is due semi-annually on
February 1 and August 1, beginning August 1, 2013. The Company used a portion of the net proceeds from the
sale to repay all borrowings outstanding under the credit agreement, increasing the unused capacity under that
agreement to the full $600.0 million size of the facility.

94

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The aggregate annual maturities for notes and contracts payable in each of the five years after December 31,

2012, are as follows:

Year

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes and
contracts
payable

(in thousands)

$

8,437
13,373
15,321
164,198
5,417
23,014

$229,760

NOTE 11.

Investment Income:

The components of investment income are as follows:

Interest:

Cash equivalents and deposits with savings and loan
associations and banks . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . .
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on marketable equity securities . . . . . . . . . . . .
Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended December 31,

2012

2011

2010

(in thousands)

$ 4,407
45,112
1,013
8,132
5,388
13,664
10,465

$ 6,602
47,337
1,693
10,172
2,896
8,099
5,354

$ 8,505
48,127
5,568
10,995
2,711
8,376
9,980

$88,181

$82,153

$94,262

NOTE 12.

Income Taxes:

For the years ended December 31, 2012, 2011 and 2010, domestic and foreign pretax income (loss) from
continuing operations before noncontrolling interests was $449.6 million and $17.8 million, $128.2 million and
$2.1 million, and $213.5 million and $(1.4) million, respectively.

Income taxes are summarized as follows:

Year ended December 31,

2012

2011

2010

(in thousands)

Current:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 82,269
15,229
8,234

$(23,095) $69,379
14,962
13,657

(1,267)
13,926

105,732

(10,436)

97,998

95

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Year ended December 31,
2011

2012

2010

Deferred:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

60,242
111
(407)

59,946

69,302
4,585
(11,737)

(680)
(9,823)
(4,345)

62,150

(14,848)

$165,678

$ 51,714

$ 83,150

Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A

reconciliation of this difference is as follows:

Taxes calculated at federal rate . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit
. . . . . . . . . . . . . . . . . .
Dividends received deduction . . . . . . . . . . . . . . . . . . . . .
Change in liability for tax positions . . . . . . . . . . . . . . . .
Exclusion of certain meals and entertainment

expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in capital loss valuation allowance . . . . . . . . . .
Foreign taxes in excess of federal rate . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax credit
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended December 31,

2012

2011

2010

$163,592
9,525
(995)
2,033

(in thousands)
$45,603
2,499
(140)
2,548

2,414
(5,276)
1,434
(2,921)
(4,128)

2,245
—
1,740
—
(2,781)

$ 74,237
3,340
(250)
4,626

2,889
(14,683)
9,802
—
3,189

$165,678

$51,714

$ 83,150

The Company’s effective income tax rate (income tax expense as a percentage of income before income
taxes) was 35.4% for 2012, 39.7% for 2011and 39.2% for 2010. The differences in the effective tax rates were
primarily due to changes in the ratio of permanent differences to income before income taxes, changes in state
and foreign income taxes resulting from fluctuations in the Company’s noninsurance and foreign subsidiaries’
contribution to pretax profits, and changes in the liability related to tax positions reported on the Company’s tax
returns. The effective tax rates for 2012 and 2010 included the release of valuation allowances recorded against
capital losses. In addition, the effective tax rate for 2012 reflected the generation of foreign tax credits.

96

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The primary components of temporary differences that give rise to the Company’s net deferred tax

(liability) asset are as follows:

Deferred tax assets:

Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax liabilities:

Depreciable and amortizable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Claims and related salvage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2012

2011

(in thousands)

$

8,110
82,421
13,423
9,096
3,044
121,605
30
23,749
—
8,844

$

6,008
76,449
13,484
—
4,469
112,558
32,887
28,175
5,422
6,134

270,322
(14,172)

285,586
(21,426)

256,150

264,160

238,688
36,307
—
18,142

293,137

179,613
29,533
15,397
—

224,543

Net deferred tax (liability) asset

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (36,987)

$ 39,617

The exercise of stock options represents a tax benefit and has been reflected as a reduction of taxes payable
and an increase to equity. The benefits recorded were $2.4 million for the year ended December 31, 2012 and
$1.1 million for the years ended December 31, 2011 and 2010.

In connection with the Separation, the Company and TFAC entered into a Tax Sharing Agreement, dated
June 1, 2010 (the “Tax Sharing Agreement”), which governs the Company’s and CoreLogic’s respective rights,
responsibilities and obligations for certain tax related matters. At December 31, 2012 and 2011, the Company
had a net payable to CoreLogic of $52.5 million and $35.4 million, respectively, related to tax matters prior to
the Separation. This amount is included in the Company’s consolidated balance sheet in due to CoreLogic, net.
The increase during the current year results from cash payments received from Corelogic related to tax matters
prior to the Separation and an additional accrual for tax matters prior to the Separation. During 2011, the
Company recorded a $5.2 million increase to stockholders’ equity related to the Separation to reflect the
Company’s actual tax liability to be included in CoreLogic’s consolidated tax return for 2010.

At December 31, 2012,

the Company had available federal, state and foreign net operating loss
carryforwards totaling, in aggregate, approximately $96.7 million for income tax purposes, of which $39.6
million has an indefinite expiration. The remaining $57.1 million expire at various times beginning in 2013. The
Company carries a valuation allowance of $13.0 million against a portion of these net operating loss
carryforwards.

97

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and
by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization
are the Company’s forecast of future taxable income and available tax planning strategies that could be
implemented to realize the net deferred tax assets. Failure to achieve the forecasted taxable income in the
applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an
increase in the Company’s effective tax rate on future earnings.

During 2012, the Company released a valuation allowance of $5.3 million previously recorded against
certain of its deferred tax assets. Specifically, management determined that it was more likely than not that all of
its tax capital loss items will be realized prior to expiration as the result of realized gains from sales of securities
and favorable market value activity in its securities portfolio. Application of the accounting guidance related to
intraperiod tax allocations resulted in the valuation allowance being credited to tax expense in the amount of $5.3
million during the year ended December 31, 2012. As of December 31, 2012, no significant capital loss carryover
remains in the Company’s deferred tax inventory.

As of December 31, 2012, United States taxes were not provided for on the earnings of the Company’s
foreign subsidiaries of $116.4 million, as the Company has invested or expects to invest the undistributed
earnings indefinitely. If in the future these earnings are repatriated to the United States, or if the Company
determines that the earnings will be remitted in the foreseeable future, additional tax provisions may be required.
It is not practicable to calculate the deferred taxes associated with these earnings because of the variability of
multiple factors that would need to be assessed at the time of any assumed repatriation; however, foreign tax
credits may be available to reduce federal income taxes in the event of distribution.

As of December 31, 2012 and 2011, the liability for income taxes associated with uncertain tax positions
was $47.9 million and $17.3 million, respectively. The increase in the liability during 2012 was primarily
attributable to the Company’s claim for a timing adjustment in a prior-year tax return. The liabilities could be
reduced by $32.6 million and $2.9 million, as of December 31, 2012 and 2011, respectively, of offsetting tax
benefits associated with the correlative effects of potential adjustments including timing adjustments and state
income taxes. The net amount of $15.3 million and $14.4 million, as of December 31, 2012 and 2011,
respectively, if recognized, would favorably affect the Company’s effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended

December 31, 2012, 2011 and 2010 is as follows:

Unrecognized tax benefits—opening balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross increases—tax positions in prior period . . . . . . . . . . . . . . . . . . . . . . . .
Gross increases—current period tax positions . . . . . . . . . . . . . . . . . . . . . . . . .
Expiration of the statute of limitations for the assessment of taxes . . . . . . . . .

December 31,

2012

2011

2010

$17,300
200
30,500
(100)

(in thousands)
$11,100
—
6,200
—

$10,400
—
700
—

Unrecognized tax benefits—ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$47,900

$17,300

$11,100

The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax
positions in tax expense. As of December 31, 2012 and 2011, the Company had accrued $4.2 million and $3.6
million, respectively, of interest and penalties (net of tax benefits of $1.7 million and $1.4 million, respectively)
related to uncertain tax positions.

98

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various state
jurisdictions, and various non-U.S. jurisdictions. The primary non-federal jurisdictions are California, Canada,
India, and the United Kingdom. The Company is no longer subject to U.S. federal, state, and non-U.S. income
tax examinations by taxing authorities for years prior to 2005.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the
Company’s unrecognized tax positions may significantly increase or decrease within the next 12 months. These
changes may be the result of items such as ongoing audits or the expiration of federal and state statute of
limitations for the assessment of taxes. Based on the status of its current tax audits, the Company estimates that
there will be no significant increase or decrease in unrecognized tax benefits within the next 12 months.

The Company records a liability for potential tax assessments based on its estimate of the potential
exposure. New tax laws and new interpretations of laws and rulings by tax authorities may affect the liability for
potential tax assessments. Due to the subjectivity and complex nature of the underlying issues, actual payments
or assessments may differ from estimates. To the extent the Company’s estimates differ from actual payments or
assessments, income tax expense is adjusted. The Company’s income tax returns in several jurisdictions are
being examined by various tax authorities. The Company believes that adequate amounts of tax and related
interest, if any, have been provided for any adjustments that may result from these examinations.

NOTE 13. Earnings Per Share:

The Company’s potential dilutive securities are stock options and RSUs. Stock options and RSUs are
reflected in diluted net income per share attributable to the Company’s stockholders by application of the
treasury-stock method.

A reconciliation of weighted-average shares outstanding is as follows:

2012

2011

2010

(in thousands, except per share data)

Numerator

Net income attributable to the Company . . . . . . . . . . . . . . .
Less: dividends and undistributed earnings allocated to

unvested RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$301,041

$ 78,276

$127,829

682

172

468

Net income allocated to common stockholders . . . . . . . . . .

$300,359

$ 78,104

$127,361

Denominator

Basic weighted-average shares . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive employee stock options and RSUs . . . . . .

Diluted weighted-average shares . . . . . . . . . . . . . . . . . . . . . . . . .

106,307
2,235

108,542

105,197
1,717

106,914

104,134
2,043

106,177

Net income per share attributable to the Company’s

stockholders

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

2.83

2.77

$

$

0.74

0.73

$

$

1.22

1.20

For the year ended December 31, 2010, basic earnings per share was computed using the number of shares
of common stock outstanding immediately following the Separation, as if such shares were outstanding for the
entire period prior to the Separation, plus the weighted average number of such shares outstanding following the
Separation through December 31, 2010.

99

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the year ended December 31, 2010, diluted earnings per share was computed using (i) the number of
shares of common stock outstanding immediately following the Separation, (ii) the weighted average number of
such shares outstanding following the Separation through December 31, 2010, and (iii) if dilutive,
the
incremental common stock that the Company would issue upon the assumed exercise of stock options and the
vesting of RSUs using the treasury stock method.

For the year ended December 31, 2012, 0.7 million stock options and RSUs were excluded from the
weighted-average diluted common shares outstanding due to their antidilutive effect. For the years ended
December 31, 2011 and 2010, 1.4 million stock options and RSUs were excluded from the weighted-average
diluted common shares outstanding due to their antidilutive effect.

NOTE 14. Employee Benefit Plans:

In connection with the Separation, the following occurred with respect to the following employee benefit

plans:

•

•

•

•

The Company adopted TFAC’s 401(k) Savings Plan, which is now the First American Financial
Corporation 401(k) Savings Plan (the “Savings Plan”). The account balances of employees of
CoreLogic who had previously participated in TFAC’s 401(k) Savings Plan were transferred to the
CoreLogic, Inc. 401(k) Savings Plan.

The Company adopted TFAC’s deferred compensation plan. The Company assumed the portion of the
deferred compensation liability associated with its employees and former employees of its businesses
and CoreLogic assumed the portion of the deferred compensation liability associated with its employees
and former employees of its businesses. Plan assets were divided in the same proportion as liabilities.

The Company assumed TFAC’s defined benefit pension plan, which was closed to new entrants
effective December 31, 2001 and amended to “freeze” all benefit accruals as of April 30, 2008. The
Company assumed the entire benefit obligation and all the plan assets associated with the defined
benefit pension plan, including the portion attributable to participants who were employees of the
businesses retained by CoreLogic in connection with the Separation, and CoreLogic issued a $19.9
million note payable to the Company which approximated the unfunded portion of the benefit obligation
attributable to those participants. In September 2011, the Company received $17.3 million from
CoreLogic in satisfaction of the remaining balance of the note. See Note 19 Transactions with
CoreLogic/TFAC to the consolidated financial statements for further discussion of this note receivable
from CoreLogic.

The Company adopted TFAC’s supplemental benefit plans. The Company assumed the portion of the
benefit obligation associated with its employees and former employees of its businesses and CoreLogic
assumed the portion of the benefit obligation associated with its employees and former employees of its
businesses. The benefit obligation associated with certain participants was divided evenly between the
Company and CoreLogic.

No material changes were made to the terms and conditions of the employee benefit plans assumed by the

Company in connection with the Separation.

The Company’s Savings Plan allows for employee-elective contributions up to the maximum amount as
determined by the Internal Revenue Code. The Company makes discretionary contributions to the Savings Plan
based on profitability, as well as contributions of the participants. The Company’s expense related to the Savings
Plan amounted to $27.8 million, $8.7 million and $12.1 million for the years ended December 31, 2012, 2011

100

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and 2010, respectively. This expense represents the discretionary contribution made by the Company following
the Separation and by TFAC to the Company’s employees’ accounts prior to the Separation. The Savings Plan
allows the participants to purchase the Company’s common stock as one of the investment options, subject to
certain limitations. The Savings Plan held 4,144,000 shares and 4,417,000 shares of the Company’s common
stock, representing 3.9% and 4.2% of the total shares outstanding, at December 31, 2012 and 2011, respectively.

The Company’s deferred compensation plan allows participants to defer up to 100% of their salary,
commissions and bonus. Participants allocate their deferrals among a variety of investment crediting options
(known as “deemed investments”). Deemed investments mean that the participant has no ownership interest in
the funds they select; the funds are only used to measure the gains or losses that will be attributed to their deferral
account over time. Participants can elect to have their deferral balance paid out in a future year while they are
still employed or after their employment ends. The deferred compensation plan is exempt from most provisions
of the Employee Retirement Income Security Act (“ERISA”) because it is only available to a select group of
management and highly compensated employees and is not a qualified employee benefit plan. To preserve the
tax-deferred savings advantages of a nonqualified deferred compensation plan, federal law requires that it be
unfunded or informally funded. The participants’ deferrals and any earnings on those deferrals are general
unsecured obligations of the Company. The Company is informally funding the deferred compensation plan
through a tax-advantaged investment known as variable universal life insurance. Deferred compensation plan
assets are held as an asset of the Company within a special trust, called a “Rabbi Trust.” At December 31, 2012
and 2011, the value of the assets in the Rabbi Trust of $64.4 million and $59.5 million, and the unfunded
liabilities of $61.6 million and $58.2 million, were included in the consolidated balance sheets in other assets and
pension costs and other retirement plans, respectively.

The Company’s defined benefit pension plan is a noncontributory, qualified, defined benefit plan with
benefits based on the employee’s compensation and years of service. The defined benefit pension plan was
closed to new entrants effective December 31, 2001 and amended to “freeze” all benefit accruals as of April 30,
2008.

The Company also has nonqualified, unfunded supplemental benefit plans covering certain management
personnel. Benefits under the Executive and Management Supplemental Benefit Plans are, subject to the
limitations described below, based on a participant’s final average compensation, which is computed as the
average compensation of the last five full calendar years preceding retirement. Maximum benefits under the
Executive and Management Supplemental Benefit Plans are 30% and 15% of final average compensation,
respectively. The Company’s compensation committee amended and restated the Executive and Management
Supplemental Benefit Plans effective as of January 1, 2011. The plans were amended to make the following
changes, among others: (i) close the plans to new participants; (ii) fix the period over which the final average
compensation that is used to calculate a participant’s benefit is determined as the one-year average of the five-
year period ending on December 31, 2010, irrespective of the participant’s actual retirement date; and (iii) cap
the maximum annual benefit at $500,000 for the Company’s chief executive officer, at $350,000 for all other
Executive Supplemental Benefit Plan participants and at $250,000 for all Management Supplemental Benefit
Plan participants. The amendments to the Executive and Management Supplemental Benefit Plans were
accounted for as negative plan amendments with the resulting decrease in the projected benefit obligations being
recorded to accumulated other comprehensive loss as a prior service credit.

Certain of the Company’s subsidiaries have separate savings plans and the Company’s international
subsidiaries have other employee benefit plans that are included in the other plans, net expense line item shown
below.

101

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table provides the principal components of employee benefit plan expenses related to (i) the
Company’s employees’ participation in TFAC’s benefit plans prior to the Separation and (ii) the Company’s
benefit plans following the Separation:

Year ended December 31,

2012

2011

2010

(in thousands)

Expense:

Savings plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit pension plans . . . . . . . . . . . . . . . . . .
Unfunded supplemental benefit plans . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other plans, net

$27,778
22,657
16,553
10,166

$ 8,697
22,386
17,279
6,628

$12,080
19,652
23,252
8,730

$77,154

$54,990

$63,714

The following table summarizes the balance sheet impact, including benefit obligations, assets and funded

status associated with the Company’s defined benefit pension and supplemental benefit plans:

December 31,

2012

2011

Defined
benefit
pension
plans

Unfunded
supplemental
benefit plans

Defined
benefit
pension
plans

Unfunded
supplemental
benefit plans

(in thousands)

Change in projected benefit obligation:

Benefit obligation at beginning of year . . . . . . . . . . . .
Service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 385,756
—
18,445
37,030
(16,769)

$ 223,516
1,712
10,623
27,226
(12,851)

$ 371,224
—
19,077
14,271
(18,816)

$ 215,301
2,167
11,075
7,088
(12,115)

Projected benefit obligation at end of year . . . . . . . . . . . . . .

424,462

250,226

385,756

223,516

Change in plan assets:

Plan assets at fair value at beginning of year . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

257,078
33,236
20,671
(16,769)

—
—
12,851
(12,851)

Plan assets at fair value at end of year . . . . . . . . . . . . . . . . .

294,216

—

262,827
(5,990)
19,057
(18,816)

257,078

—
—
12,115
(12,115)

—

Reconciliation of funded status:

Unfunded status of the plans . . . . . . . . . . . . . . . . . . . .

$(130,246)

$(250,226)

$(128,678)

$(223,516)

Amounts recognized in the consolidated balance sheet:

Accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . .

$(130,246)

$(250,226)

$(128,678)

$(223,516)

Amounts recognized in accumulated other comprehensive

loss:

Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Unrecognized prior service cost (credit)

$ 215,405
65

$ 124,183
(35,639)

$ 215,769
90

$ 105,585
(40,049)

$ 215,470

$ 88,544

$ 215,859

$ 65,536

102

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net periodic cost related to (i) the Company’s employees’ participation in TFAC’s defined benefit pension
and supplemental benefit plans prior to the Separation and (ii) the Company’s defined benefit pension and
supplemental benefit plans following the Separation includes the following components:

Year ended December 31,

2012

2011

2010

(in thousands)

Expense:

Service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . .

$ 1,712
29,068
(15,553)
28,368
(4,385)

$ 2,167
30,152
(15,316)
27,047
(4,385)

$ 3,959
30,866
(12,666)
21,790
(1,045)

$ 39,210

$ 39,665

$ 42,904

The Company’s net actuarial loss and prior service credit for defined benefit pension and supplemental
benefit plans that will be amortized from accumulated other comprehensive loss into net periodic cost over the
next fiscal year are expected to be an expense of $32.1 million and a credit of $4.4 million, respectively.

Weighted-average actuarial assumptions used to determine costs for the plans were as follows:

Defined benefit pension plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.90% 5.30%
5.75% 5.75%

Unfunded supplemental benefit plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.90% 5.30%

Weighted-average actuarial assumptions used to determine benefit obligations for the plans were as follows:

December 31,

2012

2011

December 31,

2012

2011

Defined benefit pension plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.18% 4.90%

Unfunded supplemental benefit plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.91% 4.90%

The discount rate assumption used for benefit plan accounting reflects the yield available on high-quality,

fixed-income debt securities that match the expected timing of the benefit obligation payments.

Assumptions for the expected long-term rate of return on plan assets are based on future expectations for
returns for each asset class based on the calculated market-related value of plan assets and the effect of periodic
target asset allocation rebalancing, adjusted for the payment of reasonable expenses of the plan from plan assets.
The expected long-term rate of return on assets was selected from within a reasonable range of rates determined
by (1) historical real and expected returns for the asset classes covered by the investment policy and
(2) projections of inflation over the long-term period during which benefits are payable to plan participants. The

103

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Company believes the assumptions are appropriate based on the investment mix and long-term nature of the
plan’s investments. The use of expected long-term returns on plan assets may result in recognized pension
income that is greater or less than the actual returns of those plan assets in any given year. Over time, however,
the expected long-term returns are designed to approximate the actual long-term returns, and therefore result in a
pattern of income and cost recognition that more closely matches the pattern of the services provided by the
employees.

The following table provides the funded status of the Company’s defined benefit pension and supplemental

benefit plans:

December 31,

2012

2011

Defined
benefit
pension
plans

Unfunded
supplemental
benefit plans

Defined
benefit
pension
plans

Unfunded
supplemental
benefit plans

(in thousands)

Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Plan assets at fair value at end of year

$424,462
$424,462
$294,216

$250,226
$250,226
$ —

$385,756
$385,756
$257,078

$223,516
$223,516
$ —

The Company has a pension investment policy designed to meet or exceed the expected rate of return on
plan asset assumptions. The policy’s investment objective is to increase the pension plan’s funding status such
that the plan becomes fully funded on a plan termination basis by taking progressively less risk through aligning
a greater percentage of plan assets with plan liabilities as the plan becomes more fully funded. During 2012, the
Company revised the plan’s investment policy and changed the plan’s investment manager. The investment
manager is responsible for ensuring that the portfolio is invested in compliance with the stated guidelines of the
investment policy.

Under the new investment policy, asset allocation targets are segmented into liability tracking assets and
return seeking assets. The objective of this allocation strategy is to increase the percentage of assets in liability
tracking investments as settlement funded status improves. Return seeking assets generally include pooled
investment vehicles, foreign and domestic equities, fixed income securities, cash, REITs, and commodities.
Liability tracking assets generally include fixed income securities and pooled investment vehicles. The plan
maintains a level of cash and cash equivalents appropriate for the timely disbursement of benefits and payment of
expenses.

Subject to the requirements of the investment policy, the investment manager may use commingled
investment vehicles including but not limited to mutual funds, common trust funds, commingled trusts, and
exchange traded funds. The investment policy prohibits certain investment transactions, including derivatives and
other illiquid investments (e.g. private equity and real estate), subject to certain exceptions.

The investment manager tracks the estimated settlement funded status of the plan on a regular basis. When
the funded status is equal to or greater than the next trigger point, the investment manager will rebalance to the
allocation associated with that trigger point. The objective of liability tracking assets is to achieve performance
related to changes in the value of the plan’s settlement liabilities, which is consistent with the objective of plan
termination.

104

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The pension plan’s asset allocation targets based on settlement funded status are as follows:

Settlement funded status

Return seeking assets

Liability tracking assets

100.0%
97.5%
95.0%
92.5%
90.0%
87.5%
85.0%
Below 85.0%

0%
15%
30%
40%
50%
60%
70%
85%

100%
85%
70%
60%
50%
40%
30%
15%

A summary of the asset allocation as of December 31, 2012 and 2011 are as follows:

Percentage of
plan assets at
December 31,

2012

2011

Asset category

Domestic and international equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balanced funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33.7% 61.4%
40.3% 36.4%
25.4% —
0.6% 2.2%

The Company expects to make cash contributions to its defined benefit and unfunded supplemental benefit

plans of $29.3 million and $13.7 million, respectively, during 2013.

The following benefit payments for all plans, which reflect expected future service, as appropriate, are

expected to be paid as follows:

Year

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Five years thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$ 32,627
$ 33,779
$ 34,701
$ 35,024
$ 36,942
$198,085

The Company determines the fair value of its defined benefit pension plan assets with a three-level
hierarchy for fair value measurements that distinguishes between market participant assumptions developed
based on market data obtained from sources independent of the reporting entity (observable inputs) and the
reporting entity’s own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). The hierarchy level assigned to each security
within the Company’s defined benefit pension plan assets is based on management’s assessment of the
transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. See
Note 3 Debt and Equity Securities to the consolidated financial statements for a more in-depth discussion on the
fair value hierarchy and a description for each level.

105

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the Company’s defined benefit pension plan assets at fair value as of

December 31, 2012 and 2011, classified using the fair value hierarchy:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

1,922

Estimated fair
value as of
December 31, 2012

Level 1

Level 2

Level 3

(in thousands)
1,922
$

$ — $ —

Debt securities:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equity securities:
Domestic common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International common stocks . . . . . . . . . . . . . . . . . . . . . . . . . .

Balanced funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Investment contracts with insurance companies . . . . . . . . .

101,568
11,957

113,525

46,852
53,431

59,568
11,957

71,525

46,852
53,431

100,283

100,283

71,400

7,086

—

—

42,000
—

42,000

—
—

—

71,400

—
—

—

—
—

—

—

—

7,086

$294,216

$173,730

$113,400

$7,086

Estimated fair
value as of
December 31, 2011

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

5,591

Debt securities:
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency mortgage-backed securities . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equity securities:
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International common stocks . . . . . . . . . . . . . . . . . . . . . . . . . .

Investment contracts with insurance companies . . . . . . . . .

6,801
3,724
15,100
61,284

86,909

2,954
105,550
49,347

157,851

6,727

Level 1

Level 2

Level 3

(in thousands)
5,591
$

$ — $ —

—
—
—
—

—

6,801
3,724
15,100
61,284

86,909

2,954
105,550
49,347

157,851

—

—
—
—

—

—

—
—
—
—

—

—
—
—

—

6,727

$257,078

$163,442

$ 86,909

$6,727

NOTE 15. Fair Value of Financial Instruments:

Guidance requires disclosure of fair value information about financial

instruments, whether or not
recognized at fair value on the balance sheet, for which it is practical to estimate that value. In the measurement
of the fair value of certain financial instruments, other valuation techniques were utilized if quoted market prices

106

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

were not available. These derived fair value estimates are significantly affected by the assumptions used.
Additionally, the guidance excludes certain financial instruments including those related to insurance contracts,
pension and other postretirement benefits, and equity method investments.

In estimating the fair value of the financial instruments presented, the Company used the following methods

and assumptions:

Cash and cash equivalents

The carrying amount for cash and cash equivalents is a reasonable estimate of fair value due to the short-

term maturity of these investments.

Accounts and accrued income receivable, net

The carrying amount for accounts and accrued income receivable, net is a reasonable estimate of fair value

due to the short-term maturity of these assets.

Loans receivable, net

The fair value of loans receivable, net is estimated based on the discounted value of the future cash flows

using the current rates being offered for loans with similar terms to borrowers of similar credit quality.

Investments

The fair value of deposits with savings and loan associations and banks is estimated based on the rates

currently offered for deposits of similar remaining maturities, where applicable.

The methodology for determining the fair value of debt and equity securities is discussed in Note 3 Debt and

Equity Securities to the consolidated financial statements.

The fair value of notes receivable, net is estimated based on the discounted value of the future cash flows

using approximate current market rates being offered for notes with similar maturities and similar credit quality.

Deposits

The carrying value of escrow and passbook accounts approximates fair value due to the short-term nature of
this liability. The fair value of investment certificate accounts is estimated based on the discounted value of
future cash flows using a discount rate approximating current market rates for similar liabilities.

Accounts payable and accrued liabilities

The carrying amount for accounts payable and accrued liabilities is a reasonable estimate of fair value due
to the short-term maturity of these liabilities. The Company does not include the carrying amounts and fair values
of pension costs and other retirement plans as the guidance excludes them from disclosure.

Due to CoreLogic, net

The carrying amount for due to CoreLogic, net is a reasonable estimate of fair value.

107

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Notes and contracts payable

The fair value of notes and contracts payable are estimated based on the current rates offered to the

Company for debt of the same remaining maturities.

The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2012 and

2011 are presented in the following table.

December 31,

2012

2011

Carrying
Amount

Fair Value

Carrying
Amount

Fair Value

(in thousands)

Financial Assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .
Accounts and accrued income receivable, net
. . . . . .
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 627,208
$ 259,779
$ 107,352

$ 627,208
$ 259,779
$ 111,925

$ 418,299
$ 227,847
$ 139,191

$ 418,299
$ 227,847
$ 144,868

Investments:

Deposits with savings and loan associations and

banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . .

$
71,196
$2,651,881
$ 197,920
11,166
$

$
71,400
$2,651,881
$ 197,920
11,376
$

$
56,201
$2,201,911
$ 184,000
15,581
$

$
56,350
$2,201,911
$ 184,000
14,534
$

Financial Liabilities:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . .
Due to CoreLogic, net . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . . . . .

$1,411,193
$ 337,231
$
53,510
$ 229,760

$1,411,575
$ 337,231
$
53,510
$ 233,071

$1,093,236
$ 295,351
$
35,951
$ 299,975

$1,093,771
$ 295,351
$
35,951
$ 304,806

The following table presents the fair value of the Company’s financial instruments as of December 31, 2012

and 2011, classified using the three-level hierarchy for fair value measurements:

(in thousands)

Financial Assets:

Fair Value as of
December
31, 2012

Level 1

Level 2

Level 3

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
Accounts and accrued income receivable, net . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable, net

$ 627,208
$ 259,779
$ 111,925

$ 627,208
$ 259,779
$

$
$
— $

— $ —
— $ —
— $111,925

Investments:

Deposits with savings and loan associations and

banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable, net

Financial Liabilities:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . .
Due to CoreLogic, net
. . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . . . . .

$
71,400
$2,651,881
$ 197,920
11,376
$

$1,411,575
$ 337,231
$
53,510
$ 233,071

108

$

21,969
— $2,630,035

$ —
$ 21,846

49,431

$
$
$ 197,920
$

$
— $

— $ —
— $ 11,376

$1,373,978
$ 337,231
$
53,510
$

$
$
$

37,597

$ —
— $ —
— $ —
9,853
$

— $ 223,218

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands)

Financial Assets:

Fair Value as of
December 31, 2011

Level 1

Level 2

Level 3

Cash and cash equivalents . . . . . . . . . . . . . . . . . . .
Accounts and accrued income receivable, net . . . .
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . .

$ 418,299
$ 227,847
$ 144,868

$ 418,299
$ 227,847
$

$
$
— $

— $ —
— $ —
— $144,868

Investments:

Deposits with savings and loan associations and

banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable, net . . . . . . . . . . . . . . . . . . . . . . .

Financial Liabilities:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . .
Due to CoreLogic, net . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . .

56,350
$
$2,201,911
$ 184,000
14,534
$

$1,093,771
$ 295,351
$
35,951
$ 304,806

26,624

$
$
$ 184,000
$

$
— $

$

29,726
— $2,171,277

$ —
$ 30,634

— $ —
— $ 14,534

44,307

$1,049,464
$ 295,351
$
35,951
$

$ —
— $ —
— $ —
— $ 291,178 $ 13,628

$
$
$

NOTE 16. Share-Based Compensation Plans:

Prior to the Separation, the Company participated in TFAC’s share-based compensation plans and the
Company’s employees were issued TFAC equity awards. The equity awards consisted of RSUs and stock
options. At the date of the Separation, TFAC’s outstanding equity awards for employees of the Company and
former employees of its businesses were converted into equity awards of the Company with adjustments to the
number of shares underlying each such award and, with respect to options, adjustments to the per share exercise
price of each such award, to maintain the pre-separation value of such awards. No material changes were made to
the vesting terms or other terms and conditions of the awards. As the post-separation value of the equity awards
was equal to the pre-separation value and no material changes were made to the terms and conditions applicable
to the awards, no incremental expense was recognized by the Company related to the conversion.

In connection with the Separation, the Company established the First American Financial Corporation 2010
Incentive Compensation Plan (the “Incentive Compensation Plan”). The Incentive Compensation Plan was
adopted by the Company’s board of directors and approved by TFAC, as the Company’s sole stockholder, on
May 28, 2010. Eligible participants in the Incentive Compensation Plan include the Company’s directors and
officers, as well as other employees. The Incentive Compensation Plan permits the granting of stock options,
stock appreciation rights, restricted stock, RSUs, performance units, performance shares and other stock-based
awards. Under the terms of the Incentive Compensation Plan, 16.0 million shares of common stock can be
awarded from either authorized and unissued shares or previously issued shares acquired by the Company,
subject to certain annual limits on the amounts that can be awarded based on the type of award granted. The
Incentive Compensation Plan terminates 10 years from the effective date unless cancelled prior to that date by
the Company’s board of directors.

In connection with the Separation, the Company established the First American Financial Corporation 2010
Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible employees to purchase common stock of
the Company at 85.0% of the closing price on the last day of each month. Prior to the Separation, the Company’s
employees participated in TFAC’s employee stock purchase plan. There were 323,000 and 352,000 shares issued
in connection with the Company’s plan for the years ended December 31, 2012 and 2011, respectively, and
175,000 shares issued in connection with the Company’s and TFAC’s plans for the year ended December 31,
2010. At December 31, 2012, there were 1,151,000 shares reserved for future issuances.

109

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the share-based compensation expense associated with (i) the Company’s
employees that participated in TFAC’s share-based compensation plans prior to the Separation and (ii) the
Company’s share-based compensation plans following the Separation:

Expense:

Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . .

$13,953
—
886

$14,203
9
769

$11,876
315
638

$14,839

$14,981

$12,829

2012

2011

2010

(in thousands)

The following table summarizes RSU activity for the year ended December 31, 2012:

(in thousands, except weighted-average grant-date fair value)

RSUs unvested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

3,141
826
(940)
(65)

RSUs unvested at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,962

Weighted-average
grant-date
fair value

$12.83
$16.44
$14.55
$ 9.53

$13.36

As of December 31, 2012, there was $15.1 million of total unrecognized compensation cost related to
nonvested RSUs that is expected to be recognized over a weighted-average period of 2.5 years. The fair value of
RSUs is generally based on the market value of the Company’s shares on the date of grant. The total fair value of
shares vested and not distributed for the years ended December 31, 2012, 2011 and 2010 was $2.3 million, $2.2
million and $3.5 million, respectively.

The following table summarizes stock option activity for the year ended December 31, 2012:

(in thousands, except weighted-average
exercise price and contractual term)

Balance at December 31, 2011 . . . . . . . . .
Exercised during 2012 . . . . . . . . . . . . . . . .
Forfeited during 2012 . . . . . . . . . . . . . . . .

Balance at December 31, 2012 . . . . . . . . .

Vested at December 31, 2012 . . . . . . . . . .

Exercisable at December 31, 2012 . . . . . .

Number
outstanding

Weighted-
average
exercise price

Weighted-
average
remaining
contractual term

Aggregate
intrinsic
value

2,636
(931)
(35)

1,670

1,670

1,670

$14.89
$13.24
$20.11

$15.70

$15.70

$15.70

1.9 years

1.9 years

1.9 years

$14,012

$14,012

$14,012

All stock options issued under the Company’s plans are vested and no share-based compensation expense

related to such stock options remains to be recognized.

110

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Total intrinsic value of options exercised for the years ended December 31, 2012, 2011 and 2010 was $7.1
million, $645 thousand and $168 thousand, respectively. This intrinsic value represents the difference between
the fair market value of the Company’s common stock on the date of exercise and the exercise price of each
option.

NOTE 17. Stockholders’ Equity:

In March 2011, the Company’s board of directors approved a stock repurchase plan which authorizes the
repurchase of up to $150.0 million of the Company’s common stock, of which $147.5 million remains as of
December 31, 2012. Purchases may be made from time to time by the Company in the open market at prevailing
market prices or in privately negotiated transactions. The Company did not repurchase any shares of its common
stock during the year ended December 31, 2012.

NOTE 18. Commitments and Contingencies:

Lease commitments

The Company leases certain office facilities, automobiles and equipment under operating leases, which, for
the most part, are renewable. The majority of these leases also provide that the Company pay insurance and
taxes.

Future minimum rental payments under operating leases that have initial or remaining noncancelable lease

terms in excess of one year as of December 31, 2012 are as follows:

Year
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$ 68,419
60,381
41,421
24,795
13,132
11,404

$219,552

Total rental expense for all operating leases and month-to-month rentals was $96.8 million, $102.6 million,

and $125.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Other commitments and guarantees

At December 31, 2012 and 2011, the Company was contingently liable for guarantees of indebtedness owed
by affiliates and third parties to banks and others totaling $23.2 million and $24.2 million, respectively. The
guarantee arrangements relate to promissory notes and other contracts, and contingently require the Company to
make payments to the guaranteed party based on the failure of debtors to make scheduled payments according to
the terms of the notes and contracts. The Company’s maximum potential amount of future payments under these
guarantees totaled $23.2 million and $24.2 million at December 31, 2012 and 2011, respectively, and is limited
in duration to the terms of the underlying indebtedness. The Company has not incurred any costs as a result of
these guarantees and has not recorded a liability on its consolidated balance sheets related to these guarantees at
December 31, 2012 and 2011.

111

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company also guarantees the obligations of certain of its subsidiaries. These obligations are included in

the Company’s consolidated balance sheets as of December 31, 2012 and 2011.

NOTE 19. Transactions with CoreLogic/TFAC:

Prior to the Separation, the Company had certain related party relationships with TFAC. The Company does
not consider CoreLogic to be a related party subsequent to the Separation. The related party relationships with
TFAC prior to the Separation and subsequent relationships with CoreLogic following the Separation are
discussed further below.

Transactions with TFAC prior to the Separation

Prior to the Separation, the Company was allocated corporate income and overhead expenses from TFAC
for corporate-related functions based on an allocation methodology that considered the number of the Company’s
domestic headcount, the Company’s total assets and total revenues or a combination of those drivers. General
corporate overhead expense allocations include executive management, tax, accounting and auditing, legal and
treasury services, payroll, human resources and certain employee benefits and marketing and communications.
The Company was allocated general net corporate expenses of $23.3 million from TFAC during 2010 prior to the
Separation, which is included within the investment income, net realized investment gains, personnel costs, other
operating expenses, depreciation and amortization and interest expense line items in the accompanying
consolidated statements of income.

The Company considers the basis on which the expenses were allocated to be a reasonable reflection of the
utilization of services provided to or the benefit received by the Company during the pre-separation periods
presented. The allocations may not, however, reflect the expense the Company would have incurred as an
independent publicly traded company for these periods. Actual costs that may have been incurred as a stand-
alone company during these periods would have depended on a number of factors, including the chosen
organizational structure, the functions outsourced versus performed by employees and strategic decisions in areas
such as information technology and infrastructure. Following the Separation, the Company is no longer allocated
corporate income and overhead expense, as the Company performs these functions using its own resources.

Prior to the Separation, a portion of TFAC’s combined debt, in the amount of $140.0 million, was allocated
to the Company based on amounts directly incurred for the Company’s benefit. Net interest expense was
allocated in the same proportion as debt. The Company believes the allocation basis for debt and net interest
expense was reasonable. However, these amounts may not be indicative of the actual amounts that the Company
would have incurred had it been operating as an independent publicly traded company for the period prior to
June 1, 2010. Additionally, on January 31, 2010 the Company entered into a note payable with TFAC totaling
$29.1 million. In connection with the Separation, the Company borrowed $200.0 million under its revolving
credit facility and transferred such funds to CoreLogic, which fully satisfied the Company’s $140.0 million
allocated portion of TFAC debt and the $29.1 million note payable to TFAC. The remaining $30.9 million
transferred to CoreLogic was reflected as a distribution to CoreLogic in connection with the Separation. See Note
10 Notes and Contracts Payable to the consolidated financial statements for further discussion of the Company’s
credit facility.

Transactions with CoreLogic following the Separation

In connection with the Separation,

the Company and TFAC entered into various transition services
agreements with effective dates of June 1, 2010. The agreements included transitional services in the areas of
information technology, tax, accounting and finance, employee benefits and internal audit. As of December 31,

112

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2012,
the information technology services agreements are the only remaining active transition services
agreements. The Company incurred the net amounts of $6.5 million, $6.4 million and $5.4 million for the years
ended December 31, 2012, 2011 and 2010, respectively, under these agreements which are included in other
operating expenses in the consolidated statements of income. No amounts were reflected in the consolidated
statements of income prior to June 1, 2010, as the transition services agreements were not effective prior to the
Separation.

Under the Separation and Distribution Agreement and other agreements, subject to certain exceptions
contained in the Tax Sharing Agreement, each of the Company and CoreLogic agreed to assume and be
responsible for 50% of certain of TFAC’s contingent and other corporate liabilities. All external costs and
expenses associated with the management of these contingent and other corporate liabilities will be shared
equally. These contingent and other corporate liabilities primarily relate to consolidated securities litigation and
any actions with respect to the Separation or the Distribution brought by any third party. Contingent and other
corporate liabilities that are related to only TFAC’s information solutions or financial services businesses are
generally fully allocated to CoreLogic or the Company, respectively. At December 31, 2012 and 2011, no
reserves were considered necessary for such liabilities.

In connection with the Separation, TFAC issued to the Company and FATICO a number of shares of its
common stock that resulted in the Company and FATICO collectively owning 12.9 million shares of
CoreLogic’s common stock immediately following the Separation. During 2011 the Company sold 4.0 million
shares for an aggregate cash price of $75.8 million and during 2012 the Company and FATICO sold the
remaining 8.9 million shares for an aggregate cash price of $207.9 million. At December 31, 2012, the Company
no longer owns any CoreLogic common stock.

On June 1, 2010, the Company received a note receivable from CoreLogic in the amount of $19.9 million
that accrued interest at 6.52% and was due on May 31, 2017. The note approximated the unfunded portion of the
benefit obligation attributable to participants of the defined benefit pension plan who were employees of TFAC’s
businesses that were retained by CoreLogic in connection with the Separation. In September 2011, the Company
received $17.3 million from CoreLogic in satisfaction of the remaining balance of the note. See Note 14
Employee Benefit Plans to the consolidated financial statements for further discussion of the defined benefit
pension plan.

At December 31, 2012 and 2011, the Company’s federal savings bank subsidiary, First American Trust,
FSB, held $2.3 million and $4.3 million, respectively, of interest and non-interest bearing deposits owned by
CoreLogic. These deposits are included in deposits in the consolidated balance sheets. Interest expense on the
deposits was immaterial for all periods presented.

Prior to the Separation, the Company owned three office buildings that were leased to the information
solutions businesses of TFAC under the terms of formal lease agreements. In connection with the Separation, the
Company distributed one of the office buildings to CoreLogic, and at December 31, 2012, owns two office
buildings that were leased to CoreLogic under a formal lease agreement. Rental income associated with these
properties totaled $4.4 million for the years ended December 31, 2012 and 2011and $6.2 million for the year
ended December 31, 2010.

The Company and CoreLogic are also parties to certain ordinary course commercial agreements and
transactions. The expenses associated with these transactions, which primarily relate to purchases of data and
other settlement services totaled $19.1 million, $15.0 million and $21.4 million for the years ended December 31,
2012, 2011 and 2010, respectively, and are included in other operating expenses in the Company’s consolidated

113

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

statements of income. The Company also sells data and provides other settlement services to CoreLogic through
ordinary course commercial agreements and transactions resulting in revenues totaling $1.6 million, $4.2 million
and $11.8 million for the years ended December 31, 2012, 2011, and 2010, respectively, which are included in
information and other in the Company’s consolidated statements of income.

Prior to the Separation, certain transactions with TFAC were settled in cash and the remaining transactions
were settled by non-cash capital contributions between the Company and TFAC, which resulted in net non-cash
contributions from TFAC to the Company of $2.1 million for the year ended December 31, 2010. Following the
Separation, all transactions with CoreLogic are settled, on a net basis, in cash.

NOTE 20. Other Comprehensive Income (Loss):

Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of

certain financial information that historically has not been recognized in the calculation of net income.

Components of other comprehensive income (loss) are as follows:

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . .
Pretax change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pretax change in other-than-temporary impairments
for which credit-related portion was recognized in
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pretax change in connection with the Separation . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . .
Pretax change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pretax change in other-than-temporary impairments
for which credit-related portion was recognized in
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax effect

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . .
Pretax change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pretax change in other-than-temporary impairments
for which credit-related portion was recognized in
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax effect

Net unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

(in thousands)

$(10,546)
5,249

$ 5,255
5,705

$(146,174)
18,103

$(151,465)
29,057

8,034
—
(5,974)

(3,237)
(11,733)

3,573
(2,012)

(13,409)
52,409

—
—
—

—
(36,752)
8,020

8,034
(36,752)
2,046

10,960
(6,167)

(156,803)
(20,059)

(149,080)
(37,959)

—
—

—
8,025

3,573
6,013

4,793
5,131

(168,837)
(22,619)

(177,453)
34,921

6,502
(23,564)

—
—

—
9,048

6,502
(14,516)

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . .

$ 21,938

$ 9,924

$(182,408)

$(150,546)

114

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Components of other comprehensive income (loss) allocated to the Company and noncontrolling interests are as
follows:

Net unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

(in thousands)

2012
Allocated to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to noncontrolling interests . . . . . . . . . . . . . . . . .

$ 21,928
10

$ 9,924
—

$(182,408)

—

$(150,556)
10

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . .

$ 21,938

$ 9,924

$(182,408)

$(150,546)

2011
Allocated to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to noncontrolling interests . . . . . . . . . . . . . . . . .

$(13,415)
6

$ 4,793

$(168,837)

—

—

$(177,459)
6

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . .

$(13,409)

$ 4,793

$(168,837)

$(177,453)

2010
Allocated to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to noncontrolling interests . . . . . . . . . . . . . . . . .

$ (3,246)
9

$10,893
67

$(156,803)

—

$(149,156)
76

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . .

$ (3,237)

$10,960

$(156,803)

$(149,080)

The change in net unrealized gains on securities includes reclassification adjustments of $69.8 million,
$11.0 million and $12.5 million of net realized gains on debt and equity securities for the years ended
December 31, 2012, 2011 and 2010, respectively.

NOTE 21. Litigation and Regulatory Contingencies:

The Company and its subsidiaries are parties to a number of non-ordinary course lawsuits. Frequently these

lawsuits are similar in nature to other lawsuits pending against the Company’s competitors.

For those non-ordinary course lawsuits where the Company has determined that a loss is both probable and
reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on
known facts has been recorded. Actual losses may materially differ from the amounts recorded.

For a substantial majority of these lawsuits, however, it is not possible to assess the probability of loss. Most
of these lawsuits are putative class actions which require a plaintiff to satisfy a number of procedural
requirements before proceeding to trial. These requirements include, among others, demonstration to a court that
the law proscribes in some manner the Company’s activities, the making of factual allegations sufficient to
suggest that the Company’s activities exceeded the limits of the law and a determination by the court—known as
class certification—that the law permits a group of individuals to pursue the case together as a class. In certain
instances the Company may also be able to compel the plaintiff to arbitrate its claim on an individual basis. If
these procedural requirements are not met, either the lawsuit cannot proceed or, as is the case with class
certification or compelled arbitration, the plaintiffs lose the financial incentive to proceed with the case (or the
amount at issue effectively becomes de minimus). Frequently, a court’s determination as to these procedural
requirements is subject to appeal to a higher court. As a result of, among other factors, ambiguities and
inconsistencies in the myriad laws applicable to the Company’s business and the uniqueness of the factual issues
presented in any given lawsuit, the Company often cannot determine the probability of loss until a court has
finally determined that a plaintiff has satisfied applicable procedural requirements.

115

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Furthermore, because most of these lawsuits are putative class actions, it is often impossible to estimate the
possible loss or a range of loss amounts, even where the Company has determined that a loss is reasonably
possible. Generally class actions involve a large number of people and the effort to determine which people
satisfy the requirements to become plaintiffs—or class members—is often time consuming and burdensome.
Moreover, these lawsuits raise complex factual issues which result in uncertainty as to their outcome and,
ultimately, make it difficult for the Company to estimate the amount of damages which a plaintiff might
successfully prove. In addition, many of the Company’s businesses are regulated by various federal, state, local
and foreign governmental agencies and are subject to numerous statutory guidelines. These regulations and
statutory guidelines often are complex, inconsistent or ambiguous, which results in additional uncertainty as to
the outcome of a given lawsuit—including the amount of damages a plaintiff might be afforded—or makes it
difficult to analogize experience in one case or jurisdiction to another case or jurisdiction.

Most of the non-ordinary course lawsuits to which the Company and its subsidiaries are parties challenge
practices in the Company’s title insurance business, though a limited number of cases also pertain to the
Company’s other businesses. These lawsuits include, among others, cases alleging, among other assertions, that
the Company, one of its subsidiaries and/or one of its agents:

•

charged an improper rate for title insurance in a refinance transaction, including

• Hamilton v. First American Title Insurance Company, et al., filed on August 25, 2008 and pending

in the Superior Court of the State of North Carolina, Wake County,

• Haskins v. First American Title Insurance Company, filed on September 29, 2010 and pending in

the United States District Court of New Jersey,

•

•

•

Lang v. First American Title Insurance Company of New York, filed on March 9, 2012 and pending
in the United States District Court of New York,

Levine v. First American Title Insurance Company, filed on February 26, 2009 and pending in the
United States District Court of Pennsylvania,

Lewis v. First American Title Insurance Company, filed on November 28, 2006 and pending in the
United States District Court for the District of Idaho,

• Mitchell-Tracey v. First American Title Insurance Company, et al., filed on April 30, 2012 and

pending in the United States District Court for the Northern District of Maryland,

• Raffone v. First American Title Insurance Company, filed on February 14, 2004 and pending in the

Circuit Court, Nassau County, Florida, and

•

Slapikas v. First American Title Insurance Company, filed on December 19, 2005 and pending in
the United States District Court for the Western District of Pennsylvania.

All of these lawsuits are putative class actions. A court has only granted class certification in Hamilton,
Lewis, Raffone and Slapikas. For the reasons stated above, the Company has been unable to assess the
probability of loss or estimate the possible loss or the range of loss or, where the Company has been
able to make an estimate, the Company believes the amount is immaterial to the financial statements as
a whole.

•

to refer title insurance
purchased minority interests in title insurance agents as an inducement
underwriting business to the Company or gave items of value to title insurance agents and others for
referrals of business, in each case in violation of the Real Estate Settlement Procedures Act, including

116

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

Edwards v. First American Financial Corporation, filed on June 12, 2007 and pending in the United
States District Court for the Central District of California.

In Edwards a narrow class has been certified. For the reasons stated above, the Company has been
unable to assess the probability of loss or estimate the possible loss or the range of loss.

•

conspired with its competitors to fix prices or otherwise engaged in anticompetitive behavior, including

• Klein v. First American Title Insurance Company, et al., filed on July 10, 2012 and pending in the

United States District Court for the District of Columbia.

Klein is a putative class action for which a class has not been certified. For the reasons described
above, the Company has not yet been able to assess the probability of loss or estimate the possible loss
or the range of loss.

•

engaged in the unauthorized practice of law, including

• Gale v. First American Title Insurance Company, et al., filed on October 16, 2006 and pending in

the United States District Court of Connecticut, and

• Katin v. First American Signature Services, Inc., et al., filed on May 9, 2007 and pending in the

United States District Court of Massachusetts.

Katin is a putative class action for which a class has not been certified. The class originally certified in
Gale was subsequently decertified. For the reasons described above, the Company has not yet been able
to assess the probability of loss or estimate the possible loss or the range of loss.

•

failed to pay required compensation and provide required rest periods, including

• Bartko v. First American Title Insurance Company, filed on November 8, 2011, and pending in the

Superior Court of the State of California, Los Angeles.

Bartko is a putative class action for which a class has not been certified. For the reasons described
above, the Company has not yet been able to assess the probability of loss or estimate the possible loss
or the range of loss.

•

overcharged or improperly charged fees for products and services provided in connection with the
closing of real estate transactions, denied home warranty claims, recorded telephone calls, acted as an
unauthorized trustee and gave items of value to developers, builders and others as inducements to refer
business in violation of certain other laws, such as consumer protection laws and laws generally
prohibiting unfair business practices, and certain obligations, including

• Carrera v. First American Home Buyers Protection Corporation, filed on September 23, 2009 and

pending in the Superior Court of the State of California, County of Los Angeles,

• Chassen v. First American Financial Corporation, et al., filed on January 22, 2009 and pending in

the United States District Court of New Jersey,

• Coleman v. First American Home Buyers Protection Corporation, et al., filed on August 24, 2009

and pending in the Superior Court of the State of California, County of Los Angeles,

•

Eide v. First American Title Company, filed on February 26, 2010 and pending in the Superior
Court of the State of California, County of Kern,

• Gunning v. First American Title Insurance Company, filed on July 14, 2008 and pending in the

United States District Court for the Eastern District of Kentucky,

117

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

• Kaufman v. First American Financial Corporation, et al., filed on December 21, 2007 and pending

in the Superior Court of the State of California, County of Los Angeles,

• Kirk v. First American Financial Corporation, filed on June 15, 2006 and pending in the Superior

Court of the State of California, County of Los Angeles,

• Muehling v. First American Title Company, filed on December 11, 2012 and pending in the

Superior Court of the State of California, County of Alameda,

•

•

•

Sjobring v. First American Financial Corporation, et al., filed on February 25, 2005 and pending in
the Superior Court of the State of California, County of Los Angeles,

Smith v. First American Title Insurance Company, filed on November 23, 2011 and pending in the
United States District Court for the Western District of Washington,

Tavenner v. Talon Group, filed on August 18, 2009 and pending in the United States District Court
for the Western District of Washington, and

• Wilmot v. First American Financial Corporation, et al., filed on April 20, 2007 and pending in the

Superior Court of the State of California, County of Los Angeles.

All of these lawsuits, except Kirk, Sjobring, and Tavenner, are putative class actions for which a class
has not been certified. In Sjobring a class was certified but that certification was subsequently vacated.
For the reasons described above, the Company has not yet been able to assess the probability of loss or
estimate the possible loss or the range of loss.

While some of the lawsuits described above may be material to the Company’s operating results in any
particular period if an unfavorable outcome results, the Company does not believe that any of these lawsuits will
have a material adverse effect on the Company’s overall financial condition or liquidity.

On March 5, 2010, Bank of America, N.A. filed a complaint in the North Carolina General Court of Justice,
Superior Court Division against United General Title Insurance Company and First American Title Insurance
Company alleging that the defendants failed to pay or failed to timely respond to certain claims made on title
insurance policies issued in connection with home equity loans or lines of credit that are now in default. On
April 1, 2010, the Company filed a third party complaint within the same litigation against Fiserv Solutions, Inc.
for other matters relating to the plaintiff’s allegations. During the fourth quarter of 2011, the Company, Bank of
America and Fiserv settled the lawsuit through mediation. In connection with the case, the Company recorded a
charge of $19.2 million in the fourth quarter of 2011 and $13.0 million in the third quarter of 2011, which is net
of all recoveries. These charges were recorded to provision for policy losses and other claims on the
accompanying consolidated statements of income. The settlement extinguished all Company liability in
connection with policies issued to Bank of America of the type that are the subject of the lawsuit, whether or not
Bank of America submitted a claim with respect to such policies. The court approved of the settlement on
December 8, 2011 and dismissed the case with prejudice.

The Company also is a party to non-ordinary course lawsuits other than those described above. With respect
to these lawsuits, the Company has determined either that a loss is not reasonably possible or that the estimated
loss or range of loss, if any, is not material to the financial statements as a whole.

The Company’s title insurance, property and casualty insurance, home warranty, banking, thrift, trust and
investment advisory businesses are regulated by various federal, state and local governmental agencies. Many of
the Company’s other businesses operate within statutory guidelines. Consequently, the Company may from time

118

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

to time be subject to examination or investigation by such governmental agencies. Currently, governmental
agencies are examining or investigating certain of the Company’s operations. These exams or investigations
include inquiries into, among other matters, pricing and rate setting practices in the title insurance industry,
competition in the title insurance industry, real estate settlement service customer acquisition and retention
practices and agency relationships. With respect to matters where the Company has determined that a loss is both
probable and reasonably estimable, the Company has recorded a liability representing its best estimate of the
financial exposure based on known facts. While the ultimate disposition of each such exam or investigation is not
yet determinable, the Company does not believe that individually or in the aggregate they will have a material
adverse effect on the Company’s financial condition, results of operations or cash flows. These exams or
investigations could, however, result in changes to the Company’s business practices which could ultimately
have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

The Company and its subsidiaries also are involved in numerous ongoing routine legal and regulatory
proceedings related to their operations. While the ultimate disposition of each proceeding is not determinable, the
ultimate resolution of any of such proceedings, individually or in the aggregate, could have a material adverse
effect on the Company’s financial condition, results of operations or cash flows in the period of disposition.

NOTE 22. Business Combinations:

During the year ended December 31, 2012, the Company completed five acquisitions for an aggregate
purchase price of $31.1 million in cash and contingent consideration of $0.8 million. The purchase price of each
acquisition was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques
including discounted cash flow analysis. These five acquisitions have been included in the Company’s title
insurance and services segment.

During the year ended December 31, 2011, the Company completed three acquisitions for an aggregate
purchase price of $2.1 million in cash and contingent consideration of $2.5 million. The purchase price of each
acquisition was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques
including discounted cash flow analysis. These three acquisitions have been included in the Company’s title
insurance and services segment.

In addition to the acquisitions discussed above, during the years ended December 31, 2012 and 2011, the
Company purchased additional noncontrolling interests in companies already included in the Company’s
consolidated financial statements for a total purchase price of $3.4 million and $4.2 million, respectively, in cash.

NOTE 23. Segment Financial Information:

The Company consists of the following reportable segments and a corporate function:

•

The Company’s title insurance and services segment issues title insurance policies on residential and
commercial property in the United States and offers similar or related products and services
internationally. This segment also provides escrow and closing services; accommodates tax-deferred
exchanges of real estate; maintains, manages and provides access to title plant records and images and
provides banking, trust and investment advisory services. The Company, through its principal title
insurance subsidiary and such subsidiary’s affiliates, transacts its title insurance business through a
network of direct operations and agents. Through this network, the Company issues policies in the 49
states that permit the issuance of title insurance policies and the District of Columbia. The Company
also offers title insurance and other insurance and guarantee products, as well as related settlement

119

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

services in foreign countries, including Canada, the United Kingdom, Australia and various other
established and emerging markets.

•

The Company’s specialty insurance segment issues property and casualty insurance policies and sells
home warranty products. The property and casualty insurance business provides insurance coverage to
residential homeowners and renters for liability losses and typical hazards such as fire, theft, vandalism
and other types of property damage. This business is licensed to issue policies in all 50 states and
actively issues policies in 43 states. In its largest market, California, it also offers preferred risk auto
insurance to better compete with other carriers offering bundled home and auto insurance. The home
warranty business provides residential service contracts that cover residential systems and appliances
against failures that occur as the result of normal usage during the coverage period. This business
currently operates in 39 states and the District of Columbia.

The corporate function consists primarily of certain financing facilities as well as the corporate services that
support the Company’s business operations. Eliminations consist of inter-segment revenues and related expenses
included in the results of the operating segments.

During the first quarter of 2012, the Company changed the allocation of certain expenses within its
reportable segments and corporate division to reflect the performance of the Company’s reportable segments as
reported to the chief operating decision maker. The expenses that were impacted as a result of the change in
allocation include shared services expenses, benefit plan expense and interest expense. Prior year segment data
has been conformed to the current presentation. For the years ended December 31, 2011 and 2010, income before
income taxes for the Company’s reportable segments was impacted as follows: increases of $14.9 million and
$25.1 million, respectively, to the title insurance and services segment, increases of $0.7 million and $0.9
million, respectively, to the specialty insurance segment, and decreases of $15.6 million and $26.0 million,
respectively, to the corporate division.

120

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Selected financial information about the Company’s operations by segment for each of the past three years

is as follows:

Depreciation
and
amortization

Equity in
earnings
of
affiliates

Revenues

Income (loss)
before
income taxes

(in thousands)

Assets

Investment
in affiliates

Capital
expenditures

2012
Title Insurance and

Services . . . . . . . .
Specialty Insurance .
Corporate . . . . . . . . .
Eliminations . . . . . . .

2011
Title Insurance and

Services . . . . . . . .
Specialty Insurance .
Corporate . . . . . . . . .
Eliminations . . . . . . .

2010
Title Insurance and

Services . . . . . . . .
Specialty Insurance .
Corporate . . . . . . . . .
Eliminations . . . . . . .

$4,200,520
315,171
29,892
(3,762)
$4,541,821

$67,610
4,553
2,787
—

$74,950

$13,584
—
80
—

$13,664

$473,681
47,459
(53,349)
(385)
$467,406

$5,427,432
487,780
272,928
(137,293)
$6,050,847

$127,217

—
2,753
—

$129,970

$3,541,119
286,982
(3,652)
(3,875)
$3,820,574

$69,259
4,197
3,433
—

$76,889

$ 8,340
—
(241)
—

$ 8,099

$173,581
39,852
(83,525)
385
$130,293

$4,947,903
490,620
40,479
(116,792)
$5,362,210

$132,628

—
4,099
—

$136,727

$3,615,534
286,566
6,308
(1,796)
$3,906,612

$72,783
5,341
2,518
—

$80,642

$ 8,006
—
370
—

$254,586
43,554
(86,034)
—

$ 8,376

$212,106

$5,113,600
488,650
369,037
(149,675)
$5,821,612

$140,923

—
5,861
—

$146,784

$78,614
5,278
—
—

$83,892

$68,098
7,024
251
—

$75,373

$82,123
3,273
3,329
—

$88,725

Total revenues from external customers separated between domestic and foreign operations and by segment

for each of the three years ended December 31, 2012, 2011 and 2010 is as follows:

Title Insurance and Services . . . . . .
Specialty Insurance . . . . . . . . . . . . .

2012

2011

2010

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

(in thousands)

$3,865,480
313,889
$4,179,369

$332,577

—

$332,577

$3,188,989
284,997
$3,473,986

$350,239

—

$350,239

$3,286,339
284,309
$3,570,648

$326,647

—

$326,647

Long-lived assets separated between domestic and foreign operations and by segment as of December 31,

2012, 2011 and 2010 are as follows:

Title Insurance and Services . . . . . .
Specialty Insurance . . . . . . . . . . . . .

2012

December 31,

2011

2010

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

$1,580,399
104,698
$1,685,097

$151,289

—

$151,289

$1,553,839
104,371
$1,658,210

(in thousands)
$136,188

—

$136,188

$1,558,258
100,563
$1,658,821

$134,706

—

$134,706

121

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 24. Subsequent Events:

On January 29, 2013, the Company issued $250.0 million of 4.30 percent 10 year senior unsecured notes
due in 2023. The notes were priced at 99.638 percent to yield 4.345 percent. Interest is due semi-annually on
February 1 and August 1, beginning August 1, 2013. The Company used a portion of the net proceeds from the
sale to repay all borrowings outstanding under its credit agreement.

122

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

QUARTERLY FINANCIAL DATA
(Unaudited)

2012
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income attributable to noncontrolling interests . .
Net income attributable to the Company . . . . . . . . . . . . . . . .
Net income per share attributable to the Company’s

stockholders (1):

Quarter Ended

March 31

June 30

September 30 December 31

(in thousands, except per share amounts)

$966,763
$ 51,550
$ 31,109
$
$ 31,293

$1,089,833
$ 112,290
73,517
$
516
(184) $
73,001
$

$1,208,402
$ 155,882
$ 103,900
430
$
$ 103,470

$1,276,823
$ 147,684
93,202
$
(75)
$
93,277
$

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

0.30
0.29

$
$

0.69
0.68

$
$

0.97
0.95

$
$

0.87
0.85

(1) Net income per share attributable to the Company’s stockholders for the four quarters of each fiscal year
may not sum to the total for the fiscal year because of the different number of shares outstanding during
each period.

Quarter Ended

March 31

June 30

September 30 (2) December 31

(in thousands, except per share amounts)

2011 (1)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income before income taxes . . . . . . . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income attributable to the Company . . . . . . . . . .
Net (loss) income per share attributable to the Company’s

stockholders (3):

$931,700
$927,343
$ (23,449) $ 49,215
$ (15,241) $ 32,147

94

$
(194)
$ (15,335) $ 32,341

$

$964,965
$ 38,411
$ 21,295

$
252
$ 21,043

$996,566
$ 66,116
$ 40,378

$
151
$ 40,227

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

(0.15) $
(0.15) $

0.31
0.30

$
$

0.20
0.20

$
$

0.38
0.38

(1) Net income for the year ended December 31, 2011 includes a net increase of $1.6 million related to certain
items that should have been recorded in a prior year. These items increased diluted net income per share
attributable to the Company’s stockholders by $0.02 for the year.

(2) Net income for the third quarter ended September 30, 2011 includes a net reduction of $0.9 million related
to certain items that should have been recorded in a prior quarter. These items decreased diluted net income
per share attributable to the Company’s stockholders by $0.01 for the quarter. The Company assessed these
items and concluded that such items were not material to the previously reported consolidated financial
statements and are not material to the consolidated financial statements for the year ended December 31,
2011.

(3) Net income per share attributable to the Company’s stockholders for the four quarters of each fiscal year
may not sum to the total for the fiscal year because of the different number of shares outstanding during
each period.

123

SCHEDULE I
1 OF 1

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN RELATED PARTIES
(in thousands)

December 31, 2012

Column A

Column B

Column C

Column D

Type of investment

Deposits with savings and loan associations and banks:

Cost

Market value

Amount at which
shown in the
balance sheet

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

71,196

$

71,400

$

71,196

Debt securities:

U.S. Treasury bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

80,651

$

82,175

$

82,175

Municipal bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 361,912

$ 375,822

$ 375,822

Foreign bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 236,630

$ 238,745

$ 238,745

Governmental agency bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 324,323

$ 325,450

$ 325,450

Governmental agency mortgage-backed securities

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,271,408

$1,281,532

$1,281,532

Non-agency mortgage-backed securities

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

26,656

$

21,846

$

21,846

Corporate debt securities

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 311,695

$ 326,311

$ 326,311

Total debt securities:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,613,275

$2,651,881

$2,651,881

Equity securities:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 191,170

$ 197,920

$ 197,920

Notes receivable, net:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

11,166

$

11,376

$

11,166

Other long-term investments:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 181,397

$ 181,397(1) $ 181,397

Total investments:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,068,204

$3,113,974

$3,113,560

(1) As other long-term investments are not publicly traded, reasonable estimate of the fair values could not be

made without incurring excessive costs.

124

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED BALANCE SHEETS
(in thousands, except par values)

SCHEDULE II
1 OF 5

December 31,
2012

December 31,
2011

Assets

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 163,488
—
14,093
6,569
2,908,476
1,806
—
78,134

$ 147,339
7,326
12,304
85,507
2,426,856
2,237
39,617
70,953

Liabilities and Equity

Accounts payable and other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension costs and other retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to subsidiaries, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to CoreLogic, net
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies
Stockholders’ equity:

Preferred stock, $0.00001 par value, Authorized-500 shares;

Outstanding-none . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.00001 par value: . . . . . . . . . . . . . . . . . . . . . . . . . . .

Authorized—300,000 shares; Outstanding—107,239 shares and

105,410 shares as of December 31, 2012 and 2011,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . .

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,172,566

$2,792,139

$

12,307
445,246
29,926
52,453
36,987
160,000
83,878

820,797

$

19,677
415,373
—
35,370
—
200,000
86,780

757,200

—

—

1
2,111,605
387,015
(150,556)

2,348,065
3,704

1
2,081,242
124,816
(177,459)

2,028,600
6,339

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,351,769

2,034,939

$3,172,566

$2,792,139

See notes to condensed financial statements

125

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF INCOME
(in thousands)

Revenues

Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expenses

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes and equity in undistributed earnings of subsidiaries . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . .

SCHEDULE II
2 OF 5

Year Ended
December 31,
2012

Year Ended
December 31,
2011

$285,141
29,839

314,980

24,569

290,411
102,940
114,257

301,728
687

$60,600
(3,604)

56,996

26,010

30,986
12,298
59,891

78,579
303

Net income attributable to the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$301,041

$78,276

See notes to condensed financial statements

126

SCHEDULE II
3 OF 5

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

Year Ended
December 31,
2012

Year Ended
December 31,
2011

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$301,728

$ 78,579

Other comprehensive income (loss), net of tax:

Unrealized gain (loss) on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on securities for which credit-related portion was recognized in
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension benefit adjustment

Total other comprehensive income(loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive income attributable to noncontrolling interests . . . . . . . . . . . . .

31,445

(12,316)

3,902
5,131
(13,571)

26,907

328,635
691

2,144
(6,167)
(12,034)

(28,373)

50,206
233

Comprehensive income attributable to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .

$327,944

$ 49,973

See notes to condensed financial statements

127

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

SCHEDULE II
4 OF 5

Year Ended
December 31,
2012

Year Ended
December 31,
2011

Cash flows from operating activities:

Cash (used for) provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . .

$ (39,583)

$ 84,038

Cash flows from investing activities:

Proceeds from sales of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from notes receivable from CoreLogic . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment
Net change in other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash flows from financing activities:
Proceeds from issuance of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . .
Net proceeds in connection with share-based compensation plans . . . . . . . . . . .
Net activity related to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of Company shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents—Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .

137,823
—
—
595
—

138,418

440,000
(480,000)
(2,902)
(10,999)
2,372
12,668
(4,094)
—
(44,705)

(87,660)
4,974

16,149
147,339

—
18,787
1,056
(935)
(29)

18,879

—
(1,083)
(5,269)
—
1,145
1,152
(4,491)
(2,502)
(25,216)

(36,264)
(5,731)

60,922
86,417

Cash and cash equivalents—End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 163,488

$147,339

See notes to condensed financial statements

128

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

SCHEDULE II
5 OF 5

NOTE 1. Significant Accounting Policies:

First American Financial Corporation became a publicly traded company following its spin-off from its
prior parent, The First American Corporation (“TFAC”) on June 1, 2010. On that date, TFAC distributed all of
First American Financial Corporation’s outstanding shares to the record date shareholders of TFAC on a one-for-
one basis. After the distribution, First American Financial Corporation owns TFAC’s financial services
businesses and TFAC, which reincorporated and assumed the name CoreLogic, Inc., continues to own its
information solutions businesses.

First American Financial Corporation is a holding company that conducts all of its operations through its
subsidiaries. The Parent Company Financial Statements should be read in connection with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-K.

NOTE 2. Dividends Received:

The Company received cash dividends from subsidiaries of $11.8 million and $75.6 million for the years

ended December 31, 2012 and 2011, respectively.

129

SCHEDULE III
1 OF 2

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)

BALANCE SHEET CAPTIONS

Segment

Column A

Column B

Column C

Column D

Deferred
policy
acquisition
costs

Claims
reserves

Deferred
revenues

2012
Title Insurance and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

681
21,908

$ 941,748
34,714

$

8,533
162,130

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$22,589

$ 976,462

$170,663

2011
Title Insurance and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ — $ 981,522
33,154
21,800

$ 10,261
145,365

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$21,800

$1,014,676

$155,626

130

SCHEDULE III
2 OF 2

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)

INCOME STATEMENT CAPTIONS

Column A

Column F

Column G

Column H

Column I

Column J

Column K

Segment

2012
Title Insurance and Services . . . . . . .
Specialty Insurance . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . .

Premiums
and escrow
fees

Net
investment
income

Loss
provision

Amortization
of deferred
policy
acquisition
costs

Other
operating
expenses

Net
premiums
written

$3,455,592
296,053
—
—

$101,495
17,513
29,892
(3,747)

$237,427
160,290
—
—

$ 1,174
(108)
—
—

$769,477
42,395
24,462
(15)

$ —
299,071
—
—

Total . . . . . . . . . . . . . . . . . . . . . .

$3,751,645

$145,153

$397,717

$ 1,066

$836,319

$299,071

2011
Title Insurance and Services . . . . . . .
Specialty Insurance . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . .

$2,852,455
273,665
—
—

$ 68,713
11,786
(3,652)
(3,876)

$270,697
149,439
—
—

$ —
(1,161)
—
—

$702,508
38,066
21,303
1

$ —
275,044
—
—

Total . . . . . . . . . . . . . . . . . . . . . .

$3,126,120

$ 72,971

$420,136

$(1,161)

$761,878

$275,044

2010
Title Insurance and Services . . . . . . .
Specialty Insurance . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . .

$2,908,797
272,405
—
—

$ 78,243
13,703
6,308
(1,806)

$180,821
140,053
—
—

$ —
1,887
—
—

$742,823
42,226
26,308
15

$ —
271,809
—
—

Total . . . . . . . . . . . . . . . . . . . . . .

$3,181,202

$ 96,448

$320,874

$ 1,887

$811,372

$271,809

131

SCHEDULE IV
1 OF 1

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

REINSURANCE
(in thousands, except percentages)

Premiums
and escrow
fees before
reinsurance

Ceded to
other
companies

Assumed
from
other
companies

Premiums
and escrow
fees

Percentage of
amount
assumed to
premiums
and escrow
fees

Segment

Title Insurance and Services

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,472,675

$19,884

$2,801

$3,455,592

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,861,418

$13,744

$4,781

$2,852,455

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,912,767

$12,457

$8,487

$2,908,797

Specialty Insurance

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 305,073

$ 9,020

$ —

$ 296,053

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 283,885

$10,220

$ —

$ 273,665

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 280,817

$ 8,412

$ —

$ 272,405

0.1%

0.2%

0.3%

0.0%

0.0%

0.0%

132

SCHEDULE V
1 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2012

Column A

Column B

Column C

Additions

Column D

Column E

Description

Reserve deducted from accounts receivable:

Balance at
beginning
of period

Charged to
costs and
expenses

Charged
to other
accounts

Deductions
from
reserve

Balance
at end
of period

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$

30,504

$

4,927

$

4,514(A) $ 30,917

Reserve for known and incurred but not reported

claims:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$1,014,676

$397,717

$10,055

$445,986(B) $976,462

Reserve deducted from loans receivable:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$

4,171

$

278(A) $

3,893

Reserve deducted from other assets:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$

4,183

$

462

$

1,741

$

2,904

Reserve deducted from deferred income taxes:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$

21,426

$

15

$

7,269

$ 14,172

Note A—Amount represents accounts written off, net of recoveries.

Note B—Amount represents claim payments, net of recoveries.

133

SCHEDULE V
2 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2011

Column A

Column B

Column C

Additions

Column D

Column E

Description

Reserve deducted from accounts receivable:

Balance at
beginning
of period

Charged to
costs and
expenses

Charged
to other
accounts

Deductions
from
reserve

Balance
at end
of period

Consolidated . . . . . . . . . . . . . . . . . . . . . . .

$

39,904

$

1,723

$ 11,123(A) $

30,504

Reserve for known and incurred but not

reported claims:

Consolidated . . . . . . . . . . . . . . . . . . . . . . .

$1,108,238

$420,136

$(10,264) $503,434(B) $1,014,676

Reserve deducted from loans receivable:

Consolidated . . . . . . . . . . . . . . . . . . . . . . .

$

3,271

$

900

Reserve deducted from other assets:

Consolidated . . . . . . . . . . . . . . . . . . . . . . .

Reserve deducted from deferred income taxes:
Consolidated . . . . . . . . . . . . . . . . . . . . . . .

$

$

5,905

$

1,026

$

2,748

19,126

$ 5,276

$

2,976

$

$

$

4,171

4,183

21,426

Note A—Amount represents accounts written off, net of recoveries.

Note B—Amount represents claim payments, net of recoveries.

134

SCHEDULE V
3 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2010

Column A

Column B

Column C

Additions

Column D

Column E

Description

Reserve deducted from accounts receivable:

Balance at
beginning
of period

Charged to
costs and
expenses

Charged
to other
accounts

Deductions
from
reserve

Balance
at end
of period

Consolidated . . . . . . . . . . . . . . . . . . . . . . . .

$

35,595

$ 11,046

$

6,737(A) $

39,904

Reserve for known and incurred but not

reported claims:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . .

$1,227,757

$320,874

$15,832

$456,225(B) $1,108,238

Reserve deducted from loans receivable:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . .

$

2,071

$

1,200

Reserve deducted from other assets:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . .

$

6,679

$

1,541

$

2,315

Reserve deducted from deferred income taxes:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . .

$

27,045

$

7,919

$

$

$

3,271

5,905

19,126

Note A—Amount represents accounts written off, net of recoveries.

Note B—Amount represents claim payments, net of recoveries.

135

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer have concluded that, as of December 31,
2012, the end of the fiscal year covered by this Annual Report on Form 10-K, the Company’s disclosure controls
and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, were
effective, based on the evaluation of these controls and procedures required by Rule 13a-15(b) thereunder.

Management’s Annual Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control over financial reporting has been designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally accepted in the United States of
America.

The Company’s internal control over financial reporting includes policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of
assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally accepted in the United
States of America, and that receipts and expenditures are being made only in accordance with authorization of
management and directors of the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material
effect on the Company’s consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework.
Based on that assessment under the framework in Internal Control—Integrated Framework, management
determined that, as of December 31, 2012, the Company’s internal control over financial reporting was effective.

PricewaterhouseCoopers LLP,

registered public accounting firm that audited the
Company’s consolidated financial statements provided in Item 8, above, has issued a report on the Company’s
internal control over financial reporting.

the independent

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the quarter ended
December 31, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

Item 9B. Other Information

Not applicable.

136

PART III

The information required by Items 10 through 14 of this report is expected to be set forth in the sections
entitled “Information Regarding the Nominees for Election,” “Information Regarding the Other Incumbent
Directors,” “Election of Class III Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership
Reporting Compliance,” “Board and Committee Meetings,” “Executive Compensation,” “Compensation
Discussion and Analysis,” “2012 Director Compensation,” “Codes of Ethics,” “Compensation Committee
Interlocks and Insider Participation,” “Compensation Committee Report,” “Securities Authorized for Issuance
under Equity Compensation Plans,” “Who are the largest principal stockholders outside of management?,”
“Security Ownership of Management,” “Principal Accounting Fees and Services” “Policy on Audit Committee
Pre-approval of Audit and Permissible Nonaudit Services of Independent Auditor,” “Transactions with
Management and Others” and “Independence of Directors” in the Company’s definitive proxy statement, and is
hereby incorporated in this report and made a part hereof by reference. If the definitive proxy statement is not
filed within 120 days after the close of the fiscal year, the Company will file an amendment to this Annual
Report on Form 10-K to include the information required by Items 10 through 14.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) 1. & 2.

Financial Statements and Financial Statement Schedules

The Financial Statements and Financial Statement Schedules filed as part of this report are listed
in the accompanying index at page 56 in Item 8 of Part II of this report.

(a) 3.

Exhibits. See Exhibit Index. (Each management contract or compensatory plan or arrangement in
which any director or named executive officer of First American Financial Corporation, as
defined by Item 402(a)(3) of Regulation S-K (17 C.F.R. §229.402(a)(3)), participates that is
included among the exhibits listed on the Exhibit Index is identified on the Exhibit Index by an
asterisk (*).)

137

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant

has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

FIRST AMERICAN FINANCIAL CORPORATION
(Registrant)

By

/s/ DENNIS J. GILMORE

Dennis J. Gilmore
Chief Executive Officer
(Principal Executive Officer)

Date: February 28, 2013

By

/s/ MAX O. VALDES

Max O. Valdes
Chief Financial Officer
(Principal Financial Officer)

Date: February 28, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ DENNIS J. GILMORE

Dennis J. Gilmore

/S/ MAX O. VALDES

Max O. Valdes

Chief Executive Officer and Director
(Principal Executive Officer)

February 28, 2013

Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

February 28, 2013

/S/ PARKER S. KENNEDY

Chairman of the Board of Directors

February 28, 2013

Parker S. Kennedy

/S/ ANTHONY K. ANDERSON

Director

February 28, 2013

Anthony K. Anderson

/S/ GEORGE L. ARGYROS

Director

February 28, 2013

George L. Argyros

/S/ WILLIAM G. DAVIS

Director

February 28, 2013

William G. Davis

/S/

JAMES L. DOTI

James L. Doti

Director

February 28, 2013

/S/ LEWIS W. DOUGLAS, JR.

Director

February 28, 2013

Lewis W. Douglas, Jr.

138

Signature

Title

Date

/S/ MICHAEL D. MCKEE

Director

February 28, 2013

Michael D. McKee

/S/ THOMAS V. MCKERNAN
Thomas V. McKernan

Director

February 28, 2013

/S/ HERBERT B. TASKER

Director

February 28, 2013

Herbert B. Tasker

/S/ VIRGINIA M. UEBERROTH

Director

February 28, 2013

Virginia M. Ueberroth

139

Exhibit No.

Description

Location

3.1

3.2

4.1

4.2

4.3

10.1

10.2.1

10.2.2

10.3

10.4

*10.5

*10.6

*10.7

Amended and Restated Certificate of
Incorporation of First American Financial
Corporation dated May 28, 2010.

Incorporated by reference herein to Exhibit 3.1
to the Current Report on Form 8-K dated June 1,
2010.

Bylaws of First American Financial Corporation. Incorporated by reference herein to Exhibit 3.2

Indenture, dated as of January 24, 2013, between
the Company and U.S. Bank National
Association, as trustee.

to the Current Report on Form 8-K dated June 1,
2010.

Incorporated by reference herein to Exhibit 4.1
to the Form S-3ASR filed January 24, 2013.

First Supplemental Indenture, dated as of
January 29, 2013, between the Company and
U.S. Bank National Association.

Incorporated by reference herein to Exhibit 4.2
to the Current Report on Form 8-K dated January
29, 2013.

Form of 4.30% Senior Notes due 2023.

Separation and Distribution Agreement by and
between The First American Corporation (n/k/a
CoreLogic, Inc.) and First American Financial
Corporation dated as of June 1, 2010.

Credit Agreement dated as of April 17, 2012,
among First American Financial Corporation, the
Guarantors party thereto, the Lenders party
thereto and JPMorgan Chase Bank, N.A., as
Administrative Agent.

Amendment No. 1 dated as of November 14,
2012 to the Credit Agreement dated as of April
17, 2012, among First American Financial
Corporation, the Lenders party thereto and
JPMorgan Chase Bank, N.A., as Administrative
Agent.

Tax Sharing Agreement by and between The
First American Corporation (n/k/a CoreLogic,
Inc.) and First American Financial Corporation
dated as of June 1, 2010.

Second Amended and Restated Secured
Promissory Note of First American Financial
Corporation to First American Title Insurance
Company in the amount of $83,878,422.04,
dated as of September 30, 2012.

Incorporated by reference herein to Exhibit A of
Exhibit 4.2 to the Current Report on Form 8-K
dated January 29, 2013.

Incorporated by reference herein to Exhibit 10.1
to the Current Report on Form 8-K dated June 1,
2010.

Incorporated by reference herein to Exhibit 10.1
to Form 10-Q for the quarter ended June 30,
2012.

Incorporated by reference herein to Exhibit 10.1
to the Current Report on Form 8-K dated
November 14, 2012.

Incorporated by reference herein to Exhibit 10.2
to the Current Report on Form 8-K dated June 1,
2010.

Incorporated by reference herein to Exhibit 10.1
to Form 10-Q for the quarter ended September
30, 2012.

First American Financial Corporation Executive
Supplemental Benefit Plan, amended and
restated effective as of January 1, 2011.

Incorporated by reference herein to Exhibit 10.12
to the Annual Report on Form 10-K for the year
ended December 31, 2010.

First American Financial Corporation Deferred
Compensation Plan, amended and restated
effective as of January 1, 2012.

Incorporated by reference herein to Exhibit 10.13
to the Annual Report on Form 10-K for the year
ended December 31, 2011.

First American Financial Corporation 2010
Incentive Compensation Plan, approved May 28,
2010.

Incorporated by reference herein to Exhibit 10.6
to the Current Report on Form 8-K dated June 1,
2010.

140

Exhibit No.

*10.7.1

*10.7.2

*10.7.3

*10.7.4

*10.7.5

*10.7.6

*10.7.7

*10.7.8

*10.7.9

*10.7.10

Description

Location

Form of Notice of Restricted Stock Unit Grant
(Non-Employee Director) and Restricted Stock
Unit Award Agreement (Non-Employee
Director), approved February 10, 2009.

Form of Notice of Restricted Stock Unit Grant
(Non-Employee Director) and Restricted Stock
Unit Award Agreement (Non-Employee
Director) for Non-Employee Director Restricted
Stock Unit Award approved January 18, 2011.

Form of Notice of Restricted Stock Unit Grant
(Non-Employee Director) and Restricted Stock
Unit Award Agreement (Non-Employee
Director) for Non-Employee Director Restricted
Stock Unit Award approved January 17, 2012.

Form of Notice of Restricted Stock Unit Grant
(Non-Employee Director) and Restricted Stock
Unit Award Agreement (Non-Employee
Director) for Non-Employee Director Restricted
Stock Unit Award approved January 15, 2013.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 25,
2010.

Incorporated by reference herein from
Exhibit 10(yy) of The First American
Corporation (n/k/a CoreLogic, Inc.) Annual
Report on Form 10-K for the year ended
December 31, 2008.

Incorporated by reference herein to Exhibit 10.15
to the Annual Report on Form 10-K for the year
ended December 31, 2010.

Incorporated by reference herein to Exhibit 10.17
to the Annual Report on Form 10-K for the year
ended December 31, 2011.

Attached.

Incorporated by reference herein from
Exhibit 10(zz) to The First American
Corporation (n/k/a CoreLogic, Inc.) Annual
Report on Form 10-K for the year ended
December 31, 2009.

Form of Notice of Restricted Stock Unit Grant
and Restricted Stock Unit Award Agreement
approved June 10, 2010.

Incorporated by reference herein to Exhibit 10(i)
to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved February 11,
2011.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 17,
2012.

Form of Notice of Restricted Stock Unit Grant
(Valdes) and Restricted Stock Unit Award
Agreement (Valdes), approved February 13,
2012.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 15,
2013.

Incorporated by reference herein to Exhibit 10.21
to the Annual Report on Form 10-K for the year
ended December 31, 2010.

Incorporated by reference herein to Exhibit
10.21.1 to the Annual Report on Form 10-K for
the year ended December 31, 2011.

Incorporated by reference herein to Exhibit
10.21.2 to the Annual Report on Form 10-K for
the year ended December 31, 2011.

Attached.

141

Exhibit No.

*10.7.11

*10.7.12

*10.7.13

*10.7.14

*10.7.15

*10.8

*10.9

*10.10

*10.11

(21)

(23)

(31)(a)

(31)(b)

(32)(a)

(32)(b)

Description

Location

Form of Notice of Restricted Stock Unit Grant
(Valdes) and Restricted Stock Unit Award
Agreement (Valdes), approved February 7, 2013.

Attached.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 25, 2010.

Incorporated by reference herein from
Exhibit 10(mmm) to The First American
Corporation (n/k/a CoreLogic, Inc.) Annual
Report on Form 10-K for the year ended
December 31, 2009.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
March 7, 2011.

Incorporated by reference herein to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2011.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 17, 2012.

Incorporated by reference herein to Exhibit 10.24
to the Annual Report on Form 10-K for the year
ended December 31, 2011.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 15, 2013.

Attached.

Employment Agreement, dated August 30, 2011,
between First American Financial Corporation
and Dennis J. Gilmore.

Incorporated by reference herein to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the
quarter ended September 30,2011.

Employment Agreement, dated August 30, 2011,
between First American Financial Corporation
and Kenneth D. DeGiorgio.

Incorporated by reference herein to Exhibit 10. 2
to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2011.

Employment Agreement, dated August 30, 2011,
between First American Financial Corporation
and Max O. Valdes.

Incorporated by reference herein to Exhibit 10.3
to the Quarterly Report on Form 10-Q for the
quarter ended September 30,2011.

First American Financial Corporation Form of
Amended and Restated Change in Control
Agreement effective as of December 31, 2010.

Incorporated by reference herein to Exhibit 10(c)
to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2010.

Subsidiaries of the registrant.

Consent of Independent Registered Public
Accounting Firm.

Certification by Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities
Act of 1934.

Attached.

Attached.

Attached.

Certification by Chief Financial Officer Pursuant
to Rule 13a-14(a) under the Securities Exchange
Act of 1934.

Attached.

Certification by Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350.

Attached.

Certification by Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350.

Attached.

142

Exhibit No.

Description

Location

101.INS

XBRL Instance Document.

Attached.

101.SCH

XBRL Taxonomy Extension Schema Document. Attached.

101.CAL

101.DEF

101.LAB

101.PRE

XBRL Taxonomy Extension Calculation
Linkbase Document.

Attached.

XBRL Taxonomy Extension Definition Linkbase
Document.

Attached.

XBRL Taxonomy Extension Label Linkbase
Document.

XBRL Taxonomy Extension Presentation
Linkbase Document.

Attached.

Attached.

143

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