First American Financial

March 30, 2016

TO OUR STOCKHOLDERS:

First American’s vision is to be the premier title insurance and settlement services company. To accomplish that,
we strive to be the best place to work for our employees, provide the best service to our customers and deliver
industry-leading returns to you, our stockholders. I firmly believe that engaged employees will provide a superior
experience for our customers. Satisfied customers will, in turn, give us more business and, if we run the business
efficiently, we’ll deliver strong returns to our stockholders. It’s a simple formula that begins with our people.
That’s why I’m proud that First American was recognized by Fortune® as one of the “100 Best Companies to
Work For” in 2016.

Overall, 2015 was a good year for First American. We ended the year with $5.2 billion in total revenue, an increase
of 11 percent from 2014, thanks in part to improving real estate markets that drove higher purchase, refinance and
commercial activity. Our ongoing focus on operational efficiency enabled us to exceed our expense management
goals, helping to drive net income per diluted share to $2.62, up nearly 22 percent over the prior year. The
corporation’s return on equity of 10.8 percent and the title segment’s margin of 10.2 percent were both in line with
the 10-to-12 percent long-term objective we set for each of these key metrics at our investor event in May. And, in
2015, our total return to shareholders was 8.8 percent, outpacing the 1.4 percent return for the S&P 500.

Our Title Insurance and Services segment reported revenues of $4.8 billion in 2015, up more than 11 percent
over the prior year. Both our direct and agency operations showed solid revenue growth, and our National
Commercial Services group had another record year. Our international operations also posted strong results, with
revenue growth in all of our markets.

In October 2015, implementation of the Consumer Financial Protection Bureau’s TILA-RESPA Integrated
Disclosure rule, referred to as “Know Before You Owe,” dramatically transformed the way in which residential
real estate transactions are processed. I’m proud of our title operation’s successful response to this change, which
required more than a year of extensive preparation. After initial delays, which were expected, our direct title
transactions returned to their typical closing timeframes by the end of the year. The thousands of independent
title agents that operate across the country also faced the challenge of implementing the integrated disclosure rule
and, while many of them continue to report delays, we are confident that as the rule matures, agents will fully
adapt. While we continue to refine our processes, we believe that as the new settlement practices become a
routine part of our operations, they’ll enhance the consumer experience and continue to position us as a trusted
partner with lenders and real estate professionals.

Our Specialty Insurance segment ended 2015 with $394 million in revenues, up 6.8 percent from the prior year,
driven by record volume in our home warranty company. The segment’s pretax margin came in at 10.0 percent,
compared with 14.4 percent the prior year. The margin decline was attributable in part to low claims losses
during the unusually mild summer weather that benefited our home warranty group in 2014, and to major
weather-related events that impacted our property and casualty company in 2015. Additionally, both companies
had higher claims experience due to growth initiatives during the year and have plans in place to improve
margins in 2016.

CAPITAL MANAGEMENT

We continue to follow a consistent capital management strategy focused on investing in our title and settlement
services business, acquiring companies that strengthen our competitive position and returning capital to our
stockholders.

We invested $124 million in the business in 2015, primarily related to software development projects across the
company. A portion of the investment went toward technology and training to prepare our people to work within
the new integrated disclosure rule. We also continued to invest in the expansion of our real property database—a
successful effort that propelled us to the number-one industry position in data coverage. In our ongoing effort to
strengthen our title presence, we acquired three title agencies in 2015, the most significant of which was
TitleVest, an agency in our key New York market.

In January of 2016, we reaffirmed our commitment to return capital to stockholders when our board of directors,
based on our positive, long-term outlook, approved a 4 percent increase in our common stock dividend.

Our operating cash flow grew 53 percent from 2014 to 2015 and we’ve maintained significant financial
flexibility with the full $700 million still available on our credit line. Our strong balance sheet, with a debt-to-
capital ratio of 17.5 percent, puts us in a good position to deploy capital when future opportunities present
themselves.

OUR STRATEGY

Strategically, we remain focused on:

• Maximizing long-term profitability in our title and settlement business by gaining profitable market

share and driving operating efficiencies

In 2015, revenue growth coupled with disciplined expense management
resulted in continued
improvement in our margins and profitability. While our market share declined somewhat during the
year, we continue to pursue profitable market share growth, including “tuck-in” acquisitions with
attractive risk-adjusted returns.

•

Expanding and leveraging data to strengthen our title and settlement business and pursue new
opportunities

In 2015, following several years of expansion efforts, our database of real property information became
the largest in the industry, covering the vast majority of the U.S. population. And, since our own title
and settlement services businesses are critically reliant on this data, no one expects and demands higher
quality than we do. Our databases and new data products are making it easier for our title company to
identify potential fraud, manage risk and strengthen customer service. As we look forward, we believe
our data will drive further efficiencies in our title production processes. And, while we’re focused on
our own use of this data, we’re also using it to actively develop innovative new products and services
for our customers.

• Manage complementary businesses in ways that support or expand our title and settlement business

We continue to explore ways in which our complementary businesses can help either to drive
efficiencies in our title business, like those we have realized as a result of the collaboration between our
trust company and our title operations, or to better serve our common customers, such as the offering of
home warranties and homeowners’ insurance policies as part of the settlement services process.

LOOKING AHEAD

We expect that the housing market will continue to be a key driver of the nation’s steadily improving economy in
2016. Most forecasts predict continued growth in the residential purchase market this year, consistent with our
expectation for continued increases in both transaction volume and home prices. A significant decline in
refinance activity is also forecasted in 2016, driven by an anticipated increase in interest rates. While we can
more easily manage to gradual interest rate changes, we’re well prepared to respond to any rate environment.

Growth in our residential purchase orders was lower than expected in the first two months of 2016, but we’re
optimistic that the market will pick up as we head into the spring selling season. The commercial market

also remains favorable, though we expect moderation from the double-digit growth we’ve experienced over the
past few years. We also anticipate our loss provision to decline in 2016, as reserves required for challenging
legacy policy years decrease and the favorable claims experience we’ve had since 2010 continues. And, while
we’re optimistic about the future, our significant financial flexibility makes us well positioned to respond to
disruptions and capitalize on opportunities in the marketplace.

In July, we announced the appointment of Meg McCarthy to the company’s board of directors. Meg brings to our
board deep experience in technology and service operations. The insights she’s gained from her experience
managing large groups of employees, complex processes and enterprise-critical technology are already proving
to be of great value to First American.

Last year was a good one for our company. We are well positioned for continued success in 2016 and for the
long term. A strengthening real estate market, our continued vigilance on efficiency and, most importantly, the
dedication of our people, contributed to First American’s strong performance in 2015 and we expect these factors
to positively impact our performance this year. Together with our board, I thank you for your support and look
forward to the opportunities ahead.

Dennis J. Gilmore
Chief Executive Officer

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

FORM 10-K

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

SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015

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

OR

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, 2015 was $3,981,623,275.

On February 16, 2016, there were 109,086,496 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement with respect to the 2016 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

11

19

19

19

22

23

25

26

51

53

122

122

PART III

PART IV

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

123

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THIS ANNUAL REPORT ON FORM 10-K CONTAINS 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 CAN BE IDENTIFIED BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO
HISTORICAL OR CURRENT FACTS AND MAY CONTAIN THE WORDS “BELIEVE,” “ANTICIPATE,”
“EXPECT,” “INTEND,” “PLAN,” “PREDICT,” “ESTIMATE,” “PROJECT,” “WILL BE,” “WILL
CONTINUE,” “WILL LIKELY RESULT,” OR OTHER SIMILAR WORDS AND PHRASES OR FUTURE OR
CONDITIONAL VERBS SUCH AS “WILL,” “MAY,” “MIGHT,” “SHOULD,” “WOULD,” OR “COULD.”
STATEMENTS
THESE FORWARD-LOOKING STATEMENTS
REGARDING FUTURE OPERATIONS, PERFORMANCE, FINANCIAL CONDITION, PROSPECTS, PLANS
AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT
EXPECTATIONS AND ASSUMPTIONS THAT MAY PROVE TO BE INCORRECT.

INCLUDE, WITHOUT LIMITATION,

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, WITHOUT LIMITATION:

• CHANGES IN ECONOMIC CONDITIONS, INCLUDING INTEREST RATE FLUCTUATIONS AND

VOLATILITY IN REAL ESTATE OR CAPITAL MARKETS;

• CHANGES IN REGULATORY CONDITIONS IMPACTING THE COMPANY’S BUSINESSES;

• CHANGES IN THE MORTGAGE PROCESS, THE ROLE OF TITLE INSURANCE AND OTHER
PRODUCTS AND SERVICES OF THE COMPANY IN THAT PROCESS, OR THE ROLE OF
GOVERNMENT-SPONSORED ENTERPRISES IN THAT PROCESS;

• CHANGES IN RELATIONSHIPS WITH LARGE MORTGAGE LENDERS AND GOVERNMENT-

SPONSORED ENTERPRISES;

• MATERIAL VARIANCE BETWEEN ACTUAL AND EXPECTED CLAIMS EXPERIENCE;

•

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

• OTHER FACTORS DESCRIBED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING UNDER

THE CAPTION “RISK FACTORS” IN ITEM 1A OF PART I.

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.

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Item 1. Business

The Company

PART I

First American Financial Corporation (the “Company”) was incorporated in the state of Delaware in January
2008 to hold the financial services businesses of the Company’s prior parent. On June 1, 2010, 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 provides products,
services and solutions involving the use of real property related data, including data derived from its proprietary
database, which are designed to mitigate risk or otherwise facilitate real estate transactions. It maintains, manages
and provides access to title plant records and images and, in addition, 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. In the current market environment, we are focused on growing our core title
insurance and closing services business, building and expanding our data assets to strengthen our core business
and offer additional solutions for our customers, and managing complementary businesses in ways that support
our core business. We are also focused on continued improvement of our customers’ experiences with our
products, services and solutions, and we remain committed to efficiently managing our business to market
conditions throughout business cycles.

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; provides
products, services and solutions involving the use of real property related data designed to mitigate risk or
otherwise facilitate real estate transactions; maintains, manages and provides access to title plant records and
images; and provides banking, trust and investment advisory services. In 2015, 2014, and 2013 the Company
derived 92.5%, 92.0% and 92.9% of its consolidated revenues, respectively, from this segment.

Overview of Title Insurance Industry

In most 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.

Title Policies. Title insurance policies insure the interests of owners or lenders against defects in the title
liens, encumbrances or other matters

to real property. These defects include adverse ownership claims,

4

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, such as where the buyer anticipates constructing improvements on the
property. The potential for claims under a title insurance policy issued to a mortgage lender generally ceases
upon repayment of the mortgage loan. The potential for claims under a title insurance policy issued to a buyer
generally ceases upon the sale or transfer 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 and, in many instances, curing title defects identified therein. These searches,
examinations and curative efforts distinguish title insurers from other insurers, such as property and casualty
insurers. Whereas title insurers generally insure against losses arising out of circumstances existing as of the date
of the policy, property and casualty insurers generally insure against losses arising out of events that occur
subsequent to policy issuance. As a result of these differences, title insurers typically experience relatively low
claims, as a percentage of premiums, when compared to property and casualty insurers, but have relatively high
expenses. The primary costs of a title insurer pertain to personnel and other costs associated with the search and
examination process, the curative process, the preparation of preliminary reports or commitments, title plant
maintenance, and sales, as well as technology and other administrative expenses.

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, closer or other participant 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 or settlement 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 typically 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.

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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 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 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. In addition, as part of the policy, a title insurer
may issue a closing protection letter that protects a lender from certain misuse of funds by the title insurer’s
agent. When a loss to the title insurer occurs under a policy issued through an agent or a closing protection letter,
under certain circumstances the title insurer may seek recovery of all or a portion of the loss from the agent or the
agent’s errors and omissions 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 other 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. The mortgage markets in the United States and Canada are concentrated.
We believe that five institutions, Wells Fargo & Company, JPMorgan Chase & Co., U.S. Bancorp, Quicken
Loans Inc. and Bank of America Corporation, together with their affiliates, originate or are involved in
approximately 34% 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 through our direct and agent
channels. In our direct channel, the distribution of our policies and related products and services occurs through
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 and commercial real property.

Within the direct channel, our sales and marketing efforts are focused on the primary sources of business
referrals. For residential business referred by local or decentralized customers, we market to real estate agents
and brokers, mortgage brokers, real estate attorneys, mortgage originators, homebuilders and escrow service
providers. For refinance and default related business referred by customers with centrally managed platforms, we
market to mortgage originators, servicers, and governmental sponsored enterprises. For the commercial business
we market primarily to commercial real estate investors, including real estate investment trusts, insurance
companies and asset managers, as well as to law firms, commercial banks, investment banks, mortgage brokers

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and the owners of commercial real estate. We also market directly to national homebuilders focused on newly
constructed residential property. In some instances we may supplement the efforts of our sales force with general
marketing. Our marketing efforts emphasize the quality and timeliness of our services, our financial strength,
process innovation and our national presence. We also provide educational information on our website and
through other means to help consumers better understand our services and the homebuying/settlement process in
general.

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 typically state the conditions under which the agent is authorized to issue title
insurance policies on our behalf. The agency agreement also typically 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 a number of countries outside of the United
States, and our international operations accounted for approximately 6.4% of our title insurance and services
segment revenues in 2015. Today we have direct operations and a physical presence in several countries,
including Canada, the United Kingdom and Australia. 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 21
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 certain 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.

7

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
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 most comprehensive in the industry.

Reserves for Claims and Losses. We provide for losses associated with title insurance policies, closing
protection letters 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 reinsurance 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 the treaty limits and certain other limitations, the program generally
covers claims made while the program is in effect.

We also serve as a coinsurer in connection with certain commercial transactions. In a coinsurance scenario,
two or more insurers are selected by the insured and each coinsurer is liable for its specified percentage share of
the total liability.

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 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, closing services and related products and services is based
primarily on the quality, price and timeliness of the preparation and issuance of the insurance policy and the
provision 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 and
scope of coverage are also important. In addition, we regularly evaluate our pricing and agent splits, and based on
competitive, market and regulatory conditions and claims history, among other factors, adjust our prices and
agent splits as and where appropriate.

8

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, 2015 this company
administered fiduciary and custodial assets having a market value in excess of $3.0 billion which includes
managed assets of $1.2 billion, had assets of $3.0 billion, deposits of $2.7 billion and stockholder’s equity of
$244.3 million.

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 46 states. The majority of policy liability is in the western United
States, including approximately 63% in California. In certain markets 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 our existing
closing-service activities, and through a network of independent brokers. We purchase reinsurance to limit risk
associated with large losses from single events.

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. 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, under
the contract, the holder is responsible for a service fee for each trade call. First year warranties primarily are
marketed through real estate brokers and agents, and we also increasingly 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 or agencies), 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, First American Title Insurance Company, is a Nebraska corporation and,
accordingly, is primarily regulated by the Nebraska 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.

9

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.

Our foreign insurance subsidiaries are regulated primarily by regulatory authorities in the regions, provinces
and/or countries in which they operate and may secondarily be regulated 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, agencies 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 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, including our domestic subsidiaries, in matters which impact
consumers. This authority includes the enforcement of federal consumer financial laws, including the Real Estate
Settlement Procedures Act. The CFPB has been actively utilizing its supervisory powers by bringing enforcement
actions against various participants in the mortgage and settlement industries. It has also implemented regulations
pertaining to the mortgage and settlement industries, including the TILA-RESPA integrated disclosure (TRID)
rule. The TRID rule has required extensive modifications to the process of closing a federally-regulated mortgage
loan and the systems that support that process. The full impact of the TRID rule and the extent to which such
impact is temporary or permanent is not currently known. Similarly, the full manner in which the CFPB will
utilize its rulemaking and supervisory powers in the future is not known. Regulations issued by the CFPB, or the
manner in which it interprets and enforces existing consumer protection laws, have impacted and could continue
to impact the way in which we conduct our businesses and the profitability of those businesses.

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 is regulated by the Office
of the Comptroller of the Currency, with the Federal Reserve Board supervising its parent holding company, and
is subject to regulation by the Federal Deposit Insurance Corporation.

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, certain of the Company’s regulated subsidiaries have established and maintain investment
committees to oversee their own investment portfolios. The Company’s investment policies are designed to

10

comply with regulatory requirements and to align the investment portfolio asset allocation with strategic
objectives. For example, our federal savings bank is required to maintain at least 65% 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 maximize long-
term returns consistent with liquidity, regulatory and risk objectives, and that investments should not expose the
Company to excessive levels of market, credit, liquidity, and interest rate risks.

As of December 31, 2015, our debt and equity securities portfolio consisted of 93% of fixed income
securities. As of that date, 65% of our fixed income investments were held in securities that are United States
government-backed or rated AAA, and 95% of the fixed income portfolio were rated or classified as investment
grade. Percentages are based on the estimated fair values of the securities. Credit ratings reflect published ratings
obtained from Standard & Poor’s Rating Services, DBRS, Inc., Fitch Ratings, Inc. and Moody’s Investor
Services, Inc. If a security was rated differently among the rating agencies, the lowest rating was selected.

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, 2015, the Company employed 17,955 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 10 to 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.

11

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

Historically, 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, 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 and settlement service providers, as well as securities
in its investment portfolio, 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 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, 2015 are $1.0 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 and financial condition.

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.

12

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. 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.

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 continuous 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.

We increasingly utilize social media to communicate with customers, vendors, current and potential
employees and other individuals interested in our Company. Information delivered via social media can be easily
accessed and rapidly disseminated, and the use of social media by us and other parties could result in reputational
harm, decreased customer loyalty or other issues that could diminish the value of the Company’s brand or result
in significant liability.

13

7. The breadth of the Consumer Financial Protection Bureau’s rulemaking and supervisory powers may

increase our costs and require changes in our business

The Consumer Financial Protection Bureau (“CFPB”) has broad authority to regulate, among other areas,
the mortgage and real estate markets, including our domestic subsidiaries, in matters which impact consumers.
This authority includes the enforcement of federal consumer financial laws, including the Real Estate Settlement
Procedures Act. The CFPB has been actively utilizing its supervisory powers by bringing enforcement actions
against various participants in the mortgage and settlement
industries. It has also actively proposed and
implemented regulations pertaining to the mortgage and settlement industries. The full manner in which the
CFPB will utilize its rulemaking and supervisory powers in the future is not known. Regulations issued by the
CFPB, or the manner in which it interprets and enforces existing consumer protection laws, have impacted and
could continue to impact the way in which we conduct our businesses and the profitability of those businesses.

8. The extent and duration of the impact of the CFPB’s TILA-RESPA integrated disclosure (TRID) rule

is not currently known

Implementation of the CFPB’s TRID rule, which applies to certain mortgage loan transactions originated on
or after October 3, 2015, has required extensive modifications to the process of closing a federally-regulated
mortgage loan. Compliance with the TRID rule also requires heightened coordination among market participants,
including by settlement service providers, such as the Company and its agents, with lenders and others. There can
be no assurance that the Company, its agents or other market participants will ultimately succeed in their
implementation efforts, or that consumers or the CFPB will be satisfied with the manner in which the TRID rule
has been implemented. The TRID rule also may impact other areas of the mortgage industry, including the
volume of loans being originated, and the extent and duration of the impact of the rule is not currently known.
The TRID rule, including the cost of compliance, the ultimate impact on the mortgage industry and any
enforcement actions or other proceedings in connection therewith, could adversely impact the Company’s
profitability and financial condition.

9. 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.

10. 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.

14

11. 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
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. As a result of these and other factors, the Company may find it financially
burdensome to acquire necessary data.

12. Changes in the Company’s relationships with large mortgage lenders or government–sponsored

enterprises could adversely affect the Company

The mortgage markets in the United States and Canada are concentrated. 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. Similarly, government-sponsored
enterprises, because of their significant role in the mortgage process, have significant influence over the
Company and other service providers. These circumstances could adversely affect the Company’s revenues and
profitability. Changes in the Company’s relationship with any of these lenders or government-sponsored
enterprises, the loss of all or a portion of the business the Company derives from these parties or any refusal of
these parties to accept the Company’s products and services could have a material adverse effect on the
Company.

13. 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, Inc., “A-” 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 $1.1 billion of total statutory capital and surplus as of December 31, 2015. 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.

14. 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 preferred and common stock. Securities in the Company’s investment portfolio are
interest rate (including call,
subject
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

to certain economic and financial market risks, such as credit risk,

15

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.

15. The Company’s pension plan is currently underfunded and pension expenses and funding obligations
could increase significantly as a result of decreases in interest rates or weak performance of financial markets
and its effect on plan assets

The Company is responsible for the obligations of its defined benefit pension plan. 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, 2015 by
$86.4 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.

16. 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, 70% to 80% 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. 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 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 $103.2 million. A material change in expected ultimate
losses and corresponding loss rates for older policy years is also possible, particularly for policy years with loss
ratios exceeding historical norms. The estimates made by management in determining the appropriate level of
IBNR reserves could ultimately prove to be materially different from actual claims experience.

17. 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. Recent case law in certain states also suggests that the Company is liable for the
actions or omissions of its agents in those states, regardless of contractual limitations. 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.

18. The Company’s risk mitigation efforts may prove inadequate

The Company assumes risks in the ordinary course of its business, including through the issuance of title
insurance policies and the provision of other products and services. The Company mitigates these risks through a

16

number of different means, including the implementation of underwriting policies and procedures and other
mechanisms for assessing risk. However, underwriting of title insurance policies and other risk-assumption
decisions frequently involve a substantial degree of individual judgment. The Company’s risk mitigation efforts
or the reliability of any necessary judgment may prove inadequate, especially in situations where the Company or
individuals involved in risk taking decisions are encouraged by customers or others, or because of competitive
pressures, to assume risks or to expeditiously make risk determinations. This circumstance could have an adverse
effect on the Company’s results of operations, financial condition and liquidity.

19. Systems damage, failures, interruptions and intrusions, wire transfer errors and unauthorized data
disclosures may disrupt the Company’s business, harm the Company’s reputation, result in material claims
for damages or otherwise adversely affect the Company

The Company uses computer systems to receive, process, store and transmit business information, including
highly sensitive non-public personal information as well as data from suppliers and other information upon
which its business relies. It also uses these systems to manage substantial cash, investment assets, bank deposits,
trust assets and escrow account balances on behalf of the Company and its customers, among other activities.
Many of the Company’s products, services and solutions involving the use of real property related data are fully
reliant on its systems and are only available electronically. Accordingly, for a variety of reasons, the integrity of
the Company’s computer systems and the protection of the information that resides on those systems are
critically important to its successful operation. The Company’s core computer systems are primarily located in
two data centers. The Company recently took over management of its primary data center and the secondary data
center is maintained and managed by a third party.

The Company’s computer systems and systems used by its agents, suppliers and customers have been
subject to, and are likely to continue to be the target of, computer viruses, cyber attacks, phishing attacks and
other malicious attacks. These attacks have increased in frequency and sophistication in recent years, and could
expose the Company to system-related damage, failures, interruptions, and other negative events. Further, certain
other potential causes of system damage or other negative system-related events are wholly or partially beyond
the Company’s control, such as natural disasters, vendor failures to satisfy service level requirements and power
or telecommunications failures. These incidents, regardless of their underlying causes, could disrupt
the
in the loss or unauthorized release, gathering, monitoring or
Company’s business and could also result
destruction of confidential, proprietary and other information pertaining to the Company,
its customers,
employees, agents or suppliers.

Certain laws and contracts the Company has entered into require it to notify various parties, including
consumers or customers, in the event of certain actual or potential data breaches or systems failures. These
notifications can result, among other things, in the loss of customers, lawsuits, adverse publicity, diversion of
management’s time and energy, the attention of regulatory authorities, fines and disruptions in sales. Further, the
Company’s financial institution customers have obligations to safeguard their computer systems and sensitive
information and it may be bound contractually and/or by regulation to comply with the same requirements. If the
Company fails to comply with applicable regulations and contractual requirements, it could be exposed to
lawsuits, governmental proceedings or the imposition of fines, among other consequences.

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, incorrect processing and similar
errors that could result in lost funds.

Accordingly, any inability to prevent or adequately respond to the issues described above could disrupt the
Company’s business, inhibit its ability to retain existing customers or attract new customers and/or result in
financial losses, litigation, increased costs or other adverse consequences which could be material to the
Company.

17

20. The Company may not be able to realize the benefits of its offshore operations

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.

21. Acquisitions may have an adverse effect on our business

The Company has in the past acquired, and is expected to acquire in the future, other businesses. When
businesses are acquired, the Company may not be able to integrate or manage these businesses in such a manner
as to realize the anticipated synergies or otherwise produce returns that justify the investment. Acquired
businesses may subject the Company to increased regulatory or compliance requirements. The Company may not
be able to successfully retain employees of acquired businesses or integrate them, and could lose customers,
suppliers or other partners as a result of the acquisitions. For these and other reasons, including changes in
market conditions, the projections used to value the acquired businesses may prove inaccurate. In addition, the
Company might incur unanticipated liabilities from acquisitions. These and other factors related to acquisitions
could have a material adverse effect on the Company’s results of operations, financial condition and liquidity.
The Company’s management also will continue to be required to dedicate substantial time and effort to the
integration of its acquisitions. These efforts could divert management’s focus and resources from other strategic
opportunities and operational matters.

22. 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, 2015, under such regulations,
the maximum amount of dividends, loans and advances available in 2016 from these insurance subsidiaries,
without prior approval from applicable regulators, was $547.9 million.

23. 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;

18

•

•

•

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% 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 $55.0
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 $28.8 million as of December 31, 2015.

One of our subsidiaries in the title insurance and services segment leases an aggregate of approximately
188,000 square feet of office space in three buildings of the International Technology Park in Bangalore, India
pursuant to various lease agreements. All of the space is leased pursuant to agreements that expire no later than
2017.

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. These lawsuits

frequently 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

19

certification or compelled arbitration, the plaintiffs lose the financial incentive to proceed with the case (or the
amount at issue effectively becomes de minimis). 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

•

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.

A court has granted class certification in Lewis. 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.

•

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 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. The Company believes the estimate of the possible loss
or range of loss is not material to the consolidated financial statements as a whole.

•

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.

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.

• misclassified certain employees, including

•

Sager v. Interthinx, Inc., filed on January 23, 2015 and pending in the Superior Court of the State of
California, County of Los Angeles, and

• Weber v. Interthinx, Inc., et al., filed on April 17, 2015 and pending in the United States District

Court for the Eastern District of Missouri.

20

These lawsuits are putative class actions for which a class has not been certified. For the reasons
described above, as well as the applicability of certain indemnification rights the Company may have,
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, denied home warranty claims, failed
to timely file certain documents, and gave items of value to developers, builders, brokers and others as
inducements to refer business in violation of certain laws, such as consumer protection laws and laws
generally prohibiting unfair business practices, and certain obligations, including

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

the United States District Court of New Jersey,

• Downing v. First American Title Insurance Company, et al., filed on October 2, 2015 and pending

in the United States District Court for the Northern District of Georgia,

• 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, et al., filed on June 15, 2006 and pending in the

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

• McCormick v. First American Real Estate Services, Inc., et al., filed on December 31, 2015 and

pending in the Superior Court of the State of California, County of Orange,

•

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,

• 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, and

•

In re First American Home Buyers Protection Corporation, consolidated on October 9, 2014 and
pending in the United States District Court for the Southern District of California.

All of these lawsuits, except Kaufman and Kirk, are putative class actions for which a class has not
been certified. In Kaufman a class was certified but that certification was subsequently vacated. A trial
of the Kirk matter has concluded, plaintiff has filed a notice of appeal and the Company filed a cross
appeal. 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 or, where the Company has been able to make an
estimate, the Company believes the amount is not material to the consolidated financial statements as a
whole.

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 consolidated 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

21

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. With respect to each of these proceedings, 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
consolidated financial statements as a whole.

Item 4. Mine Safety Disclosures

Not applicable.

22

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 16, 2016, was 2,568.

High and low stock prices and dividends declared for 2015 and 2014 are set forth in the table below.

Period

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

2015

2014

High-low range

$32.59-37.75
$34.50-38.19
$36.88-43.16
$34.39-40.72

Cash
dividends

$0.25
$0.25
$0.25
$0.25

High-low range

$24.81-28.19
$25.45-28.92
$26.82-28.67
$26.20-34.51

Cash
dividends

$0.12
$0.24
$0.24
$0.24

In January 2016, the Company’s board of directors declared a cash dividend of $0.26 per share. 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, 2015, 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 and
expanded on March 11, 2014, which program has no expiration date, the Company may repurchase up to $250.0
million of the Company’s issued and outstanding common stock. The Company did not repurchase any shares
under this plan during the quarter ended December 31, 2015. In January 2016, the Company repurchased 14,200
shares at an average price of $31.97 per share. Cumulatively the Company has repurchased $67.6 million
(including commissions) of its shares and has the authority to repurchase an additional $182.4 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.

23

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 December 31, 2010 through December 31, 2015. The comparison assumes an
investment of $100 on December 31, 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

$280
$270
$260
$250
$240
$230
$220
$210
$200
$190
$180
$170
$160
$150
$140
$130
$120
$110
$100
$90
$80
$70

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

First American Financial

Custom Peer Group

Russell 2000 Financial Services Index

Comparison of Cumulative Total Return

First
American Financial
Corporation
(FAF) (1)

Custom Peer
Group (1)(2)

Russell 2000
Financial
Services Index (1)

December 31, 2010 . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . .
December 31, 2012 . . . . . . . . . . . . . . . . . . . . . .
December 31, 2013 . . . . . . . . . . . . . . . . . . . . . .
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .

$100
$ 86
$167
$199
$247
$269

$100
$109
$127
$181
$200
$226

$100
$ 97
$118
$155
$169
$170

(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. (not including its FNFV tracking stock);
The Hanover Insurance Group, Inc.; Kemper Corporation; Mercury General Corporation; Old Republic

24

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.

Item 6. Selected Financial Data

The selected historical consolidated financial data for First American Financial Corporation (the
“Company”) as of and for each of the five years in the period ended December 31, 2015, have been derived from
the Company’s consolidated financial statements. The selected historical consolidated financial data should be
read in conjunction with “Item 8. Financial Statements and Supplementary Data,”“Item 1—Business,” and
“Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

First American Financial Corporation and Subsidiary Companies

Year Ended December 31,

2015

2014

2013

2012

2011

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to the Company . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
Return on average stockholders’ equity . . . . . . . .
Dividends on common shares . . . . . . . . . . . . . . . .
Per share of common stock (Note A)—

Net income attributable to the Company:

(in thousands, except percentages, per share amounts and employee data)
$3,820,574
$4,956,077
$5,175,456
78,579
$
$ 187,064
$ 288,870

$4,541,821
$ 301,728

$4,677,949
$ 234,215

$
784
$ 288,086
$8,254,351
$ 585,102
$2,758,502

$
681
$ 233,534
$7,666,100
$ 587,337
$2,572,917

$
697
$ 186,367
$6,559,183
$ 310,285
$2,453,049

$
687
$ 301,041
$6,077,626
$ 229,760
$2,348,065

303
$
$
78,276
$5,371,655
$ 299,975
$2,028,600

10.8%

9.3%

7.8%

13.8%

3.9%

$ 108,524

$

89,939

$

51,324

$

37,612

$

24,784

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . .

$
$
$
$

2.65
2.62
25.28
1.00

$
$
$
$

2.18
2.15
23.93
0.84

$
$
$
$

1.74
1.71
23.16
0.48

$
$
$
$

2.83
2.77
21.90
0.36

$
$
$
$

0.74
0.73
19.24
0.24

Number of common shares outstanding
Weighted average during the year:

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

Other Operating Data (unaudited):

Title orders opened (Note B) . . . . . . . . . . . . . . .
Title orders closed (Note B) . . . . . . . . . . . . . . . .
Number of employees (Note C) . . . . . . . . . . . . .

108,427
109,826
109,098

1,262
882
17,955

106,884
108,688
107,541

1,156
816
17,103

106,991
109,102
105,900

1,385
1,103
17,292

106,307
108,542
107,239

1,635
1,192
17,312

105,197
106,914
105,410

1,249
913
16,117

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

do not include orders processed by agents.

Note C—Number of employees is based on actual employee headcount.

25

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

CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K 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 THE FACTORS SET FORTH ON PAGE 3 OF THIS ANNUAL REPORT. 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.

This Management’s Discussion and Analysis contains certain financial measures that are not presented in
accordance with generally accepted accounting principles (“GAAP”), including adjusted information and other
revenues, adjusted personnel costs, adjusted other operating expenses and adjusted depreciation and
amortization expense, in each case excluding the effects of recent acquisitions. The Company is presenting these
non-GAAP financial measures because they provide the Company’s management and readers of this Annual
Report on Form 10-K with additional insight into the operational performance of the Company relative to earlier
periods. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP
financial information. In this Annual Report on Form 10-K, these non-GAAP financial measures have been
presented with, and reconciled to, the most directly comparable GAAP financial measures. Readers of this
Annual Report on Form 10-K should use these non-GAAP financial measures only in conjunction with the
comparable GAAP financial measures.

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with GAAP and reflect the
consolidated operations of the Company. 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 affiliates 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
affiliates in which the Company does not exercise significant influence over the investee are accounted for under
the cost method.

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 closing and/or escrow services; accommodates tax-deferred
exchanges of real estate; provides products, services and solutions involving the use of real property
related data designed to mitigate risk or otherwise facilitate real estate transactions; 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.

26

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 the
District of Columbia and actively issues policies in 46 states. In certain markets 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, such as
heating and air conditioning 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.

Critical Accounting Estimates

The preparation of financial statements in accordance with GAAP requires the application of accounting
policies that often involve a significant degree of judgment. The Company’s management considers the
accounting policies described below to be the most dependent on the application of estimates and assumptions in
preparing the Company’s consolidated financial statements. See Note 1 Description of the Company to the
consolidated financial statements for a more detailed description of the Company’s significant accounting
policies.

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 an in-house actuarial review. 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 conditions in the real estate and mortgage markets, 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, 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 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.

27

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.

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. 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.

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, 70% to 80% 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. 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
$103.2 million. A material change in expected ultimate losses and corresponding loss rates for older policy years
is also possible, particularly for policy years with loss ratios exceeding historical norms. 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 adjusted for estimated future increases in costs.

A summary of the Company’s loss reserves is as follows:

(in thousands, except percentages)

December 31, 2015

December 31, 2014

Known title claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incurred but not reported claims . . . . . . . . . . . . . . . . . . .

$ 87,543
844,364

8.9% $ 165,330
802,069
85.8%

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

931,907
51,973

94.7%
5.3%

967,399
44,381

16.3%
79.3%

95.6%
4.4%

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

$983,880

100.0% $1,011,780

100.0%

28

Activity in the reserve for known title claims is summarized as follows:

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision transferred from IBNR title claims related to:

Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Payments, net of recoveries, related to:

Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

December 31,

2015

2014

2013

$165,330

(in thousands)
$135,478

$133,070

13,569
184,473
198,042

29,939
274,481
304,420

17,720
280,373
298,093

11,258
243,519
254,777
(21,052)
$ 87,543

22,272
249,851
272,123
(2,445)
$165,330

15,355
280,627
295,982
297
$135,478

“Other” for 2015 included recoveries of $23.8 million on reinsured losses related to a large commercial title

claim.

The provision transferred from IBNR title claims related to current year decreased by $16.4 million in 2015
from 2014 and increased by $12.2 million in 2014 from 2013 and payments, net of recoveries, related to current
year decreased by $11.0 million in 2015 from 2014 and increased by $6.9 million in 2014 from 2013, reflecting
variability in claims volumes characteristic of a policy year during its first year of development. In addition, 2014
experienced a higher level of fraud losses when compared to 2015 and 2013.

The provision transferred from IBNR title claims related to prior years decreased by $90.0 million, or 32.8%, in
2015 from 2014 and decreased $5.9 million, or 2.1%, in 2014 from 2013. Payments, net of recoveries, related to prior
years decreased by $6.3 million, or 2.5%, in 2015 from 2014 and decreased $30.8 million, or 11.0%, in 2014 from
2013. Generally, the provision transferred from IBNR title claims and payments are expected to decline with the runoff
of older policy years that have higher expected ultimate losses, particularly policy years 2005 through 2008. This trend
was partially impacted by the timing of the provision transferred from IBNR title claims and payments associated with
certain large claims. During 2014, the Company transferred provision of $56.0 million from IBNR title claims related
to these large claims, and the Company paid $35.0 million, net of $21.0 million recovered through reinsurance, during
the first quarter of 2015 to settle these claims.

Activity in the reserve for incurred but not reported title claims is summarized as follows:

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision related to:

Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Provision transferred to known title claims related to:

Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

29

December 31,

2015

2014

2013

$802,069

(in thousands)
$840,104

$805,430

170,789
93,092
263,881

188,997
64,133
253,130

194,520
150,209
344,729

13,569
184,473
198,042
(23,544)
$844,364

29,939
274,481
304,420
13,255
$802,069

17,720
280,373
298,093
(11,962)
$840,104

“Other” primarily included foreign currency translation gains and losses, assets acquired in connection with
claim settlements, and recoveries. “Other” for 2014 included a reinsurance receivable of $25.0 million that
related to a large commercial title claim.

The provision related to current year decreased by $18.2 million, or 9.6%, in 2015 from 2014. This decrease
was attributable to a lower current year loss rate in 2015 when compared to 2014, partly offset by a 13.0%
increase in title premiums and escrow fees in 2015 from 2014. The current year loss rate in 2015 was 4.2%
compared to 5.3% in 2014.

The provision related to current year decreased by $5.5 million, or 2.8%, in 2014 from 2013. This decrease
was attributable to a 7.7% decline in title premiums and escrow fees in 2014 from 2013, partly offset by a higher
current year loss rate in 2014 when compared to 2013. The current year loss rate in 2014 was 5.3% compared to
5.0% in 2013.

For further discussion of title provision recorded in 2015, 2014 and 2013, see Results of Operations, pages

41 and 42.

Fair value of investment portfolio. The Company categorizes 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 Company (observable
inputs) and the Company’s own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). The hierarchy for inputs used in determining
fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that
observable inputs be used when available. The hierarchy level assigned to each security in the Company’s
available-for-sale portfolio was based on management’s assessment of the transparency and reliability of the
inputs used to estimate the fair values at the measurement date. See Note 14 Fair Value Measurements to the
consolidated financial statements for a more detailed description of the three-level hierarchy and a description for
each level.

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 values of debt securities were 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 government bonds, governmental agency bonds, governmental agency mortgage-
backed securities, U.S. and foreign corporate debt securities include, but are not limited to, benchmark yields,

30

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. Non-agency mortgage-backed securities and certain U.S. and foreign corporate debt
securities were not actively traded and there were fewer observable inputs available requiring the use of more
judgment in determining their fair values, which resulted in their classification as Level 3.

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, 2015, the Company did 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), 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.

The Company recorded other-than-temporary impairment losses considered to be credit related on its debt
securities of $2.2 million and $1.7 million for the years ended December 31, 2015 and 2014, respectively. The
Company did not record any other-than-temporary impairment losses related to its debt securities for the year
ended December 31, 2013.

Fair value of equity securities

The fair values 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.

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
fair 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 security for a period of time sufficient to allow for any anticipated recovery.

When an equity security has been in an unrealized loss position and its fair value is less than 80% of cost for
twelve consecutive months, the Company’s review of the security includes the above noted factors as well as
other evidence that might exist supporting the view that the security will recover its value in the foreseeable

31

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. The Company did not record any other-than-temporary impairment
losses related to its equity securities for the years ended December 31, 2015, 2014 and 2013.

Litigation and regulatory contingencies. The Company and its subsidiaries are parties to a number of
ongoing routine and non-ordinary course legal proceedings. For those 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 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. 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. 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.

Business Combinations. The Company allocates the fair value of purchase consideration to the tangible
assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess
of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is
recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management
makes significant estimates and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash
flows, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed
to be reasonable, but which are inherently uncertain and unpredictable and, as a result, may differ from actual
results. Other estimates associated with the accounting for acquisitions may change as additional information
becomes available regarding the assets acquired and liabilities assumed.

Impairment assessment 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

32

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 Step 1
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 Step 1, 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. 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
reporting unit.

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 elected to perform qualitative assessments for 2015, 2014 and 2013, the results of which
supported the conclusion that the fair values of the Company’s reporting units were not more likely than not less
than their carrying amounts and, therefore, a quantitative impairment test was not considered necessary. As a
result of these assessments, the Company did not record any goodwill impairment losses for 2015, 2014 or 2013.

Impairment assessment

for other intangible assets. Management uses estimated future cash flows
(undiscounted and excluding interest) to measure the recoverability of intangible assets with finite lives,
whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. If the
undiscounted cash flow analysis indicates that the carrying amount is not recoverable, an impairment loss is
recorded for the excess of the carrying amount over its fair value.

Management’s impairment assessment for indefinite-lived other intangible assets may involve calculating
the fair value by using a discounted cash flow analysis or through a market approach valuation. If the fair value
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.

Impairment of equity method investments in affiliates. The carrying value of equity method investments in
affiliates is written down, or impaired, to fair value when a decline in value is considered to be other-than-
temporary. In making the determination as to whether an individual investment in an affiliate is impaired, the

33

Company assesses the 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 the Company), 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 is operating. The Company recognized impairment losses of $2.0 million, $22.5 million and $7.8 million
on its equity method investments for 2015, 2014 and 2013, respectively.

Impairment of property and equipment. Management uses estimated future cash flows (undiscounted and
excluding interest) to measure the recoverability of property and equipment whenever events or changes in
circumstances indicate that the carrying value may not be fully recoverable. If the undiscounted cash flow
analysis indicates that the carrying amount is not recoverable, an impairment loss is recorded for the excess of
the carrying amount over its fair value. The Company recognized impairment losses on software of $10.9
million, $1.2 million and $1.1 million for the years ended December 31, 2015, 2014 and 2013, respectively.

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 income tax expense.

Employee benefit plans. The Company recognizes the overfunded or underfunded status of its defined
benefit pension and supplemental benefit 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 annually as of December 31.

The assumptions that have had the most significant impact to net periodic costs are the discount rate and
expected long-term rate of return on plan assets. The discount rate assumption 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 assets of the defined benefit pension plans 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. See Note 13 Employee Benefit Plans to the consolidated financial statements for a further
description of the expected long-term rate of return on plan assets as well as asset allocation targets.

At December 31, 2015, the Company elected to change the method it uses to estimate the interest and
service components of net periodic cost for its defined benefit pension and supplemental benefit plans, which
will impact the estimate of net periodic cost beginning in 2016. The Company will utilize a full yield curve
approach in the estimation of these components by applying the specific spot rates along the yield curve used in

34

the determination of the benefit obligation to the relevant projected cash flows. Previously, the Company
estimated the interest and service cost components utilizing a single weighted-average discount rate derived from
the yield curve used to measure the benefit obligation at the beginning of the period. This change compared to
the previous method will impact the interest and service components of net periodic cost in future periods. The
Company made this change to provide a more precise measurement of interest and service costs by improving
the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change
does not affect the measurement of the total benefit obligation as the change in the interest and service costs is
offset in net actuarial gains and losses. The impact to interest and service costs is not expected to be significant.
The Company will account for this change prospectively as a change in accounting estimate.

Weighted-average actuarial assumptions used to determine costs for the plans for the years ended

December 31, 2015 and 2014, were as follows:

December 31,

2015

2014

Defined benefit pension plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.07% 4.97%
6.50% 6.50%

Unfunded supplemental benefit plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.00% 4.80%

Weighted-average actuarial assumptions used to determine benefit obligations for the plans at December 31,

2015 and 2014, were as follows:

Defined benefit pension plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.31% 4.07%

Unfunded supplemental benefit plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.33% 4.00%

December 31,

2015

2014

Recently Adopted Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance which changes
the criteria for determining which disposals are required to be presented as discontinued operations and modifies
related disclosure requirements. The updated guidance is effective for interim and annual reporting periods
beginning after December 15, 2014, with early adoption permitted. The adoption of this guidance had no impact
on the Company’s consolidated financial statements.

Pending Accounting Pronouncements

In September 2015, the FASB issued updated guidance intended to simplify the accounting for adjustments
made to provisional amounts recognized in a business combination and eliminates the requirement
to
retrospectively account for those adjustments. The updated guidance is effective for interim and annual reporting
periods beginning after December 15, 2015 and applies prospectively to adjustments made to provisional
amounts that occur after the effective date of this guidance with early adoption permitted for financial statements
that have not been issued. The Company does not expect the adoption of this guidance to have a material impact
on its consolidated financial statements.

In August 2015, the FASB issued updated guidance relating to the Securities and Exchange Commission
Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting on the presentation and
issuance costs associated with line-of-credit arrangements. The updated
subsequent measurement of debt

35

guidance allows for the deferral and presentation of debt issuance costs as an asset which may be amortized
ratably over the term of the line-of-credit arrangement, regardless of whether there are any related outstanding
borrowings. The updated guidance is effective for interim and annual reporting periods beginning after
December 15, 2015, with early adoption permitted. The Company does not expect the adoption of this guidance
to have a material impact on its consolidated financial statements.

In May 2015, the FASB issued updated disclosure guidance related to short-duration contracts issued by
insurance entities. The updated guidance is intended to increase the transparency of significant estimates made in
measuring liabilities for unpaid claims and claim adjustment expenses and to provide additional insight into an
insurance entity’s ability to underwrite and anticipate costs associated with claims. The updated guidance is
effective for annual reporting periods beginning after December 15, 2015 and for interim periods within annual
periods beginning after December 15, 2016, with early adoption permitted. Except for the disclosure
requirements, the Company does not expect the adoption of this guidance to impact its consolidated financial
statements.

In May 2015, the FASB issued updated guidance intended to eliminate the diversity in practice surrounding
how investments measured at net asset value under the practical expedient with future redemption dates have
been categorized in the fair value hierarchy. Under the updated guidance, investments for which fair value is
measured at net asset value per share using the practical expedient should no longer be categorized in the fair
value hierarchy. The updated guidance requires retrospective adoption for all periods presented and is effective
for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted.
Except for the disclosure requirements, the Company does not expect the adoption of this guidance to impact its
consolidated financial statements.

In April 2015, the FASB issued updated guidance intended to clarify the accounting treatment for cloud
computing arrangements that include software licenses. Under the updated guidance, if a cloud computing
arrangement includes a software license, the customer should account for the software license element of the
arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does
not include a software license, the customer should account for the arrangement as a service contract. The
updated guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with
early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact
on its consolidated financial statements.

In April 2015, the FASB issued updated guidance intended to simplify, and provide consistency to, the
presentation of debt issuance costs. The new standard requires that debt issuance costs be presented in the
balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts.
The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2015,
with early adoption permitted. The Company does not expect the adoption of this guidance to have a material
impact on its consolidated financial statements.

In February 2015, the FASB issued updated guidance which changes the analysis that a reporting entity
must perform to determine whether it should consolidate certain types of legal entities. The updated guidance is
effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption
permitted. The Company expects the adoption of this guidance to have no impact on its consolidated financial
statements.

In June 2014, the FASB issued updated guidance intended to eliminate the diversity in practice regarding
share-based payment awards that include terms which provide for a performance target that affects vesting being
achieved after the requisite service period. The new standard requires that a performance target which affects
vesting and could be achieved after the requisite service period be treated as a performance condition that affects
vesting and should not be reflected in estimating the grant-date fair value. The updated guidance is effective for
interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The
Company expects the adoption of this guidance to have no impact on its consolidated financial statements.

36

In May 2014, the FASB issued updated guidance for recognizing revenue from contracts with customers to
provide a single, comprehensive revenue recognition model for all contracts with customers to improve
comparability within and across industries, and across capital markets. The new revenue standard contains
principles that an entity will apply to determine the measurement of revenue and the timing of recognition. The
underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to
customers at an amount that the entity expects to be entitled to in exchange for those goods or services. Revenue
from insurance contracts is not within the scope of this guidance. The updated guidance is effective for interim
and annual reporting periods beginning after December 15, 2016, with early adoption prohibited. In August 2015,
the FASB issued updated guidance which defers the effective date of this guidance by one year to interim and
annual reporting periods beginning after December 15, 2017, with early adoption permitted as of the original
effective date. The Company is currently assessing the impact of the new guidance on its 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 and refinancing of residential and commercial real estate. In the Company’s 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 residential purchase transactions. Traditionally, the greatest volume of
real estate activity, particularly residential purchase activity, has occurred in the spring and summer months.
However, changes in interest rates, as well as other changes in general economic conditions in the United States
and abroad, can cause fluctuations in the traditional pattern of real estate activity.

The Company’s total revenues for the year ended December 31, 2015 were $5.2 billion, which reflected an
increase of $0.5 billion, or 10.6%, when compared with $4.7 billion for the year ended December 31, 2014. This
increase was primarily attributable to increases in commercial business, residential purchase transactions and
residential refinance transactions during 2015. Direct premiums and escrow fees in the title insurance and
refinance
services segment
transactions increased 17.0%, 11.4% and 29.2%, respectively, in 2015 when compared to 2014.

residential purchase transactions and residential

from commercial business,

According to the Mortgage Bankers Association’s February 18, 2016 Mortgage Finance Forecast (the
“MBA Forecast”), residential mortgage originations in the United States (based on the total dollar value of the
transactions) increased 29.3% in 2015 when compared with 2014. According to the MBA Forecast, the dollar
amount of purchase originations increased 16.1% and refinance originations increased 49.2%. The higher volume
of domestic residential mortgage origination activity in 2015 contributed to a 4.7% increase in domestic
residential purchase orders closed per day and a 24.7% increase in domestic refinance orders closed per day by
the Company’s direct title operations in 2015 when compared to 2014.

Despite uncertainties in the economy, the Company remains optimistic that the housing market will
continue to strengthen in 2016. The Company anticipates growth in the residential purchase market and is
benefiting from the recent decline in mortgage rates, which is positively impacting residential refinance volumes.
The Company’s direct title operations opened 1,700 refinance orders per day in January 2016 and have opened
approximately 2,300 refinance orders per day so far in February 2016 (measured through February 17, 2016). It
is uncertain how long this level of elevated refinance activity will continue. The Company expects growth rates
in the commercial market to moderate relative to those experienced in 2015.

The Consumer Financial Protection Bureau (“CFPB”) has broad authority to regulate, among other areas,
the mortgage and real estate markets in matters which impact consumers. The CFPB has implemented
including the TILA-RESPA integrated
regulations pertaining to the mortgage and settlement
disclosure (TRID) rule. Implementation of the TRID rule, which applies to certain mortgage loan transactions
originated on or after October 3, 2015, has required extensive modifications to the process of closing a

industries,

37

federally-regulated mortgage loan. Compliance with the TRID rule also requires heightened coordination among
market participants, including by settlement service providers, such as the Company and its agents, with lenders
and others. After experiencing some initial delays in closings, by the end of the fourth quarter of 2015, the
Company’s direct residential business returned to its typical closing timeframes. The full impact on closing
timeframes for the Company’s residential agency business for the fourth quarter of 2015 is not yet known. While
initial facts and circumstances related to the Company’s implementation of the TRID rule appear positive, the
full impact of the TRID rule and the extent to which such impact is temporary or permanent is not currently
known. There can be no assurance that the Company, its agents or other market participants will ultimately
succeed in their implementation efforts, or that consumers or the CFPB will be satisfied with the manner in
which the TRID rule has been implemented. The TRID rule may also impact other areas of the mortgage
industry, including the volume of loans being originated.

During the fourth quarter of 2015, the Company recorded certain reclassifications and revisions to its
consolidated statements of income for the years ended December 31, 2014 and 2013. For further discussion of
these reclassifications and revisions, see Note 1 Description of the Company to the consolidated financial
statements, pages 60 and 61.

Title Insurance and Services

2015

2014

2013

2015 vs. 2014

2014 vs. 2013

$ Change % Change

$ Change % Change

(in thousands, except percentages)

Revenues

Direct premiums and

escrow fees . . . . . . $1,929,783
2,098,265

Agent premiums . . . .
Information and

other

. . . . . . . . . . .

669,984

Net investment

$1,698,430
1,867,402

$1,803,637
2,061,404

$231,353
230,863

13.6
12.4

$(105,207)
(194,002)

(5.8)
(9.4)

654,961

661,107

15,023

2.3

(6,146)

(0.9)

income . . . . . . . . . .

97,520

59,785

76,606

37,735

63.1

(16,821)

(22.0)

Net realized

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

Expenses

Personnel costs . . . . .
Premiums retained by
agents . . . . . . . . . .

Other operating

expenses . . . . . . . .

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

Depreciation and

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

Income before income

(7,442)
4,788,110

23,850
4,304,428

3,334
4,606,088

(31,292)
483,682

(131.2)
11.2

20,516
(301,660)

NM1
(6.5)

1,491,892

1,338,011

1,380,527

153,881

11.5

(42,516)

(3.1)

1,656,722

1,472,066

1,637,561

184,656

12.5

(165,495)

(10.1)

745,278

736,491

773,837

8,787

1.2

(37,346)

(4.8)

263,881

253,122

343,461

10,759

4.3

(90,339)

(26.3)

80,359
57,500
2,524
4,298,156

77,820
51,098
2,796
3,931,404

66,956
50,980
2,601
4,255,923

2,539
6,402
(272)
366,752

3.3
12.5
(9.7)
9.3

10,864
118
195
(324,519)

16.2
0.2
7.5
(7.6)

taxes . . . . . . . . . . . . . . . $ 489,954

$ 373,024

$ 350,165

$116,930

31.3

$ 22,859

6.5

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

10.2%

8.7%

7.6%

1.5% 17.2

1.1% 14.5

(1) Not meaningful

38

Direct premiums and escrow fees increased $231.4 million, or 13.6%, in 2015 from 2014 and decreased
$105.2 million, or 5.8%, in 2014 from 2013. The increase in direct premiums and escrow fees in 2015 from 2014
was primarily due to an increase in the domestic average revenues per order closed and an increase in domestic
title orders closed by the Company’s direct operations. The decrease in direct premiums and escrow fees in 2014
from 2013 was primarily due to a decrease in the number of domestic title orders closed by the Company’s direct
operations, partially offset by an increase in the domestic average revenues per order closed. The domestic
average revenues per order closed were $2,012, $1,886 and $1,498 for 2015, 2014 and 2013, respectively. The
6.7% increase in average revenues per order closed in 2015 from 2014 was primarily due to higher real estate
values and a greater number of large commercial deals that closed when compared to the prior year, partially
offset by an increase in the mix of direct revenues generated from lower premium residential refinance
transactions. The 25.9% increase in average revenues per order closed in 2014 from 2013 was primarily due to an
increase in the mix of direct revenues generated from higher premium residential purchase and commercial
transactions, higher real estate values, and a greater number of large commercial deals that closed when
compared to the prior year. The Company’s direct title operations closed 882,400, 816,400 and 1,103,400
domestic title orders during 2015, 2014 and 2013, respectively. The 8.1% increase in orders closed in 2015 from
2014 and the 26.0% decrease in orders closed in 2014 from 2013 were generally consistent with the changes in
residential mortgage origination activity in the United States as reported in the MBA Forecast.

Agent premiums increased $230.9 million, or 12.4%, in 2015 from 2014 and decreased $194.0 million, or
9.4%, in 2014 from 2013. 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 delay
between the agent’s issuance of a title policy and the Company’s recognition of agent premiums. Therefore, full
year agent premiums typically reflect mortgage origination activity from the fourth quarter of the prior year
through the third quarter of the current year. The increase in agent premiums in 2015 from 2014 was consistent
with the 16.9% increase in the Company’s direct premiums and escrow fees in the twelve months ended
September 30, 2015 as compared with the twelve months ended September 30, 2014. The decrease in agent
premiums in 2014 from 2013 was consistent with the 13.4% decrease in the Company’s direct premiums and
escrow fees in the twelve months ended September 30, 2014 as compared with the twelve months ended
September 30, 2013.

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, other non-insured settlement services,
and risk mitigation products and 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 $15.0 million, or 2.3%, in 2015 from 2014 and decreased $6.1
million, or 0.9%, in 2014 from 2013. Excluding the $23.2 million impact of new acquisitions for the year ended
December 31, 2015, information and other revenues decreased $8.2 million, or 1.2%, in 2015 compared to 2014.
The decrease in 2015 from 2014, adjusted for the impact of new acquisitions, was due to lower demand for the
Company’s default information products as a result of the decrease in domestic loss mitigation activities,
partially offset by higher demand for certain of the Company’s non-insured services and products, which is
directionally consistent with the increase in title insurance and services segment transaction volumes and
revenue. Excluding the $55.7 million impact of new acquisitions for the year ended December 31, 2014,
information and other revenues decreased $61.9 million, or 9.4%, in 2014 compared to 2013. The decrease in
2014 from 2013, adjusted for the impact of new acquisitions, was primarily attributable to lower demand for the
Company’s default and title plant information products as a result of the decrease in domestic loss mitigation,
foreclosure and mortgage origination activities.

Net investment income increased $37.7 million, or 63.1%, in 2015 from 2014 and decreased $16.8 million,
or 22.0%, in 2014 from 2013. The increase in 2015 from 2014 was primarily attributable to higher interest
income from the investment portfolio primarily due to higher average balances in the title insurance and services
segment’s debt securities portfolio in 2015 when compared to 2014 and lower impairment losses related to

39

investments accounted for using the equity method when compared to 2014. The decrease in 2014 from 2013
was primarily attributable to higher impairment losses and lower equity in earnings related to investments
accounted for using the equity method, partially offset by higher interest income from the investment portfolio
primarily due to higher average balances in the title insurance and services segment’s debt securities portfolio in
2014 when compared to 2013. Net investment income for 2015, 2014 and 2013 included impairment losses
recognized on investments accounted for using the equity method of $2.0 million, $22.5 million and $5.8 million,
respectively.

Net realized investment losses for the title insurance and services segment totaled $7.4 million for 2015 and
were primarily from the impairment of internally developed software and losses from the sales of equity
securities, partially offset by gains from the sale of real estate. Net realized investment gains were $23.9 million
for 2014 and were primarily from the sales of debt and equity securities and the sale of real estate. Net realized
investment gains were $3.3 million for 2013 and were primarily from the sale of real estate. Net realized
investment gains for 2015, 2014 and 2013 included $9.3 million, $7.5 million and $2.5 million, respectively, of
gains from the sale of real estate, and included impairment losses of $10.9 million, $2.4 million and $1.1 million,
respectively, primarily related to software and certain non-marketable investments accounted for using the cost
method.

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 primary 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 $153.9 million, or 11.5%, in 2015 from 2014 and decreased $42.5 million, or
3.1%,
in 2014 from 2013. Excluding the $19.3 million impact of new acquisitions for the year ended
December 31, 2015, personnel costs increased $134.6 million, or 10.1%, in 2015 compared to 2014. The increase
in 2015, adjusted for the impact of new acquisitions, was primarily attributable to higher incentive compensation
costs, which include commissions, bonuses and 401(k) savings plan matches, due to higher revenue and
profitability; higher salary expense due to higher headcount levels; and higher overtime and temporary labor
costs driven by higher order volumes. Excluding the $37.8 million impact of new acquisitions for the year ended
December 31, 2014, personnel costs decreased $80.3 million, or 5.8%, in 2014 compared to 2013. The decrease
in 2014, adjusted for the impact of new acquisitions, was primarily attributable to lower salary, payroll taxes,
employee benefit, temporary labor, overtime, and severance costs. The lower salary and payroll tax costs were
attributable to reduced headcount when compared to the prior year. The lower employee benefit costs were due
to changes in the Company’s medical and dental insurance plans, lower incurred medical claims and lower
headcount when compared to the prior year. The lower temporary labor and overtime costs were due to lower
order volumes when compared to the prior year. The lower severance costs were due to a lower level of
employee reductions made during 2014 when compared to 2013. Personnel costs included severance expense of
$5.6 million, $8.9 million and $17.5 million for 2015, 2014 and 2013, respectively.

The Company continues to closely monitor order volumes and related staffing levels and intends to adjust
staffing levels as considered necessary. The Company’s direct title operations opened 1,261,700, 1,155,500 and
1,384,600 domestic title orders in 2015, 2014 and 2013, respectively, representing an increase of 9.2% in 2015
from 2014 and a decrease of 16.5% in 2014 from 2013.

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

2015

2014

2013

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

(in thousands, except percentages)
$1,472,066

$1,656,722

$1,637,561

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

$2,098,265

$1,867,402

$2,061,404

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

79.0%

78.8%

79.4%

40

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 and state regulations. As a
result, the percentage of title premiums retained by agents can vary due to the geographic mix of revenues from
agency operations. The increase in the percentage of title premiums retained by agents in 2015 from 2014 was
primarily due to a change in the geographic mix of agency revenues towards higher agent-retention regions,
partially offset by increased revenue from the issuance of closing protection letters since agents typically do not
retain a portion of this revenue. The decrease in the percentage of title premiums retained by agents in 2014 from
2013 was primarily due to increased revenue from the issuance of closing protection letters and a change in the
geographic mix of agency revenues towards lower agent-retention regions.

Other operating expenses (principally related to direct operations) increased $8.8 million, or 1.2%, in 2015
from 2014 and decreased $37.3 million, or 4.8%, in 2014 from 2013. Excluding the $13.1 million impact of new
acquisitions for the year ended December 31, 2015, other operating expenses decreased $4.3 million, or 0.6%, in
2015 compared to 2014. The decrease in 2015 from 2014, adjusted for the impact of new acquisitions, was
primarily attributable to higher bank earnings credits and lower professional services expenses, partially offset by
higher production related expenses driven by higher order volumes and increased software related expenses. The
increase in bank earnings credits was driven by higher average balances invested with third-party financial
institutions and higher average earnings credit rates associated with those investments in 2015 when compared to
2014. Excluding the $29.0 million impact of new acquisitions for the year ended December 31, 2014, other
operating expenses decreased $66.3 million, or 8.6%, in 2014 compared to 2013. The decrease in 2014 from
2013, adjusted for the impact of new acquisitions, was primarily attributable to lower production related
expenses driven by lower order volumes.

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

escrow fees, was 6.6%, 7.1% and 8.9% for the years ended December 31, 2015, 2014 and 2013, respectively.

The current year rate of 6.6% reflects an ultimate loss rate of 4.2% for the current policy year and a $93.1
million net increase in loss reserve estimates for prior policy years. The increase in loss reserve estimates for
prior policy years was primarily attributable to a change in methodology used by the Company’s internal actuary
to estimate total ultimate losses. Historically, the internal actuary’s model did not separate claims experience for
large title claims from normal title claims activity. A large title claim is defined as a title claim with a total
ultimate loss in excess of $2.5 million. With this change in methodology, the model now separates claims
experience for large title claims from normal title claims activity when developing reserve estimates. As a result,
loss reserve estimates for prior policy years increased, primarily for policy years 2004 through 2007. The change
in methodology was implemented due to the increased frequency of large title claims experienced over the last
several years and the volatility associated with the timing and severity of large title claims. The Company
accounted for this change in methodology as a change in accounting estimate.

As of December 31, 2015, the IBNR claims reserve for the title insurance and services segment was $844.4
million, which reflected management’s best estimate. The Company’s internal actuary determined a range of
reasonable estimates of $719.5 million to $922.0 million. The range limits are $124.9 million below and $77.6
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 7.1% reflected an ultimate loss rate of 5.3% for policy year 2014 and a net increase in loss
reserve estimates for prior policy years of $64.1 million. The increase in loss reserve estimates for prior policy years
reflected claims development above expected levels during 2014, primarily from domestic commercial policies. The
reserve strengthening associated with domestic commercial policies was $41.4 million and was primarily attributable
to several large commercial claims, net of anticipated recoveries, mainly from mechanics liens, and primarily related to
policy years 2003, 2005 and 2007. Other factors, including a large international commercial claim from policy year
2004, also contributed to the net increase in loss reserve estimates for prior policy years.

41

The 2013 rate of 8.9% reflected an ultimate loss rate of 5.0% for policy year 2013 and a net increase in loss
reserve estimates for prior policy years of $150.2 million. The increase in loss reserve estimates for prior policy
years reflected claims development above expected levels during 2013, primarily from domestic lenders policies,
commercial policies and the Company’s guaranteed valuation product offered in Canada. The reserve
strengthening associated with domestic lenders policies was $67.4 million and was primarily attributable to
increased claims frequency for policy years 2004 through 2008. The increased claims frequency was primarily
due to mortgage lenders and servicers processing a large volume of foreclosures during 2013. As foreclosure
processing increases, lenders claims generally increase, because lenders claims typically come from foreclosures
in which the lender suffers a loss. At December 31, 2013, the Company expected the high level of foreclosure
processing to continue in the near term as mortgage lenders and servicers worked through their foreclosure
inventory. The reserve strengthening associated with domestic lenders policies reflected these expectations. The
reserve strengthening associated with commercial policies was $38.8 million and was primarily attributable to
several large commercial claims, mainly from mechanics liens, and primarily related to policy years 2007 and
2008. The reserve strengthening associated with the guaranteed valuation product offered in Canada was $21.7
million and was primarily attributable to claims frequency exceeding the Company’s expectations during 2013.
The increase in frequency primarily related to policy years 2007 and 2010.

The projected ultimate loss ratios, as of December 31, 2015, for policy years 2015, 2014 and 2013 were

4.2%, 4.7% and 3.7%, respectively.

Based on current expectations for claims activity, in 2016, the Company expects its provision for policy
losses and other claims, expressed as a percentage of title insurance premiums and escrow fees, to decline from
6.6%, the loss rate for 2015, to between 5% and 6%. However, this estimate may change based on actual claims
experience among other factors.

Depreciation and amortization expense increased $2.5 million, or 3.3%, in 2015 from 2014 and $10.9
million, or 16.2%, in 2014 from 2013. Excluding the $2.4 million impact of new acquisitions for the year ended
December 31, 2015, depreciation and amortization expense increased $0.1 million, or 0.1%, in 2015 compared to
2014. The increase in 2014 was primarily attributable to the depreciation and amortization expense associated
with developed technology and other intangible assets recorded in connection with new acquisitions completed
during the first quarter of 2014. Excluding the $8.6 million impact of new acquisitions for the year ended
December 31, 2014, depreciation and amortization expense increased $2.3 million, or 3.4%, in 2014 compared to
2013.

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 1.4% for the years ended December 31, 2015 and 2014 and 1.3% for the year
ended December 31, 2013.

The profit margins for the title insurance business 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. 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 10.2%, 8.7% and
7.6% for the years ended December 31, 2015, 2014 and 2013, respectively.

42

Specialty Insurance

Revenues

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

2015

2014

2013

2015 vs. 2014

2014 vs. 2013

$ Change % Change

$ Change % Change

(in thousands, except percentages)

$380,264
3,180
8,850

$353,812
2,260
7,288

$329,194
1,652
7,342

$ 26,452
920
1,562

7.5
40.7
21.4

$24,618
608
(54)

7.5
36.8
(0.7)

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

1,463

5,306

1,425

(3,843)

(72.4)

3,881

272.4

Expenses

Personnel costs . . . . . . . . . .
Other operating

393,757

368,666

339,613

25,091

65,742

63,072

59,510

2,670

6.8

4.2

29,053

3,562

8.6

6.0

expenses . . . . . . . . . . . . .

49,741

44,645

40,476

5,096

11.4

4,169

10.3

Provision for policy losses

and other claims . . . . . . .

227,211

196,901

186,895

30,310

15.4

10,006

Depreciation and

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

4,775
6,769

4,978
6,096

4,865
5,735

(203)
673

354,238

315,692

297,481

38,546

(4.1)
11.0

12.2

113
361

18,211

5.4

2.3
6.3

6.1

Income before income taxes . . .

$ 39,519 $ 52,974

$ 42,132

$(13,455)

(25.4)

$10,842

25.7

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

10.0%

14.4%

12.4%

(4.4)% (30.6)

2.0% 16.1

Direct premiums increased $26.5 million, or 7.5%, in 2015 from 2014 and $24.6 million, or 7.5%, in 2014
from 2013. The increases were driven by higher premiums earned in the home warranty business and, to a lesser
extent, higher premiums earned in the property and casualty business. The increase in 2015 from 2014 in the
home warranty business was in its real estate, direct to consumer and renewal channels and was driven by an
increase in the number of home warranty residential service contracts issued. The increase in 2014 from 2013 in
the home warranty business was in its real estate, direct to consumer and renewal channels and was driven by an
increase in the price charged for home warranty residential service contracts and an increase in the number of
contracts issued. The increases in the property and casualty business were primarily in its independent broker and
direct channels.

Net investment income increased $1.6 million, or 21.4%, in 2015 from 2014 and was essentially flat in 2014
when compared to 2013. The increase in 2015 from 2014 was primarily attributable to higher interest income
from the investment portfolio due to a higher average yield and higher average balances in the specialty
insurance segment’s debt securities portfolio in 2015 when compared to 2014.

Net realized investment gains for the specialty insurance segment totaled $1.5 million, $5.3 million and $1.4

million for 2015, 2014 and 2013, respectively, and were primarily from the sales of debt and equity securities.

Personnel costs and other operating expenses increased $7.8 million, or 7.2%, in 2015 from 2014 and $7.7
million, or 7.7%, in 2014 from 2013. The increase in 2015 from 2014 was primarily related to higher corporate
allocations for shared services support, higher offshore labor expense related to increased customer support
activities associated with the increased volume in the home warranty business, and higher advertising expense in
the home warranty business. The increase in 2014 from 2013 was primarily related to higher salary expense
associated with higher average employee headcount during the current year related to increased volume in the
home warranty business, higher incentive compensation related to higher revenue and profitability, higher
production related expenses due to increased volumes, and increased amortization of deferred acquisition costs.

43

The provision for home warranty claims, expressed as a percentage of home warranty premiums, was 56.5%
in 2015, 53.3% in 2014 and 57.5% in 2013. The increase in rate in 2015 from 2014 was primarily attributable to
higher contract servicing costs due to an increase in the frequency of higher cost claims related to more severe
weather conditions and less efficient claims management. The efficiency of claims management was adversely
impacted by the increased level of claims opened in 2015 as a result of the higher volume of home warranty
residential service contracts outstanding in 2015 when compared to 2014. The decrease in rate in 2014 from 2013
was primarily attributable to lower claims frequency and lower contract servicing costs due to milder weather
conditions during the second and third quarters of 2014 when compared to the respective quarters of 2013. The
rate in 2014 also benefited from an improvement in claims management in 2014 when compared to 2013.

The provision for property and casualty claims, expressed as a percentage of property and casualty
insurance premiums, was 66.4% in 2015, 60.1% in 2014 and 55.4% in 2013. The increase in rate in 2015 from
2014 was primarily attributable to wildfires in northern California, hail storms in New Mexico, and an increase in
the severity of claims, partially offset by a decrease in the frequency of claims. The increase in rate in 2014 from
2013 was primarily attributable to higher claims severity and frequency. 2014 was impacted by the severe winter
weather experienced in the first quarter and the California wildfires that occurred during the second quarter.

Premium taxes as a percentage of specialty insurance segment premiums were 1.8% in 2015 and 1.7% in

2014 and 2013.

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 in the year of renewal. 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
premium revenues increase. Pre-tax margins were 10.0%, 14.4% and 12.4% for 2015, 2014 and 2013,
respectively.

Corporate

Revenues

Net investment (losses)

2015

2014

2013

2015 vs. 2014

2014 vs. 2013

$ Change % Change

$ Change % Change

(in thousands, except percentages)

income . . . . . . . . . . . . . . . . $ (5,387) $ 5,504 $ 8,556 $(10,891)

(197.9)

$ (3,052)

(35.7)

Net realized investment

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

(568)

911

4,452

(1,479)

(162.3)

(3,541)

(79.5)

(5,955)

6,415

13,008

(12,370)

(192.8)

(6,593)

(50.7)

Expenses

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

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

37,301
25,976

34,545
26,528

48,960
27,264

2,756
(552)

8.0
(2.1)

(14,415)
(736)

(29.4)
(2.7)

462
27,014

90,753

2,799
17,981

81,853

3,095
15,278

94,597

(2,337)
9,033

(83.5)
50.2

(296)
2,703

(9.6)
17.7

8,900

10.9

(12,744)

(13.5)

Loss before income taxes . . . $(96,708) $(75,438) $(81,589) $(21,270)

(28.2)

$ 6,151

7.5

Net investment losses totaled $5.4 million in 2015 and net investment income totaled $5.5 million and $8.6
million in 2014 and 2013, respectively. The change in net investment income for all three years is primarily
attributable to fluctuations in earnings on investments associated with the Company’s deferred compensation

44

plan. Net investment losses for 2015 were impacted by a one-time non-cash charge of $4.0 million, recorded
during the first quarter of 2015, related to the investments associated with the Company’s deferred compensation
plan. Net investment income for 2013 included impairment losses recognized on investments accounted for using
the equity method of $2.0 million.

Net realized investment

losses totaled $0.6 million in 2015 and were primarily attributable to the
impairment of a non-marketable investment accounted for using the cost method. Net realized investment gains
totaled $0.9 million and $4.5 million in 2014 and 2013, respectively, and were attributable to the sale of non-
marketable investments accounted for using the cost method.

Corporate personnel costs and other operating expenses were $63.3 million, $61.1 million and $76.2 million
in 2015, 2014 and 2013, respectively. The increase for 2015 was primarily attributable to increased expense
related to the Company’s defined benefit pension and supplemental benefit plans, partially offset by decreased
expense related to the Company’s deferred compensation plan. The decrease for 2014 was primarily attributable
to decreased expense associated with the Company’s defined benefit pension, supplemental benefit and deferred
compensation plans.

Depreciation and amortization expense was $0.5 million, $2.8 million and $3.1 million in 2015, 2014 and

2013, respectively. The decrease in 2015 was due to a noncompete asset that was fully amortized during 2014.

Interest expense increased $9.0 million in 2015 from 2014 and $2.7 million in 2014 from 2013. Interest
expense increased in both 2015 and 2014 primarily due to the Company’s issuance of $300.0 million of debt in
November 2014. Interest expense related to intercompany notes payable to the title insurance and services and
specialty insurance segments was $0.4 million, $1.5 million and $2.6 million for the years ended December 31,
2015, 2014 and 2013, 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, 2015, 2014 and 2013.

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,

2015

2014

2013

(in thousands, except percentages)

Taxes calculated at federal rate . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
State taxes, net of federal benefit
Change in liability for tax positions . . . . . . . . . . . . . . .
Foreign income taxed at different rates . . . . . . . . . . . . .
Foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$151,468
4,581
1,094
(7,111)
(1,710)
(4,427)

35.0% $122,696
2,891
1.1
412
0.3
(6,091)
(1.6)
(2,184)
(0.4)
(1,379)
(1.1)

35.0% $108,748
11,480
0.8
3,537
0.1
8,567
(1.7)
(5,640)
(0.6)
(3,048)
(0.4)

35.0%
3.7
1.1
2.8
(1.8)
(1.0)

$143,895

33.3% $116,345

33.2% $123,644

39.8%

The Company’s effective income tax rates (income tax expense as a percentage of income before income
taxes) were 33.3% for 2015, 33.2% for 2014 and 39.8% for 2013. The differences in the effective tax rates were
primarily due to changes in state and foreign income taxes resulting from fluctuations in the Company’s

45

noninsurance and foreign subsidiaries’ contribution to pretax income and changes in the ratio of permanent
differences to income before income taxes. In addition, the tax rate for 2014 reflected non-recurring tax benefits
resulting from certain adjustments to the Company’s state and non-U.S. tax accounts. The 2015 rate includes a
benefit for the release of valuation allowances previously provided against certain foreign net operating losses
and other deferred tax assets.

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 . . . . . .

2015

2014

2013

(in thousands, except per share amounts)
$187,064
$234,215
$288,870
697
681
784

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

$288,086

$233,534

$186,367

Net income per share attributable to the Company’s

stockholders:

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

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

$

$

2.65

2.62

$

$

2.18

2.15

$

$

1.74

1.71

Weighted-average common shares outstanding:

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

108,427

106,884

106,991

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

109,826

108,688

109,102

See Note 12 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 and dividends on its common stock, and may include
business acquisitions and repurchases of 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
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.

46

Cash provided by operating activities amounted to $551.3 million, $360.6 million and $378.5 million for the
years ended December 31, 2015, 2014 and 2013, respectively, after claim payments, net of recoveries, of $476.5
million, $469.8 million and $479.3 million, respectively. The principal nonoperating uses of cash and cash
equivalents for the year ended December 31, 2015 were purchases of debt and equity securities, capital
expenditures and dividends to common stockholders. The principal nonoperating uses of cash and cash
equivalents for the year ended December 31, 2014 were purchases of debt and equity securities, repayment of
debt, business acquisitions, capital expenditures and dividends to common stockholders. The principal
nonoperating uses of cash and cash equivalents for the year ended December 31, 2013 were purchases of debt
and equity securities, repayment of debt, capital expenditures, purchase of Company shares and payment of
dividends to common stockholders. The most significant nonoperating sources of cash and cash equivalents for
the year ended December 31, 2015 were proceeds from the sales and maturities of debt and equity securities and
increases in the deposit balances at the Company’s banking operations. The most significant nonoperating
sources of cash and cash equivalents for the year ended December 31, 2014 were proceeds from the sales and
maturities of debt and equity securities, increases in the deposit balances at the Company’s banking operations,
proceeds from the issuance of debt and paydowns and net proceeds related to the sale of loans receivable. The
most significant nonoperating sources of cash and cash equivalents for the year ended December 31, 2013 were
proceeds from the sales and maturities of debt and equity securities, increases in the deposit balances at the
Company’s banking operations, proceeds from the issuance of debt and paydowns of loans receivable. The net
effect of all activities on total cash and cash equivalents was a decrease of $162.8 million, and increases of
$355.2 million and $164.3 million for the years ended December 31, 2015, 2014 and 2013, respectively.

The Company continually assesses its capital allocation strategy, including decisions relating to dividends,
stock repurchases, capital expenditures, acquisitions and investments. In January 2016, the Company’s board of
directors approved a first quarter cash dividend of 26 cents 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 2014, the Company’s board of directors approved an increase in the size of the Company’s stock
repurchase plan from $150.0 million to $250.0 million, of which $182.9 million remained as of December 31,
2015. 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, 2015 and as of December 31, 2015, had repurchased and retired 3.2 million shares
of its common stock under the current authorization for a total purchase price of $67.1 million. In January 2016,
the Company repurchased and retired 14 thousand shares of its common stock for a total purchase price of $454
thousand.

The Company completed acquisitions in 2015 for an aggregate purchase price of $32.3 million.

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 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,
2015, under such regulations, the maximum amount of dividends, loans and advances available to the holding

47

company from its insurance subsidiaries in 2016, without prior approval from applicable regulators, was $547.9
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, 2015, the holding company’s sources of liquidity included $289.8 million of cash and
cash equivalents and $700.0 million available on the Company’s revolving credit facility. Management believes
that liquidity at the holding company is sufficient to satisfy anticipated cash requirements and obligations for at
least the next twelve months.

Financing. The Company maintains a credit agreement with JPMorgan Chase Bank, N.A. in its capacity
as administrative agent and the lenders party thereto. The credit agreement is comprised of a $700.0 million
revolving credit facility. Unless terminated earlier, the revolving loan commitments under the credit agreement
will terminate on May 14, 2019. The obligations of the Company under the credit agreement are neither secured
nor guaranteed. Proceeds under the credit agreement may be used for general corporate purposes. At
December 31, 2015, the Company had no outstanding borrowings under the facility.

The credit agreement includes an expansion option that permits the Company, subject to satisfaction of
certain conditions, to increase the revolving commitments and/or add term loan tranches (“Incremental Term
Loans”) in an aggregate amount not to exceed $150.0 million. Incremental Term Loans, if made, may not mature
prior to the revolving commitment termination date, provided that amortization may occur prior to such date.

At the Company’s election, borrowings under the credit agreement bear interest at (a) the Alternate Base
Rate plus the applicable spread or (b) the Adjusted LIBOR rate plus the applicable spread (in each case as
defined in the agreement). 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 applicable spread varies
depending upon the debt rating assigned by Moody’s Investor Service, Inc. (“Moody’s”) and/or Standard &
Poor’s Rating Services (“S&P”). The minimum applicable spread for Alternate Base Rate borrowings is 0.625%
and the maximum is 1.00%. The minimum applicable spread for Adjusted LIBOR rate borrowings is 1.625% and
the maximum is 2.00%. The rate of interest on Incremental Term Loans will be established at or about the time
such loans are made and may differ from the rate of interest on revolving 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 an event of default the lenders may accelerate the loans. Upon the occurrence of certain insolvency
and bankruptcy events of default the loans will automatically accelerate. As of December 31, 2015, the Company
was in compliance with the financial covenants under the credit agreement.

In addition to amounts available under its 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 may
be used as short-term funding sources. During 2015, the Company financed securities for funds received totaling
$47.2 million under these agreements. As of December 31, 2015, no amounts remained outstanding under these
agreements.

Notes and contracts payable as a percentage of total capitalization was 17.5% and 18.6% at December 31,
2015 and 2014, respectively. Notes and contracts payable are further described in Note 9 Notes and Contracts
Payable to the consolidated financial statements.

Investment portfolio. The Company maintains a high quality, liquid investment portfolio that is primarily
held at its insurance and banking subsidiaries. As of December 31, 2015, 93% of the Company’s investment
portfolio consisted of fixed income securities, of which 65% were United States government-backed or rated
AAA and 95% were rated or classified as investment grade. Percentages are based on the estimated fair values of
the securities. Credit ratings reflect published ratings obtained from S&P, DBRS, Inc., Fitch Ratings, Inc. and

48

Moody’s. If a security was rated differently among the rating agencies, the lowest rating was selected. For further
information on the credit quality of the Company’s investment portfolio at December 31, 2015, see Note 3 Debt
and Equity Securities to the consolidated financial statements.

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 capitalized software development costs,
additions to property and equipment, additions to title plants and purchases of real estate data. Capital
expenditures were $127.6 million, $99.4 million and $87.1 million for the years ended December 31, 2015, 2014
and 2013, respectively. The increase in 2015 from 2014 primarily reflected increased spending in 2015 on
software, real estate data, title plants and property and equipment. The increase in software in 2015 was mainly
driven by the Company’s effort to comply with the Consumer Financial Protection Bureau’s TILA-RESPA
integrated disclosure rule. The increase in 2014 from 2013 primarily related to increased spending in 2014 on
software, real estate data and title plants, partially offset by lower spending in 2014 on property and equipment.

Contractual obligations. A summary of the Company’s contractual obligations at December 31, 2015, by

due date, 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

$ 585,102

$

5,018

(in thousands)
$ 10,075

$

8,105

$ 561,904

205,760
314,525
2,699,015
983,880

26,342
82,684
2,699,015
247,153

51,882
116,113
—
215,915

50,988
61,588
—
146,294

76,548
54,140
—
374,518

555,384
$5,343,666

37,963
$3,098,175

68,107
$462,092

64,729
$331,704

384,585
$1,451,695

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 require the use of significant assumptions. Changes in significant assumptions
could affect the amount and timing of pension and supplemental benefit plan payments. See Note 13 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 $23.8 million has not
been included in the contractual obligations table. See Note 11 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 $6.6 billion and $6.3 billion at December 31, 2015 and 2014, respectively,
of which $2.6 billion and $2.2 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 temporarily invested in
cash and cash equivalents and debt securities, with offsetting liabilities included in deposits in the accompanying
consolidated balance sheets. The remaining escrow deposits were held at third-party financial institutions.

Trust assets held or managed by First American Trust, FSB totaled $3.0 billion at December 31, 2015 and
2014. 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.

49

In conducting its operations, the Company often holds customers’ assets in escrow, pending completion of
real estate transactions and, as a result, the Company has ongoing programs for realizing economic benefits with
various financial
institutions. The results from 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.

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 each 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 $2.8 billion and $2.4 billion
at December 31, 2015 and 2014, respectively. The like-kind exchange deposits are 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 returns on such proceeds.

At December 31, 2015 and 2014, the Company was contingently liable for guarantees of indebtedness owed
by affiliates and third parties to banks and others totaling $8.2 million and $8.9 million, respectively. The
guarantee arrangements relate to promissory notes and other contracts that contingently require the Company to
make payments to the guaranteed party upon the failure of debtors to make scheduled payments according to the
terms of the notes and contracts. The Company’s maximum potential obligation under these guarantees totaled
$8.2 million and $8.9 million at December 31, 2015 and 2014, 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, 2015
and 2014.

50

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company’s assets and liabilities include financial instruments subject to the risk of loss from adverse
changes in market rates and prices. The Company’s primary market risk exposures relate to interest rate risk,
equity price risk, foreign currency risk and credit risk.

The Company manages its primary market risk exposures through an investment committee made up of

certain senior executives which is advised by an experienced investment management staff.

While the hypothetical scenarios below are considered to be near-term reasonably possible changes
the Company’s

they are for illustrative purposes only and do not reflect

demonstrating potential risk,
expectations about future market changes.

Interest Rate Risk

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 Company’s exposure to interest rate changes primarily results from the Company’s significant portfolio
of fixed income securities and from its financing activities. In general, the fair value of fixed income securities
interest rates. The Company also considers its
increases or decreases inversely with changes in market
investments in preferred stock, which are tied to interest rates, to be exposed to interest rate risk. The fair values
of the Company’s fixed income portfolio at December 31, 2015 and 2014 were $4.3 billion and $3.5 billion,
respectively. One means of assessing the exposure of the Company’s fixed income portfolio to interest rate
changes is a duration-based analysis that measures the potential changes in fair value resulting from a
hypothetical parallel and instantaneous shift in interest rates across all maturities. Under this model, with all
other factors held constant, the Company estimates that increases in interest rates of 100 and 200 basis points
could cause the fair value of its fixed income portfolio (including investments in preferred stock) at
December 31, 2015 to decrease by approximately $150.0 million, or 3.5%, and $292.0 million, or 6.8%,
respectively, and at December 31, 2014 to decrease by approximately $110.0 million, or 3.2%, and $217.0
million, or 6.2%, respectively.

With respect to floating rate debt, the Company is primarily exposed to the effects of changes in prevailing
interest rates through its variable rate credit facility and its interest bearing escrow deposit liabilities. As of
December 31, 2015 and 2014, the Company had no outstanding borrowings under its credit facility. Assuming
the full utilization of available funds under the facility of $700.0 million at December 31, 2015 and 2014, and
assuming that the borrowings were outstanding for the entire year, increases of 50 and 100 basis points in the
prevailing interest rate on the Company’s credit facility would result in increases in interest expense of $3.5
million and $7.0 million for 2015 and 2014, respectively.

The Company’s interest bearing escrow deposit

liabilities totaled $2.1 billion and $2.0 billion at
December 31, 2015 and 2014, respectively. These variable rate customer savings accounts are subject to market
rate fluctuations. Weighted average interest rates for 2015 and 2014 were 0.10% and 0.11%, respectively.
Assuming increases in interest rates of 25 and 50 basis points and the deposit amounts at December 31, 2015 and
2014 are held constant for the entire year, interest expense for 2015 would be higher by $5.2 million and $10.4
million, respectively, and 2014 would be higher by $4.9 million and $9.8 million, respectively.

Equity Price Risk

The Company is also subject to equity price risk related to its equity securities portfolio. The fair value of
the Company’s equity securities portfolio (excluding preferred stock of $15.5 million) was $305.8 million and
$386.9 million as of December 31, 2015 and 2014, respectively. Assuming broad-based declines in equity market

51

prices of 10% and 20%, with all other factors constant, the fair value of the Company’s equity securities at
December 31, 2015 could decrease by $30.6 million and $61.2 million, respectively, and at December 31, 2014
could decrease by $38.7 million and $77.4 million, respectively.

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 currently use
derivative financial instruments in any material amount to hedge its foreign exchange risk.

Credit Risk

The Company’s debt securities portfolio is subject to credit risk. The Company manages its credit risk
through actively monitoring issuer financial reports, credit spreads, security pricing and credit rating migration.
Further, diversification and concentration limits by asset type and credit rating are established and monitored by
the Company’s investment committee.

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. For
further information on the credit quality of the Company’s investment portfolio at December 31, 2015, see Note
3 Debt and Equity Securities to the consolidated financial statements.

52

Item 8. Financial Statements and Supplementary Data

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.

54

55
56
57
58
59
60
109

110
111
116
118
119

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.

53

Report of Independent Registered Public Accounting Firm

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

in our opinion,

In our opinion, the consolidated financial statements listed in the accompanying index, present fairly, in all
material respects,
the financial position of First American Financial Corporation and its subsidiaries at
December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the
United States of America. In addition,
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, 2015, based on criteria
established in Internal Control—Integrated Framework (2013) 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.

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 19, 2016

54

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 $31,552 and $34,662 . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments:

Deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities, includes pledged securities of $122,441 and $120,742 . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for known and incurred but not reported claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2015

2014

$1,027,321
256,731
1,067

$1,190,080
276,610
5,547

23,224
4,279,347
321,285
161,177

21,445
3,450,252
402,412
159,783

4,785,033

4,033,892

409,973
554,923
22,020
964,342
48,114
184,827

395,287
530,589
19,712
959,945
55,812
198,626

$8,254,351

$7,666,100

$2,699,015

$2,332,714

55,798
180,793
459,873
179,623

876,087

207,929
983,880
7,576
133,097
585,102

26,264
184,994
477,763
165,084

854,105

202,764
1,011,780
6,228
95,128
587,337

5,492,686

5,090,056

Commitments and contingencies (Notes 17 and 19)
Stockholders’ equity:

Preferred stock, $0.00001 par value; Authorized—500 shares; Outstanding—none . . . . . . . . . . . . . .
Common stock, $0.00001 par value; Authorized—300,000 shares; Outstanding—109,098 shares

and 107,541 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

—

—

1
2,150,813
846,691
(239,003)

2,758,502
3,163

1
2,109,712
662,310
(199,106)

2,572,917
3,127

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

2,761,665

2,576,044

$8,254,351

$7,666,100

See Notes to Consolidated Financial Statements

55

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

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

Year Ended December 31,

2015

2014

2013

Revenues:

Direct premiums and escrow fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agent premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment (losses) gains . . . . . . . . . . . . . . . . . . . . . . .

$2,310,047
2,098,265
673,138
100,553
(6,547)

$2,052,242
1,867,402
657,197
71,041
30,067

$2,132,831
2,061,404
662,736
89,895
9,211

5,175,456

4,677,949

4,956,077

Expenses:

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

1,594,935
1,656,722
820,969
491,092
85,596
64,269
29,108

1,435,628
1,472,066
807,634
450,023
85,597
57,194
19,247

1,488,997
1,637,561
841,523
530,356
74,916
56,715
15,301

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

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

4,742,691

4,327,389

4,645,369

432,765
143,895

288,870
784

350,560
116,345

234,215
681

310,708
123,644

187,064
697

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

$ 288,086

$ 233,534

$ 186,367

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

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

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

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

$

$

$

2.65

2.62

1.00

$

$

$

2.18

2.15

0.84

$

$

$

1.74

1.71

0.48

Weighted-average common shares outstanding:

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

108,427

106,884

106,991

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

109,826

108,688

109,102

See Notes to Consolidated Financial Statements

56

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

Year Ended December 31,

2015

2014

2013

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

$288,870

$234,215

$187,064

Other comprehensive income (loss), net of tax:

Unrealized (losses) gains on securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment
. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension benefit adjustment

(27,312)
(36,822)
24,223

19,638
(16,694)
(56,496)

(30,665)
(13,650)
49,324

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

(39,911)

(53,552)

5,009

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

248,959
770

180,663
691

192,073
694

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

$248,189

$179,972

$191,379

See Notes to Consolidated Financial Statements

57

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

$

Balance at December 31, 2012 . . . 107,239
—
Net income for 2013 . . . . . . . . . . .
Dividends on common shares . . . .
—
Purchase of Company shares . . . .
Shares issued in connection with
share-based compensation
plans . . . . . . . . . . . . . . . . . . . . .

1
—
—
(2,951) —

1,612 —

1,641 —

Share-based compensation

expense . . . . . . . . . . . . . . . . . . .

Net activity related to

noncontrolling interests . . . . . .

Other comprehensive income

(Note 18) . . . . . . . . . . . . . . . . . .

—

—

—

Balance at December 31, 2013 . . . 105,900
—
Net income for 2014 . . . . . . . . . . .
Dividends on common shares . . . .
—
Shares issued in connection with
share-based compensation
plans . . . . . . . . . . . . . . . . . . . . .

Share-based compensation

expense . . . . . . . . . . . . . . . . . . .

Net activity related to

noncontrolling interests . . . . . .

Other comprehensive income

(loss) (Note 18) . . . . . . . . . . . . .

—

—

—

Balance at December 31, 2014 . . . 107,541
—
Net income for 2015 . . . . . . . . . . .
—
Dividends on common shares . . . .
Shares issued in connection with
share-based compensation
plans . . . . . . . . . . . . . . . . . . . . .

—

—

—

1
—
—

—

—

—

1
—
—

1,557 —

Share-based compensation

expense . . . . . . . . . . . . . . . . . . .

Net activity related to

noncontrolling interests . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income

(loss) (Note 18) . . . . . . . . . . . . .

—

—
—

—

—

—
—

—

$2,111,605 $ 387,015
— 186,367
— (51,324)

(64,606)

—

9,232

(1,294)

22,301

(704)

—

—

—

—

2,077,828

520,764
— 233,534
— (89,939)

12,506

(2,049)

19,302

76

—

—

—

—

2,109,712

662,310
— 288,086
— (108,524)

16,769

(2,201)

24,339

—

—
7,020

(7)

—

—

Accumulated
other
comprehensive
loss

$(150,556)

—
—
—

—

—

—

5,012

(145,544)

—
—

—

—

—

(53,562)

(199,106)

—
—

—

—

—
—

Total
stockholders’
equity

$2,348,065
186,367
(51,324)
(64,606)

Noncontrolling
interests

Total

$ 3,704
697
—
—

$2,351,769
187,064
(51,324)
(64,606)

7,938

22,301

—

—

7,938

22,301

(704)

(1,204)

(1,908)

5,012

(3)

5,009

2,453,049
233,534
(89,939)

3,194
681
—

2,456,243
234,215
(89,939)

10,457

19,302

—

—

10,457

19,302

76

(758)

(682)

(53,562)

2,572,917
288,086
(108,524)

10

3,127
784
—

(53,552)

2,576,044
288,870
(108,524)

14,568

24,339

(7)
7,020

—

—

(734)
—

14,568

24,339

(741)
7,020

—

(39,897)

(39,897)

(14)

(39,911)

Balance at December 31, 2015 . . . 109,098

$

1

$2,150,813 $ 846,691

$(239,003)

$2,758,502

$ 3,163

$2,761,665

See Notes to Consolidated Financial Statements

58

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Year Ended December 31,

2015

2014

2013

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to cash provided by operating activities:

$

288,870

$

234,215

$

187,064

Provision for policy losses and other claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premiums and accretion of discounts on debt securities, net
. . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of affiliates, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . .
Increase in deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

491,092
85,596
28,403
(9,526)
6,547
24,339
(7,800)
9,601

(476,492)
52,543
(7,477)
36,679
5,519
23,429

450,023
85,597
24,579
(6,856)
(30,067)
19,302
16,545
5,002

(469,750)
45,872
(9,950)
(15,003)
10,333
795

530,356
74,916
26,782
(6,202)
(9,211)
22,301
(5,316)
11,552

(479,310)
2,589
23,645
5,318
20,102
(26,114)

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

551,323

360,637

378,472

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net paydowns on loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(26,682)
(4,392)
(2,123,817)
630,914
655,078
1,077
—
—

(123,697)
17,099

(163,320)
4,211
(1,969,009)
928,386
373,969
8,025
42,284
23,926
(97,222)
12,058

(5,837)
4,747
(1,532,710)
621,255
488,684
6,443
—
33,597
(87,142)
5,807

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

(974,420)

(836,692)

(465,156)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net change in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net activity related to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds in connection with share-based compensation plans . . . . . . . . . . . . . . . . . . . . .
Purchase of Company shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

366,301
—
(5,244)
(741)
9,526
5,042
—

(108,524)

266,360
(6,022)

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

(162,759)
1,190,080

647,857
594,477
(325,110)
(682)
6,856
3,601
—
(89,939)

837,060
(5,762)

355,243
834,837

281,739
249,144
(168,205)
(1,894)
6,202
1,736
(64,606)
(51,324)

252,792
(1,800)

164,308
670,529

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

$ 1,027,321

$ 1,190,080

$

834,837

SUPPLEMENTAL INFORMATION:
Cash paid during the year for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes, less refunds of $2,546, $13,925 and $1,329 . . . . . . . . . . . . . . . . . . . . . . .

$
$
$

29,212
57,367
89,062

$
$
$

17,327
58,148
72,028

$
$
$

10,827
54,629
120,313

See Notes to Consolidated Financial Statements

59

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 closing and/or escrow services; accommodates tax-deferred
exchanges of real estate; provides products, services and solutions involving the use of real property
related data designed to mitigate risk or otherwise facilitate real estate transactions; 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 the
District of Columbia and actively issues policies in 46 states. In certain markets 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, such as heating and
air conditioning 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.

Significant Accounting Policies:

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with generally accepted accounting
principles (“GAAP”) and reflect
the consolidated operations of the Company. 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 affiliates 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 affiliates in which the Company does not exercise significant
influence over the investee are accounted for under the cost method.

Reclassifications, revisions and out-of-period adjustments

Certain 2014 and 2013 amounts have been reclassified to conform to the 2015 presentation.

During the fourth quarter of 2015, the Company reclassified certain revenues and expenses related to
closing protection letters and temporary labor costs. The Company made comparable reclassifications to its
consolidated statements of income for the years ended December 31, 2014 and 2013 to conform to the 2015

60

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

presentation. The impact to the Company’s title insurance and services segment included decreases to direct
premiums and escrow fees and increases to agent premiums of $25.8 million and $16.5 million, increases to
personnel costs of $23.9 million and $42.2 million, increases to premiums retained by agents of $1.2 million and
$0.8 million, and decreases to other operating expenses of $25.1 million and $43.0 million for the years ended
December 31, 2014 and 2013, respectively. The impact to the Company’s specialty insurance segment included
increases to personnel costs and decreases to other operating expenses of $1.0 million and $1.2 million for the
years ended December 31, 2014 and 2013, respectively.

Also, during the fourth quarter of 2015, the Company identified certain non-risk based revenues included
within direct premiums and escrow fees that should have been reflected in information and other. To correct for
this error, these revenues were reclassified from direct premiums and escrow fees to information and other. The
Company has revised its consolidated statements of income for the years ended December 31, 2014 and 2013 to
conform to the 2015 presentation. The impact to the Company’s title insurance and services segment included a
decrease to direct premiums and escrow fees and an increase to information and other of $37.2 million and $35.1
million for the years ended December 31, 2014 and 2013, respectively.

During 2014, the Company identified and recorded adjustments to correct for certain errors in foreign
currency translation and transactions in prior periods. These adjustments resulted in an increase to other
operating expenses of $5.0 million.

The Company does not consider these adjustments to be material, individually or in the aggregate, to any

previously issued consolidated financial statements.

Use of estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates

and assumptions that affect the statements. Actual results could differ from the estimates and assumptions used.

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.

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. The Company considers accounts outstanding longer than the contractual
payment terms as past due. The Company determines the 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 the Company and the condition of the general economy and industry as a whole.
Amounts are charged off in the period in which they are deemed to be uncollectible.

Investments

Deposits with banks

Deposits with banks are short-term investments with initial maturities of generally more than 90 days.

61

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Debt and equity securities

Debt securities are carried at fair value and consist primarily of investments in obligations of the United
States Treasury, foreign governments, various U.S. and foreign 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, 2015 and 2014, the fair value of
such investments totaled $122.4 million and $120.7 million, respectively. See Note 2 Statutory Restrictions on
Investments and Stockholders’ Equity 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 with unrealized
gains or losses recorded as a component of accumulated other comprehensive loss. See Note 14 Fair Value
Measurements for additional discussion of the determination of fair value. Interest income, as well as the related
amortization of premium and accretion of discount, on debt securities is recognized under the effective yield
method and included in the accompanying consolidated statements of income in net investment income. Realized
gains and losses on sales of debt and equity securities are determined on a first-in, first-out basis.

The Company evaluates its debt and equity securities with unrealized losses on a quarterly basis for

potential other-than-temporary impairments in value.

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, 2015, the Company did 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), 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.

As a result of the Company’s security-level review, the Company recognized $2.2 million and $1.7 million
of other-than-temporary impairment losses considered to be credit related on its debt securities for the years
ended December 31, 2015 and 2014, respectively. The Company did not recognize any other-than-temporary

62

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

impairment losses considered to be credit related in 2013. It is possible that the Company could recognize
additional other-than-temporary impairment losses on securities it owns at December 31, 2015 if future events or
information cause it to determine that a decline in fair value is other-than-temporary.

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, 2015, 2014
and 2013.

December 31,

2015

2014

2013

(in thousands)

Cumulative credit loss on debt securities held at

beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 18,179

$16,478

$16,478

Addition to credit loss for which an other-than-

temporary impairment was previously recognized . . . .

—

1,701

Accumulated losses on securities that matured or were

sold during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(18,179)

—

—

—

Cumulative credit loss on debt securities held at end of

period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

$18,179

$16,478

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 fair
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 security for a period of time sufficient to allow for any anticipated recovery.

When an equity security has been in an unrealized loss position and its fair value is less than 80% of cost for
twelve consecutive months, the Company’s review of the security includes the above noted factors as well as
other evidence that might exist supporting the 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. The Company did not record other-than-temporary impairment
losses related to its equity securities for the years ended December 31, 2015, 2014 and 2013.

Other investments

Other investments consist primarily of investments in affiliates, which are accounted for under either the

equity method or the cost method of accounting, investments in real estate and notes receivable.

The carrying value of investments in affiliates is written down, or impaired, to fair value when a decline in
value is considered to be other-than-temporary. In making the determination as to whether an individual
investment in an affiliate is impaired, the Company assesses the 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

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payments to the Company (with respect to debt obligations to the Company), 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 is operating. The Company recognized impairment losses on
equity method investments in affiliates of $2.0 million, $22.5 million and $7.8 million for the years ended
December 31, 2015, 2014 and 2013, respectively.

Investments in real estate are classified as held for sale and carried at the lower of cost or fair value less

estimated selling costs.

Notes receivable are carried at cost less reserves for losses. 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 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
the
factors, as appropriate. Notes are placed on non-accrual status when management determines that
collectibility of contractual amounts is not reasonably assured.

Property and equipment

Buildings and furniture and equipment are initially recorded at cost and are generally depreciated using the
straight-line method over estimated useful lives of 5 to 40 years and 1 to 15 years, respectively. Leasehold
improvements are initially recorded at cost and are amortized over the lesser of the remaining term of the
respective lease or the estimated useful life, using the straight-line method. Computer software is acquired or
developed for internal use and for use with the Company’s products and is amortized over estimated useful lives
of 1 to 15 years using the straight-line method. Software development costs, which include capitalized interest
costs and certain 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.

Management uses estimated future cash flows (undiscounted and excluding interest) to measure the
recoverability of property and equipment whenever events or changes in circumstances indicate that the carrying
value may not be fully recoverable. If the undiscounted cash flow analysis indicates that the carrying amount is
not recoverable, an impairment loss is recorded for the excess of the carrying amount over its fair value. The
Company recognized impairment losses on software of $10.9 million, $1.2 million and $1.1 million for the years
ended December 31, 2015, 2014 and 2013, respectively.

Title plants and other indexes

Title plants and other indexes at December 31, 2015 included title plants of $528.7 million and capitalized
real estate data of $26.2 million, and at December 31, 2014 included title plants of $514.6 million and capitalized
real estate data of $16.0 million. 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
carried at cost, less amortization. Capitalized real estate data is amortized using the straight-line method over
estimated useful lives of 3 to 15 years.

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Business Combinations

Amounts paid for acquisitions are allocated to the tangible assets acquired,

liabilities assumed and
intangible assets acquired based on their estimated fair value at the date of acquisition. The excess of the fair
value of purchase consideration over the fair values of the identifiable assets and liabilities is recorded as
goodwill. Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of
operations of acquired businesses are included in the consolidated financial statements from the date of
acquisition.

Goodwill Impairment

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 Step 1
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 Step 1, 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

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reporting unit to other comparable companies (if such comparables are present in the marketplace) based on
valuation multiples to arrive at a fair value. 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
reporting unit.

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 elected to perform qualitative assessments for 2015, 2014 and 2013, the results of which
supported the conclusion that the fair values of the Company’s reporting units were not more likely than not less
than their carrying amounts and, therefore, a quantitative impairment test was not considered necessary. As a
result of these assessments, the Company did not record any goodwill impairment losses for 2015, 2014 or 2013.

Other intangible assets

The Company’s finite-lived intangible assets consist of customer relationships, noncompete agreements,
trademarks and patents. These assets are amortized on a straight-line basis over their useful lives ranging from 1
to 20 years and are subject to impairment assessments when there is an indication of a triggering event or
abandonment. The Company’s indefinite-lived other intangible assets consist of licenses which are not amortized
but rather assessed for impairment by comparing the fair values to carrying amounts at least annually, and when
an indicator of potential impairment has occurred.

Management uses estimated future cash flows (undiscounted and excluding interest) to measure the
recoverability of intangible assets with finite lives, whenever events or changes in circumstances indicate that the
carrying amount may not be fully recoverable. If the undiscounted cash flow analysis indicates that the carrying
amount is not recoverable, an impairment loss is recorded for the excess of the carrying amount over its fair
value. Management’s impairment assessment for indefinite-lived other intangible assets may involve calculating
the fair value by using a discounted cash flow analysis or through a market approach valuation. If the fair value
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.

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.

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The process of assessing the loss provision rate and the resulting IBNR reserve involves evaluation of the
results of an in-house actuarial review. 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 conditions in the real estate and mortgage markets, 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, 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 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’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.

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. 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.

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, 70% to 80% 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. 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
$103.2 million. A material change in expected ultimate losses and corresponding loss rates for older policy years

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is also possible, particularly for policy years with loss ratios exceeding historical norms. 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 adjusted for estimated future increases in costs.

Contingent litigation and regulatory liabilities

Amounts related to contingent litigation and regulatory liabilities are accrued if it is probable that a liability
has been incurred and an amount is reasonably estimable. The Company records legal fees in other operating
expenses in the period incurred.

Revenues

Premiums on title 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.

Premiums on home warranty contracts and property and casualty insurance policies are generally recognized

ratably over the 12-month duration of the contract or policy.

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.

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, other non-insured settlement services,
and risk mitigation products and services. For those products and services that are delivered at a point in time and
for which there is no ongoing obligation, revenue is recognized upon delivery. For those products and services
that are delivered at a point in time and for which there is an ongoing obligation, and for products and services
where delivery occurs over time, revenue is recognized ratably over the duration of the contract.

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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 income 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.

In addition, the Company has an employee stock purchase plan that allows eligible employees the option to
purchase common stock of the Company at 85% of the lower of the closing price on either the first or last day of
each offering period. The offering periods are three-month periods beginning on January 1, April 1, July 1 and
October 1 of each fiscal year. The Company recognizes an expense in the amount equal to the value of the 15%
discount and look-back feature over the three-month offering period.

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
the Company receives upon assumed exercise or vesting and the
hypothetical windfall
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

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

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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.

Employee benefit plans

The Company recognizes the overfunded or underfunded status of its defined benefit pension and
supplemental benefit 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 annually 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 net 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 other countries, including Canada, the United Kingdom, Australia 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 foreign subsidiaries with local currencies
that were determined to be the functional currency 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. For those foreign subsidiaries where the U.S. dollar has been determined to
be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical
rates, while monetary assets and liabilities are translated at current rates, with remeasurement gains and losses
included in other operating expenses. 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 purchases reinsurance to limit risk associated with large
losses from single events. 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 premiums and escrow fees on the Company’s

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consolidated statements of income. 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 in the period
ended December 31, 2015. During the year ended December 31, 2015 the Company realized recoveries of $23.8
million on reinsured losses related to a large commercial title claim for which the Company recorded a receivable
of $25.0 million at December 31, 2014. A receivable of $2.0 million related to this large commercial claim,
which the Company expects to collect during 2016, was included in the Company’s consolidated balance sheet in
accounts and accrued income receivable at December 31, 2015. Payments and recoveries on reinsured losses for
the Company’s title insurance and property and casualty businesses were immaterial during the years ended
December 31, 2014 and 2013.

Escrow deposits and trust assets

The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits
totaled $6.6 billion and $6.3 billion at December 31, 2015 and 2014, respectively, of which $2.6 billion and $2.2
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 temporarily invested in cash and cash equivalents and
debt securities, with offsetting liabilities included in deposits in the accompanying consolidated balance sheets.
The remaining escrow deposits were held at third-party financial institutions.

Trust assets held or managed by First American Trust, FSB totaled $3.0 billion at December 31, 2015 and
2014. 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 and, as a result, the Company has ongoing programs for realizing economic benefits with various
financial institutions. The results from 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 each 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 $2.8 billion and $2.4 billion
at December 31, 2015 and 2014, respectively. The like-kind exchange deposits are 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 returns on such proceeds.

Recently Adopted Accounting Pronouncements:

In April 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance which changes
the criteria for determining which disposals are required to be presented as discontinued operations and modifies

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related disclosure requirements. The updated guidance is effective for interim and annual reporting periods
beginning after December 15, 2014, with early adoption permitted. The adoption of this guidance had no impact
on the Company’s consolidated financial statements.

Pending Accounting Pronouncements:

In September 2015, the FASB issued updated guidance intended to simplify the accounting for adjustments
made to provisional amounts recognized in a business combination and eliminates the requirement
to
retrospectively account for those adjustments. The updated guidance is effective for interim and annual reporting
periods beginning after December 15, 2015 and applies prospectively to adjustments made to provisional
amounts that occur after the effective date of this guidance with early adoption permitted for financial statements
that have not been issued. The Company does not expect the adoption of this guidance to have a material impact
on its consolidated financial statements.

In August 2015, the FASB issued updated guidance relating to the Securities and Exchange Commission
Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting on the presentation and
issuance costs associated with line-of-credit arrangements. The updated
subsequent measurement of debt
guidance allows for the deferral and presentation of debt issuance costs as an asset which may be amortized
ratably over the term of the line-of-credit arrangement, regardless of whether there are any related outstanding
borrowings. The updated guidance is effective for interim and annual reporting periods beginning after
December 15, 2015, with early adoption permitted. The Company does not expect the adoption of this guidance
to have a material impact on its consolidated financial statements.

In May 2015, the FASB issued updated disclosure guidance related to short-duration contracts issued by
insurance entities. The updated guidance is intended to increase the transparency of significant estimates made in
measuring liabilities for unpaid claims and claim adjustment expenses and to provide additional insight into an
insurance entity’s ability to underwrite and anticipate costs associated with claims. The updated guidance is
effective for annual reporting periods beginning after December 15, 2015 and for interim periods within annual
periods beginning after December 15, 2016, with early adoption permitted. Except for the disclosure
requirements, the Company does not expect the adoption of this guidance to impact its consolidated financial
statements.

In May 2015, the FASB issued updated guidance intended to eliminate the diversity in practice surrounding
how investments measured at net asset value under the practical expedient with future redemption dates have
been categorized in the fair value hierarchy. Under the updated guidance, investments for which fair value is
measured at net asset value per share using the practical expedient should no longer be categorized in the fair
value hierarchy. The updated guidance requires retrospective adoption for all periods presented and is effective
for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted.
Except for the disclosure requirements, the Company does not expect the adoption of this guidance to impact its
consolidated financial statements.

In April 2015, the FASB issued updated guidance intended to clarify the accounting treatment for cloud
computing arrangements that include software licenses. Under the updated guidance, if a cloud computing
arrangement includes a software license, the customer should account for the software license element of the
arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does
not include a software license, the customer should account for the arrangement as a service contract. The
updated guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with
early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact
on its consolidated financial statements.

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In April 2015, the FASB issued updated guidance intended to simplify, and provide consistency to, the
presentation of debt issuance costs. The new standard requires that debt issuance costs be presented in the
balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts.
The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2015,
with early adoption permitted. The Company does not expect the adoption of this guidance to have a material
impact on its consolidated financial statements.

In February 2015, the FASB issued updated guidance which changes the analysis that a reporting entity
must perform to determine whether it should consolidate certain types of legal entities. The updated guidance is
effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption
permitted. The Company expects the adoption of this guidance to have no impact on its consolidated financial
statements.

In June 2014, the FASB issued updated guidance intended to eliminate the diversity in practice regarding
share-based payment awards that include terms which provide for a performance target that affects vesting being
achieved after the requisite service period. The new standard requires that a performance target which affects
vesting and could be achieved after the requisite service period be treated as a performance condition that affects
vesting and should not be reflected in estimating the grant-date fair value. The updated guidance is effective for
interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The
Company expects the adoption of this guidance to have no impact on its consolidated financial statements.

In May 2014, the FASB issued updated guidance for recognizing revenue from contracts with customers to
provide a single, comprehensive revenue recognition model for all contracts with customers to improve
comparability within and across industries, and across capital markets. The new revenue standard contains
principles that an entity will apply to determine the measurement of revenue and the timing of recognition. The
underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers
at an amount that the entity expects to be entitled to in exchange for those goods or services. Revenue from
insurance contracts is not within the scope of this guidance. The updated guidance is effective for interim and
annual reporting periods beginning after December 15, 2016, with early adoption prohibited. In August 2015, the
FASB issued updated guidance which defers the effective date of this guidance by one year to interim and annual
reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date.
The Company is currently assessing the impact of the new guidance on its consolidated financial statements.

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

Investments totaling $127.1 million and $133.0 million were on deposit with state treasurers in accordance

with statutory requirements for the protection of policyholders at December 31, 2015 and 2014, 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, 2015, under such regulations, the maximum amount of dividends, loans and
advances available to the Company from its insurance subsidiaries in 2016, without prior approval from
applicable regulators, was $547.9 million.

The Company’s principal title insurance subsidiary, First American Title Insurance Company (“FATICO”),
maintained total statutory capital and surplus of $1.1 billion and $978.7 million as of December 31, 2015 and
2014, respectively. Statutory net income for the years ended December 31, 2015, 2014 and 2013 was $191.8
million, $393.1 million and $199.1 million, respectively. FATICO was in compliance with the minimum
statutory capital and surplus requirements as of December 31, 2015.

73

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FATICO, which was previously domiciled in the state of California, redomesticated to Nebraska effective
July 1, 2014. FATICO’s statutory-based financial statements were prepared in accordance with accounting
practices prescribed or permitted by the Nebraska Department of Insurance for the years ended December 31,
2015 and 2014. 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 Nebraska. The state of Nebraska has adopted certain prescribed accounting practices that differ from
those found in the NAIC SAP. Specifically, the timing of amounts released from the statutory premium reserve
under Nebraska’s required practice differs from NAIC SAP resulting in total statutory capital and surplus that
was lower by $61.7 million and $11.7 million at December 31, 2015 and 2014, respectively, than if reported in
accordance with NAIC SAP. Additionally, for the years ended December 31, 2015 and 2014, the state of
Nebraska granted a permitted accounting practice to FATICO that differs from Nebraska’s prescribed accounting
practices; specifically, the determination to not record a bulk reserve within the known claims reserve resulting in
total statutory capital and surplus that was higher by $58.9 million and $8.2 million at December 31, 2015 and
2014, respectively, than if reported in accordance with Nebraska’s required practice.

Statutory accounting principles differ in some respects from GAAP, 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 and assets acquired in connection with
claim settlements other than real estate or mortgage loans secured by real estate), reporting of bonds at amortized
cost, amortization of goodwill, deferral of premiums received as statutory premium reserve, supplemental reserve
(if applicable) and exclusion of the incurred but not reported claims reserve.

NOTE 3. Debt and Equity Securities:

Investments in debt securities, classified as available-for-sale, are as follows:

(in thousands)

December 31, 2015
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency mortgage-backed securities . . . . . . . . . . .
U.S. corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . .

December 31, 2014
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency mortgage-backed securities . . . . . . . . . . .
Non-agency mortgage-backed securities . . . . . . . . . . . . . . . . . . .
U.S. corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
cost

Gross unrealized

gains

losses

Estimated
fair value

$ 130,252
692,000
129,984
419,869
2,065,728
642,869
210,162

$

421
12,640
1,132
1,023
4,984
4,297
1,248

$ (1,301) $ 129,372
703,795
130,101
418,091
2,055,673
634,683
207,632

(845)
(1,015)
(2,801)
(15,039)
(12,483)
(3,778)

$4,290,864

$25,745

$(37,262) $4,279,347

$

64,195
577,703
133,365
198,330
1,812,766
15,949
446,630
183,528

$

968
10,981
1,604
1,562
8,491
1,306
7,483
1,681

$

(181) $

(1,007)
(31)
(2,018)
(9,095)
(717)
(1,984)
(1,257)

64,982
587,677
134,938
197,874
1,812,162
16,538
452,129
183,952

$3,432,466

$34,076

$(16,290) $3,450,252

74

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investments in equity securities, classified as available-for-sale, are as follows:

(in thousands)

December 31, 2015
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31, 2014
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross unrealized

Cost

gains

losses

Estimated
fair value

$ 18,305
307,429

$

420
13,103

$ (3,258)
(14,714)

$ 15,467
305,818

$325,734

$13,523

$(17,972)

$321,285

$ 14,976
378,938

$

596
16,680

$

(47)
(8,731)

$ 15,525
386,887

$393,914

$17,276

$ (8,778)

$402,412

Sales of debt and equity securities resulted in realized gains of $8.7 million, $34.1 million and $17.2 million
and realized losses of $10.0 million, $9.1 million and $15.5 million for the years ended December 31, 2015, 2014
and 2013, respectively.

Gross unrealized losses on investments in debt and equity securities are as follows:

Less than 12 months

12 months or longer

Total

Estimated
fair value

Unrealized
losses

Estimated
fair value

Unrealized
losses

Estimated
fair value

Unrealized
losses

(in thousands)
December 31, 2015
Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . $ 105,701 $ (1,285) $
Municipal bonds . . . . . . . . . . . . . . . . . . . . .
Foreign government bonds . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . .
Governmental agency mortgage-backed

133,465
13,601
191,035

(733)
(890)
(2,497)

1,654 $
13,190
267
18,237

(16) $ 107,355 $ (1,301)
(112)
(845)
(1,015)
(125)
(2,801)
(304)

146,655
13,868
209,272

securities . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. corporate debt securities . . . . . . . . . . .
Foreign corporate debt securities . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .
Total

(15,039)
(12,483)
(3,778)
(37,262)
(17,972)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,195,994 $(40,894) $303,099 $(14,340) $2,499,093 $(55,234)

(5,615) 1,309,321
375,353
(1,211)
(1,053)
114,047
(8,436) 2,275,871
223,222
(5,904)

(9,424) 213,020
13,511
(11,272)
(2,725)
11,246
(28,826) 271,125
31,974
(12,068)

1,096,301
361,842
102,801
2,004,746
191,248

December 31, 2014
Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . $
Municipal bonds . . . . . . . . . . . . . . . . . . . . .
Foreign government bonds . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . .
Governmental agency mortgage-backed

8,122 $

137,755
5,653
27,479

(27) $ 15,124 $
19,625
(689)
(31)
—
(88) 127,936

(154) $
(318)
—
(1,930)

23,246 $

157,380
5,653
155,415

(181)
(1,007)
(31)
(2,018)

securities . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency mortgage-backed securities . .
U.S. corporate debt securities . . . . . . . . . . .
Foreign corporate debt securities . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .
Total

(9,095)
(717)
(1,984)
(1,257)
(16,290)
(8,778)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 970,289 $(14,162) $481,237 $(10,906) $1,451,526 $(25,068)

684,635
5,611
149,827
58,497
(10,715) 1,240,264
211,262

(1,612) 300,918
5,611
—
8,191
(1,881)
(1,247)
1,492
(5,575) 478,897
2,340
(8,587)

383,717
—
141,636
57,005
761,367
208,922

(7,483)
(717)
(103)
(10)

(191)

75

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investments in debt securities at December 31, 2015, by contractual maturities, are as follows:

(in thousands)

U.S. Treasury bonds
Amortized cost
. . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . .

Municipal bonds

Due in one
year or less

Due after
one
through
five years

Due after
five
through
ten years

Due after
ten years

Total

$ 25,982
$ 25,959

$
$

76,874
76,462

$ 11,875
$ 11,765

$ 15,521
$ 15,186

$ 130,252
$ 129,372

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

$ 47,506
$ 47,580

$ 298,071
$ 300,859

$208,057
$213,119

$138,366
$142,237

$ 692,000
$ 703,795

Foreign government bonds
Amortized cost
. . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . .

Governmental agency bonds

$
$

6,169
6,199

$ 110,707
$ 111,643

$
$

5,461
5,464

$
$

7,647
6,795

$ 129,984
$ 130,101

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

$ 31,778
$ 31,768

$ 331,052
$ 329,700

$ 28,156
$ 28,443

$ 28,883
$ 28,180

$ 419,869
$ 418,091

U.S. corporate debt securities

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

$ 16,569
$ 16,711

$ 298,860
$ 297,838

$264,527
$259,775

$ 62,913
$ 60,359

$ 642,869
$ 634,683

Foreign corporate debt securities

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

$ 13,340
$ 13,376

$
$

92,104
91,836

$ 90,555
$ 88,310

$ 14,163
$ 14,110

$ 210,162
$ 207,632

Total debt securities excluding mortgage-backed

securities

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

$141,344
$141,593

$1,207,668
$1,208,338

$608,631
$606,876

$267,493
$266,867

$2,225,136
$2,223,674

Total mortgage-backed securities

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

Total debt securities
. . . . . . . . . . . . . . . . . . . . . . .
Amortized cost
Estimated fair value . . . . . . . . . . . . . . . . . . .

$2,065,728
$2,055,673

$4,290,864
$4,279,347

Mortgage-backed securities, which include contractual terms to maturity, are not categorized by contractual
maturity because borrowers may have the right to call or prepay obligations with, or without, call or prepayment
penalties.

76

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The table below outlines the composition of the investment portfolio, by credit rating, as of December 31,

2015:

(in thousands, except percentages)

Estimated
fair value Percentage

Estimated
fair value Percentage

Estimated
fair value Percentage

Estimated
fair value Percentage

A- Ratings or higher

BBB+ to BBB- Ratings Non-Investment Grade

Total

December 31, 2015
Debt securities:
U.S. Treasury bonds . . . . . . $ 129,372
Municipal bonds . . . . . . . . .
675,257
Foreign government

100.0
95.9

$ —
23,188

— $ —
5,350
3.3

— $ 129,372
703,795
0.8

100.0
100.0

bonds . . . . . . . . . . . . . . . .

121,975

93.8

7,187

5.5

939

0.7

130,101

100.0

Governmental agency

bonds . . . . . . . . . . . . . . . .

418,091

100.0

—

—

—

—

418,091

100.0

Governmental agency
mortgage-backed
securities . . . . . . . . . . . . . 2,055,673

U.S. corporate debt

100.0

—

—

—

—

2,055,673

100.0

securities . . . . . . . . . . . . .

293,413

46.2

167,292

26.4

173,978

27.4

634,683

100.0

Foreign corporate debt

securities . . . . . . . . . . . . .

113,182

Total debt securities . . . . . . 3,806,963
—
Preferred stocks . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . $3,806,963

54.5

88.9
—

88.7

52,912

250,579
8,850

25.5

5.9
57.2

41,538

221,805
6,617

20.0

5.2
42.8

207,632

100.0

4,279,347
15,467

100.0
100.0

$259,429

6.0

$228,422

5.3

$4,294,814

100.0

The credit ratings in the above table reflect published ratings obtained from Standard & Poor’s Rating
Services, DBRS, Inc., Fitch Ratings, Inc. and Moody’s Investor Services, Inc. If a security was rated differently
among the rating agencies, the lowest rating was selected. Governmental agency mortgage-backed securities are
not rated by any of the ratings agencies; however, these securities have been included in the above table in the A-
Ratings or higher category because the payments of principal and interest are guaranteed by the governmental
agency that issued the security.

As of December 31, 2015, the estimated fair value of total debt securities included $117.8 million of bank
loans, of which $111.4 million was non-investment grade; $99.0 million of high yield corporate debt securities,
all of which was non-investment grade; and $44.3 million of emerging market debt securities, of which $6.1
million was non-investment grade.

77

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The table below outlines the composition of the investment portfolio in an unrealized loss position, by credit

rating, as of December 31, 2015:

(in thousands, except percentages)

Estimated
fair value Percentage

Estimated
fair value Percentage

Estimated
fair value Percentage

Estimated
fair value Percentage

A- Ratings or higher

BBB+ to BBB- Ratings Non-Investment Grade

Total

December 31, 2015
Debt securities:
U.S. Treasury bonds . . . . . . $ 107,355
Municipal bonds . . . . . . . . .
136,568
Foreign government

100.0
93.2

$ —
5,040

— $ —
5,047
3.4

— $ 107,355
146,655
3.4

100.0
100.0

bonds . . . . . . . . . . . . . . . .

5,824

42.0

7,105

51.2

939

6.8

13,868

100.0

Governmental agency

bonds . . . . . . . . . . . . . . . .

209,272

100.0

—

—

—

—

209,272

100.0

Governmental agency
mortgage-backed
securities . . . . . . . . . . . . . 1,309,321

U.S. corporate debt

100.0

—

—

—

—

1,309,321

100.0

securities . . . . . . . . . . . . .

134,224

35.8

112,373

29.9

128,756

34.3

375,353

100.0

Foreign corporate debt

securities . . . . . . . . . . . . .

40,094

Total debt securities . . . . . . 1,942,658
—
Preferred stocks . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . $1,942,658

35.2

85.3
—

84.8

38,891

163,409
8,850

34.1

7.2
58.9

35,062

169,804
6,164

30.7

7.5
41.1

114,047

100.0

2,275,871
15,014

100.0
100.0

$172,259

7.5

$175,968

7.7

$2,290,885

100.0

The credit ratings in the above table reflect published ratings obtained from Standard & Poor’s Rating
Services, DBRS, Inc., Fitch Ratings, Inc. and Moody’s Investor Services, Inc. If a security was rated differently
among the rating agencies, the lowest rating was selected. Governmental agency mortgage-backed securities are
not rated by any of the ratings agencies; however, these securities have been included in the above table in the A-
Ratings or higher category because the payments of principal and interest are guaranteed by the governmental
agency that issued the security.

As of December 31, 2015, the estimated fair value of total debt securities in an unrealized loss position
included $87.3 million of bank loans, of which $82.9 million was non-investment grade; $75.8 million of high
yield corporate debt securities, all of which was non-investment grade; and $39.1 million of emerging market
debt securities, of which $6.1 million was non-investment grade.

78

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4. Property and Equipment:

Property and equipment consists of the following:

December 31,

2015

2014

(in thousands)

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 28,950
259,601
205,641
499,634

$ 29,700
270,689
186,237
466,548

Accumulated depreciation and amortization . . . . . . . . . . . . . . . . .

993,826
(583,853)

953,174
(557,887)

$ 409,973

$ 395,287

NOTE 5. Goodwill:

A summary of the changes in the carrying amount of goodwill, by operating segment, for the years ended

December 31, 2015 and 2014, is as follows:

Balance as of December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . .

Title
Insurance
and Services

$799,261
121,252
(5,554)
(1,779)

913,180
13,430
(9,033)

Specialty
Insurance

(in thousands)
$46,765

—
—
—

46,765
—
—

Total

$846,026
121,252
(5,554)
(1,779)

959,945
13,430
(9,033)

Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . .

$917,577

$46,765

$964,342

For further discussion about

the Company’s acquisitions in 2015 and 2014, see Note 20 Business

Combinations.

The Company’s goodwill impairment assessments for 2015, 2014 and 2013 did not indicate impairment to
any of its reporting units. There is no accumulated impairment for goodwill as the Company has never
recognized impairment to any of its reporting units.

79

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 6. Other Intangible Assets:

Other intangible assets consist of the following:

Finite-lived intangible assets:

Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncompete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2015

2014

(in thousands)

$ 93,572
26,963
9,341
2,840

132,716
(101,479)
31,237

$ 94,850
27,286
11,241
2,840

136,217
(97,282)
38,935

Indefinite-lived intangible assets:

Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,877

16,877

$ 48,114

$ 55,812

Amortization expense for finite-lived intangible assets was $9.3 million, $12.6 million and $12.0 million for

the years ended December 31, 2015, 2014 and 2013, respectively.

Estimated amortization expense for finite-lived intangible assets for the next five years is as follows:

Year

(in thousands)

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,186
$7,040
$4,601
$3,807
$2,257

NOTE 7. Deposits:

Deposit accounts are summarized as follows:

December 31,

2015

2014

(in thousands, except
percentages)

Escrow accounts:

Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,084,926
494,077

$1,962,351
266,281

2,579,003

2,228,632

Business checking and other deposits (1) . . . . . . . . . . . . . . . . . .

120,012

104,082

$2,699,015

$2,332,714

Weighted average interest rate:

Escrow accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.10%

0.11%

(1) Business checking and other deposits primarily reflect non-interest bearing accounts.

80

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 8. 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 . . . . . . . . . . . . . . . . . . . . . . . . . .

Payments, net of recoveries, related to:

Current year . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2015

2014

2013

$1,011,780

(in thousands)
$1,018,365

$ 976,462

395,459
95,633

491,092

209,845
266,647

476,492

383,181
66,842

450,023

196,656
273,094

469,750

13,142

378,968
151,388

530,356

182,653
296,657

479,310

(9,143)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(42,500)

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

$ 983,880

$1,011,780

$1,018,365

Current year payments include $198.6 million, $174.4 million and $167.3 million in 2015, 2014 and 2013,
respectively, that primarily relate to the Company’s specialty insurance segment. Prior year payments, net of
recoveries, include $23.1 million, $23.2 million and $16.0 million in 2015, 2014 and 2013, respectively, that
relate to the Company’s specialty insurance segment.

“Other” primarily includes foreign currency translation gains and losses, assets acquired in connection with
claim settlements, and recoveries. Included for the year ended December 31, 2015, are recoveries of $23.8
million on reinsured losses related to a large commercial title claim. Payments and recoveries on reinsured losses
for the Company’s title insurance and property and casualty businesses were immaterial during the years ended
December 31, 2014 and 2013.

The provision for title insurance losses, expressed as a percentage of title insurance premiums and escrow

fees, was 6.6%, 7.1% and 8.9% for the years ended December 31, 2015, 2014 and 2013, respectively.

The current year rate of 6.6% reflects an ultimate loss rate of 4.2% for the current policy year and a $93.1
million net increase in loss reserve estimates for prior policy years. The increase in loss reserve estimates for
prior policy years was primarily attributable to a change in methodology used by the Company’s internal actuary
to estimate total ultimate losses. Historically, the internal actuary’s model did not separate claims experience for
large title claims from normal title claims activity. A large title claim is defined as a title claim with a total
ultimate loss in excess of $2.5 million. With this change in methodology, the model now separates claims
experience for large title claims from normal title claims activity when developing reserve estimates. As a result,
loss reserve estimates for prior policy years increased, primarily for policy years 2004 through 2007. The change
in methodology was implemented due to the increased frequency of large title claims experienced over the last
several years and the volatility associated with the timing and severity of large title claims. The Company
accounted for this change in methodology as a change in accounting estimate.

As of December 31, 2015, the IBNR claims reserve for the title insurance and services segment was $844.4
million, which reflected management’s best estimate. The Company’s internal actuary determined a range of

81

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

reasonable estimates of $719.5 million to $922.0 million. The range limits are $124.9 million below and $77.6
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 7.1% reflected an ultimate loss rate of 5.3% for policy year 2014 and a net increase in
loss reserve estimates for prior policy years of $64.1 million. The increase in loss reserve estimates for prior
policy years reflected claims development above expected levels during 2014, primarily from domestic
commercial policies. The reserve strengthening associated with domestic commercial policies was $41.4 million
and was primarily attributable to several large commercial claims, net of anticipated recoveries, mainly from
mechanics liens, and primarily related to policy years 2003, 2005 and 2007. Other factors, including a large
international commercial claim from policy year 2004, also contributed to the net increase in loss reserve
estimates for prior policy years.

The 2013 rate of 8.9% reflected an ultimate loss rate of 5.0% for policy year 2013 and a net increase in loss
reserve estimates for prior policy years of $150.2 million. The increase in loss reserve estimates for prior policy
years reflected claims development above expected levels during 2013, primarily from domestic lenders policies,
commercial policies and the Company’s guaranteed valuation product offered in Canada. The reserve
strengthening associated with domestic lenders policies was $67.4 million and was primarily attributable to
increased claims frequency for policy years 2004 through 2008. The increased claims frequency was primarily
due to mortgage lenders and servicers processing a large volume of foreclosures during 2013. As foreclosure
processing increases, lenders claims generally increase, because lenders claims typically come from foreclosures
in which the lender suffers a loss. At December 31, 2013, the Company expected the high level of foreclosure
processing to continue in the near term as mortgage lenders and servicers worked through their foreclosure
inventory. The reserve strengthening associated with domestic lenders policies reflected these expectations. The
reserve strengthening associated with commercial policies was $38.8 million and was primarily attributable to
several large commercial claims, mainly from mechanics liens, and primarily related to policy years 2007 and
2008. The reserve strengthening associated with the guaranteed valuation product offered in Canada was $21.7
million and was primarily attributable to claims frequency exceeding the Company’s expectations during 2013.
The increase in frequency primarily related to policy years 2007 and 2010.

The projected ultimate loss ratios, as of December 31, 2015, for policy years 2015, 2014 and 2013 were

4.2%, 4.7% and 3.7%, respectively.

A summary of the Company’s loss reserves is as follows:

(in thousands, except percentages)

December 31,
2015

December 31,
2014

Known title claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incurred but not reported claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 87,543
844,364

8.9% $ 165,330
802,069
85.8%

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

931,907
51,973

94.7%
5.3%

967,399
44,381

16.3%
79.3%

95.6%
4.4%

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

$983,880

100.0% $1,011,780

100.0%

The Company’s reserve for known title claims was $87.5 million at December 31, 2015, a decline of $77.8
million, or 47.0%, from the balance at December 31, 2014. This decline is primarily attributable to settlement

82

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

payments associated with certain large claims during the first quarter of 2015. The reserve for known title claims
associated with these claims recorded at December 31, 2014 was $56.0 million. The Company paid $35.0
million, net of $21.0 million recovered through reinsurance, during the first quarter of 2015 to settle these claims.

NOTE 9.

Notes and Contracts Payable:

4.60% senior unsecured notes due November 15, 2024, net of unamortized discount of
$66 and $74 at December 31, 2015 and 2014, respectively, effective interest rate of
4.60% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.30% senior unsecured notes due February 1, 2023, net of unamortized discount of $680

and $760 at December 31, 2015 and 2014, respectively, effective interest rate of
4.35% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust deed notes with maturities through 2023, collateralized by land and buildings with a
net book value of $50,514 and $52,414 at December 31, 2015 and 2014, respectively,
weighted-average interest rate of 5.34% and 5.39%, at December 31, 2015 and 2014,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other notes and contracts payable with maturities through 2032, weighted-average

December 31,

2015

2014

(in thousands, except
percentages)

$299,934

$299,926

249,320

249,240

30,308

34,420

interest rate of 4.21% and 5.30% at December 31, 2015 and 2014, respectively . . . . . . .

5,540

3,751

$585,102

$587,337

The weighted-average interest rate for the Company’s notes and contracts payable was 4.51% and 4.52% at

December 31, 2015 and 2014, respectively.

The Company maintains a credit agreement with JPMorgan Chase Bank, N.A.

in its capacity as
administrative agent and the lenders party thereto. The credit agreement is comprised of a $700.0 million
revolving credit facility. Unless terminated earlier, the revolving loan commitments under the credit agreement
will terminate on May 14, 2019. The obligations of the Company under the credit agreement are neither secured
nor guaranteed. Proceeds under the credit agreement may be used for general corporate purposes. At
December 31, 2015, the Company had no outstanding borrowings under the facility.

The credit agreement includes an expansion option that permits the Company, subject to satisfaction of
certain conditions, to increase the revolving commitments and/or add term loan tranches (“Incremental Term
Loans”) in an aggregate amount not to exceed $150.0 million. Incremental Term Loans, if made, may not mature
prior to the revolving commitment termination date, provided that amortization may occur prior to such date.

At the Company’s election, borrowings under the credit agreement bear interest at (a) the Alternate Base
Rate plus the applicable spread or (b) the Adjusted LIBOR rate plus the applicable spread (in each case as
defined in the agreement). 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 applicable spread varies
depending upon the debt rating assigned by Moody’s Investor Service, Inc. and/or Standard & Poor’s Rating
Services. The minimum applicable spread for Alternate Base Rate borrowings is 0.625% and the maximum is
1.00%. The minimum applicable spread for Adjusted LIBOR rate borrowings is 1.625% and the maximum is
2.00%. The rate of interest on Incremental Term Loans will be established at or about the time such loans are
made and may differ from the rate of interest on revolving loans.

83

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 an event of default the lenders may accelerate the loans. Upon the occurrence of certain insolvency
and bankruptcy events of default the loans will automatically accelerate. As of December 31, 2015, the Company
was in compliance with the financial covenants under the credit agreement.

The aggregate annual maturities for notes and contracts payable for the next five years and thereafter, are as

follows:

Year

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Annual
maturities

(in thousands)

$

5,018
5,493
4,582
4,234
3,871
561,904

$585,102

NOTE 10. Net Investment Income:

The components of net investment income are as follows:

Year ended December 31,

2015

2014

2013

(in thousands)

Interest:

Cash equivalents and deposits with banks . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on equity securities . . . . . . . . . . . . . . . . . . . .
Equity in earnings of affiliates, net . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3,822
76,822
1,841
—
11,751
7,800
314

Total investment income . . . . . . . . . . . . . . . . . . . . . . . . .
Investment expenses (1) . . . . . . . . . . . . . . . . . . . . . . . . .

102,350
(1,797)

$ 4,471
56,373
1,213
3,755
11,961
(16,545)
10,488

71,716
(675)

$ 3,694
47,226
2,009
5,474
11,776
5,316
14,400

89,895
—

Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .

$100,553

$ 71,041

$89,895

(1)

Investment expenses include fees paid to third party investment managers, which the Company began
utilizing in 2014.

84

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11.

Income Taxes:

For the years ended December 31, 2015, 2014 and 2013, domestic and foreign pretax income from
continuing operations before noncontrolling interests was $383.5 million and $49.3 million, $301.8 million and
$48.8 million, and $286.2 million and $24.5 million, respectively.

Income taxes are summarized as follows:

Year ended December 31,

2015

2014

2013

(in thousands)

Current:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 94,036
3,636
10,589

$ 87,189
4,751
812

$ 86,406
7,887
24,331

Deferred:

Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

108,261

92,752

118,624

33,446
3,413
(1,225)

35,634

15,594
(304)
8,303

23,593

8,937
9,774
(13,691)

5,020

$143,895

$116,345

$123,644

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,

2015

2014

2013

Taxes calculated at federal rate . . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit
. . . . . . . . . . . . . . . . . . .
Change in liability for tax positions . . . . . . . . . . . . . . . . .
Foreign income taxed at different rates . . . . . . . . . . . . . . .
Foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$151,468
4,581
1,094
(7,111)
(1,710)
(4,427)

(in thousands, except percentages)
35.0% $122,696
2,891
1.1
412
0.3
(6,091)
(1.6)
(2,184)
(0.4)
(1,379)
(1.1)

35.0% $108,748
11,480
0.8
3,537
0.1
8,567
(1.7)
(5,640)
(0.6)
(3,048)
(0.4)

35.0%
3.7
1.1
2.8
(1.8)
(1.0)

$143,895

33.3% $116,345

33.2% $123,644

39.8%

The Company’s effective income tax rates (income tax expense as a percentage of income before income
taxes) were 33.3% for 2015, 33.2% for 2014 and 39.8% for 2013. The differences in the effective tax rates were
primarily due to changes in state and foreign income taxes resulting from fluctuations in the Company’s
noninsurance and foreign subsidiaries’ contribution to pretax income and changes in the ratio of permanent
differences to income before income taxes. In addition, the tax rate for 2014 reflected non-recurring tax benefits
resulting from certain adjustments to the Company’s state and non-U.S. tax accounts. The 2015 rate includes a
benefit for the release of valuation allowances previously provided against certain foreign net operating losses
and other deferred tax assets.

85

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

are as follows:

Deferred tax assets:

Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax liabilities:

Depreciable and amortizable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Claims and related salvage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2015

2014

(in thousands)

$ 11,639
77,994
14,943
—
3,062
105,398
15,541
6,128
1,769
7,904

$

9,887
74,068
15,253
13,670
2,507
120,401
23,727
—
2,184
8,712

244,378
(6,729)

270,409
(15,706)

237,649

254,703

304,632
40,901
3,193
—

348,726

284,532
36,653
—
8,934

330,119

Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$111,077

$ 75,416

The exercise of stock options and vesting of RSUs represent a tax benefit that has been reflected as a
reduction of taxes payable and an increase to equity. The benefits recorded were $9.5 million and $6.9 million for
the years ended December 31, 2015 and 2014, respectively.

In connection with the Company’s June 2010 spin-off from its prior parent, which subsequently assumed the
name CoreLogic, Inc. (“CoreLogic”), it entered into a tax sharing agreement which governs the Company’s and
CoreLogic’s respective rights, responsibilities and obligations for certain tax related matters. At December 31,
2015 and 2014, the Company had a net payable to CoreLogic of $36.5 million and $35.1 million, respectively,
related to tax matters prior to the spin-off. This amount is included in the Company’s consolidated balance sheets
in accounts payable and accrued liabilities. The increase during the current year was primarily the result of an
additional accrual for tax matters prior to the spin-off.

At December 31, 2015, the Company had available a foreign tax credit carryover of $1.8 million. The

Company expects to utilize these credits within the carryover period.

At December 31, 2015, the Company had available net operating loss carryforwards for income tax
purposes totaling $92.9 million, consisting of federal, state and foreign losses of $0.4 million, $38.8 million and
$53.7 million, respectively. Of the aggregate net operating losses, $28.0 million have an indefinite expiration and

86

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the remaining $64.9 million expire at various times beginning in 2016. The Company carries a valuation
allowance of $6.7 million against its deferred tax assets. Of this amount, $5.7 million relates to net operating
losses; the remaining $1.0 million relates to other foreign deferred tax assets. The year-over-year decrease in the
overall valuation allowance is primarily due to the release of valuation allowances previously provided against
certain foreign net operating losses and other deferred tax assets.

The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and
adjusts the 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. The ability or failure to achieve the forecasted taxable income in the applicable taxing
jurisdictions could affect the ultimate realization of deferred tax assets. Based on future operating results in
certain jurisdictions, it is possible that the current valuation allowance positions of those jurisdictions could be
adjusted in the next 12 months.

As of December 31, 2015 and 2014, U.S. taxes were not provided for on the cumulative earnings of the
Company’s foreign subsidiaries of $155.7 million and $132.8 million, respectively, 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, 2015, 2014 and 2013, the liability for income taxes associated with uncertain tax
positions was $23.8 million, $24.1 million and $47.8 million, respectively. The net decreases in the liabilities
during 2015 and 2014 were primarily attributable to activity related to examinations conducted by various taxing
authorities. The net decrease in the liability during 2013 was primarily attributable to the Company’s effective
settlement of a prior year tax return position. The liabilities could be reduced by $3.4 million as of December 31,
2015 and 2014, and by $32.6 million as of December 31, 2013, due to offsetting tax benefits associated with the
correlative effects of potential adjustments, including timing adjustments and state income taxes. The net
amounts of $20.4 million, $20.7 million and $15.2 million as of December 31, 2015, 2014 and 2013,
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, 2015, 2014 and 2013 is as follows:

December 31,

2015

2014

2013

Unrecognized tax benefits—opening balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross decreases—prior period tax positions . . . . . . . . . . . . . . . . . . . . . . . . .
Gross increases—current period tax positions . . . . . . . . . . . . . . . . . . . . . . . .

$24,100
(800)
500

(in thousands)
$ 47,800
(24,100)
400

$47,900
(600)
500

Unrecognized tax benefits—ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$23,800

$ 24,100

$47,800

The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax
positions in income tax expense. As of December 31, 2015, 2014 and 2013, the Company had accrued $9.7
million, $8.9 million and $4.7 million, respectively, of interest and penalties (net of tax benefits of $4.1 million,
$3.7 million and $1.9 million, respectively) related to uncertain tax positions.

87

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. During 2015, the Company concluded U.S. federal income tax examinations for
calendar years 2010 and 2011. No material adjustments resulted from these examinations. The Company is
generally 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 decrease within the next 12 months. These changes may
be the result of ongoing audits or the expiration of federal and state statutes of limitations for the assessment of
taxes.

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, from any adjustments that may result from these examinations have been provided for.

NOTE 12. Earnings Per Share:

The computation of basic and diluted earnings per share is as follows:

2015

2014

2013

(in thousands, except per share data)

Numerator

Net income attributable to the Company . . . . . . . . . . . . . . .
Less: dividends and undistributed earnings allocated to

$288,086

$233,534

$186,367

unvested RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

321

514

324

Net income allocated to common stockholders . . . . . . . . . .

$287,765

$233,020

$186,043

Denominator

Basic weighted-average shares . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive employee stock options and RSUs . . . . . .

Diluted weighted-average shares . . . . . . . . . . . . . . . . . . . . .

108,427
1,399

109,826

106,884
1,804

108,688

106,991
2,111

109,102

Net income per share attributable to the Company’s

stockholders

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

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

$

$

2.65

2.62

$

$

2.18

2.15

$

$

1.74

1.71

For the years ended December 31, 2015, 2014 and 2013, 6 thousand, 133 thousand and 11 thousand,
respectively, of stock options and RSUs were excluded from the weighted-average diluted common shares
outstanding due to their antidilutive effect.

88

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 13. Employee Benefit Plans:

The First American Financial Corporation 401(k) Savings Plan (the “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 the contributions of
participants. Effective July 1, 2015, participants in the Savings Plan can no longer make additional investments
in common stock of the Company. The Savings Plan held 3,129,000 shares and 3,528,000 shares of the
Company’s common stock, representing 2.9% and 3.3% of the Company’s total common shares outstanding at
December 31, 2015 and 2014, respectively.

The Company maintains a deferred compensation plan for certain employees that allows participants to defer
up to 100% of their salary, commissions and certain bonuses. Participants can allocate their deferrals among a
variety of investment crediting options (known as “deemed investments”). The term deemed investments means 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 each participant’s deferral account over time. Participants can elect to have their
deferral balance paid out 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. Participant deferrals, and any earnings on those deferrals, are
general unsecured obligations of the Company. The Company informally funds 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, 2015 and 2014,
the value of the assets in the Rabbi Trust of $73.1 million and $78.6 million, respectively, and the unfunded
liabilities of $76.3 million and $76.4 million, respectively, 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 plan with benefits based on an
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. The Executive and Management Supplemental Benefit Plans, subject to certain limitations, provide
participants with maximum benefits of 30% and 15%, respectively, of average annual compensation over a fixed
five year period. Effective January 1, 2011, the plans were closed to new participants.

Certain of the Company’s subsidiaries have separate savings plans and the Company’s international
subsidiaries have other employee benefit plans. Expenses related to these plans and the Company’s deferred
compensation plan are included in the table below under other plans, net.

89

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The principal components of employee benefit plan expenses are as follows:

Year ended December 31,

2015

2014

2013

(in thousands)

Expense:

Savings plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit pension plans . . . . . . . . . . . . . . . . . .
Unfunded supplemental benefit plans . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other plans, net

$37,326
18,611
17,373
3,812

$16,333
13,465
14,614
9,259

$10,458
20,975
16,673
15,479

$77,122

$53,671

$63,585

The following table summarizes the benefit obligations, assets and funded status associated with the

Company’s defined benefit pension and supplemental benefit plans:

December 31,

2015

2014

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$450,667
—
17,537
(4,775)
(25,583)
(21,430)

$ 262,137
1,560
10,207
—
(11,835)
(13,409)

$ 382,035
—
18,644
—
76,164
(26,176)

$ 226,458
1,315
10,536
—
37,281
(13,453)

Projected benefit obligation at end of year . . . . . . . . . . . . . .

416,416

248,660

450,667

262,137

Change in plan assets:

Fair value of plan assets at beginning of year . . . . . . . .
Actual (losses) returns on plan assets . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

339,365
(9,620)
21,672
(21,430)

—
—
13,409
(13,409)

Fair value of plan assets at end of year . . . . . . . . . . . . . . . . .

329,987

—

313,469
24,400
27,672
(26,176)

339,365

—
—
13,453
(13,453)

—

Reconciliation of funded status:

Unfunded status of the plans . . . . . . . . . . . . . . . . . . . . .

$ (86,429)

$(248,660)

$(111,302)

$(262,137)

Amounts recognized in the consolidated balance sheet:

Accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . .

$ (86,429)

$(248,660)

$(111,302)

$(262,137)

Amounts recognized in accumulated other comprehensive

loss:

Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . .
Unrecognized prior service (credit) cost . . . . . . . . . . . .

$202,087
(4,775)

$ 99,023
(20,785)

$ 219,081
15

$ 120,642
(24,964)

$197,312

$ 78,238

$ 219,096

$ 95,678

Accumulated benefit obligation at end of year . . . . . . . . . . .

$416,416

$ 248,660

$ 450,667

$ 262,137

90

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net periodic cost related to the Company’s defined benefit pension and supplemental benefit plans includes

the following components:

Year ended December 31,

2015

2014

2013

(in thousands)

Expense:

Service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . .

$ 1,560
27,744
(21,802)
32,645
(4,163)

$ 1,315
29,180
(20,850)
22,587
(4,153)

$ 1,915
26,861
(18,776)
32,033
(4,385)

$ 35,984

$ 28,079

$ 37,648

Net actuarial loss and prior service credit for the defined benefit pension and supplemental benefit plans
expected to be amortized from accumulated other comprehensive loss into net periodic cost over the next fiscal
year include an expense of $28.2 million and a credit of $4.8 million, respectively.

Weighted-average actuarial assumptions used to determine costs for the plans for the years ended

December 31, 2015 and 2014, were as follows:

December 31,

2015

2014

Defined benefit pension plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.07% 4.97%
6.50% 6.50%

Unfunded supplemental benefit plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.00% 4.80%

Weighted-average actuarial assumptions used to determine benefit obligations for the plans at December 31,

2015 and 2014, were as follows:

December 31,

2015

2014

Defined benefit pension plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.31% 4.07%

Unfunded supplemental benefit plans

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.33% 4.00%

The discount rate assumption used for the Company’s benefit plans reflects the yield available on high-

quality, fixed-income debt securities that match the expected timing of the benefit obligation payments.

At December 31, 2015, the Company elected to change the method it uses to estimate the interest and
service components of net periodic cost for its defined benefit pension and supplemental benefit plans, which
will impact the estimate of net periodic cost beginning in 2016. The Company will utilize a full yield curve
approach in the estimation of these components by applying the specific spot rates along the yield curve used in
the determination of the benefit obligation to the relevant projected cash flows. Previously, the Company

91

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

estimated the interest and service cost components utilizing a single weighted-average discount rate derived from
the yield curve used to measure the benefit obligation at the beginning of the period. This change compared to
the previous method will impact the interest and service components of net periodic cost in future periods. The
Company made this change to provide a more precise measurement of interest and service costs by improving
the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change
does not affect the measurement of the total benefit obligation as the change in the interest and service costs is
offset in net actuarial gains and losses. The impact to interest and service costs is not expected to be significant.
The Company will account for this change prospectively as a change in accounting estimate.

Assumptions for the expected long-term rate of return on assets of the defined benefit pension plans 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 actual and expected returns for the asset classes and
(2) projections of inflation over the long-term period during which benefits are payable to plan participants. The
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 Company has an investment policy which governs the management of, and strategy for, assets of the
plan. 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.

Under the 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.

92

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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%

A summary of the defined benefit pension plan’s asset allocations are as follows:

100%
85%
70%
60%
50%
40%
30%
15%

December 31,

2015

2014

Asset category

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balanced funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1% 0.3%
57.2% 45.5%
39.3% 32.5%
19.4%
2.4% 2.3%

The Company expects to make cash contributions to its defined benefit and unfunded supplemental benefit

plans of $23.4 million and $14.6 million, respectively, during 2016.

Benefit payments for all plans, which reflect expected future service, as appropriate, are expected to be

made as follows:

Year

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Five years thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$ 42,890
$ 43,985
$ 44,920
$ 44,935
$ 44,701
$223,753

The Company categorizes its defined benefit pension plan assets, carried at fair value, using a three-level
hierarchy for fair value measurements. See Note 14 Fair Value Measurements for a more in-depth discussion on
the fair value hierarchy and a description for each level.

93

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the fair value of the Company’s defined benefit pension plan assets as of

December 31, 2015 and 2014:

December 31, 2015

Estimated fair
value

Level 1

Level 2

Level 3

(in thousands)

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income funds (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3,621
129,633
188,801
7,932

$

3,621
83,675
116,204
—

$ — $ —
—
—
7,932

45,958
72,597
—

$329,987

$203,500

$118,555

$7,932

December 31, 2014

Estimated fair
value

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income funds (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balanced funds (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

1,101
154,279
110,405
65,856
7,724

Level 1

Level 2

Level 3

(in thousands)

$

1,101
101,304
59,507
—
—

$ — $ —
—
—
—
7,724

52,975
50,898
65,856
—

$339,365

$161,912

$169,729

$7,724

(a)

(b)

(c)

(d)

Investments in passively managed index funds, actively managed mutual funds with holdings in domestic
and international equities, and investments in domestic equities. These investments are valued at the closing
price reported on the major market on which the individual securities are traded or the Net Asset Value
(“NAV”) provided by the administrator of the fund.
Investments in passively managed index funds and actively managed mutual funds with holdings in
domestic and foreign corporate bonds, foreign government bonds, mortgage-backed securities, and other
fixed income instruments. These investments are valued using matrix pricing models and quoted prices of
the securities in active markets.
Investments in global multi-asset risk parity strategy funds with holdings in domestic and international debt
and equity securities, commodities, real estate, and derivative investments. These investments are valued
using the NAV provided by the administrator of the fund.
Investments in a guaranteed deposit fund with holdings in insurance contracts. These investments are valued
at contract value of the fund including contributions and earnings, less applicable costs and liabilities, as
provided by the administrator of the fund.

NOTE 14.

Fair Value Measurements:

Certain of the Company’s assets are carried at fair value. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date.

The Company categorizes its assets and liabilities carried at fair value 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 Company (observable inputs) and the Company’s own assumptions
about market participant assumptions developed based on the best information available in the circumstances
(unobservable inputs). The hierarchy for inputs used in determining fair value maximizes the use of observable

94

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.
The hierarchy level assigned to the assets and liabilities is based on management’s assessment of the
transparency and reliability of the inputs used to estimate the fair values 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 assets or
liabilities.

Level 2—Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for
similar assets or liabilities 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 into different levels of the fair value hierarchy, the hierarchy

level assigned is based upon the lowest level of input that is significant to the fair value measurement.

Assets measured at fair value on a recurring basis

The valuation techniques and inputs used by the Company to estimate the fair value of assets measured on a

recurring basis, are summarized as follows:

Debt securities

The fair values of debt securities were 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 government bonds, governmental agency bonds, governmental agency mortgage-
backed securities and U.S. and foreign 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. Non-agency mortgage-backed securities and certain corporate debt securities were not
actively traded and there were fewer observable inputs available requiring the use of more judgment in
determining their fair values, which resulted in their classification as Level 3.

95

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Equity securities

The fair values 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 fair values of the Company’s assets, measured on a recurring basis, as of

December 31, 2015 and 2014:

(in thousands)

December 31, 2015
Assets:

Total

Level 1

Level 2

Level 3

Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency mortgage- backed securities . . . . . .
U.S. corporate debt securities . . . . . . . . . . . . . . . . . . . . . . .
Foreign corporate debt securities . . . . . . . . . . . . . . . . . . . .

Equity securities:
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 129,372
703,795
130,101
418,091
2,055,673
634,683
207,632

4,279,347

$ — $ 129,372
703,795
130,101
418,091
2,055,673
591,116
201,060

—
—
—
—
—
—

$ —
—
—
—
—
43,567
6,572

—

4,229,208

50,139

15,467
305,818

15,467
305,818

321,285

321,285

—
—

—

—
—

—

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,600,632

$321,285

$4,229,208

$50,139

(in thousands)

December 31, 2014
Assets:

Total

Level 1

Level 2

Level 3

Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . . . . . . . . . . . . . .
Governmental agency mortgage- backed securities . . . . . .
Non-agency mortgage-backed securities . . . . . . . . . . . . . .
U.S. corporate debt securities . . . . . . . . . . . . . . . . . . . . . . .
Foreign corporate debt securities . . . . . . . . . . . . . . . . . . . .

Equity securities:
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

64,982
587,677
134,938
197,874
1,812,162
16,538
452,129
183,952

3,450,252

$ — $
—
—
—
—
—
—
—

64,982
587,677
134,938
197,874
1,812,162

—
452,129
183,952

$ —
—
—
—
—
16,538
—
—

—

3,433,714

16,538

15,525
386,887

15,525
386,887

402,412

402,412

—
—

—

—
—

—

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,852,664

$402,412

$3,433,714

$16,538

96

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

There were no transfers between levels during the years ended December 31, 2015 and 2014. Transfers into
or out of the Level 3 category occur when unobservable inputs become more or less significant to the fair value
measurement. The Company’s policy is to recognize transfers between levels in the fair value hierarchy at the
end of the reporting period.

The following table presents a summary of the changes in the fair values of Level 3 assets measured on a

recurring basis for the years ended December 31, 2015 and 2014:

(in thousands)

December 31, 2015

December 31, 2014

U.S.
corporate
debt
securities

Foreign
corporate
debt
securities

Non-agency
mortgage-
backed
securities

Non-agency
mortgage-backed
securities

Total

Fair value at beginning of period . . . . . . . . . . . . .

$ — $ —

$ 16,538

$ 16,538

$19,022

Net realized and unrealized gains (losses):

Included in earnings . . . . . . . . . . . . . . .
Included in other comprehensive

(77)

(5)

(1,015)

(1,097)

(1,701)

income (loss)

. . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . .

(839)
47,612
(960)
(2,169)

(113)
7,307
(381)
(236)

(589)
—
(14,934)
—

(1,541)
54,919
(16,275)
(2,405)

1,225
—
—
(2,008)

Fair value at end of period . . . . . . . . . . . . . . . . . .

$43,567

$6,572

$ — $ 50,139

$16,538

Unrealized gains (losses) included in earnings
for the period relating to Level 3 assets that
were still held at the end of the period:
Net other-than-temporary

impairment losses . . . . . . . . . . .

$

(75) $ —

$ — $

(75)

$ (1,701)

Financial instruments not measured at fair value

In estimating the fair values of its financial instruments not measured at fair value, 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.

Deposits with banks

The fair value of deposits with banks is estimated based on rates currently offered for deposits of similar

remaining maturities, where applicable.

Notes receivable, net

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 credit quality.

97

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deposits

The carrying value of escrow and other deposit accounts approximates fair value due to the short-term

nature of these liabilities.

Notes and contracts payable

The fair value of notes and contracts payable is estimated based on current rates offered to the Company for

debt of similar remaining maturities.

The following table presents the carrying amounts and estimated fair values of the Company’s financial

instruments not measured at fair value as of December 31, 2015 and 2014:

(in thousands)

December 31, 2015
Assets:

Carrying
Amount

Estimated fair value

Total

Level 1

Level 2

Level 3

Cash and cash equivalents . . . . . . . . . . . . . . . .
Deposits with banks . . . . . . . . . . . . . . . . . . . .
Notes receivable, net . . . . . . . . . . . . . . . . . . . .

$1,027,321
23,224
$
5,866
$

$1,027,321
23,211
$
5,791
$

$1,027,321
$
1,103
$

$ — $ —
$ —
$ 22,108
— $ — $5,791

Liabilities:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . .

$2,699,015
$ 585,102

$2,699,015
$ 590,970

$2,699,015
$

$ — $ —
$7,077

— $583,893

(in thousands)

December 31, 2014
Assets:

Carrying
Amount

Estimated fair value

Total

Level 1

Level 2

Level 3

Cash and cash equivalents . . . . . . . . . . . . . . . .
Deposits with banks . . . . . . . . . . . . . . . . . . . .
Notes receivable, net . . . . . . . . . . . . . . . . . . . .

$1,190,080
21,445
$
6,130
$

$1,190,080
21,540
$
3,930
$

$1,190,080
4,068
$
$

$ — $ —
$ —
$ 17,472
— $ — $3,930

Liabilities:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . .

$2,332,714
$ 587,337

$2,332,714
$ 595,087

$2,332,714
$

$ — $ —
$6,545

— $588,542

NOTE 15. Share-Based Compensation Plans:

The First American Financial Corporation 2010 Incentive Compensation Plan (the “Incentive Compensation
Plan”), effective May 28, 2010, permits the granting of stock options, stock appreciation rights, restricted stock,
RSUs, performance units, performance shares and other stock-based awards. Eligible participants in the Incentive
Compensation Plan include the Company’s directors and officers, as well as other employees. At December 31,
2015, 5.2 million shares of common stock remain available to be issued from either authorized and unissued
shares or previously issued shares acquired by the Company, subject to certain annual limits 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.

The First American Financial Corporation 2010 Employee Stock Purchase Plan (the “ESPP”) allows eligible
employees the option to purchase common stock of the Company at 85% of the lower of the closing price on

98

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

either the first or last day of each quarterly offering period. There were 335,000 and 354,000 shares issued in
connection with this plan for the years ended December 31, 2015 and 2014, respectively. At December 31, 2015,
there were 3.1 million shares reserved for future issuances.

The following table presents compensation expense associated with the Company’s share-based

compensation plans:

Expense:

2015

2014

2013

(in thousands)

Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . .

$21,761
271
2,307

$17,197
271
1,834

$20,827
8
1,466

$24,339

$19,302

$22,301

The following table summarizes RSU activity for the year ended December 31, 2015:

(in thousands, except weighted-average grant-date fair value)

RSUs unvested at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

2,337
801
(1,047)
(31)

RSUs unvested at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,060

Weighted-average
grant-date
fair value

$21.21
$34.68
$18.96
$28.96

$27.47

As of December 31, 2015, there was $23.2 million of total unrecognized compensation cost related to
unvested RSUs that is expected to be recognized over a weighted-average period of 2.6 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, 2015, 2014 and 2013 was $3.3 million, $3.2
million and $4.3 million, respectively.

The following table summarizes stock option activity for the year ended December 31, 2015:

(in thousands, except weighted-average
exercise price and contractual term)

Number
outstanding

Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .
Exercised during 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

686
(554)

Weighted-
average
remaining
contractual
term

Aggregate
intrinsic
value

Weighted-
average
exercise
price

$20.18
$18.40

Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .

Vested and expected to vest at December 31, 2015 . . . . . .

Exercisable at December 31, 2015 . . . . . . . . . . . . . . . . . . .

132

132

66

$27.66

8.0 years

$1,091

$27.66

8.0 years

$1,091

$27.66

8.0 years

$ 545

As of December 31, 2015, there was $0.5 million of total unrecognized compensation cost related to
unvested stock options of the Company that is expected to be recognized over a weighted-average period of 2.0
years.

99

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, 2015, 2014 and 2013 was $9.7
million, $7.0 million and $6.0 million, 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 16. Stockholders’ Equity:

In March 2014, the Company’s board of directors approved an increase in the size of the Company’s stock
repurchase plan from $150.0 million to $250.0 million, of which $182.9 million remained as of December 31,
2015. 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, 2015 and as of December 31, 2015, had repurchased and retired 3.2 million shares
of its common stock under the current authorization for a total purchase price of $67.1 million. In January 2016,
the Company repurchased and retired 14 thousand shares of its common stock for a total purchase price of $454
thousand.

NOTE 17. 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 noncancelable lease terms in

excess of one year as of December 31, 2015 are as follows:

Year

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$ 82,684
67,031
49,082
35,537
26,051
54,140

$314,525

Total rental expense for all operating leases and month-to-month rentals was $93.3 million, $93.5 million

and $94.6 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Other commitments and guarantees

At December 31, 2015 and 2014, the Company was contingently liable for guarantees of indebtedness owed
by affiliates and third parties to banks and others totaling $8.2 million and $8.9 million, respectively. The
guarantee arrangements relate to promissory notes and other contracts that contingently require the Company to
make payments to the guaranteed party upon the failure of debtors to make scheduled payments according to the
terms of the notes and contracts. The Company’s maximum potential obligation under these guarantees totaled
$8.2 million and $8.9 million at December 31, 2015 and 2014, respectively, and is limited in duration to the

100

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2015
and 2014.

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, 2015 and 2014.

NOTE 18. Accumulated Other Comprehensive Income (Loss) (“AOCI”):

The following table presents a summary of the changes in each component of AOCI for the years ended

December 31, 2015, 2014 and 2013:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gains (losses) on securities . . . .
Change in foreign currency translation adjustment
. .
Net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gains (losses) on securities . . . .
Change in foreign currency translation adjustment
. .
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gains (losses) on securities . . . .
. .
Change in foreign currency translation adjustment
Net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

$ 21,938
(50,191)
—
—
—
—
19,526

(8,727)
31,118
—
—
—
—
(11,480)

10,911
(42,205)
—
—
—
—
14,893

(in thousands)

$ 9,924

$(182,408)

—
(13,650)
—
—
—
—

(3,726)
—
(16,694)
—
—
—
—

(20,420)
—
(36,822)
—
—
—
—

—
—
53,080
32,033
(4,385)
(31,404)

(133,084)

—
—

(109,924)
22,587
(4,153)
34,994

(189,580)

—
—
10,743
32,645
(4,163)
(15,002)

$(150,546)
(50,191)
(13,650)
53,080
32,033
(4,385)
(11,878)

(145,537)
31,118
(16,694)
(109,924)
22,587
(4,153)
23,514

(199,089)
(42,205)
(36,822)
10,743
32,645
(4,163)
(109)

Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .

$(16,401)

$(57,242) $(165,357)

$(239,000)

101

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Components of AOCI allocated to the Company and noncontrolling interests at December 31, 2015, 2014

and 2013, are as follows:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

(in thousands)

2015
Allocated to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to noncontrolling interests . . . . . . . . . . . . . . . . .

$(16,404)
3

$(57,242) $(165,357)

—

—

$(239,003)
3

Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .

$(16,401)

$(57,242) $(165,357)

$(239,000)

2014
Allocated to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to noncontrolling interests . . . . . . . . . . . . . . . . .

$ 10,894
17

$(20,420) $(189,580)

—

—

$(199,106)
17

Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .

$ 10,911

$(20,420) $(189,580)

$(199,089)

2013
Allocated to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to noncontrolling interests . . . . . . . . . . . . . . . . .

$ (8,734)
7

$ (3,726) $(133,084)

—

—

$(145,544)
7

Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . .

$ (8,727)

$ (3,726) $(133,084)

$(145,537)

The following table presents the other comprehensive income (loss) reclassification adjustments for the

years ended December 31, 2015, 2014 and 2013:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Total
other
comprehensive
income (loss)

(in thousands)

Year ended December 31, 2015

Pretax change before reclassifications . . . . . . . . . . . .
Reclassifications out of AOCI
. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

$(46,601)
4,396
14,893

$(36,822) $ 10,743
28,482
(15,002)

—
—

$(72,680)
32,878
(109)

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

$(27,312)

$(36,822) $ 24,223

$(39,911)

Year ended December 31, 2014

Pretax change before reclassifications . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Reclassifications out of AOCI
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

$ 52,693
(21,575)
(11,480)

$(16,694) $(109,924)
18,434
34,994

—
—

$(73,925)
(3,141)
23,514

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

$ 19,638

$(16,694) $ (56,496)

$(53,552)

Year ended December 31, 2013

Pretax change before reclassifications . . . . . . . . . . . .
Reclassifications out of AOCI
. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

$(40,396)
(9,795)
19,526

$(13,650) $ 53,080
27,648
(31,404)

—
—

$

(966)
17,853
(11,878)

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

$(30,665)

$(13,650) $ 49,324

$ 5,009

102

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the effect of the reclassifications out of AOCI on the respective line items in

the consolidated statements of income:

(in thousands)

Unrealized gains (losses) on securities:

Net realized gains (losses) on sales of securities . . . . . .

Amounts reclassified
from AOCI

Year ended
December 31,

2015

2014

$ (2,147) $ 23,276

Net other-than-temporary impairment losses . . . . . . . . .

Pretax total

(1,701)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,396) $ 21,575

(2,249)

Tax effect

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,551 $ (7,959)

Pension benefit adjustment:
Amortization of defined benefit pension and supplemental

benefit plan items:

Affected line items in the
consolidated statements of income

Net realized investment gains
(losses)
Net realized investment gains
(losses)

Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(32,645) $(22,587)(1)
Prior service credit
4,153(1)
Pretax total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(28,482) $(18,434)

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

4,163

Tax effect

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,893 $ 7,051

(1) These components of AOCI are included in the computation of net periodic cost. See Note 13 Employee

Benefit Plans for additional details.

NOTE 19. Litigation and Regulatory Contingencies:

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

frequently 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 minimis). 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.

103

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

•

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.

A court has granted class certification in Lewis. 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.

•

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 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. The Company believes the estimate of the possible loss
or range of loss is not material to the consolidated financial statements as a whole.

•

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.

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.

• misclassified certain employees, including

•

Sager v. Interthinx, Inc., filed on January 23, 2015 and pending in the Superior Court of the State of
California, County of Los Angeles, and

• Weber v. Interthinx, Inc., et al., filed on April 17, 2015 and pending in the United States District

Court for the Eastern District of Missouri.

These lawsuits are putative class actions for which a class has not been certified. For the reasons
described above, as well as the applicability of certain indemnification rights the Company may have,
the Company has not yet been able to assess the probability of loss or estimate the possible loss or the
range of loss.

104

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

overcharged or improperly charged fees for products and services, denied home warranty claims, failed
to timely file certain documents, and gave items of value to developers, builders, brokers and others as
inducements to refer business in violation of certain laws, such as consumer protection laws and laws
generally prohibiting unfair business practices, and certain obligations, including

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

the United States District Court of New Jersey,

• Downing v. First American Title Insurance Company, et al., filed on October 2, 2015 and pending

in the United States District Court for the Northern District of Georgia,

• 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, et al., filed on June 15, 2006 and pending in the

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

• McCormick v. First American Real Estate Services, Inc., et al., filed on December 31, 2015 and

pending in the Superior Court of the State of California, County of Orange,

•

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,

• 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, and

•

In re First American Home Buyers Protection Corporation, consolidated on October 9, 2014 and
pending in the United States District Court for the Southern District of California.

All of these lawsuits, except Kaufman and Kirk, are putative class actions for which a class has not
been certified. In Kaufman a class was certified but that certification was subsequently vacated. A trial
of the Kirk matter has concluded, plaintiff has filed a notice of appeal and the Company filed a cross
appeal. 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 or, where the Company has been able to make an
estimate, the Company believes the amount is not material to the consolidated financial statements as a
whole.

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 consolidated 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,

105

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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’s Canadian operations provide certain services to lenders which it believes to be exempt from
excise tax under applicable Canadian tax laws. However, in October 2014, the Canadian taxing authority
provided internal guidance that the services in question should be subject to the excise tax. While discussions
with the taxing authority are ongoing, the Company believes that the guidance may result in an assessment. The
amount, if any, of such assessment is not currently known, and any such assessment would be subject to
negotiation. In the event that the Company disagrees with the ultimate assessment, the Company intends to avail
itself of avenues of appeal. While the Company believes it is reasonably likely that the Company would prevail
on the merits, a loss associated with the matter is possible. In light of the foregoing, the Company is not currently
able to reasonably estimate a loss or range of loss associated with the matter. While such a loss could be material
to the Company’s operating results in any particular period if an unfavorable outcome results, the Company does
not believe that this matter will have a material adverse effect on the Company’s overall financial condition or
liquidity.

The Company and its subsidiaries also are involved in numerous ongoing routine legal and regulatory
proceedings related to their operations. With respect to each of these proceedings, 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
consolidated financial statements as a whole.

NOTE 20. Business Combinations:

During the years ended December 31, 2015 and 2014, the Company completed acquisitions for an aggregate
purchase price of $32.3 million and $162.5 million, respectively. These acquisitions have been included in the
Company’s title insurance and services segment.

NOTE 21.

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 closing and/or escrow services; accommodates tax-deferred
exchanges of real estate; provides products, services and solutions involving the use of real property
related data designed to mitigate risk or otherwise facilitate real estate transactions; 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

106

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 the
District of Columbia and actively issues policies in 46 states. In certain markets 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, such as
heating and air conditioning 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.

Selected financial

information about

the Company’s operations, by segment,

for

the years ended

December 31, 2015, 2014 and 2013, is as follows:

Depreciation
and
amortization

Equity in
earnings of
affiliates, net

Income (loss)
before
income taxes

Assets

Revenues

(in thousands)

Investments
in equity
method
affiliates

Capital
expenditures

2015
Title Insurance and

Services . . . . . . . . . . $4,788,110
393,757
(5,955)
(456)

Specialty Insurance . . .
Corporate . . . . . . . . . . .
Eliminations . . . . . . . . .

$80,359
4,775
462
—

$ 7,800
—
—
—

$489,954
39,519
(96,708)
—

$7,296,766 $108,574

510,915
448,993
(2,323)

—
—
—

$122,707
4,837
22
—

$5,175,456

$85,596

$ 7,800

$432,765

$8,254,351 $108,574

$127,566

2014
Title Insurance and

Services . . . . . . . . . . $4,304,428
368,666
6,415
(1,560)

Specialty Insurance . . .
Corporate . . . . . . . . . . .
Eliminations . . . . . . . . .

$77,820
4,978
2,799
—

$(16,545)

—
—
—

$373,024
52,974
(75,438)
—

$6,767,245 $106,083

506,242
464,980
(72,367)

—
—
—

$ 95,949
3,412
—
—

$4,677,949

$85,597

$(16,545)

$350,560

$7,666,100 $106,083

$ 99,361

2013
Title Insurance and

Services . . . . . . . . . . $4,606,088
339,613
13,008
(2,632)

Specialty Insurance . . .
Corporate . . . . . . . . . . .
Eliminations . . . . . . . . .

$66,956
4,865
3,095
—

$ 7,387
—
(2,071)
—

$350,165
42,132
(81,589)
—

$5,751,632 $124,921

499,788
369,385
(61,622)

—
101
—

$ 83,469
3,673
—
—

$4,956,077

$74,916

$ 5,316

$310,708

$6,559,183 $125,022

$ 87,142

107

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Revenues from external customers allocated between domestic and foreign operations, by segment, for the

years ended December 31, 2015, 2014 and 2013, are as follows:

Year Ended December 31,

2015

2014

2013

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

(in thousands)

Title Insurance and Services . . . . . .
Specialty Insurance . . . . . . . . . . . . .

$4,480,230
393,757

$307,453

—

$3,977,498
368,666

$325,393

—

$4,283,067
339,613

$320,413

—

$4,873,987

$307,453

$4,346,164

$325,393

$4,622,680

$320,413

Long-lived assets allocated between domestic and foreign operations, by segment, as of December 31, 2015,

2014 and 2013, are as follows:

2015

December 31,

2014

2013

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

(in thousands)

Title Insurance and Services . . . . . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . . . . . .

$ 952,651
51,920

$35,375
—

$908,885
50,611

$46,514
—

$863,884
50,674

$49,239
—

$1,004,571

$35,375

$959,496

$46,514

$914,558

$49,239

108

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

QUARTERLY FINANCIAL DATA
(Unaudited)

2015
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net 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)

$1,111,084
58,948
$
37,796
$
164
$
37,632
$

$1,323,789
$ 141,622
93,579
$
232
$
93,347
$

$1,383,915
$ 115,396
75,759
$
217
$
75,542
$

$1,356,668
$ 116,799
81,736
$
171
$
81,565
$

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

0.35
0.34

$
$

0.86
0.85

$
$

0.69
0.69

$
$

0.75
0.74

(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.

2014
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net 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)

$1,012,799
35,253
$
21,852
$
128
$
21,724
$

$1,149,969
76,458
$
50,688
$
$
94
50,594
$

$1,259,730
$ 115,952
80,937
$
$
232
80,705
$

$1,255,451
$ 122,897
80,738
$
$
227
80,511
$

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

0.20
0.20

$
$

0.47
0.47

$
$

0.75
0.74

$
$

0.75
0.74

(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.

109

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, 2015

Column A

Column B

Column C

Column D

Cost

Market value

Amount at which
shown in the
balance sheet

Type of investment

Deposits with banks:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

23,224

$

23,211

$

23,224

Debt securities:
U.S. Treasury bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 130,252

$ 129,372

$ 129,372

Municipal bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 692,000

$ 703,795

$ 703,795

Foreign government bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 129,984

$ 130,101

$ 130,101

Governmental agency bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 419,869

$ 418,091

$ 418,091

Governmental agency mortgage-backed securities

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,065,728

$2,055,673

$2,055,673

U.S. corporate debt securities

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 642,869

$ 634,683

$ 634,683

Foreign corporate debt securities

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 210,162

$ 207,632

$ 207,632

Total debt securities:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,290,864

$4,279,347

$4,279,347

Equity securities:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 325,734

$ 321,285

$ 321,285

Notes receivable, net:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

5,866

$

5,791

$

5,866

Other investments:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 155,311

$ 155,311(1)

$ 155,311

Total investments:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,800,999

$4,784,945

$4,785,033

(1) As other investments are not publicly traded, reasonable estimates of the fair values could not be made

without incurring excessive costs.

110

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED BALANCE SHEETS
(in thousands, except par values)

Assets

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SCHEDULE II
1 OF 5

December 31,

2015

2014

$ 289,791
21,430
1,067
3,492,290
22,020
96,683

$ 328,949
—
5,547
3,333,613
19,712
105,344

$3,923,281

$3,793,165

Liabilities and Equity

Accounts payable and other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension costs and other retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

58,483
413,206
7,576
—
133,097
549,254
—

$

55,021
451,501
6,228
77
95,128
549,166
60,000

1,161,616

1,217,121

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—109,098 shares and 107,541 shares . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1
2,150,813
846,691
(239,003)

1
2,109,712
662,310
(199,106)

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

2,758,502
3,163

2,572,917
3,127

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

2,761,665

2,576,044

$3,923,281

$3,793,165

See notes to condensed financial statements

111

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF INCOME
(in thousands)

SCHEDULE II
2 OF 5

Year Ended December 31,

2015

2014

2013

Revenues

Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (losses) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$142,522
(6,001)

$342,488
6,412

$372,996
12,804

136,521

348,900

385,800

Expenses

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36,233

33,959

36,184

Income before income taxes and equity in undistributed earnings (losses) of

subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings (losses) of subsidiaries . . . . . . . . . . . . . . . . . .

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

100,288
33,346
221,928

288,870
784

314,941
104,523
23,797

234,215
681

349,616
139,127
(23,425)

187,064
697

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

$288,086

$233,534

$186,367

See notes to condensed financial statements

112

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

SCHEDULE II
3 OF 5

Year Ended December 31,

2015

2014

2013

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

$288,870

$234,215

$187,064

Other comprehensive income (loss), net of tax:

Unrealized (losses) gains on securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment
. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension benefit adjustment

(27,312)
(36,822)
24,223

19,638
(16,694)
(56,496)

(30,665)
(13,650)
49,324

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

(39,911)

(53,552)

5,009

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

248,959
770

180,663
691

192,073
694

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

$248,189

$179,972

$191,379

See notes to condensed financial statements

113

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

SCHEDULE II
4 OF 5

Year Ended December 31,

2015

2014

2013

Cash flows from operating activities:

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

$ 133,022

$ 54,298

$ 71,326

Cash flows from investing activities:

Net cash effect of acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(19,069)
—
867
(22)

(151,570)
(11,396)
1,490
—

Cash (used for) provided by investing activities . . . . . . . . . . . . . . . . . .

(18,224)

(161,476)

—
(800)
6,549
—

5,749

Cash flows from financing activities:

Net proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . .
Net proceeds in connection with share-based compensation plans . . . .
Purchase of Company shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
(60,000)
9,526
5,042
—

(108,524)

593,943
(300,000)

249,095
(160,000)

—
6,856
3,601
—
(89,939)

—
6,202
1,736
(64,606)
(51,324)

Cash (used for) provided by financing activities . . . . . . . . . . . . . . . . . .

(153,956)

214,461

(18,897)

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

(39,158)
328,949

107,283
221,666

58,178
163,488

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

$ 289,791

$ 328,949

$ 221,666

See notes to condensed financial statements

114

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

SCHEDULE II
5 OF 5

NOTE 1. Description of the Company:

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 holding company received cash dividends from subsidiaries of $142.5 million, $79.1 million and

$125.1 million for the years ended December 31, 2015, 2014 and 2013, respectively.

115

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

2015
Title Insurance and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

439
26,042

$ 933,377
50,503

$

4,026
203,903

Total

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

$26,481

$ 983,880

$207,929

2014
Title Insurance and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,179
25,316

$ 969,008
42,772

$ 14,265
188,499

Total

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

$27,495

$1,011,780

$202,764

116

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

2015
Title Insurance and Services . . . . . . .
Specialty Insurance . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . .

Premiums
and escrow
fees

Net
investment
income (1)

Loss
provision

Amortization
of deferred
policy
acquisition
costs

Other
operating
expenses

Premiums
written

$4,028,048
380,264
—
—

$ 90,078
10,313
(5,955)
(430)

$263,881
227,211
—
—

$ 1,796
(727)
—
—

$745,278
49,741
25,976
(26)

$ —
395,978
—
—

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

$4,408,312

$ 94,006

$491,092

$ 1,069

$820,969

$395,978

2014
Title Insurance and Services . . . . . . .
Specialty Insurance . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . .

$3,565,832
353,812
—
—

$ 83,635
12,594
6,415
(1,536)

$253,122
196,901
—
—

$ 2,746
(878)
—
—

$736,491
44,645
26,528
(30)

$ —
364,782
—
—

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

$3,919,644

$101,108

$450,023

$ 1,868

$807,634

$364,782

2013
Title Insurance and Services . . . . . . .
Specialty Insurance . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . .

$3,865,041
329,194
—
—

$ 79,940
8,767
13,008
(2,609)

$343,461
186,895
—
—

$ 1,261
(2,529)
—
—

$773,837
40,476
27,264
(54)

$ —
344,433
—
—

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

$4,194,235

$ 99,106

$530,356

$(1,268)

$841,523

$344,433

(1) Net investment income includes net investment income and net realized investment gains (losses).

117

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

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,050,033

$23,776

$1,791

$4,028,048

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,590,673

$28,727

$3,886

$3,565,832

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,888,026

$27,483

$4,498

$3,865,041

Specialty Insurance

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 388,973

$ 8,709

$ —

$ 380,264

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 363,044

$ 9,232

$ —

$ 353,812

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 338,204

$ 9,010

$ —

$ 329,194

0.0%

0.1%

0.1%

0.0%

0.0%

0.0%

118

SCHEDULE V
1 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2015

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

$

34,662

$ 10,620

$ — $ 13,730(A) $ 31,552

Reserve for known and incurred but not reported

claims:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$1,011,780

$491,092

$(42,500) $476,492(B) $983,880

Reserve deducted from notes receivable:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$

2,441

Reserve deducted from deferred income taxes:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$

15,706

$

$

167

$ — $

333

$

2,275

108

$ — $

9,085

$

6,729

Note A—Amount represents accounts written off, net of recoveries.

Note B—Amount represents claim payments, net of recoveries.

119

SCHEDULE V
2 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2014

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

$

31,831

$ 12,352

$ — $

9,521(A) $

34,662

Reserve for known and incurred but not

reported claims:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . .

$1,018,365

$450,023

$13,142

$469,750(B) $1,011,780

Reserve deducted from notes receivable:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . .

$

2,584

$

128

$ — $

271

Reserve deducted from deferred income taxes:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . .

$

18,119

$ — $ — $

2,413

$

$

2,441

15,706

Note A—Amount represents accounts written off, net of recoveries.

Note B—Amount represents claim payments, net of recoveries.

120

SCHEDULE V
3 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2013

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

$ 30,917

$

7,478

$ — $

6,564(A) $

31,831

Reserve for known and incurred but not reported

claims:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .

$976,462

$530,356

$(9,143) $479,310(B) $1,018,365

Reserve deducted from notes receivable:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .

$

2,902

Reserve deducted from deferred income taxes:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 14,172

$

$

(132) $ — $

186

3,578

$

369

$ —

$

$

2,584

18,119

Note A—Amount represents accounts written off, net of recoveries.

Note B—Amount represents claim payments, net of recoveries.

121

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,
2015, 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 generally accepted accounting principles (“GAAP”).

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 GAAP, 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, 2015. 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
(2013). Based on that assessment under the framework in Internal Control—Integrated Framework (2013),
management determined that, as of December 31, 2015, 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, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

122

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,” “2015 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 53 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 (*).)

123

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 19, 2016

By

/s/ MARK E. SEATON

Mark E. Seaton
Chief Financial Officer
(Principal Financial Officer)

Date: February 19, 2016

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/ MARK E. SEATON

Mark E. Seaton

Chief Executive Officer and Director
(Principal Executive Officer)

February 19, 2016

Chief Financial Officer
(Principal Financial Officer)

February 19, 2016

February 19, 2016

/S/ MATTHEW F. WAJNER

Matthew F. Wajner

Chief Accounting Officer
(Principal Accounting Officer)

/S/ PARKER S. KENNEDY

Chairman of the Board of Directors

February 19, 2016

Parker S. Kennedy

/S/ ANTHONY K. ANDERSON

Director

February 19, 2016

Anthony K. Anderson

/S/

JAMES L. DOTI

James L. Doti

Director

February 19, 2016

/S/ MARGARET M. MCCARTHY

Director

February 19, 2016

Margaret M. McCarthy

/S/ MICHAEL D. MCKEE

Director

February 19, 2016

Michael D. McKee

124

Signature

Title

Date

/S/ THOMAS V. MCKERNAN

Director

February 19, 2016

Thomas V. McKernan

/S/ MARK C. OMAN

Director

February 19, 2016

Mark C. Oman

/S/ VIRGINIA M. UEBERROTH

Director

February 19, 2016

Virginia M. Ueberroth

125

Exhibit No.

Description

Location

3.1

3.2

4.1

4.2

4.3

4.4

4.5

10.1

10.2

10.3

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.

Amended and Restated Bylaws of First
American Financial Corporation, effective as of
February 20, 2015.

Incorporated by reference herein to Exhibit 3.2
to the Annual Report on Form 10-K for the
fiscal year ended December 31, 2014.

Indenture, dated as of January 24, 2013,
between First American Financial Corporation
and U.S. Bank National Association, as trustee.

First Supplemental Indenture, dated as of
January 29, 2013, between First American
Financial Corporation and U.S. Bank National
Association.

Second Supplemental Indenture, dated as of
November 10, 2014, between First American
Financial Corporation and U.S. Bank National
Association.

Form of 4.30% Senior Notes due 2023.

Form of 4.60% Senior Notes due 2024.

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.

Amended and Restated Credit Agreement dated
as of May 14, 2014, 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.

Incorporated by reference herein to Exhibit 4.1
to the Form S-3ASR filed January 24, 2013.

Incorporated by reference herein to Exhibit 4.2
to the Current Report on Form 8-K dated
January 29, 2013.

Incorporated by reference herein to Exhibit 4.2
to the Current Report on Form 8-K dated
November 10, 2014.

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 A
of Exhibit 4.2 to the Current Report on Form
8-K dated November 10, 2014.

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 the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2014.

Incorporated by reference herein to Exhibit 10.2
to the Current Report on Form 8-K dated
June 1, 2010.

*10.4

*10.4.1

*10.5

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.

Amendment No. 1, dated January 21, 2015, to
First American Financial Corporation
Executive Supplemental Benefit Plan, amended
and restated effective as of January 1, 2011.

Incorporated by reference herein to Exhibit
10.5.1 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2014.

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.

126

Exhibit No.

*10.5.1

*10.6

*10.6.1

*10.6.2

*10.6.3

*10.6.4

*10.6.5

*10.6.6

*10.6.7

*10.6.8

Description

Location

First Amendment, effective July 1, 2015, to
First American Financial Corporation Deferred
Compensation Plan, amended and restated
effective as of January 1, 2012.

Incorporated by reference herein to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2015.

First American Financial Corporation 2010
Incentive Compensation Plan, effective
May 28, 2010.

Incorporated by reference herein to Appendix A
to the Definitive Proxy Statement on Schedule
14A filed April 9, 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
(Non-Employee Director) and Restricted Stock
Unit Award Agreement (Non-Employee
Director) for Non-Employee Director
Restricted Stock Unit Award approved
January 14, 2014.

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 21, 2015.

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 19, 2016.

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
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 15,
2013.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 14,
2014.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 21,
2015.

127

Incorporated by reference herein to Exhibit
10.7.4 to the Annual Report on Form 10-K for
the year ended December 31, 2012.

Incorporated by reference herein to Exhibit
10.7.4 to the Annual Report on Form 10-K for
the year ended December 31, 2013.

Incorporated by reference herein to Exhibit
10.7.4 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2014.

Attached.

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
10.7.10 to the Annual Report on Form 10-K for
the year ended December 31, 2012.

Incorporated by reference herein to Exhibit
10.7.12 to the Annual Report on Form 10-K for
the year ended December 31, 2013.

Incorporated by reference herein to Exhibit
10.7.11 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2014.

Exhibit No.

*10.6.9

*10.6.10

*10.6.11

*10.6.12

*10.7

*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
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 19,
2016.

Attached.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 14, 2014.

Incorporated by reference herein to Exhibit
10.7.14 to the Annual Report on Form 10-K for
the year ended December 31, 2013.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 21, 2015.

Incorporated by reference herein to Exhibit
10.7.14 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2014.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 19, 2016.

Employment Agreement, dated November 17,
2015, between First American Financial
Corporation and Dennis J. Gilmore.

Employment Agreement, dated November 17,
2015, between First American Financial
Corporation and Kenneth D. DeGiorgio.

Employment Agreement, dated November 17,
2015, between First American Financial
Corporation and Christopher M. Leavell.

Employment Agreement, dated November 17,
2015, between First American Financial
Corporation and Mark E. Seaton.

Attached.

Attached.

Attached

Attached

Attached

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.

Certification by Chief Financial Officer
Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.

Certification by Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350.

Certification by Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

101.INS

XBRL Instance Document.

128

Exhibit No.

101.SCH

101.CAL

101.DEF

101.LAB

101.PRE

Description

Location

XBRL Taxonomy Extension Schema
Document.

XBRL Taxonomy Extension Calculation
Linkbase Document.

XBRL Taxonomy Extension Definition
Linkbase Document.

XBRL Taxonomy Extension Label Linkbase
Document.

XBRL Taxonomy Extension Presentation
Linkbase Document.

Attached.

Attached.

Attached.

Attached.

Attached.

129

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