First American Financial

March 31, 2017

TO OUR STOCKHOLDERS:

First American had a very strong year in 2016. Our continued focus on profitable growth and operating
efficiency, coupled with a favorable mortgage interest rate environment and a strengthening employment
outlook,
led to solid revenue gains and record title margins. Consistent with our capital priorities, we
significantly increased our common stock dividend and completed several strategic acquisitions that strengthened
our core business and enhanced our offerings to our customers. And we stayed true to our philosophy that people
are our most valuable resource. It is our strong belief that engaged employees will serve our customers well and
that satisfied customers along with our efficient operation of the business will benefit you, our stockholders.
Indeed, we’re proud that our practice of putting people first was again recognized when First American was
named for the second year in a row to the Fortune 100 Best Companies to Work For® list in 2017.

Financially, we ended 2016 with $5.6 billion in total revenue, up 8 percent from 2015, driven primarily by
growth in our purchase and refinance business. Our net income was $3.09 per diluted share, an 18 percent
increase from the prior year. And the company’s return on equity of 11.9 percent was at the upper end of our
stated objective of 10 to 12 percent. We were able to achieve these positive results even as we recorded a $0.39
per share expense related to the termination of our company’s legacy pension plan in 2016. When completed this
year, First American will generate an annual reduction of approximately $22 million in corporate expenses.

Our Title Insurance and Services segment reported revenues of $5.1 billion, up 7 percent from 2015. Our focused
growth efforts and a steadily improving residential purchase market helped our purchase business increase
6 percent over the prior year, while a stronger than anticipated refinance market led to a 21 percent jump in our
refinance revenues. Our National Commercial Services business achieved its second-highest revenues on record.
And our international group had another good year, driven by strong performance in our Canadian and European
operations. Our title claims loss rate declined to 5.5 percent from 6.6 percent the prior year—a favorable trend
we believe will continue. And our ongoing focus on operating efficiency enabled us to capitalize on favorable
market conditions to achieve a pretax margin of 11.7 percent, a record for the title segment and at the high end of
our 10 to 12 percent target.

First American’s Specialty Insurance segment generated revenues of $436 million, up 11 percent from 2015. The
segment’s pretax margin was down slightly compared with last year, attributable in part to higher claims costs in
our home warranty business, partially offset by lower weather-related claims in our property and casualty
business. Historically, home warranty has been a consistent high-return business for us and we’re currently
strengthening our service network and processes to position it well for increased business volume. We’re
optimistic about the prospects for both our home warranty and property and casualty businesses.

CAPITAL MANAGEMENT

Our capital management strategy remains consistent:

•

•

Invest in our core title and settlement services business—In 2016, we made significant investments in
our business, all with the long-term objective of increasing efficiency, improving our risk profile and
enhancing our product offerings. Much of this investment was directed to technology, including the
continued enhancement of our title production platform and our customer-facing technologies and
enterprise systems, all of which will improve our customers’ experience and our internal process
efficiency. We also significantly expanded our real property public record databases, including our title
plants.

Acquire companies that strengthen our core business and enhance the solutions we offer our
customers—We made several key acquisitions in 2016: Forsythe Appraisals, which augments our
existing valuation capabilities and expands our appraisal offerings to our lender customers; RedVision,

whose data, technology and services complement our existing title search and title evidence production
capabilities; and TD Service Financial, which enhances our post-closing and document management
capabilities and broadens our ability to serve our mortgage lender customers. We also purchased a
number of small title agencies during the year in geographic markets we’ve targeted for growth. While
we continually evaluate numerous acquisition opportunities, we remain disciplined in our commitment
to only pursue transactions that are consistent with our strategy and meet our risk-adjusted return target.

•

Return capital to stockholders—Based on our positive, long-term outlook, during 2016 First American’s
board of directors increased the common stock dividend by 36 percent to $1.36 per share, per annum.

The company’s operating cash flow in 2016 was $489 million, down 11 percent from 2015, primarily due to an
$85 million contribution related to the legacy pension plan termination previously mentioned. Our debt-to-capital
ratio at year end of 19.6 percent is within our target range and leaves us significant financial flexibility to achieve
our strategic objectives. Overall, our strong balance sheet, capital position and financial flexibility position us
well for the present and the future.

VISION AND STRATEGY

It remains our vision to be the premier title insurance and settlement services company. To realize this vision, we
need to be the best place to work for our employees, provide the best service to our customers and deliver
exceptional returns to our stockholders.

With this as our vision, our company operates with a focus on three key components of our strategy:

•

•

Profitably grow our core title and settlement business—Our continued focus on operating efficiency
coupled with favorable market conditions helped us achieve the highest pretax margin in our title
segment’s history. While our title market share fell somewhat during the year, we’re working to build
share by integrating new approaches to business development and making opportunistic acquisitions in
key markets. As we continue to pursue market share, we remain committed to ensuring that growth
never comes at the expense of returns.

Strengthen the enterprise through data and process advantage—During the year, we added 16 new title
plants to our industry-leading database, meaningfully increasing the breadth of our coverage. The data
we obtained through our RedVision acquisition promises to accelerate additional title plant development
in key geographies. We also reached an industry milestone with the assembly of property ownership
data covering 100 percent of U.S. counties. These efforts strengthen our control over the key data assets
that underlie our products and services and facilitate our efforts to manage risk and drive efficiencies
throughout the title and settlement process.

• Manage and actively invest in complementary businesses that support or expand the core—In 2016, we
completed a number of acquisitions and made investments that expand our valuation and data
businesses, allowing us to streamline the title process and continue to improve the solutions we offer our
customers. We also continued to enhance our DataTree.com portal, which provides title, lender and
other customers online access to our industry-leading data.

LOOKING AHEAD

We expect the company to benefit from continuing improvements in the housing market and the overall economy
in 2017. While signs point to incremental interest rate increases, gradually rising rates generally signal an
improving economy, which should strengthen housing demand. The Mortgage Bankers Association is forecasting
significant growth in purchase originations this year, with interest rate increases driving refinance activity down
by nearly half. Because of the strength of our purchase business, we’re well positioned to benefit from the
expected growth in purchase transactions, which on average generate more than twice the revenue of refinance
transactions. We expect housing inventory constraints to persist, which should drive further price appreciation
and, consequently, incremental revenue. We also anticipate that increased demand among millennials for first-
time home purchases will benefit us for years to come. And the commercial market is poised for another strong
year, with a modest decline in revenue expected as that market continues to normalize from its 2015 peak.

We retain the flexibility necessary to adjust to changes in market or regulatory conditions, while remaining
focused on our objectives of achieving a 10 to 12 percent return on equity for the company and 10 to 12 percent
margin for our title business.

In closing, let me emphasize again the value that our employees bring to our business. We strive to treat our
people well and encourage their development, not because it’s fashionable, but because it’s simply the right thing
to do—and in the end, it makes our company stronger. Fortune® magazine’s recognition of us as one of the “100
Best Companies to Work For” in America for the second year in a row is a testament to the dedication our people
bring to their work, colleagues and customers every day. Our placements in 2016 on Fortune’s 100 Best
Workplaces for Women and 50 Best Workplaces for Diversity lists, as well as being named one of the “Best
Workplaces in Canada,” are further testament to our ongoing efforts to create an engaging workplace for all of
our employees.

The contributions of our dedicated people helped to make 2016 a very successful year for First American.
Together with our board of directors, I thank you for your continued support.

Dennis J. Gilmore
Chief Executive Officer

[THIS PAGE INTENTIONALLY LEFT BLANK]

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, 2016

‘ 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. È

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, 2016 was $4,346,358,102.

On February 10, 2017, there were 109,966,920 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement with respect to the 2017 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

12

19

19

19

22

23

25

27

54

56

130

130

PART III

PART IV

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

131

2

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:

•

INTEREST RATE FLUCTUATIONS;

• CHANGES IN THE PERFORMANCE OF THE REAL ESTATE MARKETS;

•

VOLATILITY IN THE CAPITAL MARKETS;

• UNFAVORABLE ECONOMIC CONDITIONS;

•

•

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

FAILURES AT FINANCIAL INSTITUTIONS WHERE THE COMPANY DEPOSITS FUNDS;

• CHANGES IN APPLICABLE LAWS AND GOVERNMENT REGULATIONS;

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

• USE OF SOCIAL MEDIA BY THE COMPANY AND OTHER PARTIES;

•

•

REGULATION OF TITLE INSURANCE RATES;

LIMITATIONS ON ACCESS TO PUBLIC RECORDS AND OTHER DATA;

• CHANGES IN RELATIONSHIPS WITH LARGE MORTGAGE LENDERS AND GOVERNMENT-

SPONSORED ENTERPRISES;

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

UNDERWRITERS, INCLUDING RATINGS AND STATUTORY CAPITAL AND SURPLUS;

•

LOSSES IN THE COMPANY’S INVESTMENT PORTFOLIO;

• MATERIAL VARIANCE BETWEEN ACTUAL AND EXPECTED CLAIMS EXPERIENCE;

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

THE COMPANY’S USE OF TITLE AGENTS;

•

•

•

ANY INADEQUACY IN THE COMPANY’S RISK MITIGATION EFFORTS;

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

ERRORS AND FRAUD INVOLVING THE TRANSFER OF FUNDS;

3

•

•

•

THE COMPANY’S USE OF A GLOBAL WORKFORCE;

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

INABILITY TO REALIZE THE BENEFITS OF, AND CHALLENGES ARISING FROM, THE
COMPANY’S ACQUISITION STRATEGY; 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.

4

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, document custodial
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 settlement services business, strengthening our enterprise through data and process advantage and
managing and actively investing in complementary businesses that support our core title and settlement services
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; provides evidence of title; and provides banking, trust, document custodial and investment advisory
services. In 2016, 2015, and 2014 the Company derived 92.1%, 92.5% and 92.0% 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.

5

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

The beneficiaries of title insurance policies usually are real estate buyers and mortgage lenders. A title
insurance policy indemnifies the named insured and certain successors in interest against title defects, liens and
encumbrances existing as of the date of the policy and not specifically excepted from its provisions. The policy
typically provides coverage for the real property mortgage lender in the amount of its outstanding mortgage loan
balance and for the buyer in the amount of the purchase price of the property. In some cases the policy might
provide insurance in a greater amount, such as where the buyer anticipates constructing improvements on the
property. In addition, certain homeowner’s policies provide inflation coverage which could increase the coverage
amount above the purchase price of the underlying property by a specified amount. 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.

6

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 search is typically performed by or on behalf of the agent, and the
agent collects, 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, South Korea and various other established and emerging markets as described in the “International
Operations” section below.

Customers, Sales and Marketing. The mortgage market in the United States is concentrated. We believe
that the top five mortgage lenders by volume collectively originate or are involved in approximately 30% of the
mortgage origination volume in the United States. These institutions purchase title insurance policies and other
products and services from us. These institutions also benefit from our 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 government-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
and the owners of commercial real estate. We also market directly to national homebuilders focused on newly

7

constructed residential property. In some instances we may supplement the efforts of our sales force with general
marketing. Our marketing efforts emphasize our product offerings, 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 issuing agents typically state the conditions under which the agent is authorized to issue
our title insurance policies. 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 5.9% of our title insurance and services
segment revenues in 2016. 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.

Title Plants. Our collection of data and records on, or which impact, title to property – known as title
plants – constitutes one of our principal assets. A title search is typically conducted by searching the abstracted

8

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 effectively, 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 quality, price, customer relationships and the timeliness of the delivery of our products. 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.

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, 2016 this company

9

administered fiduciary and custodial assets having a market value in excess of $3.1 billion which includes
managed assets of $1.4 billion, and had assets of $3.1 billion, deposits of $2.9 billion and stockholder’s equity of
$237.0 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 47 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.

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

10

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 generally are 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 and banking 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. 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
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.

11

As of December 31, 2016, our debt and equity securities portfolio consisted of 92% of fixed income
securities. As of that date, 60% of our fixed income investments were held in securities that are United States
government-backed or rated AAA, and 94% 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 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, 2016, the Company employed 19,531 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.

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.

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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, 2016 are $1.1 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.

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

13

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. The CFPB, for example, has actively been
utilizing its regulatory authority over the mortgage and real estate markets by bringing enforcement actions
against various participants in the mortgage and settlement industries. Departments of insurance in the various
states, the CFPB and other federal regulators and applicable regulators in international jurisdictions, either
separately or together, also periodically conduct targeted inquiries into the practices of title insurance companies
and other settlement services providers in their respective jurisdictions.

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

7. The use of social media by the Company and other parties could result in damage to the Company’s

reputation and adversely affect its business or results of operations

The Company increasingly utilizes social media to communicate with customers, current and potential
employees and other individuals interested in the Company. Information delivered by the Company, or by third
parties about the Company, via social media can be easily accessed and rapidly disseminated, and 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.

8. 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.

14

9. Changes in certain laws and regulations, and in the regulatory environment in which the Company

operates, could adversely affect the Company’s competitive position and results of operations

Federal officials are currently discussing various potential changes to laws and regulations that could impact
the Company’s businesses, including changes to the Dodd-Frank Wall Street Reform and Consumer Protection
Act, the reform or privatization of government-sponsored enterprises such as the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and tax reform,
including changes that could affect the mortgage interest deduction, among others. Changes in these areas, and
more generally in the regulatory environment in which the Company and its customers operate, could adversely
impact the volume of mortgage originations in the United States and the Company’s competitive position and
results of operations.

10. 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.

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

enterprises could adversely affect the Company

The mortgage market in the United States is 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.

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

Certain of the Company’s customers use measurements of the financial strength of the Company’s title
insurance underwriters, including, among others, ratings provided by ratings agencies and levels of statutory
capital and surplus maintained by those underwriters, in determining the amount of a policy they will accept and
the amount of reinsurance required. Each of the major ratings agencies currently rates the Company’s title
insurance operations. The Company’s principal title insurance underwriter’s financial strength ratings are “A3”
by Moody’s Investor Services, Inc., “A” by Fitch Ratings, 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 $1.2 billion of total statutory capital and surplus as of December 31, 2016. Accordingly,

15

if the ratings or statutory capital and surplus of these title insurance underwriters are reduced from their current
levels, or if there is a deterioration in other measures of financial strength, the Company’s results of operations,
competitive position and liquidity could be adversely affected.

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

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

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

14. 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 $110.1 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.

15. 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.

16. 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
number of different means, including the implementation of underwriting policies and procedures and other

16

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.

17. Systems damage, failures, interruptions and intrusions, 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 manages 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 activity. 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
the
or telecommunications failures. These incidents, regardless of their underlying causes, could disrupt
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.

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.

18. Errors and fraud involving the transfer of funds may result in material financial losses or harm the

Company’s reputation

The Company 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

17

errors that could result in lost funds or delayed transactions. The Company’s email and computer systems and
systems used by its agents, customers and other parties involved in a transaction have been subject to, and are
likely to continue to be the target of, fraudulent attacks, including attempts to cause the Company or its agents to
improperly transfer funds. These attacks have increased in frequency and sophistication in recent years. Funds
transferred to a fraudulent recipient are often not recoverable. In certain instances the Company may be liable for
those unrecovered funds. The controls and procedures used by the Company to prevent transfer errors and fraud
may prove inadequate, resulting in financial losses, reputational harm, loss of customers or other adverse
consequences which could be material to the Company.

19. The Company’s use of a global workforce involves risks that could negatively impact the Company

The Company utilizes lower cost labor in 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.
Weakness of the United States dollar in relation to the currencies used in these countries may also reduce the
savings achievable through this strategy. Furthermore, the practice of utilizing labor based in other countries is
subject to heightened scrutiny in the United States and, as a result, the Company could face pressure to decrease
its use of labor based outside 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 labor costs abroad also could be enacted.
The Company may not be able to pass on these increased costs to its customers.

20. 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.

21. 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, 2016, under such regulations,
the maximum amount of dividends, loans and advances available in 2017 from these insurance subsidiaries,
without prior approval from applicable regulators, was $761.8 million.

18

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

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

that

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

•

•

•

•

•

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

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

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

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

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

issue preferred shares and

While the Company believes that they are appropriate, these provisions, which may only be amended by the
affirmative vote of the holders of approximately 67% 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 $25.8 million as of
December 31, 2016.

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.

19

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.

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.

• misclassified certain employees, including

• Cruz v. First American Financial Corporation, et al., filed on November 25, 2015 and pending in the

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

•

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 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.

20

•

overcharged or improperly charged fees for products and services, conspired to fix prices, participated
in the conveyance of illusory property interests, denied home warranty claims, and gave items of value
to 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

• Downing v. First American Title Insurance Company, et al., filed on July 26, 2016 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,

•

Lennen v. First American Financial Corporation, et al., filed on May 19, 2016 and pending in the
United States District court for the Middle District of Florida,

• 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 and the judgment has been affirmed on 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
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

21

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

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

PART II

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 10, 2017, was 2,487.

High and low stock prices and dividends declared for 2016 and 2015 are set forth in the table below.

Period

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

2016

2015

High-low range

$31.74-38.35
$34.63-40.23
$39.25-43.55
$35.30-41.66

Cash
dividends

$0.26
$0.26
$0.34
$0.34

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

In January 2017, the Company’s board of directors declared a cash dividend of $0.34 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, 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, 2016, 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, 2016. Cumulatively the Company has repurchased
$67.6 million (including commissions) of
an
additional $182.4 million (including commissions) under the plan.

authority to repurchase

and has

shares

the

its

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.

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, the Russell 1000
Index and a peer group index for the period from December 31, 2011 through December 31, 2016. In past years,
the Company used the Russell 2000 Financial Services Index for purposes of the stock performance graph below.

23

However, during 2016, the Russell indices were reconstituted such that the Company was moved from the
Russell 2000 Index to the Russell 1000 Index. In connection with the reconstitution, the Company determined
that the Russell 1000 Index would be a more appropriate broad equity market index to include in the stock
performance graph. Accordingly, while both the Russell 1000 Index and the Russell 2000 Financial Services
Index have been included for this transitional year, the Company does not expect to include the Russell 2000
Financial Services Index in future years.

The comparison assumes an investment of $100 on December 31, 2011 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,
Russell 2000 Financial Services Index, and Russell 1000 Index

$350
$340
$330
$320
$310
$300
$290
$280
$270
$260
$250
$240
$230
$220
$210
$200
$190
$180
$170
$160
$150
$140
$130
$120
$110
$100

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

First American Financial

Russell 2000 Financial Services Index

Custom Peer Group

Russell 1000 Index

Comparison of Cumulative Total Return

First
American Financial
Corporation
(FAF) (1)

Custom Peer
Group (1)(2)

Russell 2000
Financial
Services Index (1)

Russell 1000
Index (1)

December 31, 2011 . . . . . . . . . . . .
December 31, 2012 . . . . . . . . . . . .
December 31, 2013 . . . . . . . . . . . .
December 31, 2014 . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . .

$100
$194
$231
$286
$312
$328

$100
$116
$166
$183
$207
$246

$100
$121
$171
$197
$198
$231

$100
$116
$155
$176
$177
$198

(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);

24

The Hanover Insurance Group, Inc.; Kemper Corporation; Mercury General Corporation; Old Republic
International Corp.; White Mountains Insurance Group Ltd.; and W.R. Berkley Corporation each of which
operates in a business similar to a business operated by the Company. The compensation committee of the
Company utilizes the compensation practices of these companies as benchmarks in setting the compensation
of its executive officers.

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, 2016, 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,

2016

2015

2014

2013

2012

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

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

Net income attributable to the Company:

(in thousands, except percentages, per share amounts and employee data)
$4,541,821
$4,677,949
$5,575,846
$ 301,728
$ 234,215
$ 343,476

$5,175,456
$ 288,870

$4,956,077
$ 187,064

$
483
$ 342,993
$8,831,777
$ 736,693
$3,008,179

$
784
$ 288,086
$8,236,715
$ 581,052
$2,749,960

$
681
$ 233,534
$7,647,889
$ 582,712
$2,564,375

$
697
$ 186,367
$6,543,575
$ 308,263
$2,444,507

$
687
$ 301,041
$6,064,040
$ 229,760
$2,339,523

11.9%

10.8%

9.3%

7.8%

13.8%

$ 131,541

$ 108,524

$

89,939

$

51,324

$

37,612

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity (Note A) . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . .

$
$
$
$

3.10
3.09
27.36
1.20

$
$
$
$

2.65
2.62
25.21
1.00

$
$
$
$

2.18
2.15
23.85
0.84

$
$
$
$

1.74
1.71
23.08
0.48

$
$
$
$

2.83
2.77
21.82
0.36

Number of common shares outstanding
Weighted average during the year:

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

Other Operating Data (unaudited):

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

110,548
111,156
109,944

1,281
958
19,531

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

Note A—Amounts related to years 2015 – 2012 have been revised to reflect the derecognition of certain title
plant assets that should have been written off in prior periods, and the misclassification of certain capitalized
software, title plant imaging, real estate data and investments related to title plant assets as title plant assets. See
Note 1 Basis of Presentation and Significant Accounting Policies to the consolidated financial statements for
further information about the financial statement revisions.

Note B—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.

25

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

do not include orders processed by agents.

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

26

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 PAGES 3-4 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; provides evidence of title; and provides banking,
trust, document custodial 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

27

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, South Korea 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 47 states. The majority of policy liability is in the
western United States, including approximately 63% in California. 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 certain 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 generally
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.

28

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 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 the sensitivity of claims to external conditions in the 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 recent policy years, positive or negative, is
reasonably likely given the long duration nature of a title insurance policy. For example, if the expected ultimate
losses for each of the last six policy years increased or decreased by 50 basis points, the resulting impact on the
Company’s IBNR reserve would be an increase or decrease, as the case may be, of $110.1 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, 2016

December 31, 2015

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

$

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

83,805
888,126

971,931
53,932

8.1% $ 87,543
86.6% 844,364

94.7% 931,907
51,973
5.3%

8.9%
85.8%

94.7%
5.3%

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

$1,025,863

100.0% $983,880

100.0%

29

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

December 31,

2016

2015

2014

$ 87,543

(in thousands)
$165,330

$135,478

15,098
188,066

203,164

12,420
197,821

210,241

13,569
184,473

198,042

11,258
243,519

254,777

29,939
274,481

304,420

22,272
249,851

272,123

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

3,339

(21,052)

(2,445)

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

$ 83,805

$ 87,543

$165,330

“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 increased by $1.5 million in 2016
from 2015 and decreased by $16.4 million in 2015 from 2014 and payments, net of recoveries, related to current
year increased by $1.2 million in 2016 from 2015 and decreased by $11.0 million in 2015 from 2014, 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 2016 and 2015.

The provision transferred from IBNR title claims related to prior years increased by $3.6 million, or 1.9%,
in 2016 from 2015 and decreased by $90.0 million, or 32.8%, in 2015 from 2014. Payments, net of recoveries,
related to prior years decreased by $45.7 million, or 18.8%, in 2016 from 2015 and decreased by $6.3 million, or
2.5%, in 2015 from 2014. 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. 2015 and 2014 were 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.

30

Activity in the reserve for IBNR 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2016

2015

2014

$844,364

(in thousands)
$802,069

$840,104

193,109
42,552

235,661

15,098
188,066

203,164

170,789
93,092

263,881

13,569
184,473

198,042

188,997
64,133

253,130

29,939
274,481

304,420

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

11,265

(23,544)

13,255

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

$888,126

$844,364

$802,069

“Other” primarily includes 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 increased by $22.3 million, or 13.1%, in 2016 from 2015. This increase
was attributable to a 6.5% increase in title premiums and escrow fees in 2016 from 2015 and a higher current
year loss rate in 2016 when compared to 2015. The current year loss rate in 2016 was 4.5% compared to 4.2% in
2015.

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.

For further discussion of title provision recorded in 2016, 2015 and 2014, see Results of Operations, page

44.

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.

31

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 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 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, 2016, 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.

32

The Company recorded other-than-temporary impairment losses considered to be credit related on its debt

securities of $0.5 million, $2.2 million and $1.7 million for 2016, 2015, and 2014, respectively.

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
future. If objective, substantial evidence does not
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 2016, 2015 and 2014.

indicate a likely recovery during that

timeframe,

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, 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

33

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
industry and market considerations, overall financial
assessment may include macroeconomic conditions,
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
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

34

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.

For 2016, the Company chose to forego the qualitative assessment and performed a quantitative impairment
test and, based on the results, determined that the fair values of its reporting units exceeded their carrying
amounts and,
therefore, no additional analysis was required. The Company chose to perform qualitative
assessments for 2015 and 2014, 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, the Company did not record any goodwill
impairment losses for 2016, 2015 or 2014.

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
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 did not record any impairment losses related to its equity method investments
for 2016 and recognized impairment losses of $2.0 million and $22.5 million for 2015 and 2014, 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. Impairment losses on property and equipment, which primarily related to
impairments of internally developed software, were $5.2 million, $10.9 million and $1.2 million for 2016, 2015
and 2014, 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.

35

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 funded
defined benefit pension and unfunded 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 funded 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 plans from plan assets. See Note 13 Employee Benefit Plans to the consolidated financial
statements for discussion of the termination of the Company’s funded defined benefit pension plans.

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

December 31, 2016 and 2015, were as follows:

Funded defined benefit pension plans

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

4.31% 4.07%
3.50% 6.50%

Unfunded supplemental benefit plans

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

4.33% 4.00%

Weighted-average actuarial assumptions used to determine benefit obligations

for

the plans at

December 31, 2016 and 2015, were as follows:

December 31,

2016

2015

December 31,

2016

2015

Funded defined benefit pension plans

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

3.85% 4.31%

Unfunded supplemental benefit plans

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

4.03% 4.33%

Recently Adopted Accounting Pronouncements

In September 2015, the Financial Accounting Standards Board (“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 adoption of this guidance had no
impact on the Company’s consolidated financial statements.

36

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
subsequent measurement of debt
issuance costs associated with line-of-credit arrangements. The updated
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 adoption of this guidance had no impact on the
Company’s 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 adoption of this guidance had no impact on the Company’s 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. The
adoption of this guidance had no impact on the Company’s 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 elected to adopt the updated guidance prospectively for all arrangements
entered into or materially modified after the effective date. The adoption of this guidance did not have a material
impact on the Company’s consolidated financial statements. The financial statement line items impacted by the
adoption of the updated guidance include other intangible assets, net and depreciation and amortization. See Note
6 Other Intangible Assets to the consolidated financial statements for further information on the Company’s
internal-use software licenses.

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 adoption of this guidance did not have a material impact on the Company’s
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 adoption of this guidance had no impact on the Company’s 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

37

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
adoption of this guidance had no impact on the Company’s consolidated financial statements.

Pending Accounting Pronouncements

In November 2016, the FASB issued updated guidance intended to reduce the diversity in practice on
presenting restricted cash or restricted cash equivalents in the statement of cash flows. The updated guidance is
effective for interim and annual reporting periods beginning after December 15, 2017, 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 October 2016, the FASB issued updated guidance to amend the consolidation guidance on how a
reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the
entity held through related parties that are under common control with the reporting entity when determining
whether it is the primary beneficiary of that variable interest entity. The updated guidance is effective for interim
and annual reporting periods beginning after December 15, 2016, 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 October 2016, the FASB issued updated guidance intended to simplify and improve the accounting for
the income tax consequences of intra-entity transfers of assets other than inventory. The updated guidance, which
eliminates the intra-entity transfers exception, requires entities to recognize the income tax consequences of
intra-entity transfers of assets, other than inventory, when the transfers occur. The updated guidance is effective
for interim and annual reporting periods beginning after December 15, 2017, 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 August 2016, the FASB issued updated guidance intended to eliminate the diversity in practice regarding
the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The
updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with
early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact
on its consolidated statements of cash flows.

In June 2016, the FASB issued updated guidance intended to provide financial statement users with more
decision-useful information about the expected credit losses on financial instruments and other commitments to
extend credit held by a reporting entity at each reporting date. The updated guidance replaces the current incurred
loss impairment methodology with a methodology that reflects expected credit
losses and requires the
consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The
updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with
early adoption permitted. The Company is currently assessing the impact of the new guidance on its consolidated
financial statements.

In March 2016, the FASB issued updated guidance intended to simplify and improve several aspects of the
accounting for share-based payment transactions, including the income tax consequences, classification of such
awards as either equity or liabilities and classification on the statement of cash flows. The updated guidance is
effective for interim and annual reporting periods beginning after December 15, 2016, 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 March 2016, the FASB issued updated guidance intended to simplify the accounting treatment for
investments that become qualified for the equity method of accounting as a result of an increase in the level of

38

ownership interest or degree of influence. The updated guidance is effective for interim and annual reporting
periods beginning after December 15, 2016, with early adoption permitted. The Company expects the adoption of
this guidance to have no impact on its consolidated financial statements.

In February 2016, the FASB issued updated guidance that requires the rights and obligations associated with
leasing arrangements be reflected on the balance sheet in order to increase transparency and comparability
among organizations. Under the updated guidance, lessees will be required to recognize a right-of-use asset and a
liability to make lease payments and disclose key information about leasing arrangements. The updated guidance
is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption
permitted. While the Company is currently evaluating the impact the new guidance will have on its consolidated
financial statements, the Company expects the adoption of the new guidance will result in a material increase in
the assets and liabilities on its consolidated balance sheets and will likely have an insignificant impact on its
consolidated statements of income and statements of cash flows.

In January 2016, the FASB issued updated guidance intended to enhance the reporting model for financial
instruments to provide users of financial statements with more decision-useful information. In addition to making
other targeted improvements to current guidance, the updated guidance also requires all equity investments,
except those accounted for under the equity method of accounting or those that result in consolidation of the
investee, to be measured at fair value with changes in the fair value recognized through net income. The updated
guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early
adoption permitted in certain circumstances. While the Company expects the adoption of this guidance to impact
its consolidated statements of income, the materiality of the impact will depend upon the size of, and level of
volatility experienced within, the Company’s equity portfolio.

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. In August 2015, the FASB issued updated
guidance which defers the effective date of this guidance by one year. In 2016, the FASB issued additional
updates to the new guidance primarily to clarify, among other things, the implementation guidance related to
principal versus agent considerations, identifying performance obligations, accounting for licenses of intellectual
property, and to provide narrow-scope improvements and additional practical expedients. The updated guidance
is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption
prohibited. The Company expects to adopt the new guidance under the modified retrospective approach and,
based on a preliminary assessment, does not expect the new guidance to have a material impact 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, 2016 were $5.6 billion, which reflected an
increase of $0.4 billion, or 7.7%, when compared with $5.2 billion for the year ended December 31, 2015. This

39

increase was primarily attributable to an increase in agent premiums of $188.4 million, or 9.0%, and, to a lesser
extent, an increase in direct premiums and escrow fees in the title insurance and services segment of
$74.9 million, or 3.9%, in 2016 when compared to 2015. Direct premiums and escrow fees from residential
refinance and purchase transactions increased $59.5 million and $48.8 million, or 21.2% and 6.3%, respectively,
while direct premiums and escrow fees from commercial transactions decreased $35.7 million, or 5.1%, in 2016
when compared to 2015.

According to the Mortgage Bankers Association’s February 15, 2017 Mortgage Finance Forecast (the
“MBA Forecast”), residential mortgage originations in the United States (based on the total dollar value of the
transactions) increased 12.6% in 2016 when compared with 2015. According to the MBA Forecast, the dollar
amount of purchase originations increased 9.6% and refinance originations increased 16.1%. This higher volume
of domestic residential mortgage origination activity contributed to an increase in direct premiums and escrow
fees for the Company’s direct title operations of 6.3% from domestic residential purchase transactions and 21.2%
from domestic refinance transactions in 2016 when compared to 2015.

During 2016, the Company completed acquisitions for an aggregate purchase price of $115.3 million and
these acquisitions have been included in the Company’s title insurance and services segment. These acquisitions
strengthen the Company’s core title and settlement business, and enhance the solutions the Company offers to its
customers. In addition,
the acquisitions leverage the Company’s industry-leading property data to drive
operational efficiencies and improve quality.

In May 2016, the Company’s board of directors terminated the Company’s funded defined benefit pension
plans effective as of July 31, 2016. In connection with the termination, the pension plans offered an alternative
lump sum distribution to certain participants. The Company recognized $66.3 million in settlement costs within
the corporate segment during the fourth quarter of 2016 related to distributions of pension plan assets totaling
$127.2 million to participants electing lump sum payments. The Company expects to complete the transfer of all
remaining liabilities and administrative responsibilities related to the pension plans to one or more highly rated
insurance companies by the end of the second quarter of 2017 and to recognize approximately $154 million in
net unrealized losses within the corporate segment in the first half of 2017. Once the termination process is
complete, the Company estimates an annual reduction of approximately $22 million in personnel costs related to
the pension plans within the corporate segment, based on the level of these expenses for the year ended
December 31, 2016. For further discussion of the pension termination including the recent and expected
contribution amounts and the timing of pension termination expense to be recognized, see Note 13 Employee
Benefit Plans to the consolidated financial statements.

The Company believes the purchase market will continue to strengthen in 2017 as a result of the ongoing
improvement in housing and the general economy. The Company also expects the commercial market will
experience a modest decline in 2017 when compared to 2016. Additionally, the recent increase in interest rates
has significantly reduced the Company’s refinance volumes. After peaking in July 2016 at 2,700 open orders per
day, the Company’s refinance volumes have declined to approximately 1,200 open orders per day in January
2017. The Company has made and will continue to make adjustments to its cost structure in response to the lower
refinance order volumes.

In addition, the Company continues to monitor developments in its regulatory environment. Currently,
federal officials are discussing various potential changes to laws and regulations that could impact
the
Company’s businesses, including changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act,
the reform or privatization of government-sponsored enterprises such as the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and tax reform,
including changes that could affect the mortgage interest deduction, among others. Changes in these areas, and
more generally in the regulatory environment in which the Company and its customers operate, could impact the
volume of mortgage originations in the United States and the Company’s competitive position and results of
operations. At this time, the nature and impact of any future changes is unknown.

40

Net realized

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

Expenses

Personnel costs . . . . . .
Premiums retained by

Other operating

expenses . . . . . . . . .

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

Depreciation and

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

Title Insurance and Services

2016

2015

2014

2016 vs. 2015

2015 vs. 2014

$ Change % Change $ Change % Change

(in thousands, except percentages)

Revenues

Direct premiums and

escrow fees . . . . . . . $2,004,686
2,286,630

Agent premiums . . . . .
Information and

other . . . . . . . . . . . .

713,137

Net investment

$1,929,783
2,098,265

$1,698,430
1,867,402

$ 74,903
188,365

669,984

654,961

43,153

3.9
9.0

6.4

$231,353
230,863

15,023

13.6
12.4

2.3

income . . . . . . . . . .

110,757

97,520

59,785

13,237

13.6

37,735

63.1

18,915
5,134,125

(7,442)
4,788,110

23,850
4,304,428

26,357
346,015

354.2
7.2

(31,292)
483,682

(131.2)
11.2

1,578,244

1,491,892

1,338,011

86,352

agents . . . . . . . . . . .

1,801,571

1,656,722

1,472,066

144,849

764,388

745,278

736,491

19,110

5.8

8.7

2.6

153,881

184,656

8,787

11.5

12.5

1.2

235,661

263,881

253,122

(28,220)

(10.7)

10,759

4.3

93,069
59,464
2,856
4,535,253

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

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

12,710
1,964
332
237,097

15.8
3.4
13.2
5.5

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

3.3
12.5
(9.7)
9.3

Income before income

taxes . . . . . . . . . . . . . . . . $ 598,872

$ 489,954

$ 373,024

$108,918

22.2

$116,930

31.3

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

11.7%

10.2%

8.7%

1.5% 14.7

1.5% 17.2

Direct premiums and escrow fees increased $74.9 million, or 3.9%, in 2016 from 2015 and $231.4 million,
or 13.6%, in 2015 from 2014. The increase in direct premiums and escrow fees in 2016 from 2015 was primarily
due to an increase in domestic title orders closed by the Company’s direct title operations, partially offset by a
decrease in domestic average revenues per order closed. 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 domestic average revenues per order closed
were $1,931, $2,012 and $1,886 for 2016, 2015 and 2014, respectively. The 4.0% decrease in average revenues
per order closed in 2016 from 2015 was primarily due to a shift in the mix of direct revenues generated from
higher premium commercial products to lower premium residential refinance products. 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 Company’s
direct title operations closed 958,400, 882,400 and 816,400 domestic title orders during 2016, 2015 and 2014,
respectively. The 8.6% increase in orders closed in 2016 from 2015 and the 8.1% increase in orders closed in
2015 from 2014 were generally consistent with the changes in residential mortgage origination activity in the
United States as reported in the MBA Forecast.

Agent premiums increased $188.4 million, or 9.0%, in 2016 from 2015 and $230.9 million, or 12.4%, in
2015 from 2014. Agent premiums are recorded when notice of issuance is received from the agent, which is

41

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 2016 from 2015 was generally consistent with the 2.9% increase in the
Company’s direct premiums and escrow fees in the twelve months ended September 30, 2016 as compared with the
twelve months ended September 30, 2015. The increase in agent premiums in 2015 from 2014 was generally
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.

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 $43.2 million, or 6.4%, in 2016 from 2015 and $15.0 million, or
in 2015 from 2014. Excluding the $48.5 million impact of new acquisitions for the year ended
2.3%,
December 31, 2016, information and other revenues decreased $5.3 million, or 0.8%, in 2016 compared to 2015.
The decrease in 2016 from 2015, 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 and
lower revenue in the Company’s Australian operations due to the loss of a large customer, partially offset by
higher demand for the Company’s title plant and data products. 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.

Net investment income increased $13.2 million, or 13.6%, in 2016 from 2015 and $37.7 million, or 63.1%,
in 2015 from 2014. The increase in 2016 from 2015 was primarily attributable to higher interest income from the
investment portfolio due to higher average balances in the title insurance and services segment’s debt securities
portfolio in 2016 when compared to 2015. 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 investments accounted for using the equity method when compared to 2014. Net investment income for 2015
and 2014 included impairment losses recognized on investments accounted for using the equity method of
$2.0 million and $22.5 million, respectively. No impairment losses were recognized on investments accounted
for using the equity method in 2016.

Net realized investment gains for the title insurance and services segment totaled $18.9 million for 2016 and
were primarily from the sales of debt and equity securities. Net realized investment losses were $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 for 2016, 2015 and 2014 included $3.3 million, $9.3 million and $7.5 million,
respectively, of gains from the sale of real estate, and included impairment losses of $5.2 million, $10.9 million
and $2.4 million, respectively, primarily related to internally developed software.

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.

42

Personnel costs increased $86.4 million, or 5.8%, in 2016 from 2015 and $153.9 million, or 11.5%, in 2015
from 2014. Excluding the $38.1 million impact of new acquisitions for the year ended December 31, 2016,
personnel costs increased $48.3 million, or 3.2%, in 2016 compared to 2015. The increase in 2016, adjusted for
the impact of new acquisitions, was primarily attributable to higher salary, incentive compensation, share based
compensation, and employee benefits expense. The higher salary cost was due to an increase in average salaries
and, to a lesser extent, higher average headcount. The increase in incentive compensation expense was due to
higher commissions paid on higher revenues, partially offset by lower 401(k) savings plan matches. The higher
share based compensation cost was due to increased restricted stock units granted to employees during the first
quarter of 2016 associated with 2015 performance. The increase in employee benefits expense was primarily due
to higher paid medical claims. 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. Personnel costs included severance expense of $8.3 million, $5.6 million
and $8.9 million for 2016, 2015 and 2014, 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 1,281,400, 1,261,700 and
1,155,500 domestic title orders in 2016, 2015 and 2014, respectively, representing an increase of 1.6% in 2016
from 2015 and an increase of 9.2% in 2015 from 2014.

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

2016

2015

2014

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

(in thousands, except percentages)
$1,656,722

$1,801,571

$1,472,066

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

$2,286,630

$2,098,265

$1,867,402

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

78.8%

79.0%

78.8%

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 decrease in the percentage of title premiums retained by agents in 2016 from 2015 was primarily due
to a change in the geographic mix of agency revenues towards lower agent-retention geographies. 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.

Other operating expenses (principally related to direct operations) increased $19.1 million, or 2.6%, in 2016
from 2015 and $8.8 million, or 1.2%, in 2015 from 2014. Excluding the $14.0 million impact of new acquisitions
for the year ended December 31, 2016, other operating expenses increased $5.1 million, or 0.7%, in 2016
compared to 2015. The increase in 2016 from 2015, adjusted for the impact of new acquisitions, was primarily
attributable to higher professional services expenses and higher software related expenses, partially offset by
lower bad debt expense, lower foreign currency exchange losses and a recovery on an insurance claim. 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.

43

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

escrow fees, was 5.5%, 6.6% and 7.1% for the years ended December 31, 2016, 2015 and 2014, respectively.

The current year rate of 5.5% reflects an ultimate loss rate of 4.5% for the current policy year and a
$42.6 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 potential uncertainty with respect to the Company’s exposure
to large title claims. A large title claim is defined as a title claim with a total ultimate loss in excess of
$2.5 million. This uncertainty is due to the following factors, among others: (i) the volatility associated with the
timing and severity of large title claims, (ii) the potential of incurring one or more large title claims that
significantly exceed estimated ultimate losses indicated by current historical trends, and (iii) the complexity
associated with handling large title claims which makes it difficult to estimate the ultimate outcome. While the
Company believes its claims reserve attributable to large title claims is reasonable, this uncertainty increases the
potential for adverse loss development.

As of December 31, 2016, the IBNR claims reserve for the title insurance and services segment was
$888.1 million, which reflected management’s best estimate. The Company’s internal actuary determined a range
of reasonable estimates of $718.5 million to $938.3 million. The range limits are $169.6 million below and
$50.2 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 6.6% reflected an ultimate loss rate of 4.2% for policy year 2015 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. Previously, the internal actuary’s model did not separate claims experience for large title
claims from normal title claims activity. With this change in methodology, the model began to separate 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 prior
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.

The 2014 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.

As of December 31, 2016, the projected ultimate loss ratios for policy years 2016, 2015 and 2014 were

4.5%, 4.1% and 4.8%, respectively.

Depreciation and amortization expense increased $12.7 million, or 15.8%,

in 2016 from 2015 and
$2.5 million, or 3.3%, in 2015 from 2014. Excluding the $2.7 million impact of new acquisitions for the year
ended December 31, 2016, depreciation and amortization expense increased $10.0 million, or 12.4%, in 2016
compared to 2015. The increase in 2016 was primarily attributable to amortization expense associated with
internally developed technology and purchased software licenses. 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.

44

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, 2016, 2015 and 2014.

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 11.7%, 10.2% and
8.7% for the years ended December 31, 2016, 2015 and 2014, respectively.

Specialty Insurance

Revenues

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

2016

2015

2014

2016 vs. 2015

2015 vs. 2014

$ Change % Change

$ Change % Change

(in thousands, except percentages)

$411,353
10,877
9,476

$380,264
3,180
8,850

$353,812
2,260
7,288

$31,089
7,697
626

8.2
242.0
7.1

$ 26,452
920
1,562

7.5
40.7
21.4

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

4,138

1,463

5,306

2,675

182.8

(3,843)

(72.4)

Expenses

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

435,844

393,757

368,666

42,087

10.7

25,091

67,733

65,742

63,072

1,991

3.0

2,670

6.8

4.2

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

62,610

49,741

44,645

12,869

25.9

5,096

11.4

Provision for policy losses

and other claims . . . . . . .

252,940

227,211

196,901

25,729

11.3

30,310

15.4

Depreciation and

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

5,593
6,894

4,775
6,769

4,978
6,096

818
125

395,770

354,238

315,692

41,532

Income before income taxes . . .

$ 40,074 $ 39,519

$ 52,974

$

555

17.1
1.8

11.7

1.4

(203)
673

38,546

(4.1)
11.0

12.2

$(13,455)

(25.4)

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

9.2%

10.0%

14.4%

(0.8)% (8.0)

(4.4)% (30.6)

Direct premiums increased $31.1 million, or 8.2%, in 2016 from 2015 and $26.5 million, or 7.5%, in 2015
from 2014. The increases were driven by higher premiums earned in the home warranty business. The increase in
2016 from 2015 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 increase in 2015 from 2014 in the home warranty business was
attributable to 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.

45

Information and other revenues increased $7.7 million, or 242.0%, in 2016 from 2015 and $0.9 million, or
40.7%, in 2015 from 2014. The increase in 2016 was primarily due to a change in how the Company reports
installment fees related to home warranty residential service contracts. Beginning in 2016, the Company reported
installment fees in information and other revenues, while prior to 2016, the Company reported installment fees as
a reduction in other operating expenses. This change resulted in an increase to information and other revenues
and an increase to other operating expenses of $7.5 million in 2016 when compared to 2015.

Net investment income increased $0.6 million, or 7.1%, in 2016 from 2015 and $1.6 million, or 21.4%, in
2015 from 2014. The increases were 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 when compared to prior years.

Net realized investment gains for the specialty insurance segment totaled $4.1 million, $1.5 million and
$5.3 million for 2016, 2015 and 2014, respectively, and were primarily from the sales of debt and equity
securities. Net realized investment gains for 2016 also included $2.3 million of gains from the sale of real estate.

Personnel costs and other operating expenses increased $14.9 million, or 12.9%, in 2016 from 2015 and
$7.8 million, or 7.2%, in 2015 from 2014. The increase in 2016 from 2015 was primarily related to a change in
how the Company reports installment fees related to home warranty residential service contracts which is further
discussed above, higher offshore labor expense related to increased customer support activities associated with
the increased volume in the home warranty business, higher advertising expense in the home warranty business,
and higher salary expense due to higher average salaries. These increases were partially offset by a $3.5 million
benefit from higher deferred acquisition costs associated with the change in how the Company reports
installment fees related to home warranty residential service contracts which is further discussed above. 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 provision for home warranty claims, expressed as a percentage of home warranty premiums, was 60.7%
in 2016, 56.5% in 2015 and 53.3% in 2014. The increase in rate in 2016 from 2015 was primarily attributable to
higher contract servicing costs due to an increase in the frequency of higher cost claims related to increased
equipment and replacement costs and less efficient claims management. 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 2016 and 2015 as a result of the
higher volume of home warranty residential service contracts outstanding in 2016 and 2015.

The provision for property and casualty claims, expressed as a percentage of property and casualty
insurance premiums, was 63.3% in 2016, 66.4% in 2015 and 60.1% in 2014. The decrease in rate in 2016 from
2015 was primarily attributable to lower weather-related loss events when compared to the prior year. 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.

Premium taxes as a percentage of specialty insurance segment premiums were 1.7% in 2016, 1.8% in 2015

and 1.7% in 2014.

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 9.2%, 10.0% and 14.4% for 2016, 2015 and 2014,
respectively.

46

Corporate

Revenues

Net investment income

2016

2015

2014

2016 vs. 2015

2015 vs. 2014

$ Change % Change

$ Change % Change

(in thousands, except percentages)

(losses) . . . . . . . . . . . . . . . $

5,946 $ (5,387) $ 5,504 $ 11,333

210.4

$(10,891)

(197.9)

Net realized investment

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

—

(568)

911

568

5,946

(5,955)

6,415

11,901

100.0

199.8

(1,479)

(162.3)

(12,370)

(192.8)

Expenses

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

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

110,656
26,867

37,301
25,976

34,545
26,528

73,355
891

196.7
3.4

385
29,403

167,311

462
27,014

90,753

2,799
17,981

81,853

(77)
2,389

(16.7)
8.8

76,558

84.4

2,756
(552)

(2,337)
9,033

8,900

8.0
(2.1)

(83.5)
50.2

10.9

Loss before income taxes . . $(161,365) $(96,708) $(75,438) $(64,657)

(66.9)

$(21,270)

(28.2)

Net investment income totaled $5.9 million in 2016, a loss of $5.4 million in 2015 and income of
$5.5 million in 2014. 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 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.

Corporate personnel costs and other operating expenses were $137.5 million, $63.3 million and
$61.1 million in 2016, 2015 and 2014, respectively. The increase in 2016 was primarily attributable to a
$66.3 million settlement expense recorded in the fourth quarter of 2016 related to the termination of the
Company’s funded defined benefit pension plans. For further discussion of the pension termination including the
recent and expected contribution amounts and the timing of pension termination expense to be recognized, see
Note 13 Employee Benefit Plans to the consolidated financial statements. The increase in 2016 was also
attributable to increased expense related to the Company’s deferred compensation plan and, to a lesser extent,
higher professional services expense related to the pension termination and higher allocations from the title
insurance and services segment for certain corporate services. 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.

Depreciation and amortization expense was $0.4 million, $0.5 million and $2.8 million in 2016, 2015 and

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

Interest expense increased $2.4 million in 2016 from 2015 and $9.0 million in 2015 from 2014. Interest
expense increased in 2016 primarily due to a change in how the Company reports amortization of deferred debt
issuance costs. Beginning in 2016, the Company reported amortization of deferred debt issuance costs in interest
expense, while prior to 2016, the Company reported amortization of deferred debt issuance costs in other
operating expenses. This change resulted in an increase in interest expense and a decrease in other operating
expenses of $2.0 million in 2016 when compared to 2015. Interest expense also increased due to the Company
borrowing $160.0 million under its credit facility during September 2016. Interest expense increased in 2015
primarily due to the Company’s issuance of $300.0 million of debt in November 2014. Interest expense related to
an intercompany note payable to the title insurance segment was $0.4 million and $1.5 million for the years
ended December 31, 2015 and 2014, respectively. The intercompany note payable was settled during 2015.

47

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, 2016, 2015 and 2014.

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,

2016

2015

2014

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

$167,153
3,703
(10,512)
(7,983)
(12,265)
(5,991)

(in thousands, except percentages)
35.0% $151,468
4,581
0.8
(2.2)
1,094
(7,111)
(1.7)
(1,710)
(2.6)
(4,427)
(1.2)

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%
0.8
0.1
(1.7)
(0.6)
(0.4)

$134,105

28.1% $143,895

33.3% $116,345

33.2%

The Company’s effective income tax rates (income tax expense as a percentage of income before income
taxes) were 28.1% for 2016, 33.3% for 2015 and 33.2% for 2014. The differences in the effective tax rates are
typically 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 2016 rate reflects the resolution of certain tax
authority examinations and tax credits claimed in current and prior years. 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. The 2014 rate reflects non-recurring tax benefits resulting from certain adjustments to the
Company’s state and non-U.S. tax accounts.

Net Income and Net Income Attributable to the Company

Net income and per share information are summarized as follows:

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

Net income per share attributable to the Company’s

stockholders: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Weighted-average common shares outstanding:

Year ended December 31,

2016

2015

2014

(in thousands, except per share amounts)
$233,534
$288,086
$342,993

$

$

3.10

3.09

$

$

2.65

2.62

$

$

2.18

2.15

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

110,548

108,427

106,884

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

111,156

109,826

108,688

See Note 12 Earnings Per Share to the consolidated financial statements for further discussion of earnings

per share.

48

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. Additionally, in May 2016, the Company’s board of
directors terminated the Company’s funded defined benefit pension plans effective as of July 31, 2016. In
connection with the termination, to sufficiently fund the pension plans, the Company made additional cash
contributions above scheduled amounts in 2016 of $84.8 million and expects to make an additional cash
contribution of approximately $23 million in the first half of 2017. The Company also expects to pay other
termination related expenses. For further discussion of the pension termination and expected additional cash
contributions, see Note 13 Employee Benefit Plans to the consolidated financial statements. 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, its
liquid-asset position and amounts available on its revolving credit facility, 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.

Cash provided by operating activities amounted to $489.4 million, $551.3 million and $360.6 million for the
years ended December 31, 2016, 2015 and 2014, respectively, after claim payments, net of recoveries, of
$463.0 million, $476.5 million and $469.8 million, respectively. The principal nonoperating uses of cash and
cash equivalents for the year ended December 31, 2016 were purchases of debt and equity securities, capital
expenditures, dividends to common stockholders and business acquisitions. 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 most significant
nonoperating sources of cash and cash equivalents for the year ended December 31, 2016 were proceeds from the
sales and maturities of debt and equity securities, increases in the deposit balances at the Company’s banking
operations and net proceeds from the issuance of debt. 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 net effect of all activities on total cash and cash equivalents was a decrease of $21.2 million, a
decrease of $162.8 million, and an increase of $355.2 million for the years ended December 31, 2016, 2015 and
2014, respectively.

The Company continually assesses its capital allocation strategy, including decisions relating to dividends,
stock repurchases, capital expenditures, acquisitions and investments. In August 2016, the Company’s board of

49

directors approved an increase in the Company’s quarterly cash dividend to 34 cents per common share,
representing a 31% increase from the prior level of 26 cents per common share. The dividend increase became
effective beginning with the September 2016 dividend. In January 2017, the Company’s board of directors
approved a first quarter cash dividend of 34 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, 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 $182.4 million remained as of
December 31, 2016. Purchases may be made from time to time by the Company in the open market at prevailing
market prices or in privately negotiated transactions. During the year ended December 31, 2016, the Company
repurchased and retired 14 thousand shares of its common stock for a total purchase price of $454 thousand and,
as of December 31, 2016, had repurchased and retired 3.2 million shares of its common stock under the current
authorization for a total purchase price of $67.6 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, 2016, under such regulations, the maximum amount of dividends, loans and advances available to
the holding company from its insurance subsidiaries in 2017, without prior approval from applicable regulators,
was $761.8 million. However, the timing and amount of dividends paid by the Company’s insurance subsidiaries
to the holding company falls within the discretion of each insurance subsidiary’s board of directors and will
depend upon many factors, including the level of total statutory capital and surplus required to support minimum
financial strength ratings by certain rating agencies. 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, 2016, the holding company’s sources of liquidity included $221.5 million of cash and
cash equivalents and $540.0 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.

In September 2016, the Company borrowed $160.0 million under the credit facility to fund acquisitions and
to partially fund its obligation in connection with the termination of its funded defined benefit pension plans. At
December 31, 2016, outstanding borrowings under the facility totaled $160.0 million at an interest rate of 2.52%.
See Note 20 Business Combinations to the consolidated financial statements for further discussion of the
Company’s acquisitions, and see Note 13 Employee Benefit Plans to the consolidated financial statements for
further discussion of the Company’s pension termination.

50

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, 2016, 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 2016, the Company financed securities for funds received totaling
$39.2 million under these agreements. As of December 31, 2016, no amounts remained outstanding under these
agreements.

Notes and contracts payable as a percentage of

total capitalization was 19.6% and 17.4% at
December 31, 2016 and 2015, 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, 2016, 92% of the Company’s investment
portfolio consisted of fixed income securities, of which 60% were United States government-backed or rated
AAA and 94% 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
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, 2016, 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 software development costs, additions to
property and equipment, additions to title plants and purchases of real estate data. Capital expenditures were
$132.3 million, $127.6 million and $99.4 million for the years ended December 31, 2016, 2015 and 2014,
respectively. The increase in 2016 from 2015 primarily related to the Company’s adoption of the change in
accounting treatment for internal-use software licenses in 2016, partially offset by lower spending in property
and equipment, software, title plants, and real estate data. 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.

51

Contractual obligations. A summary of the Company’s contractual obligations at December 31, 2016, 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

$ 736,693

$

4,855

1-3 years
(in thousands)
$168,022

3-5 years

More than
5 years

$

6,769

$ 557,047

178,076
328,797
2,779,478
1,025,863

26,048
80,700
2,779,478
251,329

51,283
118,818
—
227,216

50,402
69,296
—
154,549

50,343
59,983
—
392,769

450,271
$5,499,178

38,494
$3,180,904

29,678
$595,017

30,626
$311,642

351,473
$1,411,615

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 estimates 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 $18.1 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 $6.8 billion and $6.6 billion at December 31, 2016 and 2015, respectively,
of which $2.6 billion was 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 $3.2 billion and $3.0 billion at
December 31, 2016 and 2015, respectively. Escrow deposits held at third-party financial institutions and trust
included in the accompanying
assets are not considered assets of the Company and,
consolidated balance sheets. However, the Company could be held contingently liable for the disposition of these
assets.

therefore, are not

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

52

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 $2.0 billion and $2.8 billion
at December 31, 2016 and 2015, 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, 2016 and 2015, the Company was contingently liable for guarantees of indebtedness owed
by affiliates and third parties to banks and others totaling $7.1 million and $8.2 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
$7.1 million and $8.2 million at December 31, 2016 and 2015, 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, 2016
and 2015.

53

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
increases or decreases inversely with changes in market
interest rates. The Company also considers its
investments in preferred stock to be exposed to interest rate risk. The fair values of the Company’s fixed income
portfolio at December 31, 2016 and 2015 were $4.6 billion and $4.3 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, 2016 to decrease by approximately $109.0 million, or
2.4%, and $272.0 million, or 5.9%, respectively, and at December 31, 2015 to decrease by approximately
$150.0 million, or 3.5%, and $292.0 million, or 6.8%, respectively.

the Company had $160.0 million outstanding under

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, 2016,
facility. As of
December 31, 2015, 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, 2016 and 2015, 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 $2.7 million and
$5.4 million for 2016, and $3.5 million and $7.0 million for 2015, respectively.

its credit

The Company’s interest bearing escrow deposit

liabilities totaled $2.0 billion and $2.1 billion at
December 31, 2016 and 2015, respectively. These variable rate customer savings accounts are subject to market
rate fluctuations. The weighted average interest rate for 2016 and 2015 was 0.10%. Assuming increases in
interest rates of 25 and 50 basis points and the deposit amounts at December 31, 2016 and 2015 are held constant
for the entire year, interest expense for 2016 would be higher by $4.9 million and $9.8 million, respectively, and
2015 would be higher by $5.2 million and $10.4 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 $15.6 million) was $388.5 million and

54

$305.8 million as of December 31, 2016 and 2015, respectively. Assuming broad-based declines in equity market
prices of 10% and 20%, with all other factors constant, the fair value of the Company’s equity securities at
December 31, 2016 could decrease by $38.9 million and $77.7 million, respectively, and at December 31, 2015
could decrease by $30.6 million and $61.2 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, 2016, see Note
3 Debt and Equity Securities to the consolidated financial statements.

55

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.

57

58
59
60
61
62
63
117

118
119
124
126
127

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

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

56

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

First American Financial Corporation:

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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2016 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, 2016, 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 17, 2017

57

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)

ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts and accrued income receivable, less allowances of $30,185 and $31,552 . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments:

Deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities, includes pledged securities of $110,647 and $122,441 . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2016

2015

$ 1,006,138
299,799
67,970

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

21,222
4,553,363
404,085
162,029

23,224
4,279,347
321,285
166,413

5,140,699

4,790,269

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

434,050
564,309
20,037
1,017,417
78,898
202,460

409,973
536,101
22,020
964,342
48,114
180,777

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

Commitments and contingencies (Notes 18 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—109,944 shares

and 109,098 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

$ 8,831,777

$ 8,236,715

$ 2,779,478

$ 2,699,015

59,269
193,825
400,412
140,449

793,955

228,905
1,025,863
10,376
242,158
736,693

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

876,087

207,929
983,880
7,576
128,053
581,052

5,817,428

5,483,592

—

—

1
2,191,756
1,046,822
(230,400)

3,008,179
6,170

1
2,150,813
838,149
(239,003 )

2,749,960
3,163

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

3,014,349

2,753,123

$ 8,831,777

$ 8,236,715

See Notes to Consolidated Financial Statements

58

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

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

Year Ended December 31,

2016

2015

2014

Revenues:

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

$2,416,039
2,286,630
723,990
126,134
23,053

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

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

5,575,846

5,175,456

4,677,949

Expenses:

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

1,756,633
1,801,571
853,841
488,601
99,047
66,358
32,214

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

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

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

5,098,265

4,742,691

4,327,389

477,581
134,105

343,476
483

432,765
143,895

288,870
784

350,560
116,345

234,215
681

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

$ 342,993

$ 288,086

$ 233,534

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

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

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

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

$

$

$

3.10

3.09

1.20

$

$

$

2.65

2.62

1.00

$

$

$

2.18

2.15

0.84

Weighted-average common shares outstanding:

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

110,548

108,427

106,884

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

111,156

109,826

108,688

See Notes to Consolidated Financial Statements

59

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

Year Ended December 31,

2016

2015

2014

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

$343,476

$288,870

$234,215

Other comprehensive income (loss), net of tax:

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

(10,359)
(6,334)
25,300

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

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

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

8,607

(39,911)

(53,552)

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

352,083
487

248,959
770

180,663
691

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

$351,596

$248,189

$179,972

See Notes to Consolidated Financial Statements

60

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)

First American Financial Corporation Stockholders

Shares

Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated
other
comprehensive
loss

Total
stockholders’
equity

Noncontrolling
interests

Total

Balance at December 31,

2013 . . . . . . . . . . . . . . . . . 105,900
—

Net income for 2014 . . . . . . .
Dividends on common

$

1
—

$ 2,077,828 $ 512,222
233,534

—

shares . . . . . . . . . . . . . . . .

—

—

—

(89,939)

Shares issued in connection

with share-based
compensation plans . . . . . .

Share-based compensation

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

Net activity related to

noncontrolling interests . .
Other comprehensive income
(loss) (Note 17) . . . . . . . . .

1,641 —

12,506

(2,049)

—

—

—

—

—

—

19,302

76

—

—

—

—

Balance at

December 31, 2014 . . . . . . 107,541
—

Net income for 2015 . . . . . . .
Dividends on common

1
—

2,109,712
—

653,768
288,086

shares . . . . . . . . . . . . . . . .

—

—

— (108,524)

Shares issued in connection

with share-based
compensation plans . . . . . .

Share-based compensation

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

Net activity related to

noncontrolling interests . .
Other . . . . . . . . . . . . . . . . . . .
Other comprehensive income
(loss) (Note 17) . . . . . . . . .

1,557 —

16,769

(2,201)

—

—
—

—

—

—
—

—

24,339

—

—
7,020

(7)

—

—

Balance at

December 31, 2015 . . . . . . 109,098
—

Net income for 2016 . . . . . . .
Dividends on common

1
—

2,150,813
—

838,149
342,993

shares . . . . . . . . . . . . . . . .

—

—

— (131,541)

Purchase of Company

shares . . . . . . . . . . . . . . . .

(14) —

(454)

—

Shares issued in connection

with share-based
compensation plans . . . . . .

Share-based compensation

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

Net activity related to

noncontrolling interests . .
Other comprehensive income
(loss) (Note 17) . . . . . . . . .

Balance at

860 —

7,298

(2,779)

—

—

—

—

—

—

34,125

(26)

—

—

—

—

$(145,544)

—

—

—

—

—

$ 2,444,507
233,534

$ 3,194
681

$ 2,447,701
234,215

(89,939)

10,457

19,302

—

—

—

(89,939)

10,457

19,302

76

(758)

(682)

(53,562)

(53,562)

10

(53,552)

(199,106)

—

—

—

—

—
—

(239,003)

—

—

—

—

—

—

2,564,375
288,086

3,127
784

2,567,502
288,870

(108,524)

14,568

24,339

(7)
7,020

—

—

—

(734)
—

(14)

(108,524)

14,568

24,339

(741)
7,020

(39,911)

2,749,960
342,993

3,163
483

2,753,123
343,476

(131,541)

(454)

4,519

34,125

—

—

—

—

(26)

2,520

(131,541)

(454)

4,519

34,125

2,494

8,607

8,603

8,603

4

—

(39,897)

(39,897)

December 31, 2016 . . . . . . 109,944

$

1

$ 2,191,756 $1,046,822

$(230,400)

$ 3,008,179

$ 6,170

$ 3,014,349

See Notes to Consolidated Financial Statements

61

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Year Ended December 31,

2016

2015

2014

CASH FLOWS FROM OPERATING ACTIVITIES:

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

$

343,476

$

288,870

$

234,215

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 (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 in accounts and accrued income receivable . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in accounts payable and accrued liabilities . . . . . . . . . . . . . . .
Increase in deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

488,601
99,047
28,325
(3,415)
(23,053)
34,125
(8,173)
10,023

(462,999)
17,601
(10,017)
(29,339)
21,534
(16,320)

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

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

489,416

551,323

360,637

CASH FLOWS FROM INVESTING ACTIVITIES:

Net cash effect of acquisitions/dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(106,719)
712
(2,062,743)
731,146
948,257
2,244
—
—

(132,265)
9,220

(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

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

(610,148)

(974,420)

(836,692)

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

80,463
160,000
(5,171)
(1,029)
3,415
1,104
(454)
(131,541)

106,787
(7,238)

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

(21,183)
1,027,321

(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

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

$ 1,006,138

$ 1,027,321

$ 1,190,080

SUPPLEMENTAL INFORMATION:
Cash paid during the year for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes, less refunds of $4,055, $2,546 and $13,925 . . . . . . . . . . . . . . . . . . . . . . .

$
$
$

30,125
65,506
116,309

$
$
$

29,212
57,367
89,062

$
$
$

17,327
58,148
72,028

See Notes to Consolidated Financial Statements

62

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation and Significant Accounting Policies:

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; provides evidence of title; and provides banking,
trust, document custodial 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, South Korea 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 47 states. The majority of policy liability is in the
western United States, including approximately 63% in California. 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 certain 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.

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with generally accepted accounting
the consolidated operations of the Company. The consolidated financial
principles (“GAAP”) and reflect
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

During the fourth quarter of 2016, the Company identified certain title plant assets that were no longer being
used and should have been previously written off, and certain capitalized software, title plant imaging, real estate

63

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

data and investments related to title plant assets that were misclassified as title plant assets. As these errors
primarily related to reporting periods prior to the Company’s June 2010 spin-off from its prior parent, which
subsequently assumed the name CoreLogic, Inc. (“CoreLogic”), the Company corrected for these errors by
revising retained earnings at December 31, 2013, 2014 and 2015 in the consolidated statements of equity, and
revising title plants and other indexes, other investments, deferred income tax liabilities and retained earnings in
the consolidated balance sheet at December 31, 2015. The impact of this revision, which has been consistently
applied to all periods presented, included decreases to retained earnings, title plants and other indexes and
deferred income tax liabilities of $8.5 million, $18.8 million and $5.1 million, respectively, and an increase to
other investments of $5.2 million.

During 2015, the Company reclassified certain revenues and expenses related to closing protection letters
and temporary labor costs and made comparable reclassifications to its consolidated statement of income for the
year ended December 31, 2014. The impact to the Company’s title insurance and services segment for the year
ended December 31, 2014 included a decrease to direct premiums and escrow fees and an increase to agent
premiums of $25.8 million, increases to personnel costs and premiums retained by agents of $23.9 million and
$1.2 million, respectively, and a decrease to other operating expenses of $25.1 million. The impact to the
Company’s specialty insurance segment included an increase to personnel costs and a decrease to other operating
expenses of $1.0 million for the year ended December 31, 2014.

Also during 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. The Company corrected for this error
by revising direct premiums and escrow fees and information and other in the consolidated statement of income
for the year ended December 31, 2014. The impact of the revision 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 for the year ended December 31, 2014.

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

64

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

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, 2016 and 2015, the fair value of
such investments totaled $110.6 million and $122.4 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, 2016, 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.

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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 $0.5 million, $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, 2016, 2015, and 2014, respectively. It is possible that the Company could
recognize additional other-than-temporary impairment losses on securities it owns at December 31, 2016 if future
events or information cause it to determine that a decline in fair value is other-than-temporary.

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. If objective, substantial evidence does not
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, 2016, 2015 and 2014.

indicate a likely recovery during that

timeframe,

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
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 did not record any impairment
losses related to its equity method investments for 2016 and recognized impairment losses of $2.0 million and
$22.5 million for the years ended December 31, 2015 and 2014, 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

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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
factors, as appropriate. Notes are placed on non-accrual status when management determines that
the
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.
Impairment losses on property and equipment, which primarily related to impairments of internally developed
software, were $5.2 million, $10.9 million and $1.2 million for the years ended December 31, 2016, 2015 and
2014, respectively.

Title plants and other indexes

Title plants and other indexes at December 31, 2016 included title plants of $529.2 million and capitalized
real estate data of $35.1 million, and at December 31, 2015 included title plants of $509.6 million and capitalized
real estate data of $26.5 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
initially recorded at cost and is amortized using the straight-line method over estimated useful lives of 3 to 15
years.

Business Combinations

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

liabilities assumed and
intangible assets acquired based on their estimated fair values 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.

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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
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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

For 2016, the Company chose to forego the qualitative assessment and performed a quantitative impairment
test and, based on the results, determined that the fair values of its reporting units exceeded their carrying
amounts and,
therefore, no additional analysis was required. The Company chose to perform qualitative
assessments for 2015 and 2014, 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, the Company did not record any goodwill
impairment losses for 2016, 2015 or 2014.

Other intangible assets

The Company’s finite-lived intangible assets consist of customer relationships, noncompete agreements,
trademarks, internal-use software licenses 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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 generally
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 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 the sensitivity of claims to external conditions in the 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 recent policy years, positive or negative, is
reasonably likely given the long duration nature of a title insurance policy. For example, if the expected ultimate
losses for each of the last six policy years increased or decreased by 50 basis points, the resulting impact on the
Company’s IBNR reserve would be an increase or decrease, as the case may be, of $110.1 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

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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 property and casualty insurance policies and home warranty contracts 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
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.

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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

Employee benefit plans

The Company recognizes the overfunded or underfunded status of its funded defined benefit pension and
unfunded 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. See Note 13
Employee Benefit Plans for discussion of the termination of the Company’s funded defined benefit pension
plans.

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, South Korea
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 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
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, 2016. See Note 8 Reserve for Known and Incurred But Not Reported Claims for discussion
of recoveries related to a large commercial title claim during the year ended 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, 2016 and 2014.

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Escrow deposits and trust assets

The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits
totaled $6.8 billion and $6.6 billion at December 31, 2016 and 2015, respectively, of which $2.6 billion was 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 $3.2 billion and $3.0 billion at
December 31, 2016 and 2015, respectively. Escrow deposits held at third-party financial institutions and trust
assets are not considered assets of the Company and,
included in the accompanying
consolidated balance sheets. However, the Company could be held contingently liable for the disposition of these
assets.

therefore, are not

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 $2.0 billion and $2.8 billion
at December 31, 2016 and 2015, 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 September 2015, the Financial Accounting Standards Board (“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 adoption of this guidance had no
impact on the Company’s 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

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FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

subsequent measurement of debt
issuance costs associated with line-of-credit arrangements. The updated
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 adoption of this guidance had no impact on the
Company’s 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 adoption of this guidance had no impact on the Company’s 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. The
adoption of this guidance had no impact on the Company’s 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 elected to adopt the updated guidance prospectively for all arrangements
entered into or materially modified after the effective date. The adoption of this guidance did not have a material
impact on the Company’s consolidated financial statements. The financial statement line items impacted by the
adoption of the updated guidance include other intangible assets, net and depreciation and amortization. See Note
6 Other Intangible Assets for further information on the Company’s internal-use software licenses.

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 adoption of this guidance did not have a material impact on the Company’s
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 adoption of this guidance had no impact on the Company’s 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

75

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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
adoption of this guidance had no impact on the Company’s consolidated financial statements.

Pending Accounting Pronouncements:

In November 2016, the FASB issued updated guidance intended to reduce the diversity in practice on
presenting restricted cash or restricted cash equivalents in the statement of cash flows. The updated guidance is
effective for interim and annual reporting periods beginning after December 15, 2017, 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 October 2016, the FASB issued updated guidance to amend the consolidation guidance on how a
reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the
entity held through related parties that are under common control with the reporting entity when determining
whether it is the primary beneficiary of that variable interest entity. The updated guidance is effective for interim
and annual reporting periods beginning after December 15, 2016, 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 October 2016, the FASB issued updated guidance intended to simplify and improve the accounting for
the income tax consequences of intra-entity transfers of assets other than inventory. The updated guidance, which
eliminates the intra-entity transfers exception, requires entities to recognize the income tax consequences of
intra-entity transfers of assets, other than inventory, when the transfers occur. The updated guidance is effective
for interim and annual reporting periods beginning after December 15, 2017, 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 August 2016, the FASB issued updated guidance intended to eliminate the diversity in practice regarding
the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The
updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with
early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact
on its consolidated statements of cash flows.

In June 2016, the FASB issued updated guidance intended to provide financial statement users with more
decision-useful information about the expected credit losses on financial instruments and other commitments to
extend credit held by a reporting entity at each reporting date. The updated guidance replaces the current incurred
loss impairment methodology with a methodology that reflects expected credit
losses and requires the
consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The
updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with
early adoption permitted. The Company is currently assessing the impact of the new guidance on its consolidated
financial statements.

In March 2016, the FASB issued updated guidance intended to simplify and improve several aspects of the
accounting for share-based payment transactions, including the income tax consequences, classification of such
awards as either equity or liabilities and classification on the statement of cash flows. The updated guidance is

76

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

effective for interim and annual reporting periods beginning after December 15, 2016, 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 March 2016, the FASB issued updated guidance intended to simplify the accounting treatment for
investments that become qualified for the equity method of accounting as a result of an increase in the level of
ownership interest or degree of influence. The updated guidance is effective for interim and annual reporting
periods beginning after December 15, 2016, with early adoption permitted. The Company expects the adoption of
this guidance to have no impact on its consolidated financial statements.

In February 2016, the FASB issued updated guidance that requires the rights and obligations associated with
leasing arrangements be reflected on the balance sheet in order to increase transparency and comparability
among organizations. Under the updated guidance, lessees will be required to recognize a right-of-use asset and a
liability to make lease payments and disclose key information about leasing arrangements. The updated guidance
is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption
permitted. While the Company is currently evaluating the impact the new guidance will have on its consolidated
financial statements, the Company expects the adoption of the new guidance will result in a material increase in
the assets and liabilities on its consolidated balance sheets and will likely have an insignificant impact on its
consolidated statements of income and statements of cash flows.

In January 2016, the FASB issued updated guidance intended to enhance the reporting model for financial
instruments to provide users of financial statements with more decision-useful information. In addition to making
other targeted improvements to current guidance, the updated guidance also requires all equity investments,
except those accounted for under the equity method of accounting or those that result in consolidation of the
investee, to be measured at fair value with changes in the fair value recognized through net income. The updated
guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early
adoption permitted in certain circumstances. While the Company expects the adoption of this guidance to impact
its consolidated statements of income, the materiality of the impact will depend upon the size of, and level of
volatility experienced within, the Company’s equity portfolio.

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. In August 2015, the FASB issued updated
guidance which defers the effective date of this guidance by one year. In 2016, the FASB issued additional
updates to the new guidance primarily to clarify, among other things, the implementation guidance related to
principal versus agent considerations, identifying performance obligations, accounting for licenses of intellectual
property, and to provide narrow-scope improvements and additional practical expedients. The updated guidance
is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption
prohibited. The Company expects to adopt the new guidance under the modified retrospective approach and,
based on a preliminary assessment, does not expect the new guidance to have a material impact on its
consolidated financial statements.

77

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Investments totaling $125.8 million and $127.1 million were on deposit with state treasurers in accordance

with statutory requirements for the protection of policyholders at December 31, 2016 and 2015, 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, 2016, under such regulations, the maximum amount of dividends, loans and
advances available to the Company from its insurance subsidiaries in 2017, without prior approval from
applicable regulators, was $761.8 million.

The Company’s principal title insurance subsidiary, First American Title Insurance Company (“FATICO”),
maintained total statutory capital and surplus of $1.2 billion and $1.1 billion as of December 31, 2016 and 2015,
respectively. Statutory net income for the years ended December 31, 2016, 2015 and 2014 was $150.0 million,
$191.8 million and $393.1 million, respectively. FATICO was in compliance with the minimum statutory capital
and surplus requirements as of December 31, 2016.

FATICO is domiciled in Nebraska and its statutory-based financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Nebraska Department of Insurance. 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 $69.6 million
and $61.7 million at December 31, 2016 and 2015, respectively, than if reported in accordance with NAIC SAP.
Additionally, for the year ended December 31, 2015, the state of Nebraska granted a permitted accounting
practice to FATICO that differs from Nebraska’s prescribed accounting practice; specifically, the determination
that a bulk reserve within the known claims reserve was not required resulting in total statutory capital and
surplus that was higher by $58.9 million at December 31, 2015 than if reported in accordance with Nebraska’s
prescribed practice. For the year ended December 31, 2016, FATICO elected to follow the prescribed practice
and recorded a bulk reserve within the known claims reserve resulting in a decrease to total statutory capital and
surplus of $145.7 million at December 31, 2016.

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.

78

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3. Debt and Equity Securities:

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

(in thousands)

December 31, 2016
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, 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 . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
cost

Gross unrealized

gains

losses

Estimated
fair value

$ 155,441
1,004,659
141,887
197,343
2,187,482
675,683
240,526

$

416
6,340
600
691
2,983
8,282
2,490

$ (4,466) $ 151,391
984,333
140,048
193,868
2,163,673
678,524
241,526

(26,666)
(2,439)
(4,166)
(26,792)
(5,441)
(1,490)

$4,603,021

$21,802

$(71,460) $4,553,363

$ 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

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

(in thousands)

December 31, 2016
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Gross unrealized

Cost

gains

losses

Estimated
fair value

$ 18,926
367,169

$ —
26,034

$ (3,344)
(4,700)

$ 15,582
388,503

$386,095

$26,034

$ (8,044)

$404,085

$ 18,305
307,429

$

420
13,103

$ (3,258)
(14,714)

$ 15,467
305,818

$325,734

$13,523

$(17,972)

$321,285

Sales of debt and equity securities resulted in realized gains of $30.7 million, $8.7 million and $34.1 million
and realized losses of $9.7 million, $10.0 million and $9.1 million for the years ended December 31, 2016, 2015
and 2014, respectively.

79

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

(in thousands)

Less than 12 months

12 months or longer

Total

Estimated
fair value

Unrealized
losses

Estimated
fair value

Unrealized
losses

Estimated
fair value

Unrealized
losses

December 31, 2016
Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . . . $ 111,748 $ (4,466) $ — $ — $ 111,748 $ (4,466)
(26,666)
Municipal bonds . . . . . . . . . . . . . . . . . . . . .
(2,439)
Foreign government bonds . . . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . . . .
(4,166)
Governmental agency mortgage-backed

(26,317)
(2,371)
(4,166)

652,016
63,368
148,112

635,531
63,044
148,112

16,485
324
—

(349)
(68)
—

securities . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. corporate debt securities . . . . . . . . . . .
Foreign corporate debt securities . . . . . . . .

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

1,295,790
193,533
78,658

2,526,416
70,261

(19,097) 432,349
24,499
(4,560)
8,154
(1,150)

(7,695) 1,728,139
218,032
86,812

(881)
(340)

(62,127) 481,811
59,019
(1,173)

(9,333) 3,008,227
129,280
(6,871)

(26,792)
(5,441)
(1,490)

(71,460)
(8,044)

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,596,677 $(63,300) $540,830 $(16,204) $3,137,507 $(79,504)

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

1,096,301
361,842
102,801

2,004,746
191,248

(9,424) 213,020
13,511
11,246

(11,272)
(2,725)

(5,615) 1,309,321
375,353
(1,211)
114,047
(1,053)

(28,826) 271,125
31,974
(12,068)

(8,436) 2,275,871
223,222
(5,904)

(15,039)
(12,483)
(3,778)

(37,262)
(17,972)

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,195,994 $(40,894) $303,099 $(14,340) $2,499,093 $(55,234)

80

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investments in debt securities at December 31, 2016, by contractual maturities, are as follows:

(in thousands)

U.S. Treasury bonds

Due in one
year or less

Due after
one
through
five years

Due after
five
through
ten years

Due after
ten years

Total

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

$ 47,371
$ 47,366

$ 49,652
$ 49,546

$ 25,047
$ 24,522

$ 33,371
$ 29,957

$ 155,441
$ 151,391

Municipal bonds

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

$ 53,718
$ 53,763

$331,982
$332,175

$236,718
$234,041

$382,241
$364,354

$1,004,659
$ 984,333

Foreign government bonds

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

$ 16,052
$ 16,194

$ 91,789
$ 91,973

$ 14,317
$ 14,223

$ 19,729
$ 17,658

$ 141,887
$ 140,048

Governmental agency bonds

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

$ 10,268
$ 10,266

$ 94,031
$ 92,876

$ 54,508
$ 53,652

$ 38,536
$ 37,074

$ 197,343
$ 193,868

U.S. corporate debt securities

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

$ 22,420
$ 22,457

$303,025
$306,154

$285,155
$285,604

$ 65,083
$ 64,309

$ 675,683
$ 678,524

Foreign corporate debt securities

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

$ 11,221
$ 11,258

$111,626
$112,162

$108,070
$108,061

$
9,609
$ 10,045

$ 240,526
$ 241,526

Total debt securities excluding mortgage-backed

securities

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

$161,050
$161,304

$982,105
$984,886

$723,815
$720,103

$548,569
$523,397

$2,415,539
$2,389,690

Total mortgage-backed securities

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

Total debt securities

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

$2,187,482
$2,163,673

$4,603,021
$4,553,363

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.

81

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The composition of the investment portfolio at December 31, 2016, by credit rating, is as follows:

(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, 2016
Debt securities:
U.S. Treasury bonds . . . . . . $ 151,391
912,711
Municipal bonds . . . . . . . . .
Foreign government

100.0
92.7

$ —
57,483

— $ —
14,139
5.8

— $ 151,391
984,333
1.5

100.0
100.0

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

119,151

85.1

18,782

13.4

2,115

1.5

140,048

100.0

Governmental agency

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

193,868

100.0

—

—

—

—

193,868

100.0

Governmental agency
mortgage-backed
securities . . . . . . . . . . . . . 2,163,673

U.S. corporate debt

100.0

—

—

—

—

2,163,673

100.0

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

240,188

35.4

215,731

31.8

222,605

32.8

678,524

100.0

Foreign corporate debt

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

114,125

Total debt securities . . . . . . 3,895,107
—
Preferred stocks . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . $3,895,107

47.2

85.6
—

85.2

86,605

378,601
9,203

35.9

8.3
59.1

40,796

279,655
6,379

16.9

6.1
40.9

241,526

100.0

4,553,363
15,582

100.0
100.0

$387,804

8.5

$286,034

6.3

$4,568,945

100.0

As of December 31, 2016, the estimated fair value of total debt securities included $149.9 million of bank
loans, of which $138.7 million was non-investment grade; $118.0 million of high yield corporate debt securities,
all of which was non-investment grade; and $60.9 million of emerging market debt securities, of which
$8.8 million was non-investment grade.

82

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The composition of the investment portfolio in an unrealized loss position at December 31, 2016, by credit

rating, is as follows:

(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, 2016
Debt securities:
U.S. Treasury bonds . . . . . . $ 111,748
Municipal bonds . . . . . . . . .
609,018
Foreign government

100.0
93.4

$ —
37,388

—
5.7

$ —
5,610

— $ 111,748
652,016
0.9

100.0
100.0

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

43,123

68.0

18,290

28.9

1,955

3.1

63,368

100.0

Governmental agency

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

148,112

100.0

—

—

—

—

148,112

100.0

Governmental agency
mortgage-backed
securities . . . . . . . . . . . . . 1,728,139

U.S. corporate debt

100.0

—

—

—

—

1,728,139

100.0

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

79,166

36.3

95,320

43.7

43,546

20.0

218,032

100.0

Foreign corporate debt

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

36,787

Total debt securities . . . . . . 2,756,093
—
Preferred stocks . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . $2,756,093

42.4

91.6
—

91.1

38,209

189,207
9,203

44.0

6.3
59.1

11,816

62,927
6,379

13.6

2.1
40.9

86,812

100.0

3,008,227
15,582

100.0
100.0

$198,410

6.6

$69,306

2.3

$3,023,809

100.0

As of December 31, 2016, the estimated fair value of total debt securities in an unrealized loss position
included $12.0 million of bank loans, all of which was non-investment grade; $39.2 million of high yield
corporate debt securities, all of which was non-investment grade; and $38.0 million of emerging market debt
securities, of which $6.1 million was non-investment grade.

The credit ratings in the above tables 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.

83

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,

2016

2015

(in thousands)

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

$

27,312
253,954
232,104
558,922

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

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

1,072,292
(638,242)

993,826
(583,853)

$ 434,050

$ 409,973

NOTE 5. Goodwill:

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

December 31, 2016 and 2015, is as follows:

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

Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . .

Title
Insurance
and Services

$913,180
13,430
(9,033)

917,577
53,564
(489)

Specialty
Insurance

(in thousands)
$46,765

—
—

46,765
—
—

Total

$ 959,945
13,430
(9,033)

964,342
53,564
(489)

Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . .

$970,652

$46,765

$1,017,417

For further discussion about

the Company’s acquisitions in 2016 and 2015, see Note 20 Business

Combinations.

84

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:

December 31,

2016

2015

(in thousands)

Finite-lived intangible assets:

Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncompete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal-use software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 118,298
30,332
10,097
16,580
2,840

$ 93,572
26,963
9,341
—
2,840

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

178,147
(116,133)

132,716
(101,479)

62,014

31,237

Indefinite-lived intangible assets:

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

16,884

16,877

$ 78,898

$ 48,114

Amortization expense for finite-lived intangible assets was $15.4 million, $9.3 million and $12.6 million for

the years ended December 31, 2016, 2015 and 2014, respectively.

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

Year

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$19,370
$ 9,928
$ 7,296
$ 4,944
$ 3,148

NOTE 7. Deposits:

Deposit accounts are summarized as follows:

December 31,

2016

2015

(in thousands, except
percentages)

Escrow accounts:

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

$1,961,488
673,944

$2,084,926
494,077

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

2,635,432
144,046

2,579,003
120,012

$2,779,478

$2,699,015

Weighted average interest rate:

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

0.10%

0.10%

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

85

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

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

December 31,

2016

2015

2014

$ 983,880

(in thousands)
$1,011,780

$1,018,365

441,228
47,373

488,601

223,735
239,264

462,999

16,381

395,459
95,633

491,092

209,845
266,647

476,492

(42,500)

383,181
66,842

450,023

196,656
273,094

469,750

13,142

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

$1,025,863

$ 983,880

$1,011,780

Current year payments include $211.3 million, $198.6 million and $174.4 million in 2016, 2015 and 2014,
respectively, that primarily relate to the Company’s specialty insurance segment. Prior year payments, net of
recoveries, include $41.4 million, $23.1 million and $23.2 million in 2016, 2015 and 2014, 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, 2016 and 2014.

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

fees, was 5.5%, 6.6% and 7.1% for the years ended December 31, 2016, 2015 and 2014, respectively.

The current year rate of 5.5% reflects an ultimate loss rate of 4.5% for the current policy year and a
$42.6 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 potential uncertainty with respect to the Company’s exposure
to large title claims. A large title claim is defined as a title claim with a total ultimate loss in excess of
$2.5 million. This uncertainty is due to the following factors, among others: (i) the volatility associated with the
timing and severity of large title claims, (ii) the potential of incurring one or more large title claims that
significantly exceed estimated ultimate losses indicated by current historical trends, and (iii) the complexity
associated with handling large title claims which makes it difficult to estimate the ultimate outcome. While the
Company believes its claims reserve attributable to large title claims is reasonable, this uncertainty increases the
potential for adverse loss development.

As of December 31, 2016, the IBNR claims reserve for the title insurance and services segment was
$888.1 million, which reflected management’s best estimate. The Company’s internal actuary determined a range

86

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of reasonable estimates of $718.5 million to $938.3 million. The range limits are $169.6 million below and
$50.2 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 6.6% reflected an ultimate loss rate of 4.2% for policy year 2015 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. Previously, the internal actuary’s model did not separate claims experience for large title
claims from normal title claims activity. With this change in methodology, the model began to separate 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 prior
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.

The 2014 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.

As of December 31, 2016, the projected ultimate loss ratios for policy years 2016, 2015 and 2014 were

4.5%, 4.1% and 4.8%, respectively.

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

(in thousands, except percentages)

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

$

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

December 31,
2016

December 31,
2015

83,805
888,126

971,931
53,932

8.1% $ 87,543
86.6% 844,364

94.7% 931,907
5.3% 51,973

8.9%
85.8%

94.7%
5.3%

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

$1,025,863

100.0% $983,880

100.0%

87

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Specialty Insurance Segment

The following is information about incurred and paid claims development for the Company’s specialty
insurance segment as of December 31, 2016, net of reinsurance, as well as cumulative claim frequency, by claim
event, and the total of incurred but not reported claims plus expected development on reported claims included
with the net incurred claims amounts.

The information about incurred and paid claims development for the years ended December 31, 2007 to

2015, is presented as supplementary information.

Incurred claims and allocated claims adjustment expenses, net of reinsurance

December 31, 2016

Accident
Year

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total

Years ended December 31,

2007*

2008*

2009*

2010*

2011*

2012*

2013*

2014*

2015*

2016

(in thousands)

$162,972 $163,649 $164,025 $163,099 $162,563 $162,380 $162,324 $162,214 $162,223 $ 162,217
160,421
163,829 161,035 160,868 161,322 160,803 160,605 160,455 160,423
139,216
141,154 139,580 139,663 139,266 138,936 139,090 139,191
140,353
140,621 139,966 139,991 139,639 140,128 140,641
149,552
148,395 149,076 149,768 149,486 149,763
160,517
157,287 158,981 159,918 160,579
184,826
182,858 184,419 185,244
191,120
190,985 190,738
225,754
221,617
245,859
$1,759,835

* Amounts unaudited.

Total of
IBNR
liabilities
plus
expected
development
on reported
claims

Cumulative
number of
reported
claims

$—
—
—

1
10
54
217
764
2,027
8,371

642
605
605
606
641
692
762
789
867
971

Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance

Years ended December 31,

2007*

2008*

2009*

2010*

2011*

2012*

2013*

2014*

2015*

2016

Accident
Year

$132,426

$158,669
131,251

$161,458
155,585
113,550

$161,970
158,695
134,606
113,513

$162,235
160,074
137,689
136,770
123,116

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total
All outstanding liabilities before 2007, net of reinsurance
Liabilities for claims and claims adjustment expenses, net of reinsurance

(in thousands)

$162,307
160,436
138,293
138,978
144,367
130,623

$162,323
160,398
138,710
139,486
146,952
153,753
151,377

$162,214
160,427
138,963
140,136
148,984
157,364
180,277
156,536

$162,223
160,421
139,181
140,886
149,358
159,181
182,565
185,686
181,445

$ 162,217
160,421
139,186
140,302
149,495
159,740
183,957
188,117
217,618
205,857
$1,706,910
53
52,978

$

* Amounts unaudited.

88

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A reconciliation of the net incurred and paid claims development tables to the liability for claims and claim

adjustment expense at December 31, 2016, is as follows:

December 31, 2016

(in thousands)

Liability for unpaid claims and claim adjustment expenses, net of

reinsurance:

Specialty insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

52,978

Insurance lines other than short-duration:

Title insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated claims adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . .

971,931
954

972,885

Liability for unpaid claims and claims adjustment expenses . . . . . . . . . . .

$1,025,863

The following is supplementary information about average historical claims duration for the Company’s

specialty insurance segment as of December 31, 2016:

Average annual percentage payout of incurred claims by age, net of reinsurance (unaudited)

1

2

3

4

5

6

7

8

9

10

Years
Annual

payout

81.9%

15.3%

1.5%

0.9%

0.3%

0.1%

0.0%

0.0%

0.0%

0.0%

NOTE 9. Notes and Contracts Payable:

4.60% senior unsecured notes due November 15, 2024, effective interest rate of 4.60% . .
4.30% senior unsecured notes due February 1, 2023, effective interest rate of 4.35% . . . .
Line of credit borrowings due May 14, 2019, weighted-average interest rate of 2.52% at

December 31,

2016

2015

(in thousands, except
percentages)

$300,000
250,000

$300,000
250,000

December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

160,000

—

Trust deed notes with maturities through 2023, collateralized by land and buildings with
net book values of $47,846 and $50,514 at December 31, 2016 and 2015, respectively,
weighted-average interest rate of 5.31% and 5.34%, at December 31, 2016 and 2015,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

26,646

30,308

interest rate of 5.26% and 4.21% at December 31, 2016 and 2015, respectively . . . . . . .

4,269

5,540

Unamortized discount – senior unsecured notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs – senior unsecured notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

740,915
(655)
(3,567)

585,848
(746)
(4,050)

$736,693

$581,052

The weighted-average interest rate for the Company’s notes and contracts payable was 4.10% and 4.51% at

December 31, 2016 and 2015, 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

89

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

In September 2016, the Company borrowed $160.0 million under the credit facility to fund acquisitions and
to partially fund its obligation in connection with the termination of its funded defined benefit pension plans. At
December 31, 2016, outstanding borrowings under the facility totaled $160.0 million at an interest rate of 2.52%.
See Note 20 Business Combinations for further discussion of the Company’s acquisitions, and see Note 13
Employee Benefit Plans for further discussion of the Company’s pension termination.

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.

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, 2016, 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

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90

Annual
maturities

(in thousands)

$

4,855
4,229
163,793
3,432
3,337
557,047

$736,693

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 10. Net Investment Income:

The components of net investment income are as follows:

Year ended December 31,

2016

2015

2014

(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3,989
89,920
2,631
—
12,684
8,173
11,178

$

3,822
76,822
1,841
—
11,751
7,800
314

Total investment income . . . . . . . . . . . . . . . . . . . . . . . .
Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .

128,575
(2,441)

102,350
(1,797)

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

71,716
(675)

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

$126,134

$100,553

$ 71,041

NOTE 11.

Income Taxes:

For the years ended December 31, 2016, 2015 and 2014, domestic and foreign pretax income from
continuing operations before noncontrolling interests was $416.5 million and $61.1 million, $383.5 million and
$49.3 million, and $301.8 million and $48.8 million, respectively.

Income taxes are summarized as follows:

Year ended December 31,

2016

2015

2014

(in thousands)

Current:

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

$ 24,208
1,943
10,806

$ 94,036
3,636
10,589

$ 87,189
4,751
812

Deferred:

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

36,957

108,261

92,752

91,190
3,753
2,205

97,148

33,446
3,413
(1,225)

35,634

15,594
(304)
8,303

23,593

$134,105

$143,895

$116,345

91

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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,

2016

2015

2014

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

$167,153
3,703
(10,512)
(7,983)
(12,265)
(5,991)

(in thousands, except percentages)
35.0% $151,468
4,581
0.8
1,094
(2.2)
(7,111)
(1.7)
(1,710)
(2.6)
(4,427)
(1.2)

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%
0.8
0.1
(1.7)
(0.6)
(0.4)

$134,105

28.1% $143,895

33.3% $116,345

33.2%

The Company’s effective income tax rates (income tax expense as a percentage of income before income
taxes) were 28.1% for 2016, 33.3% for 2015 and 33.2% for 2014. The differences in the effective tax rates are
typically due to changes in state and foreign income taxes resulting from fluctuations in the Company’s
noninsurance and foreign subsidiaries’ contributions to pretax income and changes in the ratio of permanent
differences to income before income taxes. In addition, the 2016 rate reflects the resolution of certain tax
authority examinations and tax credits claimed in current and prior years. 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. The 2014 rate reflects non-recurring tax benefits resulting from certain adjustments to the
Company’s state and non-U.S. tax accounts.

92

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:

December 31,

2016

2015

(in thousands)

Deferred tax assets:

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

$ 11,966
83,100
12,704
1,974
89,726
14,358
10,664
4,086
7,557

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

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

Deferred tax liabilities:

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

236,135
(8,049)

244,378
(6,729)

228,086

237,649

320,884
121,812
7,511

450,207

297,721
40,901
5,060

343,682

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

$222,121

$106,033

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 $3.4 million and $9.5 million for
the years ended December 31, 2016 and 2015, respectively.

In connection with the Company’s June 2010 spin-off from 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, 2016 and 2015, the Company had a net payable to CoreLogic of
$16.3 million and $36.5 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 decrease during
the current year was primarily the result of the effective settlement of tax positions for years prior to the spin-off.

At December 31, 2016, the Company had available a foreign tax credit carryover of $4.1 million. The

Company expects to utilize this credit within the carryover period.

At December 31, 2016, the Company had available net operating loss carryforwards for income tax
purposes totaling $85.2 million, consisting of federal, state and foreign losses of $0.2 million, $35.9 million and
$49.1 million, respectively. Of the aggregate net operating losses, $33.8 million have an indefinite expiration and
the remaining $51.4 million expire at various times beginning in 2017. The Company carries a valuation
allowance of $8.0 million against its deferred tax assets. Of this amount, $7.6 million relates to net operating

93

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

losses; the remaining $0.4 million relates to other foreign deferred tax assets. The year-over-year increase in the
overall valuation allowance is primarily due to additional foreign net operating losses incurred in 2016.

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 include 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 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, 2016 and 2015, U.S. taxes were not provided for on the cumulative earnings of the
Company’s foreign subsidiaries of $215.9 million and $155.7 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, 2016, 2015 and 2014, the liability for income taxes associated with uncertain tax
positions was $18.1 million, $23.8 million and $24.1 million, respectively. The net decreases in the liabilities
during 2016, 2015 and 2014 were primarily attributable to activity related to examinations conducted by various
taxing authorities. The liabilities could be reduced by $5.7 million as of December 31, 2016, and by $3.4 million
as of December 31, 2015 and 2014, due to offsetting tax benefits associated with the correlative effects of
potential adjustments, including timing adjustments and state income taxes. The net amounts of $12.4 million,
$20.4 million and $20.7 million as of December 31, 2016, 2015 and 2014, 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, 2016, 2015 and 2014 is as follows:

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

$23,800
(7,100)
1,400

(in thousands)
$24,100
(800)
500

$ 47,800
(24,100)
400

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

$18,100

$23,800

$ 24,100

December 31,

2016

2015

2014

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, 2016, 2015 and 2014, the Company had accrued
$4.1 million, $9.7 million and $8.9 million, respectively, of interest and penalties (net of tax benefits of
$1.8 million, $4.1 million and $3.7 million, respectively) related to uncertain tax positions.

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,

94

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Canada, India and the United Kingdom. During 2016,
income tax
examinations for calendar years 2005 through 2013. 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.

the Company concluded U.S. federal

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the
Company’s unrecognized tax positions may significantly increase or decrease within the next 12 months. This
change 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:

Year ended December 31,

2016

2015

2014

(in thousands, except per share data)

Numerator

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

$342,993

$288,086

$233,534

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

—

321

514

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

$342,993

$287,765

$233,020

Denominator

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

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

110,548
608

111,156

108,427
1,399

109,826

106,884
1,804

108,688

Net income per share attributable to the Company’s

stockholders

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

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

$

$

3.10

3.09

$

$

2.65

2.62

$

$

2.18

2.15

For the year ended December 31, 2016, no stock options or RSUs had an antidilutive effect on weighted-
average diluted common shares outstanding. For the years ended December 31, 2015 and 2014, 6 thousand RSUs
and 133 thousand stock options and RSUs, respectively, were excluded from the weighted-average diluted
common shares outstanding due to their antidilutive effect.

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

95

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 2,695,000 shares and 3,129,000 shares of the
Company’s common stock, representing 2.5% and 2.9% of the Company’s total common shares outstanding at
December 31, 2016 and 2015, 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, 2016 and 2015, the value of the assets in the Rabbi Trust of $78.9 million and
$73.1 million, respectively, and the unfunded liabilities of $82.5 million and $76.3 million, respectively, were
included in the consolidated balance sheets in other assets and pension costs and other retirement plans,
respectively.

Pension termination and settlement

In May 2016, the Company’s board of directors terminated the Company’s funded defined benefit pension
plan known as the First American Financial Corporation Pension Plan, effective as of July 31, 2016. The pension
plan was closed to new entrants effective December 31, 2001 and amended to “freeze” all benefit accruals as of
April 30, 2008. Also, in May 2016, a subsidiary of the Company terminated its small regional funded defined
benefit pension plan effective as of August 31, 2016. The Company expects the termination of both pension plans
to occur over a similar timeframe. Upon completion of these terminations, the Company will have no remaining
funded defined benefit pension plan obligations. All financial impacts discussed below reflect the termination of
both pension plans.

The pension plans offer participants annuity payments based on a number of factors and, for certain
participants, an alternative lump sum distribution option. During 2016, the Company received certain regulatory
approvals needed to terminate the pension plans and offered lump sum distributions to certain participants, which
were settled by the pension plans in the fourth quarter. The Company made additional cash contributions in 2016
above scheduled amounts of $84.8 million to sufficiently fund the pension plans. The Company will ensure that
sufficient funds are available to purchase group annuity contracts from one or more highly rated insurance
companies to pay and administer future benefit payments, and complete other transactions required to terminate
the pension plans in a manner that fully meets its obligations to all participants. While the Company expects to
make an additional cash contribution of approximately $23 million in the first half of 2017, the actual amount
will depend upon changes in interest rates, pension plan asset returns and other factors. The Company also
expects to pay other termination related expenses.

96

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company recognized $66.3 million in settlement costs during the fourth quarter of 2016 related to
distributions of pension plan assets totaling $127.2 million to participants electing lump sum payments. The
Company expects to complete the transfer of all remaining liabilities and administrative responsibilities related to
the pension plans to one or more highly rated insurance companies by the end of the second quarter of 2017 and
to recognize approximately $154 million in net unrealized losses in the first half of 2017. The preceding
information related to the expected amounts and timing of pension termination expenses to be recognized are
estimates based on net unrealized losses as of December 31, 2016 and actual amounts recognized may differ due
to changes in interest rates, pension plan asset returns, and other factors.

Certain aspects of the transactions required to terminate the pension plans and settle its obligations are

subject to regulatory review.

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”.

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

Year ended December 31,

2016

2015

2014

(in thousands)

Expense:

Savings plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funded defined benefit pension plans . . . . . . . . . . .
Unfunded supplemental benefit plans . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other plans, net

$ 33,109
88,908
13,613
10,090

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

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

$145,720

$77,122

$53,671

97

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Company’s funded defined benefit pension and unfunded supplemental benefit plans:

December 31,

2016

2015

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 losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 416,416
—
15,532
—
33,845
(150,685)

$ 248,660
1,042
8,558
—
6,804
(13,860)

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

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

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

315,108

251,204

416,416

248,660

Change in plan assets:

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

329,987
4,244
108,214
(150,685)

—
—
13,860
(13,860)

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

—
—
13,409
(13,409)

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

291,760

—

329,987

—

Reconciliation of funded status:

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

$ (23,348)

$(251,204)

$ (86,429)

$(248,660)

Amounts recognized in the consolidated balance sheet:

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

$ (23,348)

$(251,204)

$ (86,429)

$(248,660)

Amounts recognized in accumulated other comprehensive

loss:

Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . .
Unrecognized prior service credit . . . . . . . . . . . . . . . . .

$ 157,659
(4,109)

$ 97,636
(16,607)

$202,087
(4,775)

$ 99,023
(20,785)

$ 153,550

$ 81,029

$197,312

$ 78,238

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

$ 315,108

$ 251,204

$416,416

$ 248,660

98

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net periodic cost related to the Company’s funded defined benefit pension and unfunded supplemental

benefit plans includes the following components:

Expense:

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

Year ended December 31,

2016

2015

2014

(in thousands)

$

1,042
24,090
66,337
(12,386)
28,282
(4,844)

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

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

$102,521

$ 35,984

$ 28,079

Net actuarial loss and prior service credit for the unfunded 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 $7.8 million and a credit of $4.2 million, respectively.

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

December 31, 2016 and 2015, were as follows:

December 31,

2016

2015

Funded defined benefit pension plans

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

4.31%
3.50%

4.07%
6.50%

Unfunded supplemental benefit plans

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

4.33%

4.00%

Weighted-average actuarial assumptions used to determine benefit obligations

for

the plans at

December 31, 2016 and 2015, were as follows:

December 31,

2016

2015

Funded defined benefit pension plans

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

3.85%

4.31%

Unfunded supplemental benefit plans

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

4.03%

4.33%

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.

Assumptions for the expected long-term rate of return on assets of the funded 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

99

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

During 2016, the funded status of the plans improved as additional contributions were received from the
Company and a higher percentage of plan assets were allocated to liability tracking investments. At
December 31, 2016,
the majority of plan assets were invested in liability tracking investments pending
completion of the termination of the plan in 2017.

A summary of the asset allocations for the funded defined benefit pension plans is as follows:

Asset category

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.2%
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — %
86.7%
Fixed income funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.1%
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1%
57.2%
39.3%
2.4%

December 31,

2016

2015

The Company expects to make cash contributions of $14.5 million to its unfunded supplemental benefit

plans during 2017.

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

made as follows:

Year

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Five years thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100

(in thousands)

$ 35,289
$ 35,765
$ 35,591
$ 35,518
$ 36,132
$177,899

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company categorizes 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.

The following table presents the fair value of plan assets as of December 31, 2016 and 2015:

December 31, 2016

Estimated
fair value

Level 1

Level 2

Level 3

(in thousands)

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

$ 38,424
252,962
374

$ 38,424
10,376
—

$ — $ —
—
242,586
374
—

$291,760

$ 48,800

$242,586

$ 374

Estimated
fair value

Level 1

Level 2

Level 3

December 31, 2015

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

$

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

$

(in thousands)
3,621
83,675
116,204
—

$ — $ —
—
—
7,932

45,958
72,597
—

$329,987

$203,500

$118,555

$7,932

(a)

(b)

(c)

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 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.
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.

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
inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.

101

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

102

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

December 31, 2016 and 2015:

(in thousands)

December 31, 2016
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 151,391
984,333
140,048
193,868
2,163,673
678,524
241,526

4,553,363

$ — $ 151,391
984,333
140,048
193,868
2,163,673
631,859
235,258

—
—
—
—
—
—

$ —
—
—
—
—
46,665
6,268

—

4,500,430

52,933

15,582
388,503

15,582
388,503

404,085

404,085

—
—

—

—
—

—

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

$4,957,448

$404,085

$4,500,430

$52,933

(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

103

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the year ended December 31, 2016, transfers between Level 2 and Level 3 were based on market
liquidity and related transparency of pricing and associated observable inputs for certain of the Company’s
corporate debt securities. There were no transfers between levels during the year ended December 31, 2015.
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 tables present a summary of the changes in the fair values of Level 3 assets measured on a

recurring basis for the years ended December 31, 2016 and 2015:

in thousands

Fair value at beginning of

period . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 3 . . . . . .
Transfers out of Level 3 . . . . .
Net realized and unrealized

gains (losses):

Included in earnings . . . .
Included in other

comprehensive income
(loss) . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . .

December 31, 2016

December 31, 2015

U.S.
corporate
debt
securities

Foreign
corporate
debt
securities

Total

U.S.
corporate
debt
securities

Foreign
corporate
debt
securities

Non-
agency
mortgage-
backed
securities

$ 43,567
9,293
(17,503)

$ 6,572
2,536
(1,294)

$ 50,139
11,829
(18,797)

$ — $ — $ 16,538
—
—

—
—

—
—

Total

$ 16,538
—
—

(120)

(35)

(155)

(77)

(5)

(1,015)

(1,097)

1,565
27,370
(9,037)
(8,470)

122
3,530
(2,329)
(2,834)

1,687
30,900
(11,366)
(11,304)

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

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

(589)
—
(14,934)
—

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

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

$ 46,665

$ 6,268

$ 52,933

$43,567

$6,572

$ — $ 50,139

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 realized

investment
losses . . . . . . . . .

$

(5) $ — $

(5) $

(75) $ — $ — $

(75)

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.

104

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 current market rates being offered for notes

with similar maturities and credit quality.

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, 2016 and 2015:

(in thousands)

December 31, 2016
Assets:

Carrying
Amount

Estimated fair value

Total

Level 1

Level 2

Level 3

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

$1,006,138
21,222
$
7,799
$

$1,006,138
21,176
$
7,542
$

$1,006,138
$
1,017
$

$ — $ —
$ —
$ 20,159
— $ — $7,542

Liabilities:

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

$2,779,478
$ 736,693

$2,779,478
$ 734,812

$2,779,478
$

$ — $ —
$5,154

— $729,658

(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
$ 581,052

$2,699,015
$ 590,970

105

$2,699,015
$

$ — $ —
$7,077

— $583,893

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2016, 4.2 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
either the first or last day of each quarterly offering period. There were 371,000 and 335,000 shares issued in
connection with this plan for the years ended December 31, 2016 and 2015, respectively. At December 31, 2016,
there were 2.7 million shares reserved for future issuances.

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

compensation plans:

Expense:

Year ended December 31,

2016

2015

2014

(in thousands)

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

$31,120
271
2,734

$21,761
271
2,307

$17,197
271
1,834

$34,125

$24,339

$19,302

The following table summarizes RSU activity for the year ended December 31, 2016:

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

RSUs unvested at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

1,354
1,028
(849)
(23)

RSUs unvested at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,510

Weighted-average
grant-date
fair value

$29.20
$36.70
$30.77
$31.68

$33.38

As of December 31, 2016, there was $26.8 million of total unrecognized compensation cost related to
unvested RSUs that is expected to be recognized over a weighted-average period of 2.3 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, 2016, 2015 and 2014 was $25.9 million,
$20.3 million and $18.2 million, respectively.

106

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes stock option activity for the year ended December 31, 2016:

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

Number
outstanding

Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
Exercised during 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .

Vested and expected to vest at December 31, 2016 . . . . . .

Exercisable at December 31, 2016 . . . . . . . . . . . . . . . . . . .

132
—

132

132

99

Weighted-
average
remaining
contractual
term

Aggregate
intrinsic
value

Weighted-
average
exercise
price

$27.66
—

$27.66

7.0 years

$1,187

$27.66

7.0 years

$1,187

$27.66

7.0 years

$ 890

As of December 31, 2016, there was $0.3 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 1
year.

No stock options were exercised during the year ended December 31, 2016. The total intrinsic value of stock
options exercised for the years ended December 31, 2015 and 2014 was $9.7 million and $7.0 million,
respectively. 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 $182.4 million remained as of
December 31, 2016. Purchases may be made from time to time by the Company in the open market at prevailing
market prices or in privately negotiated transactions. During the year ended December 31, 2016, the Company
repurchased and retired 14 thousand shares of its common stock for a total purchase price of $454 thousand and,
as of December 31, 2016, had repurchased and retired 3.2 million shares of its common stock under the current
authorization for a total purchase price of $67.6 million.

107

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 17. 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, 2016, 2015 and 2014:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

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

Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . .
Settlement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

$ (8,727)
31,118
—
—
—
—
(11,480)

10,911
(42,205)
—
—
—
—
14,893

(16,401)
(15,702)
—
—
—
—
—
5,343

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

—
(16,694)
—
—
—
—

(20,420)
—
(36,822)
—
—
—
—

(57,242)
—
(6,334)
—
—
—
—
—

—
—

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

(189,580)

—
—
10,743
32,645
(4,163)
(15,002)

(165,357)

—
—
(48,803)
28,282
(4,844)
66,337
(15,672)

$(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)

(239,000)
(15,702)
(6,334)
(48,803)
28,282
(4,844)
66,337
(10,329)

Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .

$(26,760)

$(63,576) $(140,057)

$(230,393)

108

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, 2016, 2015

and 2014, are as follows:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

(in thousands)

2016
Allocated to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to noncontrolling interests . . . . . . . . . . . . . . . . .

$(26,767)
7

$(63,576) $(140,057)

—

—

$(230,400)
7

Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .

$(26,760)

$(63,576) $(140,057)

$(230,393)

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)

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

years ended December 31, 2016, 2015 and 2014:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Total
other
comprehensive
income (loss)

(in thousands)

Year ended December 31, 2016

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

$ 2,617
(18,319)
5,343

$ (6,334) $ (48,803)
89,775
(15,672)

—
—

$(52,520)
71,456
(10,329)

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

$(10,359)

$ (6,334) $ 25,300

$ 8,607

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)

109

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:

Amounts reclassified
from AOCI

Year ended
December 31,

(in thousands)

2016

2015

2014

Unrealized gains (losses) on securities:

Net realized gains (losses) on sales of

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

$ 18,804

$ (2,147) $ 23,276

Net other-than-temporary impairment

losses . . . . . . . . . . . . . . . . . . . . . . . . . . .

(485)

(2,249)

(1,701)

Pretax total

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

$ 18,319

$ (4,396) $ 21,575

Tax effect

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

$ (7,007) $ 1,551

$ (7,959)

Affected line items in the
consolidated statements of income

Net realized investment gains
(losses)
Net realized investment gains
(losses)

Pension benefit adjustment:

Amortization of net actuarial loss . . . . . . .
Amortization of prior service credit . . . . .
Settlement costs . . . . . . . . . . . . . . . . . . . .

$(28,282) $(32,645) $(22,587)(1)
4,153 (1)
4,163
— (1)
—

4,844
(66,337)

Pretax total

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

$(89,775) $(28,482) $(18,434)

Tax effect

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

$ 34,339

$ 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 18. Commitments and Contingencies:

Lease commitments

The Company leases certain office facilities, automobiles and equipment under operating leases, which, for the

most part, are renewable. The majority of these leases also provide that the Company pay insurance and taxes.

Future minimum rental payments under operating leases that have initial noncancelable lease terms in

excess of one year as of December 31, 2016 are as follows:

Year
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$ 80,700
66,151
52,667
41,701
27,595
59,983

$328,797

Total rental expense for all operating leases and month-to-month rentals was $91.4 million, $93.3 million

and $93.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.

110

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other commitments and guarantees

At December 31, 2016 and 2015, the Company was contingently liable for guarantees of indebtedness owed
by affiliates and third parties to banks and others totaling $7.1 million and $8.2 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
$7.1 million and $8.2 million at December 31, 2016 and 2015, 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, 2016
and 2015.

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, 2016 and 2015.

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.

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

111

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

• misclassified certain employees, including

• Cruz v. First American Financial Corporation, et al., filed on November 25, 2015 and pending in the

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

•

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 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.

•

overcharged or improperly charged fees for products and services, conspired to fix prices, participated
in the conveyance of illusory property interests, denied home warranty claims, and gave items of value
to 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

• Downing v. First American Title Insurance Company, et al., filed on July 26, 2016 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,

•

Lennen v. First American Financial Corporation, et al., filed on May 19, 2016 and pending in the
United States District court for the Middle District of Florida,

• 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,

112

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

• 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 and the judgment has been affirmed on 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
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.

113

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2016 and 2015, the Company completed acquisitions for an aggregate
purchase price of $115.3 million and $32.3 million, respectively. The Company has recorded preliminary fair
value estimates for the assets acquired and liabilities assumed, related to certain acquisitions in the current year,
which are subject to change pending completion of the Company’s purchase price allocation. The Company
allocates the purchase price of each acquisition to the assets acquired and liabilities assumed using a variety of
valuation techniques, including discounted cash flow analysis. 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; provides evidence of title; and provides banking,
trust, document custodial 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, South Korea 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 47 states. The majority of policy liability is in the
western United States, including approximately 63% in California. 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 certain 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.

114

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Selected financial

information about

the Company’s operations, by segment,

for

the years ended

December 31, 2016, 2015 and 2014, 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

2016
Title Insurance and

Services . . . . . . . . . . $5,134,125
435,844
5,946
(69)

Specialty Insurance . . .
Corporate . . . . . . . . . .
Eliminations . . . . . . . .

$93,069
5,593
385
—

$ 8,173
—
—
—

$ 598,872 $7,905,433 $102,925

40,074
(161,365)

—

551,231
453,410
(78,297)

—
—
—

$126,715
5,631
—
—

$5,575,846

$99,047

$ 8,173

$ 477,581 $8,831,777 $102,925

$132,346

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 $7,283,180 $108,574

39,519
(96,708)
—

510,915
444,943
(2,323)

—
—
—

$122,707
4,837
22
—

$5,175,456

$85,596

$ 7,800

$ 432,765 $8,236,715 $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 $6,753,658 $106,083

—
—
—

52,974
(75,438)
—

506,242
460,356
(72,367)

—
—
—

$ 95,949
3,412
—
—

$4,677,949

$85,597

$(16,545)

$ 350,560 $7,647,889 $106,083

$ 99,361

Revenues from external customers allocated between domestic and foreign operations, by segment, for the

years ended December 31, 2016, 2015 and 2014, are as follows:

Year Ended December 31,

2016

2015

2014

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

(in thousands)

Title Insurance and Services . . . . . .
Specialty Insurance . . . . . . . . . . . . .

$4,830,727
435,844

$303,352

—

$4,480,230
393,757

$307,453

—

$3,977,498
368,666

$325,393

—

$5,266,571

$303,352

$4,873,987

$307,453

$4,346,164

$325,393

115

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Long-lived assets allocated between domestic and foreign operations, by segment, as of December 31, 2016,

2015 and 2014, are as follows:

2016

December 31,

2015

2014

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

(in thousands)

Title Insurance and Services . . . . . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . . . . . .

$ 986,718
55,045

$40,161
—

$933,829
51,920

$35,375
—

$890,063
50,611

$46,514
—

$1,041,763

$40,161

$985,749

$35,375

$940,674

$46,514

116

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

QUARTERLY FINANCIAL DATA
(Unaudited)

2016
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to the Company . . . . . . . . . . . . . .
Net income per share attributable to the Company’s

stockholders (1):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Quarter Ended

March 31

June 30

September 30 December 31

(in thousands, except per share amounts)

$1,201,712
75,592
$
52,672
$

$1,361,533
$ 153,607
$ 102,451

$1,508,344
$ 166,931
$ 107,392

$1,504,257
81,451
$
80,961
$

$
$

$
$

171
52,501

$
302
$ 102,149

$
72
$ 107,320

0.48
0.47

$
$

0.92
0.92

$
$

0.97
0.96

$
$

$
$

(62)
81,023

0.73
0.73

(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.

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.

117

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, 2016

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

$

21,222

$

21,176

$

21,222

Debt securities:
U.S. Treasury bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

155,441

Municipal bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,004,659

Foreign government bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Governmental agency bonds

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

141,887

197,343

Governmental agency mortgage-backed securities

$

$

$

$

151,391

984,333

140,048

193,868

$

$

$

$

151,391

984,333

140,048

193,868

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,187,482

$ 2,163,673

$ 2,163,673

U.S. corporate debt securities

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Foreign corporate debt securities

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

675,683

240,526

$

$

678,524

241,526

$

$

678,524

241,526

Total debt securities:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,603,021

$ 4,553,363

$ 4,553,363

Equity securities:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes receivable, net:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other investments:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

386,095

7,799

154,230

$

$

$

404,085

7,542

$

$

404,085

7,799

154,230(1) $

154,230

Total investments:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,172,367

$ 5,140,396

$ 5,140,699

(1) As other investments are not publicly traded, estimates of the fair values could not be made without

incurring excessive costs.

118

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,

2016

2015

$ 221,519
77,557
67,970
3,897,995
20,037
85,709

$ 289,791
21,430
1,067
3,478,704
22,020
92,633

$4,370,787

$3,905,645

Liabilities and Equity

Accounts payable and other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension costs and other retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

39,069
359,057
10,376
242,158
705,778

$

58,483
413,206
7,576
128,053
545,204

1,356,438

1,152,522

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—109,944 shares and 109,098 shares . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1
2,191,756
1,046,822
(230,400)

1
2,150,813
838,149
(239,003)

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

3,008,179
6,170

2,749,960
3,163

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

3,014,349

2,753,123

$4,370,787

$3,905,645

See notes to condensed financial statements

119

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF INCOME
(in thousands)

SCHEDULE II
2 OF 5

Year Ended December 31,

2016

2015

2014

Revenues:

Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 46,422
5,809

$142,522
(6,001)

$342,488
6,412

52,231

136,521

348,900

Expenses:

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44,592

36,233

33,959

Income before income taxes and equity in undistributed earnings of

subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . .

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

7,639
2,145
337,982

343,476
483

100,288
33,346
221,928

288,870
784

314,941
104,523
23,797

234,215
681

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

$342,993

$288,086

$233,534

See notes to condensed financial statements

120

SCHEDULE II
3 OF 5

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

Year Ended December 31,

2016

2015

2014

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

$343,476

$288,870

$234,215

Other comprehensive income (loss), net of tax:

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

(10,359)
(6,334)
25,300

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

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

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

8,607

(39,911)

(53,552)

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

352,083
487

248,959
770

180,663
691

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

$351,596

$248,189

$179,972

See notes to condensed financial statements

121

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

SCHEDULE II
4 OF 5

Year Ended December 31,

2016

2015

2014

Cash flows from operating activities:

Cash (used for) provided by operating activities . . . . . . . . . . . . . . . . . .

$ (26,682) $ 133,022

$ 54,298

Cash flows from investing activities:

Net cash effect of acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return of capital from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(106,818)
204
32,500
—

(19,069)
—
867
—
(22)

(151,570)
(11,396)
1,490
—
—

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

(74,114)

(18,224)

(161,476)

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

160,000
—
—
3,415
1,104
(454)
(131,541)

—
—
(60,000)
9,526
5,042
—

(108,524)

593,943
(300,000)

—
6,856
3,601
—
(89,939)

Cash provided by (used for) financing activities . . . . . . . . . . . . . . . . . .

32,524

(153,956)

214,461

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

(68,272)
289,791

(39,158)
328,949

107,283
221,666

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

$ 221,519

$ 289,791

$ 328,949

See notes to condensed financial statements

122

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 $46.4 million, $142.5 million and

$79.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.

123

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

2016
Title Insurance and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

330
30,221

$ 971,931
53,932

$

9,698
219,207

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

$30,551

$1,025,863

$228,905

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

124

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

2016
Title Insurance and Services . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . .

Premiums
and escrow
fees

Net
investment
income (1)

Loss
provision

Amortization
of deferred
policy
acquisition
costs
(credits)

Other
operating
expenses

Premiums
written

$4,291,316
411,353
—
—

$129,672
13,614
5,946
(45)

$235,661
252,940
—
—

$ —
(4,179)
—
—

$764,388
62,610
26,867
(24)

$ —
426,815
—
—

Total

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

$4,702,669

$149,187

$488,601

$(4,179)

$853,841

$426,815

2015
Title Insurance and Services . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . .

$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

(1) Net investment income includes net investment income and net realized investment gains (losses).

125

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

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,304,868

$16,277

$2,725

$4,291,316

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,050,033

$23,776

$1,791

$4,028,048

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,590,673

$28,727

$3,886

$3,565,832

Specialty Insurance

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 419,629

$ 8,276

$ — $ 411,353

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 388,973

$ 8,709

$ — $ 380,264

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 363,044

$ 9,232

$ — $ 353,812

0.1%

0.0%

0.1%

0.0%

0.0%

0.0%

126

SCHEDULE V
1 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2016

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

$ 31,552

$

5,208

$ — $

6,575(A) $

30,185

Reserve for known and incurred but not reported

claims:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$983,880

$488,601

$16,381

$462,999(B) $1,025,863

Reserve deducted from notes receivable:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$

2,275

Reserve deducted from deferred income taxes:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . .

$

6,729

$

$

162

$ — $

324

1,516

$ — $

196

$

$

2,113

8,049

Note A—Amount represents accounts written off, net of recoveries.

Note B—Amount represents claim payments, net of recoveries.

127

SCHEDULE V
2 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

$

167

$

— $

333

$

2,275

Reserve deducted from deferred income

taxes:

Consolidated . . . . . . . . . . . . . . . . . . . . .

$

15,706

$

108

$

— $

9,085

$

6,729

Note A—Amount represents accounts written off, net of recoveries.

Note B—Amount represents claim payments, net of recoveries.

128

SCHEDULE V
3 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

$

2,441

Reserve deducted from deferred income

taxes:

Consolidated . . . . . . . . . . . . . . . . . . . . . .

$

18,119

$

— $ — $

2,413

$

15,706

Note A—Amount represents accounts written off, net of recoveries.

Note B—Amount represents claim payments, net of recoveries.

129

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, 2016, 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, 2016. 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, 2016, 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, 2016, that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

130

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 I Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Board and Committee Meetings,” “Executive Compensation,” “Compensation Discussion and
Analysis,” “2016 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.

Item 15. Exhibits and Financial Statement Schedules

PART IV

(a)1. & 2.

Financial Statements and Financial Statement Schedules

The Financial Statements and Financial Statement Schedules filed as part of this report are listed
in the accompanying index at page 56 in Item 8 of Part II of this report.

(a) 3.

Exhibits. See Exhibit Index. (Each management contract or compensatory plan or arrangement in
which any director or named executive officer of First American Financial Corporation, as
defined by Item 402(a)(3) of Regulation S-K (17 C.F.R. §229.402(a)(3)), participates that is
included among the exhibits listed on the Exhibit Index is identified on the Exhibit Index by an
asterisk (*).)

131

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 17, 2017

By

/S/ MARK E. SEATON

Mark E. Seaton
Chief Financial Officer
(Principal Financial Officer)

Date: February 17, 2017

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 17, 2017

Chief Financial Officer
(Principal Financial Officer)

February 17, 2017

February 17, 2017

/S/ MATTHEW F. WAJNER

Matthew F. Wajner

Chief Accounting Officer
(Principal Accounting Officer)

/S/ PARKER S. KENNEDY

Chairman of the Board of Directors

February 17, 2017

Parker S. Kennedy

/S/

JAMES L. DOTI

James L. Doti

Director

February 17, 2017

/S/ MARGARET M. MCCARTHY

Director

February 17, 2017

Margaret M. McCarthy

/S/ MICHAEL D. MCKEE

Director

February 17, 2017

Michael D. McKee

/S/ THOMAS V. MCKERNAN

Director

February 17, 2017

Thomas V. McKernan

132

Signature

Title

Date

/s/ MARK C. OMAN

Director

February 17, 2017

Mark C. Oman

/s/ VIRGINIA M. UEBERROTH

Director

February 17, 2017

Virginia M. Ueberroth

133

Exhibit No.

Description

Location

3.1

3.2

4.1

4.2

4.3

4.4

4.5

10.1

10.2

10.3

*10.4

*10.4.1

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.

First American Financial Corporation
Executive Supplemental Benefit Plan, amended
and restated effective as of January 1, 2011.

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 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.

Incorporated by reference herein to
Exhibit 10.12 to the Annual Report on
Form 10-K for the year ended December 31,
2010.

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.

134

Exhibit No.

*10.5

*10.5.1

*10.6

*10.6.1

*10.6.2

*10.6.3

*10.6.4

*10.6.5

*10.6.6

Description

Location

First American Financial Corporation Deferred
Compensation Plan, amended and restated
effective as of January 1, 2012.

First Amendment, effective July 1, 2015, to
First American Financial Corporation Deferred
Compensation Plan, amended and restated
effective as of January 1, 2012.

First American Financial Corporation 2010
Incentive Compensation Plan, effective
May 28, 2010, amended and restated effective
as of January 18, 2017.

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
(Non-Employee Director) and Restricted Stock
Unit Award Agreement (Non-Employee
Director) for Non-Employee Director
Restricted Stock Unit Award approved
January 17, 2017.

Incorporated by reference herein to
Exhibit 10.13 to the Annual Report on
Form 10-K for the year ended December 31,
2011.

Incorporated by reference herein to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2015.

Attached.

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.

Incorporated by reference herein to
Exhibit 10.6.4 to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 2015.

Attached.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 15,
2013.

Incorporated by reference herein to
Exhibit 10.7.10 to the Annual Report on
Form 10-K for the year ended December 31,
2012.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 14,
2014.

Incorporated by reference herein to
Exhibit 10.7.12 to the Annual Report on Form
10-K for the year ended December 31, 2013.

135

Exhibit No.

*10.6.7

*10.6.8

*10.6.9

*10.6.10

*10.6.11

*10.6.12

*10.6.13

*10.7

*10.8

*10.9

*10.10

*10.11

(21)

(23)

Description

Location

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 21,
2015.

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.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 19,
2016.

Incorporated by reference herein to
Exhibit 10.6.9 to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 2015.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 17,
2017.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 14, 2014.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 21, 2015.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 19, 2016.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 17, 2017.

Employment Agreement, dated December 12,
2016, between First American Financial
Corporation and Dennis J. Gilmore.

Employment Agreement, dated December 12,
2016, between First American Financial
Corporation and Kenneth D. DeGiorgio.

Employment Agreement, dated December 12,
2016, between First American Financial
Corporation and Christopher M. Leavell.

Employment Agreement, dated December 12,
2016, between First American Financial
Corporation and Mark E. Seaton.

First American Financial Corporation Form of
Amended and Restated Change in Control
Agreement effective as of December 31, 2010.

Attached.

Incorporated by reference herein to
Exhibit 10.7.14 to the Annual Report on
Form 10-K for the year ended December 31,
2013.

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.

Incorporated by reference herein to
Exhibit 10.6.12 to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 2015.

Attached.

Attached.

Attached

Attached

Attached

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.

Attached.

Attached.

136

Description

Location

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Exhibit No.

(31)(a)

(31)(b)

(32)(a)

(32)(b)

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.

101.INS

XBRL Instance Document.

101.SCH

101.CAL

101.DEF

101.LAB

101.PRE

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.

137

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