First American Financial

March 30, 2018

TO OUR STOCKHOLDERS:

2017 was another successful year for First American. We grew our revenue and net income, delivered a total
shareholder return of 58 percent, and effectively executed against our strategy, all to the benefit of our
employees, our customers and you, our investors.

Growth in our operating revenues, combined with higher investment income, favorable claims experience and
ongoing operating efficiency, led to the best margins our title segment has delivered since First American
became a standalone company in 2010. We continued to invest in and strengthen our core title and settlement
services business through acquisitions. We also returned additional capital to our stockholders through an
increase in our dividend. Importantly, I’m proud that in early 2018 First American was named for the third year
in a row to the Fortune 100 Best Companies to Work For® list.

FINANCIAL PERFORMANCE

First American’s revenue for 2017 totaled $5.8 billion, up 4 percent from 2016. The company generated net
income of $423.0 million, or $3.76 per diluted share, a 23 percent increase from the prior year. And our return on
equity of 13 percent exceeded our long-term objective of 10 to 12 percent.

• Title Insurance and Services

Revenues from our Title Insurance and Services segment were $5.3 billion in 2017, up 3 percent from
the prior year. The continued strength of the residential purchase market, primarily driven by home
price appreciation that resulted in higher fees per order, contributed to an 11 percent increase in our
purchase business revenues. Rising mortgage interest rates, however, led to a sharp drop in the
residential refinance market in late 2016 and early 2017. In response to this volatility, we maintained
operating discipline in our centralized lender business and are confident that this business is now
structured to match current market levels.

Our commercial business continued to thrive, thanks to the expertise of our people, the quality of our
underwriting and the agility of our national platform. In 2017, broad-based strength across most
commercial markets and property types contributed to a 5 percent increase in our commercial revenues,
nearly matching our record 2015 performance. The company’s international group also continued to
build on a number of successful years, while positioning itself for future growth through investments
designed to broaden its product offerings.

Favorable economic conditions and prudent underwriting, including the use of sophisticated fraud
prevention efforts, contributed to a historically low title claims loss rate of 4.0 percent, a 27 percent
decrease from the prior year. We’re pleased that this, combined with revenue growth and operational
efficiency, led to a title segment pretax margin of 12.1 percent in 2017.

•

Specialty Insurance

Our Specialty Insurance segment generated revenues of $465 million in 2017, up 7 percent from the
previous year. The pretax margin for the segment fell to 7.9 percent from 9.2 percent in 2016. This was
primarily driven by elevated claims losses in our property and casualty business, due to both higher
claims severity and frequency. While these included significant losses brought about by the severe
California wildfires in late 2017, we also continue to evaluate ways to improve our underwriting and
optimize our product offerings in this business.

Our home warranty business posted strong results in 2017, driven by significant revenue growth.
Ongoing improvements the group made to strengthen the performance of its contractor network and
customer service operations also led to declining claims losses throughout the year.

CAPITAL MANAGEMENT ACTIVITIES

The company’s capital management strategy remains consistent:

•

•

•

Invest in our core business—Much of First American’s $137 million in capital expenditures in 2017 was
directed to the development and improvement of our technology. Some of these expenditures went to
internal efforts, such as the ongoing enhancement of our title production system and implementation of
a new human resources management system. We also made investments designed to improve our
customers’ experience, including enhancements to our AgentNet portal, which streamlines our title
agents’ operations, and to our DataTree.com data services portal, which provides real estate insights to
help customers make business decisions. Additionally, we continue to develop our analytics and expand
our automation efforts to improve quality and increase efficiency across several of our businesses.

Acquire companies that strengthen our core business and enhance the solutions we offer our
customers—We completed $91 million of acquisitions in 2017, purchasing title agencies that
complement our direct title operations in key markets and acquiring a title information company that
strengthens our position in that business. In January 2018, we also expanded our post-closing offerings
with the acquisition of Bank of America’s lien release business.

Return capital to stockholders—As part of our commitment to return capital to our stockholders, the
board of directors approved a quarterly cash dividend increase to $0.38 per common share in 2017, a
12 percent boost over the prior level and a reflection of our continuing confidence in the company’s
long-term outlook.

We also completed the termination of the company’s legacy pension plan in 2017. Over the past two years, we
made $77 million in cash contributions, net of taxes, to fully fund our pension obligations. We estimate an annual
reduction of approximately $22 million in corporate expenses as a result.

First American’s operating cash flow in 2017 was $632 million, up 29 percent from 2016. The company’s
debt-to-capital ratio at year end was 17.4 percent, just below our target of 18 to 20 percent, providing the
company with significant financial flexibility to meet our strategic objectives.

The recently enacted U.S. tax reform will provide First American with additional capital, due to lower tax rates
and the ability to more cost-effectively repatriate our cash from foreign jurisdictions. We will
invest a
meaningful portion of this capital in our people through an increase in our 401(k) match beginning in 2018.
We’ll also reinvest a portion back into our business through acquisitions and continued development of
innovations that benefit our company and our customers. Excess capital will be returned to our stockholders.

Overall, our solid balance sheet, strong cash flow and financial flexibility position us well as we progress through
2018.

OUR VISION AND STRATEGY

Our vision remains the same: to be the premier title insurance and settlement services company. To achieve this,
our strategy is to:

•

•

Profitably grow our core title and settlement business—The vast majority of First American’s revenue
comes from our residential and commercial title business, and so we continue to concentrate on growing
profitable market share and enhancing margins in our core. In 2017, as part of our strategy to expand
our footprint in states in which we have direct operations, we acquired Nevada Title Company, adding
to our market share in that important and recovering market. And, while the title company’s overall
market share dipped slightly during the year, we continue to use prudent acquisitions, opportunistic
recruiting, and enhanced sales and marketing practices to promote profitable growth.

Strengthen our enterprise through data and process advantage—Our leading property records database,
which we continue to augment and improve, positions us well to advance our core title business through
process innovation and efficiency. In 2017, for example, we leveraged the quality and depth of our data
by developing analytics that enhance underwriting quality and fraud detection processes. We continued

to build additional databases, including one with extensive homeowners’ association information, to
improve the quality of title reports and reduce claims. We also further automated our title plant
processes and expanded our title plant coverage during the year.

• Manage and actively invest in complementary businesses that support or expand the core—To further
reinforce and grow our core business, we continue to cultivate and develop new services that advance
that business. The company’s 2017 buyout of our joint venture partner in a title information company in
the Northeast, for example, allowed us to expand our data offering. Additionally, we enhanced the
customer experience for our home warranty customers by upgrading the digital interface to streamline
the claims, payment and contract renewal processes.

NOTEWORTHY EVENTS

All of us at First American honor the hard work and many contributions of Virginia “Ginny” Ueberroth, as she
prepares to retire from our board of directors in 2018. Since joining in 1988, Ginny has brought to our board the
qualities of a great director, as her insight, collaborative approach and decisiveness have greatly benefited our
company. Her dedication to our success was seen in many other ways, as well, including through her steadfast
support of our leadership development program for women. We thank Ginny for her decades of service and for
the positive impact her work will continue to have on First American for years to come.

We also added a new director to our board in 2017 with the election of Reginald “Reggie” Gilyard. A senior
advisor with the Boston Consulting Group and past dean of the Argyros School of Business and Economics at
Chapman University, Reggie brings to our company a keen grasp of customer needs across a variety of
industries, as well as an in-depth understanding of the complexities of large businesses.

It is our fundamental belief that if we engage and treat our employees well, providing the tools they need to be
successful, they will serve our customers well. Satisfied customers, combined with our efficient operation of the
business, benefit you, our stockholders.

The commitment and dedication of our employees are evidenced by the compassion and care they gave their
colleagues, customers and neighbors impacted by the many devastating natural and man-made disasters in 2017.
This spirit, professionalism and dedication recently led to First American again being named to the Fortune 100
Best Companies to Work For list. I’m proud that in 2017 we were additionally named to Fortune’s 100 Best
Workplaces for Women and 100 Best Workplaces for Diversity lists, and appeared on the Great Place to Work®
Institute’s list of the top 50 Best Workplaces in Canada in its category.

LOOKING AHEAD

As we head into the spring home-buying season, we remain optimistic about the real estate market. We expect to
benefit from the positive, ongoing trends in the purchase market and from continued strength in the commercial
market. In all, we believe we are positioned to perform well in 2018.

Importantly, I am excited about the innovation underway within the company that will enable us to meet the
dynamic needs and expectations of our customers. Many of these initiatives leverage our unique data, technology
and banking assets, giving us a distinct competitive advantage.

The commitment, teamwork and professionalism of our employees made 2017 a successful year for First
American. I’m proud of our accomplishments and look forward to what we will continue to achieve together in
2018. First American’s board of directors and 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, 2017

‘ 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

Act. Yes È No ‘

is a well-known seasoned issuer, as defined in Rule 405 of the Securities

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

Act. Yes ‘ No È

Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth 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 ‘
Emerging growth company ‘
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for

Accelerated filer ‘

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of 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, 2017

was $4,788,760,345.

On February 9, 2018, there were 110,960,182 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement with respect to the 2018 annual meeting of the stockholders are
incorporated by reference in Part III of this report. The definitive proxy statement or an amendment to this Form 10-K will be filed no
later than 120 days after the close of registrant’s fiscal year.

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

INFORMATION INCLUDED IN REPORT

PART I

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

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

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

Item 2.

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

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

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

PART II

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

Item 6.

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

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

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

Item 8.

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

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

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

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

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . .

Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

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

Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

12

19

19

19

21

22

24

25

51

53

124

124

124

125

125

125

125

125

125

129

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;

•

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 MANAGEMENT FRAMEWORK;

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

PROCESS AUTOMATION;

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; 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
databases, 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 wealth management 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 advantages and
managing and actively investing in complementary businesses that support and/or leverage our core title and
settlement services business. We are also focused on continued improvement of our customers’ experiences with
our products, services and solutions, as well as enhancing our services offered to our title agents. We remain
committed to efficiently managing our business to market conditions throughout business cycles.

Title Insurance and Services Segment

Our title insurance and services segment issues title insurance policies on residential and commercial
property in the United States and offers similar or related products and services internationally. This segment
also provides closing and/or escrow services; accommodates tax-deferred exchanges of real estate; provides
products, services and solutions involving the use of real property related data designed to mitigate risk or
otherwise facilitate real estate transactions; maintains, manages and provides access to title plant records and
images; and provides appraisals and other valuation-related products and services, lien release and document
custodial services, default-related products and services, evidence of title, and banking,
trust and wealth
management services. In 2017, 2016, and 2015 the Company derived 91.7%, 92.1% and 92.5% 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 of the subject property. 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, or for automatic increases in coverage over time. 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.

In the United States, 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. 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.

In the United States, 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 agent
to agent. 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, when a title insurer has issued a
commitment to insure a particular transaction, it may be requested to issue a closing protection letter that protects
a lender or borrower, or in some states also a seller, from a loss of funds, under certain conditions, caused by the
actions of the title insurer or its 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
brokers, insurance companies and asset managers, as well as to law firms, commercial banks, investment banks,

7

mortgage brokers and the owners of commercial real estate. 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. To enhance efficiency certain underwriting functions are automated.

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 5.3% of our title insurance and services
segment revenues in 2017. Today we have direct operations and a physical presence in several countries,
including Canada, the United Kingdom, South Korea 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 title plants constitute one of our principal assets. A title plant is a collection of data and
records on, or which impact, title to real property. A title search is typically conducted by searching the

8

abstracted information from public records or utilizing a title plant holding information abstracted from public
records. While public title records generally are indexed by reference to the names of the parties to a given
recorded document, our title plants primarily arrange their records on a geographic basis. Because of this
difference, title plant records generally may be searched more 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 service, 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, Wealth Management and Banking Services. Our federal savings bank subsidiary offers trust, wealth
management and deposit product services. As of December 31, 2017, this company administered fiduciary and

9

custody assets having a market value in excess of $3.7 billion, which includes managed assets of $1.5 billion.
The bank’s balance sheet had assets of $3.4 billion, with deposits of $3.2 billion and stockholder’s equity of
$255.8 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
real estate 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 typically
place limits on, among other matters, the ability of the insurer to pay dividends to its parent company or to enter
into transactions with affiliates. They also may require approval of the insurance commissioner prior to a third
party directly or indirectly acquiring “control” of the insurer.

In addition, our insurers are subject to the laws of other jurisdictions in which they transact business, which laws
typically establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to

10

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 credit, liquidity, and interest rate risks.

11

As of December 31, 2017, our debt and equity securities portfolio consisted of 91% of fixed income
securities. As of that date, 59% of our fixed income investments were held in securities that are United States
government-backed or rated AAA, and 95% of the fixed income portfolio were rated or classified as investment
grade. Percentages are based on the estimated fair values of the securities. Credit ratings reflect published ratings
obtained from globally recognized securities rating agencies. 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, 2017, the Company employed 18,705 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.

12

2. Unfavorable economic conditions could adversely affect 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. 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.

4. 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 wealth management businesses, are regulated by various federal, state, local and
foreign governmental agencies. These and other of the Company’s businesses also operate within statutory
guidelines. The industry in which the Company operates and the markets into which it sells its products are also
regulated and subject to statutory guidelines. Changes in the applicable regulatory environment, statutory
guidelines or interpretations of existing regulations or statutes, enhanced governmental oversight or efforts by
governmental agencies to cause customers to refrain from using the Company’s products or services could
prohibit or limit its future operations or make it more burdensome to conduct such operations or result in
decreased demand for the Company’s products and services or a change in our competitive position. 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.

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

and others could adversely affect the Company

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

13

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 Consumer Financial Protection
Bureau (“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.

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

reputation or otherwise adversely affect the Company

The Company increasingly utilizes social media to communicate with current and potential customers and
employees, as well as 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.

7. Regulation of title insurance rates could adversely affect the Company

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

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

operates, could adversely affect the Company

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 and 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). 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.

14

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

Certain data used and supplied by the Company are subject to regulation by various federal, state and local
regulatory authorities. Compliance with existing federal, state and local laws and regulations with respect to such
data has not had a material adverse effect on the Company’s results of operations 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
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.

the Company’s operations and could result

10. 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 or the use of alternatives to the Company’s products and services, could
have a material adverse effect on the Company.

11. 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 could
adversely affect the Company

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, 2017. Accordingly,
if the ratings or statutory capital and surplus of these title insurance underwriters are reduced from their current
levels, or if there is a deterioration in other measures of financial strength, the Company’s results of operations,
competitive position and liquidity could be adversely affected.

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

The Company maintains a substantial investment portfolio, primarily consisting of fixed income debt
securities. The investment portfolio also includes adjustable-rate debt securities, common and preferred stock, as
well as money-market and other short-term investments. Securities in the Company’s investment portfolio are
interest rate (including call,
subject
prepayment and extension) risk and/or liquidity risk. The risk of loss associated with the portfolio is increased

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

15

during periods of instability in credit markets and economic conditions. Debt and equity securities are carried at
fair value on the Company’s balance sheet. Changes in the fair value of debt securities is recorded as a
component of accumulated other comprehensive loss on the balance sheet. For debt securities in an unrealized
loss position, where the loss is deemed to be other-than-temporary, the Company records the loss in earnings.
Starting in 2018, changes in the fair value of equity securities are recognized in earnings. Changes in the fair
value of securities in the Company’s investment portfolio could have a material adverse effect on the Company’s
results of operations, statutory surplus, financial condition and cash flow.

13. 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 $117.8 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.

14. 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. 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.

15. The Company’s risk management framework could prove inadequate, which could adversely affect

the Company

The Company’s risk management framework is designed to identify, monitor and mitigate risks that could
have a negative impact on the Company’s financial condition or reputation. This framework includes
departments or groups dedicated to enterprise risk management, information security, disaster recovery and other
information technology-related risks, business continuity, legal and compliance, compensation structures and
other human resources matters, vendor management and internal audit, among others. While many of the
processes overseen by these departments function at the enterprise level, many also function through, or rely to a
certain degree upon, risk mitigation efforts in local operating groups. Similarly, with respect to the risks the
Company assumes in the ordinary course of its business through the issuance of title insurance policies and the
provision of related products and services, the Company employs localized as well as centralized risk mitigation

16

efforts. These efforts include the implementation of underwriting policies and procedures and other mechanisms
for assessing risk. Underwriting title insurance policies and making other risk-assumption decisions frequently
involves a substantial degree of individual judgment and, accordingly, underwriters are maintained at the
regional, divisional and corporate levels with varying degrees of underwriting authority. These individuals may
be encouraged by customers or others to assume risks or to expeditiously make risk determinations. If the
Company’s risk mitigation efforts prove inadequate, the Company could be adversely affected.

16. 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 a
data center it manages and secondarily in a disaster recovery data center maintained by a third party. The
Company is currently engaged in a multi-year process of transitioning to third party cloud-based hosting of its
computer systems.

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. Further,
certain other potential causes of system damage or other negative system-related events are wholly or partially
beyond the Company’s control, such as natural disasters, vendor failures to satisfy service level requirements and
power or telecommunications failures. These incidents, regardless of their underlying causes, could expose the
Company to system-related damage, failures, interruptions, and other negative events or could otherwise disrupt
the Company’s business and could also result in the loss or unauthorized release, gathering, monitoring or
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.

17. The Company’s increased automation of processes could result in increased title claims or otherwise

adversely affect the Company

In an effort to speed the delivery of its products, increase efficiency, improve quality and decrease risk, the
Company increasingly is employing computer systems and algorithms to automate various processes, including

17

certain processes related to the search and examination of information in connection with the issuance of title
insurance policies. Risks from process automation include those associated with potential defects in the design
and development of the algorithms or other technologies used to automate the process, misapplication of those
technologies and the reliance on data, which may prove inadequate. As a result of these risks the Company could
experience increased claims, reputational damage or other adverse effects, which could be material to the
Company.

18. Errors and fraud involving the transfer of funds may adversely affect the Company

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
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 adversely affect 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. 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, 2017, under such regulations,
the maximum amount available in 2018 from these insurance subsidiaries, without prior approval from
applicable regulators, was dividends of $338.4 million and loans and advances of $96.0 million.

18

21. 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

Each of our business segments uses 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 $22.6 million as
of December 31, 2017.

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

intended use.

Item 3. Legal Proceedings

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

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

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

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

• Chavez v. First American Specialty Insurance Company, filed on June 29, 2017 and pending in the

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

• 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,

•

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,

Tenefufu vs. First American Specialty Insurance Company, filed on June 1, 2017, pending in the
Superior Court of the State of California, County of Sacramento, and

20

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

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

All of these lawsuits, except Kaufman and Sjobring, are putative class actions for which a class has not been
certified. For the reasons described above, the Company has not yet been able to assess the probability of
loss or estimate the possible loss or the range of loss 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
wealth management 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 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.

21

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 9, 2018, was 2,423.

High and low stock prices and dividends declared for 2017 and 2016 are set forth in the table below.

Period

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

2017

2016

High-low range

$36.50-39.99
$37.85-45.75
$43.92-49.99
$49.30-57.47

Cash
dividends

$0.34
$0.34
$0.38
$0.38

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

In January 2018, the Company’s board of directors declared a cash dividend of $0.38 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, 2017, 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, 2017. Cumulatively the Company has repurchased
$67.6 million (including commissions) of its shares and has the authority to repurchase an additional
$182.4 million (including commissions) under the plan.

Stock Performance Graph

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

The following graph compares the cumulative total stockholder return on the Company’s common stock
with the corresponding cumulative total returns of the Russell 1000 Index and a peer group index for the period
from December 31, 2012 through December 31, 2017. The comparison assumes an investment of $100 on
December 31, 2012 and reinvestment of dividends. This historical performance is not indicative of future
performance.

22

Comparison of Cumulative Total Returns
Among First American Financial Corporation, Custom Peer Group,
and Russell 1000 Index

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

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

First American Financial

Custom Peer Group

Russell 1000 Index

Comparison of Cumulative Total Return

First
American Financial
Corporation
(FAF) (1)

Custom Peer
Group (1)(2)

Russell 1000
Index (1)

December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . .

$100
$119
$148
$161
$169
$267

$100
$143
$158
$178
$212
$256

$100
$133
$151
$152
$170
$207

(1) As calculated by Bloomberg Financial Services, where available, to include reinvestment of dividends.
(2) The peer group consists of the following companies: American Financial Group, Inc.; Assurant, Inc.;
Cincinnati Financial Corporation; Fidelity National Financial, Inc.; The Hanover Insurance Group, Inc.;
Kemper Corporation; 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.

23

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, 2017, 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,

2017

2016

2015

2014

2013

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

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

Net income attributable to the Company:

(in thousands, except percentages, per share amounts and employee data)
$4,956,077
$5,175,456
$5,772,363
$ 187,064
$ 288,870
$ 421,863

$5,575,846
$ 343,476

$4,677,949
$ 234,215

(1,186) $

$
$ 423,049
$9,573,222
$ 732,810
$3,479,955

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

13.0%

11.9%

10.8%

9.3%

7.8%

$ 159,284

$ 131,541

$ 108,524

$

89,939

$

51,324

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

$
$
$
$

3.79
3.76
31.37
1.44

$
$
$
$

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

Number of common shares outstanding
Weighted average during the year:

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

Other Operating Data (unaudited):

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

111,668
112,435
110,925

1,069
824
18,705

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

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

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

do not include orders processed by agents.

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

24

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, and adjusted other operating expenses, in each case excluding the effects of
recent acquisitions. The Company is presenting these non-GAAP financial measures because they provide the
Company’s management and readers of this Annual Report on Form 10-K with additional insight into the
operational performance of the Company relative to earlier periods. The Company does not intend for these
non-GAAP financial measures to be a substitute for any GAAP financial information. In this Annual Report on
Form 10-K, these non-GAAP financial measures have been presented with, and reconciled to, the most directly
comparable GAAP financial measures. Readers of this Annual Report on Form 10-K should use these non-GAAP
financial measures only in conjunction with the comparable GAAP financial measures.

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with GAAP and reflect the
consolidated operations of the Company. The consolidated financial statements include the accounts of First
American Financial Corporation and all controlled subsidiaries. All significant intercompany transactions and
balances have been eliminated. Investments in affiliates in which the Company exercises significant influence,
but does not control and is not the primary beneficiary, are accounted for using the equity method. Investments in
affiliates in which the Company does not exercise significant influence over the investee are accounted for under
the cost method.

Reportable Segments

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

•

The Company’s title insurance and services segment issues title insurance policies on residential and
commercial property in the United States and offers similar or related products and services
internationally. This segment also provides closing and/or escrow services; accommodates tax-deferred
exchanges of real estate; provides products, services and solutions involving the use of real property
related data designed to mitigate risk or otherwise facilitate real estate transactions; maintains, manages
and provides access to title plant records and images; and provides appraisals and other valuation-
related products and services, lien release and document custodial services, default-related products and
services, evidence of title, and banking, trust and wealth management 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

25

policies in the 49 states that permit the issuance of title insurance policies and the District of Columbia.
The Company also offers 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.

•

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 Basis of Presentation and Significant
Accounting Policies 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 through 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.

26

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 both the 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 a 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 $117.8 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
and historical loss experience 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, 2017

December 31, 2016

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

$

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

83,094
875,724

958,818
70,115

8.1% $
85.1%

83,805
888,126

93.2%
6.8%

971,931
53,932

8.1%
86.6%

94.7%
5.3%

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

$1,028,933

100.0% $1,025,863

100.0%

27

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

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

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

Payments, net of recoveries, related to:

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

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

December 31,

2017

2016

2015

$ 83,805

(in thousands)
$ 87,543

$165,330

17,471
180,602

198,073

14,835
185,515

200,350

1,566

15,098
188,066

203,164

12,420
197,821

210,241

13,569
184,473

198,042

11,258
243,519

254,777

3,339

(21,052)

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

$ 83,094

$ 83,805

$ 87,543

“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 $2.4 million in 2017
from 2016 and increased by $1.5 million in 2016 from 2015 and payments, net of recoveries, related to current
year increased by $2.4 million in 2017 from 2016 and increased by $1.2 million in 2016 from 2015, reflecting
variability in claims volumes characteristic of a policy year during its first year of development.

The provision transferred from IBNR title claims related to prior years decreased by $7.5 million, or 4.0%,
in 2017 from 2016 and increased by $3.6 million, or 1.9%, in 2016 from 2015. Payments, net of recoveries,
related to prior years decreased by $12.3 million, or 6.2%, in 2017 from 2016 and decreased by $45.7 million, or
18.8%, in 2016 from 2015. 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 was impacted by the timing of the provision transferred from IBNR title
claims and payments associated with certain large claims.

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

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

December 31,

2017

2016

2015

$888,126

(in thousands)
$844,364

$802,069

175,322
—

175,322

17,471
180,602

198,073

10,349

193,109
42,552

235,661

15,098
188,066

203,164

170,789
93,092

263,881

13,569
184,473

198,042

11,265

(23,544)

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

$875,724

$888,126

$844,364

28

“Other” primarily includes foreign currency translation gains and losses, ceded reinsurance claims and

assets acquired in connection with claim settlements.

The provision related to current year decreased by $17.8 million, or 9.2%, in 2017 from 2016. This decrease
was attributable to a lower current year loss rate of 4.0% in 2017 when compared to 4.5% in 2016, partly offset
by a 2.1% increase in title premiums and escrow fees in 2017 from 2016.

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.

For further discussion of title provision recorded in 2017, 2016 and 2015, see Results of Operations, pages

41 and 42.

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

The valuation techniques and inputs used to estimate the fair values 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 values. 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

29

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. Certain of the Company’s 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, 2017, 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 any debt
securities before recovery of their amortized cost basis.

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

Expected future cash flows for debt securities are based on qualitative and quantitative factors specific to
each security, including the probability of default and the estimated timing and amount of recovery. The detailed
inputs used to project expected future cash flows may be different depending on the nature of the individual debt
security.

The Company did not record any other-than-temporary impairment losses related to its debt securities for
2017. The Company recorded other-than-temporary impairment losses considered to be credit related on its debt
securities of $0.5 million and $2.2 million for 2016, and 2015, 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 by the Company 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 will include the above noted factors as well as

30

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
losses related to its equity
recorded. The Company did not record any other-than-temporary impairment
securities for 2017, 2016 and 2015.

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
to be reasonable, but which are inherently uncertain and unpredictable and, as a result, may differ from actual
results. Other estimates associated with the accounting for acquisitions may change as additional information
becomes available regarding the assets acquired and liabilities assumed.

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

31

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
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 2017, the Company chose to perform qualitative assessments for each of its reporting units except for its
property and casualty insurance reporting unit, for which it performed a quantitative impairment test. Based on its
quantitative impairment test, the Company determined that its property and casualty insurance reporting unit had a
fair value that was not substantially in excess of its carrying amount. If the Company subsequently determines that
there is impairment to the goodwill related to its property and casualty insurance reporting unit, management does
not expect that it would be material to the Company’s consolidated financial statements. The results of the
Company’s qualitative assessments for each of its other reporting units supported the conclusion that their fair
values were not more likely than not less than their carrying amounts and, therefore, a quantitative impairment test
was not considered necessary. For 2016, the Company chose to perform a quantitative impairment test for all of its
reporting units 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. For 2015, the Company chose to perform a qualitative
assessment, the results of which supported the conclusion that the fair values of the Company’s reporting units were
not more likely than not less than their carrying amounts, and therefore, a quantitative impairment test was not
considered necessary. As a result of the Company’s annual goodwill impairment assessments, the Company did not
record any goodwill impairment losses for 2017, 2016 or 2015.

32

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 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.

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 recognized impairment losses of $1.5 million and $2.0 million for 2017 and
2015, respectively, and did not record any impairment losses related to its equity method investments for 2016.

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 $0.5 million, $5.2 million and $10.9 million for 2017, 2016
and 2015, respectively.

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

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

Employee benefit plans. The Company recognizes the underfunded status of its unfunded supplemental
benefit plans as a liability on its consolidated balance sheets. 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 obligations are measured annually as of December 31.

The assumption that has had the most significant impact to net periodic costs for the unfunded supplemental
benefit plans is the discount rate. 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.

33

Weighted-average discount rate assumptions used to determine net periodic benefit costs for 2017 and 2016,

were as follows:

Unfunded supplemental benefit plans

Discount rate for projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate for service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate for interest cost

4.03% 4.33%
4.32% 4.69%
3.43% 3.56%

Weighted-average discount

rate assumption used to determine the projected benefit obligation at

December 31, 2017 and 2016, was as follows:

December 31,

2017

2016

December 31,

2017

2016

Unfunded supplemental benefit plans

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

3.61% 4.03%

During 2016, the Company terminated its funded defined benefit pension plans and, in 2017, transferred all
remaining benefit obligations relating to the pension plans to a highly rated insurance company. See Note 13
Employee Benefit Plans to the consolidated financial statements for further discussion of the termination of the
Company’s funded defined benefit pension plans.

Recently Adopted Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance which
permits entities to reclassify stranded tax effects in accumulated other comprehensive income to retained
earnings as a result of the Tax Cuts and Jobs Act enacted by the U.S. federal government on December 22, 2017.
The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018,
with early adoption permitted. The Company elected to adopt this change in accounting principle in the fourth
quarter of 2017 and applied the change as of the beginning of 2017, which resulted in an increase to retained
earnings and a decrease to accumulated other comprehensive income of $4.0 million in 2017 on the Company’s
consolidated statements of equity.

In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased
callable debt securities held at a premium to shorten the amortization period for the premium to the earliest call
date. The updated guidance is intended to more closely align the amortization period of premiums and discounts
to expectations incorporated in market pricing on the underlying securities, and is effective for interim and
annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company
elected to adopt the new guidance in the fourth quarter of 2017, which did not 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. The adoption of this guidance had no impact on
the Company’s 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

34

effective for interim and annual reporting periods beginning after December 15, 2016. While the adoption of this
guidance did have an impact on the Company’s effective income tax rate for 2017, it did not have a material
impact on the Company’s consolidated financial statements. See Note 11 Income Taxes to the consolidated
financial statements for further discussion of the Company’s effective income tax rates. Beginning in 2017,
excess tax benefits from share-based compensation are presented in the consolidated statements of cash flows in
cash flows from operating activities within net change in income tax accounts.

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

Pending Accounting Pronouncements

In May 2017, the FASB issued updated guidance intended to reduce diversity in practice by clarifying
which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. 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 March 2017, the FASB issued updated guidance intended to improve the presentation of net periodic
pension cost and net periodic postretirement benefit cost
through the disaggregation of the service cost
component from the other components of net benefit cost. 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 January 2017, the FASB issued updated guidance intended to simplify how an entity tests goodwill for
impairment by eliminating Step 2 from the goodwill impairment test. Under the updated guidance, an entity will
perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and
will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value, with the loss recognized limited to the total amount of goodwill allocated to that reporting unit. The
updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, 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 January 2017, the FASB issued updated guidance to clarify the definition of a business with the objective
of providing guidance to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. 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 November 2016, the FASB issued updated guidance intended to reduce the diversity in practice on
presenting restricted cash and 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 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.

35

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 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. Upon adoption of the guidance, cumulative net
unrealized gains, net of taxes, of $40.0 million related to the Company’s investments in equity securities,
previously classified as available-for-sale, were recognized as a cumulative-effect adjustment
to retained
earnings on January 1, 2018.

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. In February 2017, the FASB issued an additional
update to the new guidance to clarify the scope of derecognition guidance for nonfinancial assets and to provide
guidance for partial sales of nonfinancial assets. The updated guidance is effective for interim and annual reporting
periods beginning after December 15, 2017. The Company has elected to adopt the new guidance under the

36

modified retrospective approach and, except for certain disclosure requirements, 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 2017 were $5.8 billion, which reflected an increase of $0.2 billion, or
3.5%, when compared with $5.6 billion for 2016. This increase was primarily attributable to an increase in agent
premiums of $74.0 million, or 3.2%, an increase in information and other revenues of $52.2 million, or 7.2%, an
increase in direct premiums and escrow fees of $45.8 million, or 1.9%, and an increase in net investment income
of $36.3 million, or 28.8%. The increase in direct premiums and escrow fees attributable to the title insurance
and services segment was $17.7 million, or 0.9%. Direct premiums and escrow fees from residential purchase
and commercial transactions in 2017 increased $93.6 million and $35.1 million, or 11.4% and 5.3%, respectively,
while direct premiums and escrow fees from residential refinance transactions decreased $110.0 million, or
32.3%, in 2017 when compared to 2016.

According to the Mortgage Bankers Association’s January 20, 2018 Mortgage Finance Forecast (the “MBA
Forecast”), residential mortgage originations in the United States (based on the total dollar value of the
transactions) decreased 16.6% in 2017 when compared with 2016. According to the MBA Forecast, the dollar
amount of purchase originations increased 5.5% and refinance originations decreased 39.9% in 2017 when
compared to 2016. This 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 11.4% from domestic residential
purchase transactions and a 32.3% decrease in direct premiums and escrow fees from domestic refinance
transactions in 2017 when compared to 2016.

During 2017, the Company completed acquisitions for an aggregate purchase price of $91.1 million, which
are included in the Company’s title insurance and services segment. These acquisitions serve to strengthen the
Company’s core title and settlement businesses.

In 2016, the Company terminated its funded defined benefit pension plans, and in 2017, the Company
transferred all remaining benefit obligations related to the pension plans to a highly rated insurance company. In
connection with the termination, the Company recognized pension settlement costs of $152.4 million and
$66.3 million in personnel costs in the corporate segment for 2017 and 2016, respectively. 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 2016. For further discussion of the pension
termination see Note 13 Employee Benefit Plans to the consolidated financial statements.

On December 22, 2017, comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the
“Tax Reform Act”) was signed into law. The Tax Reform Act amends the Internal Revenue Code to reduce U.S.
tax rates and modify policies, credits and deductions for individuals and businesses. The changes resulting from
the Tax Reform Act are broad and complex and will require additional analysis, but the Company expects that
the Tax Reform Act will have an overall favorable impact on its effective tax rate and earnings per share in future
periods. The Company recorded $114.1 million in estimated net tax benefits to net income for 2017 related to the

37

Tax Reform Act. For further discussion of the impact of the Tax Reform Act on the Company’s consolidated
financial statements, see Note 11 Income Taxes to the consolidated financial statements.

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,
and 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). In addition, the Tax
Reform Act included changes that could affect the real estate and mortgage markets, including changes to the
mortgage interest deduction, the increase in the standard deduction (which limits the benefit of itemizing and
deducting mortgage interest separately) and the limitation on state and local tax deductions, among others. The
impact of the Tax Reform Act on volumes of real estate transactions and mortgage originations is not currently
known. Other changes in these areas, and more generally in the regulatory environment, in which the Company
and its customers operate, could similarly 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.

Title Insurance and Services

2017

2016

2015

2017 vs. 2016

2016 vs. 2015

$ Change % Change $ Change % Change

(in thousands, except percentages)

Revenues

Direct premiums and

escrow fees . . . . . . . $2,022,384
2,360,659

Agent premiums . . . . .
Information and

$2,004,686
2,286,630

$1,929,783
2,098,265

$ 17,698
74,029

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

766,018

713,137

669,984

52,881

Net investment

0.9
3.2

7.4

$ 74,903
188,365

43,153

3.9
9.0

6.4

income . . . . . . . . . .

137,439

110,757

97,520

26,682

24.1

13,237

13.6

6,656

18,915

(7,442)

(12,259)

(64.8)

26,357

354.2

5,293,156

5,134,125

4,788,110

159,031

3.1

346,015

1,636,483

1,578,244

1,491,892

58,239

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

1,863,356

1,801,571

1,656,722

61,785

Other operating

expenses . . . . . . . . .

788,020

764,388

745,278

23,632

175,322

235,661

263,881

(60,339)

(25.6)

(28,220)

(10.7)

Net realized

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

Expenses

Personnel costs . . . . . .
Premiums retained by

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

Depreciation and

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

121,540
62,545
3,526

93,069
59,464
2,856

80,359
57,500
2,524

28,471
3,081
670

4,650,792

4,535,253

4,298,156

115,539

Income before income

taxes . . . . . . . . . . . . . . . . $ 642,364

$ 598,872

$ 489,954

$ 43,492

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

12.1%

11.7%

10.2%

0.4%

38

3.7

3.4

3.1

86,352

144,849

19,110

7.2

5.8

8.7

2.6

30.6
5.2
23.5

2.5

7.3

3.4

12,710
1,964
332

237,097

15.8
3.4
13.2

5.5

$108,918

22.2

1.5% 14.7

Direct premiums and escrow fees increased $17.7 million, or 0.9%, in 2017 from 2016 and $74.9 million, or
3.9%, in 2016 from 2015. The increase in direct premiums and escrow fees in 2017 from 2016 was primarily due
to an increase in domestic average revenues per order closed, partially offset by a decrease in the domestic title
orders closed by the Company’s direct title operations. 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 domestic average
revenues per order closed were $2,264, $1,931 and $2,012 for 2017, 2016 and 2015, respectively. The 17.2%
increase in average revenues per order closed in 2017 from 2016 was primarily due to a shift in the mix of direct
revenues generated from lower premium residential refinance products to higher premium residential purchase
and commercial products, higher average revenues per order from commercial transactions, higher residential
real estate values, and premium and fee increases related to residential purchase transactions. 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
Company’s direct title operations closed 823,700, 958,400 and 882,400 domestic title orders during 2017, 2016
and 2015, respectively. The 14.1% decrease in orders closed in 2017 from 2016 and the 8.6% increase in orders
closed in 2016 from 2015 were generally consistent with the changes in residential mortgage origination activity
in the United States as reported in the MBA Forecast.

Agent premiums increased $74.0 million, or 3.2%, in 2017 from 2016 and $188.4 million, or 9.0%, in 2016
from 2015. Agent premiums are recorded when notice of issuance is received from the agent, which is generally
when cash payment is received by the Company. As a result, there is generally a delay between the agent’s
issuance of a title policy and the Company’s recognition of agent premiums. Therefore, full year agent premiums
typically reflect mortgage origination activity from the fourth quarter of the prior year through the third quarter
of the current year. The increase in agent premiums in 2017 from 2016 was generally consistent with the 3.0%
increase in the Company’s direct premiums and escrow fees in the twelve months ended September 30, 2017 as
compared with the twelve months ended September 30, 2016. 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.

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 $52.9 million, or 7.4%, in 2017 from 2016 and $43.2 million, or
6.4%, in 2016 from 2015. The increases were driven by recent acquisitions. Excluding the $77.4 million impact
information and other revenues decreased
of new acquisitions for the year ended December 31, 2017,
$24.5 million, or 3.4%, in 2017 compared to 2016. The decrease in 2017 from 2016, adjusted for the impact of
new acquisitions, was due to lower demand for the Company’s default information products driven by a decrease
in loss mitigation activities and lower demand for the Company’s valuation services, fulfillment services, and
automated products driven by a decrease in mortgage origination volumes, partially offset by higher fees earned
on non-insured products related to commercial
transactions. Excluding the $48.5 million impact of new
acquisitions for the year ended 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 a 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.

Net investment income increased $26.7 million, or 24.1%, in 2017 from 2016 and $13.2 million, or 13.6%,
in 2016 from 2015. The increase in 2017 from 2016 was primarily attributable to the increase in short-term
interest rates which drove higher interest income in the Company’s cash balances and investment portfolio. The

39

increase in 2016 from 2015 was primarily attributable to higher interest income from the debt securities portfolio
due to higher average balances in 2016 when compared to 2015. Net investment income for 2017 and 2015
included impairment losses of $1.5 million and $2.0 million, respectively, recognized on investments accounted
for using the equity method. 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 $6.7 million for 2017 and
were primarily from the sales of debt and equity securities, partially offset by a $6.6 million loss recognized
when the Company purchased the remaining equity ownership in an investment in an affiliate during the third
quarter of 2017. This investment, which was previously accounted for using the equity method of accounting, is
now consolidated for financial reporting purposes. Net realized investment gains were $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 for 2017,
2016 and 2015 included $0.8 million, $3.3 million and $9.3 million, respectively, of gains from the sale of real
estate. In addition, net realized investment gains for 2017, 2016 and 2015 included impairment losses of
$3.0 million, $5.2 million and $10.9 million, respectively. The impairment losses recorded in 2017 were
primarily related to title plants and the impairment losses recorded in 2016 and 2015 were 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.

Personnel costs increased $58.2 million, or 3.7%, in 2017 from 2016 and $86.4 million, or 5.8%, in 2016
from 2015. The increases were largely driven by recent acquisitions. Excluding the $57.5 million impact of new
acquisitions for the year ended December 31, 2017, personnel costs increased $0.7 million, or were essentially
flat, in 2017 compared to 2016. The minor increase in 2017 from 2016, adjusted for the impact of new
acquisitions, was primarily attributable to higher salary, incentive compensation and employee retention costs,
mostly offset by lower temporary labor costs and overtime expense. The higher salary cost was due to an increase
in average salaries, partially offset by lower average headcount. The increase in incentive compensation expense
was due to higher profitability. 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 from 2015, 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. Personnel costs included severance
expense of $10.1 million, $8.3 million and $5.6 million for 2017, 2016 and 2015, 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 1,069,000, 1,281,400 and
1,261,700 domestic title orders in 2017, 2016 and 2015, respectively, representing a decrease of 16.6% in 2017
from 2016 and an increase of 1.6% in 2016 from 2015.

40

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

2017

2016

2015

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

(in thousands, except percentages)
$1,801,571

$1,863,356

$1,656,722

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

$2,360,659

$2,286,630

$2,098,265

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

78.9%

78.8%

79.0%

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 changes in the percentage of title premiums retained by agents in 2017 from 2016 and in
2016 from 2015 were primarily due to changes in the geographic mix of agency revenues.

Other operating expenses (principally related to direct operations) increased $23.6 million, or 3.1%, in 2017
from 2016 and $19.1 million, or 2.6%, in 2016 from 2015. The increases were driven by recent acquisitions.
Excluding the $32.4 million impact of new acquisitions for the year ended December 31, 2017, other operating
expenses decreased $8.8 million, or 1.2%, in 2017 compared to 2016. The decrease in 2017 from 2016, adjusted
for the impact of new acquisitions, was primarily attributable to lower production related costs driven by lower
order volumes, higher foreign currency exchange gains, and declines in furniture and equipment costs, software
related costs and litigation related costs. The decreases were partially offset by increased occupancy expense and
the first quarter of 2016 benefitting from the recovery of an insurance claim. In addition, other operating
expenses increased by $8.5 million due to an out-of-period adjustment recorded to write-off certain uncollectible
balances related to fees that should have been previously written off. To correct for this error, the Company
recorded the $8.5 million adjustment in the fourth quarter of 2017. For further discussion of the out-of-period
adjustments see Note 1 Basis of Presentation and Significant Accounting Policies to the consolidated financial
statements. 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.

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

escrow fees, was 4.0%, 5.5% and 6.6% for the years ended December 31, 2017, 2016 and 2015, respectively.

The current year rate of 4.0% reflects the ultimate loss rate for the current policy year and no change in the

loss reserve estimates for prior policy years.

As of December 31, 2017, the IBNR claims reserve for the title insurance and services segment was
$875.7 million, which reflected management’s best estimate. The Company’s internal actuary determined a range
of reasonable estimates of $716.3 million to $910.9 million. The range limits are $159.4 million below and
$35.2 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 5.5% reflected an ultimate loss rate of 4.5% for policy year 2016 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 was due to the following factors, among others: (i) the volatility associated with the timing and

41

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 believed its
claims reserve attributable to large title claims was reasonable, this uncertainty increased the potential for
adverse loss development.

The 2015 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.

As of December 31, 2017, the projected ultimate loss ratios for policy years 2017, 2016 and 2015 were

4.0%, 4.2% and 3.8%, respectively.

Depreciation and amortization expense increased $28.5 million, or 30.6%,

in 2017 from 2016 and
$12.7 million, or 15.8%, in 2016 from 2015. The increase in 2017 from 2016 was primarily attributable to higher
amortization expense associated with internally developed technology and purchased software licenses,
$6.5 million related to recent acquisitions, and $4.7 million in out-of-period adjustments to fully amortize certain
title plant imaging assets that were misclassified as title plants assets. The higher amortization expense related to
internally developed technology included $5.3 million of accelerated amortization for 2017, resulting from a
shortened useful life for a software interface. For further discussion of the out-of-period adjustments see Note 1
Basis of Presentation and Significant Accounting Policies to the consolidated financial statements. The increase
in 2016 from 2015 was primarily attributable to higher amortization expense associated with internally developed
technology and purchased software licenses and $2.7 million related to recent acquisitions.

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, 2017, 2016 and 2015.

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 12.1%, 11.7% and
10.2% for the years ended December 31, 2017, 2016 and 2015, respectively.

42

Specialty Insurance

2017

2016

2015

2017 vs. 2016

2016 vs. 2015

$ Change % Change

$ Change % Change

(in thousands, except percentages)

Revenues

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

$439,470
11,259
9,713

$411,353
10,877
9,476

$380,264
3,180
8,850

$28,117
382
237

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

4,578

4,138

1,463

440

465,020

435,844

393,757

29,176

Expenses

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

71,604
67,813

67,733
62,610

65,742
49,741

3,871
5,203

and other claims . . . . . . .

275,088

252,940

227,211

22,148

Depreciation and

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

6,351
7,256

5,593
6,894

4,775
6,769

758
362

428,112

395,770

354,238

32,342

6.8
3.5
2.5

10.6

6.7

5.7
8.3

8.8

13.6
5.3

8.2

$31,089
7,697
626

8.2
242.0
7.1

2,675

182.8

42,087

10.7

1,991
12,869

3.0
25.9

25,729

11.3

818
125

41,532

17.1
1.8

11.7

1.4

Income before income taxes . . . .

$ 36,908

$ 40,074

$ 39,519

$ (3,166)

(7.9)

$

555

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

7.9%

9.2%

10.0%

(1.3)% (14.1)

(0.8)% (8.0)

Direct premiums increased $28.1 million, or 6.8%, in 2017 from 2016 and $31.1 million, or 8.2%, in 2016
from 2015. The increases were due to higher premiums earned in the home warranty business driven by an
increase in the number of home warranty residential service contracts issued and an increase in the average price
charged per contract.

Information and other revenues increased $0.4 million, or 3.5%, in 2017 from 2016 and $7.7 million, or
242.0%, in 2016 from 2015. The increase in 2016 from 2015 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 realized investment gains for the specialty insurance segment totaled $4.6 million, $4.1 million and
$1.5 million for 2017, 2016 and 2015, 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 $9.1 million, or 7.0%, in 2017 from 2016 and
$14.9 million, or 12.9%, in 2016 from 2015. The increase in 2017 from 2016 was primarily related to higher
salary expense due to higher average headcount, higher incentive compensation in the home warranty business
on higher revenue and profitability, and higher offshore labor expense related to increased customer support
activities associated with increased volume in the home warranty business. The increase was also related to a
$3.5 million benefit recorded in 2016 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 2016 from 2015 was primarily related to the change in how the Company
reports installment fees related to home warranty residential service contracts, higher offshore labor expense
related to increased customer support activities associated with the increased volume in the home warranty

43

business, higher advertising expense in the home warranty business, and higher salary expense due to higher
average salaries. These increases were partially offset by the $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.

The provision for home warranty claims, expressed as a percentage of home warranty premiums, was 53.5%
in 2017, 60.7% in 2016 and 56.5% in 2015. The decrease in rate in 2017 from 2016 was primarily attributable to
a decrease in the frequency and severity of claims and, to a lesser extent, an increase in average revenue per
contract. The decrease in the severity of claims was primarily due to more efficient claims management, which
was mainly driven by improved rates with contractors and more efficient allocation of claims to contractors. The
severity and frequency of home warranty claims also benefited from milder weather conditions when compared
to the prior year. 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 efficiency of claims management was adversely impacted by the
increased level of claims opened in 2016 as a result of the higher volume of home warranty residential service
contracts outstanding in 2016.

The provision for property and casualty claims, expressed as a percentage of property and casualty
insurance premiums, was 85.0% in 2017, 63.3% in 2016 and 66.4% in 2015. The increase in rate in 2017 from
2016 was primarily attributable to an increase in the severity and, to a lesser extent, frequency of claims. The
increase in claims severity was primarily due to wildfires in California, including two separate wildfires during
the fourth quarter of 2017 with losses exceeding property and casualty’s reinsurance retention limit of
$5.0 million for each event, and rainstorms in the western portion of the United States. The decrease in rate in
2016 from 2015 was primarily attributable to lower weather-related loss events when compared to the prior year.

Premium taxes as a percentage of specialty insurance segment premiums were 1.7% in 2017 and 2016 and

1.8% in 2015.

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 7.9%, 9.2% and 10.0% for 2017, 2016 and 2015, respectively.

44

Corporate

Revenues

Net investment income

2017

2016

2015

2017 vs. 2016

2016 vs. 2015

$ Change % Change

$ Change % Change

(in thousands, except percentages)

(losses) . . . . . . . . . . . . . . $ 15,326 $

5,946 $ (5,387) $ 9,380

157.8

$ 11,333

210.4

Net realized investment

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

—

—

(568)

—

—

568

15,326

5,946

(5,955)

9,380

157.8

11,901

100.0

199.8

Expenses

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

190,464

110,656

37,301

79,808

72.1

73,355

196.7

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

26,104

26,867

25,976

(763)

(2.8)

891

3.4

Depreciation and

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

162
32,537

385
29,403

249,267

167,311

Loss before income

462
27,014

90,753

(223)
3,134

(57.9)
10.7

(77)
2,389

(16.7)
8.8

81,956

49.0

76,558

84.4

taxes . . . . . . . . . . . . . . . . $(233,941) $(161,365) $(96,708) $(72,576)

(45.0)

$(64,657)

(66.9)

Net investment income totaled $15.3 million in 2017, $5.9 million in 2016 and a loss of $5.4 million in
2015. 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 $216.6 million, $137.5 million and
$63.3 million in 2017, 2016 and 2015, respectively. The increase in 2017 from 2016 was primarily attributable to
pension settlement costs of $152.4 million that the Company recognized during the third quarter of 2017 upon
completing the termination of its funded defined benefit pension plans. The increase in 2016 from 2015 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 see Note 13 Employee Benefit Plans to the consolidated financial statements.

Interest expense increased $3.1 million in 2017 from 2016 and $2.4 million in 2016 from 2015. The increase
in 2017 was due to the Company borrowing $160.0 million under its credit facility during September 2016.
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.

Eliminations

The Company’s inter-segment eliminations were not material for the years ended December 31, 2017, 2016

and 2015.

45

Income Taxes

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

reconciliation of these differences is as follows:

Year ended December 31,

2017

2016

2015

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax reform impact
Unremitted foreign earnings . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 155,866
(872)
(3,482)
(6,163)
—

(129,139)
14,997
(7,739)

(in thousands, except percentages)
35.0% $167,153
3,703
(0.2)
(10,512)
(0.8)
(7,983)
(1.3)
—
(12,265)
(29.0)
3.3
(1.7)

35.0% $151,468
4,581
0.8
1,094
(2.2)
(7,111)
(1.7)
(1,710)
(2.6)

— —
— —

(5,991)

(4,427)

(1.2)

— —
— —

(1.1)

35.0%
1.1
0.3
(1.6)
(0.4)

$ 23,468

5.3% $134,105

28.1% $143,895

33.3%

The Company’s effective income tax rates (income tax expense as a percentage of income before income
taxes) were 5.3% for 2017, 28.1% for 2016 and 33.3% for 2015. 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. The Company’s effective tax rate for 2017 also reflects the estimated
impact of the Tax Reform Act, state tax benefits relating to the termination of the Company’s pension plan, and
the release of reserves relating to tax positions taken on prior year tax returns. For further discussion of the
impact of the Tax Reform Act on the Company’s consolidated financial statements, see Note 11 Income Taxes to
the consolidated financial statements. In addition, the Company’s effective tax rate for 2017 reflects the adoption
of new accounting guidance related to the accounting for share-based payment transactions, which requires,
among other items, that all excess tax benefits and tax deficiencies associated with share-based payment
transactions be recorded in income tax expense rather than in additional paid-in capital, as previously required.
The impact to the Company of adopting this guidance was a reduction in income tax expense of $3.4 million. For
further discussion of the new guidance, see Note 1 Basis of Presentation and Significant Accounting Policies to
the consolidated financial statements. The Company’s effective tax rate for 2016 reflects the resolution of certain
tax authority examinations and tax credits claimed in 2016 and prior years. The Company’s effective tax rate for
2015 includes a benefit for the release of valuation allowances previously provided against certain foreign net
operating losses and other deferred tax assets.

Net Income and Net Income Attributable to the Company

Net income and per share information are summarized as follows:

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

Net income per share attributable to the Company’s

stockholders:

Year ended December 31,

2017

2016

2015

(in thousands, except per share amounts)
$288,086
$342,993
$423,049

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

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

$

$

3.79

3.76

$

$

3.10

3.09

$

$

2.65

2.62

Weighted-average common shares outstanding:

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

111,668

110,548

108,427

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

112,435

111,156

109,826

46

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

per share.

Liquidity and Capital Resources

Cash requirements. The Company generates cash primarily from the sale of its products and services and
investment income. The Company’s current cash requirements include operating expenses, taxes, payments of
principal and interest on its debt, capital expenditures, dividends on its common stock, and may include business
acquisitions and repurchases of its common stock. Management forecasts the cash needs of the holding company
and its primary subsidiaries and regularly reviews their short-term and long-term projected sources and uses of
funds, as well as the asset, liability, investment and cash flow assumptions underlying such forecasts. Based on
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 totaled $632.1 million, $489.4 million and $551.3 million for the
years ended December 31, 2017, 2016 and 2015, respectively, after claim payments, net of recoveries, of
$472.0 million, $463.0 million and $476.5 million, respectively. The principal nonoperating uses of cash and
cash equivalents for the years ended December 31, 2017, 2016 and 2015 were purchases of debt and equity
securities, dividends to common stockholders, capital expenditures and business acquisitions. The most
significant nonoperating sources of cash and cash equivalents for the years ended December 31, 2017, 2016 and
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, and, for the year ended December 31, 2016, net proceeds from
the issuance of debt. The net effect of all activities on total cash and cash equivalents was an increase of
$381.1 million, a decrease of $21.2 million, and a decrease of $162.8 million for
the years ended
December 31, 2017, 2016 and 2015, respectively.

The Company continually assesses its capital allocation strategy, including decisions relating to dividends,
stock repurchases, capital expenditures, acquisitions and investments. In August 2017, the Company’s board of
directors approved an increase in the Company’s quarterly cash dividend to 38 cents per common share,
representing a 12% increase from the prior level of 34 cents per common share. The dividend increase became
effective beginning with the September 2017 dividend. In January 2018, the Company’s board of directors
approved a first quarter cash dividend of 38 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

47

December 31, 2017. 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, 2017, the Company
did not repurchase any shares of its common stock and, as of December 31, 2017, 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, 2017, under such regulations, the maximum amount available to the holding company from its
from applicable regulators, was dividends of
insurance subsidiaries in 2018, without prior approval
$338.4 million and loans and advances of $96.0 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.

The Tax Reform Act amends the Internal Revenue Code to reduce U.S. tax rates and modify policies,
credits and deductions for individuals and businesses. While the changes resulting from the Tax Reform Act are
broad and complex and will require additional analysis, the Company expects that the Tax Reform Act will have
an overall favorable impact on its effective tax rate resulting in less cash required for tax payments in future
periods. In addition, the Tax Reform Act moves the U.S. to a partial territorial tax system, which as a result, will
reduce the tax costs associated with future distributions of earnings from foreign subsidiaries. For further
discussion of the impact of the Tax Reform Act on the Company’s consolidated financial statements, see Note 11
Income Taxes to the consolidated financial statements.

As of December 31, 2017, the holding company’s sources of liquidity included $233.9 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. At
December 31, 2017, outstanding borrowings under the facility totaled $160.0 million at an interest rate of 3.32%.

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

48

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, 2017, 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 2017, the Company financed securities for funds received totaling
$10.0 million under these agreements. As of December 31, 2017, no amounts remained outstanding under these
agreements.

In addition to being a party to master repurchase agreements,

the Company’s federal savings bank
subsidiary, First American Trust, FSB maintains a secured line of credit with the Federal Home Loan Bank and
federal funds lines of credit with correspondent institutions. As of December 31, 2017, no amounts remained
outstanding under any of these facilities.

Notes and contracts payable as a percentage of

total capitalization was 17.4% and 19.6% at
December 31, 2017 and 2016, 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, 2017, 91% of the Company’s investment
portfolio consisted of fixed income securities, of which 59% were United States government-backed or rated
AAA and 95% were rated or classified as investment grade. Percentages are based on the estimated fair values of
the securities. Credit ratings reflect published ratings obtained from globally recognized securities rating
agencies. 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, 2017, 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 are primarily related to software development costs and
purchases of property and equipment and software licenses. Capital expenditures totaled $136.7 million,
$132.3 million and $127.6 million for 2017, 2016 and 2015, respectively. The increase in 2017 from 2016
primarily related to an increase in spending on property and equipment and software licenses in 2017, partially
offset by lower spending on software development. 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.

49

Contractual obligations. A summary of the Company’s contractual obligations at December 31, 2017, by

due date, is as follows:

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

payable . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . .
Claims losses . . . . . . . . . . . . . . .
Employee benefit plans . . . . . . .

Total

Less than 1
year

1-3 years

3-5 years

More than
5 years

$ 732,810

$

4,612

(in thousands)
$167,579

$

7,069

$ 553,550

165,887
367,083
3,070,566
1,028,933
410,153

25,791
83,684
3,070,566
266,920
14,266

50,856
135,300
—
221,560
30,284

63,791
80,640
—
154,129
31,640

25,449
67,459
—
386,324
333,963

$5,775,432

$3,465,839

$605,579

$337,269

$1,366,745

The timing of claims payments is estimated and is not set contractually. Nonetheless, based on historical
claims experience, the Company anticipates the above payment patterns. Changes in future claims settlement
patterns, judicial decisions, legislation, economic conditions and other factors could affect the timing and amount
of actual claims payments. The timing and amount of payments in connection with employee 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 employee 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 $12.8 million has not been included in the contractual obligations table. See Note 11 Income Taxes to the
consolidated financial statements for additional discussion of the Company’s liability for uncertain tax positions.

Off-balance sheet arrangements. The Company administers escrow deposits and trust assets as a service to
its customers. Escrow deposits totaled $7.5 billion and $6.8 billion at December 31, 2017 and 2016, respectively,
of which $2.9 billion and $2.6 billion, respectively, were held at 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 $3.7 billion and $3.2 billion at
December 31, 2017 and 2016, 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.

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

50

transferred to the customer. Like-kind exchange funds held by the Company totaled $2.6 billion and $2.0 billion
at December 31, 2017 and 2016, 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.

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, 2017 and 2016 were $4.8 billion and $4.6 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, 2017 to decrease by approximately $172.0 million, or
3.6%, and $344.0 million, or 7.2%, respectively, and at December 31, 2016 to decrease by approximately
$109.0 million, or 2.4%, and $272.0 million, or 5.9%, respectively.

With respect to adjustable-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, 2017 and 2016, the Company had $160.0 million outstanding under its credit facility.
Assuming the full utilization of available funds under the facility of $700.0 million at December 31, 2017 and
2016, and assuming that the borrowings were outstanding for the entire year, increases of 50 and 100 basis points
in the prevailing interest rate on the Company’s credit facility would result in increases in interest expense of
$3.5 million and $7.0 million for 2017 and 2016.

The Company’s interest bearing escrow deposit

liabilities totaled $2.1 billion and $2.0 billion at
December 31, 2017 and 2016, respectively. These variable rate customer savings accounts are subject to market
rate fluctuations. The weighted average interest rate for 2017 and 2016 was 0.10%. Assuming increases in
interest rates of 25 and 50 basis points and that the deposit amounts at December 31, 2017 and 2016 are held

51

constant for the entire year, interest expense for 2017 would be higher by $5.1 million and $10.3 million,
respectively, and 2016 would be higher by $4.9 million and $9.8 million, respectively.

Equity Price Risk

The Company is also subject to equity price risk related to its equity securities portfolio. The fair value of
the Company’s equity securities portfolio (excluding preferred stock of $19.0 million and $15.6 million) was
$447.5 million and $388.5 million as of December 31, 2017 and 2016, 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, 2017 could decrease by $44.8 million and $89.5 million, respectively, and at
December 31, 2016 could decrease by $38.9 million and $77.7 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, 2017, see
Note 3 Debt and Equity Securities to the consolidated financial statements.

52

Item 8. Financial Statements and Supplementary Data

INDEX

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

Consolidated Balance Sheets as of December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016
and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Equity for the years ended December 31, 2017, 2016 and 2015 . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unaudited Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statement Schedules:
Summary
December 31, 2017
Condensed Financial Information of Registrant as of December 31, 2017 and 2016 and for
the years ended December 31, 2017, 2016 and 2015
Supplementary Insurance Information as of December 31, 2017 and 2016 and for the years
ended December 31, 2017, 2016 and 2015

in Related Parties

Investments—Other

Investments

than

III.

II.

of

as

of

I.

IV. Reinsurance for the years ended December 31, 2017, 2016 and 2015
V. Valuation and Qualifying Accounts for the years ended December 31, 2017, 2016 and 2015

Page No.

54

56
57

58
59
60
61
111

112

113

118
120
121

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

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

53

Report of Independent Registered Public Accounting Firm

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

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of First American Financial Corporation
and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income,
comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2017,
including the related notes and financial statement schedules listed in the accompanying index (collectively
referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2017 based on criteria
established in Internal Control—Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, 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 the Company’s consolidated financial
statements and on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement, whether due to error or fraud, and whether effective internal control over
financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. 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.

54

Definition and Limitations of Internal Control over Financial Reporting

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 16, 2018

We have served as the Company’s auditor since 2009.

55

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 $23,066 and $30,185 . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments:

Deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities, includes pledged securities of $108,427 and $110,647 . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

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

December 31,

2017

2016

$1,387,226
311,084
38,673

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

41,335
4,752,684
466,516
117,768

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

5,378,303

5,140,699

439,569
568,452
22,803
1,113,005
99,913
214,194

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

$9,573,222

$8,831,777

$3,070,566

$2,779,478

68,460
194,357
401,083
129,257

793,157

240,822
1,028,933
4,602
219,307
732,810

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

793,955

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

6,090,197

5,817,428

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—110,925 shares

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

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

—

—

1
2,236,351
1,311,112
(67,509)

3,479,955
3,070

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

3,008,179
6,170

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

3,483,025

3,014,349

$9,573,222

$8,831,777

See Notes to Consolidated Financial Statements

56

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

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

Year Ended December 31,

2017

2016

2015

Revenues:

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

$2,461,854
2,360,659
776,214
162,402
11,234

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

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

5,772,363

5,575,846

5,175,456

Expenses:

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

1,898,551
1,863,356
880,874
450,410
128,053
69,801
35,987

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

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

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net (loss) income attributable to noncontrolling interests . . . . . . . .

5,327,032

5,098,265

4,742,691

445,331
23,468

421,863
(1,186)

477,581
134,105

343,476
483

432,765
143,895

288,870
784

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

$ 423,049

$ 342,993

$ 288,086

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

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

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

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

$

$

$

3.79

3.76

1.44

$

$

$

3.10

3.09

1.20

$

$

$

2.65

2.62

1.00

Weighted-average common shares outstanding:

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

111,668

110,548

108,427

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

112,435

111,156

109,826

See Notes to Consolidated Financial Statements

57

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

Year Ended December 31,

2017

2016

2015

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

$421,863

$343,476

$288,870

Other comprehensive income (loss), net of tax:

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

63,563
24,744
74,597

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

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

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

162,904

8,607

(39,911)

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive (loss) income attributable to noncontrolling interests . .

584,767
(1,173)

352,083
487

248,959
770

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

$585,940

$351,596

$248,189

See Notes to Consolidated Financial Statements

58

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,

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 . . .
Net activity related to

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

(loss) (Note 17) . . . . . . . . . .

1,557 —
—

—

16,769
24,339

(2,201)
—

—
—

—

—
—

—

(7)

—

—

—
7,020

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 . . .
Net activity related to

noncontrolling interests . . .

Other comprehensive income

(loss) (Note 17) . . . . . . . . . .

—

—

Balance at

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

Net income (loss) for 2017 . . .
Dividends on common

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

—

Shares issued in connection

with share-based
compensation plans . . . . . . .
Share-based compensation . . .
Net activity related to

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

(loss) (Note 17) . . . . . . . . . .

Balance at

860 —
—
—

7,298
34,125

(2,779)
—

—

—

1

—

—

(26)

—

—

—

2,191,756 1,046,822
423,049

—

— (159,284)

981 —
—
—

6,226
37,399

(3,494)
—

—
—

—

—
—

—

970
—

—

—
4,019

$(199,106)

—

—

—
—

—
—

$2,564,375
288,086

$ 3,127
784

$2,567,502
288,870

(108,524)

14,568
24,339

(7)
7,020

—

—
—

(734)
—

(108,524)

14,568
24,339

(741)
7,020

—

(39,897)

(39,897)

(14)

(39,911)

2,749,960
342,993

(131,541)

(454)

4,519
34,125

(239,003)

—

—

—

—
—

—

(26)

2,520

8,603

8,603

4

3,163
483

2,753,123
343,476

—

—

—
—

(131,541)

(454)

4,519
34,125

2,494

8,607

(230,400)

—

—

—
—

—
—

3,008,179
423,049

6,170
(1,186)

3,014,349
421,863

(159,284)

2,732
37,399

970
4,019

—

—
—

(1,927)
—

(159,284)

2,732
37,399

(957)
4,019

—

162,891

162,891

13

162,904

December 31, 2017 . . . . . . . 110,925

$

1

$2,236,351 $1,311,112

$ (67,509)

$3,479,955

$ 3,070

$3,483,025

See Notes to Consolidated Financial Statements

59

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Year Ended December 31,

2017

2016

2015

CASH FLOWS FROM OPERATING ACTIVITIES:

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

$

421,863

$

343,476

$

288,870

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

450,410
128,053
31,211
—
(11,234)
37,399
(3,785)
11,083

(472,047)
(102,819)
12,426
127,683
10,238
(8,347)

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

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

632,134

489,416

551,323

CASH FLOWS FROM INVESTING ACTIVITIES:

Net cash effect of acquisitions/dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of debt and equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of debt and equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of property and equipment

(82,993)
(18,319)
(1,970,597)
1,163,765
641,442
3,763
(134,206)
9,977

(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

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

(387,168)

(610,148)

(974,420)

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

291,088
—
(5,543)
(969)
—
2,732
—

(159,284)

128,024
8,098

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

381,088
1,006,138

(21,183)
1,027,321

(162,759)
1,190,080

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

$ 1,387,226

$ 1,006,138

$ 1,027,321

SUPPLEMENTAL INFORMATION:
Cash paid during the year for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes, less refunds of $52,153, $4,055 and $2,546 . . . . . . . . . . . . . . . . . . . . . . .

$
$
$

33,680
66,785
126,208

$
$
$

30,125
65,506
116,309

$
$
$

29,212
57,367
89,062

See Notes to Consolidated Financial Statements

60

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; and provides appraisals and other valuation-
related products and services, lien release and document custodial services, default-related products and
services, evidence of title, and banking, trust and wealth management 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, 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.

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.

Revisions and out-of-period adjustments

During the fourth quarter of 2017, the Company identified certain uncollectible balances related to fees
within its title insurance and services segment, which primarily related to reporting periods prior to 2016, that

61

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

should have been previously written off. To correct for this error, the Company recorded an adjustment in the
fourth quarter of 2017, which increased other operating expenses and increased accounts payable and accrued
liabilities by $8.5 million.

During the third quarter of 2017, the Company identified certain title plant assets within its title insurance
and services segment that should have been previously written off, and certain title plant imaging assets that were
misclassified as title plant assets. To correct for these errors, the Company recorded adjustments to net realized
investment gains, depreciation and amortization and title plants and other indexes. The impact of these
adjustments included an increase to depreciation and amortization of $4.7 million, a decrease to net realized
investment gains of $1.8 million and a decrease to title plant and other indexes of $6.5 million.

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
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, 2014 and 2015 in the consolidated statements of equity. The impact
of this revision, which has been consistently applied to all periods presented, included a decrease to retained
earnings of $8.5 million.

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

previously issued consolidated financial statements.

Use of estimates

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

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

Cash equivalents

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

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

Accounts and accrued income receivable

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

Investments

Deposits with banks

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

62

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Debt and equity securities

Debt securities are carried at fair value and consist primarily of investments in obligations of the United
States Treasury, foreign governments, various U.S. and foreign corporations, certain state and political
subdivisions and mortgage-backed securities.

The Company maintains investments in debt securities in accordance with certain statutory requirements for
the funding of statutory premium reserves and state deposits. At December 31, 2017 and 2016, the fair value of
such investments totaled $108.4 million and $110.6 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 are recognized under the effective yield
method and are 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, 2017, 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 any debt
securities before recovery of their amortized cost basis.

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

Expected future cash flows for debt securities are based on qualitative and quantitative factors specific to
each security, including the probability of default and the estimated timing and amount of recovery. The detailed
inputs used to project expected future cash flows may be different depending on the nature of the individual debt
security.

As a result of the Company’s security-level review, the Company did not recognize any other-than-
temporary impairment losses considered to be credit related for the year ended December 31, 2017 and
recognized $0.5 million and $2.2 million of other-than-temporary impairment losses considered to be credit

63

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

related on its debt securities for the years ended December 31, 2016, and 2015, respectively. It is possible that the
Company could recognize additional other-than-temporary impairment
losses on securities it owns at
December 31, 2017 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 by the Company 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 will include 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
losses related to its equity
recorded. The Company did not record any other-than-temporary impairment
securities for the years ended December 31, 2017, 2016 and 2015.

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 recognized impairment losses of
$1.5 million and $2.0 million for the years ended December 31, 2017 and 2015, respectively, and did not record
any impairment losses related to its equity method investments for the year ended December 31, 2016.

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

estimated selling costs.

Notes receivable are carried at cost, less reserves for losses. Loss reserves are established for notes
receivable based upon an estimate of probable losses for the individual notes. A loss reserve is established on an
individual note when it is deemed probable that the Company will be unable to collect all amounts due in
accordance with the contractual terms of the note. The loss reserve is based upon the Company’s assessment of
the borrower’s overall financial condition, resources and payment record; and, if appropriate, the realizable value
of any collateral. These estimates consider all available evidence including the expected future cash flows,

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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 $0.5 million, $5.2 million and $10.9 million for the years ended December 31, 2017, 2016 and
2015, respectively.

Title plants and other indexes

Title plants and other indexes at December 31, 2017 and 2016 included title plants of $526.2 million and
$529.2 million and capitalized real estate data of $42.3 million and $35.1 million, respectively. 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.

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

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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
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.

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For 2017, the Company chose to perform qualitative assessments for each of its reporting units except for its
property and casualty insurance reporting unit, for which it performed a quantitative impairment test. Based on its
quantitative impairment test, the Company determined that its property and casualty insurance reporting unit had a
fair value that was not substantially in excess of its carrying amount. If the Company subsequently determines that
there is impairment to the goodwill related to its property and casualty insurance reporting unit, management does
not expect that it would be material to the Company’s consolidated financial statements. The results of the
Company’s qualitative assessments for each of its other reporting units supported the conclusion that their fair
values were not more likely than not less than their carrying amounts and, therefore, a quantitative impairment test
was not considered necessary. For 2016, the Company chose to perform a quantitative impairment test for all of its
reporting units 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. For 2015, the Company chose to perform a qualitative
assessment, the results of which supported the conclusion that the fair values of the Company’s reporting units were
not more likely than not less than their carrying amounts, and therefore, a quantitative impairment test was not
considered necessary. As a result of the Company’s annual goodwill impairment assessments, the Company did not
record any goodwill impairment losses for 2017, 2016 or 2015.

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 through 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

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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.
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 both the 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 a 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 $117.8 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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
and historical loss experience as applied to the total of new claims incurred. The average cost per home warranty
claim is calculated using the average of the most recent 12 months of claims experience adjusted for estimated
future increases in costs.

Contingent litigation and regulatory liabilities

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

Revenues

Premiums on title policies issued directly by the Company are recognized on the effective date of the title

policy and escrow fees are recorded upon close of the escrow.

Premiums on 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 Company accounts for forfeitures as they occur.

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.

Employee benefit plans

The Company recognizes the underfunded status of its unfunded supplemental benefit plans as a liability on
its consolidated balance sheets. 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 obligations are measured annually as of December 31.

During 2016, the Company terminated its funded defined benefit pension plans and, in 2017, transferred all
remaining benefit obligations relating to the pension plans to a highly rated insurance company. See Note 13
Employee Benefit Plans for further 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

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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 Company assumes and cedes large title insurance risks through reinsurance. Additionally,
the
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, 2017. 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, 2017 and 2016.

Escrow deposits and trust assets

The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits
totaled $7.5 billion and $6.8 billion at December 31, 2017 and 2016, respectively, of which $2.9 billion and
$2.6 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust,
FSB. The escrow deposits held at First American Trust, FSB are temporarily invested in cash and cash
equivalents and debt securities, with offsetting liabilities included in deposits in the accompanying consolidated
balance sheets. The remaining escrow deposits were held at third-party financial institutions.

Trust assets held or managed by First American Trust, FSB totaled $3.7 billion and $3.2 billion at
December 31, 2017 and 2016, 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 $2.6 billion and $2.0 billion
at December 31, 2017 and 2016, 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 February 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance which
permits entities to reclassify stranded tax effects in accumulated other comprehensive income to retained
earnings as a result of the Tax Cuts and Jobs Act enacted by the U.S. federal government on December 22, 2017.
The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018,
with early adoption permitted. The Company elected to adopt this change in accounting principle in the fourth
quarter of 2017 and applied the change as of the beginning of 2017, which resulted in an increase to retained
earnings and a decrease to accumulated other comprehensive income of $4.0 million in 2017 on the Company’s
consolidated statements of equity.

In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased
callable debt securities held at a premium to shorten the amortization period for the premium to the earliest call
date. The updated guidance is intended to more closely align the amortization period of premiums and discounts
to expectations incorporated in market pricing on the underlying securities, and is effective for interim and
annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company
elected to adopt the new guidance in the fourth quarter of 2017, which did not 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. The adoption of this guidance had no impact on
the Company’s consolidated financial statements.

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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. While the adoption of this
guidance did have an impact on the Company’s effective income tax rate for 2017, it did not have a material
impact on the Company’s consolidated financial statements. See Note 11 Income Taxes for further discussion of
the Company’s effective income tax rates. Beginning in 2017, excess tax benefits from share-based
compensation are presented in the consolidated statements of cash flows in cash flows from operating activities
within net change in income tax accounts.

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

Pending Accounting Pronouncements:

In May 2017, the FASB issued updated guidance intended to reduce diversity in practice by clarifying
which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. 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 March 2017, the FASB issued updated guidance intended to improve the presentation of net periodic
pension cost and net periodic postretirement benefit cost
through the disaggregation of the service cost
component from the other components of net benefit cost. 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 January 2017, the FASB issued updated guidance intended to simplify how an entity tests goodwill for
impairment by eliminating Step 2 from the goodwill impairment test. Under the updated guidance, an entity will
perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and
will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value, with the loss recognized limited to the total amount of goodwill allocated to that reporting unit. The
updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, 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 January 2017, the FASB issued updated guidance to clarify the definition of a business with the objective
of providing guidance to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. 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 November 2016, the FASB issued updated guidance intended to reduce the diversity in practice on
presenting restricted cash and restricted cash equivalents in the statement of cash flows. The updated guidance is

73

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 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
losses and requires the
loss impairment methodology with a methodology that reflects expected credit
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 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. Upon adoption of the guidance, cumulative net
unrealized gains, net of taxes, of $40.0 million related to the Company’s investments in equity securities,
previously classified as available-for-sale, were recognized as a cumulative-effect adjustment
to retained
earnings on January 1, 2018.

74

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. In February 2017, the
FASB issued an additional update to the new guidance to clarify the scope of derecognition guidance for
nonfinancial assets and to provide guidance for partial sales of nonfinancial assets. The updated guidance is
effective for interim and annual reporting periods beginning after December 15, 2017. The Company has elected
the new guidance under the modified retrospective approach and, except for certain disclosure
to adopt
requirements, does not expect the new guidance to have a material
impact on its consolidated financial
statements.

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

Investments totaling $131.0 million and $125.8 million were on deposit with state treasurers in accordance

with statutory requirements for the protection of policyholders at December 31, 2017 and 2016, 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, 2017, under such regulations, the maximum amount available to the
Company from its insurance subsidiaries in 2018, without prior approval from applicable regulators, was
dividends of $338.4 million and loans and advances of $96.0 million.

The Company’s principal title insurance subsidiary, First American Title Insurance Company (“FATICO”),
maintained total statutory capital and surplus of $1.2 billion as of December 31, 2017 and 2016. Statutory net
income for the years ended December 31, 2017, 2016 and 2015 was $315.4 million, $150.0 million and
$191.8 million, respectively. FATICO was in compliance with the minimum statutory capital and surplus
requirements as of December 31, 2017.

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 $148.5 million
and $69.6 million at December 31, 2017 and 2016, respectively, than if reported in accordance with NAIC SAP.

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, capitalized software, and premiums and other receivables 90 days past due), reporting of

75

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

bonds at amortized cost, amortization of goodwill, deferral of premiums received as statutory premium reserve,
supplemental reserve (if applicable) and exclusion of the incurred but not reported claims reserve.

NOTE 3. Debt and Equity Securities:

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

(in thousands)

December 31, 2017
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, 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 . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
cost

Gross unrealized

gains

losses

Estimated
fair value

$ 173,049
1,031,146
170,220
212,731
2,172,377
734,409
256,430

$ 2,199
12,185
489
1,061
3,168
11,768
4,145

$ (1,250) $ 173,998
1,035,937
169,488
211,470
2,158,957
743,215
259,619

(7,394)
(1,221)
(2,322)
(16,588)
(2,962)
(956)

$4,750,362

$35,015

$(32,693) $4,752,684

$ 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

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

(in thousands)

December 31, 2017
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Gross unrealized

Cost

gains

losses

Estimated
fair value

$ 19,233
394,439

$

320
54,090

$ (563)
(1,003)

$ 18,990
447,526

$413,672

$54,410

$(1,566)

$466,516

$ 18,926
367,169

$ —
26,034

$(3,344)
(4,700)

$ 15,582
388,503

$386,095

$26,034

$(8,044)

$404,085

Sales of debt and equity securities resulted in realized gains of $35.5 million, $30.7 million and $8.7 million
and realized losses of $18.4 million, $9.7 million and $10.0 million for the years ended December 31, 2017, 2016
and 2015, respectively.

76

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:

(511) $

(1,714)
(972)
(409)

(4,868)
(1,568)
(821)

(in thousands)

December 31, 2017
Debt securities:
U.S. Treasury bonds . . . . . . . . . . . . . . . . $
Municipal bonds . . . . . . . . . . . . . . . . . . .
Foreign government bonds . . . . . . . . . . .
Governmental agency bonds . . . . . . . . . .
Governmental agency mortgage-backed

Less than 12 months

12 months or longer

Total

Estimated
fair value

Unrealized
losses

Estimated
fair value

Unrealized
losses

Estimated
fair value

Unrealized
losses

78,605 $
279,292
98,942
55,707

37,498 $
226,895
6,678
93,737

(739) $ 116,103 $ (1,250)
(7,394)
506,187
(1,221)
105,620
(2,322)
149,444

(5,680)
(249)
(1,913)

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

671,871
171,817
81,525

774,959
60,724
5,697

(11,720) 1,446,830
232,541
(1,394)
87,222
(135)

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

1,437,759
38,742

(10,863) 1,206,188
12,849
(1,041)

(21,830) 2,643,947
51,591

(525)

(16,588)
(2,962)
(956)

(32,693)
(1,566)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,476,501 $(11,904) $1,219,037 $(22,355) $2,695,538 $(34,259)

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

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

635,531
63,044
148,112

— $ — $ 111,748 $ (4,466)
(26,666)
(2,439)
(4,166)

652,016
63,368
148,112

(349)
(68)
—

16,485
324
—

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)
(4,560)
(1,150)

(62,127)
(1,173)

432,349
24,499
8,154

481,811
59,019

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

(881)
(340)

(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)

Based on the Company’s review of its investment securities in an unrealized loss position at December 31,
2017 and 2016, it determined that the losses were primarily the result of changes in interest rates, which were
considered to be temporary, rather than a deterioration in credit quality. The Company does not intend to sell and
it is not more likely than not that the Company will be required to sell these securities prior to recovering their
amortized cost. As such, the Company does not consider these securities to be other-than-temporarily impaired at
December 31, 2017 and 2016.

77

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investments in debt securities at December 31, 2017, by contractual maturities, are as follows:

(in thousands)

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

Municipal bonds

Due in one
year or less

Due after
one
through
five years

Due after
five
through
ten years

Due after
ten years

Total

$ 16,458
$ 16,425

$
$

65,124
64,550

$ 41,014
$ 40,816

$ 50,453
$ 52,207

$ 173,049
$ 173,998

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

$ 62,308
$ 62,311

$ 301,477
$ 302,404

$245,510
$248,683

$421,851
$422,539

$1,031,146
$1,035,937

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

Governmental agency bonds

$ 13,494
$ 13,506

$ 118,166
$ 117,401

$ 21,783
$ 21,963

$ 16,777
$ 16,618

$ 170,220
$ 169,488

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

$ 30,209
$ 30,075

$
$

81,498
80,713

$ 57,941
$ 57,661

$ 43,083
$ 43,021

$ 212,731
$ 211,470

U.S. corporate debt securities

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

$ 23,264
$ 23,323

$ 327,960
$ 329,199

$308,785
$311,998

$ 74,400
$ 78,695

$ 734,409
$ 743,215

Foreign corporate debt securities

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

$ 16,790
$ 16,827

$ 134,522
$ 135,107

$ 92,459
$ 94,252

$ 12,659
$ 13,433

$ 256,430
$ 259,619

Total debt securities excluding mortgage-backed

securities

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

$162,523
$162,467

$1,028,747
$1,029,374

$767,492
$775,373

$619,223
$626,513

$2,577,985
$2,593,727

Total mortgage-backed securities

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

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

$2,172,377
$2,158,957

$4,750,362
$4,752,684

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.

78

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The composition of the investment portfolio at December 31, 2017, 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- or higher

BBB+ to BBB-

Non-Investment Grade

Total

December 31, 2017
Debt securities:
U.S. Treasury bonds . . . . . . $ 173,998
964,855
Municipal bonds . . . . . . . . .
Foreign government

100.0
93.2

$ —
54,255

— $ —
16,827
5.2

— $ 173,998
1,035,937
1.6

100.0
100.0

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

138,417

81.7

25,486

15.0

5,585

3.3

169,488

100.0

Governmental agency

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

211,470

100.0

—

—

—

—

211,470

100.0

Governmental agency
mortgage-backed
securities . . . . . . . . . . . . . 2,158,957

U.S. corporate debt

100.0

—

—

—

—

2,158,957

100.0

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

260,537

35.1

274,340

36.9

208,338

28.0

743,215

100.0

Foreign corporate debt

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

119,599

Total debt securities . . . . . . 4,027,833
—
Preferred stocks . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . $4,027,833

46.1

84.7
—

84.4

110,685

464,766
13,900

$478,666

42.6

9.8
73.2

10.0

29,335

260,085
5,090

11.3

5.5
26.8

259,619

100.0

4,752,684
18,990

100.0
100.0

$265,175

5.6

$4,771,674

100.0

As of December 31, 2017, the estimated fair value of total debt securities included $142.9 million of bank
loans, of which $130.7 million were non-investment grade; $103.5 million of high yield corporate debt securities,
all of which were non-investment grade; and $81.0 million of emerging market debt securities, of which
$9.1 million were non-investment grade.

79

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, 2017, 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- or higher

BBB+ to BBB-

Non-Investment Grade

Total

December 31, 2017
Debt securities:
U.S. Treasury bonds . . . . . . $ 116,103
Municipal bonds . . . . . . . . .
491,801
Foreign government

100.0
97.1

$ —
12,075

—
2.4

$ —
2,311

— $ 116,103
506,187
0.5

100.0
100.0

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

90,829

86.0

12,393

11.7

2,398

2.3

105,620

100.0

Governmental agency

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

149,444

100.0

—

—

—

—

149,444

100.0

Governmental agency
mortgage-backed
securities . . . . . . . . . . . . . 1,446,830

U.S. corporate debt

100.0

—

—

—

—

1,446,830

100.0

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

75,173

32.3

115,951

49.9

41,417

17.8

232,541

100.0

Foreign corporate debt

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

40,063

Total debt securities . . . . . . 2,410,243
—
Preferred stocks . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . $2,410,243

46.0

91.1
—

90.8

40,688

181,107
7,208

46.6

6.8
63.1

6,471

52,597
4,219

7.4

2.1
36.9

87,222

100.0

2,643,947
11,427

100.0
100.0

$188,315

7.1

$56,816

2.1

$2,655,374

100.0

As of December 31, 2017, the estimated fair value of total debt securities in an unrealized loss position
included $25.9 million of bank loans, of which $25.2 million were non-investment grade; $22.6 million of high
yield corporate debt securities, all of which were non-investment grade; and $23.1 million of emerging market
debt securities, of which $2.5 million were non-investment grade.

The credit ratings in the above tables reflect published ratings obtained from globally recognized securities
rating agencies. 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- or higher” category because the payments of principal
and interest are guaranteed by the governmental agency that issued the security.

80

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,

2017

2016

(in thousands)

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

$

25,983
255,389
247,022
621,203

$

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

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

1,149,597
(710,028)

1,072,292
(638,242)

$ 439,569

$ 434,050

NOTE 5. Goodwill:

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

December 31, 2017 and 2016, is as follows:

Title
Insurance
and Services

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

$ 917,577
53,564
(489)

Specialty
Insurance

(in thousands)
$46,765
—
—

Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . .
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

970,652
91,516
4,370
(298)

46,765
—
—
—

Total

$ 964,342
53,564
(489)

1,017,417
91,516
4,370
(298)

Balance as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . .

$1,066,240

$46,765

$1,113,005

For further discussion about

the Company’s acquisitions in 2017 and 2016, see Note 20 Business

Combinations.

81

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,

2017

2016

(in thousands)

Finite-lived intangible assets:

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

$106,086
11,509
9,229
28,956
2,840

$ 78,542
10,007
6,472
16,038
2,840

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

158,620
(75,591)

113,899
(51,885)

83,029

62,014

Indefinite-lived intangible assets:

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

16,884

16,884

$ 99,913

$ 78,898

Amortization expense for finite-lived intangible assets was $28.1 million, $15.4 million and $9.3 million for

the years ended December 31, 2017, 2016 and 2015, respectively.

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

Year

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$21,810
$15,203
$10,577
$ 7,369
$ 6,719

NOTE 7. Deposits:

Deposit accounts are summarized as follows:

Escrow accounts:

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

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

December 31,

2017

2016

(in thousands, except
percentages)

$2,058,596
879,252
2,937,848
132,718

$1,961,488
673,944
2,635,432
144,046

$3,070,566

$2,779,478

Weighted average interest rate:

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

0.10%

0.10%

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

82

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,

2017

2016

2015

$1,025,863

(in thousands)
$ 983,880

$1,011,780

446,500
3,910

450,410

240,468
231,579

472,047

24,707

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)

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

$1,028,933

$1,025,863

$ 983,880

Current year payments, net of recoveries, include $225.6 million, $211.3 million and $198.6 million for the
years ended December 31, 2017, 2016 and 2015, respectively, that primarily relate to the Company’s specialty
insurance segment. Prior year payments, net of recoveries, include $46.1 million, $41.4 million and $23.1 million
for the years ended December 31, 2017, 2016 and 2015, respectively, that relate to the Company’s specialty
insurance segment.

“Other” primarily includes foreign currency translation gains and losses, ceded reinsurance claims and
assets acquired in connection with claim settlements. 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, 2017 and 2016.

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

fees, was 4.0%, 5.5% and 6.6% for the years ended December 31, 2017, 2016 and 2015, respectively.

The current year rate of 4.0% reflects the ultimate loss rate for the current policy year and no change in the

loss reserve estimates for prior policy years.

As of December 31, 2017, the IBNR claims reserve for the title insurance and services segment was
$875.7 million, which reflected management’s best estimate. The Company’s internal actuary determined a range
of reasonable estimates of $716.3 million to $910.9 million. The range limits are $159.4 million below and
$35.2 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 5.5% reflected an ultimate loss rate of 4.5% for policy year 2016 and a $42.6 million
net increase in loss reserve estimates for prior policy years. The increase in loss reserve estimates for prior policy

83

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 was 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 believed its
claims reserve attributable to large title claims was reasonable, this uncertainty increased the potential for
adverse loss development.

The 2015 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.

As of December 31, 2017, the projected ultimate loss ratios for policy years 2017, 2016 and 2015 were

4.0%, 4.2% and 3.8%, 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,
2017

December 31,
2016

83,094
875,724

958,818
70,115

8.1% $
83,805
85.1% 888,126

93.2% 971,931
53,932
6.8%

8.1%
86.6%

94.7%
5.3%

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

$1,028,933

100.0% $1,025,863

100.0%

Specialty Insurance Segment

The following reflects information about incurred and paid claims development for the Company’s specialty
insurance segment as of December 31, 2017, net of reinsurance, as well as cumulative claims frequency, by
claims event, and the total of incurred but not reported claims plus expected development on reported claims
included with the net incurred claims amounts.

84

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The information below about incurred and paid claims development for the years ended December 31, 2008

to 2015, is presented as supplementary information.

Incurred claims and allocated claims adjustment expenses, net of reinsurance

December 31, 2017

2008*

2009*

2010*

2011*

2012*

2013*

2014*

2015*

2016

2017

Years ended December 31,

Total of
IBNR
liabilities
plus
expected
development
on reported
claims

Cumulative
number of
reported
claims

(in thousands)

$163,829 $161,035 $160,868 $161,332 $160,803 $160,605 $160,455 $160,423 $160,421 $ 160,354
139,186
141,154 139,580 139,663 139,266 138,936 139,090 139,191 139,216
140,308
140,621 139,966 139,991 139,639 140,128 140,641 140,353
149,488
148,395 149,076 149,768 149,486 149,763 149,552
160,911
157,287 158,981 159,918 160,579 160,517
184,668
182,858 184,419 185,244 184,826
191,025
190,985 190,738 191,120
225,977
221,617 225,754
249,358
245,859
267,392

$—
—
—
—
13
67
336
796
2,473
10,236

605
605
606
641
692
762
789
867
971
1,013

$1,868,667

Accident
Year

2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Total

* Amounts unaudited.

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

Years ended December 31,

2008*

2009*

2010*

2011*

2012*

2013*

2014*

2015*

2016

2017

$131,251

$155,585
113,550

$158,695
134,606
113,513

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

(in thousands)

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

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

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

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

$160,421
139,186
140,302
149,495
159,740
183,957
188,117
217,618
205,857

Accident
Year

2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

$ 160,354
139,186
140,304
149,485
160,268
184,473
189,525
223,045
243,111
220,218

$1,809,969
7

$

58,705

Total
All outstanding liabilities before 2008, net of reinsurance

Liabilities for claims and claims adjustment expenses, net of reinsurance

* Amounts unaudited.

85

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, 2017, is as follows:

December 31, 2017

(in thousands)

Liability for unpaid claims and claim adjustment expenses, net of

reinsurance:

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

$

58,705

Reinsurance recoverable on unpaid claims:

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

Unallocated claims adjustment expenses:

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

Insurance lines other than short-duration:

10,151

1,259

Title insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

958,818

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

$1,028,933

The following reflects supplementary information about average historical claims duration for the

Company’s specialty insurance segment as of December 31, 2017:

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

82.0%

15.1%

1.6%

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 3.32% and
2.52% at December 31, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trust deed notes with maturities through 2023, collateralized by land and buildings with
net book values of $46,478 and $47,846 at December 31, 2017 and 2016, respectively,
weighted-average interest rate of 5.27% and 5.31%, at December 31, 2017 and 2016,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

December 31,

2017

2016

(in thousands, except
percentages)

$300,000
250,000

$300,000
250,000

160,000

160,000

22,725

26,646

interest rate of 4.70% and 5.26% at December 31, 2017 and 2016, respectively . . . . . . .

3,707

4,269

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

736,432
(560)
(3,062)

740,915
(655)
(3,567)

$732,810

$736,693

The weighted-average interest rate for the Company’s notes and contracts payable was 4.24% and 4.10% at

December 31, 2017 and 2016, respectively.

86

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

in its capacity as
administrative agent and the lenders party thereto. The credit agreement is comprised of a $700.0 million
revolving credit facility. Unless terminated earlier, the revolving loan commitments under the credit agreement
will terminate on May 14, 2019. The obligations of the Company under the credit agreement are neither secured
nor guaranteed. Proceeds under the credit agreement may be used for general corporate purposes. At
December 31, 2017, outstanding borrowings under the facility totaled $160.0 million at an interest rate of 3.32%.

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, 2017, 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

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Annual
maturities

(in thousands)

$

4,612
163,984
3,595
3,479
3,590
553,550

$732,810

87

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,

2017

2016

2015

(in thousands)

Interest on:

Cash equivalents and deposits with banks . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on equity securities . . . . . . . . . . . . . . .
Deferred compensation plan assets . . . . . . . . . . . . . . .
Equity in earnings of affiliates, net
. . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

7,321
104,458
22,221
12,925
14,211
3,785
607

$

3,989
89,920
7,818
12,684
5,861
8,173
130

$

3,822
76,822
7,560
11,751
(5,454)
7,800
49

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

165,528
(3,126)

128,575
(2,441)

102,350
(1,797)

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

$162,402

$126,134

$100,553

NOTE 11.

Income Taxes:

2017 Tax Reform

On December 22, 2017, comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the
“Tax Reform Act”) was signed into law. The Tax Reform Act amends the Internal Revenue Code to reduce U.S.
tax rates and modify policies, credits and deductions for individuals and businesses. The Company recorded
$114.1 million in estimated net tax benefits to net income for 2017 related to the Tax Reform Act, as follows:

• Remeasurement of Deferred Taxes. The Tax Reform Act permanently reduces the U.S. federal corporate
income tax rate from 35% to 21%, effective for tax years beginning after 2017. GAAP requires an
adjustment to deferred taxes as a result of a change in the corporate tax rate in the period that the change
is enacted, with the change recorded to the current year tax provision. Accordingly, the Company has
remeasured its deferred tax assets and liabilities at the new tax rate and recorded a one-time noncash tax
benefit of $130.9 million to deferred income taxes for the year ended December 31, 2017. This benefit
is reflected in the Company’s reduced effective tax rate for the year.

•

Immediate Expensing of Assets. The Tax Reform Act allows taxpayers to immediately expense the
entire cost of qualified tangible property placed in service after September 27, 2017. As a result, the
Company has recorded a tax benefit of $4.7 million for the year ended December 31, 2017 (included in
the Remeasurement of Deferred Taxes discussed above), and expects to continue to expense qualified
property in future years. This provision will be phased out from 2023 through 2026.

• Deemed Repatriation of Foreign Earnings. In connection with the move by the U.S. to a partial
territorial tax system, the Tax Reform Act provides for the exclusion of foreign-sourced dividends
received by a U.S. corporation from its foreign-owned corporations beginning in 2018. In addition, the
Tax Reform Act imposes a toll charge in 2017 on the deemed repatriation of a U.S. shareholder’s
pro-rata share of certain foreign subsidiaries’ post-1986 accumulated earnings. The toll charge assesses
an effective tax rate of 15.5% on cash and other liquid assets of U.S.-owned foreign corporations, while
subjecting all other property of such corporations to an effective tax rate of 8.0%, and allows for

88

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

available foreign tax credits to reduce the resulting toll charge. Taxpayers may elect to pay this tax
liability over eight years on an interest-free basis. The Company has accrued an estimated toll charge
liability of $1.8 million, reflected in current taxes payable as of December 31, 2017, and will elect to
pay the tax over eight years.

•

Investment of Foreign Earnings. For years prior to 2017, the Company asserted that earnings from
foreign affiliates would be indefinitely reinvested into those foreign businesses. Accordingly, deferred
taxes were not provided on outside basis differences in the Company’s investments in foreign
subsidiaries. With the transition by the U.S. to a partial territorial tax system, including the one-time
deemed repatriation of historical foreign earnings and a participation exemption for the distribution of
future foreign earnings, the Company has determined that it will no longer assert the indefinite
reinvestment of foreign earnings. Accordingly, estimated deferred taxes of $15.0 million have been
future
provided for anticipated foreign withholding and U.S. state taxes due on hypothetical
distributions of earnings from foreign subsidiaries.

Other provisions of the Tax Reform Act that are not expected to materially impact the Company’s
consolidated financial statements include, among others, the elimination of the performance-based exception to
the limitation on the deduction of certain executive compensation in excess of $1.0 million, elimination of the tax
deduction for entertainment expenses, a limitation on the deductibility of net interest expense, the repeal of the
corporate alternative minimum tax, changes to net operating loss rules, and various international provisions; all
effective for years beginning after 2017. In addition, for years beginning after 2017, the computation of tax-basis
discounted unpaid loss reserves for title insurance companies is modified to incorporate a discount rate based on
a corporate bond yield curve and extended loss payment patterns. While this change is likely to reduce future tax
deductions claimed by the Company in connection with its title insurance loss reserves, no material impact to its
consolidated financial statements is expected.

The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 on December 22, 2017,
which provides for a one-year measurement period that allows businesses time to evaluate the financial statement
implications of the Tax Reform Act. Companies are required to disclose in financial filings whether their
accounting for the income tax effects of the Tax Reform Act is complete, incomplete but reasonably estimated,
or incomplete with no estimate provided. The measurement period allows businesses to gather the information
necessary to prepare and analyze the income tax accounting effects of the Tax Reform Act on financial
statements issued during the measurement period. During the measurement period, an entity may need to reflect
adjustments to provisional amounts previously recorded after obtaining, preparing, or analyzing additional
information about facts and circumstances that existed as of the enactment date that, if known, would have
affected the income tax effects initially reported as provisional amounts. Such adjustments to provisional
amounts included in an entity’s financial statements during the measurement period would be included in income
from continuing operations as an adjustment to income tax expense or benefit in the reporting period the amounts
are determined. As noted above, the Company has recorded in income tax expense for 2017 the estimated impact
of various provisions of the Tax Reform Act. The ultimate impact of the Tax Reform Act on the Company’s
consolidated financial statements may differ materially from the amounts estimated herein due to further
refinement of the Company’s calculations, changes in interpretations and assumptions that the Company has
made, guidance that may be issued by income taxing authorities and regulatory bodies, and actions the Company
may take as a result of the Tax Reform Act. The Company anticipates completing its tax accounting for the Tax
Reform Act during the one-year measurement period, and will record and disclose any adjustments made to its
initial estimates during that time frame.

89

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2017, 2016 and 2015, domestic and foreign pretax income from
continuing operations before noncontrolling interests were $391.4 million and $53.9 million, $416.5 million and
$61.1 million, and $383.5 million and $49.3 million, respectively.

Income taxes are summarized as follows:

Year ended December 31,

2017

2016

2015

(in thousands)

Current:

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

$ 116,400
9,382
11,533

$ 24,208
1,943
10,806

$ 94,036
3,636
10,589

Deferred:

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

137,315

36,957

108,261

(104,062)
(10,724)
939

(113,847)

91,190
3,753
2,205

97,148

33,446
3,413
(1,225)

35,634

$ 23,468

$134,105

$143,895

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

reconciliation of these differences is as follows:

Year ended December 31,

2017

2016

2015

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax reform impact
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted foreign earnings . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 155,866
(872)
(3,482)
(6,163)
—

(129,139)
14,997
(7,739)

(in thousands, except percentages)
35.0% $167,153
(0.2)
3,703
(10,512)
(0.8)
(7,983)
(1.3)
(12,265)
—
(29.0)
3.3
(1.7)

35.0% $151,468
4,581
0.8
1,094
(2.2)
(7,111)
(1.7)
(1,710)
(2.6)

— —
— —

(5,991)

(4,427)

(1.2)

— —
— —

(1.1)

35.0%
1.1
0.3
(1.6)
(0.4)

$ 23,468

5.3% $134,105

28.1% $143,895

33.3%

The Company’s effective income tax rates (income tax expense as a percentage of income before income
taxes) were 5.3% for 2017, 28.1% for 2016 and 33.3% for 2015. 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. The Company’s effective tax rate for 2017 also reflects the estimated
impact of the Tax Reform Act, state tax benefits relating to the termination of the Company’s pension plan, and
the release of reserves relating to tax positions taken on prior year tax returns. In addition, the Company’s
effective tax rate for 2017 reflects the adoption of new accounting guidance related to the accounting for share-

90

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

based payment transactions, which requires, among other items, that all excess tax benefits and tax deficiencies
associated with share-based payment transactions be recorded in income tax expense rather than in additional
paid-in capital, as previously required. The impact to the Company of adopting this guidance was a reduction in
income tax expense of $3.4 million. See Note 1 Basis of Presentation and Significant Accounting Policies for
further discussion of the new guidance. The Company’s effective tax rate for 2016 reflects the resolution of
certain tax authority examinations and tax credits claimed in 2016 and prior years. The Company’s effective tax
rate for 2015 includes a benefit for the release of valuation allowances previously provided against certain
foreign net operating losses and other deferred tax assets.

The primary components of temporary differences that give rise to the Company’s net deferred tax liability

are as follows:

December 31,

2017

2016

(in thousands)

Deferred tax assets:

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

$

7,766
86,519
7,191
1,372
22,600
13,914
—
7,976
5,673

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

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

Deferred tax liabilities:

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

153,011
(10,333)

236,135
(8,049)

142,678

228,086

204,863
104,323
3,343
11,656
14,997

339,182

320,884
121,812
7,511
—
—

450,207

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

$196,504

$222,121

The decrease in net deferred tax liability is primarily a result of applying the recently enacted U.S. corporate
tax rate of 21% to deferred tax balances as of December 31, 2017. Balances as of December 31, 2016 were
computed using the 35% rate then in effect.

The exercise of stock options and vesting of RSUs represent a tax benefit that has been reflected as a
reduction of income taxes payable and a reduction of income tax expense for the year ended December 31, 2017,
and an increase to equity for the year ended December 31, 2016. The benefits recorded were $3.4 million for the
years ended December 31, 2017 and 2016.

91

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2017 and 2016, the Company had a net payable to CoreLogic of
$15.0 million and $16.3 million, respectively, related to tax matters prior to the spin-off. These amounts are
included in the Company’s consolidated balance sheets in accounts payable and accrued liabilities. The decrease
during the current year was primarily due to payments made for tax matters prior to the spin-off.

At December 31, 2017, the Company had available a foreign tax credit carryover of $8.0 million. The

Company expects to utilize this credit within the carryover period.

At December 31, 2017, the Company had available net operating loss carryforwards for income tax
purposes totaling $101.6 million, consisting of federal, state and foreign losses of $0.1 million, $57.5 million and
$44.0 million, respectively. Of the aggregate net operating losses, $29.9 million has an indefinite expiration and
the remaining $71.7 million expires at various times beginning in 2018. The Company carries a valuation
allowance of $10.3 million against its deferred tax assets. Of this amount, $9.3 million relates to net operating
losses; the remaining $1.0 million relates to other foreign deferred tax assets. The year-over-year increase in the
overall valuation allowance is primarily due to additional state and foreign net operating losses incurred in 2017
that are not expected to be realized.

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 Company’s ability or failure to achieve forecasted taxable income in the applicable
taxing jurisdictions could affect the ultimate realization of its 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, 2017, 2016 and 2015, the liability for income taxes associated with uncertain tax
positions was $12.8 million, $18.1 million and $23.8 million, respectively. The net decreases in the liabilities
during 2017, 2016 and 2015 were primarily attributable to activity related to examinations conducted by various
taxing authorities. The liabilities could be reduced by $3.7 million, $5.7 million and $3.4 million as of
December 31, 2017, 2016, and 2015, respectively, due to offsetting tax benefits associated with the correlative
effects of potential adjustments, including timing adjustments and state income taxes. The net amounts of
$9.1 million, $12.4 million and $20.4 million as of December 31, 2017, 2016 and 2015, respectively, if
recognized, would favorably affect the Company’s effective tax rate.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended

December 31, 2017, 2016 and 2015 is as follows:

Unrecognized tax benefits—beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross decreases—prior period tax positions . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross increases—current period tax positions . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2017

2016

2015

$18,100
(1,000)
—
(4,300)

(in thousands)
$23,800
(7,100)
1,400
—

$24,100
(800)
500
—

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

$12,800

$18,100

$23,800

92

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2017, 2016 and 2015, the Company had accrued
$5.3 million, $4.1 million and $9.7 million, respectively, of interest and penalties (net of tax benefits of
$1.4 million, $1.8 million and $4.1 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,
income tax
Canada, India and the United Kingdom. During 2016,
examinations for calendar years 2005 through 2013. The Company is generally no longer subject to U.S. federal,
state or 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 that 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 taxing 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,

2017

2016

2015

(in thousands, except per share data)

Numerator

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

$423,049

$342,993

$288,086

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

—

—

321

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

$423,049

$342,993

$287,765

Denominator

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

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

111,668
767

112,435

110,548
608

111,156

108,427
1,399

109,826

Net income per share attributable to the Company’s

stockholders

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

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

$

$

3.79

3.76

$

$

3.10

3.09

$

$

2.65

2.62

93

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2017 and 2015, 2 thousand and 6 thousand RSUs, respectively, were
excluded from the weighted-average diluted common shares outstanding due to their antidilutive effect. For the
year ended December 31, 2016, no stock options or RSUs had an antidilutive effect on weighted-average diluted
common shares outstanding.

NOTE 13. Employee Benefit Plans:

The First American Financial Corporation 401(k) Savings Plan (the “Savings Plan”) allows for employee-
elective contributions up to the maximum amount as determined by the Internal Revenue Code. The Company
makes discretionary contributions to the Savings Plan based on profitability, as well as the contributions of
participants. Effective July 1, 2015, participants in the Savings Plan can no longer make additional investments
in common stock of the Company. The Savings Plan held 2,428,000 shares and 2,695,000 shares of the
Company’s common stock, representing 2.2% and 2.5% of the Company’s total common shares outstanding at
December 31, 2017 and 2016, 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, known as a “Rabbi Trust.” At December 31, 2017 and
2016, the value of the assets in the Rabbi Trust of $92.7 million and $78.9 million, respectively, and the unfunded
liabilities of $97.2 million and $82.5 million, respectively, were included in the consolidated balance sheets in other
assets and pension costs and other retirement plans, respectively.

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.

During 2016, the Company, and a subsidiary of the Company, terminated their funded defined benefit
pension plans. Also, during 2016, the Company made additional cash contributions of $84.8 million above
scheduled amounts and provided lump sum distributions to certain participants from pension plan assets totaling
$127.2 million, for which the Company recognized $66.3 million in settlement costs. During 2017, the Company
made cash contributions of $34.0 million to fully fund its pension obligation, completed the transfer of all
remaining benefit obligations related to the pension plans to a highly rated insurance company, and recognized
$152.4 million in settlement costs in the consolidated statements of income.

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”.

94

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The principal components of employee benefit costs are as follows:

Year ended December 31,

2017

2016

2015

(in thousands)

Expense:

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

$ 34,520
162,368
12,705
17,595

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

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

$227,188

$145,720

$77,122

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,

2017

2016

Defined
benefit
pension
plans

Unfunded
supplemental
benefit plans

Defined
benefit
pension
plans

Unfunded
supplemental
benefit plans

(in thousands)

Change in projected benefit obligation:

Benefit obligation at beginning of year . . . . . . . . . . . .
Service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 315,108
—
4,911
8,560
(318,592)
(9,987)

$ 251,204
734
8,350
11,761
—
(13,521)

$ 416,416
—
15,532
33,845
—

(150,685)

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

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

—

258,528

315,108

251,204

Change in plan assets:

Fair value of plan assets at beginning of year
. . . . . . .
Actual returns on plan assets . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

291,760
2,859
33,960
(318,592)
(9,987)

—
—
13,521
—
(13,521)

329,987
4,244
108,214
—

(150,685)

—
—
13,860
—
(13,860)

Fair value of plan assets at end of year

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

—

—

291,760

—

Reconciliation of funded status:

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

Amounts recognized in the consolidated balance sheet:

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

Amounts recognized in accumulated other comprehensive

loss:

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

Accumulated benefit obligation at end of year

. . . . . . . . . .

$

$

$

$

$

— $(258,528)

$ (23,348)

$(251,204)

— $(258,528)

$ (23,348)

$(251,204)

— $ 101,596
(12,429)
—

$ 157,659
(4,109)

$ 97,636
(16,607)

— $ 89,167

$ 153,550

$ 81,029

— $ 258,528

$ 315,108

$ 251,204

95

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

benefit plans included the following components:

Expense:

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

Year ended December 31,

2017

2016

2015

(in thousands)

$

734
13,261
(4,740)
17,742
(4,312)
152,388

$

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

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

$175,073

$102,521

$ 35,984

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 $4.8 million and a credit of $4.2 million, respectively.

Weighted-average discount rate assumptions used to determine net periodic benefit costs for the years ended

December 31, 2017 and 2016, were as follows:

December 31,

2017

2016

Unfunded supplemental benefit plans

Discount rate for projected benefit obligation . . . . . . . . . . . . . . . . . . . . . .
Discount rate for service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate for interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.03%
4.32%
3.43%

4.33%
4.69%
3.56%

Weighted-average discount

rate assumption used to determine the projected benefit obligation at

December 31, 2017 and 2016, was as follows:

December 31,

2017

2016

Unfunded supplemental benefit plans

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

3.61%

4.03%

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

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

The Company expects to make cash contributions of $14.3 million to its unfunded supplemental benefit

plans during 2018.

96

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Benefit payments, which reflect expected future service, as appropriate, are expected to be made as follows:

Year

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Five years thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$14,266
$14,949
$15,335
$15,698
$15,942
$81,522

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.
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 values 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

97

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 values. 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. Certain of the Company’s 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.

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.

98

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

December 31, 2017 and 2016:

(in thousands)

December 31, 2017
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 173,998
1,035,937
169,488
211,470
2,158,957
743,215
259,619

4,752,684

$ — $ 173,998
1,035,937
169,488
211,470
2,158,957
700,347
257,953

—
—
—
—
—
—

$ —
—
—
—
—
42,868
1,666

—

4,708,150

44,534

18,990
447,526

18,990
447,526

466,516

466,516

—
—

—

—
—

—

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

$5,219,200

$466,516

$4,708,150

$44,534

(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

There were no transfers between Levels 1 and 2 during the years ended December 31, 2017 and 2016.
Transfers into or out of the Level 3 category occur when unobservable inputs become more or less significant to
the fair value measurement. For the years ended December 31, 2017 and 2016, transfers between Level 2 and
Level 3 were based on market liquidity and related transparency of pricing and associated observable inputs for

99

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

certain of the Company’s corporate debt securities. 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, 2017 and 2016:

(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

December 31, 2017

December 31, 2016

U.S.
corporate
debt
securities

Foreign
corporate
debt
securities

Total

U.S.
corporate
debt
securities

Foreign
corporate
debt
securities

Total

$ 46,665
7,991
(14,472)

$ 6,268
—
(1,112)

$ 52,933
7,991
(15,584)

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

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

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

(172)

18

(154)

(120)

(35)

(155)

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

(300)
26,399
(7,606)
(15,637)

(52)
1,847
(1,737)
(3,566)

(352)
28,246
(9,343)
(19,203)

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

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

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

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

$ 42,868

$ 1,666

$ 44,534

$ 46,665

$ 6,268

$ 52,933

Financial instruments not measured at fair value

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

following methods and assumptions:

Cash and cash equivalents

The carrying amount for cash and cash equivalents is a reasonable estimate of fair value due to the short-

term maturity of these investments.

Deposits with banks

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

remaining maturities, where applicable.

Notes receivable, net

The fair value of notes receivable, net is estimated based on current market rates being offered for notes

with similar maturities and credit quality.

Deposits

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

nature of these liabilities.

100

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Notes and contracts payable

The fair value of notes and contracts payable 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, 2017 and 2016:

(in thousands)

December 31, 2017
Assets:

Carrying
Amount

Estimated fair value

Total

Level 1

Level 2

Level 3

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

$1,387,226
41,335
$
7,066
$

$1,387,226
41,259
$
6,798
$

$1,387,226
$
6,846
$

$ — $ —
$ —
$ 34,413
— $ — $6,798

Liabilities:

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

$3,070,566
$ 732,810

$3,070,566
$ 755,670

$3,070,566
$

$ — $ —
$3,843

— $751,827

(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

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, 2017, 3.3 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 its effective date unless
previously canceled 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 390,000 and 371,000 shares issued in
connection with this plan for the years ended December 31, 2017 and 2016, respectively. At December 31, 2017,
there were 2.4 million shares reserved for future issuances.

101

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the costs associated with the Company’s share-based compensation plans:

Year ended December 31,

2017

2016

2015

(in thousands)

Expense:

RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . .

$34,059
263
3,077

$31,120
271
2,734

$21,761
271
2,307

$37,399

$34,125

$24,339

The following table summarizes RSU activity for the year ended December 31, 2017:

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

Unvested at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

1,510
930
(1,016)
(13)

Unvested at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,411

Weighted-average
grant-date
fair value

$33.38
39.56
34.47
35.47

$36.66

As of December 31, 2017, there was $26.6 million of total unrecognized compensation cost related to
unvested RSUs that is expected to be recognized over a weighted-average period of 2.2 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, 2017, 2016 and 2015 was $33.7 million,
$25.9 million and $20.3 million, respectively.

The following table summarizes stock option activity for the year ended December 31, 2017:

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

Number
outstanding

Weighted-
average
exercise price

Weighted-
average
remaining
contractual term

Aggregate
intrinsic
value

Balance at December 31, 2016 . . . . . . . . . . . . . . .
Exercised during 2017 . . . . . . . . . . . . . . . . . . . . . .

132
(66)

Balance at December 31, 2017 . . . . . . . . . . . . . . .

Vested and expected to vest at December 31, 2017

Exercisable at December 31, 2017 . . . . . . . . . . . . .

66

66

66

$27.66
27.66

$27.66

$27.66

$27.66

6.0 years

6.0 years

6.0 years

$1,883

$1,883

$1,883

As of December 31, 2017, there was no unrecognized compensation cost related to unvested stock options

of the Company.

The total intrinsic value of stock options exercised for the years ended December 31, 2017 and 2015 was
respectively. No stock options were exercised during the year ended
$1.0 million and $9.7 million,
December 31, 2016. 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.

102

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2017. Purchases may be made from time to time by the Company in the open market at prevailing
market prices or in privately negotiated transactions. The Company did not repurchase any shares of its common
stock during the year ended December 31, 2017 and, as of December 31, 2017, 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.

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, 2017, 2016 and 2015:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

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

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

$ 10,911
(42,205)
—
—
—
—
14,893

(16,401)
(15,702)
—
—
—
—
—
5,343

(26,760)
86,834
—
—
—
—
—
(23,271)

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

—
(36,822)
—
—
—
—

(57,242)
—
(6,334)
—
—
—
—
—

(63,576)
—
24,744
—
—
—
—
—

—
—
10,743
32,645
(4,163)
(15,002)

(165,357)

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

(140,057)

—
—
(20,407)
17,742
(4,312)
152,388
(70,814)

$(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)

(230,393)
86,834
24,744
(20,407)
17,742
(4,312)
152,388
(94,085)

Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .

$ 36,803

$(38,832) $ (65,460)

$ (67,489)

103

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, 2017, 2016

and 2015, are as follows:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

(in thousands)

2017
Allocated to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to noncontrolling interests . . . . . . . . . . . . . . . . .

$ 36,783
20

$(38,832) $ (65,460)

—

—

$ (67,509)
20

Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .

$ 36,803

$(38,832) $ (65,460)

$ (67,489)

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)

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

years ended December 31, 2017, 2016 and 2015:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Total
other
comprehensive
income (loss)

(in thousands)

Year ended December 31, 2017

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

$101,553
(14,719)
(23,271)

$ 24,744

—
—

$ (20,407)
165,818
(70,814)

$105,890
151,099
(94,085)

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

$ 63,563

$ 24,744

$ 74,597

$162,904

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)

104

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)

2017

2016

2015

Unrealized gains (losses) on securities:

Net realized gains (losses) on sales of

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

$ 14,719

$ 18,804

$ (2,147)

Net other-than-temporary impairment

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

—

(485)

(2,249)

Pretax total

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

$ 14,719

$ 18,319

$ (4,396)

Tax effect

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

$

(5,259) $ (7,007) $ 1,551

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

$ (17,742) $(28,282) $(32,645)(1)
4,163 (1)
4,844
— (1)
(66,337)

4,312
(152,388)

Pretax total

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

$(165,818) $(89,775) $(28,482)

Tax effect

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

$ 67,322

$ 34,339

$ 10,893

(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, 2017, are as follows:

Year

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$ 83,684
73,524
61,776
47,348
33,292
67,459

$367,083

Total rental expense for all operating leases,

including month-to-month rentals, was $91.0 million,

$91.4 million and $93.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

105

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

• Chavez v. First American Specialty Insurance Company, filed on June 29, 2017 and pending in the

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

• 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,

106

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

•

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,

Tenefufu vs. First American Specialty Insurance Company, filed on June 1, 2017, pending in the
Superior Court of the State of California, County of Sacramento, and

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

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

All of these lawsuits, except Kaufman and Sjobring, are putative class actions for which a class has not been
certified. For the reasons described above, the Company has not yet been able to assess the probability of
loss or estimate the possible loss or the range of loss 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
wealth management 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

107

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

with the taxing authority are ongoing, the Company believes that the guidance may result in an assessment. The
amount, if any, of such assessment is not currently known, and any such assessment would be subject to
negotiation. In the event that the Company disagrees with the ultimate assessment, the Company intends to avail
itself of avenues of appeal. While the Company believes it is reasonably likely that the Company would prevail
on the merits, a loss associated with the matter is possible. In light of the foregoing, the Company is not currently
able to reasonably estimate a loss or range of loss associated with the matter. While such a loss could be material
to the Company’s operating results in any particular period if an unfavorable outcome results, the Company does
not believe that this matter will have a material adverse effect on the Company’s overall financial condition or
liquidity.

The Company and its subsidiaries also are involved in numerous ongoing routine legal and regulatory
proceedings related to their operations. With respect to each of these proceedings, the Company has determined
either that a loss is not reasonably possible or that the estimated loss or range of loss, if any, is not material to the
consolidated financial statements as a whole.

NOTE 20. Business Combinations:

During the years ended December 31, 2017 and 2016, the Company completed acquisitions for an aggregate
purchase price of $91.1 million and $115.3 million, respectively. These acquisitions have been included in the
Company’s title insurance and services segment.

NOTE 21. Segment Financial Information:

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

•

•

The Company’s title insurance and services segment issues title insurance policies on residential and
commercial property in the United States and offers similar or related products and services
internationally. This segment also provides closing and/or escrow services; accommodates tax-deferred
exchanges of real estate; provides products, services and solutions involving the use of real property
related data designed to mitigate risk or otherwise facilitate real estate transactions; maintains, manages
and provides access to title plant records and images; and provides appraisals and other valuation-
related products and services, lien release and document custodial services, default-related products and
services, evidence of title, and banking, trust and wealth management 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, 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.

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

108

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Selected financial

information about

the Company’s operations, by segment,

for

the years ended

December 31, 2017, 2016 and 2015, 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

2017
Title Insurance and

Services . . . . . . . . . . $5,293,156
465,020
15,326
(1,139)

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

$121,540
6,351
162
—

$5,772,363

$128,053

2016
Title Insurance and

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

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

$ 93,069
5,593
385
—

$5,575,846

$ 99,047

2015
Title Insurance and

Services . . . . . . . . . . $4,788,110
393,757
(5,955)
(456)

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

$ 80,359
4,775
462
—

$5,175,456

$ 85,596

$ 642,364 $8,669,936 $ 56,583

36,908
(233,941)

—

592,405
429,128
(118,247)

—
—
—

$128,751
7,913
—
—

$ 445,331 $9,573,222 $ 56,583

$136,664

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

40,074
(161,365)

—

551,231
453,410
(78,297)

—
—
—

$126,715
5,631
—
—

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

$132,346

$ 489,954 $7,283,180 $108,574

39,519
(96,708)
—

510,915
444,943
(2,323)

—
—
—

$122,707
4,837
22
—

$ 432,765 $8,236,715 $108,574

$127,566

$3,785
—
—
—

$3,785

$8,173
—
—
—

$8,173

$7,800
—
—
—

$7,800

109

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

years ended December 31, 2017, 2016 and 2015, are as follows:

Year Ended December 31,

2017

2016

2015

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

(in thousands)

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

$5,011,990
465,020

$281,090

—

$4,830,727
435,844

$303,352

—

$4,480,230
393,757

$307,453

—

$5,477,010

$281,090

$5,266,571

$303,352

$4,873,987

$307,453

Long-lived assets allocated between domestic and foreign operations, by segment, as of December 31, 2017,

2016 and 2015, are as follows:

2017

December 31,

2016

2015

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

(in thousands)

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

$ 975,443
57,762

$59,960
—

$ 986,718
55,045

$40,161
—

$933,829
51,920

$35,375
—

$1,033,205

$59,960

$1,041,763

$40,161

$985,749

$35,375

110

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

QUARTERLY FINANCIAL DATA
(Unaudited)

Quarter Ended

March 31

June 30

September 30 December 31

(in thousands, except per share amounts)

2017
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss attributable to noncontrolling interests . . . . . . . . .
Net income attributable to the Company . . . . . . . . . . . . . .
Net income per share attributable to the Company’s

stockholders (1):

$1,317,043
83,880
$
$
58,069
$
$

58,282

(213) $

$1,454,429
$ 184,154
$ 121,895

$1,519,568
17,962
$
21,186
$
(362) $
$

21,383

$ 122,257

(197) $

$1,481,323
$ 159,335
$ 220,713
(414)
$ 221,127

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

$
$

0.52
0.52

$
$

1.10
1.09

$
$

0.19
0.19

$
$

1.98
1.96

(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.

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.

111

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, 2017

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

$

41,335

$

41,259

$

41,335

Debt securities:
U.S. Treasury bonds

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

$ 173,049

$ 173,998

$ 173,998

Municipal bonds

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

$1,031,146

$1,035,937

$1,035,937

Foreign government bonds

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

$ 170,220

$ 169,488

$ 169,488

Governmental agency bonds

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

$ 212,731

$ 211,470

$ 211,470

Governmental agency mortgage-backed securities

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

$2,172,377

$2,158,957

$2,158,957

U.S. corporate debt securities

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

$ 734,409

$ 743,215

$ 743,215

Foreign corporate debt securities

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

$ 256,430

$ 259,619

$ 259,619

Total debt securities:

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

$4,750,362

$4,752,684

$4,752,684

Equity securities:

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

$ 413,672

$ 466,516

$ 466,516

Notes receivable, net:

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

$

7,066

$

6,798

$

7,066

Other investments:

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

$ 110,702

$ 110,702(1) $ 110,702

Total investments:

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

$5,323,137

$5,377,959

$5,378,303

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

incurring excessive costs.

112

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED BALANCE SHEETS
(in thousands, except par values)

Assets

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SCHEDULE II
1 OF 5

December 31,

2017

2016

$ 233,920
54,347
4,098
38,673
4,360,010
22,803
97,991

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

$4,811,842

$4,370,787

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

$

38,724
359,806
4,602
219,307
706,378

$

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

1,328,817

1,356,438

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—110,925 shares and 109,944 shares . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1
2,236,351
1,311,112
(67,509)

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

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

3,479,955
3,070

3,008,179
6,170

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

3,483,025

3,014,349

$4,811,842

$4,370,787

See notes to condensed financial statements

113

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF INCOME
(in thousands)

SCHEDULE II
2 OF 5

Year Ended December 31,

2017

2016

2015

Revenues:

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

$354,350
15,011

$ 46,422
5,809

$142,522
(6,001)

369,361

52,231

136,521

Expenses:

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

54,245

44,592

36,233

Income before income taxes and equity in undistributed earnings of

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

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net (loss) income attributable to noncontrolling interests . . . . . . . . . . . .

315,116
16,606
123,353

421,863
(1,186)

7,639
2,145
337,982

343,476
483

100,288
33,346
221,928

288,870
784

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

$423,049

$342,993

$288,086

See notes to condensed financial statements

114

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

SCHEDULE II
3 OF 5

Year Ended December 31,

2017

2016

2015

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

$421,863

$343,476

$288,870

Other comprehensive income (loss), net of tax:

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

63,563
24,744
74,597

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

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

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

162,904

8,607

(39,911)

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive (loss) income attributable to noncontrolling interests . .

584,767
(1,173)

352,083
487

248,959
770

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

$585,940

$351,596

$248,189

See notes to condensed financial statements

115

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

SCHEDULE II
4 OF 5

Year Ended December 31,

2017

2016

2015

Cash flows from operating activities:

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

$ 232,347

$ (26,682) $ 133,022

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

(21,750)
(66,726)
82
25,000
—

—

(106,818)
204
32,500
—

(19,069)
—
867
—
(22)

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

(63,394)

(74,114)

(18,224)

Cash flows from financing activities:

Net proceeds from issuance 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—
2,732
—

(159,284)

160,000
—
3,415
1,104
(454)
(131,541)

—
(60,000)
9,526
5,042
—

(108,524)

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

(156,552)

32,524

(153,956)

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

12,401
221,519

(68,272)
289,791

(39,158)
328,949

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

$ 233,920

$ 221,519

$ 289,791

See notes to condensed financial statements

116

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 $87.4 million, $46.4 million and

$142.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.

117

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

2017
Title Insurance and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

300
31,252

$ 958,818
70,115

$ 11,124
229,698

Total

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

$31,552

$1,028,933

$240,822

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

118

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

2017
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

$4,383,043
439,470
—
—

$144,095
14,291
15,326
(76)

$175,322
275,088
—
—

122
$
(1,030)
—
—

$788,020
67,813
26,104
(1,063)

$ —
450,098
—
—

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

$4,822,513

$173,636

$450,410

$ (908)

$880,874

$450,098

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

$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

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

119

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

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,396,882

$15,014

$1,175

$4,383,043

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

$4,304,868

$16,277

$2,725

$4,291,316

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

$4,050,033

$23,776

$1,791

$4,028,048

Specialty Insurance

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 448,296

$ 8,826

$ —

$ 439,470

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

$ 419,629

$ 8,276

$ —

$ 411,353

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

$ 388,973

$ 8,709

$ —

$ 380,264

0.0%

0.1%

0.0%

0.0%

0.0%

0.0%

120

SCHEDULE V
1 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2017

Column A

Column B

Column C

Additions

Column D

Column E

Description

Reserve deducted from accounts receivable:

Balance at
beginning
of period

Charged to
costs and
expenses

Charged
to other
accounts

Deductions
from
reserve

Balance
at end
of period

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

$

30,185

$

5,975

$ — $ 13,094(A) $

23,066

Reserve for known and incurred but not

reported claims:

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

$1,025,863

$450,410

$24,707

$472,047(B) $1,028,933

Reserve deducted from notes receivable:

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

$

2,113

$

38

$ — $

1,641

Reserve deducted from deferred income taxes:

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

$

8,049

$

2,284

$ — $ —

$

$

510

10,333

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

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

121

SCHEDULE V
2 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

$

162

$ — $

324

Reserve deducted from deferred income taxes:

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

$

6,729

$

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.

122

SCHEDULE V
3 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 . . . . . . . . . . . . . . . . . . . . . . . . .

Reserve deducted from deferred income taxes:

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

$

$

2,441

15,706

$

$

167

$ — $

333

$

2,275

108

$ — $

9,085

$

6,729

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

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

123

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, 2017, 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, 2017. 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, 2017, 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, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

Item 9B. Other Information

None.

124

PART III

The information required by Items 10 through 14 of this report is expected to be set forth in the definitive
proxy statement to be filed with the Securities and Exchange Commission within 120 days after the fiscal year
ended December 31, 2017 for the Company’s upcoming 2018 meeting of stockholders (the “2018 Proxy
Statement”). If the 2018 Proxy Statement is not filed within 120 days after the fiscal year ended December 31,
2017, 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 10. Directors, Executive Officers and Corporate Governance

The information required by this Item will be set forth in the 2018 Proxy Statement and is incorporated

herein by reference.

Item 11. Executive Compensation

The information required by this Item will be set forth in the 2018 Proxy Statement and is incorporated

herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

The information required by this Item will be set forth in the 2018 Proxy Statement and is incorporated

herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item will be set forth in the 2018 Proxy Statement and is incorporated

herein by reference.

Item 14. Principal Accounting Fees and Services

The information required by this Item will be set forth in the 2018 Proxy Statement and is incorporated

herein by reference.

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 48 in Item 8 of Part II of this report.

(a) 3.

Exhibits. 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 (*).

125

Exhibit No.

Description

Location

3.1

3.2

4.1

4.2

4.3

4.4

4.5

10.1

10.2

10.3

*10.4

*10.4.1

*10.5

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 filed June 1,
2010.

Amended and Restated Bylaws of First
American Financial Corporation, effective as of
August 16, 2017.

Incorporated by reference herein to Exhibit 3.1
to the Current Report on Form 8-K filed
August 22, 2017.

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.

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 filed
January 29, 2013.

Incorporated by reference herein to Exhibit 4.2
to the Current Report on Form 8-K filed
November 10, 2014.

Incorporated by reference herein to Exhibit A
of Exhibit 4.2 to the Current Report on
Form 8-K filed January 29, 2013.

Incorporated by reference herein to Exhibit A
of Exhibit 4.2 to the Current Report on
Form 8-K filed November 10, 2014.

Incorporated by reference herein to Exhibit 10.1
to the Current Report on Form 8-K filed 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 filed 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.

Amendment No. 1, dated January 21, 2015, to
First American Financial Corporation
Executive Supplemental Benefit Plan, amended
and restated effective as of January 1, 2011.

Incorporated by reference herein to
Exhibit 10.5.1 to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 2014.

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

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

126

Exhibit No.

*10.5.1

*10.5.2

*10.6

*10.6.1

*10.6.2

*10.6.3

*10.6.4

*10.6.5

*10.6.6

*10.6.7

Description

Location

First Amendment, effective July 1, 2015, to the
amended and restated First American Financial
Corporation Deferred Compensation Plan.

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

Second Amendment, effective July 1, 2017, to
the amended and restated First American
Financial Corporation Deferred Compensation
Plan.

Incorporated by reference herein to Exhibit 10.2
to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2017.

First American Financial Corporation 2010
Incentive Compensation Plan, amended and
restated effective as of May 9, 2017.

Incorporated by reference herein to Exhibit 10.1
to the Current Report on Form 8-K filed
May 12, 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 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.

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 23, 2018.

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.

Incorporated by reference herein to
Exhibit 10.6.4 to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 2016.

Attached.

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.

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.

127

Exhibit No.

*10.6.8

*10.6.9

*10.6.11

*10.6.12

*10.6.13

*10.6.14

*10.7

*10.8

*10.9

*10.10

*10.11

(21)

(23)

(31)(a)

Description

Location

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

Incorporated by reference herein to
Exhibit 10.6.9 to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 2016.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 23,
2018.

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.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
February 2, 2018.

Employment Agreement, dated December 20,
2017, between First American Financial
Corporation and Dennis J. Gilmore.

Employment Agreement, dated December 20,
2017, between First American Financial
Corporation and Kenneth D. DeGiorgio.

Employment Agreement, dated December 20,
2017, between First American Financial
Corporation and Christopher M. Leavell.

Employment Agreement, dated December 20,
2017, 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 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.

Incorporated by reference herein to
Exhibit 10.6.13 to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 2016

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.

Certification by Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities
Act of 1934.

Attached.

Attached.

Attached.

128

Exhibit No.

(31)(b)

(32)(a)

(32)(b)

101.INS

101.SCH

101.CAL

101.DEF

101.LAB

101.PRE

Description

Location

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.

XBRL Instance Document.

XBRL Taxonomy Extension Schema
Document.

XBRL Taxonomy Extension Calculation
Linkbase Document.

XBRL Taxonomy Extension Definition
Linkbase Document.

XBRL Taxonomy Extension Label Linkbase
Document.

XBRL Taxonomy Extension Presentation
Linkbase Document.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Item 16. Form 10-K Summary

None.

129

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 16, 2018

By

/s/ MARK E. SEATON

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

Date: February 16, 2018

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 16, 2018

Chief Financial Officer
(Principal Financial Officer)

February 16, 2018

February 16, 2018

/S/ MATTHEW F. WAJNER

Matthew F. Wajner

Chief Accounting Officer
(Principal Accounting Officer)

/S/ PARKER S. KENNEDY

Chairman of the Board of Directors

February 16, 2018

Parker S. Kennedy

/S/

JAMES L. DOTI

James L. Doti

Director

February 16, 2018

/S/ REGINALD H. GILYARD

Director

February 16, 2018

Reginald H. Gilyard

/S/ MARGARET M. MCCARTHY

Director

February 16, 2018

Margaret M. McCarthy

/S/ MICHAEL D. MCKEE

Director

February 16, 2018

Michael D. McKee

130

Signature

Title

Date

/S/ THOMAS V. MCKERNAN

Director

February 16, 2018

Thomas V. McKernan

/S/ MARK C. OMAN

Director

February 16, 2018

Mark C. Oman

/S/ VIRGINIA M. UEBERROTH

Director

February 16, 2018

Virginia M. Ueberroth

131

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