First American Financial

March 29, 2019

TO OUR STOCKHOLDERS:

In 2018, First American generated diluted earnings per share of $4.19, a return on equity of 13.1 percent and a
pretax margin of 10.6 percent – our best results since becoming a standalone company in 2010.

Our financial performance was primarily driven by growth in the company’s commercial business and
investment income, though we also benefited from higher average premiums in our residential purchase business,
due to rising home prices. These areas of growth worked to offset the decline in refinance activity that resulted
from last year’s rising mortgage rates. And our continued focus on operational efficiency helped to produce
record title margins.

We stayed true to our capital management strategy by investing in our core title and settlement services business
and adjacent businesses, making acquisitions that strengthen those businesses, and returning capital to our
shareholders through dividends and share repurchases.

I’m proud to say that in early 2019, First American was, for the fourth year in a row, named to the Fortune 100
Best Companies to Work For® list. This honor is a testament to the strength of our people and our culture. As
I’ve often said, it’s our fundamental belief that if we engage and treat our employees well, they will serve our
customers well and that satisfied customers, along with our efficient operation of the business, benefits you, our
stockholders.

As we review a successful 2018, it’s important to note the path we took to get there. When we were preparing to
become a standalone company, our initial focus was on creating efficiencies that would support a profitable and
nimble organization for years to come – practices that we continually hone. Our next move was to further expand
our industry-leading title databases and build out what would become the largest property information database
in the country. And we continue to add depth and breadth to these databases today. More recently, we have
accelerated our efforts to develop innovative technologies and processes, many of which leverage our data assets,
to create a competitive advantage. It’s these innovation efforts, which focus on enhancing the customer
experience and increasing efficiency, that drive our strategies today.

2018 FINANCIAL PERFORMANCE

Though the company’s revenue of $5.7 billion was slightly down from the prior year, we ended 2018 with
earnings per diluted share of $4.19, up 11 percent from last year, and a return on equity of 13.1 percent that met
our long-term objective of 12 to 14 percent. While First American’s total shareholder return was disappointing in
2018, we’re pleased with our financial performance.

• Title Insurance and Services

Revenues from our Title Insurance and Services segment totaled $5.3 billion in 2018, essentially flat
compared with 2017. Closed transactions declined by 11 percent, driven by lower refinance activity as
mortgage rates rose through most of the year. The decline in orders was offset by strong performance
in our high-premium commercial business, with revenues up 8 percent to a record $753.3 million. And
home price appreciation helped our purchase business revenues increase 2 percent, even as that market
slowed in the second half of the year.

Investment income rose 62 percent in 2018, as both higher average balances and the Federal Reserve’s
rate increases drove higher interest income from our investment portfolio and cash balances. Positive
economic conditions and prudent underwriting, including the use of analytics and fraud prevention
efforts, once again drove our favorable claims experience during the year.

Our continued focus on running the business efficiently and managing expenses led the title company
to deliver a record pretax margin of 12.4 percent. Excluding an 80 basis point impact from net realized
losses in 2018, our pretax margin came in at 13.2 percent, above our long-term objective of 11 to
13 percent.

•

Specialty Insurance

Our Specialty Insurance segment’s revenues totaled $469 million in 2018, up 1 percent from the
previous year. Pretax margin for the segment came in at 5.8 percent, or 7.2 percent excluding a 140
basis point impact from net realized losses.

Our home warranty group, the larger of this segment’s businesses, continued to deliver strong returns.
It ended 2018 with operating revenues up 7 percent, driven by contract renewals and improved
customer retention rates. For the second year in a row, our property and casualty insurance company
was impacted by claims losses related to wildfires that devastated parts of California. Because that
business has been generally underperforming in recent years, we introduced tighter underwriting
practices and made leadership changes in 2018. We expect to see performance benefits from these
efforts going forward.

CAPITAL MANAGEMENT ACTIVITIES

We have stayed consistent in our capital management strategy: We invest in our core and adjacent businesses, we
acquire companies that strengthen those businesses and enhance the solutions we offer our customers, and we
return capital to stockholders. We executed well against that strategy in 2018.

Our first priority is to invest in our core business, including in the ongoing development and enhancement of our
products and services. Capital expenditures totaled $126 million during the year, and we strongly believe the
investments we make enable us to maintain and enhance our competitive position, both today and for the long
term.

We completed $83 million in acquisitions in 2018. Among these was a specialized warehouse lender,
FirstFunding, whose services facilitate an innovative effort designed to enhance our customers’ closing
experience. We also purchased PCN Network, whose Safe Escrow® platform offers title agents a simple and
more secure escrow disbursement solution.

The company’s operating cash flow in 2018 was $793 million, up 25 percent from the prior year. And our
debt-to-capital ratio at year end was 17.8 percent, giving us the financial flexibility to meet our strategic
objectives.

Consistent with our commitment to return capital to our stockholders, and as a sign of continued confidence in
our company’s long-term outlook, our board of directors approved a quarterly cash dividend increase to $0.42
per common share in 2018, up 11 percent from the prior level. All told, First American stockholders have
benefited from a 250 percent increase in the quarterly dividend over the past five years.

We also took advantage of the market selloff late in the year to repurchase shares at a level we felt confident
would bring an attractive return to stockholders. Between October 2018 and January 2019, we bought just under
500,000 shares at an average cost of $44.20 for a total of $21 million.

OUR VISION AND STRATEGY

Our vision for First American remains consistent: to be the premier title insurance and settlement services
company. Our strategy to achieve this vision is based on three key actions:

•

Profitably growing our core title and settlement business—We believe our continuing effort to improve
the customer experience is key to growing our business. As an example, we’re actively developing and
deploying innovative technologies and processes, such as digital settlement services, to reduce fraud and
streamline the closing process. These technologies and processes often have the added benefit of
bringing additional efficiency to our operations.

•

Strengthening the enterprise through data and process advantage—We have, and continue to develop,
the most extensive and highest quality databases in the industry. We’re able to leverage these databases
to automate certain risk decisions and make some of our workflow processes more efficient. For
example, we’ve deployed artificial intelligence to lower our data collection costs and improve the
accuracy of certain underwriting decisions.

• Managing and actively investing in complementary businesses that support or expand the core—Our
non-title businesses bring significant benefits to First American. For example, our expanded databases
provide an opportunity to broaden the range of products and services we offer our customers. Another
example is the competitive advantage we realize by being the only company in the industry to own a
bank, which gives us the opportunity to offer unique products and services to our title agents and
enables us to earn income on the funds deposited at the bank. Additionally, our home warranty
company’s ongoing digital transformation improved customer and contractor communications and
efficiency in 2018, while increasing customer retention in our real estate agent and direct-to-consumer
channels.

INNOVATIVE INITIATIVES

First American is working hard to meet the rising demand for transactions that are simpler, faster, more
convenient and increasingly secure. These are examples of some of the industry-leading moves we’re making to
meet those customer expectations:

•

eClosing—In 2018, we rolled out electronic “eClosing” solutions that
let consumers sign many
documents online in advance of the final closing, and we are actively developing other innovative
methods for creating a more complete digital closing experience.

• ClearSearch—Our automated title decisioning engine, ClearSearch, leverages our extensive databases
and analytics expertise to automate the production of title commitments for eligible refinance
transactions, thereby greatly speeding title production.

•

•

Automated Data Extraction—Through the use of optical character recognition and artificial intelligence,
we’re significantly reducing manual data entry, which increases our efficiency and enables us to more
rapidly expand our content.

Blockchain—In November, we announced the launch of a First American-developed system using
blockchain technology. Designed to increase efficiency and reduce risk, we’re pleased that Old Republic
Title Insurance Group was the first to join us in utilizing the system.

• Decision Science—During the year, we expanded our decision sciences group. This team is charged
with applying machine learning and other advanced analytics to our industry-leading databases to
develop innovative ways to drive efficiency, lower risk and improve the customer experience.

NOTEWORTHY EVENTS

In May of 2018, we welcomed Martha Wyrsch to our board. As an accomplished director for other publicly
traded companies, and with deep experience leading complex businesses, she provides valuable insight into how
we can enhance our operations and our ability to serve our customers.

As I mentioned earlier, First American was recently named to the Fortune 100 Best Companies to Work For® list
for the fourth year in a row. The company was also included on Fortune’s 100 Best Workplaces for Women and
100 Best Workplaces for Diversity lists in 2018. Our Canadian business was listed as one of Canada’s Top 50
Best Workplaces in its category for the fourth consecutive year. And our Indian operation was named a Top 50
Best Workplace for information technology in that country. I see these honors as a testament to our commitment
to continually engage and develop our employees, and to the remarkable efforts our employees put into serving
our customers and their communities.

LOOKING AHEAD

While 2018 was a good year for First American, we began to experience headwinds as the purchase market
slowed in the second half of the year, a trend that continued in early 2019. We have, however, already identified
and made the necessary cuts to our cost structure to put us in a good position to meet our long-term financial
targets.

A resetting of the residential real estate market is currently underway. Property price appreciation is slowing,
housing inventories are increasing and mortgage rates are moderating. While we’re positioned for a slower
market, we’re also prepared to take full advantage of any rebound the 2019 spring selling season might bring.

The commercial market remains strong heading into 2019. While our commercial group’s record 2018 results
may be hard to duplicate, we are confident that group will continue to perform well.

I’m excited about the many innovative initiatives underway across the company, and our commitment to lead the
industry in these areas is steadfast. We’ll continue streamlining and automating our processes, while enhancing
the customer experience. And while our data leadership, technology and industry expertise will propel our
efforts, it is ultimately our dedicated employees who drive these efforts to differentiate us in the marketplace and
provide a competitive advantage.

I’m confident that the people of First American, who show their commitment, teamwork and professionalism
every day, will continue to make our company successful in 2019 and beyond. First American’s board of
directors and I thank you for your continued support.

Dennis J. Gilmore
Chief Executive Officer

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, 2018

‘ 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)

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:

Title of each class
Common

Name of each exchange on which registered
New York Stock Exchange

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 the 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 every Interactive Data File required to be submitted
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 such files). Yes È No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. È

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See the 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 ‘
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 ‘
Smaller reporting company ‘

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘

Indicate by check mark whether

Act). Yes ‘ No È

the registrant

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

the Exchange

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2018

was $5,602,927,038.

On February 15, 2019, there were 111,476,203 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement with respect to the 2019 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 Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

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

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

5

12

20

20

20

22

23

25

26

52

54

126

126

126

128

128

128

128

128

128

132

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, INCLUDING DATA

PRIVACY LAWS;

• 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;

INNOVATION EFFORTS OF THE COMPANY AND OTHER INDUSTRY PARTICIPANTS AND ANY
RELATED MARKET DISRUPTION;

3

•

•

•

ERRORS AND FRAUD INVOLVING THE TRANSFER OF FUNDS;

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 that are designed to mitigate risk in, or otherwise facilitate real estate transactions. Many
of these products, services and solutions involve the use of real property-related data, including data derived from
its proprietary databases. 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.

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, and on enhancing our services offered to 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 designed to mitigate risk or otherwise facilitate real estate transactions, many of
which products, services and solutions involve the use of real property-related data; 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, warehouse lending services, default-related products
and services, evidence of title, and banking, trust and wealth management services. In 2018, 2017 and 2016 the
Company derived 91.9%, 91.7% and 92.1% 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 issuing a policy directly 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.
Where the policy is issued by an agent, the premium retained by the agent is also a primary expense.

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 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
typically 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 by
geography and 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, the District of Columbia and certain United States territories. 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 28% 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. We also market directly to firms that purchase and sell residential real estate on a large-scale basis. 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

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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, 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. In an attempt to enhance efficiency and reduce risk, certain underwriting functions are
increasingly being 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, as well as the services we provide to the agent and the price for
those services. Those services vary by geography and from agent to agent. We are continuing to seek to provide
additional services to our agents, including banking services and closing-related services, in an effort to reduce
risk and enhance relationships with our agents. 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 typically 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 5.6% of our title insurance and services
segment revenues in 2018. Today we have direct operations and a physical presence in several countries,
including Canada, the United Kingdom, South Korea and Australia, as well as in Hong Kong. While reliable data
are not available, we believe that we have the largest market share for title insurance outside of the United States.

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. In instances where we have limited claims
experience in a foreign jurisdiction it 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.

8

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
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. In addition to
reinsurance arrangements involving other industry participants, we maintain 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.

9

Trust, Wealth Management and Banking Services. Our federal savings bank subsidiary offers trust, wealth
management and deposit products and related services, including fund transfer services. The bank does not
originate loans. As of December 31, 2018, the bank administered fiduciary and custody assets having a market
value of $3.6 billion, which includes managed assets of $1.5 billion. The bank’s balance sheet had assets of
$4.1 billion, with deposits of $3.8 billion and stockholder’s equity of $286.9 million. The bank’s deposits have
traditionally consisted almost entirely of funds deposited by its affiliates, but increasingly the bank is seeking
deposits from title agents that are not affiliates. While the majority of the bank’s deposited funds are associated
with commercial and residential real estate transactions being serviced by its customers that are in the title and/or
settlement service business, the bank also maintains other deposits, including operating funds deposited by its
affiliates.

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 62% 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 marketing 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 market directly to consumers. We generally sell
renewals directly to consumers. Our home warranty business currently operates in 36 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,

10

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 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, banking and certain other subsidiaries, are subject to regulation by federal agencies,
including the Consumer Financial Protection Bureau (“CFPB”). The CFPB has broad authority to regulate,
among other areas, the mortgage and real estate markets, 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

11

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.

As of December 31, 2018, 94% of our investment portfolio consisted of debt securities. As of that date, 69%
of our debt securities portfolio was either United States government-backed or rated AAA, and 97% was either
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, 2018, the Company employed 18,251 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
including open and closed title insurance orders (which typically are posted
information for investors,
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

12

transactions in which the Company’s products and services are purchased decreases in the following situations,
among others:

•

•

•

when mortgage interest rates are high or rising;

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

when real estate values are declining.

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

2. Unfavorable economic conditions 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

13

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
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 utilized 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.

14

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

operates, could adversely affect the Company

Federal and state officials are currently discussing various potential changes to laws and regulations that
could impact the Company’s businesses, including the reform of government-sponsored enterprises such as the
Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) and data privacy regulations, among others. Changes in these areas, and more generally in the
regulatory environment in which the Company and its customers operate, could adversely impact the volume of
mortgage originations in the United States and the Company’s competitive position and results of operations.

9. Recent and pending data privacy laws and regulations could adversely affect the Company

An increasing number of federal, state, and international laws and regulations apply to the collection, use,
retention, protection, disclosure,
including the California
Consumer Privacy Act and the European Union General Data Protection Regulation. We believe that other
jurisdictions are considering similar laws. The effects of these privacy laws, including the cost of compliance, are
not fully known and are potentially significant, and the failure to comply could adversely affect the Company.

transfer, and other processing of personal data,

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

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

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

enterprises could adversely affect the Company

The mortgage market in the United States is concentrated. Due to the consolidated nature of the industry, the
Company derives a significant percentage of its revenues from a relatively small base of lenders, and their
borrowers, which enhances the negotiating power of these lenders with respect to the pricing and the terms on
which they purchase the Company’s products and other matters. Similarly, government-sponsored enterprises,
because of their significant role in the mortgage process, have significant influence over the Company and other
service providers. These circumstances could adversely affect
the Company’s revenues and profitability.
Changes in the Company’s relationship with any of these lenders or government-sponsored enterprises, the loss
of all or a portion of the business the Company derives from these parties, any refusal of these parties to accept
the Company’s products and services, the modification of the government-sponsored enterprises’ requirement for
title insurance in connection with mortgages they purchase or the use of alternatives to the Company’s products
and services, could have a material adverse effect on the Company.

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

15

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 “A2”
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, 2018. Accordingly,
if the ratings or statutory capital and surplus of these title insurance underwriters are reduced from their current
levels, or if there is a deterioration in other measures of financial strength, the Company’s results of operations,
competitive position and liquidity could be adversely affected.

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

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

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
subject
interest rate (including call,
prepayment and extension) risk and/or liquidity risk. The risk of loss associated with the portfolio is increased
during periods of instability in credit markets and economic conditions. 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.

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

Company’s reserve for incurred but not reported claims

The Company maintains a reserve for incurred but not reported (“IBNR”) claims pertaining to its title,
escrow and other insurance and guarantee products. The majority of this reserve pertains to title insurance
policies, which are long-duration contracts with the majority of the claims reported within the first few years
following the issuance of the policy. Generally, 70% to 80% of claim amounts become known in the first six
years of the policy life, and the majority of IBNR reserves relate to the six most recent policy years. Changes in
expected ultimate losses and corresponding loss rates for recent policy years are considered likely and could
result in a material adjustment to the IBNR reserves. Based on historical experience, management believes a 50
basis point change to the loss rates for recent policy years, positive or negative, is reasonably likely given the
long duration nature of a title insurance policy. For example, if the expected ultimate losses for each of the last
six policy years increased or decreased by 50 basis points, the resulting impact on the Company’s IBNR reserve
would be an increase or decrease, as the case may be, of $122.4 million. A material change in expected ultimate
losses and corresponding loss rates for older policy years is also possible, particularly for policy years with loss
ratios exceeding historical norms. The estimates made by management in determining the appropriate level of
IBNR reserves could ultimately prove to be materially different from actual claims experience.

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

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

The Company’s title insurance subsidiaries issue a significant portion of their policies through title agents
that operate with a substantial degree of independence from the Company. While these title agents are subject to
certain contractual limitations that are designed to limit the Company’s risk with respect to their activities, there
is no guarantee that the agents will fulfill their contractual obligations to the Company. In addition, regulators are

16

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.

16. 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
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.

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

The Company uses computer systems and other technologies (collectively referred to as “systems”), some
of which it owns and manages and some of which are owned and/or managed by third parties, including
providers of distributed computing infrastructure platforms commonly known as the “cloud.” The Company and
its agents, suppliers, service providers, and customers use these 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 the Company’s business relies. The Company also uses these systems to
manage substantial cash, investment assets, bank deposits, trust assets and escrow account balances on behalf of
itself 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 these systems and are only available
electronically. Accordingly, for a variety of reasons, the integrity of these systems and the protection of the
information that resides thereon are critically important to the Company’s successful operation.

These systems 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 damages, failures, interruptions, and other
the Company’s business and could also result in the loss or
negative events or could otherwise disrupt
unauthorized release, gathering, monitoring or destruction of confidential, proprietary and other information
pertaining to the Company, its customers, employees, agents or suppliers.

17

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 systems and sensitive information
and the Company 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 that could be material to the Company.

18. The Company is pursuing various innovative initiatives, which 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, improve the customer
experience and decrease risk, the Company is increasingly utilizing decision science, artificial intelligence and
other innovative technologies, processes and techniques. These efforts include streamlining the closing process
by converting certain manual processes into digital ones, in an endeavor to improve the customer experience by
simplifying and reducing the time it takes to close a transaction, reducing the risk of fraud and improving
communication. The Company increasingly is employing advanced technologies to automate various processes,
including various processes related to the building, maintaining and updating of title plants and other data assets,
as well as the search and examination of information in connection with the issuance of title insurance policies.
Risks from these and other innovative initiatives include those associated with potential defects in the design and
development of the technologies used to automate processes, misapplication of technologies, the reliance on data
that may prove inadequate, and failure to meet customer expectations, among others. 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.

19. Potentially disruptive innovation in the real estate industry could adversely affect the Company

In addition to the Company’s innovative activities, other participants in the real estate industry are seeking
to innovate in ways that could adversely impact the Company’s businesses. These participants include certain of
the Company’s sources of business, competitors and ultimate customers. Innovations of these participants may
change the demand for the Company’s products and services, the manner in which the Company’s products and
services are ordered or fulfilled and the revenue or profitability derived from the products and services. The
Company’s efforts to anticipate and participate in these transformations could require significant additional
investment and may not succeed, resulting in a reduction in market share or profitability. Accordingly, these
efforts, and the manner in which the Company, its agents and other industry participants respond to them, could
have an adverse effect on the Company.

20. 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 its own
funds and the funds of third parties. In addition to relying on third-party banks to transfer these funds, the
Company’s federal savings bank subsidiary transfers funds on behalf of the Company as well as title agents that
are not affiliates of the Company. 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

18

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.

21. 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.

22. As a holding company,

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

The Company is a holding company whose primary assets are investments in its operating subsidiaries. The
Company’s ability to pay dividends is dependent on the ability of its subsidiaries to pay dividends or repay funds.
If the Company’s operating subsidiaries are not able to pay dividends or repay funds, the Company may not be
able to fulfill parent company obligations and/or declare and pay dividends to its stockholders. Moreover,
pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the
amount of dividends, loans and advances available is limited. As of December 31, 2018, under such regulations,
the maximum amount available in 2019 from these insurance subsidiaries, without prior approval from
applicable regulators, was dividends of $291.2 million and loans and advances of $98.6 million.

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

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

that

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

•

•

•

•

•

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

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

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

19

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 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
this loan was $19.2 million as of
matures November 1, 2023. The outstanding principal balance of
December 31, 2018.

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

intended use.

Item 3. Legal Proceedings

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

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

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

For a substantial majority of these lawsuits, however, it is not possible to assess the probability of loss. Most
of these lawsuits are putative class actions which require a plaintiff to satisfy a number of procedural
requirements before proceeding to trial. These requirements include, among others, demonstration to a court that
the law proscribes in some manner the Company’s activities, the making of factual allegations sufficient to
suggest that the Company’s activities exceeded the limits of the law and a determination by the court—known as
class certification—that the law permits a group of individuals to pursue the case together as a class. In certain
instances the Company may also be able to compel the plaintiff to arbitrate its claim on an individual basis. If
these procedural requirements are not met, either the lawsuit cannot proceed or, as is the case with class
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

20

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 or one of its subsidiaries engaged in improper debt collection practices, improperly charged fees
for products and services, participated in the conveyance of illusory property interests, failed to pay overtime and
provide break periods, improperly handled property and casualty claims and gave items of value to builders 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:

• Bartine v. First American Title Insurance Company, et al., filed on August 17, 2018 and pending in the

United States District Court for the Middle District of Florida,

• Brackens v. First American Home Warranty Corporation, filed on November 28, 2018 and pending in

the United States District Court for the District of Arizona,

•

•

•

•

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,

Leramo v. First American Title Insurance Company, et al., filed on December 19, 2018 and pending in
the United States District Court for the Eastern District of California,

Simons v. First American Title Insurance Company, filed on December 14, 2018 and pending in the
United States District Court for the Middle District of Florida,

Tenefufu vs. First American Specialty Insurance Company, filed on June 1, 2017 and 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 are putative class or collective actions for which a class or collective 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,

21

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. The Company
believes it will receive an assessment related to this matter in the first half of 2019. While the amount of such
assessment is not currently known, based on preliminary discussions with the taxing authority, the Company
expects the assessment to be in the range of $12.0 million to $12.8 million, plus interest charges. As the
Company does not believe that the services in question are subject to excise tax, it intends to avail itself of
avenues of appeal after the assessment is received, and it believes it is reasonably likely that the Company will
prevail on the merits. Based on the current facts and circumstances, the Company does not believe a loss is
probable, therefore no liability has been recorded.

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

Item 4. Mine Safety Disclosures

Not applicable.

22

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

PART II

Equity Securities

Common Stock Market Prices and Dividends

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

approximate number of record holders of common stock on February 15, 2019, was 2,358.

In January 2019, the Company’s board of directors declared a cash dividend of $0.42 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, 2018, 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 following table describes purchases
by the Company under the share repurchase program that settled during each period set forth in the table. Prices
in column (b) include commissions. Cumulatively, as of December 31, 2018, the Company had repurchased
$86.4 million (including commissions) of its shares and had the authority to repurchase an additional
$163.6 million (including commissions) under the program.

Period

(a)
Total
Number of
Shares
Purchased

October 1, 2018 to October 31, 2018 . . . . . . . . . . . . .
November 1, 2018 to November 30, 2018 . . . . . . . . .
December 1, 2018 to December 31, 2018 . . . . . . . . . .

70,000
153,739
201,394

(b)
Average
Price Paid
per Share

$44.16
44.94
43.70

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

425,133

$44.22

(c)
Total Number of
Shares
Purchased as Part
of Publicly
Announced Plans
or Programs

(d)
Maximum
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs

70,000
153,739
201,394

425,133

$179,346,548
172,437,668
163,637,006

$163,637,006

Stock Performance Graph

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

23

The following graph compares the cumulative total stockholder return on the Company’s common stock
with the corresponding cumulative total returns of the Russell 1000 Index and two industry peer groups for the
period from December 31, 2013 through December 31, 2018. The comparison assumes an investment of $100 on
December 31, 2013 and reinvestment of dividends. This historical performance is not indicative of future
performance.

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

$240

$230

$220

$210

$200

$190

$180

$170

$160

$150

$140

$130

$120

$110

$100

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

First American Financial

Custom Peer Group (prior)

Custom Peer Group (new)

Russell 1000 Index

Comparison of Cumulative Total Return

First
American Financial
Corporation
(FAF) (1)

Custom Peer
Group
(new) (1)(2)

Custom Peer
Group
(prior) (1)(2)

Russell 1000
Index (1)

December 31, 2013 . . . . . . . . . . . . . . .
December 31, 2014 . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . . .
December 31, 2017 . . . . . . . . . . . . . . .
December 31, 2018 . . . . . . . . . . . . . . .

$100
$124
$135
$142
$224
$184

$100
$104
$113
$134
$154
$153

$100
$111
$125
$148
$179
$175

$100
$113
$114
$128
$156
$148

(1) As calculated by Bloomberg Financial Services, where available, to include reinvestment of dividends.
(2) The new custom peer group consists of the following companies: American Financial Group, Inc.; Assurant,
Inc.; Axis Capital Holdings Limited; Cincinnati Financial Corporation; Everest Re Group, Ltd.; Fidelity
National Financial,
Inc.; Kemper
Corporation; Mercury General Corporation; Old Republic International Corp.; 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

Inc.; Genworth Financial,

Inc.; The Hanover

Insurance Group,

24

benchmarks in setting the compensation of its executive officers. The prior custom peer group also included
White Mountains Insurance Group Ltd., which was dropped after it divested a large business unit, but did
not include Axis Capital Holdings Limited, Everest Re Group, Ltd. and Genworth Financial, Inc., each of
which was added by the compensation committee at the time White Mountains Insurance Group was
dropped.

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, 2018, 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

2018

2017

2016

2015

2014

Year Ended December 31,

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) 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:

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

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) . . . . . . . . .

(in thousands, except percentages, per share amounts and employee data)
$5,575,846
$ 343,476

$5,772,363
$ 421,863

$5,175,456
$ 288,870

$ 5,747,844
475,898
$

$4,677,949
$ 234,215

1,402
$
$
474,496
$10,630,635
$
732,019
$ 3,741,881

$
(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

$

$
$
$
$

13.1%

13.0%

11.9%

10.8%

178,487

$ 159,284

$ 131,541

$ 108,524

4.21
4.19
33.56
1.60

$
$
$
$

3.79
3.76
31.37
1.44

$
$
$
$

3.10
3.09
27.36
1.20

$
$
$
$

2.65
2.62
25.21
1.00

112,613
113,279
111,496

982
731
18,251

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

$

$
$
$
$

9.3%

89,939

2.18
2.15
23.85
0.84

106,884
108,688
107,541

1,156
816
17,103

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

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

do not include orders processed by agents.

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

25

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

CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE
FORWARD-LOOKING STATEMENTS MAY CONTAIN THE WORDS “BELIEVE,” “ANTICIPATE,”
“EXPECT,” “PLAN,” “PREDICT,” “ESTIMATE,” “PROJECT,” “WILL BE,” “WILL CONTINUE,” “WILL
LIKELY RESULT,” OR OTHER SIMILAR WORDS AND PHRASES.

RISKS AND UNCERTAINTIES EXIST THAT MAY CAUSE RESULTS TO DIFFER MATERIALLY FROM
THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE THE
ANTICIPATED RESULTS TO DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS INCLUDE THE FACTORS SET FORTH ON 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 designed to mitigate risk or otherwise
facilitate real estate transactions, many of which products, services and solutions involve the use of real
property-related data; 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, warehouse lending 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

26

direct operations and agents. Through this network, the Company issues policies in the 49 states that
permit the issuance of title insurance policies, the District of Columbia and certain United States
territories. 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 62% 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 36 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 an 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.

27

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 a corresponding increase or decrease of $122.4 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 rates 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 reserve for property and casualty insurance losses reflects management’s best estimate of the amount
necessary to settle all reported and unreported claims for the ultimate cost of insured losses, based upon the facts
of each case and the Company’s experience with similar cases. The Company also utilizes the services of an
independent actuary as part of its reserve analysis. Because the establishment of appropriate reserves, including
reserves for catastrophes, is an inherently uncertain and complex process, the ultimate cost of insured losses may
be more or less than the reserve amount. Reserve estimates are regularly analyzed and updated to reflect the most
current information available.

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.

28

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

(in thousands, except percentages)

December 31, 2018

December 31, 2017

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

$

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

80,306
877,134

957,440
85,239

7.7% $
84.1%

83,094
875,724

91.8%
8.2%

958,818
70,115

8.1%
85.1%

93.2%
6.8%

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

$1,042,679

100.0% $1,028,933

100.0%

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

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

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

Payments, net of recoveries, related to:

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

December 31,

2018

2017

2016

$ 83,094

(in thousands)
$ 83,805

$ 87,543

17,770
147,271

165,041

14,338
151,433

165,771

17,471
180,602

198,073

14,835
185,515

200,350

15,098
188,066

203,164

12,420
197,821

210,241

3,339

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

(2,058)

1,566

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

$ 80,306

$ 83,094

$ 83,805

The provision transferred from IBNR title claims related to current year increased by $0.3 million in 2018
from 2017 and increased by $2.4 million in 2017 from 2016 and payments, net of recoveries, related to current
year decreased by $0.5 million in 2018 from 2017 and increased by $2.4 million in 2017 from 2016, 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 $33.3 million, or
18.5%, in 2018 from 2017 and decreased by $7.5 million, or 4.0%, in 2017 from 2016. Payments, net of
recoveries, related to prior years decreased by $34.1 million, or 18.4%, in 2018 from 2017 and decreased by
$12.3 million, or 6.2%, in 2017 from 2016. 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.

29

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

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

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

Provision transferred to known title claims related to:

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

December 31,

2018

2017

2016

$875,724

(in thousands)
$888,126

$844,364

173,520
—

173,520

17,770
147,271

165,041

175,322
—

175,322

17,471
180,602

198,073

193,109
42,552

235,661

15,098
188,066

203,164

11,265

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

(7,069)

10,349

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

$877,134

$875,724

$888,126

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

The provision related to current year decreased by $1.8 million, or 1.0%, in 2018 from 2017. This decrease

was attributable to a decrease in title premiums and escrow fees in 2018 from 2017.

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.

For further discussion of title provision recorded in 2018, 2017 and 2016, see Results of Operations,

page 43.

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
investment 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,

30

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 values 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
the values provided represent fair values. The Company’s validation
controls in place to determine that
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 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,
issuance,
characteristics of the issuer, collateral attributes and prepayment speeds.

inputs and assumptions may also include the structure of

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, 2018, 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 loss is considered an other-than-temporary impairment
loss and the credit portion of the 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 recognize any other-than-temporary impairment losses related to its debt securities for
2018 and 2017 and recognized $0.5 million of other-than-temporary impairment losses considered to be credit
related for 2016.

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.

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

31

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
and intangible assets acquired and liabilities assumed 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 for which goodwill has been allocated. Those reporting units include title
insurance, home warranty and property and casualty insurance. The Company’s trust and other services reporting
unit has no allocated goodwill and is, therefore, not assessed for impairment. 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 accounting 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 a qualitative assessment and perform a quantitative impairment test. The qualitative
industry and market
factors considered in this assessment may include macroeconomic conditions,
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 a qualitative assessment indicate the more likely than not
threshold was not met, the Company may choose not to perform a quantitative impairment test. If, however, the
more likely than not threshold is met, the Company will perform a 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.

32

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 expected cash flows 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 2018 and 2017, the Company chose to perform qualitative assessments for its title insurance and home
warranty reporting units and performed a quantitative impairment test for its property and casualty insurance
reporting unit. Based on the results of its quantitative impairment tests for 2018 and 2017, the Company
determined that the fair value of its property and casualty insurance reporting unit exceeded the carrying amount
and, therefore, no additional analysis was required. The results of the Company’s qualitative assessments for its
title insurance and home warranty reporting units for 2018 and 2017 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
three 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. As a result of the Company’s annual
goodwill impairment assessments, the Company did not record any goodwill impairment losses for 2018, 2017 or
2016.

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.

33

Impairment of equity method investments. The carrying value of investments accounted for under the
equity method of accounting 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 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.

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 $41 thousand, $0.5 million and $5.2 million for 2018, 2017
and 2016, 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.

The weighted-average discount rate assumptions used to determine net periodic benefit costs for the

Company’s unfunded supplemental benefits plans for 2018, 2017 and 2016, were as follows:

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

3.61% 4.03% 4.33%
3.78% 4.32% 4.69%
3.23% 3.43% 3.56%

Year ended December 31,

2018

2017

2016

34

The weighted-average discount rate assumption used to determine the projected benefit obligation for the

Company’s unfunded supplemental benefits plans at December 31, 2018 and 2017, was as follows:

December 31,

2018

2017

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

4.32% 3.61%

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 May 2017, the Financial Accounting Standards Board (“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. The adoption of this guidance had no impact on the
Company’s 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. The Company adopted this change in accounting
principle at the beginning of 2018 and applied the change retrospectively. As a result, other components of net
benefit cost totaling $175.0 million and $101.5 million were reclassified from personnel costs to other operating
expenses on the consolidated statements of income for the years ended December 31, 2017 and 2016,
respectively. See Note 13 Employee Benefit Plans to the consolidated financial statements for further
information on the Company’s net periodic pension costs.

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

35

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. The Company
adopted this guidance at the beginning of 2018 and recognized cumulative net unrealized gains, net of taxes, of
$40.6 million related to its investments in equity securities, previously classified as available-for-sale, through a
cumulative-effect adjustment to retained earnings. Changes in the fair values of these investments are reflected in
net realized investment gains/losses on the Company’s consolidated statements of income. See Note 3 Debt and
Equity Securities to the consolidated financial statements for further discussion of the Company’s investments in
equity securities.

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 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 elected to adopt the new
guidance under the modified retrospective approach, which did not have a material impact on its consolidated
financial statements. See Note 1 Basis of Presentation and Significant Accounting Policies to the consolidated
financial statements for further information about the Company’s revenues within the scope of the new guidance.

Pending Accounting Pronouncements

In August 2018, the FASB issued updated guidance that is intended to reduce potential diversity in practice
in accounting for the costs of implementing cloud computing arrangements (i.e., hosting arrangements) that are
service contracts. The updated guidance aligns the requirements for capitalizing implementation costs for these
arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software and hosting arrangements that include an internal-use software license. 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 this guidance on its consolidated financial
statements.

In August 2018, the FASB issued updated guidance as part of its disclosure framework project intended to
improve the effectiveness of disclosures in the notes to the financial statements. The updated guidance
eliminates, adds and modifies certain disclosure requirements related to fair value measurements. The updated
guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early
adoption permitted. Except for the disclosure requirements, 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

36

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 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 this 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. The updated guidance
may either be adopted using a modified retrospective transition approach or may be initially applied on the
adoption date with the recognition of a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption. The Company has elected to initially apply the guidance as of the adoption date,
January 1, 2019, and expects to record on its balance sheet right-of-use assets and lease liabilities of
approximately $350 million and an immaterial cumulative-effect adjustment to retained earnings. The Company
expects the new guidance to have an insignificant impact on its consolidated statements of income and statements
of cash flows.

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 2018 were $5.7 billion, which reflected a decrease of $24.5 million, or
0.4%, when compared with $5.8 billion for 2017. This decrease was attributable to lower agent premiums in the
title insurance and services segment and a higher level of net realized investment losses, partially offset by higher
net investment income and direct premiums and escrow fees. The increase in direct premiums and escrow fees
attributable to the title insurance and services segment was $30.6 million, or 1.5%. Direct premiums and escrow
fees from domestic commercial and residential purchase transactions increased $57.5 million and $22.6 million,
or 8.3% and 2.5%, respectively, while direct premiums and escrow fees from domestic residential refinance
transactions decreased $49.3 million, or 21.4%, in 2018 when compared to 2017.

According to the Mortgage Bankers Association’s February 11, 2019 Mortgage Finance Forecast (the
“MBA Forecast”), residential mortgage originations in the United States (based on the total dollar value of the
transactions) decreased 6.6% in 2018 when compared with 2017. According to the MBA Forecast, the dollar
amount of purchase originations increased 3.7% and refinance originations decreased 25.6%. This volume of

37

domestic residential mortgage origination activity contributed to an increase in direct premiums and escrow fees
for the Company’s direct title operations of 2.5% from domestic residential purchase transactions and a 21.4%
decrease in direct premiums and escrow fees from domestic refinance transactions in 2018 when compared to
2017.

During 2018, the level of domestic title orders opened per day by the Company’s direct title operations
decreased 8.5% when compared to 2017. Residential refinance and purchase opened orders per day decreased
25.2% and 1.5%, respectively, while commercial opened orders per day increased 2.8% in 2018 when compared
to 2017.

During the fourth quarter of 2018, the level of domestic residential purchase title orders opened per day by
the Company’s direct title operations decreased 4.5% when compared to the same quarter in 2017. This trend
continued in January 2019 as open purchase orders declined 4.0% when compared to January 2018. The
Company expects the ongoing decline in the residential purchase market to continue in 2019 but also anticipates
rising investment
income. Based on current orders and market conditions, the Company also expects its
commercial business to continue to perform well. During the fourth quarter of 2018, the Company adjusted its
cost structure to position itself for 2019.

The Company adopted new accounting guidance on January 1, 2018, which requires investments in equity
securities with readily determinable fair values to be measured at fair value with changes in the fair value
recognized through net income. Previously, changes in the fair value where recognized through accumulated
other comprehensive loss on the consolidated balance sheets. Beginning in the first quarter of 2018, the Company
records changes in the fair values of its equity securities as a component of net realized investment gains (losses)
on the consolidated statements of income. See Note 1 Basis of Presentation and Significant Accounting Policies
to the consolidated financial statements for further discussion of the new guidance.

During 2018, the Company completed acquisitions for an aggregate purchase price of $82.9 million, which
are included in the Company’s title insurance and services segment. These acquisitions enable the Company to
offer its customers new ways to reduce risk and increase efficiency.

The Company is increasingly utilizing decision science, artificial

intelligence and other innovative
technologies, processes and techniques to speed the delivery of its products, increase efficiency and otherwise
improve the customer experience. These efforts include streamlining the closing process by converting certain
manual processes into digital ones, which improves the customer experience by simplifying and reducing the
time it takes to close a transaction, reducing the risk of fraud and improving communication. These efforts also
include the automation of many of the tasks required to build and update title plants and to search and examine
title records, among others. While many of these initiatives are also designed to decrease risk, they present risks
of their own. The degree to which these innovative efforts will be successful, and their ultimate impact on the
Company’s results of operations, is not currently known.

In addition to the Company’s innovative activities, other participants in the real estate and mortgage
industries are seeking to innovate in ways that could impact the Company’s businesses. These participants
include certain of the Company’s sources of business, competitors and ultimate customers. Innovations of these
participants may change the demand for the Company’s products and services, the manner in which the
Company’s products and services are ordered or fulfilled and the revenue or profitability derived from the
products and services. The Company’s efforts to anticipate and participate in these transformations could require
significant additional investment and may not succeed, resulting in a reduction in market share or profitability.
The ultimate degree to which these and other innovations in the real estate industry will impact the Company’s
business and results of operations is not currently known.

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 amended the Internal Revenue Code to reduce

38

U.S. tax rates and modify policies, credits and deductions for individuals and businesses. The changes resulting
from the Tax Reform Act had an overall favorable impact on the Company’s effective tax rate, and the Company
expects the Tax Reform Act will continue to have an overall favorable impact on its effective tax rate in the
future.

Additionally, 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 the reform of government-sponsored enterprises such as the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and data
privacy regulations, among others. 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 of
state and local tax deductions, among others. The full extent of 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.

39

Net realized

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

Expenses

Personnel costs . . . . . .
Premiums retained by

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

Depreciation and

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

Title Insurance and Services

2018

2017

2016

2018 vs. 2017

2017 vs. 2016

$ Change % Change $ Change % Change

(in thousands, except percentages)

Revenues

Direct premiums and

escrow fees . . . . . . . $2,052,951
2,284,906

Agent premiums . . . . .
Information and

$2,022,384
2,360,659

$2,004,686
2,286,630

$ 30,567
(75,753)

1.5
(3.2)

$ 17,698
74,029

other

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

770,725

766,018

713,137

4,707

0.6

52,881

Net investment

0.9
3.2

7.4

income . . . . . . . . . . .

223,318

137,439

110,757

85,879

62.5

26,682

24.1

(49,119)

6,656

18,915

(55,775)

5,282,781

5,293,156

5,134,125

(10,375)

NM1

(0.2)

159,031

(12,259)

(64.8)

1,671,846

1,636,429

1,578,130

35,417

2.2

58,299

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

1,799,836

1,863,356

1,801,571

(63,520)

(3.4)

61,785

Other operating

expenses . . . . . . . . .

793,364

788,074

764,502

5,290

0.7

23,572

173,520

175,322

235,661

(1,802)

(1.0)

(60,339)

(25.6)

119,053
62,646
7,513

121,540
62,545
3,526

93,069
59,464
2,856

(2,487)
101
3,987

(2.0)
0.2
113.1

28,471
3,081
670

4,627,778

4,650,792

4,535,253

(23,014)

(0.5)

115,539

Income before income

taxes . . . . . . . . . . . . . . . . $ 655,003

$ 642,364

$ 598,872

$ 12,639

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

12.4%

12.1%

11.7%

0.3%

2.0

2.5

$ 43,492

0.4%

(1) Not meaningful

Direct premiums and escrow fees increased $30.6 million, or 1.5%, in 2018 from 2017 and $17.7 million, or
0.9%, in 2017 from 2016. The increases in direct premiums and escrow fees in 2018 from 2017 and in 2017 from
2016 were 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 domestic average
revenues per order closed were $2,600, $2,264 and $1,931 for 2018, 2017 and 2016, respectively. The 14.8%
increase in average revenues per order closed in 2018 from 2017 and the 17.2% increase in average revenues per
order closed in 2017 from 2016 were primarily due to a shift in the mix of direct revenues generated from lower
premium residential refinance products to higher premium 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 Company’s direct title operations closed 730,800, 823,700 and 958,400
domestic title orders during 2018, 2017 and 2016, respectively. The 11.3% decrease in orders closed in 2018
from 2017 and the 14.1% decrease in orders closed in 2017 from 2016 were generally consistent with the
changes in residential mortgage origination activity in the United States as reported in the MBA Forecast.

40

3.1

3.7

3.4

3.1

30.6
5.2
23.5

2.5

7.3

3.4

Agent premiums decreased $75.8 million, or 3.2%, in 2018 from 2017 and increased $74.0 million, or 3.2%,
in 2017 from 2016. 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 decrease in agent premiums in 2018 from 2017 was generally consistent
with the 1.0% increase in the Company’s direct premiums and escrow fees in the twelve months ended
September 30, 2018 as compared with the twelve months ended September 30, 2017. 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.

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 $4.7 million, or 0.6%, in 2018 from 2017 and $52.9 million, or
7.4%, in 2017 from 2016. The increases were driven by recent acquisitions. Excluding the $42.2 million impact
information and other revenues decreased
of new acquisitions for the year ended December 31, 2018,
$37.5 million, or 4.9%, in 2018 compared to 2017. The decrease in 2018 from 2017, adjusted for the impact of
new acquisitions, was primarily due to lower demand for the Company’s valuation services, fulfillment services,
and automated products driven by a decrease in mortgage origination volumes and, to a lesser extent, lower
demand for the Company’s default information products driven by a decrease in loss mitigation activities.
Excluding the $77.4 million impact of new acquisitions for the year ended December 31, 2017, information and
other revenues decreased $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.

Net investment income increased $85.9 million, or 62.5%, in 2018 from 2017 and $26.7 million, or 24.1%,
in 2017 from 2016. The increase in 2018 from 2017 was mainly attributable to higher average balances due
primarily to strength in our commercial business and rising short-term interest rates, which drove higher income
from the Company’s cash and investment portfolio,
tax-deferred property exchange business and escrow
balances. The increase in 2017 from 2016 was primarily attributable to the increase in short-term interest rates
which drove higher income from the Company’s cash and investment portfolio, tax-deferred property exchange
business and escrow balances.

Net realized investment losses were $49.1 million for 2018 and were primarily from a decrease in the fair
values of equity securities of $32.6 million and losses from the sales of debt securities. Net realized investment
gains 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. Net realized investment gains were $18.9 million for 2016 and
were primarily from the sales of debt and equity securities. Net realized investment gains for 2018, 2017 and
2016 included $1.1 million, $0.8 million and $3.3 million, respectively, of gains from the sale of real estate. In
addition, net realized investment gains for 2018, 2017 and 2016 included impairment losses of $1.1 million,
$3.0 million and $5.2 million, respectively. The impairment losses in 2018, 2017 and 2016 were primarily related
to the retirement of a trade name, title plants and internally developed software, respectively.

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

41

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 $35.4 million, or 2.2%, in 2018 from 2017 and $58.3 million, or 3.7%, in 2017
from 2016. The increases were largely driven by recent acquisitions. Excluding the $28.3 million impact of new
acquisitions for the year ended December 31, 2018, personnel costs increased $7.1 million, or 0.4%, in 2018
compared to 2017. The slight increase in 2018 from 2017, adjusted for the impact of new acquisitions, was
primarily attributable to higher employee benefit, salary, severance and stock-based compensation expenses,
partially offset by lower incentive compensation, overtime and temporary labor expenses. The increase in
employee benefit costs was due to a higher 401(k) savings plan match. The higher salary expense was due to one
additional payroll day and higher average headcount in our international operations. Excluding the $57.5 million
impact of new acquisitions for the year ended December 31, 2017, personnel costs increased $0.8 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. Personnel costs included severance expense of $15.2 million,
$10.1 million and $8.3 million for 2018, 2017 and 2016, 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 981,800, 1,069,000 and
1,281,400 domestic title orders in 2018, 2017 and 2016, respectively, representing decreases of 8.2% in 2018
from 2017 and 16.6% in 2017 from 2016.

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

2018

2017

2016

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

(in thousands, except percentages)
$1,863,356

$1,799,836

$1,801,571

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

$2,284,906

$2,360,659

$2,286,630

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

78.8%

78.9%

78.8%

The premium split between underwriter and agents is in accordance with the respective agency contracts and
can vary from region to region due to divergences in real estate closing practices and state regulations. As a
result, the percentage of title premiums retained by agents can vary due to the geographic mix of revenues from
agency operations. The changes in the percentage of title premiums retained by agents in 2018 from 2017 and in
2017 from 2016 were primarily due to changes in the geographic mix of agency revenues.

Other operating expenses (principally related to direct operations) increased $5.3 million, or 0.7%, in 2018
from 2017 and $23.6 million, or 3.1%, in 2017 from 2016. The increases were driven by recent acquisitions.
Excluding the $19.6 million impact of new acquisitions for the year ended December 31, 2018, other operating
expenses decreased $14.3 million, or 1.8%, in 2018 compared to 2017. The decrease in 2018 from 2017, adjusted
for the impact of new acquisitions, was primarily attributable to a reduction in discretionary spending, an
increase in earnings credits and small decreases across several expense categories, partially offset by higher
software expense and foreign currency exchange losses. The decrease was also related to the $8.5 million
out-of-period adjustment recorded in 2017, which is further discussed below. 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

42

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.

The provision for policy losses and other claims, expressed as a percentage of title insurance premiums and
escrow fees, was 4.0% for the years ended December 31, 2018 and 2017 and 5.5% for the year ended
December 31, 2016.

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, 2018, the IBNR claims reserve for the title insurance and services segment was
$877.1 million, which reflected management’s best estimate. The Company’s internal actuary determined a range
of reasonable estimates of $737.7 million to $925.8 million. The range limits are $139.4 million below and
$48.7 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 2017 rate of 4.0% reflected the ultimate loss rate for policy year 2017 and no change in the loss reserve

estimates for prior policy years.

The 2016 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
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.

As of December 31, 2018, the projected ultimate loss rates for policy years 2018, 2017 and 2016 were 4.0%,

3.9% and 3.8%, respectively.

Depreciation and amortization expense decreased $2.5 million, or 2.0%, in 2018 from 2017 and increased
$28.5 million, or 30.6%, in 2017 from 2016. The decrease in 2018 from 2017 was primarily attributable to 2017
being impacted by $5.3 million of accelerated amortization charges and $4.7 million in out-of-period
adjustments, both of which are further discussed below. The decrease in 2018 was partially offset by $7.7 million
of amortization expense related to recent acquisitions. 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.

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;

43

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, 2018, 2017 and 2016.

Interest expense increased $4.0 million, or 113.1%, in 2018 from 2017 and $670 thousand, or 23.5%, in
2017 from 2016. The increase in 2018 from 2017 was primarily attributable to higher interest paid related to
customer deposits at the Company’s banking subsidiary, First American Trust, FSB, and secured financings
payable. The increase in interest paid on customer deposits is due to an increase in average balances and higher
interest rates paid. The secured financings payable relate to a specialized warehouse lender that the Company
acquired in 2018.

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 the relatively high proportion of fixed costs, title insurance profit margins generally
improve as closed order volumes increase. Title insurance profit margins are also impacted by the segment’s net
investment income and net realized investment gains or losses, which may not move in the same direction as
closed order volumes. 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 12.4%, 12.1% and 11.7% for the years ended
December 31, 2018, 2017 and 2016, respectively.

Specialty Insurance

Revenues

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

2018

2017

2016

2018 vs. 2017

2017 vs. 2016

$ Change % Change

$ Change % Change

(in thousands, except percentages)

$454,718
11,802
10,190

$439,470
11,259
9,713

$411,353
10,877
9,476

$ 15,248
543
477

3.5
4.8
4.9

$28,117
382
237

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

(7,368)

4,578

4,138

(11,946)

(260.9)

440

469,342

465,020

435,844

4,322

0.9

29,176

Expenses

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

75,355

71,604

67,733

3,751

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

74,025

67,813

62,610

6,212

Provision for policy losses

and other claims . . . . . . .

279,113

275,088

252,940

4,025

Depreciation and

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

6,721
7,129

6,351
7,256

5,593
6,894

370
(127)

442,343

428,112

395,770

14,231

5.2

9.2

1.5

5.8
(1.8)

3.3

3,871

5,203

22,148

758
362

32,342

Income before income taxes . . .

$ 26,999 $ 36,908

$ 40,074

$ (9,909)

(26.8)

$ (3,166)

(7.9)

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

5.8%

7.9%

9.2%

(2.1)% (26.6)

(1.3)% (14.1)

44

6.8
3.5
2.5

10.6

6.7

5.7

8.3

8.8

13.6
5.3

8.2

Direct premiums increased $15.2 million, or 3.5%, in 2018 from 2017 and $28.1 million, or 6.8%, in 2017
from 2016. 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.

Net realized investment losses for the specialty insurance segment were $7.4 million for 2018 and were
primarily from a decrease in the fair values of equity securities of $6.1 million and losses from the sales of debt
securities. Net realized investment gains totaled $4.6 million and $4.1 million for 2017 and 2016, respectively,
and were primarily from the sales of debt and equity securities, and for 2016, included $2.3 million of gains from
the sale of real estate.

Personnel costs and other operating expenses increased $10.0 million, or 7.1%, in 2018 from 2017 and
$9.1 million, or 7.0%, in 2017 from 2016. The increase in 2018 from 2017 was primarily attributable to higher
salary expense due to higher average salaries, higher allocations related to corporate shared services, and higher
advertising, sales tax, and employee benefit expenses. The increase in 2017 from 2016 was primarily attributable
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.

The provision for home warranty claims, expressed as a percentage of home warranty premiums, was 53.8%
in 2018, 53.5% in 2017 and 60.7% in 2016. The slight increase in rate in 2018 from 2017 was primarily
attributable to an increase in claims severity, mostly offset by a decrease in claims frequency. The increase in
claims severity was primarily due to higher claims management costs driven in part by the mix of claims. 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 in 2017 when compared to 2016.

The provision for property and casualty claims, expressed as a percentage of property and casualty
insurance premiums, was 82.3% in 2018, 85.0% in 2017 and 63.3% in 2016. The decrease in rate in 2018 from
2017 was primarily attributable to the occurrence of one event in 2018 compared with two events in 2017 with
losses exceeding property and casualty’s reinsurance retention limit of $5.0 million for each event. During the
fourth quarter of 2018 there was one wildfire in California that exceeded the reinsurance retention limit
compared to two separate wildfires during the fourth quarter of 2017 that exceeded the reinsurance retention
limit. 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 the two separate wildfires with losses exceeding the reinsurance retention limit for each event, and
rainstorms in the western portion of the United States.

Premium taxes as a percentage of specialty insurance segment premiums were 1.6% in 2018 and were 1.7%

in 2017 and 2016.

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. Specialty insurance profit margins are also impacted by the segment’s net
investment income and net realized investment gains or losses, which may not move in the same direction as

45

premium revenues. Pre-tax margins were 5.8%, 7.9% and 9.2% for the years ended December 31, 2018, 2017
and 2016, respectively.

Corporate

Revenues

Net investment (losses)

2018

2017

2016

2018 vs. 2017

2017 vs. 2016

$ Change % Change

$ Change % Change

(in thousands, except percentages)

income . . . . . . . . . . . . . $ (3,115) $ 15,326 $

5,946 $ (18,441)

(120.3)

$ 9,380

(3,115)

15,326

5,946

(18,441)

(120.3)

9,380

157.8

157.8

Expenses

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

1,748

15,506

9,301

(13,758)

(88.7)

6,205

66.7

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

33,879

201,062

128,222

(167,183)

(83.1)

72,840

56.8

Depreciation and

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

Loss before income

153
33,569

69,349

162
32,537

385
29,403

(9)
1,032

(5.6)
3.2

(223)
3,134

(57.9)
10.7

249,267

167,311

(179,918)

(72.2)

81,956

49.0

taxes . . . . . . . . . . . . . . . $(72,464) $(233,941) $(161,365) $ 161,477

69.0

$(72,576)

(45.0)

Net investment losses totaled $3.1 million in 2018 and net investment income totaled $15.3 million and
$5.9 million in 2017 and 2016, respectively. The change in net investment income for all three years was
primarily attributable to fluctuations in earnings on investments associated with the Company’s deferred
compensation plan.

Corporate personnel costs and other operating expenses were $35.6 million, $216.6 million and
$137.5 million in 2018, 2017 and 2016, respectively. The change in personnel costs and other operating expenses
for all three years was primarily attributable to pension settlement costs that the Company recognized related to
the termination of its funded defined benefit pension plans of $152.4 million and $66.3 million in 2017 and 2016,
respectively.

Interest expense increased $1.0 million, or 3.2%, in 2018 from 2017 and $3.1 million, or 10.7%, in 2017
from 2016. The increase in 2018 from 2017 was due to an increase in the interest rate on borrowings under the
Company’s credit facility. Borrowings under the credit facility bear interest at a variable rate, which increased in
2018 when compared to 2017. The increase in 2017 from 2016 was 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, 2018, 2017

and 2016.

46

Income Taxes

Income taxes differ from the amounts computed by applying the federal income tax rates of 21% for 2018

and 35.0% for 2017 and 2016. A reconciliation of these differences is as follows:

Year ended December 31,

2018

2017

2016

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

$128,003
9,941
875
7,287

(in thousands, except percentages)
21.0% $ 155,866
(872)
1.6
(3,482)
0.1
(6,163)
1.2
—
— —

(6,804)

(1.1)

(146) —

(5,516)

(0.9)

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

35.0%
0.8
(2.2)
(1.7)
(2.6)

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

(5,991)

— —
— —

(1.2)

$133,640

21.9% $ 23,468

5.3% $134,105

28.1%

The Company’s effective income tax rates (income tax expense as a percentage of income before income
taxes) were 21.9% for 2018, 5.3% for 2017 and 28.1% for 2016. The differences in the effective tax rates year over
year 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 2018 also includes a reduction in
the federal tax rate from 35% to 21% as a result of the Tax Reform Act. In addition, the Company’s effective tax
rate for 2018 reflects the adjustment made to its initial 2017 estimates for the Tax Reform Act. The Company’s
effective tax rate for 2017 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 rates for 2018 and 2017 reflected 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 Company’s effective tax rate for 2016 reflects the resolution of certain
tax authority examinations and tax credits claimed in 2016 and in prior years.

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,

2018

2017

2016

(in thousands, except per share amounts)
$342,993
$423,049
$474,496

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

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

$

$

4.21

4.19

$

$

3.79

3.76

$

$

3.10

3.09

Weighted-average common shares outstanding:

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

112,613

111,668

110,548

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

113,279

112,435

111,156

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

per share.

47

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 $793.2 million, $632.1 million and $489.4 million for the
years ended December 31, 2018, 2017 and 2016, respectively, after claim payments, net of recoveries, of
$450.8 million, $472.0 million and $463.0 million, respectively. The principal nonoperating uses of cash and
cash equivalents for the years ended December 31, 2018, 2017 and 2016 were purchases of debt and equity
securities, dividends to common stockholders, capital expenditures and business acquisitions, and for the year
ended December 31, 2018, advances and repayments under secured financing agreements. The most significant
nonoperating sources of cash and cash equivalents for the years ended December 31, 2018, 2017 and 2016 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 years ended December 31, 2018 and 2016, borrowings and
collections under secured financing agreements and net proceeds from the issuance of notes and contracts
payable, respectively. The net effect of all activities on total cash and cash equivalents were increases of
$79.9 million and $381.1 million for the years ended December 31, 2018 and 2017, respectively, and a decrease
of $21.2 million for the year ended December 31, 2016.

The Company continually assesses its capital allocation strategy, including decisions relating to dividends,
stock repurchases, capital expenditures, acquisitions and investments. In August 2018, the Company’s board of
directors approved an increase in the Company’s quarterly cash dividend to 42 cents per common share,
representing an 11% increase from the prior level of 38 cents per common share. The dividend increase became
effective beginning with the September 2018 dividend. In January 2019, the Company’s board of directors
approved a first quarter cash dividend of 42 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.

48

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 $163.6 million remained as of
December 31, 2018. 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, 2018, the Company
repurchased and retired 425 thousand shares of its common stock for a total purchase price of $18.8 million and,
as of December 31, 2018, had repurchased and retired 3.6 million shares of its common stock under the current
authorization for a total purchase price of $86.4 million. In January 2019, the Company repurchased and retired
47 thousand shares of its common stock for a total purchase price of $2.1 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, 2018, under such regulations, the maximum amount available to the holding company from its
from applicable regulators, was dividends of
insurance subsidiaries in 2019, without prior approval
$291.2 million and loans and advances of $98.6 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 amended 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 had an
overall favorable impact on the Company’s effective tax rate, resulting in less cash required for tax payments,
and the Company expects the Tax Reform Act will continue to have an overall favorable impact on its effective
tax rate and 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.

As of December 31, 2018, the holding company’s sources of liquidity included $327.3 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 and outstanding borrowings will become due and payable 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, 2018, outstanding borrowings under the facility
totaled $160.0 million at an interest rate of 4.15%.

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.

49

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, 2018, the Company
was in compliance with the financial covenants under the credit agreement.

The Company anticipates that it will enter into a successor credit agreement prior to the current agreement’s
termination on May 14, 2019. If necessary, the Company has sufficient liquidity available at its holding company
to repay the outstanding balance of $160.0 million without causing significant liquidity issues.

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 2018, the Company financed securities for funds received totaling
$10.0 million under these agreements. As of December 31, 2018, 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 certain correspondent institutions. As of December 31, 2018, no amounts
remained outstanding under any of these facilities.

The Company’s debt to capitalization ratio was 17.8% and 17.4% at December 31, 2018 and 2017,
respectively. The increase in 2018 reflects the debt assumed in connection with the Company’s 2018 acquisition
of a specialized warehouse lender.

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, 2018, 94% of the Company’s investment
portfolio consisted of debt securities, of which 69% were either United States government-backed or rated AAA
and 97% were either 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, 2018, see Note 3 Debt
and Equity Securities to the consolidated financial statements.

In addition to its debt and equity 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 $125.5 million,
$136.7 million and $132.3 million for 2018, 2017 and 2016, respectively.

50

Contractual obligations. A summary of the Company’s contractual obligations at December 31, 2018, by

due date, is as follows:

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

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

Total

Less than
1 year

1-3 years

3-5 years

More than
5 years

$ 735,038

$ 165,384

(in thousands)
$ 10,031

$259,507

$ 300,116

129,761
76,313
334,793
3,786,183
1,042,679
399,886

27,888
76,313
76,375
3,786,183
273,255
14,588

50,604
—
122,879
—
222,635
31,620

39,734
—
70,807
—
151,442
32,741

11,535
—
64,732
—
395,347
320,937

$6,504,653

$4,419,986

$437,769

$554,231

$1,092,667

The timing of payments related to claims losses 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. 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 $13.3 million has not been
included in the contractual obligations table.

Off-balance sheet arrangements. The Company administers escrow deposits and trust assets as a service to
its customers. Escrow deposits totaled $7.6 billion and $7.5 billion at December 31, 2018 and 2017, respectively,
of which $3.6 billion and $2.9 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 $3.6 billion and $3.7 billion at
December 31, 2018 and 2017, 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 as income or a reduction in expense,
as appropriate, in the consolidated statements of income based on the nature of the arrangement and benefit
received.

The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the
Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a
facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to
property identified by the customer to be acquired with such proceeds. Upon the completion of each such
exchange, the identified property is transferred to the customer or, if the exchange does not take place, an amount
equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is
transferred to the customer. Like-kind exchange funds held by the Company totaled $2.7 billion and $2.6 billion

51

at December 31, 2018 and 2017, 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 debt securities, which includes a high proportion 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 debt securities portfolio at December 31, 2018 and 2017 were $5.7 billion and
$4.8 billion, respectively. One means of assessing the exposure of the Company’s debt securities 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 debt securities portfolio (including investments in preferred stock) at
December 31, 2018 to decrease by approximately $198 million, or 3.5%, and $408 million, or 7.1%, respectively,
and at December 31, 2017 to decrease by approximately $172 million, or 3.6%, and $344 million, or 7.2%,
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, 2018 and 2017, 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, 2018 and
2017, 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 2018 and 2017.

The Company’s interest bearing escrow deposit

liabilities totaled $2.5 billion and $2.1 billion at
December 31, 2018 and 2017, respectively. These variable rate customer savings accounts are subject to market
rate fluctuations. The weighted-average interest rate was 0.12% and 0.10% for 2018 and 2017, respectively.
Assuming increases in interest rates of 25 and 50 basis points and that the deposit amounts at December 31, 2018
and 2017 are held constant for the entire year, interest expense for 2018 would be higher by $6.2 million and
$12.5 million, respectively, and 2017 would be higher by $5.1 million and $10.3 million, respectively.

52

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 $14.2 million and $19.0 million) was
$339.4 million and $447.5 million as of December 31, 2018 and 2017, respectively. Assuming broad-based
declines in equity market prices of 10% and 20%, with all other factors held constant, the fair value of the
Company’s equity securities at December 31, 2018 could decrease by $33.9 million and $67.9 million,
respectively, and at December 31, 2017 could decrease by $44.8 million and $89.5 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, 2018, see Note
3 Debt and Equity Securities to the consolidated financial statements.

53

Item 8. Financial Statements and Supplementary Data

INDEX

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

Consolidated Balance Sheets as of December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016 . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017
and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016 . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and

I.

of

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unaudited Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statement Schedules:
Summary
of
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Condensed Financial Information of Registrant as of December 31, 2018 and 2017 and for
the years ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary Insurance Information as of December 31, 2018 and 2017 and for the years
ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IV. Reinsurance for the years ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . .
V. Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and

in Related Parties

Investments—Other

Investments

than

III.

II.

as

Page No.

55

57
58

59
60

61
62
113

114

115

120
122

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

123

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.

54

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 (the “Company”) as of December 31, 2018 and 2017, 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, 2018, 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, 2018, 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, 2018 and 2017, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2018 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, 2018 based on criteria
established in Internal Control—Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which
it accounts for unrealized gains and losses associated with equity securities and the manner in which it accounts
for other components of net periodic pension and postretirement benefit cost in 2018.

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

55

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.

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
Los Angeles, California
February 20, 2019

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

56

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 $22,841 and

$23,066 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments:

Deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities, includes pledged securities of $110,975 and $108,427 . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Secured financings receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured financings payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes and contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies (Notes 18 and 19)
Stockholders’ equity:

Preferred stock, $0.00001 par value; Authorized—500 shares; Outstanding—

none . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common stock, $0.00001 par value; Authorized—300,000 shares;

Outstanding—111,496 shares and 110,925 shares . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

See Notes to Consolidated Financial Statements

57

December 31,

2018

2017

$ 1,467,129

$1,387,226

325,686
11,007

311,084
38,673

36,209
5,713,811
353,535
121,965
6,225,520
76,311
457,840
577,467
16,636
1,144,166
109,372
219,501
$10,630,635

41,335
4,752,684
466,516
117,768
5,378,303

—
439,569
568,452
22,803
1,113,005
99,913
214,194
$9,573,222

$ 3,786,183

$3,070,566

47,079
199,711
386,264
145,634
778,688
243,280
1,042,679
8,988
217,097
76,313
732,019
6,885,247

68,460
194,357
401,083
129,257
793,157
240,822
1,028,933
4,602
219,307
—
732,810
6,090,197

—

—

1
2,258,290
1,644,165
(160,575)
3,741,881
3,507
3,745,388
$10,630,635

1
2,236,351
1,311,112
(67,509)
3,479,955
3,070
3,483,025
$9,573,222

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

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

Year Ended December 31,

2018

2017

2016

Revenues:

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

$2,507,669
2,284,906
781,467
230,289
(56,487)

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

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

5,747,844

5,772,363

5,575,846

Expenses:

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

1,748,949
1,799,836
900,208
452,633
125,927
69,775
40,978

1,723,539
1,863,356
1,055,886
450,410
128,053
69,801
35,987

1,655,164
1,801,571
955,310
488,601
99,047
66,358
32,214

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

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

5,138,306

5,327,032

5,098,265

609,538
133,640

475,898
1,402

445,331
23,468

421,863
(1,186)

477,581
134,105

343,476
483

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

$ 474,496

$ 423,049

$ 342,993

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

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

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

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

$

$

$

4.21

4.19

1.60

$

$

$

3.79

3.76

1.44

$

$

$

3.10

3.09

1.20

Weighted-average common shares outstanding:

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

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

112,613

113,279

111,668

112,435

110,548

111,156

See Notes to Consolidated Financial Statements

58

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

Year Ended December 31,

2018

2017

2016

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

$475,898

$421,863

$343,476

Other comprehensive income (loss), net of tax:

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

(38,418)
(26,796)
12,680

63,563
24,744
74,597

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

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

(52,534)

162,904

8,607

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

423,364
1,384

584,767
(1,173)

352,083
487

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

$421,980

$585,940

$351,596

See Notes to Consolidated Financial Statements

59

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, 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 . . . . . . . . . . .
Share-based compensation . . .
Net activity related to

noncontrolling interests . . .

Other comprehensive

income . . . . . . . . . . . . . . . .

—

—

Balance at

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

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

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

—

Shares issued in connection

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

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

income . . . . . . . . . . . . . . . .

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

$(239,003)

—

—

—

—
—

—

$2,749,960
342,993

$ 3,163
483

$2,753,123
343,476

(131,541)

(454)

4,519
34,125

—

—

—
—

(26)

2,520

(131,541)

(454)

4,519
34,125

2,494

8,607

8,603

8,603

4

(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

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

1

2,236,351 1,311,112

(67,509)

3,479,955

3,070

3,483,025

—

162,891

162,891

13

162,904

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

(425) —

(18,801)

—

Cumulative effect adjustment

(Note 1) . . . . . . . . . . . . . . . .
Net income for 2018 . . . . . . . .
Dividends on common

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

Purchase of Company

—
—

—

—
—

—

Shares issued in connection

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

noncontrolling interests . . .
Other comprehensive loss . . . .

Balance at

996 —
—
—

—
—

—
—

—
—

40,550
474,496

(40,550)
—

—
474,496

—
1,402

— (178,487)

—

—

—
—

(178,487)

(18,801)

(4,105)
41,145

194
(52,516)

—

—

—
—

(947)
(18)

(599)
41,145

(3,506)
—

194
—

—
—

—
(52,516)

—
475,898

(178,487)

(18,801)

(4,105)
41,145

(753)
(52,534)

December 31, 2018 . . . . . . . 111,496

$

1

$2,258,290 $1,644,165

$(160,575)

$3,741,881

$ 3,507

$3,745,388

See Notes to Consolidated Financial Statements

60

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Year Ended December 31,

2018

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

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

$

475,898

$

421,863

$

343,476

Provision for policy losses and other claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premiums and accretion of discounts on debt securities, net
. . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of affiliates, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends from equity method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities excluding effects of acquisitions and noncash

transactions:

Claims paid, including assets acquired, net of recoveries . . . . . . . . . . . . . . . . . . . .
Net change in income tax accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in accounts and accrued income receivable . . . . . . . . . . . . . . .
Increase (decrease) in accounts payable and accrued liabilities . . . . . . . . . . . . . . .
Increase in deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

452,633
125,927
26,994
—
56,487
41,145
(2,717)
4,909

(450,756)
42,079
5,264
15,303
2,741
(2,742)

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)

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

793,165

632,134

489,416

CASH FLOWS FROM INVESTING ACTIVITIES:

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

(79,171)
3,361
(3,157,893)
1,501,402
640,558
(6,792)
(2,380,878)
2,374,329
(118,170)
2,630

(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

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

(1,220,624)

(387,168)

(610,148)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net change in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under secured financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of secured financings payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from issuance of notes and contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of notes and contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net activity related to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (payments) proceeds in connection with share-based compensation . . . . . . . . . . . . . . . .
Purchase of Company shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

715,617
2,380,976
(2,374,426)

—
(5,294)
(745)
—
(4,105)
(18,801)
(178,487)

514,735
(7,373)

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)

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

79,903
1,387,226

381,088
1,006,138

(21,183)
1,027,321

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

$ 1,467,129

$ 1,387,226

$ 1,006,138

SUPPLEMENTAL INFORMATION:
Cash paid during the year for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes, less refunds of $7,255, $52,153 and $4,055 . . . . . . . . . . . . . . . . . . . . . . .

$
$
$

39,183
68,526
91,745

$
$
$

33,680
66,785
126,208

$
$
$

30,125
65,506
116,309

See Notes to Consolidated Financial Statements

61

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 designed to mitigate risk or otherwise
facilitate real estate transactions, many of which products, services and solutions involve the use of real
property-related data; maintains, manages and provides access to title plant records and images; and
lien release and document
provides appraisals and other valuation-related products and services,
custodial services, warehouse lending 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, the District of Columbia and certain United States
territories. 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 62% 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 36 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
principles (“GAAP”) and reflect
the consolidated operations of the Company. The consolidated financial
statements include the accounts of First American Financial Corporation and all controlled subsidiaries. All
significant intercompany transactions and balances have been eliminated. Equity investments in which the
Company exercises significant influence, but does not control and is not the primary beneficiary, are accounted
for using the equity method. Equity investments in which the Company does not exercise significant influence
over the investee and without readily determinable fair values, are accounted for at cost, less impairment and are
adjusted for any observable price changes.

62

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Out-of-period adjustments

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

that should have been previously written off, and certain title plant

Also, during 2017, the Company identified certain title plant assets within its title insurance and services
imaging assets that were
segment
misclassified as title plant assets. To correct for these errors, the Company recorded adjustments in 2017 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.

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.

Debt 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 classifies its publicly traded debt securities as
available-for-sale with unrealized gains or losses recorded as a component of accumulated other comprehensive
loss.

63

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2018 and 2017, the fair values of
such investments totaled $111.0 million and $108.4 million, respectively. See Note 2 Statutory Restrictions on
Investments and Stockholders’ Equity for additional discussion of the Company’s statutory restrictions.

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 securities are determined on a
first-in, first-out basis.

The Company evaluates its debt 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, 2018, 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 loss is considered an other-than-temporary impairment
loss and the credit portion of the 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 its security-level review,

the Company did not recognize any other-than-temporary
impairment losses considered to be credit related for the years ended December 31, 2018 and 2017 and
recognized $0.5 million of other-than-temporary impairment losses considered to be credit related for the year
ended December 31, 2016. It is possible that the Company could recognize additional other-than-temporary
impairment losses on securities it owns at December 31, 2018 if future events or information cause it to
determine that a decline in fair value is other-than-temporary.

Equity securities

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 adopted new accounting guidance on January 1, 2018, which requires investments in equity
securities with readily determinable fair values to be measured at fair value with changes in fair value recognized

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through net income. See Recently Adopted Accounting Pronouncements within this note for further discussion of
the new guidance.

Other investments

Other investments consist primarily of equity investments in which the Company exercises significant
influence, but does not control and is not the primary beneficiary; equity investments in which the Company does
not exercise significant influence over the investee and without readily determinable fair values; investments in
real estate; and notes receivable.

Equity investments in which the Company exercises significant influence, but does not control and is not the
primary beneficiary, are accounted for under the equity method of accounting. These investments are initially
measured at cost and are generally adjusted by the Company’s share of equity in the income or losses of the
investee. The carrying value of these investments 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 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.

Equity investments in which the Company does not exercise significant influence over the investee and
without readily determinable fair values are measured at cost, less impairment and are adjusted for any
observable price changes.

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

estimated selling costs.

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

Secured financings receivable and payable

Secured financings receivable, which reflect financing transactions with correspondent mortgage lenders
involved in residential real estate lending, are collateralized by mortgages on residential real estate. Collections
of the receivable balance occur upon sale of the underlying mortgage loan to investors, generally within 30 days
and more typically in less than 10 days. Secured financings receivable is stated at the principal balance
outstanding and no allowance for doubtful accounts is maintained as the receivable balance is generally
considered fully collectible. Interest income is recorded on an accrual basis during the period the principal
balance remains outstanding.

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Secured financings payable reflect borrowings under secured warehouse lending facilities with several
banking institutions. Repayment of the warehouse borrowing occurs upon sale of the mortgage loan to investors
as noted above. Interest expense is recorded during the period the borrowing remains outstanding.

See Note 20 Business Combinations for further information about the Company’s 2018 acquisition of a

specialized warehouse lender.

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 ranging from 5 to 40 years and from 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, which is
acquired or developed for internal use and for use with the Company’s products, is amortized over estimated
useful lives ranging from 1 to 15 years using the straight-line method. Software development costs, which
include 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 $41 thousand, $0.5 million and $5.2 million for the years ended December 31, 2018, 2017 and
2016, respectively.

Title plants and other indexes

Title plants and other indexes included title plants of $530.4 million and $526.2 million and capitalized real
estate data of $47.1 million and $42.3 million at December 31, 2018 and 2017, respectively. Title plants are
carried at 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 ranging from 5 to 15 years.

Business Combinations

Amounts paid for acquisitions are allocated to the tangible and intangible assets acquired and liabilities
assumed, and are 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 for
which goodwill has been allocated. Those reporting units include title insurance, home warranty and property and

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casualty insurance. The Company’s trust and other services reporting unit has no allocated goodwill and is,
therefore, not assessed for impairment. 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 accounting
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 a qualitative
assessment and perform a 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
will perform a 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 expected cash flows 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

are not consistent with the Company’s estimates and assumptions, the Company may be exposed to future
impairment losses that could be material.

For 2018 and 2017, the Company chose to perform qualitative assessments for its title insurance and home
warranty reporting units and performed a quantitative impairment test for its property and casualty insurance
reporting unit. Based on the results of its quantitative impairment tests for 2018 and 2017, the Company
determined that the fair value of its property and casualty insurance reporting unit exceeded the carrying amount
and, therefore, no additional analysis was required. The results of the Company’s qualitative assessments for its
title insurance and home warranty reporting units for 2018 and 2017 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
three 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. As a result of the Company’s annual
goodwill impairment assessments, the Company did not record any goodwill impairment losses for 2018, 2017 or
2016.

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 an 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. A material change in expected
ultimate losses and corresponding loss rates for older policy years is also possible, particularly for policy years
with loss rates 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 reserve for property and casualty insurance losses reflects management’s best estimate of the amount
necessary to settle all reported and unreported claims for the ultimate cost of insured losses, based upon the facts
of each case and the Company’s experience with similar cases. The Company also utilizes the services of an

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

independent actuary as part of its reserve analysis. Because the establishment of appropriate reserves, including
reserves for catastrophes, is an inherently uncertain and complex process, the ultimate cost of insured losses may
be more or less than the reserve amount. Reserve estimates are regularly analyzed and updated to reflect the most
current information available.

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 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 and escrow fees are within the scope of new accounting guidance related to
the recognition of revenue from contracts with customers, which the Company adopted effective January 1, 2018.
Under the new guidance, revenue is recognized when control of the promised goods or services is transferred to
the customer and in an amount that reflects the consideration the Company expects to be entitled to in exchange
for these goods or services. See Recently Adopted Accounting Pronouncements within this note for further
discussion of the new guidance.

For those products and services where the Company’s performance obligation is satisfied at a point in time
and for which there is no ongoing obligation, revenue is recognized upon delivery. For those products and
services where the Company satisfies its performance obligation over time as the product or service is being
transferred to the customer, revenue is generally recognized using the output method as the products or services
are delivered.

The Company has elected to apply the optional exemptions allowed under the new guidance whereby the
Company is not required to disclose either the transaction price allocated to performance obligations that are
unsatisfied as of the end of the period or an explanation as to when the Company expects to recognize the related
revenue. Such contracts generally include performance obligations that are contingent upon the closing of a real
estate transaction or include variable consideration based on order volumes, and have remaining contract terms of
generally less than three years. The Company is eligible to apply the optional exemptions to its remaining
performance obligations due to 1) the performance obligation is part of a contract that has an original duration of

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one year or less, 2) the associated revenue being recognized is based on the Company’s right to invoice for the
value of the product or service delivered, 3) the associated variable consideration is being allocated entirely to
wholly unsatisfied performance obligations or 4) immateriality.

The Company has also elected to apply the practical expedient allowed under the new guidance whereby it
can disregard the impact to the transaction price of the effects of a significant financing component for
arrangements where the Company expects the period between delivery of the product or service and customer
payment to be one year or less. In addition, the Company has elected to apply the practical expedient whereby it
can recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization
period for the asset that the Company otherwise would have recognized is one year or less.

The Company records a contract asset, and recognizes revenue, upon delivery of certain products related to
the closing of a real property transaction where the Company’s right to payment is subject to the closing of the
real estate transaction. The Company records a contract liability for payments received in advance of revenue
recognition for certain products or services. Contract assets and liabilities were not material at December 31,
2018. Revenues recognized during the year ended December 31, 2018 that were included in contract liabilities at
the beginning of the period were not material.

For information about the Company’s revenues disaggregated by reportable segment see Note 21 Segment

Financial Information.

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.

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.

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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. For awards with retirement eligibility provisions, the cost is recognized through the date the employee
becomes eligible to retire and is no longer required to provide service to earn the award. 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 features 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.

The Company also offers 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
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.

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Foreign currency

The Company operates in other countries, including Canada, the United Kingdom, Australia, South Korea
and Hong Kong. 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 during the period. Translation adjustments resulting from the translation of the subsidiaries’
accounts are included in accumulated other comprehensive loss as a separate component of stockholders’ equity.
For those foreign subsidiaries where the U.S. dollar has been determined to be the functional currency,
non-monetary assets and liabilities are translated using historical rates, while monetary assets and liabilities are
translated at current rates, with remeasurement gains and losses included in other operating expenses. Gains and
losses resulting from foreign currency transactions are included within other operating expenses.

Reinsurance

the
The Company assumes and cedes large title insurance risks through reinsurance. Additionally,
Company’s property and casualty insurance business purchases reinsurance to limit risk associated with large
losses from single events. In reinsurance arrangements, the primary insurer retains a certain amount of risk under
a policy and cedes the remainder of the risk under the policy to the reinsurer. The primary insurer pays the
reinsurer a premium in exchange for accepting this risk of loss. The primary insurer generally remains liable to
its insured for the total risk, but is reinsured under the terms of the reinsurance agreement. The amount of
premiums assumed and ceded is recorded as a component of direct premiums and escrow fees on the Company’s
consolidated statements of income. The total amount of premiums assumed and ceded in connection with
reinsurance was less than 1.0% of consolidated premium and escrow fees for each of the three years in the period
ended December 31, 2018. Payments and recoveries on reinsured losses for the Company’s title insurance
business were immaterial during the years ended December 31, 2018, 2017 and 2016. For information related to
payments on reinsured losses for the Company’s property and casualty insurance business see Note 8 Reserve for
Known and Incurred But Not Reported Claims.

Escrow deposits and trust assets

The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits
totaled $7.6 billion and $7.5 billion at December 31, 2018 and 2017, respectively, of which $3.6 billion and
$2.9 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 $3.6 billion and $3.7 billion at
December 31, 2018 and 2017, respectively. Escrow deposits held at third-party financial institutions and trust
included in the accompanying
assets are not considered assets of the Company and,
consolidated balance sheets. However, the Company could be held contingently liable for the disposition of these
assets.

therefore, are not

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

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as appropriate, in the consolidated statements of income 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 $2.7 billion and $2.6 billion
at December 31, 2018 and 2017, 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 May 2017, the Financial Accounting Standards Board (“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. The adoption of this guidance had no impact on the
Company’s consolidated financial statements.

In March 2017, the FASB issued updated guidance intended to improve the presentation of net periodic
through the disaggregation of the service cost
pension cost and net periodic postretirement benefit 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. The Company adopted this change in accounting
principle at the beginning of 2018 and applied the change retrospectively. As a result, other components of net
benefit cost totaling $175.0 million and $101.5 million were reclassified from personnel costs to other operating
expenses on the consolidated statements of income for the years ended December 31, 2017 and 2016,
respectively. See Note 13 Employee Benefit Plans for further information on the Company’s net periodic pension
costs.

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

74

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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. The Company
adopted this guidance at the beginning of 2018 and recognized cumulative net unrealized gains, net of taxes, of
$40.6 million related to its investments in equity securities, previously classified as available-for-sale, through a
cumulative-effect adjustment to retained earnings. Changes in the fair values of these investments are reflected in
net realized investment gains/losses on the Company’s consolidated statements of income. See Note 3 Debt and
Equity Securities for further discussion of the Company’s investments in equity securities.

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 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 elected to adopt the new
guidance under the modified retrospective approach, which did not have a material impact on its consolidated
financial statements. See Revenues within this note for further information about the Company’s revenues within
the scope of the new guidance.

Pending Accounting Pronouncements:

In August 2018, the FASB issued updated guidance that is intended to reduce potential diversity in practice
in accounting for the costs of implementing cloud computing arrangements (i.e., hosting arrangements) that are
service contracts. The updated guidance aligns the requirements for capitalizing implementation costs for these
arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain

75

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

internal-use software and hosting arrangements that include an internal-use software license. 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 this guidance on its consolidated financial
statements.

In August 2018, the FASB issued updated guidance as part of its disclosure framework project intended to
improve the effectiveness of disclosures in the notes to the financial statements. The updated guidance
eliminates, adds and modifies certain disclosure requirements related to fair value measurements. The updated
guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early
adoption permitted. Except for the disclosure requirements, 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 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 this 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. The updated guidance
may either be adopted using a modified retrospective transition approach or may be initially applied on the
adoption date with the recognition of a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption. The Company has elected to initially apply the guidance as of the adoption date,
January 1, 2019, and expects to record on its balance sheet right-of-use assets and lease liabilities of
approximately $350 million and an immaterial cumulative-effect adjustment to retained earnings. The Company
expects the new guidance to have an insignificant impact on its consolidated statements of income and statements
of cash flows.

76

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Investments totaling $129.2 million and $131.0 million were on deposit with state treasurers in accordance

with statutory requirements for the protection of policyholders at December 31, 2018 and 2017, 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, 2018, under such regulations, the maximum amount available to the
Company from its insurance subsidiaries in 2019, without prior approval from applicable regulators, was
dividends of $291.2 million and loans and advances of $98.6 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, 2018 and 2017. Statutory net
income for the years ended December 31, 2018, 2017 and 2016 was $258.4 million, $306.5 million and
$150.0 million, respectively. FATICO was in compliance with the minimum statutory capital and surplus
requirements as of December 31, 2018.

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 $209.0 million
and $148.5 million at December 31, 2018 and 2017, 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, goodwill,
capitalized furniture and other equipment, capitalized software, and premiums and other receivables 90 days past
due), reporting of bonds at amortized cost, amortization of goodwill, deferral of premiums received as statutory
premium reserve, supplemental reserve (if applicable) and exclusion of the incurred but not reported claims
reserve. In addition, beginning in 2018, the changes in the fair values of equity securities are recorded through
net income for GAAP, whereas statutory accounting principles continue to require these changes to be recorded
on the balance sheet.

77

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3. Debt and Equity Securities:

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

(in thousands)

December 31, 2018
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, 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 . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
cost

Gross unrealized

gains

losses

Estimated
fair value

$ 162,904
1,050,134
158,885
319,115
3,219,585
575,646
274,881

$

741
7,210
571
1,145
12,030
1,113
551

$ (1,139) $ 162,506
1,045,035
157,297
316,167
3,202,599
561,260
268,947

(12,309)
(2,159)
(4,093)
(29,016)
(15,499)
(6,485)

$5,761,150

$23,361

$(70,700) $5,713,811

$ 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

Sales of debt securities resulted in realized gains of $3.3 million, $5.4 million and $12.6 million, realized
losses of $20.3 million, $16.4 million and $2.7 million, and proceeds of $1.3 billion, $821.0 million and
$561.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.

78

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

(in thousands)

December 31, 2018
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

19,749 $
172,387
23,654
56,270

(85) $

(1,772)
(1,037)
(748)

55,615 $ (1,054) $
369,139
42,119
90,631

(10,537)
(1,122)
(3,345)

75,364 $ (1,139)
(12,309)
541,526
(2,159)
65,773
(4,093)
146,901

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

850,459
374,473
175,762

(6,955)
(10,537)
(4,575)

982,610
109,844
50,802

(22,061) 1,833,069
484,317
(4,962)
226,564
(1,910)

(29,016)
(15,499)
(6,485)

$1,672,754 $(25,709) $1,700,760 $(44,991) $3,373,514 $(70,700)

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

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

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

671,871
171,817
81,525

(511) $

(1,714)
(972)
(409)

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

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)

774,959
60,724
5,697

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

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

$1,437,759 $(10,863) $1,206,188 $(21,830) $2,643,947 $(32,693)

Based on the Company’s review of its debt securities in an unrealized loss position at December 31, 2018, 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,
2018.

79

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investments in debt securities at December 31, 2018, by contractual maturities, are as follows:

(in thousands)

U.S. Treasury bonds

Due in one
year or less

Due after
one
through
five years

Due after
five
through
ten years

Due after
ten years

Total

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

$ 69,650
$ 69,504

$ 67,223
$ 67,043

$
$

2,744
2,716

$ 23,287
$ 23,243

$ 162,904
$ 162,506

Municipal bonds

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

$ 65,779
$ 65,708

$232,548
$232,572

$266,936
$266,724

$484,871
$480,031

$1,050,134
$1,045,035

Foreign government bonds

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

$ 20,304
$ 20,290

$112,746
$112,629

$ 14,336
$ 13,933

$ 11,499
$ 10,445

$ 158,885
$ 157,297

Governmental agency bonds

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

$ 21,574
$ 21,379

$122,750
$121,397

$127,392
$128,075

$ 47,399
$ 45,316

$ 319,115
$ 316,167

U.S. corporate debt securities

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

$ 29,561
$ 29,418

$266,261
$261,369

$250,275
$241,937

$ 29,549
$ 28,536

$ 575,646
$ 561,260

Foreign corporate debt securities

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

$ 17,889
$ 17,824

$169,153
$166,460

$ 79,443
$ 76,746

$
$

8,396
7,917

$ 274,881
$ 268,947

Total debt securities, excluding mortgage-backed

securities

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

$224,757
$224,123

$970,681
$961,470

$741,126
$730,131

$605,001
$595,488

$2,541,565
$2,511,212

Total mortgage-backed securities

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

Total debt securities

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

$3,219,585
$3,202,599

$5,761,150
$5,713,811

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

80

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investments in equity securities are as follows:

(in thousands)

December 31, 2018
Preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Cost

Estimated
fair value

$ 16,892
341,460

$ 14,162
339,373

$358,352

$353,535

$ 19,233
394,439

$ 18,990
447,526

$413,672

$466,516

The Company adopted new accounting guidance on January 1, 2018, which requires investments in equity
securities with readily determinable fair values to be measured at fair value with changes in fair value recognized
through net income. See Note 1 Basis of Presentation and Significant Accounting Policies for further discussion
of the new guidance.

Net losses (realized and unrealized) of $38.6 million were recognized for the year ended December 31, 2018
as a result of changes in the fair values of equity securities. Included in net losses during the year ended
December 31, 2018 were net unrealized losses of $37.6 million related to equity securities still held at
December 31, 2018. For the years ended December 31, 2017 and 2016, sales of equity securities resulted in
realized gains of $30.2 million and $18.1 million and realized losses of $2.1 million and $7.0 million,
respectively.

81

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The composition of the investment portfolio at December 31, 2018, 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

Debt securities:
U.S. Treasury bonds . . . . . . $ 162,506
Municipal bonds . . . . . . . . .
978,624
Foreign government

100.0
93.6

$ —
56,174

— $ —
10,237
5.4

— $ 162,506
1,045,035
1.0

100.0
100.0

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

128,759

81.9

24,888

15.8

3,650

2.3

157,297

100.0

Governmental agency

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

316,167

100.0

—

—

—

—

316,167

100.0

Governmental agency
mortgage-backed
securities . . . . . . . . . . . . . 3,202,599

U.S. corporate debt

100.0

—

—

—

—

3,202,599

100.0

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

242,100

43.1

172,633

30.8

146,527

26.1

561,260

100.0

Foreign corporate debt

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

119,565

Total debt securities . . . . . . 5,150,320
48
Preferred stocks . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . $5,150,368

44.4

90.1
0.3

89.9

118,029

371,724
12,916

43.9

6.5
91.2

191,767
1,198

$384,640

6.7

$192,965

31,353

11.7

268,947

100.0

3.4
8.5

3.4

5,713,811
14,162

100.0
100.0

$5,727,973

100.0

Included in debt securities at December 31, 2018, were bank loans totaling $144.6 million, of which
$133.2 million were non-investment grade; high yield corporate debt securities totaling $38.7 million, all of
which were non-investment grade; and emerging market debt securities totaling $72.2 million, of which
$9.6 million were non-investment grade.

82

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The composition of the debt securities portfolio in an unrealized loss position at December 31, 2018, by

credit rating, is as follows:

(in thousands, except percentages)

U.S. Treasury bonds . . . . . . $
Municipal bonds . . . . . . . . .
Foreign government

A- or higher

BBB+ to BBB-

Non-Investment Grade

Total

Estimated
fair value Percentage

Estimated
fair value Percentage

Estimated
fair value Percentage

Estimated
fair value Percentage

75,364
519,316

100.0
95.9

$ —
16,195

— $ —
6,015
3.0

— $
1.1

75,364
541,526

100.0
100.0

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

38,237

58.1

23,886

36.3

3,650

5.6

65,773

100.0

Governmental agency

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

146,901

100.0

—

—

—

—

146,901

100.0

Governmental agency
mortgage-backed
securities . . . . . . . . . . . . . 1,833,069

U.S. corporate debt

100.0

—

—

—

—

1,833,069

100.0

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

193,758

40.0

148,054

30.6

142,505

29.4

484,317

100.0

Foreign corporate debt

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

88,816

Total

. . . . . . . . . . . . . . . . . . $2,895,461

39.2

85.8

107,806

47.6

29,942

13.2

226,564

100.0

$295,941

8.8

$182,112

5.4

$3,373,514

100.0

Debt securities in an unrealized loss position at December 31, 2018,

included bank loans totaling
$141.2 million, of which $129.8 million were non-investment grade; high yield corporate debt securities totaling
$36.7 million, all of which were non-investment grade; and emerging market debt securities totaling
$63.4 million, of which $9.6 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” rating category because the payments of
principal and interest are guaranteed by the governmental agency that issued the security.

NOTE 4. Property and Equipment:

Property and equipment consists of the following:

December 31,

2018

2017

(in thousands)

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

$

25,472
257,159
242,415
667,667

$

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

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

1,192,713
(734,873)

1,149,597
(710,028)

$ 457,840

$ 439,569

83

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 5. Goodwill:

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

December 31, 2018 and 2017, is as follows:

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

Balance as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . .
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Title
Insurance
and Services

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

1,066,240
36,806
(5,017)
(628)

Specialty
Insurance

(in thousands)
$46,765
—
—
—

46,765
—
—
—

Total

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

1,113,005
36,806
(5,017)
(628)

Balance as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . .

$1,097,401

$46,765

$1,144,166

For further discussion about

the Company’s acquisitions in 2018 and 2017, see Note 20 Business

Combinations.

NOTE 6. Other Intangible Assets:

Other intangible assets consist of the following:

December 31,

2018

2017

(in thousands)

Finite-lived intangible assets:

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

$114,603
14,402
10,753
29,394
2,840

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

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

171,992
(79,535)

158,620
(75,591)

92,457

83,029

Indefinite-lived intangible assets:

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

16,915

16,884

$109,372

$ 99,913

Amortization expense for finite-lived intangible assets was $30.4 million, $28.1 million and $15.4 million

for the years ended December 31, 2018, 2017 and 2016, respectively.

84

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Year

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$25,620
$14,294
$10,967
$10,330
$ 9,859

NOTE 7. Deposits:

Deposit accounts are summarized as follows:

December 31,

2018

2017

(in thousands, except
percentages)

Escrow accounts:

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

$2,496,805
1,133,825

$2,058,596
879,252

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

3,630,630
155,553

2,937,848
132,718

$3,786,183

$3,070,566

Weighted-average interest rate:

Interest bearing escrow accounts . . . . . . . . . . . . . . . . . . . .

0.12%

0.10%

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

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

2018

$1,028,933

December 31,
2017

(in thousands)
$1,025,863

2016

$ 983,880

444,969
7,664

452,633

242,617
208,139

450,756

11,869

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

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

$1,042,679

$1,028,933

$1,025,863

85

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Current year payments, net of recoveries, include $228.3 million, $225.6 million and $211.3 million for the
years ended December 31, 2018, 2017 and 2016, respectively, that relate to the Company’s specialty insurance
segment. Prior year payments, net of recoveries, include $56.7 million, $46.1 million and $41.4 million for the
years ended December 31, 2018, 2017 and 2016, respectively, that relate to the Company’s specialty insurance
segment.

“Other” primarily includes foreign currency translation gains and losses and ceded reinsurance claims.
Payments and recoveries on reinsured losses for the Company’s title insurance business were immaterial during
the years ended December 31, 2018, 2017 and 2016. Payments on reinsured losses for the Company’s property
and casualty insurance business totaled $15.3 million, $8.9 million, and $2.1 million, and recoveries totaled
$20.3 million, $9.6 million, and $2.0 million for the years ended December 31, 2018, 2017 and 2016,
respectively.

The provision for title insurance losses, expressed as a percentage of title insurance premiums and escrow
fees, was 4.0% for the years ended December 31, 2018 and 2017 and 5.5% for the year ended December 31,
2016.

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.

The 2017 rate of 4.0% reflected the ultimate loss rate for policy year 2017 and no change in the loss reserve

estimates for prior policy years.

The 2016 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
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.

As of December 31, 2018, the projected ultimate loss rates for policy years 2018, 2017 and 2016 were 4.0%,

3.9% and 3.8%, respectively.

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

(in thousands, except percentages)

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

$

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

December 31,
2018

December 31,
2017

80,306
877,134

957,440
85,239

7.7% $
83,094
84.1% 875,724

91.8% 958,818
70,115
8.2%

8.1%
85.1%

93.2%
6.8%

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

$1,042,679

100.0% $1,028,933

100.0%

86

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Specialty Insurance Segment

The following reflects information about incurred and paid claims development for the Company’s specialty
insurance segment as of December 31, 2018, 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.

The information below about incurred and paid claims development for the years ended December 31, 2009

to 2015, is presented as supplementary information.

Incurred claims and allocated claim adjustment expenses, net of reinsurance

December 31, 2018

2009*

2010*

2011*

2012*

2013*

2014*

2015*

2016

2017

2018

Years ended December 31,

Total of
IBNR
liabilities
plus
expected
development
on reported
claims

Cumulative
number of
reported
claims

(in thousands)

$141,154 $139,580 $139,663 $139,266 $138,936 $139,090 $139,191 $139,216 $139,186 $ 139,186
140,324
140,621 139,966 139,991 139,639 140,128 140,641 140,353 140,308
149,487
148,395 149,076 149,768 149,486 149,763 149,552 149,488
161,650
157,287 158,981 159,918 160,579 160,517 160,911
184,777
182,858 184,419 185,244 184,826 184,668
190,944
190,985 190,738 191,120 191,025
226,555
221,617 225,754 225,977
251,506
245,859 249,358
275,480
267,392
264,088

$—
—
—
—
26
123
342
939
2,940
11,329

605
606
641
692
762
789
867
972
1,014
1,063

$1,983,997

Accident
Year

2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

Total

* Amounts unaudited.

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

Years ended December 31,

2009*

2010*

2011*

2012*

2013*

2014*

2015*

2016

2017

2018

$113,550

$134,606
113,513

$137,689
136,770
123,116

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

(in thousands)

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

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

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

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

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

Accident
Year

2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

$ 139,186
140,321
149,486
161,304
184,711
190,398
225,041
248,211
266,653
222,966

$1,928,277
16

$

55,736

Total
All outstanding liabilities before 2009, net of reinsurance

Liabilities for claims and claims adjustment expenses, net of reinsurance

* Amounts unaudited.

87

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, 2018, is as follows:

December 31, 2018

(in thousands)

Liability for unpaid claims and claim adjustment expenses, net of

reinsurance:

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

$

55,736

Reinsurance recoverable on unpaid claims:

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

Unallocated claims adjustment expenses:

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

Insurance lines other than short-duration:

28,290

1,213

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

957,440

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

$1,042,679

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

Company’s specialty insurance segment as of December 31, 2018:

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

82.6%

14.7%

1.5%

0.8%

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 4.15% and
3.32% at December 31, 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trust deed notes with maturities through 2023, collateralized by land and buildings with
net book values of $39,283 and $46,478 at December 31, 2018 and 2017, respectively,
weighted-average interest rate of 5.26% and 5.27%, at December 31, 2018 and 2017,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

December 31,

2018

2017

(in thousands, except
percentages)

$300,000
250,000

$300,000
250,000

160,000

160,000

19,247

22,725

interest rate of 4.49% and 4.70% at December 31, 2018 and 2017, respectively . . . . . . .

5,791

3,707

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

735,038
(462)
(2,557)

736,432
(560)
(3,062)

$732,019

$732,810

The weighted-average interest rate for the Company’s notes and contracts payable was 4.42% and 4.24% at

December 31, 2018 and 2017, respectively.

88

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 and outstanding borrowings will become due and payable 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, 2018, outstanding borrowings under the facility
totaled $160.0 million at an interest rate of 4.15%.

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, 2018, 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

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Annual
maturities

(in thousands)
$165,384
5,066
4,965
5,104
254,403
300,116

$735,038

89

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,

2018

2017

2016

(in thousands)

Interest on:

Cash, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 21,910
138,409
64,328
12,718
(6,399)
2,717
106

$

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

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

233,789
(3,500)

165,528
(3,126)

128,575
(2,441)

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

$230,289

$162,402

$126,134

NOTE 11.

Income Taxes:

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 amended the Internal Revenue Code to reduce
U.S. tax rates and modify policies, credits and deductions for individuals and businesses.

Also, on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, which provided for a
one-year measurement period that allowed businesses time to evaluate the financial statement implications of the
Tax Reform Act and to analyze its impact on financial statements issued during the measurement period. This
was in recognition of the fact that the ultimate impact of the Tax Reform Act on a business’ financial statements
could differ, perhaps materially, from the amounts originally estimated due to further refinement of tax
calculations, changes in interpretations and assumptions related to the Tax Reform Act, guidance issued by
taxing authorities and regulatory bodies, and actions businesses could take as a result of the Tax Reform Act. The
Company completed its accounting for the impact of the Tax Reform Act during the measurement period and
recorded adjustments of $6.8 million to its initial 2017 estimates during the fourth quarter of 2018. Specifically,
during 2018 the Company relied on regulations issued by the Internal Revenue Service and recorded an
additional $3.0 million of foreign tax credits available to offset taxes due on the future repatriation of foreign
earnings. In addition, the Company recorded a tax benefit of $3.8 million as a result of adjustments made to its
deferred tax balances as of December 31, 2017, primarily due to a change in its tax accounting method related to
statutory premium reserves. These amounts are reflected in the 2018 summary of income taxes and effective tax
rate reconciliation below.

For the years ended December 31, 2018, 2017 and 2016, domestic and foreign pretax income from
continuing operations before noncontrolling interests were $571.9 million and $37.6 million, $391.4 million and
$53.9 million, and $416.5 million and $61.1 million, respectively.

90

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Income taxes are summarized as follows:

Year ended December 31,

2018

2017

2016

(in thousands)

Current:

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

$101,427
12,285
8,990

$ 116,400
9,382
11,533

$ 24,208
1,943
10,806

Deferred:

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

122,702

137,315

36,957

4,381
299
6,258

(104,062)
(10,724)
939

10,938

(113,847)

91,190
3,753
2,205

97,148

$133,640

$ 23,468

$134,105

Income taxes differ from the amounts computed by applying the federal income tax rates of 21% for 2018

and 35.0% for 2017 and 2016. A reconciliation of these differences is as follows:

Year ended December 31,

2018

2017

2016

(in thousands, except percentages)

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

$128,003
9,941
875
7,287

21.0% $ 155,866
(872)
1.6
(3,482)
0.1
(6,163)
1.2
—
— —

(6,804)

(1.1)

(146) —

(5,516)

(0.9)

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

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

(5,991)

— —
— —

(1.2)

35.0%
0.8
(2.2)
(1.7)
(2.6)

$133,640

21.9% $ 23,468

5.3% $134,105

28.1%

The Company’s effective income tax rates (income tax expense as a percentage of income before income
taxes) were 21.9% for 2018, 5.3% for 2017, and 28.1% for 2016. The effective tax rates differ from the federal
statutory rate as a result of state and foreign income taxes for which the Company is liable, as well as permanent
differences between amounts reported for financial statement purposes and taxable income. The Company’s
effective tax rates for 2018 and 2017 also include the impact of the Tax Reform Act as discussed above, as well
as the recognition of excess tax benefits associated with share-based payment transactions through income tax
expense. The Company’s effective tax rate for 2017 also reflects state tax benefits relating to the termination of
the Company’s defined benefit pension plan and the release of reserves relating to tax positions taken on prior
year tax returns. The Company’s effective tax rate for 2016 reflects the resolution of certain tax authority
examinations and tax credits claimed in 2016 and in prior years.

91

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

are as follows:

Deferred tax assets:

December 31,

2018

2017

(in thousands)

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

$

7,362
87,960
7,421
1,793
18,817
13,290
11,356
8,415
5,464

$

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

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

Deferred tax liabilities:

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

161,878
(10,621)

153,011
(10,333)

151,257

142,678

230,758
108,497
1,957
—
10,506

351,718

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

339,182

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

$200,461

$196,504

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 years ended December 31, 2018
and 2017. The benefits recorded were $5.2 million and $3.4 million for the years ended December 31, 2018 and
2017, respectively.

In connection with the Company’s June 2010 spin-off from its prior parent, the Company entered into a tax
sharing agreement which governs the Company’s and its prior parent’s respective rights, responsibilities and
obligations for certain tax-related matters. At December 31, 2018 and 2017, the Company had a net payable to its
prior parent of $15.6 million and $15.0 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 increase during the current year was primarily the result of an additional accrual for tax matters prior to the
spin-off.

At December 31, 2018, the Company had available a foreign tax credit carryover net of valuation allowance

of $8.3 million. The Company expects to utilize this credit within the carryover period.

At December 31, 2018, the Company had available net operating loss carryforwards for income tax
purposes totaling $78.2 million, consisting of federal, state and foreign losses of $0.4 million, $35.9 million and

92

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$41.9 million, respectively. Of the aggregate net operating losses, $28.6 million has an indefinite expiration and
the remaining $49.6 million expires at various times beginning in 2019.

The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and
makes adjustments to the allowance as 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 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 deferred tax assets. At December 31, 2018
and 2017, the Company carried a valuation allowance of $10.6 million and $10.3 million, respectively, against its
deferred tax assets. Of this amount, $8.9 million and $9.3 million, respectively, related to net operating losses;
the remaining $1.7 million and $1.0 million, respectively, related 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 2018 that are not expected to be realized. Based on actual 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, 2018, 2017 and 2016, the liability for income taxes associated with uncertain tax
positions was $13.3 million, $12.8 million and $18.1 million, respectively. The net increase in the liability during
2018 was attributable to new uncertain tax positions and the net decreases in the liabilities during 2017 and 2016
were primarily attributable to activity related to examinations conducted by various taxing authorities. The
liabilities could be reduced by $3.7 million as of December 31, 2018 and 2017, and $5.7 million as of
December 31, 2016, due to offsetting tax benefits associated with the correlative effects of potential adjustments,
including timing adjustments and state income taxes. The net amounts of $9.6 million, $9.1 million and
$12.4 million as of December 31, 2018, 2017 and 2016, 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, 2018, 2017 and 2016 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,

2018

2017

2016

$12,800
—
500
—

(in thousands)
$18,100
(1,000)
—
(4,300)

$23,800
(7,100)
1,400
—

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

$13,300

$12,800

$18,100

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, 2018, 2017 and 2016, the Company had accrued
$5.8 million, $5.3 million and $4.1 million, respectively, of interest and penalties (net of tax benefits of
$1.6 million, $1.4 million and $1.8 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,
Canada, India and the United Kingdom. As of December 31, 2018, the Company had concluded U.S. federal
income tax examinations through 2015 and is generally no longer subject to state and non-U.S. income tax
examinations for years prior to 2005.

93

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the
Company’s unrecognized tax positions may significantly decrease within the next 12 months. Any such 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,

2018

2017

2016

(in thousands, except per share data)

Numerator

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

$474,496

$423,049

$342,993

Denominator

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

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

112,613
666

113,279

111,668
767

112,435

110,548
608

111,156

Net income per share attributable to the Company’s

stockholders

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

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

$

$

4.21

4.19

$

$

3.79

3.76

$

$

3.10

3.09

For the years ended December 31, 2018 and 2017, 11 thousand and 2 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. The Savings Plan held 2,162,000 shares and 2,428,000 shares of the Company’s common stock,
representing 1.9% and 2.2% of the Company’s total common shares outstanding at December 31, 2018 and 2017,
respectively. Effective July 1, 2015, participants in the Savings Plan can no longer make additional investments
in common stock of the Company.

94

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2018 and 2017, the value of the assets held in the Rabbi Trust of
$86.5 million and $92.7 million, respectively, and the unfunded liabilities of $94.3 million and $97.2 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 and employee benefit plans. Expenses related
to these plans and the Company’s deferred compensation plan are included in the table below under “other plans,
net”.

The principal components of employee benefit costs are as follows:

Year ended December 31,

2018

2017

2016

(in thousands)

Expense:

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

$46,208
—
9,248
2,794

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

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

$58,250

$227,188

$145,720

95

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the benefit obligations and funded status associated with the Company’s

unfunded supplemental benefit and funded defined benefit pension plans:

December 31,

2018

2017

Unfunded
supplemental
benefit plans

Unfunded
supplemental
benefit plans

(in thousands)

Defined
benefit
pension
plans

Change in projected benefit obligation:

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

$258,528
519
8,079
(16,517)
—
(13,836)

$251,204
734
8,350
11,761
—
(13,521)

$ 315,108

—
4,911
8,560
(318,592)
(9,987)

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

236,773

258,528

—

Change in plan assets:

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

—
—
13,836
—
(13,836)

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

—

—
—
13,521
—
(13,521)

—

Reconciliation of funded status:

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

$236,773

$258,528

Amounts recognized in the consolidated balance sheet:

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

$236,773

$258,528

Amounts recognized in accumulated other comprehensive

loss:

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

$ 80,251
(8,250)

$101,596
(12,429)

$ 72,001

$ 89,167

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

$236,773

$258,528

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

—

—

—

—
—

—

—

$

$

$

$

$

96

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

pension 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,

2018

2017

2016

(in thousands)

$

519
8,079
—
4,828
(4,178)
—

$

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

$

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

$ 9,248

$175,073

$102,521

The Company adopted new accounting guidance which requires the components of net periodic cost, other
than the service cost component, to be included in other operating expenses in the Company’s consolidated
statements of income. The change was applied retrospectively to the prior year, which resulted in a reclass of
$175.0 million and $101.5 million from personnel costs to other operating expenses for the years ended
December 31, 2017 and 2016, respectively. For further information about the new guidance see Note 1 Basis of
Presentation and Significant Accounting Policies.

For the years ended December 31, 2017 and 2016, net periodic cost includes costs related to the Company’s

previously terminated defined benefit pension plans, for which the Company has no remaining obligation.

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 $3.7 million and a credit of $4.1 million, respectively.

The weighted-average discount rate assumptions used to determine net periodic benefit costs for the
Company’s unfunded supplemental benefits plans for the years ended December 31, 2018, 2017 and 2016, were
as follows:

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

Year ended December 31,

2018

3.61%
3.78%
3.23%

2017

4.03%
4.32%
3.43%

2016

4.33%
4.69%
3.56%

The weighted-average discount rate assumption used to determine the projected benefit obligation for the

Company’s unfunded supplemental benefits plans at December 31, 2018 and 2017, was as follows:

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

4.32%

3.61%

December 31,

2018

2017

97

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 $14.6 million to its unfunded supplemental benefit

plans during 2019.

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

Year

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Five years thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$14,588
$15,626
$16,000
$16,259
$16,492
$81,032

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.

98

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assets measured at fair value on a recurring basis

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

recurring basis are summarized as follows:

Debt securities

The fair values of debt securities were based on the market values obtained from independent pricing
services that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and
other market information and price quotes from well-established, independent broker-dealers. The independent
pricing services monitor market indicators, industry and economic events, and for broker-quoted only securities,
obtain quotes from market makers or broker-dealers that they recognize to be market participants. The pricing
services utilize the market approach in determining the fair values 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 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,
issuance,
characteristics of the issuer, collateral attributes and prepayment speeds.

inputs and assumptions may also include the structure 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.

99

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, 2018 and 2017:

(in thousands)

December 31, 2018
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 162,506
1,045,035
157,297
316,167
3,202,599
561,260
268,947

5,713,811

$ — $ 162,506
1,045,035
157,297
316,167
3,202,599
561,260
268,947

—
—
—
—
—
—

—

5,713,811

14,162
339,373

14,162
339,373

353,535

353,535

—
—

—

$—
—
—
—
—
—
—

—

—
—

—

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

$6,067,346

$353,535

$5,713,811

$—

(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

There were no transfers between Levels 1 and 2 during the years ended December 31, 2018 and 2017.
Transfers into or out of the Level 3 category occur when unobservable inputs become more or less significant to
the fair value measurement. The Company’s policy is to recognize transfers between levels in the fair value
hierarchy at the end of the reporting period.

100

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables present a summary of the changes in the fair values of Level 3 assets for the years

ended December 31, 2018 and 2017:

(in thousands)

Fair value at beginning of period . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . .
Transfers out of Level 3 . . . . . . . . . . . . .
Net realized and unrealized gains

(losses):

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

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

December 31, 2018

December 31, 2017

U.S.
corporate
debt
securities

Foreign
corporate
debt
securities

Total

U.S.
corporate
debt
securities

Foreign
corporate
debt
securities

Total

$ 42,868
—
(25,089)

$1,666
—
(788)

$ 44,534
—
(25,877)

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

$ 6,268
—
(1,112)

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

(194)

3

(191)

(172)

18

(154)

(156)
—
(8,838)
(8,591)

(6)

—
(349)
(526)

(162)
—
(9,187)
(9,117)

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

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

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

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

$ — $ — $ — $ 42,868

$ 1,666

$ 44,534

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 approximates 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.

Secured financings receivable

The carrying amount of secured financings receivable approximates fair value due to the short-term nature

of these assets.

Secured financings payable

The carrying amount of secured financings payable approximates fair value due to the short-term nature of

these liabilities.

101

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, 2018 and 2017:

(in thousands)

December 31, 2018
Assets:

Carrying
Amount

Estimated fair value

Total

Level 1

Level 2

Level 3

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

$1,467,129
36,209
$
13,237
$
76,311
$

$1,467,129
35,979
$
12,805
$
76,311
$

$1,467,129
$
4,307
$
$

$ —
$ 31,672
— $ —
— $ 76,311

$ —
$ —
$12,805
$ —

Liabilities:

Secured financings payable . . . . . . . . . .
Notes and contracts payable . . . . . . . . .

$
76,313
$ 732,019

$
76,313
$ 741,839

$
$

— $ 76,313
— $736,048

$ —
$ 5,791

(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:

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

$ 732,810

$ 755,670

$

— $751,827

$3,843

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, which include
the Company’s directors and officers, as well as other employees, may elect to defer the distribution of their
RSUs to a future date beyond the scheduled vesting date. At December 31, 2018, 2.5 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 363,000 and 390,000 shares issued in
connection with this plan for the years ended December 31, 2018 and 2017, respectively. At December 31, 2018,
there were 2.0 million shares reserved for future issuances.

102

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,

2018

2017

2016

(in thousands)

Expense:

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

$37,597
—
3,548

$34,059
263
3,077

$31,120
271
2,734

$41,145

$37,399

$34,125

The following table summarizes RSU activity for the year ended December 31, 2018:

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

Unvested at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted during 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested during 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited during 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

1,411
791
(919)
(35)

Unvested at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,248

Weighted-average
grant-date
fair value

$36.66
54.80
41.27
44.84

$44.53

As of December 31, 2018, there was $28.1 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 weighted average
grant-date fair value of RSUs was $54.80, $39.56 and $36.70 for the years ended December 31, 2018, 2017 and
2016, respectively. The total fair value of shares distributed for the years ended December 31, 2018, 2017 and
2016 was $54.5 million, $34.6 million and $29.0 million, respectively. At December 31, 2018, 1.0 million shares
were vested but not distributed.

103

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes stock option activity for the year ended December 31, 2018:

(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, 2017 . . . . . . . . . . . . . . .
Exercised during 2018 . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2018 . . . . . . . . . . . . . . .

Exercisable at December 31, 2018 . . . . . . . . . . . . .

66
(36)

30

30

$27.66
27.66

$27.66

$27.66

5.0 years

5.0 years

$509

$509

As of December 31, 2018, there was no unrecognized compensation cost related to unvested stock options.

Cash proceeds from stock options exercised totaled $1.0 million and $1.8 million, and the total intrinsic
value of stock options exercised was $1.1 million and $1.0 million for the years ended December 31, 2018 and
2017, respectively. No stock options were exercised during the year ended 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.

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 $163.6 million remained as of
December 31, 2018. 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, 2018, the Company
repurchased and retired 425 thousand shares of its common stock for a total purchase price of $18.8 million and
as of December 31, 2018, had repurchased and retired 3.6 million shares of its common stock under the current
authorization for a total purchase price of $86.4 million.

104

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 17. Accumulated Other Comprehensive Income (Loss) (“AOCI”):

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

December 31, 2018, 2017 and 2016:

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

$(16,401)

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

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

$(239,000)

Change in unrealized gains (losses) on debt

and equity securities . . . . . . . . . . . . . . . . . . . . . . . .
. .
Change in foreign currency translation adjustment
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . . . .
Settlement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

(15,702)
—
—
—
—
—
5,343

—
(6,334)
—
—
—
—
—

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

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

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

(26,760)

(63,576)

(140,057)

(230,393)

Change in unrealized gains (losses) on debt

and equity 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, 2017 . . . . . . . . . . . . . . . . . . . . . .
Cumulative-effect adjustment, net of taxes (1) . . . . . .
Change in unrealized gains (losses) on debt

securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in foreign currency translation adjustment
. .
Net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect

86,834
—
—
—
—
—
(23,271)

36,803
(40,550)

(49,661)
—
—
—
—
11,243

—
24,744
—
—
—
—
—

(38,832)
—

—
(28,145)
—
—
—
1,349

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

(65,460)
—

—
—
16,517
4,828
(4,178)
(4,487)

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

(67,489)
(40,550)

(49,661)
(28,145)
16,517
4,828
(4,178)
8,105

Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . .

$(42,165)

$(65,628) $ (52,780)

$(160,573)

(1) The Company recognized a cumulative-effect adjustment to retained earnings for cumulative net unrealized
gains related to its investments in equity securities upon adoption of new accounting guidance on January 1,
2018. See Note 1 Basis of Presentation and Significant Accounting Policies for further discussion of the new
guidance.

105

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, 2018, 2017

and 2016, are as follows:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Accumulated
other
comprehensive
income (loss)

(in thousands)

2018
Allocated to the Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to noncontrolling interests . . . . . . . . . . . . . . . . .

$(42,167)
2

$(65,628) $ (52,780)

—

—

$(160,575)
2

Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . .

$(42,165)

$(65,628) $ (52,780)

$(160,573)

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)

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

years ended December 31, 2018, 2017 and 2016:

Unrealized
gains (losses)
on securities

Foreign
currency
translation
adjustment

Pension
benefit
adjustment

Total
other
comprehensive
income (loss)

(in thousands)

Year ended December 31, 2018

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

$ (63,910)
14,249
11,243

$(28,145)

—
1,349

$ 16,517
650
(4,487)

$ (75,538)
14,899
8,105

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

$ (38,418)

$(26,796)

$ 12,680

$ (52,534)

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

106

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)

2018

2017

2016

Affected line items

Unrealized gains (losses) on securities:

Net realized gains (losses) on sales of

Net realized investment

securities (1)

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

$(14,249) $ 14,719

$ 18,804

(losses) gains

Net other-than-temporary impairment

Net realized investment

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

—

—

(485)

(losses) gains

Pretax total . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(14,249) $ 14,719

$ 18,319

Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,226

$

(5,259) $ (7,007)

Pension benefit adjustment (2):

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

Pretax total . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (4,828) $ (17,742) $(28,282) Other operating expenses
4,844 Other operating expenses
(66,337) Other operating expenses

4,312
(152,388)

4,178
—

$

$

(650) $(165,818) $(89,775)

170

$ 67,322

$ 34,339

(1) Net realized losses for the year ended December 31, 2018 related to sales of debt securities and net realized

gains for the years ended December 31, 2017 and 2016 related to sales of debt and equity securities.

(2) These components of AOCI are components 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, 2018, are as follows:

Year

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$ 76,375
68,026
54,853
41,859
28,948
64,732

$334,793

Total rental expense for all operating leases,

including month-to-month rentals, was $89.4 million,

$91.0 million and $91.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.

107

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 or one of its subsidiaries engaged in improper debt collection practices, improperly charged fees
for products and services, participated in the conveyance of illusory property interests, failed to pay overtime and
provide break periods, improperly handled property and casualty claims and gave items of value to builders 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:

• Bartine v. First American Title Insurance Company, et al., filed on August 17, 2018 and pending in the

United States District Court for the Middle District of Florida,

• Brackens v. First American Home Warranty Corporation, filed on November 28, 2018 and pending in

the United States District Court for the District of Arizona,

108

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

•

•

•

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,

Leramo v. First American Title Insurance Company, et al., filed on December 19, 2018 and pending in
the United States District Court for the Eastern District of California,

Simons v. First American Title Insurance Company, filed on December 14, 2018 and pending in the
United States District Court for the Middle District of Florida,

Tenefufu vs. First American Specialty Insurance Company, filed on June 1, 2017 and 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 are putative class or collective actions for which a class or collective 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. The Company
believes it will receive an assessment related to this matter in the first half of 2019. While the amount of such
assessment is not currently known, based on preliminary discussions with the taxing authority, the Company
expects the assessment to be in the range of $12.0 million to $12.8 million, plus interest charges. As the

109

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Company does not believe that the services in question are subject to excise tax, it intends to avail itself of
avenues of appeal after the assessment is received, and it believes it is reasonably likely that the Company will
prevail on the merits. Based on the current facts and circumstances, the Company does not believe a loss is
probable, therefore no liability has been recorded.

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 year ended December 31, 2018, the Company completed acquisitions for an aggregate purchase
price of $82.9 million. For acquisitions in which the Company has not completed its purchase price allocation,
preliminary fair value estimates for the assets acquired and liabilities assumed have been recorded. The Company
allocates the purchase price of each acquisition to the assets acquired and liabilities assumed using a variety of
valuation techniques, including discounted cash flow analysis. These acquisitions have been included in the
Company’s title insurance and services segment.

Current year acquisitions included the purchase of a specialized warehouse lender that provides financing
for correspondent mortgage lenders. The business has itself secured warehouse lending facilities with several
banking institutions. The mortgage loans are generally sold by the correspondent mortgage lenders to investors
within 30 days and more typically in less than 10 days. The assets acquired included secured financings
receivable from correspondent mortgage lenders of $69.6 million and liabilities assumed included secured
financings payable of $69.8 million. The combined capacity for the warehouse lending facilities totals
$123.0 million with one additional warehouse lending facility having no stated capacity. Interest rates for the
warehouse lending facilities range from 3.50% to the current prime lending rate as published by The Wall Street
Journal. At December 31, 2018, outstanding borrowings under the facilities totaled $76.3 million.

During the year ended December 31, 2017, the Company completed acquisitions for an aggregate purchase
price of $91.1 million. 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 designed to mitigate risk or otherwise
facilitate real estate transactions, many of which products, services and solutions involve the use of real
property-related data; 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, warehouse lending 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

110

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

permit the issuance of title insurance policies, the District of Columbia and certain United States
territories. 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 62% 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 36 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, 2018, 2017 and 2016, 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

2018
Title Insurance and

Services . . . . . . . . . $5,282,781
469,342
(3,115)
(1,164)

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

$119,053
6,721
153
—

$5,747,844

$125,927

2017
Title Insurance and

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

Services . . . . . . . . . $5,293,156
465,020
15,326
(1,139)
$5,772,363

$121,540
6,351
162
—

$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

$ 655,003 $ 9,613,658 $ 54,674

26,999
(72,464)
—

600,268
431,222
(14,513)

—
—
—

$112,726
12,791
—
—

$ 609,538 $10,630,635 $ 54,674

$125,517

$ 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

$2,717
—
—
—

$2,717

$3,785
—
—
—
$3,785

$8,173
—
—
—

$8,173

111

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2018
Title Insurance and Services . . . .
Specialty Insurance . . . . . . . . . . .

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

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

Direct
premiums
and escrow
fees

Agent
premiums

Information
and other

Net
investment
income

Net realized
investment
gains (losses)

Total
Revenues

(in thousands)

$2,052,951
454,718

$2,284,906

—

$770,725
11,802

$223,318
10,190

$(49,119)
(7,368)

$5,282,781
469,342

$2,507,669

$2,284,906

$782,527

$233,508

$(56,487)

$5,752,123

$2,022,384
439,470

$2,360,659

—

$766,018
11,259

$137,439
9,713

$ 6,656
4,578

$5,293,156
465,020

$2,461,854

$2,360,659

$777,277

$147,152

$ 11,234

$5,758,176

$2,004,686
411,353

$2,286,630

—

$713,137
10,877

$110,757
9,476

$ 18,915
4,138

$5,134,125
435,844

$2,416,039

$2,286,630

$724,014

$120,233

$ 23,053

$5,569,969

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

years ended December 31, 2018, 2017 and 2016, are as follows:

Year Ended December 31,

2018

2017

2016

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

(in thousands)

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

$4,984,617
469,342

$298,059

—

$5,011,990
465,020

$281,090

—

$4,830,727
435,844

$303,352

—

$5,453,959

$298,059

$5,477,010

$281,090

$5,266,571

$303,352

Long-lived assets allocated between domestic and foreign operations, by segment, as of December 31, 2018,

2017 and 2016, are as follows:

2018

December 31,

2017

2016

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign

(in thousands)

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

$ 994,023
65,644

$61,615
—

$ 975,443
57,762

$59,960
—

$ 986,718
55,045

$40,161
—

$1,059,667

$61,615

$1,033,205

$59,960

$1,041,763

$40,161

112

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

QUARTERLY FINANCIAL DATA
(Unaudited)

2018
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income attributable to noncontrolling

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

stockholders (1):

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

2017
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)

$1,297,388
93,065
$
76,172
$

$1,491,157
$ 201,968
$ 155,091

$1,542,186
$ 195,587
$ 151,461

$1,417,113
$ 118,918
93,174
$

$
$

$
$

(55) $

(49) $

76,227

$ 155,140

$ 151,480

(19) $
$

1,525
91,649

0.68
0.67

$
$

1.38
1.37

$
$

1.34
1.34

$
$

0.81
0.81

Quarter Ended

March 31

June 30

September 30 December 31

(in thousands, except per share amounts)

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

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

$1,519,568
17,962
$
21,186
$

$1,481,323
$ 159,335
$ 220,713

$
$

$
$

(213) $

58,282

$ 122,257

21,383

(362) $
$

(197) $

(414)
$ 221,127

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.

113

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, 2018

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

$

36,209

$

35,979

$

36,209

Debt securities:

U.S. Treasury bonds

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

$ 162,904

$ 162,506

$ 162,506

Municipal bonds

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

$1,050,134

$1,045,035

$1,045,035

Foreign government bonds

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

$ 158,885

$ 157,297

$ 157,297

Governmental agency bonds

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

$ 319,115

$ 316,167

$ 316,167

Governmental agency mortgage-backed securities

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

$3,219,585

$3,202,599

$3,202,599

U.S. corporate debt securities

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

$ 575,646

$ 561,260

$ 561,260

Foreign corporate debt securities

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

$ 274,881

$ 268,947

$ 268,947

Total debt securities:

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

$5,761,150

$5,713,811

$5,713,811

Equity securities:

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

$ 358,352

$ 353,535

$ 353,535

Notes receivable, net:

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

$

13,237

$

12,805

$

13,237

Other investments:

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

$ 108,728

$ 108,728(1) $ 108,728

Total investments:

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

$6,277,676

$6,224,858

$6,225,520

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

excessive costs.

114

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note receivable from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SCHEDULE II
1 OF 5

December 31,

2018

2017

$ 327,306
—
2,529
11,007
4,592,281
7,500
16,636
90,164

$ 233,920
54,347
4,098
38,673
4,360,010

—
22,803
97,991

$5,047,423

$4,811,842

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

$

34,578
334,390
8,988
217,097
706,982

$

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

1,302,035

1,328,817

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—111,496 shares and 110,925 shares . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1
2,258,290
1,644,165
(160,575)

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

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

3,741,881
3,507

3,479,955
3,070

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

3,745,388

3,483,025

$5,047,423

$4,811,842

See Notes to Condensed Financial Statements

115

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF INCOME
(in thousands)

SCHEDULE II
2 OF 5

Year Ended December 31,

2018

2017

2016

Revenues:

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

$394,742
(2,986)

$354,350
15,011

$ 46,422
5,809

391,756

369,361

52,231

Expenses:

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

40,415

54,245

44,592

Income before income taxes and equity in undistributed earnings of

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

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

351,341
77,031
201,588

475,898
1,402

315,116
16,606
123,353

421,863
(1,186)

7,639
2,145
337,982

343,476
483

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

$474,496

$423,049

$342,993

See Notes to Condensed Financial Statements

116

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

SCHEDULE II
3 OF 5

Year Ended December 31,

2018

2017

2016

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

$475,898

$421,863

$343,476

Other comprehensive income (loss), net of tax:

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

(38,418)
(26,796)
12,680

63,563
24,744
74,597

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

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

(52,534)

162,904

8,607

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

423,364
1,384

584,767
(1,173)

352,083
487

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

$421,980

$585,940

$351,596

See Notes to Condensed Financial Statements

117

FIRST AMERICAN FINANCIAL CORPORATION
(Parent Company)

CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

SCHEDULE II
4 OF 5

Year Ended December 31,

2018

2017

2016

Cash flows from operating activities:

Cash provided by (used for) operating activities . . . . . . . . . . . . . . . . . . . $ 381,516 $ 232,347

$ (26,682)

Cash flows from investing activities:

Net cash effect of acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net payments to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(67,061)
(19,676)
—

(21,750)
(41,726)
82

—
(74,318)
204

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

(86,737)

(63,394)

(74,114)

Cash flows from financing activities:

Net proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . .
Net (payments) proceeds in connection with share-based compensation
plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of Company shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—

—
—

160,000
3,415

(4,105)
(18,801)
(178,487)

2,732
—

(159,284)

1,104
(454)
(131,541)

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

(201,393)

(156,552)

32,524

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

93,386
233,920

12,401
221,519

(68,272)
289,791

Cash and cash equivalents—End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 327,306 $ 233,920

$ 221,519

See Notes to Condensed Financial Statements

118

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 $394.4 million, $87.4 million and

$46.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.

119

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

2018
Title Insurance and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

343
32,390

$ 957,440
85,239

$

9,339
233,941

Total

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

$32,733

$1,042,679

$243,280

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

120

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

2018
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

$4,337,857
454,718
—
—

$174,199
2,822
(3,115)
(104)

$173,520
279,113
—
—

$ (125)
(1,138)
—
—

$ 793,364
74,025
33,879
(1,060)

$ —
459,098
—
—

Total

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

$4,792,575

$173,802

$452,633

$(1,263)

$ 900,208

$459,098

2017
Title Insurance and Services . . . . . .
Specialty Insurance . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . .

$4,383,043
439,470
—
—

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

$175,322
275,088
—
—

$
122
(1,030)
—
—

$ 788,074
67,813
201,062
(1,063)

$ —
450,098
—
—

Total

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

$4,822,513

$173,636

$450,410

$ (908)

$1,055,886

$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)
—
—

$ 764,502
62,610
128,222
(24)

$ —
426,815
—
—

Total

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

$4,702,669

$149,187

$488,601

$(4,179)

$ 955,310

$426,815

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

121

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

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,353,130

$16,398

$1,125

$4,337,857

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

$4,396,882

$15,014

$1,175

$4,383,043

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

$4,304,868

$16,277

$2,725

$4,291,316

Specialty Insurance

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 466,245

$11,527

$ —

$ 454,718

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

$ 448,296

$ 8,826

$ —

$ 439,470

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

$ 419,629

$ 8,276

$ —

$ 411,353

0.0%

0.0%

0.1%

0.0%

0.0%

0.0%

122

SCHEDULE V
1 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2018

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

$

23,066

$

5,039

$ — $

5,264(A) $

22,841

Reserve for known and incurred but not

reported claims:

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

$1,028,933

$452,633

$11,869

$450,756(B) $1,042,679

Reserve deducted from notes receivable:

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

Reserve deducted from deferred income taxes:

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

$

$

510

10,333

$

$

167

$ — $

334

288

$ — $ —

$

$

343

10,621

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

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

123

SCHEDULE V
2 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.

124

SCHEDULE V
3 OF 3

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Year Ended December 31, 2016

Column A

Column B

Column C

Additions

Column D

Column E

Description

Reserve deducted from accounts receivable:

Balance at
beginning
of period

Charged to
costs and
expenses

Charged
to other
accounts

Deductions
from
reserve

Balance
at end
of period

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

$ 31,552

$

5,208

$ — $

6,575(A) $

30,185

Reserve for known and incurred but not reported

claims:

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

$983,880

$488,601

$16,381

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

Reserve deducted from notes receivable:

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

$

2,275

Reserve deducted from deferred income taxes:

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

$

6,729

$

$

162

$ — $

324

1,516

$ — $

196

$

$

2,113

8,049

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

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

125

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, 2018, 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, 2018. 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, 2018, 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, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

Item 9B. Other Information

On February 19, 2019, the Company entered into amended and restated employment agreements with
Dennis J. Gilmore, Kenneth D. DeGiorgio, Christopher M. Leavell and Mark E. Seaton. Pursuant to the

126

amendments, the term of each of the revised agreements was extended by one year and now expires on
December 31, 2021; language was added to expressly make each executive’s compensation subject to clawback,
forfeiture, recoupment or any similar requirement; and the definition of what constitutes a termination of
employment for cause was revised. Each of the revised agreements incorporates the executive’s current base
salary.

The description of the amended and restated employment agreements provided herein is qualified in its

entirety by reference to the employment agreements, which are attached hereto as Exhibits 10.7 to 10.10.

127

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, 2018 for the Company’s upcoming 2019 meeting of stockholders (the “2019 Proxy
Statement”). If the 2019 Proxy Statement is not filed within 120 days after the fiscal year ended December 31,
2018, 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 under the captions “Information Regarding the
Nominees for Election,” “Information Regarding the Other Incumbent Directors,” “Executive Officers,”
“Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics” and “Board and Committee
Meetings” in the 2019 Proxy Statement and is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this Item will be set forth under the captions “Executive Compensation,”
“Compensation Discussion and Analysis,” “Executive Compensation Tables,” “Director Compensation,”
“Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in the
2019 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 under the captions “Securities Authorized for
Issuance under Equity Compensation Plans,” “Who are the largest principal stockholders outside of
management?” and “Security Ownership of Management” in the 2019 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 under the captions “Independence of Directors” and
“Transactions with Management and Others” in the 2019 Proxy Statement and is incorporated herein by
reference.

Item 14. Principal Accountant Fees and Services

The information required by this Item will be set forth under the captions “Principal Accountant Fees and
Services” and “Policy on Audit Committee Pre-approval of Audit and Permissible Nonaudit Services of
Independent Auditor” in the 2019 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 54 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 (*).

128

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.

Bylaws of First American Financial
Corporation, amended and restated 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, as Trustee.

Second Supplemental Indenture, dated as of
November 10, 2014, between First American
Financial Corporation and U.S. Bank National
Association, as Trustee.

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.

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.

129

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

*10.6.8

Description

Location

First Amendment, effective July 1, 2015, to the
First American Financial Corporation Deferred
Compensation Plan.
Second Amendment, effective July 1, 2017, to
the First American Financial Corporation
Deferred Compensation Plan.
First American Financial Corporation 2010
Incentive Compensation Plan, amended and
restated effective as of February 4, 2019.
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.

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 22, 2019.

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 21,
2015.
Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 19,
2016.
Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 17,
2017.
Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved January 23,
2018.

130

Incorporated by reference herein to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2015.
Incorporated by reference herein to Exhibit 10.2
to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2017.
Attached.

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.

Incorporated by reference herein to Exhibit
10.6.4 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2017.

Attached.

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.

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.

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.

Incorporated by reference herein to Exhibit
10.6.9 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2017.

Exhibit No.

*10.6.9

*10.6.10

*10.6.11

*10.7

*10.8

*10.9

*10.10

*10.11

21

23

31(a)

31(b)

32(a)

32(b)

101.INS

101.SCH

101.CAL

101.DEF

Description

Location

Form of Notice of Restricted Stock Unit Grant
(Employee) and Restricted Stock Unit Award
Agreement (Employee), approved February 4,
2019.

Attached.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
February 2, 2018.

Incorporated by reference herein to Exhibit
10.6.14 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2017.

Form of Notice of Performance Unit Grant and
Performance Unit Award Agreement, approved
January 22, 2019.

Employment Agreement, dated February 19,
2019, between First American Financial
Corporation and Dennis J. Gilmore.

Employment Agreement, dated February 19,
2019, between First American Financial
Corporation and Kenneth D. DeGiorgio.

Employment Agreement, dated February 19,
2019, between First American Financial
Corporation and Christopher M. Leavell.

Employment Agreement, dated February 19,
2019, 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.

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
Exchange Act of 1934.

Certification by Chief Financial Officer
Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.

Certification by Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350.

Certification by Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350.

XBRL Instance Document.

XBRL Taxonomy Extension Schema
Document.

XBRL Taxonomy Extension Calculation
Linkbase Document.

XBRL Taxonomy Extension Definition
Linkbase Document.

131

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.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Attached.

Exhibit No.

101.LAB

101.PRE

Description

Location

XBRL Taxonomy Extension Label Linkbase
Document.

XBRL Taxonomy Extension Presentation
Linkbase Document.

Attached.

Attached.

Item 16. Form 10-K Summary

None.

132

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 20, 2019

By

/s/ MARK E. SEATON

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

Date: February 20, 2019

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 20, 2019

Chief Financial Officer
(Principal Financial Officer)

February 20, 2019

February 20, 2019

/S/ MATTHEW F. WAJNER

Matthew F. Wajner

Chief Accounting Officer
(Principal Accounting Officer)

/S/ PARKER S. KENNEDY

Chairman of the Board of Directors

February 20, 2019

Parker S. Kennedy

/S/

JAMES L. DOTI

James L. Doti

Director

February 20, 2019

/S/ REGINALD H. GILYARD

Director

February 20, 2019

Reginald H. Gilyard

/S/ MARGARET M. MCCARTHY

Director

February 20, 2019

Margaret M. McCarthy

/S/ MICHAEL D. MCKEE

Director

February 20, 2019

Michael D. McKee

133

Signature

Title

Date

/S/ THOMAS V. MCKERNAN

Director

February 20, 2019

Thomas V. McKernan

/S/ MARK C. OMAN

Director

February 20, 2019

Mark C. Oman

/S/ MARTHA B. WYRSCH

Director

February 20, 2019

Martha B. Wyrsch

134

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