First American Financial Corp - Quarter Report: 2012 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-34580

FIRST AMERICAN FINANCIAL

CORPORATION

(Exact name of registrant as specified in its charter)


Incorporated in Delaware		26-1911571
(State or other jurisdiction of incorporation or organization)		(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)

(Former name, former address and former fiscal year, if changed since last report)

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 x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

On April 20, 2012, there were 106,160,140 shares of common stock outstanding.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

INFORMATION INCLUDED IN REPORT


PART I:	FINANCIAL INFORMATION	4

Item 1.	Financial Statements (unaudited)	4

	A. Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	4

	B. Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011	5

	C. Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011	6

	D. Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	7

	E. Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2012	8

	F. Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	45

PART II:	OTHER INFORMATION	46

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	49

Item 6.	Exhibits	54

Items 2 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.

CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING BUT NOT LIMITED TO THOSE RELATING TO:

•

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

•

CORELOGIC INC.’S FUTURE PERFORMANCE AND THE COMPANY’S INTENTIONS WITH RESPECT TO ITS INVESTMENT IN CORELOGIC STOCK;

•

EXPECTED BENEFIT AND PENSION PLAN CONTRIBUTIONS;

•

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

•

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

•

THE IMPACT ON THE COMPANY OF UNCERTAINTY IN GENERAL ECONOMIC CONDITIONS AND TIGHT CREDIT MARKETS;

•

SAVINGS TO BE ACHIEVED THROUGH EXPENSE MANAGEMENT EFFORTS;

•

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

•

EXPECTED FORECLOSURE VOLUMES, COSTS ASSOCIATED WITH DEFENDING INSURED’S TITLE TO FORECLOSED PROPERTIES, AND THE IMPACT OF FORECLOSURE MATTERS ON THE COMPANY;

•

THE REALIZATION OF TAX BENEFITS ASSOCIATED WITH CERTAIN LOSSES AND UNRECOGNIZED TAX BENEFIT ESTIMATES;

•

FUTURE PAYMENT OF DIVIDENDS;

•

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

•

THE LIKELIHOOD OF CHANGES IN EXPECTED ULTIMATE LOSSES AND CORRESPONDING LOSS RATES,

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.

•

INTEREST RATE FLUCTUATIONS;

•

CHANGES IN THE PERFORMANCE OF THE REAL ESTATE MARKETS;

•

VOLATILITY IN THE CAPITAL MARKETS;

•

UNFAVORABLE ECONOMIC CONDITIONS;

•

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

•

FAILURES AT FINANCIAL INSTITUTIONS WHERE THE COMPANY DEPOSITS FUNDS;

•

CHANGES IN APPLICABLE GOVERNMENT REGULATIONS;

•

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

•

REGULATION OF TITLE INSURANCE RATES;

•

REFORM OF GOVERNMENT-SPONSORED MORTGAGE ENTERPRISES;

•

LIMITATIONS ON ACCESS TO PUBLIC RECORDS AND OTHER DATA;

•

PRODUCT MIGRATION;

•

CHANGES RESULTING FROM INCREASES IN THE SIZE OF THE COMPANY’S CUSTOMERS;

•

CHANGES IN MEASURES OF THE STRENGTH OF THE COMPANY’S TITLE INSURANCE UNDERWRITERS, INCLUDING RATINGS AND STATUTORY SURPLUSES;

•

LOSSES IN THE COMPANY’S INVESTMENT PORTFOLIO;

•

EXPENSES OF AND FUNDING OBLIGATIONS TO THE PENSION PLAN;

•

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;

•

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

•

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

•

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

•

OTHER FACTORS DESCRIBED IN PART II, ITEM 1A OF THIS QUARTERLY REPORT ON FORM 10-Q.

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.

PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Balance Sheets

(in thousands, except par values)

(unaudited)


	March 31, 2012			December 31, 2011
Assets
Cash and cash equivalents	$	672,529		$	418,299
Accounts and accrued income receivable, net		236,763			227,847
Income taxes receivable		—			20,431
Investments:
Deposits with savings and loan associations and banks		66,230			56,201
Debt securities		2,186,123			2,201,911
Equity securities		217,828			184,000
Other long-term investments		199,501			200,805

		2,669,682			2,642,917

Loans receivable, net		130,431			139,191
Property and equipment, net		339,056			337,578
Title plants and other indexes		517,122			513,998
Deferred income taxes		44,893			39,617
Goodwill		832,412			818,420
Other intangible assets, net		57,811			59,994
Other assets		152,494			152,045

	$	5,653,193		$	5,370,337

Liabilities and Equity
Deposits	$	1,386,659		$	1,093,236
Accounts payable and accrued liabilities		690,253			735,934
Due to CoreLogic, Inc. (“CoreLogic”), net		41,832			35,951
Deferred revenue		147,967			155,626
Reserve for known and incurred but not reported claims		992,719			1,014,676
Income taxes payable		24,594			—
Notes and contracts payable		276,684			299,975

		3,560,708			3,335,398

Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.00001 par value, Authorized-500 shares; Outstanding-none		—			—
Common stock, $0.00001 par value:
Authorized-300,000 shares; Outstanding-106,079 shares and 105,410 shares as of March 31, 2012 and December 31, 2011, respectively		1			1
Additional paid-in capital		2,087,089			2,081,242
Retained earnings		147,446			124,816
Accumulated other comprehensive loss		(147,063	)		(177,459	)

Total stockholders’ equity		2,087,473			2,028,600
Noncontrolling interests		5,012			6,339

Total equity		2,092,485			2,034,939

	$	5,653,193		$	5,370,337

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

(unaudited)


	For the Three Months Ended March 31,
	2012			2011
Revenues
Direct premiums and escrow fees	$	413,786		$	361,094
Agent premiums		376,986			399,921
Information and other		155,760			150,758
Investment income		22,377			20,771
Net realized investment gains (losses)		456			(547	)
Net other-than-temporary impairment (“OTTI”) losses recognized in earnings:
Total OTTI losses on debt securities		(240	)		(124	)
Portion of OTTI losses on debt securities recognized in other comprehensive loss		(2,362	)		(173	)

		(2,602	)		(297	)

		966,763			931,700

Expenses
Personnel costs		305,279			283,302
Premiums retained by agents		302,164			319,987
Other operating expenses		189,150			190,390
Provision for policy losses and other claims		86,678			129,512
Depreciation and amortization		18,059			19,099
Premium taxes		10,848			9,043
Interest		3,035			3,816

		915,213			955,149

Income (loss) before income taxes		51,550			(23,449	)
Income tax expense (benefit)		20,441			(8,208	)

Net income (loss)		31,109			(15,241	)
Less: Net (loss) income attributable to noncontrolling interests		(184	)		94

Net income (loss) attributable to the Company	$	31,293		$	(15,335	)

Net income (loss) per share attributable to the Company’s stockholders (Note 9):
Basic	$	0.30		$	(0.15	)

Diluted	$	0.29		$	(0.15	)

Cash dividends per share	$	0.08		$	0.06

Weighted-average common shares outstanding (Note 9):
Basic		105,621			104,660

Diluted		107,480			104,660

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2012			2011
Net income (loss)	$	31,109		$	(15,241	)

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities		20,374			(369	)
Unrealized gain on securities for which credit-related portion was recognized in earnings		2,903			650
Foreign currency translation adjustment		5,865			4,319
Pension benefit adjustment		1,257			3,251

Total other comprehensive income, net of tax		30,399			7,851

Comprehensive income (loss)		61,508			(7,390	)
Less: Comprehensive (loss) income attributable to noncontrolling interests		(181	)		175

Comprehensive income (loss) attributable to the Company	$	61,689		$	(7,565	)

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income (loss)	$	31,109		$	(15,241	)
Adjustments to reconcile net income (loss) to cash used for operating activities:
Provision for policy losses and other claims		86,678			129,512
Depreciation and amortization		18,059			19,099
Excess tax benefits from share-based compensation		—			(971	)
Share-based compensation		6,148			5,011
Net realized investment (gains) losses		(456	)		547
Net OTTI losses recognized in earnings		2,602			297
Equity in earnings of affiliates		(1,839	)		(493	)
Dividends from equity method investments		2,324			398
Changes in assets and liabilities excluding effects of acquisitions and noncash transactions:
Claims paid, including assets acquired, net of recoveries		(116,085	)		(117,413	)
Net change in income tax accounts		32,716			(21,671	)
Increase in accounts and accrued income receivable		(8,383	)		(4,383	)
Decrease in accounts payable and accrued liabilities		(59,395	)		(57,646	)
Net change in due to CoreLogic, net		(48	)		18,985
Decrease in deferred revenue		(7,758	)		(7,030	)
Other, net		7,040			(477	)

Cash used for operating activities		(7,288	)		(51,476	)

Cash flows from investing activities:
Net cash effect of acquisitions/dispositions		(14,000	)		—
Purchase of subsidiary shares from / other decreases in noncontrolling interests		—			(66	)
Net increase in deposits with banks		(9,660	)		(13,253	)
Net decrease in loans receivable		8,760			4,298
Purchases of debt and equity securities		(182,648	)		(210,206	)
Proceeds from sales of debt and equity securities		101,310			74,303
Proceeds from maturities of debt securities		111,736			84,921
Net (increase) decrease in other long-term investments		(692	)		680
Proceeds from note receivable from CoreLogic		—			570
Capital expenditures		(18,172	)		(12,604	)
Proceeds from sale of property and equipment		685			378

Cash used for investing activities		(2,681	)		(70,979	)

Cash flows from financing activities:
Net change in deposits		293,423			157,980
Proceeds from issuance of debt		53			185
Repayment of debt		(23,569	)		(3,335	)
Net payments in connection with share-based compensation plans		(1,150	)		(2,317	)
Distributions to noncontrolling interests		(506	)		(94	)
Excess tax benefits from share-based compensation		—			971
Cash dividends		(6,328	)		(6,267	)

Cash provided by financing activities		261,923			147,123
Effect of exchange rate changes on cash		2,276			1,863

Net increase in cash and cash equivalents		254,230			26,531
Cash and cash equivalents—Beginning of period		418,299			728,746

Cash and cash equivalents—End of period	$	672,529		$	755,277

Supplemental information:
Cash paid (received) during the period for:
Interest	$	3,060		$	3,718
Premium taxes	$	16,095		$	12,210
Income taxes, net	$	(11,989	)	$	12,494
Noncash investing and financing activities:
Net noncash contribution from The First American Corporation (“TFAC”) as a result of separation	$	—		$	5,581
Liabilities assumed in connection with acquisitions	$	432		$	—

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

(unaudited)


	First American Financial Corporation Stockholders
	Shares		Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Noncontrolling interests			Total
Balance at December 31, 2011		105,410	$	1	$	2,081,242		$	124,816		$	(177,459	)	$	6,339		$	2,034,939
Net income (loss) for three months ended March 31, 2012		—		—		—			31,293			—			(184	)		31,109
Dividends on common shares		—		—		—			(8,482	)		—			—			(8,482	)
Shares issued in connection with share-based compensation plans		669		—		(969	)		(181	)		—			—			(1,150	)
Share-based compensation expense		—		—		6,148			—			—			—			6,148
Purchase of subsidiary shares from /other decreases in noncontrolling interests		—		—		668			—			—			(668	)		—
Sale of subsidiary shares to /other increases in noncontrolling interests		—		—		—			—			—			28			28
Distributions to noncontrolling interests		—		—		—			—			—			(506	)		(506	)
Other comprehensive income (Note 14)		—		—		—			—			30,396			3			30,399

Balance at March 31, 2012		106,079	$	1	$	2,087,089		$	147,446		$	(147,063	)	$	5,012		$	2,092,485

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Condensed Consolidated Financial Statements

Spin off

First American Financial Corporation (the “Company”) became a publicly traded company following its spin-off from its prior parent, The First American Corporation (“TFAC”), on June 1, 2010 (the “Separation”). On that date, TFAC distributed all of the Company’s outstanding shares to the record date shareholders of TFAC on a one-for-one basis (the “Distribution”). After the Distribution, the Company owned TFAC’s financial services businesses and TFAC, which reincorporated and assumed the name CoreLogic, Inc. (“CoreLogic”), continued to own its information solutions businesses.

Basis of Presentation

The condensed consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the consolidated results for the interim periods. Certain 2011 amounts have been reclassified to conform to the 2012 presentation.

Recently Adopted Accounting Pronouncements

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

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

Pending Accounting Pronouncements

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Note 2 – Escrow Deposits, Like-kind Exchange Deposits and Trust Assets

The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $4.1 billion and $3.1 billion at March 31, 2012 and December 31, 2011, respectively, of which $1.2 billion and $0.9 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB. The escrow deposits held at First American Trust, FSB, are included in the accompanying condensed consolidated balance sheets, in cash and cash equivalents and debt and equity securities, with offsetting liabilities included in deposits. The remaining escrow deposits were held at third-party financial institutions.

Trust assets totaled $3.0 billion and $2.8 billion at March 31, 2012 and December 31, 2011, respectively, and were held at First American Trust, FSB. Escrow deposits held at third-party financial institutions and trust assets are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets. However, the Company could be held contingently liable for the disposition of these assets.

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

The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds. Upon the completion of 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 $721.5 million and $564.7 million at March 31, 2012 and December 31, 2011, respectively. The like-kind exchange deposits were held at third-party financial institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets. All such amounts are placed in bank deposits with institutions insured by the Federal Deposit Insurance Corporation. The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the return on the proceeds.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Note 3 – Debt and Equity Securities

The amortized cost and estimated fair value of investments in debt securities, all of which are classified as available-for-sale, are as follows:


	Amortized		Gross unrealized					Estimated		Other-than- temporary impairments
(in thousands)	cost		gains		losses			fair value		in AOCI
March 31, 2012
U.S. Treasury bonds	$	109,035	$	1,843	$	(816	)	$	110,062	$	—
Municipal bonds		357,372		18,013		(674	)		374,711		—
Foreign bonds		224,883		2,186		(654	)		226,415		—
Governmental agency bonds		173,059		1,100		(373	)		173,786		—
Governmental agency mortgage-backed securities		989,290		9,207		(1,143	)		997,354		—
Non-agency mortgage-backed securities (1)		37,553		1,189		(7,805	)		30,937		29,727
Corporate debt securities		262,721		10,661		(524	)		272,858		—

	$	2,153,913	$	44,199	$	(11,989	)	$	2,186,123	$	29,727

December 31, 2011
U.S. Treasury bonds	$	71,995	$	2,236	$	—		$	74,231	$	—
Municipal bonds		329,935		19,272		(84	)		349,123		—
Foreign bonds		212,200		3,026		(206	)		215,020		—
Governmental agency bonds		195,784		1,970		(1	)		197,753		—
Governmental agency mortgage-backed securities		1,066,656		10,816		(925	)		1,076,547		—
Non-agency mortgage-backed securities (1)		42,089		478		(11,933	)		30,634		32,089
Corporate debt securities		248,921		10,420		(738	)		258,603		—

	$	2,167,580	$	48,218	$	(13,887	)	$	2,201,911	$	32,089

(1)

At March 31, 2012, the $37.6 million amortized cost is net of $2.6 million in other-than-temporary impairments determined to be credit related which have been recognized in earnings for the three months ended March 31, 2012. At December 31, 2011, the $42.1 million amortized cost is net of $9.1 million in other-than-temporary impairments determined to be credit related which have been recognized in earnings for the year ended December 31, 2011. At March 31, 2012, the $7.8 million gross unrealized losses include $7.1 million of unrealized losses for securities determined to be other-than-temporarily impaired and $0.7 million of unrealized losses for securities for which an other-than-temporary impairment has not been recognized. At December 31, 2011, the $11.9 million gross unrealized losses include $11.4 million of unrealized losses for securities determined to be other-than-temporarily impaired and $0.5 million of unrealized losses for securities for which an other-than-temporary impairment has not been recognized. The $29.7 million and $32.1 million other-than-temporary impairments recorded in accumulated other comprehensive income (“AOCI”) through March 31, 2012 and December 31, 2011, respectively, represent the amount of other-than-temporary impairment losses recognized in AOCI which, starting January 1, 2009, were not included in earnings due to the fact that the losses were not considered to be credit related. Other-than-temporary impairments were recognized in AOCI for non-agency mortgage-backed securities only.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

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


(in thousands)	Cost		Gross unrealized					Estimated fair value
(in thousands)	Cost		gains		losses			Estimated fair value
March 31, 2012
Preferred stocks	$	7,098	$	597	$	(3	)	$	7,692
Common stocks (1)		225,127		6,817		(21,808	)		210,136

	$	232,225	$	7,414	$	(21,811	)	$	217,828

December 31, 2011
Preferred stocks	$	7,007	$	678	$	(17	)	$	7,668
Common stocks (1)		224,880		3,793		(52,341	)		176,332

	$	231,887	$	4,471	$	(52,358	)	$	184,000

(1)

CoreLogic common stock with a cost basis of $167.6 million at March 31, 2012 and December 31, 2011, and an estimated fair value of $145.8 million and $115.5 million at March 31, 2012 and December 31, 2011, respectively, is included in common stocks. In connection with the Separation, TFAC issued to the Company a number of shares of its common stock. Under the terms of the Separation and Distribution Agreement, if the Company chooses to dispose of 1% or more of CoreLogic’s outstanding common stock at a given date, the Company must first provide CoreLogic with the option to purchase the shares. The Company has agreed to dispose of the shares within five years after the Separation or to bear any adverse tax consequences arising as a result of holding the shares for a longer period.

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


(in thousands)	As of March 31, 2012			As of December 31, 2011
Debt securities for which an other-than-temporary impairment has been recognized	$	(5,873	)	$	(10,937	)
Debt securities—all other		38,083			45,268
Equity securities		(14,397	)		(47,887	)

	$	17,813		$	(13,556	)

Sales of debt and equity securities resulted in realized gains of $2.0 million and $0.7 million and realized losses of $0.1 million and $0.7 million for the three months ended March 31, 2012 and 2011, respectively.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

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


	Less than 12 months					12 months or longer					Total
(in thousands)	Estimated fair value		Unrealized losses			Estimated fair value		Unrealized losses			Estimated fair value		Unrealized losses
March 31, 2012
Debt securities:
U.S. Treasury bonds	$	44,552	$	(816	)	$	—	$	—		$	44,552	$	(816	)
Municipal bonds		34,495		(674	)		—		—			34,495		(674	)
Foreign bonds		78,545		(654	)		—		—			78,545		(654	)
Governmental agency bonds		49,028		(373	)		—		—			49,028		(373	)
Governmental agency mortgage-backed securities		330,281		(890	)		39,156		(253	)		369,437		(1,143	)
Non-agency mortgage-backed securities		—		—			23,059		(7,805	)		23,059		(7,805	)
Corporate debt securities		36,852		(507	)		1,353		(17	)		38,205		(524	)

Total debt securities		573,753		(3,914	)		63,568		(8,075	)		637,321		(11,989	)
Equity securities		813		(14	)		145,791		(21,797	)		146,604		(21,811	)

Total	$	574,566	$	(3,928	)	$	209,359	$	(29,872	)	$	783,925	$	(33,800	)

December 31, 2011
Debt securities:
U.S. Treasury bonds	$	—	$	—		$	—	$	—		$	—	$	—
Municipal bonds		7,186		(43	)		1,896		(41	)		9,082		(84	)
Foreign bonds		30,508		(206	)		690		—			31,198		(206	)
Governmental agency bonds		13,828		(1	)		4,150		—			17,978		(1	)
Governmental agency mortgage-backed securities		280,114		(793	)		43,835		(132	)		323,949		(925	)
Non-agency mortgage-backed securities		—		—			26,500		(11,933	)		26,500		(11,933	)
Corporate debt securities		40,682		(708	)		1,290		(30	)		41,972		(738	)

Total debt securities		372,318		(1,751	)		78,361		(12,136	)		450,679		(13,887	)
Equity securities		131,768		(52,358	)		—		—			131,768		(52,358	)

Total	$	504,086	$	(54,109	)	$	78,361	$	(12,136	)	$	582,447	$	(66,245	)

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


(in thousands, except percentages and number of securities)	Number of Securities		Amortized Cost		Estimated Fair Value		Non-Investment Grade/ Not Rated
Non-agency mortgage-backed securities:
Prime single family residential:
2007		1	$	5,371	$	4,031		100.0	%
2006		6		15,899		11,963		100.0	%
2005		1		3,797		3,054		100.0	%
Alt-A single family residential:
2007		2		12,486		11,889		100.0	%

		10	$	37,553	$	30,937		100.0	%

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

As of March 31, 2012, none of the non-agency mortgage-backed securities were on negative credit watch by S&P or Moody’s.

The amortized cost and estimated fair value of debt securities at March 31, 2012, by contractual maturities, are as follows:

		000000		000000		000000		000000		000000
(in thousands)	Due in one year or less		Due after one through five years		Due after five through ten years		Due after ten years		Total
U.S. Treasury bonds
Amortized cost		45,702		19,278		43,921		134		109,035
Estimated fair value		45,973		20,682		43,219		188		110,062
Municipal bonds
Amortized cost		2,131		102,850		139,977		112,414		357,372
Estimated fair value		2,158		106,599		148,652		117,302		374,711
Foreign bonds
Amortized cost		33,455		160,494		30,934		—		224,883
Estimated fair value		33,785		161,865		30,765		—		226,415
Governmental agency bonds
Amortized cost		2,343		83,363		69,862		17,491		173,059
Estimated fair value		2,376		83,726		69,751		17,933		173,786
Corporate debt securities
Amortized cost		5,137		103,615		134,485		19,484		262,721
Estimated fair value		5,190		106,697		140,737		20,234		272,858

Total debt securities excluding mortgage-backed securities
Amortized cost		88,768		469,600		419,179		149,523		1,127,070
Estimated fair value		89,482		479,569		433,124		155,657		1,157,832

Total mortgage-backed securities
Amortized cost										1,026,843
Estimated fair value										1,028,291
Total debt securities
Amortized cost										2,153,913
Estimated fair value										2,186,123

Other-than-temporary impairment—debt securities

Although dislocations in the capital and credit markets have largely recovered, there continues to be volatility and disruption concerning certain vintages of non-agency mortgage-backed securities. The primary factors negatively impacting certain vintages of non-agency mortgage-backed securities include stringent borrowing guidelines that result in the inability of borrowers to refinance, high unemployment, continued declines in real estate values, uncertainty regarding the timing and effectiveness of governmental solutions and a general slowdown in economic activity. The Company determines if a non-agency mortgage-backed security in a loss position is other-than-temporarily impaired by comparing the present value of the cash flows expected to be collected from the security to its amortized cost basis. If the present value of the cash flows expected to be collected exceed the amortized cost of the security, the Company concludes that the security is not other-than-temporarily impaired. The Company performs this analysis on all non-agency mortgage-backed securities in its portfolio that are in an unrealized loss position. The methodology and key assumptions used in estimating the present value of cash flows expected to be collected are described below. For the securities that were determined not to be other-than-temporarily impaired at March 31, 2012, the present value of the cash flows expected to be collected exceeded the amortized cost of each security.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

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 March 31, 2012, the Company does not intend to sell any debt securities in an unrealized loss position and it is not more likely than not that the Company will be required to sell debt securities before recovery of their amortized cost basis.

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

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

The table below summarizes the primary assumptions used at March 31, 2012 in estimating the cash flows expected to be collected for these securities.


	Weighted average			Range
Prepayment speeds		7.3	%	4.0% – 9.4%
Default rates		7.4	%	2.5% – 13.1%
Loss severity		29.7	%	7.7% – 46.2%

As a result of the Company’s security-level review, it recognized other-than-temporary impairments considered to be credit related on its non-agency mortgage-backed securities of $2.6 million in earnings for the three months ended March 31, 2012. It is possible that the Company could recognize additional other-than-temporary impairment losses on some securities it owns at March 31, 2012 if future events or information cause it to determine that a decline in value is other-than-temporary.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The following table presents the change in the credit portion of the other-than-temporary impairments recognized in earnings on debt securities for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive income (loss) for the three months ended March 31, 2012 and 2011.


	For the Three Months Ended March 31,
(in thousands)	2012		2011
Credit loss on debt securities held at beginning of period	$	34,176	$	25,108
Addition to credit loss for which an other-than-temporary impairment was previously recognized		2,602		297
Addition to credit loss for which an other-than-temporary impairment was not previously recognized		—		—

Credit loss on debt securities held as of March 31	$	36,778	$	25,405

Other-than-temporary impairment—equity securities

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

When an equity security has been in an unrealized loss position for greater than twelve months, the Company’s review of the security includes the above noted factors as well as the evidence, if any, that exists to support that the security will recover its value in the foreseeable future, typically within the next twelve months. If objective, substantial evidence does not indicate a likely recovery during that timeframe, the Company’s policy is that such losses are considered other-than-temporary and therefore an impairment loss is recorded. The Company did not record any other-than-temporary impairments related to its equity securities for the three months ended March 31, 2012 or 2011.

At March 31, 2012, the Company owned 8.9 million shares of CoreLogic common stock with a cost basis of $167.6 million and an estimated fair value of $145.8 million. The Company assessed its investment in CoreLogic for other-than-temporary impairment due to the fact that its investment has been in an unrealized loss position for greater than twelve months. Based on the factors considered, the Company’s opinion is that the decline in the fair value of CoreLogic’s common stock is not other-than-temporary; therefore, the unrealized loss of $21.8 million was recorded in accumulated other comprehensive loss on the Company’s condensed consolidated balance sheet. The factors considered by the Company include, but are not limited to, (i) the Company has the ability and intent to hold the common stock for a period of time sufficient to allow for recovery, (ii) CoreLogic’s financial results for the quarter ended December 31, 2011 were positive, (iii) the Company believes CoreLogic’s board of directors and management are focused on enhancing shareholder value, (iv) the Company believes improving economic and marketplace conditions will positively impact CoreLogic’s financial results, (v) the positive performance of CoreLogic’s common stock during the first quarter of 2012, and (vi) the favorable nature of a recent research report for CoreLogic from an independent securities analyst reflecting a twelve month price target that exceeds the Company’s carrying value. It is possible that the Company could recognize an other-than-temporary impairment related to its CoreLogic common stock if future events or information cause it to determine that the decline in value is other-than-temporary. The Company will continue to closely monitor and regularly review its investment in CoreLogic common stock.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Fair value measurement

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

Level 1 – Valuations based on unadjusted quoted market prices in active markets for identical securities. The fair value of equity securities are classified as Level 1.

Level 2 – Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The Level 2 category includes U.S. Treasury bonds, municipal bonds, foreign bonds, governmental agency bonds, governmental agency mortgage-backed securities and corporate debt securities, many of which are actively traded and have market prices that are readily verifiable.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. The Level 3 category includes non-agency mortgage-backed securities which are currently not actively traded.

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

Debt Securities

The fair value of debt securities was based on the market values obtained from an independent pricing service 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 service monitors market indicators, industry and economic events, and for broker-quoted only securities, obtains quotes from market makers or broker-dealers that it recognizes to be market participants. The pricing service utilizes the market approach in determining the fair value of the debt securities held by the Company. Additionally, the Company obtains an understanding of the valuation models and assumptions utilized by the service and has controls in place to determine that the values provided represent fair value. The Company’s validation procedures include comparing prices received from the pricing service to quotes received from other third party sources for 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 service.

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

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Equity Securities

The fair value of equity securities, including preferred and common stocks, were based on quoted market prices for identical assets that are readily and regularly available in an active market.

The following table presents the Company’s available-for-sale investments measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, classified using the three-level hierarchy for fair value measurements:


(in thousands)	Estimated fair value as of March 31, 2012		Level 1		Level 2		Level 3
Debt securities:
U.S. Treasury bonds	$	110,062	$	—	$	110,062	$	—
Municipal bonds		374,711		—		374,711		—
Foreign bonds		226,415		—		226,415		—
Governmental agency bonds		173,786		—		173,786		—
Governmental agency mortgage-backed securities		997,354		—		997,354		—
Non-agency mortgage-backed securities		30,937		—		—		30,937
Corporate debt securities		272,858		—		272,858		—

		2,186,123		—		2,155,186		30,937

Equity securities:
Preferred stocks		7,692		7,692		—		—
Common stocks		210,136		210,136		—		—

		217,828		217,828		—		—

	$	2,403,951	$	217,828	$	2,155,186	$	30,937


(in thousands)	Estimated fair value as of December 31, 2011		Level 1		Level 2		Level 3
Debt securities:
U.S. Treasury bonds	$	74,231	$	—	$	74,231	$	—
Municipal bonds		349,123		—		349,123		—
Foreign bonds		215,020		—		215,020		—
Governmental agency bonds		197,753		—		197,753		—
Governmental agency mortgage-backed securities		1,076,547		—		1,076,547		—
Non-agency mortgage-backed securities		30,634		—		—		30,634
Corporate debt securities		258,603		—		258,603		—

		2,201,911		—		2,171,277		30,634

Equity securities:
Preferred stocks		7,668		7,668		—		—
Common stocks		176,332		176,332		—		—

		184,000		184,000		—		—

	$	2,385,911	$	184,000	$	2,171,277	$	30,634

The Company did not have any transfers in and out of Level 1 and Level 2 measurements during the three months ended March 31, 2012 and 2011. The Company’s policy is to recognize transfers between levels in the fair value hierarchy at the end of the reporting period.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The following table presents a summary of the changes in fair value of Level 3 available-for-sale investments for the three months ended March 31, 2012 and 2011:


	For the Three Months Ended March 31,
(in thousands)	2012			2011
Fair value at beginning of period	$	30,634		$	47,534
Total gains/(losses) (realized and unrealized):
Included in earnings:
Realized losses		—			—
Net other-than-temporary impairment losses recognized in earnings		(2,602	)		(297	)
Included in other comprehensive loss		4,839			2,585
Settlements		(1,934	)		(3,452	)
Sales		—			—
Transfers into Level 3		—			—
Transfers out of Level 3		—			—

Fair value as of March 31	$	30,937		$	46,370

Unrealized gains (losses) included in earnings for the period relating to Level 3 available-for-sale investments that were still held at the end of the period:
Net other-than-temporary impairment losses recognized in earnings	$	(2,602	)	$	(297	)

The Company did not purchase any non-agency mortgage-backed securities during the three months ended March 31, 2012 and 2011.

Note 4 – Financing Receivables

Financing receivables are summarized as follows:


	March 31, 2012			December 31, 2011
	(in thousands)
Loans receivable, net:
Real estate–mortgage
Multi-family residential	$	11,934		$	12,028
Commercial		121,940			130,724
Other		1,396			1,403

		135,270			144,155
Allowance for loan losses		(4,011	)		(4,171	)
Participations sold		(851	)		(861	)
Deferred loan fees, net		23			68

Loans receivable, net		130,431			139,191

Other long-term investments:
Notes receivable–secured		13,835			14,776
Notes receivable–unsecured		3,133			4,207
Loss reserve		(1,676	)		(3,402	)

Notes receivable, net		15,292			15,581

Total financing receivables, net	$	145,723		$	154,772

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Aging analysis of loans and notes receivable at March 31, 2012, is as follows:


	Total		Current		30-59 days past due		60-89 days past due		90 days or more past due		Nonaccrual status
	(in thousands)
Loans Receivable:
Multi-family residential	$	11,934	$	11,934	$	—	$	—	$	—	$	—
Commercial		121,940		119,588		—		168		—		2,184
Other		1,396		1,396		—		—		—		—

	$	135,270	$	132,918	$	—	$	168	$	—	$	2,184

Notes Receivable:
Secured	$	13,835	$	13,591	$	—	$	—	$	—	$	244
Unsecured		3,133		2,071		—		—		—		1,062

	$	16,968	$	15,662	$	—	$	—	$	—	$	1,306

Aging analysis of loans and notes receivable at December 31, 2011, is as follows:


	Total		Current		30-59 days past due		60-89 days past due		90 days or more past due		Nonaccrual status
	(in thousands)
Loans Receivable:
Multi-family residential	$	12,028	$	12,028	$	—	$	—	$	—	$	—
Commercial		130,724		123,736		1,918		170		—		4,900
Other		1,403		1,403		—		—		—		—

	$	144,155	$	137,167	$	1,918	$	170	$	—	$	4,900

Notes Receivable:
Secured	$	14,776	$	10,712	$	—	$	—	$	—	$	4,064
Unsecured		4,207		108		—		—		—		4,099

	$	18,983	$	10,820	$	—	$	—	$	—	$	8,163

The Company performs an analysis of its allowance for loan losses on a quarterly basis. In determining the allowance, the Company considers various factors, such as changes in lending policies and procedures, changes in the nature and volume of the portfolio, changes in the trend of the volume and severity of past due and classified loans, changes to the concentration of credit, as well as changes in legal and regulatory requirements. The allowance for loan losses is maintained at a level that is considered appropriate by the Company to provide for known risks in its portfolio.

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.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Note 5 – Goodwill

A reconciliation of the changes in the carrying amount of goodwill by operating segment, for the three months ended March 31, 2012, is as follows:


(in thousands)	Title Insurance and Services		Specialty Insurance		Total
Balance as of December 31, 2011	$	771,655	$	46,765	$	818,420
Acquisitions		12,642		—		12,642
Other net adjustments		1,350		—		1,350

Balance as of March 31, 2012	$	785,647	$	46,765	$	832,412

The Company’s four reporting units for purposes of testing impairment are title insurance, home warranty, property and casualty insurance and trust and other services. There is no accumulated impairment for goodwill as the Company has never recognized any impairment for its reporting units.

In accordance with accounting guidance and consistent with prior years, the Company’s policy is to perform an annual goodwill impairment test for each reporting unit in the fourth quarter. An impairment analysis has not been performed during the three months ended March 31, 2012 as no triggering events requiring such an analysis occurred.

Note 6 – Other Intangible Assets

Other intangible assets consist of the following:


(in thousands)	March 31, 2012			December 31, 2011
Finite-lived intangible assets:
Customer lists	$	70,080		$	69,763
Covenants not to compete		26,274			29,441
Trademarks		10,067			9,551
Patents		2,840			2,840

		109,261			111,595
Accumulated amortization		(69,304	)		(69,397	)

		39,957			42,198
Indefinite-lived intangible assets:
Licenses		17,854			17,796

	$	57,811		$	59,994

Amortization expense for finite-lived intangible assets was $2.9 million and $3.6 million for the three months ended March 31, 2012 and 2011, respectively.

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


Year	(in thousands)
Remainder of 2012	$	8,588
2013	$	10,740
2014	$	6,584
2015	$	3,531
2016	$	2,557
2017	$	1,116

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Note 7 – Loss Reserves

A summary of the Company’s loss reserves, broken down into its components of known title claims, incurred but not reported claims (“IBNR”) and non-title claims, follows:


(in thousands, except percentages)	March 31, 2012				December 31, 2011
Known title claims	$	150,463	15.1	%	$	162,019	15.9	%
IBNR		806,828	81.3	%		816,603	80.5	%

Total title claims		957,291	96.4	%		978,622	96.4	%
Non-title claims		35,428	3.6	%		36,054	3.6	%

Total loss reserves	$	992,719	100.0	%	$	1,014,676	100.0	%

The provision for title insurance losses was $52.2 million, or 7.2% of title premiums and escrow fees, and $96.4 million, or 13.9% of title premiums and escrow fees, for the three months ended March 31, 2012 and 2011, respectively. The current quarter rate of 7.2% reflected an ultimate loss rate of 6.2% for the current policy year and included $7.2 million in net unfavorable development for prior policy years, primarily 2007 and 2008. Approximately $4.3 million of the net unfavorable development related to the Company’s guaranteed valuation product offered in Canada. There is substantial uncertainty as to the ultimate loss emergence for this product due to the following factors, among others, (i) claims associated with this product are generally made only after a foreclosure on the related property and foreclosure rates in Canada are difficult to predict and (ii) limited historical loss data exists as a result of the relatively recent introduction of this product in 2003. While the Company believes its claims reserve attributable to this product is adequate, because of this uncertainty, the potential for adverse loss development relative to this product is significantly higher than for title insurance. The first quarter of 2011 rate of 13.9% reflected an ultimate loss rate of 5.2% for the 2011 policy year, a $45.3 million reserve strengthening adjustment related to the guaranteed valuation product offered in Canada, and a $14.6 million charge which reflected adverse development for certain prior policy years.

Note 8 – Income Taxes

The Company’s effective income tax rate (income tax expense as a percentage of income before income taxes) was 39.7% for the three months ended March 31, 2012 and 35.0% for the same period of the prior year. The differences between the U.S. federal statutory rate of 35% and the effective rates were primarily attributable to losses in foreign jurisdictions for which no tax benefit was provided, and the impact of state taxes.

In connection with the Separation, the Company and TFAC entered into a Tax Sharing Agreement, dated June 1, 2010 (the “Tax Sharing Agreement”), which governs the Company’s and CoreLogic’s respective rights, responsibilities and obligations for certain tax related matters. At March 31, 2012 and December 31, 2011 the Company had a payable to CoreLogic of $2.5 million related to these matters which is included in due to CoreLogic, net on the Company’s condensed consolidated balance sheets.

At March 31, 2012 and December 31, 2011, the Company had a net payable to CoreLogic of $41.3 million and $35.4 million, respectively, related to tax matters prior to the Separation. This amount is included in the Company’s condensed consolidated balance sheet in due to CoreLogic, net.

The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets. Failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

During the current quarter, the Company released a valuation allowance of $5.3 million previously recorded against certain of its deferred tax assets. Specifically, management determined that it is more likely than not that all its tax capital loss items will be realized prior to expiration as the result of favorable market value activity in its equity securities portfolio during the current quarter. Application of the accounting guidance related to intraperiod tax allocations resulted in the valuation allowance being released to other comprehensive income and tax expense, in the amounts of $4.5 million and $0.8 million, respectively.

The Company continues to monitor the realizability of recognized losses, impairment losses, and unrecognized losses, for which there is no associated valuation allowance, recorded through March 31, 2012. The Company believes it is more likely than not that the tax benefits associated with those losses will be realized. However, this determination is a judgment and could be impacted by further market fluctuations, among other factors.

As of March 31, 2012 and December 31, 2011, the liability for income taxes associated with uncertain tax positions was $51.1 million and $17.3 million, respectively. The increase in the liability as of March 31, 2012 was primarily attributable to the Company’s claim for a timing adjustment in a prior-year tax return. The liabilities could be reduced by $35.9 million and $2.9 million, respectively, of offsetting tax benefits associated with the correlative effects of potential adjustments including timing adjustments and state income taxes. The net amounts of $15.2 million and $14.4 million, respectively, if recognized, would favorably affect the Company’s effective tax rate.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in tax expense. As of March 31, 2012 and December 31, 2011, the Company had accrued $3.8 million and $3.6 million, respectively, of interest and penalties (net of tax benefits) related to uncertain tax positions.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly increase or decrease within the next 12 months. These changes may be the result of items such as ongoing audits or the expiration of federal and state statute of limitations for the assessment of taxes. The Company estimates that there will be no increase or decrease in unrecognized tax benefits within the next 12 months.

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, Oregon, Michigan, Texas, Canada, and the United Kingdom. The Company is no longer subject to U.S. federal, state, and non-U.S. income tax examinations by taxing authorities for years prior to 2005.

Note 9 – Earnings Per Share

The following table presents the calculation of basic and diluted net income (loss) per share:


	For the Three Months Ended March 31,
*(in thousands, except per share amounts)*	2012		2011
Numerator
Net income (loss) attributable to the Company	$	31,293	$	(15,335	)
Less: dividends and undistributed earnings allocated to unvested restricted stock units		92		—

Net income (loss) allocated to common stockholders	$	31,201	$	(15,335	)

Denominator
Basic weighted-average shares		105,621		104,660
Effect of dilutive employee stock options and restricted stock units		1,859		—

Diluted weighted-average shares		107,480		104,660

Net income (loss) per share attributable to the Company’s stockholders
Basic	$	0.30	$	(0.15	)

Diluted	$	0.29	$	(0.15	)

Restricted stock units (“RSUs”) granted by the Company generally have graded vesting, include a service condition and receive dividend equivalents. Certain unvested RSUs contain nonforfeitable rights to dividends as they are eligible to participate in undistributed earnings without meeting service condition requirements. These awards are considered participating securities under the guidance which require the use of the two-class method when computing basic and diluted earnings per share. The two-class method reduces earnings allocated to common stockholders by dividends and undistributed earnings allocated to participating securities. For the three months ended March 31, 2011, the two-class method was not applicable for purposes of calculating earnings per share as restricted stock units do not participate in net losses of the Company.

For the three months ended March 31, 2012, 1.5 million stock options and RSUs were excluded from the weighted-average diluted shares outstanding due to their antidilutive effect.

For the three months ended March 31, 2011, 3.0 million potential dilutive shares of common stock (representing all potential dilutive shares) were excluded from the weighted-average diluted shares outstanding due to the net loss for the period.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Note 10 – Employee Benefit Plans

Net periodic cost related to the Company’s defined benefit pension and supplemental benefit plans during the three months ended March 31, 2012 and 2011 includes the following components:


	For the Three Months Ended March 31,
*(in thousands)*	2012			2011
Expense:
Service cost	$	428		$	557
Interest cost		7,434			7,578
Expected return on plan assets		(3,787	)		(3,845	)
Amortization of prior service credit		(1,096	)		(1,096	)
Amortization of net loss		6,825			6,514

	$	9,804		$	9,708

The Company contributed $7.1 million to the defined benefit pension and supplemental benefit plans during the three months ended March 31, 2012, and expects to contribute an additional $27.2 million during the remainder of 2012. These contributions include both those required by funding regulations as well as discretionary contributions necessary to provide benefit payments to participants of certain of the Company’s non-qualified supplemental benefit plans.

Note 11 – Fair Value of Financial Instruments

Guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate that value. In the measurement of the fair value of certain financial instruments, other valuation techniques were utilized if quoted market prices were not available. These derived fair value estimates are significantly affected by the assumptions used. Additionally, the guidance excludes certain financial instruments including those related to insurance contracts, pension and other postretirement benefits, and equity method investments.

In estimating the fair value of the financial instruments presented, the Company used the following methods and assumptions:

Cash and cash equivalents

The carrying amount for cash and cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.

Accounts and accrued income receivable, net

The carrying amount for accounts and accrued income receivable, net is a reasonable estimate of fair value due to the short-term maturity of these assets.

Loans receivable, net

The fair value of loans receivable, net was estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to borrowers of similar credit quality.

Investments

The carrying amount of deposits with savings and loan associations and banks is a reasonable estimate of fair value due to their short-term nature.

The methodology for determining the fair value of debt and equity securities is discussed in Note 3 Debt and Equity Securities to the condensed consolidated financial statements.

The fair value of notes receivable, net is estimated based on the discounted value of the future cash flows using approximate current market rates being offered for notes with similar maturities and similar credit quality.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Deposits

The carrying value of escrow and passbook accounts approximates fair value due to the short-term nature of this liability. The fair value of investment certificate accounts was estimated based on the discounted value of future cash flows using a discount rate approximating current market rates for similar liabilities.

Accounts payable and accrued liabilities

The carrying amount for accounts payable and accrued liabilities is a reasonable estimate of fair value due to the short-term maturity of these liabilities. The Company did not include the carrying amounts and fair values of pension costs and other retirement plans as the guidance excludes them from disclosure.

Due to CoreLogic, net

The carrying amount for due to CoreLogic, net is a reasonable estimate of fair value due to the short-term maturity of this liability.

Notes and contracts payable

The fair values of notes and contracts payable were estimated based on the current rates offered to the Company for debt of the same remaining maturities.

The carrying amounts and fair values of the Company’s financial instruments as of March 31, 2012 and December 31, 2011 are presented in the following table:


	March 31, 2012				December 31, 2011
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and cash equivalents	$	672,529	$	672,529	$	418,299	$	418,299
Accounts and accrued income receivable, net	$	236,763	$	236,763	$	227,847	$	227,847
Loans receivable, net	$	130,431	$	137,210	$	139,191	$	144,868
Investments:
Deposits with savings and loan associations and banks	$	66,230	$	66,230	$	56,201	$	56,201
Debt securities	$	2,186,123	$	2,186,123	$	2,201,911	$	2,201,911
Equity securities	$	217,828	$	217,828	$	184,000	$	184,000
Notes receivable, net	$	15,292	$	14,280	$	15,581	$	14,534
Financial Liabilities:
Deposits	$	1,386,659	$	1,387,185	$	1,093,236	$	1,093,771
Accounts payable and accrued liabilities	$	259,855	$	259,855	$	303,478	$	303,478
Due to CoreLogic, net	$	41,832	$	41,832	$	35,951	$	35,951
Notes and contracts payable	$	276,684	$	281,841	$	299,975	$	304,806

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The following table presents the fair value of the Company’s financial instruments as of March 31, 2012 and December 31, 2011, classified using the three-level hierarchy for fair value measurements:


(in thousands)	Fair Value as of March 31, 2012		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	672,529	$	672,529	$	—	$	—
Accounts and accrued income receivable, net	$	236,763	$	236,763	$	—	$	—
Loans receivable, net	$	137,210	$	—	$	—	$	137,210
Investments:
Deposits with savings and loan associations and banks	$	66,230	$	66,230	$	—	$	—
Debt securities	$	2,186,123	$	—	$	2,155,186	$	30,937
Equity securities	$	217,828	$	217,828	$	—	$	—
Notes receivable, net	$	14,280	$	—	$	—	$	14,280
Financial Liabilities:
Deposits	$	1,387,185	$	1,345,147	$	42,038	$	—
Accounts payable and accrued liabilities	$	259,855	$	259,855	$	—	$	—
Due to CoreLogic, net	$	41,832	$	41,832	$	—	$	—
Notes and contracts payable	$	281,841	$	—	$	268,906	$	12,935


(in thousands)	Fair Value as of December 31, 2011		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	418,299	$	418,299	$	—	$	—
Accounts and accrued income receivable, net	$	227,847	$	227,847	$	—	$	—
Loans receivable, net	$	144,868	$	—	$	—	$	144,868
Investments:
Deposits with savings and loan associations and banks	$	56,201	$	56,201	$	—	$	—
Debt securities	$	2,201,911	$	—	$	2,171,277	$	30,634
Equity securities	$	184,000	$	184,000	$	—	$	—
Notes receivable, net	$	14,534	$	—	$	—	$	14,534
Financial Liabilities:
Deposits	$	1,093,771	$	1,049,464	$	44,307	$	—
Accounts payable and accrued liabilities	$	303,478	$	303,478	$	—	$	—
Due to CoreLogic, net	$	35,951	$	35,951	$	—	$	—
Notes and contracts payable	$	304,806	$	—	$	291,178	$	13,628

Note 12 – Share-Based Compensation Plans

The following table presents the share-based compensation expense associated with the Company’s share-based compensation plans for the three months ended March 31, 2012 and 2011:


	For the Three Months Ended March 31,
(in thousands)	2012		2011
Restricted stock units	$	5,886	$	4,703
Stock options		—		9
Employee stock purchase plan		262		230

	$	6,148	$	4,942

The following table summarizes RSU activity for the three months ended March 31, 2012:


(in thousands, except weighted-average grant-date fair value)	Shares			Weighted-average grant-date fair value
RSUs unvested at December 31, 2011		3,141		$	12.83
Granted during 2012		683		$	15.48
Vested during 2012		(869	)	$	14.53
Forfeited during 2012		(55	)	$	8.63

RSUs unvested at March 31, 2012		2,900		$	13.02

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The following table summarizes stock option activity for the three months ended March 31, 2012:


(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, 2011		2,636		$	14.89
Exercised during 2012		(95	)	$	10.08
Forfeited during 2012		(23	)	$	19.96

Balance at March 31, 2012		2,518		$	15.02		2.4	$	6,660

Vested at March 31, 2012		2,518		$	15.02		2.4	$	6,660

Exercisable at March 31, 2012		2,518		$	15.02		2.4	$	6,660

All stock options issued under the Company’s plans are vested and no share-based compensation expense related to such stock options remains to be recognized.

Note 13 – Stockholders’ Equity

In March 2011, the Company’s board of directors approved a stock repurchase plan which authorizes the repurchase of up to $150.0 million of the Company’s common stock. Purchases may be made from time to time by the Company in the open market at prevailing market prices or in privately negotiated transactions. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2012. As of March 31, 2012, the Company had repurchased and retired 203,900 shares of its common stock for a total purchase price of $2.5 million.

Note 14 – Other Comprehensive Income (Loss)

Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Components of other comprehensive income (loss) for the three months ended March 31, 2012 are as follows:


(in thousands)	Net unrealized gains (losses) on securities			Foreign currency translation adjustment		Pension benefit adjustment			Accumulated other comprehensive income (loss)
Balance at December 31, 2011	$	(13,409	)	$	4,793	$	(168,837	)	$	(177,453	)
Pretax change		26,529			5,865		2,096			34,490
Pretax change in other-than-temporary impairments for which credit-related portion was recognized in earnings		4,839			—		—			4,839
Tax effect		(8,091	)		—		(839	)		(8,930	)

Balance at March 31, 2012	$	9,868		$	10,658	$	(167,580	)	$	(147,054	)

Allocated to the Company	$	9,859		$	10,658	$	(167,580	)	$	(147,063	)
Allocated to noncontrolling interests		9			—		—			9

Balance at March 31, 2012	$	9,868		$	10,658	$	(167,580	)	$	(147,054	)

Note 15 – Litigation and Regulatory Contingencies

The Company and its subsidiaries are parties to a number of non-ordinary course lawsuits. Frequently these lawsuits are similar in nature to other lawsuits pending against the Company’s competitors.

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

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

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

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

•

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

•

Boucher v. First American Title Insurance Company, filed on May 16, 2007 and pending in the United States District Court for the Western District of Washington,

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

•

Hamilton v. First American Title Insurance Company, filed on August 22, 2007 and pending in the United States District Court for the Northern District of Texas,

•

Hamilton v. First American Title Insurance Company, et al., filed on August 25, 2008 and pending in the Superior Court of the State of North Carolina, Wake County,

•

Haskins v. First American Title Insurance Company, filed on September 29, 2010 and pending in the United States District Court of New Jersey,

•

Johnson v. First American Title Insurance Company, filed on May 27, 2008 and pending in the United States District Court of Arizona,

•

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

•

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

•

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

•

Loef v. First American Title Insurance Company, filed on August 16, 2008 and pending in the United States District Court of Maine,

•

Raffone v. First American Title Insurance Company, filed on February 14, 2004 and pending in the Circuit Court, Nassau County, Florida, and

•

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

All of these lawsuits are putative class actions. A court has only granted class certification in Loef, Hamilton (North Carolina), Johnson, Lewis, Raffone and Slapikas. An appeal to a higher court is pending with respect to the granting of class certification in Hamilton (North Carolina). For the reasons stated above, the Company has been unable to assess the probability of loss or estimate the possible loss or the range of loss or, where the Company has been able to make an estimate, the Company believes the amount is immaterial to the financial statements as a whole.

•

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

•

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

•

Galiano v. First American Title Insurance Company, et al., filed on February 8, 2008 and pending in the United States District Court for the Eastern District of New York.

Galiano is a putative class action for which a class has not been certified. In Edwards a narrow class has been certified. The United States Supreme Court is reviewing whether the Edwards plaintiff has the legal right to sue. For the reasons stated above, the Company has been unable to assess the probability of loss or estimate the possible loss or the range of loss.

•

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

•

Holt v. First American Title Insurance Company, et al., filed March 11, 2008 and pending in the United States District Court for the Eastern District of Pennsylvania,

•

Katz v. First American Title Insurance Company, et al., filed March 18, 2008 and pending in the United States District Court for the Northern District of Ohio,

•

McCray v. First American Title Insurance Company, et al., filed October 15, 2008 and pending in the United States District Court of Delaware, and

•

Swick v. First American Title Insurance Company, et al., filed March 19, 2008, and pending in the United States District Court of New Jersey.

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

•

engaged in the unauthorized practice of law, including

•

Gale v. First American Title Insurance Company, et al., filed on October 16, 2006 and pending in the United States District Court of Connecticut, and

•

Katin v. First American Signature Services, Inc., et al., filed on May 9, 2007 and pending in the United States District Court of Massachusetts.

Katin is a putative class action for which a class has not been certified. A class has been certified in Gale, however the Company’s motion to decertify the class is pending. For the reasons described above, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss.

•

misclassified employees and failed to pay overtime, including

•

Bartko v. First American Title Insurance Company, filed on November 8, 2011, and pending in the Superior Court of the State of California, Los Angeles.

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

•

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

•

Carrera v. First American Home Buyers Protection Corporation, filed on September 23, 2009 and pending in the Superior Court of the State of California, County of Los Angeles,

•

Chassen v. First American Financial Corporation, et al., filed on January 22, 2009 and pending in the United States District Court of New Jersey,

•

Coleman v. First American Home Buyers Protection Corporation, et al., filed on August 24, 2009 and pending in the Superior Court of the State of California, County of Los Angeles,

•

Eberhard v. First American Title Insurance Company, et al., filed on April 4, 2011 and pending in the Court of Common Pleas Cuyahoga County, Ohio,

•

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

•

Gunning v. First American Title Insurance Company, filed on July 14, 2008 and pending in the United States District Court for the Eastern District of Kentucky,

•

Kaufman v. First American Financial Corporation, et al., filed on December 21, 2007 and pending in the Superior Court of the State of California, County of Los Angeles,

•

Kirk v. First American Financial Corporation, filed on June 15, 2006 and pending in the Superior Court of the State of California, County of Los Angeles,

•

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

•

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

•

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

•

Wilmot v. First American Financial Corporation, et al., filed on April 20, 2007 and pending in the Superior Court of the State of California, County of Los Angeles.

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

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

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

The Company’s title insurance, property and casualty insurance, home warranty, banking, thrift, trust and investment advisory businesses are regulated by various federal, state and local governmental agencies. Many of the Company’s other businesses operate within statutory guidelines. Consequently, the Company may from time to time be subject to audit or investigation by such governmental agencies. Currently, governmental agencies are auditing or investigating certain of the Company’s operations. These audits 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 audit 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 audits or investigations could, however, result in changes to the Company’s business practices which could ultimately have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Note 16 – Segment 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 products and services internationally. This segment also provides escrow and closing services; accommodates tax-deferred exchanges of real estate; maintains, manages and provides access to title plant records and images and provides banking, trust and investment advisory services. The Company, through its principal title insurance subsidiary and such subsidiary’s affiliates, transacts its title insurance business through a network of direct operations and agents. Through this network, the Company issues policies in the 49 states that permit the issuance of title insurance policies and the District of Columbia. The Company also offers title insurance and other insurance and guarantee products, as well as related settlement services, either directly or through joint ventures in foreign countries, including Canada, the United Kingdom and various other established and emerging markets.

•

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

The corporate division consists of certain financing facilities as well as the corporate services that support the Company’s business operations. Eliminations consist of inter-segment revenues and related expenses included in the results of the operating segments.

During the first quarter of 2012, the Company changed the allocation of certain expenses within its reportable segments and corporate division to reflect the performance of the Company’s reportable segments as reported to the chief operating decision maker. The expenses that were impacted as a result of the change in allocation include shared services expenses, benefit plan expense and interest expense. Prior period segment data has been reclassified to conform to the current presentation. For the three months ended March 31, 2011, income before income taxes for the Company’s reportable segments were impacted as follows: increase of $2.9 million to the title insurance and services segment, increase of $0.2 million to the specialty insurance segment, and decrease of $3.1 million to the corporate division.

Selected financial information by reporting segment is as follows:

For the three months ended March 31, 2012:


(in thousands)	Revenues			Income (loss) before income taxes			Depreciation and amortization		Capital expenditures
Title Insurance and Services	$	891,221		$	60,822		$	16,333	$	17,594
Specialty Insurance		74,198			12,824			1,055		578
Corporate		2,248			(22,096	)		671		—
Eliminations		(904	)		—			—		—

	$	966,763		$	51,550		$	18,059	$	18,172

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

For the three months ended March 31, 2011:


(in thousands)	Revenues			Income (loss) before income taxes			Depreciation and amortization		Capital expenditures
Title Insurance and Services	$	861,924		$	(15,696	)	$	17,171	$	12,169
Specialty Insurance		68,831			12,414			1,016		411
Corporate		1,579			(20,552	)		912		24
Eliminations		(634	)		385			—		—

	$	931,700		$	(23,449	)	$	19,099	$	12,604

Note 17 – Subsequent Events

On April 17, 2012, the Company entered into a senior secured credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”) in its capacity as administrative agent and the lenders party thereto. The credit agreement is comprised of a $600.0 million revolving credit facility. Unless terminated earlier, the revolving loan commitments will terminate on April 17, 2016.

The agreement replaces the Company’s $400.0 million senior secured credit agreement dated as of April 12, 2010, which was terminated immediately prior to entry into the new agreement. In connection with the closing, the Company paid off the $200.0 million outstanding balance under the prior agreement and borrowed $200.0 million under the new agreement. Proceeds under the credit agreement may be used for general corporate purposes.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The Company’s obligations under the credit agreement are originally guaranteed by the following Company subsidiaries: First American Data Co., LLC, First American Data Tree LLC, Data Trace Information Services LLC and Smart Title Solutions LLC (collectively with any future guarantors under the facility, the “Guarantors”).

To secure the obligations of the Company and the Guarantors (collectively, the “Loan Parties”) under the credit agreement, the Company and certain other Loan Parties entered into a pledge agreement (the “Pledge Agreement”) with JPMorgan in its capacity as collateral agent (the “Collateral Agent”) and, pursuant thereto, pledged fifty percent of the equity interests of each of the Guarantors and a nine percent equity interest in First American Title Insurance Company. The security will be released in the event that, and remain released for as long as, the Company’s long-term issuer rating or long-term counterparty credit rating (the “Debt Rating”) is BBB- or higher by S&P and Baa3 or higher by Moody’s.

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

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

The credit agreement includes representations and warranties, reporting covenants, affirmative covenants, negative covenants, financial covenants and events of default customary for financings of this type. Upon the occurrence of an event of default the lenders may accelerate the loans and the Collateral Agent may exercise remedies under the collateral documents. Upon the occurrence of certain insolvency and bankruptcy events of default the loans will automatically accelerate.

Item 2.

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

CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING BUT NOT LIMITED TO THOSE SET FORTH ON PAGE 3 OF THIS QUARTERLY REPORT ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS MAY CONTAIN THE WORDS “BELIEVE,” “ANTICIPATE,” “EXPECT,” “PLAN,” “PREDICT,” “ESTIMATE,” “PROJECT,” “WILL BE,” “WILL CONTINUE,” “WILL LIKELY RESULT,” OR OTHER SIMILAR WORDS AND PHRASES.

RISKS AND UNCERTAINTIES EXIST THAT MAY CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE THE ANTICIPATED RESULTS TO DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDE THE FACTORS SET FORTH ON PAGE 3 OF THIS QUARTERLY 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those policies used in the preparation of First American Financial Corporation’s (the “Company’s”) financial statements that require management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosure of contingencies. A summary of these policies can be found in the Management’s Discussion and Analysis section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Recently Adopted Accounting Pronouncements

In June 2011, the FASB issued updated guidance that is intended to increase the prominence of other comprehensive income in financial statements. The updated guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity, and requires either consecutive presentation of the statement of net income and other comprehensive income or in a single continuous statement of comprehensive income. In addition, the option to present reclassification adjustments in the notes to financial statements has been eliminated. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2011. In December 2011, the FASB issued updated guidance deferring the effective date of the change in presentation of reclassification adjustments. The adoption of the guidance that became effective in the first quarter of 2012 had no impact on the Company’s condensed consolidated financial statements.

Pending Accounting Pronouncements

OVERVIEW

The Company became a publicly traded company following its spin-off from its prior parent, The First American Corporation (“TFAC”) on June 1, 2010 (the “Separation”). On that date, TFAC distributed all of the Company’s outstanding shares to the record date shareholders of TFAC on a one-for-one basis (the “Distribution”). After the Distribution, the Company owned TFAC’s financial services businesses and TFAC, which reincorporated and assumed the name CoreLogic, Inc. (“CoreLogic”), continued to own its information solutions businesses.

Beginning at the end of September 2010, various lenders’ foreclosure processes came under the review and scrutiny of a number of regulators such as the state Attorneys General, the Federal Reserve and other agencies. Additionally, a growing number of court rulings have called into question some foreclosure practices and regulators have conducted and continue to conduct investigations into such practices. Many of the country’s largest lenders and other key parties also have entered into consent decrees and settlement agreements which require them, among other things, to alter their foreclosure processes. The ultimate effect of the court rulings, regulatory investigations, consent decrees, settlement agreements and related matters pertaining to foreclosure processing are currently unknown, and the Company may incur costs associated with its duty to defend its insureds’ title to foreclosed properties they have purchased. The Company also believes that, as a result of these matters, its revenues tied to foreclosures have declined. However, the Company believes that, as a result of the settlement of inquiries into these processes, foreclosure volumes may begin to increase, though any expected increase of foreclosure volume may be offset by foreclosure alternatives, such as short sales. As of the current date, these matters have not had a material adverse effect on the Company. Though the Company will continue to monitor foreclosure developments, at this time the Company does not believe these matters will have a material adverse effect on the Company in the future.

Results of Operations

Summary of First Quarter

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

Residential mortgage originations in the United States (based on the total dollar value of the transactions) increased 5.3% in the first quarter of 2012 when compared with the first quarter of 2011, according to the Mortgage Bankers Association’s April 17, 2012 Mortgage Finance Forecast (the “MBA Forecast”). According to the MBA Forecast, the dollar amount of purchase originations decreased 24.5% and refinance originations increased 21.9% in the first quarter of 2012 when compared with the first quarter of 2011.

A low interest rate environment typically has a favorable impact on many of the Company’s businesses, however in recent years mortgage credit has been generally tight, which together with the uncertainty in general economic conditions, has impacted the demand for most of the Company’s products and services. During the first quarter of 2012, following a gradual improvement in the general economy, the Company observed an increase in mortgage activity as evidenced by an increase in title orders opened. The Company’s direct title operations opened 377,200 title orders during the three months ended March 31, 2012, an increase of 31.4% when compared with 287,100 title orders opened during the same period of the prior year. The increase in title orders opened was driven primarily by a significant increase in refinance activity and a modest increase in resale transactions. While market conditions and order volumes demonstrated improvement during the first quarter of 2012, the Company continues to maintain a tight control on expenses.

During 2011, the Company completed an expense reduction program, primarily directed at its shared services function in the title insurance and services segment that is expected to yield approximately $40 million in annualized cost savings. The Company’s results for the three months ended March 31, 2012 benefited from the expense reduction program when compared to the same period of the prior year.

Title Insurance and Services


	Three Months Ended March 31,
(in thousands, except percentages)	2012			2011			$ Change			% Change
Revenues
Direct premiums and escrow fees	$	343,639		$	295,431		$	48,208			16.3	%
Agent premiums		376,986			399,921			(22,935	)		(5.7	)
Information and other		155,289			150,427			4,862			3.2
Investment income		17,321			17,568			(247	)		(1.4	)
Net realized investment gains (losses)		588			(1,126	)		1,714			152.2
Net other-than-temporary impairment losses recognized in earnings		(2,602	)		(297	)		(2,305	)		N/M	¹

		891,221			861,924			29,297			3.4

Expenses
Personnel costs		277,577			259,067			18,510			7.1
Premiums retained by agents		302,164			319,987			(17,823	)		(5.6	)
Other operating expenses		171,752			175,513			(3,761	)		(2.1	)
Provision for policy losses and other claims		52,179			96,376			(44,197	)		(45.9	)
Depreciation and amortization		16,333			17,171			(838	)		(4.9	)
Premium taxes		9,733			8,039			1,694			21.1
Interest		661			1,467			(806	)		(54.9	)

		830,399			877,620			(47,221	)		(5.4	)

Income (loss) before income taxes	$	60,822		$	(15,696	)	$	76,518			487.5	%

Margins		6.8	%		(1.8	)%		8.6	%		477.8	%

(1)	Not meaningful

Direct premiums and escrow fees were $343.6 million for the three months ended March 31, 2012, an increase of $48.2 million, or 16.3%, when compared with the same period of the prior year. This increase was due to an increase in the number of title orders closed by the Company’s direct operations, which reflected the increase in mortgage originations, and a slight increase in average revenues per order closed. The slight increase in average revenues per order closed in the first quarter of 2012 when compared to the first quarter of 2011 was primarily attributable to an increase in the mix of direct revenues generated from higher premium commercial transactions. The Company’s direct title operations closed 261,300 title orders during the three months ended March 31, 2012, an increase of 15.8% when compared with 225,600 title orders closed during the same period of the prior year. The average revenues per order closed was $1,315 for the three months ended March 31, 2012, an increase of 0.4% when compared with $1,310 for the three months ended March 31, 2011.

Agent premiums were $377.0 million for the three months ended March 31, 2012, a decrease of $22.9 million, or 5.7%, when compared with the same period of the prior year. 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, first quarter agent premiums primarily reflect fourth quarter mortgage origination activity. The decrease in agent premiums quarter over quarter was consistent with the decrease in the Company’s direct premiums and escrow fees in the fourth quarter of 2011 as compared with the fourth quarter of 2010. The Company continuously analyzes the terms and profitability of its title agency relationships and, where it deems it necessary, amends agent agreements to the extent possible.

Information and other revenues, which primarily consist of revenues generated from fees associated with title search and related reports, title and other real property records and images, and other non-insured settlement services, were $155.3 million for the three months ended March 31, 2012, an increase of $4.9 million, or 3.2%, when compared with the same period of the prior year. This increase was primarily attributable to higher demand for the Company’s title plant information and increased international service revenues, offset in part by lower default information revenues. The higher demand for the Company’s title plant information was driven by the increase in mortgage origination activity. International service revenues increased due to a rebound in the Canadian real estate market, primarily driven by refinance activity. Default related information revenues were negatively impacted by a decline in foreclosure activity and increased market competition.

Net other-than-temporary impairment losses for the title insurance and services segment totaled $2.6 million and $0.3 million for the three months ended March 31, 2012 and 2011, respectively. The other-than-temporary impairment losses recognized in the first quarter of 2012 and 2011 relate to the Company’s non-agency mortgage-backed securities portfolio.

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

Personnel costs were $277.6 million for the three months ended March 31, 2012, an increase of $18.5 million, or 7.1%, when compared with the same period of the prior year. The increase was primarily due to higher commission and bonus expense as both revenues and profits have improved relative to the prior year, as well as increased healthcare related expenses and one additional payroll day in the current quarter.

Agents retained $302.2 million of title premiums generated by agency operations for the three months ended March 31, 2012, which compares with $320.0 million for the same period of the prior year. The percentage of title premiums retained by agents was 80.2% and 80.0% for the three months ended March 31, 2012 and 2011, respectively. The increase in the agent retention percentage was primarily due to a large commercial deal that closed during the first quarter of 2011 with a favorable agent split.

Other operating expenses for the title insurance and services segment were $171.8 million for the three months ended March 31, 2012, a decrease of $3.8 million, or 2.1%, when compared with the same period of the prior year. This decrease was primarily due to lower office related expenses resulting from the Company’s consolidation and closure of certain title offices. Further contributing to the decrease in other operating expenses was a decline in professional services costs. These decreases were partially offset by an increase in production related expenses due to improved refinance activity.

The provision for policy losses and other claims was $52.2 million, or 7.2% of title premiums and escrow fees, and $96.4 million, or 13.9% of title premiums and escrow fees, for the three months ended March 31, 2012 and 2011, respectively. The current quarter rate of 7.2% reflected an ultimate loss rate of 6.2% for the current policy year and included $7.2 million in net unfavorable development for prior policy years, primarily 2007 and 2008. Approximately $4.3 million of the net unfavorable development related to the Company’s guaranteed valuation product offered in Canada. There is substantial uncertainty as to the ultimate loss emergence for this product due to the following factors, among others, (i) claims associated with this product are generally made only after a foreclosure on the related property and foreclosure rates in Canada are difficult to predict and (ii) limited historical loss data exists as a result of the relatively recent introduction of this product in 2003. While the Company believes its claims reserve attributable to this product is adequate, because of this uncertainty, the potential for adverse loss development relative to this product is significantly higher than for title insurance. The first quarter of 2011 rate of 13.9% reflected an ultimate loss rate of 5.2% for the 2011 policy year, a $45.3 million reserve strengthening adjustment related to the guaranteed valuation product offered in Canada and a $14.6 million charge which reflected adverse development for certain prior policy years.

Premium taxes were $9.7 million and $8.0 million for the three months ended March 31, 2012 and 2011, respectively. Premium taxes as a percentage of title insurance premiums and escrow fees were 1.4% and 1.2% for the three months ended March 31, 2012 and 2011, respectively.

In general, the title insurance business is a lower profit margin business when compared to the Company’s specialty insurance segment. The lower profit margins reflect the high cost of performing the essential services required before insuring title, whereas the corresponding revenues are subject to regulatory and competitive pricing restraints. Due to this relatively high proportion of fixed costs, title insurance profit margins generally improve as closed order volumes increase. Title insurance profit margins are affected by the composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. In addition, profit margins from refinance transactions vary depending on whether they are centrally processed or locally processed. Profit margins from resale, new construction and centrally processed refinance transactions are generally higher than from locally processed refinance transactions because in many states there are premium discounts on, and cancellation rates are higher for, refinance transactions. Title insurance profit margins are also affected by the percentage of title insurance premiums generated by agency operations. Profit margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent. The pre-tax margin for the three months ended March 31, 2012 was 6.8% and the pre-tax margin loss for the three months ended March 31, 2011 was 1.8%.

Specialty Insurance


	Three Months Ended March 31,
(in thousands, except percentages)	2012			2011			$ Change			% Change
Revenues
Direct premiums	$	70,147		$	65,663		$	4,484			6.8	%
Information and other		475			329			146			44.4	%
Investment income		2,465			2,508			(43	)		(1.7	)
Net realized investment gains		1,111			331			780			235.6

		74,198			68,831			5,367			7.8

Expenses
Personnel costs		13,663			11,651			2,012			17.3
Other operating expenses		11,042			9,610			1,432			14.9
Provision for policy losses and other claims		34,499			33,136			1,363			4.1
Depreciation and amortization		1,055			1,016			39			3.8
Premium taxes		1,115			1,004			111			11.1

		61,374			56,417			4,957			8.8

Income before income taxes	$	12,824		$	12,414		$	410			3.3	%

Margins		17.3	%		18.0	%		(0.7	)%		(3.9	)%

Direct premiums were $70.1 million for the three months ended March 31, 2012, an increase of $4.5 million, or 6.8%, when compared with the same period of the prior year. The increase was due to an increase in premiums from both the home warranty and property and casualty divisions.

Personnel costs and other operating expenses were $24.7 million for the three months ended March 31, 2012, an increase of $3.4 million, or 16.2%, when compared with the same period of the prior year. This increase was primarily related to higher bonus expense and increased amortization of deferred acquisition costs when compared with the same period of the prior year. The FASB issued updated guidance related to deferred acquisition costs, which the Company implemented during the first quarter of 2012. The impact of implementing the new guidance was an increase to expense of approximately $0.7 million.

For the home warranty business, the provision for home warranty claims expressed as a percentage of home warranty premiums was 47.9% for the current three month period and 46.6% for the same period of the prior year. This increase in rate was primarily due to a greater number of claims incidents. For the property and casualty business, the provision for property and casualty claims expressed as a percentage of property and casualty insurance premiums was 51.3% for the current three month period, a decrease when compared with 56.8% for the same period of the prior year. This decrease was primarily due to a mild winter leading to lower winter storm losses.

Premium taxes were $1.1 million and $1.0 million for the three months ended March 31, 2012 and 2011, respectively. Premium taxes as a percentage of specialty insurance segment premiums were 1.6% and 1.5% for the three months ended March 31, 2012 and 2011, respectively.

A large part of the revenues for the specialty insurance businesses are generated by renewals and are not dependent on the level of real estate activity. With the exception of loss expense, the majority of the expenses for this segment are variable in nature and therefore generally fluctuate consistent with revenue fluctuations. Accordingly, profit margins for this segment (before loss expense) are relatively constant, although as a result of some fixed expenses, profit margins (before loss expense) should nominally improve as revenues increase. Pre-tax margins for the current three month period were 17.3%, down from 18.0% for the comparable period of the prior year.

Corporate


	Three Months Ended March 31,
(in thousands, except percentages)	2012			2011			$ Change			% Change
Revenues
Investment income	$	3,491		$	1,716		$	1,775			103.4	%
Net realized investment losses		(1,243	)		(137	)		(1,106	)		N/M	¹

		2,248			1,579			669			42.4

Expenses
Personnel costs		14,039			12,584			1,455			11.6
Other operating expenses		6,360			5,265			1,095			20.8
Depreciation and amortization		671			912			(241	)		(26.4	)
Interest		3,274			3,370			(96	)		(2.8	)

		24,344			22,131			2,213			10.0

Loss before income taxes	$	(22,096	)	$	(20,552	)	$	(1,544	)		(7.5	)%

(1)	Not meaningful

Investment income totaled $3.5 million and $1.7 million for the three months ended March 31, 2012 and 2011, respectively. The increase in investment income was attributable to higher earnings on investments associated with the Company’s deferred compensation plan.

Net realized investment losses totaled $1.2 million and $0.1 million for the three months ended March 31, 2012 and 2011, respectively. The increase in net realized investment losses was due to the impairment of a non-marketable investment in the first quarter of 2012.

Corporate personnel costs and other operating expenses were $20.4 million and $17.8 million for the three months ended March 31, 2012 and 2011, respectively. The increase in personnel costs and other operating expenses was primarily due to increased costs associated with the Company’s deferred compensation plan.

Eliminations

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

INCOME TAXES

The effective income tax rate (income tax expense as a percentage of income before income taxes) was 39.7% for the three months ended March 31, 2012 and 35.0% for the same period of the prior year. The difference in the effective rate was primarily attributable to the change to income before income taxes in 2012 from a loss before income taxes in 2011, the mix of taxable and non-taxable income for state tax purposes, and losses in foreign jurisdictions for which no tax benefit was provided.

assets. Failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings. The Company continues to monitor the realizability of recognized, impairment, and unrecognized losses recorded through March 31, 2012. The Company believes it is more likely than not that the tax benefits associated with those losses will be realized. However, this determination is a judgment and could be impacted by further market fluctuations, among other factors.

NET INCOME AND NET INCOME ATTRIBUTABLE TO THE COMPANY

Net income for the three months ended March 31, 2012 was $31.1 million. Net loss for the three months ended March 31, 2011 was $15.2 million. Net income attributable to the Company for the three months ended March 31, 2012 was $31.3 million, or $0.29 per diluted share, and net loss attributable to the Company for the three months ended March 31, 2011 was $15.3 million, or $0.15 per diluted share.

LIQUIDITY AND CAPITAL RESOURCES

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

The substantial majority of the Company’s business is dependent upon activity in the real estate and mortgage markets, which are cyclical and seasonal. Periods of increasing interest rates and reduced mortgage financing availability generally have an adverse effect on residential real estate activity and therefore typically decrease the Company’s revenues. In contrast, periods of declining interest rates and increased mortgage financing availability generally have a positive effect on residential real estate activity which typically increases the Company’s revenues. Residential purchase activity is typically slower in the winter months with increased volumes in the spring and summer months. Residential refinance activity is typically more volatile than purchase 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 used in operating activities amounted to $7.3 million for the three months ended March 31, 2012 and $51.5 million for the same period of the prior year after claim payments, net of recoveries, of $116.1 million and $117.4 million, respectively. The principal nonoperating uses of cash and cash equivalents for the three months ended March 31, 2012 were purchases of debt and equity securities, repayment of debt, business acquisitions, capital expenditures and dividends to common stockholders. The most significant nonoperating sources of cash and cash equivalents for the three months ended March 31, 2012 were increases in the deposit balances at the Company’s banking operations and proceeds from the sales and maturities of debt and equity securities. The principal nonoperating uses of cash and cash equivalents for the three months ended March 31, 2011 were additions to the investment portfolio, repayment of debt, capital expenditures and dividends to common stockholders. The most significant nonoperating sources of cash and cash equivalents for the three months ended March 31, 2011 were increases in the deposit balances at the Company’s banking operations and proceeds from the sales and maturities of debt and equity securities. The net effect of all activities on total cash and cash equivalents was an increase of $254.2 million for the three months ended March 31, 2012 and an increase of $26.5 million for the same period in 2011.

The Company continually assesses its capital allocation strategy, including decisions relating to dividends, share repurchases, capital expenditures, acquisitions and investments. The Company expects that it will continue to pay quarterly cash dividends at or above the current level. The timing, declaration and payment of future dividends, however, falls within the discretion of the Company’s board of directors and will depend upon many factors, including the Company’s financial condition and earnings, the capital requirements of the Company’s businesses, industry practice, restrictions imposed by applicable law and any other factors the board of directors deems relevant from time to time.

Holding Company. First American Financial Corporation is a holding company that conducts all of its operations through its subsidiaries. The holding company’s current cash requirements include payments of principal and interest on its debt, taxes, payments in connection with employee benefit plans, dividends on its common stock and other expenses. The holding company is dependent upon dividends and other payments from its operating subsidiaries to meet its cash requirements. The Company’s target is to maintain a cash balance at the holding company equal to at least twelve months of estimated cash requirements. At certain points in time, the actual cash balance at the holding company may vary from this target due to, among other potential factors, the timing and amount of cash payments made and dividend payments received. Pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available to the holding company is limited, principally for the protection of policyholders. As of March 31, 2012, under such regulations, the maximum amount of dividends, loans and advances available to the holding company from its insurance subsidiaries in 2012 is $207.9 million. Such restrictions have not had, nor are they expected to have, an impact on the holding company’s ability to meet its cash obligations.

As of March 31, 2012, the holding company’s sources of liquidity include $151.6 million of cash, 6.0 million shares of CoreLogic common stock with an estimated fair value of $97.8 million and $200.0 million available on the Company’s $400.0 million revolving credit facility, which has subsequently been replaced as described below. Management believes that its liquidity at the holding company is sufficient to satisfy its anticipated cash requirements and obligations for at least the next twelve months.

Financing. On April 12, 2010, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”) in its capacity as administrative agent and a syndicate of lenders.

The credit agreement was comprised of a $400.0 million revolving credit facility. The revolving loan commitments were to terminate on the third anniversary of the date of closing, or June 1, 2013, if not earlier terminated. On June 1, 2010, the Company borrowed $200.0 million under the facility and transferred such funds to CoreLogic, as previously contemplated in connection with the Separation. At March 31, 2012, the interest rate associated with the $200.0 million borrowed under the facility was 3.00%. At March 31, 2012, the Company was in compliance with the covenants under the credit agreement.

On April 17, 2012, the Company entered into a senior secured credit agreement with JPMorgan in its capacity as administrative agent and the lenders party thereto. The credit agreement is comprised of a $600.0 million revolving credit facility. Unless terminated earlier, the revolving loan commitments will terminate on April 17, 2016.

The agreement replaces the $400.0 million senior secured credit agreement referred to above, which was terminated immediately prior to entry into the new agreement. In connection with the closing, the Company paid off the $200.0 million outstanding balance under the prior agreement and borrowed $200.0 million under the new agreement. Proceeds under the credit agreement may be used for general corporate purposes.

In addition to amounts available under the credit facility, certain subsidiaries of the Company are parties to master repurchase agreements which are used as part of the Company’s liquidity management activities and to support its risk management activities. In particular, securities loaned or sold under repurchase agreements are used as short-term funding sources. In the first quarter of 2012, the Company transferred securities totaling $20.3 million and received funds totaling $19.9 million under these agreements. As of March 31, 2012, no amounts remained outstanding under these agreements.

Notes and contracts payable as a percentage of total capitalization was 11.7% and 12.8% at March 31, 2012 and December 31, 2011, respectively.

Investment Portfolio. As of March 31, 2012, the Company’s debt and equity investment securities portfolio consisted of approximately 90% fixed income securities. As of that date, approximately 68% of the Company’s fixed income investments were held in securities that are United States government-backed or rated AAA, and approximately 98% of the fixed income portfolio was rated or classified as investment grade. Percentages are based on the amortized cost basis of the securities. Credit ratings are based on S&P and Moody’s published ratings. If a security was rated differently by both rating agencies, the lower of the two ratings was selected.

The table below outlines the composition of the investment portfolio in an unrealized loss position by credit rating (percentages are based on the amortized cost basis of the investments) as of March 31, 2012. Credit ratings are based on S&P and Moody’s published ratings and are exclusive of insurance effects. If a security was rated differently by both rating agencies, the lower of the two ratings was selected:


March 31, 2012	A-Ratings or Higher			BBB+ to BBB- Ratings			Non- Investment Grade/Not Rated
U.S. Treasury bonds		100.0	%		0.0	%		0.0	%
Municipal bonds		96.8	%		0.7	%		2.5	%
Foreign bonds		98.5	%		0.0	%		1.5	%
Governmental agency bonds		100.0	%		0.0	%		0.0	%
Governmental agency mortgage-backed securities		100.0	%		0.0	%		0.0	%
Non-agency mortgage-backed securities		0.0	%		0.0	%		100.0	%
Corporate debt securities		84.3	%		15.7	%		0.0	%
Preferred stock		100.0	%		0.0	%		0.0	%

		94.0	%		1.0	%		5.0	%

In connection with the Separation, TFAC issued to the Company a number of shares of its common stock that resulted in the Company owning 12.9 million shares of CoreLogic’s common stock immediately following the Separation. Due to the fact that a substantial proportion of the Company’s investment portfolio consists of the common stock of a single issuer, CoreLogic, the Company sold 4.0 million shares in April 2011 to reduce its unsystematic risk. At March 31, 2012, the Company owned 8.9 million shares of CoreLogic common stock with a cost basis of $167.6 million and an estimated fair value of $145.8 million. The Company holds 6.0 million shares at the holding company and the remaining 2.9 million shares at First American Title Insurance Company. The Company has agreed to dispose of the shares within five years after the Separation or to bear any adverse tax consequences arising as a result of holding the shares for a longer period. The Company will continue to closely monitor and regularly review its investment in CoreLogic common stock.

In addition to its debt and equity investment securities portfolio, the Company maintains certain money-market and other short-term investments.

Off-balance sheet arrangements. The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $4.1 billion and $3.1 billion at March 31, 2012 and December 31, 2011, respectively, of which $1.2 billion and $0.9 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB. The escrow deposits held at First American Trust, FSB, are included in the accompanying condensed consolidated balance sheets, in cash and cash equivalents and debt and equity securities, with offsetting liabilities included in deposits. The remaining escrow deposits were held at third-party financial institutions.

Trust assets totaled $3.0 billion and $2.8 billion at March 31, 2012 and December 31, 2011, respectively, and were held or managed by First American Trust, FSB. Escrow deposits held at third-party financial institutions and trust assets are not the Company’s assets under U.S. generally accepted accounting principles and, therefore, are not included in the accompanying condensed consolidated balance sheets. However, the Company could be held contingently liable for the disposition of these assets.

property held by the Company is transferred to the customer. Like-kind exchange funds held by the Company totaled $721.5 million and $564.7 million at March 31, 2012 and December 31, 2011, respectively. The like-kind exchange deposits were held at third-party financial institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets. All such amounts are placed in bank deposits with institutions insured by the Federal Deposit Insurance Corporation. The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the return on the proceeds.

At March 31, 2012 and December 31, 2011, the Company was contingently liable for guarantees of indebtedness owed by affiliates and third parties to banks and others totaling $23.3 million and $23.8 million, respectively. The guarantee arrangements relate to promissory notes and other contracts, and contingently require the Company to make payments to the guaranteed party based on the failure of debtors to make scheduled payments according to the terms of the notes and contracts. The Company’s maximum potential amount of future payments under these guarantees totaled $23.3 million at March 31, 2012 and $23.8 million at December 31, 2011, and is limited in duration to the terms of the underlying indebtedness. The Company has not incurred any costs as a result of these guarantees and has not recorded a liability on its condensed consolidated balance sheets related to these guarantees at March 31, 2012 and December 31, 2011.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

The Company’s primary exposure to market risk relates to interest rate risk associated with certain financial instruments. Although the Company monitors its risk associated with fluctuations in interest rates, it does not currently use derivative financial instruments on any significant scale to hedge these risks.

There have been no material changes in the Company’s market risks since the filing of its Annual Report on Form 10-K for the year ended December 31, 2011.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer have concluded that, as of March 31, 2012, the end of the quarterly period covered by this Quarterly Report on Form 10-Q, 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.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings.

•

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

•

Boucher v. First American Title Insurance Company, filed on May 16, 2007 and pending in the United States District Court for the Western District of Washington,

•

Hamilton v. First American Title Insurance Company, filed on August 22, 2007 and pending in the United States District Court for the Northern District of Texas,

•

Hamilton v. First American Title Insurance Company, et al., filed on August 25, 2008 and pending in the Superior Court of the State of North Carolina, Wake County,

•

Haskins v. First American Title Insurance Company, filed on September 29, 2010 and pending in the United States District Court of New Jersey,

•

Johnson v. First American Title Insurance Company, filed on May 27, 2008 and pending in the United States District Court of Arizona,

•

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

•

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

•

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

•

Loef v. First American Title Insurance Company, filed on August 16, 2008 and pending in the United States District Court of Maine,

•

Raffone v. First American Title Insurance Company, filed on February 14, 2004 and pending in the Circuit Court, Nassau County, Florida, and

•

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

•

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

•

Galiano v. First American Title Insurance Company, et al., filed on February 8, 2008 and pending in the United States District Court for the Eastern District of New York.

•

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

•

Holt v. First American Title Insurance Company, et al., filed March 11, 2008 and pending in the United States District Court for the Eastern District of Pennsylvania,

•

Katz v. First American Title Insurance Company, et al., filed March 18, 2008 and pending in the United States District Court for the Northern District of Ohio,

•

McCray v. First American Title Insurance Company, et al., filed October 15, 2008 and pending in the United States District Court of Delaware, and

•

Swick v. First American Title Insurance Company, et al., filed March 19, 2008, and pending in the United States District Court of New Jersey.

•

engaged in the unauthorized practice of law, including

•

Gale v. First American Title Insurance Company, et al., filed on October 16, 2006 and pending in the United States District Court of Connecticut, and

•

Katin v. First American Signature Services, Inc., et al., filed on May 9, 2007 and pending in the United States District Court of Massachusetts.

•

misclassified employees and failed to pay overtime, including

•

Bartko v. First American Title Insurance Company, filed on November 8, 2011, and pending in the Superior Court of the State of California, Los Angeles.

•

Carrera v. First American Home Buyers Protection Corporation, filed on September 23, 2009 and pending in the Superior Court of the State of California, County of Los Angeles,

•

Chassen v. First American Financial Corporation, et al., filed on January 22, 2009 and pending in the United States District Court of New Jersey,

•

Coleman v. First American Home Buyers Protection Corporation, et al., filed on August 24, 2009 and pending in the Superior Court of the State of California, County of Los Angeles,

•

Eberhard v. First American Title Insurance Company, et al., filed on April 4, 2011 and pending in the Court of Common Pleas Cuyahoga County, Ohio,

•

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

•

Gunning v. First American Title Insurance Company, filed on July 14, 2008 and pending in the United States District Court for the Eastern District of Kentucky,

•

Kaufman v. First American Financial Corporation, et al., filed on December 21, 2007 and pending in the Superior Court of the State of California, County of Los Angeles,

•

Kirk v. First American Financial Corporation, filed on June 15, 2006 and pending in the Superior Court of the State of California, County of Los Angeles,

•

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

•

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

•

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

•

Wilmot v. First American Financial Corporation, et al., filed on April 20, 2007 and pending in the Superior Court of the State of California, County of Los Angeles.

Item 1A.

Risk Factors.

You should carefully consider each of the following risk factors and the other information contained in this Quarterly Report on Form 10-Q. 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

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

•

when mortgage interest rates are high or rising;

•

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

•

when real estate values are declining.

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

Uncertainty and negative trends in general economic conditions in the United States and abroad, including significant tightening of credit markets and a general decline in the value of real property, historically have created a difficult operating environment for the Company’s businesses and other companies in its industries. In addition, the Company holds investments in entities, such as title agencies, settlement service providers and property and casualty insurance companies, and instruments, such as mortgage-backed securities, which may be negatively impacted by these conditions. The Company also owns a federal savings bank into which it deposits some of its own funds and some funds held in trust for third parties. This bank invests those funds and any realized losses incurred will be reflected in the Company’s consolidated results. The likelihood of such losses, which generally would not occur if the Company were to deposit these funds in an unaffiliated entity, increases when economic conditions are unfavorable. Depending upon the ultimate severity and duration of any economic downturn, the resulting effects on the Company could be materially adverse, including a significant reduction in revenues, earnings and cash flows, challenges to the Company’s ability to satisfy covenants or otherwise meet its obligations under debt facilities, difficulties in obtaining access to capital, challenges to the Company’s ability to pay dividends at currently anticipated levels, deterioration in the value of its investments and increased credit risk from customers and others with obligations to the Company.

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

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

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

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

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

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

6. Scrutiny of the Company’s businesses and the industries in which it operates by governmental entities and others could adversely affect its operations and financial condition

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

Governmental entities have routinely inquired into certain practices in the real estate settlement services industry to determine whether certain of the Company’s businesses or its competitors have violated applicable laws, which include, among others, the insurance codes of the various jurisdictions and the Real Estate Settlement Procedures Act and similar state, federal and foreign laws. Departments of insurance in the various states, either separately or in conjunction with federal regulators and applicable regulators in international jurisdictions, also periodically conduct targeted inquiries into the practices of title insurance companies in their respective jurisdictions. Further, from time to time plaintiffs’ lawyers may target the Company and other members of the Company’s industry with lawsuits claiming legal violations or other wrongful conduct. These lawsuits may involve large groups of plaintiffs and claims for substantial damages. Any of these types of inquiries or proceedings may result in a finding of a violation of the law or other wrongful conduct and may result in the payment of fines or damages or the imposition of restrictions on the Company’s conduct which could impact its operations and financial condition. Moreover, these laws and standards of conduct often are ambiguous and, thus, it may be difficult to ensure compliance. This ambiguity may force the Company to mitigate its risk by settling claims or by ending practices that generate revenues, earnings and cash flows.

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

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

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

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

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

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

10. Product migration may result in decreased revenue

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

11. Increases in the size of the Company’s customers enhance their negotiating position vis-à-vis the Company and may decrease their need for the services offered by the Company

Many of the Company’s customers have increased in size as a result of consolidation or the failure of their competitors. For example, the Company believes that two lenders collectively originate approximately 35 percent of mortgage loans in the United States. As a result, the Company may derive a higher percentage of its revenues from a smaller base of customers, which would enhance the negotiating power of these customers with respect to the pricing and the terms on which these customers purchase the Company’s products and other matters. These circumstances could adversely affect the Company’s revenues and profitability. Changes in the Company’s relationship with any of these customers, the loss of all or a portion of the business the Company derives from these customers or any refusal of these customers to accept the Company’s policies could have a material adverse effect on the Company.

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

Certain of the Company’s customers use measurements of the financial strength of the Company’s title insurance underwriters, including, among others, ratings provided by ratings agencies and levels of statutory surplus maintained by those underwriters, in determining the amount of a policy they will accept and the amount of reinsurance required. Each of the major ratings agencies currently rates the Company’s title insurance operations. The Company’s principal title insurance underwriter’s financial strength ratings are “A3” by Moody’s Investor Services, Inc., “A-” by Fitch Ratings Ltd., “BBB+” by Standard & Poor’s Ratings Services and “A-” by A.M. Best Company, Inc. These ratings provide the agencies’ perspectives on the financial strength, operating performance and cash generating ability of those operations. These agencies continually review these ratings and the ratings are subject to change. Statutory surplus, or the amount by which statutory assets exceed statutory liabilities, is also a measure of financial strength. The current minimum statutory surplus capital required to be maintained by California law is $500,000. Accordingly, if the ratings or statutory surplus of these title insurance underwriters are reduced from their current levels, or if there is a deterioration in other measures of financial strength, the Company’s results of operations, competitive position and liquidity could be adversely affected.

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

The Company maintains a substantial investment portfolio, primarily consisting of fixed income securities (including mortgage-backed securities) and, as of March 31, 2012, common stock of CoreLogic, Inc. (“CoreLogic”) with a cost basis of $167.6 million and an estimated fair value of $145.8 million that was issued to the Company in connection with its separation from CoreLogic. The investment portfolio also includes money-market and other short-term investments, as well as some preferred and other common stock. Securities in the Company’s investment portfolio are subject to certain economic and financial market risks, such as credit risk, interest rate (including call, prepayment and extension) risk and/or liquidity risk. Because a substantial proportion of the portfolio consists of the common stock of a single issuer, CoreLogic, the risk of loss in the portfolio also is impacted by factors that influence the value of CoreLogic’s stock, including, but not limited to, CoreLogic’s financial results and the market’s perception of CoreLogic’s and its industry’s prospects. Additionally, the risk of loss associated with the portfolio is increased during periods, such as the present period, of instability in credit markets and economic conditions. If the carrying value of the investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, the Company will be required to write down the value of the investments, which could have a material adverse effect on the Company’s results of operations, statutory surplus and financial condition.

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

The Company is responsible for the obligations of its defined benefit pension plan, which it assumed from its former parent, The First American Corporation, on June 1, 2010 in connection with the spin-off transaction which was consummated on that date. The plan was closed to new entrants effective December 31, 2001 and amended to “freeze” all benefit accruals as of April 30, 2008. The Company’s future funding obligations for this plan depend, among other factors, upon the future performance of assets held in trust for the plan. The pension plan was underfunded as of March 31, 2012 by approximately $129.2 million and the Company may need to make significant contributions to the plan. In addition, pension expenses and funding requirements may also be greater than currently anticipated if the market values of the assets held by the pension plan decline or if the other assumptions regarding plan earnings and expenses require adjustment.

The Company’s obligations under this plan could have a material adverse effect on its results of operations, financial condition and liquidity.

15. Actual claims experience could materially vary from the expected claims experience reflected in the Company’s reserve for incurred but not reported claims

The Company maintains a reserve for incurred but not reported (“IBNR”) claims pertaining to its title, escrow and other insurance and guarantee products. The majority of this reserve pertains to title insurance policies, which are long-duration contracts with the majority of the claims reported within the first few years following the issuance of the policy. Generally, 75 to 85 percent of claim amounts become known in the first six years of the policy life, and the majority of IBNR reserves relate to the six most recent policy years. A material change in expected ultimate losses and corresponding loss rates for policy years older than six years, while possible, is not considered reasonably likely. However, changes in expected ultimate losses and corresponding loss rates for recent policy years are considered likely and could result in a material adjustment to the IBNR reserves. Based on historical experience, management believes a 50 basis point change to the loss rates for the most recent policy years, positive or negative, is reasonably likely given the long duration nature of a title insurance policy. For example, if the expected ultimate losses for each of the last six policy years increased or decreased by 50 basis points, the resulting impact on the Company’s IBNR reserve would be an increase or decrease, as the case may be, of $118.0 million. The estimates made by management in determining the appropriate level of IBNR reserves could ultimately prove to be inaccurate and actual claims experience may vary from the expected claims experience.

16. The issuance of the Company’s title insurance policies and related activities by title agents, which operate with substantial independence from the Company, could adversely affect the Company

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

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

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

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

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

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

The Company is a holding company whose primary assets are investments in its operating subsidiaries. The Company’s ability to pay dividends is dependent on the ability of its subsidiaries to pay dividends or repay funds. If the Company’s operating subsidiaries are not able to pay dividends or repay funds, the Company may not be able to fulfill parent company obligations and/or declare and pay dividends to its stockholders. Moreover, pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available is limited. As of March 31, 2012, under such regulations, the maximum amount of dividends, loans and advances available in 2012 from these insurance subsidiaries was $207.9 million.

20. Certain provisions of the Company’s bylaws and certificate of incorporation may reduce the likelihood of any unsolicited acquisition proposal or potential change of control that the Company’s stockholders might consider favorable

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 issue preferred shares and determine their rights and terms, including voting rights, or adopt a stockholder rights plan.

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

21. The Company could have conflicts with CoreLogic

The Company and CoreLogic were part of a single publicly traded company, The First American Corporation, until the Company’s separation from CoreLogic on June 1, 2010. Conflicts with CoreLogic may arise as a result of the Company’s agreements with CoreLogic. Competition between the companies also could result in conflicts. While current competition between the companies is not material, the extent of future competition could increase. In addition, the Company’s chairman of the board of directors, Parker S. Kennedy, is also chairman emeritus of CoreLogic. As such, conflicts of interest with respect to matters potentially or actually affecting both companies may arise. Conflicts, competition or conflicts of interest pertaining to the Company’s relationship with CoreLogic could adversely affect the Company.

Item 6.

Exhibits.

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

SIGNATURES

Pursuant to the requirements 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.


FIRST AMERICAN FINANCIAL CORPORATION (Registrant)

By		/s/ Dennis J. Gilmore
		Dennis J. Gilmore
		Chief Executive Officer (Principal Executive Officer)

By		/s/ Max O. Valdes
		Max O. Valdes
		Chief Financial Officer (Principal Financial Officer)

Date: May 1, 2012

EXHIBIT INDEX


Exhibit No.	Description	Location

31(a)	Certification by Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.	Attached.

31(b)	Certification by Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.	Attached.

32(a)	Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.	Attached.

32(b)	Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.	Attached.

101.INS	XBRL Instance Document.	Attached.

101.SCH	XBRL Taxonomy Extension Schema Document.	Attached.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.	Attached.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.	Attached.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.	Attached.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.	Attached.