First American Financial Corp - Quarter Report: 2013 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, 2013

¨	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 23, 2013, there were 108,180,740 shares of common stock outstanding.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

INFORMATION INCLUDED IN REPORT


PART I:	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	A.	Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012	4

	B.	Condensed Consolidated Statements of Income for the three months ended March 31, 2013 and 2012	5

	C.	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012	6

	D.	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012	7

	E.	Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2013	8

	F.	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		41

Item 4.	Controls and Procedures		41

PART II:	OTHER INFORMATION

Item 1.	Legal Proceedings		42

Item 1A.	Risk Factors		45

Item 6.	Exhibits		50

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;

•

EXPECTED PENSION PLAN AND SUPPLEMENTAL BENEFIT PLAN CONTRIBUTIONS AND RETURNS;

•

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

•

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

•

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 AND CLAIM RESERVES,

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 IN RELATIONSHIPS WITH LARGE MORTGAGE LENDERS;

•

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

•

LOSSES IN THE COMPANY’S INVESTMENT PORTFOLIO;

•

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, 2013			December 31, 2012
Assets
Cash and cash equivalents	$	814,514		$	627,208
Accounts and accrued income receivable, net		248,728			259,779
Income taxes receivable		4,897			14,093
Investments:
Deposits with savings and loan associations and banks		66,508			71,196
Debt securities, includes pledged securities of $119,606 and $105,849		2,599,038			2,651,881
Equity securities		236,899			197,920
Other long-term investments		191,313			192,563

		3,093,758			3,113,560

Loans receivable, net		91,766			107,352
Property and equipment, net		344,763			343,450
Title plants and other indexes		521,733			521,741
Goodwill		843,983			845,857
Other intangible assets, net		54,098			57,095
Other assets		163,669			160,712

	$	6,181,909		$	6,050,847

Liabilities and Equity
Deposits	$	1,559,689		$	1,411,193
Accounts payable and accrued liabilities		691,405			820,503
Due to CoreLogic, Inc. (“CoreLogic”), net		53,284			53,510
Deferred revenue		162,347			170,663
Reserve for known and incurred but not reported claims		977,254			976,462
Deferred income taxes		36,987			36,987
Notes and contracts payable		317,378			229,760

		3,798,344			3,699,078

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-108,142 shares and 107,239 shares as of March 31, 2013 and December 31, 2012, respectively		1			1
Additional paid-in capital		2,122,805			2,111,605
Retained earnings		409,917			387,015
Accumulated other comprehensive loss		(152,856	)		(150,556	)

Total stockholders’ equity		2,379,867			2,348,065
Noncontrolling interests		3,698			3,704

Total equity		2,383,565			2,351,769

	$	6,181,909		$	6,050,847

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,
	2013		2012
Revenues
Direct premiums and escrow fees	$	477,851	$	413,786
Agent premiums		484,465		376,986
Information and other		152,133		155,760
Investment income		23,058		21,134
Net realized investment gains		9,256		1,699
Net other-than-temporary impairment (“OTTI”) losses recognized in earnings:
Total OTTI losses on debt securities		—		(240	)
Portion of OTTI losses on debt securities recognized in other comprehensive loss		—		(2,362	)

		—		(2,602	)

		1,146,763		966,763

Expenses
Personnel costs		344,500		305,279
Premiums retained by agents		387,543		302,164
Other operating expenses		205,346		189,150
Provision for policy losses and other claims		116,026		86,678
Depreciation and amortization		18,395		18,059
Premium taxes		12,117		10,848
Interest		3,244		3,035

		1,087,171		915,213

Income before income taxes		59,592		51,550
Income taxes		23,360		20,441

Net income		36,232		31,109
Less: Net income (loss) attributable to noncontrolling interests		54		(184	)

Net income attributable to the Company	$	36,178	$	31,293

Net income per share attributable to the Company’s stockholders (Note 10):
Basic	$	0.34	$	0.30

Diluted	$	0.33	$	0.29

Cash dividends declared per share	$	0.12	$	0.08

Weighted-average common shares outstanding (Note 10):
Basic		107,552		105,621

Diluted		109,993		107,480

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,
	2013			2012
Net income	$	36,232		$	31,109

Other comprehensive income, net of tax:
Unrealized (loss) gain on securities		(253	)		20,374
Unrealized gain on securities for which credit-related portion was recognized in earnings		632			2,903
Foreign currency translation adjustment		(6,822	)		5,865
Pension benefit adjustment		4,144			1,257

Total other comprehensive (loss) income, net of tax		(2,299	)		30,399

Comprehensive income		33,933			61,508
Less: Comprehensive income (loss) attributable to noncontrolling interests		55			(181	)

Comprehensive income attributable to the Company	$	33,878		$	61,689

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,
	2013			2012
Cash flows from operating activities:
Net income	$	36,232		$	31,109
Adjustments to reconcile net income to cash used for operating activities:
Provision for policy losses and other claims		116,026			86,678
Depreciation and amortization		18,395			18,059
Excess tax benefits from share-based compensation		(4,148	)		(508	)
Share-based compensation		9,887			6,148
Net realized investment gains		(9,256	)		(1,699	)
Net OTTI losses recognized in earnings		—			2,602
Equity in earnings of affiliates, net		(2,650	)		(596	)
Dividends from equity method investments		2,214			2,324
Changes in assets and liabilities excluding effects of acquisitions and noncash transactions:
Claims paid, including assets acquired, net of recoveries		(111,193	)		(116,085	)
Net change in income tax accounts		10,178			28,237
Decrease (increase) in accounts and accrued income receivable		11,631			(8,383	)
Decrease in accounts payable and accrued liabilities		(122,827	)		(54,916	)
Net change in due to CoreLogic, net		(535	)		(48	)
Decrease in deferred revenue		(8,029	)		(7,758	)
Other, net		3,204			7,040

Cash used for operating activities		(50,871	)		(7,796	)

Cash flows from investing activities:
Net cash effect of acquisitions/dispositions		—			(14,000	)
Net decrease (increase) in deposits with banks		4,505			(9,660	)
Net decrease in loans receivable		15,586			8,760
Purchases of debt and equity securities		(284,003	)		(182,648	)
Proceeds from sales of debt and equity securities		152,210			101,310
Proceeds from maturities of debt securities		140,890			111,736
Net decrease (increase) in other long-term investments		875			(692	)
Capital expenditures		(18,657	)		(18,172	)
Proceeds from sale of property and equipment		4,742			685

Cash provided by (used for) investing activities		16,148			(2,681	)

Cash flows from financing activities:
Net change in deposits		148,496			293,423
Proceeds from issuance of debt		249,095			53
Repayment of debt		(161,326	)		(23,569	)
Net payments in connection with share-based compensation plans		(3,184	)		(1,150	)
Net activity related to noncontrolling interests		(52	)		(506	)
Excess tax benefits from share-based compensation		4,148			508
Cash dividends		(12,927	)		(6,328	)

Cash provided by financing activities		224,250			262,431
Effect of exchange rate changes on cash		(2,221	)		2,276

Net increase in cash and cash equivalents		187,306			254,230
Cash and cash equivalents—Beginning of period		627,208			418,299

Cash and cash equivalents—End of period	$	814,514		$	672,529

Supplemental information:
Cash paid (received) during the period for:
Interest	$	1,409		$	3,060
Premium taxes	$	21,961		$	16,095
Income taxes, net	$	13,193		$	(11,989	)

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			Total stockholders’ equity			Noncontrolling interests			Total
Balance at December 31, 2012		107,239	$	1	$	2,111,605	$	387,015		$	(150,556	)	$	2,348,065		$	3,704		$	2,351,769
Net income for three months ended March 31, 2013		—		—		—		36,178			—			36,178			54			36,232
Dividends on common shares		—		—		—		(12,927	)		—			(12,927	)		—			(12,927	)
Shares issued in connection with share-based compensation plans		903		—		1,313		(349	)		—			964			—			964
Share-based compensation		—		—		9,887		—			—			9,887			—			9,887
Net activity related to noncontrolling interests		—		—		—		—			—			—			(61	)		(61	)
Other comprehensive loss (Note 14)		—		—		—		—			(2,300	)		(2,300	)		1			(2,299	)

Balance at March 31, 2013		108,142	$	1	$	2,122,805	$	409,917		$	(152,856	)	$	2,379,867		$	3,698		$	2,383,565

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, 2012. 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. All material intercompany transactions and balances have been eliminated upon consolidation. Certain 2012 amounts have been reclassified to conform to the 2013 presentation.

Recently Adopted Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance requiring entities to present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If the component is not required to be reclassified to net income in its entirety, entities should instead cross reference to the related footnote for additional information. The updated guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2012, with early adoption permitted. Except for the disclosure requirements, the adoption of the guidance had no impact on the Company’s condensed consolidated financial statements.

In July 2012, the FASB issued updated guidance that is intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets, other than goodwill, by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The updated guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with current guidance. The updated guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of the guidance had no impact on the Company’s condensed consolidated financial statements.

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. The adoption of the guidance had no 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 $4.0 billion and $4.2 billion at March 31, 2013 and December 31, 2012, respectively, of which $1.4 billion and $1.2 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB. The escrow deposits held at First American Trust, FSB, are 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 $2.9 billion and $2.8 billion at March 31, 2013 and December 31, 2012, respectively, and were held or managed by 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 $1.2 billion and $1.4 billion at March 31, 2013 and December 31, 2012, 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 deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation. The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the 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, 2013
U.S. Treasury bonds	$	74,672	$	1,338	$	(73	)	$	75,937	$	—
Municipal bonds		381,658		11,828		(1,115	)		392,371		—
Foreign bonds		234,925		2,955		(83	)		237,797		—
Governmental agency bonds		285,825		1,163		(196	)		286,792		—
Governmental agency mortgage-backed securities		1,234,357		8,491		(1,891	)		1,240,957		—
Non-agency mortgage-backed securities (1)		26,319		—		(3,699	)		22,620		20,743
Corporate debt securities		328,501		14,350		(287	)		342,564		—

	$	2,566,257	$	40,125	$	(7,344	)	$	2,599,038	$	20,743

December 31, 2012
U.S. Treasury bonds	$	80,651	$	1,574	$	(50	)	$	82,175	$	—
Municipal bonds		361,912		14,516		(606	)		375,822		—
Foreign bonds		236,630		2,312		(197	)		238,745		—
Governmental agency bonds		324,323		1,445		(318	)		325,450		—
Governmental agency mortgage-backed securities		1,271,408		11,259		(1,135	)		1,281,532		—
Non-agency mortgage-backed securities (1)		26,656		—		(4,810	)		21,846		20,743
Corporate debt securities		311,695		14,941		(325	)		326,311		—

	$	2,613,275	$	46,047	$	(7,441	)	$	2,651,881	$	20,743

(1)

At December 31, 2012, the $26.7 million amortized cost is net of $3.6 million in other-than-temporary impairments determined to be credit related which have been recognized in earnings for the year ended December 31, 2012. At March 31, 2013, the $3.7 million gross unrealized losses include $3.4 million of unrealized losses for securities determined to be other-than-temporarily impaired and $0.3 million of unrealized losses for securities for which an other-than-temporary impairment has not been recognized. At December 31, 2012, the $4.8 million gross unrealized losses include $4.4 million of unrealized losses for securities determined to be other-than-temporarily impaired and $0.4 million of unrealized losses for securities for which an other-than-temporary impairment has not been recognized. The $20.7 million other-than-temporary impairments recorded in accumulated other comprehensive income (“AOCI”) through March 31, 2013 and December 31, 2012, represent the amount of other-than-temporary impairment losses recognized in AOCI which 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, 2013
Preferred stocks	$	14,663	$	1,031	$	(34	)	$	15,660
Common stocks		209,030		12,944		(735	)		221,239

	$	223,693	$	13,975	$	(769	)	$	236,899

December 31, 2012
Preferred stocks	$	13,326	$	752	$	(41	)	$	14,037
Common stocks		177,844		6,447		(408	)		183,883

	$	191,170	$	7,199	$	(449	)	$	197,920

The Company had the following net unrealized gains (losses) as of March 31, 2013 and December 31, 2012:


(in thousands)	As of March 31, 2013			As of December 31, 2012
Debt securities for which an other-than-temporary impairment has been recognized	$	(3,382	)	$	(4,435	)
Debt securities—all other		36,163			43,041
Equity securities		13,206			6,750

	$	45,987		$	45,356

Sales of debt and equity securities resulted in realized gains of $6.6 million and $2.0 million and realized losses of $0.6 million and $0.1 million for the three months ended March 31, 2013 and 2012, 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, 2013 and December 31, 2012:


	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, 2013
Debt securities:
U.S. Treasury bonds	$	22,338	$	(73	)	$	—	$	—		$	22,338	$	(73	)
Municipal bonds		86,988		(1,010	)		2,069		(105	)		89,057		(1,115	)
Foreign bonds		8,443		(83	)		—		—			8,443		(83	)
Governmental agency bonds		65,129		(196	)		—		—			65,129		(196	)
Governmental agency mortgage-backed securities		322,513		(1,724	)		18,658		(167	)		341,171		(1,891	)
Non-agency mortgage-backed securities		7,077		(888	)		15,543		(2,811	)		22,620		(3,699	)
Corporate debt securities		40,363		(240	)		1,046		(47	)		41,409		(287	)

Total debt securities		552,851		(4,214	)		37,316		(3,130	)		590,167		(7,344	)
Equity securities		36,146		(766	)		97		(3	)		36,243		(769	)

Total	$	588,997	$	(4,980	)	$	37,413	$	(3,133	)	$	626,410	$	(8,113	)

December 31, 2012
Debt securities:
U.S. Treasury bonds	$	27,219	$	(50	)	$	—	$	—		$	27,219	$	(50	)
Municipal bonds		60,229		(557	)		451		(49	)		60,680		(606	)
Foreign bonds		58,262		(183	)		1,031		(14	)		59,293		(197	)
Governmental agency bonds		60,882		(318	)		—		—			60,882		(318	)
Governmental agency mortgage-backed securities		135,354		(889	)		22,112		(246	)		157,466		(1,135	)
Non-agency mortgage-backed securities		6,544		(1,498	)		15,302		(3,312	)		21,846		(4,810	)
Corporate debt securities		35,537		(227	)		996		(98	)		36,533		(325	)

Total debt securities		384,027		(3,722	)		39,892		(3,719	)		423,919		(7,441	)
Equity securities		34,258		(447	)		98		(2	)		34,356		(449	)

Total	$	418,285	$	(4,169	)	$	39,990	$	(3,721	)	$	458,275	$	(7,890	)

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 either rating agency, the lower of the two ratings was selected. All amounts and ratings are as of March 31, 2013.


(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	$	4,431	$	3,420		100.0	%
2006		3		11,021		9,537		100.0	%
2005		1		2,902		2,586		100.0	%
Alt-A single family residential:
2007		1		7,965		7,077		100.0	%

		6	$	26,319	$	22,620		100.0	%

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

The amortized cost and estimated fair value of debt securities at March 31, 2013, by contractual maturities, are as follows:


(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		3,751		41,870		27,613		1,438		74,672
Estimated fair value		3,810		42,810		27,854		1,463		75,937
Municipal bonds
Amortized cost		2,161		101,825		134,416		143,256		381,658
Estimated fair value		2,178		103,572		139,993		146,628		392,371
Foreign bonds
Amortized cost		42,405		177,010		14,477		1,033		234,925
Estimated fair value		42,611		179,400		14,725		1,061		237,797
Governmental agency bonds
Amortized cost		5,741		108,819		170,679		586		285,825
Estimated fair value		5,744		109,311		171,180		557		286,792
Corporate debt securities
Amortized cost		11,823		176,365		129,582		10,731		328,501
Estimated fair value		11,938		181,503		137,345		11,778		342,564

Total debt securities excluding mortgage-backed securities
Amortized cost		65,881		605,889		476,767		157,044		1,305,581
Estimated fair value		66,281		616,596		491,097		161,487		1,335,461

Total mortgage-backed securities
Amortized cost										1,260,676
Estimated fair value										1,263,577
Total debt securities
Amortized cost										2,566,257
Estimated fair value										2,599,038

Other-than-temporary impairment—debt securities

If the Company intends to sell a debt security in an unrealized loss position or determines that it is more likely than not that the Company will be required to sell a debt security before it recovers its amortized cost basis, the debt security is other-than-temporarily impaired and it is written down to fair value with all losses recognized in earnings. As of March 31, 2013, 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), 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.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

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. For the securities that were determined not to be other-than-temporarily impaired at March 31, 2013, the present value of the cash flows expected to be collected exceeded the amortized cost of each security.

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 a third party’s securities, loans and property data and market analytics tools.

The table below summarizes the primary assumptions used at March 31, 2013 in estimating the cash flows expected to be collected for these securities.


	Weighted average			Range
Prepayment speeds		9.3	%	7.9% – 10.8%
Default rates		3.1	%	1.3% – 6.6%
Loss severity		20.5	%	4.0% – 36.6%

As a result of the Company’s security-level review, it did not recognize any other-than-temporary impairments considered to be credit related for the three months ended March 31, 2013, and recognized $2.6 million in earnings related to its non-agency mortgage-backed securities 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, 2013 if future events or information cause it to determine that a decline in value is other-than-temporary.

The following table presents the change in the credit portion of the other-than-temporary impairments recognized in earnings on debt securities for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive income (loss) for the three months ended March 31, 2013 and 2012.


	For the Three Months Ended March 31,
(in thousands)	2013		2012
Cumulative credit loss on debt securities held at beginning of period	$	16,478	$	33,656
Addition to credit loss for which an other-than-temporary impairment was previously recognized		—		2,602

Cumulative credit loss on debt securities held as of March 31	$	16,478	$	36,258

Other-than-temporary impairment—equity securities

When a decline in the fair value of an equity security, including common and preferred stock, is considered to be other-than-temporary, such equity security is written down to its fair value. When assessing if a decline in 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 exists, that supports the Company’s view that the security will recover its value in the foreseeable future, typically within the next twelve months. If objective, substantial evidence does not indicate a likely

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

recovery during that timeframe, the Company’s policy is that such losses are considered other-than-temporary and therefore an impairment loss is recorded. The Company did not record any other-than-temporary impairment losses related to its equity securities for the three months ended March 31, 2013 and 2012.

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.

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.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment.

If the inputs used to measure fair value fall into 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 independent pricing services that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and price quotes from well-established independent broker-dealers. The independent pricing services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants. The pricing services utilize the market approach in determining the fair value of the debt securities held by the Company. The Company obtains an understanding of the valuation models and assumptions utilized by the services and has controls in place to determine that the values provided represent fair value. The Company’s validation procedures include comparing prices received from the pricing services to quotes received from other third party sources for certain securities with market prices that are readily verifiable. If the price comparison results in differences over a predefined threshold, the Company will assess the reasonableness of the changes relative to prior periods given the prevailing market conditions and assess changes in the issuers’ credit worthiness, performance of any underlying collateral and prices of the instrument relative to similar issuances. To date, the Company has not made any material adjustments to the fair value measurements provided by the pricing services.

Typical inputs and assumptions to pricing models used to value the Company’s U.S. Treasury bonds, 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 were fewer 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, 2013 and December 31, 2012, classified using the three-level hierarchy for fair value measurements:


(in thousands)	Estimated fair value as of March 31, 2013		Level 1		Level 2		Level 3
Debt securities:
U.S. Treasury bonds	$	75,937	$	—	$	75,937	$	—
Municipal bonds		392,371		—		392,371		—
Foreign bonds		237,797		—		237,797		—
Governmental agency bonds		286,792		—		286,792		—
Governmental agency mortgage-backed securities		1,240,957		—		1,240,957		—
Non-agency mortgage-backed securities		22,620		—		—		22,620
Corporate debt securities		342,564		—		342,564		—

		2,599,038		—		2,576,418		22,620

Equity securities:
Preferred stocks		15,660		15,660		—		—
Common stocks		221,239		221,239		—		—

		236,899		236,899		—		—

	$	2,835,937	$	236,899	$	2,576,418	$	22,620


(in thousands)	Estimated fair value as of December 31, 2012		Level 1		Level 2		Level 3
Debt securities:
U.S. Treasury bonds	$	82,175	$	—	$	82,175	$	—
Municipal bonds		375,822		—		375,822		—
Foreign bonds		238,745		—		238,745		—
Governmental agency bonds		325,450		—		325,450		—
Governmental agency mortgage-backed securities		1,281,532		—		1,281,532		—
Non-agency mortgage-backed securities		21,846		—		—		21,846
Corporate debt securities		326,311		—		326,311		—

		2,651,881		—		2,630,035		21,846

Equity securities:
Preferred stocks		14,037		14,037		—		—
Common stocks		183,883		183,883		—		—

		197,920		197,920		—		—

	$	2,849,801	$	197,920	$	2,630,035	$	21,846

The Company did not have any transfers in and out of Level 1 and Level 2 measurements during the three months ended March 31, 2013 and 2012. 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, 2013 and 2012:


	For the Three Months Ended March 31,
(in thousands)	2013			2012
Fair value at beginning of period	$	21,846		$	30,634
Total gains/(losses) (realized and unrealized):
Included in earnings:
Net other-than-temporary impairment losses recognized in earnings		—			(2,602	)
Included in other comprehensive income		1,111			4,839
Settlements		(337	)		(1,934	)
Transfers into Level 3		—			—
Transfers out of Level 3		—			—

Fair value as of March 31	$	22,620		$	30,937

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	)

The Company did not purchase or sell any non-agency mortgage-backed securities during the three months ended March 31, 2013 and 2012.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

Note 4 – Financing Receivables

Financing receivables are summarized as follows:


	March 31, 2013			December 31, 2012
	(in thousands)
Loans receivable, net:
Real estate—mortgage
Multi-family residential	$	8,556		$	8,768
Commercial		87,254			102,626
Other		589			598

		96,399			111,992
Allowance for loan losses		(3,893	)		(3,893	)
Participations sold		(748	)		(761	)
Deferred loan fees, net		8			14

Loans receivable, net		91,766			107,352

Other long-term investments:
Notes receivable—secured		11,091			11,358
Notes receivable—unsecured		2,288			2,710

		13,379			14,068
Loss reserve		(2,604	)		(2,902	)

Notes receivable, net		10,775			11,166

Total financing receivables, net	$	102,541		$	118,518

Aging analysis of loans and notes receivable at March 31, 2013 is as follows:


	Total		Current		30-59 days past due		60-89 days past due		90 days or more past due		Non-accrual status
	(in thousands)
Loans Receivable:
Multi-family residential	$	8,556	$	8,556	$	—	$	—	$	—	$	—
Commercial		87,254		84,578		—		158		—		2,518
Other		589		547		—		—		—		42

	$	96,399	$	93,681	$	—	$	158	$	—	$	2,560

Notes Receivable:
Secured	$	11,091	$	6,345	$	3,825	$	—	$	88	$	833
Unsecured		2,288		233		23		—		811		1,221

	$	13,379	$	6,578	$	3,848	$	—	$	899	$	2,054

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

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


	Total		Current		30-59 days past due		60-89 days past due		90 days or more past due		Non-accrual status
	(in thousands)
Loans Receivable:
Multi-family residential	$	8,768	$	8,768	$	—	$	—	$	—	$	—
Commercial		102,626		99,911		—		160		—		2,555
Other		598		556		—		—		—		42

	$	111,992	$	109,235	$	—	$	160	$	—	$	2,597

Notes Receivable:
Secured	$	11,358	$	6,517	$	3,912	$	72	$	16	$	841
Unsecured		2,710		319		—		—		811		1,580

	$	14,068	$	6,836	$	3,912	$	72	$	827	$	2,421

Note 5 – Goodwill

A summary of the changes in the carrying amount of goodwill by operating segment for the three months ended March 31, 2013 is as follows:


(in thousands)	Title Insurance and Services			Specialty Insurance		Total
Balance as of December 31, 2012	$	799,092		$	46,765	$	845,857
Acquisitions		—			—		—
Other net adjustments		(1,874	)		—		(1,874	)

Balance as of March 31, 2013	$	797,218		$	46,765	$	843,983

The Company’s four reporting units for purposes of assessing 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 assessment of goodwill for impairment for each reporting unit in the fourth quarter. An impairment analysis has not been performed during the three months ended March 31, 2013 as no triggering events requiring such an analysis occurred.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

Note 6 – Other Intangible Assets

Other intangible assets consist of the following:


(in thousands)	March 31, 2013			December 31, 2012
Finite-lived intangible assets:
Customer lists	$	77,861		$	77,981
Covenants not to compete		26,696			26,842
Trademarks		10,056			10,070
Patents		2,840			2,840

		117,453			117,733
Accumulated amortization		(81,193	)		(78,495	)

		36,260			39,238
Indefinite-lived intangible assets:
Licenses		17,838			17,857

	$	54,098		$	57,095

Amortization expense for finite-lived intangible assets was $3.1 million and $2.9 million for the three months ended March 31, 2013 and 2012, respectively.

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


Year	(in thousands)
Remainder of 2013	$	8,826
2014	$	7,917
2015	$	4,707
2016	$	3,624
2017	$	2,072
2018	$	1,923

Note 7 – Reserve for Known and Incurred But Not Reported Claims

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, is as follows:


(in thousands, except percentages)	March 31, 2013				December 31, 2012
Known title claims	$	135,951	13.9	%	$	133,070	13.6	%
IBNR		804,613	82.4	%		805,430	82.5	%

Total title claims		940,564	96.3	%		938,500	96.1	%
Non-title claims		36,690	3.7	%		37,962	3.9	%

Total loss reserves	$	977,254	100.0	%	$	976,462	100.0	%

The provision for title losses, expressed as a percentage of title premiums and escrow fees, was 8.7% and 7.2% for the three months ended March 31, 2013 and 2012, respectively.

The current quarter rate of 8.7% reflected an ultimate loss rate of 5.6% for the current policy year and a $28.6 million net increase in the loss reserve estimates for prior policy years. The increase in loss reserve estimates for prior policy years reflected claims development above expected levels during the first quarter of 2013, primarily from policy years 2006 and 2007, which were adversely impacted by a few large commercial claims and, to a lesser extent, increased claims frequency related to residential lenders policies.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

The first quarter of 2012 rate of 7.2% reflected an ultimate loss rate of 6.2% for the 2012 policy year and a net increase in the loss reserve estimates for prior policy years of $7.2 million, primarily associated with the Company’s guaranteed valuation product offered in Canada. The reserve strengthening associated with the guaranteed valuation product reflected an increase in claims frequency experienced during the first quarter of 2012, primarily related to policy years 2008 and 2009.

Note 8 – Notes and Contracts Payable

On January 29, 2013, the Company issued $250.0 million of 4.30% 10 year senior unsecured notes due in 2023. The notes were priced at 99.638% to yield 4.345%. Interest is due semi-annually on February 1 and August 1, beginning August 1, 2013. The Company used a portion of the net proceeds from the sale to repay all borrowings outstanding under its credit facility, increasing the unused capacity thereunder to the full $600.0 million size of the facility.

Note 9 – Income Taxes

The Company’s effective income tax rate (income tax expense as a percentage of income before income taxes) was 39.2% for the three months ended March 31, 2013 and 39.7% 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, which governs the Company’s and CoreLogic’s respective rights, responsibilities and obligations for certain tax related matters. At March 31, 2013 and December 31, 2012 the Company had a payable to CoreLogic of $52.8 million and $52.5 million, respectively, related to tax matters prior to the Separation. This amount is included in the Company’s condensed consolidated balance sheets 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 quarter ended March 31, 2012, the Company released a valuation allowance of $5.3 million previously recorded against certain of its deferred tax assets. Specifically, management determined that it was more likely than not that all of its tax capital loss items will be realized prior to expiration as the result of realized gains from sales of securities and favorable market value activity in its securities portfolio during the first quarter of 2012. Application of the accounting guidance related to intraperiod tax allocations resulted in the valuation allowance being credited to other comprehensive income and tax expense in the amounts of $4.5 million and $0.8 million, respectively, for the three months ended March 31, 2012.

As of March 31, 2013 and December 31, 2012, the liability for income taxes associated with uncertain tax positions was $48.0 million and $47.9 million, respectively. The liability for each period could be reduced by $32.6 million of offsetting tax benefits associated with the correlative effects of potential adjustments including timing adjustments and state income taxes. The net amounts of $15.4 million and $15.3 million, respectively, if recognized, would favorably affect the Company’s effective tax rate.

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, 2013 and December 31, 2012, the Company had accrued $4.3 million and $4.2 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. Based on the status of its current tax audits, the Company estimates that there will be no significant 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, Canada, India 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.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

Note 10 – Earnings Per Share

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


	For the Three Months Ended March 31,
(in thousands, except per share amounts)	2013		2012
Numerator
Net income attributable to the Company	$	36,178	$	31,293
Less: dividends and undistributed earnings allocated to unvested restricted stock units		54		92

Net income allocated to common stockholders	$	36,124	$	31,201

Denominator
Basic weighted-average shares		107,552		105,621
Effect of dilutive employee stock options and restricted stock units		2,441		1,859

Diluted weighted-average shares		109,993		107,480

Net income per share attributable to the Company’s stockholders
Basic	$	0.34	$	0.30

Diluted	$	0.33	$	0.29

For the three months ended March 31, 2013 and 2012, 32 thousand and 1.5 million, respectively, of stock options and RSUs were excluded from the weighted-average diluted shares outstanding due to their antidilutive effect.

Note 11 – 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, 2013 and 2012 includes the following components:


	For the Three Months Ended March 31,
(in thousands)	2013			2012
Expense:
Service cost	$	479		$	428
Interest cost		6,724			7,434
Expected return on plan assets		(4,674	)		(3,787	)
Amortization of prior service credit		(1,096	)		(1,096	)
Amortization of net loss		8,002			6,825

	$	9,435		$	9,804

The Company contributed $7.9 million to the defined benefit pension and supplemental benefit plans during the three months ended March 31, 2013, and expects to contribute an additional $35.1 million during the remainder of 2013. 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 12 – Fair Value of Financial Instruments

Accounting guidance requires disclosure of fair value information about financial instruments, whether or not recognized at fair value on 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 accounting guidance excludes certain financial instruments including those related to insurance contracts, pension and other postretirement benefits, and equity method investments.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

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 is 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 fair value of deposits with savings and loan associations and banks is estimated based on the rates currently offered for deposits of similar remaining maturities where applicable.

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.

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 is 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 does not include the carrying amounts and fair values of pension costs and other retirement plans as the accounting guidance excludes them from disclosure.

Due to CoreLogic, net

The carrying amount for due to CoreLogic, net is a reasonable estimate of fair value.

Notes and contracts payable

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

The carrying amounts and fair values of the Company’s financial instruments as of March 31, 2013 and December 31, 2012 are presented in the following table:


	March 31, 2013				December 31, 2012
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and cash equivalents	$	814,514	$	814,514	$	627,208	$	627,208
Accounts and accrued income receivable, net	$	248,728	$	248,728	$	259,779	$	259,779
Loans receivable, net	$	91,766	$	93,214	$	107,352	$	111,925
Investments:
Deposits with savings and loan associations and banks	$	66,508	$	66,536	$	71,196	$	71,400
Debt securities	$	2,599,038	$	2,599,038	$	2,651,881	$	2,651,881
Equity securities	$	236,899	$	236,899	$	197,920	$	197,920
Notes receivable, net	$	10,775	$	10,693	$	11,166	$	11,376
Financial Liabilities:
Deposits	$	1,559,689	$	1,560,061	$	1,411,193	$	1,411,575
Accounts payable and accrued liabilities	$	233,929	$	233,929	$	337,231	$	337,231
Due to CoreLogic, net	$	53,284	$	53,284	$	53,510	$	53,510
Notes and contracts payable	$	317,378	$	332,427	$	229,760	$	233,071

The following table presents the fair value of the Company’s financial instruments as of March 31, 2013 and December 31, 2012, classified using the three-level hierarchy for fair value measurements:


(in thousands)	Fair Value as of March 31, 2013		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	814,514	$	814,514	$	—	$	—
Accounts and accrued income receivable, net	$	248,728	$	248,728	$	—	$	—
Loans receivable, net	$	93,214	$	—	$	—	$	93,214
Investments:
Deposits with savings and loan associations and banks	$	66,536	$	55,359	$	11,177	$	—
Debt securities	$	2,599,038	$	—	$	2,576,418	$	22,620
Equity securities	$	236,899	$	236,899	$	—	$	—
Notes receivable, net	$	10,693	$	—	$	—	$	10,693
Financial Liabilities:
Deposits	$	1,560,061	$	1,524,444	$	35,617	$	—
Accounts payable and accrued liabilities	$	233,929	$	233,929	$	—	$	—
Due to CoreLogic, net	$	53,284	$	53,284	$	—	$	—
Notes and contracts payable	$	332,427	$	—	$	323,433	$	8,994

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)


(in thousands)	Fair Value as of December 31, 2012		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	627,208	$	627,208	$	—	$	—
Accounts and accrued income receivable, net	$	259,779	$	259,779	$	—	$	—
Loans receivable, net	$	111,925	$	—	$	—	$	111,925
Investments:
Deposits with savings and loan associations and banks	$	71,400	$	49,431	$	21,969	$	—
Debt securities	$	2,651,881	$	—	$	2,630,035	$	21,846
Equity securities	$	197,920	$	197,920	$	—	$	—
Notes receivable, net	$	11,376	$	—	$	—	$	11,376
Financial Liabilities:
Deposits	$	1,411,575	$	1,373,978	$	37,597	$	—
Accounts payable and accrued liabilities	$	337,231	$	337,231	$	—	$	—
Due to CoreLogic, net	$	53,510	$	53,510	$	—	$	—
Notes and contracts payable	$	233,071	$	—	$	223,218	$	9,853

Note 13 – 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, 2013 and 2012:


	For the Three Months Ended March 31,
(in thousands)	2013		2012
Restricted stock units	$	9,501	$	5,886
Employee stock purchase plan		386		262

	$	9,887	$	6,148

The following table summarizes RSU activity for the three months ended March 31, 2013:


(in thousands, except weighted-average grant-date fair value)	Shares			Weighted-average grant-date fair value
RSUs unvested at December 31, 2012		2,962		$	13.36
Granted during 2013		821		$	24.31
Vested during 2013		(785	)	$	14.79
Forfeited during 2013		(6	)	$	14.09

RSUs unvested at March 31, 2013		2,992		$	15.99

The following table summarizes stock option activity for the three months ended March 31, 2013:


(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, 2012		1,670		$	15.70
Exercised during 2013		(277	)	$	10.75

Balance at March 31, 2013		1,393		$	16.68		2.0 years	$	12,386

Vested at March 31, 2013		1,393		$	16.68		2.0 years	$	12,386

Exercisable at March 31, 2013		1,393		$	16.68		2.0 years	$	12,386

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.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

Note 14 – Accumulated 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.

Changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2013 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, 2012	$	21,938		$	9,924		$	(182,408	)	$	(150,546	)
Pretax change before reclassifications		5,591			(6,822	)		—			(1,231	)
Pretax change in other-than-temporary impairments for which credit-related portion was recognized in earnings		1,053			—			—			1,053
Amounts reclassified from accumulated other comprehensive income		(6,012	)		—			6,906			894
Tax effect		(253	)		—			(2,762	)		(3,015	)

Balance at March 31, 2013	$	22,317		$	3,102		$	(178,264	)	$	(152,845	)

Allocated to the Company	$	22,306		$	3,102		$	(178,264	)	$	(152,856	)
Allocated to noncontrolling interests		11			—			—			11

Balance at March 31, 2013	$	22,317		$	3,102		$	(178,264	)	$	(152,845	)

The reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2013 are as follows:


(in thousands)	Amount reclassified from accumulated other comprehensive income					Affected line items in the condensed consolidated statements of income
Net unrealized gains (losses) on securities:
Net realized gains on sales of securities	$	6,012				Net realized investment gains


Pension benefit adjustment:
Amortization of defined benefit pension and supplemental benefit plan items:
Net actuarial loss	$	(8,002	)	(1	)
Prior service credit		1,096		(1	)

Pretax total	$	(6,906	)


Total reclassifications for the period	$	(894	)

(1)	These accumulated other comprehensive income components are included in the computation of net periodic cost. See Note 11 Employee Benefit Plans for additional details.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

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. In certain instances the Company may also be able to compel the plaintiff to arbitrate its claim on an individual basis. If these procedural requirements are not met, either the lawsuit cannot proceed or, as is the case with class certification or compelled arbitration, the plaintiffs lose the financial incentive to proceed with the case (or the amount at issue effectively becomes de 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

•

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,

•

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,

•

Mitchell-Tracey v. First American Title Insurance Company, et al., filed on April 30, 2012 and pending in the United States District Court for the Northern District of Maryland,

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

•

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 Hamilton, Lewis, Raffone and Slapikas. 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.

In Edwards a narrow class has been certified. 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

•

Klein v. First American Title Insurance Company, et al., filed on July 10, 2012 and pending in the United States District Court for the District of Columbia.

Klein 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.

•

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. The class originally certified in Gale was subsequently decertified. For the reasons described above, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss.

•

failed to pay required compensation and provide required rest periods, 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,

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

•

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,

•

Deceuster v. First American Title Insurance Company, filed on February 13, 2013 and pending in the Court of Common Pleas of 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,

•

Muehling v. First American Title Company, filed on December 11, 2012 and pending in the Superior Court of the State of California, County of Alameda,

•

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,

•

Todd v. First American Title Insurance Company, et al., filed on January 15, 2013 and pending in the United States District Court for the District of Colorado, 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 Kirk, 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. 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 reasonably possible or that the estimated loss or range of loss, if any, 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 examination or investigation by such governmental agencies. Currently, governmental agencies are examining or investigating certain of the Company’s operations. These exams or investigations include inquiries into, among other matters, pricing and rate setting practices in the title insurance industry, competition in the title insurance industry, real estate settlement service customer acquisition and retention practices and agency relationships. With respect to matters where the Company has determined that a loss is both probable and reasonably estimable, the Company has recorded a liability representing its best estimate of the financial exposure based on known facts. While the ultimate disposition of each such exam or investigation is not yet determinable, the Company does not believe that individually or in the

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

aggregate they will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. These exams or investigations could, however, result in changes to the Company’s business practices which could ultimately have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

The Company and its subsidiaries also are involved in numerous ongoing routine legal and regulatory proceedings related to their operations. 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.

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 or related 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 in foreign countries, including Canada, the United Kingdom, Australia and various other established and emerging markets.

•

The Company’s specialty insurance segment issues property and casualty insurance policies and sells home warranty products. The property and casualty insurance business provides insurance coverage to residential homeowners and renters for liability losses and typical hazards such as fire, theft, vandalism and other types of property damage. This business is licensed to issue policies in all 50 states and 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.

Selected financial information by reporting segment is as follows:

For the three months ended March 31, 2013:


(in thousands)	Revenues			Income (loss) before income taxes			Depreciation and amortization		Capital expenditures
Title Insurance and Services	$	1,062,581		$	64,269		$	16,483	$	17,623
Specialty Insurance		81,509			15,901			1,179		1,034
Corporate		3,430			(20,578	)		733		—
Eliminations		(757	)		—			—		—

	$	1,146,763		$	59,592		$	18,395	$	18,657

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

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

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, 2012. There have been no material changes to the Company’s critical accounting policies since the filing of its Annual Report on Form 10-K for the year ended December 31, 2012.

Recently Adopted Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance requiring entities to present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If the component is not required to be reclassified to net income in its entirety, entities should instead cross reference to the related footnote for additional information. The updated guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2012, with early adoption permitted. Except for the disclosure requirements, the adoption of the guidance had no impact on the Company’s condensed consolidated financial statements.

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.

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 and refinancing 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.

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. Over the last several quarters, primarily due to the historically low interest rate environment and the gradual improvement in both the general economy and availability of mortgage credit, the Company observed an increase in mortgage activity.

According to the Mortgage Bankers Association’s April 18, 2013 Mortgage Finance Forecast (the “MBA Forecast”), residential mortgage originations in the United States (based on the total dollar value of the transactions) increased 29.2% in the first quarter of 2013 when compared with the first quarter of 2012. According to the MBA Forecast, the dollar amount of purchase originations increased 5.0% and refinance originations increased 40.6%. This increase in residential mortgage origination activity drove an increase in title orders closed by the Company’s direct title operations, which contributed to the title insurance and services segment’s 19.2% increase in total revenues for the first quarter of 2013 when compared with the first quarter of 2012.

The level of title orders opened per day by the Company’s direct title operations during the first quarter of 2013 was essentially flat when compared with the first quarter of 2012. While total open orders per day were flat, the order mix shifted toward residential resale and commercial transactions, which typically generate higher premiums than refinance transactions. Residential resale and commercial open orders per day increased 13.0% and 9.4%, respectively, while refinance open orders per day decreased 6.5%.

Title Insurance and Services


	Three Months Ended March 31,
(in thousands, except percentages)	2013			2012			$ Change			% Change
Revenues
Direct premiums and escrow fees	$	399,985		$	343,639		$	56,346			16.4	%
Agent premiums		484,465			376,986			107,479			28.5
Information and other		151,749			155,289			(3,540	)		(2.3	)
Investment income		18,986			17,321			1,665			9.6
Net realized investment gains		7,396			588			6,808			N/M	¹
Net other-than-temporary impairment losses recognized in earnings		—			(2,602	)		2,602			100.0

		1,062,581			891,221			171,360			19.2

Expenses
Personnel costs		316,844			277,577			39,267			14.1
Premiums retained by agents		387,543			302,164			85,379			28.3
Other operating expenses		188,614			171,752			16,862			9.8
Provision for policy losses and other claims		77,360			52,179			25,181			48.3
Depreciation and amortization		16,483			16,333			150			0.9
Premium taxes		10,904			9,733			1,171			12.0
Interest		564			661			(97	)		(14.7	)

		998,312			830,399			167,913			20.2

Income before income taxes	$	64,269		$	60,822		$	3,447			5.7	%

Margins		6.0	%		6.8	%		(0.8	)%		(11.8	)%

(1)	Not meaningful

Direct premiums and escrow fees were $400.0 million for the three months ended March 31, 2013, an increase of $56.3 million, or 16.4%, 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 and, to a lesser extent, an increase in average revenues per order closed. The Company’s direct title operations closed 291,400 title orders during the three months ended March 31, 2013, an increase of 11.5% when compared with 261,300 title orders closed during the same period of the prior year. The increase in closed title orders reflected the increase in residential mortgage originations in the United States in the first quarter of 2013 when compared to the first quarter of 2012. The average revenues per order closed was $1,373 for the three months ended March 31, 2013, an increase of 4.4% when compared with $1,315 for the three months ended March 31, 2012. The increase in average revenues per order closed was primarily attributable to higher real estate values in the first quarter of 2013 when compared with the same period of the prior year.

Agent premiums were $484.5 million for the three months ended March 31, 2013, an increase of $107.5 million, or 28.5%, 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 typically reflect fourth quarter mortgage origination activity. The increase in agent premiums quarter over quarter was consistent with the 38.1% increase in the Company’s direct premiums and escrow fees in the fourth quarter of 2012 as compared with the fourth quarter of 2011. 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 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. These revenues generally trend with direct premiums and escrow fees but are typically less volatile since a portion of the revenues are subscription based and do not fluctuate with transaction volumes.

Information and other revenues were $151.7 million for the three months ended March 31, 2013, a decrease of $3.5 million, or 2.3%, when compared with the same period of the prior year. This decrease was primarily attributable to lower demand for title related services in Canada due to a decline in mortgage transactions resulting primarily from a recent tightening of lending requirements, partially offset by higher demand for the Company’s default and title plant information products as a result of the increase in domestic loss mitigation and mortgage origination activities.

Investment income totaled $19.0 million for the three months ended March 31, 2013, an increase of $1.7 million, or 9.6%, when compared with the same period of the prior year. The increase was primarily due to increased dividend and interest income from the investment portfolio and higher equity in earnings from investments accounted for using the equity method of accounting. The increase in interest income reflected a higher average investment portfolio balance in the first quarter of 2013 when compared with the same period of the prior year, partially offset by a decline in yields.

Net realized investment gains totaled $7.4 million and $0.6 million for the three months ended March 31, 2013 and 2012, respectively. The gains recognized during the first quarter of 2013 were primarily from the sale of investment securities as well as the sale of an office building.

The title insurance and services segment recognized no other-than-temporary impairment losses for the three months ended March 31, 2013 and $2.6 million for the three months ended March 31, 2012. The other-than-temporary impairment losses recognized in the first quarter of 2012 related 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 primary factors: the need to monitor personnel changes to match the level of corresponding or anticipated new orders and the need to provide quality service.

Personnel costs were $316.8 million for the three months ended March 31, 2013, an increase of $39.3 million, or 14.1%, when compared with the same period of the prior year. The increase was primarily due to higher staffing levels required to support the increased closed order volumes and higher incentive compensation driven by increased revenues when compared to the respective period of the prior year.

Agents retained $387.5 million of title premiums generated by agency operations for the three months ended March 31, 2013, which compares with $302.2 million for the same period of the prior year. The percentage of title premiums retained by agents was 80.0% and 80.2% for the three months ended March 31, 2013 and 2012, respectively.

Other operating expenses for the title insurance and services segment were $188.6 million for the three months ended March 31, 2013, an increase of $16.9 million, or 9.8%, when compared with the same period of the prior year. This increase was primarily due to higher production related expenses and temporary labor costs driven by increased closed order volumes.

The provision for policy losses and other claims, expressed as a percentage of title premiums and escrow fees, was 8.7% and 7.2% for the three months ended March 31, 2013 and 2012, respectively.

Premium taxes were $10.9 million and $9.7 million for the three months ended March 31, 2013 and 2012, respectively. Premium taxes as a percentage of title insurance premiums and escrow fees were 1.2% and 1.4% for the three months ended March 31, 2013 and 2012, 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, 2013 and 2012 was 6.0% and 6.8%, respectively.

Specialty Insurance


	Three Months Ended March 31,
(in thousands, except percentages)	2013			2012			$ Change			% Change
Revenues
Direct premiums	$	77,866		$	70,147		$	7,719			11.0	%
Information and other		390			475			(85	)		(17.9	)
Investment income		1,678			2,465			(787	)		(31.9	)
Net realized investment gains		1,575			1,111			464			41.8

		81,509			74,198			7,311			9.9

Expenses
Personnel costs		14,331			13,663			668			4.9
Other operating expenses		10,219			11,042			(823	)		(7.5	)
Provision for policy losses and other claims		38,666			34,499			4,167			12.1
Depreciation and amortization		1,179			1,055			124			11.8
Premium taxes		1,213			1,115			98			8.8

		65,608			61,374			4,234			6.9

Income before income taxes	$	15,901		$	12,824		$	3,077			24.0	%

Margins		19.5	%		17.3	%		2.2	%		12.7	%

Direct premiums were $77.9 million for the three months ended March 31, 2013, an increase of $7.7 million, or 11.0%, when compared with the same period of the prior year. The increase was primarily due to an increase in the number of home warranty residential service contracts issued and, to a lesser extent, an increase in property and casualty policies issued. The growth in home warranty residential service contracts issued was primarily associated with renewals and residential purchase transactions.

Investment income totaled $1.7 million for the three months ended March 31, 2013, a decrease of $0.8 million, or 31.9%, when compared with the same period of the prior year. The decrease was primarily due to a decrease in interest income earned from the investment portfolio reflecting a decline in yields.

Net realized investment gains were $1.6 million and $1.1 million for the three months ended March 31, 2013 and 2012, respectively. The net realized gains were due to gains from the sale of investment securities.

Personnel costs and other operating expenses were $24.5 million for the three months ended March 31, 2013, a decrease of $0.2 million, or 0.6%, when compared with the same period of the prior year. This slight decrease was primarily related to decreased amortization of deferred acquisition costs, partially offset by increased salary expense associated with higher employee headcount and increased commissions associated with increased volume in the home warranty and property and casualty businesses.

The provision for home warranty claims expressed as a percentage of home warranty premiums was 48.1% for the current three month period, which was essentially unchanged when compared with 47.9% for the same period of the prior year. For the property and casualty business, the provision for property and casualty claims expressed as a percentage of property and casualty insurance premiums was 52.5% for the current three month period, an increase when compared with 51.3% for the same period of the prior year. This increase was primarily attributable to higher weather-related claims across the U.S. in the first quarter of 2013 when compared to the same quarter of 2012.

Premium taxes were $1.2 million and $1.1 million for the three months ended March 31, 2013 and 2012, respectively. Premium taxes as a percentage of specialty insurance segment premiums were 1.6% for the three months ended March 31, 2013 and 2012.

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 19.5%, up from 17.3% for the comparable period of the prior year.

Corporate


	Three Months Ended March 31,
(in thousands, except percentages)	2013			2012			$ Change			% Change
Revenues
Investment income	$	3,145		$	2,248		$	897			39.9	%
Net realized investment gains		285			—			285			—

		3,430			2,248			1,182			52.6

Expenses
Personnel costs		13,325			14,039			(714	)		(5.1	)
Other operating expenses		6,519			6,360			159			2.5
Depreciation and amortization		733			671			62			9.2
Interest		3,431			3,274			157			4.8

		24,008			24,344			(336	)		(1.4	)

Loss before income taxes	$	(20,578	)	$	(22,096	)	$	1,518			6.9	%

Investment income totaled $3.1 million and $2.2 million for the three months ended March 31, 2013 and 2012, respectively. The increase in investment income was primarily attributable to the impairment of a non-marketable investment recorded in the first quarter of 2012 with no impairment recorded in the first quarter of 2013. This increase was partially offset by a decrease in earnings on investments associated with the Company’s deferred compensation plan.

Corporate personnel costs and other operating expenses were $19.8 million and $20.4 million for the three months ended March 31, 2013 and 2012, respectively. The decrease in personnel costs and other operating expenses was primarily due to decreased 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, 2013 and 2012.

INCOME TAXES

The Company’s effective income tax rate (income tax expense as a percentage of income before income taxes) was 39.2% and 39.7% for the three months ended March 31, 2013 and 2012, respectively. The difference in the effective tax rates was primarily due to changes in the ratio of permanent differences to income before income taxes, changes in state and foreign income taxes resulting from fluctuations in the Company’s noninsurance and foreign subsidiaries’ contribution to pretax profits, and changes in the liability related to tax positions reported on the Company’s tax returns. The effective tax rate for 2012 included the release of valuation allowances recorded against capital losses.

NET INCOME AND NET INCOME ATTRIBUTABLE TO THE COMPANY

Net income for the three months ended March 31, 2013 and 2012 was $36.2 million and $31.1 million, respectively. Net income attributable to the Company for the three months ended March 31, 2013 and 2012 was $36.2 million and $31.3 million, or $0.33 and $0.29 per diluted share, respectively.

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 for operating activities amounted to $50.9 million and $7.8 million for the three months ended March 31, 2013 and 2012, respectively, after claim payments, net of recoveries, of $111.2 million and $116.1 million, respectively. The principal nonoperating uses of cash and cash equivalents for the three months ended March 31, 2013 were purchases of debt and equity securities, 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, 2013 were proceeds from the issuance of debt, 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, 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 net effect of all activities on total cash and cash equivalents was an increase of $187.3 million and $254.2 million for the three months ended March 31, 2013 and 2012, respectively.

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

In March 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, of which $147.5 million remains as of March 31, 2013. 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, 2013.

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, 2013, under such regulations, the maximum amount of dividends, loans and advances available to the holding company from its insurance subsidiaries in 2013, without prior approval from applicable regulators, was $405.6 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, 2013, the holding company’s sources of liquidity include $262.2 million of cash and cash equivalents and $600.0 million available on the Company’s revolving credit facility. 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. The Company maintains a credit agreement with JPMorgan Chase Bank, N.A. as administrative agent and a syndicate of lenders. The credit agreement is comprised of a $600.0 million revolving credit facility, which will terminate on April 17, 2016, unless terminated earlier. Proceeds under the credit agreement may be used for general corporate purposes. At March 31, 2013, the Company had no outstanding borrowings under the facility and was in compliance with the financial covenants under the credit agreement.

In addition to amounts available under its credit facility, certain subsidiaries of the Company are parties to master repurchase agreements which are used as part of the Company’s liquidity management activities and to support its risk management activities. In particular, securities loaned or sold under repurchase agreements are used as short-term funding sources. In the first quarter of 2013, the Company financed securities for funds totaling $25.4 million under these agreements. As of March 31, 2013, no amounts remained outstanding under these agreements.

Notes and contracts payable as a percentage of total capitalization was 11.8% and 8.9% at March 31, 2013 and December 31, 2012, respectively. The increase primarily reflects the Company’s issuance of the senior unsecured notes during the first quarter of 2013.

Investment Portfolio. The Company’s investment portfolio is primarily held at its insurance and banking subsidiaries. The Company maintains a high quality, liquid investment portfolio. As of March 31, 2013, the Company’s debt and equity investment securities portfolio consists of approximately 92% of fixed income securities. As of that date, over 63% of the Company’s fixed income investments are held in securities that are United States government-backed or rated AAA, and approximately 99% of the fixed income portfolio is rated or classified as investment grade. Percentages are based on the amortized cost basis of the securities. Credit ratings are based on Standard & Poor’s Rating 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.

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, 2013. 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, 2013	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		100.0	%		0.0	%		0.0	%
Foreign bonds		100.0	%		0.0	%		0.0	%
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		49.5	%		50.5	%		0.0	%
Preferred stock		0.0	%		100.0	%		0.0	%

		91.8	%		4.0	%		4.2	%

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 $4.0 billion and $4.2 billion at March 31, 2013 and December 31, 2012, respectively, of which $1.4 billion and $1.2 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB. The escrow deposits held at First American Trust, FSB, are 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 $2.9 billion and $2.8 billion at March 31, 2013 and December 31, 2012, 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.

At March 31, 2013 and December 31, 2012, the Company was contingently liable for guarantees of indebtedness owed by affiliates and third parties to banks and others totaling $19.9 million and $23.2 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 $19.9 million at March 31, 2013 and $23.2 million at December 31, 2012, 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, 2013 and December 31, 2012.

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, 2012.

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, 2013, 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, 2013, 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

•

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,

•

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,

•

Mitchell-Tracey v. First American Title Insurance Company, et al., filed on April 30, 2012 and pending in the United States District Court for the Northern District of Maryland,

•

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.

In Edwards a narrow class has been certified. 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

•

Klein v. First American Title Insurance Company, et al., filed on July 10, 2012 and pending in the United States District Court for the District of Columbia.

•

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.

•

failed to pay required compensation and provide required rest periods, 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,

•

Deceuster v. First American Title Insurance Company, filed on February 13, 2013 and pending in the Court of Common Pleas of 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,

•

Muehling v. First American Title Company, filed on December 11, 2012 and pending in the Superior Court of the State of California, County of Alameda,

•

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,

•

Todd v. First American Title Insurance Company, et al., filed on January 15, 2013 and pending in the United States District Court for the District of Colorado, 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 and the Company’s claims experience

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

•

when mortgage interest rates are high or rising;

•

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

•

when real estate values are declining.

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

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

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 condensed consolidated balance sheet as of March 31, 2013 are $898.1 million. Any substantial goodwill and other intangible asset impairments that may be required could have a material adverse effect on the Company’s results of operations and financial condition.

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

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

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

Many of the Company’s businesses, including its title insurance, property and casualty insurance, home warranty, banking, trust and investment businesses, are regulated by various federal, state, local and foreign governmental agencies. These and other of the Company’s businesses also operate within statutory guidelines. The industry in which the Company operates and the markets into which it sells its products are also regulated and subject to statutory guidelines. Changes in the applicable regulatory environment, statutory guidelines or interpretations of existing regulations or statutes, enhanced governmental oversight or efforts by governmental 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, federal regulators and applicable regulators in international jurisdictions, either separately or together, also periodically conduct targeted inquiries into the practices of title insurance companies and other settlement services providers in their respective jurisdictions.

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

7. 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. Changes in the Company’s relationships with large mortgage lenders could adversely affect the Company

A relatively small number of lenders originate a majority of the mortgages in the United States and Canada. Due to the consolidated nature of the industry, the Company derives a significant percentage of its revenues from a relatively small base of lenders, and their borrowers, which enhances the negotiating power of these lenders with respect to the pricing and the terms on which they purchase the Company’s products and other matters. These circumstances could adversely affect the Company’s revenues and profitability. Changes in the Company’s relationship with any of these lenders, the loss of all or a portion of the business the Company derives from these lenders or any refusal of these lenders to accept the Company’s policies could have a material adverse effect on the Company.

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

Certain of the Company’s customers use measurements of the financial strength of the Company’s title insurance underwriters, including, among others, ratings provided by ratings agencies and levels of statutory capital and surplus maintained by those underwriters, in determining the amount of a policy they will accept and the amount of reinsurance required. Each of the major ratings agencies currently rates the Company’s title insurance operations. The Company’s principal title insurance underwriter’s financial strength ratings are “A3” by Moody’s Investor Services, Inc., “A-” by Fitch Ratings 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 capital and surplus, or the amount by which statutory assets exceed statutory liabilities, is also a measure of financial strength. The Company’s principal title insurance underwriter maintained approximately $959.0 million of total statutory capital and surplus as of December 31, 2012. Accordingly, if the ratings or statutory capital and surplus of these title insurance underwriters are reduced from their current levels, or if there is a deterioration in other measures of financial strength, the Company’s results of operations, competitive position and liquidity could be adversely affected.

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

The Company maintains a substantial investment portfolio, primarily consisting of fixed income securities (including mortgage-backed securities). The investment portfolio also includes money-market and other short-term investments, as well as some preferred and 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. The risk of loss associated with the portfolio is increased during periods of instability in credit markets and economic conditions. If the carrying value of the investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, the Company will be required to write down the value of the investments, which could have a material adverse effect on the Company’s results of operations, statutory surplus and financial condition.

14. 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 upon, among other factors, the future performance of assets held in trust for the plan and interest rates. The pension plan was underfunded as of March 31, 2013 by approximately $125.3 million and the Company may need to make significant contributions to the plan. In addition, pension expenses and funding requirements may also be greater than currently anticipated if the market values of the assets held by the pension plan decline or if the other assumptions regarding plan earnings, expenses and interest rates require adjustment. The Company’s obligations under this plan could have a material adverse effect on its results of operations, financial condition and liquidity.

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. 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 $108.5 million. A material change in expected ultimate losses and corresponding loss rates for older policy years is also possible, particularly for policy years with loss ratios exceeding historical norms. The estimates made by management in determining the appropriate level of IBNR reserves could ultimately prove to be materially different from actual claims experience.

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

Systems 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 data centers, which are maintained and managed by a third party. 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 is subject to heightened scrutiny in the United States and, as a result, some of the Company’s customers may require it to use labor based in the United States. Laws or regulations that require the Company to use labor based in the United States or effectively increase the cost of the Company’s foreign labor also could be enacted. The Company may not be able to pass on these increased costs to its customers.

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, 2013, under such regulations, the maximum amount of dividends, loans and advances available in 2013 from these insurance subsidiaries, without prior approval from applicable regulators, was $405.6 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.

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

Date: April 26, 2013

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.