First American Financial Corp (Form: 10-K, Received: 03/01/2011 15:03:05)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2010

¨	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

(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

Securities registered pursuant to Section 12(b) of the Act:


Common		New York Stock Exchange
(Title of each class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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


Large accelerated filer x		Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2010 was $1,304,313,092.

On February 18, 2011, there were 104,646,524 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement with respect to the 2011 annual meeting of the stockholders are incorporated by reference in Part III of this report. The definitive proxy statement or an amendment to this Form 10-K will be filed no later than 120 days after the close of registrant’s fiscal year.

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

•

THE IMPACT OF UNCERTAINTY IN GENERAL ECONOMIC CONDITIONS AND TIGHT MORTGAGE;

•

THE COMPANY’S CONTINUED INITIATIVES TO CONTROL COSTS AND SCRUTINIZE THE PROFITABILITY OF ITS AGENCY RELATIONSHIPS ;

•

THE COMPANY’S PURSUIT OF TARGETED GROWTH OPPORTUNITIES;

•

THE EFFECT OF A DECREASE IN PRODUCTS OR SERVICES PURCHASED BY OR FOR THE BENEFIT OF THE COMPANY’S MOST SIGNIFICANT CUSTOMERS;

•

ANTICIPATED OPPORTUNITIES FOR AND THE ABILITY OF THE COMPANY TO EXPAND INTERNATIONALLY;

•

EXPECTED MATURITY DATES OF CERTAIN ASSETS AND LIABILITIES THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES;

•

FUTURE COMMERCIAL TITLE INSURANCE PROFIT MARGINS;

•

THE COMPANY’S CONTINUED PRACTICE OF ASSUMING AND CEDING LARGE TITLE INSURANCE RISKS THRO UGH REINSURANCE AND COINSURANCE;

•

THE COMPETITIVE IMPORTANCE OF PRICE AND QUALITY AND TIMELINESS OF SERVICE;

•

CONTINUED PRICE ADJUSTMENTS;

•

THE ADEQUACY OF THE ALLOWANCE AGAINST FORESEEABLE LOAN LOSSES;

•

THE IMPACT OF CHANGES IN GOVERNMENT REGULATIONS;

•

THE LIKELIHOOD OF CHANGES IN EXPECTED ULTIMATE LOSSES AND CORRESPONDING LOSS RATES AND THE EFFECT OF INCREASED MORTGAGE LOAN UNDERWRITING STANDARDS AND LOWER RESIDENTIAL REAL ESTATE PRICES ON CLAIMS RISK FOR TITLE INSURANCE POLICIES ISSUED IN 2009 AND 2010;

•

UNCERTAINTY AND POTENTIAL FOR VOLATILITY IN THE CURRENT ECONOMIC ENVIRONMENT AND ITS EFFECT ON TITLE CLAIMS, THE VARIANCE BETWEEN ACTUAL CLAIMS EXPERIENCE AND PROJECTIONS AND THE NEED TO ADJUST RESERVES BASED ON UPDATED ESTIMATES OF FUTURE CLAIMS;

•

ASSUMPTIONS UNDERLYING GOODWILL VALUATIONS;

•

THE TIMING OF CLAIM PAYMENTS;

•

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

•

FUTURE PAYMENT OF DIVIDENDS;

•

THE EFFECT OF THE ISSUES FACING THE COMPANY’S CUSTOMERS;

•

THE EFFECT OF FORECLOSURE SUSPENSIONS AND POTENTIAL DEFICIENCIES IN LENDER FORECLOSURE PROCESSES;

•

THE COMPANY’S CONTINUED MONITORING OF ORDER VOLUMES AND RELATED STAFFING LEVELS, AND ADJUSTMENTS TO STAFFING LEVELS AS NECESSARY;

•

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

•

THE UNITED STATES GOVERNMENT’S COMMITMENT TO ENSURING THAT FANNIE MAE AND FREDDIE MAC HAVE SUFFICIENT CAPITAL TO PERFORM UNDER GUARANTEES ISSUED AND TO MEET THEIR DEBT OBLIGATIONS;

•

POTENTIAL FUTURE IMPAIRMENT CHARGES RESULTING FROM VOLATILITY IN THE CURRENT MARKETS AND OTHER ASSUMPTIONS;

•

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

•

THE SALE OF AND EXPECTED CASH FLOWS FOR DEBT SECURITIES AND ASSUMPTIONS RELATING THERETO;

•

THE REALIZATION OF TAX BENEFITS ASSOCIATED WITH CERTAIN LOSSES, POTENTIAL TAX PROVISIONS IN CONNECTION WITH THE EARNINGS OF FOREIGN SUBSIDIARIES AND THE ADEQUACY OF TAX AND RELATED INTEREST ESTIMATES IN CONNECTION WITH EXAMINATIONS BY TAX AUTHORITIES;

•

ESTIMATED NET LOSS AND PRIOR SERVICE CREDIT RELATING TO PENSION PLANS;

•

EXPECTED BENEFIT AND PENSION PLAN CONTRIBUTIONS, PAYMENTS AND INVESTMENT STRATEGY AND RETURN ASSUMPTIONS;

•

COMPENSATION COST RECOGNITION; AND

•

RESERVES FOR LIABILITIES ALLOCATED TO THE COMPANY IN CONNECTION WITH THE SEPARATION FROM THE FIRST AMERICAN CORPORATION,

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:

•

INTEREST RATE FLUCTUATIONS;

•

CHANGES IN THE PERFORMANCE OF THE REAL ESTATE MARKETS;

•

LIMITATIONS ON ACCESS TO PUBLIC RECORDS AND OTHER DATA;

•

GENERAL VOLATILITY IN THE CAPITAL MARKETS;

•

CHANGES IN APPLICABLE GOVERNMENT REGULATIONS;

•

REFORM OF GOVERNMENT-SPONSORED MORTGAGE ENTERPRISES

•

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

•

INCREASES IN THE SIZE OF THE COMPANY’S CUSTOMERS;

•

UNFAVORABLE ECONOMIC CONDITIONS;

•

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

•

LOSSES IN THE COMPANY’S INVESTMENT PORTFOLIO;

•

EXPENSES OF AND FUNDING OBLIGATIONS TO THE PENSION PLAN;

•

WEAKNESS IN THE COMMERCIAL REAL ESTATE MARKET AND INCREASES IN THE AMOUNT OR SEVERITY OF COMMERCIAL REAL ESTATE TRANSACTION CLAIMS;

•

REGULATION OF TITLE INSURANCE RATES; AND

•

OTHER FACTORS DESCRIBED IN THIS ANNUAL REPORT ON FORM 10-K.

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

Item 1. Business

The Company

First American Financial Corporation (the “Company”) was incorporated in the state of Delaware in January 2008 to serve as the holding company of The First American Corporation’s (“TFAC’s”) financial services businesses following the spin-off of those businesses from TFAC (the “Separation”). The Separation was consummated on June 1, 2010, at which time the Company’s common stock was listed on the New York Stock Exchange under the ticker symbol “FAF.” In connection with the Separation, TFAC reincorporated in Delaware and assumed the name CoreLogic, Inc. The businesses operated by the Company’s subsidiaries have, in some instances, been in existence since the late 1800s.

The Company has its executive offices at 1 First American Way, Santa Ana, California 92707-5913. The Company’s telephone number is (714) 250-3000.

General

The Company, through its subsidiaries, is engaged in the business of providing financial services through its title insurance and services segment and its specialty insurance segment. The title insurance and services segment provides title insurance, escrow or closing services and similar or related financial services domestically and internationally in connection with residential and commercial real estate transactions. It also maintains, manages and provides access to title plant records and images and provides banking, trust and investment advisory services. The specialty insurance segment issues property and casualty insurance policies and sells home warranty products. In addition, our corporate function consists of certain financing facilities as well as the corporate services that support our business operations. Financial information regarding each of these business segments is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements” of Part II of this report.

The substantial majority of our business is dependent upon activity in the real estate and mortgage markets, which are cyclical and seasonal. During the most recent real estate and mortgage cycle, we have primarily emphasized expense control and operational efficiency by, among other activities, reducing employee count, consolidating offices, centralizing agency and administrative functions, optimizing our organizational structure and rationalizing our brand strategy. Future activity in the real estate and mortgage markets remains uncertain and cost control measures are of continued importance. In addition, our current emphasis also includes the pursuit of targeted growth opportunities.

Title Insurance and Services Segment

Our title insurance and services segment issues title insurance policies on residential and commercial property in the United States and offers similar 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. In 2010, 2009, and 2008 the Company derived 92.5%, 93.1%, and 93.2% of its consolidated revenues, respectively, from this segment.

Overview of Title Insurance Industry

In most real estate transactions, mortgage lenders and purchasers of real estate desire to be protected from loss or damage in the event of defects in the title they acquire. Title insurance is a means of providing such protection.

Title Policies. Title insurance policies insure the interests of owners or lenders against defects in the title to real property. These defects include adverse ownership claims, liens, encumbrances or other matters affecting

title. Title insurance policies are issued on the basis of a title report, which is typically prepared after a search of the public records, maps, documents and prior title policies to ascertain the existence of easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of, real property. In certain limited instances, a visual inspection of the property is also made. To facilitate the preparation of title reports, copies of public records, maps, documents and prior title policies may be compiled and indexed to specific properties in an area. This compilation is known as a “title plant.”

The beneficiaries of title insurance policies are usually real estate buyers and mortgage lenders. A title insurance policy indemnifies the named insured and certain successors in interest against title defects, liens and encumbrances existing as of the date of the policy and not specifically excepted from its provisions. The policy typically provides coverage for the real property mortgage lender in the amount of its outstanding mortgage loan balance and for the buyer in the amount of the purchase price of the property. In some cases the policy might provide insurance in a greater amount where the buyer anticipates constructing improvements on the property. Coverage under a title insurance policy issued to a mortgage lender generally terminates upon repayment of the mortgage loan. Coverage under a title insurance policy issued to a buyer generally terminates upon the sale of the insured property unless the owner carries back a mortgage or makes certain warranties as to the title.

Before issuing title policies, title insurers typically seek to limit their risk of loss by accurately performing title searches and examinations. The major expenses of a title company relate to such searches and examinations, the preparation of preliminary reports or commitments and the maintenance of title plants, and not from claim losses as in the case of property and casualty insurers.

The Closing Process. Title insurance is essential to the real estate closing process in most transactions involving real property mortgage lenders. In a typical residential real estate sale transaction, a real estate broker, lawyer, developer, lender or closer involved in the transaction orders title insurance on behalf of an insured. Once the order has been placed, a title insurance company or an agent typically conducts a title search to determine the current status of the title to the property. When the search is complete, the title company or agent prepares, issues and circulates a commitment or preliminary report to the parties to the transaction. The commitment or preliminary report identifies the conditions, exceptions and/or limitations that the title insurer intends to attach to the policy and identifies items appearing on the title that must be eliminated prior to closing.

The closing function, sometimes called an escrow in the western United States, is often performed by a lawyer, an escrow company or a title insurance company or agent, generally referred to as a “closer.” Once documentation has been prepared and signed, and mortgage lender payoff demands are in hand, the transaction is “closed.” The closer records the appropriate title documents and arranges the transfer of funds to pay off prior loans and extinguish the liens securing such loans. Title policies are then issued insuring the priority of the mortgage of the real property mortgage lender in the amount of its mortgage loan and the buyer in the amount of the purchase price. The time between the opening of the title order and the issuance of the title policy is usually between 30 and 90 days. Before a closing takes place, however, the closer requests that the title insurer provide an update to the commitment to discover any adverse matters affecting title and, if any are found, works with the seller to eliminate them so that the title insurer issues the title policy subject only to those exceptions to coverage which are acceptable to the title insurer, the buyer and the buyer’s lender.

Issuing the Policy: Direct vs. Agency. A title policy can be issued directly by a title insurer or indirectly on behalf of a title insurer through agents, which may not themselves be licensed as insurers. Where the policy is issued by a title insurer, the search is performed by or on behalf of the title insurer, and the premium is collected and retained by the title insurer. Where the policy is issued by an agent, the agent typically performs the search, examines the title, collects the premium and retains a portion of the premium. The agent remits the remainder of the premium to the title insurer as compensation for the insurer bearing the risk of loss in the event a claim is made under the policy and for other services the insurer may provide. The percentage of the premium retained by an agent varies from region to region. A title insurer is obligated to pay title claims in accordance with the terms of its policies, regardless of whether it issues its policy directly or indirectly through an agent.

Premiums. The premium for title insurance is typically due and earned in full when the real estate transaction is closed. Premiums generally are calculated with reference to the policy amount. The premium charged by a title insurer or an agent is subject to regulation in most areas. Such regulations vary from state to state.

Our Title Insurance Operations

Overview. We conduct our title insurance business through a network of direct operations and agents. Through this network, we issue policies in the 49 states that permit the issuance of title insurance policies and the District of Columbia. We also offer title insurance and similar products, as well as related services, either directly or through joint ventures in foreign countries, including Canada, the United Kingdom and various other established and emerging markets as described in the “International Operations” section below.

Customers, Sales and Marketing. We believe that three institutions, Bank of America Corporation, JPMorgan Chase & Co. and Wells Fargo & Company, together with their affiliates, originate in excess of 50% of the mortgages in the United States. Each of these institutions directly purchases title insurance policies and other products and services from us. These institutions also benefit from products and services which are purchased for their benefit by others, such as title insurance policies purchased by borrowers as a condition to the making of a loan. The refusal of one or more of these institutions to purchase products and services directly from us or to accept our products and services that are to be purchased for their benefit could have a material adverse effect on the title insurance and services segment.

Though we endeavor to educate customers on the value of title insurance and the closing process, we can most efficiently market to our primary sources of business referrals, including escrow or closing service providers, real estate agents and brokers, developers, mortgage brokers, mortgage bankers, lenders and attorneys. In addition, we also market our title insurance services directly to large corporate customers and mortgage lenders and servicers. We actively market to mortgage servicers, default service providers and investors who are important sources of title insurance business during periods with high levels of foreclosures. We also market our title insurance services to independent agents. Our marketing efforts emphasize our financial strength, the quality and timeliness of our services, process innovation and our national presence.

We have expanded our commercial business base primarily through increased commercial sales efforts. Because commercial transactions involve higher coverage amounts and higher premiums, commercial title insurance business generally generates greater profit margins than does residential title insurance business. Our national commercial services division also has a dedicated sales force. One of the responsibilities of the sales personnel of this division is the coordination of marketing efforts directed at large real estate lenders and companies developing, selling, buying or brokering properties on a multi-state basis.

We supplement the efforts of our sales force with general advertising in various trade and professional journals.

International Operations. Over the past 20 years, we have led the industry in global expansion by investing in the development and growth of operations in international markets. We provide products and services in numerous countries, and our international operations accounted for approximately 9.0 percent of our title insurance and services segment revenues in 2010. Today we have direct operations and a physical presence in 11 countries including Canada and the United Kingdom. Additionally, we have partnered with leading local companies to provide services in many other countries. While reliable data are not available, we believe that we have the largest market share for title insurance outside of the United States. The Company’s operating revenues from external customers and long-lived assets are broken down between domestic and foreign operations in Note 22 Segment Financial Information to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of Part II of this report.

Our range of international products and services is designed to lower our clients’ risk profiles and reduce their operating costs through enhanced operational efficiencies. In established markets, primarily British Commonwealth countries, we have combined title insurance with unique processing offerings to enhance the speed and efficiency of the mortgage and conveyancing processes. We believe that opportunities for growth exist not only in the relatively established markets, but also in the emerging markets that are heavily reliant on expensive manual business processes and dated technology and land registry systems. As the number of countries adopting Western style mortgage systems continues to increase and as the demand for greater efficiency in the real estate settlement process continues to grow, we are well situated to seize these opportunities because of our industry expertise, financial strength, existing international licenses and contacts around the world. For example, we are licensed or otherwise authorized to do business in 36 countries and we have partnered with entities authorized to do business in various additional countries.

Because title insurance is relatively new to foreign markets, our international operations present risks that may not exist in our domestic operations. These risks include unforeseen regulatory changes as regulators’ familiarity with our products increases. In addition, limited claims experience in foreign jurisdictions, especially where land ownership and mortgage lending systems meaningfully differ from the United States, makes it more difficult to set reserve rates or set prices.

Underwriting. Before a title insurance policy is issued, a number of underwriting decisions are made. For example, matters of record revealed during the title search may require a determination as to whether an exception should be taken in the policy. We believe that it is important for the underwriting function to operate efficiently and effectively at all decision-making levels so that transactions may proceed in a timely manner. To perform this function, we have underwriters at the regional, divisional and corporate levels to whom we give varying levels of underwriting authority.

Agency Operations. Our agreements with our agents state the conditions under which the agent is authorized to issue title insurance policies on our behalf. The agency agreement also prescribes the circumstances under which the agent may be liable to us if a policy loss occurs. Although such agency agreements typically are terminable without cause after a specified notice period has been met and are terminable immediately for cause, certain agents have negotiated terms that are more favorable to them. Beginning in early 2008, we intensified our effort to evaluate all of our agency relationships, including a review of premium splits, deductibles and claims. As a result, we terminated or renegotiated the terms of many of our agency relationships. We have also centralized the receipt of agency remittances and are in the process of centralizing other agent-related administrative activities, and we continue to evaluate the profitability of agency relationships.

We have an agent selection process and an agent audit program. In determining whether to engage an independent agent, we obtain information about the agent, including the agent’s experience and background. We maintain loss experience records for each agent and conduct periodic audits of our agents. We also maintain agent representatives and agent auditors. Agent auditors routinely perform an examination of the agent’s escrow trust accounts and supporting accounting records. In addition to these routine examinations, an expanded examination will be triggered if certain “warning signs” are evident. Warning signs that can trigger an expanded examination include the failure to implement required accounting controls, shortages of escrow funds and failure to remit title insurance premiums on a timely basis. Adverse findings in an agency audit may result in various actions, including, if warranted, termination of the agency relationship.

Title Plants. Our network of title plants constitutes one of our principal assets. A title search is typically conducted by searching the abstracted information from public records or utilizing a title plant holding abstracted information from public records. While public title records generally are indexed by reference to the names of the parties to a given recorded document, our title plants arrange their records on a geographic basis. Because of this difference, title plant records generally may be searched more efficiently, which we believe reduces the risk of errors associated with the search. Our title plants also index prior policies, adding to searching efficiency. Most of our title plants are automated, or available on-line. Certain offices utilize jointly owned plants or utilize a plant

under a joint user agreement with other title companies. In addition to these ownership interests, we are in the business of maintaining, managing and providing access to title plant records and images that may be owned by us or other parties. We believe that our title plants, whether wholly or partially owned or utilized under a joint user agreement, are among the best in the industry.

Reserves for Claims and Losses. We provide for title insurance losses based upon our historical experience and other factors by a charge to expense when the related premium revenue is recognized. The resulting reserve for known claims and incurred but not reported claims reflects management’s best estimate of the total costs required to settle all claims reported to us and claims incurred but not reported, and is considered to be adequate for such purpose. Each period the reasonableness of the estimated reserves is assessed; if the estimate requires adjustment, such an adjustment is recorded.

Reinsurance and Coinsurance. We plan to continue our practice of assuming and ceding large title insurance risks through the mechanism of reinsurance. In reinsurance arrangements, the primary insurer retains a certain amount of risk under a policy and cedes the remainder of the risk under the policy to the reinsurer. The primary insurer pays the reinsurer a premium in exchange for accepting this risk of loss. The primary insurer generally remains liable to its insured for the total risk, but is reinsured under the terms of the reinsurance agreement. Prior to 2010, our title insurance arrangements primarily involved other industry participants. Beginning in January of 2010, we established a global reinsurance program involving treaty reinsurance provided by a global syndicate of highly rated non-industry reinsurers. In addition to covering claims under policies issued while the program is in effect, the program also generally covers claims made under policies issued in certain prior years, as long as the losses are discovered while the program is in effect.

We also serve as a coinsurer in connection with certain transactions. In a coinsurance scenario, two or more insurers are selected by the insured and typically issue separate policies with respect to the subject property, with each coinsurer liable to the extent provided in the policy that it issues.

Competition. The title insurance business is highly competitive. The number of competing companies and the size of such companies vary in the different areas in which we conduct business. Generally, in areas of major real estate activity, such as metropolitan and suburban localities, we compete with many other title insurers and agents. Our major nationwide competitors in our principal markets include Fidelity National Financial, Inc., Stewart Title Guaranty Company and Old Republic International Corporation. In addition to these national competitors, small nationwide, regional and local competitors, as well as numerous agency operations throughout the country, provide aggressive competition on the local level. Over 30 title insurance underwriters are currently members of the American Land Title Association, the title insurance industry’s national trade association. We are currently the second largest provider of title insurance in the United States, based on the most recent American Land Title Association market share data.

We believe that competition for title insurance business is based primarily on both the price of the policy and the quality and timeliness of the service, because parties to real estate transactions are usually concerned with time schedules and costs associated with delays in closing transactions. In certain transactions, such as those involving commercial properties, financial strength is also important. In those states where prices are established by regulatory authorities, the price of title insurance policies is not likely to be an important competitive factor. As part of our on-going strategy, we regularly evaluate our pricing, and based on competitive, market and regulatory conditions and claims history, among other factors, intend to continue to adjust our prices as and where appropriate.

Trust and Investment Advisory Services. Our federal savings bank subsidiary offers trust and investment advisory services and manages equity and fixed-income securities. As of December 31, 2010, this company managed $1.5 billion of assets, administered fiduciary and custodial assets having a market value in excess of $2.9 billion, had assets of $1.1 billion, deposits of $1.0 billion and stockholder’s equity of $90.8 million.

Lending and Deposit Products. Our industrial bank subsidiary accepts deposits and uses deposited funds to originate and purchase loans secured by commercial properties primarily in Southern California. As of December 31, 2010, this company, First Security Business Bank, had approximately $482.4 million of deposits and $161.5 million of loans outstanding.

Loans made or acquired during 2010 by the industrial bank totaled $9.1 million, with an average new loan balance of $432,875. The average loan balance outstanding at December 31, 2010, was $654,387. Loans are made only on a secured basis, at loan-to-value percentages generally less than 70 percent. The industrial bank specializes in making commercial real estate loans. The majority of the industrial bank’s loans are made on a fixed-to-floating rate basis. The average yield on the industrial bank’s loan portfolio for the year ended December 31, 2010, was 6.69 percent. A number of factors are included in the determination of average yield, principal among which are loan fees and closing points amortized to income, prepayment penalties recorded as income, and amortization of discounts on purchased loans. The industrial bank’s primary competitors in the Southern California commercial real estate lending market are local community banks, other industrial banks and, to a lesser extent, commercial banks. The industrial bank’s average loan to value was approximately 44 percent at December 31, 2010.

The performance of the industrial bank’s loan portfolio is evaluated on an ongoing basis by management of the industrial bank. The industrial bank places a loan on non-accrual status when three payments become past due. When a loan is placed on non-accrual status, the industrial bank’s general policy is to reverse from income previously accrued but unpaid interest. Income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is probable. Interest income on non-accrual loans that would have been recognized during the year ended December 31, 2010, if all of such loans had been current in accordance with their original terms, totaled $113,198.

The following table sets forth the amount of the industrial bank’s non-performing loans as of the dates indicated.


	Year Ended December 31
	2010		2009		2008		2007		2006
	(in thousands)
Nonperforming Assets:
Loans accounted for on a nonaccrual basis	$	2,441	$	603	$	—	$	—	$	—

Total	$	2,441	$	603	$	—	$	—	$	—

Based on a variety of factors concerning the creditworthiness of its borrowers, the industrial bank determined that it had three non-performing assets as of December 31, 2010.

The industrial bank’s allowance for loan losses is established through charges to earnings in the form of provision for loan losses. Loan losses are charged to, and recoveries are credited to, the allowance for loan losses. The provision for loan losses is determined after considering various factors, such as loan loss experience, maturity of the portfolio, size of the portfolio, borrower credit history, the existing allowance for loan losses, current charges and recoveries to the allowance for loan losses, the overall quality of the loan portfolio, and current economic conditions, as determined by management of the industrial bank, regulatory agencies and independent credit review specialists. While many of these factors are essentially a matter of judgment and may not be reduced to a mathematical formula, we believe that, in light of the collateral securing its loan portfolio, the industrial bank’s current allowance for loan losses is an adequate allowance against foreseeable losses.

The following table provides certain information with respect to the industrial bank’s allowance for loan losses as well as charge-off and recovery activity.


	Year Ended December 31
	2010			2009			2008			2007			2006
	(in thousands, except percentages)
Allowance for Loan Losses:
Balance at beginning of year	$	2,071		$	1,600		$	1,488		$	1,440		$	1,410

Charge-offs:
Real estate—mortgage		—			—			—			—			—
Assigned lease payments		—			—			—			—			—

		—			—			—			—			—

Recoveries:
Real estate—mortgage		—			—			—			—			—
Assigned lease payments		—			—			—			—			—

		—			—			—			—			—

Net (charge-offs) recoveries		—			—			—			—			—
Provision for losses		1,200			471			112			48			30

Balance at end of year	$	3,271		$	2,071		$	1,600		$	1,488		$	1,440

Ratio of net charge-offs during the year to average loans outstanding during the year		0	%		0	%		0	%		0	%		0	%

The adequacy of the industrial bank’s allowance for loan losses is based on formula allocations and specific allocations. Formula allocations are made on a percentage basis, which is dependent on the underlying collateral, the type of loan, general economic conditions and historical losses. Specific allocations are made as problem or potential problem loans are identified and are based upon an evaluation by the industrial bank’s management of the status of such loans. Specific allocations may be revised from time to time as the status of problem or potential problem loans changes.

The following table shows the allocation of the industrial bank’s allowance for loan losses and the percent of loans in each category to total loans at the dates indicated.


	Year Ended December 31
	2010				2009				2008				2007				2006
	Allowance		% of Loans		Allowance		% of Loans		Allowance		% of Loans		Allowance		% of Loans		Allowance		% of Loans
	(in thousands, except percentages)
Loan Categories:
Real estate-mortgage	$	3,271		100	$	2,071		100	$	1,600		100	$	1,488		100	$	1,440		100
Other		—		—		—		—		—		—		—		—		—		—

	$	3,271		100	$	2,071		100	$	1,600		100	$	1,488		100	$	1,440		100

Specialty Insurance Segment

Property and Casualty Insurance. Our property and casualty insurance business provides insurance coverage to residential homeowners and renters for liability losses and typical hazards such as fire, theft, vandalism and other types of property damage. We are licensed to issue policies in all 50 states and actively issues policies in 43 states. In our largest market, California, we also offer preferred risk auto insurance to better compete with other carriers offering bundled home and auto insurance. We market our property and casualty

insurance business using both direct distribution channels, including cross-selling through our existing closing-service activities, and through a network of independent brokers. Reinsurance is used extensively to limit risk associated with natural disasters such as windstorms, winter storms, wildfires and earthquakes.

Home Warranties. Our 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. Most of these policies are issued on resale residences, although policies are also available in some instances for new homes. Coverage is typically for one year and is renewable annually at the option of the contract holder and upon our approval. Coverage and pricing typically vary by geographic region. Fees for the warranties generally are paid at the closing of the home purchase or directly by the consumer and are recognized monthly over the initial contract period. Renewal premiums may be paid by a number of different options. In addition, the contract holder is responsible for a service fee for each trade call. First year warranties primarily are marketed through real estate brokers and agents, although we also market directly to consumers. We generally sell renewals directly to consumers. Our home warranty business currently operates in 39 states and the District of Columbia.

Corporate

The Company’s corporate function consists primarily of certain financing facilities as well as the corporate services that support our business operations.

Regulation

The title insurance business is heavily regulated in the United States by state insurance regulatory authorities and internationally by the applicable regulatory authorities. These authorities generally possess broad powers with respect to the licensing of title insurers, the types and amounts of investments that title insurers may make, insurance rates, forms of policies and the form and content of required annual statements, as well as the power to audit and examine title insurers. Under state laws, certain levels of capital and surplus must be maintained and certain amounts of securities must be segregated or deposited with appropriate state officials. Various state statutes require title insurers to defer a portion of all premiums in a reserve for the protection of policyholders and to segregate investments in a corresponding amount. Further, most states restrict the amount of dividends and distributions a title insurer may make to its stockholders.

Our property and casualty businesses are subject to regulation by state insurance regulators in the states in which they transact business. In order to issue policies on a direct basis in a state, the property and casualty insurer must generally be licensed by such state. In certain circumstances, such as placements through licensed surplus lines brokers, it may conduct business without being admitted and without being subject to rate and policy form approvals.

The nature and extent of regulation to which insurance companies are subject may vary from jurisdiction to jurisdiction, but typically involves prior approval of the acquisition of “control” of an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, the amount and payment of dividends by an insurance company, approval of premium rates and policy forms for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained.

Our home warranty business is subject to regulation in some states by insurance authorities or other applicable regulatory entities. Our federal savings bank and industrial bank are both subject to regulation by the Federal Deposit Insurance Corporation. In addition, our federal savings bank is regulated by the United States Department of the Treasury’s Office of Thrift Supervision. After July 21, 2011, it is anticipated that the federal savings bank will instead be regulated by the Office of the Comptroller of the Currency, with the Federal Reserve Board supervising its parent holding companies. The industrial bank is regulated by the California Department of Financial Institutions.

Investment Policies

Subject to oversight by our board of directors, the Company’s investment portfolio activities such as policy setting, compliance reporting, portfolio reviews, and strategy are overseen by an investment committee made up of certain senior executives. Additionally, the Company’s regulated subsidiaries, including title insurance underwriters, property and casualty insurance companies and banking entities, are required to establish and maintain an investment committee to oversee their own investment portfolios. The investment policy of each regulated subsidiary is designed to comply with regulatory requirements and to align the investment portfolio strategy with the entity’s strategic objectives. For example, our federal savings bank is required to maintain at least 65 percent of its asset portfolio in loans or securities that are secured by real estate. Our federal savings bank currently does not make real estate loans, and therefore fulfills this regulatory requirement predominately through investments in mortgage-backed securities. In addition, state laws impose certain restrictions upon the types and amounts of investments that may be made by our regulated insurance subsidiaries.

Pursuant to our investment policy, escrow and similar fiduciary funds are to be managed in a manner designed to ensure return of the principal to the underlying beneficiaries and, where appropriate, an investment return to the Company. The policy further provides that operating and investment funds are to be managed to balance earnings, liquidity, regulatory and risk objectives, and that investments should not expose the Company to excessive levels of credit risk, interest (including call, prepayment and extension) risk or liquidity risk.

As of December 31, 2010, our debt and equity investment securities portfolio consists of approximately 88 percent of fixed income securities. As of that date, over 72 percent of our fixed income investments are held in securities that are United States government-backed or rated AAA, and approximately 96 percent 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 and Moody’s published ratings. If a security was rated differently by both rating agencies, the lower of the two ratings was selected.

Our equity portfolio includes the CoreLogic common stock that was issued to us in connection with the Separation and which is further described in Note 18 Transactions with CoreLogic/TFAC to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of Part II of this report.

In addition to our debt and equity investment securities portfolio, we maintain certain money-market and other short-term investments. We also hold strategic equity investments in companies engaged in the title insurance and settlement services industries.

Employees

As of December 31, 2010, the Company employed 16,879 people on either a part-time or full-time basis. Of these employees, approximately 32% are employed outside of the United States.

Available Information

The Company maintains a website, www.firstam.com, which includes financial information and other information for investors, including open and closed title insurance orders (which typically are posted approximately 15 days after the end of each calendar month). The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the “Investors” page of the website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission. The Company’s website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K, or any other filing with the Securities and Exchange Commission unless the Company expressly incorporates such materials.

Item 1A. Risk Factors

You should carefully consider each of the following risk factors and the other information contained in this Annual Report on Form 10-K. The Company faces risks other than those listed here, including those that are unknown to the Company and others of which the Company may be aware but, at present, considers immaterial. Because of the following factors, as well as other variables affecting the Company’s operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

1. Conditions in the real estate market generally impact the demand for a substantial portion of the Company’s products and services

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

•

when mortgage interest rates are high or rising;

•

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

•

when real estate values are declining.

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

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

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

The Company performs an impairment test of the carrying value of goodwill and other indefinite-lived intangible assets annually in the fourth quarter or sooner if circumstances indicate a possible impairment. Finite-lived intangible assets are subject to impairment tests on a periodic basis. Factors that may be considered in connection with this review include, without limitation, underperformance relative to historical or projected future operating results, reductions in the Company’s stock price and market capitalization, increased cost of capital and negative macroeconomic, industry and company-specific trends. These and other factors could lead to a conclusion that goodwill or other intangible assets are no longer fully recoverable, in which case the Company would be required to write off the portion believed to be unrecoverable. Total goodwill and other intangible assets reflected on the Company’s consolidated balance sheet as of December 31, 2010 is approximately $0.9 billion. Any substantial goodwill and other intangible asset impairments that may be required could have a material adverse effect on the Company’s results of operations, financial condition and liquidity.

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

Certain of the Company’s customers use measurements of the financial strength of the Company’s title insurance underwriters, including, among others, ratings provided by ratings agencies and levels of statutory surplus maintained by those underwriters, in determining the amount of a policy they will accept and the amount of reinsurance required. Each of the major ratings agencies currently rates the Company’s title insurance operations. The Company’s principal title insurance underwriter’s financial strength ratings are “A3” by Moody’s, “A-” by Fitch, “BBB+” by Standard & Poor’s and “A-” by A.M. Best. These ratings provide the agencies’ perspectives on the financial strength, operating performance and cash generating ability of those operations. These agencies continually review these ratings and the ratings are subject to change. Statutory surplus, or the amount by which statutory assets exceed statutory liabilities, is also a measure of financial strength. The Company’s principal title insurance underwriter maintained approximately $854.6 million of statutory surplus capital as of December 31, 2010. The current minimum statutory surplus capital required to be maintained by California law is $500,000. Accordingly, if the ratings or statutory surplus of these title insurance underwriters are reduced from their current levels, or if there is a deterioration in other measures of financial strength, the Company’s results of operations, competitive position and liquidity could be adversely affected.

5. 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.

6. Changes in government regulation could prohibit or limit the Company’s operations or make it more burdensome to conduct such operations

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. 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. 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, New York, 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.

7. 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, has become 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 and federal laws. Departments of insurance in the various states, either separately or in conjunction with federal regulators and applicable regulators in international jurisdictions, also periodically conduct targeted inquiries into the practices of title insurance companies in their respective jurisdictions. Further, from time to time plaintiffs’ lawyers may target the Company and other members of the Company’s industry with lawsuits claiming legal violations or other wrongful conduct. These lawsuits may involve large groups of plaintiffs and claims for substantial damages. Any of these types of inquiries or proceedings may result in a finding of a violation of the law or other wrongful conduct and may result in the payment of fines or damages or the imposition of restrictions on the Company’s conduct which could impact its operations and financial condition. Moreover, these laws and standards of conduct often are ambiguous and, thus, it may be difficult to ensure compliance. This ambiguity may force the Company to mitigate its risk by settling claims or by ending practices that generate revenues, earnings and cash flows.

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. 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.

11. 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. Under such regulations, the maximum amount of dividends, loans and advances available in 2011 from these insurance subsidiaries is $194.3 million.

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

The Company is responsible for the obligations of its defined benefit pension plan, which it assumed from its former parent, The First American Corporation, on June 1, 2010 in connection with the spin-off transaction which was consummated on that date. The plan was closed to new entrants effective December 31, 2001 and amended to “freeze” all benefit accruals as of April 30, 2008. The Company’s future funding obligations for this plan depend, among other factors, upon the future performance of assets held in trust for the plan. The pension plan was underfunded as of December 31, 2010 by approximately $108.4 million and the Company may need to make significant contributions to the plan. In addition, pension expenses and funding requirements may also be greater than currently anticipated if the market values of the assets held by the pension plan decline or if the other assumptions regarding plan earnings and expenses require adjustment. On June 1, 2010, CoreLogic, Inc. issued a $19.9 million promissory note to the Company which approximated the unfunded portion of the liability attributable to the plan participants that were employed in the information solutions group of The First American Corporation. There is no guarantee that CoreLogic, Inc. will fulfill its obligation under the note or that the amount of the note will be sufficient to ultimately cover the unfunded portion of the liability attributable to these employees. The Company’s obligations under this plan could have a material adverse effect on its results of operations, financial condition and liquidity.

13. Weakness in the commercial real estate market or an increase in the amount or severity of claims in connection with commercial real estate transactions could adversely affect the Company’s results of operations

The Company issues title insurance policies in connection with commercial real estate transactions. Premiums paid and limits on these policies are large relative to policies issued on residential transactions. Because a claim under a single policy could be significant, title insurers often seek reinsurance or coinsurance from other insurance companies, both within and outside the industry. The Company both receives and provides such coverage. Additionally, the pretax margin derived from these policies generally is higher than on other policies. Disruptions in the commercial real estate market, including limitations on available credit and defaults on loans secured by commercial real estate, may result in a decrease in the number of commercial policies issued by the Company and/or an increase in the number of claims it incurs on commercial policies. As a reference, commercial premiums earned by the Company in 2009 decreased nearly 50 percent compared with the amount earned in 2006. A further decrease in the number of commercial policies issued by the Company or an increase in the amount or severity of claims it incurs on commercial policies could adversely affect the Company’s results of operations.

14. Actual claims experience could materially vary from the expected claims experience reflected in the Company’s reserve for incurred but not reported (“IBNR”) title claims

Title insurance policies are long-duration contracts with the majority of the claims reported within the first few years following the issuance of the policy. Generally, 70 to 80 percent of claim amounts become known in the first five years of the policy life, and the majority of IBNR reserves relate to the five most recent policy years. A material change in expected ultimate losses and corresponding loss rates for policy years older than five years, while possible, is not considered reasonably likely. However, changes in expected ultimate losses and corresponding loss rates for recent policy years are considered likely and could result in a material adjustment to the IBNR reserves. Based on historical experience, management believes a 50 basis point change to the loss rates for the most recent policy years, positive or negative, is believed to be reasonably likely given the long duration nature of a title insurance policy. For example, if the expected ultimate losses for each of the last five 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 $105.1 million. The estimates made by management in determining the appropriate level of IBNR reserves could ultimately prove to be inaccurate and actual claims experience may vary from the expected claims experience.

15. Systems interruptions and intrusions may impair the delivery of the Company’s products and services

System interruptions and intrusions may impair the delivery of the Company’s products and services, resulting in a loss of customers and a corresponding loss in revenue. The Company’s businesses depend heavily upon computer systems located in its data centers. Certain events beyond the Company’s control, including natural disasters, telecommunications failures and intrusions into the Company’s systems by third parties could temporarily or permanently interrupt the delivery of products and services. These interruptions also may interfere with suppliers’ ability to provide necessary data and employees’ ability to attend work and perform their responsibilities.

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

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

17. 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.

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

Many of the Company’s customers are increasing in size as a result of consolidation or the failure of their competitors. For example, the Company believes that three lenders collectively originate more than 50 percent of mortgage loans in the United States. As a result, the Company may derive a higher percentage of its revenues from a smaller base of customers, which would enhance the negotiating power of these customers with respect to the pricing and the terms on which these customers purchase the Company’s products and other matters. Moreover, these larger customers may prove more capable of performing in-house some or all of the services the Company provides or, with respect to the Company’s title insurance products, more willing to assume the risk of title defects themselves and, consequently, the demand for the Company’s products and services may decrease. These circumstances could adversely affect the Company’s revenues and profitability. Changes in the Company’s relationship with any of these customers, the loss of all or a portion of the business the Company derives from these customers or any refusal of these customers to accept the Company’s policies could have a material adverse effect on the Company.

19. 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.

20. 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 and asset-backed securities) and, as of December 31, 2010, $239.5 million in common stock of CoreLogic that was issued to the Company in connection with its spin-off separation from CoreLogic. The investment portfolio also includes money-market and other short-term investments, as well as some preferred and other common stock. Securities in the Company’s investment portfolio are subject to certain economic and financial market risks, such as credit risk, interest rate (including call, prepayment and extension) risk and/or liquidity risk. Because a substantial proportion of the portfolio consists of the common stock of a single issuer, CoreLogic, the risk of loss in the portfolio also is impacted by factors that influence the value of

CoreLogic’s stock, including, but not limited to, CoreLogic’s financial results and the market’s perception of CoreLogic’s and its industry’s prospects. Additionally, the risk of loss associated with the portfolio is increased during periods, such as the present period, of instability in credit markets and economic conditions. If the carrying value of the investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, the Company will be required to write down the value of the investments, which could have a material adverse effect on the Company’s results of operations, statutory surplus and financial condition.

21. The Company could have conflicts with CoreLogic

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We maintain our executive offices at MacArthur Place in Santa Ana, California. In 2005, The First American Corporation expanded its three-building office campus through the addition of two four-story office buildings totaling approximately 226,000 square feet, a two-story, free standing, 52,000 square foot technology center and a two-story parking structure, bringing the total square footage to approximately 490,000 square feet. The original three office buildings, totaling approximately 210,000 square feet, and the fixtures thereto and underlying land, are subject to a deed of trust and security agreement securing payment of a promissory note evidencing a loan made in October 2003, to our principal title insurance subsidiary in the original sum of $55.0 million. This loan is payable in monthly installments of principal and interest, is fully amortizing and matures November 1, 2023. The outstanding principal balance of this loan was $41.7 million as of December 31, 2010. Our title insurance subsidiary owns and operates these properties, and leases approximately 106,956 square feet within one of the buildings to CoreLogic for its executive offices pursuant to a lease that was entered into in connection with the separation. The technology center referred to above is primarily utilized and maintained by the Company but also houses physically segregated servers belonging to CoreLogic which are maintained by CoreLogic.

One of our subsidiaries in the title insurance and services segment leases an aggregate of approximately 134,000 square feet of office space in four buildings of the International Technology Park in Bangalore, India. Five of the six leases associated with this space expire in 2012 and the sixth is currently a month-to-month lease. We have the option to terminate all of the leases in the International Technology Park in 2011.

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

Item 3. Legal Proceedings

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

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

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

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

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

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

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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,

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

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Hickman v. First American Title Insurance Company, filed on May 25, 2007 and pending in the United States District Court for the District of Ohio,

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

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Lang v. First American Title Insurance Company of New York, filed on January 11, 2008 and pending in the United States District Court for the Western District of New York,

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

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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,

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

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Scott v. First American Title Insurance Company, filed on March 7, 2007 and pending in the United States District Court for the Eastern District of Kentucky,

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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 and

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Tello v. First American Title Insurance Company, filed on July 14, 2009 and pending in the United States District Court for the District of New Hampshire.

All of these lawsuits are putative class actions. A court has granted class certification only in Campbell, Hamilton (North Carolina), Hamilton (Texas), Johnson, Lewis, Raffone and Slapikas. An appeal to a higher court is pending with respect to the granting of class certification in Hamilton (Texas) and a motion to decertify the class in Campbell is pending. 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, gave items of value to title insurance agents and others for referrals of business and paid marketing fees to real estate brokers as an inducement to refer home warranty 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,

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

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Paul v. First American Home Buyers Protection Corporation, filed on July 29, 2010 and pending in the United States District Court, Middle District of Florida, Ft. Myers Division and

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Zaldana v. First American Financial Corporation, et al., filed on July 15, 2008 and pending in the United States District Court for the Northern District of California.

All of these lawsuits are putative class actions for which a class has not been certified, except in Edwards. In Edwards a narrow class has been certified and information is being exchanged for the purpose of enabling the plaintiff to argue whether a broader class is appropriate. In addition, a petition for a hearing on the legal right of the Edwards plaintiff to sue is pending in the United States Supreme Court. 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

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Barton v. First American Title Insurance Company, et al, filed March 10, 2008 and pending in the United States District Court for the Northern District of California,

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

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

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

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

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

•

engaged in the unauthorized practice of law, including

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

Both of these lawsuits are putative class actions for which a class has not been certified. Consequently, for the reasons described above, the Company has not yet been able to assess the probability 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

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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,

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

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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,

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Diaz v. First American Home Buyers Protection Corporation, filed on March 10, 2009 and pending in the United States District Court for the Southern District of California,

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Diehl v. First American Title Insurance Company, et al., filed on December 11, 2009 and pending in the United States District Court for the District of Montana,

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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,

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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,

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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,

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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,

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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,

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

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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.

While some of the lawsuits described above may be material to our 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.

Additionally, on March 5, 2010, Bank of America, N.A. filed a complaint in the North Carolina General Court of Justice, Superior Court Division against United General Title Insurance Company and First American Title Insurance Company. The plaintiff alleges that the defendants failed to pay or failed to timely respond to certain claims made on title insurance policies issued in connection with home equity loans or lines of credit that are now in default. According to the complaint, these title insurance policies, which did not require a title search, were intended to protect against the risks of certain defects in the title to real property, including undisclosed intervening liens, vesting problems and legal description errors, that would have been discovered if the plaintiff had conducted a full title search. As indicated in the complaint, Fiserv Solutions, Inc. (“Fiserv”), as agent for the defendants, was authorized to issue certificates evidencing that a given loan was insured. The complaint also indicates that plaintiff was required to satisfy certain criteria before title would be insured. This involved (a) reviewing borrower statements to the lender when applying for the loan, (b) reviewing the borrower’s credit report and (c) addressing secured mortgages appearing on the credit report which did not appear on the borrower’s loan application. The plaintiff alleges that the failure to pay or timely respond to the subject claims was done in bad faith and constitutes a breach of the title insurance policies issued to the plaintiff. The plaintiff is seeking monetary damages, punitive damages where permitted, treble damages where permitted, attorneys fees and costs where permitted, declaratory judgment and pre-judgment and post-judgment interest.

On April 1, 2010, the Company filed an answer to Bank of America’s complaint and filed a third party complaint within the same litigation against Fiserv for breach of contract, indemnification and other matters. The Company’s agreement with Fiserv required Fiserv, among other things, to ensure that the Company’s policies were issued in accordance with prudent practices, to refrain from issuing the Company’s policies unless it had determined the product could be properly issued in accordance with the Company’s standards and to provide reasonable assistance in claims handling. The agreement also required Fiserv to indemnify the Company for certain losses, including losses resulting from Fiserv’s failure to comply with its agreement with the Company or with Company instructions or from its negligence or misconduct.

As indicated above, this lawsuit pertains to claims on title insurance policies issued by the defendants. The Company provides for title insurance losses through a known claims reserve and an incurred but not reported (“IBNR”) claims reserve (for a discussion of the Company’s reserve for known and IBNR claims, see Note 1 Description of the Company and Note 9 Reserve for Known and Incurred But Not Reported Claims to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of Part II of this report). A portion of the known claims reserve is attributable to certain of the claims that are the subject of this lawsuit and a portion of the IBNR claims reserve is attributable to the title insurance products that are the subject of the lawsuit and similar products issued to others. The ultimate outcome of this lawsuit is subject to a number of uncertainties, including the amount of responsibility that a court may apportion to Fiserv, whether a court determines that the defendants are entitled to certain documents requested as part of the claims submission process, the contents of those documents and whether a court interprets the title insurance policies that are the subject of the lawsuit in a manner consistent with the Company’s understanding. As a result of this uncertainty, it is currently not possible to estimate whether the loss or range of loss is greater than the amount of the known claims reserve and the IBNR claims reserve attributable to the claims that are the subject of this lawsuit. If this uncertainty is resolved in a manner that is unfavorable to the Company, the ultimate resolution of this lawsuit could have a material adverse effect on the Company’s financial condition, results of operations, cash flows or liquidity.

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

The Company’s title insurance, property and casualty insurance, home warranty, thrift, trust and investment advisory businesses are regulated by various federal, state and local governmental agencies. Many of the Company’s other businesses operate within statutory guidelines. Consequently, the Company may from time to time be subject to audit or investigation by such governmental agencies. Currently, governmental agencies are auditing or investigating certain of the Company’s operations. These audits or investigations include inquiries into, among other matters, pricing and rate setting practices in the title insurance industry, competition in the title insurance industry, title insurance customer acquisition and retention practices and agency relationships. With respect to matters where the Company has determined that a loss is both probable and reasonably estimable, the Company has recorded a liability representing its best estimate of the financial exposure based on known facts. While the ultimate disposition of each such audit or investigation is not yet determinable, the Company does not believe that individually or in the aggregate they will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. These audits or investigations could, however, result in changes to the Company’s business practices which could ultimately have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

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

Item 4. [Removed and Reserved]

PART II

Item 5.

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

Common Stock Market Prices and Dividends

The Company’s common stock trades on the New York Stock Exchange (ticker symbol FAF). The approximate number of record holders of common stock on February 18, 2011, was 3,075.

High and low stock prices and dividends declared for June 2 through June 30, 2010, and for the third and fourth quarters of 2010 are set forth in the table below. June 2, 2010 was the first day that the Company’s common stock traded regular way on the New York Stock Exchange following the Company’s spin-off separation from The First American Corporation on June 1, 2010.


	2010
Period	High-low range		Cash dividends
June 2—June 30, 2010	$	12.31-$14.48	$	0.06
Quarter Ended September 30	$	12.65-$15.66	$	0.06
Quarter Ended December 31	$	13.62-$15.17	$	0.06

We expect that the Company will continue to pay quarterly cash dividends at or above the historical levels reflected in the table above. The timing, declaration and payment of future dividends, however, falls within the discretion of the Company’s board of directors and will depend upon many factors, including the Company’s financial condition and earnings, the capital requirements of our businesses, industry practice, restrictions imposed by applicable law and any other factors the board of directors deems relevant from time to time. In addition, the ability to pay dividends also is potentially affected by the restrictions described in Note 2 Statutory Restrictions on Investments and Stockholders’ Equity to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of Part II of this report.

Unregistered Sales of Equity Securities

During the year ended December 31, 2010, the Company did not issue any unregistered common stock.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the quarter ended December 31, 2010, the Company did not purchase any of the Company’s common stock.

Stock Performance Graph

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

The following graph compares the cumulative total stockholder return on the Company’s common stock with the corresponding cumulative total returns of the Russell 2000 Financial Services Index and a peer group index for the period from June 2, 2010, the first day the Company’s common stock traded in the regular way market on the New York Stock Exchange, through December 31, 2010. The comparison assumes an investment of $100 on June 2, 2010 and reinvestment of dividends. This historical performance is not indicative of future performance.

LOGO

Comparison of Cumulative Total Return


	First American Financial Corporation (FAF) (1)		Custom Peer Group (1)(2)		Russell 2000 Financial Services Index (1)
June 2, 2010	$	100	$	100	$	100
December 31, 2010	$	104	$	105	$	112

(1)	As calculated by Bloomberg Financial Services, to include reinvestment of dividends.

(2)

The peer group consists of the following companies: American Financial Group, Inc.; Assurant, Inc.; Cincinnati Financial Corporation; Fidelity National Financial, Inc.; The Hanover Insurance Group, Inc.; Lender Processing Services, Inc.; Mercury General Corporation; Old Republic International Corp.; Unitrin, Inc.; White Mountains Insurance Group Ltd., and W.R. Berkley Corporation each of which operates in a business similar to a business operated by the Company. The compensation committee of the Company utilizes the compensation practices of these companies as benchmarks in setting the compensation of its executive officers.

Item 6. Selected Financial Data

The selected historical consolidated financial data for First American Financial Corporation (the “Company”) for the five-year period ended December 31, 2010, have been derived from the Company’s consolidated financial statements presented in Item 8. The selected historical consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, “Item 1—Business,” and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company became a publicly traded company in connection with its spin-off from its prior parent, The First American Corporation (“TFAC”), on June 1, 2010 (the “Separation”). The Company’s historical financial statements prior to June 1, 2010 have been derived from the consolidated financial statements of TFAC and represent carve-out stand-alone combined financial statements. The combined financial statements prior to June 1, 2010 include items attributable to the Company and allocations of general corporate expenses from TFAC. As a result, the Company’s selected historical consolidated financial data prior to June 1, 2010 do not necessarily reflect what its financial position or results of operations would have been if it had been operated as a stand-alone public entity during the periods covered prior to June 1, 2010, and may not be indicative of the Company’s future results of operations and financial position. See Note 1 Description of the Company to the consolidated financial statements for further discussion of the Separation and basis of presentation.

First American Financial Corporation and Subsidiary Companies


	Year Ended December 31
	2010			2009			2008			2007			2006
	(in thousands, except percentages, per share amounts and employee data)
Revenues	$	3,906,612		$	4,046,834		$	4,367,725		$	6,076,132		$	6,685,587
Net income (loss)	$	128,956		$	134,277		$	(72,482	)	$	(122,446	)	$	213,692
Net income attributable to noncontrolling interests	$	1,127		$	11,888		$	11,523		$	20,537		$	23,875
Net income (loss) attributable to the Company	$	127,829		$	122,389		$	(84,005	)	$	(142,983	)	$	189,817
Total assets	$	5,821,826		$	5,530,281		$	5,720,757		$	5,354,531		$	5,658,505
Notes and contracts payable	$	293,817		$	119,313		$	153,969		$	306,582		$	372,338
Allocated portion of TFAC debt (Note A)	$	—		$	140,000		$	140,000		$	—		$	—
Stockholders’ equity or TFAC’s invested equity (Note B)	$	1,993,721		$	2,019,800		$	1,891,841		$	1,930,774		$	2,564,369
Return on average stockholders’ equity or TFAC’s invested equity		6.4	%		6.3	%		(4.4	)%		(6.4	)%		7.4	%
Dividends on common shares (Note C)	$	18,553		$	—		$	—		$	—		$	—
Per share of common stock (Note D)— Net income (loss) attributable to the Company:
Basic	$	1.23		$	1.18		$	(0.81	)	$	(1.37	)	$	1.83
Diluted	$	1.20		$	1.18		$	(0.81	)	$	(1.37	)	$	1.83
Stockholders’ equity or TFAC’s invested equity	$	19.09		$	19.42		$	18.19		$	18.56		$	24.66
Cash dividends	$	0.18		$	—		$	—		$	—		$	—
Number of common shares outstanding (Note E)— Weighted average during the year:
Basic		104,134			104,006			104,006			104,006			104,006
Diluted		106,177			104,006			104,006			104,006			104,006
End of year		104,457			104,006			104,006			104,006			104,006
Other Operating Data (unaudited):
Title orders opened (Note F)		1,458			1,769			1,782			2,221			2,366
Title orders closed (Note F)		1,067			1,305			1,237			1,538			1,738
Number of employees (Note G)		16,879			13,963			15,147			19,783			23,418

Note A—Prior to the Separation, a portion of TFAC’s combined debt, in the amount of $140.0 million, was allocated to the Company based on amounts directly incurred for the Company’s benefit. In connection with the Separation, the Company borrowed $200.0 million under its revolving credit facility and transferred such funds to CoreLogic, which fully satisfied the Company’s $140.0 million allocated portion of TFAC debt

Note B—Stockholders’ equity refers to the stockholders of the Company and excludes noncontrolling interests. TFAC’s invested equity refers to the net assets of the Company which reflects TFAC’s investment in the Company prior to the Separation and excludes noncontrolling interests.

Note C—The Company did not declare dividends prior to the Separation as it was not a stand-alone publicly traded company until the Separation.

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

Note E—Number of common shares outstanding for the current year and prior years was computed using the number of shares of common stock outstanding immediately following the Separation, as if such shares were outstanding for the entire period prior to the Separation.

Note F—Title order volumes are those processed by the direct domestic title operations of the Company and do not include orders processed by agents. Prior years title order volumes have been reclassified to conform to the 2010 presentation. See Note 1 Description of the Company to the consolidated financial statements for further discussion of this change in presentation.

Note G—Number of employees is based on actual employee headcount. The increase in headcount in 2010 is due to certain offshore functions that prior to the Separation were performed by TFAC being performed internally by the Company following the Separation. This increase in headcount is substantially related to employees employed outside of the United States.

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

This Management’s Discussion and Analysis contains certain financial measures, in particular presentation of certain balances excluding the impact of non-recurring items, that are not presented in accordance with generally accepted accounting principles (“GAAP”). The Company is presenting these non-GAAP financial measures because they provide the Company’s management and readers of the Annual Report on Form 10-K with additional insight into the operational performance of the Company relative to earlier periods and relative to the Company’s competitors. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. Readers of this Annual Report on Form 10-K should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures.

Spin-off

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 owns TFAC’s financial services businesses and TFAC, which reincorporated and assumed the name CoreLogic, Inc. (“CoreLogic”), continues to own its information solutions businesses. The Company’s common stock trades on the New York Stock Exchange under the “FAF” ticker symbol and CoreLogic’s common stock trades on the New York Stock Exchange under the ticker symbol “CLGX.”

To effect the Separation, TFAC and the Company entered into a Separation and Distribution Agreement (the “Separation and Distribution Agreement”) that governs the rights and obligations of the Company and CoreLogic regarding the Distribution. It also governs the relationship between the Company and CoreLogic subsequent to the completion of the Separation and provides for the allocation between the Company and CoreLogic of TFAC’s assets and liabilities. The Separation and Distribution Agreement identifies assets, liabilities and contracts that were allocated between CoreLogic and the Company as part of the Separation and describes the transfers, assumptions and assignments of these assets, liabilities and contracts. In particular, the Separation and Distribution Agreement provides that, subject to the terms and conditions contained therein:

•

All of the assets and liabilities primarily related to the Company’s business—primarily the business and operations of TFAC’s title insurance and services segment and specialty insurance segment—have been retained by or transferred to the Company;

•

All of the assets and liabilities primarily related to CoreLogic’s business—primarily the business and operations of TFAC’s data and analytic solutions, information and outsourcing solutions and risk mitigation and business solutions segments—have been retained by or transferred to CoreLogic;

•

On the record date for the Distribution, TFAC issued to the Company and its principal title insurance subsidiary, First American Title Insurance Company (“FATICO”), a number of shares of its common stock that resulted in the Company and FATICO collectively owning 12.9 million shares of CoreLogic’s common stock immediately following the Separation. See Note 18 Transactions with CoreLogic/TFAC to the consolidated financial statements for further discussion of the CoreLogic stock;

•

The Company effectively assumed $200.0 million of the outstanding liability for indebtedness under TFAC’s senior secured credit facility through the Company’s borrowing and transferring to CoreLogic of $200.0 million under the Company’s credit facility in connection with the Separation. See Note 10 Notes and Contracts Payable to the consolidated financial statements for further discussion of the Company’s credit facility.

The Separation resulted in a net distribution from the Company to TFAC of $156.6 million. In connection with such distribution, the Company assumed $22.1 million of accumulated other comprehensive loss, net of tax, which was primarily related to the Company’s assumption of the unfunded portion of the defined benefit pension obligation associated with participants who were employees of the businesses retained by CoreLogic. See Note 14 Employee Benefit Plans to the consolidated financial statements for additional discussion of the defined benefit pension plan.

Principles of Combination and Basis of Presentation

The Company’s historical financial statements prior to June 1, 2010 have been prepared in accordance with generally accepted accounting principles and have been derived from the consolidated financial statements of TFAC and represent carve-out stand-alone combined financial statements. The combined financial statements prior to June 1, 2010 include items attributable to the Company and allocations of general corporate expenses from TFAC.

The Company’s historical financial statements prior to June 1, 2010 include assets, liabilities, revenues and expenses directly attributable to the Company’s operations. The Company’s historical financial statements prior to June 1, 2010 reflect allocations of corporate expenses from TFAC for certain functions provided by TFAC, including, but not limited to, general corporate expenses related to finance, legal, information technology, human resources, communications, compliance, facilities, procurement, employee benefits, and share-based compensation. These expenses have been allocated to the Company on the basis of direct usage when identifiable, with the remainder allocated on the basis of net revenue, domestic headcount or assets or a combination of such drivers. The Company considers the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by the Company during the periods presented. The Company’s historical financial statements prior to June 1, 2010 do not reflect the debt or interest expense it might have incurred if it had been a stand-alone entity. In addition, the Company expects to incur other expenses, not reflected in its historical financial statements prior to June 1, 2010, as a result of being a separate publicly traded company. As a result, the Company’s historical financial statements prior to June 1, 2010 do not necessarily reflect what its financial position or results of operations would have been if it had been operated as a stand-alone public entity during the periods covered prior to June 1, 2010, and may not be indicative of the Company’s future results of operations and financial position.

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and reflect the consolidated operations of the Company as a separate, stand-alone publicly traded company subsequent to June 1, 2010. The consolidated financial statements include the accounts of First American Financial Corporation and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments in which the Company exercises significant influence, but does not control and is not the primary beneficiary, are accounted for using the equity method. Investments in which the Company does not exercise significant influence over the investee are accounted for under the cost method.

Reportable Segments

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

•

The Company’s title insurance and services segment issues title insurance policies on residential and commercial property in the United States and offers similar 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 similar products, as well as related services, either directly or through joint ventures in foreign countries, including Canada, the United Kingdom and various other established and emerging markets.

•

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.

Critical Accounting Policies and Estimates

The Company’s management considers the accounting policies described below to be critical in preparing the Company’s consolidated financial statements. These policies require management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures of contingencies. See Note 1 Description of the Company to the consolidated financial statements for a more detailed description of the Company’s accounting policies.

R evenue recognition. Title premiums on policies issued directly by the Company are recognized on the effective date of the title policy and escrow fees are recorded upon close of the escrow. Revenues from title policies issued by independent agents are recorded when notice of issuance is received from the agent, which is generally when cash payment is received by the Company. Revenues earned by the Company’s title plant management business are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.

Direct premiums of the Company’s specialty insurance segment include revenues from home warranty contracts which are recognized ratably over the 12-month duration of the contracts, and revenues from property and casualty insurance policies which are also recognized ratably over the 12-month duration of the policies.

Interest on loans of the Company’s thrift subsidiary is recognized on the outstanding principal balance on the accrual basis. Loan origination fees and related direct loan origination costs are deferred and recognized over the life of the loan. Revenues earned by the other products in the Company’s trust and banking operations are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.

Provision for policy losses. The Company provides for title insurance losses by a charge to expense when the related premium revenue is recognized. The amount charged to expense is generally determined by applying a rate (the loss provision rate) to total title insurance premiums and escrow fees. The Company’s management estimates the loss provision rate at the beginning of each year and reassesses the rate quarterly to ensure that the resulting incurred but not reported (“IBNR”) loss reserve and known claims reserve included in the Company’s consolidated balance sheets together reflect management’s best estimate of the total costs required to settle all IBNR and known claims. If the ending IBNR reserve is not considered adequate, an adjustment is recorded.

The process of assessing the loss provision rate and the resulting IBNR reserve involves evaluation of the results of both an in-house actuarial review and independent actuarial analysis. The Company’s in-house actuary performs a reserve analysis utilizing generally accepted actuarial methods that incorporate cumulative historical claims experience and information provided by in-house claims and operations personnel. Current economic and business trends are also reviewed and used in the reserve analysis. These include real estate and mortgage markets conditions, changes in residential and commercial real estate values, and changes in the levels of defaults and foreclosures that may affect claims levels and patterns of emergence, as well as any company-specific factors that may be relevant to past and future claims experience. Results from the analysis include, but are not limited to, a range of IBNR reserve estimates and a single point estimate for IBNR as of the balance sheet date.

For recent policy years at early stages of development (generally the last three years), IBNR is estimated by applying an expected loss rate to total title insurance premiums and escrow fees and adjusting for policy year maturity using the estimated loss development patterns. The expected loss rate and patterns are based on historical experience and the relationship of the history to the applicable policy years. This is a generally accepted actuarial method of determining IBNR for policy years at early development ages. IBNR calculated in this way differs from

the IBNR a multiplicative loss development factor calculation would produce. Factor-based development effectively extrapolates results to date forward through the lifetime of the policy year’s development.

For more mature policy years (generally, policy years aged more than three years), IBNR is estimated using multiplicative loss development factor calculations. These years were exposed to adverse economic conditions during 2007-2010 that may have resulted in acceleration of claims and one-time losses. The possible extrapolation of these losses to future development periods by using factors was considered. The impact of economic conditions during 2007-2010 is believed to account for a much less significant portion of losses on policy years 2004 and prior than on more recent policy years. Policy years 2004 and prior were at relatively mature ages when the adverse development period began in 2007, and much of their losses had already been incurred by then. In addition, the loss development factors for policy years 2007 and prior are low enough that the potential for over-extrapolation is limited to an acceptable level.

The Company utilizes an independent third party actuary who produces a report with estimates and projections of the same financial items described above. The third party actuary’s analysis uses generally accepted actuarial methods that may in whole or in part be different from those used by the in-house actuary. The third party actuary’s report is used to validate the reasonableness of the in-house analysis.

The Company’s management uses the IBNR point estimate from the in-house actuary’s analysis and other relevant information it may have concerning claims to determine what it considers to be the best estimate of the total amount required for the IBNR reserve.

Title insurance policies are long-duration contracts with the majority of the claims reported to the Company within the first few years following the issuance of the policy. Generally, 70 to 80 percent of claim amounts become known in the first five years of the policy life, and the majority of IBNR reserves relate to the five most recent policy years. A material change in expected ultimate losses and corresponding loss rates for policy years older than five years, while possible, is not considered reasonably likely by the Company. However, changes in expected ultimate losses and corresponding loss rates for recent policy years are considered likely and could result in a material adjustment to the IBNR reserves. Based on historical experience, the Company believes that a 50 basis point change to one or more of 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. If the expected ultimate losses for each of the last five policy years increased or decreased by 50 basis points, the resulting impact on the IBNR reserve would be an increase or decrease, as the case may be, of $105.1 million. The estimates made by management in determining the appropriate level of IBNR reserves could ultimately prove to be inaccurate and actual claims experience may vary from expected claims experience.

The Company provides for property and casualty insurance losses when the insured event occurs. The Company provides for claims losses relating to its home warranty business based on the average cost per claim as applied to the total of new claims incurred. The average cost per home warranty claim is calculated using the average of the most recent 12 months of claims experience.

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


(in thousands except percentages)	December 31, 2010				December 31, 2009
Known title claims	$	192,268	17.4	%	$	206,439	16.8	%
IBNR		875,627	79.0	%		978,854	79.7	%

Total title claims		1,067,895	96.4	%		1,185,293	96.5	%
Non-title claims		40,343	3.6	%		42,464	3.5	%

Total loss reserves	$	1,108,238	100.0	%	$	1,227,757	100.0	%

Fair Value of Investment Portfolio. The Company classifies the fair value of its debt and equity securities using a three-level hierarchy for fair value measurements that distinguishes between market participant

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

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

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

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

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

Fair value of debt securities

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

Typical inputs and assumptions to pricing models used to value the Company’s U.S. Treasury bonds, municipal bonds, foreign bonds, governmental agency bonds, governmental agency mortgage-backed securities 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 and asset-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 and asset-backed securities was obtained from the independent pricing service referenced above and subject to the Company’s validation procedures discussed above. However, due to the fact that these securities were not actively traded, there was less observable inputs available requiring the pricing service to use more judgment in determining the fair value of the securities, therefore the Company classified non-agency mortgage-backed and asset-backed securities as Level 3.

Other-than-temporary impairment–debt securities

If the Company intends to sell a debt security in an unrealized loss position or determines that it is more likely than not that the Company will be required to sell a debt security before it recovers its amortized cost basis, the debt security is other-than-temporarily impaired and it is written down to fair value with all losses recognized in earnings. As of December 31, 2010, the Company does not intend to sell any debt securities in an unrealized loss position and it is not more likely than not that the Company will be required to sell debt securities before recovery of their amortized cost basis.

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

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

The table below summarizes the primary assumptions used at December 31, 2010 in estimating the cash flows expected to be collected for these securities.


	Weighted average			Range
Prepayment speeds		7.8	%		4.4%—13.0%
Default rates		6.3	%		0.2%—18.4%
Loss severity		39.0	%		0.3%—61.0%

Fair value of equity securities

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

Other-than-temporary impairment–equity securities

When, in the opinion of management, a decline in the fair value of an equity security (including common and preferred stock) and, prior to the first quarter of 2009, a debt security is considered to be other-than-temporary, such 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 and duration 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 what evidence, if any, exists to support that the security will recover its value in the foreseeable future, typically within the next twelve months. If objective, substantial evidence does not indicate a likely recovery during that timeframe, the Company’s policy is that such losses are considered other-than-temporary and therefore an impairment loss is recorded.

Impairment testing for goodwill and other indefinite-lived intangible assets. The Company is required to perform an annual impairment test for goodwill and other indefinite-lived intangible assets for each reporting unit. This annual test, which the Company has elected to perform every fourth quarter, utilizes a variety of valuation techniques, all of which require it to make estimates and judgments. Fair value is determined by employing an expected present value technique, which utilizes multiple cash flow scenarios that reflect a range of possible outcomes and an appropriate discount rate. The use of comparative market multiples (the “market approach”) compares the reporting unit to other comparable companies (if such comparables are present in the marketplace) based on valuation multiples to arrive at a fair value. The Company also uses certain of these valuation techniques in accounting for business combinations, primarily in the determination of the fair value of acquired assets and liabilities. In assessing the fair value, the Company utilizes the results of the valuations (including the market approach to the extent comparables are available) and considers the range of fair values determined under all methods and the extent to which the fair value exceeds the book value of the equity. The Company’s four reporting units are title insurance, home warranty, property and casualty insurance and trust and other services. The Company’s policy is to perform an annual impairment test for each reporting unit in the fourth quarter or sooner if circumstances indicate a possible impairment.

Management’s impairment testing process includes two steps. The first step (“Step 1”) compares the fair value of each reporting unit to its book value. The fair value of each reporting unit is determined by using discounted cash flow analysis and market approach valuations. If the fair value of the reporting unit exceeds its book value, the goodwill is not considered impaired and no additional analysis is required. However, if the book value is greater than the fair value, a second step (“Step 2”) must be completed to determine if the fair value of the goodwill exceeds the book value of the goodwill.

Step 2 involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment loss is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.

The valuation of goodwill requires assumptions and estimates of many critical factors including revenue growth rates and operating margins, discount rates and future market conditions, determination of market multiples and the establishment of a control premium, among others. Forecasts of future operations are based, in part, on operating results and the Company’s expectations as to future market conditions. These types of analyses contain uncertainties because they require the Company to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. However, if actual results are not consistent with the Company’s estimates and assumptions, the Company may be exposed to future impairment

losses that could be material. The Company completed the required annual impairment testing for goodwill and other finite-lived intangible assets for the years ended December 31, 2010 and 2009, in the fourth quarter of each year. In 2010 and 2009, management concluded that, based on its assessment of the reporting units’ operations, the markets in which the reporting units operate and the long-term prospects for those reporting units that the more likely than not threshold for decline in value had not been met and that therefore no triggering events requiring an earlier analysis had occurred.

Impairment testing for long-lived assets. Management uses estimated future cash flows (undiscounted and excluding interest) to measure the recoverability of long-lived assets held and used, including intangible assets with finite lives, whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable. At such time impairment in value of a long-lived asset is identified, the impairment is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.

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

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

Depreciation and amortization lives for assets. Management is required to estimate the useful lives of several asset classes, including capitalized data, internally developed software and other intangible assets. The estimation of useful lives requires a significant amount of judgment related to matters such as future changes in technology, legal issues related to allowable uses of data and other matters.

Share-based compensation. The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The cost is recognized over the period during which an employee is required to provide services in exchange for the award. As stock-based compensation expense recognized in the results of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company applies the long-form method for determining the pool of windfall tax benefits.

The Company’s primary means of share-based compensation is granting restricted stock units (“RSUs”). The fair value of a RSU grant is generally based on the market value of the Company’s shares on the date of grant and is generally recognized as compensation expense over the vesting period. RSUs granted to certain key employees have graded vesting and have a service and performance requirement and are therefore expensed using the accelerated multiple-option method to record share-based compensation expense. In addition, other RSUs granted to certain executive officers have a service and market requirement and are therefore expensed using the graded-vesting method to record share-based compensation expense. Due to the existence of the market requirement, the Company calculates the fair value on grant date using a Monte-Carlo Simulation to simulate a range of possible future stock prices for the Company. All other RSU awards have graded vesting and service is the only requirement to vest in the award and are therefore generally expensed using the straight-line single

option method to record share-based compensation expense. RSUs receive dividend equivalents in the form of RSUs having the same vesting requirements as the RSUs initially granted.

In accordance with the modified prospective method, the Company used the Black-Scholes option-pricing model for all unvested stock options as of December 31, 2005. The Company used the binomial lattice option-pricing model to estimate the fair value for any options granted after December 31, 2005. The Company utilizes the straight-line single option method of attributing the value of share-based compensation expense unless another expense attribution model is required by the guidance.

In addition to RSUs and stock options, the Company has an employee stock purchase plan that allows eligible employees to purchase common stock of the Company at 85.0% of the closing price on the last day of each month. The Company recognizes an expense in the amount equal to the discount.

Employee benefit plans. The Company recognizes the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability on its consolidated balance sheets and recognizes changes in the funded status in the year in which changes occur, through accumulated other comprehensive income (loss). The funded status is measured as the difference between the fair value of plan assets and benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for the other postretirement plans). Actuarial gains and losses and prior service costs and credits that have not been recognized as a component of net periodic benefit cost previously are recorded as a component of accumulated other comprehensive income (loss). Plan assets and obligations are measured as of December 31.

Recent Accounting Pronouncements:

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidelines relating to transfers of financial assets which amended existing guidance by removing the concept of a qualifying special purpose entity and establishing a new “participating interest” definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarifies and amends the derecognition criteria for a transfer to be accounted for as a sale, and changes the amount that can be recognized as a gain or loss on a transfer accounted for as a sale when beneficial interests are received by the transferor. Enhanced disclosures are also required to provide information about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This guidance must be applied as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this standard had no impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued guidance amending existing guidance surrounding the consolidation of variable interest entities (“VIE”) to require an enterprise to qualitatively assess the determination of the primary beneficiary of a VIE based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. This guidance also requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. This statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this standard had no impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity

should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued updated guidance which amended the subsequent events disclosure requirements to eliminate the requirement for Securities and Exchange Commission (“SEC”) filers to disclose the date through which it has evaluated subsequent events, clarify the period through which conduit bond obligors must evaluate subsequent events and refine the scope of the disclosure requirements for reissued financial statements. The updated guidance was effective upon issuance. Except for the disclosure requirements, the adoption of the guidance had no impact on the Company’s consolidated financial statements.

In March 2010, the FASB issued updated guidance that amends and clarifies the guidance on how entities should evaluate credit derivatives embedded in beneficial interests in securitized financial assets. The updated guidance eliminates the scope exception for bifurcation of embedded credit derivatives in interests in securitized financial assets, unless they are created solely by subordination of one financial instrument to another. The updated guidance is effective for interim financial reporting periods beginning after June 15, 2010, with adoption permitted at the beginning of each entity’s first fiscal quarter beginning after issuance. The adoption of this standard had no impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued updated guidance related to credit risk disclosures for finance receivables and the related allowance for credit losses. The updated guidance requires entities to disclose information at disaggregated levels, specifically defined as “portfolio segments” and “classes”. Expanded disclosures include, among other things, roll-forward schedules of the allowance for credit losses and information regarding the credit quality of receivables (including their aging) as of the end of a reporting period. The updated guidance is effective for interim and annual reporting periods ending after December 15, 2010, although the disclosures of reporting period activity are required for interim and annual reporting periods beginning after December 15, 2010. Except for the disclosure requirements, the adoption of this standard had no impact on the Company’s consolidated financial statements.

Pending Accounting Pronouncements:

In December 2010, the FASB issued updated guidance related to disclosure of supplementary pro forma information in connection with business combinations. The updated guidance clarifies the acquisition date that should be used for reporting pro forma financial information when comparative financial statements are presented. The updated guidance also expands supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The updated guidance is effective for annual reporting periods beginning on or after December 15, 2010. Except for the disclosure requirements, management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

whether there are any adverse qualitative factors indicating an impairment may exist. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2010. Management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

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

In July 2010, the FASB issued updated guidance related to credit risk disclosures for finance receivables and the related allowance for credit losses. The updated guidance requires entities to disclose information at disaggregated levels, specifically defined as “portfolio segments” and “classes”. Expanded disclosures include, among other things, roll-forward schedules of the allowance for credit losses and information regarding the credit quality of receivables (including their aging) as of the end of a reporting period. The updated guidance for disclosures of reporting period activity are required for interim and annual reporting periods beginning after December 15, 2010. Except for the disclosure requirements, management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately, a reconciliation for fair value measurements using significant unobservable inputs (Level 3) information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2010 and for interim periods within the fiscal year. Management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

Results of Operations

Overview

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

Residential mortgage originations in the United States (based on the total dollar value of the transactions) decreased 24.6% in 2010 when compared with 2009, according to the Mortgage Bankers Association’s January 14, 2011 Mortgage Finance Forecast (the “MBA Forecast”). This decrease was due to a decline in both purchase and refinance activity. According to the MBA Forecast, the dollar amount of refinance originations and purchase originations decreased 20.3% and 32.4%, respectively, in 2010 when compared with 2009. Residential mortgage originations in the United States increased 40.0% in 2009 when compared with 2008 according to the January 12, 2010 MBA Forecast. This increase reflected increases in refinance originations and purchase originations of 76.6% and 1.5%, respectively.

Despite the low interest rate environment, which has had a favorable effect on the Company’s businesses, mortgage credit still remains generally tight, which together with the uncertainty in general economic conditions,

continues to impact the demand for most of the Company’s products and services. These conditions have also had an impact on, and continue to impact, the performance and financial condition of some of the Company’s customers; should these parties continue to encounter significant issues, those issues may lead to negative impacts on the Company’s revenue, claims, earnings and liquidity.

Management expects the above mentioned conditions will continue impacting the Company. Given this outlook, the Company continues its focus on controlling costs by, among other cost containment initiatives, reducing employee counts and improving the efficiencies of previously centralized functions.

Beginning at the end of September 2010, several lenders announced that they would suspend certain foreclosures as a result of potential deficiencies in their foreclosure processes. Additionally, over the last several months, certain court rulings have called into question some foreclosure practices. Though the ultimate effect of any such deficiencies, the foreclosure suspensions (which in large part have now been lifted) and the court rulings are currently unknown, the Company believes that revenues tied to foreclosures have declined, and may continue to decline, especially in the short term, and the Company may incur costs associated with its duty to defend its insureds’ title to foreclosed properties they have purchased. As of the current date, these matters have not had a material adverse effect on the Company. Though the Company will continue to monitor foreclosure developments, at this time, the Company does not believe these matters will have a material adverse effect on the Company in the future.

Title Insurance and Services


	2010			2009			2008			2010 vs. 2009						2009 vs. 2008
										$ Change			% Change			$ Change			% Change
	(in thousands, except percentages)
Revenues
Direct premiums and escrow fees	$	1,422,619		$	1,511,264		$	1,608,769		$	(88,645	)		(5.9	)	$	(97,505	)		(6.1	)
Agent premiums		1,517,704			1,524,120			1,709,640			(6,416	)		(0.4	)		(185,520	)		(10.9	)
Information and other		597,799			646,791			702,215			(48,992	)		(7.6	)		(55,424	)		(7.9	)
Investment income		75,517			104,551			136,108			(29,034	)		(27.8	)		(31,557	)		(23.2	)
Net realized investment gains (losses)		8,694			14,504			(53,441	)		(5,810	)		(40.1	)		67,945			127.1
Net other-than-temporary impairment losses recognized in earnings		(7,912	)		(33,038	)		(31,074	)		25,126			76.1			(1,964	)		(6.3	)

		3,614,421			3,768,192			4,072,217			(153,771	)		(4.1	)		(304,025	)		(7.5	)

Expenses
Personnel costs		1,133,133			1,147,539			1,314,905			(14,406	)		(1.3	)		(167,366	)		(12.7	)
Premiums retained by agents		1,222,274			1,229,229			1,364,046			(6,955	)		(0.6	)		(134,817	)		(9.9	)
Other operating expenses		735,424			849,740			985,904			(114,316	)		(13.5	)		(136,164	)		(13.8	)
Provision for policy losses and other claims		180,821			205,819			343,559			(24,998	)		(12.1	)		(137,740	)		(40.1	)
Depreciation and amortization		70,852			74,321			86,962			(3,469	)		(4.7	)		(12,641	)		(14.5	)
Premium taxes		33,645			32,138			42,000			1,507			4.7			(9,862	)		(23.5	)
Interest		8,803			14,336			24,739			(5,533	)		(38.6	)		(10,403	)		(42.1	)

		3,384,952			3,553,122			4,162,115			(168,170	)		(4.7	)		(608,993	)		(14.6	)

Income (loss) before income taxes	$	229,469		$	215,070		$	(89,898	)	$	14,399			6.7		$	304,968			339.2

Margins		6.3	%		5.7	%		(2.2	)%		0.6	%		11.2			7.9	%		358.5

During the third quarter of 2010, the Company changed the presentation of its revenues for the title insurance and services segment. This change resulted in direct revenues from escrow and insured products being presented separately from direct revenues from non-insured products. Direct revenues from escrow and insured products are included in direct premiums and escrow fees, while direct revenues from non-insured products are included in information and other. Information and other is primarily comprised 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. This change also impacted the reporting of certain metrics discussed below, such as direct title orders opened and closed, average revenues per direct title order closed, provision for title insurance policy losses as a percentage of title insurance premiums and escrow fees, and premium taxes as a percentage of title insurance premiums and escrow fees. The Company has reclassified prior period data to conform to the current presentation.

Direct premiums and escrow fees decreased 5.9% in 2010 from 2009 and 6.1% in 2009 from 2008. The decrease in 2010 from 2009 was primarily due to a decline in the number of title orders closed by the Company’s

direct operations, which reflected the decline in mortgage originations, offset in part by an increase in the average revenues per order closed. The increase in the average revenues per order closed was primarily due to an increase in commercial activity year over year. The decrease in direct premiums and escrow fees in 2009 from 2008 was primarily due to a decline in the average revenues per order closed, which was driven by an increase in the mix of lower premium refinance activity, offset in part by an increase in the number of orders closed by the Company’s direct operations. The increase in closing reflected the increase in mortgage originations year over year. The average revenues per order closed were $1,334, $1,158 and $1,301 for 2010, 2009 and 2008, respectively. The Company’s direct title operations closed 1,066,700, 1,305,000 and 1,236,600 domestic title orders during 2010, 2009 and 2008, respectively.

Agent premiums decreased 0.4% in 2010 from 2009 and 10.9% in 2009 from 2008. The decrease in 2010 from 2009 was primarily due to the same factors impacting direct title operations offset in part by an increase in market share. According to the American Land Title Association’s comparative nine months ended September 30, 2010 market share data, the Company’s agency market share increased to 15.9% up from 14.5% for the same period of the prior year. The comparative nine months ended September 30, 2010 market share data are the most current market share data available from the American Land Title Association. The decrease in 2009 from 2008 was due to the same factors affecting the direct title operations as well as the cancellation of certain agency relationships. The Company is continuing to analyze the terms and profitability of its title agency relationships and is working to amend agent agreements to the extent possible. Amendments being sought include, among others, changing the percentage of premiums retained by the agent and the deductible paid by the agent on claims; if changes to the agreements cannot be made, the Company may elect to terminate certain agreements.

Information and other revenue decreased 7.6% in 2010 from 2009 and 7.9% in 2009 from 2008. These decreases were primarily attributable to the same factors affecting the direct title operations, as well as changes in the Company’s international and default revenues. The Company’s international information and other revenue was flat in 2010 compared to 2009, and down approximately 50% in 2009 compared to 2008. The decline in 2009 from 2008 was due to a downturn in the global economy and real estate markets. The Company’s default information and other revenue decreased approximately 14% in 2010 compared to 2009 and increased approximately 31% in 2009 compared to 2008. The decrease in 2010 compared to 2009 was primarily attributable to a decline in foreclosure activity as a result of moratoriums on foreclosures and increased market competition, which were partially offset by increased loss mitigation activities. The increase in 2009 compared to 2008 was the result of increased default and foreclosure activity driven by the decline in U.S. property values and increased unemployment rate.

Investment income decreased 27.8% in 2010 from 2009 and 23.2% in 2009 from 2008. The decrease in the current year from the prior year is primarily due to income recognized from the sale of title plant copies in 2009 while similar sales did not occur in 2010; lower interest income from deposits in 2010 due to lower yields; and a reduction in interest income from internal notes receivable when compared to 2009 due to a reduction in the notes receivable balance. The decrease in 2009 from 2008 primarily reflected declining yields earned from the investment portfolio, a decrease in interest earned on certain escrow deposits, which reflected lower yields and lower balances, and a decrease in investment income at the Company’s trust division as a result of a decline in deposits. These decreases were partially offset by an increase in the average investment portfolio balance and the sale of title plant copies in 2009.

Net realized investment gains (losses) for the title insurance segment totaled gains of $8.7 million and $14.5 million for 2010 and 2009, respectively, and losses of $53.4 million for 2008. The net gains for 2010 and 2009 were primarily from the sale of certain debt securities and equity securities, respectively. The net losses for 2008 primarily reflected $38.8 million of impairment losses on other long-term investments, including $14.9 million related to an investment in non-voting convertible preferred stock, $17.1 million related to a note receivable of a diversified provider of real estate settlement services that declared bankruptcy and $6.8 million related to an investment in affiliate. Additionally, in 2008, the Company wrote-off $5.3 million in other accounts receivable related to the aforementioned diversified provider of real estate settlement services.

Net other-than-temporary impairment losses recognized in earnings for the title insurance segment totaled $7.9 million, $33.0 million and $31.1 million for 2010, 2009 and 2008, respectively. The majority of the net other-than-temporary impairment losses recognized in 2010 related to the Company’s non-agency mortgage-backed securities portfolio. In 2009, the net other-than-temporary impairment losses pertained primarily to the Company’s equity securities portfolio and also to the non-agency mortgage-backed securities portfolios. In 2008, a $30.3 million net other-than-temporary impairment loss was recognized related to preferred securities issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).

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

Title insurance personnel costs decreased 1.3% in 2010 from 2009 and 12.7% in 2009 from 2008. Included in personnel costs for 2010, and not in prior years, were $22.0 million of expenses associated with certain offshore functions that prior to the Separation were performed by TFAC and allocated to the Company. The allocations in prior years were included in the title insurance segment’s other operating expenses. These offshore functions are now part of the Company’s operations and their related personnel expenses are included in the title insurance segment’s personnel costs. Excluding the impact of these expenses, title insurance personnel costs decreased 3.3% in 2010 from 2009. This decrease was primarily due to domestic employee reductions, offset in part by increased expense in connection with the Company’s pension and other retirement plans. The decrease in title insurance personnel costs in 2009 from 2008 was primarily due to employee reductions, offset in part by employee separations costs and an increase in employee benefit expense due primarily to the profit-driven 401(k).

The Company continues to closely monitor order volumes and related staffing levels and will adjust staffing levels as considered necessary. The Company’s direct title operations opened 1,458,400, 1,768,900, and 1,781,700 domestic title orders in 2010, 2009, and 2008, respectively, representing a decrease of 17.6% in 2010 from 2009 and a decrease of 0.7% in 2009 from 2008.

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


	2010			2009			2008
	(in thousands, except percentages)
Premiums retained by agents	$	1,222,274		$	1,229,229		$	1,364,046

Agent premiums	$	1,517,704		$	1,524,120		$	1,709,640

% retained by agents		80.5	%		80.7	%		79.8	%

The premium split between underwriter and agents is in accordance with the respective agency contracts and can vary from region to region due to divergences in real estate closing practices, as well as rating structures. As a result, the percentage of title premiums retained by agents varies due to the geographical mix of revenues from agency operations. The percentage of title premiums retained by agents increased over the last three years due primarily to the geographic mix of agency revenues (i.e., the agency share or split varies from region to region and thus the geographic mix of agency revenues causes this variation), partially offset by the cancellation and/or modification of certain agency relationships with unfavorable splits.

Title insurance other operating expenses (principally related to direct operations) decreased 13.5% in 2010 from 2009 and 13.8% in 2009 from 2008. Excluding the impact of the allocations for certain offshore functions discussed in the personnel costs discussion above, the decrease in other operating expenses was 10.9% in 2010 from 2009. This decrease reflected lower occupancy costs as a result of the continued consolidation/closure of certain title offices and other cost-containment programs. The decrease in 2009 from 2008 was also primarily due to lower occupancy costs as a result of the consolidation/closure of certain title offices and other cost-containment programs.

The provision for title insurance losses, expressed as a percentage of title insurance premiums and escrow fees, was 6.1% in 2010, 6.8% in 2009 and 10.4% in 2008. The current year rate of 6.1% reflects an expected ultimate loss rate of 4.9% for policy year 2010, with a net upward adjustment to the reserve for prior policy years. The changes in estimates resulted primarily from higher than expected claims emergence experienced during 2010 for policies issued prior to 2009, and lower than expected claims emergence experienced during 2010 for policy year 2009. The prior year rate of 6.8% reflected an expected ultimate loss rate of 7.0% for policy year 2009, with a minor downward adjustment to the reserve for certain prior policy years. The rate of 10.4% for 2008 included a $78.0 million reserve strengthening adjustment. The 2008 reserve strengthening adjustment reflected changes in estimates for ultimate losses expected, primarily from policy years 2006 and 2007. The changes in estimates resulted primarily from higher than expected claims emergence, in both frequency and aggregate amounts, experienced during 2008, for those policy years. There were many factors that impacted the claims emergence, including but not limited to: decreases in real estate prices during 2008; increases in defaults and foreclosures during 2008; and higher than expected claims emergence from lenders policies.

The current economic environment continues to show more potential for volatility than usual over the short term, particularly in regard to real estate prices and mortgage defaults, which directly affect title claims. Relevant contributing factors include high foreclosure volume, tight credit markets, general economic instability and government actions that may mitigate or exacerbate recent trends. Other factors, including factors not yet identified, may also influence claims development. At this point, economic and certain market conditions appear to be improving, yet significant uncertainty remains. This environment results in increased potential for actual claims experience to vary significantly from projections, in either direction, which would directly affect the claims provision. If actual claims vary significantly from expected, reserves may need to be adjusted to reflect updated estimates of future claims.

The volume and timing of title insurance claims are subject to cyclical influences from real estate and mortgage markets. Title policies issued to lenders are a large portion of the Company’s title insurance volume. These policies insure lenders against losses on mortgage loans due to title defects in the collateral property. Even if an underlying title defect exists that could result in a claim, often the lender must realize an actual loss, or at least be likely to realize an actual loss, for title insurance liability to exist. As a result, title insurance claims exposure is sensitive to lenders’ losses on mortgage loans, and is affected in turn by external factors that affect mortgage loan losses.

A general decline in real estate prices can expose lenders to greater risk of losses on mortgage loans, as loan-to-value ratios increase and defaults and foreclosures increase. The current environment may continue to have increased potential for claims on lenders’ title policies, particularly if defaults and foreclosures are at elevated levels. Title insurance claims exposure for a given policy year is also affected by the quality of mortgage loan underwriting during the corresponding origination year. The Company believes that sensitivity of claims to external conditions in real estate and mortgage markets is an inherent feature of title insurance’s business economics that applies broadly to the title insurance industry. Lenders have experienced high losses on mortgage loans from prior years, including loans that were originated during the years 2005 through 2007. These losses have led to higher title insurance claims on lenders policies, and also have accelerated the reporting of claims that would have been realized later under more normal conditions.

Loss ratios (projected to ultimate value) for policy years 2005-2007 are higher than loss ratios for policy years 1992-2004. The major causes of the higher loss ratios for those three policy years are believed to be confined mostly to that period. These causes included: rapidly increasing residential real estate prices which led to an increase in the incidences of fraud, lower mortgage loan underwriting standards and a higher concentration than usual of subprime mortgage loan originations.

including tighter loan underwriting standards and lower housing prices. Current claims data from policy years 2009 and 2010, while still at an early stage of development, supports this assumption.

Insurers generally are not subject to state income or franchise taxes. However, in lieu thereof, a “premium” tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The Company’s noninsurance subsidiaries are subject to state income tax and do not pay premium tax. Accordingly, the Company’s total tax burden at the state level for the title insurance segment is composed of a combination of premium taxes and state income taxes. Premium taxes as a percentage of title insurance premiums and escrow fees were 1.1% for 2010, 1.1% for 2009 and 1.3% for 2008.

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 was 6.3% and 5.7% for the years ended December 31, 2010 and 2009, respectively. The pre-tax margin loss for the year ended December 31, 2008 was 2.2%.

Specialty Insurance


	2010			2009			2008			2010 vs. 2009						2009 vs. 2008
										$ Change			% Change			$ Change			% Change
	(in thousands, except percentages)
Revenues
Direct premiums	$	272,032		$	269,631		$	286,321		$	2,401			0.9		$	(16,690	)		(5.8	)
Investment income		11,876			13,431			15,657			(1,555	)		(11.6	)		(2,226	)		(14.2	)
Net realized investment gains (losses)		1,938			1,297			(2,631	)		641			49.4			3,928			149.3
Net other-than-temporary impairment losses recognized in earnings		(111	)		(6,820	)		(1,530	)		6,709			98.4			(5,290	)		(345.8	)

		285,735			277,539			297,817			8,196			3.0			(20,278	)		(6.8	)

Expenses
Personnel costs		51,477			54,907			56,532			(3,430	)		(6.2	)		(1,625	)		(2.9	)
Other operating expenses		41,980			41,601			46,840			379			0.9			(5,239	)		(11.2	)
Provision for policy losses and other claims		140,053			140,895			166,004			(842	)		(0.6	)		(25,109	)		(15.1	)
Depreciation and amortization		5,324			4,275			3,329			1,049			24.5			946			28.4
Premium taxes		4,135			4,346			4,366			(211	)		(4.9	)		(20	)		(0.5	)
Interest		18			25			23			(7	)		(28.0	)		2			8.7

		242,987			246,049			277,094			(3,062	)		(1.2	)		(31,045	)		(11.2	)

Income before income taxes	$	42,748		$	31,490		$	20,723		$	11,258			35.8		$	10,767			52.0

Margins		15.0	%		11.3	%		7.0	%		3.6	%		31.9			4.4	%		63.1

Specialty insurance direct premiums increased 0.9% in 2010 over 2009 and decreased 5.8% in 2009 from 2008. The increase in 2010 was due to an increase in volume from the home warranty division offset by a decline in the property and casualty division. Home warranty benefitted from the First Time Homebuyer Credit that expired in April of 2010. The decreases in 2009 compared to 2008 primarily reflected declines in business volume impacting both the property and casualty insurance division and the home warranty division.

Investment income decreased 11.6% in 2010 from 2009 and 14.2% in 2009 from 2008. These decreases primarily reflected the decreased yields earned from the investment portfolio.

Net realized investment gains (losses) and net other-than-temporary impairment losses recognized in earnings for the specialty insurance segment totaled gains of $1.8 million in 2010, compared with losses of $5.5 million and $4.2 million in 2009 and 2008, respectively. The current year net gains were primarily driven by the sale of debt securities. The prior year net losses were primarily driven by impairment losses taken on certain debt, preferred equity and common equity securities. The 2008 net losses were primarily due to realized losses on the sale of certain securities.

Specialty insurance personnel costs and other operating expenses decreased 3.2% in 2010 from 2009 and 6.6% in 2009 from 2008. The decreases were primarily due to employee reductions as well as other cost-containment programs.

The provision for home warranty claims, expressed as a percentage of home warranty premiums, was 50.6% in 2010, 53.9% in 2009 and 60.5% in 2008. The decrease in rate in 2010 from 2009 was primarily due to a reduction in the average cost of claims and, to a lesser extent, fewer incidents. The decrease in rate in 2009 from 2008 was primarily due to a reduction in the average cost of claims.

The provision for property and casualty claims, expressed as a percentage of property and casualty insurance premiums, was 53.0% in 2010, 49.8% in 2009 and 54.3% in 2008. The increase in rate in 2010 from 2009 was primarily due to the return of seasonal winter storms in the first and fourth quarters of 2010, including an unusual hailstorm over Arizona in October 2010. These increases in 2010 were partially offset by lower routine or non-event core losses. The decrease in the rate in 2009 from 2008 was the result of a decline in seasonal winter storm and wildfire losses, as well as lower routine or non-event core losses.

Premium taxes as a percentage of specialty insurance segment premiums were 1.5% in 2010, 1.6% in 2009 and 1.5% in 2008.

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 were 15.0%, 11.3% and 7.0% for 2010, 2009 and 2008, respectively.

Corporate


	2010			2009			2008			2010 vs. 2009						2009 vs. 2008
										$ Change			% Change			$ Change			% Change
	(in thousands, except percentages)
Revenues
Investment income	$	8,675		$	2,267		$	(162	)	$	6,408			282.7		$	2,429			NM	¹
Net realized investment losses		(423	)		(1,164	)		(2,147	)		741			63.7			983			45.8

		8,252			1,103			(2,309	)		7,149			648.1			3,412			147.8

Expenses
Personnel costs		31,440			15,746			16,738			15,694			99.7			(992	)		(5.9	)
Other operating expenses		26,299			18,235			20,289			8,064			44.2			(2,054	)		(10.1	)
Depreciation and amortization		2,735			3,879			4,951			(1,144	)		(29.5	)		(1,072	)		(21.7	)
Interest		7,889			5,458			2,453			2,431			44.5			3,005			122.5

		68,363			43,318			44,431			25,045			57.8			(1,113	)		(2.5	)

Loss before income taxes	$	(60,111	)	$	(42,215	)	$	(46,740	)	$	(17,896	)		(42.4	)	$	4,525			9.7

(1)	Not meaningful

Investment income totaled $8.7 million and $2.3 million in 2010 and 2009, respectively, and a loss of $0.2 million in 2008. The increase in 2010 is primarily due to an increase in yields earned on investments associated with the Company’s deferred compensation plan.

Corporate personnel costs and other operating expenses increased $23.7 million, or 69.9%, in 2010 over 2009 and decreased $3.0 million, or 8.2%, in 2009 from 2008. The increase in 2010 is primarily due to a higher level of corporate personnel costs and other operating expenses following the Separation when compared to the amounts allocated from TFAC prior to the Separation. Following the Separation, the Company is a separate publicly traded company, which resulted in a higher level of corporate costs. The increase is also due to an increase in personnel costs associated with the Company’s deferred compensation plan. The increase in costs associated with the Company’s deferred compensation plan is offset by the increase in income earned on investments associated with the deferred compensation plan, as discussed above. Other operating expenses also increased due to professional services expenses incurred in the current year related to the Separation. The decrease in 2009 from 2008 was primarily due to changes in technology initiatives and the impact of other corporate-wide cost saving initiatives that the Company implemented.

Interest expense increased $2.4 million in 2010 over 2009 and increased $3.0 million in 2009 over 2008. Interest expense prior to the Separation related to draws made in 2008 used for the Company’s operations in the amount of $140.0 million under TFAC’s credit agreement that was allocated to the Company. In connection with the Separation, the Company borrowed $200.0 million under its new credit facility and paid off the allocated portion of TFAC’s debt. Interest expense increased in 2010 over 2009 because the Company’s new credit facility bears interest at a higher rate than the allocated portion of TFAC’s debt. The increase in 2009 over 2008 is due to 2009 reflecting a full year of expense, while interest expense in 2008 reflects approximately half a year of expense, as the draws were made in the second and third quarters of 2008.

Eliminations

Eliminations represent interest income and related interest expense associated with intercompany notes between the Company’s segments, which are eliminated in the consolidated financial statements. The Company’s inter-segment eliminations were not material for the year ended December 31, 2010. The Company did not record inter-segment eliminations for the years ended December 31, 2009 and 2008, as there was no inter-segment income or expense.

Income Taxes

Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A reconciliation of this difference is as follows:


	Year ended December 31,
	2010			2009			2008
	(in thousands)
Taxes calculated at federal rate	$	73,843		$	67,360		$	(44,321	)
State taxes, net of federal benefit		3,340			(612	)		3,735
Tax effect of noncontrolling interests		388			681			1,096
Dividends received deduction		(250	)		(1,381	)		(526	)
Change in liability for tax positions		4,626			(8,776	)		(1,710	)
Exclusion of certain meals and entertainment expenses		2,889			2,675			3,745
Change in capital loss valuation allowance		(14,683	)		—			—
Foreign taxes in excess of (less than) federal rate		9,802			10,365			(1,535	)
Other items, net		3,195			(244	)		(3,917	)

	$	83,150		$	70,068		$	(43,433	)

The Company’s effective income tax rate (income tax expense as a percentage of income before income taxes), was 39.2% for 2010, 34.3% for 2009 and 37.5% for 2008. The absolute differences in the effective tax rates were primarily due to changes in the ratio of permanent differences to income before income taxes and noncontrolling interests, reserve adjustments recorded in 2009 and 2008 for which corresponding tax benefits were recognized, as well as changes in state and foreign income taxes resulting from fluctuations in the Company’s noninsurance and foreign subsidiaries’ contribution to pretax profits. In addition, certain interest and penalties relating to uncertain tax positions were released during 2009 and 2008 based on changes in facts and circumstances associated with the related tax uncertainty.

Net Income and Net Income (loss) Attributable to the Company

Net income (loss) and per share information are summarized as follows see Note 13 Earnings (Loss) Per Share to the consolidated financial statements:


	2010		2009		2008
	(in thousands, except per share amounts)
Net income	$	128,956	$	134,277	$	(72,482	)
Less: Net income attributable to noncontrolling interests		1,127		11,888		11,523

Net income (loss) attributable to the Company	$	127,829	$	122,389	$	(84,005	)

Per share of common stock:
Net income (loss) attributable to the Company:
Basic	$	1.23	$	1.18	$	(0.81	)

Diluted	$	1.20	$	1.18	$	(0.81	)

Weighted-average shares:
Basic		104,134		104,006		104,006

Diluted		106,177		104,006		104,006

Net income attributable to noncontrolling interests decreased $10.8 million, or 90.5%, in 2010 from 2009 and increased $0.4 million in 2009 over 2008. The decrease in net income attributable to noncontrolling interests in 2010 when compared to 2009 is due to the Company’s purchases of subsidiary shares from noncontrolling interests in 2009. The purchases of subsidiary shares did not significantly impact net income attributable to noncontrolling interests in 2009, because the majority of the Company’s purchases occurred late in the fourth quarter of 2009. Net income attributable to noncontrolling interests was relatively unchanged in 2009 when compared to 2008 due to the profits of the Company’s subsidiaries with noncontrolling interests not significantly fluctuating year over year, and the fact that the majority of the Company’s purchases of subsidiary shares from noncontrolling interests occurred late in the fourth quarter of 2009.

Per share information for the current year and prior years was computed using the number of shares of common stock outstanding immediately following the Separation, as if such shares were outstanding for the entire period prior to the Separation.

Liquidity and Capital Resources

Cash Requirements. The Company’s current cash requirements include operating expenses, taxes, payments of interest and principal on its debt, capital expenditures, potential business acquisitions, payments in connection with employee benefit plans and dividends on its common stock. The Company continually assesses its capital allocation strategy, including decisions relating to dividends, share repurchases, capital expenditures, acquisitions and investments. Management expects that the Company will continue to pay quarterly cash dividends at or above the historical levels paid since the Separation. The timing, declaration and payment of future dividends, however, falls within the discretion of the Company’s board of directors and will depend upon many factors, including the Company’s financial condition and earnings, the capital requirements of our businesses, industry practice, restrictions imposed by applicable law and any other factors the board of directors deems relevant from time to time. The Company believes that all anticipated cash requirements for current operations will be met from internally generated funds, through cash dividends from subsidiaries and borrowings on its revolving credit facility, as needed. The Company’s short-term and long-term liquidity requirements are monitored regularly to ensure that it can meet its cash requirements. The Company forecasts the needs of its primary subsidiaries and periodically 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 liquid-asset position and its ability to generate cash flows from operations, management believes that its resources are sufficient to satisfy its anticipated operational cash requirements and obligations for at least the next twelve months.

The Company’s insurance subsidiaries generate cash from premiums earned and their respective investment portfolios and these funds are adequate to satisfy the payments of claims and other liabilities.

The Company’s two significant sources of internally generated funds are dividends and other payments from its subsidiaries. Pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available to the Company is limited, principally for the protection of policyholders. Under such regulations, the maximum amount of dividends, loans and advances available to the Company from its insurance subsidiaries in 2011 is $194.3 million. Such restrictions have not had, nor are they expected to have, an impact on the Company’s ability to meet its cash obligations.

Cash provided by operating activities amounted to $155.5 million, $233.6 million and $110.4 million for the years ended December 31, 2010, 2009 and 2008, respectively, after net claim payments of $456.2 million, $452.2 million and $482.2 million, respectively. The principal nonoperating uses of cash and cash equivalents for the year ended December 31, 2010 were the repayment of debt (to TFAC and third parties), cash distribution to TFAC in connection with the Separation, additions to the investment portfolio, capital expenditures and dividends to common stockholders. The most significant nonoperating sources of cash and cash equivalents for the year ended December 31, 2010 were increases in the deposit balances at the Company’s banking operations, proceeds from the Company’s new revolving credit facility and proceeds from the sales and maturities of debt and equity securities.

The principal nonoperating uses of cash and cash equivalents for the two years ended December 31, 2009 were for acquisitions (including the acquisition of noncontrolling interests), additions to the investment portfolio, capital expenditures, dividends paid to TFAC, distributions to noncontrolling shareholders and the repayment of debt. The most significant nonoperating sources of cash and cash equivalents were the proceeds from the allocated portion of TFAC debt, net investment activity by TFAC 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 $97.4 million for 2010, and decreases of $92.4 million and $182.7 million for 2009 and 2008, respectively.

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

The credit agreement is comprised of a $400.0 million revolving credit facility. The revolving loan commitments terminate on the third anniversary of the date of closing, or June 1, 2013. On June 1, 2010, the Company borrowed $200.0 million under the facility and transferred such funds to CoreLogic, as previously contemplated in connection with the Separation. Proceeds may also be used for general corporate purposes. At September 30, 2010, the interest rate associated with the $200.0 million borrowed under the facility is 3.06%.

The Company’s obligations under the credit agreement are guaranteed by certain of the Company’s subsidiaries (the “Guarantors”). To secure the obligations of the Company and the Guarantors (collectively, the “Loan Parties”) under the credit agreement, the Loan Parties pledged all of the equity interests they own in each Data Trace and Data Tree company and a 9% equity interest in FATICO.

If at any time the rating by Moody’s Investor Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Group (“S&P”) of the senior, unsecured, long-term indebtedness for borrowed money of the Company that is not guaranteed by any other person or subject to any other credit enhancement is rated lower than Baa3 or BBB-, respectively, or is not rated by either such rating agency, then the loan commitments are subject to mandatory reduction from (a) 50% of the net proceeds of certain equity issuances by any Loan Party, (b) 50% of the net proceeds of certain debt incurred or issued by any Loan Party, (c) 25% of the net proceeds received by any Loan Party from the disposition of CoreLogic stock received in connection with the Separation and (d) the net proceeds received by any Loan Party from certain dispositions of assets, provided that the commitment reductions described above are only required to the extent necessary to reduce the total loan commitments to $200.0 million. The Company is only required to prepay loans to the extent that, after giving effect to any mandatory commitment reduction, the aggregate principal amount of all outstanding loans exceeds the remaining total loan commitments.

At the Company’s election, borrowings under the credit agreement bear interest at (a) the Alternate Base Rate plus the Applicable Rate or (b) the Adjusted LIBO Rate plus the Applicable Rate (in each case as defined in the agreement). The Company may select interest periods of one, two, three or six months or (if agreed to by all lenders) such other number of months for Eurodollar borrowings of loans. The Applicable Rate varies depending upon the rating assigned by Moody’s and/or S&P to the credit agreement, or if no such rating is in effect, the Index Debt Rating. The minimum Applicable Rate for Alternate Base Rate borrowings is 1.50% and the maximum is 2.25%. The minimum Applicable Rate for Adjusted LIBO Rate borrowings is 2.50% and the maximum is 3.25%.

The credit agreement includes representations and warranties, reporting covenants, affirmative covenants, negative covenants, financial covenants and events of default customary for financings of this type. Upon the occurrence of an event of default the lenders may accelerate the loans and the Collateral Agent may exercise remedies under the collateral documents. Upon the occurrence of certain insolvency and bankruptcy events of default the loans automatically accelerate. At December 31, 2010, the Company is in compliance with the debt covenants under the credit agreement.

Notes and contracts payable (including allocated portion of TFAC debt) as a percentage of total capitalization was 12.8% at December 31, 2010, compared with 11.3% as of the prior year end. This increase was

attributable to the decrease in total equity and increase in notes and contract payable during the current year. Equity decreased due to the net distribution to TFAC made by the Company in connection with the Separation. The increase in debt was also a result of the Separation. Notes and contracts payable are more fully described in Note 10 Notes and Contracts Payable to the consolidated financial statements.

Investment Portfolio. As of December 31, 2010, the Company’s debt and equity investment securities portfolio consists of approximately 88% of fixed income securities. As of that date, over 72% of the Company’s fixed income investments are held in securities that are United States government-backed or rated AAA, and approximately 96% 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 S&P and Moody’s published ratings. If a security was rated differently by both rating agencies, the lower of the two ratings was selected.

The table below outlines the composition of the investment portfolio currently in an unrealized loss position by credit rating (percentages are based on the amortized cost basis of the investments). 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:


	A-Ratings or Higher			BBB+ to BBB- Ratings			Non- Investment Grade
December 31, 2010
U.S. Treasury bonds		100.0	%		0.0	%		0.0	%
Municipal bonds		99.6	%		0.4	%		0.0	%
Foreign bonds		97.5	%		0.4	%		2.1	%
Governmental agency bonds		100.0	%		0.0	%		0.0	%
Governmental agency mortgage-backed securities		100.0	%		0.0	%		0.0	%
Non-agency mortgage-backed and asset-backed securities		0.5	%		0.0	%		99.5	%
Corporate debt securities		95.4	%		4.6	%		0.0	%
Preferred stock		0.0	%		0.0	%		100.0	%

		91.7	%		0.5	%		7.8	%

Approximately 27% of the Company’s municipal bonds portfolio has third party insurance in effect.

Substantially all securities in the Company’s non-agency mortgage-backed and asset-backed portfolio are senior tranches and were investment grade at the time of purchase, however many have been downgraded below investment grade since purchase. The table below summarizes the composition of the Company’s non-agency mortgage-backed and asset-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 S&P’s and Moody’s published ratings. If a security was rated differently by both rating agencies, the lower of the two ratings was selected. All amounts and ratings are as of December 31, 2010.


(in thousands, except percentages and number of securities)	Number of Securities		Amortized Cost		Estimated Fair Value		A-Ratings or Higher			BBB+ to BBB- Ratings			Non- Investment Grade
Non-agency mortgage-backed securities:
Prime single family residential:
2007		1	$	6,906	$	5,340		0.0	%		0.0	%		100.0	%
2006		7		31,438		21,355		0.0	%		0.0	%		100.0	%
2005		2		6,131		4,636		0.0	%		0.0	%		100.0	%
2003		1		310		303		100.0	%		0.0	%		0.0	%
Alt-A single family residential:
2007		2		18,988		15,900		0.0	%		0.0	%		100.0	%

		13	$	63,773	$	47,534		0.5	%		0.0	%		99.5	%

As of December 31, 2010, none of the non-agency mortgage-backed and asset-backed securities were on negative credit watch by S&P or Moody’s.

The Company assessed its non-agency mortgage-backed and asset-backed securities portfolio to determine what portion of the portfolio, if any, is other-than-temporarily impaired at December 31, 2010. Management’s analysis of the portfolio included its expectations of the future performance of the underlying collateral, including, but not limited to, prepayments, defaults and loss severity assumptions. In developing these expectations, the Company utilized publicly available information related to individual assets, analysts’ expectations on the expected performance of similar underlying collateral and certain of CoreLogic’s securities, loans and property data and market analytic tools. As a result of the Company’s security-level review, it recognized total other-than-temporary impairments of $8.5 million on its non-agency mortgage-backed securities for the year ended December 31, 2010. $6.3 million of other-than-temporary impairment losses were considered to be credit related and were recognized in earnings and $2.2 million of other-than-temporary impairment losses were considered to be related to factors other than credit and were therefore recognized in other comprehensive income for the year ended December 31, 2010. The amounts remaining in other comprehensive income should not be recorded in earnings, because the losses were not considered to be credit related based on the Company’s other-than-temporary impairment analysis as discussed above.

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

Contractual obligations. A summary, by due date, of the Company’s total contractual obligations at December 31, 2010, is as follows:


	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(in thousands)
Notes and contracts payable	$	293,817	$	19,585	$	214,355	$	26,988	$	32,889
Interest on notes and contracts payable		40,960		10,248		15,197		4,400		11,115
Operating leases		292,763		89,926		125,686		55,506		21,645
Deposits		1,482,557		1,460,065		15,837		6,655		—
Claim losses		1,108,238		292,900		281,829		161,987		371,522
Pension and supplemental benefit plans		499,063		36,378		68,198		38,440		356,047

	$	3,717,398	$	1,909,102	$	721,102	$	293,976	$	793,218

The timing of claim payments is estimated and is not set contractually. Nonetheless, based on historical claims experience, the Company anticipates the above payment patterns. Changes in future claim settlement patterns, judicial decisions, legislation, economic conditions and other factors could affect the timing and amount of actual claim payments. The timing and amount of payments in connection with pension and supplemental benefit plans is based on the Company’s current estimate and requires the use of significant assumptions. Changes in significant assumptions could affect the amount and timing of pension and supplemental benefit plan payments. See Note 14 Employee Benefit Plans to the consolidated financial statements for additional discussion of management’s significant assumptions. The Company is not able to reasonably estimate the timing of payments, or the amount by which the liability for the Company’s uncertain tax positions will increase or decrease over time; therefore the liability of $11.1 million has not been included in the contractual obligations table. See Note 12 Income Taxes to the consolidated financial statements for additional discussion of the Company’s liability for uncertain tax positions.

Off-balance sheet arrangements. The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $3.03 billion and $2.46 billion at December 31, 2010 and 2009, respectively, of which $0.9 billion and $0.9 billion, respectively, were held at the Company’s federal savings

bank subsidiary, First American Trust, FSB. The escrow deposits held at First American Trust, FSB, are included in the accompanying consolidated balance sheets, in cash and cash equivalents at December 31, 2010 and 2009, respectively, with offsetting liabilities included in deposits. The remaining escrow deposits were held at third-party financial institutions.

Trust assets totaled $2.9 billion at December 31, 2010 and 2009, and were held at First American Trust, FSB. Escrow deposits held at third-party financial institutions and trust assets are not considered assets of the Company under GAAP and, therefore, are not included in the accompanying 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 consolidated financial statements as income or a reduction in expense, as appropriate, based on the nature of the arrangement and benefit earned.

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 $609.9 million and $385.0 million at December 31, 2010 and December 31, 2009, respectively, of which $408.8 million and $186.1 million at December 31, 2010 and December 31, 2009, respectively, were held at the Company’s subsidiary, First Security Business Bank (“FSBB”). The like-kind exchange deposits held at FSBB are included in the accompanying consolidated balance sheets in cash and cash equivalents with offsetting liabilities included in deposits. The remaining 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 under GAAP and, therefore, are not included in the accompanying consolidated balance sheets. All such amounts are placed in bank deposits with FDIC insured institutions. The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the return on the proceeds.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company has interest rate risk associated with certain financial instruments. The Company monitors its risk associated with fluctuations in interest rates and makes investment decisions to manage accordingly. The Company does not currently use derivative financial instruments in any material amount to hedge these risks. The table below provides information about certain assets and liabilities as of December 31, 2010 that are sensitive to changes in interest rates and presents cash flows and the related weighted average interest rates by expected maturity dates.


	2011			2012			2013			2014			2015			Thereafter			Total		Fair Value
	(in thousands except percentages)
Assets
Deposits with Savings and Loan Associations and Banks
Book Value	$	59,974																	$	59,974	$	59,974
Average Interest Rate		1.70	%																			100.0	%
Debt Securities
Amortized Cost	$	105,107			127,170			85,311			108,148			97,837			1,592,268		$	2,115,841	$	2,107,984
Average Interest Rate		4.19	%		3.46	%		4.15	%		3.41	%		3.11	%		2.45	%				99.6	%
Notes Receivable from CoreLogic
Book Value	$	2,338			2,494			2,661			2,838			3,028			5,428		$	18,787	$	18,708
Average Interest Rate		6.52	%		6.52	%		6.52	%		6.52	%		6.52	%		6.52	%				96.7	%
Loans Receivable
Book Value	$	3,973			3,004			2,180			2,931			9,830			143,685		$	165,603	$	166,904
Average Interest Rate		7.15	%		7.47	%		7.02	%		6.21	%		6.10	%		6.61	%				100.8	%
Liabilities
Interest Bearing Escrow Deposits
Book Value	$	736,664																	$	736,664	$	736,664
Average Interest Rate		0.38	%																			100.0	%
Variable Rate Deposits
Book Value	$	437,137																	$	437,137	$	437,137
Average Interest Rate		0.31	%																			100.0	%
Fixed Rate Deposits
Book Value	$	22,736			9,024			6,813			2,384			4,271					$	45,228	$	45,988
Average Interest Rate		2.09	%		2.90	%		2.31	%		3.03	%		2.70	%							101.7	%
Notes and Contracts Payable
Book Value	$	19,585			7,848			206,507			11,950			15,038			32,889		$	293,817	$	295,465
Average Interest Rate		3.66	%		3.48	%		3.42	%		4.46	%		4.61	%		5.22	%				100.6	%

Equity Price Risk

The Company is also subject to equity price risk related to its equity securities portfolio. At December 31, 2010, the Company had equity securities with a cost basis of $280.0 million and estimated fair value of $282.4 million. At December 31, 2010, included in the equity securities portfolio are shares of CoreLogic common stock, which the Company received in connection with the Separation, with a cost basis of $242.6 million and estimated fair value of $239.5 million. The Company manages its equity price risk, including the risk associated with its CoreLogic common stock, through an investment committee made up of certain senior executives which is advised by an experienced investment management staff.

Foreign Currency Risk

Although the Company has exchange rate risk for its operations in certain foreign countries, this risk is not material to the Company’s financial condition or results of operations. The Company does not hedge any of its foreign exchange risk.

Credit Risk

The Company’s corporate, municipal, foreign, non-agency mortgage-backed and asset-backed and, to a lesser extent, its agency securities are subject to credit risk. The Company manages its credit risk through actively monitoring issuer financial reports, credit spreads, security pricing and credit rating migration. Further, diversification and concentration limits by asset type and per issuer are established and monitored by the Company’s investment committee.

The Company’s non-agency mortgage-backed and asset-backed securities credit risk is analyzed by monitoring servicer reports and through utilization of sophisticated cash flow models to measure the default characteristics of the underlying collateral pools.

The Company holds a large concentration in US government agency securities, including agency mortgage-backed securities. In the event of discontinued US government support of its federal agencies, material credit risk could be observed in the portfolio. The Company views that scenario as unlikely but possible. The federal government currently is considering various alternatives to reform the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The nature and timing of the reforms is unknown, however the federal government recently reiterated its commitment to ensuring that Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations.

The Company’s overall investment securities portfolio maintains an average credit quality of AA.

Item 8. Financial Statements and Supplementary Data

Separate financial statements for subsidiaries not consolidated and 50% or less owned persons accounted for by the equity method have been omitted because they would not constitute a significant subsidiary.

INDEX


	Page No.
Report of Independent Registered Public Accounting Firm		58
Financial Statements:
Consolidated Balance Sheets		59
Consolidated Statements of Income		60
Consolidated Statements of Comprehensive Income		61
Consolidated Statements of Equity		62
Consolidated Statements of Cash Flows		63
Notes to Consolidated Financial Statements		64
Unaudited Quarterly Financial Data		126
Financial Statement Schedules:
I. Summary of Investments—Other than Investments in Related Parties		127
II. Condensed Financial Information of Registrant		128
III. Supplementary Insurance Information		132
IV. Reinsurance		134
V. Valuation and Qualifying Accounts		135

Financial statement schedules not listed are either omitted because they are not applicable or the required information is shown in the consolidated financial statements or in the notes thereto.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

First American Financial Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of First American Financial Corporation and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our audits (which was an integrated audit in 2010). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1, amounts recorded for allocations of certain expenses directly attributable to the operations of First American Financial Corporation are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company operated as a separate, stand-alone entity.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ P RICEWATERHOUSE C OOPERS LLP

PricewaterhouseCoopers LLP

Orange County, California

March 1, 2011

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)


	December 31,
	2010			2009
ASSETS
Cash and cash equivalents	$	728,746		$	631,297
Accounts and accrued income receivable, less allowances ($39,904 and $35,595)		234,539			239,166
Income taxes receivable		22,266			27,265
Investments:
Deposits with savings and loan associations and banks		59,974			75,505
Debt securities		2,107,984			1,838,719
Equity securities		282,416			51,020
Other long-term investments		177,990			275,275
Notes receivable from CoreLogic/The First American Corporation (“TFAC”)		18,787			187,825

		2,647,151			2,428,344

Loans receivable, net		161,526			161,897
Property and equipment, net		345,871			358,571
Title plants and other indexes		504,606			488,135
Deferred income taxes		96,846			101,818
Goodwill		812,031			800,986
Other intangible assets, net		70,050			78,892
Other assets		198,194			213,910

	$	5,821,826		$	5,530,281

LIABILITIES AND EQUITY
Deposits	$	1,482,557		$	1,153,574
Accounts payable and accrued liabilities:
Accounts payable		33,350			31,951
Personnel costs		137,848			125,622
Pension costs and other retirement plans		409,317			378,427
Other		155,889			163,766

		736,404			699,766

Due to CoreLogic / TFAC, net		62,370			12,264
Deferred revenue		144,719			144,756
Reserve for known and incurred but not reported claims		1,108,238			1,227,757
Notes and contracts payable		293,817			119,313
Allocated portion of TFAC debt		—			140,000

		3,828,105			3,497,430

Commitments and contingencies
Stockholders’ equity or TFAC’s invested equity:
Preferred stock, $0.00001 par value, Authorized—500 shares; Outstanding—none		—			—
Common stock, $0.00001 par value:
Authorized—300,000 shares, Outstanding—104,457 shares		1			—
Additional paid-in capital		2,057,098			—
Retained earnings		72,074			—
TFAC’s invested equity		—			2,167,291
Accumulated other comprehensive loss		(149,156	)		(147,491	)

Total stockholders’ equity or TFAC’s invested equity		1,980,017			2,019,800
Noncontrolling interests		13,704			13,051

Total equity		1,993,721			2,032,851

	$	5,821,826		$	5,530,281

See Notes to Consolidated Financial Statements

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)


	Year Ended December 31
	2010			2009			2008
Revenues:
Direct premiums and escrow fees	$	1,694,651		$	1,780,895		$	1,895,090
Agent premiums		1,517,704			1,524,120			1,709,640
Information and other		597,809			646,791			702,215
Investment income		94,262			120,249			151,603
Net realized investment gains (losses)		10,209			14,637			(58,219	)
Net other-than-temporary impairment (“OTTI”) losses recognized in earnings:
Total OTTI losses on equity securities		(1,722	)		(21,051	)		(31,845	)
Total OTTI losses on debt securities		(8,497	)		(45,020	)		(759	)
Portion of OTTI losses on debt securities recognized in other comprehensive loss		2,196			26,213			—

		(8,023	)		(39,858	)		(32,604	)

		3,906,612			4,046,834			4,367,725

Expenses:
Personnel costs		1,216,050			1,218,192			1,388,175
Premiums retained by agents		1,222,274			1,229,229			1,364,046
Other operating expenses		803,718			909,576			1,053,033
Provision for policy losses and other claims		320,874			346,714			509,563
Depreciation and amortization		78,911			82,475			95,242
Premium taxes		37,780			36,484			46,366
Interest		14,899			19,819			27,215

		3,694,506			3,842,489			4,483,640

Income (loss) before income taxes		212,106			204,345			(115,915	)
Income taxes		83,150			70,068			(43,433	)

Net income (loss)		128,956			134,277			(72,482	)
Less: Net income attributable to noncontrolling interests		1,127			11,888			11,523

Net income (loss) attributable to the Company	$	127,829		$	122,389		$	(84,005	)

Net income (loss) per share attributable to the Company’s stockholders:
Basic	$	1.23		$	1.18		$	(0.81	)

Diluted	$	1.20		$	1.18		$	(0.81	)

Cash dividends per share	$	0.18		$	—		$	—

Weighted-average common shares outstanding:
Basic		104,134			104,006			104,006

Diluted		106,177			104,006			104,006

See Notes to Consolidated Financial Statements

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	Year Ended December 31
	2010			2009		2008
Net income (loss)	$	128,956		$	134,277	$	(72,482	)

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities		2,489			51,873		(72,906	)
Unrealized gain on securities for which credit-related portion was recognized in earnings		4,820			10,173		—
Foreign currency translation adjustment		5,705			31,972		(47,796	)
Pension benefit adjustment		(10,629	)		20,846		(50,208	)

Total other comprehensive income (loss), net of tax		2,385			114,864		(170,910	)

Comprehensive income (loss)		131,341			249,141		(243,392	)
Less: Comprehensive income attributable to noncontrolling interests		5,177			12,788		6,771

Comprehensive income (loss) attributable to the Company	$	126,164		$	236,353	$	(250,163	)

See Notes to Consolidated Financial Statements

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)


	First American Financial Corporation Stockholders
	Shares		Common stock		Additional paid-in capital			Retained earnings			TFAC’s invested equity			Accumulated other comprehensive loss			Noncontrolling interests			Total
Balance at December 31, 2007		—	$	—	$	—		$	—		$	2,026,071		$	(95,297	)	$	109,684		$	2,040,458
Net (loss) income for 2008		—		—		—			—			(84,005	)		—			11,523			(72,482	)
Sale of subsidiary shares to /other increases in noncontrolling interests		—		—		—			—			—			—			6,571			6,571
Purchase of subsidiary shares from /other decreases in noncontrolling interests		—		—		—			—			—			—			(29,258	)		(29,258	)
Distributions to noncontrolling interests		—		—		—			—			—			—			(11,344	)		(11,344	)
Dividends to TFAC		—		—		—			—			(10,000	)		—			—			(10,000	)
Other comprehensive loss (Note 19)		—		—		—			—			—			(166,158	)		(4,752	)		(170,910	)
Net contributions from TFAC		—		—		—			—			221,230			—			—			221,230

Balance at December 31, 2008		—		—		—			—			2,153,296			(261,455	)		82,424			1,974,265
Net income for 2009		—		—		—			—			122,389			—			11,888			134,277
Sale of subsidiary shares to /other increases in noncontrolling interests		—		—		—			—			—			—			30,348			30,348
Purchase of subsidiary shares from /other decreases in noncontrolling interests		—		—		—			—			26,948			—			(103,131	)		(76,183	)
Distributions to noncontrolling interests		—		—		—			—			—			—			(9,378	)		(9,378	)
Dividends to TFAC		—		—		—			—			(83,000	)		—			—			(83,000	)
Other comprehensive income (Note 19)		—		—		—			—			—			113,964			900			114,864
Net distributions to TFAC		—		—		—			—			(52,342	)		—			—			(52,342	)

Balance at December 31, 2009		—		—		—			—			2,167,291			(147,491	)		13,051			2,032,851
Net income earned prior to June 1, 2010 separation		—		—		—			—			36,777			—			147			36,924
Net contributions from TFAC		—		—		—			—			2,097			—			—			2,097
Distribution to TFAC upon separation		—		—		—			—			(156,570	)		(22,051	)		—			(178,621	)
Capitalization as a result of separation from TFAC		—		—		2,047,528			—			(2,047,528	)		—			—			—
Issuance of common stock at separation		104,006		1		(1	)		—			—			—			—			—
Net income earned following June 1, 2010 separation		—		—		—			91,052			—			—			980			92,032
Dividends on common shares		—		—		—			(18,553	)		—			—			—			(18,553	)
Shares issued in connection with restricted stock unit, option and benefit plans		451		—		2,855			(425	)		—			—			—			2,430
Share-based compensation expense		—		—		6,852			—			—			—			—			6,852
Purchase of subsidiary shares from /other decreases in noncontrolling interests		—		—		(136	)		—			(2,067	)		—			(3,501	)		(5,704	)
Sale of subsidiary shares to /other increases in noncontrolling interests		—		—		—			—			—			—			110			110
Distributions to noncontrolling interests		—		—		—			—			—			—			(1,133	)		(1,133	)
Other comprehensive income (Note 19)		—		—		—			—			—			20,386			4,050			24,436

Balance at December 31, 2010		104,457	$	1	$	2,057,098		$	72,074		$	—		$	(149,156	)	$	13,704		$	1,993,721

See Notes to Consolidated Financial Statements

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year Ended December 31
	2010			2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	128,956		$	134,277		$	(72,482	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Provision for policy losses and other claims		320,874			346,714			509,563
Depreciation and amortization		78,911			82,475			95,242
Net realized investment (gains) losses		(10,209	)		(14,637	)		58,219
Net OTTI losses recognized in earnings		8,023			39,858			32,604
Share-based compensation		15,163			14,563			8,289
Equity in (earnings) losses of affiliates		(8,376	)		(10,877	)		2,642
Dividends from equity method investments		8,257			3,911			5,262
Changes in assets and liabilities excluding effects of acquisitions and noncash transactions:
Claims paid, including assets acquired, net of recoveries		(456,225	)		(452,187	)		(482,157	)
Net change in income tax accounts		60,290			58,437			(36,337	)
Decrease in accounts and accrued income receivable		4,730			12,355			4,821
Increase (decrease) in accounts payable and accrued liabilities		5,890			52,620			(188,171	)
Net change in due to CoreLogic/TFAC		(11,392	)		49,589			—
Decrease in deferred revenue		(1,802	)		(3,317	)		(7,757	)
Other, net		12,453			(80,194	)		180,703

Cash provided by operating activities		155,543			233,587			110,441

CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash effect of acquisitions/dispositions		(12,145	)		22,350			(32,801	)
Purchase of subsidiary shares from/other decreases in noncontrolling interests		(3,746	)		(103,131	)		(12,763	)
Sale of subsidiary shares to/other increases in noncontrolling interests		110			30,348			6,571
Net decrease (increase) in deposits with banks		16,092			113,974			(13,224	)
Purchases of debt and equity securities		(1,532,801	)		(939,229	)		(886,974	)
Proceeds from sales of debt and equity securities		699,342			418,552			199,883
Proceeds from maturities of debt securities		597,838			478,870			197,834
Proceeds from redemption of Company owned life insurance		19,602			—			—
Net decrease (increase) in other long-term investments		13,429			(30,717	)		(166,315	)
Proceeds from notes receivable from CoreLogic/TFAC		2,830			4,809			4,587
Origination and purchases of loans and participations		(9,090	)		(23,729	)		(45,096	)
Net decrease in loans receivable after originations and others		9,461			13,524			10,155
Capital expenditures		(88,725	)		(42,304	)		(88,630	)
Proceeds from sale of property and equipment		8,832			12,018			16,001

Cash used for investing activities		(278,971	)		(44,665	)		(810,772	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		328,983			(144,647	)		554,536
Proceeds from issuance of debt		213,462			8,057			5,577
Proceeds from issuance of note payable to TFAC		29,087			—			—
Proceeds from allocation of debt from TFAC		—			—			140,000
Repayment of debt		(40,958	)		(52,747	)		(157,228	)
Repayment of debt to TFAC		(169,572	)		—			—
Distributions to noncontrolling interests		(1,133	)		(9,378	)		(11,344	)
Excess tax benefits from share-based compensation		1,080			439			(358	)
Proceeds from shares issued in connection with restricted stock unit, option and benefit plans		2,430			—			—
Dividends paid to TFAC		—			(83,000	)		(10,000	)
Cash dividends		(12,502	)		—			(3,588	)
Cash distribution to TFAC upon separation		(130,000	)		—			—

Cash provided by (used for) financing activities		220,877			(281,276	)		517,595

Net increase (decrease) in cash and cash equivalents		97,449			(92,354	)		(182,736	)
Cash and cash equivalents—Beginning of year		631,297			723,651			906,387

Cash and cash equivalents—End of year	$	728,746		$	631,297		$	723,651

SUPPLEMENTAL INFORMATION:
Cash paid (received) during the year for:
Interest	$	16,717		$	10,876		$	17,050
Premium taxes	$	41,060		$	33,520		$	56,301
Income taxes, net	$	21,771		$	25,036		$	(7,097	)
Noncash investing and financing activities:
Liabilities assumed in connection with acquisitions	$	1,100		$	2,215		$	4,096
Net noncash capital contributions from (distributions to) TFAC	$	2,097		$	(52,342	)	$	217,642
Net noncash distribution to TFAC upon separation	$	(26,570	)	$	—		$	—

See Notes to Consolidated Financial Statements

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Description of the Company:

First American Financial Corporation (the “Company”), through its subsidiaries, is engaged in the business of providing financial services. The Company consists of the following reportable segments and a corporate function:

•

The Company’s 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.

Spin-off

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

transfers, assumptions and assignments of these assets, liabilities and contracts. In particular, the Separation and Distribution Agreement provides that, subject to the terms and conditions contained therein:

•

On the record date for the Distribution, TFAC issued to the Company and its principal title insurance subsidiary, First American Title Insurance Company (“FATICO”) a number of shares of its common stock that resulted in the Company and FATICO collectively owning 12.9 million shares of CoreLogic’s common stock immediately following the Separation. See Note 18 Transactions with CoreLogic/TFAC to the consolidated financial statements for further discussion of the CoreLogic stock;

•

Significant Accounting Policies:

Principles of Combination and Basis of Presentation

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

separate publicly traded company. As a result, the Company’s historical financial statements prior to June 1, 2010 do not necessarily reflect what its financial position or results of operations would have been if it had been operated as a stand-alone public entity during the periods covered prior to June 1, 2010, and may not be indicative of the Company’s future results of operations and financial position.

Principles of Consolidation

Reclassification

Certain 2008 and 2009 amounts have been reclassified to conform to the 2010 presentation.

During 2010, the Company changed the presentation of its revenues. This change resulted in direct revenues from escrow and insured products being presented separately from direct revenues from non-insured products. Direct revenues from escrow and insured products are included in direct premiums and escrow fees, while direct revenues from non-insured products are included in information and other. Information and other is primarily comprised 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. The Company has reclassified prior period data to conform to the current presentation.

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the statements. Actual results could differ from the estimates and assumptions used.

Cash and cash equivalents

The Company considers cash equivalents to be all short-term investments that have an initial maturity of 90 days or less and are not restricted for statutory deposit or premium reserve requirements.

Accounts and accrued income receivable

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investments

Deposits with savings and loan associations and banks are short-term investments with initial maturities of more than 90 days.

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

Equity securities are carried at fair value and consist primarily of investments in marketable common stocks of corporate entities.

The Company classifies its publicly traded debt and equity securities as available-for-sale and carries them at fair value with unrealized gains or losses classified as a component of accumulated other comprehensive loss. See Note 3 Debt and Equity Securities to the consolidated financial statements for discussion of the Company’s accounting policies pertaining to its debt and equity securities, including other-than-temporary impairment and fair value measurement.

Other long-term investments consist primarily of investments in affiliates, which are accounted for under the equity method of accounting or the cost method of accounting, and notes receivable. For the year ended December 31, 2010, the Company recognized $3.9 million of impairment losses on other long-term investments, including $3.2 million related to a note receivable and $0.7 million related to other investments. For the year ended December 31, 2009, the Company recognized a $2.2 million impairment loss on a note receivable. For the year ended December 31, 2008, the Company recognized $38.8 million of impairment losses on other long-term investments, including $14.9 million related to an investment in non-voting convertible preferred stock, $17.1 million related to a note receivable of a diversified provider of real estate settlement services that declared bankruptcy and $6.8 million related to an investment in affiliate. Additionally, in 2008, the Company wrote-off $5.3 million in other accounts receivable related to the aforementioned diversified provider of real estate settlement services. In making the determination as to whether an individual investment was impaired, the Company assessed the then-current and expected financial condition of each relevant entity, including, but not limited to, the anticipated ability of the entity to make its contractually required payments to the Company (with respect to debt obligations to us), the results of valuation work performed with respect to the entity, the entity’s anticipated ability to generate sufficient cash flows and the market conditions in the industry in which the entity was operating.

Loans receivable

The performance of the Company’s loan portfolio is evaluated on an ongoing basis by management. Loans receivable are impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans receivable are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate. As a practical expedient, the loan may be valued based on its observable market price or the fair value of the collateral, if the loan is collateral-dependent. No indications of material impairment of loans receivable were identified during the three-year period ended December 31, 2010.

Loans, including impaired loans, are generally classified as nonaccrual if they miss more than three contractual payments, which usually represent past due between 60 to 90 days or more. Loans that are on a current payment status or miss 1 or 2 contractual payments may also be classified as nonaccrual if they are classified by the regulators in an examination, and the circumstances have not improved. The Company’s general

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

policy is to reverse from income previously accrued but unpaid interest. While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. Income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is probable. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, in accordance with the contractual terms of interest and principal. Interest income on non-accrual loans that would have been recognized during the years ended December 31, 2010, 2009 and 2008, if all of such loans had been current in accordance with their original terms, totaled $113 thousand, $12 thousand and $0, respectively.

The allowance for loan losses is established through charges to earnings in the form of provision for loan losses. Loan losses are charged to, and recoveries are credited to, the allowance for loan losses. The provision for loan losses is determined after considering various factors, such as loan loss experience, maturity of the portfolio, size of the portfolio, borrower credit history, the existing allowance for loan losses, current charges and recoveries to the allowance for loan losses, the overall quality of the loan portfolio, and current economic conditions, as determined by management, regulatory agencies and independent credit review specialists. While many of these factors are essentially a matter of judgment and may not be reduced to a mathematical formula, the Company believes that, in light of the collateral securing its loan portfolio, the current allowance for loan losses is an adequate allowance against foreseeable losses.

The adequacy of the allowance for loan losses is based on formula allocations and specific allocations. Formula allocations are made on a percentage basis, which is dependent on the underlying collateral, the type of loan and general economic conditions. Specific allocations are made as problem or potential problem loans are identified and are based upon an evaluation by management of the status of such loans. Specific allocations may be revised from time to time as the status of problem or potential problem loans changes.

Property and equipment

Property and equipment includes computer software acquired or developed for internal use and for use with the Company’s products. Software development costs, which include capitalized interest costs and certain payroll-related costs of employees directly associated with developing software, in addition to incremental payments to third parties, are capitalized from the time technological feasibility is established until the software is ready for use.

Depreciation on buildings and on furniture and equipment is computed using the straight-line method over estimated useful lives of 25 to 40 years and 3 to 10 years, respectively. Capitalized software costs are amortized using the straight-line method over estimated useful lives of 3 to 15 years. Leasehold improvements are amortized over useful lives that are consistent with the lease term.

Title plants and other indexes

Title plants and other indexes includes title plants of $502.9 million and capitalized real estate data, net of $1.7 million at December 31, 2010 and title plants of $484.7 million and capitalized real estate data, net of $3.5 million at December 31, 2009. Title plants are carried at original cost, with the costs of daily maintenance (updating) charged to expense as incurred. Because properly maintained title plants have indefinite lives and do not diminish in value with the passage of time, no provision has been made for depreciation or amortization. The Company analyzes its title plants for impairment on an annual basis. This analysis includes, but is not limited to, the effects of obsolescence, duplication, demand and other economic factors. Capitalized real estate data is amortized using the straight-line method over estimated useful lives of 5 to 15 years.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Goodwill

Goodwill is tested at least annually for impairment. The Company performs the goodwill impairment test in the fourth quarter using September 30 as the annual valuation date to test goodwill for impairment.

The valuation of goodwill requires assumptions and estimates of many critical factors, including revenue growth rates and operating margins, discount rates and future market conditions, determination of market multiples and the establishment of a control premium, among others. Forecasts of future operations are based, in part, on operating results and management’s expectations as to future market conditions. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. However, if actual results are not consistent with the Company’s estimates and assumptions, the Company may be exposed to future impairment losses that could be material.

Other intangible assets

The Company’s intangible assets consist of covenants not to compete, customer lists, trademarks and licenses. Each of these intangible assets, excluding licenses, is amortized on a straight-line basis over their useful lives ranging from 2 to 20 years and is subject to impairment tests when there is an indication of a triggering event or abandonment. Licenses are an intangible asset with an indefinite life and are therefore not amortized but rather tested for impairment by comparing the fair value of the license with its carrying value at least annually and when an indicator of potential impairment has occurred.

Impairment of long-lived assets

Long-lived assets held and used include property and equipment, capitalized software and other intangible assets with a finite life. Management uses estimated future cash flows (undiscounted and excluding interest) to measure the recoverability of long-lived assets held and used whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable. If the undiscounted cash flow analysis indicates a long-lived asset is not recoverable, the impairment loss recorded is the excess of the carrying amount of the asset over its fair value.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In addition, the Company carries long-lived assets held for sale at the lower of cost or market as of the date that certain criteria have been met. As of December 31, 2010 and 2009 no long-lived assets were classified as held for sale.

Reserve for known and incurred but not reported claims

The Company provides for title insurance losses by a charge to expense when the related premium revenue is recognized. The amount charged to expense is generally determined by applying a rate (the loss provision rate) to total title insurance premiums and escrow fees. The Company’s management estimates the loss provision rate at the beginning of each year and reassesses the rate quarterly to ensure that the resulting incurred but not reported (“IBNR”) loss reserve and known claims reserve included in the Company’s consolidated balance sheets together reflect management’s best estimate of the total costs required to settle all IBNR and known claims. If the ending IBNR reserve is not considered adequate, an adjustment is recorded.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Invested Equity

Invested equity refers to the net assets of the Company which reflects TFAC’s investment in the Company prior to the Separation and excludes noncontrolling interests.

Revenues

Title premiums on policies issued directly by the Company are recognized on the effective date of the title policy and escrow fees are recorded upon close of the escrow. Revenues from title policies issued by independent agents are recorded when notice of issuance is received from the agent, which is generally when cash payment is received by the Company. Revenues earned by the Company’s title plant management business are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Premium taxes

Title insurance, property and casualty insurance and home warranty companies, like other types of insurers, are generally not subject to state income or franchise taxes. However, in lieu thereof, most states impose a tax based primarily on insurance premiums written. This premium tax is reported as a separate line item in the consolidated statements of income (loss) in order to provide a more meaningful disclosure of the taxation of the Company.

Income taxes

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

Share-based compensation

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The cost is recognized over the period during which an employee is required to provide services in exchange for the award. As stock-based compensation expense recognized in the results of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company applies the long-form method for determining the pool of windfall tax benefits.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net income (loss) available to the Company’s stockholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if dilutive stock options had been exercised and RSUs were vested. The dilutive effect of stock options and unvested RSUs is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options and vesting of RSUs would be used to purchase common shares at the average market price for the period. The assumed proceeds include the purchase price the grantee pays, the hypothetical windfall tax benefit that the Company receives upon assumed exercise or vesting and the hypothetical average unrecognized compensation expense for the period. The Company calculates the assumed proceeds from excess tax benefits based on the “as-if” deferred tax assets calculated under share based compensation standards.

Employee benefit plans

The Company recognizes the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability on its consolidated balance sheets and recognizes changes in the funded status in the year in which changes occur, through accumulated other comprehensive income (loss). The funded status is measured as the difference between the fair value of plan assets and benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for the other postretirement plans). Actuarial gains and losses and prior service costs and credits that have not been recognized as a component of net periodic benefit cost previously are recorded as a component of accumulated other comprehensive income (loss). Plan assets and obligations are measured as of December 31.

The Company informally funds its nonqualified deferred compensation plan through tax-advantaged investments known as variable universal life insurance. The Company’s deferred compensation plan assets are included as a component of other assets and the Company’s deferred compensation plan liability is included as a component of pension costs and other retirement plans on the consolidated balance sheets. The income earned on the Company’s deferred compensation plan assets is included as a component of investment income and the income earned by the deferred compensation plan participants is included as a component of personnel costs on the consolidated statements of income.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Foreign currency

The Company operates in foreign countries, including Canada, the United Kingdom and various other established and emerging markets. The functional currencies of the Company’s foreign subsidiaries are their respective local currencies. The financial statements of the foreign subsidiaries are translated into U.S. dollars as follows: assets and liabilities at the exchange rate as of the balance sheet date, equity at the historical rates of exchange, and income and expense amounts at average rates prevailing throughout the period. Translation adjustments resulting from the translation of the subsidiaries’ accounts are included in accumulated other comprehensive loss as a separate component of stockholders’ equity. Gains and losses resulting from foreign currency transactions are included within other operating expenses.

Reinsurance

The Company assumes and cedes large title insurance risks through the mechanism of reinsurance. Additionally, the Company’s property and casualty insurance business uses reinsurance to limit risk associated with natural disasters such as windstorms, winter storms, wildfires and earthquakes. In reinsurance arrangements, the primary insurer retains a certain amount of risk under a policy and cedes the remainder of the risk under the policy to the reinsurer. The primary insurer pays the reinsurer a premium in exchange for accepting this risk of loss. The primary insurer generally remains liable to its insured for the total risk, but is reinsured under the terms of the reinsurance agreement. The amount of premiums assumed and ceded is recorded as a component of direct premiums and escrow fees on the Company’s income statement. The total amount of premiums assumed and ceded in connection with reinsurance was less than 1.0% of premium and escrow fees for the Company’s title insurance and property and casualty businesses for each of the three years ended December 31, 2010. Payments and recoveries on reinsured losses for the Company’s title insurance and property and casualty businesses were immaterial during the three years ended December 31, 2010.

Escrow deposits and trust assets

The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $3.03 billion and $2.46 billion at December 31, 2010 and 2009, respectively, of which $0.9 billion and $0.9 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB. The escrow deposits held at First American Trust, FSB, are included in the accompanying 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 at December 31, 2010 and 2009, and were held at First American Trust, FSB. Escrow deposits held at third-party financial institutions and trust assets are not considered the Company’s assets under generally accepted accounting principles and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company could be held contingently liable for the disposition of these assets.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Like-kind exchanges

The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds. Upon the completion of 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 $609.9 million and $385.0 million at December 31, 2010 and December 31, 2009, respectively, of which $408.8 million and $186.1 million at December 31, 2010 and December 31, 2009, respectively, were held at the Company’s subsidiary, First Security Business Bank (“FSBB”). The like-kind exchange deposits held at FSBB are included in the accompanying consolidated balance sheets in cash and cash equivalents with offsetting liabilities included in deposits. The remaining 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 under generally accepted accounting principles and, therefore, are not included in the accompanying consolidated balance sheets. All such amounts are placed in bank deposits with FDIC insured institutions. The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the return on the proceeds.

Recent Accounting Pronouncements:

FIRST AMERICAN FINANCIAL CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued updated guidance related to credit risk disclosures for financing receivables and the related allowance for credit losses. The updated guidance requires entities to disclose information at disaggregated levels, specifically defined as “portfolio segments” and “classes”. Expanded disclosures include, among other things, roll-forward schedules of the allowance for credit losses and information regarding the credit quality of receivables (including their aging) as of the end of a reporting period. The updated guidance is effective for interim and annual reporting periods ending after December 15, 2010, although the disclosures of reporting period activity are required for interim and annual reporting periods beginning after December 15, 2010. Except for the disclosure requirements, the adoption of this standard had no impact on the Company’s consolidated financial statements.

Pending Accounting Pronouncements:

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In December 2010, the FASB issued updated guidance related to when goodwill impairment testing should include Step 2 for reporting units with zero or negative carrying amounts. The updated guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts requiring those entities to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2010. Management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements as none of its reporting units have zero or negative carrying amounts.

In July 2010, the FASB issued updated guidance related to credit risk disclosures for financing receivables and the related allowance for credit losses. The updated guidance requires entities to disclose information at disaggregated levels, specifically defined as “portfolio segments” and “classes”. Expanded disclosures include, among other things, roll-forward schedules of the allowance for credit losses and information regarding the credit quality of receivables (including their aging) as of the end of a reporting period. The updated guidance for disclosures of reporting period activity are required for interim and annual reporting periods beginning after December 15, 2010. Except for the disclosure requirements, management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

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

Investments carried at $134.2 million were on deposit with state treasurers in accordance with statutory requirements for the protection of policyholders at December 31, 2010.

Pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available to the Company is limited, principally for the protection of policyholders. Under such regulations, the maximum amount of dividends, loans and advances available to the Company from its insurance subsidiaries in 2011 is $194.3 million.

The Company’s principal title insurance subsidiary, FATICO, maintained statutory surplus of $854.6 million and $802.3 million as of December 31, 2010 and 2009, respectively. Statutory net income for the years ended December 31, 2010 and 2009 was $73.3 million and $213.1 million, respectively. Statutory net loss for the year ended December 31, 2008 was $89.4 million.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Statutory accounting principles differ in some respects from generally accepted accounting principles, and these differences include, but are not limited to non-admission of certain assets (principally limitations on deferred tax assets, capitalized furniture and other equipment, premiums and other receivables 90 days past due, assets acquired in connection with claim settlements other than real estate or mortgage loans secured by real estate and limitations on goodwill), reporting of bonds at amortized cost, deferral of premiums received as statutory premium reserve and supplemental reserve (if applicable) and exclusion of incurred but not reported claims reserve.

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 cost		Gross unrealized					Estimated fair value		Other-than- temporary impairments in AOCI
(in thousands)	Amortized cost		gains		losses			Estimated fair value		Other-than- temporary impairments in AOCI
December 31, 2010
U.S. Treasury bonds	$	96,055	$	2,578	$	(774	)	$	97,859	$	—
Municipal bonds		280,471		2,925		(5,597	)		277,799		—
Foreign bonds		184,956		1,416		(430	)		185,942		—
Governmental agency bonds		241,844		1,314		(2,997	)		240,161		—
Governmental agency mortgage-backed securities		1,039,266		7,560		(1,329	)		1,045,497		—
Non-agency mortgage-backed and asset-backed securities (1)		63,773		277		(16,516	)		47,534		28,409
Corporate debt securities		209,476		5,216		(1,500	)		213,192		—

	$	2,115,841	$	21,286	$	(29,143	)	$	2,107,984	$	28,409

December 31, 2009
U.S. Treasury bonds	$	72,316	$	1,834	$	(297	)	$	73,853	$	—
Municipal bonds		132,965		2,484		(493	)		134,956		—
Foreign bonds		150,105		1,886		(83	)		151,908		—
Governmental agency bonds		326,787		1,816		(1,829	)		326,774		—
Governmental agency mortgage-backed securities		997,293		13,929		(6,080	)		1,005,142		—
Non-agency mortgage-backed and asset-backed securities (1)		94,454		1,546		(36,799	)		59,201		26,213
Corporate debt securities		86,911		1,204		(1,230	)		86,885		—

	$	1,860,831	$	24,699	$	(46,811	)	$	1,838,719	$	26,213

(1)

At December 31, 2010, the $63.8 million amortized cost is net of $6.3 million in other-than-temporary impairments determined to be credit related which have been recognized in earnings for the year ended December 31, 2010. At December 31, 2009, the $94.5 million amortized cost is net of $18.8 million in other-than-temporary impairments determined to be credit related which have been recognized in earnings for the year ended December 31, 2009. At December 31, 2010, the $16.5 million gross unrealized losses include $10.4 million of unrealized losses for securities determined to be other-than-temporarily impaired and $6.1 million of unrealized losses for securities for which an other-than-temporary impairment has not

FIRST AMERICAN FINANCIAL CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

been recognized. At December 31, 2009, the $36.8 million gross unrealized losses include $17.2 million of unrealized losses for securities determined to be other-than-temporarily impaired and $19.6 million of unrealized losses for securities for which an other-than-temporary impairment has not been recognized. The $28.4 million and $26.2 million other-than-temporary impairments recorded in accumulated other comprehensive income (“AOCI”) through December 31, 2010 and December 31, 2009, respectively, represent the amount of other-than-temporary impairment losses recognized in AOCI which, from January 1, 2009, were not included in earnings due to the fact that the losses were not considered to be credit related. Other-than-temporary impairments were recognized in AOCI for non-agency mortgage-backed and asset-backed securities only.

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
December 31, 2010
Preferred stocks	$	10,442	$	1,150	$	(18	)	$	11,574
Common stocks (1)		269,512		4,458		(3,128	)		270,842

	$	279,954	$	5,608	$	(3,146	)	$	282,416

December 31, 2009
Preferred stocks	$	31,808	$	1,523	$	(2,140	)	$	31,191
Common stocks		16,333		3,497		(1	)		19,829

	$	48,141	$	5,020	$	(2,141	)	$	51,020

(1)	CoreLogic common stock with a cost basis of $242.6 million and an estimated fair value of $239.5 million is included in common stocks at December 31, 2010. See Note 18 Transactions with CoreLogic/TFAC to the consolidated financial statements for additional discussion of the CoreLogic common stock.

The Company had the following net unrealized gains (losses) as of December 31, 2010, 2009 and 2008:


	As of December 31, 2010			As of December 31, 2009			As of December 31, 2008
	(in thousands)
Debt securities for which an OTTI has been recognized	$	(10,175	)	$	(15,690	)	$	—
Debt securities—all other		2,318			(6,422	)		(73,429	)
Equity securities		2,462			2,879			(33,291	)

	$	(5,395	)	$	(19,233	)	$	(106,720	)

Sales of debt and equity securities resulted in realized gains of $15.2 million, $19.5 million and $6.3 million and realized losses of $2.6 million, $3.5 million and $5.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company had the following gross unrealized losses as of December 31, 2010 and December 31, 2009:


	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
December 31, 2010
Debt securities:
U.S. Treasury bonds	$	13,555	$	(774	)	$	—	$	—		$	13,555	$	(774	)
Municipal bonds		149,921		(5,597	)		—		—			149,921		(5,597	)
Foreign bonds		76,106		(399	)		13,587		(31	)		89,693		(430	)
Governmental agency bonds		160,240		(2,991	)		4,994		(6	)		165,234		(2,997	)
Governmental agency mortgage-backed securities		177,417		(1,126	)		74,848		(203	)		252,265		(1,329	)
Non-agency mortgage-backed and asset-backed securities		—		—			45,301		(16,516	)		45,301		(16,516	)
Corporate debt securities		72,481		(1,497	)		422		(3	)		72,903		(1,500	)

Total debt securities		649,720		(12,384	)		139,152		(16,759	)		788,872		(29,143	)
Equity securities		247,673		(3,128	)		220		(18	)		247,893		(3,146	)

Total	$	897,393	$	(15,512	)	$	139,372	$	(16,777	)	$	1,036,765	$	(32,289	)

December 31, 2009
Debt securities:
U.S. Treasury bonds	$	44,382	$	(297	)	$	—	$	—		$	44,382	$	(297	)
Municipal bonds		42,428		(448	)		25,067		(45	)		67,495		(493	)
Foreign bonds		28,541		(82	)		1,091		(1	)		29,632		(83	)
Governmental agency bonds		185,351		(1,817	)		4,138		(12	)		189,489		(1,829	)
Governmental agency mortgage-backed securities		267,692		(3,048	)		319,375		(3,032	)		587,067		(6,080	)
Non-agency mortgage-backed and asset-backed securities		1,767		(176	)		54,733		(36,623	)		56,500		(36,799	)
Corporate debt securities		49,970		(443	)		23,500		(787	)		73,470		(1,230	)

Total debt securities		620,131		(6,311	)		427,904		(40,500	)		1,048,035		(46,811	)
Equity securities		1,362		(1,341	)		7,776		(800	)		9,138		(2,141	)

Total	$	621,493	$	(7,652	)	$	435,680	$	(41,300	)	$	1,057,173	$	(48,952	)

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Substantially all securities in the Company’s non-agency mortgage-backed and asset-backed portfolio are senior tranches and were investment grade at the time of purchase, however many have been downgraded below investment grade since purchase. The table below summarizes the composition of the Company’s non-agency mortgage-backed and asset-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 Group (“S&P”) and Moody’s Investors 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 December 31, 2010.


(in thousands, except percentages and number of securities)	Number of Securities		Amortized Cost		Estimated Fair Value		A-Ratings or Higher			BBB+ to BBB- Ratings			Non- Investment Grade
Non-agency mortgage-backed securities:
Prime single family residential:
2007		1	$	6,906	$	5,340		0.0	%		0.0	%		100.0	%
2006		7		31,438		21,355		0.0	%		0.0	%		100.0	%
2005		2		6,131		4,636		0.0	%		0.0	%		100.0	%
2003		1		310		303		100.0	%		0.0	%		0.0	%
Alt-A single family residential:
2007		2		18,988		15,900		0.0	%		0.0	%		100.0	%

		13	$	63,773	$	47,534		0.5	%		0.0	%		99.5	%

As of December 31, 2010, none of the non-agency mortgage-backed and asset-backed securities were on negative credit watch by S&P or Moody’s.

FIRST AMERICAN FINANCIAL CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The amortized cost and estimated fair value of debt securities at December 31, 2010, 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	$	9,234	$	69,408	$	11,313	$	6,100	$	96,055
Estimated fair value	$	9,415	$	71,413	$	11,205	$	5,826	$	97,859
Municipal bonds
Amortized cost	$	3,629	$	41,927	$	117,318	$	117,597	$	280,471
Estimated fair value	$	3,678	$	42,988	$	117,987	$	113,146	$	277,799
Foreign bonds
Amortized cost	$	76,811	$	105,182	$	2,963	$	—	$	184,956
Estimated fair value	$	76,918	$	106,059	$	2,965	$	—	$	185,942
Governmental agency bonds
Amortized cost	$	5,077	$	110,802	$	107,239	$	18,726	$	241,844
Estimated fair value	$	5,183	$	110,987	$	105,320	$	18,671	$	240,161
Corporate debt securities
Amortized cost	$	8,698	$	87,962	$	94,771	$	18,045	$	209,476
Estimated fair value	$	8,822	$	89,763	$	96,272	$	18,335	$	213,192

Total debt securities excluding mortgage-backed and asset-backed securities
Amortized cost	$	103,449	$	415,281	$	333,604	$	160,468	$	1,012,802
Estimated fair value	$	104,016	$	421,210	$	333,749	$	155,978	$	1,014,953

Total mortgage-backed and asset-backed securities
Amortized cost									$	1,103,039
Estimated fair value									$	1,093,031
Total debt securities
Amortized cost									$	2,115,841
Estimated fair value									$	2,107,984

Other-than-temporary impairment—debt securities

Although dislocations in the capital and credit markets have largely recovered, there continues to be volatility and disruption concerning certain vintages of non-agency mortgage-backed securities. The primary factors negatively impacting certain vintages of non-agency mortgage-backed securities include stringent borrowing guidelines that result in the inability of borrowers to refinance, high unemployment, continued declines in real estate values, uncertainty regarding the timing and effectiveness of governmental solutions and a general slowdown in economic activity. As of December 31, 2010, gross unrealized losses on non-agency mortgage-backed and asset-backed securities for which an other-than-temporary impairment has not been recognized were $6.1 million (which represents 6 securities), all of which have been in an unrealized loss position for longer than 12 months. The Company determines if a non-agency mortgage-backed and asset-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 and

FIRST AMERICAN FINANCIAL CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

asset-backed securities in its portfolio that are in an unrealized loss position. The methodology and key assumptions used in estimating the present value of cash flows expected to be collected are described below. For the securities that were determined not to be other-than-temporarily impaired at December 31, 2010, the present value of the cash flows expected to be collected exceeded the amortized cost of each security.

The table below summarizes the primary assumptions used at December 31, 2010 in estimating the cash flows expected to be collected for these securities.


	Weighted average			Range
Prepayment speeds		7.8	%		4.4% – 13.0%
Default rates		6.3	%		0.2% – 18.4%
Loss severity		39.0	%		0.3% – 61.0%

As a result of the Company’s security-level review, it recognized total other-than-temporary impairments of $8.5 million and $45.0 million on its non-agency mortgage-backed and asset-backed securities for the years ended December 31, 2010 and 2009, respectively. $6.3 million and $18.8 million of other-than-temporary impairment losses were considered to be credit related and were recognized in earnings for the years ended

FIRST AMERICAN FINANCIAL CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2010 and 2009, respectively, while $2.2 million and $26.2 million of other-than-temporary impairment losses were considered to be related to factors other than credit and were therefore recognized in other comprehensive income for the years ended December 31, 2010 and 2009, respectively. The amounts remaining in other comprehensive income for the years ended December 31, 2010 and 2009 should not be recorded in earnings, because the losses were not considered to be credit related based on the Company’s other-than-temporary impairment analysis as discussed above.

It is possible that the Company could recognize additional other-than-temporary impairment losses on some securities it owns at December 31, 2010 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 years ended December 31, 2010 and 2009.


	Year Ended December 31,
*(in thousands)*	2010		2009
Credit loss on debt securities held at beginning of period	$	18,807	$	—
Addition for credit loss for which an other-than-temporary impairment was previously recognized		6,169		—
Addition for credit loss for which an other-than-temporary impairment was not previously recognized		132		18,807

Credit loss on debt securities held as of December 31	$	25,108	$	18,807

Credit loss on debt securities held as of January 1, 2009 was $0 as there was no cumulative effect adjustment recorded related to initially applying the newly issued accounting guidance that established a new method of recognizing and measuring other-than-temporary impairments of debt securities. There was no cumulative effect adjustment recorded because there were no other-than-temporary impairment adjustments previously recognized on the debt securities held by the Company at January 1, 2009.

Other-than-temporary impairment—equity securities

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

If objective, substantial evidence does not indicate a likely recovery during that timeframe, the Company’s policy is that such losses are considered other-than-temporary and therefore an impairment loss is recorded. The Company recorded other-than-temporary impairment of $1.7 million during the year ended December 31, 2010 relating to the Company’s preferred equity securities as a component of net other-than-temporary impairment losses recognized in earnings. During the prior year, the Company concluded that objective substantive evidence was not available on 51 common equity securities and 15 preferred equity securities that had been in a loss position for greater than twelve months. Accordingly, for the year ended December 31, 2009, the Company recorded an other-than-temporary impairment charge of $16.0 million and $5.1 million, relating to its common and preferred equity securities, respectively, as a component of net other-than-temporary impairment losses recognized in earnings. The prior year impairment loss includes a $2.9 million other-than-temporary impairment charge upon the Company’s election to convert its preferred stock in Citigroup Inc. into common stock of that entity under the terms of Citigroup’s publicly announced exchange offer. For the year ended December 31, 2008, we recognized an other-than-temporary impairment charge in earnings of $31.2 million related to our investments in perpetual preferred securities issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The impairment was due to actions taken by the United States government with respect to Fannie Mae and Freddie Mac.

Fair value measurement

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

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Debt Securities

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 and asset-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 and asset-backed securities was obtained from the independent pricing service referenced above and subject to the Company’s validation procedures discussed above. However, due to the fact that these securities were not actively traded, there was less observable inputs available requiring the pricing service to use more judgment in determining the fair value of the securities, therefore the Company classified non-agency mortgage-backed and asset-backed securities as Level 3.

Equity Securities

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the Company’s available-for-sale investments measured at fair value on a recurring basis as of December 31, 2010 and December 31, 2009, classified using the three-level hierarchy for fair value measurements:


(in thousands)	Estimated fair value as of December 31, 2010		Level 1		Level 2		Level 3
Debt securities
U.S. Treasury bonds	$	97,859	$	—	$	97,859	$	—
Municipal bonds		277,799		—		277,799		—
Foreign bonds		185,942		—		185,942		—
Governmental agency bonds		240,161		—		240,161		—
Governmental agency mortgage-backed securities		1,045,497		—		1,045,497		—
Non-agency mortgage-backed and asset-backed securities		47,534		—		—		47,534
Corporate debt securities		213,192		—		213,192		—

		2,107,984		—		2,060,450		47,534

Equity securities
Preferred stocks		11,574		11,574		—		—
Common stocks		270,842		270,842		—		—

		282,416		282,416		—		—

	$	2,390,400	$	282,416	$	2,060,450	$	47,534


(in thousands)	Estimated fair value as of December 31, 2009		Level 1		Level 2		Level 3
Debt securities
U.S. Treasury bonds	$	73,853	$	—	$	73,853	$	—
Municipal bonds		134,956		—		134,956		—
Foreign bonds		151,908		—		151,908		—
Governmental agency bonds		326,774		—		326,774		—
Governmental agency mortgage-backed securities		1,005,142		—		1,005,142		—
Non-agency mortgage-backed and asset-backed securities		59,201		—		—		59,201
Corporate debt securities		86,885		—		86,885		—

		1,838,719		—		1,779,518		59,201

Equity securities
Preferred stocks		31,191		31,191		—		—
Common stocks		19,829		19,829		—		—

		51,020		51,020		—		—

	$	1,889,739	$	51,020	$	1,779,518	$	59,201

The Company did not have any transfers in and out of Level 1 and Level 2 measurements during the years ended December 31, 2010 and 2009. 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 CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents a summary of the changes in fair value of Level 3 available-for-sale investments for the years ended December 31, 2010 and 2009:


(in thousands)	Non-agency mortgage-backed and asset-backed securities as of December 31, 2010			Non-agency mortgage-backed and asset-backed securities as of December 31, 2009
Fair value at beginning of year	$	59,201		$	—
Total gains/(losses) (realized and unrealized):
Included in earnings:
Net other-than-temporary impairment losses recognized in earnings		(6,301	)		—
Included in other comprehensive loss		19,014			—
Settlements and sales		(24,380	)		—
Transfers into Level 3		—			59,201
Transfers out of Level 3		—			—

Fair value as of December 31	$	47,534		$	59,201

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	$	(6,301	)	$	—

The Company did not purchase any non-agency mortgage-backed and asset-backed securities during the years ended December 31, 2010 and 2009. Also, the Company did not have a material amount of gains or losses on sales of non-agency mortgage-backed and asset-backed securities for the years ended December 31, 2010 and 2009. During the quarter ended December 31, 2009, we determined that the fair values of our non-agency mortgage-backed and asset-backed securities were estimated using certain significant unobservable inputs, which resulted in a Level 3 classification. Our policy is to report transfers into Level 3 as of the end of the period.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4. Financing Receivables:

Financing receivables are summarized as follows:


	December 31
	2010			2009
	(in thousands)
*Loans receivable, net:*
Real estate–mortgage
Multi-family residential	$	12,203		$	12,176
Commercial		152,280			151,879
Other		1,120			773

		165,603			164,828
Allowance for loan losses		(3,271	)		(2,071	)
Participations sold		(977	)		(1,031	)
Deferred loan fees, net		171			171

Loans receivable, net		161,526			161,897

*Other long-term investments:*
Notes receivable—secured		14,127			13,059
Notes receivable—unsecured		10,463			23,991
Loss reserve		(5,095	)		(6,573	)

Notes receivable, net		19,495			30,477

*Notes receivable from CoreLogic/TFAC*		18,787			187,825

Total financing receivables, net	$	199,808		$	380,199

Real estate loans are collateralized by properties located primarily in Southern California. The average yield on the loan portfolio was 6.69% and 6.78% for the years ended December 31, 2010 and 2009, respectively. Average yields are affected by prepayment penalties recorded as income, prepayment speeds, loan fees amortized to income and the market interest rates.

Aging analysis of loans receivables at December 31, 2010, is as follows:


	Total Loans Receivables		Current		30-60 days past due		60-89 days past due		Greater than 90 days past due		Nonaccrual status
	(in thousands)
Loans Receivable:
Multi-family residential	$	12,203	$	12,203	$	—	$	—	$	—	$	—
Commercial		152,280		149,839		—		—		—		2,441
Other		1,120		1,120		—		—		—		—

	$	165,603	$	163,162	$	—	$	—	$	—	$	2,441

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

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The aggregate annual maturities for loans receivable are as follows:


Year	(in thousands)
2011	$	3,973
2012		3,004
2013		2,180
2014		2,932
2015		9,830
2016 and thereafter		143,684

	$	165,603

NOTE 5. Property and Equipment:

Property and equipment consists of the following:


	December 31
	2010			2009
	(in thousands)
Land	$	31,843		$	36,581
Buildings		297,966			342,481
Furniture and equipment		190,834			176,260
Capitalized software		307,454			270,593

		828,097			825,915
Accumulated depreciation and amortization		(482,226	)		(467,344	)

	$	345,871		$	358,571

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 6. Goodwill:

A reconciliation of the changes in the carrying amount of goodwill by operating segment, for the years ended December 31, 2010 and 2009, is as follows:


	Title Insurance			Specialty Insurance		Total
	(in thousands)
Balance as of December 31, 2008	$	760,144		$	46,057	$	806,201
Dispositions		(6,317	)		—		(6,317	)
Other/ post acquisition adjustments		1,102			—		1,102

Balance as of December 31, 2009		754,929			46,057		800,986
Acquisitions		8,631			—		8,631
Other/ post acquisition adjustments		2,414			—		2,414

Balance as of December 31, 2010	$	765,974		$	46,057	$	812,031

The activity in the above reconciliation for other/ post acquisition adjustments primarily relates to the effect of foreign currency exchange adjustments.

The Company’s four reporting units for purposes of testing impairment are title insurance, home warranty, property and casualty insurance and trust and other services.

The Company’s policy is to perform an annual goodwill impairment test for each reporting unit in the fourth quarter. Although recent market conditions and economic events have had an overall negative impact on the Company’s operations and related financial results, impairment analyses were not performed at any other time in the year as no triggering events requiring such an analysis occurred.

The Company’s 2010, 2009 and 2008 evaluations did not indicate impairment in any of its reporting units. There is no accumulated impairment for goodwill as the Company has never recognized any impairment to its reporting units. Due to significant volatility in the current markets, the Company’s operations may be negatively impacted in the future to the extent that exposure to impairment losses may be increased.

NOTE 7. Other Intangible Assets:

Other intangible assets consist of the following:


	December 31
	2010			2009
	(in thousands)
Finite-lived intangible assets:
Customer lists	$	72,854		$	67,598
Covenants not to compete		30,811			42,459
Trademarks		10,304			10,525

		113,969			120,582
Accumulated amortization		(63,597	)		(61,385	)

		50,372			59,197
Indefinite-lived intangible assets:
Licenses		19,678			19,695

	$	70,050		$	78,892

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amortization expense for finite-lived intangible assets was $14.5 million, $14.1 million and $16.0 million for the years ended December 31, 2010, 2009 and 2008, respectively.

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


Year	(in thousands)
2011	$	13,125
2012	$	10,705
2013	$	9,715
2014	$	5,647
2015	$	3,236

NOTE 8. Deposits:

Escrow, passbook and investment certificate accounts are summarized as follows:


	December 31
	2010			2009
	(in thousands, except percentages)
Escrow accounts:
Interest bearing	$	736,664		$	670,308
Non-interest bearing		263,528			222,621

		1,000,192			892,929

Passbook accounts		437,137			215,031

Certificate accounts:
Less than one year		22,736			27,829
One to five years		22,492			17,785

		45,228			45,614

	$	1,482,557		$	1,153,574

Annualized interest rates:
Escrow accounts		0.38	%		0.61	%

Passbook accounts		0.31	%		0.33	%

Certificate accounts		2.39	%		3.23	%

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 9. Reserve for Known and Incurred But Not Reported Claims:

Activity in the reserve for known and incurred but not reported claims is summarized as follows:


	December 31
	2010		2009			2008
	(in thousands)
Balance at beginning of year	$	1,227,757	$	1,326,282		$	1,332,337
Provision related to:
Current year		289,220		354,149			432,033
Prior years		31,654		(7,435	)		77,530

		320,874		346,714			509,563

Payments, net of recoveries, related to:
Current year		136,445		137,300			180,806
Prior years		319,780		314,887			301,346

		456,225		452,187			482,152

Other		15,832		6,948			(33,466	)

Balance at end of year	$	1,108,238	$	1,227,757		$	1,326,282

“Other” primarily represents reclassifications to the reserve for assets acquired in connection with claim settlements and purchase accounting adjustments related to company acquisitions and foreign currency gains/losses. Claims activity associated with reinsurance is not material and, therefore, not presented separately. Current year payments include $123.6 million, $125.2 million and $148.1 million in 2010, 2009 and 2008, respectively, that primarily relate to the Company’s specialty insurance segment. Prior year payments include $18.6 million, $20.4 million and $23.3 million in 2010, 2009 and 2008, respectively, that relate to the Company’s specialty insurance segment.

The current economic environment appears to have more potential for volatility than usual over the short term, particularly in regard to real estate prices and mortgage defaults, which directly affect title claims. Relevant contributing factors include high foreclosure volumes, tight credit markets, general economic instability and

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

government actions that may mitigate or exacerbate recent trends. Other factors, including factors not yet identified, may also influence claims development. At this point, economic and certain market conditions appear to be improving, yet significant uncertainty remains. This environment results in increased potential for actual claims experience to vary significantly from projections, in either direction, which would directly affect the claims provision. If actual claims vary significantly from expected, reserves may need to be adjusted to reflect updated estimates of future claims.

A general decline in real estate prices can expose lenders to greater risk of losses on mortgage loans, as loan-to-value ratios increase and defaults and foreclosures increase. The current environment may continue to have increased potential for claims on lenders’ title policies, particularly if defaults and foreclosures are at elevated levels. Title insurance claims exposure for a given policy year is also affected by the quality of mortgage loan underwriting during the corresponding origination year. The Company believes that sensitivity of claims to external conditions in real estate and mortgage markets is an inherent feature of title insurance’s business economics that applies broadly to the title insurance industry. Lenders have experienced high losses on mortgage loans originated during several prior policy years. These losses have led to higher title insurance claims on lenders policies, and also have accelerated the reporting of claims that would have been realized later under more normal conditions.

The projected ultimate loss ratios, as of December 31, 2010, for policy years 2010 and 2009 are 4.9% and 5.2%, respectively, which are lower than the ratios for 2005 through 2008. These projections are based in part on an assumption that more favorable underwriting conditions existed in 2009 and 2010 than in 2005 through 2008, including tighter loan underwriting standards and lower housing prices. Current claims data from both policy years 2009 and 2010, while still at an early stage of development, supports this assumption.

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


(in thousands except percentages)	December 31, 2010				December 31, 2009
Known title claims	$	192,268	17.4	%	$	206,439	16.8	%
IBNR		875,627	79.0	%		978,854	79.7	%

Total title claims		1,067,895	96.4	%		1,185,293	96.5	%
Non-title claims		40,343	3.6	%		42,464	3.5	%

Total loss reserves	$	1,108,238	100.0	%	$	1,227,757	100.0	%

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 10. Notes and Contracts Payable:


	December 31
	2010		2009
	(in thousands)
Line of credit borrowings due June 1, 2013, weighted-average interest rate of 3.06% at December 31, 2010	$	200,000	$	—
Trust deed notes with maturities through 2032, collateralized by land and buildings with a net book value of $40,426 and $40,520 at December 31, 2010 and 2009, respectively, weighted-average interest rate of 5.45% and 5.24%, at December 31, 2010 and 2009, respectively		47,931		50,403
Other notes and contracts payable with maturities through 2020, weighted-average interest rate of 4.39% and 5.59% at December 31, 2010 and 2009, respectively		45,886		68,910

	$	293,817	$	119,313

The weighted-average interest rate for the Company’s notes and contracts payable was 3.66% and 5.44% at December 31, 2010 and 2009, respectively.

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

The credit agreement is comprised of a $400.0 million revolving credit facility. The revolving loan commitments terminate on the third anniversary of the date of closing, or June 1, 2013. On June 1, 2010, the Company borrowed $200.0 million under the facility and transferred such funds to CoreLogic, as previously contemplated in connection with the Separation. Proceeds may also be used for general corporate purposes. At December 31, 2010, the interest rate associated with the $200.0 million borrowed under the facility is 3.06%. See Note 18 Transactions with CoreLogic/TFAC to the consolidated financial statements for additional discussion of the $200.0 million transferred to CoreLogic.

If at any time the rating by Moody’s or S&P of the senior, unsecured, long-term indebtedness for borrowed money of the Company that is not guaranteed by any other person or subject to any other credit enhancement is rated lower than Baa3 or BBB-, respectively, or is not rated by either such rating agency, then the loan commitments are subject to mandatory reduction from (a) 50% of the net proceeds of certain equity issuances by any Loan Party, (b) 50% of the net proceeds of certain debt incurred or issued by any Loan Party, (c) 25% of the net proceeds received by any Loan Party from the disposition of CoreLogic stock received in connection with the Separation and (d) the net proceeds received by any Loan Party from certain dispositions of assets, provided that the commitment reductions described above are only required to the extent necessary to reduce the total loan commitments to $200.0 million. The Company is only required to prepay loans to the extent that, after giving effect to any mandatory commitment reduction, the aggregate principal amount of all outstanding loans exceeds the remaining total loan commitments.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The credit agreement includes representations and warranties, reporting covenants, affirmative covenants, negative covenants, financial covenants and events of default customary for financings of this type. Upon the occurrence of an event of default the lenders may accelerate the loans and may exercise their remedies under the collateral documents. Upon the occurrence of certain insolvency and bankruptcy events of default the loans automatically accelerate. At December 31, 2010, the Company is in compliance with the debt covenants under the credit agreement.

The aggregate annual maturities for notes and contracts payable in each of the five years after December 31, 2010, are as follows:


Year	Notes and contracts payable
	(in thousands)
2011	$	19,585
2012		7,848
2013		206,507
2014		11,950
2015		15,038
Thereafter		32,889

	$	293,817

NOTE 11. Investment Income:

The components of investment income are as follows:


	Year ended December 31,
	2010		2009		2008
	(in thousands)
Interest:
Cash equivalents and deposits with savings and loan associations and banks	$	11,499	$	14,252	$	42,568
Debt securities		48,127		48,015		57,213
Other long-term investments		2,574		12,879		30,913
Loans receivable		10,995		10,711		9,055
Dividends on marketable equity securities		2,711		5,041		5,403
Equity in earnings (losses) of affiliates		8,376		10,877		(2,642	)
Other		9,980		18,474		9,093

	$	94,262	$	120,249	$	151,603

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 12. Income Taxes:

For the years ended December 31, 2010, 2009 and 2008, domestic and foreign pretax income (loss) from continuing operations before noncontrolling interests was $213.5 million and $(1.4) million, $195.2 million and $9.1 million and $(132.4) million and $16.5 million, respectively.

Income taxes are summarized as follows:


	Year ended December 31,
	2010			2009			2008
	(in thousands)
Current:
Federal	$	69,379		$	(25,430	)	$	(28,713	)
State		14,962			3,727			6,881
Foreign		13,657			12,450			11,475

		97,998			(9,253	)		(10,357	)

Deferred:
Federal		(680	)		82,488			(25,228	)
State		(9,823	)		(4,668	)		(1,008	)
Foreign		(4,345	)		1,501			(6,840	)

		(14,848	)		79,321			(33,076	)

	$	83,150		$	70,068		$	(43,433	)

Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A reconciliation of this difference is as follows:


	Year ended December 31,
	2010			2009			2008
	(in thousands)
Taxes calculated at federal rate	$	73,843		$	67,360		$	(44,321	)
State taxes, net of federal benefit		3,340			(612	)		3,735
Tax effect of noncontrolling interests		388			681			1,096
Dividends received deduction		(250	)		(1,381	)		(526	)
Change in liability for tax positions		4,626			(8,776	)		(1,710	)
Exclusion of certain meals and entertainment expenses		2,889			2,675			3,745
Foreign taxes in excess of (less than) federal rate		9,802			10,365			(1,535	)
Change in capital loss valuation allowance		(14,683	)		—			—
Other items, net		3,195			(244	)		(3,917	)

	$	83,150		$	70,068		$	(43,433	)

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The primary components of temporary differences that give rise to the Company’s net deferred tax assets are as follows:


	December 31
	2010			2009
	(in thousands)
Deferred tax assets:
Deferred revenue	$	6,103		$	5,758
Employee benefits		61,726			60,224
Bad debt reserves		17,508			13,447
Investment in affiliates		4,866			8,526
Loss reserves		7,987			29,039
Pension		104,535			97,694
Capital loss carryforward		29,186			31,402
Net operating loss carryforward		22,134			19,236
Other		4,301			26,864

		258,346			292,190

Deferred tax liabilities:
Depreciable and amortizable assets		145,785			138,863
Claims and related salvage		(1,029	)		18,549
Other		(2,382	)		5,915

		142,374			163,327

Net deferred tax asset before valuation allowance		115,972			128,863

Valuation allowance		(19,126	)		(27,045	)

Net deferred tax asset	$	96,846		$	101,818

The exercise of stock options represents a tax benefit and has been reflected as a reduction of taxes payable and an increase to equity. The benefits or expenses recorded were $1.1 million benefit, $0.0 million benefit and $0.4 million expense for the years ended December 31, 2010, 2009 and 2008, respectively.

In connection with the Separation, the Company and TFAC entered into a Tax Sharing Agreement, dated June 1, 2010 (the “Tax Sharing Agreement”), which governs the Company’s and CoreLogic’s respective rights, responsibilities and obligations. Pursuant to the Tax Sharing Agreement, CoreLogic will prepare and file the consolidated federal income tax return, and any other tax returns that include both CoreLogic and the Company for all taxable periods ending on or prior to June 1, 2010. The Company will prepare and file all tax returns that include solely the Company for all taxable periods ending after that date. As part of the Tax Sharing Agreement, the Company is contingently responsible for 50% of certain Separation-related tax liabilities. At December 31, 2010, the Company has a $2.3 million payable to CoreLogic related to these matters which is included in due to CoreLogic/TFAC, net on the Company’s consolidated balance sheet.

At December 31, 2010, the Company had a net payable to CoreLogic of $61.5 million related to tax matters prior to the Separation. This amount is included in the Company’s consolidated balance sheet in due to CoreLogic/TFAC, net. At December 31, 2009, the Company had a net receivable from TFAC of $14.2 million related to tax matters prior to the Separation. This amount is included in the Company’s consolidated balance sheet in income taxes receivable and accounts payable and accrued liabilities.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, 2010, the Company had available federal, state and foreign net operating loss carryforwards totaling, in aggregate, approximately $81.5 million for income tax purposes, of which $41.4 million has an indefinite expiration. The remaining $40.1 million expire at various times beginning in 2011.

The Company has a capital loss carryforward of $83.3 million that expires in 2012. In addition, the Company has net impairment and unrealized capital losses of $21.0 million which includes $38.2 million of unrealized losses related to debt securities that the Company has the ability and intent to hold to recovery. The Company continues to monitor the realizability of these losses and believes it is more likely than not that the tax benefits associated with these losses will be realized. In making that determination the Company has identified certain prudent and feasible tax planning strategies that the Company will implement unless the need to do so is eliminated in the future. However, this determination is a judgment and could be impacted by further market fluctuations.

The valuation allowance relates to deferred tax assets for certain state net operating loss carryforwards and the Company’s foreign operations. The Company evaluates the realizability of its deferred tax assets by assessing the 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 net deferred tax assets. Failure to achieve the forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings. The activity in the valuation allowance results from the Company’s decision to deduct its foreign taxes paid, rather than claim a foreign tax credit, and its assessment that certain capital losses were realizable. This decrease was partially offset by an increase in the valuation allowance related to certain foreign net operating losses.

As of December 31, 2010, United States taxes were not provided for on the earnings of the Company’s foreign subsidiaries of $118.1 million, as the Company has invested or expects to invest the undistributed earnings indefinitely. If in the future these earnings are repatriated to the United States, or if the Company determines that the earnings will be remitted in the foreseeable future, additional tax provisions may be required. It is not practical to calculate the deferred taxes associated with these earnings; however foreign tax credits may be available to reduce federal income taxes in the event of distribution.

As of December 31, 2010, the liability for income taxes associated with uncertain tax positions was $11.1 million. This liability can be reduced by $1.5 million of offsetting tax benefits associated with the correlative effects of potential adjustments including state income taxes and timing adjustments. The net amount of $9.6 million, if recognized, would favorably affect the Company’s effective tax rate. At December 31, 2009, the liability for income taxes associated with uncertain tax positions was $10.4 million.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2010, 2009 and 2008 is as follows:


	December 31
	2010		2009			2008
	(in thousands)
Unrecognized tax benefits—opening balance	$	10,400	$	18,900		$	22,800
Gross decreases—tax positions in prior period		—		(1,700	)		(900	)
Gross increases—current period tax positions		700		—			600
Expiration of the statute of limitations for the assessment of taxes		—		(6,800	)		(3,600	)

Unrecognized tax benefits—ending balance	$	11,100	$	10,400		$	18,900

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in tax expense. As of December 31, 2010 and 2009, the Company had accrued $2.4 million and $2.0 million, respectively, of interest and penalties (net of tax benefits of $0.9 million and $0.7 million, respectively) related to uncertain tax positions.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various non-U.S. jurisdictions. The primary non-federal jurisdictions are California, Oregon, Michigan, Texas, the United Kingdom and Canada. 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.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly increase or decrease within the next 12 months. These changes may be the result of items such as ongoing audits or the expiration of federal and state statute of limitations for the assessment of taxes. The Company estimates that decreases in unrecognized tax benefits within the next 12 months will total approximately $1.5 million.

The Company records a liability for potential tax assessments based on its estimate of the potential exposure. New tax laws and new interpretations of laws and rulings by tax authorities may affect the liability for potential tax assessments. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates. To the extent the Company’s estimates differ from actual payments or assessments, income tax expense is adjusted. The Company’s income tax returns in several jurisdictions are being examined by various tax authorities. The Company believes that adequate amounts of tax and related interest, if any, have been provided for any adjustments that may result from these examinations.

NOTE 13. Earnings (Loss) Per Share:

The Company’s potential dilutive securities are stock options and RSUs. Stock options and RSUs are reflected in diluted net income (loss) per share attributable to the Company’s stockholders by application of the treasury-stock method. There are no reconciling items for net income (loss) attributable to the Company for the three years ended December 31, 2010 necessary for the diluted net income (loss) per share attributable to the Company’s stockholders calculation. A reconciliation of weighted-average shares outstanding is as follows:


	2010		2009		2008
	(in thousands, except per share data)
Numerator for basic and diluted net income (loss) per share attributable to the Company’s stockholders:
Net income (loss) attributable to the Company	$	127,829	$	122,389	$	(84,005	)

Denominator for basic net income (loss) per share attributable to the Company’s stockholders:
Weighted-average shares		104,134		104,006		104,006
Effect of dilutive securities:
Employee stock options and restricted stock units		2,043		—		—

Denominator for diluted net income (loss) per share attributable to the Company’s stockholders		106,177		104,006		104,006

Net income (loss) per share attributable to the Company’s stockholders:
Basic	$	1.23	$	1.18	$	(0.81	)

Diluted	$	1.20	$	1.18	$	(0.81	)

100

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the year ended December 31, 2010, basic earnings per share was computed using the number of shares of common stock outstanding immediately following the Separation, as if such shares were outstanding for the entire period prior to the Separation, plus the weighted average number of such shares outstanding following the Separation through December 31, 2010.

For the year ended December 31, 2010, diluted earnings per share was computed using (i) the number of shares of common stock outstanding immediately following the Separation, (ii) the weighted average number of such shares outstanding following the Separation through December 31, 2010, and (iii) if dilutive, the incremental common stock that the Company would issue upon the assumed exercise of stock options and the vesting RSUs using the treasury stock method.

For the years ended December 31, 2009 and 2008, basic and diluted earnings per share were computed using the number of shares of common stock outstanding immediately following the Separation, as if such shares were outstanding for the entire period.

For the year ended December 31, 2010, 1.4 million stock options and RSUs were excluded from the weighted-average diluted common shares outstanding due to their antidilutive effect.

NOTE 14. Employee Benefit Plans:

In connection with the Separation, the following occurred with respect to the following employee benefit plans:

•

The Company adopted TFAC’s 401(k) Savings Plan, which is now the First American Financial Corporation 401(k) Savings Plan (the “Savings Plan”). The account balances of employees of CoreLogic who had previously participated in TFAC’s 401(k) Savings Plan were transferred to the CoreLogic, Inc. 401(k) Savings Plan.

•

The Company adopted TFAC’s deferred compensation plan. The Company assumed the portion of the deferred compensation liability associated with its employees and former employees of its businesses and CoreLogic assumed the portion of the deferred compensation liability associated with its employees and former employees of its businesses. Plan assets were divided in the same proportion as liabilities.

•

The Company assumed TFAC’s defined benefit pension plan, which was closed to new entrants effective December 31, 2001 and amended to “freeze” all benefit accruals as of April 30, 2008. The Company assumed the entire benefit obligation and all the plan assets associated with the defined benefit pension plan, including the portion attributable to participants who were employees of the businesses retained by CoreLogic in connection with the Separation, and CoreLogic issued a $19.9 million note payable to the Company which approximated the unfunded portion of the benefit obligation attributable to those participants. See Note 18 Transactions with CoreLogic/TFAC to the consolidated financial statements for further discussion of this note receivable from CoreLogic.

•

The Company adopted TFAC’s supplemental benefit plans. The Company assumed the portion of the benefit obligation associated with its employees and former employees of its businesses and CoreLogic assumed the portion of the benefit obligation associated with its employees and former employees of its businesses. The benefit obligation associated with certain participants was divided evenly between the Company and CoreLogic.

No material changes were made to the terms and conditions of the employee benefit plans assumed by the Company in connection with the Separation.

101

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s Savings Plan allows for employee-elective contributions up to the maximum amount as determined by the Internal Revenue Code. The Company makes discretionary contributions to the Savings Plan based on profitability, as well as contributions of the participants. The Company’s expense related to the Savings Plan amounted to $12.1 million, $15.5 million and $0.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. This expense represents the discretionary contribution made by the Company following the Separation and by TFAC to the Company’s employees’ accounts prior to the Separation. There was no contribution or expense for the year ended December 31, 2008 related to the Savings Plan as a result of the determination that TFAC did not meet the requirement for a profit driven 401(k) match. The Savings Plan allows the participants to purchase the Company’s common stock as one of the investment options, subject to certain limitations. The Savings Plan held 4,968,000 shares of the Company’s common stock, representing 4.8% of the total shares outstanding, at December 31, 2010. TFAC’s 401(k) Savings Plan held 6,790,000 shares of TFAC common stock, representing 6.6% of the total shares outstanding, at December 31, 2009.

The Company’s deferred compensation plan allows participants to defer up to 100% of their salary, commissions and bonus. Participants allocate their deferrals among a variety of investment crediting options (known as “deemed investments”). Deemed investments mean that the participant has no ownership interest in the funds they select; the funds are only used to measure the gains or losses that will be attributed to their deferral account over time. Participants can elect to have their deferral balance paid out in a future year while they are still employed or after their employment ends. The deferred compensation plan is exempt from most provisions of ERISA because it is only available to a select group of management and highly compensated employees and is not a qualified employee benefit plan. To preserve the tax-deferred savings advantages of a nonqualified deferred compensation plan, federal law requires that it be unfunded or informally funded. The participants’ deferrals and any earnings on those deferrals are general unsecured obligations of the Company. The Company is informally funding the deferred compensation plan through a tax-advantaged investment known as variable universal life insurance. Deferred compensation plan assets are held as an asset of the Company within a special trust, called a “Rabbi Trust.” At December 31, 2010, the value of the assets in the Rabbi Trust are $60.0 million and the unfunded liability is $61.9 million, and these amounts are included in the consolidated balance sheets in other assets and pension costs and other retirement plans, respectively. At December 31, 2009, the value of the assets in the Rabbi Trust that relate to the Company’s employees and have been allocated to the Company are $61.2 million and the unfunded liability that relates to the Company’s employees and has been allocated to the Company is $60.3 million, and these amounts are included in the consolidated balance sheets in other assets and pension costs and other retirement plans, respectively.

The Company’s defined benefit pension plan is a noncontributory, qualified, defined benefit plan with benefits based on the employee’s compensation and years of service. The defined benefit pension plan was closed to new entrants effective December 31, 2001 and amended to “freeze” all benefit accruals as of April 30, 2008.

The Company also has nonqualified, unfunded supplemental benefit plans covering certain key management personnel. Benefits under the Executive and Management Supplemental Benefit Plans are based on a participant’s final average compensation, which is computed as the average compensation of the last five full calendar years preceding retirement. Maximum benefits under the Executive and Management Supplemental Benefit Plans are 30% and 15% of final average compensation, respectively. The Company’s compensation committee amended and restated the Executive and Management Supplemental Benefit Plans effective as of January 1, 2011. The plans were amended to make the following changes, among others: (i) close the plans to new participants; (ii) fix the period over which the final average compensation that is used to calculate a participant’s benefit is determined as the one-year average of the five-year period ending on December 31,

102

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2010, irrespective of the participant’s actual retirement date; and (iii) cap the maximum annual benefit at $500,000 for the Company’s chief executive officer, at $350,000 for all other Executive Supplemental Benefit Plan participants and at $250,000 for all Management Supplemental Benefit Plan participants. The amendments to the Executive and Management Supplemental Benefit Plans were accounted for as negative plan amendments with the resulting decrease in the projected benefit obligations being recorded to accumulated other comprehensive income as a prior service credit.

Certain of the Company’s subsidiaries have separate savings plans and the Company’s international subsidiaries have other employee benefit plans that are included in the other plans, net line item shown below.

The following table provides the principal components of employee benefit plan expenses related to (i) the Company’s employees’ participation in TFAC’s benefit plans prior to the Separation and (ii) the Company’s benefit plans following the Separation:


	Year ended December 31,
	2010		2009		2008
	(in thousands)
Expense:
Savings plan	$	12,080	$	15,468	$	—
Defined benefit pension plans		19,652		8,643		(395	)
Unfunded supplemental benefit plans		23,252		23,322		21,780
Other plans, net		8,730		1,849		1,071

	$	63,714	$	49,282	$	22,456

103

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the balance sheet impact, including benefit obligations, assets and funded status associated with (i) the Company’s employees who participated in TFAC’s defined benefit pension and supplemental benefit plans prior to the Separation and (ii) the Company’s defined benefit pension and supplemental benefit plans following the Separation:


	December 31
	2010						2009
	Defined benefit pension plans			Unfunded supplemental benefit plans			Defined benefit pension plans			Unfunded supplemental benefit plans
	(in thousands)
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	288,997		$	210,396		$	266,852		$	196,998
Service costs		—			3,899			—			4,417
Interest costs		18,155			12,711			16,453			12,470
Actuarial losses		23,863			19,496			18,641			6,090
Benefits paid		(14,010	)		(12,165	)		(12,949	)		(9,579	)
Impact of Separation		54,219			15,906			—			—
Impact of plan amendment		—			(34,942	)		—			—

Projected benefit obligation at end of year		371,224			215,301			288,997			210,396

Change in plan assets:
Plan assets at fair value at beginning of year		203,105			—			170,932			—
Actual return on plan assets		18,800			—			34,742			—
Contributions		16,088			12,165			10,380			9,579
Benefits paid		(14,010	)		(12,165	)		(12,949	)		(9,579	)
Impact of Separation		38,844			—			—			—

Plan assets at fair value at end of year		262,827			—			203,105			—

Reconciliation of funded status:
Unfunded status of the plans	$	(108,397	)	$	(215,301	)	$	(85,892	)	$	(210,396	)

Amounts recognized in the consolidated balance sheet:
Accrued benefit liability	$	(108,397	)	$	(215,301	)	$	(85,892	)	$	(210,396	)

Amounts recognized in accumulated other comprehensive income:
Unrecognized net actuarial loss	$	198,738		$	106,943		$	165,775		$	87,781
Unrecognized prior service cost (credit)		115			(44,459	)		118			(10,567	)

	$	198,853		$	62,484		$	165,893		$	77,214

104

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net periodic cost related to (i) the Company’s employees’ participation in TFAC’s defined benefit pension and supplemental benefit plans prior to the Separation and (ii) the Company’s defined benefit pension and supplemental benefit plans following the Separation includes the following components:


	Year ended December 31,
	2010			2009			2008
	(in thousands)
Expense:
Service costs	$	3,959		$	4,476		$	4,762
Interest costs		30,866			28,923			28,349
Expected return on plan assets		(12,666	)		(16,969	)		(21,870	)
Amortization of net loss		21,790			16,586			11,145
Amortization of prior service credit		(1,045	)		(1,051	)		(1,001	)

	$	42,904		$	31,965		$	21,385

The Company’s estimated net loss and prior service credit for defined benefit pension and supplemental benefit plans that will be amortized from accumulated other comprehensive income (loss) into net periodic cost over the next fiscal year are expected to be an expense of $26.1 million and a credit of $4.4 million, respectively.

Weighted-average actuarial assumptions used to determine costs for the plans were as follows:


	December 31
	2010			2009
Defined benefit pension plans
Discount rate		5.81	%		6.30	%
Rate of return on plan assets		5.75	%		8.00	%
Unfunded supplemental benefit plans
Discount rate		5.81	%		6.30	%

Weighted-average actuarial assumptions used to determine benefit obligations for the plans were as follows:


	December 31
	2010			2009
Defined benefit pension plans
Discount rate		5.30	%		5.81	%
Unfunded supplemental benefit plans
Discount rate		5.30	%		5.81	%
Salary increase rate		5.00	%		5.00	%

The discount-rate assumption used for benefit plan accounting reflects the yield available on high-quality, fixed-income debt securities that match the expected timing of the benefit obligation payments.

Assumptions for the expected long-term rate of return on plan assets are based on future expectations for returns for each asset class based on the calculated market-related value of plan assets and the effect of periodic target asset allocation rebalancing, adjusted for the payment of reasonable expenses of the plan from plan assets. The expected long-term rate of return on assets was selected from within a reasonable range of rates determined by (1) historical real and expected returns for the asset classes covered by the investment policy and

105

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(2) projections of inflation over the long-term period during which benefits are payable to plan participants. The Company believes the assumptions are appropriate based on the investment mix and long-term nature of the plan’s investments. The use of expected long-term returns on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns, and therefore result in a pattern of income and cost recognition that more closely matches the pattern of the services provided by the employees.

The following table provides the funded status of (i) TFAC’s defined benefit pension and supplemental benefit plan obligations related to the Company’s employees prior to the Separation and (ii) the Company’s defined benefit pension and supplemental benefit plans following the Separation:


	December 31
	2010				2009
	Defined benefit pension plans		Unfunded supplemental benefit plans		Defined benefit pension plans		Unfunded supplemental benefit plans
	(in thousands)
Projected benefit obligation	$	371,224	$	215,301	$	288,997	$	210,396
Accumulated benefit obligation	$	371,224	$	215,301	$	288,997	$	184,784
Plan assets at fair value at end of year	$	262,827	$	—	$	203,105	$	—

The Company has a pension investment policy designed to meet or exceed the expected rate of return on plan assets assumption. The investment objective is to increase the pension plan’s funding status to being fully funded on a plan termination basis. Under the policy, as the funded status of the pension plan improves, the investment manager is to implement a lower risk strategy in order to minimize funded status volatility, according to the predetermined asset allocation strategy disclosed below. This strategy is intended to provide the best balance of minimizing funded status volatility while maintaining upside potential over time in order to fully fund the pension plan. To achieve this, the pension plan assets are monitored regularly to determine the funded status of the plan. The investment manager is responsible for ensuring that the portfolio is invested in compliance with the stated guidelines and that the individual investments are within acceptable risk tolerance levels. The investment manager will invest the assets of the plan in equity and fixed income debt securities and cash. Sufficient liquidity is also maintained to provide cash flow for ongoing needs.

Cash investments may be made in short-term securities, such as commercial paper or variable rate notes, or in money market funds. The short-term securities are investment grade with a maturity of less than 13 months. Fixed income investments must be government or government agency obligations, corporate debt or preferred stock, or fixed income mutual funds. The corporate debt securities are investment grade. Common stock investments may be either individual issues or stock mutual funds. The Company’s pension investment policy prohibits the use of the following financial instruments: options, short sales, commodities, derivatives, letter stock, private or direct placements and margin purchases. At December 31, 2010 and 2009, the Company’s pension plan assets also include $6.3 million and $5.7 million, respectively, of investment contracts with insurance companies as part of an acquired plan.

106

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s target asset allocation is based on funded status as follows:


Funded Ratio	Domestic and International Equities	Fixed Income
70% or less	60%	40%
75%	53%	47%
80%	45%	55%
85%	38%	62%
90%	31%	69%
95%	23%	77%
100%	16%	84%
105%	9%	91%
110%	0%	100%

The investment manager must maintain a threshold of within 2% for each portfolio category.

A summary of the asset allocation as of December 31, 2010 and 2009 are as follows:


	Percentage of plan assets at December 31
	2010			2009
Asset category
Domestic and international equities		61.0	%		66.0	%
Fixed income		34.6	%		31.7	%
Cash		4.4	%		2.3	%

The Company expects to make cash contributions to its pension plans of approximately $36.4 million during 2011.

The following benefit payments for all plans, which reflect expected future service, as appropriate, are expected to be paid as follows:


Year	(in thousands)
2011	$	29,849
2012	$	31,037
2013	$	32,500
2014	$	33,599
2015	$	34,572
2016-2019	$	188,371

The Company determines the fair value of its defined benefit pension plans assets with 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 defined benefit pension plan assets 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. See Note 3 Debt and Equity Securities to the consolidated financial statements for a more in-depth discussion on the fair value hierarchy and a description for each level.

107

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents (i) TFAC’s defined benefit pension plan assets prior to the Separation and (ii) the Company’s defined benefit pension plan assets following the Separation measured at fair value as of December 31, 2010 and 2009, classified using the fair value hierarchy:


	Estimated fair value as of December 31, 2010		Level 1		Level 2
	(in thousands)
Cash and cash equivalents	$	11,209	$	11,209	$	—

Debt securities:
Municipal bonds		8,874		—		8,874
Foreign bonds		4,082		—		4,082
Governmental agency mortgage-backed securities		25,481		—		25,481
Corporate debt securities		45,034		—		45,034

		83,471		—		83,471

Equity securities:
Preferred stocks		3,618		3,618		—
Domestic common stocks		107,119		107,119		—
International common stocks		51,139		51,139		—

		161,876		161,876		—
Investment contracts with insurance companies		6,271		—		6,271

	$	262,827	$	173,085	$	89,742


	Estimated fair value as of December 31, 2009		Level 1		Level 2
	(in thousands)
Cash and cash equivalents	$	4,481	$	4,481	$	—

Debt securities:
Municipal bonds		7,267		—		7,267
Foreign bonds		3,196		—		3,196
Governmental agency mortgage-backed securities		26,202		—		26,202
Corporate debt securities		21,215		—		21,215

		57,880		—		57,880

Equity securities:
Preferred stocks		3,233		3,233		—
Domestic common stocks		106,480		106,480		—
International common stocks		25,296		25,296		—

		135,009		135,009		—
Investment contracts with insurance companies		5,735		—		5,735

	$	203,105	$	139,490	$	63,615

The Company’s and TFAC’s defined benefit pension plans had no securities that were classified at Level 3 of the fair value hierarchy at December 31, 2010 and 2009.

108

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 15. Fair Value of Financial Instruments:

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

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

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

As other long-term investments, which consist primarily of investments in affiliates, are not publicly traded, reasonable estimate of the fair values could not be made without incurring excessive costs.

The fair value of the notes receivable from CoreLogic/TFAC is estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to third party borrowers of 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 was estimated based on the discounted value of future cash flows using a discount rate approximating current market rates for similar liabilities.

Accounts payable and accrued liabilities

The carrying amount for accounts payable and accrued liabilities is a reasonable estimate of fair value due to the short-term maturity of these liabilities.

109

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Due to CoreLogic/TFAC, net

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

Notes and contracts payable and allocated portion of TFAC debt

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

The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2010 and 2009 are presented in the following table.


	December 31
	2010				2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	728,746	$	728,746	$	631,297	$	631,297
Accounts and accrued income receivable, net	$	234,539	$	234,539	$	239,166	$	239,166
Loans receivable, net	$	161,526	$	166,904	$	161,897	$	165,130
Investments:
Deposits with savings and loan associations and banks	$	59,974	$	59,974	$	75,505	$	75,505
Debt securities	$	2,107,984	$	2,107,984	$	1,838,719	$	1,838,719
Equity securities	$	282,416	$	282,416	$	51,020	$	51,020
Other long-term investments	$	177,990	$	177,990	$	275,275	$	275,275
Notes receivable from CoreLogic/TFAC	$	18,787	$	18,708	$	187,825	$	189,830
Financial Liabilities:
Deposits	$	1,482,557	$	1,483,317	$	1,153,574	$	1,154,210
Accounts payable and accrued liabilities	$	736,404	$	736,404	$	699,766	$	699,766
Due to CoreLogic/TFAC, net	$	62,370	$	62,370	$	12,264	$	12,264
Notes and contracts payable	$	293,817	$	295,465	$	119,313	$	119,804
Allocated portion of TFAC debt	$	—	$	—	$	140,000	$	124,206

NOTE 16. Share-Based Compensation Plans:

Prior to the Separation, the Company participated in TFAC’s share-based compensation plans and the Company’s employees were issued TFAC equity awards. The equity awards consisted of RSUs and stock options. At the date of the Separation, TFAC’s outstanding equity awards for employees of the Company and former employees of its businesses were converted into equity awards of the Company with adjustments to the number of shares underlying each such award and, with respect to options, adjustments to the per share exercise price of each such award, to maintain the pre-separation value of such awards. No material changes were made to the vesting terms or other terms and conditions of the awards. As the post-separation value of the equity awards was equal to the pre-separation value and no material changes were made to the terms and conditions applicable to the awards, no incremental expense was recognized by the Company related to the conversion.

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FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In connection with the Separation, the Company established the First American Financial Corporation 2010 Incentive Compensation Plan (the “Incentive Compensation Plan”). The Incentive Compensation Plan was adopted by the Company’s board of directors and approved by TFAC, as the Company’s sole stockholder, on May 28, 2010. Eligible participants in the Incentive Compensation Plan include the Company’s directors and officers, as well as other employees. The Incentive Compensation Plan permits the granting of stock options, stock appreciation rights, restricted stock, RSUs, performance units, performance shares and other stock-based awards. Under the terms of the Incentive Compensation Plan, 16.0 million shares of common stock can be awarded from either authorized and unissued shares or previously issued shares acquired by the Company, subject to certain annual limits on the amounts that can be awarded based on the type of award granted. The Incentive Compensation Plan terminates 10 years from the effective date unless cancelled prior to that date by the Company’s board of directors.

In connection with the Separation, the Company established the First American Financial Corporation 2010 Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible employees to purchase common stock of the Company at 85.0% of the closing price on the last day of each month. Prior to the Separation, the Company’s employees participated in TFAC’s employee stock purchase plan. There were 175,000, 208,000 and 251,000 shares issued in connection with the Company’s and TFAC’s plans for the years ended December 31, 2010, 2009 and 2008, respectively. At December 31, 2010, there were 1,825,000 shares reserved for future issuances.

On June 1, 2010, certain executive officers were granted performance based RSUs. Up to one third of the performance based RSUs will vest on each of the third, fourth and fifth anniversaries of the date of the grant if the employee remains employed by the Company and the Company, as of the prospective vesting date, has met the specified compounded annual total stockholder return criteria. Due to the existence of the market requirement, the Company calculated the fair value of the performance based RSUs on the grant date using a Monte-Carlo Simulation to simulate a range of possible future stock prices for the Company. The performance based RSUs have a service and market requirement and are therefore expensed using the graded-vesting method to record share-based compensation expense. The performance based RSUs receive dividend equivalents in the form of performance based RSUs having the same vesting requirements as the performance based RSUs initially granted.

The following table presents the share-based compensation expense associated with (i) the Company’s employees that participated in TFAC’s share-based compensation plans prior to the Separation and (ii) the Company’s share-based compensation plans following the Separation:


	2010		2009		2008
	(in thousands)
Expense:
Stock options	$	315	$	493	$	479
Restricted stock units		11,876		13,534		7,086
Employee stock purchase plan		638		536		724

	$	12,829	$	14,563	$	8,289

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes stock option activity related to the Company’s employees participating in TFAC’s equity award plans prior to the Separation and activity under the Company’s equity award plans subsequent to the Separation through December 31, 2010:


(in thousands, except weighted-average exercise price and contractual term)	Number outstanding			Weighted- average exercise price		Weighted- average remaining contractual term		Aggregate intrinsic value
Activity under TFAC plan:
Balance at December 31, 2009		1,127		$	30.81
Exercised during 2010		(180	)	$	18.08
Forfeited during 2010		(18	)	$	41.87

Balance at May 31, 2010		929		$	33.06
Transfer of corporate employees at June 1, 2010		362		$	36.57

Balance at June 1, 2010		1,291		$	34.04

Activity under Company plan:
Conversion of TFAC stock options to Company stock options at June 1, 2010 (1)		3,009		$	14.62
Exercised during 2010		(114	)	$	12.77
Forfeited during 2010		(28	)	$	16.56

Balance at December 31, 2010		2,867		$	14.67		3.5	$	5,282

Vested and expected to vest at December 31, 2010		2,867		$	14.67		3.5	$	5,282

Exercisable at December 31, 2010		2,802		$	14.55		3.5	$	5,282

(1)

At the date of the Separation, TFAC’s outstanding stock options held by employees of the Company and former employees of its businesses were converted into Company stock options using a conversion ratio based on the closing price of TFAC common stock on June 1, 2010 divided by the closing price of the Company’s common stock on June 1, 2010.

As of December 31, 2010, there was $10 thousand of total unrecognized compensation cost related to nonvested stock options for the Company’s employees that is expected to be recognized during the first quarter of 2011.

Total intrinsic value of options exercised for the years ended December 31, 2010, 2009 and 2008 was $168 thousand, $2.9 million and $4.8 million, respectively. This intrinsic value represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes RSU activity related to the Company’s employees participating in TFAC’s equity award plans prior to the Separation and activity under the Company’s equity award plans subsequent to the Separation through December 31, 2010:


(in thousands, except weighted-average grant-date fair value)	Shares			Weighted-average grant-date fair value
Activity under TFAC plan:
RSUs unvested at December 31, 2009		1,147		$	30.40
Granted during 2010		260		$	33.93
Vested during 2010		(272	)	$	31.54
Forfeited during 2010		(3	)	$	28.02

RSUs unvested at May 31, 2010		1,132		$	30.94
Transfer of corporate employees at June 1, 2010		168		$	31.46

RSUs unvested at June 1, 2010		1,300		$	31.00

Activity under Company plan:
Conversion of TFAC RSUs to Company RSUs at June 1, 2010 (1)		3,011		$	13.31
Granted during 2010		926		$	8.69
Vested during 2010		(198	)	$	12.48
Forfeited during 2010		(53	)	$	13.84

RSUs unvested at December 31, 2010		3,686		$	12.18

(1)

At the date of the Separation, TFAC’s outstanding RSUs for employees of the Company and former employees of its businesses were converted into Company RSUs using a conversion ratio based on the closing price of TFAC common stock on June 1, 2010 divided by the closing price of the Company’s common stock on June 1, 2010.

As of December 31, 2010, there was $24.2 million of total unrecognized compensation cost related to nonvested RSUs that is expected to be recognized over a weighted-average period of 3.4 years. The fair value of RSUs is generally based on the market value of the Company’s shares on the date of grant. The total fair value of shares vested and not distributed on December 31, 2010 is $3.5 million.

NOTE 17. Commitments and Contingencies:

Lease Commitments

The Company leases certain office facilities, automobiles and equipment under operating leases, which, for the most part, are renewable. The majority of these leases also provide that the Company pay insurance and taxes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2010 are as follows:


	Operating
	(in thousands)
Year
2011	$	89,926
2012		71,960
2013		53,726
2014		34,130
2015		21,376
Thereafter		21,645

	$	292,763

Total rental expense for all operating leases and month-to-month rentals was $125.4 million, $157.9 million and $194.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.

Other commitments and guarantees

The Company also guarantees the obligations of certain of its subsidiaries. These obligations are included in the Company’s consolidated balance sheets as of December 31, 2010 and 2009.

NOTE 18. Transactions with CoreLogic/TFAC:

Prior to the Separation, the Company had certain related party relationships with TFAC. The Company does not consider CoreLogic to be a related party subsequent to the Separation. The related party relationships with TFAC prior to the Separation and subsequent relationships with CoreLogic following the Separation are discussed further below.

Transactions with TFAC prior to the Separation

Prior to the Separation, the Company was allocated corporate income and overhead expenses from TFAC for corporate-related functions based on an allocation methodology that considered the number of the Company’s domestic headcount, the Company’s total assets and total revenues or a combination of those drivers. General corporate overhead expense allocations include executive management, tax, accounting and auditing, legal and treasury services, payroll, human resources and certain employee benefits and marketing and communications. The Company was allocated general net corporate expenses of $23.3 million from TFAC during the current year prior to the June 1, 2010 Separation, and $57.0 million and $65.5 million for the years ended December 31, 2009 and 2008, respectively, which are included within the investment income, net realized investment losses, personnel costs, other operating expenses, depreciation and amortization and interest expense line items in the accompanying consolidated statements of income.

The Company considers the basis on which the expenses were allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by the Company during the pre-separation periods presented. The allocations may not, however, reflect the expense the Company would have incurred as an independent publicly traded company for these periods. Actual costs that may have been incurred as a stand-alone company during these periods would have depended on a number of factors, including the chosen

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

organizational structure, the functions outsourced versus performed by employees and strategic decisions in areas such as information technology and infrastructure. Following the Separation, the Company is no longer allocated corporate income and overhead expense, as the Company performs these functions using its own resources.

Prior to the Separation, a portion of TFAC’s combined debt, in the amount of $140.0 million, was allocated to the Company based on amounts directly incurred for the Company’s benefit. Net interest expense was allocated in the same proportion as debt. The Company believes the allocation basis for debt and net interest expense was reasonable. However, these amounts may not be indicative of the actual amounts that the Company would have incurred had it been operating as an independent publicly traded company for the period prior to June 1, 2010. Additionally, on January 31, 2010 the Company entered into a note payable with TFAC totaling $29.1 million. In connection with the Separation, the Company borrowed $200.0 million under its revolving credit facility and transferred such funds to CoreLogic, which fully satisfied the Company’s $140.0 million allocated portion of TFAC debt and the $29.1 million note payable to TFAC. The remaining $30.9 million transferred to CoreLogic was reflected as a distribution to CoreLogic in connection with the Separation. See Note 10 Notes and Contracts Payable to the consolidated financial statements for further discussion of the Company’s credit facility.

At December 31, 2009, the Company held notes receivable from TFAC totaling $187.8 million with a weighted average interest rate of 4.49%. The notes have maturity dates ranging from 2010 to 2020. In connection with the Separation, TFAC’s corresponding notes payable were assumed by the Company. Therefore, these notes receivable from TFAC eliminate in consolidation with TFAC’s notes payable assumed by the Company, resulting in no balance being reported on the Company’s consolidated balance sheet as of December 31, 2010. Interest income earned on the notes receivable totaled $3.4 million in the current year prior to the June 1, 2010 Separation, and $11.0 million and $8.9 million for the years ended December 31, 2009 and 2008, respectively. Following the Separation, there is no interest income reflected in connection with these notes receivable from TFAC.

During the years ended December 31, 2009 and 2008, the Company made cash dividend payments of $83.0 million and $10.0 million, respectively, to TFAC which were recorded as a reduction of invested equity on the Company’s consolidated balance sheets. No cash dividends were paid to TFAC during 2010.

Transactions with CoreLogic following the Separation

In connection with the Separation, the Company and TFAC entered into various transition services agreements with effective dates of June 1, 2010. The agreements include transitional services in the areas of information technology, tax, accounting and finance, employee benefits and internal audit. Except for the information technology services agreements, the transition services agreements are short-term in nature. The Company incurred $5.4 million for the year ended December 31, 2010, under these agreements which are included in other operating expenses in the consolidated statement of income. No amounts were reflected in the consolidated statements of income prior to June 1, 2010, as the transition services agreements were not effective prior to the Separation.

Under the Separation and Distribution Agreement and other agreements, subject to certain exceptions contained in the Tax Sharing Agreement, each of the Company and CoreLogic agreed to assume and be responsible for 50% of certain of TFAC’s contingent and other corporate liabilities. All external costs and expenses associated with the management of these contingent and other corporate liabilities will be shared equally. These contingent and other corporate liabilities primarily relate to consolidated securities litigation and any actions with respect to the Separation or the Distribution brought by any third party. Contingent and other

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

corporate liabilities that are related to only the information solutions or financial services businesses will generally be fully allocated to CoreLogic or the Company, respectively. At December 31, 2010, no reserves were considered necessary for such liabilities.

In connection with the Separation, TFAC issued to the Company and FATICO a number of shares of its common stock that resulted in the Company and FATICO collectively owning 12.9 million shares of CoreLogic’s common stock immediately following the Separation. Under the terms of the Separation and Distribution Agreement, if the Company chooses to dispose of 1% or more of CoreLogic’s outstanding common stock at a given date, the Company must first provide CoreLogic with the option to purchase the shares. The Company has agreed to dispose of the shares within five years after the Separation or to bear any adverse tax consequences arising as a result of holding the shares for a longer period. The CoreLogic common stock is classified as available-for-sale and carried at fair value with unrealized gains or losses classified as a component of accumulated other comprehensive loss. At December 31, 2010, the cost basis and estimated fair value of the CoreLogic common stock is $242.6 million and $239.5 million, respectively. The CoreLogic common stock is included in equity securities in the consolidated balance sheet.

On June 1, 2010, the Company received a note receivable from CoreLogic in the amount of $19.9 million that accrues interest at 6.52%. Interest was first due on July 1, 2010 and is due quarterly thereafter. The note receivable is due on May 31, 2017. The note approximated the unfunded portion of the benefit obligation attributable to participants of the defined benefit pension plan who were employees of TFAC’s businesses that were retained by CoreLogic in connection with the Separation. See Note 14 Employee Benefit Plans to the consolidated financial statements for further discussion of the defined benefit pension plan.

At December 31, 2010 and December 31, 2009, the Company’s federal savings bank subsidiary, First American Trust, FSB, held $11.9 million and $20.1 million, respectively, of interest and non-interest bearing deposits owned by CoreLogic. These deposits are included in deposits in the consolidated balance sheets. Interest expense on the deposits was immaterial for all periods presented.

Prior to the Separation, the Company owned three office buildings that were leased to the information solutions businesses of TFAC under the terms of formal lease agreements. In connection with the Separation, the Company distributed one of the office buildings to CoreLogic, and currently owns two office buildings that are leased to CoreLogic under the terms of formal lease agreements. Rental income associated with these properties totaled $6.2 million for the year ended December 31, 2010 and $8.5 million and $6.5 million for the years ended December 31, 2009 and 2008, respectively.

The Company and CoreLogic are also parties to certain ordinary course commercial agreements and transactions. The expenses associated with these transactions, which primarily relate to purchases of data and other settlement services totaled $21.4 million for the year ended December 31, 2010, and $46.4 million and $50.8 million for the years ended December 31, 2009 and 2008, respectively, and are included in other operating expenses in the Company’s consolidated statements of income. The Company also sells data and provides other settlement services to CoreLogic through ordinary course commercial agreements and transactions resulting in revenues totaling $11.8 million, $6.6 million and $2.5 million for the years ended December 31, 2010, 2009, and 2008, respectively, which are included in direct premiums and escrow fees and information and other in the Company’s consolidated statements of income.

Prior to the Separation, certain transactions with TFAC were settled in cash and the remaining transactions were settled by non-cash capital contributions between the Company and TFAC, which resulted in net non-cash

116

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

contributions from TFAC to the Company of $2.1 million in the current year prior to June 1, 2010. Following the Separation, all transactions with CoreLogic are settled, on a net basis, in cash.

NOTE 19. 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.

Components of other comprehensive income (loss) are as follows:


	Net unrealized gains (losses) on securities			Foreign currency translation adjustment			Pension benefit adjustment			Accumulated other comprehensive income (loss)
	(in thousands)
Balance at December 31, 2007	$	314		$	21,079		$	(116,812	)	$	(95,419	)
Pretax change		(107,715	)		(47,796	)		(77,243	)		(232,754	)
Tax effect		34,809			—			27,035			61,844

Balance at December 31, 2008		(72,592	)		(26,717	)		(167,020	)		(266,329	)
Pretax change		71,834			31,972			13,846			117,652
Pretax change in other-than-temporary impairments for which credit-related portion was recognized in earnings		15,651			—			—			15,651
Tax effect		(25,439	)		—			7,000			(18,439	)

Balance at December 31, 2009		(10,546	)		5,255			(146,174	)		(151,465	)
Pretax change		5,249			5,705			18,103			29,057
Pretax change in other-than-temporary impairments for which credit-related portion was recognized in earnings		8,034			—			—			8,034
Pretax change in connection with the Separation		—			—			(36,752	)		(36,752	)
Tax effect		(5,974	)		—			8,020			2,046

Balance at December 31, 2010	$	(3,237	)	$	10,960		$	(156,803	)	$	(149,080	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Components of other comprehensive income (loss) allocated to the Company and noncontrolling interests are as follows:


	Net unrealized gains (losses) on securities			Foreign currency translation adjustment			Pension benefit adjustment			Accumulated other comprehensive income (loss)
	(in thousands)
2010
Allocated to the Company	$	(3,246	)	$	10,893		$	(156,803	)	$	(149,156	)
Allocated to noncontrolling interests		9			67			—			76

Balance at December 31, 2010	$	(3,237	)	$	10,960		$	(156,803	)	$	(149,080	)

2009
Allocated to the Company	$	(10,475	)	$	9,158		$	(146,174	)	$	(147,491	)
Allocated to noncontrolling interests		(71	)		(3,903	)		—			(3,974	)

Balance at December 31, 2009	$	(10,546	)	$	5,255		$	(146,174	)	$	(151,465	)

2008
Allocated to the Company	$	(72,375	)	$	(22,060	)	$	(167,020	)	$	(261,455	)
Allocated to noncontrolling interests		(217	)		(4,657	)		—			(4,874	)

Balance at December 31, 2008	$	(72,592	)	$	(26,717	)	$	(167,020	)	$	(266,329	)

The change in net unrealized gains on securities includes reclassification adjustments of $12.5 million, $16.0 million and $0.7 million of net realized gains on debt and equity securities for the years ended December 31, 2010, 2009 and 2008, respectively.

NOTE 20. Litigation and Regulatory Contingencies:

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

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

•

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

•

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

•

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

•

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

•

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

•

Hickman v. First American Title Insurance Company, filed on May 25, 2007 and pending in the United States District Court for the District of Ohio,

•

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

•

Lang v. First American Title Insurance Company of New York, filed on January 11, 2008 and pending in the United States District Court for the Western District of New York,

•

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

•

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

•

Scott v. First American Title Insurance Company, filed on March 7, 2007 and pending in the United States District Court for the Eastern District of Kentucky,

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FIRST AMERICAN FINANCIAL CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

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 and

•

Tello v. First American Title Insurance Company, filed on July 14, 2009 and pending in the United States District Court for the District of New Hampshire.

•

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,

•

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

•

Paul v. First American Home Buyers Protection Corporation, filed on July 29, 2010 and pending in the United States District Court, Middle District of Florida, Ft. Myers Division and

•

Zaldana v. First American Financial Corporation, et al., filed on July 15, 2008 and pending in the United States District Court for the Northern District of California.

•

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

•

Barton v. First American Title Insurance Company, et al, filed March 10, 2008 and pending in the United States District Court for the Northern District of California,

•

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

•

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

•

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

•

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

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 for the District 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 for the District of Massachusetts.

•

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 for the District 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,

•

Diaz v. First American Home Buyers Protection Corporation, filed on March 10, 2009 and pending in the United States District Court for the Southern District of California,

•

Diehl v. First American Title Insurance Company, et al., filed on December 11, 2009 and pending in the United States District Court for the District of Montana,

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As indicated above, this lawsuit pertains to claims on title insurance policies issued by the defendants. The Company provides for title insurance losses through a known claims reserve and an IBNR claims reserve (for a discussion of the Company’s reserve for known and IBNR claims, see Note 1 Description of the Company and Note 9 Reserve for Known and Incurred But Not Reported Claims to the consolidated financial statements). A portion of the known claims reserve is attributable to certain of the claims that are the subject of this lawsuit and a portion of the IBNR claims reserves is attributable to the title insurance products that are the subject of the lawsuit and similar products issued to others. The ultimate outcome of this lawsuit is subject to a number of uncertainties, including the amount of responsibility that a court may apportion to Fiserv, whether a court determines that the defendants are entitled to certain documents requested as part of the claims submission process, the contents of those documents and whether a court interprets the title insurance policies that are the subject of the lawsuit in a manner consistent with the Company’s understanding. As a result of this uncertainty, it is currently not possible to estimate whether the loss or range of loss is greater than the amount of the known claims reserve and the IBNR claims reserve attributable to the claims that are the subject of this lawsuit. If this uncertainty is resolved in a manner that is unfavorable to the Company, the ultimate resolution of this lawsuit could have a material adverse effect on the Company’s financial condition, results of operations, cash flows or liquidity.

122

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 21. Business Combinations:

During the year ended December 31, 2010, the Company completed five acquisitions for an aggregate purchase price of $10.9 million in cash and $0.5 million in notes payable. The purchase price of each acquisition was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis. These five acquisitions have been included in the Company’s title insurance segment.

In addition to the acquisitions discussed above, during the year ended December 31, 2010, the Company purchased the remaining noncontrolling interests in three companies already included in the Company’s consolidated financial statements. The total purchase price of these transactions was $2.8 million in cash.

During the year ended December 31, 2009, the Company completed three acquisitions. These acquisitions were not material, individually or in the aggregate. These three acquisitions have been included in the Company’s title insurance segment. The aggregate purchase price for these acquisitions was $1.2 million in cash and $0.1 million in notes payable. The purchase price of each acquisition was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis.

In addition to the acquisitions discussed above, during the year ended December 31, 2009, the Company purchased the remaining noncontrolling interests in six companies already included in the Company’s consolidated financial statements. The total purchase price of these transactions was $62.5 million in cash and $8.6 million in notes payable.

123

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 22. Segment Financial Information:

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

•

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. The Company did not record inter-segment eliminations for the years ended December 31, 2009 and 2008, as there was no inter-segment income or expense.

124

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Selected financial information about the Company’s operations by segment for each of the past three years is as follows:


	Revenues			Depreciation and amortization		Equity in earnings of affiliates			Income (loss) before income taxes			Assets			Investment in affiliates		Capital expenditures
	(in thousands)
2010
Title Insurance and Services	$	3,614,421		$	70,852	$	8,006		$	229,469		$	5,109,174		$	140,923	$	82,123
Specialty Insurance		285,735			5,324		—			42,748			488,351			—		3,273
Corporate		8,252			2,735		370			(60,111	)		373,976			5,861		3,329
Eliminations		(1,796	)		—		—			—			(149,675	)		—		—

	$	3,906,612		$	78,911	$	8,376		$	212,106		$	5,821,826		$	146,784	$	88,725

2009
Title Insurance and Services	$	3,768,192		$	74,321	$	10,577		$	215,070		$	4,824,581		$	228,735	$	34,318
Specialty Insurance		277,539			4,275		—			31,490			498,740			—		7,503
Corporate		1,103			3,879		300			(42,215	)		206,960			—		483

	$	4,046,834		$	82,475	$	10,877		$	204,345		$	5,530,281		$	228,735	$	42,304

2008
Title Insurance and Services	$	4,072,217		$	86,962	$	(2,619	)	$	(89,898	)	$	5,003,657		$	200,680	$	81,276
Specialty Insurance		297,817			3,329		—			20,723			467,478			—		7,344
Corporate		(2,309	)		4,951		(23	)		(46,740	)		249,622			—		10

	$	4,367,725		$	95,242	$	(2,642	)	$	(115,915	)	$	5,720,757		$	200,680	$	88,630

Total revenues from external customers separated between domestic and foreign operations and by segment for each of the three years ending December 31, 2010, 2009 and 2008 is as follows:


	2010				2009				2008
	Domestic		Foreign		Domestic		Foreign		Domestic		Foreign
	(in thousands)
Title Insurance and Services	$	3,287,828	$	326,593	$	3,471,588	$	296,604	$	3,676,824	$	395,393
Specialty Insurance		285,735		—		277,539		—		297,817		—

	$	3,573,563	$	326,593	$	3,749,127	$	296,604	$	3,974,641	$	395,393

Long-lived assets separated between domestic and foreign operations and by segment as of December 31, 2010, 2009 and 2008 are as follows:


	December 31
	2010				2009				2008
	Domestic		Foreign		Domestic		Foreign		Domestic		Foreign
Title Insurance and Services	$	1,875,035	$	143,284	$	1,955,317	$	209,801	$	2,081,318	$	114,020
Specialty Insurance		149,582		—		160,599		—		166,736		—

	$	2,024,617	$	143,284	$	2,115,916	$	209,801	$	2,248,054	$	114,020

125

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

QUARTERLY FINANCIAL DATA

(Unaudited)


	Quarter Ended
	March 31			June 30		September 30		December 31 (2)
	(in thousands, except per share amounts)
2010 (1)
Revenues	$	908,426		$	969,924	$	1,003,523	$	1,024,739
Income before income taxes	$	24,540		$	56,995	$	55,988	$	74,583
Net income	$	13,729		$	34,140	$	33,343	$	47,744
Net income attributable to noncontrolling interests	$	(40	)	$	307	$	210	$	650
Net income attributable to the Company	$	13,769		$	33,833	$	33,133	$	47,094
Net income per share attributable to the Company’s stockholders (3) (4):
Basic	$	0.13		$	0.33	$	0.32	$	0.45
Diluted	$	0.13		$	0.32	$	0.31	$	0.44

(1)	Net income for the year ended December 31, 2010 includes net expense of $7.7 million related to certain items that should have been recorded in a prior year. These items decreased diluted net income per share attributable to the Company’s stockholders by $0.06 for the year.

(2)	Net income for the fourth quarter ended December 31, 2010 includes net expense of $6.9 million related to certain items that should have been recorded in a prior quarter. These items decreased diluted net income per share attributable to the Company’s stockholders by $0.06 for the quarter.

(3)	Net income per share attributable to the Company’s stockholders for the four quarters of each fiscal year may not sum to the total for the fiscal year because of the different number of shares outstanding during each period.

(4)	Per share information was computed using the number of shares of common stock outstanding immediately following the Separation, as if such shares were outstanding for the entire period prior to the Separation.


	Quarter Ended
	March 31		June 30		September 30		December 31
	(in thousands, except per share amounts)
2009
Revenues	$	888,375	$	1,025,085	$	1,100,581	$	1,032,793
Income before income taxes	$	10,144	$	64,535	$	68,521	$	61,145
Net income	$	7,369	$	33,392	$	40,913	$	52,603
Net income attributable to noncontrolling interests	$	2,467	$	4,800	$	2,088	$	2,533
Net income attributable to the Company	$	4,902	$	28,592	$	38,825	$	50,070
Net income per share attributable to the Company’s stockholders (1) (2):
Basic	$	0.05	$	0.27	$	0.37	$	0.48
Diluted	$	0.05	$	0.27	$	0.37	$	0.48

(1)	Net income per share attributable to the Company’s stockholders for the four quarters of each fiscal year may not sum to the total for the fiscal year because of the different number of shares outstanding during each period.

(2)	Per share information was computed using the number of shares of common stock outstanding immediately following the Separation, as if such shares were outstanding for the entire period prior to the Separation.

126

SCHEDULE I

1 OF 1

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN RELATED PARTIES

(in thousands)

December 31, 2010


Column A	Column B		Column C			Column D
Type of investment	Cost		Market value			Amount at which shown in the balance sheet
Deposits with savings and loan associations and banks:
Consolidated	$	59,974	$	59,974		$	59,974

Debt securities:
U.S. Treasury bonds
Consolidated	$	96,055	$	97,859		$	97,859

Municipal bonds
Consolidated	$	280,471	$	277,799		$	277,799

Foreign bonds
Consolidated	$	184,956	$	185,942		$	185,942

Governmental agency bonds
Consolidated	$	241,844	$	240,161		$	240,161

Governmental agency mortgage-backed securities
Consolidated	$	1,039,266	$	1,045,497		$	1,045,497

Non-agency mortgage-backed and asset-backed securities
Consolidated	$	63,773	$	47,534		$	47,534

Corporate debt securities
Consolidated	$	209,476	$	213,192		$	213,192

Total debt securities:
Consolidated	$	2,115,841	$	2,107,984		$	2,107,984

Equity securities:
Consolidated	$	279,954	$	282,416		$	282,416

Other long-term investments:
Consolidated	$	177,990	$	177,990	(1)	$	177,990

Notes receivable from CoreLogic:
Consolidated	$	18,787	$	18,708		$	18,787

Total investments:
Consolidated	$	2,652,546	$	2,647,072		$	2,647,151

(1)	As other long-term investments are not publicly -traded, reasonable estimate of the fair values could not be made without incurring excessive costs.

127

SCHEDULE II

1 OF 4

FIRST AMERICAN FINANCIAL CORPORATION

(Parent Company)

CONDENSED BALANCE SHEETS

(in thousands)


	December 31, 2010			June 1, 2010
Assets
Cash and cash equivalents	$	86,417		$	22,730
Dividends receivable from subsidiaries		30,000			—
Due from subsidiaries, net		20,929			—
Income taxes receivable		22,266			—
Investments		123,967			138,033
Investment in subsidiaries		2,337,361			2,365,006
Property and equipment, net		10,890			8,509
Deferred income taxes		96,846			80,305
Other assets		76,644			84,415

	$	2,805,320		$	2,698,998

Liabilities and Equity
Accounts payable and other accrued liabilities	$	23,401		$	31,074
Pension costs and other retirement plans		389,597			382,438
Due to subsidiaries, net		—			25,398
Due to CoreLogic, net		80,468			20,556
Notes and contracts payable		201,084			201,850
Notes and contracts payable to subsidiaries		117,049			140,685

		811,599			802,001

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.00001 par value, Authorized-500 shares; Outstanding-none		—			—
Common stock, $0.00001 par value:
Authorized – 300,000 shares, Outstanding—104,457 and 104,006 shares at December 31, 2010 and June 1, 2010, respectively		1			1
Additional paid-in capital		2,057,098			2,047,528
Retained earnings		72,074			—
Accumulated other comprehensive loss		(149,156	)		(163,807	)

Total stockholders’ equity		1,980,017			1,883,722
Noncontrolling interests		13,704			13,275

Total equity		1,993,721			1,896,997

	$	2,805,320		$	2,698,998

See notes to condensed financial statements

128

SCHEDULE II

2 OF 4

FIRST AMERICAN FINANCIAL CORPORATION

(Parent Company)

CONDENSED STATEMENT OF INCOME

(in thousands)


	Seven Months Ended December 31, 2010
Revenues
Dividends from subsidiaries	$	136,650
Other income		6,323

		142,973
Expenses
Other expenses		24,281

Income before income taxes and equity in undistributed earnings of subsidiaries		118,692
Income taxes		45,660
Equity in undistributed earnings of subsidiaries		19,000

Net income		92,032
Less: Net income attributable to noncontrolling interests		980

Net income attributable to the Company	$	91,052

See notes to condensed financial statements

129

SCHEDULE II

3 OF 4

FIRST AMERICAN FINANCIAL CORPORATION

(Parent Company)

CONDENSED STATEMENT OF CASH FLOWS

(in thousands)


	Seven Months Ended December 31, 2010
Cash flows from operating activities:
Cash provided by operating activities	$	67,444

Cash flows from investing activities:
Net change in investments		12,893
Capital expenditures		(3,256	)

Cash provided by investing activities		9,637

Cash flows from financing activities:
Repayment of debt		(4,402	)
Excess tax benefits from share-based compensation		1,080
Proceeds from shares issued in connection with restricted stock unit, option and benefit plans		2,430
Cash dividends		(12,502	)

Cash used for financing activities		(13,394	)

Net increase in cash and cash equivalents		63,687
Cash and cash equivalents—Beginning of period		22,730

Cash and cash equivalents—End of period	$	86,417

See notes to condensed financial statements

130

SCHEDULE II

4 OF 4

FIRST AMERICAN FINANCIAL CORPORATION

(Parent Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE 1. Significant Accounting Policies:

First American Financial Corporation became a publicly traded company following its spin-off from its prior parent, The First American Corporation (“TFAC”) on June 1, 2010. On that date, TFAC distributed all of First American Financial Corporation’s outstanding shares to the record date shareholders of TFAC on a one-for-one basis. After the distribution, First American Financial Corporation owns TFAC’s financial services businesses and TFAC, which reincorporated and assumed the name CoreLogic, Inc. continues to own its information solutions businesses. As such, First American Financial Corporation’s Parent Company opening condensed balance sheet is as of June 1, 2010 and the condensed statements of income and cash flows are for the seven months ended December 31, 2010.

First American Financial Corporation is a holding company that transacts all of its business through its subsidiaries. The Parent Company Financial Statements should be read in connection with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

NOTE 2. Dividends Received:

The Company received cash dividends from subsidiaries of $83.8 million during the seven months ended December 31, 2010.

131

SCHEDULE III

1 OF 2

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

SUPPLEMENTARY INSURANCE INFORMATION

(in thousands)

BALANCE SHEET CAPTIONS


Column A	Column B		Column C		Column D
Segment	Deferred policy acquisition costs		Claims reserves		Deferred revenues
2010
Title Insurance and Services	$	—	$	1,070,680	$	7,603
Specialty Insurance		20,639		37,558		137,116

Total	$	20,639	$	1,108,238	$	144,719

2009
Title Insurance and Services	$	—	$	1,188,552	$	7,216
Specialty Insurance		22,526		39,205		137,540

Total	$	22,526	$	1,227,757	$	144,756

132

SCHEDULE III

2 OF 2

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

SUPPLEMENTARY INSURANCE INFORMATION

(in thousands)

INCOME STATEMENT CAPTIONS


Column A	Column F		Column G			Column H		Column I		Column J		Column K
Segment	Premiums and escrow fees		Net investment income			Loss provision		Amortization of deferred policy acquisition costs		Other operating expenses		Net premiums written
2010
Title Insurance and Services	$	2,940,323	$	76,299		$	180,821	$	—	$	735,424	$	—
Specialty Insurance		272,032		13,703			140,053		1,887		41,980		271,809
Corporate		—		8,252			—		—		26,299		—
Eliminations		—		(1,806	)		—		—		15		—

Total	$	3,212,355	$	96,448		$	320,874	$	1,887	$	803,718	$	271,809

2009
Title Insurance and Services	$	3,035,384	$	86,017		$	205,819	$	—	$	849,740	$	—
Specialty Insurance		269,631		7,908			140,895		2,353		41,601		265,601
Corporate		—		1,103			—		—		18,235		—

Total	$	3,305,015	$	95,028		$	346,714	$	2,353	$	909,576	$	265,601

2008
Title Insurance and Services	$	3,318,409	$	51,593		$	343,559	$	—	$	985,904	$	—
Specialty Insurance		286,321		11,496			166,004		1,145		46,840		282,391
Corporate		—		(2,309	)		—		—		20,289		—

Total	$	3,604,730	$	60,780		$	509,563	$	1,145	$	1,053,033	$	282,391

133

SCHEDULE IV

1 OF 1

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

REINSURANCE

(in thousands, except percentages)


Segment	Premiums and escrow fees before reinsurance		Ceded to other companies		Assumed from other companies		Premiums and escrow fees		Percentage of amount assumed to premiums and escrow fees
Title Insurance and services
2010	$	2,944,293	$	12,457	$	8,487	$	2,940,323		0.3	%

2009	$	3,035,536	$	4,430	$	4,278	$	3,035,384		0.1	%

2008	$	3,319,227	$	6,728	$	5,910	$	3,318,409		0.2	%

Specialty Insurance
2010	$	280,444	$	8,412	$	—	$	272,032		0.0	%

2009	$	277,463	$	7,832	$	—	$	269,631		0.0	%

2008	$	293,662	$	7,341	$	—	$	286,321		0.0	%

134

SCHEDULE V

1 OF 3

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Year Ended December 31, 2010


Column A	Column B		Column C					Column D			Column E
Description	Balance at beginning of period		Additions					Deductions from reserve			Balance at end of period
Description	Balance at beginning of period		Charged to costs and expenses			Charged to other accounts		Deductions from reserve			Balance at end of period
Reserve deducted from accounts receivable:
Consolidated	$	35,595	$	11,046				$	6,737	(A)	$	39,904

Reserve for title losses and other claims:
Consolidated	$	1,227,757	$	320,874		$	15,832	$	456,225	(B)	$	1,108,238

Reserve deducted from loans receivable:
Consolidated	$	2,071	$	1,200							$	3,271

Reserve deducted from assets acquired in connection with claim settlements:
Consolidated	$	776	$	710				$	322	(C)	$	1,164

Reserve deducted from other assets:
Consolidated	$	6,679	$	1,541				$	2,315		$	5,905

Reserve deducted from deferred income taxes:
Consolidated	$	27,045		(7,919	)						$	19,126

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

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

Note C—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

135

SCHEDULE V

2 OF 3

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Year Ended December 31, 2009


Column A	Column B		Column C				Column D			Column E
Description	Balance at beginning of period		Additions				Deductions from reserve			Balance at end of period
Description	Balance at beginning of period		Charged to costs and expenses		Charged to other accounts		Deductions from reserve			Balance at end of period
Reserve deducted from accounts receivable:
Consolidated	$	43,695	$	20,377			$	28,477	(A)	$	35,595

Reserve for title losses and other claims:
Consolidated	$	1,326,282	$	346,714	$	6,948	$	452,187	(B)	$	1,227,757

Reserve deducted from loans receivable:
Consolidated	$	1,600	$	471						$	2,071

Reserve deducted from assets acquired in connection with claim settlements:
Consolidated	$	1,604	$	181			$	1,009	(C)	$	776

Reserve deducted from other assets:
Consolidated	$	15,817	$	792			$	9,930		$	6,679

Reserve deducted from deferred income taxes:
Consolidated	$	19,922	$	7,123						$	27,045

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

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

Note C—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

136

SCHEDULE V

3 OF 3

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Year Ended December 31, 2008


Column A	Column B		Column C					Column D			Column E
Description	Balance at beginning of period		Additions					Deductions from reserve			Balance at end of period
Description	Balance at beginning of period		Charged to costs and expenses		Charged to other accounts			Deductions from reserve			Balance at end of period
Reserve deducted from accounts receivable:
Consolidated	$	36,249	$	27,012				$	19,566	(A)	$	43,695

Reserve for title losses and other claims:
Consolidated	$	1,332,337	$	509,563	$	(33,466	)	$	482,152	(B)	$	1,326,282

Reserve deducted from loans receivable:
Consolidated	$	1,488	$	112							$	1,600

Reserve deducted from assets acquired in connection with claim settlements:
Consolidated	$	1,316	$	572				$	284	(C)	$	1,604

Reserve deducted from other assets:
Consolidated	$	11,628	$	4,189				$	—		$	15,817

Reserve deducted from deferred income taxes:
Consolidated	$	5,311	$	14,611							$	19,922

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

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

Note C—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

137

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer have concluded that, as of December 31, 2010, the end of the fiscal year covered by this Annual Report on Form 10-K, the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, were effective, based on the evaluation of these controls and procedures required by Rule 13a-15(b) thereunder.

Management’s Annual Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorization of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework . Based on that assessment under the framework in Internal Control—Integrated Framework, management determined that, as of December 31, 2010, the Company’s internal control over financial reporting was effective.

PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements provided in Item 8, above, has issued an attestation report on the Company’s internal controls over financial reporting.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.

Other Information

None.

138

PART III

The information required by Items 10 through 14 of this report is expected to be set forth in the sections entitled “Information Regarding the Nominees for Election,” “Information Regarding the Other Incumbent Directors,” “Election of Class I Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation,” “Compensation Discussion and Analysis,” “Director Compensation,” “Codes of Ethics,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report,” “Who are the largest principal stockholders outside of management?,” “Security Ownership of Management,” “Principal Accounting Fees and Services” and “Transactions with Management and Others” in the Company’s definitive proxy statement, and is hereby incorporated in this report and made a part hereof by reference. If the definitive proxy statement is not filed within 120 days after the close of the fiscal year, the Company will file an amendment to this Annual Report on Form 10-K to include the information required by Items 10 through 14.

PART IV

Item 15.

Exhibits and Financial Statement Schedules


(a) 1. & 2.		Financial Statements and Financial Statement Schedules

		The Financial Statements and Financial Statement Schedules filed as part of this report are listed in the accompanying index at page 57 in Item 8 of Part II of this report.

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

139

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


FIRST AMERICAN FINANCIAL CORPORATION
(Registrant)

By		/s/ D ENNIS J. G ILMORE

		Dennis J. Gilmore Chief Executive Officer (Principal Executive Officer)

		Date: March 1, 2011

By		/s/ M AX O. V ALDES

		Max O. Valdes Chief Financial Officer (Principal Financial Officer)

		Date: March 1, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ D ENNIS J. G ILMORE Dennis J. Gilmore	Chief Executive Officer and Director (Principal Executive Officer)	March 1, 2011

/s/ M AX O. V ALDES Max O. Valdes	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	March 1, 2011

/s/ P ARKER S. K ENNEDY Parker S. Kennedy	Executive Chairman	March 1, 2011

/s/ G EORGE L. A RGYROS George L. Argyros	Director	March 1, 2011

/s/ B RUCE S. B ENNETT Bruce S. Bennett	Director	March 1, 2011

/s/ G LENN C. C HRISTENSON Glenn C. Christenson	Director	March 1, 2011

/s/ W ILLIAM G. D AVIS William G. Davis	Director	March 1, 2011

140


Signature	Title	Date

/s/ J AMES L. D OTI James L. Doti	Director	March 1, 2011

/s/ L EWIS W. D OUGLAS , J R . Lewis W. Douglas, Jr.	Director	March 1, 2011

/s/ F RANK O’B RYAN Frank O’Bryan	Director	March 1, 2011

/s/ H ERBERT B. T ASKER Herbert B. Tasker	Director	March 1, 2011

/s/ V IRGINIA M. U EBERROTH Virginia M. Ueberroth	Director	March 1, 2011

141


Exhibit No.	Description	Location

3.1	Amended and Restated Certificate of Incorporation of First American Financial Corporation dated May 28, 2010.	Incorporated by reference herein to Exhibit 3.1 to the Current Report on Form 8-K dated June 1, 2010.

3.2	Bylaws of First American Financial Corporation.	Incorporated by reference herein to Exhibit 3.2 to the Current Report on Form 8-K dated June 1, 2010.

10.1	Separation and Distribution Agreement by and between The First American Corporation (n/k/a CoreLogic, Inc.) and First American Financial Corporation dated as of June 1, 2010.	Incorporated by reference herein to Exhibit 10.1 to the Current Report on Form 8-K dated June 1, 2010.

10.2	Credit Agreement dated as of April 12, 2010, among First American Financial Corporation, the Guarantors party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.	Incorporated by reference herein to Exhibit 10(s) to Amendment No. 3 to Form 10 filed April 30, 2010.

10.3	Tax Sharing Agreement by and between The First American Corporation (n/k/a CoreLogic, Inc.) and First American Financial Corporation dated as of June 1, 2010.	Incorporated by reference herein to Exhibit 10.2 to the Current Report on Form 8-K dated June 1, 2010.

10.4	Promissory Note of The First American Corporation (n/k/a CoreLogic, Inc.) to First American Financial Corporation dated as of June 1, 2010.	Attached.

10.5	Amended and Restated Secured Promissory Note of First American Financial Corporation to First American Title Insurance Company in the amount of $70,000,000, dated as of December 31, 2010.	Attached.

10.6	Promissory Note of First American Financial Corporation to First American Home Buyers Protection Corporation in the amount of $8,970,705, dated as of December 14, 2001.	Incorporated by reference herein to Exhibit 10(u) to Amendment No. 1 to Form 10 filed February 12, 2010.

10.7	Promissory Note of First American Financial Corporation to First American Home Buyers Protection Corporation in the amount of $10,000,000, dated as of March 29, 2002.	Incorporated by reference herein to Exhibit 10(v) to Amendment No. 1 to Form 10 filed February 12, 2010.

10.8	Promissory Note of First American Financial Corporation to First American Home Buyers Protection Corporation in the amount of $10,000,000, dated as of January 31, 2003.	Incorporated by reference herein to Exhibit 10(w) to Amendment No. 1 to Form 10 filed February 12, 2010.

10.9	Promissory Note of First American Financial Corporation to First American Home Buyers Protection Corporation in the amount of $10,000,000, dated as of January 9, 2004.	Incorporated by reference herein to Exhibit 10(x) to Amendment No. 1 to Form 10 filed February 12, 2010.

142


Exhibit No.	Description	Location
10.10	Promissory Note of First American Financial Corporation to First American Home Buyers Protection Corporation in the amount of $30,000,000, dated as of March 12, 2004.	Incorporated by reference herein to Exhibit 10(y) to Amendment No. 1 to Form 10 filed February 12, 2010.

10.11	Promissory Note of First American Financial Corporation to First American Home Buyers Protection Corporation in the amount of $10,000,000, dated as of March 7, 2005.	Incorporated by reference herein to Exhibit 10(z) to Amendment No. 1 to Form 10 filed February 12, 2010.

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

*10.13	First American Financial Corporation Deferred Compensation Plan, effective June 1, 2010.	Incorporated by reference herein to Exhibit 10.5 to the Current Report on Form 8-K dated June 1, 2010.

*10.14	First American Financial Corporation 2010 Incentive Compensation Plan, approved May 28, 2010.	Incorporated by reference herein to Exhibit 10.6 to the Current Report on Form 8-K dated June 1, 2010.

*10.15	Form of Notice of Restricted Stock Unit Grant (Non-Employee Director) and Restricted Stock Unit Award Agreement (Non-Employee Director) for Non-Employee Director Restricted Stock Unit Award approved January 18, 2011.	Attached.

*10.16	Form of Notice of Restricted Stock Unit Grant (Non-Employee Director) and Restricted Stock Unit Award Agreement (Non-Employee Director), approved February 10, 2009.	Incorporated by reference herein from Exhibit 10(yy) of The First American Corporation (n/k/a CoreLogic, Inc.) Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

*10.17	Form of Notice of Restricted Stock Unit Grant and Restricted Stock Unit Award Agreement approved June 10, 2010.	Incorporated by reference herein to Exhibit 10(i) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.

*10.18	Form of Notice of Performance Unit Grant and Performance Unit Award Agreement, approved January 25, 2010.	Incorporated by reference herein from Exhibit 10(mmm) to The First American Corporation (n/k/a CoreLogic, Inc.) Annual Report on Form 10-K for the year ended December 31, 2009.

*10.19	Form of Notice of Performance Unit Grant and Performance Unit Award Agreement, approved February 11, 2011.	Attached.

*10.20	Form of Notice of Restricted Stock Unit Grant (Employee) and Restricted Stock Unit Award Agreement (Employee), approved January 25, 2010.	Incorporated by reference herein from Exhibit 10(zz) to The First American Corporation (n/k/a CoreLogic, Inc.) Annual Report on Form 10-K for the year ended December 31, 2009.

*10.21	Form of Notice of Restricted Stock Unit Grant (Employee) and Restricted Stock Unit Award Agreement (Employee), approved February 11, 2011.	Attached.

143


Exhibit No.	Description	Location

*10.22	Arrangement regarding salaries, bonuses and long term incentive restricted stock units for named executive officers, approved August 25, 2010 and August 31, 2010, respectively.	Incorporated by reference herein to the description contained in the Current Report on Form 8-K, dated August 31, 2010.

*10.23	Employment Agreement, dated December 17, 2008, between The First American Corporation and Dennis J. Gilmore.	Incorporated by reference herein from Exhibit 10(dddd) to The First American Corporation (n/k/a CoreLogic, Inc.) Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

*10.24	Employment Agreement, dated December 17, 2008, between The First American Corporation and Kenneth D. DeGiorgio.	Incorporated by reference herein to Exhibit 10(f) to Amendment No. 2 to Form 10 filed March 22, 2010.

*10.25	Employment Agreement, dated December 17, 2008, between The First American Corporation and Max O. Valdes.	Incorporated by reference herein from Exhibit 10(ffff) to The First American Corporation (n/k/a CoreLogic, Inc.) Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

*10.26	Letter Agreement among First American Financial Corporation, The First American Corporation (n/k/a CoreLogic, Inc.) and Parker S. Kennedy dated as of May 31, 2010.	Incorporated by reference herein to Exhibit 10.7 to the Current Report on Form 8-K dated June 1, 2010.

*10.27	Letter agreement dated October 29, 2010 among First American Financial Corporation, CoreLogic, Inc. and Parker S. Kennedy.	Incorporated by reference herein to Exhibit 10(e) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.

*10.28	Change in Control Agreement effective as of December 31, 2010, by and between First American Financial Corporation and Parker S. Kennedy.	Incorporated by reference herein to Exhibit 10(d) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.

*10.29	The First American Corporation Amended and Restated Change in Control Agreement (Executive Form), effective as of January 1, 2010.	Incorporated by reference herein from Exhibit 10(c) to The First American Corporation (n/k/a CoreLogic, Inc.) Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.

*10.30	First American Financial Corporation Form of Amended and Restated Change in Control Agreement effective as of December 31, 2010.	Incorporated by reference herein to Exhibit 10(c) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.

(21)	Subsidiaries of the registrant.	Attached.

(23)	Consent of Independent Registered Public Accounting Firm.	Attached.

144


Exhibit No.	Description	Location

(31)(a)	Certification by Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities 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.

145

Exhibit 10.4

THE FIRST AMERICAN CORPORATION

PROMISSORY NOTE

FOR PENSION LIABILITY


$19,900,000		June 1, 2010

The First American Corporation, a California corporation (together with its successors and assignees under this Note, the “ Company ”), for value received, hereby promises to pay to First American Financial Corporation, a Delaware corporation, or its permitted successors, endorsees or assignees (the “ Holder ”), the sum of Nineteen Million Nine Hundred Thousand Dollars ($19,900,000 ) (the “ Principal Amount ”) on the Due Date, as defined in Section 5.01 .

The following is a statement of the rights of the Holder of this Note and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees:

1. PAYMENTS ON THIS NOTE.

1.01 PRINCIPAL AND INTEREST PAYMENTS. Commencing on July 1, 2010, with quarterly payments continuing thereafter on October 1 2010, January 1, 2011, April 1, 2011, and on said dates in each calendar year thereafter, until the Principal Amount has been paid in full (each, a “ Payment Date ”), the Company shall pay, in addition to installments of the Principal Amount as set forth on Schedule I attached hereto (each, a “ Principal Payment ”), interest in arrears (each, an “ Interest Payment ”) at the rate of six and fifty-two hundredths percent (6.52%) per annum (the “ Interest Rate ”) on the Principal Amount.

1.02 METHOD OF PAYMENTS. Principal and interest shall be paid in cash. The Company shall make all cash payments to the Holder at 1 First American Way, Santa Ana, CA 92707 or at such other place as the Holder may designate from time to time in writing. If any Payment Date falls on a Saturday or Sunday or on a banking holiday in the State of California, the maturity thereof will be extended to the next succeeding business day.

2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Holder that:

2.01 ORGANIZATION AND QUALIFICATION. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the state of its formation.

2.02 CORPORATE POWERS. The Company has the right and power and is duly authorized and empowered to enter into, execute, deliver and perform this Note. This Note is the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms.

2.03 COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. The execution, delivery and performance by the Company of this Note will not:

(a) contravene, result in any breach of, or constitute a default under, or result in the creation of any lien in respect of any property of the Company or any subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any subsidiary is bound or by which the Company or any subsidiary or any of their respective properties may be bound or affected other than in respect of those certain indentures, mortgages, deeds of trust, loans, purchase or credit agreements or leases, or any other agreements or instruments for which written consents shall have been obtained either prior to, or contemporaneously with, the closing of this Note;

(b) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or governmental authority applicable to the Company or any subsidiary; or

(c) violate any provision of any statute or other rule or regulation of any governmental authority applicable to the Company or any subsidiary;

except in each case as could not reasonably be expected to have a material adverse effect on the business or financial condition of the Company and its subsidiaries, taken as a whole.

2.04 GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or authorization of, or registration, filing or declaration with, any governmental authority is required in connection with the execution, delivery or performance by the Company of this Note.

2.05 LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS. There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any subsidiary or any property of the Company or any subsidiary in any court or before any arbitrator of any kind or before or by any governmental authority that, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the business or financial condition of the Company and its subsidiaries, taken as a whole. Neither the Company nor any subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or governmental authority or is in violation of any applicable law, ordinance, rule or regulation of any governmental authority, which default or violation could reasonably be expected to have a material adverse effect on the business or financial condition of the Company and its subsidiaries, taken as a whole.

2.06 TAXES. The Company and its subsidiaries have filed all material tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments the amount of which is not individually or in the aggregate material, or the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a subsidiary, as the case may be, has established adequate reserves in accordance with generally accepted accounting principles. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a material adverse effect on the business or financial condition of the Company and its subsidiaries, taken as a whole. The charges, accruals and reserves on the books of the Company and its subsidiaries in respect of federal, state or other taxes for all fiscal periods are adequate.

3. COVENANTS. The Company covenants that, unless otherwise consented to by the Holder in writing, it will:

(a) preserve and maintain its corporate existence and all rights, privileges and franchises in connection therewith;

(b) file all federal, state and local tax returns and other reports that the Company is required by law to file, maintain adequate reserves for the payment of all taxes, assessments, governmental charges and levies imposed upon it, its income or its profits, or upon any property belonging to it, and pay and discharge all such taxes, assessments, governmental charges and levies prior to the date on which penalties attach thereto, except where the same are being contested in good faith by appropriate proceedings and provided that in such event adequate book reserves have been established with respect to each such claim being contested;

(c) maintain its property in good condition and make all necessary renewals, repairs, replacements, additions and improvements thereto;

(d) not be in violation of any federal, state, or local laws, ordinances, governmental rules and regulations to which it is subject, and not fail to obtain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its properties or to the conduct of its business, which violation or failure to obtain could reasonably be expected to have a material adverse effect on the business or financial condition of the Company;

(e) keep adequate records and books of account with respect to its business activities in which proper entries are made in accordance with generally accepted accounting principles reflecting all its financial transactions; and

(f) not directly or indirectly consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another person unless (subject in each case to Section 4(i)): (1) the person formed by or surviving any such consolidation or merger (if other than the Company) or the person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes in writing all the obligations of the Company under this Note, in a form reasonably satisfactory to the Holder; and (2) immediately after such transaction no Event of Default exists.

4. EVENTS OF DEFAULT. If any of the following events shall occur (herein individually referred to as an “ Event of Default ”), the Holder of the Note may, so long as such conditions exist, declare the entire Principal Amount and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company:

(a) the failure by the Company to make any payment hereunder when due and payable if such default is not cured by the Company within five (5) days after the due date thereof; or

(b) any warranty, representation or other statement made or furnished to the Holder by or on behalf of the Company or in any instrument furnished in compliance with or in reference to this Note proving to have been false or misleading in any material respect when made or furnished; or

(c) the failure or neglect of the Company to perform, keep or observe any other term, provision, condition or covenant contained in this Note, which is required to be performed, kept or observed by the Company and to cure the

same to the Holder’s satisfaction within thirty (30) days after written notice from the Holder to the Chief Executive Officer or General Counsel of the Company; or

(d) the default of the Company in the payment (whether at stated maturity, upon acceleration, upon required prepayment or otherwise), beyond any period of grace provided therefor, of any principal of or interest on any other debt with a principal amount in excess of $10,000,000 with respect to the Company (“ Covered Debt ”), or any other breach or default (or other event or condition) occurring under any agreement, indenture or instrument relating to Covered Debt, if the effect of such breach or default (or such other event or condition) is to cause, or to permit the holder or holders of the Covered Debt (or a person on behalf of such holder or holders) to cause (upon the giving of notice, the lapse of time or both, or otherwise), such Covered Debt to become or be declared due and payable, or required to be prepaid, redeemed, purchased or defeased (or an offer of prepayment, redemption, purchase or defeasance be made), prior to its stated maturity (other than prepayments, redemptions, purchases (or offers therefor) required in connection with asset dispositions, change of control, events of loss or excess cash flow), provided, however that any “Permitted Action” as that term is defined in the Third Amended and Restated Credit Agreement dated as of April 12, 2010 between the Company, JPMorgan Chase Bank, N.A. as the administrative agent and collateral agent and certain other lenders party thereto (without regard to any amendment, modification or waiver thereto, the “ Credit Agreement ”), shall not constitute an Event of Default or violate any other provision of this Note; or

(e) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Company or any of its subsidiaries, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any of its subsidiaries or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for a period of sixty (60) or more days or an order or decree approving or ordering any of the foregoing shall be entered; or

(f) the Company shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause 4(g) of this Note, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any of its subsidiaries or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; or

(g) one or more judgments for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against the Company, and the same shall remain undischarged for a period of thirty (30) consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Company to enforce any such judgment; or

(h) a Change of Control of the Company shall occur. A “Change of Control” shall be defined as such term is defined in the Credit Agreement. For the avoidance of doubt, a transaction shall not constitute a Change of Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

5. REMEDIES. Upon the occurrence of an Event of Default:

(a)

If an Event of Default occurs under Section 4(e) or 4(f), then the unpaid principal amount of this Note and all other obligations of the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest, notice or other requirements of any kind, all of which are hereby expressly waived by the Company.

(b)

If an Event of Default occurs, other than under Section 4(e) or 4(f), the Holder may, by written notice to the Company, declare the unpaid principal amount of this Note and all other obligations of the Company hereunder to be, and the same shall thereupon become, due and payable, without presentment, demand, protest, any additional notice or other requirements of any kind, all of which are hereby expressly waived by the Company.

6. PREPAYMENT, REPAYMENT AND REDEMPTION.

6.01 DUE DATE. For purposes hereof, the “ Due Date ” is the earliest to occur of (a) May 31, 2017; or (b) the date this Note is declared, or automatically becomes, immediately due and payable upon or after the occurrence of an Event of Default.

6.02 PREPAYMENT. The Principal Amount and any interest accrued thereon may be prepaid by the Company in full or in part at any time and from time to time without premium or penalty, provided that all payments made hereunder are first to be applied to any accrued and unpaid interest outstanding on the date of such payment.

7. MISCELLANEOUS.

7.01 ASSIGNMENT. The Company may not transfer this Note or assign its rights or obligations hereunder, except in connection with an assignment complying with Section 3(f) hereof, without prior written consent of the Holder, and any purported assignment or delegation absent such consent is void. Subject to the foregoing, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

7.02 WAIVER. Diligence, presentment, protest, demand, dishonor, nonpayment, and notice of every kind are waived by all makers, sureties, guarantors, and endorsers of this Note to the fullest extent permitted by applicable law.

7.03 REMEDIES. No delay or omission on the part of the Holder in exercising any right or remedy under this Note or applicable law will operate as a waiver of such right or remedy or of any other right or remedy. No single or partial exercise of any power under this Note or applicable law will preclude other or further exercise thereof or the exercise of any other power. The release of any party liable under this Note will not operate to release any other party liable under this Note.

7.04 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All warranties and representations shall survive until the Principal Amount and all applicable interest thereon have been paid in full.

7.05 AMENDMENT. No provision of this Note may be amended, waived or modified except by written agreement of the Company and the Holder, except that the Company and any sureties or guarantors of this Note consent to all extensions without notice for any period or periods of time and to the acceptance of partial payments before or after maturity, all without prejudice to the Holder. The Holder will have the right to deal in any way, at any time, with the Company, or with any surety or guarantor hereof, without notice to any other party, and to grant any such party any extensions of time for payment of any of the indebtedness hereunder, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the liability of any such party.

7.06 USURY. All agreements between the Company and the Holder are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration of maturity of the unpaid principal balance hereof, or otherwise, will the amount paid or agreed to be paid to the Holder for the use, forbearance or detention of money exceed the highest lawful rate permissible under applicable usury laws. If, from any circumstances whatsoever, fulfillment of any provision of this Note or any agreement or guaranty securing this Note, at the time performance of such provision is due, involves transcending the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto, then the obligation to be fulfilled will be reduced to the limit of such validity. Furthermore, if, from any circumstances whatsoever, the Holder ever receives as interest an amount which would exceed the highest lawful rate, the amount which would be excessive interest will be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest. This provision controls every other provision of all agreements between the Company and the Holder.

7.07 SEVERABILITY. If any term or provision of this Note is held invalid, illegal, or unenforceable, the validity of all other terms and provisions hereof will in no way be affected thereby.

7.08 GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND THIS NOTE AND ALL CLAIMS AND CAUSES OF ACTION ARISING OUT OF THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF CALIFORNIA (OTHER THAN CHOICE OF LAW RULES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION).

7.09 DISPUTES. Any dispute regarding this Note shall be resolved in accordance with the dispute resolution provisions in Article XII of the Separation and Distribution Agreement dated as of June 1, 2010 between the Company and the Holder.

7.10 ATTORNEYS’ FEES. The Company agrees to pay the costs (including without limitation reasonable attorneys’ fees and costs) of enforcement and collection of this Note in case of any breach or default by the Company hereunder.

7.11 OTHER OBLIGATIONS. Performance under this Note is not intended and is not to be construed as an accord and satisfaction or other release or discharge of any obligations or indebtedness of the Company to the Holder not otherwise evidenced specifically.

7.12 HEADING; REFERENCES. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.

7.13 WAIVER OF JURY TRIAL; CHOICE OF FORUM. All actions or proceedings arising in connection with this Note shall be tried and litigated in (a) the state courts of Orange County, California, or (b) the United States District Court for the Central District of California, except that the Holder shall have the right to bring any action or proceeding against the Company or its property in the courts of any other jurisdiction which Holder deems necessary or appropriate in order to otherwise enforce its rights against the Company or its property. THE COMPANY WAIVES THE RIGHT TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR IN CONNECTION WITH THIS NOTE, AND ANY RIGHT THE COMPANY MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT HEREUNDER.

7.14 CONSENT TO JURISDICTION. The Company hereby submits to the jurisdiction of (a) the state courts of Orange County, California, or (b) the United States District Court for the Central District of California for the purposes of any suit, action or other proceeding relating to this Note.

7.15 NOTICES, ETC. All notices and other communications under this Note shall be in writing and shall be personally delivered or sent by prepaid courier, by overnight, registered or certified mail (postage prepaid), or by prepaid telex or telecopy, and shall be deemed given when received by the intended recipient thereof. Unless otherwise specified in a notice sent or delivered in accordance with this Section, all notices and other communications shall be given to the parties hereto as follows:

If to the Company, to it at:

4 First American Way

Santa Ana, CA 92707

Attn: General Counsel

Facsimile: (714) 250-6917

If to the Holder, to it at:

1 First American Way

Santa Ana, CA 92707

Attn: General Counsel

Facsimile: (714) 250-3325

7.16 COMPLETE AGREEMENT. This Note is intended by the Company as a final expression of its agreement regarding the subject matter hereof and contains a complete and exclusive statement of the terms and conditions of such agreement.

7.17 LIMITATION OF LIABILITY, ETC; CERTAIN WAIVERS. No claim shall be made by the Company against the Holder or the affiliates, directors, officers, employees or agents of the Holder for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or under any other theory of liability arising out of or related to the transactions contemplated by this Note, or any act, omission or event occurring in connection therewith; and the Company, on behalf of itself and its subsidiaries, waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. The Company expressly waives any presentment, demand, protest, notice of dishonor or any other notice of any kind in connection with this Note now or hereafter required by law.


THE FIRST AMERICAN CORPORATION

By:		/s/ Anand Nallathambi
Name:		Anand Nallathambi
Title:		Executive Vice President

SCHEDULE I


Interest Rate			6.52%
Payment			876,583


Date	Total Payment		Principal		Interest		Prepaid Interest		Balance
6/1/2010										19,900,000
7/1/2010		876,583		552,213		108,123		216,247		19,347,787
10/1/2010		876,583		561,214		315,369				18,786,573
1/1/2011		876,583		570,362		306,221				18,216,211
4/1/2011		876,583		579,659		296,924				17,636,552
7/1/2011		876,583		589,107		287,476				17,047,445
10/1/2011		876,583		598,710		277,873				16,448,735
1/1/2012		876,583		608,469		268,114				15,840,267
4/1/2012		876,583		618,387		258,196				15,221,880
7/1/2012		876,583		628,466		248,117				14,593,414
10/1/2012		876,583		638,710		237,873				13,954,703
1/1/2013		876,583		649,121		227,462				13,305,582
4/1/2013		876,583		659,702		216,881				12,645,880
7/1/2013		876,583		670,455		206,128				11,975,425
10/1/2013		876,583		681,384		195,199				11,294,041
1/1/2014		876,583		692,490		184,093				10,601,551
4/1/2014		876,583		703,778		172,805				9,897,774
7/1/2014		876,583		715,249		161,334				9,182,524
10/1/2014		876,583		726,908		149,675				8,455,616
1/1/2015		876,583		738,756		137,827				7,716,860
4/1/2015		876,583		750,798		125,785				6,966,062
7/1/2015		876,583		763,036		113,547				6,203,026
10/1/2015		876,583		775,474		101,109				5,427,552
1/1/2016		876,583		788,114		88,469				4,639,438
4/1/2016		876,583		800,960		75,623				3,838,478
7/1/2016		876,583		814,016		62,567				3,024,462
10/1/2016		876,583		827,284		49,299				2,197,178
1/1/2017		876,583		840,769		35,814				1,356,409
4/1/2017		876,583		854,474		22,109				501,935
7/1/2017		510,117		501,935		8,182				—

Exhibit 10.5

AMENDED AND RESTATED

SECURED PROMISSORY NOTE


$70,000,000.00			Santa Ana, California December 31, 2010

This AMENDED AND RESTATED SECURED PROMISSORY NOTE amends and restates that certain SECURED PROMISSORY NOTE dated as of June 1, 2010 made by Payor (as defined below) in favor of Payee (as defined below).

FIRST AMERICAN FINANCIAL CORPORATION, a corporation organized and existing under the laws of the State of Delaware (the “Payor”) hereby promises to pay to the order of First American Title Insurance Company, a California corporation (the “Payee”), in lawful money of the United States of America, by bank check or wire transfer, at 1 First American Way, Santa Ana, CA 92707, the principal sum of SEVENTY MILLION DOLLARS ($70,000,000.00), together with interest thereon at a rate of three and twenty-nine hundredths percent (3.29%) per annum, payable on December 31, 2011.

Upon the commencement of any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar proceeding or any jurisdiction relating to the Payor, the unpaid principal amount hereof, together with any unpaid interest, shall become immediately due and payable without presentment, demand, protest or notice of any kind in connection with this Note.

This Note may be voluntarily repaid by the Payor prior to maturity, in whole or in part, without premium or penalty. The Payor hereby waives presentment, demand, protest or notice of any kind in connection with this Note.

This Note is delivered by Payor in satisfaction in the principal amount of this Note of intercompany balances (whether characterized on the books and records of Payor and Payee as advances or otherwise) owed by Payor to Payee. This Note is secured by the security pledged by Payor to Payee under that certain Amended and Restated Pledge Agreement dated December 31, 2008 between Payor and Payee, as such agreement may be amended from time to time.

THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.


FIRST AMERICAN FINANCIAL CORPORATION

By:		/s/ Max O. Valdes
		Name: Max O. Valdes
		Title: Chief Financial Officer

Exhibit 10.12

First American Financial Corporation

Executive Supplemental Benefit Plan

Amended and Restated Effective

as of January 1, 2011

Contents


Article 1. Introduction			1
1.1 Background and History			1
1.2 Purpose of the Plan			1
1.3 Gender and Number			1

Article 2. Definitions			2
2.1 Affiliate			2
2.2 Annuity Starting Date			2
2.3 Basic Plan			2
2.4 Beneficiary			2
2.5 Board of Directors			3
2.6 Cause			3
2.7 Change of Control			3
2.8 Code			4
2.9 Committee			4
2.10 Company			4
2.11 Competing Business			4
2.12 Competition			4
2.13 Covered Compensation			4
2.14 Deferred Retirement Date			5
2.15 Disabled			5
2.16 Early Retirement Date			5
2.17 Employee			6
2.18 Employer			6
2.19 ERISA			6
2.20 Executive			6
2.21 Final Average Compensation			6
2.22 Good Reason			6
2.23 Hours of Service			7
2.24 In Pay Status			8
2.25 Incumbent Directors			8
2.26 Involuntary Termination			8
2.27 Joint and Survivor Annuity			8
2.28 Management Plan			9
2.29 Normal Retirement Date			9


2.30 Person			9
2.31 Plan			9
2.32 Pre-Retirement Death Benefit			9
2.33 Retirement Income Benefit			9
2.34 Separation from Service			10
2.35 Specified Employee			10
2.36 Spouse			11
2.37 Surviving Spouse			11
2.38 Years of Credited Service			11

Article 3. Retirement Income Benefits			12
3.1 Eligibility to Participate			12
3.2 Normal Retirement			12
3.3 Early Retirement			13
3.4 Disabled Executive			14
3.5 Six-Month Delay for Specified Employees			14
3.6 Rehired Executive Not In Pay Status			14
3.7 Rehired Executive In Pay Status			14
3.8 Maximum Annual Benefit			14

Article 4. Pre-Retirement Death Benefit			16

Article 5. Vesting of Benefits			17
5.1 General Rule			17
5.2 Change of Control			17
5.3 Forfeiture in the Event of Competition			17
Article 6. Funding of Benefits			19
Article 7. Plan Administration			21
7.1 Committee			21
7.2 Operation of the Committee			21
7.3 Agents			22
7.4 Compensation and Expenses			22
7.5 Committee’s Powers and Duties			22
7.6 Committee’s Decisions Conclusive/Exclusive Benefit			23
7.7 Indemnity			23
7.8 Insurance			25
7.9 Notices			25
7.10 Data			25
7.11 Claims Procedure			26
7.12 Effect of a Mistake			28

Article 8. Amendment and Termination			29
8.1 Amendment and Termination Generally			29
8.2 Amendment and Termination Following a Change of Control			29



Article 9. Miscellaneous			30
9.1 No Enlargement of Employee Rights			30
9.2 Benefit Agreement			30
9.3 Exclusion for Suicide or Self-Inflicted Injury			30
9.4 Leave of Absence			30
9.5 Termination for Cause			30
9.6 Monthly Payments			30
9.7 Actuarial Equivalence			31
9.8 Withholding			31
9.9 No Examination or Accounting			31
9.10 Records Conclusive			31
9.11 Section 409A			31
9.12 Service of Legal Process			31
9.13 Governing Law			31
9.14 Severability			31
9.15 Missing Persons			32
9.16 Facility of Payment			32
9.17 General Restrictions Against Alienation			32
9.18 Counterparts			33
9.19 Effect of Amendment on Vested Executives			33
9.20 Assignment			33

iii

Article 1.

Introduction

1.1

Background and History

The First American Financial Corporation Executive Supplemental Benefit Plan was established by the Board of Directors of The First American Corporation (“FAC”), effective as of July 1, 1985. The Plan was amended and restated, effective November 1, 2007, to comply with final regulations under Code section 409A. The Plan was again amended and restated, effective as of January 1, 2009, to amend and clarify certain Plan provisions and to clarify compliance with certain aspects of the final regulations under Code section 409A.

On June 1, 2010, FAC transferred sponsorship and administration of the Plan to the First American Financial Corporation (the “Company”). As a part of this transfer, the Company assumed the liabilities under the portion of the Plan covering the Company’s employees and former employees and FAC remained responsible for liabilities under the portion of the Plan relating to FAC employees and former FAC employees.

The Company restated the Plan to incorporate prior amendments and to reflect that it is the sole sponsor thereof, effective as of June 1, 2010 (“Spin-Off Date”). The provisions of this Plan are intended to govern the benefits payable to a participant under this Plan both before and after June 1, 2010.

The adoption of the restated Plan effective as of the Spin-Off Date was not intended to grant additional benefits to the Plan participants hereof, rather, it was intended to be consistent with the historical practice of the Plan. Accordingly, all elections by Company employees and former employees that were in effect under the terms of the Plan immediately prior to June 1, 2010, continued in effect from and after such date until a new election that by its terms supersedes the prior election was or is made by such Company employee or former employee in accordance with the terms of the Plan and consistent with the provisions of Code Section 409A to the extent applicable. As a result thereof, nothing therein was intended to constitute a “material modification” (within the meaning of Code Section 409A) of the Plan.

The Plan was further amended and restated effective January 1, 2011 to freeze the Plan with respect to new participants and to make certain other changes.

1.2

Purpose of the Plan

The Plan is designed to provide supplemental retirement income and death benefits for certain Executives.

1.3

Gender and Number

Except as otherwise indicated by the context, any masculine or feminine terminology shall also include the opposite gender, and the definition of any term in the singular or plural shall also include the opposite number.

Article 2.

Definitions

The following definitions, set forth in alphabetical order, are used throughout the Plan and have the meaning set forth below.

2.1

Affiliate

“Affiliate” means

(a)

Any entity or organization that, together with the Company, is part of a controlled group of corporations, within the meaning of Code section 414(b);

(b)

Any trade or business that, together with the Company, is under common control, within the meaning of Code section 414(c); and

(c)

Any entity or organization that is required to be aggregated with the Company, pursuant to Code sections 414(m) or 414(o).

For purposes of this Plan, however, the term “Affiliate” shall be interpreted such that the phrase “at least 50 percent” will be substituted for the phrase “at least 80 percent” in each place that it appears in Code section 1563. Additionally, an entity shall be an Affiliate only during the period when the entity has the required relationship, under this Plan section 2.1, with the Company.

2.2

Annuity Starting Date

“Annuity Starting Date” means the first day of the first period for which an amount is paid as an annuity.

2.3

Basic Plan

“Basic Plan” means the First American Financial Corporation Pension Plan, a defined benefit pension plan qualified under Code section 401(a), as amended from time to time.

2.4

Beneficiary

“Beneficiary” means the person, persons or entity designated in writing by the Executive on forms provided by the Company to receive the Pre-Retirement Death Benefit set forth under Article 4 of the Plan. An Executive may change the designated Beneficiary from time to time by filing a new written designation with the Company, and such designation shall be effective upon receipt by the Company, provided that the Company has determined that such change in Beneficiary will not result in an “impermissible acceleration” under Code section 409A. If the Company determines that such change in Beneficiary will result in an “impermissible acceleration,” such intended change will be null and void and the Beneficiary on file prior to such intended change (if any) shall remain the Beneficiary. If an Executive has not designated a Beneficiary, or if a designated Beneficiary is not living or in existence at the time of the Executive’s death, the Pre-Retirement Death Benefit payable under the Plan shall be paid to the Executive’s Spouse, if then living, and if the Executive’s Spouse is not then living, to the Executive’s estate.

2.5

Board of Directors

“Board of Directors” means the Board of Directors of the Company.

2.6

Cause

“Cause” means, with respect to an Employee’s Separation from Service with an Employer, a termination for:

(a)

Employee’s breach of any fiduciary duty to Employer;

(b)

Employee’s failure or refusal to comply with laws or regulations applicable to Employer and its business or the policies of Employer governing the conduct of its employees;

(c)

Employee’s gross incompetence in the performance of Employee’s job duties;

(d)

Commission by Employee of any criminal or fraudulent acts against Employer;

(e)

The failure of Employee to perform duties consistent with a commercially reasonable standard of care;

(f)

Employee’s failure or refusal to perform Employee’s job duties; or

(g)

Any gross or willful conduct of Employee resulting in loss to Employer or any other Affiliate of the Company, or damage to the reputation of Employer or any other Affiliate of the Company.

2.7

Change of Control

“Change of Control” means the occurrence of any of the following:

(a)

The acquisition by any person, entity or “group” (as defined in section 13(d)(3) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the then outstanding securities of the Company;

(b)

A change in the composition of the Board of Directors occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors; or

(c)

Any other event constituting a change in control required to be reported in response to item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act.

Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred by reason of the acquisition of Company securities by the Company, any entity controlled by the Company or any plan sponsored by the Company which is qualified under Code section 401(a).

2.8

Code

“Code” means the Internal Revenue Code of 1986, as amended.

2.9

Committee

“Committee” means the Compensation Committee appointed by the Board of Directors, or any other committee appointed by the Board of Directors to administer this Plan in accordance with Article 7 of the Plan.

2.10

Company

“Company” means the First American Financial Corporation.

2.11

Competing Business

“Competing Business” means any individual (including the Executive), person, sole proprietorship, joint venture, partnership, corporation, limited liability company, business entity, trust or other entity that competes with, or will compete with, the Company or an Affiliate in any locality worldwide. A Competing Business includes, without limitation, any start-up or other entity in formation.

2.12

Competition

“Competition” means any of the following, whether occurring during or after the end of the Executive’s employment with the Employer:

(a)

The Executive’s Involvement (as defined in Article 5) in or with a Competing Business;

(b)

The misappropriation, sale, transfer, use or disclosure of trade secrets, or confidential or proprietary information of the Company or an Affiliate;

(c)

Any action or attempt by the Executive, directly or indirectly, either for himself or for any other person or entity, to recruit or solicit for hire any employee, officer, director, consultant, independent contractor or other personnel of the Company or an Affiliate, or to induce or encourage such a person or entity to terminate his, her or its relationship, or breach an agreement, with the Company or an Affiliate; or

(d)

Any action or attempt by the Executive, directly or indirectly, either for himself or for any other person or entity, to solicit or induce any customer or potential customer of the Company or an Affiliate to cease or not commence doing business, in whole or in part, with or through the Company or an Affiliate, or to do business with any Competing Business.

2.13

Covered Compensation

“Covered Compensation” means base salary, cash bonus, sales commissions, similar commission-based remuneration and equity-based compensation explicitly designated as

Covered Compensation or explicitly designated as compensation for past performance. “Covered Compensation” excludes any other form of remuneration, including, but not limited to, equity compensation awarded to incentivize future performance, relocation expenses and bonuses, earn-outs and other acquisition-related consideration, car allowances and perquisites. Except as otherwise provided by the Committee, “Covered Compensation” also excludes any payments made in connection with a Separation from Service, including, but not limited to, any bonus paid to an Executive in connection with his Separation from Service during a calendar year in which such Executive has already received a performance bonus. If an Executive dies or becomes Disabled, his Covered Compensation for that calendar year shall be defined as the Covered Compensation received through the date of death or disability, respectively, and no compensation received thereafter shall be considered Covered Compensation. Covered Compensation shall for all purposes be deemed paid in the year in which it is actually paid.

2.14

Deferred Retirement Date

“Deferred Retirement Date” means the date on which an Executive who is actively employed by the Company or an Affiliate incurs a Separation from Service following attainment of his Normal Retirement Date.

2.15

Disabled

“Disabled” means an Executive who is, in the determination of the Committee, unable to perform substantially all of the material duties of one’s regular position because of a bodily injury sustained or disease originating after the date of such person’s designation as an Executive under this Plan. Notwithstanding the foregoing:

(a)

After an Executive has been Disabled as defined above for a period of 24 continuous months, the Executive will cease to be considered Disabled unless he is unable to perform any occupation for which he is reasonably fitted by education, training or experience because of such bodily injury or sickness; and

(b)

An Executive is not Disabled at any time that he is working for pay or profit at any occupation.

2.16

Early Retirement Date

“Early Retirement Date” means the later of an Executive’s

(a)

55 ^th birthday;

(b)

Completion of 10 Years of Credited Service; and

(c)

Completion of 5 years as an Executive under the Plan and/or the Management Plan (which requirement may be waived unilaterally only by the Board of Directors or the Committee).

2.17

Employee

“Employee” means any person who is employed by the Company or Affiliate and who is classified as a common-law employee in the employment records of the Company or an Affiliate (other than a leased employee within the meaning of Code section 414(n)(2)).

2.18

Employer

“Employer” means the Company and any Affiliate.

2.19

ERISA

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

2.20

Executive

“Executive” means a key management or key highly compensated employee of the Employer who has been specifically designated by the Board of Directors or the Committee, or the designee of either, as eligible to participate in this Plan, as evidenced by execution by the Executive of the benefit agreement contemplated by Plan section 9.2.

2.21

Final Average Compensation

“Final Average Compensation” means the Executive’s average one-year Covered Compensation for the five-year period ending on December 31 of the calendar year immediately preceding the calendar year in which the Executive has a Separation from Service, unless the Executive has a Separation from Service on the last business day of the calendar year, in which case “Final Average Compensation” means the Executive’s average one-year Covered Compensation for the five-year period ending on December 31 of the calendar year in which the Executive has a Separation from Service; provided, however, that for any Executive whose Separation from Service occurs on or after January 1, 2011, “Final Average Compensation” means the Executive’s average one-year Covered Compensation for the five-year period ending on December 31, 2010.

2.22

Good Reason

“Good Reason” means, with respect to an Employee’s Separation from Service with an Employer following a Change of Control, without the Employee’s express written consent, the occurrence of any of the following circumstances:

(a)

The assignment to the Employee by the Employer of duties which are a significant adverse alteration in the nature or status of the Employee’s position, responsibilities, duties, or conditions of employment from those in effect immediately prior to the occurrence of the Change of Control; or any other action by the Company that results in a material diminution in the Employee’s position, authority, duties, or responsibilities from those in effect immediately prior to the occurrence of the Change of Control;

(b)

A reduction in the Employee’s annual base compensation as in effect on the occurrence of the Change of Control;

(c)

The relocation of the Employer’s offices at which the Employee is principally employed immediately prior to the Change of Control (the “Principal Location”) to a location more than fifty (50) miles from such location or the Employer’s requiring the Employee to be based anywhere other than the Principal Location, except for required travel on the Employer’s business to an extent substantially consistent with the Employee’s business travel obligations prior to the Change of Control;

(d)

The Employer’s failure to pay to the Employee any portion of the Employee’s compensation or to pay to the Employee any portion of an installment of deferred compensation under any deferred compensation program of the Employer within ten (10) days of the date such compensation is due; or

(e)

The Employer’s failure to continue in effect any material compensation or benefit plan or practice in which the Employee is eligible to participate on the occurrence of the Change of Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan or practice, or the Employer’s failure to continue the Employee’s participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Employee’s participation relative to other participants, as existed at the time of the Change of Control.

2.23

Hours of Service

“Hours of Service” means:

(a)

Each hour for which an Executive is paid or entitled to payment by the Company or an Affiliate for the performance of duties.

(b)

Each hour for which an Executive is paid or entitled to payment by the Company or an Affiliate on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability) layoff, jury duty, or leave of absence.

(c)

Each hour for which back pay (irrespective of mitigation of damages) for an Executive is either awarded or agreed to by the Company or an Affiliate, with no duplication of credit for hours under subsections (a) or (b) and this subsection.

(d)

Each hour credited pursuant to applicable ERISA regulations for unpaid periods of absence for service in the United States armed forces or Public Health Service during which an Executive’s reemployment rights are guaranteed by law, provided that the Executive is reemployed by the Company or an Affiliate within the time limits prescribed by such law.

Notwithstanding the foregoing, no more than 501 Hours of Service shall be credited to an Executive on account of any single continuous period during which the Executive performs no duties.

To the extent a record of an Executive’s hours of employment is not maintained by the Company or an Affiliate, the Executive shall be credited with 10 Hours of Service for each day for which the Executive would be required to be credited with at least one Hour of Service.

All Hours of Service shall be determined and credited to computation periods in accordance with reasonable standards and policies consistent with United States Department of Labor Regulations sections 2530.200b-2(b) and (c).

Notwithstanding anything herein to the contrary, each Hour of Service credited to an Executive under any previous version of the Plan, shall be credited to the Executive under this Plan.

2.24

In Pay Status

“In Pay Status” means, with respect to a benefit, that an Executive, Spouse or Beneficiary has met all of the requirements to receive such benefit, and it is being paid or is about to be paid to such Executive, Spouse or Beneficiary. No benefit can be paid under this Plan unless the Executive has incurred a Separation from Service.

2.25

Incumbent Directors

“Incumbent Directors” means directors who either are:

(a)

Directors of the Company as of June 1, 2010; or

(b)

Elected, or nominated for election, to the Board of Directors with the affirmative votes of at least two-thirds of the Incumbent Directors at the time of such election or nomination.

“Incumbent Directors” shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company.

2.26

Involuntary Termination

“Involuntary Termination” means, with respect to an Employee’s Separation from Service with an Employer, a termination: (i) by the Employer for any reason other than for Cause, death or as a result of the Employee becoming Disabled, or (ii) by the Employee for Good Reason.

2.27

Joint and Survivor Annuity

“Joint and Survivor Annuity” means an annuity that provides equal monthly payments for the life of the Executive and, after his death, a reduced annuity (“survivor annuity”) for the life of the Executive’s Surviving Spouse, if any. The monthly payment under the survivor annuity to a Surviving Spouse shall be equal to 50% of the amount of the monthly payment made to the Executive during their joint lives if the Surviving Spouse is not more than five years younger, or

is older, than the Executive at the time benefits begin. If the Surviving Spouse is more than five years younger than the Executive, the survivor annuity will be determined with reference to the actual age of the Surviving Spouse at the time benefits begin and will be reduced to produce the actuarial equivalent of a 50% survivor annuity for a Surviving Spouse who is five years younger than the Executive.

If the Executive is not married at the time that Plan benefits commence, the Joint and Survivor Annuity means an annuity providing equal monthly payments for the lifetime of the Executive with no survivor benefits.

2.28

Management Plan

“Management Plan” means The First American Management Supplemental Benefit Plan.

2.29

Normal Retirement Date

“Normal Retirement Date” means the last day of the month coinciding with or next following the later of an Executive’s:

(a)

62 ^nd birthday;

(b)

Completion of 10 Years of Credited Service (which requirement may be waived unilaterally only by the Board of Directors or the Committee); and

(c)

Completion of 5 years as an Executive under the Plan and/or the Management Plan (which requirement may be waived unilaterally only by the Board of Directors or the Committee).

2.30

Person

“Person” means any individual, partnership, joint venture, association, joint company, corporation, trust, limited liability company, unincorporated organization, a group, a government or other department, agency or political subdivision thereof or any other person or entity as contemplated by the Exchange Act.

2.31

Plan

“Plan” means the First American Financial Corporation Executive Supplemental Benefit Plan.

2.32

Pre-Retirement Death Benefit

“Pre-Retirement Death Benefit” means the benefit payable, as set forth in Article 4.

2.33

Retirement Income Benefit

“Retirement Income Benefit” means 1/12 of the benefit described in Article 3 payable as a monthly annuity.

2.34

Separation from Service

“Separation from Service” means the date on which an Executive who ceases to be an Employee or otherwise separates from the service of the Company or an Affiliate on account of the Executive’s retirement, death or other termination of employment. Whether or not an Executive has incurred a Separation from Service will be based on all surrounding relevant circumstances, including, but not limited to, the reasonable belief of both the Executive and the Company (or Affiliate) that the Executive will perform no future services for the Company or an Affiliate whether as an Employee, as a contractor or in any other capacity. For purposes of this defined term, no Separation from Service will be deemed to have occurred if the Executive transfers employment from the Company or an Affiliate to another member of the Company’s Code section 414 controlled group. For this purpose, controlled group membership will include the Company and all Affiliates.

Notwithstanding the foregoing, the Plan will treat an anticipated permanent reduction in the level of bona fide services provided by the Executive to the Company or an Affiliate as a Separation from Service provided that it is reasonable for the Company or the Affiliate to anticipate that the Executive’s reduced level of bona fide services will not exceed 49 percent of the average level of bona fide services provided by such Executive within the immediately preceding applicable 36 months within the meaning of Treasury Regulations section 1.409A-1(h)(1)(ii).

The commencement of the Retirement Income Benefit, described in Article 3 and subject to the six-month payment delay set forth at Plan section 3.5, will be deemed to be on account of the Executive’s Separation from Service provided that the Retirement Income Benefit commences no later than the end of the calendar year in which the Separation from Service occurs or, if later, within 2 ¹ / 2 months following such Separation from Service provided that the Executive cannot designate the taxable period in which such Retirement Income Benefit shall commence.

2.35

Specified Employee

“Specified Employee” means an Executive qualifying as a “key employee” for purposes of Code section 416 (determined without regard to Code section 416(i)(5)) by satisfying any one of the following conditions at any time during the 12-month period ending on each December 31 (“Identification Date”):

(a)

The Executive is among the top-paid 50 officers of the Company with annual compensation (within the meaning of Code section 415(c)(3)) in excess of $145,000 (subject to cost-of-living adjustments);

(b)

The Executive is a five-percent owner; or

(c)

The Executive is a one-percent owner and has annual compensation in excess of $150,000.

If an individual is a key employee as of an Identification Date, including an individual who acknowledges his Specified Employee status to the Company immediately prior to the date his Retirement Income Benefit commences, the individual shall be treated as a Specified Employee for the 12-month period beginning on April 1 following the Identification Date. For the limited

purpose of applying the “one-percent” and “five-percent” ownership rules, ownership is determined with respect to the entity for which the Employee provides services. The Code’s controlled and affiliated service group rules do not apply when determining an Executive’s ownership interests. Notwithstanding the foregoing, an individual shall not be treated as a Specified Employee unless any stock of the Company or any Affiliate is publicly traded on an established securities market or otherwise.

For purposes of making its annual Specified Employee determination, the Company shall consider compensation treated as recognizable pay under the definition of pay commonly referred to as “general Code section 415 pay.”

Notwithstanding the above, the Company may (but is not required to) adopt an alternative method for identifying Specified Employees, provided such method satisfies the requirements set forth at Treasury Regulations section 1.409A-1(i)(5).

2.36

Spouse

“Spouse” means with respect to an Executive, a person of the opposite sex from the Executive, who is the Executive’s husband or wife (as applicable) under applicable state law: (i) to whom the Executive has been legally married during the 12-month period immediately preceding the Executive’s date of death, if such death is earlier than any of the Executive’s Early, Normal or Deferred Retirement Date, (ii) to whom the Executive is married immediately preceding the Executive’s death, if such death occurs on or after any of the Executive’s Early, Normal or Deferred Retirement Date, or (iii) the person to whom the Executive is married as of his or her Annuity Starting Date if the Executive is living on such date. No individual, including an individual of the opposite sex, shall be the Spouse of an Executive on account of the fact that the individual is registered as the domestic partner of the Executive under state law, even if state law provides that the domestic partners shall have the same rights, protections, and benefits, under state law, as married persons. No individual shall be the Spouse of an Executive unless the person would be treated as the “Spouse” of the Executive under 1 USC section 7 (relating to the definition of a “Spouse” for purposes of federal law, as added by the Defense of Marriage Act).

2.37

Surviving Spouse

“Surviving Spouse” means the Spouse of a deceased Executive who is living at the time of the Executive’s death.

2.38

Years of Credited Service

“Year of Credited Service” means years of benefit service as defined in Article 3 of the Basic Plan, but without regard to the Basic Plan’s freezing of Benefit Service as of April 30, 2008. In making this determination, however, the provisions of Plan section 9.4 relating to leaves of absence shall control over any contrary provisions in the Basic Plan.

Article 3.

Retirement Income Benefits

3.1

Eligibility to Participate

Subject to Plan section 5.2, each Executive who either:

(a)

Reaches his Normal Retirement Date while an Executive employed by an Employer and experiences a Separation from Service on or after such date; or

(b)

Experiences a Separation from Service on or after his Early Retirement Date but prior to reaching Normal Retirement Date,

shall be eligible to receive a Retirement Income Benefit under this Plan upon the Executive’s Separation from Service.

(c) Notwithstanding anything in the Plan to the contrary, if the Board of Directors or its designee so authorizes, an Executive may be employed as a dual employee of the Company and FAC. In such event, such Executive shall only be eligible to receive a Retirement Income Benefit under this Plan upon such Executive’s Separation from Service.

In the event of such authorized dual employment, upon such Executive’s Separation from Service, to the extent that such Executive’s Final Average Compensation covers the period of dual employment in question, such Executive’s benefit shall include only that Covered Compensation attributable to service performed for that Employer. Furthermore, only one-half of Covered Compensation attributable to periods of service with the Company prior to the Spin-Off Date shall be treated as Covered Compensation for purposes of the Plan. For the avoidance of doubt, Covered Compensation allocable to periods prior to FAC’s spin-off of its financial services businesses, consisting primarily of its title insurance and specialty insurance reporting segments, to FinCo, shall be allocated equally between this Plan and to a plan substantially similar to the Plan sponsored by FAC.

(d) Notwithstanding anything in the Plan to the contrary, as of January 1, 2011, the Plan shall be frozen to new participants. For the avoidance of doubt, only those Executives that were specifically designated by the Committee or the Board of Directors on or before December 31, 2010 shall be eligible to participate in the Plan.

3.2

Normal Retirement

Subject to Plan sections 3.5 and 3.8 and to the Executive’s execution of (1) a separation agreement within sixty (60) days following his Separation from Service and (2) annual written certification within thirty (30) days following the end of each year that he is not in Competition with the Company or any Affiliate, each in the form prescribed by the Committee or its designee, an Executive who incurs a Separation from Service on or after his Normal Retirement Date shall be entitled (or the Surviving Spouse of such Executive shall be entitled, if the Separation from Service is due to the Executive’s death) to a Retirement Income Benefit equal to 30% of his Final Average Compensation and payable in the form of a Joint and Survivor Annuity commencing on the last day of the month following the month in which the Executive’s

Separation from Service occurs. If the Executive does not execute and submit to the Company the separation agreement within sixty (60) days following his Separation from Service, he shall not receive any benefit under this Plan. If the Executive fails to submit an annual written certification within thirty (30) days following the end of a year, or if the certification submitted is not accurate, he shall not receive any further benefits under this Plan. In the event of the Executive’s death, the requirement to provide a separation agreement or an annual written certification shall cease to apply.

Notwithstanding the foregoing, an Executive’s Retirement Income Benefit shall be reduced by the amount of any payments that are required to be made to a Spouse, former Spouse, child, or other dependant pursuant to:

(a)

A valid state domestic relations order that is a judgment, decree, or order under state community property or domestic relations law and that relates to the provision of child support, alimony, or marital property rights of an Executive’s Spouse, child or other dependent; or

(b)

In the event of a divorce and after the divorce decree has been issued, a property settlement signed by the Executive, the Executive’s former Spouse, and any other individual named within the agreement to receive Plan funds.

3.3

Early Retirement

Subject to Plan sections 3.5 and 3.8 and to the Executive’s execution of (1) a separation agreement within sixty (60) days following his Separation from Service and (2) annual written certification within thirty (30) days following the end of each year that he is not in Competition with the Company, or any Affiliate, each in the form prescribed by the Committee or its designee, an Executive who incurs a Separation from Service prior to his Normal Retirement Date, but after reaching his Early Retirement Date, shall be entitled (or the Surviving Spouse of such Executive shall be entitled, if the Separation from Service is due to the Executive’s death) to a Retirement Income Benefit payable in the form of a Joint and Survivor Annuity commencing on the last day of the month following the month in which the Executive’s Separation from Service occurs equal to:

(a)

The Retirement Income Benefit that the Executive would have received under Plan section 3.2 above had his date of Separation from Service been on or after the Executive’s Normal Retirement Date;

(b)

Reduced by the product of 5.952% and the number of years (rounded up) by which the Executive’s Separation from Service precedes his Normal Retirement Date.

If the Executive does not execute and submit to the Company the separation agreement within sixty (60) days following his Separation from Service, he shall not receive any benefit under this Plan. If the Executive fails to submit an annual written certification within thirty (30) days following the end of a year, or if the certification submitted is not accurate, he shall not receive any further benefits under this Plan. In the event of the Executive’s death, the requirement to provide a separation agreement or an annual written certification shall cease to apply.

3.4

Disabled Executive

A Disabled Executive shall be deemed to be an Executive during the period of his Disability and shall continue to be eligible for early retirement benefits under Plan section 3.3, normal retirement benefits under Plan section 3.2 and a Pre-Retirement Death Benefit under Article 4, and shall be credited with Years of Credited Service for such period regardless of the nonperformance of services for the Company or an Affiliate. A Disabled Executive’s benefit payments, if any, under this Plan will commence to a vested Executive only upon his Separation from Service. For avoidance of doubt, if an Executive is receiving benefits that are affected in any manner as a result of being a Disabled Executive, then the period used to calculate such Executive’s “Final Average Compensation” shall not include any year during which the Executive is Disabled or is otherwise being credited with Years of Credited Service while not serving as an employee of an Employer.

3.5

Six-Month Delay for Specified Employees

If an Executive is determined by the Committee to be a Specified Employee, payment of the Executive’s Retirement Income Benefit will not commence prior to the last day of the month following the six-month anniversary of the Executive’s Separation from Service. Additionally, an Executive must notify the Company to affirm whether or not he is a Specified Employee by virtue of the one-percent and five-percent ownership thresholds set forth at Treasury Regulations section 1.409A-1(i) and the Company will not be responsible for any consequences to the Executive as a result of Executive’s failure to so notify the Company. If an Executive’s normal, early or deferred Retirement Income Benefit is subject to this six-month delay, the Executive will be entitled to receive a one-time lump sum payment equal to the annuity payments delayed by the above six-month delay. The above six-month delay will not apply for determining when survivor benefits may commence in the event of an Executive’s death.

3.6

Rehired Executive Not In Pay Status

An Executive who has a Separation from Service before he is In Pay Status and subsequently is re-employed by the Company or an Affiliate shall not resume his status as an Executive unless approved by the Committee.

3.7

Rehired Executive In Pay Status

An Executive who is In Pay Status following a Separation from Service and is subsequently re-employed by the Company or an Affiliate shall remain In Pay Status.

3.8

Maximum Annual Benefit

Notwithstanding anything in the Plan to the contrary, in any twelve (12) month period, an Executive’s payments pursuant to any of the provisions in the Plan shall in no event exceed $350,000 (the “Maximum Annual Benefit”); provided, however, that with respect to the Executive serving as the Company’s Chief Executive Officer on January 1, 2011, the Maximum Annual Benefit shall be $500,000. The Maximum Annual Benefit shall be taken into consideration when determining any monthly annuity or other benefit payable pursuant to the Plan. Notwithstanding the foregoing, for purposes of applying the limit set forth in this Plan

section 3.8, any payments delayed pursuant to Plan section 3.5 shall be taken into account as if such payments had been made on the normal payment date ( i.e. as if not subject to any delay), rather than on the actual date of payment.

Article 4.

Pre-Retirement Death Benefit

The Beneficiary of an Executive who dies prior to the earlier to occur of his or her Early Retirement Date and his or her Normal Retirement Date shall be entitled to receive a Pre-Retirement Death Benefit consisting of 10 annual amounts, each equal to 15% of the Executive’s Final Average Compensation, as reduced pursuant to Plan section 3.8, if applicable, commencing as soon as practicable after the Executive’s death, including following the death of an Executive who is also a Specified Employee. Commencement of the Beneficiary’s Pre-Retirement Death Benefit will begin in the same calendar year as the Executive’s death, or, to the extent distribution in the same calendar year is not administratively practicable, then in no event more than 2 ¹ / 2 months into the next successive calendar year.

Article 5.

Vesting of Benefits

5.1

General Rule

An Executive will be 100% vested in his Retirement Income Benefit if he is an Executive on or after attaining his Early Retirement Date or Normal Retirement Date and will be 100% vested in his Pre-Retirement Death Benefit if he dies while an Executive.

5.2

Change of Control

(a)

All Executives shall be 100% vested in all of their Plan benefits upon a Change of Control. Such benefits shall be determined in accordance with the provisions of the Plan as in effect immediately prior to the Change of Control, regardless of subsequent amendments to or a complete termination of the Plan.

(b)

Notwithstanding any other provision of the Plan and subject to Plan section 3.5 and 3.8, an Executive who incurs an Involuntary Termination within thirty-six (36) months following a Change of Control shall be entitled to a Retirement Income Benefit in the form of a Joint and Survivor Annuity commencing on the last day of the month following such Separation from Service equal to (i) the Retirement Income Benefit that the Executive would have been entitled to receive under Plan section 3.3, but only if he has reached his Early Retirement Date upon such Involuntary Termination, and (ii) if he has not yet reached his Early Retirement Date, the actuarial equivalent (as determined in good faith by the Committee) of the Retirement Income Benefit that the Executive would have been entitled to receive under Plan section 3.3 if he had attained his Early Retirement Date on the date of the Executive’s Involuntary Termination taking into account the number of full and partial years by which the Executive’s Involuntary Termination precedes his Early Retirement Date.

5.3

Forfeiture in the Event of Competition

(a)

In the event an Executive who has not attained his Early Retirement Date prior to September 1, 2005, engages in Competition (as defined below) with the Company or an Affiliate on or after September 1, 2005, such Executive and his Beneficiary shall forfeit all right, title and interest in and to any benefits payable under the Plan.

(b)

In the event an Executive who has attained his Early Retirement Date but has not attained his Normal Retirement Date prior to September 1, 2005, engages in Competition with the Company or an Affiliate on or after September 1, 2005, such Executive and his Beneficiary shall not be entitled to receive the Retirement Income Benefit described in Plan section 3.2 or the Pre-Retirement Death Benefit described in Article 4 and shall not accrue any additional benefits pursuant to the terms of the Plan on or after September 1, 2005, and shall only be entitled to those benefits that the Executive would have been entitled to had he incurred a Separation from Service on September 1, 2005.

(c)

“Involvement” means the Executive’s relationship with, or provision of services to or for, a Competing Business in any manner whatsoever, directly or indirectly, including,

without limitation, as a shareholder, member, partner, director, officer, manager, investor, organizer, founder, employee, consultant, advisor, independent contractor, owner, trustee, beneficiary, co-venturer, lender, distributor or agent, or in any other capacity. The ownership of less than a 2% equity or debt interest in a corporation whose equity securities are publicly traded in a recognized stock exchange or traded in the over-the-counter market shall not be deemed Involvement with a Competing Business under this Plan, even though the corporation may be a competitor of the Company or an Affiliate.

(d)

Nothing in this Plan section 5.3 restrains an Executive in any way from engaging in any lawful profession, trade or business of any kind. Rather, this Plan section 5.3 provides for a forfeiture of certain benefits in the event of Competition with the Company or an Affiliate.

Article 6.

Funding of Benefits

The Plan shall be unfunded. All benefits payable under the Plan shall be paid from the Company’s general assets, and nothing contained in the Plan shall require the Company to set aside or hold in trust any funds for the benefit of an Executive or his Beneficiary, who shall have the status of a general unsecured creditor with respect to the Company’s obligation to make payments under the Plan. Any funds of the Company available to pay benefits under the Plan shall be subject to the claims of general creditors of the Company and may be used for any purpose by the Company.

Notwithstanding anything herein to the contrary, if the Board of Directors or its designee so authorizes, an Affiliate of the Company may be designated as a “Participating Company” (as defined below). Such Participating Company and its Subsidiaries shall be treated under the Plan in the same manner as an Affiliate of the Company; provided, however, that all benefits payable under the Plan to Employees of such Participating Company and its Subsidiaries shall be paid from the general assets of that Participating Company, rather than from the general assets of the Company, unless the Committee or its designee determines in its sole discretion that the Company shall pay such benefits.

As an express condition of its of adoption of the Plan, each Participating Company agrees to each of the following conditions:

(a)

The Participating Company is bound by the terms and conditions of the Plan as the Company or the Committee may reasonably require;

(b)

The Participating Company must comply with all requirements and employee benefit rules of the Code, ERISA and applicable regulations for nonqualified retirement plans;

(c)

The Participating Company acknowledges the authority of the Company and the Committee to review the Participating Company’s compliance with the Plan procedures and to require changes in such procedures as the Company and the Committee may reasonably deem appropriate;

(d)

The Participating Company authorizes the Company and the Committee to act on its behalf with respect to matters pertaining to the Plan, including making any and all Plan amendments;

(e)

The Participating Company will cooperate fully with Plan officials and agents by providing information and taking actions as directed by the Committee or the Company so as to allow for the efficient administration of the Plan; and

(f)

The Participating Company’s status as a Participating Company is expressly conditioned on its being and continuing to be an Affiliate of the Company.

For purposes of the Plan, “Participating Company” shall mean an Affiliate whose governing body, with the approval of the Board of Directors or its designee, adopts the Plan for certain of its employees.”

In addition, for purposes of the Plan, “Subsidiary” shall mean, with respect to a Participating Company:

Any entity or organization that, together with the Participating Company, is part of a controlled group of corporations, within the meaning of Code sections 414(b) and 1563(a)(1); provided, however, that for purposes of this definition, the term “Subsidiary” shall be interpreted such that the phrase “at least 50 percent” will be substituted for the phrase “at least 80 percent” in each place that it appears in Code section 1563. Additionally, an entity shall be a Subsidiary only during the period when the entity has the required relationship, as described herein, with the Participating Company.

Article 7.

Plan Administration

7.1

Committee

(a)

Except as otherwise provided in the Plan, the Committee shall be the administrator of the Plan, within the meaning of ERISA section 3(16)(A). The Committee shall generally administer the Plan.

(b)

The Committee may be composed of as many members as the Board of Directors may appoint in writing from time to time. The Board of Directors may also delegate to another person the power to appoint and remove members of the Committee.

(c)

The Company by action of an officer or the Chairperson of the Committee, or if there is no Chairperson, then by unanimous consent of the members of the Committee, may appoint Committee members from time to time. Members of the Committee may, but need not, be Employees.

(d)

A member of the Committee may resign by delivering his written resignation to the Committee. The resignation shall be effective as of the date it is received by the Committee or such other later date as is specified in the resignation notice. A Committee member may be removed at any time and for any reason by the Company by action of any of its officers, the Chairman of the Committee, or by unanimous consent of the remaining members of the Committee. Any Employee appointed to the Committee shall automatically cease to be a member of the Committee, effective on the date that he ceases to be an Employee, unless the Chairman of the Committee, an officer of the Company, or all of the Committee members unanimously specify otherwise in writing.

7.2

Operation of the Committee

(a)

A majority of the members of the Committee at the time in office shall constitute a quorum for the transaction of business. All resolutions adopted and other actions taken by the Committee at any meeting shall be by the vote of a majority of those present at any such meeting. Upon the concurrence of all of the members in office at the time, action by the Committee may be taken otherwise than at a meeting.

(b)

The members of the Committee may elect one of their members as Chair and may elect a Secretary who may, but need not, be a member of the Committee.

(c)

The members of the Committee may authorize one or more of their members or any agent to execute or deliver any instrument or instruments on their behalf. The members of the Committee may allocate any of the Committee’s powers and duties among individual members of the Committee.

(d)

The Committee may appoint one or more subcommittees and delegate any of its discretionary authority and such of its powers and duties, as it deems desirable to any such subcommittee. The members of any such subcommittee shall consist of such persons as the Committee may appoint.

(e)

All resolutions, proceedings, acts, and determinations of the Committee, with respect to the administration of the Plan, shall be recorded; and all such records, together with such documents and instruments as may be necessary for the administration of the Plan, shall be preserved by the Committee.

(f)

Subject to the limitations contained in the Plan, the Committee shall be empowered from time to time in its discretion to establish rules for the exercise of the duties imposed upon the Committee under the Plan.

7.3

Agents

(a)

The Board of Directors, the Company, or the Committee may delegate such of its powers and duties as it deems desirable to any person, in which case every reference herein made to the Board of Directors, Company, or the Committee (as applicable) shall be deemed to mean or include the delegated persons as to matters within their jurisdiction.

(b)

The Board of Directors, the Company, or the Committee may also appoint one or more persons or agents to aid it in carrying out its duties and delegate such of its powers and duties as it deems desirable to such persons or agents.

(c)

The Board of Directors, the Company, or the Committee may employ such counsel, auditors, and other specialists and such clerical and other services as it may require in carrying out the provisions of the Plan, with the expenses therefore paid, as provided in Plan section 7.4.

7.4

Compensation and Expenses

(a)

A member of the Committee shall serve without compensation for services as a member. Any member of the Committee may receive reimbursement of expenses properly and actually incurred in connection with his services as a member of the Committee, as provided in this Article 7.

(b)

All expenses of administering the Plan shall be paid by the Company.

7.5

Committee’s Powers and Duties

Except as otherwise provided in this Plan, the Company shall have responsibility for any settlor duties, powers or functions ( e.g., the right to amend and terminate the Plan) and except as otherwise provided in the Plan, the Committee shall have responsibility for the general administration of the Plan and for carrying out its provisions. The Committee shall have such powers and duties as may be necessary to discharge its functions hereunder, including the following:

(a)

To establish rules, policies, and procedures for administration of the Plan;

(b)

To construe and interpret the Plan, to decide all questions of eligibility, and to determine the amount, manner, and time of payment of any benefits hereunder;

(c)

To make a determination as to the right of any person to a benefit and the amount thereof;

(d)

To obtain from the Company such information as shall be necessary for the proper administration of the Plan;

(e)

To prepare and distribute information explaining the Plan;

(f)

To keep all records necessary for the operation and administration of the Plan;

(g)

To prepare and file any reports, descriptions, or forms required by the Code or ERISA; and

(h)

To designate or employ agents and counsel (who may also be persons employed by the Company) and direct them to exercise the powers of the Committee.

7.6

Committee’s Decisions Conclusive/Exclusive Benefit

The Committee shall have the exclusive right and discretionary authority to interpret the terms and provisions of the Plan and to resolve all questions arising thereunder, including the right to resolve and remedy ambiguities, inconsistencies, or omissions in the Plan, provided, however, that the construction necessary for the Plan to conform to the Code and ERISA shall in all cases control. Benefits under this Plan will be paid only if the Committee decides in its discretion that the Executive, Surviving Spouse or Beneficiary is entitled to them. The Committee shall endeavor to act in such a way as not to discriminate in favor of any class of Executives or other persons. Any and all disputes with respect to the Plan that may arise involving Executives will be referred to the Committee, and its decisions shall be final, conclusive, and binding. All findings of fact, interpretations, determinations, and decisions of the Committee in respect of any matter or question arising under the Plan shall be final, conclusive, and binding upon all persons, including, without limitation, Executives, and any and all other persons having, or claiming to have, any interest in or under the Plan and shall be given the maximum possible deference allowed by law.

The Committee shall administer the Plan for the exclusive benefit of Executives and their Beneficiaries.

7.7

Indemnity

(a)

The Company (including any successor employer, as applicable) shall indemnify and hold harmless each of the following persons (“Indemnified Persons”) under the terms and conditions of subsection (b).

(1)

The Committee; and

(2)

Each Employee, former Employee, current and former members of the Committee, or current or former members of the Board of Directors who have, or had, responsibility (whether by delegation from another person, an allocation of responsibilities under the terms of this Plan document, or otherwise) for a fiduciary duty, a non-fiduciary settlor function (such as deciding whether to

approve a plan amendment), or a non-fiduciary administrative task relating to the Plan.

(b)

The Company shall indemnify and hold harmless each Indemnified Person against any and all claims, losses, damages, and expenses, including reasonable attorneys’ fees and court costs, incurred by that person on account of his good faith actions or failures to act with respect to his responsibilities relating to the Plan. The Company’s indemnification shall include payment of any amounts due under a settlement of any lawsuit or investigation, but only if the Company agrees to the settlement.

(1)

An Indemnified Person shall be indemnified under this Plan section 7.7 only if he notifies an Appropriate Person (defined below) at the Company of any claim asserted against or any investigation of the Indemnified Person that relates to the Indemnified Person’s responsibilities with respect to the Plan.

(A)

An “Appropriate Person” is one or more of the following individuals at the Company:

(i)

The Chief Executive Officer,

(ii)

The Chief Financial Officer, or

(iii)

Its General Counsel.

(B)

The notice may be provided orally or in writing. The notice must be provided to the Appropriate Person promptly after the Indemnified Person becomes aware of the claim or investigation. No indemnification shall be provided under this Plan section 7.7 to the extent that the Company is materially prejudiced by the unreasonable delay of the Indemnified Person in notifying an Appropriate Person of the claim or investigation.

(2)

An Indemnified Person shall be indemnified under this Plan section 7.7 with respect to attorneys’ fees, court costs, or other litigation expenses or any settlement of such litigation only if the Indemnified Person agrees to permit the Company to select counsel and to conduct the defense of the lawsuit and agrees not to take any action in the lawsuit that the Company believes would be prejudicial to the Company’s interests.

(3)

No Indemnified Person, including an Indemnified Person who is a former Employee, shall be indemnified under this Plan section 7.7 unless he makes himself reasonably available to assist the Company with respect to the matters in issue and agrees to provide whatever documents, testimony, information, materials, or other forms of assistance that the Company shall reasonably request.

(4)

No Indemnified Person shall be indemnified under this Plan section 7.7 with respect to any action or failure to act that is judicially determined to constitute or be attributable to the gross negligence or willful misconduct of the Indemnified Person.

(5)

Payments of any indemnity under this Plan section 7.7 shall only be made from assets of the Company. The provisions of this Plan section 7.7 shall not preclude or limit such further indemnities or reimbursement under this Plan as allowable under applicable law, as may be available under insurance purchased by the Company, or as may be provided by the Company under any by-law, agreement or otherwise, provided that no expense shall be indemnified under this Plan section 7.7 that is otherwise indemnified by the Company, by an insurance contract purchased by the Company, or by this Plan.

7.8

Insurance

The Committee may authorize the purchase of insurance to cover any liabilities or losses occurring by reason of the act or omission of any Committee member or its designee. To the extent permitted by law, the Committee may purchase insurance covering any member (or its designee) for any personal liability of such Committee member (or its designee) with respect to any administrative responsibilities under this Plan. Any Committee member (or its designee) may also purchase insurance for his own account covering any personal liability under this Plan.

7.9

Notices

Each Executive shall be responsible for furnishing to the Company his current address. The Executive shall also be responsible for notifying the Company of any change in the above information. If an Executive does not provide the above information to the Company, the Committee may rely on the address of record of the Executive on file with the Company’s personnel office.

All notices or other communications from the Committee to an Executive (who is a current Employee) shall be deemed given and binding upon that person for all purposes of the Plan when delivered by e-mail to the Executive’s individually designated e-mail address at the Company and all notices or other communications from the Committee to an Executive (who is a former Employee) shall be deemed given and binding upon that person for all purposes of the Plan when delivered to, or when mailed first-class mail, postage prepaid, and addressed to that person at his address last appearing on the Committee’s records, and the Committee, and the Company shall not be obliged to search for or ascertain his whereabouts.

All notices or other communications from the Executive required or permitted under this Plan shall be provided to the person specified by the Committee, using such procedures as are prescribed by the Committee. The Committee may require that the oral notice or communication be provided by telephoning a specific telephone number and, after calling that telephone number, by following a specified procedure. Any oral notice or oral communication from an Executive that is made in accordance with procedures prescribed by the Committee shall be deemed to have been duly given when all information requested by the person specified by the Committee is provided to such person, in accordance with the specified procedures.

7.10

Data

All persons entitled to benefits from the Plan must furnish to the Committee such documents, evidence, or information, as the Committee considers necessary or desirable for the purpose of

administering the Plan, and it shall be a condition of the Plan that each such person must furnish such information and sign such documents as the Committee may require before any benefits become payable from the Plan.

7.11

Claims Procedure

All decisions made under the procedure set out in this Plan section 7.11 shall be final, and there shall be no further right of appeal. No lawsuit may be initiated by any person before fully pursuing the procedures set out in this Plan section 7.11, including the appeal permitted pursuant to subsection (c) below.

(a)

The right of an Executive or any other person entitled to claim a benefit under the Plan (collectively “Claimants”) to a benefit shall be determined by the Committee, provided, however, that the Committee may delegate its responsibility to any person.

(1)

The Claimant (or an authorized representative of a Claimant) may file a claim for benefits by written notice to the Committee. The Committee shall establish procedures for determining whether a person is authorized to represent a Claimant.

(2)

Any claim for benefits under the Plan, pursuant to this Plan section 7.11, shall be filed with the Committee no later than three months after the date of the Executive’s Separation from Service. The Committee in its sole discretion shall determine whether this limitation period has been exceeded.

(3)

Notwithstanding anything to the contrary in this Plan, the following shall not be a claim for purposes of this Plan section 7.11:

(A)

A request for determination of eligibility, participation, or benefit calculation under the Plan without an accompanying claim for benefits under the Plan. The determination of eligibility, participation, or benefit calculation under the Plan may be necessary to resolve a claim, in which case such determination shall be made in accordance with the claims procedures set forth in this Plan section 7.11.

(B)

Any casual inquiry relating to the Plan, including an inquiry about benefits or the circumstances under which benefits might be paid under the Plan.

(C)

A claim that is defective or otherwise fails to follow the procedures of the Plan ( e.g., a claim that is addressed to a party other than the Committee or an oral claim).

(D)

An application or request for benefits under the Plan.

(b)

If a claim for benefits is wholly or partially denied, the Committee shall, within a reasonable period of time, but no later than 90 days after receipt of the claim, notify the Claimant of the denial of benefits. If special circumstances justify extending the period up to an additional 90 days, the Claimant shall be given written notice of this extension

within the initial 90-day period, and such notice shall set forth the special circumstances and the date a decision is expected. A notice of denial

(1)

Shall be written in a manner calculated to be understood by the Claimant; and

(2)

Shall contain

(A)

The specific reasons for denial of the claim;

(B)

Specific reference to the Plan provisions on which the denial is based;

(C)

A description of any additional material or information necessary for the Claimant to perfect the claim, along with an explanation as to why such material or information is necessary; and

(D)

An explanation of the Plan’s claim review procedures and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring a civil action under ERISA section 502(a) following an adverse determination on review.

(c)

Within 60 days of the receipt by the Claimant of the written denial of his claim or, if the claim has not been granted, within a reasonable period of time (which shall not be less than the 90 or 180 days described in subsection (b) above), the Claimant (or an authorized representative of a Claimant) may file a written request with the Committee that it conduct a full review of the denial of the claim. In connection with the Claimant’s appeal, upon request, the Claimant may review and obtain copies of all documents, records and other information relevant to the Claimant’s claim for benefits (but not including any document, record or information that is subject to any attorney–client or work–product privilege) and may submit issues and comments in writing. The Claimant may submit written comments, documents, records, and other information relating to the claim for benefits. All comments, documents, records, and other information submitted by the Claimant shall be taken into account in the appeal without regard to whether such information was submitted or considered in the initial benefit determination.

(d)

The Committee shall deliver to the Claimant a written decision on the claim promptly, but no later than 60 days after the receipt of the Claimant’s request for such review, unless special circumstances exist that justify extending this period up to an additional 60 days. If the period is extended, the Claimant shall be given written notice of this extension during the initial 60-day period and such notice shall set forth the special circumstances and the date a decision is expected. The decision on review of the denial of the claim

(1)

Shall be written in a manner calculated to be understood by the Claimant;

(2)

Shall include specific reasons for the decision;

(3)

Shall contain specific references to the Plan provisions on which the decision is based;

(4)

Shall contain a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and other information relevant to the Claimant’s claim for benefits. Whether a document, record, or other information is relevant to a claim for benefits shall be determined by reference to U.S. Department of Labor Regulations section 2560; and

(5)

Shall contain a statement of the Claimant’s right to bring a civil action under ERISA section 502(a) following an adverse determination on review.

(e)

No lawsuit may be initiated by any person before fully pursuing the procedures set out in this Plan section 7.11, including the appeal permitted pursuant to subsection (c) above. In addition, no legal action may be commenced later than 365 days subsequent to the date of the written response of the Committee to a Claimant’s request for review pursuant to subsection (d) above.

7.12

Effect of a Mistake

In the event of a mistake or misstatement as to the eligibility, participation, or service of any Executive or the amount of payments made or to be made to an Executive, the Committee shall, if possible, cause to be withheld or accelerated or otherwise make adjustment of the amounts of payments as will, in its sole judgment, result in the Executive receiving the proper amount of payments under the Plan.

Article 8.

Amendment and Termination

8.1

Amendment and Termination Generally

The Plan may be amended or terminated by the Company, acting through its Board of Directors (or the Compensation Committee or other designee of the Board of Directors) at any time. Notwithstanding the preceding sentence, benefits may be distributed to Executives on account of the termination only if:

(a)

The termination does not occur proximate to a downturn in the financial health of the Company;

(b)

All nonqualified defined benefit nonaccount-based retirement plans maintained by the Company and all Affiliates that would be aggregated with the Plan under Code section 409A are terminated when the Plan is terminated;

(c)

No payments are made within 12 months after the date when the Company takes all steps necessary to terminate and liquidate the Plan, other than payments made pursuant to the Plan’s otherwise applicable distribution provisions;

(d)

All benefits are distributed within 24 months after the date when the Company takes all steps necessary to terminate and liquidate the Plan; and

(e)

Neither the Company nor any Affiliate establishes a new nonqualified, nonaccount-based plan that would be aggregated with the Plan under Code section 409A at any time within three years after the date when the Company takes all steps necessary to terminate and liquidate the Plan.

Such amendment or termination may modify or eliminate any benefits hereunder other than a benefit that is In Pay Status, or the vested portion of a benefit that is not In Pay Status.

8.2

Amendment and Termination Following a Change of Control

Notwithstanding the Company’s general right to amend or terminate the Plan at any time, the Company, including any successor entity to the Company, may not amend or terminate this Plan in any manner following a Change of Control that would adversely affect the rights of an Executive to benefits under this Plan to the extent such rights are vested as of, or as a result of, such Change of Control.

Article 9.

Miscellaneous

9.1

No Enlargement of Employee Rights

This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Employee or to be consideration for, or an inducement to, or a condition of, the employment of any Employee. Nothing contained in the Plan shall be deemed to give any Employee the right to be retained in the service of the Company or any Affiliate or to interfere with the right of any of them to discharge or retire any person at any time. No one shall have any right to benefits, except to the extent provided in this Plan.

9.2

Benefit Agreement

The Committee shall provide to each Executive within 60 days of the date the Executive first became an Executive a form of benefit agreement, which shall set forth the Executive’s acceptance of the benefits provided hereunder and his agreement to be bound by the terms of the Plan.

9.3

Exclusion for Suicide or Self-Inflicted Injury

Notwithstanding any other provision of the Plan, no benefits shall be paid to any Executive, or Spouse or Beneficiary in the event of the death of the Executive within two years of the later of the date he first became an Executive or the date he executed the benefit agreement referred to in Plan section 9.2 as the result of suicide or self-inflicted injury.

9.4

Leave of Absence

An Executive who is on an approved leave of absence with salary, or on an approved leave of absence without salary for a period of not more than six months, shall be deemed to be an Executive during such leave of absence. An Executive who is on an approved leave of absence without salary for a period in excess of six months shall be deemed to have voluntarily incurred a Separation from Service as of the end of such six-month period, provided that, based on all relevant facts and circumstances, neither the Executive nor the Company has a reasonable expectation that the Executive will provide future services to the Company or an Affiliate.

9.5

Termination for Cause

Notwithstanding any provision herein to the contrary, an Executive whose employment with the Company or an Affiliate is terminated for Cause shall not be eligible for any benefit hereunder.

9.6

Monthly Payments

Periodic payments hereunder shall be paid in equal monthly amounts.

9.7

Actuarial Equivalence

Actuarial equivalence hereunder shall be determined using the interest and mortality factors adopted from time to time by the Committee. The initial factors to be used shall be the factors used under the Basic Plan for determining actuarial equivalence.

9.8

Withholding

Benefit payments hereunder shall be subject to applicable federal, state or local withholding for taxes.

9.9

No Examination or Accounting

Neither this Plan nor any action taken thereunder shall be construed as giving any person the right to an accounting or to examine the books or affairs of the Company, or any Affiliate.

9.10

Records Conclusive

The records of the Company shall be conclusive in respect to all matters involved in the administration of the Plan.

9.11

Section 409A

Notwithstanding any provision of this Plan to the contrary, the Committee shall administer this Plan in a manner designed to comply with Code section 409A and the Committee shall disregard any Plan provision if the Committee determines that application of such Plan provision would subject the Executive to an additional excise tax under Code section 409A(a)(1)(B).

9.12

Service of Legal Process

The members of the Committee (or if there is no such Committee then the Company) are hereby designated as agent(s) of the Plan for the purpose of receiving legal process.

9.13

Governing Law

The Plan shall be construed, administered, and governed in all respects under the applicable laws of the State of California, except to the extent pre-empted by federal law. Upon any change in the law or other determination that any term, condition or other provision of the Plan has been altered in any way, the Committee shall administer this Plan in accordance with such change notwithstanding the terms of the Plan pending an amendment to this Plan.

9.14

Severability

If any provision of this Plan is held illegal or invalid for any reason, such illegality or invalidity will not affect the remaining provisions; instead, each provision is fully severable and the Plan will be construed and enforced as if any illegal or invalid provision had never been included.

9.15

Missing Persons

The Committee shall establish rules if the Committee is unable to make payment of a benefit due under the terms of the Plan to an Executive because the whereabouts of the Executive cannot be ascertained.

9.16

Facility of Payment

Every person receiving or claiming benefits under this Plan is presumed to be mentally competent and of age until the date on which the Committee receives a written notice, in a form and manner acceptable to it, that such person is mentally incompetent or a minor, and that a guardian or other person legally vested with the care of such person or his estate has been appointed.

However, if the Committee should find that any person to whom a benefit is payable under this Plan is unable to care for his affairs because of any incompetency or is a minor, any payment due (unless a prior claim shall have been made by a duly appointed legal representative) may be paid to the Spouse, a child, a parent, or a brother or sister, or to any other person or institution that the Committee determines to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor under the Plan.

If a guardian of the estate or other person legally vested with the care of the estate of any person receiving or claiming benefits under the Plan is appointed by a court of competent jurisdiction, payments shall be made to such guardian or other person provided that proper proof of appointment and continuing qualification is furnished in a form and manner suitable to the Committee. To the extent permitted by law, such guardian or other person may act for the Executive and make any election required of or permitted by the Executive under this Plan, and such action or election shall be deemed to have been done by the Executive, and benefit payments may be made to such guardian or other person and any such payment shall be a complete discharge of any such liability under the Plan.

9.17

General Restrictions Against Alienation

The interest of any Executive under this Plan shall not in any event be subject to sale, assignment, or transfer, and each Executive is hereby prohibited from anticipating, encumbering, assigning, or in any manner alienating his interest hereunder and is without power to do so; provided, however, that this provision shall not restrict the power or authority of the Committee, in accordance with the applicable provisions of the Plan, to disburse funds to the legally appointed guardian, executor, administrator, or personal representative of any Executive or pursuant to a valid domestic relations order certified and issued by a court of competent jurisdiction.

If any person attempts to take any action contrary to this Plan section 9.17, such action shall be void and the Company may disregard such action and is not in any manner bound thereby, and they shall suffer no liability for any such disregard thereof. If the Committee is notified that any Executive has been adjudicated bankrupt or has purported to anticipate, sell, transfer, assign, or encumber any Plan distribution or payment, voluntarily or involuntarily, the Committee shall

hold or apply such distribution or payment or any part thereof to, or for the benefit of, such Executive in such manner as the Committee finds appropriate.

9.18

Counterparts

This Plan may be executed in any number of counterparts, each of which shall be deemed to be an original. All the counterparts shall constitute but one and the same instrument and may be sufficiently evidenced by any one counterpart.

9.19

Effect of Amendment on Vested Executives

Any Executive who met the requirements for vesting of his Retirement Income Benefit as of October 31, 2007, shall upon Separation from Service be entitled to receive as his Retirement Income Benefit the greater of

(a)

The Retirement Income Benefit that such Executive would have been entitled to receive under the Plan as it was in effect on October 31, 2007 (which, for the avoidance of doubt, was prior to the amendments affected by the amendment and restatement of the Plan effective November 1, 2007) and as if such Executive had a Separation from Service on October 31, 2007 (but not for purposes of the six-month period described at Plan section 3.5 which shall always be measured from the actual date the Executive experienced a Separation from Service); or

(b)

The Retirement Income Benefit that such Executive is entitled to receive under the Plan (which, for the avoidance of doubt, is the Plan as amended and restated effective November 1, 2007). The amendment and restatement effective November 1, 2007, shall not result in the decrease or increase of any Retirement Income Benefit of any Executive who is In Pay Status or any Pre-Retirement Death Benefit being paid as of October 31, 2007.

9.20

Assignment

The Company shall have the right to assign its obligations under the Plan, either in whole or in part, to any Affiliate of the Company.

In Witness Whereof , an authorized officer of the Company has signed this document on January 18, 2011, but effective as of January 1, 2011, unless otherwise stated herein.


First American Financial Corporation

By:		/s/ Dennis J. Gilmore

Its:		Chief Executive Officer

Exhibit 10.15

[Non-Employee Director]

Notice of Restricted Stock Unit Grant


Participant:		[Participant Name]

Company:		First American Financial Corporation

Notice:		You have been granted the following Restricted Stock Units in accordance with the terms of the Plan and the Restricted Stock Unit Award Agreement attached hereto.

Type of Award:		Restricted Stock Units

Plan:		First American Financial Corporation 2010 Incentive Compensation Plan

Grant:		Date of Grant: [Grant Date] Number of Shares Underlying Restricted Stock Units: [Number of Shares Granted]

Period of Restriction:		Subject to the terms of the Plan and this Agreement, the Period of Restriction applicable to the Restricted Stock Units shall commence on the Date of Grant and shall lapse on the date listed in the “Lapse Date” column below as to that percentage of Shares underlying the Restricted Stock Units set forth below opposite each such date.


Lapse Date		Percentage of Shares as to Which Period of Restriction Lapses
Date of Grant + 1 year		33.333%
Date of Grant + 2 years		33.333%
Date of Grant + 3 years		33.334%



Rejection:		If you wish to accept this Restricted Stock Unit Award, please access Fidelity NetBenefits ^® at www.netbenefits.com and follow the steps outlined under the “Accept Grant” link at any time within forty-five (45) days after the Date of Grant. If you do not accept your grant via Fidelity NetBenefits ^® within forty-five (45) days after the Date of Grant, you will have rejected this Restricted Stock Unit Award.

[ Non-Employee Director]

Restricted Stock Unit Award Agreement

This Restricted Stock Unit Award Agreement (this “Agreement”), dated as of the Date of Grant set forth in the Notice of Restricted Stock Unit Grant attached hereto (the “Grant Notice”), is made between First American Financial Corporation (the “Company”) and the Participant set forth in the Grant Notice. The Grant Notice is included in and made part of this Agreement.

Definitions .

Capitalized terms used but not defined in this Agreement (including the Grant Notice) have the meaning set forth in the Plan.

Grant of the Restricted Stock Units .

Subject to the provisions of this Agreement and the provisions of the Plan, the Company hereby grants to the Participant, pursuant to the Plan, a right to receive the number of shares of common stock of the Company, par value $.00001 per share (“Shares”), set forth in the Grant Notice (the “Restricted Stock Units”).

Dividend Equivalents .

Each Restricted Stock Unit shall accrue Dividend Equivalents with respect to dividends that would otherwise be paid on the Share underlying such Restricted Stock Unit during the period from the Grant Date to the date such Share is delivered in accordance with Section 6. Any such Dividend Equivalent shall be deemed reinvested in additional Shares underlying the Restricted Stock Units within each Period of Restriction immediately upon the related dividend’s payment date, based on the then-current Fair Market Value (rounded down to the nearest whole number), and shall be subject to the Period of Restriction applicable to the Restricted Stock Unit on which such Dividend Equivalent is paid. Any such conversion of Dividend Equivalents shall be conclusively determined by the Committee. The Shares underlying Restricted Stock Units into which Dividend Equivalents are so converted shall be delivered in accordance with Section 6.

Period of Restriction; Termination .

The Period of Restriction with respect to the Restricted Stock Units shall be as set forth in the Grant Notice. Subject to the terms of the Plan and the remaining provisions of this Section 4, all Restricted Stock Units for which the Period of Restriction had not lapsed prior to the date of the Participant’s Termination shall be immediately forfeited. Notwithstanding the foregoing to the contrary:

(a)

In the event of the Participant’s Termination due to his or her death or Disability, the Period of Restriction as to all Restricted Stock Units shall lapse in its entirety.

(b)

In the event of the Participant’s Termination due to his or her retirement from the Board, irrespective of length of service prior to such retirement, the Period of Restriction as to all Restricted Stock Units shall lapse in its entirety.

Change of Control .

Except for a Change of Control that has been approved by the Company’s Incumbent Board prior to the occurrence of such Change of Control, the provisions of Section 15.1 of the Plan shall apply to the Restricted Stock Units.

Delivery of Shares .

As soon as reasonably practicable following the lapse of the applicable portion of the Period of Restriction, but in no event later than 90 days following the date of such lapse, the Company shall cause to

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be delivered to the Participant the full number of Shares underlying the Restricted Stock Units as to which such portion of the Period of Restriction has so lapsed, together with Shares comprising all accrued Dividend Equivalents with respect to such Restricted Stock Units, subject to satisfaction of applicable tax withholding obligations with respect thereto pursuant to Article XVII of the Plan.

No Ownership Rights Prior to Issuance of Shares .

Neither the Participant nor any other person shall become the beneficial owner of the Shares underlying the Restricted Stock Units, nor have any rights to dividends or other rights as a shareholder with respect to any such Shares, until and after such Shares have been actually issued to the Participant and transferred on the books and records of the Company or its agent in accordance with the terms of the Plan and this Agreement.

Detrimental Activity .

(a) Notwithstanding any other provisions of this Agreement to the contrary, if at any time prior to the delivery of Shares with respect to the Restricted Stock Units, the Participant engages in Detrimental Activity, such Restricted Stock Units shall be cancelled and rescinded without any payment or consideration therefor. The determination of whether the Participant has engaged in Detrimental Activity shall be made by the Committee in its good faith discretion, and lapse of the Period of Restriction and delivery of Shares with respect to the Restricted Stock Units shall be suspended pending resolution to the Committee’s satisfaction of any investigation of the matter.

(b) For purposes of this Agreement, “Detrimental Activity” means at any time (i) using information received during the Participant’s membership on the Board relating to the business affairs of the Company or any of its Subsidiaries or Affiliates, in breach of the Participant’s express or implied undertaking to keep such information confidential; (ii) directly or indirectly persuading or attempting to persuade, by any means, any employee of the Company or any of its Subsidiaries or Affiliates to breach any of the terms of his or her employment with Company, its Subsidiaries or its Affiliates; (iii) directly or indirectly making any statement that is, or could be, disparaging of the Company or any of its Subsidiaries or Affiliates, or any of their respective employees (except to the extent necessary to respond truthfully to any inquiry from applicable regulatory authorities or to provide information pursuant to legal process); (iv) directly or indirectly engaging in any illegal, unethical or otherwise wrongful activity that is, or could be, substantially injurious to the financial condition, reputation or goodwill of the Company or any of its Subsidiaries or Affiliates; or (v) directly or indirectly engaging in an act of misconduct such as, embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Company or any of its Subsidiaries or Affiliates, breach of fiduciary duty or disregard or violation of rules, policies or procedures of the Company or any of its Subsidiaries or Affiliates, an unauthorized disclosure of any trade secret or confidential information of the Company or any of its Subsidiaries or Affiliates, any conduct constituting unfair competition, or inducing any customer to breach a contract with the Company or any of its Subsidiaries or Affiliates, in each case as determined by the Committee in its good faith discretion.

The Plan .

In consideration for this grant, the Participant agrees to comply with the terms of the Plan and this Agreement. This Agreement is subject to all the terms, provisions and conditions of the Plan, which are incorporated herein by reference, and to such regulations as may from time to time be adopted by the Committee. In the event of any conflict between the provisions of the Plan and this Agreement, the provisions of the Plan shall control, and this Agreement shall be deemed to be modified accordingly. The Plan and the prospectus describing the Plan can be found on Fidelity NetBenefits ^® at www.netbenefits.com under Plan Information and Documents. A paper copy of the Plan and the prospectus shall be provided to the Participant upon the Participant’s written request to the Company at First American Financial Corporation, 1 First American Way, Santa Ana, California 92707, Attention: Incentive Compensation Plan Administrator, or such other address as the Company may from time to time specify.

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10.

Compliance with Laws and Regulations .

(a) The Restricted Stock Units and the obligation of the Company to sell and deliver Shares hereunder shall be subject in all respects to (i) all applicable Federal and state laws, rules and regulations and (ii) any registration, qualification, approvals or other requirements imposed by any government or regulatory agency or body which the Committee shall, in its discretion, determine to be necessary or applicable. Moreover, the Company shall not deliver any certificates for Shares to the Participant or any other person pursuant to this Agreement if doing so would be contrary to applicable law. If at any time the Company determines, in its discretion, that the listing, registration or qualification of Shares upon any national securities exchange or under any state or Federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable, the Company shall not be required to deliver any certificates for Shares to the Participant or any other person pursuant to this Agreement unless and until such listing, registration, qualification, consent or approval has been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Company.

(b) It is intended that the Shares received in respect of the Restricted Stock Units shall have been registered under the Securities Act. If the Participant is an “affiliate” of the Company, as that term is defined in Rule 144 under the Securities Act (“Rule 144”), the Participant may not sell the Shares received except in compliance with Rule 144. Certificates representing Shares issued to an “affiliate” of the Company may bear a legend setting forth such restrictions on the disposition or transfer of the Shares as the Company deems appropriate to comply with Federal and state securities laws.

(c) If, at any time, the Shares are not registered under the Securities Act, and/or there is no current prospectus in effect under the Securities Act with respect to the Shares, the Participant shall execute, prior to the delivery of any Shares to the Participant by the Company pursuant to this Agreement, an agreement (in such form as the Company may specify) in which the Participant represents and warrants that the Participant is purchasing or acquiring the shares acquired under this Agreement for the Participant’s own account, for investment only and not with a view to the resale or distribution thereof, and represents and agrees that any subsequent offer for sale or distribution of any kind of such Shares shall be made only pursuant to either (i) a registration statement on an appropriate form under the Securities Act, which registration statement has become effective and is current with regard to the Shares being offered or sold, or (ii) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption the Participant shall, prior to any offer for sale of such Shares, obtain a prior favorable written opinion, in form and substance satisfactory to the Company, from counsel for or approved by the Company, as to the applicability of such exemption thereto.

11.

Notices .

All notices by the Participant or the Participant’s assignees shall be addressed to First American Financial Corporation, 1 First American Way, Santa Ana, California 92707, Attention: Incentive Compensation Plan Administrator, or such other address as the Company may from time to time specify. All notices to the Participant shall be addressed to the Participant at the Participant’s address in the Company’s records.

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12.

Severability .

In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Agreement, and this Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.


FIRST AMERICAN FINANCIAL CORPORATION

By:
		Name: Parker S. Kennedy
		Title: Executive Chairman

Date: [Grant Date]

Acknowledged and agreed as of the Date of Grant:

Printed Name:

[Participant Name]

Date:

[Acceptance Date]

[NOTE: GRANT WILL BE ACCEPTED ELECTRONICALLY]

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Exhibit 10.19

Notice of Performance Unit Grant

Participant:

[ · ]

Company:

First American Financial Corporation (the “Company”)

Notice:

You have been granted a Performance Unit in accordance with the terms of the Plan and the Performance Unit Award Agreement attached hereto.

Type of Award:

Performance Units

Plan:

First American Financial Corporation 2010 Incentive Compensation Plan

Grant:

Date of Grant: March 21, 2011

Number of Performance Units: [ · ]

Each Performance Unit has the value of $1

Performance

Period:

Subject to the terms of the Plan and this Agreement, the Performance Period applicable to the Performance Units shall be the calendar year 2011.

Performance

Condition:

Your right to the receipt of cash for your Performance Units is conditioned on the Company’s achievement of net income (as defined in accordance with generally acceptable accounting principles) for 2011 of $25 million or more, determined without regard to (a) asset write-downs, (b) litigation or claim judgments or settlements, (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (d) any reorganization and restructuring programs, (e) extraordinary, unusual and/or nonrecurring items of gain or loss, and (f) foreign exchange gains and losses. This condition is referred to as the “Performance Target.” Within a reasonable time after the determination of whether the Performance Target has been met, the Committee shall determine the final amount of Performance Units to which you shall be entitled, provided that the total amount thereof shall not exceed the amount set forth above. The Committee, in its sole and unfettered discretion, may decrease the number of Performance Units awarded to you at any time prior to the payment thereon.

Rejection:

If you wish to accept this Performance Unit Award, please return this Agreement, executed by you on the last page of this Agreement, at any time within forty-five (45) days after the Date of Grant, to First American Financial Corporation, 1 First American Way, Santa Ana, California 92707, Attn: Matthew MacDougall. Do not return a signed copy of this Agreement if you wish to reject this Performance Unit Award. If you do not return a signed copy of this Agreement within forty-five (45) days

after the Date of Grant, you will have rejected this Performance Unit Award.

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Performance Unit Award Agreement

This Performance Unit Award Agreement (this “Agreement”), dated as of the date of the Notice of Performance Unit Grant attached hereto (the “Grant Notice”), is made between First American Financial Corporation (the “Company”) and the Participant set forth in the Grant Notice. The Grant Notice is included and made a part of this Agreement.

Definitions .

Capitalized terms used but not defined in this Agreement (including the Grant Notice) have the meaning set forth in the First American Financial Corporation 2010 Incentive Compensation Plan.

Grant of the Performance Units .

Subject to the provisions of this Agreement and the provisions of the Plan, the Company hereby grants to the Participant, pursuant to the Plan, the contingent right to receive in cash an amount equal in value to the performance units set forth in the Grant Notice, as such number of performance units may be reduced by the Committee in its sole and unfettered discretion (the “Performance Units”). Each Performance Unit has a value of $1.

Vesting and Payment of Performance Units .

After the Performance Period (as specified in the Notice of Grant) has ended and provided that the Committee has determined that the Performance Target (as defined in the Notice of Grant) has been achieved, the Participant shall be entitled to receive, and the Company shall pay to the Participant, the cash value of the Performance Units; provided , however , that prior to paying to the Participant such cash value, the Committee may, in its sole and unfettered discretion, decrease the amount of Performance Units awarded to the Participant. If the Performance Target is not met, the Participant shall forfeit the Performance Units and the Participant shall not be entitled to any cash payment in connection therewith.

No Right to Continued Employment .

None of the Performance Units nor any terms contained in this Agreement shall confer upon the Participant any express or implied right to be retained in the employ of the Company or any Subsidiary or Affiliate for any period, nor restrict in any way the right of the Company or any Subsidiary or any Affiliate, which right is hereby expressly reserved, to terminate the Participant’s employment at any time for any reason. For the avoidance of doubt, this Section 4 is not intended to amend or modify any other agreement, including any employment agreement, that may be in existence between the Participant and the Company or any Subsidiary or Affiliate.

The Plan .

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provisions of the Plan and this Agreement, the provisions of the Plan shall control, and this Agreement shall be deemed to be modified accordingly. The Plan and the prospectus describing the Plan can be found on the Company’s HR intranet. A paper copy of the Plan and the prospectus shall be provided to the Participant upon the Participant’s written request to the Company at First American Financial Corporation, 1 First American Way, Santa Ana, California 92707, Attention: Incentive Compensation Plan Administrator, or such other address as the Company may from time to time specify.

Notices .

Severability .

Other Plans .

The Participant acknowledges that any income derived from the Performance Units shall not affect the Participant’s participation in, or benefits under, any other benefit plan or other contract or arrangement maintained by the Company or any Subsidiary or Affiliate. For purposes of the Company’s Executive Supplemental Benefit Plan and Management Supplemental Benefit Plan, as the same may be amended from time to time, cash ultimately paid for any Performance Units shall be deemed to be “Covered Compensation”.

Assignment .

Participant may not transfer or assign this Agreement or any part thereof. The Company reserves the right to transfer or assign this Agreement to any of its Affiliates.

[SIGNATURES FOLLOW]

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FIRST AMERICAN FINANCIAL CORPORATION

By:
		Name:
		Title:


Date:

Acknowledged and agreed as of the Date of Grant:



Signature:

Printed Name:

Date:

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Exhibit 10.21

[Employee]

Notice of Restricted Stock Unit Grant

Participant:

[Participant Name]

Company:

First American Financial Corporation

Notice:

You have been granted the following Restricted Stock Units in accordance with the terms of the Plan and the Restricted Stock Unit Award Agreement attached hereto.

Type of Award:

Restricted Stock Units

Plan:

First American Financial Corporation 2010 Incentive Compensation Plan

Grant:

Date of Grant: [Grant Date]

[Number of Shares Underlying Bonus Restricted Stock Units: [Number of shares Granted]]

[Number of Shares Underlying Other Restricted Stock Units: [Number of shares Granted]]

Period of Restriction:

Subject to the terms of the Plan and this Agreement, the Period of Restriction applicable to the Restricted Stock Units shall commence on the Date of Grant and shall lapse on the date listed in the “Lapse Date” column below as to that percentage of Shares underlying the Restricted Stock Units set forth below opposite each such date.


Lapse Date		Percentage of Shares as to Which Period of Restriction Lapses
Date of Grant + 1 year		25%
Date of Grant + 2 years		25%
Date of Grant + 3 years		25%
Date of Grant + 4 years		25%

For the avoidance of doubt, the relevant percentage of the Period of Restriction shall lapse on a pro-rata basis with respect to each of the total Shares underlying Bonus Restricted Stock Units and the total Shares underlying Other Restricted Stock Units.

Rejection:

If you wish to accept this Restricted Stock Unit Award, please access Fidelity NetBenefits ^® at www.netbenefits.com and follow the steps outlined under the “Accept Grant” link at any time within forty-five (45) days after the Date of Grant. If you do not accept your grant via Fidelity NetBenefits ^® within forty-five (45) days after the Date of Grant, you will have rejected this Restricted Stock Unit Award.

[ Employee]

Restricted Stock Unit Award Agreement

Definitions .

Capitalized terms used but not defined in this Agreement (including the Grant Notice) have the meaning set forth in the Plan.

For “Cause,” shall be defined as: (i) embezzlement, theft or misappropriation by the Participant of any property of any of the Company or its affiliates; (ii) Participant’s breach of any fiduciary duty to the Company or its affiliates; (iii) Participant’s failure or refusal to comply with laws or regulations applicable to the Company or its affiliates and their businesses or the policies of the Company and its affiliates governing the conduct of its employees or directors; (iv) Participant’s gross incompetence in the performance of Participant’s job duties; (v) commission by Participant of a felony or of any crime involving moral turpitude, fraud or misrepresentation; (vi) the failure of Participant to perform duties consistent with a commercially reasonable standard of care; (vii) Participant’s failure or refusal to perform Participant’s job duties or to perform specific directives of Participant’s supervisor or designee, or the senior officers or Board of Directors of the Company; or (viii) any gross negligence or willful misconduct of Participant resulting in loss to the Company or its affiliates, or damage to the reputation of the Company or its affiliates.

Grant of the Restricted Stock Units .

Dividend Equivalents .

Period of Restriction; Termination .

(a)

In the event of the Participant’s Termination due to his or her death, the Period of Restriction as to all Restricted Stock Units shall lapse in its entirety.

(b)

In the event of the Participant’s Termination due to his or her Disability, the Period of Restriction as to all Restricted Stock Units shall lapse in its entirety, provided that the Participant shall have signed a separation agreement in the form established by the Company.

-2-

(c)

In the event of the Participant’s Termination due to his or her Normal Retirement, the Period of Restriction as to all Restricted Stock Units shall continue in effect until, and lapse on, the first anniversary of the date of such Normal Retirement, provided that the Participant shall have signed a separation agreement in the form established by the Company.

(d)

In the event of Participant’s Termination due to his or her Early Retirement, the outstanding Period of Restriction applicable to all Bonus Restricted Stock Units (but not any Other Restricted Stock Units) shall continue in effect until, and lapse on, the first anniversary of the date of such Early Retirement, provided that the Participant shall have signed a separation agreement in the form established by the Company.

(e)

In the event of the Participant’s involuntary Termination by the Company or an Affiliate without Cause, the outstanding Period of Restriction applicable to all Bonus Restricted Stock Units (but not any Other Restricted Stock Units) shall continue in effect until, and lapse on, the first anniversary of the date of such Termination, provided that the Participant shall have signed a separation agreement in the form established by the Company.

For purposes of this Agreement, “Normal Retirement” means Termination of the Participant, other than for Cause, after the Participant has reached 62 years of age and “Early Retirement” means Termination of the Participant, other than for Cause, after the Participant has reached 55 years of age and been employed by the Company and/or an Affiliate for more than 10 years.

Change of Control .

Delivery of Shares .

Unless delivery is deferred pursuant to a deferred compensation arrangement made available by the Company, as soon as reasonably practicable following the lapse of the applicable portion of the Period of Restriction, but in no event later than 90 days following the date of such lapse, the Company shall cause to be delivered to the Participant the full number of Shares underlying the Restricted Stock Units as to which such portion of the Period of Restriction has so lapsed, together with Shares comprising all accrued Dividend Equivalents with respect to such Restricted Stock Units, subject to satisfaction of applicable tax withholding obligations with respect thereto pursuant to Article XVII of the Plan; provided, however , that if the Participant’s Termination occurs due to Disability, such delivery of Shares shall be delayed for six months from the date of such Participant’s Termination if the Participant is a “specified employee” (as such term is defined in Section 409A(a)(2)(B)(i) of the Code) and if necessary to avoid the imposition of taxes on the Participant pursuant to Section 409A of the Code.

No Ownership Rights Prior to Issuance of Shares .

Detrimental Activity .

-3-

Committee in its good faith discretion, and lapse of the Period of Restriction and delivery of Shares with respect to the Restricted Stock Units shall be suspended pending resolution to the Committee’s satisfaction of any investigation of the matter.

(b) For purposes of this Agreement, “Detrimental Activity” means at any time (i) using information received during the Participant’s employment with the Company and/or its Subsidiaries and Affiliates relating to the business affairs of the Company or any such Subsidiaries or Affiliates, in breach of the Participant’s express or implied undertaking to keep such information confidential; (ii) directly or indirectly persuading or attempting to persuade, by any means, any employee of the Company or any of its Subsidiaries or Affiliates to breach any of the terms of his or her employment with Company, its Subsidiaries or its Affiliates; (iii) directly or indirectly making any statement that is, or could be, disparaging of the Company or any of its Subsidiaries or Affiliates, or any of their respective employees (except to the extent necessary to respond truthfully to any inquiry from applicable regulatory authorities or to provide information pursuant to legal process); (iv) directly or indirectly engaging in any illegal, unethical or otherwise wrongful activity that is, or could be, substantially injurious to the financial condition, reputation or goodwill of the Company or any of its Subsidiaries or Affiliates; or (v) directly or indirectly engaging in an act of misconduct such as, embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Company or any of its Subsidiaries or Affiliates, breach of fiduciary duty or disregard or violation of rules, policies or procedures of the Company or any of its Subsidiaries or Affiliates, an unauthorized disclosure of any trade secret or confidential information of the Company or any of its Subsidiaries or Affiliates, any conduct constituting unfair competition, or inducing any customer to breach a contract with the Company or any of its Subsidiaries or Affiliates, in each case as determined by the Committee in its good faith discretion.

No Right to Continued Employment .

None of the Restricted Stock Units nor any terms contained in this Agreement shall confer upon the Participant any express or implied right to be retained in the employ of the Company or any Subsidiary or Affiliate for any period, nor restrict in any way the right of the Company or any Subsidiary or any Affiliate, which right is hereby expressly reserved, to terminate the Participant’s employment at any time for any reason. For the avoidance of doubt, this Section 9 is not intended to amend or modify any other agreement, including any employment agreement, that may be in existence between the Participant and the Company or any Subsidiary or Affiliate.

10.

The Plan .

11.

Compliance with Laws and Regulations .

-4-

to this Agreement unless and until such listing, registration, qualification, consent or approval has been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Company.

12.

Notices .

13.

Severability .

-5-

14.

Other Plans .

The Participant acknowledges that any income derived from the Restricted Stock Units shall not affect the Participant’s participation in, or benefits under, any other benefit plan or other contract or arrangement maintained by the Company or any Subsidiary or Affiliate. Dividend Equivalents paid on either Bonus Restricted Stock Units or Other Restricted Stock Units shall not be deemed to be “Covered Compensation” under such plans.

[15.

Vesting of RSUs Contingent on Company Performance .

Notwithstanding any other provisions in this Agreement, except in the event of an acceleration of vesting pursuant to Section 4(a) or Section 5 of this Agreement, the Participant’s entitlement to the receipt of any Shares hereunder is contingent upon the Company’s achievement of net income (as defined in accordance with generally acceptable accounting principles) for 2011 of $25 million or more. Net income shall be determined without regard to (a) asset write-downs, (b) litigation or claim judgments or settlements, (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (d) any reorganization and restructuring programs, (e) extraordinary, unusual and/or nonrecurring items of gain or loss, and (f) foreign exchange gains and losses.][NOTE: PARAGRAPH 15 APPLIES ONLY TO EXECUTIVE OFFICER VERSION.]


FIRST AMERICAN FINANCIAL CORPORATION

By:
		Name: Parker S. Kennedy
		Title: Executive Chairman

Date: [Grant Date]

Acknowledged and agreed as of the Date of Grant:

Printed Name:

[Participant Name]

Date:

[Acceptance Date]

[NOTE: GRANT WILL BE ACCEPTED ELECTRONICALLY]

-6-

Exhibit 21

Subsidiaries of the Registrant as of December 31, 2010


Name of Subsidiary:		State or Country Under Laws of Which Organized
Abstracters’ Information Service, Inc.		New York
Accu-Search, Inc.		New Jersey
Alliance Home Warranty, Inc.		Utah
American Data Exchange Corporation Ltd.		Bermuda
American Escrow Company		Texas
American First Abstract, LLC		Delaware
American Property Exchange, Inc.		Washington
Arizona Title Insurance Agency, Inc		Arizona
Augusta Holdings, LLC		Delaware
Brownstone Technologies Inc.		Canada
Cahaba Title, Inc.		Alabama
Campbell County Abstract Company		Wyoming
Consumer Select Insurance of America, LLC		Florida
Consumer Select Insurance, LLC		Florida
Core Title Agency, Ltd.		Ohio
Corea Title Company		Korea
Data Trace Information Services LLC		Delaware
Delta 360 Inc.		Canada
Discovery Title Company, LLC		Michigan
Dona Ana Title Company, Inc.		New Mexico
DRN Commerce, Inc.		Canada
enact Conveyancing Limited		United Kingdom
enact Holdings Limited		United Kingdom
Enact Processing Solutions Limited		United Kingdom
enact Properties Limited		United Kingdom
Equity Title Insurance Agency, Inc.		Utah
FA Business Services, LLC		Delaware
FAF International Holdings B.V.		Netherlands
FAF International Insurance Holdings B.V.		Netherlands
FAF International Limited		New Zealand
FAF International Limited		United Kingdom
FAF International Property Services Holdings B.V.		Netherlands
FAF International Pty Limited		Australia
FAF International Seguros Generales S.A.		Chile
FAF International Sigorta Aracilik Hizmetieri Anonim Sirketi		Turkey
FAF Servicios Hipotecarios Limitada		Chile
Fairbanks Title Agency, Inc.		Alaska
FATCO Holdings, LLC		Delaware
FATNY Realty Holdings LLC		New York
Faxxon Legal Information Services, Inc.		Illinois
FCT Holdings Company Ltd.		Canada
FCT Insurance Company Ltd.		Canada
FCT Insurance Services Inc.		Canada
First American (India) Private Limited		India
First American Abstract Company		Mississippi
First American Administrative Services, LLC		Florida
First American China Holdings, LLC		Delaware
First American Coordination Services, LLC		Kansas


Name of Subsidiary:		State or Country Under Laws of Which Organized
First American Corporate Services, LLC		Delaware
First American Data Co., LLC		Delaware
First American Data Tree LLC		Delaware
First American Exchange Company, LLC		Delaware
First American Exchange Corporation		New York
First American Financial Corporation		Delaware
First American Fund Control, Inc.		California
First American Holdings (Mauritius) Limited		Mauritius
First American Holdings, LLC		Delaware
First American Home Buyers Protection Corporation		California
First American Home Warranty Corp.		Florida
First American International Holdings, LLC		Delaware
First American International Title Services Inc.		Canada
First American Leasing Company		California
First American Professional Real Estate Services, Inc		California
First American Property & Casualty Insurance Agency, Inc		California
First American Property & Casualty Insurance Agency, LLC		Delaware
First American Property & Casualty Insurance Company		California
First American Relocation Solutions, Inc.		Delaware
First American Servicios de Mexico S. de R.L. de C.V.		Mexico
First American SMS, LLC		Delaware
First American Specialty Insurance Company		California
First American Technology Advantage, LLC		Kansas
First American Teton Land Title Company		Wyoming
First American Title & Trust Company		Oklahoma
First American Title Company		California
First American Title Company of Laramie County		Wyoming
First American Title Company, Inc.		Florida
First American Title Company, Inc.		Hawaii
First American Title Company, LLC		Delaware
First American Title Company, LLC		Texas
First American Title Insurance Agency of Mohave, Inc.		Arizona
First American Title Insurance Company		California
First American Title Insurance Company of Australia Pty Limited		Australia
First American Title Insurance Company of Louisiana		Louisiana
First American Title Services de Mexico S. de R.L. de C.V.		Mexico
First American Trust, F.S.B.		California
First American Trustee Servicing Solutions, LLC		Texas
First American UCC Insurance Services, LLC		Delaware
First American United General Alaska LLC		Alaska
First American Vacation Ownership Services, Inc.		Hawaii
First American Vacation Ownership Services, LLC		Florida
First Australian Company Pty Limited		Australia
First Australian Title Company Pty Limited		Australia
First Canadian Title Company Limited		Canada
First European Group Limited		United Kingdom
First European Title GmbH		German
First Florida Title Insurance Agency, LLC		Florida
First Hong Kong Title Limited		Cayman Islands
First International Real Estate Solutions Limited		United Kingdom
First Metropolitan Title Company		Michigan
First Mortgage Services Limited		New Zealand
First Mortgage Services Pty Ltd		Australia
First Reliable, LLC		Delaware
First Security Business Bank		California
First Title CEE (Biztositaskovetito Korltotl Feleossegu Tarsasag)		Hungary
First Title Insurance Brokers Limited		United Kingdom


Name of Subsidiary:		State or Country Under Laws of Which Organized
First Title Insurance plc		United Kingdom
First Title Limited		United Kingdom
First Title New Zealand Limited		New Zealand
First Title Pacific Limited		New Zealand
First Title Polska Sp. Z.o.o		Poland
First Title Real Estate Guaranty Co., Ltd		China
First Title Services Limited		United Kingdom
Florida Sunshine Title, L.L.C.		Michigan
FMCT, L.L.C.		Michigan
FMS Administration Limited		New Zealand
Fortune Title Agency, Ltd		Ohio
Greater Michigan Title, L.L.C.		Michigan
Heritage Closing Services, Inc		California
Intertitle, Inc		California
Island Title Corporation		Hawaii
Island Title Exchange, Inc.		Hawaii
Johnson County Title Company, Inc.		Wyoming
Konstar Title Insurance Agency, L.L.C.		Michigan
Live Letting Exchange Limited		United Kingdom
Live Overseas Limited		United Kingdom
Los Angeles Land Title Company		California
Market Center Title, L.L.C.		Michigan
Masiello Closing Services, LLC		Michigan
Massachusetts Title Insurance Company		Massachusetts
Metropolitan Title—Wisconsin, L.L.C.		Michigan
Mid Valley Title and Escrow Company		California
Millennium Title Agency, LLC		Michigan
Mortgage Guarantee & Title Company		Rhode Island
National Default REO Services, LLC		Delaware
National Land Title of Tarrant, Inc		Texas
Nazca Solutions LLC		Delaware
New Reunion Title, LLC		Texas
Ohio Bar Title Insurance Company		Ohio
Pacific Northwest Title of Alaska, Inc.		Alaska
Pacific Northwest Title Company		Washington
Pacific Northwest Title Company of Kenai, Inc.		Alaska
Pacific Northwest Title Holding Company		Washington
Pacific Northwest Title of Oregon, Inc.		Oregon
Partners Title Agency, LLC		Michigan
Pioneer Agency Acquisition Company		Pennsylvania
Presidential Title Services A Title Agency LLC		Michigan
Promeric Technologies Inc.		Canada
Propel-LC Limited		New Zealand
Public Abstract Corporation		New York
Regency Escrow Corporation		California
Relocation Advantage, LLC		Delaware
Republic Title of Texas, Inc.		Texas
Rock River Title, L.L.C.		Illinois
Sanderson Weir Pty Ltd		Australia
Security Exchange Corporation		Nebraska
SFG Title Agency, L.L.C.		Michigan
Shoshone Title Insurance and Abstract Company		Wyoming
Smart Title Solutions LLC		Delaware
South East Insurance Condominium Association		Alaska
Southwest Title Land Company		Oklahoma
Sweeney Closing Services, LLC		New Hampshire
Team Conveyancing Limited		United Kingdom


Name of Subsidiary:		State or Country Under Laws of Which Organized
Texas Escrow Company, Inc.		Texas
The Executive Corner Title and Settlement Services, LLC		Ohio
The First American Financial Corporation		California
The Heritage Escrow Company, Inc.		California
The Inland Empire Service Corporation		California
The Live Organization Limited		United Kingdom
The Orange Coast Company, LLC		Delaware
The Title Security Group, Inc.		Puerto Rico
Title Insurance Agency, Inc.		Alaska
Title Insurance Company of Oregon		Oregon
Title Records, Inc.		California
Titlestar Mortgagee Services, L.L.C.		Texas
Tri-County Title Services, LLC		Michigan
United General Title Insurance Company		Colorado
Vehicle Title Agency, LLC		Delaware
Vehicle Title, LLC		Delaware
Word of Mouth Investment Consulting Co., Ltd.		China
Wyoming Land Title Company		Wyoming

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-167229) and Form S-8 (Nos. 333-167228 and 333-167226) of First American Financial Corporation of our report dated March 1, 2011 relating to the financial statements, financial statement schedules and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ P RICEWATERHOUSE C OOPERS LLP

PricewaterhouseCoopers LLP

Orange County, California

March 1, 2011

Exhibit 31(a)

CERTIFICATIONS

I, Dennis J. Gilmore, certify that:

1. I have reviewed this annual report on Form 10-K of First American Financial Corporation (“registrant”);

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2011

/s/ D ENNIS J. G ILMORE

Dennis J. Gilmore

Chief Executive Officer

(Principal Executive Officer)

Exhibit 31(b)

CERTIFICATIONS

I, Max O. Valdes, certify that:

1. I have reviewed this annual report on Form 10-K of First American Financial Corporation (“registrant”);

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2011

/s/ Max O. Valdes

Max O. Valdes

Chief Financial Officer

(Principal Financial Officer)

Exhibit 32(a)

Certification pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Form 10-K of First American Financial Corporation (the “ Company ”) for the period ended December 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), I, Dennis J. Gilmore, chief executive officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ D ENNIS J. G ILMORE

Dennis J. Gilmore

Chief Executive Officer

March 1, 2011

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Exhibit 32(b)

Certification pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Form 10-K of First American Financial Corporation (the “ Company ”) for the period ended December 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), I, Max O. Valdes, chief financial officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ M AX O. V ALDES

Max O. Valdes

Chief Financial Officer

March 1, 2011