UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 20172020

 

OR

 

1

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

 

For the transition period from ______ to ______

 

Commission file number 001-34580

 

FIRST AMERICAN FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Incorporated in Delaware

 

26-1911571

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1 First American Way, Santa Ana, California

 

92707-5913

(Address of principal executive offices)

 

(Zip Code)

(714) 250-3000

(Registrant’s telephone number, including area code)

 

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.00001 par value

FAF

New York Stock Exchange

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

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      No  1

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 1

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  1    No  

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

 PROCEEDINGS DURING THE PRECEDING FIVE YEARS: 

Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  1    No  1

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

On October 20, 2017,19, 2020 there were 110,817,359111,645,048 shares of common stock outstanding.

 

 

 

 

 


 

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

INFORMATION INCLUDED IN REPORT

 

PART I: FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

  

 

 

 

 

 

 

 

 

 

 

 

 

A. Condensed Consolidated Balance Sheets as of September 30, 20172020 and December 31, 20162019

  

 

5

 

 

 

 

 

 

 

 

 

 

B. Condensed Consolidated Statements of Income for the three and nine months ended September 30, 20172020 and 20162019

 

 

6

 

 

 

 

 

 

 

 

 

 

C. Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20172020 and 20162019

 

 

7

 

 

 

 

 

 

 

 

 

 

D. Condensed Consolidated StatementStatements of Stockholders’ Equity for each of the quarters within the nine months ended September 30, 20172020 and 2019

 

 

8

 

 

 

 

 

 

 

 

 

 

E. Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20172020 and 2016

9

F. Notes to Condensed Consolidated Financial Statements2019

  

 

10

 

 

 

 

 

 

 

 

F. Notes to Condensed Consolidated Financial Statements

12

Item 2.

 

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

  

 

3239

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

 

4451

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

  

 

4451

 

 

 

 

 

 

 

 

PART II: OTHER INFORMATION

  

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

  

 

4452

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

  

 

4654

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

  

 

5364

 

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

 

 



2


THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.  THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS AND MAY CONTAIN THE WORDS “BELIEVE,” “ANTICIPATE,” “EXPECT,” “INTEND,” “PLAN,” “PREDICT,” “ESTIMATE,” “PROJECT,” “WILL BE,” “WILL CONTINUE,” “WILL LIKELY RESULT,” OR OTHER SIMILAR WORDS AND PHRASES OR FUTURE OR CONDITIONAL VERBS SUCH AS “WILL,” “MAY,” “MIGHT,” “SHOULD,” “WOULD,” OR “COULD.” THESE FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS REGARDING FUTURE OPERATIONS, PERFORMANCE, FINANCIAL CONDITION, PROSPECTS, PLANS AND STRATEGIES.  THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS THAT MAY PROVE TO BE INCORRECT.

 

RISKS AND UNCERTAINTIES EXIST THAT MAY CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE THE ANTICIPATED RESULTS TO DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION:

INTEREST RATE FLUCTUATIONS;

CHANGES IN THE PERFORMANCE OF THE REAL ESTATE MARKETS;

VOLATILITY IN THE CAPITAL MARKETS;

UNFAVORABLE ECONOMIC CONDITIONS;

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

FAILURES AT FINANCIAL INSTITUTIONS WHERE THE COMPANY DEPOSITS FUNDS;

CHANGES IN APPLICABLE LAWS AND GOVERNMENT REGULATIONS;

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

USE OF SOCIAL MEDIA BY THE COMPANY AND OTHER PARTIES;

REGULATION OF TITLE INSURANCE RATES;

LIMITATIONS ON ACCESS TO PUBLIC RECORDS AND OTHER DATA;

CHANGES IN RELATIONSHIPS WITH LARGE MORTGAGE LENDERS AND GOVERNMENT-SPONSORED ENTERPRISES;

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

LOSSES IN THE COMPANY’S INVESTMENT PORTFOLIO;

MATERIAL VARIANCE BETWEEN ACTUAL AND EXPECTED CLAIMS EXPERIENCE;

DEFALCATIONS, INCREASED CLAIMS OR OTHER COSTS AND EXPENSES ATTRIBUTABLE TO THE COMPANY’S USE OF TITLE AGENTS;

ANY INADEQUACY IN THE COMPANY’S RISK MANAGEMENT FRAMEWORK;

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

ERRORS AND FRAUD INVOLVING THE TRANSFER OF FUNDS;

THE COMPANY’S USE OF A GLOBAL WORKFORCE;

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

INABILITY TO REALIZE THE BENEFITS OF, AND CHALLENGES ARISING FROM, THE COMPANY’S ACQUISITION STRATEGY; AND

3


 

INTEREST RATE FLUCTUATIONS;

CHANGES IN THE PERFORMANCE OF THE REAL ESTATE MARKETS;

VOLATILITY IN THE CAPITAL MARKETS;

UNFAVORABLE ECONOMIC CONDITIONS;

THE CORONAVIRUS PANDEMIC AND RESPONSES THERETO;

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

UNCERTAINTY FROM THE EXPECTED DISCONTINUANCE OF LIBOR AND TRANSITION TO ANY OTHER INTEREST RATE BENCHMARK;

FAILURES AT FINANCIAL INSTITUTIONS WHERE THE COMPANY DEPOSITS FUNDS;

REGULATORY OVERSIGHT AND CHANGES IN APPLICABLE LAWS AND GOVERNMENT REGULATIONS, INCLUDING PRIVACY AND DATA PROTECTION LAWS;

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

USE OF SOCIAL MEDIA BY THE COMPANY AND OTHER PARTIES;

REGULATION OF TITLE INSURANCE RATES;

LIMITATIONS ON ACCESS TO PUBLIC RECORDS AND OTHER DATA;

CLIMATE CHANGE, HEALTH CRISES, SEVERE WEATHER CONDITIONS AND OTHER CATASTROPHE EVENTS;

CHANGES IN RELATIONSHIPS WITH LARGE MORTGAGE LENDERS AND GOVERNMENT-SPONSORED ENTERPRISES;

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

LOSSES IN THE COMPANY’S INVESTMENT PORTFOLIO;

MATERIAL VARIANCE BETWEEN ACTUAL AND EXPECTED CLAIMS EXPERIENCE;

DEFALCATIONS, INCREASED CLAIMS OR OTHER COSTS AND EXPENSES ATTRIBUTABLE TO THE COMPANY’S USE OF TITLE AGENTS;

ANY INADEQUACY IN THE COMPANY’S RISK MANAGEMENT FRAMEWORK;

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


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

ERRORS AND FRAUD INVOLVING THE TRANSFER OF FUNDS;

THE COMPANY’S USE OF A GLOBAL WORKFORCE;

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

OTHER FACTORS DESCRIBED IN THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING UNDER THE CAPTION “RISK FACTORS” IN ITEM 1A OF PART II.

 

THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE THEY ARE MADE.  THE COMPANY DOES NOT UNDERTAKE TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT CIRCUMSTANCES OR EVENTS THAT OCCUR AFTER THE DATE THE FORWARD-LOOKING STATEMENTS ARE MADE.

 

 


4


PART I: FINANCIAL INFORMATION

Item 1.Financial Statements.

Item 1.

Financial Statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Balance Sheets

(in thousands, except par values)

(unaudited)

 

 

September 30,

2017

 

 

December 31,

2016

 

September 30,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,141,915

  

 

$

1,006,138

  

$

1,512,369

 

 

$

1,485,959

 

Accounts and accrued income receivable, net

 

 

341,395

  

 

 

299,799

  

Accounts and accrued income receivable, less allowances of $12,600 and $12,676

 

392,885

 

 

 

324,385

 

Income taxes receivable

 

 

11,102

  

 

 

67,970

  

 

8,814

 

 

 

10,967

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits with banks

 

 

20,940

  

 

 

21,222

  

 

41,551

 

 

 

44,422

 

Debt securities, includes pledged securities of $100,681 and $110,647

 

 

4,803,484

  

 

 

4,553,363

  

Debt securities, includes pledged securities of $88,049 and $91,636 (amortized cost of $5,732,761 and $5,796,755; allowance for credit losses of $821 at September 30, 2020)

 

5,939,224

 

 

 

5,913,636

 

Equity securities

 

 

446,185

  

 

 

404,085

  

 

393,180

 

 

 

392,318

 

Other investments

 

 

120,514

  

 

 

162,029

  

 

325,652

 

 

 

239,067

 

 

 

5,391,123

  

 

 

5,140,699

  

 

6,699,607

 

 

 

6,589,443

 

Secured financings receivable

 

722,156

 

 

 

287,459

 

Property and equipment, net

 

 

438,136

  

 

 

434,050

  

 

442,409

 

 

 

442,014

 

Operating lease assets

 

272,367

 

 

 

291,385

 

Title plants and other indexes

 

 

566,599

  

 

 

564,309

  

 

580,462

 

 

 

579,674

 

Deferred income taxes

 

 

20,037

 

 

 

20,037

 

 

18,283

 

 

 

18,283

 

Goodwill

 

 

1,145,464

  

 

 

1,017,417

  

 

1,355,289

 

 

 

1,150,908

 

Other intangible assets, net

 

 

75,126

  

 

 

78,898

  

 

196,691

 

 

 

91,833

 

Assets held for sale

 

198,283

 

 

 

 

Other assets

 

 

216,150

  

 

 

202,460

  

 

239,195

 

 

 

246,857

 

 

$

9,347,047

  

 

$

8,831,777

  

$

12,638,810

 

 

$

11,519,167

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,965,426

  

 

$

2,779,478

  

$

3,499,640

 

 

$

3,337,431

 

Accounts payable and accrued liabilities

 

 

741,569

  

 

 

793,955

  

 

830,050

 

 

 

820,356

 

Deferred revenue

 

 

250,917

  

 

 

228,905

  

 

202,291

 

 

 

252,331

 

Reserve for known and incurred but not reported claims

 

 

1,021,648

  

 

 

1,025,863

  

 

1,069,859

 

 

 

1,063,044

 

Income taxes payable

 

 

92,841

 

 

 

10,376

 

 

47,817

 

 

 

25,475

 

Deferred income taxes

 

 

242,158

  

 

 

242,158

  

 

266,108

 

 

 

266,108

 

Operating lease liabilities

 

301,525

 

 

 

322,776

 

Liabilities held for sale

 

148,283

 

 

 

 

Secured financings payable

 

526,544

 

 

 

278,412

 

Notes and contracts payable

 

 

734,091

  

 

 

736,693

  

 

1,011,758

 

 

 

728,232

 

 

 

6,048,650

  

 

 

5,817,428

  

 

7,903,875

 

 

 

7,094,165

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.00001 par value; Authorized—500 shares;
Outstanding—none

 

 

 

 

 

 

Common stock, $0.00001 par value; Authorized—300,000 shares;
Outstanding���110,817 shares and 109,944 shares

 

 

1

 

 

1

 

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

 

0

 

 

 

0

 

Common stock, $0.00001 par value; Authorized—300,000 shares;
Outstanding—111,645 shares and 112,476 shares

 

1

 

 

 

1

 

Additional paid-in capital

 

 

2,226,691

 

 

 

2,191,756

  

 

2,273,007

 

 

 

2,300,926

 

Retained earnings

 

 

1,128,981

 

 

 

1,046,822

  

 

2,426,949

 

 

 

2,161,049

 

Accumulated other comprehensive loss

 

 

(61,779

)

 

 

(230,400

)

Accumulated other comprehensive income (loss)

 

23,813

 

 

 

(41,492

)

Total stockholders’ equity

 

 

3,293,894

 

 

 

3,008,179

  

 

4,723,770

 

 

 

4,420,484

 

Noncontrolling interests

 

 

4,503

 

 

 

6,170

  

 

11,165

 

 

 

4,518

 

Total equity

 

 

3,298,397

 

 

 

3,014,349

  

 

4,734,935

 

 

 

4,425,002

 

 

$

9,347,047

 

 

$

8,831,777

  

$

12,638,810

 

 

$

11,519,167

 

See notes to condensed consolidated financial statements.


FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

(unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums and escrow fees

 

$

807,947

 

 

$

728,610

 

 

$

2,080,568

 

 

$

1,910,830

 

Agent premiums

 

 

722,434

 

 

 

656,154

 

 

 

1,920,011

 

 

 

1,701,538

 

Information and other

 

 

285,882

 

 

 

208,297

 

 

 

728,563

 

 

 

581,858

 

Net investment income

 

 

52,466

 

 

 

76,628

 

 

 

156,760

 

 

 

236,607

 

Net realized investment gains

 

 

44,992

 

 

 

1,507

 

 

 

49,491

 

 

 

42,564

 

 

 

 

1,913,721

 

 

 

1,671,196

 

 

 

4,935,393

 

 

 

4,473,397

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

 

511,298

 

 

 

470,683

 

 

 

1,392,445

 

 

 

1,329,322

 

Premiums retained by agents

 

 

572,780

 

 

 

518,824

 

 

 

1,520,559

 

 

 

1,344,517

 

Other operating expenses

 

 

281,079

 

 

 

248,252

 

 

 

788,407

 

 

 

667,047

 

Provision for policy losses and other claims

 

 

157,836

 

 

 

124,683

 

 

 

414,001

 

 

 

331,525

 

Depreciation and amortization

 

 

38,227

 

 

 

31,719

 

 

 

110,652

 

 

 

97,537

 

Impairments on assets held for sale (Note 2)

 

 

73,264

 

 

 

0

 

 

 

73,264

 

 

 

0

 

Premium taxes

 

 

19,885

 

 

 

19,484

 

 

 

53,554

 

 

 

50,887

 

Interest

 

 

15,981

 

 

 

12,213

 

 

 

41,521

 

 

 

36,057

 

 

 

 

1,670,350

 

 

 

1,425,858

 

 

 

4,394,403

 

 

 

3,856,892

 

Income before income taxes

 

 

243,371

 

 

 

245,338

 

 

 

540,990

 

 

 

616,505

 

Income taxes

 

 

59,780

 

 

 

57,171

 

 

 

121,859

 

 

 

131,263

 

Net income

 

 

183,591

 

 

 

188,167

 

 

 

419,131

 

 

 

485,242

 

Less: Net income attributable to noncontrolling interests

 

 

1,312

 

 

 

985

 

 

 

2,993

 

 

 

1,830

 

Net income attributable to the Company

 

$

182,279

 

 

$

187,182

 

 

$

416,138

 

 

$

483,412

 

Net income per share attributable to the Company's

stockholders (Note 11):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.62

 

 

$

1.65

 

 

$

3.69

 

 

$

4.28

 

Diluted

 

$

1.62

 

 

$

1.65

 

 

$

3.68

 

 

$

4.26

 

Cash dividends declared per share

 

$

0.44

 

 

$

0.42

 

 

$

1.32

 

 

$

1.26

 

Weighted-average common shares outstanding (Note 11):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

112,584

 

 

 

113,163

 

 

 

112,913

 

 

 

112,983

 

Diluted

 

 

112,843

 

 

 

113,741

 

 

 

113,176

 

 

 

113,509

 

See notes to condensed consolidated financial statements.


FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

183,591

 

 

$

188,167

 

 

$

419,131

 

 

$

485,242

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on debt securities

 

 

1,991

 

 

 

13,493

 

 

 

73,077

 

 

 

126,172

 

Unrealized (losses) gains on debt securities for which credit-related portion was recognized in earnings

 

 

(7

)

 

 

0

 

 

 

140

 

 

 

0

 

Foreign currency translation adjustment

 

 

10,074

 

 

 

(7,373

)

 

 

(9,109

)

 

 

2,959

 

Pension benefit adjustment

 

 

399

 

 

 

(76

)

 

 

1,197

 

 

 

(227

)

Total other comprehensive income, net of tax

 

 

12,457

 

 

 

6,044

 

 

 

65,305

 

 

 

128,904

 

Comprehensive income

 

 

196,048

 

 

 

194,211

 

 

 

484,436

 

 

 

614,146

 

Less: Comprehensive income attributable to noncontrolling interests

 

 

1,312

 

 

 

985

 

 

 

2,993

 

 

 

1,829

 

Comprehensive income attributable to the Company

 

$

194,736

 

 

$

193,226

 

 

$

481,443

 

 

$

612,317

 

See notes to condensed consolidated financial statements.


FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

First American Financial Corporation Stockholders

 

 

 

 

 

 

 

 

 

Shares

 

 

Common
stock

 

 

Additional
paid-in
capital

 

 

Retained
earnings

 

 

Accumulated
other
comprehensive
income (loss)

 

 

Total
stockholders’
equity

 

 

Noncontrolling
interests

 

 

Total

 

Balance at December 31, 2019

 

 

112,476

 

 

$

1

 

 

$

2,300,926

 

 

$

2,161,049

 

 

$

(41,492

)

 

$

4,420,484

 

 

$

4,518

 

 

$

4,425,002

  

Net income for three months ended March 31, 2020

 

 

0

 

  

 

0

 

  

 

0

 

  

 

63,204

  

 

 

0

 

 

 

63,204

  

 

 

642

 

 

 

63,846

  

Dividends on common shares

 

 

0

 

  

 

0

 

  

 

0

 

  

 

(49,702

 

 

0

 

 

 

(49,702

)

 

 

0

 

 

 

(49,702

)

Purchase of Company shares

 

 

(1,703

)

 

 

0

 

 

 

(65,785

)

 

 

0

 

 

 

0

 

 

 

(65,785

)

 

 

0

 

 

 

(65,785

)

Shares issued in connection with share-based compensation

 

 

644

  

  

 

0

 

  

 

(13,547

)

  

 

(831

 

 

0

 

 

 

(14,378

)

 

 

0

 

 

 

(14,378

)

Share-based compensation

 

 

0

 

  

 

0

 

  

 

25,903

  

  

 

0

 

 

 

0

 

 

 

25,903

 

 

 

0

 

 

 

25,903

 

Net activity related to noncontrolling interests

 

 

0

 

  

 

0

 

  

 

72

 

  

 

0

 

 

 

0

 

 

 

72

 

 

 

4,417

 

 

 

4,489

 

Other comprehensive loss

 

 

0

 

  

 

0

 

  

 

0

 

  

 

0

 

 

 

(20,453

)

 

 

(20,453

)

 

 

0

 

 

 

(20,453

)

Balance at March 31, 2020

 

 

111,417

  

  

 

1

  

  

 

2,247,569

  

  

 

2,173,720

  

 

 

(61,945

 

 

4,359,345

 

 

 

9,577

 

 

 

4,368,922

  

Net income for three months ended June 30, 2020

 

 

0

 

  

 

0

 

  

 

0

 

  

 

170,655

  

 

 

0

 

 

 

170,655

  

 

 

1,039

 

 

 

171,694

  

Dividends on common shares

 

 

0

 

  

 

0

 

  

 

0

 

  

 

(48,996

 

 

0

 

 

 

(48,996

)

 

 

0

 

 

 

(48,996

)

Purchase of Company shares

 

 

(71

)

 

 

0

 

 

 

(3,079

)

 

 

0

 

 

 

0

 

 

 

(3,079

)

 

 

0

 

 

 

(3,079

)

Shares issued in connection with share-based compensation

 

 

173

  

  

 

0

 

  

 

5,308

 

  

 

(827

 

 

0

 

 

 

4,481

 

 

 

0

 

 

 

4,481

 

Share-based compensation

 

 

0

 

  

 

0

 

  

 

9,693

  

  

 

0

 

 

 

0

 

 

 

9,693

 

 

 

0

 

 

 

9,693

 

Net activity related to noncontrolling interests

 

 

0

 

  

 

0

 

  

 

0

 

  

 

0

 

 

 

0

 

 

 

0

 

 

 

(405

)

 

 

(405

)

Other comprehensive income

 

 

0

 

  

 

0

 

  

 

0

 

  

 

0

 

 

 

73,301

 

 

 

73,301

 

 

 

0

 

 

 

73,301

 

Balance at June 30, 2020

 

 

111,519

  

  

 

1

  

  

 

2,259,491

  

  

 

2,294,552

  

 

 

11,356

 

 

 

4,565,400

 

 

 

10,211

 

 

 

4,575,611

  

Net income for three months ended September 30, 2020

 

 

0

 

  

 

0

 

  

 

0

 

  

 

182,279

  

 

 

0

 

 

 

182,279

  

 

 

1,312

 

 

 

183,591

  

Dividends on common shares

 

 

0

 

  

 

0

 

  

 

0

 

  

 

(49,070

 

 

0

 

 

 

(49,070

)

 

 

0

 

 

 

(49,070

)

Shares issued in connection with share-based compensation

 

 

126

  

  

 

0

 

  

 

5,112

 

  

 

(812

 

 

0

 

 

 

4,300

 

 

 

0

 

 

 

4,300

 

Share-based compensation

 

 

0

 

  

 

0

 

  

 

8,404

  

  

 

0

 

 

 

0

 

 

 

8,404

 

 

 

0

 

 

 

8,404

 

Net activity related to noncontrolling interests

 

 

0

 

  

 

0

 

  

 

0

 

  

 

0

 

 

 

0

 

 

 

0

 

 

 

(358

)

 

 

(358

)

Other comprehensive income

 

 

0

 

  

 

0

 

  

 

0

 

  

 

0

 

 

 

12,457

 

 

 

12,457

 

 

 

0

 

 

 

12,457

 

Balance at September 30, 2020

 

 

111,645

  

  

$

1

  

  

$

2,273,007

  

  

$

2,426,949

  

 

$

23,813

 

 

$

4,723,770

 

 

$

11,165

 

 

$

4,734,935

  

See notes to condensed consolidated financial statements.



FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Stockholders’ Equity – (Continued)

(in thousands)

(unaudited)

 

 

First American Financial Corporation Stockholders

 

 

 

 

 

 

 

 

 

Shares

 

 

Common
stock

 

 

Additional
paid-in
capital

 

 

Retained
earnings

 

 

Accumulated
other
comprehensive
loss

 

 

Total
stockholders’
equity

 

 

Noncontrolling
interests

 

 

Total

 

Balance at December 31, 2018

 

 

111,496

 

 

$

1

 

 

$

2,258,290

 

 

$

1,644,165

 

 

$

(160,575

)

 

$

3,741,881

 

 

$

3,507

 

 

$

3,745,388

  

Cumulative-effect adjustment

 

 

0

 

  

 

0

 

  

 

0

 

  

 

1,283

  

 

 

0

 

 

 

1,283

  

 

 

0

 

 

 

1,283

  

Net income for three months ended March 31, 2019

 

 

0

 

  

 

0

 

  

 

0

 

  

 

109,575

  

 

 

0

 

 

 

109,575

  

 

 

229

 

 

 

109,804

  

Dividends on common shares

 

 

0

 

  

 

0

 

  

 

0

 

  

 

(47,021

 

 

0

 

 

 

(47,021

)

 

 

0

 

 

 

(47,021

)

Purchase of Company shares

 

 

(47

)

 

 

0

 

 

 

(2,066

)

 

 

0

 

 

 

0

 

 

 

(2,066

)

 

 

0

 

 

 

(2,066

)

Shares issued in connection with share-based compensation

 

 

623

  

  

 

0

 

  

 

(10,618

)

  

 

(862

 

 

0

 

 

 

(11,480

)

 

 

0

 

 

 

(11,480

)

Share-based compensation

 

 

0

 

  

 

0

 

  

 

19,597

  

  

 

0

 

 

 

0

 

 

 

19,597

 

 

 

0

 

 

 

19,597

 

Net activity related to noncontrolling interests

 

 

0

 

  

 

0

 

  

 

(60

)

  

 

0

 

 

 

0

 

 

 

(60

)

 

 

(1,226

)

 

 

(1,286

)

Other comprehensive income (loss)

 

 

0

 

  

 

0

 

  

 

0

 

  

 

0

 

 

 

66,318

 

 

 

66,318

 

 

 

(1

)

 

 

66,317

 

Balance at March 31, 2019

 

 

112,072

  

  

 

1

  

  

 

2,265,143

  

  

 

1,707,140

  

 

 

(94,257

 

 

3,878,027

 

 

 

2,509

 

 

 

3,880,536

  

Net income for three months ended June 30, 2019

 

 

0

 

  

 

0

 

  

 

0

 

  

 

186,655

  

 

 

0

 

 

 

186,655

  

 

 

616

 

 

 

187,271

  

Dividends on common shares

 

 

0

 

  

 

0

 

  

 

0

 

  

 

(47,084

 

 

0

 

 

 

(47,084

)

 

 

0

 

 

 

(47,084

)

Shares issued in connection with share-based compensation

 

 

145

  

  

 

0

 

  

 

3,836

 

  

 

(846

 

 

0

 

 

 

2,990

 

 

 

0

 

 

 

2,990

 

Share-based compensation

 

 

0

 

  

 

0

 

  

 

7,758

  

  

 

0

 

 

 

0

 

 

 

7,758

 

 

 

0

 

 

 

7,758

 

Net activity related to noncontrolling interests

 

 

0

 

  

 

0

 

  

 

0

 

  

 

0

 

 

 

0

 

 

 

0

 

 

 

20

 

 

 

20

 

Other comprehensive income

 

 

0

 

  

 

0

 

  

 

0

 

  

 

0

 

 

 

56,543

 

 

 

56,543

 

 

 

0

 

 

 

56,543

 

Balance at June 30, 2019

 

 

112,217

  

  

 

1

  

  

 

2,276,737

  

  

 

1,845,865

  

 

 

(37,714

 

 

4,084,889

 

 

 

3,145

 

 

 

4,088,034

  

Net income for three months ended September 30, 2019

 

 

0

 

  

 

0

 

  

 

0

 

  

 

187,182

  

 

 

0

 

 

 

187,182

  

 

 

985

 

 

 

188,167

  

Dividends on common shares

 

 

0

 

  

 

0

 

  

 

0

 

  

 

(47,139

 

 

0

 

 

 

(47,139

)

 

 

0

 

 

 

(47,139

)

Shares issued in connection with share-based compensation

 

 

119

  

  

 

0

 

  

 

4,466

 

  

 

(835

 

 

0

 

 

 

3,631

 

 

 

0

 

 

 

3,631

 

Share-based compensation

 

 

0

 

  

 

0

 

  

 

7,556

  

  

 

0

 

 

 

0

 

 

 

7,556

 

 

 

0

 

 

 

7,556

 

Net activity related to noncontrolling interests

 

 

0

 

  

 

0

 

  

 

(22

)

  

 

0

 

 

 

0

 

 

 

(22

)

 

 

(49

)

 

 

(71

)

Other comprehensive income

 

 

0

 

  

 

0

 

  

 

0

 

  

 

0

 

 

 

6,044

 

 

 

6,044

 

 

 

0

 

 

 

6,044

 

Balance at September 30, 2019

 

 

112,336

  

  

$

1

  

  

$

2,288,737

  

  

$

1,985,073

  

 

$

(31,670

 

$

4,242,141

 

 

$

4,081

 

 

$

4,246,222

  

 

See notes to condensed consolidated financial statements.

 

 

5



FIRST AMERICAN FINANCIALFINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of IncomeCash Flows

(in thousands, except per share amounts)thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums and escrow fees

 

$

651,104

 

 

$

649,726

 

 

$

1,819,193

 

 

$

1,775,615

 

Agent premiums

 

 

629,186

 

 

 

625,953

 

 

 

1,757,796

 

 

 

1,653,990

 

Information and other

 

 

201,819

 

 

 

188,727

 

 

 

586,179

 

 

 

526,575

 

Net investment income

 

 

44,460

 

 

 

34,422

 

 

 

117,109

 

 

 

92,717

 

Net realized investment (losses) gains

 

 

(7,001

)

 

 

9,516

 

 

 

10,763

 

 

 

22,692

 

 

 

 

1,519,568

 

 

 

1,508,344

 

 

 

4,291,040

 

 

 

4,071,589

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

 

599,380

 

 

 

438,692

 

 

 

1,458,928

 

 

 

1,239,129

 

Premiums retained by agents

 

 

497,911

 

 

 

495,130

 

 

 

1,387,608

 

 

 

1,303,838

 

Other operating expenses

 

 

218,959

 

 

 

219,959

 

 

 

649,182

 

 

 

622,995

 

Provision for policy losses and other claims

 

 

120,349

 

 

 

137,015

 

 

 

333,695

 

 

 

366,473

 

Depreciation and amortization

 

 

36,000

 

 

 

24,491

 

 

 

96,292

 

 

 

70,905

 

Premium taxes

 

 

19,900

 

 

 

18,288

 

 

 

52,527

 

 

 

48,692

 

Interest

 

 

9,107

 

 

 

7,838

 

 

 

26,812

 

 

 

23,427

 

 

 

 

1,501,606

 

 

 

1,341,413

 

 

 

4,005,044

 

 

 

3,675,459

 

Income before income taxes

 

 

17,962

 

 

 

166,931

 

 

 

285,996

 

 

 

396,130

 

Income tax (benefit) expense

 

 

(3,224

)

 

 

59,539

 

 

 

84,846

 

 

 

133,615

 

Net income

 

 

21,186

 

 

 

107,392

 

 

 

201,150

 

 

 

262,515

 

Less: Net (loss) income attributable to noncontrolling interests

 

 

(197

)

 

 

72

 

 

 

(772

)

 

 

545

 

Net income attributable to the Company

 

$

21,383

 

 

$

107,320

 

 

$

201,922

 

 

$

261,970

 

Net income per share attributable to the Company's

   stockholders (Note 8):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

 

$

0.97

 

 

$

1.81

 

 

$

2.37

 

Diluted

 

$

0.19

 

 

$

0.96

 

 

$

1.80

 

 

$

2.36

 

Cash dividends declared per share

 

$

0.38

 

 

$

0.34

 

 

$

1.06

 

 

$

0.86

 

Weighted-average common shares outstanding (Note 8):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

111,799

 

 

 

110,571

 

 

 

111,578

 

 

 

110,423

 

Diluted

 

 

112,575

 

 

 

111,251

 

 

 

112,254

 

 

 

111,006

 

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

419,131

 

 

$

485,242

 

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

 

 

 

 

 

 

 

 

Provision for policy losses and other claims

 

 

414,001

 

 

 

331,525

 

Depreciation and amortization

 

 

110,652

 

 

 

97,537

 

Impairments on assets held for sale

 

 

73,264

 

 

 

0

 

Amortization of premiums and accretion of discounts on debt securities, net

 

 

28,678

 

 

 

18,646

 

Net realized investment gains

 

 

(49,491

)

 

 

(42,564

)

Share-based compensation

 

 

44,000

 

 

 

34,911

 

Equity in earnings of equity method investments, net

 

 

(3,556

)

 

 

(1,802

)

Dividends from equity method investments

 

 

4,383

 

 

 

4,077

 

Changes in assets and liabilities excluding effects of acquisitions and noncash transactions:

 

 

 

 

 

 

 

 

Claims paid, including assets acquired, net of recoveries

 

 

(342,721

)

 

 

(305,174

)

Net change in income tax accounts

 

 

(47

)

 

 

17,523

 

Increase in accounts and accrued income receivable

 

 

(72,670

)

 

 

(52,757

)

Increase in accounts payable and accrued liabilities

 

 

32,030

 

 

 

10,686

 

Increase in deferred revenue

 

 

21,668

 

 

 

19,484

 

Other, net

 

 

1,723

 

 

 

(5,653

)

Cash provided by operating activities

 

 

681,045

 

 

 

611,681

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net cash effect of acquisitions/dispositions

 

 

(387,024

)

 

 

(19,674

)

Net decrease (increase) in deposits with banks

 

 

1,859

 

 

 

(3,749

)

Purchases of debt and equity securities

 

 

(2,073,802

)

 

 

(1,611,934

)

Proceeds from sales of debt and equity securities

 

 

784,750

 

 

 

979,019

 

Proceeds from maturities of debt securities

 

 

1,157,725

 

 

 

666,749

 

Investments in unconsolidated entities

 

 

(57,966

)

 

 

(77,000

)

Net change in other investments

 

 

(8,960

)

 

 

(4,707

)

Advances under secured financing agreements

 

 

(11,619,818

)

 

 

(5,311,828

)

Collections of secured financings receivable

 

 

11,185,121

 

 

 

5,036,122

 

Capital expenditures

 

 

(91,601

)

 

 

(78,158

)

Proceeds from sales of property and equipment

 

 

13,951

 

 

 

105

 

Proceeds from insurance settlement

 

 

123

 

 

 

0

 

Cash used for investing activities

 

 

(1,095,642

)

 

 

(425,055

)

 

See notes to condensed consolidated financial statements.

 

 


6


FIRST AMERICANAMERICAN FINANCIAL CORPORATIONCORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Comprehensive IncomeCash Flows – (Continued)

(in thousands)

(unaudited)

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

$

21,186

  

 

$

107,392

  

 

$

201,150

  

 

$

262,515

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on securities

 

13,929

 

 

 

2,579

 

 

 

52,014

 

 

 

52,087

 

Foreign currency translation adjustment

 

11,415

 

 

 

(3,459

)

 

 

23,558

 

 

 

3,066

 

Pension benefit adjustment

 

85,891

  

 

 

3,602

  

 

 

93,061

  

 

 

10,819

 

Total other comprehensive income, net of tax

 

111,235

 

 

 

2,722

 

 

 

168,633

 

 

 

65,972

 

Comprehensive income

 

132,421

  

 

 

110,114

  

 

 

369,783

  

 

 

328,487

 

Less: Comprehensive (loss) income attributable to noncontrolling interests

 

(192

)

 

 

77

  

 

 

(760

)

 

 

566

 

Comprehensive income attributable to the Company

$

132,613

 

 

$

110,037

 

 

$

370,543

  

 

$

327,921

 

See notes to condensed consolidated financial statements.

7


FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

First American Financial Corporation Stockholders

 

 

 

 

 

 

 

 

 

Shares

 

  

Common
stock

 

  

Additional
paid-in
capital

 

  

Retained
earnings

 

 

Accumulated
other
comprehensive
loss

 

 

Total
stockholders’
equity

 

 

Noncontrolling
interests

 

 

Total

 

Balance at December 31, 2016

 

 

109,944

 

 

$

1

 

 

$

2,191,756

 

 

$

1,046,822

 

 

$

(230,400

)

 

$

3,008,179

 

 

$

6,170

 

 

$

3,014,349

  

Net income (loss) for nine months ended September 30, 2017

 

 

 

  

 

 

  

 

 

  

 

201,922

  

 

 

 

 

 

201,922

  

 

 

(772

)

 

 

201,150

  

Dividends on common shares

 

 

 

  

 

 

  

 

 

  

 

(117,174

 

 

 

 

 

(117,174

)

 

 

 

 

 

(117,174

)

Shares issued in connection with share-based compensation plans

 

 

873

  

  

 

 

  

 

3,784

 

  

 

(2,589

 

 

 

 

 

1,195

 

 

 

 

 

 

1,195

 

Share-based compensation

 

 

 

  

 

 

  

 

31,196

  

  

 

 

 

 

 

 

 

31,196

 

 

 

 

 

 

31,196

 

Net activity related to noncontrolling interests

 

 

 

  

 

 

  

 

(45

)

  

 

 

 

 

 

 

 

(45

)

 

 

(907

)

 

 

(952

)

Other comprehensive income (Note 12)

 

 

 

  

 

 

  

 

 

  

 

 

 

 

168,621

 

 

 

168,621

 

 

 

12

 

 

 

168,633

 

Balance at  September 30, 2017

 

 

110,817

  

  

$

1

  

  

$

2,226,691

  

  

$

1,128,981

  

 

$

(61,779

 

$

3,293,894

 

 

$

4,503

 

 

$

3,298,397

  

See notes to condensed consolidated financial statements.


8


FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

  

 

Nine Months Ended
September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

201,150

 

 

$

262,515

 

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

 

 

 

 

 

 

 

 

Provision for policy losses and other claims

 

 

333,695

 

 

 

366,473

 

Depreciation and amortization

 

 

96,292

 

 

 

70,905

 

Amortization of premiums and accretion of discounts on debt securities, net

 

 

25,013

 

 

 

20,267

 

Excess tax benefits from share-based compensation

 

 

 

 

 

(3,197

)

Net realized investment gains

 

 

(10,763

)

 

 

(22,692

)

Share-based compensation

 

 

31,196

 

 

 

28,096

 

Equity in earnings of affiliates, net

 

 

(4,550

)

 

 

(5,771

)

Dividends from equity method investments

 

 

9,593

 

 

 

7,953

 

Changes in assets and liabilities excluding effects of acquisitions and noncash transactions:

 

 

 

 

 

 

 

 

Claims paid, including assets acquired, net of recoveries

 

 

(351,397

)

 

 

(351,349

)

Net change in income tax accounts

 

 

34,462

 

 

 

20,765

 

Increase in accounts and accrued income receivable

 

 

(11,907

)

 

 

(43,454

)

Increase (decrease) in accounts payable and accrued liabilities

 

 

95,383

 

 

 

(99,777

)

Increase in deferred revenue

 

 

20,313

 

 

 

23,342

 

Other, net

 

 

(12,953

)

 

 

(21,857

)

Cash provided by operating activities

 

 

455,527

 

 

 

252,219

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net cash effect of acquisitions/dispositions

 

 

(82,993

)

 

 

(73,173

)

Net decrease in deposits with banks

 

 

1,171

 

 

 

608

 

Purchases of debt and equity securities

 

 

(1,276,401

)

 

 

(1,490,824

)

Proceeds from sales of debt and equity securities

 

 

599,365

 

 

 

494,717

 

Proceeds from maturities of debt securities

 

 

457,334

 

 

 

744,411

 

Net change in other investments

 

 

2,555

 

 

 

2,798

 

Capital expenditures

 

 

(103,064

)

 

 

(103,735

)

Proceeds from sales of property and equipment

 

 

9,882

 

 

 

9,218

 

Cash used for investing activities

 

 

(392,151

)

 

 

(415,980

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net change in deposits

 

 

185,948

 

 

 

519,113

 

Net proceeds from issuance of debt

 

 

 

 

 

160,000

 

Repayment of debt

 

 

(4,128

)

 

 

(3,745

)

Net activity related to noncontrolling interests

 

 

(964

)

 

 

(1,004

)

Excess tax benefits from share-based compensation

 

 

 

 

 

3,197

 

Net proceeds (payments) in connection with share-based compensation plans

 

 

1,195

 

 

 

(754

)

Purchase of Company shares

 

 

 

 

 

(454

)

Cash dividends

 

 

(117,174

)

 

 

(94,202

)

Cash provided by financing activities

 

 

64,877

 

 

 

582,151

 

Effect of exchange rate changes on cash

 

 

7,524

 

 

 

(2,399

)

Net increase in cash and cash equivalents

 

 

135,777

 

 

 

415,991

 

Cash and cash equivalents—Beginning of period

 

 

1,006,138

 

 

 

1,027,321

 

Cash and cash equivalents—End of period

 

$

1,141,915

 

 

$

1,443,312

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

24,619

 

 

$

21,097

  

Premium taxes

 

$

55,233

 

 

$

54,151

  

Income taxes, less refunds of $52,828 and $2,731

 

$

50,264

 

 

$

112,401

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net change in deposits

 

 

162,209

 

 

 

54,545

 

Borrowings under secured financing agreements

 

 

10,964,792

 

 

 

5,195,063

 

Repayments of secured financings payable

 

 

(10,716,660

)

 

 

(5,037,893

)

Net proceeds from issuance of unsecured senior notes

 

 

443,936

 

 

 

0

 

Borrowings under unsecured credit facility

 

 

120,000

 

 

 

160,000

 

Repayments of borrowings under unsecured credit facility

 

 

(280,000

)

 

 

(160,000

)

Repayments of notes and contracts payable

 

 

(4,228

)

 

 

(4,280

)

Net activity related to noncontrolling interests

 

 

(2,090

)

 

 

(1,112

)

Net payments in connection with share-based compensation

 

 

(5,597

)

 

 

(4,859

)

Repurchases of Company shares

 

 

(68,864

)

 

 

(2,066

)

Payments of cash dividends

 

 

(147,768

)

 

 

(141,244

)

Cash provided by financing activities

 

 

465,730

 

 

 

58,154

 

Effect of exchange rate changes on cash

 

 

(3,122

)

 

 

(910

)

Net increase in cash and cash equivalents

 

 

48,011

 

 

 

243,870

 

Cash and cash equivalents—Beginning of period

 

 

1,485,959

 

 

 

1,467,129

 

Reclassification to assets held for sale

 

 

(21,601

)

 

 

0

 

Cash and cash equivalents—End of period

 

$

1,512,369

 

 

$

1,710,999

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

30,034

 

 

$

34,053

 

Premium taxes

 

$

59,523

 

 

$

55,229

 

Income taxes, less refunds of $3,168 and $930

 

$

122,086

 

 

$

113,723

 

 

See notes to condensed consolidated financial statements.

 

 

 

9



FIRST AMERICAN FINANCIAL CORPORATION CORPORATION
AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements
(unaudited)

 

Note 1 – Basis of Condensed Consolidated Financial Statements

 

Basis of Presentation

 

The condensed consolidated financial information included in this report has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X.  The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements.  Therefore, these financial statements should be read in conjunction with the Company’sFirst American Financial Corporation (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2016.2019.  The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the consolidated results for the interim periods.  All material intercompany transactions and balances have been eliminated upon consolidation.

Out-of-Period AdjustmentsCoronavirus Pandemic

DuringThe coronavirus pandemic and responses to it have created significant volatility, uncertainty and economic disruption. The extent to which the third quarter of 2017,coronavirus pandemic impacts the Company’s business, operations and financial results will depend on numerous factors that the Company identified certain title plant assets within its title insurancemay not be able to accurately predict, including: the duration and scope of the pandemic and restrictions and responses to it; governmental, business and individual actions that have been and will continue to be taken in response to the pandemic; the ongoing impact of the pandemic on economic activity and actions taken in response, including the efficacy of governmental relief efforts; the effect on participants in real estate transactions and the demand for the Company’s products and services, segmentincluding as a result of higher unemployment, business closures and economic uncertainty; and the Company’s ability to sell and provide its services and solutions, including as a result of illness, travel restrictions, people working from home, governmental closure orders and partial or full closures of business and government offices.  The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that should have been previously written off, and certain title plant imaging assets that were misclassified as title plant assets.  To correct for these errors,affect the Company recorded adjustments to net realized investment gains, depreciation and amortization and title plants and other indexes.  Thefinancial statements, some of which consider the impact or expected impact of these adjustments included an increasethe coronavirus pandemic.  Actual results could differ from the estimates and assumptions used due to depreciation and amortization of $4.7 million,  a decrease to net realized investment gains of $1.8 million and a decrease to title plant andthe uncertainty created by the coronavirus pandemic, as well as other indexes of $6.5 million.  In addition, during the third quarter of 2017, the Company recorded adjustments to correct for errors in recording certain personnel costs within its title insurance and services segment.  The impact of these adjustments included an increase to personnel costs of $9.0 million, a decrease to other assets of $8.5 million and an increase in accounts payable and accrued liabilities of $0.5 million.  

The Company does not consider these adjustments to be material, individually or in the aggregate, to either the current period or any previously issued condensed consolidated financial statements.factors.

Recently Adopted Accounting Pronouncements

In October 2016,August 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance intended to amendreduce potential diversity in practice in accounting for the consolidation guidance on how a reporting entity that is the single decision makercosts of a variable interest entity should treat indirect interests in the entity held through related partiesimplementing cloud computing arrangements (i.e., hosting arrangements) that are under common controlservice contracts.  The updated guidance aligns the requirements for capitalizing implementation costs for these arrangements with the reporting entity when determining whether it is the primary beneficiary ofrequirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that variable interest entity.include an internal-use software license.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016.2019.  The adoption of this guidance, had noeffective January 1, 2020, did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2016,August 2018, the FASB issued updated guidance as part of its disclosure framework project intended to simplifyimprove the effectiveness of disclosures in the notes to the financial statements.  The updated guidance eliminates, adds and improve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of such awards as either equity or liabilities and classification on the statement of cash flows.modifies certain disclosure requirements related to fair value measurements.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016.  While the2019.  The adoption of this guidance, did have an impact on the Company’s effective income tax rate for 2017, itJanuary 1, 2020, did not have a material impact on the Company’s condensed consolidated financial statements.  See Note 7 Income Taxes for further discussion of the Company’s effective income tax rates.  Beginning in 2017, excess tax benefits from share-based compensation are presented in the condensed consolidated statements of cash flows in cash flows from operating activities within net change in income tax accounts.

In March 2016, the FASB issued updated guidance intended to simplify the accounting treatment for investments that become qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016.  The adoption of this guidance had no impact on the Company’s condensed consolidated financial statements.

10


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

Pending Accounting Pronouncements

In May 2017, the FASB issued updated guidance intended to reduce diversity in practice by clarifying which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased callable debt securities held at a premium to shorten the amortization period for the premium to the earliest call date.  The updated guidance is intended to more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities, and is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In March 2017, the FASB issued updated guidance intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost through the disaggregation of the service cost component from the other components of net benefit cost.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In January 2017, the FASB issued updated guidance intended to simplify how an entity tests goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Under the updated guidance, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized limited to the total amount of goodwill allocated to that reporting unit.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.2019.  The Company does not expect the adoption of this guidance, toeffective January 1, 2020, did not have a material impact on itsthe Company’s condensed consolidated financial statements.


In January 2017, the FASB issued updated guidance to clarify the definition of a business with the objective of providing guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In November 2016, the FASB issued updated guidance intended to reduce the diversity in practice on presenting restricted cash or restricted cash equivalents in the statement of cash flows.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In October 2016, the FASB issued updated guidance intended to simplify and improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory.  The updated guidance, which eliminates the intra-entity transfers exception, requires entities to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, when the transfers occur.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In August 2016, the FASB issued updated guidance intended to eliminate the diversity in practice regarding the presentation and classification of certain cash receipts and cash payments in the statement of cash flows.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated statements of cash flows.

11


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

In June 2016, the FASB issued updated guidance intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  The updated guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires the consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early2019.  The adoption permitted.  The Company is currently assessing the impact of the newthis guidance on itsa modified-retrospective basis, effective January 1, 2020, did not have a material impact, except for the disclosure requirements, on the Company’s condensed consolidated financial statements.  See Note 4 Debt and Equity Securities and Note 5 Credit Losses – Financial Assets and Off-Balance Sheet Credit Exposures for further information on the Company’s credit losses.

Pending Accounting Pronouncements

In February 2016,December 2019, the FASB issued updated guidance that requiresintended to simplify and improve the rights and obligations associated with leasing arrangements be reflected on the balance sheet in order to increase transparency and comparability among organizations.  Under theaccounting for income taxes.  The updated guidance lessees will be required to recognize a right-of-use asseteliminates certain exceptions and a liability to make lease paymentsclarifies and disclose key information about leasing arrangements.amends certain areas of the guidance.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018,2020, with early adoption permitted.  While the Company is currently evaluating the impact the new guidance will have on its condensed consolidated financial statements, the Company expects the adoption of the new guidance will result in a material increase in the assets and liabilities on its condensed consolidated balance sheets and will likely have an insignificant impact on its condensed consolidated statements of income and statements of cash flows.

In January 2016, the FASB issued updated guidance intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  In addition to making other targeted improvements to current guidance, the updated guidance also requires all equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in the fair value recognized through net income.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted in certain circumstances.  While the Company expects the adoption of this guidance to impact its condensed consolidated statements of income, the materiality of the impact will depend upon the size of, and level of volatility experienced within, the Company’s equity portfolio.

In May 2014, the FASB issued updated guidance for recognizing revenue from contracts with customers to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within and across industries, and across capital markets.  The new revenue standard contains principles that an entity will apply to determine the measurement of revenue and the timing of recognition.  The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.  Revenue from insurance contracts is not within the scope of this guidance.  In August 2015, the FASB issued updated guidance which defers the effective date of this guidance by one year.  In 2016, the FASB issued additional updates to the new guidance primarily to clarify, among other things, the implementation guidance related to principal versus agent considerations, identifying performance obligations, accounting for licenses of intellectual property, and to provide narrow-scope improvements and additional practical expedients.  In February 2017, the FASB issued an additional update to the new guidance to clarify the scope of derecognition guidance for nonfinancial assets and to provide guidance for partial sales of nonfinancial assets.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption prohibited. The Company expects to adopt the new guidance under the modified retrospective approach and, except for certain disclosure requirements, does not expect the newadoption of this guidance to have a material impact on its condensed consolidated financial statements.

Note 2 – Disposition of the Property and Casualty Insurance Business

In the third quarter of 2020, the Company committed to a plan to sell its property and casualty insurance business, which is expected to be completed within one year.  As a result of this decision, the Company remeasured the assets and liabilities of its property and casualty insurance business at estimated fair value, less costs to sell, and recorded pretax impairment losses to goodwill, other intangible assets, property and equipment and other assets totaling $73.3 million for the three and nine months ended September 30, 2020.  In addition, the assets and liabilities of the property and casualty insurance business have been reclassified as held for sale on the Company’s condensed consolidated balance sheet at September 30, 2020.  The impairment losses are included in impairments on assets held for sale on the condensed consolidated statements of income and in the operating results of the specialty insurance segment.

The major classes of assets and liabilities classified as held for sale, as of September 30, 2020, are summarized as follows:

(in thousands)

September 30,

2020

 

Assets held for sale

 

 

 

Cash and cash equivalents

$

21,601

 

Accounts and accrued income receivable

 

11,308

 

Debt and equity securities

 

162,803

 

Other assets

 

20,900

 

Assets held for sale

 

216,612

 

Less: Loss accrual

 

(18,329

)

Total assets held for sale

$

198,283

 

Liabilities held for sale

 

 

 

Accounts payable and accrued liabilities

$

14,924

 

Deferred revenue

 

72,655

 

Reserve for known and incurred but not reported claims

 

60,583

 

Other liabilities

 

121

 

Total liabilities held for sale

$

148,283

 


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

 

Note 23 – Escrow Deposits, Like-kind Exchange Deposits and Trust Assets

The Company administers escrow deposits and trust assets as a service to its customers.  Escrow deposits totaled $7.9 billion and $6.8$7.3 billion at September 30, 20172020 and December 31, 2016,2019, respectively, of which $2.8$3.3 billion and $2.6$3.2 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB.  The escrow deposits held at First American Trust, FSB are temporarily invested in cash and cash equivalents and debt securities, with offsetting liabilities included in deposits in the accompanying condensed consolidated balance sheets.  The remaining escrow deposits were held at third-party financial institutions.

Trust assets held or managed by First American Trust, FSB totaled $3.5$4.3 billion and $3.2$4.2 billion at September 30, 20172020 and December 31, 2016,2019, respectively.  Escrow deposits held at third-party financial institutions and trust assets are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets.  However,All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation.  The Company could be held contingently liable for the disposition of these assets.

12


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

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

The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37.  As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds.  Upon the completion of each such exchange, the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred to the customer.  Like-kind exchange funds held by the Company totaled $2.3$2.0 billion and $2.0$3.0 billion at September 30, 20172020 and December 31, 2016,2019, respectively.  The like-kind exchange deposits are held at third-party financial institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets.  All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation.  The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the returns on such proceeds.


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

Note 34 – Debt and Equity Securities

On January 1, 2020, the Company adopted updated accounting guidance that changed the impairment methodology for available-for-sale debt securities.  Under the new guidance, when the fair value of an available-for-sale debt security falls below its amortized cost, entities must determine whether the decline in fair value is due to credit-related factors or noncredit-related factors.  Declines in fair value that are credit-related are now recorded on the balance sheet through an allowance for credit losses with a corresponding adjustment to earnings and declines that are noncredit-related are recognized through other comprehensive income/loss.

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

 

(in thousands)

Amortized
cost

 

 

Gross unrealized

 

 

Estimated
fair value

 

(in thousands)

 

Amortized
cost

 

Allowance for credit losses (1)

 

 

Gross unrealized

 

 

Estimated
fair value

 

Gains

 

Losses

 

 

 

 

 

Gains

 

 

Losses

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury bonds

$

145,396

 

 

$

1,484

 

$

(1,427

)

 

$

145,453

 

U.S. Treasury bonds

 

$

111,183

 

$

0

 

 

$

890

 

 

$

(1

)

 

$

112,072

 

Municipal bonds

 

1,068,611

 

 

 

14,546

 

 

(10,795

)

 

 

1,072,362

 

Municipal bonds

 

 

1,036,502

 

 

0

 

 

 

67,396

 

 

 

(1,115

)

 

 

1,102,783

 

Foreign government bonds

 

162,550

 

 

 

556

 

 

(1,457

)

 

 

161,649

 

Foreign government bonds

 

 

181,885

 

 

(111

)

 

 

5,425

 

 

 

(215

)

 

 

186,984

 

Governmental agency bonds

 

223,546

 

 

 

1,063

 

 

(2,891

)

 

 

221,718

 

Governmental agency bonds

 

 

255,359

 

 

0

 

 

 

11,663

 

 

 

(170

)

 

 

266,852

 

Governmental agency mortgage-backed securities

 

2,238,222

 

 

 

4,098

 

 

(16,400

)

 

 

2,225,920

 

Governmental agency mortgage-backed securities

 

 

3,272,439

 

 

0

 

 

 

76,010

 

 

 

(2,112

)

 

 

3,346,337

 

U.S. corporate debt securities

 

716,299

 

 

 

13,400

 

 

(2,771

)

 

 

726,928

 

U.S. corporate debt securities

 

 

533,446

 

 

(496

)

 

 

35,153

 

 

 

(1,428

)

 

 

566,675

 

Foreign corporate debt securities

 

244,777

 

 

 

5,201

 

 

(524

)

 

 

249,454

 

Foreign corporate debt securities

 

 

341,947

 

 

(214

)

 

 

16,993

 

 

 

(1,205

)

 

 

357,521

 

$

4,799,401

 

 

$

40,348

 

$

(36,265

)

 

$

4,803,484

 

 

$

5,732,761

 

$

(821

)

 

$

213,530

 

 

$

(6,246

)

 

$

5,939,224

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury bonds

$

155,441

 

 

$

416

 

$

(4,466

)

 

$

151,391

 

U.S. Treasury bonds

 

$

143,825

 

$

0

 

 

$

469

 

 

$

(353

)

 

$

143,941

 

Municipal bonds

 

1,004,659

 

 

 

6,340

 

 

(26,666

)

 

 

984,333

 

Municipal bonds

 

 

1,043,252

 

 

0

 

 

 

47,804

 

 

 

(217

)

 

 

1,090,839

 

Foreign government bonds

 

141,887

 

 

 

600

 

 

(2,439

)

 

 

140,048

 

Foreign government bonds

 

 

179,554

 

 

0

 

 

 

1,497

 

 

 

(961

)

 

 

180,090

 

Governmental agency bonds

 

197,343

 

 

 

691

 

 

(4,166

)

 

 

193,868

 

Governmental agency bonds

 

 

316,318

 

 

0

 

 

 

5,820

 

 

 

(219

)

 

 

321,919

 

Governmental agency mortgage-backed securities

 

2,187,482

 

 

 

2,983

 

 

(26,792

)

 

 

2,163,673

 

Governmental agency mortgage-backed securities

 

 

3,241,966

 

 

0

 

 

 

43,599

 

 

 

(7,307

)

 

 

3,278,258

 

U.S. corporate debt securities

 

675,683

 

 

 

8,282

 

 

(5,441

)

 

 

678,524

 

U.S. corporate debt securities

 

 

535,878

 

 

0

 

 

 

18,466

 

 

 

(972

)

 

 

553,372

 

Foreign corporate debt securities

 

240,526

 

 

 

2,490

 

 

(1,490

)

 

 

241,526

 

Foreign corporate debt securities

 

 

335,962

 

 

0

 

 

 

9,468

 

 

 

(213

)

 

 

345,217

 

$

4,603,021

 

 

$

21,802

 

$

(71,460

)

 

$

4,553,363

 

 

$

5,796,755

 

$

0

 

 

$

127,123

 

 

$

(10,242

)

 

$

5,913,636

 

 

(1)

Reflects impairments resulting from credit-related factors, which are also included in net realized investment gains in the condensed consolidated statements of income for the three and nine months ended September 30, 2020.

 

13Sales of debt securities resulted in realized gains of $7.1 million and $16.4 million, realized losses of $0.4 million and $3.4 million, and proceeds of $200.1 million and $694.6 million for the three and nine months ended September 30, 2020, respectively, and realized gains of $3.3 million and $8.2 million, realized losses of $0.5 million and $5.2 million, and proceeds of $229.4 million and $852.1 million for the three and nine months ended September 30, 2019, respectively.



FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

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

 

Cost

 

 

Gross unrealized

 

 

Estimated
fair value

 

(in thousands)

 

 

Gains

 

 

Losses

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

$

19,269

 

 

$

202

 

 

$

(944

)

 

$

18,527

 

Common stocks

 

381,622

 

 

 

47,204

 

 

 

(1,168

)

 

 

427,658

 

 

$

400,891

 

 

$

47,406

 

 

$

(2,112

)

 

$

446,185

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

$

18,926

 

 

$

 

 

$

(3,344

)

 

$

15,582

 

Common stocks

 

367,169

 

 

 

26,034

 

 

 

(4,700

)

 

 

388,503

 

 

$

386,095

 

 

$

26,034

 

 

$

(8,044

)

 

$

404,085

 

Sales of debt and equity securities resulted in realized gains of $1.7 million and $8.9 million, and realized losses of $0.7 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and realized gains of $21.8 million and $22.1 million, and realized losses of $5.9 million and $7.2 million for the nine months ended September 30, 2017 and 2016, respectively.

Gross unrealized losses on investments in debt and equity securities for which an allowance for credit losses has not been recorded, are as follows:

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

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

 

 

Estimated

fair value

 

 

Unrealized

losses

 

 

Estimated

fair value

 

 

Unrealized

losses

 

 

Estimated

fair value

 

 

Unrealized

losses

 

September 30, 2017

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Debt securities:

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury bonds

$

61,500

  

  

$

(584

 

$

20,177

  

  

$

(843

)

 

$

81,677

  

  

$

(1,427

 

$

56,635

 

 

$

(1

)

 

$

0

 

 

$

0

 

 

$

56,635

 

 

$

(1

)

Municipal bonds

 

124,976

  

  

 

(775

 

 

247,001

 

 

 

(10,020

 

 

371,977

  

  

 

(10,795

 

 

91,375

 

 

 

(1,115

)

 

 

0

 

 

 

0

 

 

 

91,375

 

 

 

(1,115

)

Foreign government bonds

 

97,341

  

  

 

(1,058

 

 

10,471

 

 

 

(399

)

 

 

107,812

  

  

 

(1,457

 

 

68,562

 

 

 

(215

)

 

 

0

 

 

 

0

 

 

 

68,562

 

 

 

(215

)

Governmental agency bonds

 

106,783

  

  

 

(778

 

 

81,053

  

  

 

(2,113

)

 

 

187,836

  

  

 

(2,891

 

 

12,372

 

 

 

(170

)

 

 

0

 

 

 

0

 

 

 

12,372

 

 

 

(170

)

Governmental agency mortgage-backed securities

 

686,814

 

 

 

(4,572

)

 

 

832,251

 

 

 

(11,828

)

 

 

1,519,065

 

 

 

(16,400

)

 

 

257,038

 

 

 

(1,601

)

 

 

109,180

 

 

 

(511

)

 

 

366,218

 

 

 

(2,112

)

U.S. corporate debt securities

 

113,028

  

  

 

(1,484

 

 

50,152

  

  

 

(1,287

 

 

163,180

  

  

 

(2,771

 

 

59,593

 

 

 

(1,409

)

 

 

1,551

 

 

 

(19

)

 

 

61,144

 

 

 

(1,428

)

Foreign corporate debt securities

 

62,671

  

  

 

(457

 

 

3,492

  

  

 

(67

 

 

66,163

  

  

 

(524

 

 

41,839

 

 

 

(1,193

)

 

 

255

 

 

 

(12

)

 

 

42,094

 

 

 

(1,205

)

Total debt securities

 

1,253,113

  

  

 

(9,708

 

 

1,244,597

  

  

 

(26,557

 

 

2,497,710

  

  

 

(36,265

Equity securities

 

36,407

  

  

 

(485

 

 

28,115

  

  

 

(1,627

 

 

64,522

  

  

 

(2,112

Total

$

1,289,520

  

  

$

(10,193

 

$

1,272,712

  

  

$

(28,184

 

$

2,562,232

  

  

$

(38,377

December 31, 2016

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Debt securities:

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

$

587,414

 

 

$

(5,704

)

 

$

110,986

 

 

$

(542

)

 

$

698,400

 

 

$

(6,246

)

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury bonds

$

111,748

 

$

(4,466

)

 

$

 

$

 

 

$

111,748

 

$

(4,466

)

 

$

12,507

 

 

$

(350

)

 

$

3,193

 

 

$

(3

)

 

$

15,700

 

 

$

(353

)

Municipal bonds

 

635,531

 

 

(26,317

)

 

 

16,485

 

 

(349

)

 

 

652,016

 

 

(26,666

)

 

 

29,333

 

 

 

(207

)

 

 

2,827

 

 

 

(10

)

 

 

32,160

 

 

 

(217

)

Foreign government bonds

 

63,044

 

 

(2,371

)

 

 

324

 

 

(68

)

 

 

63,368

 

 

(2,439

)

 

 

112,167

 

 

 

(934

)

 

 

11,001

 

 

 

(27

)

 

 

123,168

 

 

 

(961

)

Governmental agency bonds

 

148,112

 

 

(4,166

)

 

 

 

 

 

 

 

148,112

 

 

(4,166

)

 

 

24,493

 

 

 

(142

)

 

 

14,923

 

 

 

(77

)

 

 

39,416

 

 

 

(219

)

Governmental agency mortgage-backed securities

 

1,295,790

 

 

(19,097

)

 

 

432,349

 

 

(7,695

)

 

 

1,728,139

 

 

(26,792

)

 

 

719,602

 

 

 

(2,785

)

 

 

637,009

 

 

 

(4,522

)

 

 

1,356,611

 

 

 

(7,307

)

U.S. corporate debt securities

 

193,533

 

 

(4,560

)

 

 

24,499

 

 

(881

)

 

 

218,032

 

 

(5,441

)

 

 

42,607

 

 

 

(451

)

 

 

10,216

 

 

 

(521

)

 

 

52,823

 

 

 

(972

)

Foreign corporate debt securities

 

78,658

 

 

(1,150

)

 

 

8,154

 

 

(340

)

 

 

86,812

 

 

(1,490

)

 

 

30,895

 

 

 

(108

)

 

 

12,373

 

 

 

(105

)

 

 

43,268

 

 

 

(213

)

Total debt securities

 

2,526,416

 

 

(62,127

)

 

 

481,811

 

 

(9,333

)

 

 

3,008,227

 

 

(71,460

)

Equity securities

 

70,261

 

 

(1,173

)

 

 

59,019

 

 

(6,871

)

 

 

129,280

 

 

(8,044

)

Total

$

2,596,677

 

$

(63,300

)

 

$

540,830

 

$

(16,204

)

 

$

3,137,507

 

$

(79,504

)

 

$

971,604

 

 

$

(4,977

)

 

$

691,542

 

 

$

(5,265

)

 

$

1,663,146

 

 

$

(10,242

)

 

14Based on the Company’s review of its debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded, it determined that the losses were due to non-credit factors.  As such, the Company does not consider these securities to be credit impaired at September 30, 2020.


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 impaired and it is written down to fair value with all losses recognized in earnings.  As of September 30, 2020, the Company did not intend to sell any debt securities in an unrealized loss position and it is not more likely than not that the Company will be required to sell any debt securities before recovery of their amortized cost basis.

For debt securities in an unrealized loss position for which the Company does not intend to sell the debt security and it is not more likely than not that the Company will be required to sell the debt security, the Company determines whether the loss is due to credit-related factors or noncredit-related factors.  For debt securities in an unrealized loss position for which the losses are primarily due to credit-related factors, the Company’s policy is to recognize the entire loss in earnings.  For debt securities in an unrealized loss position for which the losses are determined to be the result of both credit-related and noncredit-related factors, the credit loss is determined as 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 using the effective interest rate (i.e., purchase yield) and for variable rate securities the interest rate is fixed at the rate in effect at the credit loss measurement date.

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


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

Activity in the allowance for credit losses on debt securities for the three and nine months ended September 30, 2020 is summarized as follows:

(in thousands)

 

Three Months Ended
September 30, 2020

 

 

 

Nine Months Ended
September 30, 2020

 

Balance at beginning of period

$

(1,380

)

 

$

0

 

Credit losses recognized during the period

 

0

 

 

 

(7,493

)

Net decreases to credit losses previously recognized

 

278

 

 

 

3,738

 

Reductions for securities sold

 

271

 

 

 

2,924

 

Reclassification to assets held for sale (1)

 

10

 

 

 

10

 

Balance at end of period

$

(821

)

 

$

(821

)

(1)

See Note 2 Disposition of the Property and Casualty Insurance Business for information on assets held for sale.

In determining credit losses on its debt securities in an unrealized loss position, the Company considers certain factors that may include, among others, severity of the unrealized loss, security type, industry sector, credit rating, profitability and stock performance.

The Company’s policy is to present accrued interest receivable on debt securities within accounts and accrued income receivable on the balance sheet.  Accrued interest receivable on debt securities at September 30, 2020 totaled $26.4 million.  The Company has elected to not measure an allowance for credit losses for accrued interest receivable on debt securities and maintains a policy that all receivables ninety days past due are written off as credit loss expense.  Debt securities are placed on non-accrual status, and accrual of interest is discontinued, when management determines that collectibility of contractual amounts is not reasonably assured.  Interest income is recognized on a cash basis for interest payments received on debt securities in non-accrual status.


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

Investments in debt securities at September 30, 2017,2020, 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

 

 

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

$

24,966

  

$

48,269

  

$

28,318

  

$

43,843

 

  

$

145,396

  

 

$

82,169

 

 

$

25,321

 

 

$

907

 

 

$

2,786

 

 

$

111,183

 

Estimated fair value

$

24,937

  

$

48,104

  

$

28,338

  

$

44,074

 

  

$

145,453

  

 

$

82,442

 

 

$

25,755

 

 

$

1,023

 

 

$

2,852

 

 

$

112,072

 

Municipal bonds

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

$

61,831

  

$

314,910

  

$

254,976

  

$

436,894

 

  

$

1,068,611

  

 

$

46,100

 

 

$

111,450

 

 

$

391,718

 

 

$

487,234

 

 

$

1,036,502

 

Estimated fair value

$

61,960

  

$

318,703

  

$

259,744

  

$

431,955

 

  

$

1,072,362

  

 

$

46,478

 

 

$

115,646

 

 

$

420,952

 

 

$

519,707

 

 

$

1,102,783

 

Foreign government bonds

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

$

7,772

  

$

129,408

  

$

9,699

  

$

15,671

 

  

$

162,550

  

 

$

48,951

 

 

$

57,372

 

 

$

60,917

 

 

$

14,645

 

 

$

181,885

 

Estimated fair value

$

7,783

  

$

128,568

  

$

9,864

  

$

15,434

 

  

$

161,649

  

 

$

48,975

 

 

$

59,281

 

 

$

62,930

 

 

$

15,798

 

 

$

186,984

 

Governmental agency bonds

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

$

15,430

  

$

106,826

  

$

55,085

  

$

46,205

 

  

$

223,546

  

 

$

20,045

 

 

$

108,735

 

 

$

71,939

 

 

$

54,640

 

 

$

255,359

 

Estimated fair value

$

15,415

  

$

105,946

  

$

54,607

  

$

45,750

 

  

$

221,718

  

 

$

20,197

 

 

$

112,761

 

 

$

74,429

 

 

$

59,465

 

 

$

266,852

 

U.S. corporate debt securities

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

$

29,681

  

$

299,209

  

$

314,805

  

$

72,604

 

  

$

716,299

  

 

$

9,704

 

 

$

307,185

 

 

$

145,883

 

 

$

70,674

 

 

$

533,446

 

Estimated fair value

$

29,800

  

$

302,345

  

$

319,329

  

$

75,454

 

  

$

726,928

  

 

$

9,771

 

 

$

325,903

 

 

$

154,727

 

 

$

76,274

 

 

$

566,675

 

Foreign corporate debt securities

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

$

14,843

  

$

120,804

  

$

93,769

  

$

15,361

 

  

$

244,777

  

 

$

11,204

 

 

$

188,095

 

 

$

99,704

 

 

$

42,944

 

 

$

341,947

 

Estimated fair value

$

14,869

  

$

121,807

  

$

96,350

  

$

16,428

 

  

$

249,454

  

 

$

11,281

 

 

$

196,961

 

 

$

105,032

 

 

$

44,247

 

 

$

357,521

 

Total debt securities excluding mortgage-backed securities

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

$

154,523

  

$

1,019,426

  

$

756,652

  

$

630,578

 

  

$

2,561,179

  

 

$

218,173

 

 

$

798,158

 

 

$

771,068

 

 

$

672,923

 

 

$

2,460,322

 

Estimated fair value

$

154,764

  

$

1,025,473

  

$

768,232

  

$

629,095

 

  

$

2,577,564

  

 

$

219,144

 

 

$

836,307

 

 

$

819,093

 

 

$

718,343

 

 

$

2,592,887

 

Total mortgage-backed securities

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

$

2,238,222

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,272,439

 

Estimated fair value

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

$

2,225,920

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,346,337

 

Total debt securities

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

$

4,799,401

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,732,761

 

Estimated fair value

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

$

4,803,484

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,939,224

 

 

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

15



FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

Investments in equity securities are as follows:

(in thousands)

 

Cost

 

 

Estimated

fair value

 

September 30, 2020

 

 

 

 

 

 

 

 

Preferred stocks

 

$

21,335

 

 

$

17,244

 

Common stocks

 

 

332,174

 

 

 

375,936

 

 

 

$

353,509

 

 

$

393,180

 

December 31, 2019

 

 

 

 

 

 

 

 

Preferred stocks

 

$

21,849

 

 

$

18,094

 

Common stocks

 

 

328,110

 

 

 

374,224

 

 

 

$

349,959

 

 

$

392,318

 

Net gains (realized and unrealized) of $26.0 million and $2.6 million were recognized for the three and nine months ended September 30, 2020, respectively, as a result of changes in the fair values of equity securities.  Included in net gains during the three and nine months ended September 30, 2020 were net unrealized gains of $26.1 million and $2.4 million, respectively, related to equity securities still held at September 30, 2020.  Net gains (realized and unrealized) of $0.2 million and $41.6 million were recognized for the three and nine months ended September 30, 2019, respectively, as a result of changes in the fair values of equity securities.  Included in net gains during the three and nine months ended September 30, 2019, were net unrealized losses of $1.5 million and net unrealized gains of $35.9 million, respectively, related to equity securities still held at September 30, 2019.  

The composition of the investment portfolio at September 30, 2017,2020, by credit rating, is as follows:

 

A- or higher

 

 

BBB+ to BBB-

 

 

Non-Investment Grade

 

 

Total

 

 

A- or higher

 

 

BBB+ to BBB-

 

 

Non-Investment Grade

 

 

Total

 

(in thousands, except percentages)

Estimated

fair value

 

 

 

Percentage

 

 

Estimated

fair value

 

 

 

Percentage

 

 

Estimated

fair value

 

 

 

Percentage

 

 

Estimated

fair value

 

 

 

Percentage

 

 

Estimated

fair value

 

 

Percentage

 

 

Estimated

fair value

 

 

Percentage

 

 

Estimated

fair value

 

 

Percentage

 

 

Estimated

fair value

 

 

Percentage

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury bonds

$

145,453

 

 

 

100.0

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

145,453

 

 

 

100.0

 

 

$

112,072

 

 

 

100.0

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

112,072

 

 

 

100.0

 

Municipal bonds

 

999,995

 

 

 

93.2

 

 

 

54,521

 

 

 

5.1

 

 

 

17,846

 

 

 

1.7

 

 

 

1,072,362

 

 

 

100.0

 

 

 

1,065,632

 

 

 

96.6

 

 

 

37,151

 

 

 

3.4

 

 

 

 

 

 

 

 

 

1,102,783

 

 

 

100.0

 

Foreign government bonds

 

133,945

 

 

 

82.9

 

 

 

22,184

 

 

 

13.7

 

 

 

5,520

 

 

 

3.4

 

 

 

161,649

 

 

 

100.0

 

 

 

170,806

 

 

 

91.3

 

 

 

13,686

 

 

 

7.4

 

 

 

2,492

 

 

 

1.3

 

 

 

186,984

 

 

 

100.0

 

Governmental agency bonds

 

221,718

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

221,718

 

 

 

100.0

 

 

 

266,852

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

266,852

 

 

 

100.0

 

Governmental agency mortgage-backed securities

 

2,225,920

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,225,920

 

 

 

100.0

 

 

 

3,346,337

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,346,337

 

 

 

100.0

 

U.S. corporate debt securities

 

249,320

 

 

 

34.3

 

 

 

262,936

 

 

 

36.2

 

 

 

214,672

 

 

 

29.5

 

 

 

726,928

 

 

 

100.0

 

 

 

266,057

 

 

 

47.0

 

 

 

246,872

 

 

 

43.5

 

 

 

53,746

 

 

 

9.5

 

 

 

566,675

 

 

 

100.0

 

Foreign corporate debt securities

 

123,674

 

 

 

49.6

 

 

 

96,553

 

 

 

38.7

 

 

 

29,227

 

 

 

11.7

 

 

 

249,454

 

 

 

100.0

 

 

 

149,096

 

 

 

41.7

 

 

 

187,669

 

 

 

52.5

 

 

 

20,756

 

 

 

5.8

 

 

 

357,521

 

 

 

100.0

 

Total debt securities

 

4,100,025

 

 

 

85.3

 

 

 

436,194

 

 

 

9.1

 

 

 

267,265

 

 

 

5.6

 

 

 

4,803,484

 

 

 

100.0

 

 

 

5,376,852

 

 

 

90.5

 

 

 

485,378

 

 

 

8.2

 

 

 

76,994

 

 

 

1.3

 

 

 

5,939,224

 

 

 

100.0

 

Preferred stocks

 

 

 

 

 

 

 

13,616

 

 

 

73.5

 

 

 

4,911

 

 

 

26.5

 

 

 

18,527

 

 

 

100.0

 

 

 

44

 

 

 

0.3

 

 

 

16,063

 

 

 

93.1

 

 

 

1,137

 

 

 

6.6

 

 

 

17,244

 

 

 

100.0

 

Total

$

4,100,025

 

 

 

85.1

 

 

$

449,810

 

 

 

9.3

 

 

$

272,176

 

 

 

5.6

 

 

$

4,822,011

 

 

 

100.0

 

 

$

5,376,896

 

 

 

90.3

 

 

$

501,441

 

 

 

8.4

 

 

$

78,131

 

 

 

1.3

 

 

$

5,956,468

 

 

 

100.0

 

As of

Included in debt securities at September 30, 2017, the estimated fair value of total debt securities included $144.32020, were bank loans totaling $54.9 million, of bank loans, of which $133.7$51.5 million waswere non-investment grade; $106.7 million of high yield corporate debt securities totaling $20.3 million, all of which waswere non-investment grade; and $74.3 million of emerging market debt securities totaling $65.2 million, of which $9.0$5.2 million waswere non-investment grade.


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

The composition of the investmentdebt securities portfolio in an unrealized loss position at September 30, 2017,2020, by credit rating, is as follows:

 

A- or higher

 

 

BBB+ to BBB-

 

 

Non-Investment Grade

 

 

Total

 

 

A- or higher

 

 

BBB+ to BBB-

 

 

Non-Investment Grade

 

 

Total

 

(in thousands, except percentages)

Estimated

fair value

 

 

 

Percentage

 

 

Estimated

fair value

 

 

 

Percentage

 

 

Estimated

fair value

 

 

 

Percentage

 

 

Estimated

fair value

 

 

 

Percentage

 

 

Estimated

fair value

 

 

Percentage

 

 

Estimated

fair value

 

 

Percentage

 

 

Estimated

fair value

 

 

Percentage

 

 

Estimated

fair value

 

 

Percentage

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury bonds

$

81,677

 

 

 

100.0

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

81,677

 

 

 

100.0

 

 

$

56,635

 

 

 

100.0

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

56,635

 

 

 

100.0

 

Municipal bonds

 

355,301

 

 

 

95.6

 

 

 

15,057

 

 

 

4.0

 

 

 

1,619

 

 

 

0.4

 

 

 

371,977

 

 

 

100.0

 

 

 

80,589

 

 

 

88.2

 

 

 

10,786

 

 

 

11.8

 

 

 

 

 

 

 

 

 

91,375

 

 

 

100.0

 

Foreign government bonds

 

95,300

 

 

 

88.4

 

 

 

9,663

 

 

 

9.0

 

 

 

2,849

 

 

 

2.6

 

 

 

107,812

 

 

 

100.0

 

 

 

68,227

 

 

 

99.5

 

 

 

335

 

 

 

0.5

 

 

 

 

 

 

 

 

 

68,562

 

 

 

100.0

 

Governmental agency bonds

 

187,836

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

187,836

 

 

 

100.0

 

 

 

12,372

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,372

 

 

 

100.0

 

Governmental agency mortgage-backed securities

 

1,519,065

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,519,065

 

 

 

100.0

 

 

 

366,218

 

 

 

100.0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

366,218

 

 

 

100.0

 

U.S. corporate debt securities

 

46,440

 

 

 

28.5

 

 

 

80,803

 

 

 

49.5

 

 

 

35,937

 

 

 

22.0

 

 

 

163,180

 

 

 

100.0

 

 

 

13,148

 

 

 

21.5

 

 

 

8,436

 

 

 

13.8

 

 

 

39,560

 

 

 

64.7

 

 

 

61,144

 

 

 

100.0

 

Foreign corporate debt securities

 

40,649

 

 

 

61.4

 

 

 

23,108

 

 

 

34.9

 

 

 

2,406

 

 

 

3.7

 

 

 

66,163

 

 

 

100.0

 

 

 

18,845

 

 

 

44.8

 

 

 

12,222

 

 

 

29.0

 

 

 

11,027

 

 

 

26.2

 

 

 

42,094

 

 

 

100.0

 

Total debt securities

 

2,326,268

 

 

 

93.1

 

 

 

128,631

 

 

 

5.1

 

 

 

42,811

 

 

 

1.8

 

 

 

2,497,710

 

 

 

100.0

 

Preferred stocks

 

 

 

 

 

 

 

7,990

 

 

 

66.3

 

 

 

4,063

 

 

 

33.7

 

 

 

12,053

 

 

 

100.0

 

Total

$

2,326,268

 

 

 

92.7

 

 

$

136,621

 

 

 

5.4

 

 

$

46,874

 

 

 

1.9

 

 

$

2,509,763

 

 

 

100.0

 

 

$

616,034

 

 

 

88.2

 

 

$

31,779

 

 

 

4.6

 

 

$

50,587

 

 

 

7.2

 

 

$

698,400

 

 

 

100.0

 

As of September 30, 2017, the estimated fair value of total debt

Debt securities in an unrealized loss position at September 30, 2020, included $26.4bank loans totaling $48.5 million, of bank loans, of which $26.0$45.2 million waswere non-investment grade; $11.6 million of high yield corporate debt securities totaling $4.2 million, all of which waswere non-investment grade; and $15.4 million of emerging market debt securities totaling $3.9 million, of which $3.6$1.2 million waswere non-investment grade.

The credit ratings in the above tables reflect published ratings obtained from globally recognized securities rating agencies.  If a security was rated differently among the rating agencies, the lowest rating was selected.  Governmental agency mortgage-backed securities are not rated by any of the ratings agencies; however, these securities have been included in the above table in the “A- or higher” rating category because the payments of principal and interest are guaranteed by the governmental agency that issued the security.

 

16


Note 5 – Credit Losses – Financial Assets and Off-Balance Sheet Credit Exposures

On January 1, 2020, the Company adopted updated accounting guidance which requires financial assets measured at amortized cost to be presented at the net amount expected to be collected with credit losses recorded through an allowance account that is deducted from the amortized cost of the financial asset.  The updated guidance also requires the measurement of expected credit losses on off-balance sheet credit exposures.

The Company’s financial assets, which are measured at amortized cost, primarily include accounts receivable, accrued interest receivable and secured financings receivable.  See Note 4 Debt and Equity Securities for discussion of accrued interest receivable on debt securities.

Accounts and accrued income receivable

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


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

Activity in the allowance for credit losses on accounts receivable for the three and nine months ended September 30, 2020 is summarized as follows:

(in thousands)

 

Three Months Ended
September 30, 2020

 

 

 

Nine Months Ended
September 30, 2020 (1)

 

 

Balance at beginning of period

 

$

12,172

 

 

$

12,676

 

 

Provision for expected credit losses

 

 

1,526

 

 

 

4,547

 

 

Reclassification to assets held for sale (2)

 

 

(365

)

 

 

(365

)

 

Write-offs, net of recoveries

 

 

(733

)

 

 

(4,258

)

 

Balance at end of period

 

$

12,600

 

 

$

12,600

 

 

(1)

The allowance at December 31, 2019 was determined under previous accounting guidance.  Transition to the updated guidance did not result in an adjustment to the allowance.

(2)

See Note 2 Disposition of the Property and Casualty Insurance Business for information on assets held for sale.

The Company’s policy is to present accrued interest receivable on financial assets measured at amortized cost within accounts and accrued income receivable on the balance sheet.  Accrued interest receivable at September 30, 2020 totaled $2.5 million.  The Company has elected to not measure an allowance for credit losses for accrued interest receivable and maintains a policy that all receivables ninety days past due are written off as credit loss expense.  Accounts are placed on non-accrual status, and accrual of interest is discontinued, when management determines that collectibility of contractual amounts is not reasonably assured.  Payments of interest for accounts in non-accrual status are applied under the cost recovery method.

Secured financings receivable

The Company’s secured financings receivable are collateralized by mortgage loans on residential real estate.  Collections of the receivable balance occur upon sale of the underlying mortgage loan to investors in the secondary market, generally within 30 days and more typically in less than 10 days.  No allowance for credit losses has been recorded due to, among other factors, the Company typically identifying investors in the underlying mortgage loans prior to making advances, the short-term nature of these receivables, the underlying mortgage loans are predominantly Qualified Mortgages (QM) and due to the receivable having no history of significant prior credit losses.

Escrow deposits and like-kind exchange deposits

Escrow deposits held at third-party financial institutions are not considered assets or liabilities of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets.  All amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation.  The Company could be held contingently liable for the disposition of these assets.  The Company regularly reviews the financial strength of third-party financial institutions where escrow deposits are held and, based on this review and the fact that all amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation, does not expect any credit losses; therefore the Company has not recorded a liability for credit losses.


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

Like-kind exchange deposits held at third-party financial institutions are not considered assets or liabilities of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets.  All amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation.  The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the returns on such proceeds.  The Company regularly reviews the financial strength of third-party financial institutions where like-kind exchange deposits are held and, based on this review and the fact that all amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation, does not expect any credit losses; therefore the Company has not recorded a liability for credit losses.

See Note 43 Escrow Deposits, Like-Kind Exchange Deposits and Trust Assets for further information about the Company’s escrow deposits and like-kind exchange deposits.

Note 6 – Goodwill

A summary of the changes in the carrying amount of goodwill, by operatingreportable segment, for the nine months ended September 30, 2017,2020, is as follows:

 

(in thousands)

 

Title

Insurance

and Services

 

 

Specialty

Insurance

 

 

Total

 

Balance at December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

1,104,143

 

 

$

46,765

 

 

$

1,150,908

 

Accumulated impairment losses

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,104,143

 

 

 

46,765

 

 

 

1,150,908

 

(in thousands)

Title
Insurance
and Services

 

 

Specialty
Insurance

 

  

Total

 

Balance as of December 31, 2016

$

970,652

 

$

46,765

 

$

1,017,417

  

Acquisitions

 

123,954

 

 

 

 

 

 

123,954

 

 

 

240,436

 

 

 

0

 

 

 

240,436

 

Dispositions

 

 

(358

)

 

 

0

 

 

 

(358

)

Impairment losses

 

 

0

 

 

 

(34,178

)

 

 

(34,178

)

Foreign currency translation

 

4,391

 

 

 

 

  

 

4,391

 

 

 

(1,519

)

 

 

0

 

 

 

(1,519

)

Other adjustments

 

(298

)

 

 

 

  

 

(298

)

Balance as of September 30, 2017

$

1,098,699

  

 

$

46,765

  

  

$

1,145,464

  

Balance at September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

1,342,702

 

 

 

46,765

 

 

 

1,389,467

 

Accumulated impairment losses

 

 

0

 

 

 

(34,178

)

 

 

(34,178

)

 

$

1,342,702

 

 

$

12,587

 

 

$

1,355,289

 

The Company’s four4 reporting units for purposes of assessing goodwill for impairment are title insurance, home warranty, property and casualty insurance and trust and other services.  During the nine months ended September 30, 20172020, there were no triggering events that would more likely than not reduce the fair value of any reporting unit below its carrying amount.amount for the title insurance, home warranty and trust and other services reporting units.  

For further discussion aboutIn the Company’s acquisitionsthird quarter of 2020, the Company committed to a plan to sell its property and casualty insurance business, which triggered a goodwill impairment test for the property and casualty insurance reporting unit.  Based on the results of the goodwill impairment test, the Company determined that the fair value of the property and casualty insurance reporting unit did not exceed its carrying amount.  As a result, the Company recorded a pretax impairment loss to goodwill of $34.2 million for the three and nine months ended September 30, 2017,2020. See Note 2 Disposition of the Property and Casualty Insurance Business for further information on the sale of the business.

For discussion about the Company’s acquisitions in 2020, see Note 1418 Business Combinations.


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

 

Note 57 – Other Intangible Assets

Other intangible assets consist of the following:

 

(in thousands)

 

September 30,

2017

 

 

December 31,
2016

 

 

September 30,

2020

 

 

December 31,

2019

 

Finite-lived intangible assets:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

77,600

  

 

$

78,542

  

 

$

167,278

 

 

$

99,905

 

Noncompete agreements

 

 

10,210

  

 

 

10,007

  

 

 

38,045

 

 

 

13,150

 

Trademarks

 

 

7,210

  

 

 

6,472

  

 

 

23,344

 

 

 

10,520

 

Internal-use software licenses

 

 

27,632

 

 

 

16,038

 

 

 

22,820

 

 

 

21,982

 

Patents

 

 

2,840

  

 

 

2,840

  

 

 

2,840

 

 

 

2,840

 

 

 

125,492

  

 

 

113,899

  

 

 

254,327

 

 

 

148,397

 

Accumulated amortization

 

 

(67,250

)

 

 

(51,885

)

 

 

(74,423

)

 

 

(73,449

)

 

 

58,242

  

 

 

62,014

  

 

 

179,904

 

 

 

74,948

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

16,884

  

 

 

16,884

  

 

 

16,787

 

 

 

16,885

 

 

$

75,126

  

 

$

78,898

  

 

$

196,691

 

 

$

91,833

 

Amortization expense for finite-lived intangible assets was $7.0$11.6 million and $19.7$31.4 million for the three and nine months ended September 30, 2017,2020, respectively, and $3.7$6.7 million and $9.3$22.0 million for the three and nine months ended September 30, 2016,2019, respectively.  The current year increase in finite-lived intangible assets primarily reflects the impact of acquisitions during 2020.  For further discussion about the Company’s acquisitions in 2020, see Note 18 Business Combinations.

In connection with the decision to sell the property and casualty insurance business, the Company recognized pretax impairment losses on its finite-lived intangible assets – customer relationships of $3.2 million for the three and nine months ended September 30, 2020.  See Note 2 Disposition of the Property and Casualty Insurance Business for further information on the sale of the business.

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

 

Year

(in thousands)

 

Remainder of 2017

$

7,975

  

2018

$

15,920

  

2019

$

9,210

  

2020

$

5,221

  

2021

$

2,976

  

2022

$

2,380

  

Year

 

(in thousands)

 

Remainder of 2020

 

$

11,141

 

2021

 

$

37,722

 

2022

 

$

33,858

 

2023

 

$

30,353

 

2024

 

$

23,293

 

2025

 

$

17,174

 

 

17



FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

 

Note 68 – 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:

 

Nine months ended
September 30,

 

 

Nine Months Ended
September 30,

 

(in thousands)

2017

 

2016

 

 

2020

 

 

2019

 

Balance at beginning of period

$

1,025,863

 

 

$

983,880

 

 

$

1,063,044

 

 

$

1,042,679

 

Provision related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

330,342

 

 

 

345,556

 

 

 

379,987

 

 

 

325,012

 

Prior years

 

3,353

 

 

 

20,917

 

 

 

34,014

 

 

 

6,513

 

 

333,695

 

 

 

366,473

 

 

 

414,001

 

 

 

331,525

 

Payments, net of recoveries, related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

165,914

 

 

 

160,693

 

 

 

179,654

 

 

 

158,285

 

Prior years

 

185,483

 

 

 

190,656

 

 

 

163,067

 

 

 

146,889

 

 

351,397

 

 

 

351,349

 

 

 

342,721

 

 

 

305,174

 

Other

 

13,487

 

 

 

19,036

 

 

 

(3,882

)

 

 

(14,306

)

Reclassification to liabilities held for sale (1)

 

 

(60,583

)

 

 

 

Balance at end of period

$

1,021,648

 

 

$

1,018,040

 

 

$

1,069,859

 

 

$

1,054,724

 

 

(1)

See Note 2 Disposition of the Property and Casualty Insurance Business for information on liabilities held for sale.

The provision for title insurance losses, expressed as a percentage of title insurance premiums and escrow fees, was 5.0% for the three and nine months ended September 30, 2020 compared to 4.0% for the three and nine months ended September 30, 2017 compared to 5.5% for the three and nine months ended September 30, 2016.2019, respectively.  The current quarter rate of 4.0%5.0% reflects thean ultimate loss rate of 4.5% for the current policy year and no change in the loss reserve estimates for prior policy years. The third quarter of 2016 rate of 5.5% reflected the ultimate loss rate of 5.0% for the 2016 policy year and a $5.8 million net increase in the loss reserve estimates for prior policy years of $7.0 million.  The 4.0% rate for the third quarter of 2019 reflected the ultimate loss rate for the 2019 policy year and 0 change in the loss reserve estimates for prior policy years.

To date, the Company has not experienced an increase in title claims as a result of the coronavirus pandemic.  Incurred title claims for the three and nine months ended September 30, 2020 were lower by 21.0% and 18.1%, respectively, when compared with the same periods of the prior year, and significantly below the Company’s actuarial expectation. However, title claims generally increase when economic conditions deteriorate.  Due to the recent deterioration in economic conditions in connection with the coronavirus pandemic and responses to it, the Company increased its calendar year loss rate from 4.0% in 2019 to 5.0% in 2020.

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

 

(in thousands, except percentages)

September 30, 2017

 

 

December 31, 2016

 

 

September 30, 2020

 

 

December 31, 2019

 

Known title claims

$

74,755

  

  

 

7.3

 

$

83,805

 

8.1

 

$

63,865

 

 

 

6.0

%

 

$

83,382

 

 

 

7.8

%

Incurred but not reported claims

 

889,079

  

  

 

87.0

 

 

888,126

 

 

86.6

 

 

981,837

 

 

 

91.7

%

 

 

903,994

 

 

 

85.1

%

Total title claims

 

963,834

  

  

 

94.3

 

 

971,931

 

 

94.7

 

 

1,045,702

 

 

 

97.7

%

 

 

987,376

 

 

 

92.9

%

Non-title claims

 

57,814

  

  

 

5.7

 

 

53,932

 

 

5.3

 

 

24,157

 

 

 

2.3

%

 

 

75,668

 

 

 

7.1

%

Total loss reserves

$

1,021,648

  

  

 

100.0

 

$

1,025,863

 

 

100.0

 

$

1,069,859

 

 

 

100.0

%

 

$

1,063,044

 

 

 

100.0

%


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

Note 9 – Notes and Contracts Payable

In May 2020, the Company issued $450.0 million of 4.00% 10 year senior unsecured notes due in 2030. Interest is due semi-annually on May 15 and November 15, beginning November 15, 2020. The Company used a portion of the net proceeds from the sale to repay all borrowings outstanding under its credit facility, increasing the unused capacity thereunder to the full $700.0 million size of the facility.

 

 

Note 710 – Income Taxes

The Company’s effective income tax rates (income tax expense as a percentage of income before income taxes) were -17.9%24.6% and 29.7%22.5% for the three and nine months ended September 30, 2017,2020, respectively, and 35.7%23.3% and 33.7%21.3% for the three and nine months ended September 30, 2016,2019, respectively.  The Company’s effective tax rates differ from the statutory federal rate of 35% primarily21.0% due to changes in state and foreign income taxes resulting from fluctuations in the Company’s noninsurance and foreign subsidiaries’ contributions to pretax income and changes in the ratio of permanent differences to income before income taxes. The Company’s effective tax rates for 2017 also reflect state tax benefits relating to the termination of the Company’s pension plan,incurred, as well as permanent differences between amounts reported for financial statement purposes and amounts reported for income tax purposes, including the releaserecognition of reserves relating to tax positions taken on prior year tax returns.  In addition, the Company’s effective tax rates for 2017 reflect the adoption of new accounting guidance related to the accounting for share-based payment transactions, which requires, among other items, that all excess tax benefits andor tax deficiencies associated with share-based payment transactions be recorded inthrough income tax expense rather than in additional paid-in capital, as previously required.  The impact toexpense.  In addition, the Company of adopting this guidance was a reduction in income tax expense of $0.1 million and $2.8 million for the three and nine months ended September 30, 2017, respectively.  See Note 1 Basis of Condensed Consolidated Financial Statements for further discussion of the new guidance.  The Company’s effective tax rates for 2016 also2020 reflect a benefit related to foreign tax law changes, and the rates for 2019 reflect the resolution of certain tax authority examinations and tax credits claimed in 2016 and in prior years.  

18


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

In connection with the Company’s June 2010 spin-off from its prior parent, which subsequently assumed the name CoreLogic, Inc. (“CoreLogic”), it entered into a tax sharing agreement which governs the Company’s and CoreLogic’s respective rights, responsibilities and obligations for certain tax related matters. At September 30, 2017 and December 31, 2016, the Company had a net payable to CoreLogic of $13.0 million and $16.3 million, respectively, related tostate tax matters from prior to the spin-off. This amount is included in the Company’s condensed consolidated balance sheets in accounts payable and accrued liabilities. The decrease during the current year was primarily due to payments made for tax matters prior to the spin-off.years.

The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and makes adjustments to the allowance as necessary.  The factors used by the Company to assess the likelihood of realization include the Company’sits forecast of future taxable income and available tax planning strategies that could be implemented to realize theits deferred tax assets.  The Company’s ability or failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of its deferred tax assets.  Based on actual future operating results in certain jurisdictions, it is possible that the current valuation allowance positions of those jurisdictions could be adjusted induring the next 12 months.

As of September 30, 20172020 and December 31, 2016,2019, the liability for income taxes associated with uncertain tax positions was $12.8$7.0 million and $18.1$1.5 million, respectively.  The net decreaseincrease in the liability during 2017 wascurrent year results primarily attributable to settlements with taxing authorities relating to taxfrom positions taken byon the Company onCompany’s tax returns for prior year tax returns.years.  As of September 30, 20172020 and December 31, 2016,2019, the liability could be reduced by $5.4$2.0 million and $5.7$0.4 million, respectively, due to offsetting tax benefits associated with the correlative effects of potential adjustments, including timing adjustments and state income taxes.  The net amounts of $7.4 million and $12.4 million as of September 30, 2017 and December 31, 2016, respectively,liability, if recognized, would favorably affect the Company’s effective income tax rate.

The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.  As of September 30, 2017 and December 31, 2016, the Company had accrued $4.5 million and $4.1 million, respectively, ofAccrued interest and penalties, (netnet of tax benefits, of $2.0 million and $1.8 million, respectively) related to uncertain tax positions.positions were 0t material as of September 30, 2020 and December 31, 2019.

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.  Any such change may be the result of ongoing audits or the expiration of federal and state statutes of limitations for the assessment of taxes.

The Company, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and various non-U.S. jurisdictions.  The primary non-federal jurisdictions are California, Canada, India and the United Kingdom.  During 2016,As of September 30, 2020, the Company had concluded U.S. federal income tax examinations for calendar years 2005 through 2013.  The Company2015 and is generally no longer subject to U.S. federal, state and non-U.S. income tax examinations for years prior to 2005.2014.



19


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

Note 811 – Earnings Per Share

The computation of basic and diluted earnings per share is as follows:

 

Three Months Ended
September 30,

 

  

Nine Months Ended
September 30,

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands, except per share amounts)

 

2017

 

  

2016

 

  

2017

 

  

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator

Numerator

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

Net income attributable to the Company

$

21,383

  

  

$

107,320

  

  

$

201,922

  

  

$

261,970

  

 

$

182,279

 

 

$

187,182

 

 

$

416,138

 

 

$

483,412

 

Denominator

Denominator

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average shares

Basic weighted-average shares

 

111,799

  

  

 

110,571

  

  

 

111,578

  

  

 

110,423

  

 

 

112,584

 

 

 

113,163

 

 

 

112,913

 

 

 

112,983

 

Effect of dilutive employee stock options and
restricted stock units (“RSUs”)

Effect of dilutive employee stock options and
restricted stock units (“RSUs”)

 

776

  

  

 

680

  

  

 

676

  

  

 

583

  

 

 

259

 

 

 

578

 

 

 

263

 

 

 

526

 

Diluted weighted-average shares

Diluted weighted-average shares

 

112,575

  

  

 

111,251

  

  

 

112,254

  

  

 

111,006

  

 

 

112,843

 

 

 

113,741

 

 

 

113,176

 

 

 

113,509

 

Net income per share attributable to the Company’s stockholders

Net income per share attributable to the Company’s stockholders

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

Basic

$

0.19

  

  

$

0.97

  

  

$

1.81

  

  

$

2.37

  

 

$

1.62

 

 

$

1.65

 

 

$

3.69

 

 

$

4.28

 

Diluted

Diluted

$

0.19

  

  

$

0.96

  

  

$

1.80

  

  

$

2.36

  

 

$

1.62

 

 

$

1.65

 

 

$

3.68

 

 

$

4.26

 

 

For the three and nine months ended September 30, 2017, 12020, 172 thousand RSUs and 8284 thousand RSUs, respectively, were excluded from the weighted-average diluted common shares outstanding due to their antidilutive effect.  For the three months ended September 30, 2016, no RSUs had an antidilutive effect on weighted-average diluted common shares outstanding, and for the nine months ended September 30, 2016, 17 thousand2019, RSUs were excluded from the weighted-average diluted common shares outstanding due to their antidilutive effect. Noeffect were not material.  NaN stock options had an antidilutivea dilutive effect on weighted-average diluted common shares outstanding for either period induring the current year or inthree and nine months ended September 30, 2020, as all remaining stock options outstanding were exercised during the prior year.fourth quarter of 2019.

Note 912 – Employee Benefit Plans

Net periodic cost related to the Company’s defined benefit pension andunfunded supplemental benefit plans includes the following components:

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Expense:

Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service costs

Service costs

$

184

  

 

$

260

  

 

$

551

  

 

$

781

  

 

$

44

 

 

$

70

 

 

$

134

 

 

$

211

 

Interest costs

Interest costs

 

2,086

  

 

 

5,999

  

 

 

11,185

  

 

 

18,000

  

 

 

1,781

 

 

 

2,280

 

 

 

5,343

 

 

 

6,838

 

Settlement costs

 

152,388

 

 

 

 

 

 

152,388

 

 

 

 

Expected return on plan assets

 

 

 

 

(3,083

 

 

(4,740

 

 

(9,250

Amortization of net actuarial loss

Amortization of net actuarial loss

 

1,958

  

 

 

7,043

  

 

 

15,792

  

 

 

21,153

  

 

 

1,321

 

 

 

916

 

 

 

3,961

 

 

 

2,746

 

Amortization of prior service credit

Amortization of prior service credit

 

(1,045

 

 

(1,211

 

 

(3,268

 

 

(3,633

 

 

(777

)

 

 

(1,018

)

 

 

(2,331

)

 

 

(3,053

)

$

155,571

  

 

$

9,008

  

 

$

171,908

  

 

$

27,051

  

 

$

2,369

 

 

$

2,248

 

 

$

7,107

 

 

$

6,742

 

Pension termination

The Company contributed $10.8 million to its unfunded supplemental benefit plans during the nine months ended September 30, 2020, and settlementexpects to contribute an additional $4.6 million during the remainder of 2020.

In May 2016, the Company’s board of directors terminated the Company’s funded defined benefit pension plan known as the First American Financial Corporation Pension Plan, effective as of July 31, 2016.  The pension plan was closed to new entrants effective December 31, 2001 and amended to “freeze” all benefit accruals as of April 30, 2008.  Also, in May 2016, a subsidiary of the Company terminated its small regional funded defined benefit pension plan effective as of August 31, 2016.  All financial impacts discussed below reflect the termination of both pension plans.

20



FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

The pension plans offered participants annuity payments based on a number of factors and, for certain participants, an alternative lump sum distribution option.  During 2016, the Company made additional cash contributions of $84.8  million above scheduled amounts and offered lump sum distributions to certain participants. The lump sum distributions were settled through distributions of pension plan assets in the fourth quarter totaling $127.2  million for which the Company recognized $66.3  million in settlement costs.  

The Company made cash contributions of $34.0 million in March 2017 to fully fund its pension obligation.  In July 2017, the Company completed the transfer of all remaining benefit obligations related to the pension plans to a highly rated insurance company and recognized $152.4 million in settlement costs in the condensed consolidated statements of income in the third quarter of 2017.

 

Note 1013 – Fair Value Measurements

Certain of the Company’s assets are carried at fair value.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company categorizes its assets and liabilities carried at fair value using a three-level hierarchy for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the Company (observable inputs) and the Company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).  The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  The hierarchy level assigned to the assets and liabilities is based on management’s assessment of the transparency and reliability of the inputs used to estimate the fair values at the measurement date.  The three hierarchy levels are defined as follows:

Level 1—Valuations based on unadjusted quoted market prices in active markets for identical assets or liabilities.

Level 2—Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.

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

If the inputs used to measure fair value fall into different levels of the fair value hierarchy, the hierarchy level assigned is based upon the lowest level of input that is significant to the fair value measurement.

Assets measured at fair value on a recurring basis

The valuation techniques and inputs used by the Company to estimate the fair value of assets measured on a recurring basis are summarized as follows:

Debt securities

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

21


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

Typical inputs and assumptions to pricing models used to value the Company’s U.S. Treasury bonds, municipal bonds, foreign government bonds, governmental agency bonds, governmental agency mortgage-backed securities and U.S. and foreign corporate debt securities include, but are not limited to, benchmark yields, reported trades, broker-dealer quotes, credit spreads, credit ratings, bond insurance (if applicable), benchmark securities, bids, offers, reference data and industry and economic events.  For mortgage-backed securities, inputs and assumptions may also include the structure of issuance, characteristics of the issuer, collateral attributes and prepayment speeds. Certain corporate debt securities were not actively traded and there were fewer observable inputs available requiring the use of more judgment in determining their fair values, which resulted in their classification as Level 3.


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

Equity securities

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

The following tables present the fair values of the Company’s assets, measured on a recurring basis, as of September 30, 20172020 and December 31, 2016:2019:

 

(in thousands)

 

Total

 

 

Level 1

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury bonds

 

$

145,453

 

 

$

 

 

$

145,453

 

 

$

 

 

$

112,072

 

 

$

0

 

 

$

112,072

 

 

$

0

 

Municipal bonds

 

1,072,362

 

 

 

 

1,072,362

 

 

 

 

 

1,102,783

 

 

 

0

 

 

 

1,102,783

 

 

 

0

 

Foreign government bonds

 

161,649

 

 

 

 

161,649

 

 

 

 

 

186,984

 

 

 

0

 

 

 

186,984

 

 

 

0

 

Governmental agency bonds

 

221,718

 

 

 

 

221,718

 

 

 

 

 

266,852

 

 

 

0

 

 

 

266,852

 

 

 

0

 

Governmental agency mortgage-backed securities

 

2,225,920

 

 

 

 

2,225,920

 

 

 

 

 

3,346,337

 

 

 

0

 

 

 

3,346,337

 

 

 

0

 

U.S. corporate debt securities

 

726,928

 

 

 

 

714,419

 

 

12,509

 

 

 

566,675

 

 

 

0

 

 

 

566,675

 

 

 

0

 

Foreign corporate debt securities

 

 

249,454

 

 

 

 

 

 

248,581

 

 

 

873

 

 

 

357,521

 

 

 

0

 

 

 

357,521

 

 

 

0

 

 

 

4,803,484

 

 

 

 

 

 

4,790,102

 

 

 

13,382

 

 

 

5,939,224

 

 

 

0

 

 

 

5,939,224

 

 

 

0

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

18,527

 

 

18,527

 

 

 

 

 

 

 

17,244

 

 

 

17,244

 

 

 

0

 

 

 

0

 

Common stocks

 

 

427,658

 

 

 

427,658

 

 

 

 

 

 

 

 

 

375,936

 

 

 

375,936

 

 

 

0

 

 

 

0

 

 

 

446,185

 

 

 

446,185

 

 

 

 

 

 

 

 

 

393,180

 

 

 

393,180

 

 

 

0

 

 

 

0

 

Total assets

 

$

5,249,669

 

 

$

446,185

 

 

$

4,790,102

 

 

$

13,382

 

 

$

6,332,404

 

 

$

393,180

 

 

$

5,939,224

 

 

$

0

 

 

(in thousands)

 

Total

 

 

Level 1

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury bonds

 

$

151,391

 

 

$

 

 

$

151,391

 

 

$

 

 

$

143,941

 

 

$

0

 

 

$

143,941

 

 

$

0

 

Municipal bonds

 

984,333

 

 

 

 

984,333

 

 

 

 

 

1,090,839

 

 

 

0

 

 

 

1,090,839

 

 

 

0

 

Foreign government bonds

 

140,048

 

 

 

 

140,048

 

 

 

 

 

180,090

 

 

 

0

 

 

 

180,090

 

 

 

0

 

Governmental agency bonds

 

193,868

 

 

 

 

193,868

 

 

 

 

 

321,919

 

 

 

0

 

 

 

321,919

 

 

 

0

 

Governmental agency mortgage-backed securities

 

2,163,673

 

 

 

 

2,163,673

 

 

 

 

 

3,278,258

 

 

 

0

 

 

 

3,278,258

 

 

 

0

 

U.S. corporate debt securities

 

678,524

 

 

 

 

631,859

 

 

46,665

 

 

 

553,372

 

 

 

0

 

 

 

553,372

 

 

 

0

 

Foreign corporate debt securities

 

 

241,526

 

 

 

 

 

 

235,258

 

 

 

6,268

 

 

 

345,217

 

 

 

0

 

 

 

345,217

 

 

 

0

 

 

 

4,553,363

 

 

 

 

 

 

4,500,430

 

 

 

52,933

 

 

 

5,913,636

 

 

 

0

 

 

 

5,913,636

 

 

 

0

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stocks

 

15,582

 

 

15,582

 

 

 

 

 

 

 

18,094

 

 

 

18,094

 

 

 

0

 

 

 

0

 

Common stocks

 

 

388,503

 

 

 

388,503

 

 

 

 

 

 

 

 

 

374,224

 

 

 

374,224

 

 

 

0

 

 

 

0

 

 

 

404,085

 

 

 

404,085

 

 

 

 

 

 

 

 

 

392,318

 

 

 

392,318

 

 

 

0

 

 

 

0

 

Total assets

 

$

4,957,448

 

 

$

404,085

 

 

$

4,500,430

 

 

$

52,933

 

 

$

6,305,954

 

 

$

392,318

 

 

$

5,913,636

 

 

$

0

 

 

22


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

There were no0 transfers between Levels 1, 2 and 23 during the three and nine months ended September 30, 20172020 and 2016.2019. Transfers into or out of the Level 3 category occur when unobservable inputs become more or less significant to the fair value measurement. For the three and nine months ended September 30, 2017 and 2016, transfers between Level 2 and Level 3 were based on market liquidity and related transparency of pricing and associated observable inputs for certain of the Company’s corporate debt securities. The Company’s policy is to recognize transfers between levels in the fair value hierarchy at the end of the reporting period.

The following table presents a summary of the changes in the fair values of Level 3 assets, measured on a recurring basis, for the three months ended September 30, 2017 and 2016:

 

September 30, 2017

 

 

September 30, 2016

 

(in thousands)

U.S. corporate

debt

securities

 

 

Foreign corporate

debt securities

 

 

Total

 

 

U.S. corporate

debt

securities

 

 

Foreign corporate

debt securities

 

 

Total

 

Fair value at beginning of period

$

18,128

 

 

$

1,915

 

 

$

20,043

 

 

$

14,493

 

 

$

723

 

 

$

15,216

 

Transfers into Level 3

 

3,747

 

 

 

573

 

 

 

4,320

 

 

 

5,968

 

 

 

 

 

 

5,968

 

Transfers out of Level 3

 

(6,788

)

 

 

 

 

 

(6,788

)

 

 

(4,546

)

 

 

 

 

 

(4,546

)

Net realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

26

 

 

 

(1

)

 

 

25

 

 

 

5

 

 

 

 

 

 

5

 

Included in other comprehensive income (loss)

 

(86

)

 

 

(5

)

 

 

(91

)

 

 

115

 

 

 

43

 

 

 

158

 

Purchases

 

901

 

 

 

149

 

 

 

1,050

 

 

 

1,866

 

 

 

1,045

 

 

 

2,911

 

Sales

 

(1,231

)

 

 

 

 

 

(1,231

)

 

 

(46

)

 

 

(50

)

 

 

(96

)

Settlements

 

(2,188

)

 

 

(1,758

)

 

 

(3,946

)

 

 

(356

)

 

 

 

 

 

(356

)

Fair value at end of period

$

12,509

 

 

$

873

 

 

$

13,382

 

 

$

17,499

 

 

$

1,761

 

 

$

19,260

 

The following table presents a summary of the changes in the fair values of Level 3 assets, measured on a recurring basis, for the nine months ended September 30, 2017 and 2016:

 

September 30, 2017

 

 

September 30, 2016

 

(in thousands)

U.S. corporate

debt

securities

 

 

Foreign corporate

debt securities

 

 

Total

 

 

U.S. corporate

debt

securities

 

 

Foreign corporate

debt securities

 

 

Total

 

Fair value at beginning of period

$

46,665

 

 

$

6,268

 

 

$

52,933

 

 

$

43,567

 

 

$

6,572

 

 

$

50,139

 

Transfers into Level 3

 

377

 

 

 

198

 

 

 

575

 

 

 

269

 

 

 

 

 

 

269

 

Transfers out of Level 3

 

(27,066

)

 

 

(2,111

)

 

 

(29,177

)

 

 

(27,764

)

 

 

(3,822

)

 

 

(31,586

)

Net realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

117

 

 

 

11

 

 

 

128

 

 

 

(88

)

 

 

(48

)

 

 

(136

)

Included in other comprehensive income (loss)

 

(460

)

 

 

(47

)

 

 

(507

)

 

 

1,053

 

 

 

88

 

 

 

1,141

 

Purchases

 

7,994

 

 

 

1,075

 

 

 

9,069

 

 

 

10,132

 

 

 

1,243

 

 

 

11,375

 

Sales

 

(2,824

)

 

 

(1,954

)

 

 

(4,778

)

 

 

(4,750

)

 

 

(1,045

)

 

 

(5,795

)

Settlements

 

(12,294

)

 

 

(2,567

)

 

 

(14,861

)

 

 

(4,920

)

 

 

(1,227

)

 

 

(6,147

)

Fair value at end of period

$

12,509

 

 

$

873

 

 

$

13,382

 

 

$

17,499

 

 

$

1,761

 

 

$

19,260

 


 

23


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

Financial instruments not measured at fair value

In estimating the fair values of its financial instruments not measured at fair value, the Company used the following methods and assumptions:

Cash and cash equivalents

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

Deposits with banks

The fair value of deposits with banks is estimated based on rates currently offered for deposits of similar remaining maturities, where applicable.

Notes receivable, net

The fair value of notes receivable, net is estimated based on current market rates being offered for notes with similar maturities and credit quality.

DepositsSecured financings receivable

The carrying valuesamount of escrow and other deposit accounts approximatesecured financings receivable approximates fair value due to the short-term nature of these assets.

Secured financings payable

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

Notes and contracts payable

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

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value as of September 30, 20172020 and December 31, 2016:2019:

 

 

Carrying

 

Estimated fair value

 

 

Carrying

 

Estimated fair value

 

(in thousands)

 

Amount

 

Total

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Amount

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,141,915

 

$

1,141,915

 

 

$

1,141,915

 

 

$

 

 

$

 

 

$

1,512,369

 

$

1,512,369

 

 

$

1,512,369

 

 

$

0

 

 

$

0

 

Deposits with banks

 

$

20,940

 

$

20,887

 

 

$

265

 

 

$

20,622

 

 

$

 

 

$

41,551

 

$

41,687

 

 

$

3,194

 

 

$

38,493

 

 

$

0

 

Notes receivable, net

 

$

7,466

 

$

7,297

 

 

$

 

 

$

 

 

$

7,297

 

 

$

29,986

 

$

28,851

 

 

$

0

 

 

$

0

 

 

$

28,851

 

Secured financings receivable

 

$

722,156

 

$

722,156

 

 

$

0

 

 

$

722,156

 

 

$

0

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,965,426

 

$

2,965,426

 

 

$

2,965,426

 

 

$

 

 

$

 

Secured financings payable

 

$

526,544

 

$

526,544

 

 

$

0

 

 

$

526,544

 

 

$

0

 

Notes and contracts payable

 

$

734,091

 

$

756,536

 

 

$

 

 

$

752,070

 

 

$

4,466

 

 

$

1,011,758

 

$

1,114,323

 

 

$

0

 

 

$

1,107,735

 

 

$

6,588

 

 

 

 

Carrying

 

Estimated fair value

 

(in thousands)

 

Amount

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,006,138

 

$

1,006,138

 

 

$

1,006,138

 

 

$

 

 

$

 

Deposits with banks

 

$

21,222

 

$

21,176

 

 

$

1,017

 

 

$

20,159

 

 

$

 

Notes receivable, net

 

$

7,799

 

$

7,542

 

 

$

 

 

$

 

 

$

7,542

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,779,478

 

$

2,779,478

 

 

$

2,779,478

 

 

$

 

 

$

 

Notes and contracts payable

 

$

736,693

 

$

734,812

 

 

$

 

 

$

729,658

 

 

$

5,154

 


 

24


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

 

Carrying

 

Estimated fair value

 

(in thousands)

 

Amount

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,485,959

 

$

1,485,959

 

 

$

1,485,959

 

 

$

0

 

 

$

0

 

Deposits with banks

 

$

44,422

 

$

44,339

 

 

$

4,074

 

 

$

40,265

 

 

$

0

 

Notes receivable, net

 

$

18,970

 

$

19,422

 

 

$

0

 

 

$

0

 

 

$

19,422

 

Secured financings receivable

 

$

287,459

 

$

287,459

 

 

$

0

 

 

$

287,459

 

 

$

0

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured financings payable

 

$

278,412

 

$

278,412

 

 

$

0

 

 

$

278,412

 

 

$

0

 

Notes and contracts payable

 

$

728,232

 

$

761,224

 

 

$

0

 

 

$

756,306

 

 

$

4,918

 

Assets measured at fair value on a non-recurring basis

The Company measures the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount may not be recoverable.  These assets generally include goodwill, title plants and other indexes, other intangible assets, property and equipment and cost and equity-method investments.  

In connection with the decision to sell the property and casualty insurance business, the Company recognized impairment losses of $34.2 million, $17.6 million and $3.2 million to goodwill, property and equipment and other intangible assets, respectively, during the three and nine months ended September 30, 2020. The impairment charges were determined based on fair values utilizing Level 3 unobservable inputs.  See Note 2 Disposition of the Property and Casualty Insurance Business for further information on the sale of the business.

 

Note 1114 – Share-Based Compensation

The following table presents compensation expensecosts associated with the Company’s share-based compensation plans:

 

Three Months Ended
September 30,

 

  

Nine Months Ended
September 30,

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2017

 

  

2016

 

  

2017

 

  

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Expense:

Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs

RSUs

$

5,866

  

  

$

5,401

  

  

$

28,634

  

  

$

25,766

  

 

$

7,049

 

 

$

6,608

 

 

$

39,763

 

 

$

31,761

 

Stock options

 

69

 

 

 

68

 

 

 

203

 

 

 

203

 

Employee stock purchase plan

Employee stock purchase plan

 

682

 

  

 

659

  

  

 

2,359

  

  

 

2,127

  

 

 

1,355

 

 

 

948

 

 

 

4,237

 

 

 

3,150

 

$

6,617

  

  

$

6,128

  

  

$

31,196

  

  

$

28,096

  

 

$

8,404

 

 

$

7,556

 

 

$

44,000

 

 

$

34,911

 

 

The following table summarizes RSU activity for the nine months ended September 30, 2017:2020:

 

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

 

Shares

 

 

Weighted-average
grant-date

fair value

 

Unvested at December 31, 2016

 

1,510

 

 

$

33.38

 

Granted during 2017

 

893

 

 

$

39.26

 

Vested during 2017

 

(957

)

 

$

34.53

 

Forfeited during 2017

 

(9

)

 

$

35.22

 

Unvested at September 30, 2017

 

1,437

 

 

$

36.25

 

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

 

Shares

 

 

Weighted-average

grant-date

fair value

 

Unvested at December 31, 2019

 

 

1,152

 

 

$

49.25

 

Granted during 2020

 

 

763

 

 

$

63.88

 

Vested during 2020

 

 

(982

)

 

$

53.00

 

Forfeited during 2020

 

 

(39

)

 

$

58.16

 

Unvested at September 30, 2020

 

 

894

 

 

$

57.23

 


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

Note 15 – Stockholders’ Equity

The Company maintains a stock repurchase plan with authorization up to $250.0 million, of which $92.7 million remained as of September 30, 2020.  Repurchases may be made from time to time by the Company in the open market at prevailing market prices or in privately negotiated transactions.  The Company did 0t repurchase any shares of its common stock during the three months ended September 30, 2020.  During the nine months ended September 30, 2020, the Company repurchased and retired 1.8 million shares of its common stock for a total purchase price of $68.9 million, and as of September 30, 2020, had repurchased and retired 5.4 million shares of its common stock under the current authorization for a total purchase price of $157.3 million.

 

 

Note 1216 – Accumulated Other Comprehensive Income (Loss) (“AOCI”)

The following table presents a summary of the changes in each component of AOCI for the nine months ended September 30, 2017:2020:

 

(in thousands)

Unrealized

gains (losses)

on securities

 

 

Foreign

currency

translation

adjustment

 

 

Pension

benefit

adjustment

 

 

Accumulated

other

comprehensive

income (loss)

 

Balance at December 31, 2016

$

(26,760

)

 

$

(63,576

)

 

$

(140,057

)

 

$

(230,393

)

Change in unrealized gains (losses) on securities

 

81,044

 

 

 

 

 

 

 

 

 

81,044

 

Change in foreign currency translation adjustment

 

 

 

 

23,558

 

 

 

 

 

 

23,558

 

Net actuarial loss

 

 

 

 

 

 

 

(8,646

)

 

 

(8,646

)

Amortization of net actuarial loss

 

 

 

 

 

 

 

15,792

 

 

 

15,792

 

Amortization of prior service credit

 

 

 

 

 

 

 

(3,268

)

 

 

(3,268

)

Settlement costs

 

 

 

 

 

 

 

152,388

 

 

 

152,388

 

Tax effect

 

(29,030

)

 

 

 

 

 

(63,205

)

 

 

(92,235

)

Balance at September 30, 2017

$

25,254

 

 

$

(40,018

)

 

$

(46,996

)

 

$

(61,760

)

Allocated to the Company

$

25,235

 

 

$

(40,018

)

 

$

(46,996

)

 

$

(61,779

)

Allocated to noncontrolling interests

 

19

 

 

 

 

 

 

 

 

 

19

 

Balance at September 30, 2017

$

25,254

 

 

$

(40,018

)

 

$

(46,996

)

 

$

(61,760

)

 

First American Financial Corporation

 

 

NCI

 

 

 

 

 

(in thousands)

Unrealized
gains (losses)
on debt securities

 

 

Foreign
currency
translation
adjustment

 

 

Pension
benefit
adjustment

 

 

Accumulated
other
comprehensive
income (loss)

 

 

Accumulated
other
comprehensive
income (loss)

 

 

Balance

 

 

Balance at December 31, 2019

$

83,117

 

 

$

(51,668

)

 

$

(72,941

)

 

$

(41,492

)

 

$

1

 

 

$

(41,491

)

 

Change in unrealized gains (losses) on debt securities

 

97,031

 

 

 

 

 

 

 

 

 

97,031

 

 

 

0

 

 

 

97,031

 

 

Change in unrealized gains (losses) on debt securities for which credit-related portion was recognized in earnings

 

186

 

 

 

 

 

 

 

 

 

186

 

 

 

0

 

 

 

186

 

 

Change in foreign currency translation adjustment

 

 

 

 

(9,498

)

 

 

 

 

 

(9,498

)

 

 

 

 

 

(9,498

)

 

Amortization of net actuarial loss

 

 

 

 

 

 

 

3,961

 

 

 

3,961

 

 

 

 

 

 

3,961

 

 

Amortization of prior service credit

 

 

 

 

 

 

 

(2,331

)

 

 

(2,331

)

 

 

 

 

 

(2,331

)

 

Tax effect

 

(24,000

)

 

 

389

 

 

 

(433

)

 

 

(24,044

)

 

 

0

 

 

 

(24,044

)

 

Balance at September 30, 2020

$

156,334

 

 

$

(60,777

)

 

$

(71,744

)

 

$

23,813

 

 

$

1

 

 

$

23,814

 

 

 


25


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

The following table presents the other comprehensive income (loss) reclassification adjustments for the three months ended September 30, 20172020 and 2016:2019:

 

(in thousands)

Unrealized

gains (losses)

on securities

 

 

Foreign

currency

translation

adjustment

 

 

Pension

benefit

adjustment

 

 

Total

other

comprehensive

income (loss)

 

 

Unrealized

gains (losses)

on debt securities

 

 

Foreign

currency

translation

adjustment

 

 

Pension

benefit

adjustment

 

 

Total

other

comprehensive

income (loss)

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax change before reclassifications

$

22,833

 

$

11,415

 

 

$

(8,646

)

 

$

25,602

 

 

$

9,110

 

 

$

10,817

 

 

$

0

 

 

$

19,927

 

Reclassifications out of AOCI

 

(928

)

 

 

 

153,301

 

 

152,373

 

 

 

(6,627

)

 

 

0

 

 

 

544

 

 

 

(6,083

)

Tax effect

 

(7,976

)

 

 

 

 

 

(58,764

)

 

 

(66,740

)

 

 

(499

)

 

 

(743

)

 

 

(145

)

 

 

(1,387

)

Total other comprehensive income (loss), net of tax

$

13,929

 

$

11,415

 

 

$

85,891

 

 

$

111,235

 

 

$

1,984

 

 

$

10,074

 

 

$

399

 

 

$

12,457

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax change before reclassifications

$

12,435

 

$

(3,459

)

 

$

 

 

$

8,976

 

 

$

19,348

 

 

$

(7,614

)

 

$

0

 

 

$

11,734

 

Reclassifications out of AOCI

 

(8,687

)

 

 

 

5,832

 

 

(2,855

)

 

 

(2,165

)

 

 

0

 

 

 

(102

)

 

 

(2,267

)

Tax effect

 

(1,169

)

 

 

 

 

 

(2,230

)

 

 

(3,399

)

 

 

(3,690

)

 

 

241

 

 

 

26

 

 

 

(3,423

)

Total other comprehensive income (loss), net of tax

$

2,579

 

$

(3,459

)

 

$

3,602

 

 

$

2,722

 

 

$

13,493

 

 

$

(7,373

)

 

$

(76

)

 

$

6,044

 

 

The following table presents the other comprehensive income (loss) reclassification adjustments for the nine months ended September 30, 20172020 and 2016:2019:

 

(in thousands)

Unrealized

gains (losses)

on securities

 

 

Foreign

currency

translation

adjustment

 

 

Pension

benefit

adjustment

 

 

Total

other

comprehensive

income (loss)

 

 

Unrealized

gains (losses)

on debt securities

 

 

Foreign

currency

translation

adjustment

 

 

Pension

benefit

adjustment

 

 

Total

other

comprehensive

income (loss)

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax change before reclassifications

$

95,329

 

$

23,558

 

 

$

(8,646

)

 

$

110,241

 

 

$

102,392

 

 

$

(9,498

)

 

$

0

 

 

$

92,894

 

Reclassifications out of AOCI

 

(14,285

)

 

 

 

164,912

 

 

150,627

 

 

 

(5,175

)

 

 

0

 

 

 

1,630

 

 

 

(3,545

)

Tax effect

 

(29,030

)

 

 

 

 

 

(63,205

)

 

 

(92,235

)

 

 

(24,000

)

 

 

389

 

 

 

(433

)

 

 

(24,044

)

Total other comprehensive income (loss), net of tax

$

52,014

 

$

23,558

 

 

$

93,061

 

 

$

168,633

 

 

$

73,217

 

 

$

(9,109

)

 

$

1,197

 

 

$

65,305

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax change before reclassifications

$

96,612

 

$

3,066

 

 

$

 

 

$

99,678

 

 

$

166,647

 

 

$

3,146

 

 

$

0

 

 

$

169,793

 

Reclassifications out of AOCI

 

(13,222

)

 

 

 

17,520

 

 

4,298

 

 

 

(1,830

)

 

 

0

 

 

 

(307

)

 

 

(2,137

)

Tax effect

 

(31,303

)

 

 

 

 

 

(6,701

)

 

 

(38,004

)

 

 

(38,645

)

 

 

(187

)

 

 

80

 

 

 

(38,752

)

Total other comprehensive income (loss), net of tax

$

52,087

 

$

3,066

 

 

$

10,819

 

 

$

65,972

 

 

$

126,172

 

 

$

2,959

 

 

$

(227

)

 

$

128,904

 

 



26


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

The following table presents the effects of the reclassifications out of AOCI on the respective line items in the condensed consolidated statements of income:

 

Amounts reclassified from AOCI

 

 

 

 

Amounts reclassified from AOCI

 

��

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

Affected line items

(in thousands)

(in thousands)

 

Three Months Ended

September 30,

 

 

 

Nine Months Ended

September 30,

 

 

Affected line items in the condensed

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2017

 

 

 

2016

 

 

 

2017

 

 

 

2016

 

 

consolidated statements of income

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains on
sales of securities

$

928

 

 

$

8,687

 

 

$

14,285

 

 

$

13,707

 

 

Net realized investment (losses) gains

Net other-than-temporary impairment losses

 

 

 

 

 

 

 

 

 

 

(485

)

 

Net realized investment (losses) gains

Unrealized gains (losses) on debt securities:

Unrealized gains (losses) on debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses) on sales of debt securities

Net realized gains (losses) on sales of debt securities

 

$

6,694

 

 

$

2,165

 

 

$

12,749

 

 

$

1,830

 

 

Net realized investment gains

Credit losses recognized on debt securities

Credit losses recognized on debt securities

 

 

(67

)

 

 

0

 

 

 

(7,574

)

 

 

0

 

 

Net realized investment gains

Pretax total

Pretax total

$

928

 

 

$

8,687

 

 

$

14,285

 

 

$

13,222

 

 

 

Pretax total

 

$

6,627

 

 

$

2,165

 

 

$

5,175

 

 

$

1,830

 

 

 

Tax effect

Tax effect

$

(332

)

 

$

(3,261

)

 

$

(5,778

)

 

$

(5,057

)

 

 

Tax effect

 

$

(1,322

)

 

$

(465

)

 

$

(1,278

)

 

$

(429

)

 

 

Pension benefit adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension benefit adjustment (1):

Pension benefit adjustment (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss

Amortization of net actuarial loss

$

(1,958

)

 

$

(7,043

)

 

$

(15,792

)

 

$

(21,153

)

(1

)

Amortization of net actuarial loss

 

$

(1,321

)

 

$

(916

)

 

$

(3,961

)

 

$

(2,746

)

 

Other operating expenses

Amortization of prior service
credit

Amortization of prior service
credit

 

1,045

 

 

 

1,211

 

 

 

3,268

 

 

 

3,633

 

(1

)

Amortization of prior service credit

 

 

777

 

 

 

1,018

 

 

 

2,331

 

 

 

3,053

 

 

Other operating expenses

Settlement costs

 

(152,388

)

 

 

 

 

 

(152,388

)

 

 

 

(1

)

Pretax total

Pretax total

$

(153,301

)

 

$

(5,832

)

 

$

(164,912

)

 

$

(17,520

)

 

 

Pretax total

 

$

(544

)

 

$

102

 

 

$

(1,630

)

 

$

307

 

 

 

Tax effect

Tax effect

$

62,276

 

 

$

2,229

 

 

$

66,702

 

 

$

6,701

 

 

 

Tax effect

 

$

145

 

 

$

(26

)

 

$

433

 

 

$

(80

)

 

 

 

 

(1)

These components of AOCI are included in the computationcomponents of net periodic cost.  See Note 912 Employee Benefit Plans for additional details.


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

 

Note 1317 – Litigation and Regulatory Contingencies

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

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

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

27


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

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

Most of the non-ordinary course lawsuits to which the Company and its subsidiaries are parties challenge practices in the Company’s title insurance business, though a limited number of cases also pertain to the Company’s other businesses.  These lawsuits include, among others, cases alleging, among other assertions, that the Company one of its subsidiaries and/or one of its agents overcharged orsubsidiaries improperly charged fees for products and services, conspired to fix prices, participated in the conveyance of illusory property interests, denied home warranty claims, improperly handled property and casualty claims and gave items of value to brokers and othersbuilders as inducements to refer business in violation of certain laws, such as consumer protection laws and laws generally prohibiting unfair business practices, and certain obligations, including  including:

Antao Properties LLC vs. First American Title Insurance Company, filed on November 6, 2019 and pending in the United States District Court for the Middle District of Florida,

Chavez v. First American Specialty Insurance Company, filed on June 29,

Leonard vs. First American Property & Casualty Insurance Company, filed on October 17, 2019 and pending in the United States District Court for the Western District of Washington,

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

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

These lawsuits are putative class actions for which a class has not been certified; however, the appellate court has remanded the Wilmot action back for certification of a subclass.  For the reasons described above, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss.


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

The Company and/or its subsidiaries are also parties to class action lawsuits as a result of the Stateinformation security incident that occurred during the second quarter of California, County of Los Angeles,

Downing v. First American Title Insurance Company, et al., filed on July 26, 2016 and pending in the United States District Court for the Northern District of Georgia,

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

Lennen v. First American Financial Corporation, et al., filed on May 19, 2016 and pending in the United States District court for the Middle District of Florida,

McCormick v. First American Real Estate Services, Inc., et al., filed on December 31, 2015 and pending in the Superior Court of the State of California, County of Orange,

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

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

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, and

In re First American Home Buyers Protection Corporation, consolidated on October 9, 2014 and pending in the United States District Court for the Southern District of California.

2019.  All of these lawsuits except Kaufman and Sjobring, are putative class actions for which a class has not been certified.  For the reasons described above, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss or, where the Company has been able to make an estimate, the Company believes the amount is not material to the condensed consolidated financial statements as a whole.loss.

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

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

28


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

The Company’s title insurance, property and casualty insurance, home warranty, banking, thrift, trust and investment advisorywealth management businesses are regulated by various federal, state and local governmental agencies.  Many of the Company’s other businesses operate within statutory guidelines.  Consequently, the Company may from time to time be subject to examination or investigation by such governmental agencies.  Currently, governmental agencies are examining or investigating certain of the Company’s operations.  These exams orand investigations include inquiriestwo investigations initiated in connection with the information security incident that occurred during the second quarter of 2019, one being conducted by the Securities and Exchange Commission (“SEC”) enforcement staff and the other by the New York Department of Financial Services. The SEC enforcement staff is questioning the adequacy of disclosures the Company made at the time of the incident and the adequacy of its disclosure controls.  In September 2020, the Company received a Wells Notice informing the Company that the enforcement staff has made a preliminary determination to recommend a filing of an enforcement action by the SEC against the Company.   The Company believes that its disclosures and disclosure controls complied with the securities laws and has availed itself of the opportunity to provide a response to convince the SEC that an enforcement action is inappropriate under the circumstances. The New York Department of Financial Services has alleged violations of its cyber security requirements for financial services companies and has filed a statement of charges and scheduled an administrative hearing in connection therewith.  These exams and investigations also include an inquiry by the New York Attorney General and the Massachusetts Attorney General into among other matters, pricing and rate settingcompetitive practices in the title insurance industry, competition in the title insurance industry, real estate settlement service, customer acquisition and retention practices and agency relationships.industry.  With respect to matters where the Company has determined that a loss is both probable and reasonably estimable, the Company has recordedrecords a liability representing its best estimate of the financial exposure based on known facts.  While the ultimate disposition of each such exam or investigation is not yet determinable, the Company does not believe that individually or in the aggregate they will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.  TheseSome of these exams or investigations could, however, result in changes to the Company’s business practices which could ultimately have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

The Company’s Canadian operations provide certain services to lenders which it believes to be exempt from excise tax under applicable Canadian tax laws.  However, in October 2014, the Canadian taxing authority provided internal guidance that the services in question should be subject to the excise tax.  While discussions with the taxing authority are ongoing,During July 2019, the Company believesreceived an assessment from the Canadian taxing authority.  The amount of the assessment is $14.9 million, which is based on the exchange rate as of, and includes interest charges through, September 30, 2020.  As the Company does not believe that the guidance may resultservices in an assessment.  The amount, if any, of such assessment is not currently known, and any such assessment would bequestion are subject to negotiation.  In the event that the Company disagrees with the ultimate assessment, the Companyexcise tax, it intends to avail itself of avenues of appeal.  While the Companyappeal, and it believes it is reasonably likely that the Company wouldwill prevail on the merits,merits.  Accordingly, the Company filed a loss associatednotice of appeal with the matter is possible.  In light ofCanadian taxing authority in March 2020.  Based on the foregoing, the Company is not currently able to reasonably estimate a loss or range of loss associated with the matter.  While such a loss could be material to the Company’s operating results in any particular period if an unfavorable outcome results,current facts and circumstances, the Company does not believe that this matter will have a material adverse effect on the Company’s overall financial condition or liquidity.  loss is probable, therefore no liability has been recorded.

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


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

 

Note 1418 – Business Combinations

During the three and nine months ended September 30, 2017,2020, the Company completed acquisitions for an aggregate purchase price of $87.3$391.9 million, which were funded through cash on hand and $91.1additional borrowings of $120.0 million respectively. Theunder the Company’s credit facility.  For acquisitions in which the Company has recordednot completed its purchase price allocation, preliminary fair value estimates for the assets acquired and liabilities assumed which are subject to change pending completion of the Company’s purchase price allocation.have been recorded.  The Company allocates the purchase price of each acquisition to the assets acquired and liabilities assumed using a variety of valuation techniques, including discounted cash flow analysis.  These acquisitions have been included in the Company’s title insurance and services segment.

DuringCurrent year acquisitions included the threepurchase of a company that provides document, eClose and nine months ended September 30, 2016,fulfillment technology for the Company completed acquisitionsmortgage industry on March 2, 2020 for an aggregatea purchase price of $56.9$350.0 million.  In connection with the purchase, the Company recorded goodwill, property and equipment and other intangible assets of $201.9 million, $19.0 million and $75.5$121.0 million, respectively. These acquisitions have been included in the Company’s title insurance and services segment.

29


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

 

Note 1519 – Segment Information

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

The Company’s title insurance and services segment issues title insurance policies on residential and commercial property in the United States and offers similar or related products and services internationally. This segment also provides closing and/or escrow services; accommodates tax-deferred exchanges of real estate; provides products, services and solutions involving the use of real property related data designed to mitigate risk or otherwise facilitate real estate transactions; maintains, manages and provides access to title plant records and images; provides evidence of title; and provides banking, trust, document custodial and investment advisory services. The Company, through its principal title insurance subsidiary and such subsidiary’s affiliates, transacts its title insurance business through a network of direct operations and agents. Through this network, the Company issues policies in the 49 states that permit the issuance of title insurance policies and the District of Columbia. The Company also offers title insurance and other insurance and guarantee products, as well as related settlement services in foreign countries, including Canada, the United Kingdom, Australia, South Korea and various other established and emerging markets.

The Company’s title insurance and services segment issues title insurance policies on residential and commercial property in the United States and offers similar or related products and services internationally.  This segment also provides closing and/or escrow services; accommodates tax-deferred exchanges of real estate; provides products, services and solutions designed to mitigate risk or otherwise facilitate real estate transactions, many of which products, services and solutions involve the use of real property-related data; maintains, manages and provides access to title plant data and records; provides document generation and delivery services; and provides appraisals and other valuation-related products and services, lien release and document custodial services, warehouse lending services, default-related products and services, evidence of title, and banking, trust and wealth management services.  The Company, through its principal title insurance subsidiary and such subsidiary’s affiliates, transacts its title insurance business through a network of direct operations and agents.  Through this network, the Company issues policies in the 49 states that permit the issuance of title insurance policies, the District of Columbia and certain United States territories.  The Company also offers title insurance, closing services and similar or related products and services, either directly or through third parties in other countries, including Canada, the United Kingdom, Australia, South Korea and various other established and emerging markets.

The Company’s specialty insurance segment issues property and casualty insurance policies and sells home warranty products. The property and casualty insurance business provides insurance coverage to residential homeowners and renters for liability losses and typical hazards such as fire, theft, vandalism and other types of property damage. This business is licensed to issue policies in all 50 states and the District of Columbia and actively issues policies in 47 states. The majority of policy liability is in the western United States, including approximately 65% in California.  In certain markets it also offers preferred risk auto insurance to better compete with other carriers offering bundled home and auto insurance. The home warranty business provides residential service contracts that cover residential systems, such as heating and air conditioning systems, and certain appliances against failures that occur as the result of normal usage during the coverage period. This business currently operates in 39 states and the District of Columbia.

The Company’s specialty insurance segment issues property and casualty insurance policies and sells home warranty products.  The property and casualty insurance business provides insurance coverage to residential homeowners and renters for liability losses and typical hazards such as fire, theft, vandalism and other types of property damage.  This business is licensed to issue policies in all 50 states and the District of Columbia and actively issues policies in 46 states.  The majority of policy liability is in the western United States, including approximately 59% in California.  In certain markets it also offers preferred risk auto insurance to better compete with other carriers offering bundled home and auto insurance.  The home warranty business provides residential service contracts that cover residential systems, such as heating and air conditioning systems, and certain appliances against failures that occur as the result of normal usage during the coverage period.  This business currently operates in 35 states and the District of Columbia.

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


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)

(unaudited)

Selected financial information about the Company’s operations, by segment, is as follows:

For the three months ended September 30, 2017:2020:

 

(in thousands)

Revenues

 

 

Income (loss)
before
income taxes

 

 

Depreciation
and
amortization

 

 

Capital
expenditures

 

 

Revenues

 

 

Income (loss)

before

income taxes

 

 

Depreciation

and

amortization

 

 

Capital

expenditures

 

Title Insurance and Services

$

1,397,262

  

 

$

181,199

 

 

$

34,363

 

 

$

33,750

 

 

$

1,771,993

 

 

$

337,480

 

 

$

36,194

 

 

$

33,034

 

Specialty Insurance

 

118,481

  

 

 

6,178

 

 

 

1,599

 

 

 

2,015

 

 

 

136,332

 

 

 

(72,129

)

 

 

1,995

 

 

 

2,114

 

Corporate

 

4,108

 

 

 

(169,415

)

 

 

38

 

 

 

 

 

 

6,055

 

 

 

(21,980

)

 

 

38

 

 

 

0

 

Eliminations

 

(283

)

 

 

 

 

 

 

 

 

 

 

 

(659

)

 

 

0

 

 

 

0

 

 

 

0

 

$

1,519,568

  

 

$

17,962

 

 

$

36,000

 

 

$

35,765

 

 

$

1,913,721

 

 

$

243,371

 

 

$

38,227

 

 

$

35,148

 

(in thousands)

 

Direct

premiums

and escrow

fees

 

 

Agent

premiums

 

 

Information

and other

 

 

Net

investment

income

 

 

Net realized

investment

gains (losses)

 

 

Total

Revenues

 

Title Insurance and Services

 

$

680,910

 

 

$

722,434

 

 

$

282,671

 

 

$

44,726

 

 

$

41,252

 

 

$

1,771,993

 

Specialty Insurance

 

 

127,037

 

 

 

0

 

 

 

3,450

 

 

 

2,105

 

 

 

3,740

 

 

 

136,332

 

 

 

$

807,947

 

 

$

722,434

 

 

$

286,121

 

 

$

46,831

 

 

$

44,992

 

 

$

1,908,325

 

For the three months ended September 30, 2016:2019:

(in thousands)

 

Revenues

 

 

Income (loss)

before

income taxes

 

 

Depreciation

and

amortization

 

 

Capital

expenditures

 

Title Insurance and Services

 

$

1,540,741

 

 

$

253,570

 

 

$

29,822

 

 

$

22,869

 

Specialty Insurance

 

 

129,190

 

 

 

11,021

 

 

 

1,859

 

 

 

2,015

 

Corporate

 

 

1,770

 

 

 

(19,253

)

 

 

38

 

 

 

0

 

Eliminations

 

 

(505

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

$

1,671,196

 

 

$

245,338

 

 

$

31,719

 

 

$

24,884

 

(in thousands)

 

Direct

premiums

and escrow

fees

 

 

Agent

premiums

 

 

Information

and other

 

 

Net

investment

income

 

 

Net realized

investment

gains (losses)

 

 

Total

Revenues

 

Title Insurance and Services

 

$

606,812

 

 

$

656,154

��

 

$

205,282

 

 

$

72,044

 

 

$

449

 

 

$

1,540,741

 

Specialty Insurance

 

 

121,798

 

 

 

0

 

 

 

3,270

 

 

 

3,064

 

 

 

1,058

 

 

 

129,190

 

 

 

$

728,610

 

 

$

656,154

 

 

$

208,552

 

 

$

75,108

 

 

$

1,507

 

 

$

1,669,931

 

For the nine months ended September 30, 2020:

 

(in thousands)

Revenues

 

 

Income (loss)
before
income taxes

 

 

Depreciation
and
amortization

 

 

Capital
expenditures

 

 

Revenues

 

 

Income (loss)

before

income taxes

 

 

Depreciation

and

amortization

 

 

Capital

expenditures

 

Title Insurance and Services

$

1,395,727

  

 

$

188,706

 

 

$

22,994

 

 

$

41,948

 

 

$

4,535,558

 

 

$

648,261

 

 

$

104,705

 

 

$

86,456

 

Specialty Insurance

 

109,782

  

 

 

1,781

 

 

 

1,401

 

 

 

844

 

 

 

391,818

 

 

 

(51,954

)

 

 

5,832

 

 

 

8,015

 

Corporate

 

2,855

 

 

 

(23,556

)

 

 

96

 

 

 

 

 

 

9,260

 

 

 

(55,317

)

 

 

115

 

 

 

0

 

Eliminations

 

(20

)

 

 

 

 

 

 

 

 

 

 

 

(1,243

)

 

 

0

 

 

 

0

 

 

 

0

 

$

1,508,344

  

 

$

166,931

 

 

$

24,491

 

 

$

42,792

 

 

$

4,935,393

 

 

$

540,990

 

 

$

110,652

 

 

$

94,471

 


 

30


FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

 

(in thousands)

 

Direct

premiums

and escrow

fees

 

 

Agent

premiums

 

 

Information

and other

 

 

Net

investment

income

 

 

Net realized

investment

gains (losses)

 

 

Total

Revenues

 

Title Insurance and Services

 

$

1,712,946

 

 

$

1,920,011

 

 

$

719,196

 

 

$

147,628

 

 

$

35,777

 

 

$

4,535,558

 

Specialty Insurance

 

 

367,622

 

 

 

0

 

 

 

9,992

 

 

 

7,005

 

 

 

7,199

 

 

 

391,818

 

 

 

$

2,080,568

 

 

$

1,920,011

 

 

$

729,188

 

 

$

154,633

 

 

$

42,976

 

 

$

4,927,376

 

For the nine months ended September 30, 2017:2019:

 

(in thousands)

Revenues

 

 

Income (loss)
before
income taxes

 

 

Depreciation
and
amortization

 

  

Capital
expenditures

 

 

Revenues

 

 

Income (loss)

before

income taxes

 

 

Depreciation

and

amortization

 

 

Capital

expenditures

 

Title Insurance and Services

$

3,937,119

  

 

$

476,746

 

 

$

91,471

 

 

$

100,059

  

 

$

4,084,795

 

 

$

628,392

 

 

$

92,043

 

 

$

71,839

 

Specialty Insurance

 

343,908

  

 

 

25,779

 

 

 

4,697

 

 

 

5,797

  

 

 

374,340

 

 

 

44,546

 

 

 

5,379

 

 

 

7,187

 

Corporate

 

10,872

 

 

 

(216,529

)

 

 

124

 

 

 

 

 

 

15,456

 

 

 

(56,433

)

 

 

115

 

 

 

0

 

Eliminations

 

(859

)

 

 

 

 

 

 

 

 

 

 

 

(1,194

)

 

 

0

 

 

 

0

 

 

 

0

 

$

4,291,040

  

 

$

285,996

 

 

$

96,292

 

 

$

105,856

  

 

$

4,473,397

 

 

$

616,505

 

 

$

97,537

 

 

$

79,026

 

For the nine months ended September 30, 2016:

 

(in thousands)

Revenues

 

 

Income (loss)
before
income taxes

 

 

Depreciation
and
amortization

 

 

Capital
expenditures

 

 

Direct

premiums

and escrow

fees

 

 

Agent

premiums

 

 

Information

and other

 

 

Net

investment

income

 

 

Net realized

investment

gains (losses)

 

 

Total

Revenues

 

Title Insurance and Services

$

3,750,118

  

 

$

448,815

 

 

$

66,510

 

 

$

99,887

 

 

$

1,561,926

 

 

$

1,701,538

 

 

$

573,150

 

 

$

213,067

 

 

$

35,114

 

 

$

4,084,795

 

Specialty Insurance

 

317,246

 

 

 

18,744

 

 

 

4,107

 

 

 

3,928

 

 

 

348,904

 

 

 

0

 

 

 

9,490

 

 

 

8,496

 

 

 

7,450

 

 

 

374,340

 

Corporate

 

4,265

 

 

 

(71,429

)

 

 

288

 

 

 

 

Eliminations

 

(40

)

 

 

 

 

 

 

 

 

 

$

4,071,589

  

 

$

396,130

 

 

$

70,905

 

 

$

103,815

 

 

$

1,910,830

 

 

$

1,701,538

 

 

$

582,640

 

 

$

221,563

 

 

$

42,564

 

 

$

4,459,135

 

 

 

 


ItemItem 2.

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

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.  THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS AND MAY CONTAIN THE WORDS “BELIEVE,” “ANTICIPATE,” “EXPECT,” “INTEND,” “PLAN,” “PREDICT,” ���ESTIMATE,“ESTIMATE,” “PROJECT,” “WILL BE,” “WILL CONTINUE,” “WILL LIKELY RESULT,” OR OTHER SIMILAR WORDS AND PHRASES OR FUTURE OR CONDITIONAL VERBS SUCH AS “WILL,” “MAY,” “MIGHT,” “SHOULD,” “WOULD,” OR “COULD.” THESE FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS REGARDING FUTURE OPERATIONS, PERFORMANCE, FINANCIAL CONDITION, PROSPECTS, PLANS AND STRATEGIES.  THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS THAT MAY PROVE TO BE INCORRECT.

RISKS AND UNCERTAINTIES EXIST THAT MAY CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS.  FACTORS THAT COULD CAUSE THE ANTICIPATED RESULTS TO DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDE THE FACTORS SET FORTH ON PAGES 3-4 OF THIS QUARTERLY REPORT.  THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE THEY ARE MADE.  THE COMPANY DOES NOT UNDERTAKE TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT CIRCUMSTANCES OR EVENTS THAT OCCUR AFTER THE DATE THE FORWARD-LOOKING STATEMENTS ARE MADE.

This Management’s Discussion and Analysis contains certainthe financial measuresmeasure adjusted debt to capitalization ratio that areis not presented in accordance with U.S. generally accepted accounting principles (“GAAP”), including adjusted information and other revenues, adjusted personnel costs and adjusted other operating expenses, in each case excludingas it excludes the effectseffect of recent acquisitions.secured financings payable.  The Company is presenting thesethis non-GAAP financial measuresmeasure because they provideit provides the Company’s management and readers of this Quarterly Report on Form 10-Q with additional insight into the operational performancefinancial leverage of the Company relative to earlier periods.Company.  The Company does not intend for thesethis non-GAAP financial measuresmeasure to be a substitute for any GAAP financial information.  In this Quarterly Report on Form 10-Q, thesethis non-GAAP financial measures havemeasure has been presented with, and reconciled to, the most directly comparable GAAP financial measures.measure.  Readers of this Quarterly Report on Form 10-Q should use thesethis non-GAAP financial measuresmeasure only in conjunction with the comparable GAAP financial measures.measure.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to the Company’s critical accounting estimates since the filing of its Annual Report on Form 10-K for the year ended December 31, 2016. A summary of the Company’s significant accounting policies that it considers to be the most dependent on the application of estimates and assumptions can be found in the Management’s Discussion and Analysis section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.  Changes in 2020 to the Company’s significant accounting policies, which are dependent upon estimates and assumptions, include the adoption of new accounting guidance for the recognition of credit losses. For discussion of the new guidance and the related changes to the Company’s accounting policy, see Recently Adopted Accounting Pronouncements, Note 4 Debt and Equity Securities and Note 5 Credit Losses – Financial Assets and Off-Balance Sheet Credit Exposures to the condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In October 2016,August 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance intended to amendreduce potential diversity in practice in accounting for the consolidation guidance on how a reporting entity that is the single decision makercosts of a variable interest entity should treat indirect interests in the entity held through related partiesimplementing cloud computing arrangements (i.e., hosting arrangements) that are under common controlservice contracts.  The updated guidance aligns the requirements for capitalizing implementation costs for these arrangements with the reporting entity when determining whether it is the primary beneficiary ofrequirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that variable interest entity.include an internal-use software license.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016.2019.  The adoption of this guidance, had noeffective January 1, 2020, did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2016,August 2018, the FASB issued updated guidance as part of its disclosure framework project intended to simplifyimprove the effectiveness of disclosures in the notes to the financial statements.  The updated guidance eliminates, adds and improve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of such awards as either equity or liabilities and classification on the statement of cash flows.modifies certain disclosure requirements related to fair value measurements. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016.  While the2019.  The adoption of this guidance, did have an impact on the Company’s effective income tax rate for 2017, itJanuary 1, 2020, did not have a material impact on the Company’s condensed consolidated financial statements.  See Note 7 Income Taxes to the condensed consolidated financial statements for further discussion of the Company’s effective income tax rates. Beginning in 2017, excess tax benefits from share-based compensation are presented in the condensed consolidated statements of cash flows in cash flows from operating activities within net change in income tax accounts.


In March 2016, the FASB issued updated guidance intended to simplify the accounting treatment for investments that become qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016.  The adoption of this guidance had no impact on the Company’s condensed consolidated financial statements.

Pending Accounting Pronouncements

In May 2017, the FASB issued updated guidance intended to reduce diversity in practice by clarifying which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased callable debt securities held at a premium to shorten the amortization period for the premium to the earliest call date.  The updated guidance is intended to more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities, and is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In March 2017, the FASB issued updated guidance intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost through the disaggregation of the service cost component from the other components of net benefit cost.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In January 2017, the FASB issued updated guidance intended to simplify how an entity tests goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Under the updated guidance, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized limited to the total amount of goodwill allocated to that reporting unit.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.2019.  The Company does not expect the adoption of this guidance, toeffective January 1, 2020, did not have a material impact on itsthe Company’s condensed consolidated financial statements.

In January 2017, the FASB issued updated guidance to clarify the definition of a business with the objective of providing guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In November 2016, the FASB issued updated guidance intended to reduce the diversity in practice on presenting restricted cash or restricted cash equivalents in the statement of cash flows.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In October 2016, the FASB issued updated guidance intended to simplify and improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory.  The updated guidance, which eliminates the intra-entity transfers exception, requires entities to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, when the transfers occur.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In August 2016, the FASB issued updated guidance intended to eliminate the diversity in practice regarding the presentation and classification of certain cash receipts and cash payments in the statement of cash flows.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated statements of cash flows.


In June 2016, the FASB issued updated guidance intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  The updated guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires the consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early2019.  The adoption permitted.  The Company is currently assessing the impact of the newthis guidance on itsa modified-retrospective basis, effective January 1, 2020, did not have a material impact, except for the disclosure requirements, on the Company’s condensed consolidated financial statements.  See Note 4 Debt and Equity Securities and Note 5 Credit Losses – Financial Assets and Off-Balance Sheet Credit Exposures to the condensed consolidated financial statements for further information on the Company’s credit losses.

Pending Accounting Pronouncements

In February 2016,December 2019, the FASB issued updated guidance that requiresintended to simplify and improve the rights and obligations associated with leasing arrangements be reflected on the balance sheet in order to increase transparency and comparability among organizations.  Under theaccounting for income taxes.  The updated guidance lessees will be required to recognize a right-of-use asseteliminates certain exceptions and a liability to make lease paymentsclarifies and disclose key information about leasing arrangements.amends certain areas of the guidance.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018,2020, with early adoption permitted.  While the Company is currently evaluating the impact the new guidance will have on its condensed consolidated financial statements, the Company expects the adoption of the new guidance will result in a material increase in the assets and liabilities on its condensed consolidated balance sheets and will likely have an insignificant impact on its condensed consolidated statements of income and statements of cash flows.

In January 2016, the FASB issued updated guidance intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  In addition to making other targeted improvements to current guidance, the updated guidance also requires all equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in the fair value recognized through net income.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted in certain circumstances.  While the Company expects the adoption of this guidance to impact its condensed consolidated statements of income, the materiality of the impact will depend upon the size of, and level of volatility experienced within, the Company’s equity portfolio.

In May 2014, the FASB issued updated guidance for recognizing revenue from contracts with customers to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within and across industries, and across capital markets.  The new revenue standard contains principles that an entity will apply to determine the measurement of revenue and the timing of recognition.  The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.  Revenue from insurance contracts is not within the scope of this guidance.  In August 2015, the FASB issued updated guidance which defers the effective date of this guidance by one year.  In 2016, the FASB issued additional updates to the new guidance primarily to clarify, among other things, the implementation guidance related to principal versus agent considerations, identifying performance obligations, accounting for licenses of intellectual property, and to provide narrow-scope improvements and additional practical expedients.  In February 2017, the FASB issued an additional update to the new guidance to clarify the scope of derecognition guidance for nonfinancial assets and to provide guidance for partial sales of nonfinancial assets.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption prohibited. The Company expects to adopt the new guidance under the modified retrospective approach and, except for certain disclosure requirements, does not expect the newadoption of this guidance to have a material impact on its condensed consolidated financial statements.



Results of Operations

Summary of Third Quarter

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

The Company’s total revenues increased $242.5 million, or 14.5%, in the third quarter of 2020 when compared with the third quarter of 2019.  This increase was primarily attributable to an increase in direct premiums and escrow fees of $79.3 million, or 10.9%, an increase in information and other services revenue of $77.6 million, or 37.2%, and an increase in agent premiums of $66.3 million, or 10.1%.  Direct premiums and escrow fees in the title insurance and services segment increased $74.1 million, or 12.2%.  Direct premiums and escrow fees from domestic residential refinance and purchase transactions increased $85.6 million, or 91.9%, and $52.3 million, or 19.7%, respectively, while direct premiums and escrow fees from domestic commercial transactions decreased $57.1 million, or 28.6%, in the third quarter of 2020 when compared with the third quarter of 2019.

According to the Mortgage Bankers Association’s October 24, 201721, 2020 Mortgage Finance Forecast (the “MBA Forecast”), residential mortgage originations in the United States (based on the total dollar value of the transactions) decreased 16.0%increased 25.7% in the third quarter of 20172020 when compared with the third quarter of 2016.2019.  According to the MBA Forecast, the dollar amount of purchase originations increased 7.4%4.9% and refinance originations decreased 42.6%increased 56.3%.  This volume of domestic residential mortgage origination activity contributed to a 9.9% increaseincreases in direct premiums and escrow fees for the Company’s direct title operations of 19.7% from domestic residential purchase transactions and a 40.4% decrease in direct premiums and escrow fees91.9% from domestic residential refinance transactions in the third quarter of 20172020 when compared towith the third quarter of 2016.2019.

During the third quarter of 2017,2020, the level of domestic title orders opened per day by the Company’s direct title operations decreased by 22.5%increased 29.4% when compared with the third quarter of 2016.2019.  Residential refinance openand purchase opened orders per day increased 64.1% and 14.1%, respectively, while commercial opened orders per day decreased by 46.4%, while purchase and commercial open orders per day increased by 2.2% and 0.5%, respectively.  The sharp decline in residential refinance orders opened per day was attributable to higher mortgage interest rates in the third quarter of 20177.0% when compared to the third quarter of 2016.2019.

In 2016, the Company terminated its funded defined benefit pension plans.  In July 2017, the Company completed the transfer of all remaining benefit obligations related to the pension plans to a highly rated insurance company and recognized $152.4 million of pension expense in personnel costs in the corporate segment in the third quarter of 2017.2020, the Company committed to a plan to sell its property and casualty insurance business, which is expected to be completed within one year.  As a result of this decision, the Company remeasured the assets and liabilities of its property and casualty insurance business at estimated fair value, less costs to sell, and recorded pretax impairment losses to goodwill, other intangible assets, property and equipment and other assets totaling $73.3 million for the three and nine months ended September 30, 2020.  The Company estimates an annual reduction of approximately $22 millionimpairment losses are included in personnel costs related to the pension plans within the corporate segment, basedimpairments on assets held for sale on the levelcondensed consolidated statements of these expenses forincome and in the year ended December 31, 2016.  For further discussionoperating results of the pension termination seespecialty insurance segment.  See Note 9 Employee Benefit Plans2 Disposition of the Property and Casualty Insurance Business to the condensed consolidated financial statements.statements for further information on the sale of the business.

During the third quarter of 2017 and in October 2017, hurricanes and wildfires impacted many regions across the country.  The Company does not expect these eventsis increasingly utilizing innovative technologies, processes and techniques to ultimately havespeed the delivery of its products, increase efficiency, improve quality, improve the customer experience and decrease risk.  These efforts include streamlining the closing process by converting certain manual processes into automated ones, in an endeavor to improve the customer experience by simplifying and reducing the time it takes to close a transaction, reducing risk and improving communication.  The Company increasingly is employing advanced technologies to automate various processes, including various processes related to the building, maintaining and updating of title plants and other data assets, as well as the search and examination of information in connection with the issuance of title insurance policies.  As a result of the reduction in interest rates in connection with the coronavirus pandemic, the Company has experienced a significant impact to its condensed consolidated financial statements.  Whileincrease in refinance orders.  To facilitate the processing of these orders, the Company doeshas expanded the use of certain of these advanced technologies.  While many of these initiatives are also designed to decrease risk, they present risks of their own.  The degree to which these innovative efforts will be successful, and their ultimate impact on the Company’s results of operations, is uncertain.


In addition to the Company’s innovative activities, other participants in the real estate industry are seeking to innovate in ways that could impact the Company’s businesses.  These participants include certain of the Company’s sources of business, competitors and ultimate customers.  Innovations by these participants may change the demand for the Company’s products and services, the manner in which the Company’s products and services are ordered or fulfilled and the revenue or profitability derived from the products and services.  The Company has made and will likely continue to make high-risk, illiquid investments in some of these participants, typically during their early- and growth-stages.  If any of these companies do not expect a significant impact to its financial results,succeed, the Company expects the wildfires in Californiacould lose and/or be required to negatively impactimpair all or part of its property and casualty business in its specialty insurance segmentinvestment in the fourth quarterunsuccessful company.  The risk of 2017.failure or impairment for these investments is greater in the current economic environment.  These investments could also facilitate efforts that ultimately disrupt the Company’s business or enable competitors.  Accordingly, the Company’s efforts to anticipate and participate in these transformations could require significant additional investment and management attention and may not succeed, resulting in a reduction in market share, reduced profitability and/or a loss of invested funds. The Company expects losses fromultimate degree to which these fires to continue to develop and expects to reach its reinsurance retention limitother innovations in the real estate industry will impact the Company’s business and results of $5.0 million.operations is uncertain.

In addition,Additionally, the Company continues to monitor developments in its regulatory environment.  Currently, federalFederal officials are discussing various potential changes to laws and regulations that could impact the Company’s businesses, including changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the reform or privatization of government-sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and tax reform, including changes that could affect the mortgage interest deduction, state and local tax deductions and the availability of tax-deferred property exchanges,data privacy regulations, among others.  Changes in these areas, and more generally in the regulatory environment in which the Company and its customers operate, could impact the volume of mortgage originations in the United States and the Company’s competitive position and results of operations. At this time,

Coronavirus Pandemic Update

The coronavirus pandemic and responses to it have created significant volatility, uncertainty and economic disruption. The extent to which the naturecoronavirus pandemic impacts the Company’s business, operations and financial results will depend on numerous factors that the Company may not be able to accurately predict, including: the duration and scope of the pandemic and restrictions and responses to it; governmental, business and individual actions that have been and continue to be taken in response to the pandemic; the ongoing impact of any future changesthe pandemic on economic activity and actions taken in response, including the efficacy of governmental relief efforts; the effect on participants in real estate transactions and the demand for the Company’s products and services, including as a result of higher unemployment, business closures and economic uncertainty; and the Company’s ability to sell and provide its services and solutions, including as a result of illness, travel restrictions, people working from home, governmental closure orders and partial or full closures of business and government offices.

In response to the pandemic, early on, the Company activated its business continuity plan, which enabled most employees to work from home.  Currently, the vast majority of the Company’s global workforce is unknown.working remotely, and the Company believes it is likely to remain this way through the end of the year.

The Company’s residential purchase business experienced a consistent recovery since the trough in April when purchase orders opened by the Company’s direct title operations were down 38.2% compared to April 2019.  The Company’s pipeline is strong heading into the fourth quarter, as purchase orders opened were up 14.1% in the third quarter of 2020 when compared to the third quarter of 2019, and this trend has continued into October.


Low rates continue to support elevated residential refinance orders opened by the Company’s direct title operations, which averaged 3,200 per day in the third quarter of 2020.  For the first three weeks of October, refinance orders opened averaged 2,800 orders per day.  The Company believes the refinance market will remain elevated for the remainder of the year.

In the Company’s commercial business, revenue in the third quarter of 2020 declined 28.6% when compared to the third quarter of 2019, improving from the 39.3% decline in the second quarter of 2020 when compared to the second quarter of 2019.  The overall commercial market continues its recovery with improvement varying by asset class.  While the Company’s commercial pipeline is improving, the Company does not expect commercial revenue for the fourth quarter of 2020 to equal the level of commercial revenue from the fourth quarter of 2019.


Title Insurance and Services

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands, except percentages)

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

(in thousands, except percentages)

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums and escrow fees

$

538,063

  

 

$

544,427

  

 

$

(6,364

)

 

 

(1.2

)% 

 

$

1,492,258

  

 

$

1,471,338

  

 

$

20,920

 

 

 

1.4

Direct premiums and escrow fees

 

$

680,910

 

 

$

606,812

 

 

$

74,098

 

 

 

12.2

%

 

$

1,712,946

 

 

$

1,561,926

 

 

$

151,020

 

 

 

9.7

%

Agent premiums

 

629,186

  

 

 

625,953

  

 

 

3,233

 

 

 

0.5

 

 

 

1,757,796

  

 

 

1,653,990

  

 

 

103,806

 

 

 

6.3

 

Agent premiums

 

 

722,434

 

 

 

656,154

 

 

 

66,280

 

 

 

10.1

 

 

 

1,920,011

 

 

 

1,701,538

 

 

 

218,473

 

 

 

12.8

 

Information and other

 

199,271

  

 

 

187,979

  

 

 

11,292

 

 

 

6.0

 

 

 

578,549

  

 

 

524,199

  

 

 

54,350

 

 

 

10.4

 

Information and other

 

 

282,671

 

 

 

205,282

 

 

 

77,389

 

 

 

37.7

 

 

 

719,196

 

 

 

573,150

 

 

 

146,046

 

 

 

25.5

 

Net investment income

 

37,901

  

 

 

28,986

  

 

 

8,915

 

 

 

30.8

 

 

 

99,181

  

 

 

81,389

  

 

 

17,792

 

 

 

21.9

 

Net investment income

 

 

44,726

 

 

 

72,044

 

 

 

(27,318

)

 

 

(37.9

)

 

 

147,628

 

 

 

213,067

 

 

 

(65,439

)

 

 

(30.7

)

Net realized investment (losses) gains

 

(7,159

)

 

 

8,382

  

 

 

(15,541

)

 

 

(185.4

)

 

 

9,335

  

 

 

19,202

  

 

 

(9,867

)

 

 

(51.4

)

Net realized investment gains

Net realized investment gains

 

 

41,252

 

 

 

449

 

 

 

40,803

 

 

 

NM

1

 

 

35,777

 

 

 

35,114

 

 

 

663

 

 

 

1.9

 

 

1,397,262

  

 

 

1,395,727

  

 

 

1,535

 

 

 

0.1

 

 

 

3,937,119

  

 

 

3,750,118

  

 

 

187,001

 

 

 

5.0

 

 

 

1,771,993

 

 

 

1,540,741

 

 

 

231,252

 

 

 

15.0

 

 

 

4,535,558

 

 

 

4,084,795

 

 

 

450,763

 

 

 

11.0

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

421,849

  

 

 

409,345

  

 

 

12,504

 

 

 

3.1

 

 

 

1,222,277

  

 

 

1,154,225

  

 

 

68,052

 

 

 

5.9

 

Personnel costs

 

 

481,417

 

 

 

447,795

 

 

 

33,622

 

 

 

7.5

 

 

 

1,320,097

 

 

 

1,251,590

 

 

 

68,507

 

 

 

5.5

 

Premiums retained by agents

 

497,911

  

 

 

495,130

  

 

 

2,781

 

 

 

0.6

 

 

 

1,387,608

  

 

 

1,303,838

  

 

 

83,770

 

 

 

6.4

 

Premiums retained by agents

 

 

572,780

 

 

 

518,824

 

 

 

53,956

 

 

 

10.4

 

 

 

1,520,559

 

 

 

1,344,517

 

 

 

 

176,042

 

 

 

13.1

 

Other operating expenses

 

196,455

  

 

 

198,147

  

 

 

(1,692

)

 

 

(0.9

)

 

 

579,431

  

 

 

559,141

  

 

 

20,290

 

 

 

3.6

 

Other operating expenses

 

 

251,304

 

 

 

218,687

 

 

 

32,617

 

 

 

14.9

 

 

 

700,090

 

 

 

581,455

 

 

 

118,635

 

 

 

20.4

 

Provision for policy losses and other claims

 

46,689

  

 

 

64,352

  

 

 

(17,663

)

 

 

(27.4

)

 

 

130,037

  

 

 

171,994

  

 

 

(41,957

)

 

 

(24.4

)

Provision for policy losses and other claims

 

 

70,167

 

 

 

50,519

 

 

 

19,648

 

 

 

38.9

 

 

 

181,648

 

 

 

130,539

 

 

 

51,109

 

 

 

39.2

 

Depreciation and amortization

 

34,363

  

 

 

22,994

  

 

 

11,369

 

 

 

49.4

 

 

 

91,471

  

 

 

66,510

  

 

 

24,961

 

 

 

37.5

 

Depreciation and amortization

 

 

36,194

 

 

 

29,822

 

 

 

6,372

 

 

 

21.4

 

 

 

104,705

 

 

 

92,043

 

 

 

12,662

 

 

 

13.8

 

Premium taxes

 

17,871

  

 

 

16,301

  

 

 

1,570

 

 

 

9.6

 

 

 

46,973

  

 

 

43,488

  

 

 

3,485

 

 

 

8.0

 

Premium taxes

 

 

17,522

 

 

 

17,310

 

 

 

212

 

 

 

1.2

 

 

 

47,360

 

 

 

44,988

 

 

 

2,372

 

 

 

5.3

 

Interest

 

925

  

 

 

752

  

 

 

173

 

 

 

23.0

 

 

 

2,576

  

 

 

2,107

  

 

 

469

 

 

 

22.3

 

Interest

 

 

5,129

 

 

 

4,214

 

 

 

915

 

 

 

21.7

 

 

 

12,838

 

 

 

11,271

 

 

 

1,567

 

 

 

13.9

 

 

1,216,063

  

 

 

1,207,021

  

 

 

9,042

 

 

 

0.7

 

 

 

3,460,373

  

 

 

3,301,303

  

 

 

159,070

 

 

 

4.8

 

 

 

1,434,513

 

 

 

1,287,171

 

 

 

147,342

 

 

 

11.4

 

 

 

3,887,297

 

 

 

3,456,403

 

 

 

430,894

 

 

 

12.5

 

Income before income taxes

$

181,199

  

 

$

188,706

  

 

$

(7,507

)

 

 

(4.0

)% 

 

$

476,746

 

 

$

448,815

  

 

$

27,931

 

 

 

6.2

Income before income taxes

 

$

337,480

 

 

$

253,570

 

 

$

83,910

 

 

 

33.1

%

 

$

648,261

 

 

$

628,392

 

 

$

19,869

 

 

 

3.2

%

Margins

 

13.0

 

 

13.5

 

 

(0.5

)% 

 

 

(3.7

)% 

 

 

12.1

 

 

12.0

 

 

0.1

 

 

0.8

Pretax margins

Pretax margins

 

 

19.0

%

 

 

16.5

%

 

 

2.5

%

 

 

15.2

%

 

 

14.3

%

 

 

15.4

%

 

 

(1.1

)%

 

 

(7.1

)%

(1)

Not meaningful

Direct premiums and escrow fees were $538.1$680.9 million and $1.5$1.7 billion for the three and nine months ended September 30, 2017,2020, respectively, a decreaseincreases of $6.4$74.1 million, or 1.2%12.2%, and an increase of $20.9$151.0 million, or 1.4%9.7%, when compared with the respective periods of the prior year.  The decrease for the three months ended September 30, 2017 was primarily due to a decrease in the domestic title orders closed, partially offset by an increase in the average revenues per order closed.  The increase for the nine months ended September 30, 2017 was primarily due to an increase in the average revenues per order closed, partially offset by a decrease in the domestic title orders closed.  The average revenues per order closed were $2,298 and $2,215increases for the three and nine months ended September 30, 2017,2020 were primarily due to increases in the number of domestic title orders closed by the Company’s direct title operations, partially offset by decreases in the average domestic revenues per order closed.  The domestic average revenues per order closed were $2,193 and $2,143 for the three and nine months ended September 30, 2020, respectively, increasesdecreases of 23.6%12.7% and 15.3%15.6% when compared with $1,859$2,513 and $1,921$2,540 for the respective periods of the prior year.  The increasesdecreases in average revenues per order closed for the three and nine months ended September 30, 2017 were primarily attributabledue to a shift in the mix of direct revenues generated from higher premium commercial products to lower premium residential refinance products to higher premium residential purchase and commercial products, higher average revenues per order from commercial transactions, higher residential real estate values, and, to a lesser extent, premium and fee increases related to residential purchase transactions.products.  The Company’s direct title operations closed 214,300291,500 and 619,500748,700 domestic title orders during the three and nine months ended September 30, 2017,2020, respectively, decreasesincreases of 20.2%30.1% and 12.2%31.0% when compared with 268,400224,100 and 705,700571,600 title orders closed during the respective periods of the prior year. Domesticyear, which was generally consistent with the changes in residential mortgage origination activity in the United States as reported in the MBA Forecast.  For the three and nine months ended September 30, 2020, domestic residential refinance orders closed per day decreasedincreased by 42.5%84.8% and 32.9%120.3%, whilerespectively, and domestic residential purchase orders closed per day increased by 4.8%11.1% and 3.9% for the three and nine months ended September 30, 2017decreased by 1.6%, respectively, when compared to the samerespective periods of 2016.the prior year.

Agent premiums were $629.2$722.4 million and $1.8$1.9 billion for the three and nine months ended September 30, 2017,2020, respectively, increases of $3.2$66.3 million, or 0.5%10.1%, and $103.8$218.5 million, or 6.3%12.8%, when compared with the respective periods of the prior year.  Agent premiums are recorded when notice of issuance is receivedThe increases were primarily attributable to higher premium revenue from the agent, which is generally when cash payment is receivedresidential refinance transactions, partially offset by the Company. As a result, there is generally a delay between the agent’s issuance of a title policylower premium revenue from commercial and the Company’s recognition of agent premiums.  Therefore, current quarter agent premiums typically reflect prior quarter mortgage origination activity.  The increase in agent premiums for the three months ended September 30, 2017 is generally consistent with the 1.8% increase in the Company’s direct premiums and escrow fees in the second quarter of 2017 as compared with the second quarter of 2016.residential purchase transactions.

Information and other revenues primarily consist of revenues generated from fees associated with title search and related reports, title and other real property records and images, other non-insured settlement services, and risk mitigation products and services.  These revenues generally trend with direct premiums and escrow fees but are typically less volatile since a portion of the revenues are subscription based and do not fluctuate with transaction volumes.


Information and other revenues were $199.3$282.7 million and $578.5$719.2 million for the three and nine months ended September 30, 2017,2020, respectively, increases of $11.3$77.4 million, or 6.0%37.7%, and $54.4$146.0 million, or 10.4%25.5%, when compared with the respective periods of the prior year.  year.  The increases were driven by recent acquisitions.  Excludingprimarily attributable to the $23.6 million and $68.2 million impact of new acquisitions, which were $23.7 million and $55.1 million for the three and nine months ended September 30, 2017,2020, respectively; growth in mortgage origination activity that led to higher demand for the Company’s title information products; and revenues from services provided to support a temporary government program related to the coronavirus pandemic in Canada.

Net investment income totaled $44.7 million and $147.6 million for the three and nine months ended September 30, 2020, respectively, information and other revenues decreased $12.3decreases of $27.3 million, or 6.6%37.9%, and $13.8$65.4 million, or 2.6%30.7%, when compared with the respective periods of the prior year.  The decreases in information and other revenues for the three and nine months ended September 30, 2017, adjusted for the impact of acquisitions, were primarily dueattributable to lower demand forshort-term interest rates, which drove lower income from the Company’s default information products driven bycash and investment portfolio, escrow balances and tax-deferred property exchange business.  The decreases in net investment income were also partially attributable to lower loss mitigation activities and lower demand foraverage balances in the Company’s valuation services, fulfillment services, and automated products driven by lower mortgage origination volumes. The decrease fortax-deferred property exchange business, which is consistent with the nine months ended September 30, 2017 was partially offset by higher fees earned on non-insured products relateddecline in the Company’s commercial business in 2020 when compared to commercial transactions.2019.

Net realized investment incomegains totaled $37.9$41.3 million and $99.2$35.8 million for the three and nine months ended September 30, 2017, respectively, increases of $8.9 million, or 30.8%, and $17.8 million, or 21.9%, when compared with the respective periods of the prior year.2020, respectively.  The increases were primarily attributable to increases in short-term interest rates which drove higher interest income on balances held in connection with the Company’s tax-deferred property exchange business, the floating rate mortgage-backed securities portfolio, and escrow deposits.  In addition, interest income from the debt securities portfolio increased due to higher average balances when compared to the same periods of the prior year.

Net realized investment losses totaled $7.2 million for the three months ended September 30, 2017 and net realized investment gains totaled $9.3 million for the nine months ended September 30, 2017.  Net realized investment losses for the three months ended September 30, 2017 primarily related to a $6.6 million loss recognized when the Company purchased the remaining equity ownership in an investment in an affiliate during the third quarter of 2017.  This investment, which was previously accounted for using the equity method of accounting, is now consolidated for financial reporting purposes.  Net realized investment gains for the nine months ended September 30, 2017 primarily related to sales of equity securities, partially offset by the third quarter loss of $6.6 million described above.  Net realized investment gains totaled $8.4 million and $19.2 million for the three and nine months ended September 30, 2016, respectively,2020 were primarily attributable to increases in the fair values of equity securities and were primarilygains from the sales of debt and equity securities.  Net realized investment gains for the nine months ended September 30, 20162020 also included a gain recognized upon purchase of the remaining equity ownership in an investment in affiliate during the first quarter of 2020.  Net realized investment gains totaled $0.4 million and $35.1 million for the three and nine months ended September 30, 2019.  The net realized investment gains for the three months ended September 30, 2019 were primarily from the sales of real estate and certain regional operations.debt securities, partially offset by impairments related to software.  The net realized investment gains for the nine months ended September 30, 2019 were primarily from an increase in the fair values of equity securities.

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

Personnel costs were $421.8$481.4 million and $1.2$1.3 billion for the three and nine months ended September 30, 2017,2020, respectively, increases of $12.5$33.6 million, or 3.1%7.5%, and $68.1$68.5 million, or 5.9%5.5%, when compared with the respective periods of the prior year.  The increases were primarily driven by recent acquisitions.  Excluding the $17.4 million and $50.1 million impact of new acquisitions for the three and nine months ended September 30, 2017, respectively, personnel costs decreased $4.9 million, or 1.2%, and increased $18.0 million, or 1.6%, when compared with the respective periods of the prior year.  The decrease in personnel costs for the three months ended September 30, 2017, adjusted for2020 were primarily attributable to the impact of new acquisitions, was primarily attributable to decreases inwhich were $10.1 million and $26.7 million for the three and nine months ended September 30, 2020, respectively, and higher incentive compensation, salary, overtime and temporary labor costs, overtime expense and medical insurance expense.  These decreases wereexpenses, partially offset by $9.0 millionlower employee benefit expense.  The increases in out-of-period adjustments recordedincentive compensation expense were due to correct for errorshigher revenue and profitability. The increases in recording certain personnel costs.salary expense were due to higher average salaries and higher headcount.  The increases in overtime and temporary labor expenses were driven by higher volumes.  The decreases in employee benefit expense were primarily due to the impact of lower expense related to the Company’s expected 401(k) saving plan match.  The increase in personnel costs for the nine months ended September 30, 2017, adjusted for the impact of new acquisitions,2020 was primarilyalso partially attributable to increased salaryshare-based compensation expense due to an increasea higher dollar value of restricted stock units granted in average salaries; an increase in incentive compensation duethe first quarter of 2020 related to higher revenue and profitability; and the $9.0 million in out-of-period adjustments recorded to correct for errors in recording certain personnel costs; partially offset by a decrease in temporary labor costs and overtime expense. For further discussion of the out-of-period adjustments see Note 1 Basis of Condensed Consolidated Financial Statements.2019 performance.

Agents retained $497.9$572.8 million and $1.4$1.5 billion of title premiums generated by agency operations for the three and nine months ended September 30, 2017, respectively,2020, which compares with $495.1$518.8 million and $1.3 billion for the respective periods of the prior year.  The percentage of title premiums retained by agents was 79.1%79.3% and 78.9%79.2% for the three and nine months ended September 30, 2017,2020, respectively, compared to 79.1% and 78.8%79.0% for the respective periods of the prior year.


Other operating expenses for the title insurance and services segment were $196.5$251.3 million and $579.4$700.1 million for the three and nine months ended September 30, 2017, respectively, a decrease of $1.7 million, or 0.9%, and an increase of $20.3 million, or 3.6%, when compared with the respective periods of the prior year.  These expenses for the three months ended September 30, 2017 were essentially unchanged when compared with the three months ended September 30, 2016 and the increase for the nine months ended September 30, 2017 was driven by recent acquisitions.  Excluding the $10.5 million and $28.6 million impact of new acquisitions for the three and nine months ended September 30, 2017, respectively, other operating expenses decreased $12.2 million, or 6.2%, and $8.3 million, or 1.5%, when compared with the respective periods of the prior year.  The decrease for the three months ended September 30, 2017, adjusted for the impact of acquisitions, was primarily attributable to lower production related costs driven by lower order volumes, lower legal expense, lower bad debt expense, and lower software expenses when compared to the same period of the prior year.  The decrease for the nine months ended September 30, 2017, adjusted for the impact of acquisitions, was primarily attributable to lower software related expenses, lower legal expense, and higher foreign currency exchange gains; partially offset by the first quarter of 2016 benefitting from the recovery of an insurance claim.

The provision for policy losses and other claims, expressed as a percentage of title insurance premiums and escrow fees, was 4.0% for the three and nine months ended September 30, 2017 compared to 5.5% for the three and nine months ended September 30, 2016. The current quarter rate of 4.0% reflects the ultimate loss rate for the current policy year and no change in the loss reserve estimates for prior policy years. The third quarter of 2016 rate of 5.5% reflected the ultimate loss rate of 5.0% for the 2016 policy year and a $5.8 million net increase in the loss reserve estimates for prior policy years.

Depreciation and amortization expense was $34.4 million and $91.5 million for the three and nine months ended September 30, 2017,2020, respectively, increases of $11.4$32.6 million, or 49.4%14.9%, and $25.0$118.6 million, or 37.5%20.4%, when compared with the respective periods of the prior year.  The increases were primarily attributable to $4.7 million in out-of-period adjustments recordedhigher production related costs due to fully amortize certain title plant imaging assets that were misclassified as title plants assets and higher amortization expense associated with internally developed technology and purchased software licenses.  The higher amortization expense related to internally developed technology included $1.2increased transaction volumes; the impact of new acquisitions, which was $7.7 million and $5.3 million of accelerated amortization for the three and nine months ended September 30, 2017, respectively, resulting from a shortened useful life for a software interface.  For further discussion of the out-of-period adjustments see Note 1 Basis of Condensed Consolidated Financial Statements.

Premium taxes were $17.9 million and $47.0$18.6 million for the three and nine months ended September 30, 2017,2020, respectively; and increases in professional services expense, computer hardware related costs and software expense, partially offset by lower travel and entertainment expenses.


The provision for policy losses and other claims, expressed as a percentage of title premiums and escrow fees, was 5.0% for the three and nine months ended September 30, 2020 compared to 4.0% for the three and nine months ended September 30, 2019, respectively.  The current quarter rate of 5.0% reflects an ultimate loss rate of 4.5% for the current policy year and a net increase in the loss reserve estimates for prior policy years of $7.0 million. The 4.0% rate for the third quarter of 2019 reflected the ultimate loss rate for the 2019 policy year and no change in the loss reserve estimates for prior policy years.

To date, the Company has not experienced an increase in title claims as a result of the coronavirus pandemic.  Incurred title claims for the three and nine months ended September 30, 2020 were lower by 21.0% and 18.1%, respectively, when compared with the same periods of the prior year, and significantly below the Company’s actuarial expectation.  However, title claims generally increase when economic conditions deteriorate.  Due to the recent deterioration in economic conditions in connection with the coronavirus pandemic and responses to it, the Company increased its calendar year loss rate from 4.0% in 2019 to 5.0% in 2020.  The Company will continue to monitor economic conditions and actual claims experience and will consider this information, among other factors, when determining the appropriate loss rate and reserve balance for incurred but not reported claims in future periods.

Depreciation and amortization expense was $36.2 million and $104.7 million for the three and nine months ended September 30, 2020, respectively, increases of $1.6$6.4 million, or 9.6%21.4%, and $3.5$12.7 million, or 8.0%13.8%, when compared with the respective periods of the prior year.  The increases were primarily attributable to the impact of new acquisitions, which were $6.2 million and $14.8 million for the three and nine months ended September 30, 2020, respectively, and primarily related to the amortization of software and other intangible assets.

Premium taxes were $17.5 million and $47.4 million for the three and nine months ended September 30, 2020, respectively, increases of $0.2 million, or 1.2%, and $2.4 million, or 5.3%, respectively, compared to $16.3$17.3 million and $43.5$45.0 million for the same periods of the prior year. Premium taxes as a percentage of title insurance premiums and escrow fees were 1.5%1.2% and 1.3% for the three and nine months ended September 30, 2020, respectively, and were 1.4% for the three and nine months ended September 30, 2017, respectively, compared to 1.4%2019.

Interest expense was $5.1 million and $12.8 million for the three and nine months ended September 30, 2016.2020, respectively, increases of $0.9 million, or 21.7%, and $1.6 million, or 13.9%, when compared with the respective periods of the prior year.  The increases were primarily attributable to higher interest paid on secured financings payable due to higher average balances outstanding, partially offset by lower interest paid related to customer deposits at the Company’s banking subsidiary, First American Trust, FSB, due to lower interest rates.

The profit margins for the title insurance business reflect the high cost of performing the essential services required before insuring title, whereas the corresponding revenues are subject to regulatory and competitive pricing restraints.  Due to thisthe relatively high proportion of fixed costs, title insurance profit margins generally improve as closed order volumes increase.  Title insurance profit margins are also impacted by the segment’s net investment income and net realized investment gains or losses, which may not move in the same direction as closed order volumes.  Title insurance profit margins are affected by the composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity.  Title insurance profit margins are also affected by the percentage of title insurance premiums generated by agency operations.  Profit margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent.  Pre-taxThe pretax margins for the three and nine months ended September 30, 20172020 were 13.0%19.0% and 12.1%14.3%, respectively, compared with 13.5%16.5% and 12.0%15.4% in the respective periods of the prior year.



Specialty Insurance

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands, except percentages)

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

(in thousands, except percentages)

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums

$

113,041

  

 

$

105,299

  

 

$

7,742

  

 

 

7.4

 

$

326,935

  

 

$

304,277

  

 

$

22,658

  

 

 

7.4

%

Direct premiums

 

$

127,037

 

 

$

121,798

 

 

$

5,239

 

 

 

4.3

%

 

$

367,622

 

 

$

348,904

 

 

$

18,718

 

 

 

5.4

%

Information and other

 

2,814

  

 

 

754

  

 

 

2,060

 

 

 

273.2

 

 

 

8,427

  

 

 

2,394

  

 

 

6,033

 

 

 

252.0

 

Information and other

 

 

3,450

 

 

 

3,270

 

 

 

180

 

 

 

5.5

 

 

 

9,992

 

 

 

9,490

 

 

 

502

 

 

 

5.3

 

Net investment income

 

2,468

  

 

 

2,595

  

 

 

(127

)

 

 

(4.9

)

 

 

7,118

  

 

 

7,085

  

 

 

33

 

 

 

0.5

 

Net investment income

 

 

2,105

 

 

 

3,064

 

 

 

(959

)

 

 

(31.3

)

 

 

7,005

 

 

 

8,496

 

 

 

(1,491

)

 

 

(17.5

)

Net realized investment gains

 

158

  

 

 

1,134

  

 

 

(976

)

 

  

(86.1

)

 

 

1,428

  

 

 

3,490

  

 

 

(2,062

)

 

  

(59.1

)

Net realized investment gains

 

 

3,740

 

 

 

1,058

 

 

 

2,682

 

 

 

253.5

 

 

 

7,199

 

 

 

7,450

 

 

 

(251

)

 

 

(3.4

)

 

118,481

  

 

 

109,782

  

 

 

8,699

 

 

 

7.9

 

 

 

343,908

  

 

 

317,246

  

 

 

26,662

 

 

 

8.4

  

 

 

136,332

 

 

 

129,190

 

 

 

7,142

 

 

 

5.5

 

 

 

391,818

 

 

 

374,340

 

 

 

17,478

 

 

 

4.7

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

18,478

  

 

 

17,347

  

 

 

1,131

 

 

 

6.5

 

 

 

53,632

  

 

 

51,149

  

 

 

2,483

 

 

 

4.9

  

Personnel costs

 

 

22,271

 

 

 

20,742

 

 

 

1,529

 

 

 

7.4

 

 

 

64,398

 

 

 

60,246

 

 

 

4,152

 

 

 

6.9

 

Other operating expenses

 

16,537

  

 

 

14,603

  

 

 

1,934

 

 

 

13.2

 

 

 

50,588

  

 

 

43,563

  

 

 

7,025

 

 

 

16.1

 

Other operating expenses

 

 

20,899

 

 

 

19,230

 

 

 

1,669

 

 

 

8.7

 

 

 

61,731

 

 

 

57,284

 

 

 

4,447

 

 

 

7.8

 

Provision for policy losses and other claims

 

73,660

  

 

 

72,663

  

 

 

997

 

 

 

1.4

 

 

 

203,658

  

 

 

194,479

  

 

 

9,179

 

 

 

4.7

  

Provision for policy losses and other claims

 

 

87,669

 

 

 

74,164

 

 

 

13,505

 

 

 

18.2

 

 

 

232,353

 

 

 

200,986

 

 

 

31,367

 

 

 

15.6

 

Depreciation and amortization

 

1,599

  

 

 

1,401

  

 

 

198

 

 

 

14.1

 

 

 

4,697

  

 

 

4,107

  

 

 

590

 

 

 

14.4

 

Depreciation and amortization

 

 

1,995

 

 

 

1,859

 

 

 

136

 

 

 

7.3

 

 

 

5,832

 

 

 

5,379

 

 

 

453

 

 

 

8.4

 

Impairments on assets held for sale

Impairments on assets held for sale

 

 

73,264

 

 

 

 

 

 

73,264

 

 

 

 

 

 

73,264

 

 

 

 

 

 

73,264

 

 

 

 

Premium taxes

 

2,029

  

 

 

1,987

  

 

 

42

 

 

 

2.1

 

 

 

5,554

  

 

 

5,204

  

 

 

350

 

 

 

6.7

 

Premium taxes

 

 

2,363

 

 

 

2,174

 

 

 

189

 

 

 

8.7

 

 

 

6,194

 

 

 

5,899

 

 

 

295

 

 

 

5.0

 

 

112,303

  

 

 

108,001

  

 

 

4,302

 

 

 

4.0

 

 

 

318,129

  

 

 

298,502

  

 

 

19,627

 

 

 

6.6

 

 

 

208,461

 

 

 

118,169

 

 

 

90,292

 

 

 

76.4

 

 

 

443,772

 

 

 

329,794

 

 

 

113,978

 

 

 

34.6

 

Income before income taxes

$

6,178

  

 

$

1,781

  

 

$

4,397

 

 

 

246.9

%

 

$

25,779

  

 

$

18,744

  

 

$

7,035

 

 

 

37.5

(Loss) income before income taxes

(Loss) income before income taxes

 

$

(72,129

)

 

$

11,021

 

 

$

(83,150

)

 

 

NM

1%

 

$

(51,954

)

 

$

44,546

 

 

$

(96,500

)

 

 

(216.6

)%

Margins

 

5.2

 

 

1.6

 

 

3.6

 

 

225.0

 

 

7.5

%

 

 

5.9

%

 

 

1.6

%

 

 

27.1

%

Margins

 

 

(52.9

)%

 

 

8.5

%

 

 

(61.4

)%

 

 

NM

1%

 

 

(13.3

)%

 

 

11.9

%

 

 

(25.2

)%

 

 

(211.8

)%

(1)

Not meaningful

Direct premiums were $113.0$127.0 million and $326.9$367.6 million for the three and nine months ended September 30, 2017,2020, respectively, increases of $7.7$5.2 million, or 7.4%4.3%, and $22.7$18.7 million, or 7.4%, when compared with the respective periods of the prior year. The increases were attributable to higher premiums earned in the home warranty business driven by an increase in the number of home warranty residential service contracts issued and an increase in the average price charged per contract.

Information and other revenues were $2.8 million and $8.4 million for the three and nine months ended September 30, 2017, respectively, increases of $2.1 million, or 273.2%, and $6.0 million, or 252.0%, when compared with the respective periods of the prior year.  The increases were due to a change in how the Company reports installment fees related to home warranty residential service contracts.  Beginning December 31, 2016, the Company reported installment fees in information and other revenues, while prior to December 31, 2016, the Company reported installment fees as a reduction in other operating expenses.  This change resulted in an increase to information and other revenues and an increase to other operating expenses of $2.1 million and $6.0 million for the three and nine months ended September 30, 2017, respectively, when compared with the respective periods of the prior year.

Net realized investment gains totaled $0.2 million and $1.4 million for the three and nine months ended September 30, 2017, respectively, and $1.1 million and $3.5 million for the three and nine months ended September 30, 2016, respectively.  The net realized gains for the three and nine months ended September 30, 2017 were from the sales of debt and equity securities.  The net realized gains for the three months ended September 30, 2016 were primarily from the sales of debt securities.  The net realized gains for the nine months ended September 30, 2016 were primarily from the sale of real estate and, to a lesser extent, from the sales of debt securities.

Personnel costs and other operating expenses were $35.0 million and $104.2 million for the three and nine months ended September 30, 2017, respectively, increases of $3.1 million, or 9.6%, and $9.5 million, or 10.0%5.4%, when compared with the respective periods of the prior year.  The increases were primarily attributable to higher premiums earned in the home warranty business.  

Net realized investment gains for the specialty insurance segment totaled $3.7 million and $7.2 million for the three and nine months ended September 30, 2020.  The net realized investment gains for the three months ended September 30, 2020 were primarily from the increase in the fair values of equity securities.  The net realized investment gains for the nine months ended September 30, 2020 were primarily from a changegain from the sale of real estate.  Net realized investment gains for the specialty insurance segment totaled $1.1 million and $7.5 million for the three and nine months ended September 30, 2019, respectively, and were primarily from the increase in how the Company reports installment feesfair values of equity securities.

Personnel costs and other operating expenses were $43.2 million and $126.1 million for the three and nine months ended September 30, 2020, respectively, increases of $3.2 million, or 8.0%, and $8.6 million, or 7.3%, when compared with the respective periods of the prior year.  The increases were primarily attributable to increased salary expense, due to higher average headcount, and higher advertising expense related to the home warranty residential service contracts which is further discussed above.business.


The provision for home warranty claims, expressed as a percentage of home warranty premiums, was 60.1%64.5% and 56.1%54.1% for the three and nine months ended September 30, 2017,2020, respectively, compared with 69.8%59.9% and 63.4% for the respective periods of the prior year.  The decrease in the claims rate for the three months ended September 30, 2017 was primarily attributable to a decrease in the frequency and severity of claims and, to a lesser extent, an increase in average revenue per contract.  The decrease in the severity of claims was primarily due to more efficient claims management, which was mainly driven by improved rates with contractors and more efficient allocation of claims to contractors.  The severity and frequency of home warranty claims also benefited from milder weather conditions when compared to the same quarter of the prior year.  The provision for property and casualty claims, expressed as a percentage of property and casualty insurance premiums, was 77.8% and 77.3% for the three and nine months ended September 30, 2017, respectively, compared with 67.3% and 65.0%52.0% for the respective periods of the prior year.  The increase in the claims rate for the three months ended September 30, 20172020 was primarily attributable to higher claims frequency driven by claims in the appliance and plumbing trades likely due to the coronavirus pandemic.  The provision for property and casualty claims, expressed as a percentage of property and casualty insurance premiums, was 82.7% and 89.9% for the three and nine months ended September 30, 2020, respectively, compared with 63.8% and 73.8% for the respective periods of the prior year.  The increase in the claims rate for the three months ended September 30, 2020 was primarily attributable to an increase in large losses and the severityimpact of west coast wildfires.

In the third quarter of 2020, the Company committed to a plan to sell its property and frequencycasualty insurance business, which is expected to be completed within one year.  As a result of claims.

Premium taxes were $2.0 millionthis decision, the Company recorded pretax impairment losses to goodwill, other intangible assets, property and $5.6equipment and other assets totaling $73.3 million for the three and nine months ended September 30, 2017,2020.  See Note 2 Disposition of the Property and Casualty Insurance Business to the condensed consolidated financial statements for further information on the sale of the business.

Premium taxes were $2.4 million and $6.2 million for the three and nine months ended September 30, 2020, respectively, compared with $2.0$2.2 million and $5.2$5.9 million for the respective periods of the prior year.  Premium taxes as a percentage of specialty insurance segment premiums were 1.9% and 1.7% for the three and nine months ended September 30, 2020, respectively, and 1.8% and 1.7% for the three and nine months ended September 30, 2017, respectively, compared with 1.9% and 1.7% in the respective periods of the prior year.2019, respectively.


A large part of the revenues for the specialty insurance businesses are generated by renewals and are not dependent on the level of real estate activity in the year of renewal.  With the exception of loss expense, the majority of the expenses for this segment are variable in nature and therefore generally fluctuate consistent with revenue fluctuations.  Accordingly, profit margins for this segment (before loss expense) are relatively constant, although as a result of some fixed expenses, profit margins (before loss expense) should nominally improve as premium revenues increase.  Pre-taxSpecialty insurance profit margins are also impacted by the segment’s net investment income and net realized investment gains or losses, which may not move in the same direction as premium revenues.  The profit margins for the three and nine months ended September 30, 20172020 were 5.2%also impacted by the impairments on assets held for sale recorded during the three months ended September 30, 2020.  The pretax margin losses for the three and 7.5%nine months ended September 30, 2020 were (52.9%) and (13.3%), respectively, compared with 1.6%pretax margins of 8.5% and 5.9%11.9% in the respective periods of the prior year.

Corporate

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands, except percentages)

2017

 

  

2016

 

 

$ Change

 

 

% Change

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Revenues

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

$

4,108

 

  

$

2,855

 

 

$

1,253

 

 

 

43.9

%

 

$

10,872

 

 

$

4,265

 

 

$

6,607

 

 

 

154.9

 

$

6,055

 

 

$

1,770

 

 

$

4,285

 

 

 

242.1

%

 

$

2,745

 

 

$

15,456

 

 

$

(12,711

)

 

 

(82.2

)%

Net realized investment gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,515

 

 

 

 

 

 

6,515

 

 

 

 

 

4,108

 

  

 

2,855

 

 

 

1,253

 

 

 

43.9

 

 

 

10,872

 

 

 

4,265

 

 

 

6,607

 

 

 

154.9

 

 

 

6,055

 

 

 

1,770

 

 

 

4,285

 

 

 

242.1

 

 

 

9,260

 

 

 

15,456

 

 

 

(6,196

)

 

 

(40.1

)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

159,053

 

  

 

12,000

 

 

 

147,053

 

 

 

NM

1

 

 

183,019

 

 

 

33,755

 

 

 

149,264

 

 

 

442.2

 

 

 

7,610

 

 

 

2,146

 

 

 

5,464

 

 

 

254.6

 

 

 

7,950

 

 

 

17,486

 

 

 

(9,536

)

 

 

(54.5

)

Other operating expenses

 

6,233

 

  

 

7,215

 

 

 

(982

)

 

 

(13.6

)

 

 

19,960

 

 

 

20,309

 

 

 

(349

)

 

 

(1.7

)

 

 

9,115

 

 

 

10,590

 

 

 

(1,475

)

 

 

(13.9

)

 

 

27,211

 

 

 

29,090

 

 

 

(1,879

)

 

 

(6.5

)

Depreciation and amortization

 

38

 

  

 

96

 

 

 

(58

)

 

 

(60.4

)

 

 

124

 

 

 

288

 

 

 

(164

)

 

 

(56.9

)

 

 

38

 

 

 

38

 

 

 

 

 

 

 

 

 

115

 

 

 

115

 

 

 

 

 

 

 

Interest

 

8,199

 

  

 

7,100

 

 

 

1,099

 

 

 

15.5

  

 

 

24,298

 

 

 

21,342

 

 

 

2,956

 

 

 

13.9

 

 

 

11,272

 

 

 

8,249

 

 

 

3,023

 

 

 

36.6

 

 

 

29,301

 

 

 

25,198

 

 

 

4,103

 

 

 

16.3

 

 

173,523

 

  

 

26,411

 

 

 

147,112

 

 

 

557.0

 

 

 

227,401

 

 

 

75,694

 

 

 

151,707

 

 

 

200.4

 

 

 

28,035

 

 

 

21,023

 

 

 

7,012

 

 

 

33.4

 

 

 

64,577

 

 

 

71,889

 

 

 

(7,312

)

 

 

(10.2

)

Loss before income taxes

$

(169,415

)

  

$

(23,556

)

 

$

(145,859

)

 

 

(619.2

)% 

 

$

(216,529

)

 

$

(71,429

)

 

$

(145,100

)

 

 

(203.1

)% 

 

$

(21,980

)

 

$

(19,253

)

 

$

(2,727

)

 

 

(14.2

)%

 

$

(55,317

)

 

$

(56,433

)

 

$

1,116

 

 

 

2.0

%

 

(1)

Not meaningful

Net investment income totaled $4.1$6.1 million and $10.9$2.7 million for the three and nine months ended September 30, 2017,2020, respectively, compared with $2.9net investment income of $1.8 million and $4.3$15.5 million for the respective periods of the prior year.  The increasesincrease in net investment income for the three months ended September 30, 2020 and the decrease in net investment income for the nine months ended September 30, 20172020 were primarily attributable to higherfluctuations in earnings on investments associated with the Company’s deferred compensation plan when compared to the same periods of 2016.2019.

Net realized investment gains for the corporate segment totaled $6.5 million for the nine months ended September 30, 2020 and were primarily from the sale of real estate.  There were no realized investment gains or losses for the corporate segment for the three months ended September 30, 2020 and the three and nine months ended September 30, 2019.

Corporate personnel costs and other operating expenses were $165.3$16.7 million and $203.0$35.2 million for the three and nine months ended September 30, 2017,2020, respectively, compared with $19.2$12.7 million and $54.1$46.6 million for the respective periods of the prior year.  The increases wereincrease for the three months ended September 30, 2020 was primarily attributable to pension settlement costs of $152.4 million that the Company recognized during the third quarter of 2017 upon completing the termination of its funded defined benefit pension plans.  For further discussion of the pension termination see Note 9 Employee Benefit Planshigher expense related to the condensed consolidated financial statements.Company’s deferred compensation plan.  The decrease for the nine months ended September 30, 2020 was primarily attributable to lower expense related to the Company’s deferred compensation plan.

Interest expense was $8.2$11.3 million and $24.3$29.3 million for the three and nine months ended September 30, 2017,2020, respectively, increases of $1.1 million, or 15.5%, and $3.0 million, or 13.9%36.6%, and $4.1 million, or 16.3%, when compared with the respective periods of the prior year.  The increases were dueattributable to the interest accrued on the $450.0 million of 4.00% 10 year senior unsecured notes that the Company borrowing $160.0 million under its credit facility during September 2016.issued in May 2020.


Eliminations

The Company’s inter-segment eliminations were not material for the three and nine months ended September 30, 20172020 and 2016.2019.


INCOME TAXES

The Company’s effective income tax rates (income tax expense as a percentage of income before income taxes) were -17.9%24.6% and 29.7%22.5% for the three and nine months ended September 30, 2017,2020, respectively, compared with 35.7%23.3% and 33.7%21.3% for the respective periods of the prior year.  The Company’sdifferences in the effective tax rates for 2017 reflect state tax benefits relating to the termination of the Company’s pension plan, as well as the release of reserves relating to tax positions taken on prior year tax returns.  In addition, the Company’s effective tax rates for 2017 reflect the adoption of new accounting guidance related to the accounting for share-based payment transactions, which requires, among other items, that all excess tax benefits and tax deficiencies associated with share-based payment transactions be recorded in income tax expense rather than in additional paid-in capital, as previously required.  The impact to the Company of adopting this guidance was a reduction in income tax expense of $0.1 million and $2.8 million for the three and nine months ended September 30, 2017, respectively.  See Note 1 Basis2020 when compared with the respective periods of Condensed Consolidated Financial Statementsthe prior year were primarily due to state income taxes related to the condensed consolidated financial statements for further discussion of the new guidance.  The Company’s effective tax rates for 2016 reflectnoninsurance businesses, foreign exchange rate fluctuation, and the resolution in 2019 of certainstate tax authority examinations and tax credits claimed in 2016 and inmatters from prior years.

The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and makes adjustments to the allowance as necessary.  The factors used by the Company to assess the likelihood of realization include the Company’sits forecast of future taxable income and available tax planning strategies that could be implemented to realize theits deferred tax assets.  The Company’s ability or failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of its deferred tax assets.  Based on actual future operating results in certain jurisdictions, it is possible that the current valuation allowance positions of those jurisdictions could be adjusted induring the next 12 months.

NET INCOME AND NET INCOME ATTRIBUTABLE TO THE COMPANY

Net income for the three and nine months ended September 30, 20172020 was $21.2$183.6 million and $201.2$419.1 million, respectively, compared with $107.4$188.2 million and $262.5$485.2 million for the respective periods of the prior year. Net income attributable to the Company for the three and nine months ended September 30, 20172020 was $21.4$182.3 million, or $0.19$1.62 per diluted share, and $201.9$416.1 million, or $1.80$3.68 per diluted share, respectively, compared with $107.3$187.2 million, or $0.96$1.65 per diluted share, and $262.0$483.4 million, or $2.36$4.26 per diluted share, for the respective periods of the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Cash requirements.    The Company generates cash primarily from the sale of its products and services and investment income.  The Company’s current cash requirements include operating expenses, taxes, payments of principal and interest on its debt, capital expenditures, dividends on its common stock, and may include business acquisitions, investments in unconsolidated entities and repurchases of its common stock.  Management forecasts the cash needs of the holding company and its primary subsidiaries and regularly reviews their short-term and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying such forecasts.  Based on the Company’s ability to generate cash flows from operations, its liquid-asset position and amounts available on its revolving credit facility, management believes that its resources are sufficient to satisfy its anticipated operational cash requirements and obligations for at least the next twelve months. In making this assessment, management considered the impact that the coronavirus pandemic and related responses has had, or is expected to have, on the Company’s liquidity and capital resources, such as uncertainty related to cash flows from operations and potential volatility in the Company’s investment portfolio, among other factors.

The substantial majority of the Company’s business is dependent upon activity in the real estate and mortgage markets, which are cyclical and seasonal.  Periods of increasing interest rates and reduced mortgage financing availability generally have an adverse effect on residential real estate activity and therefore typically decrease the Company’s revenues.  In contrast, periods of declining interest rates and increased mortgage financing availability generally have a positive effect on residential real estate activity, which typically increases the Company’s revenues.  Residential purchase activity is typically slower in the winter months with increased volumes in the spring and summer months.  Residential refinance activity is typically more volatile than purchase activity and is highly impacted by changes in interest rates.  Commercial real estate volumes are less sensitive to changes in interest rates but fluctuate based on local supply and demand conditions for space and mortgage financing availability.


Cash provided by operating activities amounted to $455.5totaled $681.0 million and $252.2$611.7 million for the nine months ended September 30, 20172020 and 2016,2019, respectively, after claim payments, net of recoveries, of $351.4$342.7 million and $351.3$305.2 million, respectively.  The principal nonoperating uses of cash and cash equivalents for the nine months ended September 30, 20172020 and 20162019 were advances and repayments related to secured financing transactions, purchases of debt and equity securities, business acquisitions, capital expenditures andrepayment of borrowings under the unsecured credit facility, dividends to common stockholders.stockholders, capital expenditures, investments in unconsolidated entities, and for the nine months ended September 30, 2020, business acquisitions and repurchases of Company shares.  The most significantprincipal nonoperating sources of cash and cash equivalents for the nine months ended September 30, 20172020 and 2019 were borrowings and collections related to secured financing transactions, proceeds from the sales and maturities of debt and equity securities, borrowings under the unsecured credit facility, and for the nine months ended September 30, 2020, proceeds from the issuance of unsecured senior notes and increases in the deposit balances at the Company’s banking operations.  The most significant nonoperating sources of cash and cash equivalents for the nine months ended September 30, 2016 were proceeds from the sales and maturities of debt and equity securities, increases in the deposit balances at the Company’s banking operations and net proceeds from the issuance of debt. The net effect of all activities on total cash and cash equivalents were increases of $135.8$48.0 million and $416.0$243.9 million for the nine months ended September 30, 20172020 and 2016,2019, respectively.

The Company continually assesses its capital allocation strategy, including decisions relating to dividends, stock repurchases, capital expenditures, acquisitions and investments. In August 2017,September 2020, the Company’s board of directors approved an increase in the Company’s quarterlyCompany paid a third quarter cash dividend to 38of 44 cents per common share, representing a 12% increase from the prior level of 34 cents per common share.  The dividend increase became effective beginning with the September 2017 dividend.  Management expects that the Company will continue to pay quarterly cash dividends at or above the current level.  The timing, declaration and payment of future dividends, however, falls within the discretion of the Company’s board of directors and will depend upon many factors, including the Company’s financial condition and earnings, the capital requirements of the Company’s businesses, restrictions imposed by applicable law and any other factors the board of directors deems relevant from time to time.

In March 2014, the Company’s board of directors approved an increase in the size of the Company’sThe Company maintains a stock repurchase plan from $150.0 millionwith authorization up to $250.0 million, of which $182.4$92.7 million remained as of September 30, 2017. Purchases2020.  Repurchases may be made from time to time by the Company in the open market at prevailing market prices or in privately negotiated transactions.  The Company did not repurchase any shares of its common stock during the three months ended September 30, 2020.  During the nine months ended September 30, 20172020, the Company repurchased and retired 1.8 million shares of its common stock for a total purchase price of $68.9 million, and as of September 30, 2017,2020, had repurchased and retired 3.25.4 million shares of its common stock under the current authorization for a total purchase price of $67.6$157.3 million.

During the nine months ended September 30, 2020, the Company completed acquisitions for an aggregate purchase price of $391.9 million, which were funded through cash on hand and additional borrowings of $120.0 million under the Company’s credit facility.

Holding Company.    First American Financial Corporation is a holding company that conducts all of its operations through its subsidiaries.  The holding company’s current cash requirements include payments of principal and interest on its debt, taxes, payments in connection with employee benefit plans, dividends on its common stock and other expenses.  The holding company is dependent upon dividends and other payments from its operating subsidiaries to meet its cash requirements.  The Company’s target is to maintain a cash balance at the holding company equal to at least twelve months of estimated cash requirements.  At certain points in time, the actual cash balance at the holding company may vary from this target due to, among other factors, the timing and amount of cash payments made and dividend payments received.  Pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available to the holding company is limited, principally for the protection of policyholders.  As of September 30, 2017,2020, under such regulations, the maximum amount of dividends, loans and advances available to the holding company from its insurance subsidiaries for the remainder of 2017,2020, without prior approval from applicable regulators, was $759.7dividends of $304.2 million and loans and advances of $110.3 million.  However, the timing and amount of dividends paid by the Company’s insurance subsidiaries to the holding company falls within the discretion of each insurance subsidiary’s board of directors and will depend upon many factors, including the level of total statutory capital and surplus required to support minimum financial strength ratings by certain rating agencies.  Such restrictions have not had, nor are they expected to have, an impact on the holding company’s ability to meet its cash obligations.

As of September 30, 2017,2020, the holding company’s sources of liquidity included $259.3$67.4 million of cash and cash equivalents and $540.0$700.0 million available on the Company’s revolving credit facility.  Management believes that liquidity at the holding company is sufficient to satisfy anticipated cash requirements and obligations for at least the next twelve months.


Financing.    In May 2020, the Company issued $450.0 million of 4.00% 10 year senior unsecured notes due in 2030. Interest is due semi-annually on May 15 and November 15, beginning November 15, 2020. The Company used a portion of the net proceeds from the sale to repay all borrowings outstanding under its credit facility, increasing the unused capacity thereunder to the full $700.0 million size of the facility.

The Company maintains a credit agreement with JPMorgan Chase Bank, N.A. in its capacity as administrative agent and the lenders party thereto.  The credit agreement, which is comprised of a $700.0 million revolving credit facility.facility, includes an expansion option that permits the Company, subject to satisfaction of certain conditions, to increase the revolving commitments and/or add term loan tranches in an aggregate amount not to exceed $350.0 million.  Unless terminated earlier, the revolving loan commitments under the credit agreement will terminate on May 14, 2019.April 30, 2024.  The obligations of the Company under the credit agreement are neither secured nor guaranteed. Proceeds under the credit agreement may be used for general corporate purposes.  At September 30, 2017,2020, the Company had no outstanding borrowings under the facility totaled $160.0 million at an interest rate of 2.99%.


The credit agreement includes an expansion option that permits the Company, subject to satisfaction of certain conditions, to increase the revolving commitments and/or add term loan tranches (“Incremental Term Loans”) in an aggregate amount not to exceed $150.0 million. Incremental Term Loans, if made, may not mature prior to the revolving commitment termination date, provided that amortization may occur prior to such date.facility.

At the Company’s election, borrowings of revolving loans under the credit agreement bear interest at either (a) the Alternate Base Rate plus the applicable spread or (b) the Adjusted LIBOR rate plus the applicable spread (in each case as defined in the credit agreement).  The Company may select interest periods of one, two, three or six months or (if agreed to by all lenders) such other number of months for Eurodollar borrowings of loans.  The applicable spread varies depending upon the debt rating assigned by Moody’s Investor Service, Inc. and/or, Standard & Poor’s Rating Services.Services and/or Fitch Ratings Inc.  The minimum applicable spread for Alternate Base Rate borrowings is 0.625%0.25% and the maximum is 1.00%.  The minimum applicable spread for Adjusted LIBOR rate borrowings is 1.625%1.25% and the maximum is 2.00%.  The rate of interest on Incremental Term Loansany term loans incurred in connection with the expansion option will be established at or about the time such loans are made and may differ from the rate of interest on revolving loans.

The credit agreement includes representations and warranties, reporting covenants, affirmative covenants, negative covenants, financial covenants and events of default customary for financings of this type.  Upon the occurrence of an event of default the lenders may accelerate the loans.  Upon the occurrence of certain insolvency and bankruptcy events of default the loans will automatically accelerate.  As of September 30, 2017,2020, the Company was in compliance with the financial covenants under the credit agreement.

In addition to amounts available under its credit facility, certain subsidiaries of the Company are parties to master repurchase agreements which are used as partmaintain separate financing arrangements.  The primary financing arrangements maintained by subsidiaries of the Company are as follows:

FirstFunding, Inc., a specialized warehouse lender to correspondent mortgage lenders, maintains secured warehouse lending facilities with several banking institutions.  At September 30, 2020, outstanding borrowings under these facilities totaled $526.5 million.

First American Trust, FSB, a federal savings bank, maintains a secured line of credit with the Federal Home Loan Bank and federal funds lines of credit with certain correspondent institutions.  In addition, First American Trust, FSB is a party to master repurchase agreements under which securities may be loaned or sold.  At September 30, 2020, no amounts were outstanding under any of these facilities.

First Canadian Title Company Limited, a Canadian title insurance and services company, maintains credit facilities with certain Canadian banking institutions. At September 30, 2020, no amounts were outstanding under these facilities.

The Company’s liquidity management activitiesdebt to capitalization ratios were 24.5% and to support its risk management activities. In particular, securities loaned or sold under repurchase agreements may be used as short-term funding sources. During the nine months ended September 30, 2017, the Company financed securities for funds received totaling $10.0 million under these agreements. As of September 30, 2017, no amounts remained outstanding under these agreements.

Notes and contracts payable as a percentage of total capitalization was 18.2% and 19.6%18.5% at September 30, 20172020 and December 31, 2016,2019, respectively.  The Company’s adjusted debt to capitalization ratios, excluding secured financings payable of $526.5 million and $278.4 million at September 30, 2020 and December 31, 2019, were 17.6% and 14.1%, respectively.


Investment Portfolio.    The Company maintains a high quality, liquid investment portfolio that is primarily held at its insurance and banking subsidiaries.  As of September 30, 2017, 92%2020, 94% of the Company’s investment portfolio consisted of fixed incomedebt securities, of which 60%67% were either United States government-backed or rated AAA and 94%99% were either rated or classified as investment grade.  Percentages are based on the estimated fair values of the securities.  Credit ratings reflect published ratings obtained from globally recognized securities rating agencies.  If a security was rated differently among the rating agencies, the lowest rating was selected.  For further information on the credit quality of the Company’s investment portfolio at September 30, 2017,2020, see Note 34 Debt and Equity Securities to the condensed consolidated financial statements.

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

Off-balance sheet arrangements.    The Company administers escrow deposits and trust assets as a service to its customers.  Escrow deposits totaled $7.9 billion and $6.8$7.3 billion at September 30, 20172020 and December 31, 2016,2019, respectively, of which $2.8$3.3 billion and $2.6$3.2 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB.  The escrow deposits held at First American Trust, FSB are temporarily invested in cash and cash equivalents and debt securities, with offsetting liabilities included in deposits in the accompanying condensed consolidated balance sheets.  The remaining escrow deposits were held at third-party financial institutions.

Trust assets held or managed by First American Trust, FSB totaled $3.5$4.3 billion and $3.2$4.2 billion at September 30, 20172020 and December 31, 2016,2019, respectively.  Escrow deposits held at third-party financial institutions and trust assets are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets.  However,All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation.  The Company could be held contingently liable for the disposition of these assets.

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


The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37.  As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds.  Upon the completion of each such exchange, the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred to the customer.  Like-kind exchange funds held by the Company totaled $2.3$2.0 billion and $2.0$3.0 billion at September 30, 20172020 and December 31, 2016,2019, respectively.  The like-kind exchange deposits are held at third-party financial institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets.  All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation.  The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the returns on such proceeds.

At September 30, 2017 and December 31, 2016, the Company was contingently liable for guarantees of indebtedness owed by affiliates and third parties to banks and others totaling $5.6 million and $7.1 million, respectively. The guarantee arrangements relate to promissory notes and other contracts that contingently require the Company to make payments to the guaranteed party upon the failure of debtors to make scheduled payments according to the terms of the notes and contracts. The Company’s maximum potential obligation under these guarantees totaled $5.6 million and $7.1 million at September 30, 2017 and December 31, 2016, respectively, and is limited in duration to the terms of the underlying indebtedness. The Company has not incurred any costs as a result of these guarantees and has not recorded a liability on its condensed consolidated balance sheets related to these guarantees at September 30, 2017 and December 31, 2016.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

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

There have been no material changes in the Company’s market risks since the filing of its Annual Report on Form 10-K for the year ended December 31, 2016.2019.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer have concluded that, as of September 30, 2017,2020, the end of the quarterly period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, were effective, based on the evaluation of these controls and procedures required by Rule 13a-15(b) thereunder.


Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2017,2020, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

 

Item 1.

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

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


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

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

Most of the non-ordinary course lawsuits to which the Company and its subsidiaries are parties challenge practices in the Company’s title insurance business, though a limited number of cases also pertain to the Company’s other businesses.  These lawsuits include, among others, cases alleging, among other assertions, that the Company one of its subsidiaries and/or one of its agents overcharged orsubsidiaries improperly charged fees for products and services, conspired to fix prices, participated in the conveyance of illusory property interests, denied home warranty claims, improperly handled property and casualty claims and gave items of value to brokers and othersbuilders as inducements to refer business in violation of certain laws, such as consumer protection laws and laws generally prohibiting unfair business practices, and certain obligations, including  including:

Antao Properties LLC vs. First American Title Insurance Company, filed on November 6, 2019 and pending in the United States District Court for the Middle District of Florida,

Chavez v. First American Specialty Insurance Company, filed on June 29,

Leonard vs. First American Property & Casualty Insurance Company, filed on October 17, 2019 and pending in the United States District Court for the Western District of Washington,

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

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


These lawsuits are putative class actions for which a class has not been certified; however, the appellate court has remanded the Wilmot action back for certification of a subclass.  For the reasons described above, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss.

The Company and/or its subsidiaries are also parties to class action lawsuits as a result of the Stateinformation security incident that occurred during the second quarter of California, County of Los Angeles,

Downing v. First American Title Insurance Company, et al., filed on July 26, 2016 and pending in the United States District Court for the Northern District of Georgia,

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

Lennen v. First American Financial Corporation, et al., filed on May 19, 2016 and pending in the United States District court for the Middle District of Florida,

McCormick v. First American Real Estate Services, Inc., et al., filed on December 31, 2015 and pending in the Superior Court of the State of California, County of Orange,

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

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

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, and

In re First American Home Buyers Protection Corporation, consolidated on October 9, 2014 and pending in the United States District Court for the Southern District of California.

2019.  All of these lawsuits except Kaufman and Sjobring, are putative class actions for which a class has not been certified.  For the reasons described above, the Company has not yet been able to assess the probability of loss or


estimate the possible loss or the range of loss or, where the Company has been able to make an estimate, the Company believes the amount is not material to the condensed consolidated financial statements as a whole.loss.

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

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

The Company’s title insurance, property and casualty insurance, home warranty, banking, thrift, trust and investment advisorywealth management businesses are regulated by various federal, state and local governmental agencies.  Many of the Company’s other businesses operate within statutory guidelines.  Consequently, the Company may from time to time be subject to examination or investigation by such governmental agencies.  Currently, governmental agencies are examining or investigating certain of the Company’s operations.  These exams orand investigations include inquiriestwo investigations initiated in connection with the information security incident that occurred during the second quarter of 2019, one being conducted by the Securities and Exchange Commission (“SEC”) enforcement staff and the other by the New York Department of Financial Services. The SEC enforcement staff is questioning the adequacy of disclosures the Company made at the time of the incident and the adequacy of its disclosure controls.  In September 2020, the Company received a Wells Notice informing the Company that the enforcement staff has made a preliminary determination to recommend a filing of an enforcement action by the SEC against the Company.   The Company believes that its disclosures and disclosure controls complied with the securities laws and has availed itself of the opportunity to provide a response to convince the SEC that an enforcement action is inappropriate under the circumstances. The New York Department of Financial Services has alleged violations of its cyber security requirements for financial services companies and has filed a statement of charges and scheduled an administrative hearing in connection therewith.  These exams and investigations also include an inquiry by the New York Attorney General and the Massachusetts Attorney General into among other matters, pricing and rate settingcompetitive practices in the title insurance industry, competition in the title insurance industry, real estate settlement service, customer acquisition and retention practices and agency relationships.industry.  With respect to matters where the Company has determined that a loss is both probable and reasonably estimable, the Company has recordedrecords a liability representing its best estimate of the financial exposure based on known facts.  While the ultimate disposition of each such exam or investigation is not yet determinable, the Company does not believe that individually or in the aggregate they will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.  TheseSome of these exams or investigations could, however, result in changes to the Company’s business practices which could ultimately have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

The Company’s Canadian operations provide certain services to lenders which it believes to be exempt from excise tax under applicable Canadian tax laws.  However, in October 2014, the Canadian taxing authority provided internal guidance that the services in question should be subject to the excise tax.  During July 2019, the Company received an assessment from the Canadian taxing authority.  The amount of the assessment is $14.9 million, which is based on the exchange rate as of, and includes interest charges through, September 30, 2020.  As the Company does not believe that the services in question are subject to excise tax, it intends to avail itself of avenues of appeal, and it believes it is reasonably likely that the Company will prevail on the merits.  Accordingly, the Company filed a notice of appeal with the Canadian taxing authority in March 2020.  Based on the current facts and circumstances, the Company does not believe a loss is probable, therefore no liability has been recorded.

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


Item 1A.

Risk Factors.

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

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

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

when mortgage interest rates are high or rising;

when mortgage interest rates are high or rising;

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

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

when real estate values are declining.

when real estate affordability is declining.

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


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

Historically, uncertainty and negative trends in general economic conditions in the United States and abroad, including significant tightening of credit markets and a general decline in the value of real property, have created a difficult operating environment for the Company’s businessescore title and other companiessettlement businesses.  Uncertainty and a deterioration in its industries. In addition,economic conditions in connection with the coronavirus pandemic have adversely affected the Company.  These conditions also tend to negatively impact the amount of funds the Company holds investmentsreceives from third parties to be held in entities, such as title agenciestrust pending the closing of commercial and settlement service providers,residential real estate transactions.  The Company deposits a substantial portion of these funds, as well as securities in its investment portfolio, which may be negatively impacted by these conditions. The Company also owns aown funds, with the federal savings bank into which it deposits some of its own funds and some funds held in trust for third parties. Thisowns.  The Company’s bank invests those funds and any realized losses incurred on those investments 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.  Moreover, during periods of unfavorable economic conditions, the return on these funds deposited at the Company’s bank, as well as funds the Company deposits with third party financial institutions, tends to decline.  Certain rules promulgated in connection with the coronavirus pandemic allow certain borrowers to request forbearance of the payment of their mortgages.  In certain circumstances, if a borrower requests forbearance on a mortgage originated through the Company’s warehouse lender before that mortgage is sold to a third party, the Company’s warehouse lender may have to retain that loan.  In addition, the Company holds investments in entities, such as title agencies and settlement service providers, some of which have been negatively impacted by these conditions, as well as other securities in its investment portfolio, which also may be, and recently have been, negatively impacted by these conditions.  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 or return on its investments and increased credit risk from customers and others with obligations to the Company.


3.The coronavirus pandemic and the responses thereto could adversely affect the Company

The coronavirus pandemic and responses to it have created significant volatility, uncertainty and economic disruption. The extent to which the coronavirus pandemic impacts the Company’s business, operations and financial results will depend on numerous factors that the Company may not be able to accurately predict, including: the duration and scope of the pandemic and restrictions and responses to it; governmental, business and individual actions that have been and continue to be taken in response to the pandemic; the ongoing impact of the pandemic on economic activity and actions taken in response, including the efficacy of governmental relief efforts; the effect on participants in real estate transactions and the demand for the Company’s products and services, including as a result of higher unemployment, business closures and economic uncertainty; and the Company’s ability to sell and provide, or its efficiency in selling and providing, its services and solutions, including as a result of illness, travel restrictions, people working from home, governmental closure orders and partial or full closures of business and government offices.  The Company is experiencing, for example, a decrease in the number of opened commercial orders relative to the same period last year, and experienced a decrease in the number of opened residential purchase orders earlier in the pandemic.  The Company also has experienced increased volatility in the Company’s investment portfolio.  The Company is also taking certain underwriting risks that could result in increased claims.  In addition, the Company has made changes to certain of its production processes that also could result in increased claims.  While the Company is unable to predict the ultimate impact the coronavirus pandemic and related responses will have on its businesses, these events have adversely affected, and are expected to continue to adversely affect, its business and results of operations and, if prolonged, could materially adversely affect the Company’s financial condition.  The impacts of the coronavirus pandemic may also exacerbate the risks discussed elsewhere in Part II, Item 1A of this Quarterly Report.

4.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,impaired, in which case the Company would be required to write off the portion believed to be unrecoverable.impaired.  In the third quarter of 2020, the Company committed to a plan to sell its property and casualty insurance business, which triggered goodwill and other intangible assets impairment tests.  Based on the results of the impairment tests, the Company recorded pretax impairment losses to goodwill and other intangible assets of $34.2 million and $3.2 million, respectively, for the three and nine months ended September 30, 2020.  Total goodwill and other intangible assets reflected on the Company’s condensed consolidated balance sheet as of September 30, 20172020 are $1.2$1.6 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 and financial condition.

4. 5.Uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark may affect the Company’s cost of capital and net investment income

In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021, which is expected to result in these widely used reference rates no longer being available.  The Company has exposure to LIBOR-based financial instruments, such as LIBOR-based securities held in its investment portfolio.  Borrowings under the Company’s $700.0 million senior unsecured credit facility and some of its warehouse credit facilities also are LIBOR-based, although each allows for the use of an unspecified alternative benchmark rate if LIBOR is no longer available.  Potential changes to LIBOR, as well as uncertainty related to such potential changes and the establishment of any alternative reference rate, may adversely affect the Company’s cost of capital and the market for LIBOR-based securities, which could have an adverse impact on the earnings from or value of the Company’s investment portfolio.  At this time, the Company cannot predict the overall effect of the modification or discontinuation of LIBOR or the establishment of any alternative benchmark rate.

6.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 and like-kind exchange 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.  Given the current economic environment, the probability of these failures has increased.  In the event of any such failure, the Company also could be held liable for the funds owned by third parties.


5. Changes7.Regulatory oversight and changes in government regulation could require the Company to raise capital, make it more difficult to deploy capital, including dividends to shareholders and repurchases of the Company’s shares, prohibit or limit the Company’s operations, make it more costly or burdensome to conduct such operations or result in decreased demand for the Company’s products and services

Many of the Company’s businesses, including its title insurance, property and casualty insurance, home warranty, banking, trust and investmentwealth management businesses, are regulated by various federal, state, local and foreign governmental agencies.  These and other of the Company’s businesses also operate within statutory guidelines.  The industry in which the Company operates and the markets into which it sells its products are also regulated and subject to statutory guidelines.  ChangesIn general, the Company is experiencing increasing regulatory oversight and is subject to increasingly complex statutory guidelines.  This is due, among other factors, to the passing of, and significant changes in, laws and regulations pertaining to privacy and data protection and to the Company’s status as a savings and loan holding company.

Regulatory oversight could require the Company to raise capital, and/or make it more difficult to deploy capital, including dividends to shareholdersand repurchases of the Company’s shares.  For example, regulatory capital requirements for the Company have historically applied only at the subsidiary level, specifically to the Company’s federal savings bank subsidiary and the Company’s insurance underwriter subsidiaries.  However, both the National Association of Insurance Commissioners and the Board of Governors of the Federal Reserve System have issued proposals for group capital calculations.  These proposals, if finalized and adopted in their current forms, would apply to the Company at the group level and would be in addition to existing subsidiary-level capital requirements.  It is possible that the requirements, particularly in an economic downturn, could have the effect of requiring the Company to raise capital and/or making it more difficult to otherwise deploy capital, including dividends to shareholdersand repurchases of the Company’s shares.

In addition, 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 costly or burdensome to conduct such operations or result in decreased demand for the Company’s products and services or a change in ourits competitive position.  The impact of these changes would be more significant if they involve jurisdictions in which the Company generates a greater portion of its title premiums, such as the states of Arizona, California, Florida, Michigan, New York, Ohio, Pennsylvania and Texas. These changes may compel the Company to reduce its prices, may restrict its ability to implement price increases or acquire assets or businesses, may limit the manner in which the Company conducts its business or otherwise may have a negative impact on its ability to generate revenues, earnings and cash flows.


6. 8.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 conditionthe Company

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

Governmental entities have routinely inquired into certain practices in the real estate settlement services industry to determine whether certain of the Company’s businesses or its competitors have violated applicable laws, which include, among others, the insurance codes of the various jurisdictions and the Real Estate Settlement Procedures Act and similar state, federal and foreign laws.  The CFPB,Consumer Financial Protection Bureau (“CFPB”), for example, has actively been utilizingutilized its regulatory authority over the mortgage and real estate markets by bringing enforcement actions against various participants in the mortgage and settlement industries.  Departments of insurance in the various states, the CFPB and other federal regulators and applicable regulators in international jurisdictions, either separately or together, also periodically conduct targeted inquiries into the practices of title insurance companies and other settlement services providers in their respective jurisdictions.  Currently the Company is the subject of a number of regulatory inquiries.


Further, from time to time plaintiffs’ lawyers mayhave targeted, and are expected to continue to target, the Company and other members of the Company’s industry with lawsuits claiming legal violations or other wrongful conduct.  These lawsuits mayoften involve large groups of plaintiffs and claims for substantial damages.  Any of theseThese types of inquiries or proceedings have from time to time resulted, and may in the future result, in a findingfindings 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 whichconduct.  This could impact itsthe Company’s 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.  Currently the Company is a party to a number of class action lawsuits.

7. 9.The use of social media by the Company and other parties could result in damage to the Company’s reputation andor otherwise adversely affect its business or results of operations the Company

The Company increasingly utilizes social media to communicate with customers, current and potential customers and employees, andas well as other individuals interested in the Company.  Information delivered by the Company, or by third parties about the Company, via social media can be easily accessed and rapidly disseminated, and could result in reputational harm, decreased customer loyalty or other issues that could diminish the value of the Company’s brand or result in significant liability.

8. 10.Regulation of title insurance rates could adversely affect the Company’s results of operationsCompany

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 regulationThese regulations 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.

9. 11.Changes in certain laws and regulations, and in the regulatory environment in which the Company operates, could adversely affect the Company’s competitive position and results of operationsCompany

Federal and state officials are currently discussing various potential changes to laws and regulations that could impact the Company’s businesses, including changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the reform or privatization of government-sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and tax reform, including changes that could affect the mortgage interest deduction,additional data privacy regulations, among others.  Changes in these areas, and more generally in the regulatory environment in which the Company and its customers operate, could adversely impact the volume of mortgage originations in the United States and the Company’s competitive position and results of operations.  In addition, in connection with the coronavirus pandemic, the Company and generally its agents have been deemed in most areas an essential business and have been permitted to operate.  A change in this determination, particularly in jurisdictions where the Company generates a large portion of its revenues, could adversely impact the Company’s businesses.

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

An increasing number of federal, state, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data, including the California Consumer Privacy Act and the European Union General Data Protection Regulation.  The effects of these privacy and data protection laws, including the cost of compliance and required changes in the manner in which the Company conducts its business, are not fully known and are potentially significant, and the failure to comply could adversely affect the Company.  The Company has incurred costs to comply with these laws and to respond to inquiries about its compliance with them.


10. 13.Climate change, severe weather conditions, health crises and other catastrophe events could adversely affect the Company

Climate change, global or extensive health crises, severe weather and other catastrophe events could adversely affect the Company, and the current coronavirus pandemic and responses to it are having an adverse effect on the Company.  These include impacts on the results of the Company’s property and casualty insurance business due to any increase in the frequency and severity of wildfires, hurricanes, floods, earthquakes or other catastrophe or severe weather events, as well as increased claims in the Company’s home warranty business.  Home warranty claims, including those pertaining to climate control units, tend to rise as temperatures become extreme, especially in geographies where extreme temperatures are infrequent.  In addition, the Company manages its financial exposure for losses in its title insurance business and in its property and casualty insurance business with third-party reinsurance.  Catastrophic events could adversely affect the cost and availability of that reinsurance.  Moreover, to the extent climate change, health crises, severe weather conditions and other catastrophe events impact companies or municipalities whose securities the Company invests in, the value of its investment portfolio may also decrease due to these factors.  In addition, these factors may impact real estate markets and the broader economy, which could also impact the Company.  The frequency, severity, duration, and geographic location and scope of such health crises, catastrophe and severe whether events are inherently unpredictable, and, therefore, the Company is unable to predict the ultimate impact climate change and such events will have on its businesses.

14.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.  As a result of these and other factors, the Company may find it financially burdensome to acquire necessary data.

11. 15.Changes in the Company’s relationships with large mortgage lenders or government–sponsored enterprises could adversely affect the Company

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

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

Certain of the Company’s customers use measurements of the financial strength of the Company’s title insurance underwriters, including, among others, ratings provided by ratings agencies and levels of statutory capital and surplus maintained by those underwriters, in determining the amount of a policy they will accept and the amount of reinsurance required.  Each of the major ratings agencies currently rates the Company’s title insurance operations. The Company’s principal title insurance underwriter’s financial strength ratings are “A3”“A2” by Moody’s Investor Services, Inc., “A” by Fitch Ratings, Inc., “A-” by Standard & Poor’s Ratings Services and “A” by A.M. Best Company, Inc.Inc. These ratings provide the agencies’ perspectives on the financial strength, operating performance and cash generating ability of those operations.  These agencies continually review these ratings and the ratings are subject to change.  Statutory capital and surplus, or the amount by which statutory assets exceed statutory liabilities, is also a measure of financial strength.  The Company’s principal title insurance underwriter maintained $1.2$1.5 billion of total statutory capital and surplus as of December 31, 2016.2019.  Accordingly, if the ratings or statutory capital and surplus of these title insurance underwriters are reduced from their current levels, or if there is a deterioration in other measures of financial strength, the Company’s results of operations, competitive position and liquidity could be adversely affected.

13. 58


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

The Company maintains a substantial investment portfolio, primarily consisting of fixed income securities (including mortgage-backed securities).debt securities.  The investment portfolio also includes adjustable-rate debt securities, common and preferred stock, as well as money-market and other short-term investments, as well as preferred and common stock.investments. Securities in the Company’s investment portfolio are subject to certain economic and financial market risks, such as credit risk, interest rate (including call, prepayment and extension) risk and/or liquidity risk.  The risk of loss associated with the portfolio is increased during periods of instability in credit markets and economic conditions. Ifconditions, including during the carryingcurrent pandemic.  Debt and equity securities are carried at fair value ofon the investments exceedsCompany’s balance sheet.  Changes in the fair value andof debt securities is recorded as a component of accumulated other comprehensive income/loss on the declinebalance sheet.  For debt securities in an unrealized loss position, where the loss is determined to be due to credit-related factors, the Company records the loss in earnings.  Changes in the fair value is deemed to be other-than-temporary,of equity securities are recognized in earnings.  Changes in the fair value of securities in the Company’s investment portfolio have had an adverse impact on the Company will be required to write down the value of the investments, whichand could have a material adverse effect on the Company’s results of operations, statutory surplus, financial condition and financial condition.  cash flow.


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

The Company maintains a reserve for incurred but not reported (“IBNR”) claims pertaining to its title, escrow and other insurance and guarantee products.  The majority of this reserve pertains to title insurance policies, which are long-duration contracts with the majority of the claims reported within the first few years following the issuance of the policy.  Generally, 70% to 80% of claim amounts become known in the first six years of the policy life, and the majority of IBNR reserves relate to the six most recent policy years.  Changes in expected ultimate losses and corresponding loss rates for recent policy years are considered likely and could result in a material adjustment to the IBNR reserves.  Based on historical experience, management believes a 50 basis point change to the loss rates for recent policy years, positive or negative, is reasonably likely given the long duration nature of a title insurance policy.  For example,In uncertain economic times, such as those currently being experienced as a result of the coronavirus pandemic, an even larger change is more likely.  As examples, if the expected ultimate losses for each of the last six policy years increased or decreased by 50 basis points, the resulting impact on the Company’s IBNR reserve would be an increase or decrease, as the case may be, of $115.9$131.1 million, and if expected ultimate losses for those same years were to fluctuate by 100 basis points, the resulting impact would be $262.2 million.  A material change in expected ultimate losses and corresponding loss rates for older policy years is also possible, particularly for policy years with loss ratios exceeding historical norms.  The estimates made by management in determining the appropriate level of IBNR reserves could ultimately prove to be materially different from actual claims experience.

15. Changes in laws or regulations impacting real estate, particularly when applied retroactively, may cause a material change in expected ultimate losses and corresponding loss rates for recent and/or older policy years.  For example, the 2020 United States Supreme Court decision in McGirt v. Oklahoma calls into question the governing authority for certain real estate-related matters in Native American reservations once thought to have been disestablished.  To the extent the Company, in those areas, underwrote title insurance policies or closed real estate transactions in conformity with authority that ultimately proves inapplicable, expected ultimate losses arising from those policies and transactions could change materially and could result in a material change to loss rates. 

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

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


16. 20.The Company’s risk management framework could prove inadequate, resulting in financial and/or reputational harmwhich could adversely affect the Company

The Company’s risk management framework is designed to identify, monitor and mitigate risks that could have a negative impact on the Company’s financial condition or reputation.  This framework includes departments or groups dedicated to enterprise risk management, information security, disaster recovery and other information technology-related risks, business continuity, legal and compliance, compensation structures and other human resources matters, vendor management and internal audit, among others.  While manyMany of the processes overseen by these departments function at the enterprise level, but many also function through, or rely to a certain degree upon, risk mitigation efforts in local operating groups.  Similarly, with respect to the risks the Company assumes in the ordinary course of its business through the issuance of title insurance policies and the provision of related products and services, the Company employs localized as well as centralized risk mitigation efforts.  These efforts include the implementation of underwriting policies and procedures and other mechanisms for assessing risk.  Underwriting title insurance policies and making other risk-assumption decisions frequently involves a substantial degree of individual judgment and, accordingly, underwriters are maintained at the state, regional, divisional, and corporate levels with varying degrees of underwriting authority.  These individuals may be encouraged by customers or others to assume risks or to expeditiously make risk determinations.  If the Company’s risk mitigation efforts prove inadequate, the Company may experience significant financial and/or reputational harm.   could be adversely affected.


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

The Company uses computer systems and other technologies (collectively referred to as “systems”), some of which it owns and manages and some of which are owned and/or managed by third parties, including providers of distributed computing infrastructure platforms commonly known as the “cloud.”  The Company and its agents, suppliers, service providers, and customers use these systems to receive, process, store and transmit business information, including highly sensitive non-public personal information as well as data from suppliers and other information upon which itsthe Company’s business relies.  ItThe Company also uses these systems to manage substantial cash, investment assets, bank deposits, trust assets and escrow account balances on behalf of the Companyitself and its customers, among other activities.  Many of the Company’s products, services and solutions involving the use of real property related data are fully reliant on itsthese systems and are only available electronically.  Accordingly, for a variety of reasons, the integrity of the Company’s computerthese systems and the protection of the information that resides on those systemsthereon are critically important to itsthe Company’s successful operation.  The Company’s core computer

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

The Company’s computer systems and systems used by its agents, suppliers and customers have been subject to, and are likely to continue to be the target of, computer viruses, cyber attacks,cyberattacks, phishing attacks and other malicious activity.  These attacks have increased in frequency and sophistication, in recent years.particularly as a result of the coronavirus pandemic.  The Company’s employees working remotely are more susceptible to social engineering attacks, intrusions and other malicious activity, and this risk has increased given that a substantial number of the Company’s employees are working from home as a result of the coronavirus pandemic.  Further, certain other potential causes of system damage or other negative system-related events are wholly or partially beyond the Company’s control, such as natural disasters, vendor failures to satisfy service level requirements and power or telecommunications failures.  These incidents, regardless of their underlying causes, could expose the Company to system-related damage,damages, failures, interruptions, cyberattacks and other negative events or could otherwise disrupt the Company’s business and could also result in the loss or unauthorized release, gathering, monitoring or destruction of confidential, proprietary and other information pertaining to the Company, its customers, employees, agents or suppliers.

In conducting its business and delivering its products and services, the Company also utilizes service providers.  These service providers and the systems they utilize are typically subject to similar types of system- and information security-related risks that the Company faces.  The Company provides certain of these service providers with data, including nonpublic personal information.  There is no guarantee that the Company’s due diligence or ongoing vendor oversight will be sufficient to ensure the integrity and security of the systems utilized by these service providers or the protection of the information that resides thereon.  Adverse consequences for the Company in the event of a significant event involving the systems of its service providers or the information residing thereon include, among others, delays in the delivery of the Company’s products and services, direct or indirect financial loss, loss of business and reputational damage.


During the third quarter of 2019, the Company concluded an investigation regarding unauthorized access to non-public personal information as a result of a vulnerability in one of the Company's applications.  The investigation identified imaged documents containing non-public personal information pertaining to 32 consumers that likely were accessed without authorization.  These 32 consumers were notified and offered complimentary credit monitoring services.  This incident triggered numerous federal and state governmental inquiries as well as private lawsuits against the Company.  While the incident is not expected to have a material impact on the Company’s business, it increases the risk associated with any future incidents, particularly the risk of damage to the Company’s reputation.

Certain laws and contracts the Company has entered into require it to notify various parties, including consumers or customers, in the event of certain actual or potential data breaches or systems failures.failures, including those of the Company’s service providers.  These notifications can result, among other things, in the loss of customers, lawsuits, adverse publicity, diversion of management’s time and energy, the attention of regulatory authorities, fines and disruptions in sales.  Further, the Company’s financial institution customers have obligations to safeguard their computer systems and sensitive information and itthe Company may be bound contractually and/or by regulation to comply with the same requirements.  If the Company failsor its service providers fail to comply with applicable regulations and contractual requirements, itthe Company could be exposed to lawsuits, governmental proceedings or the imposition of fines, among other consequences.

Accordingly, anyAny inability to prevent or adequately respond to the issues described above could disrupt the Company’s business, inhibit its ability to retain existing customers or attract new customers, otherwise harm its reputation and/or result in financial losses, litigation, increased costs or other adverse consequences that could be material to the Company.

22.The Company is pursuing various innovative initiatives, which could result in increased title claims or otherwise adversely affect the Company

In an effort to speed the delivery of its products, increase efficiency, improve quality, improve the customer experience and decrease risk, the Company is increasingly utilizing innovative technologies, processes and techniques in the creation of its products and services.  These efforts include streamlining the closing process by converting certain manual processes into automated ones, in an endeavor to improve the customer experience by simplifying and reducing the time it takes to close a transaction, reducing risk and improving communication.  The Company increasingly is employing advanced technologies to automate various processes, including various processes related to the building, maintaining and updating of title plants and other data assets, as well as the search and examination of information in connection with the issuance of title insurance policies.  As a result of the recent reduction in interest rates in connection with the coronavirus pandemic, the Company has experienced a significant increase in refinance orders.  To facilitate the processing of these orders, the Company has expanded the use of certain of these advanced technologies.  Risks from these and other innovative initiatives include those associated with potential defects in the design and development of the technologies used to automate processes, misapplication of technologies, the reliance on data that may prove inadequate, and failure to meet customer expectations, among others.  As a result of these risks the Company could experience increased claims, reputational damage or other adverse effects, which could be material to the Company.

18. 23.Potentially disruptive innovation in the real estate industry and/or the Company’s participation in these efforts could adversely affect the Company

In addition to the Company’s innovative activities, other participants in the real estate industry are seeking to innovate in ways that could adversely impact the Company’s businesses.  These participants include certain of the Company’s sources of business, competitors and ultimate customers.  Innovations by these participants may change the demand for the Company’s products and services, the manner in which the Company’s products and services are ordered or fulfilled and the revenue or profitability derived from the products and services.  The Company has made and will likely continue to make high-risk, illiquid investments in some of these participants, typically during their early- and growth-stages.  If any of these companies do not succeed, the Company could lose and/or be required to impair all or part of its investment in the unsuccessful company.  The risk of failure or impairment for these investments is greater in the current economic environment.  These investments could also facilitate efforts that ultimately disrupt the Company’s business or enable competitors.  Accordingly, the Company’s efforts to anticipate and participate in these transformations could require significant additional investment and management attention and may not succeed.  These innovative efforts by third parties, and the manner in which the Company, its agents and other industry participants respond to them, could therefore have an adverse effect on the Company.


24.Errors and fraud involving the transfer of funds may result in material financial losses or harmadversely affect the Company’s reputationCompany

The Company relies on its systems, employees and domestic and international banks to transfer funds.its own funds and the funds of third parties.  In addition to relying on third-party banks to transfer these funds, the Company’s federal savings bank subsidiary transfers funds on behalf of the Company as well as title agents that are not affiliates of the Company.  These transfers are susceptible to user input error, fraud, system interruptions, incorrect processing and similar errors that couldfrom time to time result in lost funds or delayed transactions.  The Company’s email and computer systems and systems used by its agents, customers and other parties involved in a transaction have been subject to, and are likely to continue to be the target of, fraudulent attacks, including attempts to cause the Company or its agents to improperly transfer funds.  These attacks have increased in frequency and sophistication in recent years.sophistication.  Funds transferred to a fraudulent recipient are often not recoverable.  In certain instances the Company may be liable for those unrecovered funds.  The controls and procedures used by the Company to prevent transfer errors and fraud may prove inadequate, resulting in financial losses, reputational harm, loss of customers or other adverse consequences which could be material to the Company.

19. 25.The Company’s use of a global workforce involves risks that could negatively impactadversely affect the Company

The Company utilizes lower cost labor in countries such as India and the Philippines, among others.  These countries are subject to relatively high degrees of political and social instability and may lack the infrastructure to withstand natural disasters.disasters, health crises and other catastrophe events.  Such disruptions could decrease efficiency and increase the Company’s costs.costs, which the Company has experienced during the coronavirus pandemic.  Weakness of the United States dollar in relation to the currencies used in these countries may also reduce the savings achievable through this strategy.  Furthermore, the practice of utilizing labor based in other countries is subject to heightened scrutiny in the United States and, as a result, the Company could face pressure to decrease its use of labor based outside the United States.  Laws or regulations that require the Company to use labor based in the United States or effectively increase the cost of the Company’s labor costs abroad also could be enacted.  The Company may not be able to pass on these increased costs to its customers.


20. Acquisitions may have an adverse effect on our business

The Company has in the past acquired, and is expected to acquire in the future, other businesses. When businesses are acquired, the Company may not be able to integrate or manage these businesses in such a manner as to realize the anticipated synergies or otherwise produce returns that justify the investment. Acquired businesses may subject the Company to increased regulatory or compliance requirements. The Company may not be able to successfully retain employees of acquired businesses or integrate them, and could lose customers, suppliers or other partners as a result of the acquisitions. For these and other reasons, including changes in market conditions, the projections used to value the acquired businesses may prove inaccurate. In addition, the Company might incur unanticipated liabilities from acquisitions. These and other factors related to acquisitions could have a material adverse effect on the Company’s results of operations, financial condition and liquidity. The Company’s management also will continue to be required to dedicate substantial time and effort to the integration of its acquisitions. These efforts could divert management’s focus and resources from other strategic opportunities and operational matters.

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

The Company is a holding company whose primary assets are investments in its operating subsidiaries.  The Company’s ability to pay dividends is dependent on the ability of its subsidiaries to pay dividends or repay funds.  If the Company’s operating subsidiaries are not able to pay dividends or repay funds, the Company may not be able to fulfill parent company obligations and/or declare and pay dividends to its stockholders.  Moreover, pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available is limited.  As of September 30, 2017,2020, under such regulations, the maximum amount of dividends, loans and advances available for the remainder of 20172020 from these insurance subsidiaries, without prior approval from applicable regulators, was $759.7dividends of $304.2 million and loans and advances of $110.3 million.

22. 27.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;

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 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 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

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.

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% of the Company’s issued voting shares, could have the effect of discouraging an unsolicited acquisition proposal or delaying, deferring or preventing a change of control transaction that might involve a premium price or otherwise be considered favorably by the Company’s stockholders.



Item 6.

Exhibits.Exhibits.

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

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 datedfiled June 1, 2010.

 

 

 

 

 

  3.2

 

Amended and Restated Bylaws of First American Financial Corporation, effective as of August 16, 2017.

 

Incorporated by reference herein to Exhibit 3.1 to the Current Report on Form 8-K datedfiled August 16,22, 2017.

 

 

 

 

 

  31(a)

 

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

 

Attached.

 

 

 

 

 

  31(b)

 

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

 

Attached.

 

 

 

 

 

  32(a)

 

Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

 

Attached.

 

 

 

 

 

  32(b)

 

Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

Attached.

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document.  The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

Attached.N/A.

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

Attached.

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

Attached.

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

Attached.

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

Attached.

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

Attached.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

N/A.

 

 

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

FIRST AMERICAN FINANCIAL CORPORATION

(Registrant)

 

 

 

 

Date: October 22, 2020

 

By

/s/ Dennis J. Gilmore

 

 

 

Dennis J. Gilmore

 

 

 

Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

Date: October 22, 2020

 

By

/s/ Mark E. Seaton

 

 

 

Mark E. Seaton

 

 

 

Executive Vice President,

Chief Financial Officer

(Principal Financial Officer)

Date: October 26, 2017

 

 

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