FAF%20Annual%201999

a c l o s e r l o o k

9 9 a n n u a l r e p o r t

The First American Financial Corporation

t a b l e of c o n t e n t s

Financial Highlights 1

Letter to Stockholders 2

The First American Family of Companies and Services 4

1999— A Closer Look 5

Title Insurance and Services 6

Real Estate Information and Services 11

Consumer Information and Services 16

Management’s Discussion and Analysis 21

Selected Financial Data 26

Common Stock and Quarterly Data 27

Consolidated Balance Sheets 28

Consolidated Statements of Income 30

Consolidated Statements of Stockholders’ Equity 31

Consolidated Statements of Cash Flows 32

Notes to Consolidated Financial Statements 33

Report of Independent Accountants 41

Board of Directors 42

Officers 43

Primary Companies 44

Shareholder Information 45

The First American Financial Corporation is the nation’s

leading provider of business information and related products

and services. It serves mortgage lenders and other real

estate-related businesses, and is today complemented by

a successful and growing consumer information and services

division. Over its 111-year history, it has evolved from a one-

county abstract company into an international, diversified

business information provider.

An enduring philosophy of providing the services its customers

need — and providing them where and how they need them —

has led First American to expand in both reach and scope.

The Corporation’s Title Insurance and Services segment now

provides residential, commercial and subdivision title services

throughout the United States and in 11 additional countries.

Our Real Estate Information and Services segment serves

mortgage loan originators and administrators with an extensive

list of services and provides a variety of database information

products to a wide audience as well. First American’s growing

Consumer Information and Services segment brings consumer

information to many business markets, and offers numerous

services directly to the public. Companies throughout the

First American family are helping to lead their industries in

technological advancements, bringing efficiencies to their

customers and their own operations.

Now well into its second century, First American is based in

Santa Ana, California, where it has had its roots since 1889.

Today, the Corporation has approximately 20,000 employees

in more than 900 offices in the United States and abroad.

First American is dedicated to leading our industry — in

customer satisfaction by providing consistently high-quality

service; in innovation by developing and marketing new

systems, products and services; in profitability by demanding

efficiency; and in growth by searching out domestic and

international opportunities.

first american profile

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THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES

f i n a n c i a l h ig h l i g h t s

Percent(in thousands, except percentages, per share amounts and employee data) 1999 1998 ChangeRevenues $2,988,169 $2,943,880 2

Expenses 2,818,197 2,578,829 9

Income before income taxes, minority interests and cumulative effect of a change in accounting principle 169,972 365,051 (53)

Income taxes 62,300 128,512 (52)

Income before minority interests and cumulative effect of a change in accounting principle 107,672 236,539 (54)

Minority interests 19,029 35,012 (46)

Income before cumulative effect of a change in accounting for tax service contracts 88,643 201,527 (56)

Cumulative effect of a change in accounting fortax service contracts (Note A) (55,640)

Net income $ 33,003 $ 201,527 (84)

Stockholders’ equity $ 815,991 $ 762,265 7

Return on average stockholders’ equity (Note B) 10.9% 33.4% (67)

Cash dividends on common shares $ 15,840 $ 13,894 14

Per share of common stock —

Basic:

Income before cumulative effect of a changein accounting for tax service contracts $ 1.37 $ 3.35 (59)

Cumulative effect of a change in accounting for tax service contracts (.86)

Net income $ .51 $ 3.35 (85)

Diluted:

Income before cumulative effect of a changein accounting for tax service contracts $ 1.34 $ 3.21 (58)


Net income $ .50 $ 3.21 (84)

Stockholders’ equity $ 12.54 $ 12.08 4

Cash dividends $ .24 $ .23 4

Number of common shares outstanding —

Weighted average during the year:

Basic 64,669 60,194 7

Diluted 66,351 62,720 6

End of year 65,068 63,120 3

Number of employees 20,065 19,669 2

All consolidated results have been restated to reflect the 1999 acquisition of National Information Group accounted for under the pooling-of-interests method of accounting.

Note A — Cumulative effect of a change in accounting for tax service contracts is presented net of income taxes and minority interests. See Note 1 to theconsolidated financial statements for a description of a change in accounting for tax service contracts.

Note B — Return on average stockholders’ equity for 1999 excludes the cumulative effect of a change in accounting for tax service contracts from both net income and stockholders’ equity.

Operating Revenues by Business Segment

Title Insurance and Services – 73%

Real Estate Information and Services – 20%

Consumer Information and Services – 7%

Income Before Income Taxes and Minority Interests

Real Estate Information and Services – 25%

Consumer Information and Services – 17%

Title Insurance and Services – 58%

1999 was a year of contrasts for First American. Our overall revenues

were the best in our Company’s 111-year history, yet our earnings per

share of $1.34, representing the second-best year ever for our Company,

were well below 1998’s $2.89 (excluding a 32 cent per share investment

gain). Order counts in most of our businesses were strong during early

1999, but as the year progressed were as much as 40 percent below

1998 levels. Together, this added up to a challenging year.

In contrast to these results, our Company also made remarkable

progress in 1999. Over the past 15 years, First American has evolved

from a pure title insurance company, and in

1999 emerged as a true business information

provider, rich in technology and database

content. There is no company quite like

First American, and certainly none with the

same mix of businesses. Each of our segments

made great strides during 1999, adding

products and technology solutions for our

customers. The theme of our annual report this

year invites you to take “a closer look” at First

American as a whole. Each of our businesses should also be observed

at close range. The following is a discussion of our primary segments

and their progress during 1999, as well as a look into the future.

Technology Strengthens Our Title Operations

We saw our Title Insurance and Services segment market share

climb in 1999, as it has each year since 1957 when our nationwide

growth began. By far the Company’s largest

segment, this group continued its strategy of

linking our offices and customers, expanding

title plant capabilities and building systems

to streamline the searching process.

During 1999 and early 2000, First American

acquired title operations in more than 40

counties throughout the U.S., with title plants

in over 30 of those counties. These plants will

eventually be transferred to our Smart Title Solutions subsidiary, the

nation’s largest provider of title plant systems and data solutions.

Ultimately, the documents in the counties covered by these plants will

be included in the imaged document systems of our subsidiary Data

Tree, which maintains the largest database of imaged recorded

documents in the country. Our technology systems work by combining

historical records with modern databases, moving us closer to a

national automated search capability that allows for centralized order

processing. These efforts will soon provide unprecedented efficiencies.

Our FAST Title™ system was completed during 1999. This technology

solution allows us to integrate our title production over multiple

county lines and to integrate that production with the escrow closing

process. We also continued the expansion of our FASTSearch®

program, a system that produces completely automated title reports.

Strategic Growth Continues

Within Our Real Estate Information Segment

Inside of our Real Estate Information and Services segment is a solid

group of mortgage and database information companies. This group

also grew by acquisition in 1999, the most significant of which was

National Information Group (NAIG). This company provides flood

certification, tax service and insurance tracking services to the

mortgage industry, as well as insurance tracking services to the auto

lending and leasing industries. The integration of this acquisition,

which closed in May 1999, is proceeding ahead of schedule and

customer retention has been good.

Another significant 1999 acquisition was the default servicing

operations of the Dallas-based law firm of Barrett, Burke, Wilson,

Castle, Daffin & Frappier, L.L.P. The largest default processing

company in the nation, Barrett Burke strongly complements all of

our loan-servicing and related units. This division will provide a

significant counter-cyclical balance to our other businesses that are

more dependent on new loan originations. With this purchase, First

American has completed all of the significant elements of our menu

of mortgage-related services — a menu that has been in the making

for 15 years.

Through additional acquisitions, further market share growth and

new product introductions, this part of our company will continue

to grow long into the future.

Consumer Information Operations Yield Diversification Benefits

Our Consumer Information and Services segment includes an

incredible array of technology-oriented consumer businesses.

While this segment is our smallest, it brings our most significant

growth opportunities. Because these businesses operate outside

of the real estate arena, they also provide a steady stream of

noncyclical income.

This promising segment grew by acquisition in 1999. As a part of the

NAIG acquisition, we acquired a property and casualty insurance

company licensed in 46 states. We also purchased Five Star Insurance

Company, another property and casualty insurer. We have combined

the two under the able leadership of the Five Star team and have

begun to market homeowner’s insurance through the escrow closing

process. Early efforts indicate strong potential for this strategy.

As we did with mortgage-related products and services, we are

building a complete menu of businesses to serve the auto lending

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l e t t e r t o s t o c k h o l d e r s

Parker S. KennedyPresident

D.P. KennedyChairman of the Board

and leasing industry. We are already a major provider of credit

information to the auto lending industry through our CREDCO division.

The NAIG transaction also brought us a large auto insurance

tracking division. And, we are especially excited about our early

2000 acquisition of a minority interest in VINtek, Inc. VINtek is a

leading Internet provider of business-to-business automotive data

fulfillment services to automotive e-retailers, finance companies,

state motor vehicle agencies and other related companies.

Among its many assets, our Consumer Information and Services

segment includes the nation’s richest database of subprime credit

information. Within this extensive database is the country’s largest

collection of “skip information,” which indicates a consumer’s failure

to make a payment on an item purchased on time or on a rent-to-

own basis. Also included in this segment is the nation’s largest

eviction-notice compilation, providing information to assist landlords

in their decision-making processes.

Another successful operation within this segment is First American’s

home warranty company, the nation’s second largest, which provides

a one-year policy against problems with fixtures, such as heating

and plumbing, in resale housing. When we entered this business,

it was more cyclical and tied to the loan origination market. Over

the past 15 years, we have steadily increased the renewal rate of

these contracts, making this a far less cyclical business. This is a very

well run unit with a tremendous future.

Technology, E-commerce and Cross-Marketing Efforts

Are Expanding Our Opportunities

First American is now beginning to enjoy the benefits of our

extensive technology investments. Our internal Wide-Area

Network, which now links approximately 750 First American Title

offices, will soon link all of our divisions. FAST Web, our well-

established Internet-based order entry and delivery system, now

serves more than 48,000 customers nationwide. Our high-volume,

multi-product delivery system, called FASTDirect,™ is being rolled

out now. These powerful systems play a vital role in our strategy

to cross market our various products and services, adding to sales

efforts which are already making us a single-source provider of

multiple services to many of our largest clients.

Transitions

Tony Moiso, a board member since 1990 and a developer of major

master-planned communities in California, decided to step down

during early 2000. His counsel, great sense of humor and sage

advice will be missed. Six officers were also added to The First

American Financial Corporation in 1999, including Gary Kermott,

Executive Vice President; John Long, Executive Vice President;

Curt Caspersen, Executive Vice President; Jo Etta Bandy, Vice

President /Corporate Communications; Drew Cree, Vice President /

Human Resources; and Kathleen Collins, Assistant Secretary and

Associate Corporate Counsel. We appreciate the expertise and

valued commitment that these skilled professionals continue to bring

to our operations.

Outlook

Early 2000 has seen a return to seasonal order volumes in most of

our businesses. Orders were slow in January, but are steadily gaining

momentum. Our Company engaged in extensive cost-cutting measures

during 1999 and those efforts have continued into 2000. In light of

our lowered expense levels and the strong U.S. economy, we look

forward with confidence to the remainder of 2000 and beyond.

We have amassed a remarkable group of service, technology and

database-oriented businesses within First American. Among other

things, we provide information and services to help home buyers

to purchase homes, lenders to make mortgage loans, loan servicers

to administer their mortgage portfolios, auto lenders and leasing

companies to process car loans, landlords to rent apartments,

employers to hire employees. Our purpose is to help “grease the

wheels”of commerce, and no company does it better or in a bigger

way. Our plan is to keep growing and improving through careful

acquisition, market share growth and continued technology expansion.

We realize that many analysts still view our Corporation solely as a title

insurance company, and are assigning us a value comparable to that of

most publicly held title companies. When viewed separately, however,

each of our companies has a unique valuation formula and its own

value. When added together, these businesses are worth a great deal

more than today’s market capitalization for First American. It is our

challenge to unlock this value.

On behalf of the officers and directors of First American, we thank

you for your continued support.


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t h e f i r s t a m e r i c a n f a m i l y o f c o m p a n i e s a n d s e r v i c e s

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Title Insurance and Services

First American Title Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . Residential Title Insurance

National/Commercial Title Insurance

Subdivision Title Insurance

First American Lenders Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lender Services

First American Equity Loan Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Loan Services

First American Exchange Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1031 Tax-Deferred Exchange Services

SMS Settlement Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Title and Escrow Systems

First American Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aircraft and Vessel Title InsuranceTitle Insurance Company

Real Estate Information and Services

Mortgage Information Services:

First American CREDCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit Reporting and Information Management

First American Flood Data Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Flood Determination and Compliance

First American Nationwide Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Document Services

Contour Software, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Origination Software Systems

First American Real Estate Tax Service . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential and Commercial Real Estate Tax Reporting

First American Field Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Field Inspections

First American Excelis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Servicing Software Systems

Pinnacle Management Solutions Insurance Services, Inc. . . . . . . . . . . . . . . . Property Insurance Tracking and Lender-Placed Flood and Hazard Insurance

First American Default Management Solutions . . . . . . . . . . . . . . . . . . . . . . Default Management Services

First American Tax Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Valuation Services

Database Information and Services:

First American Real Estate Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Information and Map Image Products

Smart Title Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Title Plant and Document Imaging Services

Data Tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Database Management Services and Document Imaging Systems

First American Appraisal Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appraisal and Property Valuation

Consumer Information and Services

Consumer Information:

First American CREDCO Consumer Products Group. . . . . . . . . . . . . . . . . . . Specialized Credit Reporting

First American Registry, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resident Screening

CIC Applicant Background Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pre-Employment Screening

First American Fastrac Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Automotive Insurance Tracking

Consumer Services:

First American Home Buyers Protection Corporation. . . . . . . . . . . . . . . . . Home Warranty

Five Star and Great Pacific Insurance Companies. . . . . . . . . . . . . . . . . . . . Property and Casualty Insurance

First American Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust Services

First American Capital Management, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . Investment Services

First Security Thrift . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banking Services

The past year was a memorable one for our First American Family of Companies. Increasing

interest rates and the other economic variables that ultimately trigger a downturn in the

real estate market produced a decline in our profits and halted the record-breaking revenue

gains we enjoyed in 1998. We reacted quickly to these circumstances, substantially reducing

operating expenses and personnel to match the shrinking real estate transaction volume.

We did not, however, allow this downturn to deter us from carrying out our long-term

strategic growth plans.

We added 25 companies to the First American Family of Companies in 1999. We added property

and casualty insurance products, for example, to help reach our goal of providing all of

the information products necessary to close a real estate transaction. We also continued

to bring our products together in order to cross market and deliver them as a package —–

a strategy that is paving the way for gaining new customers and increasing market share.

We added dramatically to our product offerings within our Consumer Information and Services

segment. As this segment grows, our sensitivity to the effects of interest rates and the

cyclicality of the real estate market diminishes.

Additionally, we saw our goal to lead the industry in technology realized. Our FAST

initiatives are allowing us to deliver our products as our customers want them delivered,

increasing efficiencies for everyone along the way.

1999 brought us a new First American —– a complete business information and services

provider. A close look at our Company reveals the strong fundamentals and unique values

we have always held fast. It also shows our diligence in applying these values to every

new venture.

With the year’s changes and activities came questions from our shareholders

and analysts —– about how our Company addressed the changes in 1999, and

how we will continue to do so. With this in mind, we decided to answer

those questions directly in the following pages. We hope our responses

help to give you insight into our strategies, operations, management team

and commitment to growth. We invite you now to see how our Company continues

to evolve from a successful title company to the nation’s true leader in business

information and services.

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1 9 9 9 a c l o s e r l o o k


Gary L. KermottPresident,First American Title Insurance Company

t i t l e i n s u r a n c e a n d s e r v i c e s

America’s real estate markets maintained their momentum through much of the first half of 1999, benefiting from high employment and a strong home-buyingsentiment. As the year progressed, however, rising interest rates dampened refinancingsand led to a slowdown in residential resales. Commercial real estate, reflecting thecontinuation of nearly a decade of economic expansion, produced high occupancy andvaluation gains for property owners in most major markets.

After posting consecutive record-breaking quarterly revenue increases in 1998, theseoperations began 1999 with a 30 percent revenueincrease in the first quarter, as compared with the sameperiod in 1998. Rising mortgage rates led to a decline in refinance transactions in the second quarter, whileresidential resale and commercial markets remainedstrong. This resulted in a 9 percent increase in revenues,although the number of title orders opened slipped by 2 percent from the previous year’s second quarter. Interestrates continued to rise, and the resulting decline inrefinance activity led to a slowdown in the third quarterand a revenue total that remained nearly even with that of third quarter 1998. Resaleactivity, which began to slow in the third period, continued to be slack for the remainderof the year. The decline in refinance activity hit the company’s fourth quarter revenuesespecially hard. By the end of the year, it was shown that these transactions across allsegments of the Corporation declined by approximately 60 percent. Throughout the last half of 1999, however, the title company was diligent in reducing staff levels and

We believe that we will see strong improvements perhaps as early as the second

quarter of 2000, when we’ll begin reaping the profits from our sizeable

investments in technology. Whether we’ll reach the previous high price levels

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“When can we expect to see improvement in earnings? What happened to

the days of the $40 stock price? Do you believe First American will ever

reach those levels again?”

[Elissa Aronwald, National Title Assistant, First American Title Insurance Company of New York]

Q U E S T I O N A N S W E R

expenses to match the decreasing order volumes. As of December 31, 1999, our employee count haddecreased by 14 percent from its high point in 1999.

At year’s end, this segment’s operating revenues totaled $2.15 billion, an increase of more than 4 percentover the previous year’s total of $2.06 billion. These operations also recorded $128.7 million in incomebefore income taxes and minority interests in 1999, a decrease of 44 percent from the $227.9 millionrecord performance of 1998. The company opened 1,334,100 title orders in 1999, a 16 percent drop from the 1,585,400 opened the previous year.

First American Title Insurance Company began 1999 with a 22 percentmarket share, and maintained its leadership throughout the year as the top-ranked title company in the nation. Internationally, thecompany held a commanding market share of the title business inCanada, Australia, the United Kingdom and the Republic of Ireland,and maintained active operations in Mexico, the Bahamas, Guam,Puerto Rico and the U.S. Virgin Islands. First American Title Companyof Korea was incorporated early in the year to facilitate the issuance

of title insurance and related services in thatcountry. Today, the company continues to seek out opportunities in nations where real estate conveyancing systems lend themselves to the adoption of title insurance.

As 1999 progressed, First American Title continued its strategic growth activitiesby expanding geographically, advancing technologically, and adding new andinnovative services.

is difficult to predict. We are aggressively diversifying into counter-cyclical and

consumer-related businesses, which we hope will allow us to decrease our sensitivity

to interest rate fluctuations. The market appears to be focused on technology stocks,

which has diverted investments from traditional businesses. It’s ironic that while our

technical advances have kept us on the leading edge of our industry, that feat hasn’t

been recognized by the market. We can only repeat that we are a well-established

company, with solid assets, that has been in business for more than a century.


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0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

Total Title Insurance Revenues ($ in millions)

90 91 92 93 94 95 96 97 98 99

ANSWERED BY:Don Kennedy, Chairman of the Board,



First American’s growth strategies continued in 1999. We added to our direct operations,now totaling more than 800 offices nationwide. The company also added greatly to its extensive network of agents, with more than 5,000 now representing First AmericanTitle. With solid agency representation in every state, this group contributes significantlyto our revenues and market share growth. Our strategy continues to focus on maintaininga good balance of direct and agency operations.

Numerous acquisitions were made during 1999 asFirst American Title maintained its strategy of acquiringtitle operations known for their strength in their regions,expertise in specialized fields or market presence ingrowing urban areas. Many were also added to theFirst American family because of their extensive titlerecord databases, complementing our strategy ofdeveloping the largest and most integrated repositoryof property information in the nation. By year’s end,these experienced, high-quality operations brought First American expanded coverage in areas including California, Florida, Kansas, Maine,Michigan, Missouri, Ohio and Pennsylvania.

First American made great strides in 1999 toward realizing benefits from our substantialinvestments in technology. Our strategy of offering a fully automated, centralized title-searching capability is designed to substantially improve our Company’s title insurancemargins and ultimately set the standard for the way in which title transactions arecompleted. By eliminating the traditional system of searching property records locally,

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Increased productivity and decreased production costs, while there’s more to

it than that, will be the primary effects of our efforts to consolidate the

title searching process. Let me explain. Creating centralized searching centers

is dependent upon having title records stored within electronic databases.

Today, and for several years now, our subsidiaries Smart Title Solutions and

“You’ve talked about how technology will allow for consolidation in the title

searching process. What effects will technology have on the title company as this

consolidation, in turn, creates a decrease in title searching operations nationwide?”[Joy Palmer, Vice President, Merrill Lynch]

ANSWERED BY:Gary Kermott, President, First American Title Insurance Company


on a county-by-county basis, we continue to streamline, accelerate and control this process. Our FASTSearch® system enables the centralized searching portion of this initiative. To feed this electronicsystem, First American has pulled together records from two of its subsidiaries — Smart Title Solutions’title information repository, the largest in the United States; and Data Tree’s database of imaged recordeddocuments, also the nation’s largest. These databases continue to grow as the extensive title recordsfrom acquired companies are added.

1999 also brought the continued rollout of FAST Web, the Company’s online ordering, monitoring and delivery system. This remarkable, automated system providesmortgage originators and others with title and escrow services, as well as with appraisal, credit reporting, flood determination,home warranty and other First American products. The systemalso gives real estate professionals and others access toinformation on properties across the nation. Today, more than48,000 registered FAST Web users are realizing the benefits of this

technology advantage.

First American continued its steadyintroduction of new products in 1999,furthering its position as the industryinnovator. To address the ever-increasing globalization of business and industry,the company introduced the International Title Insurance Policy, the world’s first to provide protection for citizens of one country purchasing property inanother. During the year, First American Title also put in motion plans forEaglePLUS, which provides protection for real estate sellers and agents in


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15

20

25

94 95 96 97 98

Share of Total U.S. Title Insurance Market

(percent)

Data Tree have been imaging and storing these property documents within our immense

database. As we acquire new title companies, their records are added to this archive.

As we bring together records from our nation’s large and mid-size cities, we fulfill our

strategy of centralizing our searching activities within a handful of centers. Through

these centers, and the databases we share with other title companies, the process is

streamlined. Our productivity will increase greatly as we add production shifts within

each location, centralize our training efforts and standardize our procedures. We believe

that leveraging the efficiencies created by centralization will, in turn, lead to

increased market share. And that’s another effect we’re looking for.


connection with hazard zone disclosures. This coverage was introduced after the year’sclose. The company’s successful EAGLE Policy™, introduced in 1997 to offer expandedcoverage for residential home buyers and lenders, had its availability broadened to 37 states. Early 2000 brought the introduction of First American’s title policy providingcoverage for manufactured housing. And, later this year, our revolutionary EAGLE 9™

UCC Insurance Policy will provide lenders with title insurance for commercial loanssecured by personal property under the Uniform Commercial Code.

Continued progress was recorded by other operations within First American’s Title Insuranceand Services group. First American Transportation Title Insurance Company, which providescoverage for pleasure and commercial aircraft, introduced title insurance for nautical vesselsin early 2000. SMS Settlement Services, which designs software andsystems that improve the productivity of title plants and escrowoperations, played an increased role in corporate software developmentservices and support for many of the title company‘s key productionapplications. Our Lenders Advantage group, offering a variety of titleservices to lenders, continued its geographic expansion. And FirstAmerican Exchange Corporation saw its business increase as a qualifiedintermediary in 1031 Exchange and similar tax-related transactions.

First American Title Insurance Company continues to be fiscally sound. In1999, the company’s claims-paying ability rating was upgraded to an “A+”rating (Superior) by A.M. Best Company. It was also given an “A” rating byDuff & Phelps Credit Rating Co., an ’’A double prime’’ (Unsurpassed) byDemotech, Inc., and an “A3” (Exceptional) by Moody’s Investors Service.

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Fannie Mae and Freddie Mac have long taken the position that

the home-buying process should be faster, easier and less

expensive for everyone. We agree. In fact, we’ve built our

business plans around these initiatives. By consolidating

“Fannie Mae and Freddie Mac are committed to reducing the costs of home ownership.

How has First American Financial responded to those concerns, and how likely

is it that there will be legislative or regulatory initiatives to reduce the closing

costs —– including title insurance, document preparation, flood

certifications, tax services, etc. —– on conforming residential mortgages?”

[Sabra R. Brinkmann, CFA Senior Director — Insurance Research, Advest, Inc.]

ANSWERED BY:Craig DeRoy, Executive Vice President

and General Counsel, The First American Financial Corporation


High consumer confidence, a generally robust real estate market and the contributions of newly acquired companies brought additional business to First American’sReal Estate Information and Services operations early in 1999. Strong pretax earnings in thefirst quarter were more than offset, however, by declines in the periods that followed, asinterest rates continued to rise, refinance activity declined and First American continuedto invest in measures to prevent Y2K disorders. The Securities and Exchange Commission(SEC) mandated an accounting change in the tax services industry, also affecting this segment’s revenues. While this change decreases the recognition of tax service revenuesin the early years of a contract, the SEC allowed the industry to take a one-time charge in order to increasedeferred revenues on previously issued contracts. Accordingly, the Company took a one-time first quarter1999 after-tax charge of $55.6 million as a cumulative effect of the accounting change.

Due to these issues, Real Estate Information and Services finished the year with $54.9 million in income beforeincome taxes and minority interests, a 50 percent decrease from the $110.1 million in 1998. This segment’soperating revenues also declined by 9 percent, from a 1998 total of $630.5 million to $574.8 million in 1999.

Numerous steps to ensure this segment’s industry leadership in the gathering, packaging and distributionof real estate-related data were taken in 1999. Its services, when combined with title insurance services,provide the most complete suite of mortgage origination and administration services in the industry.Special attention is focused on providing centralized services to national lenders.

Real Estate Information and Services has been restructured to take full advantage of economies of scale and the efficient use of shared resources among its companies. First American CREDCO and First American

Nationwide Documents were brought together with the mortgage administrationcompanies to form the Mortgage Information Services group. First American

1 1


a multitude of real estate transaction services, streamlining their production and

accelerating their delivery, we’re saving time and money. We think that the consumer should

realize these benefits, in turn. Our ownership of the companies that provide these services

helps in that regard. We don’t rely on strategic alliances or affiliations that bring

layers of cost and infrastructure to each transaction. As with other industries, the

Internet is also shaping the mindset of our customers, who are now accustomed to accessing

large amounts of information instantly and cost effectively. Very soon, our investments

in technology will further speed our distribution and lower our production costs. Increased

efficiency will make the Fannie Mae and Freddie Mac concepts a reality. Legislation and

regulation will follow our lead and generate measures designed to shortcut and streamline

the process. In the end, all of our customers will benefit.

John W. LongPresident and Chief Executive Officer,

First American Real EstateInformation Services, Inc.

r e al e s ta te i n f or m a t i o n a n d s e r v i c e s

r e al e s ta t e i n f o r m a t i o n a n d s e r v i c e s

Appraisal Services was moved into the Database Information and Services group, creatingbusiness efficiencies through the combination of automated and manual appraisal capabilities.

Mortgage Information ServicesMortgage Information Services is a strong consolidation of mortgage origination andadministration services that offers advantages in cross marketing First American’s servicesto mortgage lenders.

In this group, as in Title Insurance and Services, First American’s technology investmentsare successfully helping to fulfill the Company’s strategy to provide mortgage lenders withrapid, efficient, single-source access to First American services. Customers gain speed andprofitability as First American gains cross-selling opportunities and greater revenues.

Today, we are realizing our goal of becoming the first company in our industry to create a completely integrated system by which products and services can be electronicallyordered, routed, processed and delivered to any customer, anywhere, with any technologyplatform. The result will be greater efficiency, accuracy, speed and profitability for everylink in the supply chain. Costs will be reduced dramatically on a per-order basis.

First American’s primary electronic-commerce vehicles are FAST Web, for Internet access;FAST Win™, for desktop computer applications; and FASTDirect™, for direct connection tocustomers’ existing systems. These systems, now in place with some 48,000 registeredusers, provide secure electronic ordering of multiple products and around-the-clock orderentry, routing, tracking and delivery. The Company gained national acclaim for these proprietary e-commerce solutions by ranking second on PC Week magazine’s FinancialServices Fast@Track 100 list, chosen from among 260,000 corporate information technologysites in North America.

1 2

Barry M. SandoPresident,

Mortgage Information Services

Well, let me first tell you that the Company is engaged

in a number of technology initiatives, including FASTWeb,

FASTWin and FASTDirect, a suite of multiple-product,

e-commerce platforms. We’ve also invested in improved

databases within many of our companies and in powerful,

”One of the things that attracts investors to First American is the investment

that the Company has been making in technology. Assuming that interest rates stay within

the range they’re in today, what will the revenue and expense impacts of these

investments be on the Company over the next two to three years?”

[Bruce J. Zwick, Investment Executive, R.J. Steichen & Co.]

ANSWERED BY:John Hollenbeck, National Title Processes Director,

First American Title Insurance Company


First American has strong working relationships with both Fannie Mae and Freddie Mac, the nation’slargest sources of mortgage financing. We have entered into an agreement with Fannie Mae to haveFirst American products and services made available over Fannie Mae’s MORNETPlus® network later this year. In 1999, we announced an initiative called FAST-AU™, which provides an e-commerce solutionfor mortgage brokers needing access to the automated underwriting platforms of Freddie Mac and others. Our work with these two government-sponsored entities is designed to increase efficiencies in our business and positively influence improvements in the mortgage origination process.

First American CREDCO, the nation’s leading provider of creditreporting services to the mortgage industry, has introducedFASTCredit technology, a remarkable system enabling the orderingand delivery of the first three-bureau, merged credit report over the Internet. First American CREDCO now processes more than 2 million credit reports per month, including some 800,000 relatedto home mortgages. In response to a three-year, six-fold increase incustomer inquiries, this company has invested in IBM®’s ”Magic BoxTechnology” system to permit continued expansion of its capacity.

During 1999, the Company’s Contour Software subsidiary introducedan improved tool that permits lenders to transmit data and ship documents over the Internet. With thisnew system, a lender can print complete sets of closing documents accurately and efficiently from anyInternet connection, around the clock, seven days a week.

First American’s product offerings were enhanced in May of 1999, as the Company completed its mergerwith National Information Group (NAIG). This company’s flood services and real estate tax monitoringgroups were integrated with our existing operations, creating significant economies of scale.


1 3

050100150200250300350400450500550600650

95 96 97 98 99

Total Real Estate Information Revenues

($ in millions)

new internal production systems —– all geared toward delivering a seamless, completely

integrated process for our customers. While many of these initiatives are substantially

complete, the full benefits will be realized when the new systems are rolled out to all

of our offices and customers. We expect to make a good deal of progress in that area

this year. So, will our technology initiatives help improve our bottom line? Absolutely.

In fact, we’re beginning to see the benefits of our efforts already, reflected in both

our service levels and our productivity. I truly believe that these systems will have

an incremental —– and ultimately significant —– quarter-by-quarter impact on our margins,

as they continue to successfully take hold.

r e al e s t a t e i n f o r m a t i o n a n d s e r v i c e s

Great Pacific Insurance Company, a nationwide provider of lender-placed insurance coverage,was acquired through the NAIG transaction and carries an “A” rating by A.M. Best Company.Pinnacle Management Solutions Insurance Services, Inc., a wholly owned agent, provides tracking and outsourcing services for mortgage servicers. This division monitors, on behalf ofthe mortgage lender, the status of a homeowner’s hazard insurance and, when coverage haslapsed, provides lender-placed insurance to protect the lender’s security interest. In addition,Great Pacific will be sharing resources with First American’s newly acquiredFive Star Holdings, Inc., which will utilize First American’s escrow andclosing infrastructure to provide home buyers with the convenience ofsecuring homeowner’s insurance through the real estate closing process.

In late 1999, First American purchased the default processing operationsof Dallas-based Barrett, Burke, Wilson, Castle, Daffin & Frappier, L.L.P.With this acquisition, First American became the largest provider ofdefault processing services in the nation. Revenues from default-relatedservices are counter-cyclical to the income generated from other realestate-oriented divisions. This acquisition also included LoneStarMortgagee Services, L.L.C., the largest processor of California TrustDeed enforcement services; and a majority of the assets of TitleStar,L.L.C., a title services outsourcing company. Also added to FirstAmerican was Barrett Burke’s default management software, includingthe National Default Tracking System and the acclaimed Default Account InformationSystem (DAISY™). DAISY, which is used by mortgage servicers to manage defaults, is nowdeployed in support of more than 8 million mortgage loans at 10 of the country’s largest andmost technologically sophisticated companies. Last year, First American also took steps to

1 4

Dennis J. GilmorePresident, Database Information

and Services

It is tougher to sustain positive growth during a flat market. That’s the

nature of the industry. The key to growth during those times is the ability to

gain market share. One of the primary ways we’re doing that is through the

”Can First American realize top-line growth in its Real Estate Information

and Services segment in a flat real estate or mortgage origination market?

If so, what efforts will lead that growth? Bundling? Electronic delivery? E-commerce? Leveraging across the business segments?”

[Dan Kurz, Consultant, D.K. Equities]


expand its menu of mortgage default-related services by acquiring the CMAX™ (Claims Maximization) system,the leader in claims management and processing software. This system is designed to reduce substantially thetime associated with the processing cycle, while boosting productivity by more than 30 percent.

Database Information and Services

This group continues to lead the movement toward a streamlined, automated real estate industry. Two of itscompanies, in fact, are helping to transform the way title insurance is processed. Smart Title Solutions (STS),with the largest title information repository in the nation, and Data Tree, boasting the country’s largest collection of imaged recorded property documents, are each growing rapidly. Since First American’s acquisitionof Data Tree, its archive of imaged documents has grown from 550 million to more than 700 million. In 1999 alone, STS added 47 plants to its system, bringing its total to 217, and introduced a nationwide userinterface to allow for title processing efficiencies and Internet accessibility. The combined database of thesecompanies is facilitating the centralization of title production, increasing efficiencies and improving margins.

First American Real Estate Solutions (FARES) enhanced its operations in 1999 as it completed the integration and consolidation of databases brought together by the companies that formed this group.The operation now offers detail on more than 65 million U.S. properties to lenders, Realtors®, appraisersand others. During 2000, it will provide the most comprehensive real estate data available in the industry,including superior data content and history, delivered through the most advanced, Internet-enabledUNIX-based technology platform in the business.

In 1999, First American Appraisal Services introduced the first complete Internet appraisal ordering, tracking and delivery system,branded eAppraiseIT.com. By integrating FARES’ automated valuationproducts with eAppraiseIT.com, we have created the industry’s mostpowerful appraisal source.


1 5

bundling of our services, which is allowing us to offer our clients true efficiency

benefits. Pricing combinations are securing some of our relationships as well. Our

technology is also keeping us solidly in the game. In fact, our e-commerce initiatives

are making our products easier than ever to access. We’re also partnering with many

of our clients —– in some cases creating actual joint ventures with them as we,

together, increase our market share. But most of our success, even in a flat market,

still comes from the fact that we’re a premium product provider. We’ll continue

to ensure that our client relationships benefit from this.

ANSWERED BY:John Long, President,

First American Real Estate Information Services, Inc.

c o n s u m e r i n f o r m a t i o n a n d s e r v i c e s

First American’s Consumer Information and Services business segment deliveredexceptional quarter-by-quarter improvements in revenues throughout 1999. These gainswere due primarily to greater awareness and acceptance of this segment’s services and to the addition of newly acquired companies. The group ended the year with operatingrevenues of $207.5 million, an improvement of nearly 20 percent over its year-end 1998figure of $173.4 million. This segment’s income before income taxes and minority interestsrose by almost 34 percent, from $28.5 million in 1998 to $38.1 million in 1999.

This group’s consumer-related operations add a diversified revenuestream outside the interest-rate-sensitive real estate industry, andpresent avenues of great growth potential for First American. Weforecast that as this and the Real Estate Information and Servicessegments grow and continue to add high-margin businesses, the overallCorporation’s market value will increase to a level comparable to that ofother information services companies. Today, this segment accounts for17 percent of First American Financial’s income before income taxes and minority interests, and 7 percent of its operating revenues.

This segment’s operations provide information about consumers to a variety of industries through its Consumer Information group, while it offers other services directly to consumers via its Consumer Services companies.

Consumer InformationFirst American acquired Ace Information Services in 1999 and its operations werecombined with those of First American Registry, the nation’s leading resident screening

1 6

Donald A. RobertPresident, ConsumerInformation Group

That’s a great question. Basically, it comes down to the fact that analysts

view us primarily as a title insurance company. That’s understandable,

because for decades that’s what we were. But today, and for several years

now, we’ve been far more diversified, having added counter-cyclical and

noncyclical companies well outside the title and real estate arenas. We now

have three business segments —– Title Insurance, Real Estate Information,

and Consumer Information —– which would be valued differently if viewed

”Why don’t market analysts recognize the true value of First American Financial?”

[Larry A. Sucharow, Senior Partner, Goodkind, Labaton, Rudoff & Sucharow, L.L.P.]


company. Together, these noncyclical operations provide a vitally important service to the multifamily housing industry by giving property owners and managers the information needed to assess the creditworthiness of prospective tenants. A key component of this information is First American Registry’s proprietary database of records indicating how tenants have paid theirobligations to prior landlords. First American Registry continued its national growth last year and,through the addition of Ace Information Services, significantly increased its market share in Florida and other Southern states.

Tele-Track, Inc., the nation’s leading provider of subprime consumer information to lenders, was acquired by First American in 1999. Tele-Track is the primary issuer of credit information on individuals who, through traditional reportingmethods, may not be considered creditworthy. It has a proprietarydatabase of 19 million records detailing credit histories. This information is used by furniture and appliance retailers, payday loan/check advancestores, rent-to-own retailers, subprime consumer and auto financecompanies, cable television companies and many other businesses offering credit terms.

First American Fastrac Systems came to First American through the 1999 acquisition of National Information Group. This company is the

nation’s leading automotive vehicleinsurance tracking and data management company. It providescritical, real-time, online information to lending institutions and auto leasing companies nationwide.

Also within this growing list of companies is CIC ApplicantBackground Checks, which provides information on prospective


1 7

0

50

100

150

200

250

98 99

Total Consumer Information�and Services Revenues

($ in millions)

97

separately. Today, for example, our price-to-earnings multiple is about 8, which

is comparable with that of most publicly held title insurance companies. Those in

the peer group of our Real Estate Information segment have multiples ranging from

12 to 15. And our Consumer Information segment competitors report multiples of

20 to 25. So a blended multiple for First American, which is what we think

would best depict our Company’s true value, would double the 8 we’ve earned

today. I don’t think it will be long before analysts start viewing First

American as a business and consumer information provider and, in turn,

valuing our Company this way.

ANSWERED BY:Tom Klemens, Executive Vice President

and Chief Financial Officer,The First American Financial Corporation


employees to assist employers in evaluating applicant qualifications. First AmericanCREDCO Consumer Products Division continues to offer specialized credit reports tothousands of automobile retailers and a variety of businesses, providing informationvital in the lending, credit granting and financial decision-making processes. This groupalso offers Confidential Credit® reports and other products to consumers, providingthem with information about their own credit histories and property.

Early in the year 2000, First American acquired a minority interest in VINtek, Inc., a leading Internet provider of business-to-business automotive data fulfillment services to automotive e-retailers, finance companies, state motor vehicle agencies and otherauto industry-related companies. VINtek gives automotive e-commerce companies theability to finalize the purchase of a vehicle sold on the Internet. The addition of thiscompany adds to our automotive credit reporting, subprime consumer information andinsurance tracking businesses and positions First American as a vital e-commerce sourceto this vertical market.

Consumer ServicesAs mentioned, First American acquired Five Star Insurance Company in 1999, a California-based property and casualty underwriter that manages and places coverage throughout California, Arizona and Nevada. This company will offerhomeowners insurance through First American Title Insurance Company’s extensiveescrow infrastructure.

First American Home Buyers Protection Corporation continued to grow in 1999, endingthe year with 217,000 policies in force, an increase of 30,000 over year-end 1998. Thiscompany is one of the nation’s leading providers of home warranty contracts that protecthomeowners from the cost of repair or replacement of the major operating systems and

1 8

I can tell you that we’re keenly aware of these issues, especially because of our

sizeable footprint in the national credit reporting industry. In particular, when

our businesses — including such companies as First American CREDCO, First American

Registry, Tele-Track and CIC — provide such personal information, we endeavor to do

so utilizing the highest ethical standards as our guide. Based on our long history

”Internet financial services companies have an insatiable demand for consumer

financial data for data mining, credit scoring and product underwriting purposes.

With Internet privacy concerns increasing, how does First American balance the

needs of its customers with the privacy demands of consumer advocates?”

[Sabra R. Brinkmann, CFA, Senior Director— Insurance Research, Advest, Inc.]


ANSWERED BY:Don Robert, President, Consumer Information Group

appliances in resale homes. The year’s end found First American Home Buyers Protection deriving a largerpercentage of its revenues from renewal contracts than it had previously, providing the Company with astrong, noncyclical revenue stream. The company upgraded its computer systems and undertook anaggressive direct mail campaign to realize these renewal increases. First American Home Buyers Protectionalso continued its expansion efforts, establishing business in Georgia, Utah and New Mexico, gaininglicensing in Oregon, and opening new territories in Texas, California and Arizona. The addition of asecond call center is planned for 2000 in order to accommodate the company’s rapid growth.

First American Trust built on its long-standing record of success in personal trust and employee benefittrust administration services last year. It became chartered as a Federal Savings Bank in 1999, allowing it to provide additional services, to expand nationally and to sell the services of other First Americangroups. First American Trust is expanding wire service in California and elsewhere, and has introducedPortfolio Access Link, an innovative option that allows customers secure, 24-hour Internet access to their accounts.

The company’s SEC-registered investment adviser, First American Capital Management, Inc., alsoexpanded last year. This operation manages more than $1.8 billion in assets, including a 1031Exchange short-term investment fund that accumulated almost $400 million in 1999. This company also continues to offer private asset management, as well as its First Choice Family of mutual funds thatsaw its equity retail fund ranked in the top third of 908 funds in Morningstar®’s Large Blend Category.Pacific American Securities, L.L.C., the licensed securities broker/dealer of which First American CapitalManagement owns 42 percent, grew dramatically through its acquisition of a larger competitor lastyear. This increased Pacific American’s ability to serve institutional and retail investors with stocks,bonds, mutual funds, options, annuities and other investment products.

First Security Thrift, the Company’s California-based F.D.I.C.-insured industrial bank, increased itsearnings in 1999, as it has each year for more than a decade. This company earned the highest rating


1 9

of operation under the Fair Credit Reporting Act, we are familiar with the requirements and

restrictions on the use of personal credit information for our lender, retailer, employer,

landlord and consumer customers. We’re certainly aware of the significant value of this

information and are carefully evaluating how best to realize that value further. In using this

information for commercial purposes, you can rest assured that we will comply with all

emerging standards, and will use the most advanced technology methods for storing and

protecting this data. In addition to this protected information, much of the data collected

and used by our businesses are currently available in the public domain. Even in the use of

this information, we are sensitive to consumer privacy expectations. So overall, we’re working

hard to really balance our customers’ demands for consumer information and the privacy rights

of those consumers. It’s a complex and sensitive situation that we’ve been ready for, and I

believe we’re addressing it successfully.


awarded by the independent bank analyst Bauer Financial Reports. First Security hasearned this five-star rating for safety, strength and performance in every year since 1993.The company maintains a stable group of depositors, and continues to attract a steadystream of commercial and industrial property loan business.

2 0

I know this is often said, but our biggest challenges in the immediate future really

will be our greatest opportunities. Our technology advancements, cross-marketing

efforts and the growth of our Consumer Information and Services segment will be at

the forefront of these opportunities. Building the infrastructure for our technology

systems has been a challenge —– and not an inexpensive undertaking. These systems’

tremendous capabilities, however, are now providing us with great opportunities to

meet our customers’ needs and increase their, and our, efficiency. Already, our

FASTWeb and FASTDirect online delivery systems are showing success, with more than

48,000 registered users of FAST Web alone. While our cross-marketing efforts continue

to be quite an endeavor, they also hold enormous opportunities for increased market

share. Throughout our companies, and especially within our title operations, we

have hundreds of employees capable of cross selling our numerous products. This has

allowed us to become a single-source provider of multiple services to our largest

clients, and we are continuing to aggressively approach small- to mid-size lenders

as well. But possibly our biggest task and potential for growth lies in the

expansion of our Consumer Information and Services segment. Much as we did with

our mortgage information group, we’re now building an amazing array of consumer

information products. And, many of these products can be sold by other First

American companies. For example, property and casualty insurance can be sold along

with title insurance and other mortgage-related products as part of the real estate

closing process. Our consumer segment also features a growing list of information

products directed at auto lenders, making First American a primary source of

services within that industry. Overall, the realization of our strategic growth

plans will mark our achievements over the next few years. The future holds

great potential for First American. We’re looking forward to it.

”What do you see as the biggest challenges the Company faces in 2000 and beyond?”

[Charles F. Gunther, Vice President of Research, First Security Van Kasper)

ANSWERED BY:Parker Kennedy, President, The First American Financial Corporation


m a n a g e m e n t ’ s d i s c u s s i o n a n d a n a l y s i s


2 1

Any statements in this document that look forward in time involve risks anduncertainties, including but not limited to the following: the effect of interestrate fluctuations; changes in the performance of the real estate markets; the effect of changing economic conditions; general volatility in the capitalmarkets; the demand for and the acceptance of the Company’s products;changes in applicable government regulations; continued consolidationamong the Company’s significant customers; consolidation among significantcompetitors; the impact of legal proceedings commenced by the Californiaattorney general and related litigation; the continued ability to identifybusinesses to be acquired; and changes in the Company’s ability to integratebusinesses which it acquires. The Company’s actual results, performance orachievement could differ materially from those expressed in, or implied by,any forward-looking statements. Accordingly, no assurances can be given thatany of the events anticipated by the forward-looking statements will transpireor occur or, if any of them do, what impact they will have on the results ofoperations or financial condition of the Company.

results of operations

Overview — The majority of the revenues for the Company’s title

insurance and real estate information segments depend, in large

part, upon the level of real estate activity and the cost and availability

of mortgage funds. Revenues for these segments result primarily

from resales and refinancings of residential real estate and, to a

lesser extent, from commercial transactions and the construction and

sale of new housing. The majority of the revenues for the Company’s

consumer information segment result from activities not related to

real estate. Traditionally, the greatest volume of real estate activity,

particularly residential resale, has occurred in the spring and summer

months. However, changes in interest rates, as well as other economic

factors, can cause fluctuations in the traditional pattern of real estate

activity. 1997 was a year in which relatively low mortgage interest

rates, stability in the real estate marketplace and increasing property

values prompted a resurgence in refinance and home equity

transactions, primarily towards the latter part of the year. These

factors, as well as market share increases in all of the Company’s

primary businesses, culminated in a record-setting year. Further

rate declines started in the fourth quarter of 1997 and continued

throughout 1998. This, coupled with higher consumer confidence,

led to nationwide record-setting residential resale and refinance

transactions, which, together with the particularly strong California

real estate market, resulted in record-setting revenues and net

income for the Company in 1998. The favorable conditions present

throughout 1998 continued into 1999, resulting in record-setting

revenues for the first half of the year. However, commencing in the

second quarter 1999, new orders began to soften as rising interest

rates led to a significant decline in refinance transactions, although

residential resale and commercial activity remained relatively strong.

During the second half of the year, the trend of higher interest rates

continued. New orders, including residential resale orders, continued

to decline. This, coupled with fourth quarter seasonal factors, led

to a decrease in operating revenues. In response, the Company

instituted personnel reductions and other cost-containment programs;

however, because of separation costs, the benefits of the reductions

in the latter part of the year will not be fully realized until 2000. Also

impacting 1999 were a revenue recognition accounting change for

the Company’s tax service contracts, which decreased revenues by

$22.7 million, Y2K expenses of $24.8 million and $10.8 million of

nonrecurring merger-related charges incurred in the acquisition of

National Information Group (NAIG). See Operating Revenues in

Note 1 to the consolidated financial statements for a detailed

description of the accounting change. Results for 1998 and 1997

have been restated to reflect the 1999 acquisition of NAIG,

accounted for under the pooling-of-interests method of accounting.

Operating revenues — A summary by segment of the Company’s

operating revenues is as follows:

(in thousands, except percentages) 1999 % 1998 % 1997 % Title Insurance:

Direct operations $ 1,067,133 36 $ 1,097,989 38 $ 761,774 39Agency operations 1,086,746 37 965,228 34 700,193 36

2,153,879 73 2,063,217 72 1,461,967 75Real Estate Information 574,784 20 630,510 22 343,076 18Consumer Information 207,533 7 173,380 6 127,862 7

$2,936,196 100 $2,867,107 100 $1,932,905 100

0200400600800

1,0001,2001,4001,6001,8002,0002,2002,4002,6002,8003,000

96 97 98 9990 91 92 93 94 95

Operating Revenues ($ in millions)

5%

6%

7%

8%

9%

10%

96 97 98 99

Fixed 30 -Year Mortgage Rates (average per quarter)

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4Q

Operating revenues from direct title operations decreased 2.8%

in 1999 from 1998 and increased 44.1% in 1998 over 1997. The

decrease in 1999 from 1998 was attributable to a decrease in the

number of title orders closed by the Company’s direct title operations,

offset in part by an increase in the average revenues per order closed.

The increase in 1998 over 1997 was attributable to an increase in the

number of title orders closed by the Company’s direct title operations,

as well as an increase in the average revenues per order closed. The

Company’s direct title operations closed 1,119,900, 1,210,200 and

885,600 title orders during 1999, 1998 and 1997, respectively,

representing a decrease of 7.5% in 1999 from 1998 and an increase

of 36.7% in 1998 over 1997. The decrease in 1999 from 1998 was

primarily due to the significant decrease in refinance transactions

experienced during the second half of 1999. The increase in 1998

over 1997 was primarily due to the continuation of lower mortgage

interest rates which led to an increase in overall transaction volume

nationwide (including California, a state highly concentrated with

direct operations) and increases in the Company’s title insurance

national market share. The average revenues per order closed

were $953, $907 and $860 for 1999, 1998 and 1997, respectively,

representing increases of 5.1% in 1999 over 1998 and 5.5% in 1998

over 1997. These increases were primarily attributable to appreciating

home values, an increased mix of resale activity and a resurgence in

commercial real estate transactions. Operating revenues from agency

title operations increased 12.6% in 1999 over 1998 and 37.9% in 1998

over 1997. These fluctuations were primarily attributable to the same

factors affecting direct operations mentioned above, compounded

by the inherent delay in the reporting of transactions by agents.

Real estate information operating revenues decreased 8.8% in

1999 from 1998 and increased 83.8% in 1998 over 1997. These

fluctuations were primarily attributable to the same factors affecting

title insurance mentioned above, as well as acquisition activity.

In addition, the decrease in 1999 from 1998 was also due to a

$22.7 million reduction in tax service operating revenues attributable

to the change in revenue recognition policy. Operating revenues

of $19.3 million and $141.0 million were contributed by new

acquisitions in 1999 and 1998, respectively.

Consumer information operating revenues increased 19.7% in

1999 over 1998 and 35.6% in 1998 over 1997. These increases

were primarily attributable to an increased awareness and

acceptance of this business segment’s products, increased market

share and acquisition activity. Operating revenues of $8.1 million

and $3.5 million were contributed by new acquisitions in 1999 and

1998, respectively.

Investment and other income — Investment and other income

decreased $24.8 million in 1999 from 1998 and increased $47.7

million in 1998 over 1997. The decrease in 1999 from 1998 was

primarily due to an investment gain of $32.4 million recognized in

1998 relating to the joint venture agreement with Experian, offset

in part by a 24.8% increase in the average investment portfolio

balance and a $5.2 million gain resulting from stock received in the

demutualization of a life insurance company which insures a large

portion of the Company’s corporate-owned life insurance portfolio.

The increase in 1998 over 1997 was primarily attributable to the

investment gain of $32.4 million mentioned above, as well as a

36.9% increase in the average investment portfolio balance due to

the investment of excess cash flow from operations and a portion

of the proceeds from the Company’s $100 million senior debentures

(see Note 8 to consolidated financial statements).

Salaries and other personnel costs — A summary by segment of

the Company’s salaries and other personnel costs is as follows:

(in thousands, except percentages) 1999 % 1998 % 1997 % Title Insurance $ 729,720 71 $659,289 70 $498,424 73Real Estate Information 231,696 22 221,237 23 132,170 19Consumer Information 59,106 6 51,425 6 40,879 6Corporate 14,250 1 13,562 1 10,979 2

$1,034,772 100 $945,513 100 $682,452 100

The Company’s title insurance segment (primarily direct

operations) is labor intensive; accordingly, a major variable expense

component is salaries and other personnel costs. This expense

component is affected by two competing factors: the need to

monitor personnel changes to match corresponding or anticipated

new orders, and the need to provide quality service. In addition,

this segment’s growth in operations that specialize in builder and

lender business has created ongoing fixed costs required to

service accounts.

Title insurance personnel expenses increased 10.7% in 1999 over

1998 and 32.3% in 1998 over 1997. The increase in 1999 over 1998

was primarily due to the relatively high number of employees added

during the latter part of 1998 and the beginning of 1999 in order to

service the volume of orders processed during those periods. The

Company initiated personnel and other cost reduction programs in

response to the subsequent decrease in business volume. During

the fourth quarter and full year 1999, title insurance staffing levels

were reduced by approximately 6% and 14%, respectively; however,

because of separation costs, the benefits of the fourth quarter

reductions will not be fully realized until 2000. Contributing to

the increase in salaries and other personnel costs in 1999 were

$20.8 million of personnel costs associated with new acquisitions.

The increase in 1998 over 1997 was primarily attributable to the

costs incurred servicing the increasing volume of business and

$63.0 million of personnel costs associated with new acquisitions,

offset in part by productivity gains as measured by new orders per

person. Contributing to the increases for both 1999 and 1998 was

an increased volume of labor-intensive residential resale transactions.

The Company’s direct title operations opened 1,334,100, 1,585,400

and 1,173,300 title orders in 1999, 1998 and 1997, respectively,

representing a decrease of 15.9% in 1999 from 1998 and an

increase of 35.1% in 1998 over 1997.

Real estate information personnel expenses increased 4.7% in

1999 over 1998 and 67.4% in 1998 over 1997. The increase in 1999

over 1998 was primarily attributable to $7.6 million of personnel costs

associated with new acquisitions and costs incurred in connection

2 2

2 3

with Y2K. The increase in 1998 over 1997 was primarily due to costs

incurred servicing the increase in business volume and $61.9 million

of costs associated with new acquisitions. Contributing to the increases

in both 1999 and 1998 were higher overhead costs attributable to

the integration of new acquisitions and costs associated with in-house

development of new electronic communication delivery systems for

information-based products to interface with customer needs.

Consumer information personnel expenses increased 14.9%

in 1999 over 1998 and 25.8% in 1998 over 1997. These increases

were primarily attributable to additional personnel required to service

the increased business volume and acquisition activity. Personnel

expenses associated with new acquisitions were $2.7 million and

$1.1 million for 1999 and 1998, respectively.

Premiums retained by agents — A summary of agent retention and

agent revenues is as follows:

(in thousands, except percentages) 1999 1998 1997Agent Retention $ 871,036 $773,030 $563,137Agent Revenues $1,086,746 $965,228 $700,193% Retained by Agents 80.2% 80.1% 80.4%

The premium split between underwriter and agents is in

accordance with their respective agency contracts and can vary

from region to region due to divergencies in real estate closing

practices, as well as rating structures. As a result, the percentage of

title premiums retained by agents may vary due to the geographical

mix of revenues from agency operations.

Other operating expenses — A summary by segment of the

Company’s other operating expenses is as follows:

(in thousands, except percentages) 1999 % 1998 % 1997 % Title Insurance $327,182 48 $307,055 49 $ 247,579 56Real Estate Information 249,987 37 253,695 40 146,671 34Consumer Information 72,996 11 58,243 9 32,835 8Corporate 28,691 4 14,424 2 10,591 2

$678,856 100 $633,417 100 $437,676 100

Title insurance other operating expenses (principally direct

operations) increased 6.6% in 1999 over 1998 and 24% in 1998 over

1997. The increase in 1999 over 1998 was primarily due to $9.7 million

of costs associated with new acquisitions, Y2K expenses of $5.8 million,

a $2.5 million charge resulting from a previously announced fine

imposed by the California insurance commissioner, approximately

$2.0 million in impaired asset write-offs, and general price-level

increases, offset in part by a reduction in certain incremental costs

associated with the decline in title order volume. The increase in 1998

over 1997 was primarily attributable to an increase in the incremental

costs associated with the increased order volume, marginal price-level

increases, Y2K costs and acquisition activity.

Real estate information other operating expenses decreased

1.5% in 1999 from 1998 and increased 73% in 1998 over 1997.

The decrease in 1999 from 1998 was primarily due to a reduction

in costs resulting from the Company’s cost-containment programs

initiated in response to the decline in business volume, offset in

part by $6.9 million of costs associated with new acquisitions and

Y2K expenses of $19.0 million. The increase in 1998 over 1997 was

primarily attributable to costs incurred servicing the increased business

activity, as well as $60.6 million of other operating costs relating to

new acquisitions, offset in part by cost-containment programs.

Consumer information other operating expenses increased 25.3%

in 1999 over 1998 and 77.4% in 1998 over 1997. These increases

were primarily attributable to costs incurred servicing the increased

business volume, as well as acquisition activity. Other operating

expenses associated with new acquisitions were $3.3 million in

1999 and $1.8 million in 1998.

Corporate other operating expenses increased 98.9% in 1999 over

1998 and 36.2% in 1998 over 1997. The increase in 1999 over 1998

was primarily attributable to $10.8 million of nonrecurring merger-

related charges incurred in the NAIG acquisition. The increase in

1998 over 1997 was primarily due to increased costs associated

with supporting the overall growth of the Company’s businesses.

Provision for title losses and other claims — A summary by

segment of the Company’s provision for title losses and other

claims is as follows:

(in thousands, except percentages) 1999 % 1998 % 1997 % Title Insurance $ 65,925 57 $ 68,697 55 $52,924 55Real Estate Information 10,391 9 17,428 14 8,806 9Consumer Information 39,902 34 38,053 31 35,075 36

$116,218 100 $124,178 100 $96,805 100

The provision for title insurance losses, expressed as a percentage of

title insurance operating revenues, was 3.1% in 1999, 3.3% in 1998 and

3.6% in 1997. These decreases reflect ongoing improvement in title

insurance claims experience. The provision for consumer information

losses principally reflects home warranty claims and, to a lesser

extent, property and casualty insurance claims. The provision for home

warranty claims, expressed as a percentage of home warranty operating

revenues, was 49.8% in 1999, 56.2% in 1998 and 58.3% in 1997. This

decreasing trend reflects the relative change in the average number of

claims per contract experienced during these periods. The provision

for property and casualty insurance losses, expressed as a percentage

of property and casualty insurance operating revenues, approximated

32.5% for the three-year period ended December 31, 1999.

Depreciation and amortization — Depreciation and amortization,

as well as capital expenditures, are summarized in Note 19 to the

consolidated financial statements.

Premium taxes — A summary by pertinent segment of the Company’s

premium taxes is as follows:

(in thousands, except percentages) 1999 % 1998 % 1997 % Title Insurance $21,265 93 $19,959 94 $16,034 93Consumer Information 1,632 7 1,376 6 1,204 7

$22,897 100 $21,335 100 $17,238 100

2 4

Insurers are generally not subject to state income or franchise

taxes. However, in lieu thereof, a “premium” tax is imposed on

certain operating revenues, as defined by statute. Tax rates and

bases vary from state to state; accordingly, the total premium tax

burden is dependent upon the geographical mix of operating

revenues. The Company’s underwritten title company (noninsurance)

subsidiaries are subject to state income tax and do not pay premium

tax. Accordingly, the Company’s total tax burden at the state level

is composed of a combination of premium taxes and state income

taxes. Premium taxes attributable to title insurance operations, as a

percentage of title insurance operating revenues, were approximately

1% for the three-year period ended December 31, 1999.

Interest — Interest expense decreased 8.9% in 1999 from 1998

and increased 85.5% in 1998 over 1997. The decrease in 1999

from 1998 was primarily due to $2.5 million of capitalized interest

expense related to the development of internal-use software and the

construction of the Company’s new corporate headquarters, offset in

part by increased interest expense associated with debt incurred in

connection with company acquisitions. The increase in 1998 over

1997 was primarily due to $5.5 million of interest expense related to

the 7.55% senior debentures issued in April 1998, as well as incremental

interest expense of $2.8 million related to the mandatorily redeemable

preferred securities (outstanding for the full year 1998).

Income before income taxes, minority interests and cumulative

effect of a change in accounting principle — A summary by

segment is as follows:

(in thousands, except percentages) 1999 % 1998 % 1997 % Title Insurance $128,738 58 $227,906 62 $ 79,602 56Real Estate Information 54,914 25 110,069 30 40,608 28Consumer Information 38,080 17 28,455 8 22,134 16

221,732 100 366,430 100 142,344 100

Corporate (51,760) (1,379) (27,967)$169,972 $365,051 $114,377

The Company’s profit margins vary according to a number

of factors, including the volume, composition (residential or

commercial) and type (resale, refinancing or new construction)

of real estate activity. For example, in title insurance operations,

commercial transactions tend to generate higher revenues and

greater profit margins than residential transactions. Further, profit

margins from refinancing activities are lower than those from resale

activities because in many states there are premium discounts on,

and cancellation rates are higher for, refinancing transactions.

Cancellations of title orders adversely affect profits because costs

are incurred in opening and processing such orders but revenues

are not generated. Also, the Company’s direct title insurance

business has significant fixed costs in addition to its variable

costs. Accordingly, profit margins from the Company’s direct title

insurance business improve as the volume of title orders closed

increases. Title insurance profit margins are also affected by the

percentage of operating revenues 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. Real estate information

profits are generally unaffected by the type of real estate

activity but increase as the volume of residential real estate loan

transactions increases. Consumer information profits increase as

the volume of transactions increases and are not affected by real

estate activity. In general, the title insurance business is a lower-

margin business when compared to the Company’s other segments.

The lower margins reflect the high fixed cost of producing title

evidence, whereas the corresponding revenues are subject to

regulatory and competitive pricing constraints.

The increase in net corporate expenses in 1999 over 1998 was

primarily due to an investment gain of $32.4 million recognized in

1998 relating to the joint venture agreement with Experian; and

in 1999, $10.8 million of nonrecurring merger-related charges

incurred in the NAIG acquisition; and decreased equity in earnings

of unconsolidated subsidiaries. The decrease in net corporate

expenses in 1998 from 1997 was primarily attributable to the

investment gain of $32.4 million mentioned above.

Income taxes — The Company’s effective income tax rate, which

includes a provision for state income and franchise taxes for non-

insurance subsidiaries, was 36.7%, 35.2% and 37.5% for 1999, 1998

and 1997, respectively. The differences in the effective tax rate were

primarily due to changes in the ratio of permanent differences to

income before income taxes and minority interests and changes in

state income and franchise taxes resulting from fluctuations in the

Company’s noninsurance subsidiaries’ contribution to pretax profits.

Information regarding items included in the reconciliation of the

effective rate with the federal statutory rate is contained in Note 10

to the consolidated financial statements.

-50

0

50

100

150

200

250

300

350

400

90 92 97 98 9991 93 969594

Income Before Income Taxes, Minority Interests and Cumulative Effect�

of a Change in Accounting Principle ($ in millions)

Minority interests — Minority interests in net income of consolidated

subsidiaries decreased $16.0 million in 1999 from 1998 and increased

$31.3 million in 1998 over 1997. These fluctuations were primarily

due to the relative change in the operating results of the Company’s

joint venture with Experian.

Net income — Net income and per share information are summarized

as follows:

(in thousands, except per share amounts) 1999 1998 1997Income before cumulative effect

of a change in accountingfor tax service contracts $88,643 $201,527 $67,765

Net income $33,003 $201,527 $67,765Per share of common stock:

Income before cumulative effectof a change in accountingfor tax service contracts:

Basic $ 1.37 $ 3.35 $ 1.19Diluted $ 1.34 $ 3.21 $ 1.16

Net income:Basic $ .51 $ 3.35 $ 1.19Diluted $ .50 $ 3.21 $ 1.16

Weighted average shares:Basic 64,669 60,194 57,092Diluted 66,351 62,720 58,482

liquidity and capital resources

Cash provided by operating activities amounted to $173.2 million,

$361.6 million and $117.4 million for 1999, 1998 and 1997, respectively,

after net claim payments of $119.3 million, $100.9 million and

$88.1 million, respectively. The principal nonoperating uses of cash and

cash equivalents for the three-year period ended December 31, 1999,

were for capital expenditures, additions to the investment portfolio,

company acquisitions in 1999 and 1997, dividends and the repayment

of debt. The most significant nonoperating sources of cash and cash

equivalents were proceeds from the sales and maturities of certain

investments, proceeds in 1999 from the sale-leaseback of certain

property and equipment, proceeds in 1998 from the issuance of

senior debentures and proceeds in 1997 from the issuance of

mandatorily redeemable preferred securities. The net effect of all

activities on total cash and cash equivalents was a decrease of

$31.3 million for 1999, an increase of $197.9 million for 1998 and

an increase of $8.3 million for 1997.

On April 7, 1998, the Company issued and sold $100.0 million

of 7.55% senior debentures, due April 1, 2028. The Company used a

portion of the net proceeds from the sale to repay certain obligations

and purchase land for the Company’s new corporate facilities. The

remaining proceeds were invested in debt and equity securities.

On July 2, 1999, the Company increased its lines of credit to

$175.0 million. Pursuant to the terms of the credit agreements, the

Company is required to maintain minimum levels of capital and

earnings and meet predetermined debt-to-capitalization ratios.

The lines of credit are currently unused.

Notes and contracts payable, as a percentage of total

capitalization, was 16.4% as of December 31, 1999, as compared

with 13% as of the prior year end. This increase was primarily

attributable to debt incurred in connection with company acquisitions,

offset, in part, by an increase in the capital base primarily due to

shares issued in connection with company acquisitions and net

income for the period. Notes and contracts payable are more fully

described in Note 8 to the consolidated financial statements.

Pursuant to various insurance and other regulations, the maximum

amount of dividends, loans and advances available to the Company

in 2000 from its insurance subsidiaries is $133.1 million. Such

restrictions have not had, nor are they expected to have, an

impact on the Company’s ability to meet its cash obligations.

During the latter part of 1999, the Company successfully completed

its Y2K plan. The plan, which was created with the help of an outside

consulting firm in January 1997, was completed at a total cost of

$40.0 million.

Due to the Company’s significant liquid asset position and

its consistent ability to generate cash flows from operations,

management believes that its resources are sufficient to satisfy

its anticipated operational cash requirements. The Company’s

strong financial position will enable management to react to future

opportunities for acquisitions or other investments in support of the

Company’s continued growth and expansion.

2 5

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50

100

150

200

250

300

350

400

90 92 97 98 9991 93 969594

Cash Flows from Operating Activities ($ in millions)

2 6

s e l e c t e d f i n a n c i a l d a t a

Year Ended December 31

(in thousands, except percentages, per share amounts and employee data) 1999 1998 1997 1996 1995Revenues $2,988,169 $2,943,880 $1,962,001 $1,654,976 $1,293,210Income before cumulative effect of a change in

accounting for tax service contracts (Note A) $ 88,643 $ 201,527 $ 67,765 $ 55,766 $ 2,934Cumulative effect of a change in accounting for

tax service contracts (Note A) $ (55,640)Net income $ 33,003 $ 201,527 $ 67,765 $ 55,766 $ 2,934Total assets $2,116,414 $1,852,731 $1,220,377 $1,010,556 $ 907,252 Notes and contracts payable $ 196,815 $ 143,466 $ 51,720 $ 72,761 $ 77,430Mandatorily redeemable preferred securities $ 100,000 $ 100,000 $ 100,000Stockholders’ equity $ 815,991 $ 762,265 $ 442,783 $ 384,931 $ 338,659Return on average stockholders’ equity (Note B) 10.9% 33.4% 16.4% 15.4% .9%Cash dividends on common shares $ 15,840 $ 13,894 $ 14,035 $ 7,928 $ 6,850Per share of common stock (Note C) —

Basic:Income before cumulative effect of a change

in accounting for tax service contracts $ 1.37 $ 3.35 $ 1.19 $ .98 $ .05Cumulative effect of a change in accounting

for tax service contracts (.86)Net income $ .51 $ 3.35 $ 1.19 $ .98 $ .05

Diluted:Income before cumulative effect of a change

in accounting for tax service contracts $ 1.34 $ 3.21 $ 1.16 $ .98 $ .05Cumulative effect of a change in accounting

for tax service contracts (.84)Net income $ .50 $ 3.21 $ 1.16 $ .98 $ .05

Stockholders’ equity $ 12.54 $ 12.08 $ 7.74 $ 6.76 $ 5.96Cash dividends $ .24 $ .23 $ .25 $ .14 $ .12

Number of common shares outstanding (Note C) —Weighted average during the year:

Basic 64,669 60,194 57,092 56,652 56,812Diluted 66,351 62,720 58,482 57,112 56,812

End of year 65,068 63,120 57,186 56,965 56,849Title orders opened (Note D) 1,334 1,585 1,173 1,027 894Title orders closed (Note D) 1,120 1,210 886 775 667Number of employees 20,065 19,669 13,156 11,611 10,149

All consolidated results reflect the 1999 acquisition of NAIG accounted for under the pooling-of-interests method of accounting.

Note A — See Note 1 to the consolidated financial statements for a description of the change in accounting for tax service contracts.

Note B — Return on average stockholders’ equity for 1999 excludes the cumulative effect of a change in accounting for tax service contracts from both net income and stockholders’ equity.

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

Note D— Title order volumes are those processed by the direct title operations of the Company and do not include orders processed by agents.

0200400600800

1,0001,2001,4001,6001,8002,0002,2002,4002,6002,8003,000

96 97 98 9990 91 92 93 94 95

Total Revenues ($ in millions)

0200400600800

1,0001,2001,4001,6001,8002,0002,200

90 92 97 98 9991 93 969594

Total Assets ($ in millions)

050100150200250300350400450500550600650700750800850

Stockholders’ Equity ($ in millions)

96 97 98 9990 91 92 93 94 95


2 7

c o m m o n s t o c k p r i c e s a n d d i v i d e n d s


The Company’s common stock trades on the New York Stock Exchange (ticker symbol FAF). The approximate number of record holders of common stock on March 20, 2000, was 3,679.

High and low stock prices and dividends for the last two years were as follows: 1999 1998

Cash CashQuarter Ended High-low range dividends High-low range dividends

March 31 $34.81–$15.81 $.06 $22.88–$16.08 $.06June 30 $20.69–$13.88 $.06 $30.75–$21.08 $.05September 30 $19.25–$12.00 $.06 $41.25–$25.75 $.06December 31 $15.13–$11.50 $.06 $36.06–$24.94 $.06

While the Company expects to continue its policy of paying regular quarterly cash dividends, future dividends will be dependent on future earnings, financial condition and capital requirements.

The payment of dividends is subject to the restrictions described in Note 2 to the consolidated financial statements.

q u a r t e r l y f i n a n c i a l d a t aQuarter Ended

(in thousands, except per share amounts) March 31 June 30 September 30 December 31

Year Ended December 31, 1999Revenues $730,867 $781,855 $775,054 $700,393Income before income taxes, minority interests and

cumulative effect of a change in accounting principle $ 52,686 $ 63,010 $ 50,840 $ 3,436Cumulative effect of a change in accounting

for tax service contracts $ (55,640)Net income (loss) $ (27,557) $ 34,811 $ 27,993 $ (2,244)Net income (loss) per share:

Basic $ (.43) $ .54 $ .43 $ (.03)Diluted $ (.42) $ .52 $ .42 $ (.03)

Year Ended December 31, 1998

Revenues $628,216 $726,420 $775,028 $814,216Income before income taxes and minority interests $ 82,768 $ 84,635 $101,761 $ 95,887Net income $ 45,321 $ 46,126 $ 56,200 $ 53,880Net income per share:

Basic $ .79 $ .78 $ .91 $ .86Diluted $ .76 $ .75 $ .87 $ .82

In December 1999, the Company adopted Staff Accounting Bulletin No. 101 (SAB), ”Revenue Recognition in Financial Statements,” which became effective January 1, 1999. In conformity with the SAB the Company has restated its results for the first three quarters of 1999. See Note 1 to the consolidated financial statements for further discussion.

All financial results presented include the effect of the 1999 acquisition of NAIG accounted for under the pooling-of-interests method of accounting.

$45

$40

$35

$30

$25

$20

$15

$10

$ 5

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Stock Prices

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Highs

Lows

98 99

c o n s o l i d a t e d b a l a n c e s h e e t s


2 8

December 31

Assets 1999 1998

Cash and cash equivalents $ 350,010,000 $ 381,293,000

Accounts and accrued income receivable,less allowances ($13,669,000 and $10,715,000) 180,824,000 201,165,000

Income taxes receivable 8,606,000

Investments:

Deposits with savings and loan associations and banks 32,225,000 39,480,000

Debt securities 226,369,000 235,628,000

Equity securities 39,266,000 32,573,000

Other long-term investments 86,686,000 63,244,000

384,546,000 370,925,000

Loans receivable 87,338,000 72,035,000

Property and equipment, at cost:

Land 41,662,000 34,578,000

Buildings 145,204,000 112,664,000

Furniture and equipment 379,975,000 356,338,000

Less — accumulated depreciation (173,527,000) (181,489,000)

393,314,000 322,091,000

Title plants and other indexes 250,723,000 216,711,000

Assets acquired in connection with claim settlements 24,196,000 17,051,000

Deferred income taxes 48,284,000 16,324,000

Goodwill and other intangibles, less accumulated amortization ($27,707,000 and $20,434,000) 284,390,000 187,106,000

Other assets 104,183,000 68,030,000

$2,116,414,000 $1,852,731,000

2 9

December 31

Liabilities and Stockholders’ Equity 1999 1998Demand deposits $ 80,843,000 $ 67,404,000

Accounts payable and accrued liabilities:

Accounts payable 38,899,000 21,887,000

Salaries and other personnel costs 78,803,000 88,579,000

Pension costs 65,796,000 50,100,000

Other 97,200,000 104,268,000

280,698,000 264,834,000

Deferred revenue 279,766,000 119,202,000

Reserve for known and incurred but not reported claims 273,724,000 272,921,000

Income taxes payable 22,734,000

Notes and contracts payable 196,815,000 143,466,000

Minority interests in consolidated subsidiaries 88,577,000 99,905,000

Commitments and contingencies (Note 13)

Mandatorily redeemable preferred securities of the Company’ssubsidiary trust whose sole assets are the Company’s $100,000,000 8.5% deferrable interest subordinated notes due 2012 (Note 14) 100,000,000 100,000,000

Stockholders’ equity:

Preferred stock, $1 par value

Authorized — 500,000 shares; Outstanding— None

Common stock, $1 par value (Note 15)

Authorized — 108,000,000 shares

Outstanding — 65,068,000 and 63,120,000 shares 65,068,000 63,120,000

Additional paid-in capital 184,759,000 146,624,000

Retained earnings 561,946,000 544,783,000

Accumulated other comprehensive income (Note 16) 4,218,000 7,738,000

Total stockholders’ equity 815,991,000 762,265,000

$2,116,414,000 $ 1,852,731,000

See notes to consolidated financial statements.

c o n s o l i d a t e d s t a t e m e n t s o f i n c o m e

3 0


1999 1998 1997

Revenues

Operating revenues $2,936,196,000 $2,867,107,000 $1,932,905,000

Investment and other income 51,973,000 76,773,000 29,096,000

2,988,169,000 2,943,880,000 1,962,001,000

Expenses

Salaries and other personnel costs 1,034,772,000 945,513,000 682,452,000

Premiums retained by agents 871,036,000 773,030,000 563,137,000

Other operating expenses 678,856,000 633,417,000 437,676,000

Provision for title losses and other claims 116,218,000 124,178,000 96,805,000

Depreciation and amortization 77,031,000 62,263,000 40,025,000

Premium taxes 22,897,000 21,335,000 17,238,000

Interest 17,387,000 19,093,000 10,291,000

2,818,197,000 2,578,829,000 1,847,624,000

Income before income taxes, minority interests andcumulative effect of a change in accounting principle 169,972,000 365,051,000 114,377,000

Income taxes 62,300,000 128,512,000 42,936,000

Income before minority interests and cumulative effect of a change in accounting principle 107,672,000 236,539,000 71,441,000

Minority interests 19,029,000 35,012,000 3,676,000

Income before cumulative effect of a change in accounting principle 88,643,000 201,527,000 67,765,000

Cumulative effect of a change in accounting for tax servicecontracts, net of income taxes and minority interests (Note 1 ) (55,640,000)

Net income 33,003,000 201,527,000 67,765,000

Other comprehensive income (loss), net of tax (Note 16):

Unrealized gain (loss) on securities (4,283,000) 3,269,000 2,751,000

Minimum pension liability adjustment 763,000 (1,206,000)

(3,520,000) 2,063,000 2,751,000

Comprehensive income $ 29,483,000 $ 203,590,000 $ 70,516,000

Per share amounts:

Basic:Income before cumulative effect of a change in accounting

for tax service contracts $1.37 $3.35 $1.19


Net income $ .51 $3.35 $1.19

Diluted:Income before cumulative effect of a change in accounting

for tax service contracts $1.34 $3.21 $1.16


Net income $ .50 $3.21 $1.16

Weighted-average common shares outstanding:

Basic 64,669,000 60,194,000 57,092,000

Diluted 66,351,000 62,720,000 58,482,000



3 1

c o n s o l i d a t e d s t a t e m e n t s o f s t o c k h o l d e r s ’ e q u i t y


AccumulatedAdditional other

Common paid-in Retained comprehensiveShares stock capital earnings income

Balance at December 31, 1996 56,966,000 $56,966,000 $ 21,621,000 $303,420,000 $2,924,000

Net income for 1997 67,765,000

Cash dividends on common shares (14,035,000 )

Shares issued in connection withcompany acquisitions 48,000 48,000 500,000

Shares issued in connection withbenefit and savings plans 718,000 718,000 5,268,000

Purchase of Company shares (546,000) (546,000) (4,617,000)

Other comprehensive income 2,751,000

Balance at December 31, 1997 57,186,000 57,186,000 22,772,000 357,150,000 5,675,000

Net income for 1998 201,527,000


Shares issued in connection with company acquisitions 4,458,000 4,458,000 100,854,000

Shares issued in connection withbenefit and savings plans 1,476,000 1,476,000 22,998,000

Other comprehensive income 2,063,000

Balance at December 31, 1998 63,120,000 63,120,000 146,624,000 544,783,000 7,738,000

Net income for 1999 33,003,000


Shares issued in connection with company acquisitions 1,398,000 1,398,000 27,195,000

Shares issued in connection withbenefit and savings plans 794,000 794,000 13,789,000

Purchase of company shares (244,000) (244,000) (2,849,000)

Other comprehensive loss (3,520,000 )

Balance at December 31, 1999 65,068,000 $65,068,000 $184,759,000 $561,946,000 $4,218,000


c o n s o l i d a t e d s t a t e m e n t s o f c a s h f l o w s


1999 1998 1997Cash flows from operating activities:

Net income $ 33,003,000 $201,527,000 $ 67,765,000Adjustments to reconcile net income to cash provided by operating activities —

Provision for title losses and other claims 116,218,000 124,178,000 96,805,000Depreciation and amortization 77,031,000 62,263,000 40,025,000Minority interests in net income 19,029,000 35,012,000 3,676,000Cumulative effect of a change in accounting principle (Note 1) 55,640,000Investment gain (5,160,000) (32,449,000)Other, net (1,164,000) 2,226,000 933,000

Changes in assets and liabilities excluding effects ofcompany acquisitions and noncash transactions —

Claims paid, including assets acquired, net of recoveries (119,279,000) (100,855,000) (88,085,000)Net change in income tax accounts (26,895,000) 34,382,000 12,097,000Decrease (increase) in accounts and accrued income receivable 27,037,000 (42,570,000) (28,700,000)Increase in accounts payable and accrued liabilities 1,745,000 71,075,000 10,025,000Increase in deferred revenue 25,189,000 10,203,000 8,674,000Other, net (29,175,000) (3,437,000) (5,768,000)

Cash provided by operating activities 173,219,000 361,555,000 117,447,000Cash flows from investing activities:

Net cash effect of company acquisitions/dispositions (73,700,000) 8,953,000 (59,217,000)Net decrease (increase) in deposits with banks 7,648,000 (3,771,000) (7,355,000)Purchases of debt and equity securities (92,463,000) (144,388,000) (136,623,000)Proceeds from sales of debt and equity securities 88,219,000 32,302,000 39,240,000Proceeds from maturities of debt securities 21,789,000 36,729,000 78,948,000Net decrease (increase) in other long-term investments 6,797,000 (1,580,000) (1,117,000)Net increase in loans receivable (15,303,000) (8,657,000) (9,122,000)Capital expenditures (212,588,000) (160,526,000) (77,976,000)Net proceeds from sale of property and equipment 86,037,000 3,361,000 1,646,000Cash used for investing activities (183,564,000) (237,577,000) (171,576,000)

Cash flows from financing activities:Net increase in demand deposits 13,439,000 4,929,000 11,154,000Proceeds from issuance of notes 4,740,000 9,268,000Repayment of debt (14,897,000) (28,058,000) (41,965,000)Proceeds from issuance of senior debentures 99,456,000Proceeds from the issuance of mandatorily redeemable preferred securities 100,000,000Purchase of Company shares (3,093,000) (5,163,000)Proceeds from exercise of stock options 4,350,000 3,413,000 2,482,000Proceeds from issuance of stock to employee savings plan 4,794,000 18,144,000 980,000Distributions to minority shareholders (9,691,000) (14,762,000) (299,000)Cash dividends (15,840,000) (13,894,000) (14,035,000)Cash (used for) provided by financing activities (20,938,000) 73,968,000 62,422,000

Net (decrease) increase in cash and cash equivalents (31,283,000) 197,946,000 8,293,000Cash and cash equivalents — Beginning of year 381,293,000 183,347,000 175,054,000

Cash and cash equivalents — End of year $350,010,000 $381,293,000 $ 183,347,000Supplemental information

Cash paid during the year for:Interest $ 19,454,000 $ 17,429,000 $ 8,608,000Premium taxes $ 27,527,000 $ 18,433,000 $ 18,103,000Income taxes $ 91,926,000 $ 97,474,000 $ 32,865,000

Noncash investing and financing activities:Shares issued for benefits plans $ 5,439,000 $ 2,917,000 $ 2,524,000Company acquisitions in exchange for common stock $ 28,593,000 $105,312,000 $ 548,000Liabilities in connection with company acquisitions $ 96,305,000 $118,718,000 $ 48,294,000


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c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s


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note 1Description of the Company:

The First American Financial Corporation (the Company), through its subsidiaries, is engaged in the business of providing businessinformation and related products and services. The Company’s threeprimary business segments are title insurance and services, real estateinformation and services, and consumer information and services. Thetitle insurance segment issues residential and commercial title insurancepolicies, and provides escrow services, equity loan services, tax-deferredexchanges and other related products. The real estate informationsegment provides tax monitoring, mortgage credit reporting, propertydata services, flood certification, field inspection services, appraisalservices, mortgage loan servicing systems and mortgage documentpreparation. The consumer information segment provides homewarranties, property and casualty insurance, resident screening, pre-employment screening, specialized credit reporting, automotiveinsurance tracking, investment advisory, and trust and thrift services.

Significant Accounting Policies:Principles of consolidation

The consolidated financial statements include the accounts of The First American Financial Corporation and all majority-ownedsubsidiaries. All significant intercompany transactions and balanceshave been eliminated. All consolidated results reflect the 1999acquisition of National Information Group accounted for under thepooling-of-interests method of accounting. Certain 1997 and 1998amounts have been reclassified to conform with the 1999 presentation.

Cash equivalentsThe Company considers cash equivalents to be all short-term

investments which have an initial maturity of 90 days or less and arenot restricted for statutory deposit or premium reserve requirements.The carrying amount for cash equivalents is a reasonable estimate offair value due to the short-term maturity of these investments.

InvestmentsDeposits with savings and loan associations and banks are

short-term investments with initial maturities of more than 90 days.The carrying amount of these investments is a reasonable estimate of fair value due to their short-term nature.

Debt securities are carried at fair value and consist primarily ofinvestments in obligations of the United States Treasury, variouscorporations and certain state and political subdivisions.

Equity securities are carried at fair value and consist primarily ofinvestments in marketable common stocks of corporate entities inwhich the Company’s ownership does not exceed 20%.

Other long-term investments consist primarily of investments in affiliates, which are accounted for under the equity method ofaccounting, and notes receivable, which are carried at the lower of cost or fair value less costs to sell.

The Company classifies its debt and equity securities portfolio asavailable-for-sale and, accordingly, includes unrealized gains and losses,net of related tax effects, as a component of other comprehensiveincome. Realized gains and losses on investments are determinedusing the specific identification method.

Property and equipmentEffective January 1, 1999, the Company adopted Statement of

Position (SOP) 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.” SOP 98-1 requires theCompany to capitalize interest costs incurred and certain payroll-related costs of employees directly associated with developingsoftware, in addition to incremental payments to third parties. The adoption of SOP 98-1 did not have a material effect on the Company’s financial condition or results of operations.

Furniture and equipment includes computer software acquiredand developed for internal use and for use with the Company’sproducts. Software development costs are capitalized from the time technological feasibility is established until the software is ready for use.

Depreciation on buildings and on furniture and equipment iscomputed using the straight-line method over estimated useful livesof 25 to 45 and three to 10 years, respectively. Capitalized softwarecosts are amortized using the straight-line method over estimateduseful lives of three to 10 years.

Title plants and other indexesTitle plants and other indexes are carried at original cost.

The costs of daily maintenance (updating) of these plants and other indexes are charged to expense as incurred. Because properlymaintained title plants and other indexes have indefinite lives anddo not diminish in value with the passage of time, no provision hasbeen made for depreciation.

Assets acquired in connection with claim settlementsIn connection with settlement of title insurance and other claims,

the Company sometimes purchases mortgages, deeds of trust, realproperty, or judgment liens. These assets, sometimes referred to as“salvage assets,” are carried at the lower of cost or fair value lesscosts to sell.

Goodwill and other intangiblesGoodwill recognized in business combinations is amortized

over its estimated useful life ranging from 20 to 40 years. Otherintangibles, which include customer lists and covenants not tocompete, are amortized over their estimated useful lives, rangingfrom three to 20 years. The Company periodically evaluates theamortization period assigned to each intangible asset to ensure that there have not been any events or circumstances that warrantrevised estimates of useful lives.

Impairment of goodwill, loans receivable and other long-lived assets

The Company periodically reviews the carrying value of goodwill,loans receivable and other long-lived assets for impairment whenevents or circumstances warrant such a review.

To the extent that the undiscounted cash flows related to thebusinesses underlying the goodwill are less than the carrying value ofthe related goodwill, such goodwill will be reduced to the amount of the undiscounted cash flows.

A loan is impaired when, based on current information and events,it is probable that the Company will be unable to collect all amountsdue according to the contractual terms of the loan agreement.Impaired loans receivable are measured at the present value ofexpected future cash flows discounted at the loan’s effective interestrate. As a practical expedient, the loan may be valued based on itsobservable market price or the fair value of the collateral, if the loanis collateral dependent.

To the extent that the undiscounted cash flows related to otherlong-lived assets are less than the assets’ carrying value, the carryingvalue of such assets is reduced to the assets’ fair value.

Reserve for known and incurred but not reported claimsThe Company provides for title insurance losses based upon

its historical experience by a charge to expense when the relatedpremium revenue is recognized. Title insurance losses and otherclaims associated with ceded reinsurance are provided for as theCompany remains contingently liable in the event that the reinsurerdoes not satisfy its obligations. The reserve for known and incurredbut not reported claims reflects management’s best estimate of thetotal costs required to settle all claims reported to the Company and

notes to

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claims incurred but not reported. The process applied to estimateclaims costs is subject to many variables, including changes andtrends in the type of title insurance policies issued, the real estatemarket and the interest rate environment. It is reasonably possiblethat a change in the estimate will occur in the future.

The Company provides for claims losses relating to its homewarranty business based on the average cost per claim as applied to the total of new claims incurred. The average cost per claim iscalculated using the average of the most recent 12 months of claims experience.

Operating revenuesTitle insurance — Title premiums on policies issued directly by the

Company are recognized on the effective date of the title policy andescrow fees are recorded upon close of the escrow. Revenues fromtitle policies issued by independent agents are recorded when noticeof issuance is received from the agent.

Real estate information — In December 1999, the Companyadopted Staff Accounting Bulletin No. 101 (SAB), “RevenueRecognition in Financial Statements.” The SAB, which becameeffective January 1, 1999, applies to the Company’s tax serviceoperations and requires the deferral of the tax service fee and therecognition of that fee as revenue ratably over the expected serviceperiod. The amortization rates applied to recognize the revenuesassume a 10-year contract life and are adjusted to reflectprepayments. The Company periodically reviews its tax servicecontract portfolio to determine if there have been changes incontract lives and/or changes in the number and/or timing ofprepayments. Accordingly, the Company may adjust the rates toreflect current trends. SAB No. 101 finalizes a series of changesinstituted by the Securities and Exchange Commission concerningrevenue recognition policies. As a result of adopting the SAB, theCompany reported a charge of $55.6 million, net of income taxesand minority interests, as a cumulative change in accounting principleand restated its 1999 quarterly information.

Consumer information — Revenues from home warranty contractsare recognized ratably over the 12-month duration of the contracts.Interest on loans with the Company’s thrift subsidiary is recognizedon the outstanding principal balance on the accrual basis. Loanorigination fees and related direct loan origination costs are deferredand recognized over the life of the loan.

Premium taxesTitle insurance, home warranty, and property and casualty insurance

companies, like other types of insurers, are generally not subject tostate income or franchise taxes. However, in lieu thereof, most statesimpose a tax based primarily on insurance premiums written. Thispremium tax is reported as a separate line item in the consolidatedstatements of income in order to provide a more meaningful disclosureof the taxation of the Company.

Income taxesTaxes are based on income for financial reporting purposes and

include deferred taxes applicable to temporary differences betweenthe financial statement carrying amount and the tax basis of certainof the Company’s assets and liabilities.

Earnings per shareBasic earnings per share are computed by dividing net income

available to common stockholders by the weighted-average numberof common shares outstanding. The computation of diluted earningsper share is similar to the computation of basic earnings per shareexcept that the weighted-average number of common sharesoutstanding is increased to include the number of additionalcommon shares that would have been outstanding if potentialdilutive common shares had been issued.

The Company’s only potential dilutive common shares are stockoptions (see Note 12). Stock options are reflected in diluted earningsper share by application of the treasury stock method.

Risk of real estate marketReal estate activity is cyclical in nature and is affected greatly by the

cost and availability of long-term mortgage funds. Real estate activityand, in turn, the Company’s revenues can be adversely affected duringperiods of high interest rates and/or limited money supply.

Use of estimatesThe preparation of financial statements in accordance with

generally accepted accounting principles requires management tomake estimates and assumptions that affect the statements. Actualresults could differ from the estimates and assumptions used.

Fiduciary assets and liabilitiesAssets and liabilities of the trusts and escrows administered by

the Company are not included in the consolidated balance sheets.

note 2Statutory Restrictions on Investments and Stockholders’ Equity:

Investments carried at $16.5 million were on deposit with statetreasurers in accordance with statutory requirements for the protectionof policyholders at December 31, 1999.

Pursuant to insurance and other regulations of the various states in which the Company’s insurance subsidiaries operate, the amountof dividends, loans and advances available to the Company is limited,principally for the protection of policyholders. Under such statutoryregulations, the maximum amount of dividends, loans and advancesavailable to the Company from its insurance subsidiaries in 2000 is $133.1 million.

The Company’s title insurance subsidiary, First American Title InsuranceCompany, maintained statutory capital and surplus of $394.2 million and$301.6 million at December 31, 1999 and 1998, respectively. Statutorynet income for the years ended December 31, 1999, 1998 and 1997 was $71.2 million, $137.3 million and $35.9 million, respectively.

note 3Debt and Equity Securities:

The amortized cost and estimated fair value of investments in debtsecurities are in the table below. The fair value of debt and equitysecurities was estimated using quoted market prices.

Amortized Gross unrealized Estimated

(in thousands) cost gains losses fair value

December 31, 1999

U.S. Treasury securities $ 38,049 $ 156 $ (345) $ 37,860

Corporate securities 135,230 1,542 (4,118) 132,654

Obligations of states andpolitical subdivisions 32,547 91 (2,293) 30,345

Mortgage-backed securities 27,453 21 (1,964) 25,510

$233,279 $1,810 $ (8,720) $226,369

December 31, 1998

U.S. Treasury securities $ 38,056 $1,169 $ (14) $ 39,211

Corporate securities 75,840 1,759 (40) 77,559

Obligations of states andpolitical subdivisions 95,178 2,314 (48) 97,444

Mortgage-backed securities 21,405 77 (68) 21,414

$230,479 $5,319 $ (170) $235,628

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The amortized cost and estimated fair value of debt securities atDecember 31, 1999, by contractual maturities, are as follows:

Amortized Estimated(in thousands) cost fair value

Due in one year or less $ 15,476 $ 15,488

Due after one year through five years 106,156 105,616

Due after five years through 10 years 59,421 56,559

Due after 10 years 24,773 23,196

205,826 200,859

Mortgage-backed securities 27,453 25,510

$233,279 $226,369

The cost and estimated fair value of investments in equitysecurities are as follows:

Amortized Gross unrealized Estimated

(in thousands) cost gains losses fair value

December 31, 1999

Preferred stock:

Other $ 4,339 $ – $ – $ 4,339

Common stocks:

Corporate securities 20,601 14,633 (710) 34,524

Other 245 158 – 403

$25,185 $14,791 $ (710) $39,266

December 31, 1998

Preferred stocks:

Other $ 4,802 $ 164 $ (44) $ 4,922

Common stocks:

Corporate securities 18,944 9,429 (1,051) 27,322

Other 214 115 – 329

$23,960 $ 9,708 $(1,095) $32,573

Sales of debt and equity securities resulted in realized gains of$3.5 million, $1.4 million and $0.7 million; and realized losses of $1.6 million, $0.2 million and $0.3 million for the years endedDecember 31, 1999, 1998 and 1997, respectively.

note 4Loans Receivable:

Loans receivable are summarized as follows:

December 31

(in thousands) 1999 1998Real estate — mortgage $89,421 $74,093

Other 94 107

89,515 74,200

Unearned income on lease contracts (11) (15)

Allowance for loan losses (905) (1,150)

Participations sold (983) (770)

Deferred loan fees, net (278) (230)

$87,338 $72,035

Real estate loans are secured by properties located in California.The average yield on the Company’s loan portfolio was 10% for the years ended December 31, 1999 and 1998. Average yields areaffected by amortization of discounts on loans purchased from otherinstitutions, prepayment penalties recorded as income, loan feesamortized to income and the market interest rates charged by thriftand loan institutions.

The fair value of loans receivable was $87.7 million and $72.2million at December 31, 1999 and 1998, respectively, and wasestimated based on the discounted value of the future cash flowsusing the current rates being offered for loans with similar terms toborrowers of similar credit quality.

The allowance for loan losses is maintained at a level that isconsidered appropriate by management to provide for known risks in the portfolio.

note 5Assets Acquired in Connection with Claim Settlements:

December 31

(in thousands) 1999 1998Notes receivable $10,863 $11,833

Real estate 2,720 4,880

Judgments and other 10,613 338

$24,196 $17,051

The above amounts are net of valuation reserves of $4.9 millionand $12.3 million at December 31, 1999 and 1998, respectively.

The fair value of notes receivable was $11.1 million and $12.2 million at December 31, 1999 and 1998, respectively, and was estimated based on the discounted value of future cash flowsusing the current rates at which similar loans would be made toborrowers of similar credit quality.

The activity in the valuation reserve is summarized as follows:

December 31

(in thousands) 1999 1998Balance at beginning of year $12,256 $11,135

Valuation reserve adjustments (6,093) 3,951

Dispositions (1,307) (2,830)

Balance at end of year $ 4,856 $12,256

note 6Demand Deposits:

Passbook and investment certificate accounts are summarized as follows:

December 31

(in thousands, except percentages) 1999 1998Passbook accounts $11,117 $12,502

Certificate accounts:

Less than one year 51,976 33,980

One to five years 17,750 20,922

69,726 54,902

$80,843 $67,404

Annualized interest rates:

Passbook accounts 4%–5% 4%–5%

Certificate accounts 5%–8% 5%–8%

The carrying value of the passbook accounts approximates fairvalue due to the short-term nature of this liability. The fair value ofinvestment certificate accounts was $69.5 million and $55.4 million atDecember 31, 1999 and 1998, respectively, and was estimated basedon the discounted value of future cash flows using a discount rateapproximating current market for similar liabilities.

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note 7Reserve for Known and Incurred But Not Reported Claims:

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

December 31

(in thousands) 1999 1998 1997Balance at beginning of year $ 272,921 $254,058 $247,443

Provision related to:

Current year 122,311 121,118 92,009

Prior years (6,093) 3,060 4,796

116,218 124,178 96,805

Payments related to:

Current year 58,915 52,164 43,226

Prior years 54,029 46,359 41,901

112,944 98,523 85,127

Other (2,471) (6,792) (5,063)

Balance at end of year $ 273,724 $272,921 $254,058

“Other” primarily represents reclassifications to the reserve forassets acquired in connection with claim settlements. “Other” for1999 includes $7,955 in purchase accounting adjustments related tocompany acquisitions and $11,251 related to company dispositions.Claims activity associated with reinsurance is not material and,therefore, not presented separately.

note 8Notes and Contracts Payable:

December 31

(in thousands) 1999 1998

7.55% senior debentures, due April 2028 $ 99,486 $ 99,468

Secured notes payable pursuant to amendedcredit agreement – 2,040

Trust deed notes with maturities through2007, secured by land and buildings with a netbook value of $3,437, average rate of 10.5% 3,022 3,952

Other notes and contracts payable withmaturities through 2007, average rate of 7.5% 94,307 38,006

$196,815 $143,466

In April 1999, the Company paid off the fixed-rate indebtednessportion of the 1997 amended credit agreement. The $75.0 million line of credit established under the amended credit agreementremained in effect. In July 1999, the Company entered into a newcredit agreement that provides for an additional $100.0 million line of credit. Under the terms of the credit agreements, the Company isrequired to maintain minimum levels of capital and earnings and meetpredetermined debt-to-capitalization ratios. Both lines of credit expirein July 2002 and were unused at December 31, 1999.

In April 1998, the Company issued and sold $100.0 million of7.55% senior debentures, due April 2028. The 30-year bonds wereissued at 99.456% of the principal amount.

The aggregate annual maturities for notes and contracts payable in each of the five years after December 31, 1999, are as follows:

(in thousands) Year2000 $23,004

2001 $21,203

2002 $13,982

2003 $12,260

2004 $ 9,893

The fair value of notes and contracts payable was $195.7 millionand $130.9 million at December 31, 1999 and 1998, respectively, andwas estimated based on the current rates offered to the Company fordebt of the same remaining maturities. The weighted-average interestrate for the Company’s notes and contracts payable was 7.5% atDecember 31, 1999 and 1998.

note 9Investment and Other Income:

The components of investment and other income are as follows:

(in thousands) 1999 1998 1997Interest:

Cash equivalents and depositswith savings and loanassociations and banks $11,921 $10,706 $ 7,051

Debt securities 15,199 14,547 11,354

Other long-term investments 5,163 7,023 3,550

32,283 32,276 21,955

Investment gain 5,160 32,449 –

Dividends on marketable equity securities 630 409 469

Equity in earnings ofunconsolidated affiliates 3,553 4,614 2,304

Net gain on sales of debtand equity securities 1,854 1,154 445

Other 8,493 5,871 3,923

$51,973 $76,773 $29,096

note 10Income Taxes:

Income taxes are summarized as follows:

(in thousands) 1999 1998 1997Current:

Federal $51,237 $101,238 $28,491

State 7,183 12,520 4,075

58,420 113,758 32,566

Deferred:

Federal 3,260 13,584 9,600

State 620 1,170 770

3,880 14,754 10,370

$62,300 $128,512 $42,936

Income taxes differ from the amounts computed by applying thefederal income tax rate of 35%. A reconciliation of this difference isas follows:

(in thousands) 1999 1998 1997Taxes calculated at federal rate $52,830 $115,514 $38,819

Tax exempt interest income (1,367) (1,684) (839)

Tax effect of minority interests 826 1,273 1,286

State taxes, net of federal benefit 5,071 9,043 3,941

Exclusion of certain meals andentertainment expenses 4,519 3,794 2,889

Other items, net 421 572 (3,160)

$62,300 $128,512 $42,936

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The primary components of temporary differences which give riseto the Company’s net deferred tax asset are as follows:

December 31

(in thousands) 1999 1998Deferred tax assets:

Deferred revenue $ 67,540 $25,952

Employee benefits 24,892 14,407

Bad debt reserves 7,291 7,412

Acquisition reserve 114 520

State taxes 872 2,262

Other 3,938 6,235

104,647 56,788

Deferred tax liabilities:

Depreciable and amortizable assets 31,616 21,426

Investment gain 11,357 11,357

Claims and related salvage 8,679 (3,139)

Accumulated other comprehensive income 2,271 4,166

Other 2,440 6,654

56,363 40,464

Net deferred tax asset $ 48,284 $16,324

note 11Employee Benefit Plans:

The Company has pension and other retirement benefit planscovering substantially all employees. The Company’s principal pensionplan, amended to be noncontributory effective January 1, 1995, is aqualified defined benefit plan with benefits based on the employee’syears of service and the highest five consecutive years’ compensationduring the last 10 years of employment. The Company’s policy is tofund all accrued pension costs. Contributions are intended to providenot only for benefits attributable to past service, but also for thosebenefits expected to be earned in the future. The Company also hasnonqualified, unfunded supplemental benefit plans covering certainkey management personnel. Benefits under these plans are intendedto be funded with proceeds from life insurance policies purchased bythe Company on the lives of the executives.

Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, “Employers’Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132 revises employers’ disclosures about pension andother postretirement benefit plans but does not change themeasurement or recognition of those plans.

Net periodic pension cost for the Company’s pension and otherretirement benefit plans includes the following components:

(in thousands) 1999 1998 1997Expense:

Service cost $23,726 $14,863 $10,550

Interest cost 15,376 13,067 11,178

Actual return on plan assets (11,751) (9,196) (7,421)

Amortization of net transitionobligation 309 309 309

Amortization of prior service cost 143 143 143

Amortization of net loss 1,746 1,408 945

$29,549 $20,594 $15,704

The following table provides a reconciliation of benefit obligations,plan assets and funded status of the plans at:

December 31

(in thousands) 1999 1998Unfunded Unfunded

Funded supplemental Funded supplementalpension benefit pension benefit

plans plans plans plans

Change in benefit obligation:

Benefit obligation atbeginning of year $184,397 $38,176 $141,689 $ 32,134

Service costs 22,224 1,502 13,772 1,091

Interest costs 12,451 2,925 10,586 2,481

Actuarial (gains) losses (24,186) 606 23,590 3,895

Benefits paid (6,711) (1,633) (5,240) (1,425)

Projected benefit obligation at end of year 188,175 41,576 184,397 38,176

Change in plan assets:

Plan assets at fair valueat beginning of year 141,233 – 109,358 –

Actual return on plan assets 9,331 – 26,857 –

Company contributions 8,157 – 10,258 –

Benefits paid (6,711) – (5,240) –

Plan assets at fair value at end of year 152,010 – 141,233 –

Reconciliation of funded status:

Funded status of the plans (36,165) (41,576) (43,164) (38,176)

Unrecognized net actuarial loss 741 9,765 23,543 9,856

Unrecognized prior service cost (367) 1,237 (412) 1,426

Unrecognized net transition(asset) obligation (152) 721 (204) 1,081

Accrued pension cost (35,943) (29,853) (20,237) (25,813)

Amounts recognized in the statement of financialposition consist of:

Accrued benefit liability (35,943) (31,732) (20,237) (29,863)

Intangible asset – 1,198 – 2,194

Minimum pensionliability adjustment – 681 – 1,856

$ (35,943) $(29,853) $ (20,237) $(25,813)

The rate of increase in future compensation levels for the plans of 4.5% and the weighted-average discount rates of 7.5% and 6.75%were used in determining the actuarial present value of the projectedbenefit obligation at December 31, 1999 and 1998, respectively. The majority of pension plan assets are invested in U.S. governmentsecurities, time deposits and common stocks with projected long-term rates of return of 9%.

The Company’s principal profit-sharing plan was amended effectiveJanuary 1, 1995, to discontinue future contributions. The plan holds5,799,000 and 6,081,000 shares of the Company’s common stock,representing 9% and 10% of the total shares outstanding atDecember 31, 1999 and 1998, respectively.

The Company also has a Stock Bonus Plan (the Plan) for keyemployees pursuant to which 154,000, 186,000 and 258,000common shares were issued in 1999, 1998 and 1997, respectively,resulting in a charge to operations of $3.4 million, $2.7 million and$2.2 million, respectively. The Plan, as amended December 9, 1992,provides that a total of up to 1,350,000 common shares may beawarded in any one year.

Effective January 1, 1995, the Company adopted The First AmericanFinancial Corporation 401(k) Savings Plan (The Savings Plan), which is available to substantially all employees. The Savings Plan allows for employee-elective contributions up to the maximum deductible

3 8

amount as determined by the Internal Revenue Code. The Companymakes contributions to The Savings Plan based on profitability, as wellas contributions of the participants. The Company’s expense related to The Savings Plan amounted to $13.7 million, $14.4 million and$6.4 million for the years ended December 31, 1999, 1998 and 1997, respectively.

note 12Stock Option Plans:

On April 24, 1996, the Company implemented The First AmericanFinancial Corporation 1996 Stock Option Plan (the Stock OptionPlan). Under the Stock Option Plan, options are granted to certainemployees to purchase the Company’s common stock at a price no less than the market value of the shares on the date of the grant.The maximum number of shares that may be subject to options is 11,625,000. Currently outstanding options become exercisable one to five years, and expire 10 years, from the grant date. On April 24, 1997, the Company implemented The First AmericanFinancial Corporation 1997 Directors’ Stock Plan (the Directors’Plan). The Directors’ Plan is similar to the employees’ Stock OptionPlan, except that the maximum number of shares that may be subjectto options is 1,800,000 and the maximum number of shares that maybe purchased pursuant to options granted shall not exceed 6,750shares during any 12-consecutive-month period.

Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” In accounting for its plan, theCompany, as allowable under the provisions of SFAS No. 123, applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” As a result of this election, theCompany does not recognize compensation expense for its stockoption plans. Had the Company determined compensation costbased on the fair value for its stock options at grant date, as set forthunder SFAS No. 123, the Company’s net income and earnings pershare would have been reduced to the pro forma amounts as follows:

(in thousands, except per share amounts) 1999 1998 1997Net income:

As reported $33,003 $201,527 $67,765

Pro forma $21,790 $183,845 $66,533

Earnings per share:

As reported

Basic $ .51 $ 3.35 $ 1.19

Diluted $ .50 $ 3.21 $ 1.16

Pro forma

Basic $ .34 $ 3.05 $ 1.17

Diluted $ .33 $ 2.93 $ 1.14

The fair value of each option grant is estimated at the grant dateusing the Black-Scholes option-pricing model with the followingweighted-average assumptions used for grants in 1999, 1998 and1997, respectively; dividend yield of 1.5%, 1% and 1.2%; expectedvolatility of 39.6%, 36%, and 38.1%; risk-free interest rate of 5.8%,5.7% and 6.3%; and expected life of seven years.

Transactions involving stock options are summarized as follows: Weighted-

averageNumber exercise

(in thousands, except weighted-average exercise price) outstanding price

Balance at December 31, 1996 3,782 $ 6.55

Granted during 1997 400 $11.66

Exercised during 1997 (382) $ 6.51

Forfeited during 1997 (351) $ 8.36

Balance at December 31, 1997 3,449 $ 6.97

Granted during 1998 4,305 $23.32


Forfeited during 1998 (283) $14.16

Balance at December 31, 1998 6,907 $16.94

Granted during 1999 224 $17.23


Forfeited during 1999 (400) $18.61

Balance at December 31, 1999 6,278 $17.37

The following table summarizes stock options outstanding andexercisable at December 31, 1999:

(shares in thousands) Outstanding ExercisableAverage Average Average

Range of life exercise exerciseexercise prices Options (years) (a) price Options price

$ 5.69 – $ 8.54 1,977 6.6 $ 5.78 962 $ 5.86

$ 8.77 – $13.15 138 7.0 $10.01 99 $ 9.47

$13.25 – $19.87 321 8.6 $16.45 111 $17.00

$20.34 – $30.50 3,816 8.3 $23.63 831 $23.61

$32.00 – $33.44 26 8.9 $32.27 3 $32.00

$ 5.69 – $33.44 6,278 7.0 $17.38 2,006 $14.05

(a) Average contractual life remaining in years.

note 13Commitments and Contingencies:

The Company leases certain office facilities, automobiles andequipment under operating leases, which, for the most part, arerenewable. The majority of these leases also provide that the Companywill pay insurance and taxes. In December 1999, the Company enteredinto a sale-leaseback agreement with regard to certain furniture andequipment with a net book value of $65.7 million. Proceeds from thesale amounted to $80.1 million and a gain of $14.4 million has beenincluded in deferred revenue and will be amortized over the life of the lease. Under the agreement, the Company agreed to lease theequipment for five years with minimum annual lease payments of $15.2 million. At the end of the term of the lease, the Company has the option to acquire the equipment or return it to the lessor.

Future minimum rental payments under operating leases that haveinitial or remaining noncancelable lease terms in excess of one yearas of December 31, 1999, are as follows:

(in thousands) Year

2000 $114,880

2001 93,747

2002 77,027

2003 60,037

2004 46,901

Later years 67,915

$460,507

Total rental expense for all operating leases and month-to-monthrentals was $126.3 million, $110.3 million and $79.7 million for 1999,1998 and 1997, respectively.

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note 14Mandatorily Redeemable Preferred Securities:

On April 22, 1997, the Company issued and sold $100.0 million of 8.5% trust preferred securities, due in 2012, through its whollyowned subsidiary, First American Capital Trust. In connection withthe subsidiary’s issuance of the preferred securities, the Companyissued to the subsidiary trust 8.5% subordinated interest notes, due 2012. The sole assets of the subsidiary are and will be thesubordinated interest notes. The Company’s obligations under thesubordinated interest notes and related agreements, taken together,constitute a full and unconditional guarantee by the Company of thesubsidiary’s obligations under the preferred securities. Distributionspayable on the securities are included as interest expense in theCompany’s consolidated income statement.

note 15Stockholders’ Equity:

In December 1999, the Company announced plans to repurchaseup to 5% of its then issued and outstanding shares. The amount ofany share repurchases will depend on, among other factors, themarket performance of the shares; the availability of, and alternateuses of, the Company’s funds; and Securities and ExchangeCommission regulations. Pursuant to the terms of the repurchaseprogram, the Company had repurchased and retired 140,000 of its issued and outstanding shares as of December 31, 1999.

On October 23, 1997, the Company adopted a Shareholder Rights Plan (the Rights Plan). Under the Rights Plan, after the close of business on November 15, 1997, each holder of the Company’scommon shares received a dividend distribution of one Right foreach common share held. Each Right entitles the holder thereof tobuy a preferred share fraction equal to 1/100,000 of a share of SeriesA Junior Participating Preferred Shares of the Company at an exerciseprice of $265 per preferred share fraction. Each fraction is designedto be equivalent in voting and dividend rights to one common share.

The Rights will be exercisable and will trade separately from thecommon shares only if a person or group, with certain exceptions,acquires beneficial ownership of 15% or more of the Company’scommon shares or commences a tender or exchange offer that wouldresult in such person or group beneficially owning 15% or more ofthe common shares then outstanding. The Company may redeem theRights at $0.001 per Right at any time prior to the occurrence of oneof these events. All Rights expire on October 23, 2007.

Each Right will entitle its holder to purchase, at the Right’s then-current exercise price, preferred share fractions (or other securities ofthe Company) having a value of twice the Right’s exercise price. Thisamounts to the right to buy preferred share fractions of the Companyat half price. Rights owned by the party triggering the exercise ofRights will be void and therefore will not be exercisable.

In addition, if after any person has become a 15%-or-morestockholder, the Company is involved in a merger or other businesscombination transaction with another person in which the Company’scommon shares are changed or converted, or if the Company sells50% or more of its assets or earning power to another person, eachRight will entitle its holder to purchase, at the Right’s then-currentexercise price, common stock of such other person (or its parent)having a value of twice the Right’s exercise price.

note 16Other Comprehensive Income:

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

Components of other comprehensive income are as follows:Minimum Accumulated

Unrealized pension othergains on liability comprehensive

(in thousands) securities adjustment income

Balance at December 31, 1996 $2,924 – $2,924

Pretax change 4,232 – 4,232

Tax expense (1,481) – (1,481)

Balance at December 31, 1997 5,675 – 5,675

Pretax change 5,028 $ (1,856) 3,172

Tax (expense) benefit (1,759) 650 (1,109)

Balance at December 31, 1998 8,944 (1,206) 7,738

Pretax change (6,591) 1,175 (5,416)

Tax benefit (expense) 2,308 (412) 1,896

Balance at December 31, 1999 $4,661 $ (443) $4,218

The change in other unrealized gains (losses) on debt and equitysecurities includes reclassification adjustments of $3.7 million, $1.2 million and $0.4 million of net realized gains for the years ended December 31, 1999, 1998 and 1997, respectively.

note 17Litigation:

On May 19, 1999, The People of the State of California, Kathleen Connell, Controller of the State of California, and Chuck Quackenbush, Insurance Commissioner of the State ofCalifornia, filed a class action suit in the Sacramento Superior Court. The action seeks to certify as a class of defendants all “titleinsurers,” all “underwritten title companies” and all “controlledescrow companies” (as those terms are defined in the CaliforniaInsurance Code) and all “independent escrow companies” (as theterm is defined in the California Financial Code) doing business in the State of California from 1970 to the present who (i) holddormant, unclaimed escrow funds; (ii) charged California homebuyers and other escrow customers $10.00 or more for deliveryservices or administrative fees; (iii) charged California home buyersand other escrow customers reconveyance fees and/or (iv) earnedinterest (or its equivalent) from financial institutions on customers’deposited escrow funds.

The plaintiffs allege that the defendants unlawfully (i) failed toescheat unclaimed property to the Controller of the State of Californiaon a timely basis; (ii) charged California home buyers and other escrowcustomers fees for services that were never performed or which cost less than the amount charged; and (iii) devised and carried outschemes with financial institutions to receive interest, or monies in lieuof interest, on escrow funds deposited by defendants with financialinstitutions in demand deposits.

In February 2000, the company entered into an administrativesettlement with the California Department of Insurance (DOI),whereby the DOI released the Company from any further claim ofliability as to the Company’s receipt of earnings credits or any allegedovercharges for various miscellaneous escrow fee items, such ascourier, Federal Express or wire service fees. The DOI further agreedto direct the attorney general to dismiss it as a plaintiff from theaction brought by the State of California. In the settlement with theDOI, the Company agreed to (i) make a contribution to a consumereducation fund and (ii) accept a new regulation to be promulgatedby the DOI, whereby earnings credit programs will be authorized andregulated by the DOI and rate filings will be required for escrow feesincluding several specified miscellaneous fee items.

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Subsequent to the filing of the action by the State of California,First American Title Insurance Company was named and served as a defendant in two private class actions. The allegations in thecomplaints include some, but not all, of the allegations contained in the class action filed by the State of California. The private classactions independently seek injunctive relief, attorneys’ fees, damagesand penalties in unspecified amounts. The private class actions havebeen stayed by court orders pending settlement negotiations relatingto the class action filed by the State of California.

The Company does not believe that the ultimate resolution of theseactions will have a materially adverse effect on its financial conditionor results of operations.

The Company is involved in various routine legal proceedingsrelated to its operations. While the ultimate disposition of eachproceeding is not determinable, the Company does not believe thatany such proceedings will have a materially adverse effect on itsfinancial condition or results of operations.

note 18Business Combinations:

Effective May 14, 1999, the Company completed its merger of National Information Group (NAIG). Under the terms of thedefinitive merger agreement, each of the NAIG shareholdersreceived .67 of a share of the Company’s common stock for eachNAIG common share they owned. To complete the merger, theCompany issued 3,004,800 shares, in exchange for 100% of theoutstanding common stock of NAIG. The information servicesprovided by NAIG include outsourcing services, flood zonedetermination services, real estate tax tracking, hazard and motorvehicle insurance tracking, lender-placed insurance and floodinsurance. This merger was accounted for under the pooling-of-interests method of accounting and, as a result, the Company hasrestated all previously reported results to reflect this merger.

Included in other operating expenses for the 12 months endedDecember 31, 1999, were merger-related charges of $10.8 million, $7.0 million after tax, or 10 cents per diluted share. These nonrecurringcharges include severance payments, lease terminations and consultingservices. Combined and separate results of the Company and NAIGduring the periods preceding the acquisitions were as follows:

Year ended Year ended(in thousands) December 31, 1998 December 31, 1997

Revenues:

The First American Financial Corporation $2,877,328 $1,908,923

NAIG 66,552 53,078

$2,943,880 $1,962,001

Net income:

The First American Financial Corporation $ 198,710 $ 64,499

NAIG 2,817 3,266

$ 201,527 $ 67,765

Net income (loss) per diluted share:

The First American Financial Corporation $ 3.32 $ 1.16

NAIG (.11) –

$ 3.21 $ 1.16

During the year ended December 31, 1999, the Companyacquired 25 companies. The purchase method of accounting wasused for 24 of the acquisitions and the pooling-of-interests methodwas used for one.

The 24 acquisitions accounted for under the purchase method of accounting were individually not material and are included in the following business segments; 20 in the title insurance segment, three in the real estate information services segment and one in theconsumer information segment. Their aggregate purchase price was$71.8 million in cash, $53.5 million in notes and 1,119,321 shares ofthe Company’s common stock. The purchase price for each wasallocated to the assets acquired and liabilities assumed based onestimated fair values and approximately $110.7 million in goodwillwas recorded. Goodwill is being amortized on a straight-line basisover its estimated useful life ranging from 20 to 30 years. Theoperating results of these acquired companies were included in theCompany’s consolidated financial statements from their respectiveacquisition dates. Assuming these acquisitions had occurred January 1, 1998, pro forma revenues, net income and net income per diluted share would have been $3.07 billion, $36.8 million and $.55, respectively, for the year ended December 31, 1999; and$3.08 billion, $207.6 million and $3.25, respectively, for the yearended December 31, 1998. All pro forma results include amortizationof goodwill and interest expense on acquisition debt. The pro formaresults are not necessarily indicative of the operating results thatwould have been obtained had the acquisitions occurred at thebeginning of the periods presented, nor are they necessarilyindicative of future operating results.

On January 1, 1998, the Company formed a limited liabilitycorporation (LLC) with Experian Group (Experian). The purpose of the LLC is to combine certain operations of the Company’ssubsidiary, First American Real Estate Information Services, Inc.(FAREISI), with Experian’s Real Estate Solutions division (RES). TheLLC is 80% owned by the Company and 20% owned by Experian.RES is a supplier of core real estate data, providing, among otherthings, property valuation information, title and tax information andimaged title documents. The Company treated the transaction as anacquisition of the assets and liabilities of RES in consideration for a20% interest in FAREISI. As a result of the transaction, the Companyrecognized an investment gain of $32.4 million in the first quarter1998. The operating results of the LLC are included in theCompany’s consolidated financial statements commencing January 1, 1998.

note 19Segment Financial Information:

The Company’s operations include three reportable segments: title insurance and services, real estate information and services, and consumer information and services. The title insurance segment issues policies, which are insured statements of the condition of title to real property, and provides other related services. The real estateinformation segment provides to lender customers the status of taxpayments on real property securing their loans, mortgage creditinformation derived from at least two credit bureau sources, flood zone determination reports that provide information on whether or not a property is in a special flood hazard area, as well as other real estate-related information services. The consumer information segmentprovides home warranties, which protect homeowners against defectsin home fixtures; automotive tracking services; resident screening; pre-employment screening; property and casualty insurance; trust andbanking services; investment advisory; and other related services.

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The title insurance and real estate information segments operatethrough networks of offices nationwide. The Company provides itstitle services through both direct operations and agents throughoutthe United States. It also offers title services abroad in Australia, the Bahama Islands, Canada, England, Guam, Ireland, Mexico, Puerto Rico, Scotland, South Korea, and the U.S. Virgin Islands. To date, the international title operations have not been material to the Company’s financial condition or results of operations. Theconsumer information segment provides home warranty services inArizona, California, Georgia, Nevada, New Mexico, North Carolina,Oregon, South Carolina, Texas, Utah and Washington. Trust, bankingand thrift services are provided in Southern California. Investmentadvisory, automotive tracking, resident screening, pre-employmentscreening, property and casualty insurance, and lender-placed floodand hazard insurances are offered nationwide.

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

Income (loss)before

income taxes, Depreciationminority interests and and Capital

(in thousands) Revenues cumulative effect Assets amortization expenditures

1999Title Insurance $2,182,434 $128,738 $1,042,860 $36,839 $124,027

Real EstateInformation 582,123 54,914 710,613 32,541 85,186

Consumer Information 216,078 38,080 286,725 4,289 2,043

Corporate 7,534 (51,760) 76,216 3,362 1,332

$2,988,169 $169,972 $2,116,414 $ 77,031 $212,588

1998Title Insurance $2,087,106 $227,906 $ 858,326 $ 29,375 $100,560



Corporate 43,630 (1,379) 130,935 2,288 –

$2,943,880 $365,051 $1,852,731 $62,263 $160,526

1997Title Insurance $1,482,993 $ 79,602 $ 656,622 $23,501 $ 39,190



Corporate 2,304 (27,967) 33,989 1,251 250

$1,962,001 $114,377 $1,220,377 $40,025 $ 77,976

Corporate consists primarily of unallocated interest expenses,minority interests, equity in earnings of affiliated companies andpersonnel and other operating expenses associated with theCompany’s home office facilities.

r e p o r t o f i n d e p e n d e n ta c c o u n t a n t s

To the Board of Directors and Stockholders of The First AmericanFinancial Corporation:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, ofstockholders’ equity and of cash flows present fairly, in all materialrespects, the financial position of The First American FinancialCorporation and its subsidiaries at December 31, 1999 and 1998,and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, inconformity with accounting principles generally accepted in theUnited States. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States whichrequire that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in thefinancial statements, assessing the accounting principles used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that ouraudits provide a reasonable basis for the opinion expressed above.

As discussed in Note 1 to the financial statements, theCompany changed its method of recognizing revenue for taxservice contracts in 1999.

PricewaterhouseCoopers LLPCosta Mesa, CaliforniaFebruary 15, 2000


b o a r d o f d i r e c t o r s

4 2

D.P. Kennedy

J. David Chatham

Paul B. Fay Jr.

Parker S. Kennedy

The Hon. William G. Davis

Frank E. O’Bryan

D. Van Skilling

George L. Argyros

Dr. James L. Doti

Roslyn B. Payne

Virginia M. Ueberroth

Gary J. Beban

Lewis W. Douglas Jr.

D.P. KennedyChairman of the Board, The First American FinancialCorporation and ViceChairman, First American Title Insurance Company, Santa Ana, California. Director since 1956.

Parker S. KennedyPresident, The First AmericanFinancial Corporation andChairman of the Board, First American Title InsuranceCompany, Santa Ana, California. Director since 1987.

of f i c e r s


4 3

George L. ArgyrosChairman and Chief ExecutiveOfficer, Arnel & Affiliates, diversified investment company,Costa Mesa, California. Director since 1988.

Gary J. BebanSenior Executive ManagingDirector, CB Richard Ellis, Inc.,commercial real estate services, Chicago, Illinois. Director since 1996.

J. David ChathamPresident and Chief ExecutiveOfficer, Chatham HoldingsCorporation, real estate development and associatedindustries, Roswell, Georgia. Director since 1989.

The Hon. William G. DavisP.C., C.C., Q.C.; Counsel, Torys, a law firm, and retiredPremier of Ontario, Toronto,Ontario, Canada. Director since 1992.

Dr. James L. DotiPresident and Donald BrenDistinguished Professor of Business and Economics,Chapman University,Orange, California. Director since 1993.

Lewis W. Douglas Jr.Chairman, Stanley Energy, Inc., oil exploration, Denver, Colorado.Director since 1971(earlier 1961–1967).

Paul B. Fay Jr.President, The Fay ImprovementCompany, financial consultingand business ventures, San Francisco, California. Director since 1967.

Frank E. O’BryanChairman of the Board, WMC Mortgage Corporation, Newport Beach, California. Director since 1994.

Roslyn B. PaynePresident, Jackson StreetPartners, Ltd., real estate venture capital and investments,San Francisco, California. Director since 1988.

D. Van SkillingRetired Chairman and Chief Executive Officer, ExperianInformation Solutions, Inc.,Orange, California. Director since 1998.

Virginia M. UeberrothPresident, Ueberroth Family Foundation, Laguna Beach, California. Director since 1988.

Gary L. KermottCraig I. DeRoy

Curt A. Caspersen Mark R Arnesen

Kathleen M. CollinsDrew R. Cree

Thomas A. Klemens

John W. Long

Jo Etta Bandy



Thomas A. KlemensExecutive Vice President and Chief Financial Officer

Craig I. DeRoyExecutive Vice President and General Counsel

Gary L. KermottExecutive Vice President

John W. LongExecutive Vice President

Curt A. CaspersenExecutive Vice President

Mark R ArnesenVice President, Secretary and Corporate Counsel

Jo Etta BandyVice President, Corporate Communications

Drew R. CreeVice President, Human Resources

Kathleen M. CollinsAssistant Secretary and Associate Corporate Counsel

p r i m a r y c o m p a n i e s

4 4

CORPORATE HEADQUARTERSTHE FIRST AMERICANFINANCIAL CORPORATION1 First American WaySanta Ana, California 92707(714) 800-3000www.firstam.comD.P. KennedyChairman of the BoardParker S. KennedyPresidentThomas A. KlemensExecutive Vice President and Chief Financial OfficerCraig I. DeRoyExecutive Vice President and General CounselGary L. KermottExecutive Vice PresidentJohn W. LongExecutive Vice PresidentCurt A. CaspersenExecutive Vice PresidentMark R ArnesenVice President, Secretary,Corporate CounselJo Etta BandyVice President, Corporate CommunicationsDrew R. CreeVice President, Human ResourcesKathleen M. CollinsAssistant Secretary and Associate Corporate Counsel

Administrative StaffJohn A. BuehlerCompany IntegrationPaul W. KnutsonCorporate AccountingKelly J. CaskeyCorporate AccountingKaren S. EbbingCorporate ServicesNancy M. PettusCounsel, Human ResourcesKathy M. SnyderEmployee CommunicationsThomas W. RubadueInteractive Division, DirectorEric P. JacobsInteractive DivisionHarry A. FisherInternal AuditDenise M. WarrenInvestor RelationsThomas R. WawersichMergers and AcquisitionsJohn M. HollenbeckNational Title Processes DirectorGary C. AndersonPrintingKenneth D. DeGiorgioRegulatory CounselStephen OswaldTax ManagerK. Gene AalsethYear 2000 Project Director

First American TitleInsurance Company1 First American WaySanta Ana, California 92707(714) 800-3000Gary L. KermottPresidentMax O. ValdesChief Financial OfficerTimothy P. SullivanGeneral CounselWilliam G. ErgasTreasurerRoger S. HullChief Information OfficerOscar H. BeasleySenior Vice President,Senior Title CounselRobert W. DuffSenior Vice President,National Subdivision DevelopmentRobert J. Hauser Jr.Senior Vice President, National Agency DirectorClifford L. MorganSenior Vice President,Underwriting DirectorWalter M. ReevesSenior Vice President,National Accounts DirectorAlbert F. RushSenior Vice President,National Counsel

Regional Vice PresidentsRobert L. BaileyWyomingJohn R. BethellMidwest RegionTom E. BlackwellTexasMelville R. BoisMinnesota, North Dakota,South DakotaJohn N. CasbonSoutheast RegionJohn S. ChristiansenArizona, Nevada, Oklahoma, UtahMichael W. ConwayFloridaJames M. CostelloIllinoisMichael F. Frederick Jr.North Atlantic RegionRichard E. GarlickColorado, GuamThomas H. GriffertyInternational OperationsThomas S. HartmanIdaho, Montana, WashingtonMichael B. HopkinsEquity Loan ServicesA.J. LagomarsinoCaliforniaJohn T. McGrathMid-Atlantic RegionJoseph W. McNamara Jr.Iowa, NebraskaRobert G. MeckfesselKansas, MissouriTed MooreCalifornia Lenders AdvantagePeter C. NordenNortheast RegionJoseph J. OddoCalifornia

Charles J. O’RourkeAlaska, OregonJames M. OrphanidesNew YorkErnest H. PhillipsNew MexicoDennie L. RowlandCalifornia, HawaiiMark SachauCaliforniaJames StipanovichKentucky, Ohio, West VirginiaGary A. WangbergCalifornia Agencies

First American Equity Loan ServicesThe Halle Building1228 Euclid Avenue, Suite 400Cleveland, Ohio 44115(216) 241-1278Michael B. HopkinsPresident

First American Exchange Corporation520 North Central AvenueGlendale, California 91203(818) 242-5800Troy X. KelleyPresident

First American TransportationTitle Insurance Company510 Bienville StreetNew Orleans, Louisiana 70130(504) 588-9252John N. CasbonPresident and Chief Executive Officer

SMS Settlement Services, Inc.1004 West Taft AvenueOrange, California 92865(714) 998-1111Carl T. BauchlePresident

First American Real EstateInformation Services, Inc.150 Second Avenue North, Suite 1600 St. Petersburg, Florida 33701(800) 449-8732John W. LongPresident and Chief Executive OfficerJoseph R. ReppertVice ChairmanJohn C. LamsonChief Financial OfficerCurt A. CaspersenExecutive Vice President,National SalesDonald A. RobertExecutive Vice PresidentBarry M. SandoExecutive Vice PresidentDennis J. GilmoreExecutive Vice President

Mortgage Information Services(800) 229-8426Barry M. SandoPresident, Mortgage Information Services

Contour Software, Inc.700 West Hamilton AvenueCampbell, California 95008(800) 266-8687Scott M. CooleyPresident

First American CREDCO

12395 First American WayPoway, California 92064(800) 255-0792Anand K. NallathambiDivision PresidentKathy ManzioneExecutive Vice President andChief Operating Officer

First American Excelis8435 Stemmons FreewayDallas, Texas 75247(800) 717-5554C. Clark RiffeDivision President

First American Field Services1125 Ocean AvenueLakewood, New Jersey 08701(732) 363-3626Thomas BlauveltDivision PresidentCathy H. MenchiseExecutive Vice President and Chief Operating Officer

First American Flood Data Services11902 Burnet Road, Suite 400Austin, Texas 78758(800) 447-1772William J. SherakasDivision President and Chief Operating Officer

First American Default Management Solutions8435 Stemmons FreewayDallas, Texas 75247(800) 229-8426Joseph G. FilosetaDivision President

First American Nationwide Documents4100 E. Mississippi Avenue, Suite 1000Denver, Colorado 80246(800) 892-6678Lloyd G. BoothDivision President

First American Real Estate Tax Service8435 Stemmons FreewayDallas, Texas 75247(800) 229-8426David C. YavorskyDivision President

First American Tax Valuation8435 Stemmons FreewayDallas, Texas 75247(800) 359-3908S. Lewis HillDivision President

Pinnacle Management SolutionsInsurance Services, Inc.395 Oyster Point Boulevard, Suite 500South San Francisco, California 94080(800) 643-7073Lucy A. PrzybylaExecutive Vice President

Database Information and Services(800) 426 -1466Dennis J. GilmorePresident, Database Information and Services

Data Tree550 West C Street, Suite 2040San Diego, California 92101(619) 231-3300Harish K. ChopraChairmanJoseph J. OddoPresident

First American Appraisal Services12395 First American WayPoway, California 92064(800) 281-6200Chris LeavellDivision President

First American Real Estate Solutions5601 La Palma AvenueAnaheim, California 92807(800) 426 -1466Dennis J. GilmoreGroup PresidentGeorge S. LivermoreDivision President

Smart Title Solutions5601 East La Palma AvenueAnaheim, California 92807(714) 701-5600Michael T. HenneyDivision President

First American ConsumerInformation and Services

Consumer Information(800) 710-1877Donald A. RobertPresident, Consumer Information and Services GroupMary S. SiegristExecutive Vice President, ConsumerInformation and Services Group

CIC, Inc.12505 Starkey Road, Suite KLargo, Florida 33773(800) 321-4473Mary S. SiegristPresident

First American CREDCOConsumer Products Division12395 First American WayPoway, California 92064(800) 694-1414Eric J. RumseySenior Vice President and General Manager

First American Fastrac Systems668 North 44th Street, Suite 300Phoenix, Arizona 85008(602) 685-1100David L. AmesExecutive Vice President

First American Registry, Inc.11140 Rockville Pike, Suite 1200Rockville, Maryland 20852(800) 999-0350Evan T. BarnettPresident

Consumer Services

First American Capital Management, Inc.567 San Nicolas Place, Suite 101Newport Beach, California 92660(949) 719-4546William C. ConradPresident and Chief Executive OfficerDeborah A. CastellaniChief Operating Officer

First American Home BuyersProtection Corporation7833 Haskell AvenueVan Nuys, California 91406(800) 992-3400Philip B. BransonChairmanMartin R. WoolPresident

First American Trust421 North Main StreetSanta Ana, California 92701(877) 908-7878Jerald P. LewisPresident and Chief Executive OfficerDavid O. RahnSenior Vice President and Chief Operating Officer

First Security Thrift803 East Katella AvenueOrange, California 92867(714) 538-3481James BresnanPresident and Chief Executive Officer

Five Star Insurance Company2400 Main Street, Suite 100Irvine, California 92614(800) 756-9100Dirk R. McNameePresident

Great Pacific Insurance Company2400 Main Street, Suite 100Irvine, California 92614(888) 922-5343Dirk R. McNameePresident

Stock ListingThe First American Financial Corporation’s common stock istraded on the New York Stock Exchange under the symbol “FAF.”

Common Stock PriceFiscal 1999

High LowFirst Quarter 34.81 15.81Second Quarter 20.69 13.88Third Quarter 19.25 12.00Fourth Quarter 15.13 11.50

Investor ContactDenise M. WarrenInvestor Relations [email protected](800) 854-3643, ext. 3915Additional copies of this Annual Report and other informationabout the Company are available from the CorporateCommunications Department at (800) 854-3643, ext. 3298.

Transfer Agent, Registrar and Dividend Disbursing AgentFirst American TrustP.O. Box 267Santa Ana, California 92702-9932(714) 647-2116Any change of a stockholder’s address should be sent to theTransfer Agent and Registrar at the address above.

Dividend Payment DatesQuarterly dividends on common stock are paid, following declaration by the Board of Directors, on or about the 15th of January, April, July and October. The Company has paid a cash dividend every year since 1909.

Annual MeetingThe Annual Meeting of Stockholders will be held at 2 p.m. onThursday, May 11, 2000, at First American Financial’s CorporateHeadquarters, 1 First American Way, Santa Ana, California.

Safe Harbor StatementAny statements in this document that look forward in timeinvolve risks and uncertainties, including but not limited to thefollowing: the effect of interest rate fluctuations; changes in theperformance of the real estate markets; the effect of changingeconomic conditions; general volatility in the capital markets;the demand for, and the acceptance of, the Company’s products;changes in applicable government regulations; continuedconsolidation among the Company’s significant customers;consolidation among significant competitors; the impact of legalproceedings commenced by the California attorney general andrelated litigation; the continued ability to identify businesses tobe acquired; and changes in the Company’s ability to integratebusinesses which it acquires. The Company’s actual results,performance or achievement could differ materially from thoseexpressed in, or implied by, any forward-looking statements.Accordingly, no assurances can be given that any of the eventsanticipated by the forward-looking statements will transpire oroccur or, if any of them do, what impact they will have on theresults of operations or financial condition of the Company.

First American and the eagle logo are registered service marks, and FASTSearch andConfidential Credit are registered trademarks, of The First American Financial Corporation.MORNETPlus is a registered trademark of Fannie Mae.IBM is a registered trademark of International Business Machines Corporation. Morningstar is a registered trademark of Morningstar, Inc.Editor: Jo Etta BandyDesign: Ervin/Bell AdvertisingPrinter: Costello Brothers

s h a r e h o l d e r i n f o r m a t i o n


1 First American WaySanta Ana, CA 92707

(800) 854-3643www.firstam.com

NYSE: FAF

Date post:	07-Aug-2015
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