The First American Corporation / Annual Report 2001

notes to consolidated financial statements

NOTE 11

Employee Benefit Plans:

The Company has pension and other retirement benefit plans covering substantially all employees. The Company’s principal pension plan is a noncontributory, qualified, defined benefit plan with benefits based on the employee’s years of service and the highest five consecutive years’ compensation during the last ten years of employment. The Company’s policy is to fund all accrued pension costs. Contributions are intended to provide not only for benefits attributable to past service, but also for those benefits expected to be earned in the future. The Company also has nonqualified, unfunded supplemental benefit plans covering certain key management personnel. Benefits under these plans are intended to be funded with proceeds from life insurance policies purchased by the Company on the lives of the executives. In December 2000, the Company amended its principal pension plan and certain other retirement plans. The primary impact of the amendment was to reduce future benefits accrued by employees by limiting credit for pay increases through December 31, 2001, and by limiting credit for years of service through December 31, 2005. As a result of amending the plans, the Company reduced its pension expense in 2000 by $5.0 million, recognized a one-time benefit of $34.3 million and will record reduced employee benefit expense in subsequent years.

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


(in thousands, except per share amounts)	2001		2000		1999

Expense:
Service cost	$ 17,015		$ 23,082		$ 23,726
Interest cost	15,737		17,110		15,376
Actual return on plan assets	(15,926	)	(15,379	)	(11,751	)
Amortization of net transition obligation	309		309		309
Amortization of prior service cost	(3,632	)	144		143
Amortization of net loss	742		783		1,746
Curtailment gain	–		(34,291	)	–

	$ 14,245		$ (8,242	)	$29,549

A reconciliation of benefit obligations, plan assets and funded status of the plans is as follows:


(in thousands)	2001				2000

	Funded pension plans		Unfunded supplemental benefit plans		Funded pension plans		Unfunded supplemental benefit plans

Change in benefit obligation:
Benefit obligation at
beginning of year	$ 158,157		$ 52,289		$ 188,175		$ 41,576
Service costs	14,928		2,087		21,418		1,664
Interest costs	11,653		4,084		13,542		3,568
Plan amendments	–		–		(53,348	)	2,100
Actuarial losses (gains)	8,651		3,470		(3,324	)	5,471
Benefits paid	(10,203	)	(2,537	)	(8,306	)	(2,090	)

Projected benefit obligation
at end of year	183,186		59,393		158,157		52,289

Change in plan assets:
Plan assets at fair value
at beginning of year	159,123		–		152,010		–
Actual return on plan assets	(11,060	)	–		3,161		–
Company contributions	779		2,537		12,258		2,090
Benefits paid	(10,203	)	(2,537	)	(8,306	)	(2,090	)

Plan assets at fair value
at end of year	138,639		–		159,123		–

Reconciliation of funded status:
Funded status of the plans	(44,547	)	(59,393	)	966		(52,289	)
Unrecognized net
actuarial loss	45,227		17,214		9,637		14,486
Unrecognized prior
service cost	(13,789	)	1,193		(17,795	)	1,566
Unrecognized net transition
(asset) obligation	(50	)	–		(101	)	360

Accrued pension cost	(13,159	)	(40,986	)	(7,293	)	(35,877	)

Amounts recognized in the
consolidated financial
statements consist of:
Accrued benefit liability	(35,213	)	(45,172	)	(7,293	)	(40,222	)
Intangible asset	(37	)	1,193		–		1,926
Minimum pension
liability adjustment	22,091		2,993		–		2,419

	$ (13,159	)	$ (40,986	)	$ (7,293	)	$ (35,877	)

    The rate of increase in future compensation levels for the plans of 4.5% and the weighted-average discount rates of 7.25% and 7.5%, respectively, were used in determining the actuarial present value of the projected benefit obligation at December 31, 2001 and 2000. The majority of pension plan assets are invested in U.S. government securities, time deposits and common stocks with a projected long-term rate of return of 10.0% at December 31, 2001 and 2000.

    The Company’s principal profit-sharing plan was amended effective January 1, 1995, to discontinue future contributions. The plan holds 5,089,000 and 5,393,000 shares of the Company’s common stock, representing 7.4% and 8.4% of the total shares outstanding at December 31, 2001 and 2000, respectively.

    The Company also has a Stock Bonus Plan (the “Plan”) for key employees pursuant to which 9,000, 21,000 and 154,000 common shares were issued in 2001, 2000 and 1999, respectively, resulting in a charge to operations of $0.3 million, $0.2 million and $3.4 million, respectively. The Plan, as amended December 9, 1992, provides that a total of up to 1,350,000 common shares may be awarded in any one year.

    Effective January 1, 1995, the Company adopted The First American 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 amount as determined by the Internal Revenue Code. The Company makes contributions to the Savings Plan based on profitability, as well as contributions of the participants. The Company’s expense related to the Savings Plan amounted to $16.0 million, $9.2 million and $13.7 million for the years ended December 31, 2001, 2000 and 1999, respectively.

    In December 2001, the Company established an employee stock purchase plan under which eligible employees may purchase common stock of the Company at 85% of the closing price on the last day of each month. There were 17,000 shares issued in connection with the plan in 2001. At December 31, 2001, there were 2,983,000 shares reserved for future issuances.