Sears 2011 Annual Report Download - page 44

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Domestic Pension Plan Funding
Contributions to our pension plans remain a significant use of our cash on an annual basis. While Sears
Holdings’ pension plan is frozen, and thus associates do not currently earn pension benefits, the company has a
legacy pension obligation for past service performed by Kmart and Sears, Roebuck and Co. associates. During
2011, we contributed $352 million to our domestic pension plans. We estimate that the domestic pension
contribution will be approximately $310 million in 2012 and $740 million in 2013, though the ultimate amount
of pension contributions could be affected by changes in the applicable regulations as well as financial market
and investment performance.
Wholly owned Insurance Subsidiary and Inter-company Securities
As noted in Note 1 of Notes to Consolidated Financial Statements, we have numerous types of insurable
risks, including workers’ compensation, product and general liability, automobile, warranty, and asbestos and
environmental claims. In addition, as discussed in Note 1, we sell extended service contracts to our customers.
The associated risks are managed through Holdings’ wholly owned insurance subsidiary, Sears Reinsurance
Company Ltd. (“Sears Re”), a Bermuda Class 3 insurer.
In accordance with applicable insurance regulations, Sears Re holds marketable securities to support the
insurance coverage it provides. Sears utilizes two securitization structures to issue specific securities in which
Sears Re invests its capital to fund its insurance obligations. In November 2003, Sears formed a Real Estate
Mortgage Investment Conduit, or REMIC. The real estate associated with 125 full-line stores was contributed to
indirect wholly owned subsidiaries of Sears, and then leased back to Sears. The contributed stores were
mortgaged and the REMIC issued securities that are secured by the mortgages and collateral assignments of the
store leases. Sears Re and two other indirect wholly owned subsidiaries of Holdings own $1.3 billion (par value)
of these mortgage-backed securities. Payments to Sears Re on these securities are funded by the lease payments.
In May 2006, a subsidiary of Holdings contributed the rights to use the Kenmore, Craftsman and DieHard
trademarks in the U.S. and its possessions and territories to KCD IP, LLC, an indirect wholly owned subsidiary
of Holdings. KCD IP, LLC has licensed the use of the trademarks to subsidiaries of Holdings, including Sears
and Kmart. Asset-backed securities with a par value of $1.8 billion were issued by KCD IP, LLC and
subsequently purchased by Sears Re, the collateral for which includes the trademark rights and royalty income.
Payments to Sears Re on these asset-backed securities are funded by the royalty payments. The issuers of these
mortgage-backed and asset-backed securities and the owners of these real estate and trademark assets are
bankruptcy remote, special purpose entities that are indirect wholly owned subsidiaries of Holdings. Cash flows
received from rental streams and licensing fee streams paid by Sears, Kmart, other affiliates and third parties, are
used for the payment of fees, interest and principal on these securities. Since the inception of the REMIC and
KCD IP, LLC, these mortgage-backed and asset-backed securities have been entirely held by our wholly owned
consolidated subsidiaries in support of our insurance activities. At January 28, 2012 and January 29, 2011, the net
book value of the securitized trademark rights was approximately $1.0 billion. The net book value of the
securitized real estate assets was approximately $0.8 billion at both January 28, 2012 and January 29, 2011.
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