Sears 2012 Annual Report Download - page 46

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As previously reported, on July 6, 2012, federal legislation signed into law allows pension plan sponsors to use
higher interest rate assumptions in valuing plan liabilities and determining funding obligations. As a result of this
legislation, the Company's domestic pension plan was within $203 million of being 80% funded under applicable
law. In order to reduce the risks of gross pension obligations, the Company elected to contribute an additional $203
million to its domestic pension plan on September 14, 2012, after which its domestic pension plan was 80% funded
under applicable law.
Effective September 17, 2012, the Company amended its domestic pension plan, primarily related to lump sum
benefit eligibility, and began notifying certain former employees of the Company of its offer to pay those employees'
pension benefit in a lump sum. These amendments did not have a significant impact on our plan. Former employees
eligible for the voluntary lump sum payment option are generally those who are vested traditional formula
participants of the Plan who terminated employment prior to January 1, 2012 and who have not yet started receiving
monthly payments of their pension benefits.
The Company offered the one-time voluntary lump sum window in an effort to reduce its long-term pension
obligations and ongoing annual pension expense. This voluntary offer was made to approximately 86,000 eligible
terminated vested participants, representing approximately $2.0 billion of the Company's total qualified pension plan
liabilities. Eligible participants had until November 19, 2012 to make their election. The Company made payments
of approximately $1.5 billion to employees who made the election in December 2012 and funded the payments from
existing pension plan assets. In connection with this transaction, the Company incurred a non-cash charge to
operations of approximately $452 million pre-tax in the fourth quarter of 2012 as a result of the requirement to
expense the unrealized actuarial losses. The charge had no effect on equity because the unrealized actuarial losses
are already recognized in accumulated other comprehensive income/(loss). Accordingly, the effect on retained
earnings was offset by a corresponding reduction in accumulated other comprehensive loss.
Wholly owned Insurance Subsidiary and Intercompany Securities
We have numerous types of insurable risks, including workers’ compensation, product and general liability,
automobile, warranty, asbestos and environmental claims and the extended service contracts we sell to our
customers. In addition, we provide credit insurance to third party creditors of the Company to mitigate their credit
risk with the Company. 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 and interest 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 February 2,
2013 and January 28, 2012, 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 February 2, 2013 and
January 28, 2012.