Kimberly-Clark Offloads Pension Obligations to Insurance Companies

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Kimberly-Clark

Kimberly-Clark (NYSE: KMB), maker of the Huggies and Kleenex brands, announced on February 23rd that it has entered into a purchase agreement with two insurance companies for the purchase of group annuity contracts for its retirees. The agreement will transfer Kimberly-Clark’s pension obligations towards approximately 21,000 of its retirees in the U.S. to the insurance companies, The Prudential Insurance Company of America (Prudential) and Massachusetts Mutual Life Insurance Company (MassMutual). [1]

We have a price estimate of $101 for Kimberly-Clark, which is slightly lower than its current market price.

See our complete analysis of Kimberly-Clark here

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Long-term Savings in Lieu of Short-term Charges

The purchase of group annuity contracts will reduce Kimberly-Clark’s projected benefit obligations by approximately $2.5 billion. As of December 31st 2015, Kimberly-Clark’s total projected benefit obligations stood at $6.9 billion. [2] Of this, $4.4 billion related to projected benefit obligations towards U.S. qualified and non-qualified pension plans, which will now get reduced by approximately $2.5 billion to $1.9 billion.

The purchase of the annuities will be funded with assets of Kimberly-Clark’s U.S. pension plan, which stood at approximately $3.8 billion as of December 31st, 2015. [2] To support this transaction, Kimberly-Clark expects to make a contribution of $400 million to $475 million to its U.S. pension plan. This is in addition to the projected $100 million contribution to Kimberly-Clark’s global defined benefit pension plans in 2015. Further, the company also expects to recognize a non-cash charge of $1.3 billion (before tax) towards pension settlement in the second quarter of 2015.

Thus, the move is likely to depress Kimberly-Clark’s second quarter GAAP results. However, it may also provide a bump to Kimberly-Clark’s valuation as part of the non-current liability towards employee benefits will get shifted to the insurers. We will have more clarity on the same once the company releases detailed information regarding its defined benefit pension plans in the second quarter earnings report.

Benefits Extend Beyond Financial Factors

Kimberly-Clark’s move is the latest in a string of companies offloading pension obligations to insurance companies in recent years. The trend is reflected in a recent report which stated that 21% of U.S. corporate pensions are likely to explore the option of offloading their pension obligations. [3] This is a marked uptick from 2013, when only 13% of the companies expressed a similar interest. Early adopters of the strategy include other corporate heavyweights like General Motors, Verizon Communications and Motorola Solutions.

Kimberly-Clark stated that retirees will receive the same monthly benefits as before, to be split evenly by the two insurance companies. This arrangement was proposed by State Street Global Advisors which was retained as independent fiduciary of the beneficiaries.  We see this as a win-win for the company and its employees. The latter will benefit from the immense scale and security of the insurers. And the company will cede both an administrative burden and the offsetting liabilities with these pension assets.  Therefore, the benefits of the move extend beyond purely financial factors.

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Notes:
  1. Kimberly-Clark Signs Agreements To Purchase Pension Annuity Contracts, Kimberly-Clark Press Release, February 23, 2015 []
  2. Kimberly-Clark 2014 10-K [] []
  3. More Pensions Want to Offload Risk to Insurers, The Wall Street Journal, February 11, 2015 []