Notes to Condensed Consolidated Financial Statements (Unaudited)
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1.
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Significant Accounting Policies
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Description of Business
CVS Health Corporation (“CVS Health”), together with its subsidiaries (collectively, the “Company”), has more than 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 103 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year and expanding specialty pharmacy services. The Company also serves an estimated 34 million people through traditional, voluntary and consumer-directed health insurance products and related services, including expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan (“PDP”). The Company believes its innovative health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.
The coronavirus disease 2019 (“COVID-19”) pandemic has severely impacted the economies of the U.S. and other countries around the world. The impact of COVID-19 on the Company’s businesses, operating results, cash flows and financial condition in the three and six months ended June 30, 2020, as well as information regarding certain expected impacts of COVID-19 on the Company, is discussed throughout this Quarterly Report on Form 10-Q.
The Company has four reportable segments: Pharmacy Services, Retail/LTC, Health Care Benefits and Corporate/Other, which are described below.
Pharmacy Services Segment
The Pharmacy Services segment provides a full range of pharmacy benefit management (“PBM”) solutions, including plan design offerings and administration, formulary management, retail pharmacy network management services, mail order pharmacy, specialty pharmacy and infusion services, clinical services, disease management services and medical spend management. The Pharmacy Services segment’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, PDPs, Medicaid managed care plans, plans offered on public health insurance exchanges (“Public Exchanges”) and private health insurance exchanges, other sponsors of health benefit plans and individuals throughout the United States. The Pharmacy Services segment operates retail specialty pharmacy stores, specialty mail order pharmacies, mail order dispensing pharmacies, compounding pharmacies and branches for infusion and enteral nutrition services.
Retail/LTC Segment
The Retail/LTC segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products, cosmetics and personal care products, provides health care services through its MinuteClinic® walk-in medical clinics, provides medical diagnostic testing and conducts long-term care pharmacy (“LTC”) operations, which distribute prescription drugs and provide related pharmacy consulting and other ancillary services to long-term care facilities and other care settings. As of June 30, 2020, the Retail/LTC segment operated more than 9,900 retail locations, approximately 1,100 MinuteClinic locations as well as online retail pharmacy websites, LTC pharmacies and onsite pharmacies.
Health Care Benefits Segment
The Health Care Benefits segment is one of the nation’s leading diversified health care benefits providers. The Health Care Benefits segment has the information and resources to help members, in consultation with their health care professionals, make more informed decisions about their health care. The Health Care Benefits segment offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, PDPs, Medicaid health care management services, workers’ compensation administrative services and health information technology products and services. The Health Care Benefits segment’s customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers (“providers”), governmental units, government-sponsored plans, labor groups and expatriates. The Company refers to insurance products (where it assumes all or a majority of the risk for medical and dental care costs) as “Insured” and administrative services contract products (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) as “ASC.”
Corporate/Other Segment
The Company presents the remainder of its financial results in the Corporate/Other segment, which consists of:
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Management and administrative expenses to support the Company’s overall operations, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments, expenses associated with the Company’s investments in its transformation and Enterprise modernization programs and acquisition-related integration costs; and
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•
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Products for which the Company no longer solicits or accepts new customers such as its large case pensions and long-term care insurance products.
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Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of CVS Health and its subsidiaries have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. In accordance with such rules and regulations, certain information and accompanying note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”).
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. Because of the influence of various factors on the Company’s operations, including business combinations, certain holidays and other seasonal influences, net income for any interim period may not be comparable to the same interim period in previous years or necessarily indicative of income for the full year.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated.
The Company continually evaluates its investments to determine if they represent variable interests in a VIE. If the Company determines that it has a variable interest in a VIE, the Company then evaluates if it is the primary beneficiary of the VIE. The evaluation is a qualitative assessment as to whether the Company has the ability to direct the activities of a VIE that most significantly impact the entity’s economic performance. The Company consolidates a VIE if it is considered to be the primary beneficiary.
Assets and liabilities of VIEs for which the Company is the primary beneficiary were not significant to the Company’s unaudited condensed consolidated financial statements. VIE creditors do not have recourse against the general credit of the Company.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation.
Restricted Cash
Restricted cash included in other assets on the unaudited condensed consolidated balance sheets represents amounts held in a trust in one of the Company’s captive insurance companies to satisfy collateral requirements associated with the assignment of certain insurance policies. All restricted cash is invested in time deposits, money market funds or commercial paper.
The following is a reconciliation of cash and cash equivalents on the unaudited condensed consolidated balance sheets to total cash, cash equivalents and restricted cash on the unaudited condensed consolidated statements of cash flows:
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In millions
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June 30,
2020
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December 31,
2019
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Cash and cash equivalents
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$
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14,869
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$
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5,683
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Restricted cash (included in other assets)
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276
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271
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Total cash, cash equivalents and restricted cash in the statements of cash flows
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$
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15,145
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$
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5,954
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Accounts Receivable
Accounts receivable are stated net of allowances for credit losses, customer credit allowances, contractual allowances and estimated terminations. Accounts receivable, net is composed of the following:
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In millions
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June 30,
2020
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December 31,
2019
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Trade receivables
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$
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6,848
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$
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6,717
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Vendor and manufacturer receivables
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9,791
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7,856
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Premium receivables
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3,080
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2,663
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Other receivables
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2,801
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2,381
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Total accounts receivable, net
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$
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22,520
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$
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19,617
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The Company’s allowance for credit losses was $342 million as of June 30, 2020. When developing an estimate of the Company’s expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The Company’s accounts receivable are short duration in nature and typically settle in less than 30 days. The Company’s allowance for doubtful accounts was $319 million as of December 31, 2019.
Revenue Recognition
Disaggregation of Revenue
The following tables disaggregate the Company’s revenue by major source in each segment for the three and six months ended June 30, 2020 and 2019:
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In millions
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Pharmacy
Services
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Retail/
LTC
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Health Care
Benefits
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Corporate/
Other
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Intersegment
Eliminations
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Consolidated
Totals
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Three Months Ended June 30, 2020
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Major goods/services lines:
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Pharmacy
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$
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34,645
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$
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16,870
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$
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—
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$
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—
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$
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(9,741
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$
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41,774
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Front Store
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—
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4,653
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—
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—
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—
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4,653
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Premiums
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—
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—
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16,913
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14
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—
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16,927
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Net investment income
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—
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—
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127
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57
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—
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184
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Other
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244
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139
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1,428
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15
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(23
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1,803
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Total
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$
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34,889
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$
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21,662
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$
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18,468
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$
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86
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$
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(9,764
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$
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65,341
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Pharmacy Services distribution channel:
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Pharmacy network (1)
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$
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20,536
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Mail choice (2)
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14,109
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Other
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244
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Total
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$
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34,889
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Three Months Ended June 30, 2019
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Major goods/services lines:
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Pharmacy (3)
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$
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34,698
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$
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16,392
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$
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—
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$
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—
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$
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(10,416
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$
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40,674
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Front Store
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—
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4,875
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—
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—
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—
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4,875
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Premiums
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—
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—
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15,777
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14
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—
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15,791
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Net investment income
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—
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—
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148
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145
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—
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293
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Other (3)
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144
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180
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1,478
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2
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(6
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1,798
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Total
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$
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34,842
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$
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21,447
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$
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17,403
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$
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161
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$
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(10,422
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$
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63,431
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Pharmacy Services distribution channel:
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Pharmacy network (1) (3)
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$
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21,974
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Mail choice (2) (3)
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12,724
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Other
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144
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Total
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$
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34,842
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In millions
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Pharmacy
Services
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Retail/
LTC
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Health Care
Benefits
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Corporate/
Other
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Intersegment
Eliminations
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Consolidated
Totals
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Six Months Ended June 30, 2020
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Major goods/services lines:
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Pharmacy
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$
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69,419
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$
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34,225
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$
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—
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$
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—
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$
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(19,998
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)
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$
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83,646
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Front Store
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—
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9,861
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—
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—
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—
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9,861
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Premiums
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—
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—
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34,534
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33
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|
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—
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34,567
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Net investment income
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—
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—
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220
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126
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—
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346
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Other
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453
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325
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2,912
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17
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(31
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3,676
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Total
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$
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69,872
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$
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44,411
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$
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37,666
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$
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176
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$
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(20,029
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)
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$
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132,096
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Pharmacy Services distribution channel:
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Pharmacy network (1)
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$
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41,636
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Mail choice (2)
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27,783
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Other
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453
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Total
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$
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69,872
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Six Months Ended June 30, 2019
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Major goods/services lines:
|
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Pharmacy (3)
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$
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68,111
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$
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32,510
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$
|
—
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$
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—
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$
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(21,417
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)
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$
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79,204
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Front Store
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—
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9,674
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—
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—
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—
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9,674
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Premiums
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—
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—
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32,036
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37
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—
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32,073
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Net investment income
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—
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|
—
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|
312
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|
230
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—
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|
542
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Other (3)
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289
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|
378
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2,925
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4
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(12
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3,584
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Total
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$
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68,400
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$
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42,562
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$
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35,273
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$
|
271
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$
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(21,429
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)
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$
|
125,077
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Pharmacy Services distribution channel:
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Pharmacy network (1) (3)
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$
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43,506
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Mail choice (2) (3)
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24,605
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|
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Other
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289
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|
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Total
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$
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68,400
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_____________________________________________
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(1)
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Pharmacy Services pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies, but excluding Maintenance Choice® activity, which is included within the mail choice category. Maintenance Choice permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS Pharmacy retail store for the same price as mail order.
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(2)
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Pharmacy Services mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a retail pharmacy, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program.
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(3)
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Certain prior year amounts have been reclassified for consistency with the current period presentation.
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Contract Balances
Contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration, and include ExtraBucks® Rewards and unredeemed Company gift cards. The consideration received remains a contract liability until goods or services have been provided to the customer. In addition, the Company recognizes breakage on Company gift cards based on historical redemption patterns.
The following table provides information about receivables and contract liabilities from contracts with customers:
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In millions
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June 30,
2020
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December 31,
2019
|
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Trade receivables (included in accounts receivable, net)
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$
|
6,848
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$
|
6,717
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Contract liabilities (included in accrued expenses)
|
78
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|
|
73
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During the six months ended June 30, 2020 and 2019, the contract liabilities balance includes increases related to customers’ earnings in ExtraBucks Rewards or issuances of Company gift cards and decreases for revenues recognized during the period as a result of the redemption of ExtraBucks Rewards or Company gift cards and breakage of Company gift cards. Below is a summary of such changes:
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Six Months Ended
June 30,
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In millions
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2020
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2019
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Contract liabilities, beginning of the period
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$
|
73
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$
|
67
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Rewards earnings and gift card issuances
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179
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|
181
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Redemption and breakage
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(174
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)
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|
(172
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)
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Contract liabilities, end of the period
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$
|
78
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|
|
$
|
76
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Health Insurer Fee
Since January 1, 2014, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) has imposed an annual premium-based health insurer fee (the “HIF”). The HIF, which is payable each September, is not deductible for federal income tax purposes. There was no expense related to the HIF in the three and six months ended June 30, 2019, since there was a one-year suspension of the HIF for 2019. In the three and six months ended June 30, 2020, operating expenses included $248 million and $519 million, respectively, related to the Company’s estimated share of the 2020 HIF. In December 2019, the HIF was repealed for calendar years after 2020.
Related Party Transactions
The Company has an equity method investment in SureScripts, LLC (“SureScripts”), which operates a clinical health information network. The Company utilizes this clinical health information network in providing services to its client plan members and retail customers. The Company expensed fees for the use of this network of $3 million and $2 million in the three months ended June 30, 2020 and 2019, respectively, and expensed fees for the use of this network of approximately $23 million and $12 million in the six months ended June 30, 2020 and 2019, respectively. The Company’s investment in and equity in the earnings of SureScripts for all periods presented is immaterial.
The Company has an equity method investment in Heartland Healthcare Services, LLC (“Heartland”). Heartland operates several LTC pharmacies in four states. Heartland paid the Company $22 million and $27 million for pharmaceutical inventory purchases during the three months ended June 30, 2020 and 2019, respectively, and $43 million and $52 million for pharmaceutical inventory purchases during the six months ended June 30, 2020 and 2019, respectively. Additionally, the Company performs certain collection functions for Heartland and then transfers those customer cash collections to Heartland. The Company’s investment in and equity in the earnings of Heartland for all periods presented is immaterial.
New Accounting Pronouncements Recently Adopted
Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This standard requires the use of a forward-looking expected credit loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This standard also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. The Company adopted this new accounting standard on January 1, 2020. The Company adopted the credit loss impairment model on a modified retrospective basis and recorded a $3 million cumulative effect adjustment to reduce retained earnings as of the adoption date. The Company adopted the available-for-sale debt security impairment model on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows or financial condition.
Refer to “Accounts Receivable” above for a discussion of the Company’s expected credit loss impairment policy for its accounts receivable. The following is a discussion of the Company’s available-for-sale debt security impairment policy and expected credit loss impairment policy for mortgage loans under the new credit loss impairment standard:
Debt Securities
Debt securities consist primarily of United States Treasury and agency securities, mortgage-backed securities, corporate and foreign bonds and other debt securities. Debt securities are classified as either current or long-term investments based on their contractual maturities unless the Company intends to sell an investment within the next 12 months, in which case it is classified as current within the unaudited condensed consolidated balance sheets. Debt securities are classified as available for sale and are carried at fair value.
If a debt security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the amortized cost basis of the security is written down to its fair value and the difference is recognized in net income. If a debt security is in an unrealized loss position and the Company does not have the intent to sell and it is more likely than not that the Company will not have to sell such security before recovery of its amortized cost basis, the Company bifurcates the impairment into credit-related and non-credit related components. In evaluating whether a credit related loss exists, the Company considers a variety of factors including: the extent to which the fair value is less than the amortized cost basis; adverse conditions specifically related to the issuer of a security, an industry or geographic area; the payment structure of the security; the failure of the issuer of the security to make scheduled interest or principle payments; and any changes to the rating of the security by a rating agency. The amount of the credit-related component is recorded as an allowance for credit losses and recognized in net income, and the amount of the non-credit related component is included in other comprehensive income. Interest is not accrued on debt securities when management believes the collection of interest is unlikely.
The credit-related component is determined by comparing the present value of cash flows expected to be collected from the security, considering all reasonably available information relevant to the collectability of the security, with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, the Company records an allowance for credit losses, which is limited by the amount that the fair value is less than amortized cost basis.
For mortgage-backed and other asset-backed securities, the Company recognizes income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The Company’s investment in the security is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security, with adjustments recognized in net income.
Mortgage Loans
Mortgage loan investments are valued at the unpaid principal balance, net of an allowance for credit losses. Mortgage loans with a maturity date or a committed prepayment date within twelve months are classified as current on the unaudited condensed consolidated balance sheets. The Company assesses whether its loans share similar risk characteristics and, if so, groups such loans in a risk pool when measuring expected credit losses. The Company considers the following characteristics when evaluating whether its loans share similar risk characteristics: loan-to-value ratios, property type (e.g., office, retail, apartment, industrial), geographic location, vacancy rates and property condition.
Credit loss reserves are determined using a loss rate method that multiplies the unpaid principal balance of each loan within a risk pool group by an estimated loss rate percentage. The loss rate percentage considers both the expected loan loss severity and the probability of loan default. For periods where the Company is able to make or obtain reasonable and supportable forecasts of expected economic conditions (e.g., gross domestic product, employment), the Company adjusts its expected loss rates to reflect these forecasted economic conditions. For periods beyond which the Company is able to make or obtain reasonable and supportable forecasts of expected economic conditions, the Company reverts to historical loss rates in determining expected credit losses.
Interest income on a potential problem loan (i.e., high probability of default) or restructured loan is accrued to the extent it is deemed to be collectible and the loan continues to perform under its original or restructured terms. Interest income on problem loans (i.e., more than 60 days delinquent, in bankruptcy or in process of foreclosure) is recognized on a cash basis. Cash payments on loans in the process of foreclosure are treated as a return of principal.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350-40 to determine which implementation costs to capitalize as assets. The Company adopted this new accounting guidance on January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.
New Accounting Pronouncements Not Yet Adopted
Targeted Improvements to the Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944). This standard requires the Company to review cash flow assumptions for its long-duration insurance contracts at least annually and recognize the effect of changes in future cash flow assumptions in net income. This standard also requires the Company to update discount rate assumptions quarterly and recognize the effect of changes in these assumptions in other comprehensive income. The rate used to discount the Company’s liability for future policy benefits will be based on an estimate of the yield for an upper-medium grade fixed-income instrument with a duration profile matching that of the Company’s liabilities. In addition, this standard changes the amortization method for deferred acquisition costs and requires additional disclosures regarding the long duration insurance contract liabilities in the Company’s interim and annual financial statements. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.
Total investments at June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
In millions
|
Current
|
|
Long-term
|
|
Total
|
|
Current
|
|
Long-term
|
|
Total
|
|
Debt securities available for sale
|
$
|
2,396
|
|
|
$
|
16,158
|
|
|
$
|
18,554
|
|
|
$
|
2,251
|
|
|
$
|
14,671
|
|
|
$
|
16,922
|
|
|
Mortgage loans
|
200
|
|
|
938
|
|
|
1,138
|
|
|
122
|
|
|
1,091
|
|
|
1,213
|
|
|
Other investments
|
—
|
|
|
1,498
|
|
|
1,498
|
|
|
—
|
|
|
1,552
|
|
|
1,552
|
|
|
Total investments
|
$
|
2,596
|
|
|
$
|
18,594
|
|
|
$
|
21,190
|
|
|
$
|
2,373
|
|
|
$
|
17,314
|
|
|
$
|
19,687
|
|
Debt Securities
Debt securities available for sale at June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Gross
Amortized
Cost
|
|
Allowance
for Credit
Losses (1)
|
|
Net
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
$
|
1,924
|
|
|
$
|
—
|
|
|
$
|
1,924
|
|
|
$
|
156
|
|
|
$
|
—
|
|
|
$
|
2,080
|
|
|
States, municipalities and political subdivisions
|
2,312
|
|
|
—
|
|
|
2,312
|
|
|
138
|
|
|
(2
|
)
|
|
2,448
|
|
|
U.S. corporate securities
|
7,352
|
|
|
(1
|
)
|
|
7,351
|
|
|
837
|
|
|
(18
|
)
|
|
8,170
|
|
|
Foreign securities
|
2,266
|
|
|
(1
|
)
|
|
2,265
|
|
|
231
|
|
|
(11
|
)
|
|
2,485
|
|
|
Residential mortgage-backed securities
|
666
|
|
|
—
|
|
|
666
|
|
|
36
|
|
|
—
|
|
|
702
|
|
|
Commercial mortgage-backed securities
|
754
|
|
|
—
|
|
|
754
|
|
|
69
|
|
|
—
|
|
|
823
|
|
|
Other asset-backed securities
|
1,815
|
|
|
(1
|
)
|
|
1,814
|
|
|
30
|
|
|
(22
|
)
|
|
1,822
|
|
|
Redeemable preferred securities
|
22
|
|
|
—
|
|
|
22
|
|
|
2
|
|
|
—
|
|
|
24
|
|
|
Total debt securities (2)
|
$
|
17,111
|
|
|
$
|
(3
|
)
|
|
$
|
17,108
|
|
|
$
|
1,499
|
|
|
$
|
(53
|
)
|
|
$
|
18,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
$
|
1,791
|
|
|
$
|
—
|
|
|
$
|
1,791
|
|
|
$
|
62
|
|
|
$
|
(1
|
)
|
|
$
|
1,852
|
|
|
States, municipalities and political subdivisions
|
2,202
|
|
|
—
|
|
|
2,202
|
|
|
108
|
|
|
(1
|
)
|
|
2,309
|
|
|
U.S. corporate securities
|
7,167
|
|
|
—
|
|
|
7,167
|
|
|
573
|
|
|
(3
|
)
|
|
7,737
|
|
|
Foreign securities
|
2,149
|
|
|
—
|
|
|
2,149
|
|
|
200
|
|
|
(1
|
)
|
|
2,348
|
|
|
Residential mortgage-backed securities
|
508
|
|
|
—
|
|
|
508
|
|
|
25
|
|
|
—
|
|
|
533
|
|
|
Commercial mortgage-backed securities
|
654
|
|
|
—
|
|
|
654
|
|
|
46
|
|
|
—
|
|
|
700
|
|
|
Other asset-backed securities
|
1,397
|
|
|
—
|
|
|
1,397
|
|
|
13
|
|
|
(5
|
)
|
|
1,405
|
|
|
Redeemable preferred securities
|
30
|
|
|
—
|
|
|
30
|
|
|
8
|
|
|
—
|
|
|
38
|
|
|
Total debt securities (2)
|
$
|
15,898
|
|
|
$
|
—
|
|
|
$
|
15,898
|
|
|
$
|
1,035
|
|
|
$
|
(11
|
)
|
|
$
|
16,922
|
|
_____________________________________________
|
|
|
|
(1)
|
Effective January 1, 2020, the Company adopted the available-for-sale debt security impairment model under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The new impairment model requires the write down of amortized cost through an allowance for credit losses, rather than through a reduction of the amortized cost basis of the available-for-sale debt security. As the Company adopted the new available-for-sale debt security impairment model on a prospective basis, there was no allowance for credit losses recorded on available-for-sale debt securities at December 31, 2019.
|
|
|
|
|
(2)
|
Investment risks associated with the Company’s experience-rated products generally do not impact the Company’s consolidated operating results. At June 30, 2020, debt securities with a fair value of $931 million, gross unrealized capital gains of $118 million and gross unrealized capital losses of $2 million and at December 31, 2019, debt securities with a fair value of $965 million, gross unrealized capital gains of $83 million and no gross unrealized capital losses were included in total debt securities, but support experience-rated products. Changes in net unrealized capital gains (losses) on these securities are not reflected in accumulated other comprehensive income.
|
The net amortized cost and fair value of debt securities at June 30, 2020 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid, or the Company intends to sell a security prior to maturity.
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Net
Amortized
Cost
|
|
Fair
Value
|
|
Due to mature:
|
|
|
|
|
Less than one year
|
$
|
1,198
|
|
|
$
|
1,214
|
|
|
One year through five years
|
5,619
|
|
|
5,925
|
|
|
After five years through ten years
|
3,160
|
|
|
3,448
|
|
|
Greater than ten years
|
3,897
|
|
|
4,620
|
|
|
Residential mortgage-backed securities
|
666
|
|
|
702
|
|
|
Commercial mortgage-backed securities
|
754
|
|
|
823
|
|
|
Other asset-backed securities
|
1,814
|
|
|
1,822
|
|
|
Total
|
$
|
17,108
|
|
|
$
|
18,554
|
|
Summarized below are the debt securities the Company held at June 30, 2020 and December 31, 2019 that were in an unrealized capital loss position, aggregated by the length of time the investments have been in that position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
Greater than 12 months
|
|
Total
|
|
In millions, except number of securities
|
Number of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Number of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Number of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
22
|
|
|
$
|
105
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
22
|
|
|
$
|
105
|
|
|
$
|
—
|
|
|
States, municipalities and political subdivisions
|
83
|
|
|
169
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
83
|
|
|
169
|
|
|
2
|
|
|
U.S. corporate securities
|
569
|
|
|
481
|
|
|
17
|
|
|
8
|
|
|
3
|
|
|
1
|
|
|
577
|
|
|
484
|
|
|
18
|
|
|
Foreign securities
|
171
|
|
|
245
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
171
|
|
|
245
|
|
|
11
|
|
|
Residential mortgage-backed securities
|
21
|
|
|
52
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
52
|
|
|
—
|
|
|
Commercial mortgage-backed securities
|
13
|
|
|
65
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
65
|
|
|
—
|
|
|
Other asset-backed securities
|
400
|
|
|
567
|
|
|
16
|
|
|
97
|
|
|
81
|
|
|
6
|
|
|
497
|
|
|
648
|
|
|
22
|
|
|
Total debt securities
|
1,279
|
|
|
$
|
1,684
|
|
|
$
|
46
|
|
|
109
|
|
|
$
|
84
|
|
|
$
|
7
|
|
|
1,388
|
|
|
$
|
1,768
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
52
|
|
|
$
|
168
|
|
|
$
|
1
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
52
|
|
|
$
|
168
|
|
|
$
|
1
|
|
|
States, municipalities and political subdivisions
|
66
|
|
|
115
|
|
|
1
|
|
|
2
|
|
|
5
|
|
|
—
|
|
|
68
|
|
|
120
|
|
|
1
|
|
|
U.S. corporate securities
|
181
|
|
|
305
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
1
|
|
|
183
|
|
|
305
|
|
|
3
|
|
|
Foreign securities
|
39
|
|
|
75
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
75
|
|
|
1
|
|
|
Residential mortgage-backed securities
|
30
|
|
|
16
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
16
|
|
|
—
|
|
|
Commercial mortgage-backed securities
|
16
|
|
|
49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
49
|
|
|
—
|
|
|
Other asset-backed securities
|
138
|
|
|
254
|
|
|
1
|
|
|
187
|
|
|
182
|
|
|
4
|
|
|
325
|
|
|
436
|
|
|
5
|
|
|
Total debt securities
|
522
|
|
|
$
|
982
|
|
|
$
|
6
|
|
|
200
|
|
|
$
|
187
|
|
|
$
|
5
|
|
|
722
|
|
|
$
|
1,169
|
|
|
$
|
11
|
|
The Company reviewed the securities in the table above and concluded that they are performing assets generating investment income to support the needs of the Company’s business. In performing this review, the Company considered factors such as the quality of the investment security based on research performed by the Company’s internal credit analysts and external rating agencies and the prospects of realizing the carrying value of the security based on the investment’s current prospects for recovery. Unrealized capital losses at June 30, 2020 were generally caused by the widening of credit spreads on these securities relative to the interest rates on U.S. Treasury securities, driven by the adverse economic conditions in the U.S. and abroad caused by the COVID-19 pandemic. As of June 30, 2020, the Company did not intend to sell these securities, and did not believe it was more likely than not that it would be required to sell these securities prior to the anticipated recovery of their amortized cost basis.
The maturity dates for debt securities in an unrealized capital loss position at June 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supporting
experience-rated products
|
|
Supporting
remaining products
|
|
Total
|
|
In millions
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Due to mature:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
—
|
|
|
One year through five years
|
5
|
|
|
—
|
|
|
365
|
|
|
9
|
|
|
370
|
|
|
9
|
|
|
After five years through ten years
|
10
|
|
|
—
|
|
|
316
|
|
|
12
|
|
|
326
|
|
|
12
|
|
|
Greater than ten years
|
3
|
|
|
1
|
|
|
256
|
|
|
9
|
|
|
259
|
|
|
10
|
|
|
Residential mortgage-backed securities
|
—
|
|
|
—
|
|
|
52
|
|
|
—
|
|
|
52
|
|
|
—
|
|
|
Commercial mortgage-backed securities
|
—
|
|
|
—
|
|
|
65
|
|
|
—
|
|
|
65
|
|
|
—
|
|
|
Other asset-backed securities
|
12
|
|
|
1
|
|
|
636
|
|
|
21
|
|
|
648
|
|
|
22
|
|
|
Total
|
$
|
33
|
|
|
$
|
2
|
|
|
$
|
1,735
|
|
|
$
|
51
|
|
|
$
|
1,768
|
|
|
$
|
53
|
|
Mortgage Loans
The Company’s mortgage loans are collateralized by commercial real estate. During the three and six months ended June 30, 2020 and 2019, the Company had the following activity in its mortgage loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
New mortgage loans
|
$
|
16
|
|
|
$
|
37
|
|
|
$
|
24
|
|
|
$
|
78
|
|
|
Mortgage loans fully repaid
|
33
|
|
|
19
|
|
|
77
|
|
|
71
|
|
|
Mortgage loans foreclosed
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The Company assesses mortgage loans on a regular basis for credit impairments, and assigns a credit quality indicator to each loan. The Company’s credit quality indicator is internally developed and categorizes each loan in its portfolio on a scale from 1 to 7. These indicators are based upon several factors, including current loan-to-value ratios, current and future property cash flow, property condition, market trends, creditworthiness of the borrower and deal structure.
|
|
|
|
•
|
Category 1 - Represents loans of superior quality.
|
|
|
|
|
•
|
Categories 2 to 4 - Represent loans where credit risk is minimal to acceptable; however, these loans may display some susceptibility to economic changes.
|
|
|
|
|
•
|
Categories 5 and 6 - Represent loans where credit risk is not substantial, but these loans warrant management’s close attention.
|
|
|
|
|
•
|
Category 7 - Represents loans where collections are potentially at risk; if necessary, an impairment is recorded.
|
Based on the Company’s assessments at June 30, 2020 and December 31, 2019, the amortized cost basis of the Company's mortgage loans within each credit quality indicator by year of origination was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis by Year of Origination
|
|
In millions, except credit quality indicator
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
40
|
|
|
$
|
62
|
|
|
2 to 4
|
11
|
|
|
95
|
|
|
89
|
|
|
157
|
|
|
130
|
|
|
546
|
|
|
1,028
|
|
|
5 and 6
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
39
|
|
|
7
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
Total
|
$
|
11
|
|
|
$
|
95
|
|
|
$
|
93
|
|
|
$
|
188
|
|
|
$
|
130
|
|
|
$
|
621
|
|
|
$
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
58
|
|
|
2 to 4
|
5
|
|
|
88
|
|
|
93
|
|
|
206
|
|
|
140
|
|
|
611
|
|
|
1,143
|
|
|
5 and 6
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
|
7
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
5
|
|
|
$
|
88
|
|
|
$
|
93
|
|
|
$
|
221
|
|
|
$
|
140
|
|
|
$
|
666
|
|
|
$
|
1,213
|
|
Net Investment Income
Sources of net investment income for the three and six months ended June 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Debt securities
|
$
|
146
|
|
|
$
|
146
|
|
|
$
|
290
|
|
|
$
|
292
|
|
|
Mortgage loans
|
15
|
|
|
18
|
|
|
30
|
|
|
35
|
|
|
Other investments
|
(20
|
)
|
|
67
|
|
|
27
|
|
|
103
|
|
|
Gross investment income
|
141
|
|
|
231
|
|
|
347
|
|
|
430
|
|
|
Investment expenses
|
(9
|
)
|
|
(9
|
)
|
|
(17
|
)
|
|
(18
|
)
|
|
Net investment income (excluding net realized capital gains or losses)
|
132
|
|
|
222
|
|
|
330
|
|
|
412
|
|
|
Net realized capital gains (1)
|
52
|
|
|
71
|
|
|
16
|
|
|
130
|
|
|
Net investment income (2)
|
$
|
184
|
|
|
$
|
293
|
|
|
$
|
346
|
|
|
$
|
542
|
|
_____________________________________________
|
|
|
|
(1)
|
Net realized capital gains include the reversal of previously recorded credit-related impairment losses on debt securities of $42 million and yield-related impairment losses on debt securities of $1 million in the three months ended June 30, 2020. Net realized capital gains include credit-related and yield-related impairment losses on debt securities of $3 million and $42 million, respectively, in the six months ended June 30, 2020. Net realized capital gains are net of other than temporary impairment losses on debt securities of $6 million and $13 million, respectively, in the three and six months ended June 30, 2019.
|
|
|
|
|
(2)
|
Net investment income includes $10 million and $21 million for the three and six months ended June 30, 2020, respectively, and $12 million and $23 million for the three and six months ended June 30, 2019, respectively, related to investments supporting experience-rated products.
|
Excluding amounts related to experience-rated products, proceeds from the sale of available for sale debt securities and the related gross realized capital gains and losses for the three and six months ended June 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Proceeds from sales
|
$
|
1,419
|
|
|
$
|
1,273
|
|
|
$
|
2,142
|
|
|
$
|
2,762
|
|
|
Gross realized capital gains
|
23
|
|
|
37
|
|
|
43
|
|
|
72
|
|
|
Gross realized capital losses
|
21
|
|
|
2
|
|
|
56
|
|
|
4
|
|
The preparation of the Company’s unaudited condensed consolidated financial statements in accordance with GAAP requires certain assets and liabilities to be reflected at their fair value and others to be reflected on another basis, such as an adjusted historical cost basis. The Company’s assets and liabilities carried at fair value have been classified within one of three levels of a hierarchy established by GAAP. The following are the levels of the hierarchy and a brief description of the type of valuation information (“valuation inputs”) that qualifies a financial asset or liability for each level:
|
|
|
|
•
|
Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
|
|
|
•
|
Level 2 – Valuation inputs other than Level 1 that are based on observable market data. These include: quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets, valuation inputs that are observable that are not prices (such as interest rates and credit risks) and valuation inputs that are derived from or corroborated by observable markets.
|
|
|
|
|
•
|
Level 3 – Developed from unobservable data, reflecting the Company’s assumptions.
|
For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see Note 4 “Fair Value” in the 2019 Form 10-K.
There were no financial liabilities measured at fair value on a recurring basis on the condensed consolidated balance sheets at June 30, 2020 or December 31, 2019. Financial assets measured at fair value on a recurring basis on the condensed consolidated balance sheets at June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
9,101
|
|
|
$
|
5,768
|
|
|
$
|
—
|
|
|
$
|
14,869
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
U.S. government securities
|
1,955
|
|
|
125
|
|
|
—
|
|
|
2,080
|
|
|
States, municipalities and political subdivisions
|
—
|
|
|
2,448
|
|
|
—
|
|
|
2,448
|
|
|
U.S. corporate securities
|
—
|
|
|
8,122
|
|
|
48
|
|
|
8,170
|
|
|
Foreign securities
|
—
|
|
|
2,485
|
|
|
—
|
|
|
2,485
|
|
|
Residential mortgage-backed securities
|
—
|
|
|
702
|
|
|
—
|
|
|
702
|
|
|
Commercial mortgage-backed securities
|
—
|
|
|
823
|
|
|
—
|
|
|
823
|
|
|
Other asset-backed securities
|
—
|
|
|
1,820
|
|
|
2
|
|
|
1,822
|
|
|
Redeemable preferred securities
|
—
|
|
|
23
|
|
|
1
|
|
|
24
|
|
|
Total debt securities
|
1,955
|
|
|
16,548
|
|
|
51
|
|
|
18,554
|
|
|
Equity securities
|
19
|
|
|
—
|
|
|
26
|
|
|
45
|
|
|
Total
|
$
|
11,075
|
|
|
$
|
22,316
|
|
|
$
|
77
|
|
|
$
|
33,468
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
3,397
|
|
|
$
|
2,286
|
|
|
$
|
—
|
|
|
$
|
5,683
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
1,785
|
|
|
67
|
|
|
—
|
|
|
1,852
|
|
|
States, municipalities and political subdivisions
|
—
|
|
|
2,309
|
|
|
—
|
|
|
2,309
|
|
|
U.S. corporate securities
|
—
|
|
|
7,700
|
|
|
37
|
|
|
7,737
|
|
|
Foreign securities
|
—
|
|
|
2,348
|
|
|
—
|
|
|
2,348
|
|
|
Residential mortgage-backed securities
|
—
|
|
|
533
|
|
|
—
|
|
|
533
|
|
|
Commercial mortgage-backed securities
|
—
|
|
|
700
|
|
|
—
|
|
|
700
|
|
|
Other asset-backed securities
|
—
|
|
|
1,405
|
|
|
—
|
|
|
1,405
|
|
|
Redeemable preferred securities
|
—
|
|
|
26
|
|
|
12
|
|
|
38
|
|
|
Total debt securities
|
1,785
|
|
|
15,088
|
|
|
49
|
|
|
16,922
|
|
|
Equity securities
|
34
|
|
|
—
|
|
|
39
|
|
|
73
|
|
|
Total
|
$
|
5,216
|
|
|
$
|
17,374
|
|
|
$
|
88
|
|
|
$
|
22,678
|
|
During the three and six months ended June 30, 2020 and 2019, there were no transfers into or out of Level 3.
The carrying value and estimated fair value classified by level of fair value hierarchy for financial instruments carried on the condensed consolidated balance sheets at adjusted cost or contract value at June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
|
In millions
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
1,138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,163
|
|
|
$
|
1,163
|
|
|
Equity securities (1)
|
154
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Investment contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
With a fixed maturity
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
Without a fixed maturity
|
322
|
|
|
—
|
|
|
—
|
|
|
367
|
|
|
367
|
|
|
Long-term debt
|
71,673
|
|
|
82,823
|
|
|
—
|
|
|
—
|
|
|
82,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
1,213
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,239
|
|
|
$
|
1,239
|
|
|
Equity securities (1)
|
149
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
With a fixed maturity
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
Without a fixed maturity
|
372
|
|
|
—
|
|
|
—
|
|
|
392
|
|
|
392
|
|
|
Long-term debt
|
68,480
|
|
|
74,306
|
|
|
—
|
|
|
—
|
|
|
74,306
|
|
_____________________________________________
|
|
|
|
(1)
|
It was not practical to estimate the fair value of these cost-method investments as it represents shares of unlisted companies.
|
Separate Accounts assets relate to the Company’s large case pensions products which represent funds maintained to meet specific objectives of contract holders. Since contract holders bear the investment risk of these assets, a corresponding Separate Accounts liability has been established equal to the assets. These assets and liabilities are carried at fair value. Separate Accounts financial assets as of June 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
In millions
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
4
|
|
|
$
|
263
|
|
|
$
|
—
|
|
|
$
|
267
|
|
|
$
|
2
|
|
|
$
|
143
|
|
|
$
|
—
|
|
|
$
|
145
|
|
|
Debt securities
|
|
1,353
|
|
|
2,479
|
|
|
—
|
|
|
3,832
|
|
|
1,224
|
|
|
2,589
|
|
|
—
|
|
|
3,813
|
|
|
Equity securities
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
Common/collective trusts
|
|
—
|
|
|
538
|
|
|
—
|
|
|
538
|
|
|
—
|
|
|
499
|
|
|
—
|
|
|
499
|
|
|
Total
|
|
$
|
1,357
|
|
|
$
|
3,282
|
|
|
$
|
—
|
|
|
$
|
4,639
|
|
|
$
|
1,226
|
|
|
$
|
3,233
|
|
|
$
|
—
|
|
|
$
|
4,459
|
|
|
|
|
|
4.
|
Health Care Costs Payable
|
The following table shows the components of the change in health care costs payable during the six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
In millions
|
2020
|
|
2019
|
|
Health care costs payable, beginning of the period
|
$
|
6,879
|
|
|
$
|
6,147
|
|
|
Less: Reinsurance recoverables
|
5
|
|
|
4
|
|
|
Health care costs payable, beginning of the period, net
|
6,874
|
|
|
6,143
|
|
|
Acquisition
|
412
|
|
|
—
|
|
|
Add: Components of incurred health care costs
|
|
|
|
|
Current year
|
26,390
|
|
|
26,864
|
|
|
Prior years
|
(420
|
)
|
|
(489
|
)
|
|
Total incurred health care costs (1)
|
25,970
|
|
|
26,375
|
|
|
Less: Claims paid
|
|
|
|
|
Current year
|
20,223
|
|
|
20,552
|
|
|
Prior years
|
5,704
|
|
|
5,095
|
|
|
Total claims paid
|
25,927
|
|
|
25,647
|
|
|
Add: Premium deficiency reserve
|
29
|
|
|
14
|
|
|
Health care costs payable, end of the period, net
|
7,358
|
|
|
6,885
|
|
|
Add: Reinsurance recoverables
|
4
|
|
|
4
|
|
|
Health care costs payable, end of the period
|
$
|
7,362
|
|
|
$
|
6,889
|
|
_____________________________________________
|
|
|
|
(1)
|
Total incurred health care costs for the six months ended June 30, 2020 and 2019 in the table above exclude (i) $29 million and $14 million, respectively, related to a premium deficiency reserve related to the Company’s Medicaid products, (ii) $20 million and $21 million, respectively, of benefit costs recorded in the Health Care Benefits segment that are included in other insurance liabilities on the Company’s unaudited condensed consolidated balance sheets and (iii) $119 million and $136 million, respectively, of benefit costs recorded in the Corporate/Other segment that are included in other insurance liabilities on the Company’s unaudited condensed consolidated balance sheets.
|
The Company’s estimates of prior years’ health care costs payable decreased by $420 million and $489 million, respectively, in the six months ended June 30, 2020 and 2019, because claims were settled for amounts less than originally estimated (i.e., the amount of claims incurred was lower than originally estimated), primarily due to lower health care cost trends as well as the actual claim submission time being faster than originally assumed (i.e., the Company’s completion factors were higher than originally assumed) in estimating health care costs payable at the end of the prior year.
At June 30, 2020, the Company’s liabilities for the ultimate cost of (i) services rendered to the Company’s Insured members but not yet reported to the Company and (ii) claims which have been reported to the Company but not yet paid (collectively, “IBNR”) plus expected development on reported claims totaled approximately $5.4 billion. Substantially all of the Company’s liabilities for IBNR plus expected development on reported claims at June 30, 2020 related to the current year.
The following table is a summary of the Company’s borrowings at June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
June 30,
2020
|
|
December 31,
2019
|
|
Long-term debt
|
|
|
|
|
3.125% senior notes due March 2020
|
—
|
|
|
723
|
|
|
Floating rate notes due March 2020 (2.515% at December 31, 2019)
|
—
|
|
|
277
|
|
|
2.8% senior notes due July 2020
|
2,750
|
|
|
2,750
|
|
|
3.35% senior notes due March 2021
|
2,038
|
|
|
2,038
|
|
|
Floating rate notes due March 2021 (1.033% at June 30, 2020 and 2.605% at December 31, 2019)
|
1,000
|
|
|
1,000
|
|
|
4.125% senior notes due May 2021
|
222
|
|
|
222
|
|
|
2.125% senior notes due June 2021
|
1,750
|
|
|
1,750
|
|
|
4.125% senior notes due June 2021
|
203
|
|
|
203
|
|
|
5.45% senior notes due June 2021
|
187
|
|
|
187
|
|
|
3.5% senior notes due July 2022
|
1,500
|
|
|
1,500
|
|
|
2.75% senior notes due November 2022
|
1,000
|
|
|
1,000
|
|
|
2.75% senior notes due December 2022
|
1,250
|
|
|
1,250
|
|
|
4.75% senior notes due December 2022
|
399
|
|
|
399
|
|
|
3.7% senior notes due March 2023
|
6,000
|
|
|
6,000
|
|
|
2.8% senior notes due June 2023
|
1,300
|
|
|
1,300
|
|
|
4% senior notes due December 2023
|
1,250
|
|
|
1,250
|
|
|
3.375% senior notes due August 2024
|
650
|
|
|
650
|
|
|
2.625% senior notes due August 2024
|
1,000
|
|
|
1,000
|
|
|
3.5% senior notes due November 2024
|
750
|
|
|
750
|
|
|
5% senior notes due December 2024
|
299
|
|
|
299
|
|
|
4.1% senior notes due March 2025
|
5,000
|
|
|
5,000
|
|
|
3.875% senior notes due July 2025
|
2,828
|
|
|
2,828
|
|
|
2.875% senior notes due June 2026
|
1,750
|
|
|
1,750
|
|
|
3% senior notes due August 2026
|
750
|
|
|
750
|
|
|
3.625% senior notes due April 2027
|
750
|
|
|
—
|
|
|
6.25% senior notes due June 2027
|
372
|
|
|
372
|
|
|
4.3% senior notes due March 2028
|
9,000
|
|
|
9,000
|
|
|
3.25% senior notes due August 2029
|
1,750
|
|
|
1,750
|
|
|
3.75% senior notes due April 2030
|
1,500
|
|
|
—
|
|
|
4.875% senior notes due July 2035
|
652
|
|
|
652
|
|
|
6.625% senior notes due June 2036
|
771
|
|
|
771
|
|
|
6.75% senior notes due December 2037
|
533
|
|
|
533
|
|
|
4.78% senior notes due March 2038
|
5,000
|
|
|
5,000
|
|
|
6.125% senior notes due September 2039
|
447
|
|
|
447
|
|
|
4.125% senior notes due April 2040
|
1,000
|
|
|
—
|
|
|
5.75% senior notes due May 2041
|
133
|
|
|
133
|
|
|
4.5% senior notes due May 2042
|
500
|
|
|
500
|
|
|
4.125% senior notes due November 2042
|
500
|
|
|
500
|
|
|
5.3% senior notes due December 2043
|
750
|
|
|
750
|
|
|
4.75% senior notes due March 2044
|
375
|
|
|
375
|
|
|
5.125% senior notes due July 2045
|
3,500
|
|
|
3,500
|
|
|
3.875% senior notes due August 2047
|
1,000
|
|
|
1,000
|
|
|
5.05% senior notes due March 2048
|
8,000
|
|
|
8,000
|
|
|
4.25% senior notes due April 2050
|
750
|
|
|
—
|
|
|
Finance lease obligations
|
1,002
|
|
|
808
|
|
|
Other
|
277
|
|
|
279
|
|
|
Total debt principal
|
72,438
|
|
|
69,246
|
|
|
Debt premiums
|
251
|
|
|
262
|
|
|
Debt discounts and deferred financing costs
|
(1,016
|
)
|
|
(1,028
|
)
|
|
|
71,673
|
|
|
68,480
|
|
|
Less:
|
|
|
|
|
Current portion of long-term debt
|
(8,192
|
)
|
|
(3,781
|
)
|
|
Long-term debt
|
$
|
63,481
|
|
|
$
|
64,699
|
|
Long-term Borrowings
2020 Notes
On March 31, 2020, the Company issued $750 million aggregate principal amount of 3.625% unsecured senior notes due April 1, 2027, $1.5 billion aggregate principal amount of 3.75% unsecured senior notes due April 1, 2030, $1.0 billion aggregate principal amount of 4.125% unsecured senior notes due April 1, 2040 and $750 million aggregate principal amount of 4.25% unsecured senior notes due April 1, 2050 (collectively, the “2020 Notes”) for total proceeds of approximately $3.95 billion, net of discounts and underwriting fees. The net proceeds of the 2020 Notes will be used for general corporate purposes, which may include working capital, capital expenditures and repayment of indebtedness. As the net proceeds from this offering had not been used for these purposes, the net proceeds were held in cash or temporarily invested in cash equivalents and short-term investment-grade securities from the date of issuance through June 30, 2020.
During March 2020, the Company entered into several interest rate swap transactions to manage interest rate risk. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of the 2020 Notes. In connection with the issuance of the 2020 Notes, the Company terminated all outstanding cash flow hedges. The Company paid a net amount of $7 million to the hedge counterparties upon termination, which was recorded as a loss, net of tax, of $5 million in accumulated other comprehensive income and will be reclassified as interest expense over the life of the 2020 Notes. See Note 7 ‘‘Other Comprehensive Income’’ for additional information.
Share Repurchases
On November 2, 2016, CVS Health’s Board of Directors (the “Board”) authorized the 2016 share repurchase program (“2016 Repurchase Program”) for up to $15.0 billion of the Company’s common shares. The 2016 Repurchase Program permits the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The 2016 Repurchase Program can be modified or terminated by the Board at any time.
During the six months ended June 30, 2020 and 2019, the Company did not repurchase any shares of its common stock. At June 30, 2020, the Company had remaining authorization to repurchase an aggregate of up to approximately $13.9 billion of its common shares under the 2016 Repurchase Program.
Dividends
The quarterly cash dividend declared by the Board was $0.50 per share in each of the three-month periods ended June 30, 2020 and 2019. Cash dividends declared by the Board were $1.00 per share in the each of the six-month periods ended June 30, 2020 and 2019. CVS Health has paid cash dividends every quarter since becoming a public company. Future dividend payments will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Board.
|
|
|
|
7.
|
Other Comprehensive Income
|
Shareholders’ equity included the following activity in accumulated other comprehensive income for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net unrealized investment gains (losses):
|
|
|
|
|
|
|
|
|
Beginning of period balance
|
$
|
463
|
|
|
$
|
431
|
|
|
$
|
774
|
|
|
$
|
97
|
|
|
Other comprehensive income before reclassifications ($681, $309, $195 and $719 pretax)
|
560
|
|
|
259
|
|
|
166
|
|
|
607
|
|
|
Amounts reclassified from accumulated other comprehensive income ($(44), $(11), $57 and $(30) pretax) (1)
|
(36
|
)
|
|
(8
|
)
|
|
47
|
|
|
(22
|
)
|
|
Other comprehensive income
|
524
|
|
|
251
|
|
|
213
|
|
|
585
|
|
|
End of period balance
|
987
|
|
|
682
|
|
|
987
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
Beginning of period balance
|
(8
|
)
|
|
(157
|
)
|
|
4
|
|
|
(158
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
6
|
|
|
3
|
|
|
(6
|
)
|
|
4
|
|
|
Other comprehensive income (loss)
|
6
|
|
|
3
|
|
|
(6
|
)
|
|
4
|
|
|
End of period balance
|
(2
|
)
|
|
(154
|
)
|
|
(2
|
)
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash flow hedges:
|
|
|
|
|
|
|
|
|
Beginning of period balance
|
270
|
|
|
308
|
|
|
279
|
|
|
312
|
|
|
Other comprehensive loss before reclassifications ($0, $0, $(7) and $0 pretax)
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
Amounts reclassified from accumulated other comprehensive income ($(4), $(4), $(10) and $(9) pretax) (2)
|
(3
|
)
|
|
(3
|
)
|
|
(7
|
)
|
|
(7
|
)
|
|
Other comprehensive loss
|
(3
|
)
|
|
(3
|
)
|
|
(12
|
)
|
|
(7
|
)
|
|
End of period balance
|
267
|
|
|
305
|
|
|
267
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefits:
|
|
|
|
|
|
|
|
|
Beginning of period balance
|
(38
|
)
|
|
(149
|
)
|
|
(38
|
)
|
|
(149
|
)
|
|
Other comprehensive loss before reclassifications ($(8), $0, $(8) and $0 pretax)
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
Amounts reclassified from accumulated other comprehensive loss ($7, $0, $7 and $0 pretax) (3)
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
Other comprehensive loss
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
End of period balance
|
(39
|
)
|
|
(149
|
)
|
|
(39
|
)
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
Total beginning of period accumulated other comprehensive income
|
687
|
|
|
433
|
|
|
1,019
|
|
|
102
|
|
|
Total other comprehensive income
|
526
|
|
|
251
|
|
|
194
|
|
|
582
|
|
|
Total end of period accumulated other comprehensive income
|
$
|
1,213
|
|
|
$
|
684
|
|
|
$
|
1,213
|
|
|
$
|
684
|
|
_____________________________________________
|
|
|
|
(1)
|
Amounts reclassified from accumulated other comprehensive income for specifically identified debt securities are included in net investment income in the unaudited condensed consolidated statements of operations.
|
|
|
|
|
(2)
|
Amounts reclassified from accumulated other comprehensive income for specifically identified cash flow hedges are included in interest expense in the unaudited condensed consolidated statements of operations. The Company expects to reclassify approximately $15 million, net of tax, in net gains associated with its cash flow hedges into net income within the next 12 months.
|
|
|
|
|
(3)
|
Amounts reclassified from accumulated other comprehensive loss for specifically identified pension and other postretirement benefits are included in other income in the unaudited condensed consolidated statements of operations.
|
Earnings per share is computed using the two-class method. Stock appreciation rights and options to purchase 17 million and 15 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2020, respectively, because their exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. For the same reason, stock appreciation rights and options to purchase 23 million and 19 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2019, respectively.
The following is a reconciliation of basic and diluted earnings per share for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions, except per share amounts
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Numerator for earnings per share calculation:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
2,986
|
|
|
$
|
1,931
|
|
|
$
|
4,998
|
|
|
$
|
3,358
|
|
|
Income allocated to participating securities
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(3
|
)
|
|
Net (income) loss attributable to noncontrolling interests
|
(11
|
)
|
|
5
|
|
|
(16
|
)
|
|
(1
|
)
|
|
Net income attributable to CVS Health
|
$
|
2,975
|
|
|
$
|
1,935
|
|
|
$
|
4,982
|
|
|
$
|
3,354
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for earnings per share calculation:
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
1,309
|
|
|
1,301
|
|
|
1,307
|
|
|
1,299
|
|
|
Effect of dilutive securities
|
5
|
|
|
1
|
|
|
6
|
|
|
3
|
|
|
Weighted average shares, diluted
|
1,314
|
|
|
1,302
|
|
|
1,313
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
2.27
|
|
|
$
|
1.49
|
|
|
$
|
3.81
|
|
|
$
|
2.58
|
|
|
Diluted
|
$
|
2.26
|
|
|
$
|
1.49
|
|
|
$
|
3.79
|
|
|
$
|
2.58
|
|
|
|
|
|
9.
|
Commitments and Contingencies
|
COVID-19
The COVID-19 pandemic continues to evolve. We believe COVID-19’s impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and the severity and duration of the pandemic; the pandemic’s impact on the U.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. As a result, the impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. COVID-19 also may result in legal and regulatory proceedings, investigations and claims against us.
Lease Guarantees
Between 1995 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores and Linens ‘n Things, each of which subsequently filed for bankruptcy, and Marshalls. In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the former subsidiary’s lease obligations for the initial lease term and any extension thereof pursuant to a renewal option provided for in the lease prior to the time of the disposition. When the subsidiaries were disposed of and accounted for as discontinued operations, the Company’s guarantees remained in place, although each initial purchaser agreed to indemnify the Company for any lease obligations the Company was required to satisfy. If any of the purchasers or any of the former subsidiaries fail to make the required payments under a store lease, the Company could be required to satisfy those obligations, and any significant adverse impact of COVID-19 on such purchasers and/or former subsidiaries increases the risk that the Company will be required to satisfy those obligations. As of June 30, 2020, the Company guaranteed 76 such store leases (excluding the lease guarantees related to Linens ‘n Things, which have been recorded as a liability on the unaudited condensed consolidated balance sheets), with the maximum remaining lease term extending through 2030.
Guaranty Fund Assessments, Market Stabilization and Other Non-Voluntary Risk Sharing Pools
Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed (in most states up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. The life and health insurance guaranty associations in which the Company participates that operate under these laws respond to insolvencies of long-term care insurers and life insurers as well as health insurers. The Company’s assessments generally are based on a formula relating to the Company’s health care premiums in the state compared to the premiums of other insurers. Certain states allow assessments to be recovered over time as offsets to premium taxes. Some states have similar laws relating to HMOs and/or other payors such as not-for-profit consumer-governed health plans established under the ACA.
In 2009, the Pennsylvania Insurance Commissioner placed long-term care insurer Penn Treaty Network America Insurance Company and one of its subsidiaries (collectively, “Penn Treaty”) in rehabilitation, an intermediate action before insolvency, and subsequently petitioned a state court to convert the rehabilitation into a liquidation. Penn Treaty was placed in liquidation in March 2017. The Company has recorded a liability for its estimated share of future assessments by applicable life and health insurance guaranty associations. It is reasonably possible that in the future the Company may record a liability and expense relating to other insolvencies which could have a material adverse effect on the Company’s operating results, financial condition and cash flows, and this risk is heightened by any significant adverse impact of the COVID-19 pandemic on the solvency of other insurers, including long-term care insurers and life insurers. While historically the Company has ultimately recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could lead to legislative and/or regulatory actions that limit future offsets.
HMOs in certain states in which the Company does business are subject to assessments, including market stabilization and other risk-sharing pools, for which the Company is assessed charges based on incurred claims, demographic membership mix and other factors. The Company establishes liabilities for these assessments based on applicable laws and regulations. In certain states, the ultimate assessments the Company pays are dependent upon the Company’s experience relative to other entities subject to the assessment, and the ultimate liability is not known at the financial statement date. While the ultimate amount of the assessment is dependent upon the experience of all pool participants, the Company believes it has adequate reserves to cover such assessments.
Litigation and Regulatory Proceedings
The Company is a party to numerous legal proceedings, investigations, audits and claims arising, for the most part, in the ordinary course of its businesses, including the matters described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrued liability. None of the Company’s accruals for outstanding legal matters are material individually or in the aggregate to the Company’s financial condition.
Except as otherwise noted, the Company cannot predict with certainty the timing or outcome of the legal matters described below, and the Company is unable to reasonably estimate a possible loss or range of possible loss in excess of amounts already accrued for these matters. It is reasonably possible that the outcome of such legal matters could be material to the Company.
Usual and Customary Litigation
The Company is named as a defendant in a number of lawsuits that allege that the Company’s retail stores overcharged for prescription drugs by not submitting the price available to members of the CVS Health Savings Pass program as the pharmacy’s usual and customary price, and related theories. The Company is defending itself against these claims.
Corcoran et al. v. CVS Health Corporation (U.S. District Court for the Northern District of California) and Podgorny et al. v. CVS Health Corporation (U.S. District Court for the Northern District of Illinois). These putative class actions were filed against the Company in July and September 2015. The cases were consolidated in the U.S. District Court for the Northern District of California. Plaintiffs seek damages and injunctive relief under the consumer protection statutes of certain states on behalf of a class of consumers who purchased certain prescription drugs. Several third-party payors filed similar putative class actions on behalf of payors captioned Sheet Metal Workers Local No. 20 Welfare and Benefit Fund v. CVS Health Corp. and Plumbers Welfare Fund, Local 130 v. CVS Health Corporation (both pending in the U.S. District Court for the District of Rhode Island) in February and August 2016. In all of these cases the plaintiffs allege the Company overcharged for certain
prescription drugs by not submitting the price available to members of the CVS Health Savings Pass program as the pharmacy’s usual and customary price. In the Corcoran case, the U.S. District Court granted summary judgment to the Company on plaintiffs’ claims in their entirety and certified certain subclasses in September 2017. In June 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court’s grant of summary judgment and reversed the U.S. District Court’s narrowing of the requested class. The Corcoran case is proceeding to a trial on a six state class basis, and trial is scheduled to occur in 2021. The Sheet Metal Workers plaintiffs have amended their complaint to assert a claim under the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) premised on an alleged conspiracy between the Company and other PBMs.
State of Mississippi v. CVS Health Corporation, et al. (Circuit Court of DeSoto County, Mississippi, Third Judicial District). In July 2016, the Company was served with a complaint filed on behalf of the State of Mississippi. The complaint alleged that CVS retail pharmacies in Mississippi submitted false claims for reimbursement to the Mississippi Medicaid program by not submitting the price available to members of the CVS Health Savings Pass program as the pharmacy’s usual and customary price. In June 2019, the Company’s motion for judgment on the pleadings was granted in part and denied in part. Also in June 2019, the State of Mississippi’s motion to dismiss the Company’s counterclaim for declaratory relief was granted. In April 2020, the Company’s motion to dismiss the State of Mississippi’s second amended complaint was denied.
Blue Cross and Blue Shield of Alabama, et al. v. CVS Health Corporation, et al. (U.S. District Court for the District of Rhode Island). In May 2020, eight Blue Cross Blue Shield entities from six states filed a lawsuit against the Company alleging fraud and other state causes of action premised on a theory that the Company’s retail stores overcharged for prescription drugs by not submitting accurate usual and customary prices, including by not submitting the price available to members of the former CVS Health Savings Pass program.
PBM Litigation and Investigations
The Company is named as a defendant in a number of lawsuits and is subject to a number of investigations concerning its PBM practices.
Klein, et al. v. Prime Therapeutics, et al. (U.S. District Court for the District of Minnesota). This putative class action was filed against the Company and other PBMs in June 2017 on behalf of ERISA plan members who purchased and paid for EpiPen or EpiPen Jr. Plaintiffs allege that the PBMs are ERISA fiduciaries to plan members and have violated ERISA by allegedly causing higher inflated prices for EpiPens through the process of negotiating increased rebates from EpiPen manufacturer Mylan. This case has been consolidated with a similar matter and is now proceeding as In re EpiPen ERISA Litigation. The Company is defending itself against these claims.
County of Harris, Texas v. Eli Lilly and Company, et al. (U.S. District Court for the Southern District of Texas). This lawsuit was filed against Caremark, Aetna, the manufacturers of insulin and other PBMs in November 2019 by Harris County. Harris County alleges that it was overcharged for insulin as a result of a “price fixing conspiracy” between the manufacturers and PBMs to artificially increase the price of insulin and other diabetes medications. The complaint alleges violations of RICO and claims that the manufacturers and PBMs engaged in an “Insulin Pricing Scheme” whereby the manufacturers artificially increased the reported prices of their insulin products while “secretly” paying rebates to the PBMs in exchange for preferred treatment on the PBMs’ drug formularies. The Company is defending itself against these claims.
Rochester Drug Cooperative, Inc. v. Mylan Inc., et al. (U.S. District Court for the District of Minnesota). This putative class action was filed in March 2020 against Caremark, other PBMs and the manufacturer of EpiPen products and their authorized generics on behalf of purported classes of direct purchasers of these products. The complaint alleges violations of RICO and claims that rebate agreements between the drug manufacturer and PBMs caused the direct purchasers to pay inflated prices for these drug products. A nearly identical case was separately filed in the same court (Dakota Drug, Inc. v. Mylan Inc., et al.) and a motion to consolidate that lawsuit with this case is pending. The Company is defending itself against these claims.
Rochester Drug Cooperative, Inc. v. Eli Lilly and Co., et al. (U.S. District Court for the District of New Jersey). This putative class action was filed in March 2020 against Caremark, other PBMs and the manufacturers of analog insulin products on behalf of purported classes of direct purchasers of these products. The complaint alleges violations of RICO and claims that rebate agreements between the drug manufacturers and PBMs caused the direct purchasers to pay inflated prices for these drug products. Two nearly identical cases were separately filed in the same court (FWK Holdings, LLC v. Novo Nordisk, et al. and Value Drug Company v. Eli Lilly & Co., et al.), and motions to consolidate those lawsuits with this case are pending. The Company is defending itself against these claims.
In March 2017, Advanced Care Scripts, a subsidiary acquired in the Omnicare transaction that is now part of the Company’s PBM specialty operations, received a subpoena from the U.S. Department of Justice (the “DOJ”) requesting documents concerning its work with pharmaceutical manufacturers and charitable foundations that provide payment assistance to Medicare patients in connection with an investigation concerning potential violations of the federal Anti-Kickback Statute and/or federal False Claims Act. The Company has been cooperating with the government with respect to this subpoena and additional requests for information.
United States ex rel. Behnke v. CVS Caremark Corporation, et al. (U.S. District Court for the Eastern District of Pennsylvania). In April 2018, the Court unsealed a complaint filed in February 2014. The government has declined to intervene in this case. The relator alleges that the Company submitted, or caused to be submitted, to Part D of the Medicare program Prescription Drug Event data and/or Direct and Indirect Remuneration reports that misrepresented true prices paid by the Company’s PBM to pharmacies for drugs dispensed to Part D beneficiaries with prescription benefits administered by the Company’s PBM. In April 2020, the Company’s motion to dismiss was granted in part and denied in part. The Company is defending itself against these claims.
The Company has received subpoenas, civil investigative demands (“CIDs”) and other requests for documents and information from, and is being investigated by, Attorneys General of several states regarding its PBM practices, including pricing and rebates. In addition, the Company has received inquiries from congressional committees regarding insulin pricing. The Company has been providing documents and information in response to these subpoenas, CIDs and requests for information.
Controlled Substances Litigation, Audits and Subpoenas
In December 2017, the U.S. Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against various defendants by plaintiffs such as counties, cities, hospitals, Indian tribes and third-party payors, alleging claims generally concerning the impacts of widespread prescription opioid abuse. The consolidated multidistrict litigation captioned In re National Prescription Opiate Litigation (MDL No. 2804) is pending in the U.S. District Court for the Northern District of Ohio. This multidistrict litigation presumptively includes hundreds of relevant federal court cases that name the Company as a defendant. A significant number of similar cases that name the Company as a defendant in some capacity are pending in state courts. In addition, the Company has been named as a defendant in similar cases brought by certain state Attorneys General. The Company is defending itself against all such claims. Additionally, the Company has received subpoenas, CIDs and/or other requests for information regarding opioids from state Attorneys General and insurance and other regulators of several states. The Company has been cooperating with the government with respect to these subpoenas, CIDs and other requests for information.
The Company routinely is audited by the U.S. Drug Enforcement Administration (the “DEA”). In some instances, the Company is in discussions with the DEA and U.S. Attorney’s Offices concerning allegations that the Company violated certain requirements of the federal Controlled Substances Act.
In September 2015, the DEA served the Company with an administrative subpoena. The subpoena sought documents related to controlled substance policies, procedures and practices at eight Omnicare pharmacy locations from May 2012 to the present. In September 2017, the DEA expanded the investigation to include an additional Omnicare pharmacy location. In May 2020, the Company entered into an agreement with multiple U.S. Attorney’s Offices and the DEA to resolve the claims in the investigating jurisdictions.
In January 2020, the DOJ served the Company with a DEA administrative subpoena. The subpoena seeks documents relating to practices with respect to prescription opioids and other controlled substances at CVS Pharmacy locations in connection with an investigation concerning potential violations of the federal Controlled Substances Act and the federal False Claims Act. The Company has been cooperating with the government with respect to this subpoena.
Prescription Processing Litigation and Investigations
U.S. ex rel. Bassan et al. v. Omnicare, Inc. and CVS Health Corp. and U.S. ex rel. Mohajer et al. v. Omnicare, Inc. and CVS Health Corp. (U.S. District Court for the Southern District of New York). In December 2019, the U.S. Attorney’s Office for the Southern District of New York (the “SDNY”) filed complaints-in-intervention in these two previously sealed qui tam cases. With respect to the Bassan complaint, all states and Washington, D.C. have declined to intervene at this time. The government’s investigation related to these complaints included the previously disclosed CID that the Company received in October 2015 from the SDNY concerning the Company’s Omnicare pharmacies’ cycle fill process for assisted living facilities. The complaints allege that for certain non-skilled nursing facilities, Omnicare improperly filled prescriptions beyond one year where a valid prescription did not
exist and that these dispensing events violated the federal False Claims Act. The Mohajer relators have amended their complaint to include claims based on similar theories related to certain skilled nursing facilities. The Company is defending itself against these claims.
In July 2017, the Company also received a subpoena from the California Department of Insurance requesting documents concerning the Company’s Omnicare pharmacies’ cycle fill process for assisted living facilities. The Company has been cooperating with the California Department of Insurance and providing documents and information in response to this subpoena.
In December 2016, the Company received a CID from the U.S. Attorney’s Office for the Northern District of New York requesting documents and information in connection with a federal False Claims Act investigation concerning whether the Company’s retail pharmacies improperly submitted certain insulin claims to Part D of the Medicare program rather than Part B of the Medicare program. The Company has been cooperating with the government and providing documents and information in response to this CID.
In May 2017, the Company received a CID from the SDNY requesting documents and information concerning possible false claims submitted to Medicare in connection with reimbursements for prescription drugs under the Medicare Part D program. The Company has been cooperating with the government and providing documents and information in response to this CID.
Provider Proceedings
The Company is named as a defendant in purported class actions and individual lawsuits arising out of its practices related to the payment of claims for services rendered to its members by health care providers with whom the Company has a contract and with whom the Company does not have a contract (“out-of-network providers”). Among other things, these lawsuits allege that the Company paid too little to its health plan members and/or providers for these services and/or otherwise allege that the Company failed to timely or appropriately pay or administer claims and benefits (including the Company’s post payment audit and collection practices and reductions in payments to providers due to sequestration). Other major health insurers are the subject of similar litigation or have settled similar litigation.
The Company also has received subpoenas and/or requests for documents and other information from, and been investigated by, state Attorneys General and other state and/or federal regulators, legislators and agencies relating to, and the Company is involved in other litigation regarding, its out-of-network benefit payment and administration practices. It is reasonably possible that others could initiate additional litigation or additional regulatory action against the Company with respect to its out-of-network benefit payment and/or administration practices.
CMS Actions
The U.S. Centers for Medicare & Medicaid Services (“CMS”) regularly audits the Company’s performance to determine its compliance with CMS’s regulations and its contracts with CMS and to assess the quality of services it provides to Medicare beneficiaries. CMS uses various payment mechanisms to allocate and adjust premium payments to the Company’s and other companies’ Medicare plans by considering the applicable health status of Medicare members as supported by information prepared, maintained and provided by health care providers. The Company collects claim and encounter data from providers and generally relies on providers to appropriately code their submissions to the Company and document their medical records, including the diagnosis data submitted to the Company with claims. CMS pays increased premiums to Medicare Advantage plans and Medicare PDP plans for members who have certain medical conditions identified with specific diagnosis codes. Federal regulators review and audit the providers’ medical records to determine whether those records support the related diagnosis codes that determine the members’ health status and the resulting risk-adjusted premium payments to the Company. In that regard, CMS has instituted risk adjustment data validation (“RADV”) audits of various Medicare Advantage plans, including certain of the Company’s plans, to validate coding practices and supporting medical record documentation maintained by health care providers and the resulting risk adjusted premium payments to the plans. CMS may require the Company to refund premium payments if the Company’s risk adjusted premiums are not properly supported by medical record data. The Office of the Inspector General of Health and Human Services (the “OIG”) also is auditing the Company’s risk adjustment-related data and that of other companies. The Company expects CMS and the OIG to continue these types of audits.
In 2012, CMS revised its audit methodology for RADV audits to determine refunds payable by Medicare Advantage plans for contract year 2011 and forward. Under the revised methodology, among other things, CMS will extrapolate the error rate identified in the audit sample of approximately 200 members to all risk adjusted premium payments made under the contract being audited. For contract years prior to 2011, CMS did not extrapolate sample error rates to the entire contract. As a result, the
revised methodology may increase the Company’s exposure to premium refunds to CMS based on incomplete medical records maintained by providers. Since 2013, CMS has selected certain of the Company’s Medicare Advantage contracts for various contract years for RADV audit, and the number of RADV audits continues to increase. The Company is currently unable to predict which of its Medicare Advantage contracts will be selected for future audit, the amounts of any retroactive refunds of, or prospective adjustments to, Medicare Advantage premium payments made to the Company, the effect of any such refunds or adjustments on the actuarial soundness of the Company’s Medicare Advantage bids, or whether any RADV audit findings would require the Company to change its method of estimating future premium revenue in future bid submissions to CMS or compromise premium assumptions made in the Company’s bids for prior contract years, the current contract year or future contract years. Any premium or fee refunds or adjustments resulting from regulatory audits, whether as a result of RADV, Public Exchange related or other audits by CMS, the OIG, the U.S. Department of Health and Human Services or otherwise, including audits of the Company’s minimum MLR rebates, methodology and/or reports, could be material and could adversely affect the Company’s operating results, cash flows and/or financial condition.
Medicare and Medicaid CIDs
The Company has received CIDs from the Civil Division of the DOJ in connection with a current investigation of the Company’s patient chart review processes in connection with risk adjustment data submissions under Parts C and D of the Medicare program. The Company has been cooperating with the government and providing documents and information in response to these CIDs.
In April 2020, the Company received a CID from the Office of the Washington Attorney General, Medicaid Fraud Control Division, on behalf of the State of Washington and all other states, as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The investigation involves, among other things, possible retention of overpayments and possible submission of false claims for Medicaid reimbursement relating to drugs prescribed by providers who were excluded by the applicable federal and/or state Medicaid programs. The Company is cooperating with the government with respect to this investigation.
Stockholder Matters
The Company and/or its current and/or former directors and/or executive officers are named as defendants in a number of lawsuits and a request for access to information initiated by holders or putative holders of CVS Health common stock.
Between February and August 2019, six class action complaints were filed by putative plaintiffs against the Company and certain current and former officers and directors: Anarkat v. CVS Health Corp., et al. (U.S. District Court for the District of Rhode Island); Labourers’ Pension Fund of Central and Eastern Canada v. CVS Health Corp., et al. (New York Supreme Court); City of Warren Police and Fire Retirement Sys. v. CVS Health Corp., et. al. (Rhode Island Superior Court); Cambria Co. Employees Retirement Sys. v. CVS Health Corp., et al. (New York Supreme Court); Freundlich v. CVS Health Corp., et al. (Rhode Island Superior Court); and Waterford Twp. Police & Fire Retirement Sys. v. CVS Health Corp., et al. (U.S. District Court for the District of Rhode Island). The plaintiffs in these cases assert a variety of causes of action under federal securities laws that are premised on allegations that the defendants made certain omissions and misrepresentations relating to the performance of the Company’s LTC business unit, which allegedly injured investors who acquired CVS Health securities between February 9, 2016 and February 20, 2019. The Freundlich case also alleges that defendants misrepresented anticipated synergies of the acquisition of Aetna (the “Aetna Acquisition”). Plaintiffs in the Freundlich and the City of Warren cases have filed a consolidated complaint that combines their allegations. The Labourers’ Pension Fund and Cambria County cases have been consolidated into a single action based on the Labourers’ Pension Fund complaint. The Company is defending itself against these claims.
In January 2020, a derivative complaint was filed against the Company’s directors and current and former executive officers in the U.S. District Court for the District of Rhode Island by a stockholder. Lovoi v. Aguirre, et al. makes allegations similar to those contained the six stockholder class action complaints described above, including that the Company made false or misleading statements about its LTC business unit’s financial health. The Lovoi complaint alleges claims for breach of fiduciary duty against the Company’s directors and certain of its current and former executive officers and for violation of the federal securities laws. The Lovoi complaint seeks damages, restitution and equitable relief on behalf of the Company. The Lovoi case has been stayed pending the resolution of the two federal class action complaints described above. The Company’s directors and current and former executive officers are defending themselves against these claims.
In November 2019, the Company received a demand to inspect its books and records under Delaware General Corporation Law Section 220 from purported stockholder Judith B. Cohen. The demand seeks various documents related to the Company’s LTC
operations, its financial condition and its goodwill impairment charges, as well as more general information regarding share repurchases, director nominations and charitable donations. The Company has objected to this request.
Other Legal and Regulatory Proceedings
The Company is also a party to other legal proceedings and is subject to government investigations, inquiries and audits and has received and is cooperating with the government in response to CIDs, subpoenas or similar process from various governmental agencies requesting information, arising, for the most part, in the ordinary course of its businesses. These other legal proceedings and government actions include claims of or relating to bad faith, medical or professional malpractice, claims processing, dispensing of medications, non-compliance with state and federal regulatory regimes, marketing misconduct, failure to timely or appropriately pay or administer claims and benefits, provider network structure (including the use of performance-based networks and termination of provider contracts), rescission of insurance coverage, improper disclosure or use of personal information, anticompetitive practices, general contractual matters, product liability, intellectual property litigation and employment litigation. Some of these other legal proceedings are or are purported to be class actions or derivative claims. The Company is defending itself against the claims brought in these matters.
Awards to the Company and others of certain government contracts, particularly Medicaid contracts and other contracts with government customers in the Company’s Health Care Benefits segment, frequently are subject to protests by unsuccessful bidders. These protests may result in awards to the Company being reversed, delayed or modified. The loss or delay in implementation of any government contract could adversely affect the Company’s operating results. The Company will continue to defend contract awards it receives.
There also continues to be a heightened level of review and/or audit by regulatory authorities and legislators of, and increased litigation regarding, the Company’s and the rest of the health care and related benefits industry’s business and reporting practices, including premium rate increases, utilization management, development and application of medical policies, complaint, grievance and appeal processing, information privacy, provider network structure (including provider network adequacy, the use of performance-based networks and termination of provider contracts), provider directory accuracy, calculation of minimum medical loss ratios and/or payment of related rebates, delegated arrangements, rescission of insurance coverage, limited benefit health products, student health products, pharmacy benefit management practices (including manufacturers’ rebates, pricing, the use of narrow networks and the placement of drugs in formulary tiers), sales practices, customer service practices, vendor oversight and claim payment practices (including payments to out-of-network providers).
As a leading national health care company, the Company regularly is the subject of government actions of the types described above. These government actions may prevent or delay the Company from implementing planned premium rate increases and may result, and have resulted, in restrictions on the Company’s businesses, changes to or clarifications of the Company’s business practices, retroactive adjustments to premiums, refunds or other payments to members, beneficiaries, states or the federal government, withholding of premium payments to the Company by government agencies, assessments of damages, civil or criminal fines or penalties, or other sanctions, including the possible suspension or loss of licensure and/or suspension or exclusion from participation in government programs.
The Company can give no assurance that its businesses, financial condition, operating results and/or cash flows will not be materially adversely affected, or that the Company will not be required to materially change its business practices, based on: (i) future enactment of new health care or other laws or regulations; (ii) the interpretation or application of existing laws or regulations as they may relate to one or more of the Company’s businesses, one or more of the industries in which the Company competes and/or the health care industry generally; (iii) pending or future federal or state government investigations of one or more of the Company’s businesses, one or more of the industries in which the Company competes and/or the health care industry generally; (iv) pending or future government audits, investigations or enforcement actions against the Company; (v) adverse developments in any pending qui tam lawsuit against the Company, whether sealed or unsealed, or in any future qui tam lawsuit that may be filed against the Company; or (vi) adverse developments in pending or future legal proceedings against the Company or affecting one or more of the industries in which the Company competes and/or the health care industry generally.
The Company has three operating segments, Pharmacy Services, Retail/LTC and Health Care Benefits, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the Company’s chief operating decision maker (the “CODM”) evaluates the segments’ operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company’s segments based on adjusted operating income, which is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance. See the reconciliations of operating income (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company’s ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.
The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Pharmacy
Services (1)
|
|
Retail/
LTC
|
|
Health Care
Benefits
|
|
Corporate/
Other
|
|
Intersegment
Eliminations
|
|
Consolidated
Totals
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
32,623
|
|
|
$
|
14,187
|
|
|
$
|
18,318
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
65,157
|
|
|
Intersegment revenues
|
2,266
|
|
|
7,475
|
|
|
23
|
|
|
—
|
|
|
(9,764
|
)
|
|
—
|
|
|
Net investment income
|
—
|
|
|
—
|
|
|
127
|
|
|
57
|
|
|
—
|
|
|
184
|
|
|
Total revenues
|
34,889
|
|
|
21,662
|
|
|
18,468
|
|
|
86
|
|
|
(9,764
|
)
|
|
65,341
|
|
|
Adjusted operating income (loss)
|
1,327
|
|
|
1,057
|
|
|
3,464
|
|
|
(343
|
)
|
|
(177
|
)
|
|
5,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
31,988
|
|
|
$
|
13,885
|
|
|
$
|
17,249
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
63,138
|
|
|
Intersegment revenues
|
2,854
|
|
|
7,562
|
|
|
6
|
|
|
—
|
|
|
(10,422
|
)
|
|
—
|
|
|
Net investment income
|
—
|
|
|
—
|
|
|
148
|
|
|
145
|
|
|
—
|
|
|
293
|
|
|
Total revenues
|
34,842
|
|
|
21,447
|
|
|
17,403
|
|
|
161
|
|
|
(10,422
|
)
|
|
63,431
|
|
|
Adjusted operating income (loss)
|
1,296
|
|
|
1,669
|
|
|
1,438
|
|
|
(202
|
)
|
|
(170
|
)
|
|
4,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
64,741
|
|
|
$
|
29,544
|
|
|
$
|
37,415
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
131,750
|
|
|
Intersegment revenues
|
5,131
|
|
|
14,867
|
|
|
31
|
|
|
—
|
|
|
(20,029
|
)
|
|
—
|
|
|
Net investment income
|
—
|
|
|
—
|
|
|
220
|
|
|
126
|
|
|
—
|
|
|
346
|
|
|
Total revenues
|
69,872
|
|
|
44,411
|
|
|
37,666
|
|
|
176
|
|
|
(20,029
|
)
|
|
132,096
|
|
|
Adjusted operating income (loss)
|
2,508
|
|
|
2,959
|
|
|
4,955
|
|
|
(628
|
)
|
|
(353
|
)
|
|
9,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
61,814
|
|
|
$
|
27,731
|
|
|
$
|
34,949
|
|
|
$
|
41
|
|
|
$
|
—
|
|
|
$
|
124,535
|
|
|
Intersegment revenues
|
6,586
|
|
|
14,831
|
|
|
12
|
|
|
—
|
|
|
(21,429
|
)
|
|
—
|
|
|
Net investment income
|
—
|
|
|
—
|
|
|
312
|
|
|
230
|
|
|
—
|
|
|
542
|
|
|
Total revenues
|
68,400
|
|
|
42,562
|
|
|
35,273
|
|
|
271
|
|
|
(21,429
|
)
|
|
125,077
|
|
|
Adjusted operating income (loss)
|
2,243
|
|
|
3,158
|
|
|
3,000
|
|
|
(433
|
)
|
|
(342
|
)
|
|
7,626
|
|
_____________________________________________
|
|
|
|
(1)
|
Total revenues of the Pharmacy Services segment include approximately $2.6 billion and $2.9 billion of retail co-payments for the three months ended June 30, 2020 and 2019, respectively, and $6.0 billion and $6.2 billion of retail co-payments for the six months ended June 30, 2020 and 2019, respectively.
|
The following are reconciliations of consolidated operating income to adjusted operating income for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Operating income (GAAP measure)
|
$
|
4,680
|
|
|
$
|
3,332
|
|
|
$
|
8,138
|
|
|
$
|
6,022
|
|
|
Amortization of intangible assets (1)
|
578
|
|
|
593
|
|
|
1,164
|
|
|
1,215
|
|
|
Acquisition-related integration costs (2)
|
70
|
|
|
106
|
|
|
139
|
|
|
254
|
|
|
Store rationalization charge (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
135
|
|
|
Adjusted operating income
|
$
|
5,328
|
|
|
$
|
4,031
|
|
|
$
|
9,441
|
|
|
$
|
7,626
|
|
_____________________________________________
|
|
|
|
(1)
|
The Company’s acquisition activities have resulted in the recognition of intangible assets as required under the acquisition method of accounting which consist primarily of trademarks, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company’s revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company’s insurance products, the services performed for the Company’s customers or the sale of the Company’s products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company’s acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company’s GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised.
|
|
|
|
|
(2)
|
During the three and six months ended June 30, 2020 and 2019, acquisition-related integration costs relate to the Aetna Acquisition. The acquisition-related integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within the Corporate/Other segment.
|
|
|
|
|
(3)
|
During the six months ended June 30, 2019, the store rationalization charge primarily relates to operating lease right-of-use asset impairment charges in connection with the planned closure of 46 underperforming retail pharmacy stores in the second quarter of 2019. The store rationalization charge is reflected in the Company’s unaudited GAAP condensed consolidated statement of operations in operating expenses within the Retail/LTC segment.
|
On July 31, 2020, the Company sold its Coventry Health Care Workers Compensation business for $850 million, subject to a working capital adjustment. The results of this business have historically been reported within the Health Care Benefits segment. The Company expects to recognize a pretax gain on the divestiture of approximately $225 million in the third quarter of 2020.