Other Insurance Liabilities and Separate Accounts

12 Months Ended

Dec. 31, 2022

Other Insurance Liabilities and Separate Accounts

New Accounting Pronouncements Recently Adopted

Targeted Improvements to the Accounting for Long-Duration Insurance Contracts

In August 2018, the Financial Accounting Standards Board issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944) (the “long-duration insurance standard”). 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 Company adopted this accounting standard on January 1, 2023, using the modified retrospective transition method as of January 1, 2021, also referred to as the “transition date”, for changes to its liabilities for future policy benefits, deferred acquisition costs and value of business acquired intangible asset. Upon adoption, the Company recorded a transition date net adjustment to reduce accumulated other comprehensive income (loss) by $986 million ($766 million after-tax) with a corresponding increase to its liability for future policy benefits, the majority of which is included within other insurance liabilities and other long-term liabilities on the consolidated balance sheets. The transition date net adjustment was a result of updating the rate used to discount the liabilities to reflect the yield for an upper-medium grade fixed-income instrument compared to the Company’s expected investment yield under the historical guidance. The Company was not required to record an adjustment to retained earnings on the transition date. Prior period financial information subsequent to the transition date has been revised to reflect the adoption of the long-duration insurance standard.

The following summarizes changes in the balances of long-duration insurance liabilities as a result of the adoption of the long-duration insurance standard effective January 1, 2021:


In millions	Large Case Pensions		Long-Term Care		Other
Balance at December 31, 2020, net of reinsurance	$	3,224	$	1,142	$	480
Add: Reinsurance recoverable	—		—		274
Balance at December 31, 2020	3,224		1,142		754
Change in discount rate assumptions	604		553		44
Removal of shadow adjustments in accumulated other comprehensive income	(181)		—		—
Adjusted balance at January 1, 2021	3,647		1,695		798
Less: Reinsurance recoverable	—		—		308
Adjusted balance at January 1, 2021, net of reinsurance	$	3,647	$	1,695	$	490

Impact of New Long-Duration Insurance Contracts Standard on Financial Statement Line Items

As a result of applying the long-duration insurance standard using a modified retrospective method, the following adjustments were made to amounts reported in the consolidated statement of operations for the years ended December 31, 2022 and 2021:


	Impact of Change in Accounting Policy
In millions	As Reported December 31, 2022		Adjustments		Adjusted December 31, 2022
Consolidated Statement of Operations:
Operating costs:
Benefit costs	$	71,281	$	(208)	$	71,073
Total operating costs	314,721		(208)		314,513
Operating income	7,746		208		7,954
Income before income tax provision	5,628		208		5,836
Income tax provision	1,463		46		1,509
Income from continuing operations	4,165		162		4,327
Net income	4,165		162		4,327
Net income attributable to CVS Health	4,149		162		4,311
Basic earnings per share:
Income from continuing operations attributable to CVS Health	$	3.16	$	0.13	$	3.29
Net income attributable to CVS Health	$	3.16	$	0.13	$	3.29
Diluted earnings per share:
Income from continuing operations attributable to CVS Health	$	3.14	$	0.12	$	3.26
Net income attributable to CVS Health	$	3.14	$	0.12	$	3.26


	Impact of Change in Accounting Policy
In millions	As Reported December 31, 2021		Adjustments		Adjusted December 31, 2021
Consolidated Statement of Operations:
Operating costs:
Benefit costs	$	64,260	$	(72)	$	64,188
Operating expenses	37,066		(45)		37,021
Total operating costs	278,918		(117)		278,801
Operating income	13,193		117		13,310
Income before income tax provision	10,420		117		10,537
Income tax provision	2,522		26		2,548
Income from continuing operations	7,898		91		7,989
Net income	7,898		91		7,989
Net income attributable to CVS Health	7,910		91		8,001
Basic earnings per share:
Income from continuing operations attributable to CVS Health	$	6.00	$	0.07	$	6.07
Net income attributable to CVS Health	$	6.00	$	0.07	$	6.07
Diluted earnings per share:
Income from continuing operations attributable to CVS Health	$	5.95	$	0.07	$	6.02
Net income attributable to CVS Health	$	5.95	$	0.07	$	6.02


	Impact of Change in Accounting Policy
In millions	As Reported December 31, 2022		Adjustments		Adjusted December 31, 2022
Consolidated Balance Sheet:
Other current assets	$	2,685	$	(49)	$	2,636
Total current assets	65,682		(49)		65,633
Intangible assets, net	24,754		49		24,803
Total assets	228,275		—		228,275
Health care costs payable	10,406		(264)		10,142
Other insurance liabilities	1,140		(51)		1,089
Total current liabilities	69,736		(315)		69,421
Deferred income taxes	3,880		136		4,016
Other long-term insurance liabilities	6,108		(273)		5,835
Other long-term liabilities	6,732		(2)		6,730
Total liabilities	156,960		(454)		156,506
Retained earnings	56,145		253		56,398
Accumulated other comprehensive loss	(1,465)		201		(1,264)
Total CVS Health shareholders’ equity	71,015		454		71,469
Total shareholders’ equity	71,315		454		71,769
Total liabilities and shareholders’ equity	228,275		—		228,275


	Impact of Change in Accounting Policy
In millions	As Reported December 31, 2021		Adjustments		Adjusted December 31, 2021
Consolidated Balance Sheet:
Other current assets	$	5,292	$	27	$	5,319
Total current assets	60,008		27		60,035
Intangible assets, net	29,026		26		29,052
Total assets	232,999		53		233,052
Health care costs payable	8,808		(130)		8,678
Other insurance liabilities	1,303		42		1,345
Total current liabilities	67,807		(88)		67,719
Deferred income taxes	6,270		(155)		6,115
Other long-term insurance liabilities	6,402		833		7,235
Other long-term liabilities	1,904		3		1,907
Total liabilities	157,618		593		158,211
Retained earnings	54,906		91		54,997
Accumulated other comprehensive loss	965		(631)		334
Total CVS Health shareholders’ equity	75,075		(540)		74,535
Total shareholders’ equity	75,381		(540)		74,841
Total liabilities and shareholders’ equity	232,999		53		233,052

As a result of applying the long-duration insurance standard using a modified retrospective method, the following adjustments were made to amounts reported in the consolidated statement of cash flows for the years ended December 31, 2022 and 2021:


	Impact of Change in Accounting Policy
In millions	As Reported December 31, 2022		Adjustments		Adjusted December 31, 2022
Consolidated Statement of Cash Flows:
Reconciliation of net income to net cash provided by operating activities:
Net income	$	4,165	$	162	$	4,327
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,247		(23)		4,224
Deferred income taxes	(2,075)		46		(2,029)
Change in operating assets and liabilities, net of effects from acquisitions:
Other assets	(566)		75		(491)
Health care costs payable and other insurance liabilities	1,247		(255)		992
Other liabilities	6,468		(5)		6,463


	Impact of Change in Accounting Policy
In millions	As Reported December 31, 2021		Adjustments		Adjusted December 31, 2021
Consolidated Statement of Cash Flows:
Reconciliation of net income to net cash provided by operating activities:
Net income	$	7,898	$	91	$	7,989
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,512		(26)		4,486
Deferred income taxes	(428)		26		(402)
Change in operating assets and liabilities, net of effects from acquisitions:
Other assets	(3)		(27)		(30)
Health care costs payable and other insurance liabilities	169		(68)		101
Other liabilities	2,852		4		2,856

Future Policy Benefits

The following tables show the components of the change in the liability for future policy benefits, which is included in other insurance liabilities and other long-term insurance liabilities on the consolidated balance sheets, during the years ended December 31, 2022 and 2021:


	2022
In millions	Large Case Pensions		Long-Term Care
Present value of expected net premiums (1)
Liability for future policy benefits, beginning of period - current discount rate			$	389

Beginning liability for future policy benefits at original (locked-in) discount rate			$	323
Effect of changes in cash flow assumptions			(15)
Effect of actual variances from expected experience			18
Adjusted beginning liability for future policy benefits - original (locked-in) discount rate			326

Interest accrual (using locked-in discount rate)			16
Net premiums (actual)			(40)

Ending liability for future policy benefits at original (locked-in) discount rate			302
Effect of changes in discount rate assumptions			(2)
Liability for future policy benefits, end of period - current discount rate			$	300

Present value of expected future policy benefits
Liability for future policy benefits, beginning of period - current discount rate	$	3,034	$	1,991

Beginning liability for future policy benefits at original (locked-in) discount rate	$	2,650	$	1,480
Effect of changes in cash flow assumptions	—		99
Effect of actual variances from expected experience	(44)		18
Adjusted beginning liability for future policy benefits - original (locked-in) discount rate	2,606		1,597
Issuances	4		—
Interest accrual (using locked-in discount rate)	106		80
Benefit payments (actual)	(291)		(64)


Ending liability for future policy benefits at original (locked-in) discount rate	2,425		1,613
Effect of changes in discount rate assumptions	(173)		(47)
Liability for future policy benefits, end of period - current discount rate	$	2,252	$	1,566

Net liability for future policy benefits	$	2,252	$	1,266
Less: Reinsurance recoverable	—		—
Net liability for future policy benefits, net of reinsurance recoverable	$	2,252	$	1,266

_____________________________________________

(1)The present value of expected net premiums is equivalent to the present value of expected gross premiums for the long-term care insurance contracts as net premiums are set equal to gross premiums.


	2021
In millions	Large Case Pensions		Long-Term Care
Present value of expected net premiums (1)
Liability for future policy benefits, beginning of period - current discount rate			$	417

Beginning liability for future policy benefits at original (locked-in) discount rate			$	330
Effect of changes in cash flow assumptions			8
Effect of actual variances from expected experience			9
Adjusted beginning liability for future policy benefits - original (locked-in) discount rate			347

Interest accrual (using locked-in discount rate)			17
Net premiums (actual)			(41)

Ending liability for future policy benefits at original (locked-in) discount rate			323
Effect of changes in discount rate assumptions			66
Liability for future policy benefits, end of period - current discount rate			$	389

Present value of expected future policy benefits
Liability for future policy benefits, beginning of period - current discount rate	$	3,582	$	2,051

Beginning liability for future policy benefits at original (locked-in) discount rate	$	2,979	$	1,430
Effect of changes in cash flow assumptions	(96)		35
Effect of actual variances from expected experience	(39)		3
Adjusted beginning liability for future policy benefits - original (locked-in) discount rate	2,844		1,468
Issuances	2		—
Interest accrual (using locked-in discount rate)	117		74
Benefit payments (actual)	(313)		(62)


Ending liability for future policy benefits at original (locked-in) discount rate	2,650		1,480
Effect of changes in discount rate assumptions	384		511
Liability for future policy benefits, end of period - current discount rate	$	3,034	$	1,991

Net liability for future policy benefits	$	3,034	$	1,602
Less: Reinsurance recoverable	—		—
Net liability for future policy benefits, net of reinsurance recoverable	$	3,034	$	1,602

_____________________________________________

(1)The present value of expected net premiums is equivalent to the present value of expected gross premiums for the long-term care insurance contracts as net premiums are set equal to gross premiums.

The amount of undiscounted expected gross premiums and expected future benefit payments for long-duration insurance liabilities as of December 31, 2022 and 2021 were as follows:


In millions	2022		2021
Large case pensions
Expected future benefit payments	$	3,539	$	3,882
Expected gross premiums	—		—

Long-term care
Expected future benefit payments	$	3,265	$	3,115
Expected gross premiums	437		478

The weighted-average interest rate used in the measurement of the long-duration insurance liabilities as of December 31, 2022 and 2021 were as follows:


	2022	2021
Large case pensions
Interest accretion rate	4.20%	4.20%
Current discount rate	5.24%	2.53%

Long-term care
Interest accretion rate	5.11%	5.11%
Current discount rate	5.39%	2.88%

The weighted-average durations (in years) of the long-duration insurance liabilities as of December 31, 2022 and 2021 were as follows:


	2022	2021
Large case pensions	7.4	7.5
Long-term care	12.6	13.5

The Company did not have any material differences between the actual experience and expected experience for the significant assumptions used in the computation of the liability for future policy benefits.

Policyholders’ Funds

The following table shows the components of the change in policyholders’ funds related to long-duration insurance contracts, which are included in policyholders’ funds and other long-term liabilities on the consolidated balance sheets, during the years ended December 31, 2022 and 2021:


In millions, except weighted average crediting rate	2022		2021
Policyholders’ funds, beginning of the period	$	522	$	568

Deposits received	13		20
Policy charges	(2)		(2)
Surrenders and withdrawals	(31)		(21)


Interest credited	11		12
Change in net unrealized gains (losses)	(148)		(42)
Other	(20)		(13)
Policyholders’ funds, end of the period	$	345	$	522

Weighted average crediting rate	4.72%		4.81%

Net amount at risk	$	—	$	—

Cash surrender value	$	339	$	346

Separate Accounts

The following table shows the fair value of assets, by major investment category, supporting Separate Accounts as of December 31, 2022 and 2021:


In millions	2022		2021

Cash and cash equivalents	$	156	$	188
Debt securities:
U.S. government securities	717		1,234
States, municipalities and political subdivisions	27		48
U.S. corporate securities	1,667		2,339


Foreign securities	201		325
Residential mortgage-backed securities	41		144
Commercial mortgage-backed securities	6		57
Other asset-backed securities	18		134
Total debt securities	2,677		4,281

Equity securities and common/collective trusts	480		548

Total (1)	$	3,313	$	5,017

_____________________________________________

(1)Excludes $85 million of other payables and $70 million of other receivables at December 31, 2022 and 2021, respectively.

The following table shows the components of the change in Separate Accounts liabilities during the years ended December 31, 2022 and 2021:


In millions	2022		2021

Separate Accounts liability, beginning of the period	$	5,087	$	4,881
Premiums and deposits	853		1,118

Surrenders and withdrawals	(581)		(42)
Benefit payments	(947)		(984)
Investment earnings	(1,130)		53
Net transfers from general account	9		14
Other	(63)		47
Separate Accounts liability, end of the period	$	3,228	$	5,087

Cash surrender value, end of the period	$	2,087	$	3,513

The Company did not recognize any gains or losses on assets transferred to Separate Accounts during the years ended December 31, 2022 and 2021.