NOTES TO THE FINANCIAL STATEMENTS 1. Operations CVS Caremark Indemnity Ltd. ("The Company"), formerly known as Twinsurance Limited, was incorporated in Bermuda on March 27, 1980, and is a wholly owned subsidiary of CVS Foreign, Inc. (the "Parent"), a United States of America corporation. The Company was licensed as a Class 2 reinsurer under the Insurance Act, 1978 of Bermuda and the related regulations up to March 28, 2011 and as a Class 3A insurer effective March 29, 2011. The ultimate parent company is CVS Health Corporation, an SEC registrant, incorporated in the United States of America. Effective October 31, 2008, Twinsurance Limited and Caremark Indemnity Ltd., an affiliate, amalgamated pursuant to the provisions of the Companies Act, 1981 of Bermuda. The amalgamated Company continued under the name CVS Caremark Indemnity Ltd. Prior to 1988, the Company participated in a reinsurance pool and various quota share reinsurance treaties with unrelated parties. As of May 31, 1998, participation in the pool and treaties were either canceled or commuted. As of August 1, 1998, the Company commenced providing the Parent and affiliates coverage for general liability, auto liability and workers compensation risks with limits of up to $4,000,000 per occurrence and no annual aggregate. The Company also entered into a Pharmacy Provider Indemnity Policy, which insured the risks of unrelated third parties. The Pharmacy Provider Indemnity Policy was cancelled effective May 7, 1999. All other policies remain in effect with the same limits per occurrence. Caremark Indemnity Ltd., formerly MP Indemnity Ltd., was incorporated in Bermuda on November 28, 1994, under the provisions of the Companies Act 1981. Prior to the amalgamation, it was a wholly owned subsidiary of Caremark International L.L.C., a company incorporated in the United States of America, and its ultimate parent was CVS Health Corporation. The Company's principal activity was to reinsure excess layers of pharmaceutical plans offered by its Parent. The policies written are no longer active, and no known or estimated liabilities exist. As of January 1, 2011, the Company entered into quota share reinsurance agreements reinsuring Medicare Part D prescription drug coverage with Accendo Insurance Company and Silverscript Insurance Company, both wholly owned subsidiaries of CVS Health Corporation. Under the terms of the reinsurance agreement the Company participates in a 20% quota share on a funds withheld basis. On January 1, 2014, the Company has not renewed its quota share reinsurance agreement with Accendo Insurance Company. 7
2. Significant accounting policies (a) Basis of preparation The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). (b) Cash and cash equivalents The Company considers all highly liquid instruments that are readily convertible to known amounts of cash or purchased with a maturity of three months or less to be cash equivalents. (c) Premiums and acquisition costs Premiums written and acquisition costs are reported as earned on the accrual basis and are included in income on a pro-rated basis over the term of the policies. The policies are co-terminus with the Company s year-end and accordingly, there are no unearned premiums and deferred acquisition costs at the balance sheet date. Certain of the quota share reinsurance treaties have retrospectively rated premium provisions, whereby additional/return premium assessments are made as a result of loss activity. The Company records such premium assessments as premiums assumed, when reported by the ceding insurance companies. (d) Losses and loss expenses Losses and loss expenses are recorded when advised by the ceding insurance company. Reserve for losses and loss expenses comprise estimates of the amount of reported losses and loss expenses received from the ceding insurance company plus a provision for losses incurred but not reported based on the recommendations of an independent actuary. The selected loss development patterns are based on a blend of actual Company experience and the benchmark loss development patterns. Inherent in the estimates of ultimate losses are expected trends in claim severity and frequency and other factors which could vary significantly as claims are settled. Accordingly, ultimate losses may vary materially from the amounts provided in the financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in results of operations in the period in which they become known and are accounted for as changes in estimates. (e) Income taxes The Company reports its liability and expense for income taxes under the requirements of Accounting Standards Codification ("ASC") No. 740, Income Taxes. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes, measured by applying currently enacted tax laws. A valuation 8
2. Significant accounting policies, cont'd. allowance against a deferred tax asset is provided for if and when the Company believes that a portion or all of the deferred tax asset may not be realized in the near term. In addition, the Company is required to recognize the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained, assuming examination by tax authorities. The Company has not recognized any liabilities for unrecognized tax benefits as a result of this guidance. The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next twelve months and classifies all income tax associated with interest and penalties as income tax expense. (f) Fair value of measurement The carrying values of the financial assets and liabilities, which consist of cash and cash equivalents, restricted cash, insurance and reinsurance balances receivable, intercompany loan receivable, accrued interest receivable, funds withheld, income tax payable and accounts payable and accrued liabilities approximate their fair values due to the immediate or short-term maturity. (g) Use of estimates The preparation of financial statements in conformity with U.S GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. (h) Recent accounting standards In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. This ASU requires additional disclosures for insurance entities associated to the liability for unpaid claims and claim adjustment expenses for short-duration insurance contracts. The provisions of ASU 2015-09 are effective for annual periods beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016. The new disclosure in ASU 2015-09 should be applied retrospectively, except for those requirements that apply only to the current period. The Company has adopted ASU 2015-09. 9
(h) Recent accounting standards, cont d. In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15, Disclosures of Uncertainties about an Entity s Ability to Continue as a Going Concern to address financial reporting considerations about an entity s ability to continue as a going concern. This ASU requires management to determine every interim and annual period whether conditions or events exists that raise substantial doubt about an entity s ability to continue as a going concern within one year after the date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and for interim periods within annual periods beginning after December 15, 2016. The Company has decided not to early adopt ASU 2014-15 as they want to evaluate whether to adjust internal controls or implement new controls to comply with the new requirements. 3. Reinsurance Pool business The Company participates in a reinsurance pool, the R-Pool, which is managed by United Insurance Company. The R-Pool provides reinsurance to the Company s parent and other companies domiciled in the United States. The Company records the R-Pool activity reported by the treaty manager. The policies in the R-Pool are subject to retrospective premium adjustments. A provision for premium adjustments has been included in the accompanying financial statements. Amounts included in the accompanying financial statements as at December 31, 2017 and 2016 relating to the R-Pool are as follows: 2017 2016 Funds held by ceding reinsurers $ 195,118 $ 195,118 Insurance balance payables (31,553) (58,548) Loss and loss expenses provisions 213,001 243,004 Net premiums earned 18,247 (7,569) Net losses incurred and net loss expense (39,323) (402) 10
4. Losses and loss expenses 2017 2016 Balance at beginning of year $ 560,738,921 $ 571,231,282 Incurred related to: Current year 756,605,307 609,313,146 Prior years (8,616,684) (2,425,612) Total incurred 747,988,623 606,887,534 Paid losses related to: Current year (582,923,520) (459,900,324) Prior years (117,639,122) (157,479,571) Total paid (700,562,642) (617,379,895) Balance at end of year $ 608,164,902 $ 560,738,921 The loss development in 2017 relating to prior years reserves of $8,616,684 is predominantly related to favorable movements on Worker s Compensation, General Liability and Pharmacy Liability lines of business as a result of lower claims activity. The loss development in 2016 relating to prior years reserves of $2,425,612 is predominantly related to favorable movements on the Workers Compensation, General Liability and Pharmacy Liability lines of business as result of lower claims activity. ( the Company ) determines its provision for reported losses on the basis of losses reported by the third party claims administrator engaged by CVS Health. The Company s provision for loss development is based on the advice of independent consulting actuaries. Please note that the following information is supplemental and unaudited. In their report, the consulting actuaries estimated that at December 31, 2017, the provision for total outstanding losses for all policy years, including the current year, on an expected undiscounted basis, is US $604,613,365 (2016: US $563,184,353). Ultimate loss and allocated loss adjustment expenses (herein referred to as loss ) were estimated on a combined basis by accident year, by business segment, and by coverage, using a variety of actuarial estimation techniques. The following is a list of the actuarial estimation techniques used: Paid and Incurred Loss Development methods; Paid and Incurred Bornhuetter-Ferguson methods; Generalized Cape Cod method; and the Loss Rate 11
4. Losses and loss expenses, cont d. method. Incurred but not reported ("IBNR ) reserves include amounts for expected development on known claims and pure IBNR reserves. Since December 31, 2016, there have been no significant changes to the methodologies or assumptions used. A brief description of each method is as follows: a. Paid Loss Development - A loss development factor ( LDF ) is applied to cumulative paid loss as of December 31, 2017. The LDFs are selected based on a review of historical Company loss payment patterns (data triangles) and industry information. Development beyond the maturity of the historical data triangles is estimated by selecting a tail LDF. b. Incurred Loss Development - This method is similar to the Paid Loss Development method except incurred loss (paid loss plus case reserves) are used in place of paid loss. The LDFs used in this method estimate future loss payments on unreported and reopened claims, as well as changes in the incurred loss values on reported claims. c. Paid (Incurred) Bornhuetter-Ferguson This method estimates ultimate loss as the sum of two components: actual paid (incurred) loss plus expected losses unpaid (IBNR reserves). This method requires paid (incurred) LDFs and an initial expectation of the ultimate loss amount. The payment (reporting) patterns associated with the LDFs imply that a specific percentage of the ultimate loss will be paid (reported) after the evaluation date. The amount of unpaid (unreported) loss is estimated by applying this percentage to the expected ultimate loss. The initial expected ultimate loss amount is selected based on a review of charged premium (excluding premium relating to underwriting expenses) and the prior estimated ultimate loss amount. d. Generalized Cape Cod The Generalized Cape Cod method is a variant of the Expected Emergence method that includes a systematic approach for calculating the a priori expected loss. This method calculates expected loss rates based on the relationship between the exposures, the losses that have emerged as of the evaluation date, and the loss emergence pattern indicated by the selected LDFs. The method relies on a selected decay rate that governs the extent to which the expected loss rate for any given year is influenced by the data for other years. In our analysis, we used a version of the Generalized Cape Cod method that utilizes ultimate claim counts in place of exposures and expected average claim severities in place of expected loss rates. e. Loss Rate In the Loss Rate method, the ultimate losses are estimated by multiplying the exposures by a selected ultimate loss rate. The Loss Rate method was used to estimate expected losses for the expected paid and incurred emergence methods for accident year 2017 and projected losses for 2018. The selected ultimate loss rates were selected based on a review of ultimate loss rates for prior years, 12
4. Losses and loss expenses, cont d. adjusted for loss and exposure trend and benefit level changes and premium level changes where appropriate. After reviewing the results of each method, weights are assigned to each, resulting in a selected ultimate loss amount. IBNR reserves are then calculated as the difference between the selected ultimate loss amount and incurred loss as of December 31, 2017. The total loss and loss adjustment expenses reserves displayed on the balance sheet as of December 31, 2017 are not discounted for the time value of money. Reported claims used in the Actuary s analysis are aggregated on an occurrence basis (e.g. a claim with multiple claimants is considered to be one claim/occurrence) and include both claims closed with and without payments. Re-opened claims are not considered to be a newly reported claim. For determining claim frequency, the chain ladder approach is used. Year over year frequency (estimated ultimate claims per exposure unit) are compared as a check of reasonableness. There have been no changes in the methodologies used. The following supplemental financial information summarizes incurred claims, cumulative number of reported claims (unaudited) and cumulative paid claims data by accident year and line of business as of December 31, 2017: Auto Liability Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of Incurred-but- Not-Reported Liabilities Plus Expected Cumulative Development Number of Accident on Reported Reported Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Claims Claims 2008 $ 1,064 $ 1,169 $ 1,136 $ 1,025 $ 1,091 $ 1,057 $ 1,057 $ 1,057 $ 1,057 $ 1,057 $ - 358 2009 1,476 1,855 2,609 2,714 2,911 2,911 2,914 3,026 3,061-366 2010 1,765 1,918 2,286 2,241 2,468 2,519 2,512 2,510 2 336 2011 1,755 1,372 1,238 890 866 852 855 3 338 2012 2,195 1,781 1,666 1,708 1,646 1,633 10 276 2013 2,083 2,269 3,267 3,310 3,419 37 250 2014 1,056 820 973 1,294 99 207 2015 1,279 959 879 139 166 2016 1,816 2,015 620 203 2017 1,552 1,237 430 Total $ 18,276 13
4. Losses and loss expenses, cont d. Auto Liability Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 314 $ 758 $ 916 $ 918 $ 1,043 $ 1,057 $ 1,057 $ 1,057 $ 1,057 $ 1,057 2009 269 556 1,947 2,563 2,581 2,588 2,597 2,616 3,061 2010 407 819 1,583 1,717 2,150 2,182 2,512 2,508 2011 361 646 801 852 852 852 852 2012 321 678 837 1,542 1,621 1,623 2013 407 712 2,881 3,033 3,268 2014 206 333 714 878 2015 215 444 557 2016 505 900 2017 203 Total 14,907 All outstanding liabilities before 2008, net of reinsurance $ - Liabilities for claims and claim adjustment expenses, net of reinsurance $ 3,369 General Liablity Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of Incurred-but- Not-Reported Liabilities Plus Expected Cumulative Development Number of Accident on Reported Reported Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Claims Claims 2008 $ 24,813 $ 24,710 $ 24,409 $ 23,889 $ 22,977 $ 22,570 $ 22,514 $ 22,472 $ 22,107 $ 21,891 $ 59 7,141 2009 29,620 28,550 29,155 29,325 29,312 29,121 29,323 31,802 32,612 173 7,644 2010 35,486 30,631 31,983 30,388 31,030 31,256 31,221 30,330 312 8,172 2011 33,105 32,265 29,323 28,942 27,523 28,697 27,810 560 9,053 2012 33,021 32,643 31,663 31,889 31,099 31,985 1,096 9,165 2013 34,266 33,993 32,349 32,813 32,411 2,326 8,741 2014 37,634 33,237 34,172 34,021 4,410 9,035 2015 27,813 24,694 28,534 7,702 9,005 2016 28,251 28,412 15,893 8,549 2017 31,693 25,329 8,426 Total $ 299,699 General Liablity Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 1,439 $ 5,923 $ 10,342 $ 16,516 $ 19,774 $ 21,293 $ 21,802 $ 21,823 $ 21,826 $ 21,826 2009 1,539 6,232 13,503 20,327 24,520 26,343 26,789 30,244 31,680 2010 1,638 7,313 16,607 20,114 25,619 26,499 28,881 29,604 2011 1,548 7,434 13,897 20,033 21,264 25,559 26,273 2012 1,853 8,174 14,509 19,142 24,592 26,322 2013 1,931 7,828 11,922 22,233 27,020 2014 2,388 5,689 13,467 20,622 2015 853 5,183 13,005 2016 1,161 5,226 2017 1,049 Total 202,628 All outstanding liabilities before 2008, net of reinsurance 231 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 97,302 14
4. Losses and loss expenses, cont d. Druggist Liability Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of Incurred-but- Not-Reported Liabilities Plus Expected Cumulative Development Number of Accident on Reported Reported Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Claims Claims 2008 $ 31,505 $ 32,812 $ 33,154 $ 31,748 $ 30,003 $ 28,007 $ 29,016 $ 29,250 $ 29,116 $ 29,102 $ 300 3,235 2009 40,153 31,288 30,352 29,309 29,767 30,599 31,133 33,124 33,296 480 4,253 2010 35,181 36,308 36,359 33,961 33,912 34,102 33,544 33,966 895 3,392 2011 30,286 31,096 30,535 32,549 31,965 30,700 32,707 1,342 2,523 2012 35,919 33,641 37,560 41,314 50,022 50,156 2,698 3,054 2013 37,823 33,021 29,044 28,133 27,845 4,296 3,111 2014 41,116 41,880 46,446 48,239 7,904 3,119 2015 31,922 35,272 41,480 10,370 2,624 2016 36,857 35,549 17,633 2,337 2017 37,987 29,747 2,013 Total $ 370,327 Druggist Liability Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 2,791 $ 9,733 $ 17,435 $ 21,950 $ 23,878 $ 25,843 $ 28,391 $ 28,325 $ 28,560 $ 28,695 2009 3,598 10,871 17,641 23,169 26,355 27,669 28,888 32,459 32,472 2010 2,468 10,294 20,901 24,381 30,188 30,726 31,321 32,649 2011 2,684 9,972 16,450 25,568 27,264 28,476 28,901 2012 3,592 10,626 22,958 30,191 41,933 45,465 2013 2,825 8,953 14,403 18,905 21,356 2014 2,410 13,858 25,389 31,484 2015 1,662 14,541 21,333 2016 2,586 7,840 2017 2,443 Total 252,639 All outstanding liabilities before 2008, net of reinsurance 442 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 118,130 Healthcare Professional Liability Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of Incurred-but- Not-Reported Liabilities Plus Expected Cumulative Development Number of Accident on Reported Reported Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Claims Claims 2008 $ - $ 796 $ 268 $ 157 $ 141 $ 130 $ 118 $ 115 $ 115 $ 112 $ 0 23 2009 1,361 684 699 393 397 330 317 315 308 1 37 2010 1,319 845 667 336 293 258 253 246 1 52 2011 1,595 1,627 3,545 2,913 2,826 2,565 3,068 18 45 2012 1,374 1,369 535 1,031 840 818 9 80 2013 2,241 699 1,197 1,483 2,270 77 1,028 2014 2,317 1,660 1,257 1,083 225 2,958 2015 1,845 1,271 1,079 543 2,951 2016 1,896 1,699 1,278 3,015 2017 2,302 1,918 2,372 Total $ 12,985 15
4. Losses and loss expenses, cont d. Healthcare Professional Liability Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ - $ 84 $ 107 $ 112 $ 112 $ 112 $ 112 $ 112 $ 112 $ 112 2009 73 132 143 178 297 307 307 307 307 2010 51 193 193 245 245 245 245 245 2011 55 137 347 763 1,607 1,905 2,999 2012 72 158 385 376 473 659 2013 64 181 199 1,237 2,193 2014 87 145 448 567 2015 62 130 268 2016 87 145 2017 65 Total 7,558 All outstanding liabilities before 2008, net of reinsurance 0 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 5,427 Worker's Compensation Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of Incurred-but- Not-Reported Liabilities Plus Expected Cumulative Development Number of Accident on Reported Reported Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Claims Claims 2008 $ 65,224 $ 62,496 $ 65,840 $ 70,004 $ 76,086 $ 76,010 $ 77,580 $ 78,402 $ 78,843 $ 78,977 $ 5,485 5,891 2009 75,849 82,407 91,469 95,106 97,453 97,356 98,631 99,748 98,809 8,827 6,398 2010 88,954 109,301 117,110 118,061 120,258 120,642 120,266 121,758 13,464 6,525 2011 92,648 90,231 89,977 90,820 89,250 89,995 88,623 12,570 6,223 2012 100,771 92,686 92,416 92,337 88,904 87,590 14,392 5,804 2013 107,960 98,434 94,412 90,397 87,534 17,847 5,976 2014 109,670 99,049 89,594 86,393 22,696 6,228 2015 102,719 98,081 95,350 31,069 6,202 2016 107,322 95,535 42,552 6,159 2017 99,686 65,981 6,262 Total $ 940,255 Worker's Compensation Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 13,286 $ 28,856 $ 39,703 $ 47,169 $ 54,050 $ 60,033 $ 64,450 $ 67,469 $ 69,058 $ 70,239 2009 14,930 36,909 50,604 60,449 68,763 73,833 78,413 81,862 83,595 2010 18,676 44,759 62,343 75,436 84,025 90,884 95,825 99,459 2011 15,061 35,248 48,301 57,108 62,786 67,912 70,008 2012 13,453 34,603 48,760 58,652 64,423 67,144 2013 15,193 34,656 47,715 54,971 60,257 2014 13,009 32,198 44,910 53,261 2015 13,103 33,731 48,047 2016 14,366 32,221 2017 14,420 Total 598,652 All outstanding liabilities before 2008, net of reinsurance 22,941 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 364,544 16
4. Losses and loss expenses, cont d. Health (Excluding Medicare Part D Exposures) Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of Incurred-but- Not-Reported Liabilities Plus Expected Cumulative Development Number of Accident on Reported Reported Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Claims Claims 2008 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - 0 2009 - - - - - - - - - - 0 2010 - - - - - - - - - 0 2011 - - - - - - - - 0 2012 - - - - - - - 0 2013 - - - - - - 0 2014 - - - - - 0 2015 - - - - 0 2016 - - - 0 2017 14,575 14,575 0 Total $ 14,575 Health (Excluding Medicare Part D Exposures) Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - 2009 - - - - - - - - - 2010 - - - - - - - - 2011 - - - - - - - 2012 - - - - - - 2013 - - - - - 2014 - - - - 2015 - - - 2016 - - 2017 - Total - All outstanding liabilities before 2008, net of reinsurance $ - Liabilities for claims and claim adjustment expenses, net of reinsurance $ 14,575 Property (Inventory Shrink) Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of Incurred-but- Not-Reported Liabilities Plus Expected Cumulative Development Number of Accident on Reported Reported Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Claims Claims 2008 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - 0 2009 - - - - - - - - - - 0 2010 - - - - - - - - - 0 2011 - - - - - - - - 0 2012 - - - - - - - 0 2013 - - - - - - 0 2014 - - - - - 0 2015 - - - - 0 2016 - - - 0 2017 3,013 3,013 0 Total $ 3,013 17
4. Losses and loss expenses, cont d. Property (Inventory Shrink) Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - 2009 - - - - - - - - - 2010 - - - - - - - - 2011 - - - - - - - 2012 - - - - - - 2013 - - - - - 2014 - - - - 2015 - - - 2016 - - 2017 - Total - All outstanding liabilities before 2008, net of reinsurance $ - Liabilities for claims and claim adjustment expenses, net of reinsurance $ 3,013 All Coverages Combined (Excluding Medicare Part D Exposures, Reinsurance Pool Reserves, and Corridor Deductible Losses) Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of Incurred-but- Not-Reported Liabilities Plus Expected Cumulative Development Number of Accident on Reported Reported Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Claims Claims 2008 $ 122,606 $ 121,983 $ 124,807 $ 126,822 $ 130,299 $ 127,774 $ 130,285 $ 131,296 $ 131,237 $ 131,140 $ 5,843 16,648 2009 148,459 144,783 154,284 156,847 159,841 160,318 162,319 168,015 168,086 9,481 18,698 2010 162,706 179,004 188,404 184,987 187,961 188,777 187,795 188,810 14,674 18,477 2011 159,390 156,592 154,618 156,114 152,430 152,809 153,062 14,493 18,182 2012 173,281 162,119 163,840 168,279 172,510 172,183 18,205 18,379 2013 184,373 168,416 160,268 156,136 153,478 24,583 19,106 2014 191,793 176,645 172,443 171,031 35,334 21,547 2015 165,579 160,278 167,323 49,823 20,948 2016 176,143 163,209 77,976 20,263 2017 187,432 138,425 19,503 Total $ 1,655,754 All Coverages Combined (Excluding Medicare Part D Exposures, Reinsurance Pool Reserves, and Corridor Deductible Losses) Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 17,830 $ 45,353 $ 68,504 $ 86,665 $ 98,857 $ 108,338 $ 115,812 $ 118,787 $ 120,614 $ 121,930 2009 20,408 54,700 83,839 106,686 122,516 130,739 136,994 147,488 151,115 2010 23,240 63,378 101,628 121,893 142,226 150,536 158,783 164,466 2011 19,709 53,436 79,797 104,324 113,773 124,703 129,033 2012 19,291 54,239 87,449 109,904 133,041 141,213 2013 20,420 52,330 77,119 100,379 114,094 2014 18,101 52,224 84,927 106,812 2015 15,895 54,029 83,209 2016 18,704 46,333 2017 18,178 Total 1,076,384 All outstanding liabilities before 2008, net of reinsurance 23,614 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 606,359 18
4. Losses and loss expenses, cont d. The following reconciles the above cumulative incurred and paid data to the liability for unpaid losses and loss adjustment expenses as of December 31, 2017: Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses 2017 Net outstanding liabilities Auto Liability $ 3,369 General Liability 97,302 Druggist Liability 118,130 Healthcare Professional Liability 5,427 Worker's Compensation 364,544 Health 14,575 Property (Inventory Shrink) Liabilities for unpaid claims and claim 3,013 adjustment expenses, net of reinsurance 606,359 Reinsurance recoverable on unpaid claims Auto Liability $ - Workers Compensation $ - Total reinsurance recoverable on unpaid claims $ - Unallocated claims adjustment expenses $ - Impact of discounting $ - $ - Other lines of business excluded from the above $ 1,806 Total gross liability for unpaid claims and claim adjustment expense $ 608,165 The following summarizes the average annual percentage payout of incurred claims by age: Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years 1st Year 2nd Year 3rd Year 4th Year 5th Year 6th Year 7th Year 8th Year 9th Year 10th Year Auto Liability 20.7% 20.8% 28.1% 13.1% 6.9% 0.6% 3.4% 0.2% 7.3% 0.0% General Liablity 5.1% 16.9% 22.4% 21.4% 13.7% 7.3% 3.5% 4.4% 2.2% 0.0% Druggist Liability 7.6% 21.8% 22.8% 16.2% 11.8% 4.6% 3.9% 4.8% 0.4% 0.5% Healthcare Professional Liability 8.0% 20.6% 12.5% 15.1% 20.0% 7.1% 8.9% 0.0% 0.0% 0.0% Workers Compensation 15.5% 21.7% 14.7% 9.9% 7.2% 5.4% 4.2% 3.4% 1.9% 1.5% Health 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Property (Inventory Shrinkage) 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% All Coverages Excl. Medicare Part D 11.7% 20.6% 18.1% 13.6% 9.7% 5.7% 4.2% 3.8% 1.8% 1.0% 19
5. Concentrations of credit risk The Company is party to financial instruments with concentration of credit risk. These financial instruments include cash and cash equivalents, restricted cash, and funds withheld. As of December 31, 2017 and 2016, all cash and cash equivalents, restricted cash, and funds withheld are held with two financial institutions. Credit risk arises from the failure of the counter-party to perform according to the terms of a contract. Except as disclosed in Note 6, the Company does not require collateral or other security to support financial instruments with credit risk. 6. Letters of credit In the normal course of reinsurance operations, the Company has issued letters of credit in the amount of $483,509 (2016 - $483,509) in favor of the ceding insurance companies. At December 31, 2017, the letters of credit were collateralized by cash and cash equivalents of $483,509 (2016 - $1,043,409). 7. Restricted Cash On June 24, 2010, the Company entered into an assignment agreement with National Union Fire Insurance Company (NUFIC) to assign its deductible reimbursement policies to NUFIC. NUFIC requires collateral for the Workers' Compensation Large Deductible policies issued in the US. A trust agreement is being used to satisfy a portion of these collateral requirements. At December 31, 2017, the Company had $190,501,650 (2016 - $148,913,369) in trust with the Bank of New York to satisfy the collateral requirements. Prior to June 24, 2010 the collateral was provided by the parent company. 8. Related party transactions Premiums written and losses paid are all with related parties. The Company assumes risks associated with premiums, claims and expenses under a 20% quota share reinsurance agreement with Silverscript Insurance Company. Silverscript Insurance Company is a wholly owned subsidiary of CVS Health Corporation, which is also the ultimate parent of the Company. Under the agreement, the Company nets off amounts recoverable and amounts payable. As at December 31, 2017, the Company was owed $63,501,872 (2016 - $56,095,558) from Silverscript Insurance Company. During the year, the Company paid a commission expense of $85,983,837 (2016 - $117,474,989) to Silverscript Insurance Company in respect of the above agreement. On October 30, 2015, the Company issued a $500,000,000 loan to the Ultimate Parent 20
8. Related party transactions, cont d. payable upon demand or until July 29, 2020. During the year ended December 31, 2017, the applicable interest rate on the loan was 1.405% until April 29, 2017, increasing to 1.756% then increasing to 1.92628% in October 2017 and 2.07306% thereafter. Interest is payable on the last day of the applicable interest period. As at December 31, 2017, $1,807,485 of interest was accrued on the loan. 9. Share capital 2017 2016 Authorized, issued and fully paid: 850,000 voting common shares of $1 par value each $ 850,000 $ 850,000 10. Taxes Under current Bermuda Law, the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that in the event of any such taxes being imposed, the Company will be exempted from taxation until the year 2035. However, the Company has made an irrevocable election under Section 953(d) of the Internal Revenue Code of 1986, as amended, to be taxed as a US domestic corporation. As a result of this "domestic election", the Company is subject to U.S. taxation on its worldwide income as if it was a U.S. corporation. The Company accounts for income taxes under the provision of ASC 740. The significant temporary difference that gives rise to the deferred tax assets relate to the discounted loss reserves, incentive pool accrual and advance premiums. The deferred tax asset reflects the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes multiplied by the enacted tax rate when the temporary differences are expected to reverse. Income taxes attributable to continuing operations for the year ended December 31, 2017 and 2016 consist of the following: 2017 2016 Current tax expense $ (69,007,726) $ (27,630,282) Deferred tax benefit (expense) 12,018,272 (5,492,201) Income tax expense $ (56,989,454) $ (33,122,483) 21
10. Taxes, cont d. Income tax expense attributable to continuing operations for the year ended December 31, 2017 and 2016 differs from the amount computed by applying the U.S. federal income tax rate of 35 percent to net income before tax due to state income taxes. For federal income tax purposes, the Company joins in a consolidated income tax return filing with its ultimate parent company, CVS Health Corporation, and other affiliated companies. For state income tax purposes, the Company is included in the Parent s unitary filings on multiple state jurisdictions. The method of allocation between the companies is subject to a written tax allocation agreement. The provision for income taxes is recorded in the amounts that would have been provided had the Company filed separate federal and state income tax returns. Intercompany income tax balances are settled between the Company and its ultimate parent on a timely basis after income tax returns have been filed with the Internal Revenue Service and appropriate state jurisdictions. All material U.S. Federal income tax matters through December 31, 2014 have been concluded. State income tax audits are ongoing. The tax effects of temporary differences that give rise to significant portions of the deferred tax provision are as follows: 2017 2016 Deferred tax asset: Discount on loss and loss adjustment expenses $ 12,096,857 $ 20,367,375 Advance premiums 20,325,593 - Incentive pool accrual 5,448 42,251 Deferred tax asset $ 32,427,898 $ 20,409,626 There was no valuation allowance for deferred tax assets as of December 31, 2017 and 2016 as management believes that it is more likely than not that the deferred tax assets will be realized. However, the amount of the deferred tax asset could be reduced in the near term if estimates of future taxable income are reduced. On December 22, 2017, the Tax Cuts and Jobs Act ( the Act ) was signed into law. The Act significantly lowers the corporate tax rate from 35% to 21% beginning in 2018, among other changes. Because the Act was enacted in 2017, certain accounting adjustments were required to be made in 2017, most notably the re-valuation of deferred tax assets and liabilities (DTAs and DTLs) from 35% to the enacted tax rate of 21%. The impact of revaluation was $20,325,593, the effect of which was included in the income statement as a deferred tax expense. SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) describes three scenarios associated with a company s status of accounting for income tax reform. The Company has made a policy to adopt SAB 118 in 22
10. Taxes, cont d. the current year. Under the SAB 118 guidance, the Company has determined that while the accounting is incomplete, the Company is able to make reasonable estimates for certain effects of tax reform. In the 2017 financial statements, the Company has recognized provisional amounts for deferred income taxes based on reasonable estimates. However, as of the date of this report, the Company is continuing to evaluate the accounting implications of the Tax Act and continues to assemble and analyze all the information required to prepare and analyze these effects and awaits additional guidance from the U.S. Treasury Department, Internal Revenue Service or other standard-setting bodies. Additionally, the Company continues to analyze other information and regulatory guidance and accordingly may record additional provisional amounts or adjustments to provisional amounts in future periods. 11. Statutory requirements The Insurance Act 1978, amendments thereto and the Insurance Account Rules 2016 (the Legislation ) requires the Company to meet a minimum solvency margin. Statutory capital and surplus at December 31, 2017 was $434,463,478 and the amount required to be maintained by the Company was $208,791,516. This requirement was met at December 31, 2017. In this regard, the declaration of dividends from retained earnings and returns of additional paid-in capital are limited to the extent that the above requirements are met. Further, under the Insurance Act, the Company must maintain capital at a level equal to its enhanced capital requirement ( ECR ) which is established by reference to the Bermuda Solvency Capital Requirement ( BSCR ) model. The BSCR is a standard mathematical model designed to give the Bermuda Monetary Authority ( BMA ) more advanced methods for determining an insurer s capital adequacy. Underlying the BSCR is the belief that all insurers should operate on an ongoing basis with a view to maintaining their capital at a prudent level in excess of the minimum solvency margin otherwise prescribed under the Insurance Act. Alternatively, under the Insurance Act, insurers may, subject to the terms of the Insurance Act and to the BMA s oversight, elect to utilize an approved internal capital model to determine regulatory capital. In either case, the ECR shall at all times equal or exceed the respective Class 3A insurer s Minimum Solvency Margin and may be adjusted in circumstances where the BMA concludes that the insurer s risk profile deviates significantly from the assumptions underlying its ECR or the insurer s assessment of its risk management policies and practices used to calculate the ECR applicable to it. While not specifically referred to in the Insurance Act, the BMA has also established a target capital level ( TCL ) for each Class 3A insurer equal to 120% of its respective ECR. While a Class 3A insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an underlying warning toll for the BMA and failure 23
11. Statutory requirements, cont d. to maintain statutory capital at least equal to the TCL will likely result in increased BMA regulatory oversight. 12. Indemnifications and warranties In the ordinary course of business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on past experience, management currently believes that the likelihood of such event is remote. 13. Subsequent events Subsequent events were evaluated to June 29, 2018, the date the financial statements were available to be issued. No events have occurred subsequently to December 31, 2017 requiring adjustments or disclosure in these financial statements. 24