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Fair Value

12 Months Ended

Dec. 31, 2020

The preparation of the Company’s 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. In this note, the Company provides details on the fair value of financial assets and liabilities and how it determines those fair values. The Company presents this information for those financial instruments that are measured at fair value for which the change in fair value impacts net income (loss) attributable to CVS Health or other comprehensive income separately from other financial assets and liabilities.

Financial Instruments Measured at Fair Value on the Consolidated Balance Sheets

Certain of the Company’s financial instruments are measured at fair value on the consolidated balance sheets. The fair values of these instruments are based on valuations that include inputs that can be 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.

Financial assets and liabilities are classified based upon the lowest level of input that is significant to the valuation. When quoted prices in active markets for identical assets and liabilities are available, the Company uses these quoted market prices to determine the fair value of financial assets and liabilities and classifies these assets and liabilities in Level 1. In other cases where a quoted market price for identical assets and liabilities in an active market is either not available or not observable, the Company estimates fair value using valuation methodologies based on available and observable market information or by using a matrix pricing model. These financial assets and liabilities are classified in Level 2. If quoted market prices are not available, the Company determines fair value using broker quotes or an internal analysis of each investment’s financial performance and cash flow projections. Thus, financial assets and liabilities may be classified in Level 3 even though there may be some significant inputs that may be observable.

The following is a description of the valuation methodologies used for the Company’s financial assets and liabilities that are measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Cash and Cash Equivalents – The carrying value of cash and cash equivalents approximates fair value as maturities are less than three months. When quoted prices are available in an active market, cash equivalents are classified in Level 1 of the fair value hierarchy. Fair values of cash equivalent instruments that do not trade on a regular basis in active markets are classified as Level 2.

Debt Securities – Where quoted prices are available in an active market, debt securities are classified in Level 1 of the fair value hierarchy. The Company’s Level 1 debt securities consist primarily of U.S. Treasury securities.

The fair values of the Company’s Level 2 debt securities are obtained using models, such as matrix pricing, which use quoted market prices of debt securities with similar characteristics or discounted cash flows to estimate fair value. The Company reviews these prices to ensure they are based on observable market inputs that include quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets and inputs that are observable that are not prices (such as interest rates and credit risks). The Company also reviews the methodologies and the assumptions used to calculate prices from these observable inputs. On a quarterly basis, the Company selects a sample of its Level 2 debt securities’ prices and compares them to prices provided by a secondary source. Variances over a specified threshold are identified and reviewed to confirm the price provided by the primary source represents an appropriate estimate of fair value. In addition, the Company’s internal investment team consistently compares the prices obtained for select Level 2 debt securities to the team’s own independent estimates of fair value for those securities. The Company obtained one price for each of its Level 2 debt securities and did not adjust any of those prices at December 31, 2020 or 2019.

The Company also values certain debt securities using Level 3 inputs. For Level 3 debt securities, fair values are determined by outside brokers or, in the case of certain private placement securities, are priced internally. Outside brokers determine the value of these debt securities through a combination of their knowledge of the current pricing environment and market flows. The Company did not have any broker quoted debt securities for the years ended December 31, 2020 and 2019. For some private placement securities, the Company’s internal staff determines the value of these debt securities by analyzing spreads of corporate and sector indices as well as interest spreads of comparable public bonds. Examples of these private placement Level 3 debt securities include certain U.S. and foreign securities and certain tax-exempt municipal securities.

Equity Securities – The Company currently has two classifications of equity securities: those that are publicly traded and those that are privately placed. Publicly-traded equity securities are classified in Level 1 because quoted prices are available for these securities in an active market. For privately placed equity securities, there is no active market; therefore, these securities are classified in Level 3 because the Company prices these securities through an internal analysis of each investment’s financial statements and cash flow projections. Significant unobservable inputs consist of earnings and revenue multiples, discount for lack of marketability and comparability adjustments. An increase or decrease in any of these unobservable inputs would have resulted in a change in the fair value measurement.

There were no financial liabilities measured at fair value on a recurring basis on the consolidated balance sheets at December 31, 2020 or 2019. Financial assets measured at fair value on a recurring basis on the consolidated balance sheets at December 31, 2020 and 2019 were as follows:


In millions	Level 1		Level 2		Level 3		Total
December 31, 2020
Cash and cash equivalents	$	4,210	$	3,869	$	—	$	8,079
Debt securities:
U.S. government securities	2,370		99		—		2,469
States, municipalities and political subdivisions	—		2,727		1		2,728
U.S. corporate securities	—		8,842		52		8,894
Foreign securities	—		2,918		—		2,918
Residential mortgage-backed securities	—		705		—		705
Commercial mortgage-backed securities	—		1,046		—		1,046
Other asset-backed securities	—		2,403		—		2,403
Redeemable preferred securities	—		24		1		25
Total debt securities	2,370		18,764		54		21,188
Equity securities	17		—		30		47
Total	$	6,597	$	22,633	$	84	$	29,314

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

The changes in the balances of Level 3 financial assets during the year ended December 31, 2020 were as follows:


In millions	States, municipalities and political subdivisions		U.S. corporate securities		Equity securities		Redeemable preferred securities		Total
Beginning balance	$	—	$	37	$	39	$	12	$	88
Net realized and unrealized capital gains (losses):
Included in earnings	—		(11)		(3)		18		4
Included in other comprehensive income	—		—		—		(5)		(5)
Purchases	—		27		3		—		30
Sales	—		—		(9)		(24)		(33)
Settlements	—		(1)		—		—		(1)
Transfers into Level 3, net	1		—		—		—		1
Ending balance	$	1	$	52	$	30	$	1	$	84

The change in unrealized capital losses included in other comprehensive income associated with Level 3 financial assets which were held as of December 31, 2020 was $4 million during the year ended December 31, 2020.

The changes in the balances of Level 3 financial assets during the year ended December 31, 2019 were as follows:


In millions	Foreign securities		U.S. corporate securities		Equity securities		Redeemable preferred securities		Total
Beginning balance	$	3	$	67	$	54	$	7	$	131
Net realized and unrealized capital gains (losses):
Included in earnings	—		(33)		13		—		(20)
Included in other comprehensive income	—		18		—		5		23
Purchases	2		3		13		—		18
Sales	—		(6)		(41)		—		(47)
Settlements	(1)		(12)		—		—		(13)
Transfers out of Level 3, net	(4)		—		—		—		(4)
Ending balance	$	—	$	37	$	39	$	12	$	88

The total gross transfers into (out of) Level 3 during the years ended December 31, 2020 and 2019 were as follows:


In millions	2020		2019
Gross transfers into Level 3	$	1	$	—
Gross transfers out of Level 3	—		(4)
Net transfers out of Level 3	$	1	$	(4)

Financial Instruments Not Measured at Fair Value on the Consolidated Balance Sheets

The carrying value and estimated fair value classified by level of fair value hierarchy for financial instruments carried on the consolidated balance sheets at adjusted cost or contract value at December 31, 2020 and 2019 were as follows:


	Carrying Value		Estimated Fair Value
In millions			Level 1		Level 2		Level 3		Total
December 31, 2020
Assets:
Mortgage loans	$	1,047	$	—	$	—	$	1,070	$	1,070
Equity securities (1)	145		N/A		N/A		N/A		N/A
Liabilities:
Investment contract liabilities:
With a fixed maturity	5		—		—		5		5
Without a fixed maturity	322		—		—		371		371
Long-term debt	64,647		75,940		—		—		75,940

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

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(1)It was not practical to estimate the fair value of these cost-method investments as it represents shares of unlisted companies. See Note 1 ‘‘Significant Accounting Policies’’ for additional information regarding the valuation of cost method investments.

Separate Accounts Measured at Fair Value on the Consolidated Balance Sheets

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. Net investment income and capital gains and losses on Separate Accounts assets accrue directly to such contract holders. The assets of each account are legally segregated and are not subject to claims arising from the Company’s other businesses. Deposits, withdrawals, net investment income and realized and unrealized capital gains and losses on Separate Accounts assets are not reflected in the consolidated statements of operations, shareholders’ equity or cash flows.

Separate Accounts assets include debt and equity securities. The valuation methodologies used for these assets are similar to the methodologies described above in this Note 4 ‘‘Fair Value.’’ Separate Accounts assets also include investments in common/collective trusts that are carried at fair value. Common/collective trusts invest in other investment funds otherwise known as the underlying funds. The Separate Accounts’ interests in the common/collective trust funds are based on the fair values of the investments of the underlying funds and therefore are classified in Level 2. The assets in the underlying funds primarily consist of equity securities. Investments in common/collective trust funds are valued at their respective net asset value (“NAV”) per share/unit on the valuation date.

Separate Accounts financial assets at December 31, 2020 and 2019 were as follows:


	December 31, 2020								December 31, 2019
In millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	2	$	186	$	—	$	188	$	2	$	143	$	—	$	145
Debt securities	1,465		2,634		—		4,099		1,224		2,589		—		3,813
Equity securities	—		2		—		2		—		2		—		2
Common/collective trusts	—		563		—		563		—		499		—		499
Total (1)	$	1,467	$	3,385	$	—	$	4,852	$	1,226	$	3,233	$	—	$	4,459

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(1)Excludes $29 million of other receivables at December 31, 2020.

During the years ended December 31, 2020 and 2019, the Company had no gross transfers of Separate Accounts financial assets into or out of Level 3.

Offsetting Financial Assets and Liabilities

Certain financial assets and liabilities are offset in the Company’s consolidated balance sheets or are subject to master netting arrangements or similar agreements with the applicable counterparty. Financial assets subject to offsetting and enforceable master netting arrangements were $2 million as of December 31, 2020. Financial liabilities subject to offsetting and enforceable master netting arrangements were $3 million as of December 31, 2019.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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