STATE OF UTAH INSURANCE DEPARTMENT

REPORT OF FINANCIAL EXAMINATION

of

ACCENDO INSURANCE COMPANY

of

Salt Lake City, Utah

as of

December 31, 20 12

TABLE OF CONTENTS

SALUTATION .................................................................................................................... 1 SCOPE OF EXAMINATION ............................................................................................. 1

Period Covered by Examination .................................................................................. 1 Examination Procedure Employed .............................................................................. 1 Status of Prior Examination Findings .......................................................................... 2

SUMMARY OF SIGNIFICANT FINDINGS ..................................................................... 2 SUBSEQUENT EVENTS ................................................................................................... 2 COMPANY HISTORY ....................................................................................................... 2

General ............................................................................................................................. 2 Capital Stock and Capital Contributions ......................................................................... 3 Dividends to Stockholders ............................................................................................... 3 Acquisitions, Mergers, Disposals, Dissolutions, and Purchases or Sales through Reinsurance ...................................................................................................................... 3

CORPORATE RECORDS .................................................................................................. 3 MANAGEMENT AND CONTROL INCLUDING CORPORATE GOVERNANCE ..... .4

Holding Company System ............................................................................................... 5 Transactions with Affiliates ............................................................................................. 6

FIDELITY BOND AND OTHER INSURANCE ............................................................... 6 PENSION, STOCK OWNERSHIP AND INSURANCE PLANS ...................................... 7 TERRITORY AND PLAN OF OPERATION .................................................................... ? GROWTH OF COMPANY ................................................................................................. ? MORTALITY AND LOSS EXPERIENCE ........................................................................ 8 REINSURANCE ................................................................................................................. 8

Ceded ............................................................................................................................... 8 ACCOUNTS AND RECORDS ........................................................................................... 8 STATUTORY DEPOSITS .................................................................................................. 9 FINANCIAL STATEMENTS ............................................................................................. 9

BALANCE SHEET ....................................................................................................... 1 0 STATEMENT OF REVENUE AND EXPENSES ....................................................... 11 RECONCILIATION OF CAPITAL AND SURPLUS ................................................. 12

NOTES TO FINANCIAL STATEMENTS ....................................................................... 12 SUMMARY OF RECOMMENDATIONS ....................................................................... 14 CONCLUSION .................................................................................................................. 14

July 30, 2013

Honorable Todd E. Kiser Insurance Commissioner State of Utah 3110 State Office Building Salt Lake City, UT 84114

Commissioner:

Pursuant to your instructions and in compliance with statutory requirements, an examination, as of December 31, 2012, has been made of the financial condition and business affairs of:

Accendo Insurance Company Salt Lake City, Utah

hereinafter referred to in this report as "Accendo" or "the Company", and the following report of examination is respectfully submitted.

SCOPE OF EXAMINATION

Period Covered by Examination

We have concluded our financial examination of Accendo Insurance Company. This examination covers the period from January 1, 2008, through December 31, 2012, including any material transactions and/or events occurring subsequent to the examination date noted during the course of the examination.

Examination Procedure Employed

We conducted our examination in accordance with the National Association of Insurance Commissioners (NAIC) Financial Condition Examiners Handbook. The Handbook requires that we plan and perform the examination to evaluate the financial condition and identify prospective risks of the Company by obtaining information about the Company, including corporate governance, identifying and assessing inherent risks within the Company, and evaluating system controls and procedures used to mitigate those risks. The examination also includes assessing the principles used, and significant estimates made by management, as well as evaluating the overall financial statement presentation, and management's compliance with Statutory Accounting Principles and the NAIC Annual Statement Instructions, when applicable to domestic state regulations.

All accounts and activities of the Company were considered in accordance with the risk-focused examination process. The examination included a general review and

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analysis of the Company's operations, the manner in which its business was conducted, and a determination of its financial condition.

Status of Prior Examination Findings

The prior examination was performed by the Utah Insurance Department (Department) as of December 31, 2007. There were no unresolved significant findings from the prior examination report.

SUMMARY OF SIGNIFICANT FINDINGS

There were certain adjustments made to the 2012 Audited Financial Statements that were not made to the Annual Statement. These adjustments resulted in a net decrease in 2012 capital and surplus of $1,139,042. The adjustments were subsequently made, and are reflected in the March 31,2013 financial statement balance. (NOTES TO FINANCIAL STATEMENTS)

SUBSEQUENT EVENTS

On June 13, 20 13, the Centers of Medicare and Medicaid Services ( CMS) completed their final reconciliation of the Company's Medicare Part D contract S5644.

On July 1, 2013 the Company received payment of $45,989,988.39, representing $62,538,005.56 owed to the Company less $16,548,017.17 owed to CMS by Rx America, an affiliate. On July 16, 2013, Rx America reimbursed the Company the remaining $16,548,017.17.

COMPANY HISTORY

General

The Company was initially incorporated on December 8, 1955 as Monumental General Insurance Company, under the laws of the state of Maryland. On October 13, 1992, Toyota Motor Credit Corporation purchased 100 percent of the Company's outstanding stock, and subsequently renamed it Toyota Motor Life Insurance Company, and redomiciled to the state of Iowa.

On September 29, 1999, Hartford Life and Accident Insurance Company, a Connecticut company, purchased 100 percent of the Company, and on January 24, 2002, the name was changed to Nutmeg Life Insurance Company (Nutmeg).

During 2007, RxAmerica LLC, a wholly-owned subsidiary of Longs Drug Stores California, Inc. (Longs), formed Accendo Holding Company (AHC), for the purpose of acquiring Nutmeg from Hartford. Nutmeg applied for redomestication to the state of Utah, and received its certificate of authority effective October 3, 2007, with a name

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change to Accendo Insurance Company, a wholly-owned subsidiary of AHC, with Longs as the ultimate parent.

In October 2008 Longs was acquired by CVS Caremark Corporation (CVS), a Delaware corporation. The name of Accendo' s direct parent, AHC, was changed to Part D Holding Company, L.L.C. on January 1, 2010.

Effective January 1, 2009, upon novation ofRxAmerica's waiver from the CMS as a provider of the Medicare Part D Plan, Accendo took over the Medicare Part D business from RxAmerica, under contract with the CMS. RxAmerica remained as an administrator for Accendo and other insurance entities in the CVS group.

Capital Stock and Capital Contributions

The Company's Articles of Domestication authorize 5,000 shares of common voting capital stock with a par value of one thousand dollars ($1 ,000) per share. At December 31, 2012, there were 2,500 shares issued and outstanding to the sole parent, Part D Holding Company, L.L.C., at a total of $2,500,000.

As of the prior examination, December 31, 2007, total contributed surplus was $8,000,000. The parent made additional capital contributions to the Company during 2008 and 2009 in the amounts of $3,000,000 ad $32,000,000, respectively, for a balance of $43,000,000 at December 31,2012.

Dividends to Stockholders

During June 2012, an ordinary dividend was declared and paid in the amount of $8,000,000. No other dividends were declared or paid during 2008 through 2012.

Acquisitions, Mergers, Disposals, Dissolutions, and Purchases or Sales through Reinsurance

The Company has had no acquisitions, mergers, disposals, dissolutions, purchases or sales through reinsurance during the years covered by this examination.

CORPORATE RECORDS

In general, the minutes of meetings and actions of the stockholder and directors adequately demonstrated approval and support of the Company's transactions and events. The most recent meeting of the Board of Directors was held on December 17, 2012.

The previous report of examination as of December 31, 2007, was filed as a public document on August 13, 2008, and distributed to the Board of Directors at the September 17, 2008 meeting.

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The Company's Board of Directors adopted the CVS written Code of Conduct, which was in effect during the period covered by this examination. All directors and executive officers of the Company have signed conflict of interest statements on an annual basis.

MANAGEMENT AND CONTROL INCLUDING CORPORATE GOVERNANCE

The Company's bylaws specify the number of directors shall be five. The following persons served as directors of the Company as of December 31, 2012:

Name and Location

Joseph C. LaPine Long Beach, CA

Harold N. Lund Solon, OH

Lloyd D. McDonald Scottsdale, AZ

James G. Maritan Medfield, MA

Todd D. Meek Henderson, NV

Principal Occupation

Vice President Medicare, CVS Caremark Corporation

Vice President Finance, CVS Caremark Corporation

Vice President Medicare Part D, CVS Caremark Corporation

Vice President Market Strategy & Analysis, CVS Caremark Corporation

Vice President Compliance, CVS Caremark Corporation

The Company's bylaws provide that principal officers shall consist of a president, vice president, treasurer, and secretary; and any additional vice presidents and one or more assistant secretaries and treasurers, as needed.

The following principalofficers were appointed at the June 19, 2012 meeting of the Board of Directors, and served as of December 31,2012:

Principal Officer

Lloyd D. McDonald Anthony G. Strong Michele W. Buchanan Joseph C. LaPine

President Treasurer Secretary Assistant Secretary

Upon the CVS acquisition of Longs in 2008, there was a complete change in Accendo's Board of Directors, but the primary officers were retained. Since that time, there have been two changes in directors and three changes in officers. The sole shareholder approved the 2011 replacement of director Mark Weeks with DavidS. Azzolina, and also the 2012 replacement of Mr. Azzolina with Harold N. Lund. During

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2009 Lloyd D. McDonald replaced Todd Meek as President, and Michele W. Buchanan replaced Susan Thorner as Secretary. In 2011 Anthony G. Strong replaced Douglas Finlinson as Treasurer.

As of December 31,2012, the Company had no committees. The audit committee function is provided by the ultimate parent, CVS, for all companies in the group.

Holding Company System

The Company is a member of an insurance holding company system pursuant to Utah Code § 31A-16. The Company is a wholly-owned subsidiary of Part D Holding Company, L.L.C., with the ultimate parent, CVS Caremark Corporation. An organizational chart illustrating the holding company system follows:

CVS Caramark Corporation (DE)

I EIN: 05~49411-40

CVS Caramark Indemnity, Ltd. (BM)

CVS Pharmacy, Inc. EIN: 05·0500188

(RI) EIN: 05~340626

Caremark, Rx. L.L.C. (DE)

EIN: 20-8404182

I I I RxAmerlca, L.L.C Part D Holding Co. L.L.C CVS Caremark Part D Caremark U lyssas

(DE) (DE) Services, L.L.C. Holding Corporation EIN: 87~546860 EIN: 33-1113587 (DE) (NY)

EIN: 33-1113587 EIN: 11-2580136

I I I SllverScript Insurance Co. Accendo Insurance Co. UAC Holding, Inc. MemberHealth LLC

(TN) (UT) (DE) (DE) EiN: 20-2833904 EIN: 08-1566092 EIN: 27-1298765 EIN: 87-08040-47

NAIC: 12575 NAIC: 63444

I Pennsylvania LHe Ins. Co.

(PA) EIN: 23·1305366

NAIC: 67660

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Transactions with Affiliates

At December 31,2012, the Company reported a payable to parent, subsidiaries and affiliates in the amount of $8,519,681. Of this amount $8,000,000 was reported as a cash advance from RxAmerica, which was settled in January 2013 through the intercompany account. The remaining $519,681 was comprised of$419,676 expenses payable to the parent and $100,005 claims related to uninsured plans.

As of December 31, 2012, Accendo had the following agreements with affiliates.

Income Tax Sharing Agreement

The Company maintained a written tax sharing agreement with the ultimate parent, CVS Caremark Corporation. The Company's federal income tax return is consolidated with that of the parent and subsidiaries, as defined in Section 1504 of the Internal Revenue Code (IRC). The agreement specifies that the tax allocation is based on the Company's federal tax liability determined as if the Company were filing its own separate tax return each year. The ultimate parent is to pay Accendo for its net operating losses to the extent that such net operating loss is utilized in the reduction of the consolidated federal income tax liability. The agreement also specifies that intercompany tax balances shall be settled quarterly.

Administrative Services Agreement

On June 13, 2008, the Company entered into an amended and restated administrative services agreement with RxAmerica LLC, by which RxAmerica, as administrator, provides the Company with professional, managerial, consultative and support services, including claims payment and adjustments, underwriting, premium collection, actuarial, policyholder services, informational technology, preparation of financial statements, and pharmacy network services. The management fees were assessed on a "Per Member Per Month" (PMPM) basis, and totaled $86 million during 2011. Since there were no member premiums written during 2012, there were no fees paid to RxAmerica for administrative services.

Reinsurance Agreement

Accendo had a reinsurance agreement, effective January 1, 2011, with CVS Caremark Indemnity, Ltd., a Bermuda affiliate, directly owned by CVS Caremark Corporation. During 2012, Accendo maintained $2.2 million in Funds Held Under Reinsurance Treaties, representing net amounts due to CVS Caremark Indemnity, Ltd under the reinsurance agreement. Details of this agreement are in the REINSURANCE section of this report.

FIDELITY BOND AND OTHER INSURANCE

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The minimum fidelity coverage suggested by the National Association of Insurance Commissioners (NAIC) for a life and health insurer of the Company's size and premium volume is not less than $400,000. As of the examination date, the Company participated in fidelity bond coverage with its ultimate parent and affiliates in the amount of $20,000,000. The Company was also a named insured on its parent's managed care errors and omissions policy, as well as the directors and officers policy.

PENSION, STOCK OWNERSHIP AND INSURANCE PLANS

During the period 2008 through 2012, and as of December 31, 2012, the Company had no employees, and offered no employee benefits or insurance plans.

TERRITORY AND PLAN OF OPERATION

Accendo was formed to provide benefits as a prescription drug plan (PDP) under the federal government's Medicare Part D program, which is administered by the CMS. The Company commenced operations on January 1, 2009, licensed to provide Medicare Part D plans to eligible participants in all 50 states and the District of Columbia.

The Company's most recent contract with CMS was through the year ending December 31, 2011. Effective January 1, 2012, in accordance with CMS regulations, the Company did not bid on the CMS contract for 2012, and ceased writing new business. The Company is currently in run-off status, and is only recording the run-out activity related to prior plan years, expected to be accomplished over a three year period. The Company plans to maintain alllicensures, however, there are no definite plans regarding future lines of business.

GROWTH OF COMPANY

The Company began writing Medicare Part D business in 2009, and continued its operations for three years until CVS Caremark consolidated the Part D business as required by CMS.

The following table lists the key financial indicators ($000's), showing the entrance into and exit out of the Medicare Part B business since the prior examination.

Net Net Net Total Net Premium Admitted Premium Underwriting Net Capital and to Surplus

Year Assets Income Deductions Income Surplus Ratio 2007 10,159,313 0 148,506 9,985,020

2008 12,401,086 0 3,137,877 (1,814,252) 11,224,077 0.000 2009 259,019,378 621,898,852 592,902,583 27,132,782 68,317,040 9.103

2010 110,958,013 536,884,828 536, 100,203 ( 1 ,594,235) 67,355,640 7.971 2011 146,571,557 583,735,064 559,646,213 14,320,053 83,974,281 7.171 2012 117,574,301 (296,504) (15,115,332) 7,753,113 82,547,736 (0.004)

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In 2012 there were still large balances related to receivable for uninsured plans and claims unpaid, due to the nature of the business and the extended run-off. In 2008, although there was no premium income, the Company reported some underwriting deductions related to general and administrative expenses during start-up of operations. The 2010 net loss of $1,594,235 includes a large write-off of approximately $5 million uncollectible premiums, primarily due to the Low Income (LICS) business. The increases in 2008 and 2009 capital and surplus are primarily the result of capital infusions of $3 million and $32 million, respectively.

The Company's Risk Based Capital (RBC) level remained strong throughout operations, and was 4,681% at December 31, 2012.

MORTALITY AND LOSS EXPERIENCE

There are no significant items to report.

REINSURANCE

Ceded

Effective January 1, 2011, the Company entered into a quota share reinsurance agreement with an affiliate, CVS Caremark Indemnity, Ltd. This reinsurance agreement was submitted to the Utah Insurance Department by Form D filing, and was not disapproved. Under the terms of the agreement, the Company ceded 20% of its premium and claims as regards the Medicare Part D prescription drug plan insurance, and retained 80%.

Premiums and benefits ceded to reinsurer in 2011 were $145,200,000 and $119,300,000, respectively. The 2012 premiums and benefits ceded to reinsurer were negative ($16,800) and negative ($1,300,000), respectively. At December 31,2012, the net reinsurance payable related to this agreement was $2,200,415, and reported as Funds held under reinsurance treaties on the accompanying balance sheet.

ACCOUNTS AND RECORDS

The Company's accounts and records consisted of a general ledger, registers and other subsidiary records, which are maintained electronically. As a member of a holding company group, the Company utilizes the CVS common systems for recording its transactions.

Ernst & Young LLP, an independent certified public accounting (CPA) firm, audited the Company's records and financial statements for 2009 through 2012. Because no business was transacted during 2008, the Company obtained a 2008 audit exemption.

The examiners were given direct access to the CPA firm to facilitate timely receipt of CPA workpapers. Because our examination was being conducted prior to

8

completion of the CPA audit we chose to utilize the 2011 work papers until such time as the 2012 work papers were available. We obtained the 2012 work papers near the end of our examination.

The examination experienced significant delays receiving the 2011 work papers. For four weeks the examination requested the copies, after which the examiner requested intervention from the Department's Assistant Chief and the Company's CFO. The copies were received during the fifth week.

STATUTORY DEPOSITS

The Company's statutory deposit requirement was $400,000, pursuant to U.C.A. § 31A-5-211(2)(a), for a life and health company. The Company's deposit with the State of Utah at December 31, 2012 was $2,611,388, which was more than adequate to meet the minimum requirement. The following special deposits were held with Utah and other states at December 31, 2012.

Deposits for Benefit of All Policyholders: State Type of Asset Utah US Treasury Notes

All Other Special Deposits: State Type of Asset Arkansas US Treasury Note Georgia Cash & Money Market Massachusetts US Treasury Note New Mexico US Treasury Note North Carolina First Am Treas Money Market Virginia Federated Money Market Total Other Special Deposits

Book Value $2,606,932

Book Value $190,523

45,121 100,289 114,671 460,000 235,000

$1,145,604

FINANCIAL STATEMENTS

Fair Value $2,611,388

Fair Value $190,832

45,121 100,439 114,856 460,000 235,000

$1,146,248

The following financial statements were prepared from the Company's accounting records and the valuations and determinations made during the examination:

BALANCE SHEET as of December 31,2012

STATEMENT OF REVENUE AND EXPENSES for the Year Ended December 31, 20 12

RECONCILIATION OF CAPITAL AND SURPLUS 2008 through 2012

The accompanying Reconciliation of the 2012 Capital and Surplus between that reported by the Company and as determined by the examination, and the NOTES TO FINANCIAL STATEMENTS are an integral part of the financial statements.

9

ACCENDO INSURANCE COMPANY BALANCE SHEET

as of December 31, 20 12

ASSETS

Net Admitted Assets Notes

Bonds Cash and short-term investments Investment income due and accrued Amounts receivable related to uninsured plans Net deferred tax asset

Total assets

$ 3,012,414 45,608,803

8,894 68,624,629

319,561 $ 117,574,301

LIABILITIES, CAPITAL AND SURPLUS

Claims unpaid $ 10,941,634 Aggregate health policy reserves 1,172,010 Premiums received in advance 753,289 General expenses due or accrued 1,880,153 Current federal and foreign income tax payable 2,117,266 Amounts due to parent, subsidiaries and affiliates 8,519,681 Funds held under reinsurance treaties 2,200,415 Liability for amounts held under uninsured plans 8,581,159

Total liabilities $ 36,165,607

Common capital stock $ 2,500,000 Gross paid in and contributed surplus 43,000,000 Unassigned funds (surplus) 35,908,694 Total capital and surplus $ 81,408,694

Total liabilities, capital and surplus $ 117,574,301

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(2) (3)

(4)

ACCENDO INSURANCE COMPANY STATEMENT OF REVENUE AND EXPENSES

for the Year Ended December 31, 2012

Total

Net premium income $ (296,504)

Change in unearned premiun reserves 293,935 Total revenues $ (2,569)

Medical and Hospital:

Prescription drugs (12,076,816)

Outside referrals

Other medical and hospital

Subtotal (12,076,816)

Less:

Net reinsurance recoveries ( 1 ,278,392)

Total medical and hospital (1 0, 798,424)

Claims adjustment expenses (690,847)

General administrative expenses 2,090,414

Total underwriting deductions (9,398,857)

Total underwriting gain or (loss) 9,396,288

Net investment income earned 10,022

Net investment gains or (losses) 10,022

Net gain/(loss) from agents' or premium balances charged off (3,260,886)

Net income or (loss) before federal income taxes 6,145,424 Federal and foreign income taxes incurred 2,108,023

Net income (Joss) $ 4,037,401

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Notes

(l)

(2)

(3)

ACCENDO INSURANCE COMPANY RECONCILIATION OF CAPITAL AND SURPLUS

2008 through 2012

2lE :mJ 2010

Capital arrl srnpl.LE picr ~ $ 9,985,019 $ 11,224,078 $ 68,317,00 Ni in::are cr Qa;s) (1,814,252) 27,132,782 (1,5<}1.,235)

~in ret dferred in::are tax 1,168,754 (285,140)

~in am Vdluatirnresene ~in rrm:lrrittfrl ams (3,n\575) 917,975 PaidinsrnplLE 3,ffi),ffi) 32,(ID,ffi) 0 Ilvicfirl; to stocklrld:Ts

Aggreglte wite-in gpin Qa;s) in srnplt.E 53,310 Ni ~in cap tal arrl srnplt.E $ 1,'139,(158 $ 57,Wl,%1 $ (%1,400) Capital arrl srnplt.E en:l c{ a.nrent ~ $ 11,224,G78 $68,317,00 $ 67,355,640

2011

$ 67,355,640 16,h%,723

'l39,CJE

(518,011)

$ 16,618,641 $ 83,974,281

The following is a reconciliation of the 2012 capital and surplus between that reported by the Company and as determined by examination.

Description

Per Annual Statement

Dr (Cr) Per Examination

Change in Surplus Incr/

(Deer)

Rl"Exam 2012

$ 83,974,281 4,ffi7,401 (003,982)

2,21),9)4

(8,ffi),ffi))

$ (2,565,587) $ 81,403,(f.)4

Notes Prior period adjustment to net income Prescription drug benefits expense Federal income tax expense

$ (14,320,053) (16,040,923)

4,108,786

$ (16,896,723) $ (12,076,816)

2,108,023

2,576,670 (1)

General & administrative expenses (state income tax expense)

Total examination changes Total capital and surplus per Company Total capital and surplus per Examination

338,046 2,090,414

NOTES TO FINANCIAL STATEMENTS

(3,964, 107) (1) 2,000,763 (3)

(1,752,368) (2)

(1,139,042) 82,547,736

$ 81,408,694

The above adjustments are made as a result of differences between the Company's 2011-2012 Audited Financial Statements and the 2012 Annual Statement as filed. The net effect from these adjustments is a $1,139,042 decrease in Accendo's 2012 capital and surplus. The adjustments are material for purposes of this examination;

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however, there is little impact on the Company's RBC, which remains very high at 4,681%. As such, the Department does not require are-filing of the financial statements.

Note (1): Prescription Drug Expense ($12,076,816)

The current year prescription drug expense is increased by $3,964,107, from a credit balance of ($16,040,923) to a credit balance of ($12,076,816). This is the result of true-ups between Accendo and RxAmerica on the CMS prescription drug benefit reimbursements, which apply to 2011 rather than 2012 benefits. The respective $1,387,437 impact to current federal income tax is included in Note (3).

A $2,576,670 prior year adjustment is also made, increasing Accendo's 2011 capital and surplus from $81,397,611 to $83,974,281. The $2,576,670 adjustment is the net result of the $3,964,107 decrease in 2011 prescription drug expense, less the respective $1,387,437 increase in 2011 federal income taxes.

Between these two adjustments, the net effect to capital and surplus as of December 31,2012 is zero.

Note (2): General and Administrative Expenses $2,090,414

Per examination, general & administrative expenses, reported at $338,406, are increased by $1,752,368 to a balance of $2,090,414. General expenses due or accrued were also increased from $127,785 to $1,880,153. This adjustment is made to record the state income tax expense on the gain recognized in Accendo's PDP membership transferred to SilverScript on January 1, 2012. CMS refers to the consolidation process of Accendo's surrender of its PDP contract with another insurer covering the same membership as a "crosswalk" of its membership. The gain on this crosswalk was determined by management, and the external auditors provided a thorough review of federal and state regulations and codes related to the reporting of the crosswalk, the gain on intangible assets, and the tax implications. A fair value assumption was based on a recent CVS acquisition of another Part D company near January 1, 2012. Using this assumption, Accendo's membership of 658,930 the day prior to the crosswalk was valued at $400 each, for a total $263,572,000 fair value. Accendo's tax basis was zero. The various state income taxes applicable to the respective state memberships totaled $1,752,360, which should be included on the Annual Statement. There is also a $613,326 decrease in current federal income tax for the credit given on state income taxes paid, as discussed in Note (3).

The adjustments were subsequently made, and are reflected in the March 31, 2013 financial statement balance.

Note (3): Federal Income Tax Expense $2,108,023

The Company reported $4,108,786 federal income tax expense, which is reduced by $2,000,763 as a result of the following:

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• Note (1) above- Current federal income tax is reduced by $1,387,437, applicable to the increased prescription drug expense of $3,964,107, at a 35% tax rate.

• Note (2) above- Current federal income tax is reduced by $613,326, applicable to the federal income tax credit for the respective state income taxes paid on the gain associated with the crosswalk of Accendo's PDP membership to SilverScript.

The adjustments were subsequently made, and are reflected in the March 31, 2013 financial statement balance.

Note (4)- Total Adjusted Capital $81.408,694

As defined by U.C.A. §31A-17 Part 6, the Company had total adjusted capital of $81,408,694 which exceeded the company action level risk-based capital (RBC) requirement of $3,478,538 by $77,930,156.

SUMMARY OF RECOMMENDATIONS

It is recommended that the Company inform the Utah Insurance Department in a timely manner of all adjustments made to the general ledger subsequent to filing its financial statements, resulting in the filed statements differing from the audited financial statements and/or general ledger. (NOTES TO FINANCIAL STATEMENTS)

CONCLUSION

In addition to the below signed, Donald Catmull, CFE, Assistant Chief Examiner, and Aaron Philips, CFE, IT Examiner, Utah Insurance Department, and David Reimer, FSA, MAAA, Actuary, Risk & Regulatory Consulting, LLC, participated in the examination representing the Utah Insurance Department. They join the undersigned in acknowledging the assistance and cooperation extended during the course of the examination by officers, employees, and representatives of the Company.

Respectfully Submitted,

c::i.~T---f v ( J

Carolyn Maynard, CFE, Examiner-in-Charge Risk & Regulatory Consulting, LLC Representing the Utah Insurance Department

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