Clover Health Investments, Corp. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2023. Clover operates Medicare Advantage PPO and HMO plans through its Insurance segment and participates in CMS’s ACO REACH Model through its Non-Insurance segment. Clover Assistant is used to support providers in managing chronic conditions and healthcare costs.
At September 30, 2023, Clover operated Medicare Advantage plans in eight states and 220 counties with 81,275 members. It had 51,528 aligned Non-Insurance beneficiaries, approximately 615 contracted participant providers, and approximately 1,555 preferred providers and facilities. Total Lives under Clover Management were 132,803.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $482.1 million | $856.8 million | $1.523 billion | $2.578 billion |
| Premiums earned, net | $301.2 million | $267.9 million | $932.7 million | $814.6 million |
| Non-Insurance revenue | $176.0 million | $585.3 million | $575.3 million | $1.758 billion |
| Net medical claims incurred | $419.0 million | $839.8 million | $1.328 billion | $2.560 billion |
| Loss from operations | $(41.5) million | $(74.1) million | $(142.9) million | $(264.3) million |
| Net loss | $(41.5) million | $(75.5) million | $(142.9) million | $(255.3) million |
| Net loss per share | $(0.09) | $(0.16) | $(0.30) | $(0.54) |
| Operating cash flow | Not separately presented | $113.4 million | $5.4 million |
Q3 total revenue declined 43.7%, while nine-month revenue declined 40.9%, primarily because of the strategic reduction in ACO REACH beneficiaries. Premium revenue increased 12.4% in Q3 and 14.5% for the nine-month period, supported by CMS premiums, risk adjustment revenue, and the prior 3.5-Star rating.
Insurance medical care ratio was 80.8% for the nine months ended September 30, 2023, compared with 91.7% in the prior-year period. Non-Insurance MCR was 99.7%, compared with 103.3%. Consolidated net loss margins were approximately 8.6% in Q3 and 9.4% for the nine-month period.
At September 30, 2023, cash and cash equivalents were $299.0 million, restricted cash was $52.7 million, and total cash, cash equivalents, restricted cash, and investments were approximately $672.0 million. Investment securities had fair value of approximately $305.1 million. Total assets were $1.060 billion and stockholders’ equity was $321.9 million.
Total liabilities were $737.9 million, including a $254.4 million Non-Insurance performance-year obligation, $182.4 million Non-Insurance payable, $114.4 million of unpaid claims, and $103.3 million of deferred revenue. The filing reports no material changes to financing arrangements and no material debt balance is identified in the provided financial statements.
Material changes versus the prior comparable period
- Non-Insurance revenue fell 69.9% in Q3 and 67.3% for nine months as aligned beneficiaries declined from 166,432 to 51,528.
- Premiums earned, net increased $33.3 million in Q3 and $118.1 million for nine months.
- Net medical claims declined 50.1% in Q3 and 48.1% for nine months, largely reflecting the smaller Non-Insurance beneficiary base.
- Salaries and benefits declined 13.7% in Q3 and 7.9% for nine months, following a workforce reduction of approximately 10% beginning in April 2023.
- General and administrative expenses declined 12.7% in Q3 and 7.2% for nine months.
- Restructuring costs were $1.3 million in Q3 and $7.9 million for nine months, related to the UST HealthProof transition, workforce reductions, and other transformation actions.
- Operating cash flow improved to $113.4 million from $5.4 million, partly due to a $103.3 million CMS prepayment for October 2023 and working-capital changes.
- The Company adopted a change in the premium deficiency reserve methodology to include anticipated future investment income. The change reduced the September 30, 2023 reserve by approximately $0.5 million and reduced reported nine-month net loss by approximately $8.7 million relative to the prior methodology.
- Stock-based compensation remained material at $107.8 million for nine months, compared with $125.2 million in the prior-year period. Approximately $452.0 million of unrecognized stock-based compensation remained at September 30, 2023.
Guidance, outlook, commentary, risks, and unusual items
Management expects available cash, investments, and projected operating cash flows to satisfy projected operating and regulatory requirements for at least the next 12 months under current plans. Management cautions that additional equity or debt financing may be required depending on growth, business opportunities, or unforeseen circumstances, and that financing may be dilutive or unavailable on acceptable terms.
- Beginning in 2024, Medicare Advantage plans are expected to be offered in 200 counties and five states, compared with 220 counties and eight states at September 30, 2023.
- CMS assigned both the PPO and HMO plans a 3.0-Star rating for the 2022 measurement year, down 0.5 Star. The rating affects the 2025 payment year; the Company expects to be paid on the basis of 3.5 Stars in calendar year 2024.
- The Company expects another reduction in ACO REACH participating physicians and beneficiaries for the 2024 performance year.
- The ACO REACH performance guarantee creates a $254.4 million current obligation and a $185.4 million receivable at September 30, 2023. The Company cannot estimate the maximum potential future payments because of stop-loss provisions, risk ratings, benchmark trends, and other variables.
- The securities class action related to prior disclosures was settled for $22.0 million, funded in part by $19.5 million of insurance proceeds, and dismissed with prejudice on October 3, 2023. Derivative litigation settlements were subject to final documentation and court approval and contemplated governance enhancements rather than a monetary payment, other than counsel fees.
- The Company continues to cooperate with an SEC investigation concerning prior disclosures and certain business matters.
- Unpaid claims reserves, risk adjustment, ACO REACH benchmarks, premium deficiency reserves, investment valuations, and medical cost trends involve significant estimates and could materially affect future results.
- Interest-rate risk affects the fixed-maturity investment portfolio. At September 30, 2023, the portfolio was investment grade, with no fixed-maturity securities unrated or below investment grade.
- The Company disclosed a Nasdaq listing risk because its Class A common stock closing bid price was below $1.00 on multiple occasions, including October 16 through November 1, 2023. A future failure to meet Nasdaq’s minimum-price requirement could result in delisting.
Most important facts for investors to verify
- Whether improved Insurance MCR and premium growth offset the substantial reduction in ACO REACH scale and revenue.
- The sustainability and cash quality of the $113.4 million nine-month operating cash flow, including the impact of the $103.3 million CMS prepayment and other working-capital movements.
- The adequacy of unpaid claims reserves and the ultimate settlement of the $254.4 million ACO REACH performance-year obligation.
- The effect of the reduced CMS Star ratings on 2025 payment rates and future Medicare Advantage membership.
- Progress and remaining costs associated with the UST HealthProof transition and restructuring program.
- Future capital needs, regulatory capital restrictions, and the ability to transfer cash from regulated insurance subsidiaries to the parent.
- Potential dilution from approximately 110.9 million anti-dilutive options, RSUs, and PRSUs excluded from diluted loss per share.
- The status and financial consequences of the SEC investigation, derivative proceedings, insurance disputes, and any remaining legal matters.
- Nasdaq listing compliance and the potential effect of delisting on liquidity and access to capital.