Clover Health Investments, Corp. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
Clover Health filed its Form 10-K for the fiscal year ended December 31, 2022, filed March 1, 2023. The filing covers the full fiscal year rather than a standalone fourth quarter. Clover operates two reportable segments: Insurance, consisting primarily of Medicare Advantage PPO and HMO plans, and Non-Insurance, consisting of its participation in CMS’s Direct Contracting Model, renamed ACO REACH effective January 1, 2023.
The company’s strategy centers on Clover Assistant, a software platform intended to help physicians identify and manage chronic conditions using claims, clinical, medication, diagnostic, and electronic health record data. At December 31, 2022, Clover managed 253,514 lives, comprising 88,627 Insurance members and 164,887 Non-Insurance beneficiaries.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenues | $3.477 billion | $1.472 billion | Up 136.2% |
| Premiums earned, net | $1.085 billion | $799.4 million | Up 35.7% |
| Non-Insurance revenue | $2.380 billion | $667.6 million | Up 256.5% |
| Net medical claims incurred | $3.454 billion | $1.551 billion | Up 122.7% |
| Loss from operations | $370.9 million | $637.0 million | Loss narrowed 41.8% |
| Net loss | $338.8 million | $587.8 million | Loss narrowed 42.3% |
| Net loss per share | $0.71 | $1.42 | Improved |
| Net cash used in operating activities | $203.9 million | $282.3 million | Use decreased |
| Total assets | $808.6 million | $950.8 million | Down $142.2 million |
| Total liabilities | $460.9 million | $411.5 million | Up $49.4 million |
| Stockholders’ equity | $347.7 million | $539.3 million | Down $191.6 million |
Insurance members increased 30.1% year over year. Insurance net medical claims incurred were $996.4 million, producing a net medical care ratio of 91.8%, compared with 106.0% in 2021. The Insurance segment reported gross profit of $91.0 million, compared with a $47.7 million gross loss in 2021.
Non-Insurance beneficiaries increased from 61,876 to 164,887. Non-Insurance net medical claims incurred were $2.461 billion, compared with $705.4 million in 2021. The Non-Insurance medical care ratio improved to 103.4% from 105.7%, but remained above 100%, indicating claims and related costs exceeded Non-Insurance revenue. The Non-Insurance segment reported a gross loss of $79.4 million.
Operating expenses included $164.3 million of stock-based compensation, $278.7 million of salaries and benefits, and $207.9 million of general and administrative expenses. Clover recorded a $94.2 million premium deficiency reserve benefit in 2022, compared with a $110.6 million expense in 2021. The company also recognized a $23.3 million gain from extinguishing the Seek convertible note and a $9.2 million gain related to its investment in Character Biosciences.
Liquidity, cash flow, debt, and capital resources
At December 31, 2022, consolidated cash, cash equivalents, restricted cash, and investments totaled $555.3 million, including $227.7 million of cash, cash equivalents, restricted cash, and short-term investments and $327.6 million of available-for-sale and held-to-maturity securities. Cash, cash equivalents, and restricted cash totaled $186.2 million, including $82.4 million held in escrow for CMS performance-guarantee requirements.
Cash used in operating activities was $203.9 million. Investing activities provided $95.1 million, primarily from sales and maturities of investment securities. Financing activities used $5.0 million, primarily for treasury stock purchases. The company stated that available liquidity and projected cash flows were expected to satisfy operating and regulatory requirements for at least the next 12 months under current plans, but it may require additional debt or equity financing to support growth or unforeseen needs.
No notes or securities payable were outstanding at December 31, 2022. The company had $73.8 million of current Non-Insurance performance-year obligation and reported operating lease obligations of approximately $5.9 million. Regulated insurance subsidiaries held capital and surplus of $141.4 million, exceeding minimum risk-based capital requirements of approximately $120.6 million. Dividends from regulated subsidiaries to the parent had not been paid and generally require regulatory approval.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the expansion of the Direct Contracting business and higher Insurance membership.
- Insurance economics improved materially: the net medical care ratio declined from 106.0% to 91.8%, and the segment moved from a gross loss to gross profit.
- Non-Insurance scale increased substantially, but the segment remained loss-making with a 103.4% medical care ratio.
- Consolidated net loss narrowed by $248.9 million, although the company remained significantly unprofitable.
- Operating cash burn improved by $78.4 million, but cash from operations remained negative.
- The company’s cash and investment balances declined, while accumulated deficit increased to $1.956 billion and stockholders’ equity decreased to $347.7 million.
- Clover acquired Juxly, an electronic health record software provider, for approximately $16.5 million, recording approximately $10.5 million of goodwill and $5.4 million of developed technology.
- The company strategically reduced ACO REACH participant physicians for the 2023 performance year, reducing participating providers from approximately 1,560 in 21 states at year-end 2022 to approximately 605 in 13 states at the beginning of January 2023.
- Management stated that material weaknesses in internal control identified for 2021 were remediated in the first quarter of 2022. Management and Ernst & Young concluded that internal control over financial reporting was effective as of December 31, 2022.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide a clear formal revenue, earnings, or membership forecast. Management expects continued investment in Clover Assistant, technology infrastructure, clinical programs, provider adoption, geographic expansion, and additional offerings. Management also indicated that it is evaluating additional Medicare value-based models, including MSSP-A and MSSP Enhanced.
Key uncertainties include the company’s ability to achieve profitability and positive operating cash flow; control of medical costs; provider adoption of Clover Assistant; CMS risk-adjustment and benchmark changes; reconciliation of Direct Contracting and ACO REACH results; regulatory capital and dividend restrictions; and the availability and terms of future financing.
The company remains subject to significant healthcare regulation, CMS audits, risk-adjustment data validation, privacy and cybersecurity requirements, state licensing and capital rules, and fraud-and-abuse laws. Clover disclosed SEC subpoenas and cooperation with an SEC investigation relating to certain disclosures and business arrangements, as well as securities class actions and derivative litigation related in part to allegations discussed in the Hindenburg Research article. The matters were described as being in preliminary stages, and the company stated that an unfavorable outcome was not probable or estimable at December 31, 2022.
Other notable risks include concentration of beneficiaries in New Jersey and several other states, continued net losses, potential need for additional capital, volatility and possible Nasdaq delisting if the share price falls below applicable requirements, dilution from equity awards, and concentrated voting control. Class B shares carry ten votes per share, and directors, executives, and affiliates collectively held approximately 66.5% of voting power at December 31, 2022.
Most important facts for investors to verify
- Whether Insurance medical care ratios remain below 100% and whether the improvement is sustainable as membership mix changes.
- Whether the Non-Insurance and ACO REACH business can achieve a medical care ratio below 100% after the provider and beneficiary restructuring.
- Actual cash burn, unrestricted parent-company liquidity, regulatory capital requirements, and the timing of CMS performance-year settlements.
- Final CMS risk-adjustment, benchmark, audit, and reconciliation outcomes, including potential retroactive payment adjustments.
- Status and potential financial or operational consequences of the SEC investigation, securities litigation, derivative actions, and other regulatory matters.
- The extent to which stock-based compensation, unvested awards, and other potential share issuances dilute existing shareholders.
- Provider adoption, usage, and measurable clinical or financial benefits attributable to Clover Assistant.
- Future financing needs and whether additional equity or debt can be obtained without significant dilution or restrictive terms.