Clover Health Investments, Corp. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. The filing is an annual report, not a standalone fourth-quarter filing. Comparisons are primarily with fiscal 2020.
Business context
Clover operates two reportable segments: Medicare Advantage (MA) insurance and Direct Contracting (DC). Its strategy centers on the Clover Assistant, a physician-enablement platform intended to improve care coordination, risk adjustment, and medical-cost management. The DC business launched in April 2021 under CMS’s Global and Professional Direct Contracting Model, where Clover assumes substantial shared-savings and shared-loss risk but does not act as an insurer.
- At December 31, 2021, Clover managed 129,996 lives: 68,120 MA members and 61,876 aligned DC beneficiaries.
- MA membership increased 17.3% from 58,056 at December 31, 2020.
- As of January 1, 2022, MA plans operated in nine states and 209 counties; the DC provider network covered 22 states.
Financial and operating metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $1,472.0 million | $672.9 million | 118.8% increase |
| MA premiums earned, net | $799.4 million | $665.7 million | 20.1% increase |
| Direct Contracting revenue | $667.6 million | — | New in 2021 |
| MA net medical claims incurred | $838.1 million | $585.4 million | 43.2% increase |
| MA medical care ratio, net | 106.0% | 88.8% | 17.2 percentage-point increase |
| Direct Contracting net medical claims incurred | $705.4 million | — | New in 2021 |
| Direct Contracting margin as defined in filing | 105.7% | — | New in 2021 |
| Loss from operations | $(637.0) million | $(92.7) million | Loss increased |
| Net loss | $(587.8) million | $(136.4) million | Loss increased 330.9% |
| Net loss per share | $(1.42) | $(1.54) | Improved per share due primarily to share growth |
| Net cash used in operating activities | $(282.3) million | $(118.5) million | Higher cash outflow |
The MA and DC segments both generated negative gross results before corporate costs: MA gross loss was $47.7 million and DC gross loss was $37.8 million. The filing’s Direct Contracting margin is defined as claims divided by revenue; therefore, 105.7% indicates claims exceeded revenue, not a positive profit margin.
Profitability, liquidity, debt and capital
- Total operating expenses were $2.109 billion, including $110.6 million of premium deficiency reserve expense, compared with a $17.1 million benefit in 2020.
- Salaries and benefits rose to $260.5 million, driven substantially by $163.7 million of stock-based compensation, compared with $7.1 million in 2020.
- Cash, cash equivalents and short-term investments totaled $593.8 million at year-end. Investment securities totaled approximately $197.4 million at fair value.
- Net cash provided by financing activities was $925.4 million, primarily from $666.2 million of business-combination proceeds and $283.8 million of net proceeds from a November 2021 equity offering.
- Operating cash flow remained negative at $282.3 million. Investing cash flow was negative $435.4 million, principally because the company purchased investment securities.
- The $60.0 million term-loan facility was repaid and terminated in June 2021. Remaining debt primarily consisted of the Seek convertible note, with approximately $22.0 million carrying value at year-end and $20.0 million principal due in 2024.
- Known commitments included a $36.9 million DC performance-year obligation, $7.9 million of operating lease obligations and the Seek note.
- Management stated that cash, investments and projected cash flows were expected to fund operating and regulatory requirements for at least the next 12 months, but additional financing may be required to support growth.
Material changes versus FY2020
- Revenue more than doubled because of the April 2021 launch of Direct Contracting, while MA premiums grew 20.1%.
- Medical costs increased faster than MA premiums, resulting in an MA MCR above 100%. Management attributed the deterioration to COVID-19 treatment costs and the return of utilization deferred during 2020.
- The company recorded a $110.6 million premium deficiency reserve, including a reserve for expected 2022 losses.
- The January 2021 business combination converted preferred stock and convertible securities into common stock and materially increased cash and equity capital.
- Warrants were exercised or redeemed during 2021; no warrants remained outstanding at year-end.
- In November 2021, Clover issued 52.2 million Class A shares and reported $283.8 million of net proceeds.
- CMS awarded the MA PPO plan a 3.5-Star Rating for the 2020 measurement year, while the HMO plan had a 3.0-Star Rating. The PPO rating could affect reimbursement beginning in 2023.
Guidance, outlook, commentary and risks
- Management expected 2022 average DC beneficiaries to more than double the 2021 average and pursued continued geographic expansion of both MA and DC operations. These are expectations, not guarantees.
- CMS announced in February 2022 that the DC Model would transition to the ACO REACH Model. Clover was evaluating the changes and could transition only if it met applicable requirements.
- COVID-19 remains a significant risk through higher medical utilization, delayed care, reduced risk-adjustment documentation, potential Star Rating effects and operational disruption.
- The company assumes significant medical-cost and benchmark risk. CMS risk-adjustment settlements, audits, coding changes, benchmark revisions and final DC reconciliation could materially change revenue and earnings.
- Clover disclosed an ongoing DOJ inquiry and SEC subpoenas concerning disclosures and aspects of its business, including matters discussed in the Hindenburg Research article. Securities class actions, derivative litigation and provider payment disputes were also pending; management stated losses were not probable or estimable.
- Ernst & Young issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting because of a material weakness involving review of stock-based compensation assumptions. The company estimated that approximately $13.2 million of expense was overstated across the first three quarters and adjusted the fourth quarter.
- The company has incurred recurring net losses and negative operating cash flow, and expects continued investment in technology, clinical programs, marketing, provider networks, geographic expansion and public-company infrastructure.
- Approximately 81.8% of voting power was controlled by directors, officers, principal stockholders and affiliates as of December 31, 2021. Class B shares carry ten votes per share versus one vote for Class A shares.
- The filing identifies substantial risks from competition, provider-network development, adoption of Clover Assistant, cybersecurity and privacy, regulatory compliance, capital requirements at regulated subsidiaries, litigation and extreme stock-price volatility.
Most important facts for investors to verify
- Whether MA MCR and DC medical-cost performance improve materially from the 2021 levels above 100%.
- The final CMS reconciliation, benchmark, risk-adjustment settlements and any shared losses or savings under the DC Model or ACO REACH transition.
- Whether the $110.6 million premium deficiency reserve adequately covers expected 2022 MA losses.
- The company’s quarterly operating cash burn, remaining liquidity and need for additional equity or debt financing.
- Progress in remediating the material weakness and whether auditors provide an unqualified internal-control opinion in subsequent filings.
- Developments in the DOJ inquiry, SEC investigation, securities litigation, derivative actions and provider disputes, including any settlement or reserve requirements.
- Actual beneficiary growth, retention, Clover Assistant adoption and provider engagement, rather than management’s forward-looking targets.
- The effect of the 3.5-Star PPO rating and subsequent CMS rating changes on reimbursement, benefits and enrollment.