Oscar Health, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; filed August 13, 2021. Oscar sells Individual & Family, Small Group, and Medicare Advantage health plans and provides technology and administrative services through partnerships.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $529.3 million | $115.3 million | $898.7 million | $203.4 million |
| Premiums earned, net of ceded reinsurance | $528.2 million | $113.8 million | $896.7 million | $199.0 million |
| Operating loss | $(72.3) million | $(39.4) million | $(134.8) million | $(135.3) million |
| Net loss | $(73.1) million | $(40.9) million | $(160.4) million | $(137.8) million |
| Adjusted EBITDA, non-GAAP | $(50.4) million | $(28.8) million | $(76.7) million | $(115.0) million |
| Medical loss ratio | 82.4% | 60.7% | 78.7% | 71.3% |
| InsuranceCo administrative expense ratio | 19.8% | 23.1% | 19.8% | 23.3% |
| InsuranceCo combined ratio | 102.2% | 83.8% | 98.5% | 94.6% |
At June 30, 2021, Oscar reported $1.672 billion of cash and cash equivalents and $1.418 billion of investments, including short- and long-term investments. Total assets were $3.706 billion and current liabilities were $1.973 billion. The balance sheet included $1.044 billion of risk adjustment transfer payable. The company reported no long-term debt and no borrowings under its $200 million revolving credit facility. The facility is secured by substantially all company and guarantor assets and carries financial covenants.
For the first half, operating cash flow was $373.0 million, investing cash flow was $(742.3) million, and financing cash flow was $1.215 billion. Cash and restricted cash increased $845.3 million. Positive operating cash flow reflected, among other items, increases in risk adjustment payable and benefits payable; it should not be read as equivalent to operating profitability.
Changes versus comparable periods
- Q2 revenue rose 359% year over year, largely reflecting higher membership, market expansion, plan mix, and lower quota-share reinsurance cessions. Membership was 563,114, up 35% from 417,480 a year earlier.
- Q2 net loss widened to $73.1 million from $40.9 million. Claims incurred, net, increased to $419.9 million from $55.5 million, as membership grew, reinsurance ceded less, and utilization and COVID-19-related costs increased from unusually depressed Q2 2020 levels.
- Q2 adjusted EBITDA loss also widened. For the six-month period, adjusted EBITDA loss narrowed versus 2020, while GAAP net loss increased, including a $20.2 million loss on extinguishment of debt.
- The combined ratio exceeded 100% in Q2, indicating insurance claims and administrative costs exceeded the relevant premium base for that period. The administrative expense ratio improved, but the higher medical loss ratio more than offset that improvement.
Outlook, commentary, risks, and unusual items
- Management said cash, cash equivalents, and investments held by Holdco, excluding restricted cash, were expected to fund operating requirements for at least the next 12 months. The company also said its insurance subsidiaries exceeded applicable minimum statutory capital and surplus requirements; combined statutory capital and surplus was $501.6 million at June 30, 2021.
- Oscar expected to make an approximately $665 million payment into the 2020 policy-year risk adjustment program in Q3 2021, which could materially affect operating cash flow. Management noted timing of risk adjustment and reinsurance receipts can cause significant period-to-period cash-flow fluctuations.
- The March 2021 IPO generated approximately $1.3 billion in net proceeds. Oscar used part of the proceeds to repay its term loan in full, recognizing a $20.2 million extinguishment loss, and retained the remainder in cash and investments.
- Medical utilization, COVID-19 infections and variants, deferred care returning to the system, and testing and treatment costs create uncertainty in claims and margins. Management said it could not accurately estimate COVID-19’s future net effect on claims.
- Other significant risks include uncertainty in risk adjustment estimates and claims reserves; dependence on ACA marketplaces and subsidies; regulatory and capital requirements; reinsurance availability and counterparty performance; provider concentration and network relations; cyber and privacy risks; and the company’s history of losses. No specific financial guidance is provided in the supplied filing text.
- The filing reports ongoing regulatory reviews and ordinary-course litigation and claims, but management stated it did not believe pending proceedings would have a material effect. The company noted that losses from some legal or regulatory matters could be difficult to estimate.
- The company’s dual-class shares give Class B holders 20 votes per share; the filing reported that Thrive Capital and co-founder Joshua Kushner controlled approximately 75.1% of voting power at June 30, 2021. IPO lock-up restrictions were scheduled to expire August 16, 2021, potentially increasing shares available for sale.
Important facts for investors to verify
- Whether the expected approximately $665 million risk adjustment payment occurred as anticipated and its effect on subsequent liquidity and cash flow.
- How claims utilization, COVID-19-related costs, and risk-adjustment estimates developed after June 30, including any reserve revisions.
- Whether membership growth and new partnerships translate into improved underwriting results, particularly given Q2’s 102.2% combined ratio.
- The composition and availability of cash and investments across Holdco and regulated insurance subsidiaries, including restrictions on transferring subsidiary capital.
- How the scheduled lock-up expiration, equity compensation, and dual-class voting structure affect share supply, dilution, and governance.