Clover Health Investments, Corp. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Clover Health operates Medicare Advantage PPO and HMO plans through its Insurance segment and assumes full risk for aligned Original Medicare beneficiaries through its Non-Insurance segment under CMS’s Direct Contracting Model. The company uses its Clover Assistant technology platform to support provider decision-making and care management.
The filing covers the quarter and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods. As of September 30, 2022, Clover operated Medicare Advantage plans in nine states and 209 counties, with 88,136 Insurance members and 166,432 aligned Non-Insurance beneficiaries, or 254,568 total Lives under Clover Management.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $856.8 million | $427.2 million | $2.578 billion | $1.040 billion |
| Premiums earned, net | $267.9 million | $203.7 million | $814.6 million | $598.4 million |
| Non-Insurance revenue | $585.3 million | $222.6 million | $1.758 billion | $439.0 million |
| Net medical claims incurred | $839.8 million | $436.3 million | $2.560 billion | $1.109 billion |
| Loss from operations | $(73.9) million | $(149.3) million | $(263.8) million | $(450.2) million |
| Net loss | $(75.3) million | $(34.5) million | $(254.8) million | $(400.6) million |
| Net loss per share | $(0.16) | $(0.08) | $(0.54) | $(0.98) |
| Operating cash flow | Not separately provided for the quarter | $5.4 million | $(202.2) million |
Total revenue increased 100.6% in Q3 and 147.9% for the nine-month period. The nine-month operating loss margin was approximately 10.2% and the net loss margin was approximately 9.9%; Q3 margins were approximately 8.6% and 8.8%, respectively.
- Insurance medical care ratio was 91.7% for the nine months ended September 30, 2022, compared with 107.1% in the prior-year period.
- Non-Insurance medical care ratio was 103.3%, compared with 107.1% in the prior-year period.
- Cash and cash equivalents were $382.9 million at September 30, 2022, versus $300.0 million at December 31, 2021.
- Cash, cash equivalents and short-term investments totaled $536.7 million; available-for-sale and held-to-maturity securities totaled approximately $246.1 million.
- Total assets were $1.558 billion and total stockholders’ equity was $392.0 million.
- Debt consisted primarily of the Seek convertible note, with a carrying value of approximately $20.0 million and reported fair value of $23.2 million including accrued interest. The note matures in September 2023 unless otherwise converted, paid, or waived.
Material changes versus the prior comparable period
- Insurance membership increased 31.0%, from 67,281 to 88,136 members, driving a 36.1% increase in nine-month net premiums earned.
- Aligned Non-Insurance beneficiaries increased from 61,818 to 166,432, substantially increasing Non-Insurance revenue and medical claims.
- Net medical claims grew 130.8% for the nine months, primarily because of Non-Insurance beneficiary growth and higher Insurance membership.
- The company recorded an $83.0 million premium deficiency reserve benefit for the nine months, compared with a $48.7 million expense in the prior-year period. The reserve balance was $27.7 million at September 30, 2022, versus $110.6 million at year-end 2021.
- Operating losses improved year over year, but Q3 net loss increased to $75.3 million from $34.5 million because the prior-year quarter included a $115.2 million favorable change in the fair value of warrant liabilities. No warrants remained outstanding in 2022.
- Nine-month operating cash flow improved to $5.4 million from an outflow of $202.2 million. Cash generation benefited from working-capital changes, including a $96.4 million CMS prepayment for October 2022.
- Stock-based compensation remained significant at $125.2 million for the nine months, with approximately $381.0 million of unrecognized expense remaining at September 30, 2022.
- In February 2022, Character Biosciences became an equity-method investment after a financing reduced Clover’s ownership to approximately 25.46%. Clover recognized a $10.2 million nine-month gain on the investment and a $1.0 million Q3 loss.
Guidance, outlook, commentary, risks and unusual items
- Management stated that cash, investments and projected cash flows were expected to satisfy projected operating and regulatory requirements for at least the next 12 months based on current plans, while noting that additional equity or debt financing may be required to support growth or unforeseen needs.
- Clover planned to make Medicare Advantage plans available in 13 additional counties beginning in 2023, subject to CMS approval. The company also planned to strategically reduce the number of participating physicians as its Direct Contracting business transitions to the ACO REACH model in 2023.
- The Non-Insurance business carries full shared savings and shared losses risk. A $655.8 million Non-Insurance performance-year obligation and a $585.9 million receivable were recorded at September 30, 2022. The maximum potential future payments under the performance guarantee cannot be estimated because of stop-loss arrangements, corridors, risk ratings and benchmark trends.
- COVID-19 and related deferred care, utilization, treatment trends and CMS risk-adjustment requirements continued to affect costs and results. Management reported elevated costs during the first three quarters of 2022.
- Claims reserves, risk adjustment revenue, medical-cost trends, Direct Contracting benchmarks, shared savings or losses and premium deficiency reserves involve significant estimates and may develop adversely.
- Regulated insurance subsidiaries are subject to statutory capital requirements and restrictions on dividends to the parent. Neither regulated insurance subsidiary paid dividends during the reported periods.
- The company disclosed SEC subpoenas and cooperation with an SEC investigation concerning certain disclosures and business matters, as well as securities class actions, derivative litigation and related allegations. The cases were in preliminary stages, and the company determined that an unfavorable outcome was not probable or estimable.
- The filing identifies interest-rate risk in the investment portfolio, credit risk, healthcare regulation and Medicare policy risk, competition, provider and member retention risk, execution risk in Clover Assistant, and continued operating losses as significant considerations.
Important facts for investors to verify
- Whether Insurance medical care ratios continue to improve and whether the Non-Insurance medical care ratio can reach sustainable profitability.
- The ultimate shared savings or shared loss outcome and cash requirements associated with the $655.8 million Non-Insurance performance-year obligation.
- Whether current cash and investment balances remain sufficient as operating losses, regulatory capital needs and potential expansion continue.
- The effect of the 2023 transition to ACO REACH, including beneficiary alignment, provider reductions and CMS program terms.
- Development of medical claims reserves, risk-adjustment revenue and the premium deficiency reserve.
- The status and potential financial impact of the SEC investigation and securities and derivative litigation.
- The magnitude and timing of remaining stock-based compensation expense and potential future equity dilution.
- Whether the planned 2023 county expansion receives CMS approval and produces profitable membership growth.