Clover Health Investments, Corp. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2022; filed August 8, 2022. The interim financial statements are unaudited. Clover operates Medicare Advantage insurance plans and a Non-Insurance business participating in CMS’s Direct Contracting Model, which is expected to transition to ACO REACH in 2023.
Business Context and Operating Scale
- Insurance operations covered 86,629 Medicare Advantage members at June 30, 2022, across nine states and 209 counties.
- Non-Insurance operations had 168,777 aligned beneficiaries, approximately 1,810 contracted participating providers, and approximately 1,630 preferred providers and facilities.
- Total Lives under Clover Management were 255,406 at June 30, 2022.
- Management continued to emphasize Clover Assistant, data-driven care coordination, member growth, and improvement in medical cost performance.
Financial Performance
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $846.7 million, up 105.3% | $1.721 billion, up 180.9% |
| Premiums earned, net | $268.5 million, up 37.4% | $546.7 million, up 38.5% |
| Non-Insurance revenue | $577.4 million, up 166.8% | $1.172 billion, up 441.8% |
| Net medical claims incurred | $858.8 million, up 87.3% | $1.721 billion, up 155.7% |
| Loss from operations | $(102.5) million | $(189.8) million |
| Net loss | $(104.2) million, or $(0.22) per share | $(179.5) million, or $(0.38) per share |
| Net loss margin | Approximately 12.3% of revenue | Approximately 10.4% of revenue |
- Insurance medical care ratio was 94.3% for the six months ended June 30, 2022, compared with 109.4% in the prior-year period.
- Non-Insurance medical care ratio was 102.9%, compared with 111.8% in the prior-year period.
- Salaries and benefits were $70.5 million in the quarter and $139.6 million year to date. Stock-based compensation was $41.9 million in the quarter and $82.6 million year to date.
- General and administrative expenses were $47.0 million in the quarter and $104.7 million year to date.
- A premium deficiency reserve benefit of $27.7 million in the quarter and $55.3 million year to date reduced operating expenses; the comparable prior-year periods included reserve expense of $27.9 million.
Cash Flow, Liquidity, Debt, and Capitalization
- Cash and cash equivalents were $324.5 million at June 30, 2022, compared with $300.0 million at December 31, 2021.
- Cash, cash equivalents, and short-term investments totaled $428.5 million. Available-for-sale and held-to-maturity securities totaled $254.4 million.
- Operating cash flow was $(96.2) million for the six months, compared with $(157.0) million in the prior-year period.
- Investing cash flow was $125.9 million, primarily reflecting proceeds from maturities and sales of investments exceeding purchases.
- Financing cash flow was $(5.2) million, primarily due to $6.0 million of treasury stock purchases.
- Seek’s convertible note had approximately $20.0 million of carrying principal and $22.8 million of carrying value including accrued interest. It bears 8.0% interest and matures in September 2023, although the Company expects it to be terminated upon Seek’s dissolution.
- Total assets were $2.063 billion, total liabilities were $1.636 billion, and stockholders’ equity was $426.9 million at June 30, 2022.
- Management stated that available cash, investments, and projected cash flows are expected to fund operating and regulatory requirements for at least the next 12 months, while noting that additional financing may be required to support growth or unforeseen needs.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by a 30.1% increase in Insurance members and significant expansion of aligned Non-Insurance beneficiaries from 62,025 to 168,777.
- Net loss improved from $317.6 million to $104.2 million for the quarter and from $366.0 million to $179.5 million year to date.
- The improvement reflected the absence of prior-year warrant fair-value losses, lower interest and debt-discount amortization, improved medical care ratios, and the premium deficiency reserve benefit.
- Non-Insurance revenue and claims increased substantially because the Direct Contracting business operated for a full year in 2022 and had a much larger beneficiary base.
- Character Biosciences was deconsolidated after a February 2022 financing reduced Clover’s ownership to approximately 25.46%; Clover recorded a $1.2 million investment loss in the quarter and an $11.2 million gain year to date related to the change in accounting and its equity-method investment.
- Investment securities increased, while unrealized losses on available-for-sale securities reached $8.4 million, principally due to interest-rate and credit-spread changes; management reported that all securities were investment grade.
Outlook, Risks, Contingencies, and Unusual Items
- Clover announced plans to offer Medicare Advantage plans in 13 additional counties beginning in 2023, subject to CMS approval, potentially reaching 220 counties across eight states.
- COVID-19 and related variants continued to increase medical utilization and costs, particularly among the Company’s elderly membership. Management also cited deferred care and increased CMS inpatient reimbursement for COVID-19 diagnoses as factors affecting medical costs.
- The Non-Insurance performance year receivable was $1.165 billion and the related current obligation was $1.214 billion. The Company assumes full risk for shared savings and losses under the Direct Contracting arrangement and cannot estimate the maximum potential future payments under its performance guarantee.
- Management’s key estimates include unpaid claims, risk-adjustment revenue, premium deficiency reserves, medical-cost trends, Direct Contracting benchmarks, risk scores, and recoveries from third parties. Actual results may differ materially from estimates.
- The Company faces securities class actions, shareholder derivative actions, and SEC subpoenas concerning disclosures and matters discussed in a 2021 Hindenburg Research article. The cases remain in preliminary stages; the Company stated that an unfavorable outcome is not probable or estimable and has recorded no related liability.
- Regulated insurance subsidiaries are subject to statutory capital requirements and restrictions on dividends to the parent. Neither regulated insurance subsidiary paid dividends as of June 30, 2022.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether improved Insurance and Non-Insurance medical care ratios are sustainable after COVID-19 effects, utilization trends, risk adjustment, and benchmark updates.
- The economic substance and future cash requirements associated with the $1.214 billion Non-Insurance performance year obligation and related CMS performance guarantee.
- Actual cash burn, statutory capital levels, and the amount of cash accessible at the parent company versus regulated insurance subsidiaries.
- Progress toward the 2023 ACO REACH transition and the planned Medicare Advantage geographic expansion, including CMS approvals.
- Potential dilution from approximately $388.9 million of unrecognized stock-based compensation and outstanding options, RSUs, and PRSUs.
- Developments in the SEC investigation, securities litigation, derivative litigation, and any related financial or governance consequences.