Clover Health Investments, Corp. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Clover Health operates Medicare Advantage (MA) insurance plans and, beginning April 1, 2021, a CMS Direct Contracting Entity (DCE) under the Global and Professional Direct Contracting Model. Its strategy centers on the Clover Assistant technology platform, which provides data-driven insights to providers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparative periods ended September 30, 2020.
At September 30, 2021, Clover had 67,281 MA members, 61,818 aligned DCE beneficiaries, and 129,099 total Lives under Clover Management. It operated in 108 MA markets across eight states and planned expansion to 209 counties across nine states in 2022.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $427.2 million | $169.1 million | $1,040.0 million | $506.7 million |
| Premiums earned, net | $203.7 million | $167.1 million | $598.4 million | $501.1 million |
| Direct Contracting revenue | $222.6 million | — | $439.0 million | — |
| Net medical claims incurred | $436.4 million | $144.8 million | $1,109.4 million | $410.5 million |
| Loss from operations | $(149.3) million | $(21.6) million | $(450.2) million | $(25.1) million |
| Net income (loss) | $(34.5) million | $12.8 million | $(400.6) million | $(10.0) million |
| Net loss per share | $(0.08) | $0.06 diluted | $(0.98) | $(0.11) |
- MA net medical care ratio was 102.5% in Q3 and 107.1% for the nine-month period, compared with 86.7% and 81.9%, respectively, in the prior-year periods.
- Direct Contracting margin, defined by the Company as net medical claims divided by Direct Contracting revenue, was 107.1% for the nine months ended September 30, 2021.
- Q3 salaries and benefits increased to $73.4 million, including $46.8 million of stock-based compensation. Nine-month stock-based compensation was $132.5 million.
- Premium deficiency reserve expense was $20.8 million in Q3 and $48.7 million for the nine-month period, compared with a benefit in the prior-year periods.
- Cash and cash equivalents were $202.3 million at September 30, 2021. Cash, cash equivalents, and short-term investments totaled $420.7 million; investment securities totaled approximately $168.0 million.
- Net cash used in operating activities was $202.2 million for the nine months, compared with $58.6 million used in the prior-year period. Investing activities used $329.0 million, while financing activities provided $641.0 million.
- Total assets were $952.5 million and stockholders’ equity was $412.3 million at September 30, 2021. Accumulated deficit was $1.43 billion.
- The Company had $21.6 million outstanding under a convertible note issued by an indirect subsidiary and no outstanding Term Loan Notes after repaying the remaining $20.7 million principal in June 2021.
Material changes versus the prior comparable periods
- Total revenue increased 152.7% in Q3 and 105.3% for the nine-month period, primarily because of the launch of Direct Contracting and MA membership growth.
- MA premiums increased 21.9% in Q3 and 19.4% for the nine-month period, reflecting membership growth from 57,503 at September 30, 2020 to 67,281 at September 30, 2021 and additional risk-adjustment revenue.
- Net medical claims increased 201.3% in Q3 and 170.2% for the nine-month period. Management attributed the increase to Direct Contracting, MA growth, COVID-19-related costs, and utilization of care deferred during earlier pandemic periods.
- The Business Combination with Social Capital Hedosophia Holdings Corp. III closed on January 7, 2021 and was accounted for as a reverse recapitalization. The transaction and PIPE financing generated approximately $666.2 million of net financing proceeds and materially increased cash and equity.
- Legacy convertible securities converted into common stock, associated derivative liabilities were extinguished, and the former Term Loan Facility was repaid. These actions substantially reduced interest expense and debt-related accounting charges.
- All Public and Private Placement Warrants were exercised or redeemed by September 9, 2021; no warrants remained outstanding at September 30, 2021. The quarter included a $115.2 million loss from the change in fair value of warrant liabilities.
Outlook, commentary, risks, and unusual items
Management stated that available cash, investments, and projected cash flows were expected to fund operating and regulatory requirements for the next 12 months under current plans. The filing does not provide formal revenue, earnings, or profitability guidance. Management expects continued investment in technology, clinical programs, geographic expansion, provider networks, staffing, and public-company compliance, and anticipates continued operating losses and higher expenses.
- Direct Contracting exposes Clover to full shared-savings and shared-loss risk, subject to CMS risk-mitigation mechanisms. The filing reported a $220.7 million performance-year receivable and a $244.6 million performance-year obligation, while noting that the maximum future payment under the performance guarantee could not be estimated.
- COVID-19 continued to affect utilization, medical costs, risk adjustment, provider operations, and the ability to document diagnoses. Deferred care and exacerbated conditions contributed to higher 2021 utilization.
- The Company recognized a $48.7 million premium deficiency reserve for the nine months, reflecting expected losses on certain MA contracts.
- Clover disclosed securities class actions, shareholder derivative litigation, SEC subpoenas, and an ongoing inquiry by the U.S. Department of Justice related to matters including provider arrangements, disclosures, and the Clover Assistant. Management stated that losses from the litigation were not probable or estimable at September 30, 2021.
- The filing identifies material risks from medical-cost estimation, CMS risk-adjustment changes, Direct Contracting benchmark and rule changes, regulatory compliance, Star Ratings, provider and Clover Assistant adoption, cybersecurity, competition, and continued losses.
- CMS assigned Clover’s PPO plan a 3.5-star rating for the 2020 measurement year in October 2021. Management stated that the rating could improve reimbursement beginning in 2023, but there is no assurance that the rating will be maintained or improved.
- The Company reported that disclosure controls were effective and that the previously identified material weakness relating to derivative accounting was remediated when the derivative was extinguished upon completion of the Business Combination.
Important facts for investors to verify
- Whether MA and Direct Contracting medical care ratios improve from levels above 100% and whether the businesses can achieve sustainable positive margins.
- The final CMS reconciliation of the 2021 Direct Contracting performance year, including any shared losses, benchmark changes, risk-score adjustments, and payments under the performance guarantee.
- The adequacy of unpaid claims reserves and the potential for further unfavorable claims development, particularly given COVID-19-related utilization and estimation uncertainty.
- The Company’s ongoing cash burn, regulatory capital requirements, and whether additional equity or debt financing will be required despite management’s 12-month liquidity assessment.
- The status and potential financial impact of SEC and DOJ inquiries, securities litigation, derivative actions, and any related provider-arrangement or risk-adjustment matters.
- Whether the 3.5-star PPO rating translates into improved reimbursement and enrollment, and whether Clover can execute its planned 2022 market expansion.
- The scale and future expense impact of equity compensation, including approximately $463.7 million of unrecognized stock-based compensation at September 30, 2021.