CLOVER HEALTH INVESTMENTS, CORP. /DE (CLOV) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2024, contained in this Annual Report on Form 10-K (the "Form 10-K"). The following discussion and analysis does not include certain items related to the year ended December 31, 2023, including year-to-year comparisons between the year ended December 31, 2023 and the year ended December 31, 2022. For a discussion of these items and comparison of our results of operations for the fiscal years ended December 31, 2023 and December 31, 2022, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 14, 2024. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements" for additional information. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we," "us," "our," "Clover," "Clover Health," and the "Company" mean the business and operations of Clover Health Investments, Corp. and its consolidated subsidiaries.
Overview
At Clover Health, our vision is to empower every physician with the technology to identify, manage, and treat chronic diseases earlier. Our strategy is to improve the care of people with Medicare, develop wide physician networks, and provide technology to help empower physicians. Our proprietary software platform, Clover Assistant (licensed externally as Counterpart Assistant), helps us execute this strategy by enabling physicians to detect, identify, and manage chronic diseases earlier than they otherwise could. This technology is a cloud-based software platform that provides physicians with access to data-driven and personalized insights for the patients they treat.
We operate Preferred Provider Organization ("PPO") and Health Maintenance Organization ("HMO") Medicare Advantage ("MA") plans for Medicare-eligible individuals. We aim to provide high-quality, affordable healthcare for all Medicare beneficiaries. Among plans with similar major characteristics, we offer most members in our MA plans (the "members") among the lowest average out-of-pocket costs for primary care provider and specialist co-pays in their markets. We strongly believe in providing our members provider choice, and we consider our PPO plans to be our flagship insurance product. An important feature of our MA product is wide network access. We believe the use of Clover Assistant and related data insights allows us to improve clinical decision-making through a highly scalable platform. At December 31, 2024, we operated our MA plans in five states and 200 counties, with 82,664 members.
2024 Highlights
2025 Annual Election Period Results
On January 13, 2025, the Company announced a 27% year-over-year growth of its MA membership during the most recent Annual Election Period ("AEP"). The Company entered 2025 with over 100,000 members, approximately 95% of whom are enrolled in Clover’s flagship PPO plans.
Geographic Presence
Beginning in 2025, our MA plans will be available in a total of 200 counties and 5 states.
CMS Star Ratings
In October 2023, CMS initially released the Company’s 2024 Star ratings, which related to the 2022 measurement year and would have impacted the 2025 payment year. For both of the Company's plans (PPO and HMO), CMS had awarded a rating of 3.0 Stars for the measurement year 2022, which represented a 0.5 Star rating decrease for both plans from the 2021 measurement year. Subsequently, on June 14, 2024, the Company announced that CMS had recalculated the Company's 2024 Star ratings for its PPO Medicare Advantage plans for the 2025 payment year, and had increased such plans’ rating by 0.5 Star, to a revised rating of 3.5 Stars. Pursuant to CMS’s Medicare Advantage Star ratings system, CMS annually awards between 1.0 and 5.0 Stars to Medicare Advantage plans based on performance in several categories. In the calendar year 2024, the Company was paid on the basis of 3.5 Stars for both our PPO and HMO plans.
On October 10, 2024, the Company announced that CMS had increased the Star rating of its PPO Medicare Advantage plans to 4.0 Stars for 2025, which will affect payment year 2026. In payment year 2026, the Company expects to experience a general 5% quality bonus increase in benchmark rates as a result of its PPO contract being rated 4.0 Stars, in accordance with CMS regulations. Increased quality bonus payments enable the Company to further reinvest in more competitive benefits, which the Company believes will deliver greater value to its members while fueling continued membership growth. Additionally, CMS increased the rating of Clover’s HMO MA plan to 3.5 Stars. As discussed earlier, as of December 31, 2024, over 95% of the Company's insurance members are members of our PPO Medicare Advantage Plans.
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Counterpart Health
During the second quarter of 2024, the Company launched Counterpart Health, Inc., or ("Counterpart Health"), a subsidiary of the Company which houses a new software-as-a-service and tech enabled services solution to bring the power of Counterpart Assistant technology to external payors and providers serving the Medicare eligible population. This external offering aims to equip clinician users with our already built, clinician-centric, and AI-powered care management platform. Strategically, Counterpart Health aims to extend the benefits of data-driven proven technology and personalized care to a wider audience, enabling enhanced patient outcomes and reduced healthcare costs across the nation. Counterpart Health is complementary to Clover Health, and enables the Company to deploy and expand the reach of its existing technology asset for new potential growth and high margin business opportunities, with low startup costs. Revenue from our Counterpart Health SaaS and tech enabled services is included within Other income on our consolidated statements of operations and comprehensive loss.
ACO REACH
We previously participated as a Direct Contracting Entity ("DCE") in the Centers for Medicare and Medicaid Services ("CMS") Accountable Care Organization Realizing Equity, Access, and Community Health Model ("ACO REACH Model" or "ACO REACH"). On December 1, 2023, the Company notified CMS that it will no longer participate as a REACH ACO in connection with the 2024 performance year. The remaining activity recognized during 2024 directly relates to prior performance years with CMS. As of January 1, 2024, this line of business met the definition of discontinued operations, and prior period amounts have been updated to conform to the current period presentation. At December 31, 2024, the Company did not anticipate any further material activity related to its discontinued operations. Refer to Note 22 "Discontinued Operations" in the accompanying notes to the consolidated financial statements included in this Form 10-K for additional information.
Key Performance Measures
Starting in the first quarter of 2024, we manage our operations based on one reportable segment: Insurance. Through our Insurance segment, we provide PPO and HMO plans to Medicare Advantage members in several states. All other clinical services and all corporate overhead not included in the reportable segments are included in Corporate/Other.
The segment grouping is consistent with the information used by our Chief Executive Officer (identified as our chief operating decision maker) ("CODM")) to assess performance and allocate the Company's resources.
We review several key performance measures, discussed below, to evaluate our business and results, measure performance, identify trends, formulate plans, and make strategic decisions. We believe that the presentation of such metrics is useful to management and counterparties to model the performance of healthcare companies such as Clover.
Through our Insurance segment, we provide PPO and HMO plans to members in several states. We seek to improve care and lower costs for our members by empowering providers with intuitive data-driven, personalized insights to support treatment of members through our software platform, Clover Assistant.
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The following table presents key financial measures for the periods indicated:
| Year Ended December 31, | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||||||||||||||
| Total | PMPM (1) | Total | PMPM (1) | ||||||||||||||||||||
| (amounts in thousands, except PMPM amounts) | |||||||||||||||||||||||
| Insurance members at period end (#) | 82,664 | N/A | 81,205 | N/A | |||||||||||||||||||
| Premiums earned, gross | $ | 1,345,280 | $ | 1,392 | $ | 1,236,213 | $ | 1,250 | |||||||||||||||
| Premiums earned, net | $ | 1,344,881 | $ | 1,391 | $ | 1,235,769 | $ | 1,250 | |||||||||||||||
| Insurance medical claim expense incurred, gross | $ | 1,012,905 | $ | 1,048 | $ | 1,004,454 | $ | 1,016 | |||||||||||||||
| Insurance net medical claims incurred | $ | 1,010,289 | $ | 1,045 | $ | 1,003,683 | $ | 1,015 | |||||||||||||||
| Medical care ratio, gross | 75.3 | % | N/A | 81.3 | % | N/A | |||||||||||||||||
| Medical care ratio, net | 75.1 | % | N/A | 81.2 | % | N/A | |||||||||||||||||
| Benefits expense ratio, gross | 81.3 | % | N/A | 86.5 | % | N/A | |||||||||||||||||
| Benefits expense ratio, net | 81.2 | % | N/A | 86.5 | % | N/A | |||||||||||||||||
| Adjusted SG&A | $ | 294,713 | N/A | $ | 297,508 | N/A | |||||||||||||||||
| Adjusted EBITDA | $ | 70,091 | N/A | $ | (41,555) | N/A | |||||||||||||||||
| Adjusted Net income (loss) from continuing operations | $ | 68,243 | N/A | $ | (48,883) | N/A |
(1) Calculated per member per month ("PMPM") figures are based on the applicable amount divided by member months in the given period. Member months represents the number of months members are enrolled in a Clover Health plan in the period.
Membership and associated premiums earned and medical claim expenses.
We define new and returning members on a calendar year basis. Any member who is active on July 1 of a given year is considered a returning member in the following year. Any member who joins a Clover plan after July 1 in a given year is considered a new member for the entirety of the following calendar year. We view our number of members and associated PMPM premiums earned and medical claim expenses, in the aggregate and on a PMPM basis, as useful metrics to assess our financial performance. Member growth and retention aligns with our mission, drives our Total revenues, expands brand awareness, deepens our market penetration, creates additional opportunities to inform our data-driven insights to improve care and decrease medical claim expenses, and generates additional data to continue to improve the functioning of Clover Assistant. Among other things, the longer a member is enrolled in one of our insurance plans, the more data we collect and synthesize and the more actionable insights we generate. We believe these data-driven insights lead to better care delivery as well as improved identification, documentation and management of members' chronic conditions, helping to lower PMPM medical claim expenses.
Premiums earned, gross.
Premiums earned, gross is the amount received, or to be received, for insurance policies written by us during a specific period of time without reduction for premiums ceded to reinsurance. We believe premiums earned, gross provides useful insight into the gross economic benefit generated by our business operations and allows us to evaluate our underwriting performance without regard to changes in our underlying reinsurance structure. Premiums earned, gross excludes the effects of premiums ceded to reinsurers, and therefore should not be used as a substitute for Premiums earned, net, Total revenues, or any other measure presented in accordance with GAAP.
Premiums earned, net.
Premiums earned, net represents the earned portion of our premiums earned, gross, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements. Premiums are earned in the period in which members are entitled to receive services, and are net of estimated uncollectible amounts, retroactive membership adjustments, and any adjustments to recognize rebates under the minimum benefit ratios required under the ACA.
We earn premiums through our plans offered under contracts with CMS. We receive premiums from CMS on a monthly basis based on our actuarial bid and the risk-adjustment model used by CMS. Premiums anticipated to be received within twelve months based on the documented diagnostic criteria of our members are estimated and included in revenues for the period, including the member months for which the payment is designated by CMS.
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Premiums ceded is the amount of premiums earned, gross ceded to reinsurers. From time to time, we enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity for growth. Under these agreements, the "reinsurer," agrees to cover a portion of the claims of another insurer, i.e., us, the "primary insurer," in return for a portion of their premium. Ceded earned premiums are earned over the reinsurance contract period in proportion to the period of risk covered. The volume of our ceded earned premium is impacted by the level of our premiums earned, gross and any decision we make to adjust our reinsurance agreements.
Insurance gross medical claims incurred.
Insurance gross medical claims incurred reflects claims incurred, excluding amounts ceded to reinsurers, and the costs associated with processing those claims. We believe gross medical claims incurred provides useful insight into the gross medical expense incurred by members and allows us to evaluate our underwriting performance without regard to changes in our underlying reinsurance structure.
Insurance gross medical claims incurred excludes the effects of medical claims and associated costs ceded to reinsurers, and therefore should not be used as a substitute for Net claims incurred, Total operating expenses, or any other measure presented in accordance with GAAP.
Insurance net medical claims incurred.
Insurance net medical claims incurred are our medical expenses and consist of the costs of claims, including the costs incurred for claims net of amounts ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential catastrophic losses. These expenses generally vary based on the total number of members and their utilization rate of our services.
Medical care ratio, gross and net.
We calculate our medical care ratio ("MCR") by dividing total Insurance medical claim expenses incurred by premiums earned, in each case on a gross or net basis, as the case may be, in a given period. We believe our MCR is an indicator of our gross margin for our Insurance plans and the ability of our Clover Assistant platform to capture and analyze data over time to generate actionable insights for returning members to improve care and reduce medical expenses.
Non-GAAP Financial Measures
We use non-GAAP measures in this Form 10-K, including Insurance BER, Adjusted SG&A and Adjusted EBITDA. These non-GAAP financial measures are provided to enhance the reader's understanding of Clover Health's past financial performance and our prospects for the future. Clover Health's management team uses these non-GAAP financial measures in assessing Clover Health's performance, as well as in planning and forecasting future periods. These non-GAAP financial measures are not computed according to generally accepted accounting principles in the United States ("GAAP"), and the methods we use to compute them may differ from the methods used by other companies. Non-GAAP financial measures are supplemental to and should not be considered a substitute for financial information presented in accordance with GAAP and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
For a description of these non-GAAP financial measures, including the reasons management uses such measures, and the reconciliations of these non-GAAP financial measures to the comparable GAAP measures, please see "Benefits expense ratio, gross and net", "Adjusted SG&A" and "Adjusted EBITDA" below.
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Benefits expense ratio, gross and net.
Benefits expense ratio ("Insurance BER") is a non-GAAP financial measure. We calculate our Insurance BER by taking the total of Insurance net medical expenses incurred and quality improvements, and dividing that total by premiums earned on a net basis, in a given period. Quality improvements include expenses associated with activities that improve health outcomes, as defined by the U.S. Department of Health and Human Services ("HHS"), as well as those directly tied to enhancing healthcare quality, such as the Company's spend on health information technology, wellness and prevention programs, initiatives to reduce hospital readmissions, and our clinically focused Member Rewards program. We believe our Insurance BER is useful to management, investors, and others because it offers a clearer and more accurate representation of our investment in healthcare quality and member engagement, and gives a comprehensive view of costs related to maintaining and improving the quality of care of our members, which is crucial for sustaining member satisfaction and adherence to treatment regimens.
The table below provides a reconciliation of Net medical claims incurred and Premiums earned, net, both of which are GAAP measures, to Insurance BER, a non-GAAP measure.
| Year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||
| (in thousands) | ||||||||||
| Net medical claims incurred, gross (GAAP): | $ | 1,012,905 | $ | 1,004,454 | ||||||
| Adjustments | ||||||||||
| Quality improvements | 81,144 | 64,943 | ||||||||
| Benefits expense, gross (non-GAAP) | $ | 1,094,049 | $ | 1,069,397 | ||||||
| Premiums earned, gross (GAAP) | $ | 1,345,280 | $ | 1,236,213 | ||||||
| Benefits expense ratio, gross (non-GAAP) | 81.3 | % | 86.5 | % |
| Year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||
| (in thousands) | ||||||||||
| Net medical claims incurred, net (GAAP): | $ | 1,010,289 | $ | 1,003,683 | ||||||
| Adjustments | ||||||||||
| Quality improvements | 81,144 | 64,943 | ||||||||
| Benefits expense, net (non-GAAP) | $ | 1,091,433 | $ | 1,068,626 | ||||||
| Premiums earned, net (GAAP) | $ | 1,344,881 | $ | 1,235,769 | ||||||
| Benefits expense ratio, net (non-GAAP) | 81.2 | % | 86.5 | % |
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Adjusted SG&A
Adjusted Salaries and benefits plus General and Administrative expenses ("SG&A") is a non-GAAP financial measure defined by us as total SG&A less stock-based compensation and non-recurring legal expenses and settlements. We believe that Adjusted SG&A provides management, investors, and others a useful view of our operating spend as it excludes non-cash, stock-based compensation and expenses related to investments that management believes do not reflect the Company's core operating expenses. We believe that Adjusted SG&A as a percentage of Total revenues is useful to management, investors, and others because it allows us to measure our operational leverage as revenue scales.
The table below provides a reconciliation of Total SG&A, a GAAP financial measure, to Adjusted SG&A, a non-GAAP measure:
| Year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||
| (in thousands) | ||||||||||
| Salaries and benefits | $ | 232,454 | $ | 257,157 | ||||||
| General and administrative expenses | 176,480 | 183,089 | ||||||||
| Total SG&A (GAAP) | 408,934 | 440,246 | ||||||||
| Adjustments | ||||||||||
| Stock-based compensation | (114,331) | (140,931) | ||||||||
| Non-recurring legal expenses and settlements | 110 | (1,807) | ||||||||
| Adjusted SG&A (non-GAAP) | $ | 294,713 | $ | 297,508 | ||||||
| Total revenues (GAAP) | $ | 1,371,131 | $ | 1,260,543 | ||||||
| Adjusted SG&A (non-GAAP) as a percentage of Total revenues | 21 | % | 24 | % |
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure defined by us as net loss from continuing operations before depreciation and amortization, loss on investment, interest expense, change in fair value of warrants, stock-based compensation, premium deficiency reserve benefit, restructuring costs, impairment of goodwill and other intangible assets, and non-recurring legal expenses and settlements. Adjusted EBITDA is a key measure used by our management team and the board of directors to understand and evaluate our operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operating plans. In particular, we believe that the exclusion of the amounts eliminated in calculating Adjusted EBITDA provide useful measures for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides investors and others useful information to understand and evaluate our operating results in the same manner as our management and our board of directors.
The table below provides a reconciliation of Net loss from continuing operations, a GAAP financial measure, to Adjusted EBITDA, a non-GAAP financial measure:
| Year ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||
| (in thousands) | ||||||||||
| Net loss from continuing operations (GAAP): | $ | (46,266) | $ | (210,148) | ||||||
| Adjustments | ||||||||||
| Interest expense | — | 7 | ||||||||
| Depreciation and amortization | 1,331 | 2,509 | ||||||||
| Change in fair value of warrants | 50 | 86 | ||||||||
| Loss on investment | 467 | 4,726 | ||||||||
| Stock-based compensation | 114,331 | 140,931 | ||||||||
| Premium deficiency reserve benefit | — | (7,239) | ||||||||
| Restructuring costs | 288 | 9,821 | ||||||||
| Non-recurring legal expenses and settlements | (110) | 1,807 | ||||||||
| Impairment of goodwill and other intangible assets | — | 15,945 | ||||||||
| Adjusted EBITDA (non-GAAP) | $ | 70,091 | $ | (41,555) |
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Adjusted Net income (loss) from continuing operations
Adjusted Net income (loss) from continuing operations is a non-GAAP financial measure defined by us as net loss from continuing operations before stock-based compensation, premium deficiency reserve benefit, restructuring costs, non-recurring legal expenses and settlement, and impairment of goodwill and other intangible assets. Adjusted Net income (loss) from continuing operations is a key measure used by our management team and the board of directors to understand and evaluate our operating performance and trends. We believe that Adjusted Net income (loss) from continuing operations is helpful to investors in assessing the Company’s financial performance in the same manner as our management and our board of directors.
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| (in thousands) | ||||||
| Net loss from continuing operations (GAAP) | $ | (46,266) | $ | (210,148) | ||
| Adjustments | ||||||
| Stock-based compensation | 114,331 | 140,931 | ||||
| Premium deficiency reserve benefit | — | (7,239) | ||||
| Restructuring costs | 288 | 9,821 | ||||
| Non-recurring legal expenses and settlements | (110) | 1,807 | ||||
| Impairment of goodwill and other intangible assets | — | 15,945 | ||||
| Adjusted Net income (loss) from continuing operations (non-GAAP) | $ | 68,243 | $ | (48,883) |
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Results of Operations
Comparison of the Years ended December 31, 2024 and 2023
The following table summarizes our consolidated results of operations for the years ended December 31, 2024 and 2023. The period-to-period comparison of results is not necessarily indicative of results for future periods.
| Year ended December 31, | Change between2024 and 2023 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ($) | (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenues | ||||||||||||||||
| Premiums earned, net (Net of ceded premiums of $399 and $444 for the years ended December 31, 2024 and 2023, respectively) | $ | 1,344,881 | $ | 1,235,769 | $ | 109,112 | 8.8 | % | ||||||||
| Other income | 26,250 | 24,774 | 1,476 | 6.0 | ||||||||||||
| Total revenues | 1,371,131 | 1,260,543 | 110,588 | 8.8 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Net medical claims incurred | 1,006,327 | 1,004,590 | 1,737 | 0.2 | ||||||||||||
| Salaries and benefits | 232,454 | 257,157 | (24,703) | (9.6) | ||||||||||||
| General and administrative expenses | 176,480 | 183,089 | (6,609) | (3.6) | ||||||||||||
| Impairment of goodwill and other intangible assets | — | 15,945 | (15,945) | * | ||||||||||||
| Premium deficiency reserve benefit | — | (7,239) | 7,239 | * | ||||||||||||
| Depreciation and amortization | 1,331 | 2,509 | (1,178) | (47.0) | ||||||||||||
| Restructuring costs | 288 | 9,821 | (9,533) | (97.1) | ||||||||||||
| Total operating expenses | 1,416,880 | 1,465,872 | (48,992) | (3.3) | ||||||||||||
| Loss from continuing operations | (45,749) | (205,329) | 159,580 | (77.7) | ||||||||||||
| Change in fair value of warrants | 50 | 86 | (36) | (41.9) | ||||||||||||
| Interest expense | — | 7 | (7) | * | ||||||||||||
| Loss on investment | 467 | 4,726 | (4,259) | (90.1) | ||||||||||||
| Net loss from continuing operations | $ | (46,266) | $ | (210,148) | $ | 163,882 | (78.0) | % | ||||||||
| Net income (loss) from discontinued operations (Note 22 ) | 3,257 | (3,213) | 6,470 | * | ||||||||||||
| Net loss | $ | (43,009) | $ | (213,361) | $ | 170,352 | (79.8) | % |
* Not presented because the current or prior period amount is zero or the amount for the line item changed from a gain to a loss (or vice versa) and thus yields a result that is not meaningful.
Premiums earned, net
Premiums earned, net increased $109.1 million, or 9%, to $1,344.9 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase was primarily due to an increase in our risk adjustment revenue driving favorability as a result of the Company focusing on member retention.
Other income
Other income increased $1.5 million, or 6%, to $26.3 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase was primarily attributable to an increase in net investment income due to a higher interest rate environment as compared to the prior period.
Net medical claims incurred
Net medical claims incurred remained materially consistent for the year ended December 31, 2024 as compared to the year ended December 31, 2023.
Salaries and benefits
Salaries and benefits decreased $24.7 million, or 10%, to $232.5 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. This decrease was primarily driven by a decrease in share-based compensation related costs.
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General and administrative expenses
General and administrative expenses decreased $6.6 million, or 4%, to $176.5 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. The decrease was primarily driven by a decrease in legal, consulting and contractor related costs.
Restructuring costs
On April 17, 2023, the Company announced it would implement certain business transformation initiatives, including an agreement to move its core plan operations to UST HealthProof’s integrated technology platform and additional corporate restructuring actions. The agreement with UST HealthProof includes the transition of certain of the Company’s plan operation functions in support of its Medicare Advantage members pursuant to a master services agreement. In addition to the arrangement with UST HealthProof, the Company conducted a reduction in force to better align its Selling, General, and Administrative cost structure with its revenue base. For the year ended December 31, 2024 the Company recorded $0.3 million of restructuring charges related to these business transformation initiatives, which consisted of employee termination benefits, vendor related costs, and other costs. Refer to Note 15 "Restructuring Costs" of the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.
Loss on investment
In February 2022, Character Biosciences completed a private capital transaction. After the Company evaluated its ownership interest in Character Biosciences, it began applying the equity method of accounting. From this point forward, the Company recognizes its proportionate share of the gain/loss on equity of that entity during the period. For the year ended December 31, 2024, the Company recognized $0.5 million in shared losses. Refer to Note 12 "Variable Interest Entity and Equity Method of Accounting" of the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.
Liquidity and Capital Resources
We manage our liquidity and financial position in the context of our overall business strategy. We continually forecast and manage our cash, investments, working capital balances, and capital structure to meet the short-term and long-term obligations of our businesses while seeking to maintain liquidity and financial flexibility.
Historically, we have financed our operations primarily from the proceeds we received through premiums earned under our MA plans. We expect that our cash, cash equivalents, restricted cash, investments, and our current projections of cash flows, taken together, will be sufficient to meet our projected operating and regulatory requirements for the next 12 months based on our current plans. Our future capital requirements will depend on many factors, including our needs to support our business growth, to respond to business opportunities, challenges or unforeseen circumstances, or for other reasons. We may be required to seek additional equity or debt financing to provide the capital required to maintain or expand our operations. Any future equity financing may be dilutive to our existing investors, and any future debt financing may include debt service requirements and financial and other restrictive covenants that may constrain our operations and growth strategies. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected.
Consolidated Entities
Our cash equivalents and investment securities consist primarily of money market funds, U.S. government debt securities, and corporate debt securities. At December 31, 2024 and 2023, total restricted and unrestricted cash, cash equivalents, and investments were $437.6 million and $417.3 million, respectively. These totals consist of $243.1 million and $228.6 million at December 31, 2024 and December 31, 2023, respectively, that specifically relate to available-for-sale and held-to-maturity investment securities.
Unregulated Entities
At December 31, 2024 and December 31, 2023, total restricted and unrestricted cash, cash equivalents, and investments for the parent company, Clover Health Investments, Corp., and unregulated subsidiaries were $151.5 million and $136.8 million, respectively, with the increase at December 31, 2024 primarily reflecting cash provided by operating activities. We operate as a holding company in a highly regulated industry. As such, we may receive dividends and administrative expense reimbursements from our subsidiaries, two of which are subject to regulatory restrictions. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated insurance subsidiaries. Cash, cash equivalents, and investments at the parent company were $146.8 million and $74.0 million at December 31, 2024 and December 31, 2023, respectively. Our unregulated subsidiaries held $4.8 million and $62.8 million of cash, cash equivalents, restricted cash, and investments at December 31, 2024 and December 31, 2023, respectively.
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Regulated Entities
At December 31, 2024 and December 31, 2023 total cash, cash equivalents, restricted cash, and investments for our regulated subsidiaries were $286.1 million and $280.5 million, respectively. Additionally, our regulated insurance subsidiaries held $243.1 million and $203.4 million of available-for-sale and held-to-maturity investment securities at December 31, 2024 and December 31, 2023, respectively. Our use of operating cash derived from our unregulated subsidiaries is generally not restricted by departments of insurance (or comparable state regulatory agencies). Our regulated insurance subsidiaries have not paid dividends to the parent, and applicable insurance laws restrict the ability of our regulated insurance subsidiary to declare and pay dividends to the parent. Insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels, and there is no assurance that dividends of the maximum amounts calculated under any applicable formula would be permitted. State insurance regulatory authorities that have jurisdiction over the payment of dividends by our regulated insurance subsidiary may in the future adopt statutory provisions more restrictive than those currently in effect.
For a detailed discussion of our regulatory requirements, including aggregate statutory capital and surplus as well as dividends paid from the subsidiaries to the parent, please refer to Notes 19 "Dividend Restrictions", 20 "Statutory Equity and Income", and 21 "Regulatory Matters" to the consolidated financial statements included in this Form 10-K, as well as in Part I.
Cash Flows
The following table summarizes our consolidated cash flows for the years ended December 31, 2024 and 2023.
| Year ended December 31, | 2024 | 2023 | |||||
|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||
| Cash Flows Data: | |||||||
| Net cash provided by (used in) operating activities from continuing operations | $ | 82,450 | $ | (35,148) | |||
| Net cash provided by investing activities | 565 | 140,013 | |||||
| Net cash used in financing activities | (17,361) | (5,070) | |||||
| Increase in cash, cash equivalents, and restricted cash from continuing operations | $ | 65,654 | $ | 99,795 |
Cash Requirements
Our cash requirements within the next twelve months include medical claims payable, accounts payable and accrued liabilities, current liabilities, purchase commitments, and other obligations. We expect the cash required to meet these obligations to be primarily generated through cash, cash equivalents, restricted cash, short-term investments, and our current projections of cash flows from operations.
Operating Activities from Continuing Operations
Our largest source of operating cash flows is capitated payments from CMS. Our primary uses of cash from operating activities are payments for medical benefits and payments of operating expenses.
For the year ended December 31, 2024, Net cash provided by operating activities was $82.5 million, which reflects a Net loss from continuing operations of $46.3 million. Non-cash activities primarily included a $114.3 million charge to Stock-based compensation expense.
For the year ended December 31, 2023, Net cash used in operating activities was $35.1 million, which reflects a Net loss from continuing operations of $210.1 million. Non-cash activities primarily included a $140.9 million charge to Stock-based compensation expense, $15.9 million Goodwill and intangible asset impairment, $7.2 million amortization of the 2022 Premium deficiency reserve, and a $4.7 million Loss on investment.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2024 of $0.6 million was primarily due to $203.4 million provided from the sale and maturity of investment securities. This was offset by $201.2 million used to purchase investments.
Net cash provided by investing activities for the year ended December 31, 2023, of $140.0 million was primarily due to $316.2 million provided from the sale and maturity of investment securities. This was offset by $175.6 million used to purchase investments.
For additional information regarding our investing activities, please refer to Note 3 "Investment Securities" to our consolidated financial statements included in this Form 10-K.
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Financing Activities
Net cash used in financing activities for the year ended December 31, 2024 of $17.4 million was primarily the result of the acquisition of $16.5 million in Treasury stock and repurchases of $1.8 million of Class A Common stock.
Net cash used in financing activities for the year ended December 31, 2023 of $5.1 million was primarily the result of the acquisition of $6.2 million in Treasury stock.
Financing Arrangements
There have been no material changes to our financing arrangements at December 31, 2024.
Contractual Obligations and Commitments
We believe that funds from projected future operating cash flows, cash, cash equivalents, and investments will be sufficient for future operations and commitments, and for capital acquisitions and other strategic transactions, over at least the next 12 months.
Material cash requirements from known contractual obligations and commitments at December 31, 2024 include operating lease obligations of $2.3 million. These commitments are associated with contracts that were enforceable and legally binding at December 31, 2024, and that specified all significant terms, including fixed or minimum serves to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts. There were no other material cash requirements from known contractual obligations and commitments at December 31, 2024. For additional information regarding our remaining estimated contractual obligations and commitments, see Note 13 "Commitments and Contingencies" and Note 22 "Discontinued Operations" in the accompanying notes to the consolidated financial statements included in this Form 10-K.
Indemnification Agreements
In the ordinary course of business, we enter into agreements, with various parties (providers, vendors, consultants, etc.), with varying scope and terms, pursuant to which we may agree to defend, indemnify, and hold harmless the other parties from any claim, demand, loss, lawsuit, settlement, judgment, fine, or other liability, and all related expenses that may accrue therefrom (including reasonable attorneys' fees), arising from or in connection with third party claims, including, but not limited to, negligence, recklessness, willful misconduct, fraud, or otherwise wrongful act or omission with respect to our obligations under the applicable agreements.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. We evaluate, on an ongoing basis, our significant accounting estimates, which include, but are not limited to, net claims and claims adjustment expense and revenue recognition, including the risk adjustment provisions related to Medicare contracts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions, which could impact our reported results of operations and financial condition.
We believe that the accounting policies and estimates described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 2 "Summary of Significant Accounting Policies" to the consolidated financial statements included in this Form 10-K.
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Net Medical Claims Incurred
Insurance net medical claims incurred is recognized in the period in which services are provided and includes paid claims and an estimate of the cost of services that have been incurred but not yet reported ("IBNR") and certain other unpaid claims and adjustments. IBNR represents a substantial portion of our unpaid claims, as reflected below:
| Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||
| Total | % | Total | % | ||||||||
| (dollars in thousands) | |||||||||||
| IBNR | $ | 131,230 | 83.9 | % | $ | 121,961 | 89.0 | % | |||
| Other unpaid claims | 19,862 | 12.7 | 10,261 | 7.5 | |||||||
| Claims adjustment expense | 5,304 | 3.4 | 4,878 | 3.6 | |||||||
| Total unpaid claims and claims adjustment expense | $ | 156,396 | 100.0 | % | $ | 137,100 | 100.0 | % |
Management determines the unpaid claims and claims adjustment expense with a supplemental perspective provided by a third-party actuarial firm. We estimate our unpaid claims by following a detailed actuarial process that uses both historical claim payment patterns as well as emerging medical expense trends to project the best estimate of claims liabilities. These data and trends include historical data adjusted for claims receipt and payment patterns, cost trends, product mix, seasonality, utilization of healthcare services, changes in membership, provider billing practices, benefit changes, known outbreaks of disease, or increased incidence of illness such as influenza, the incidence of high-dollar or catastrophic claims, and other relevant factors. These factors are used to determine our lag-dependent completion factors, which represent the average percentage of total incurred claims that have been paid through a given date after being incurred. Completion factors are applied to claims paid through the period-end date to estimate the ultimate claim expense incurred for the period.
The completion factors are the most significant factor impacting the IBNR estimate. We continually adjust our completion factor with our knowledge of recent events that may impact current completion factors when establishing our reserves. Because our reserving practice is to consistently recognize the actuarial best estimate using an assumption of moderately adverse conditions as required by actuarial standards, there is a reasonable possibility that there could be variances between actual completion factors and those assumed in our December 31, 2024 and 2023 unpaid claim estimates.
Actuarial standards require the use of assumptions based on moderately adverse experience, and as such, a provision for adverse deviation ("PAD") is recognized on current reserves and released on prior reserves. For further discussion of our reserving methodology, including our use of completion factors to estimate IBNR, refer to Note 2 "Summary of Significant Accounting Policies" in the consolidated financial statements included in this Form 10-K.
Recently Issued and Adopted Accounting Pronouncements
See Note 2 "Summary of Significant Accounting Policies" in the accompanying notes to the consolidated financial statements included in this Form 10-K for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our consolidated financial statements.