CLOVER HEALTH INVESTMENTS, CORP. /DE – 10-Q – 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 Condensed Consolidated Financial Statements and notes
thereto for the three and nine months ended September 30, 2021, contained in
this Quarterly Report on Form 10-Q (the "Form 10-Q") and the Consolidated
Financial Statements and notes thereto for the year ended December 31, 2020,
contained in Exhibit 99.5 of Amendment No. 1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission (the "SEC") on April 1, 2021
(the "Form 8-K/A"). 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 document. Actual results may
differ materially from those contained in any forward-looking statements. 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," the "Company," and the "Corporation" are intended to mean the business
and operations of Clover Health Investments, Corp. and its consolidated
subsidiaries subsequent to the closing of the Business Combination (as defined
below).
Overview
At Clover Health, we are singularly focused on creating great, sustainable
healthcare to improve every life. We have centered our strategy on building and
deploying technology that we believe will enable us to solve a significant data
problem while avoiding the limitations of legacy approaches. We leverage our
flagship software platform, the Clover Assistant, to help America's seniors
receive better care at lower costs. By empowering physicians with data-driven,
personalized insights at the point of care through our software, we believe we
can improve clinical decision making.

We operate Preferred Provider Organization (PPO) and Health Maintenance
Organization (HMO) Medicare Advantage (MA) plans that are the obvious choice for
Medicare-eligible consumers. We call our plans "Obvious" because we believe they
are highly affordable-offering most of our MA members (the "members") the lowest
average out-of-pocket costs for primary care provider co-pays, specialist
co-pays, drug deductibles and drug costs in their markets-and provide wide
network access and the same cost-sharing (co-pays and deductibles) for primary
care providers who are in- and out-of-network. We believe the use of the Clover
Assistant and related data insights allow us to viably offer these "Obvious"
plans at scale, through an asset-light approach.
We initially launched our MA offering in 2013, scaling to our first nine MA
markets, or counties, by 2016 with approximately 15,000 members. As of
September 30, 2021, we operated in 108 MA markets across eight states with
67,281 Medicare Advantage members. As of September 30, 2021, our PPO plans were
licensed in 45 states and the District of Columbia and were not licensed in
Michigan, New Hampshire, New York, North Carolina and Vermont, and our HMO was
licensed in New Jersey and Texas.
On April 1, 2021, our subsidiary, Clover Health Partners, LLC (Health Partners),
began participating as a direct contracting entity (DCE) in the Global and
Professional Direct Contracting Model (DC Model) of the Centers for Medicare and
Medicaid Services (CMS), an agency of the United States Department of Health and
Human Services. Our DCE assumes full risk (i.e., 100.0% shared savings and
shared losses) for the total cost of care of aligned Original Medicare
beneficiaries (the "DCE Beneficiaries" and, collectively with the members,
"Lives under Clover Management" or the "beneficiaries"). We operate our Direct
Contracting (DC) operations through Health Partners, which focuses on our
technology platform, the Clover Assistant, to enhance healthcare delivery,
reduce expenditures, and improve care for DCE Beneficiaries. As of September 30,
2021, we had approximately 850 contracted participating providers who manage
primary care for our DCE Beneficiaries. Additionally, as of September 30, 2021,
we had approximately 865 preferred providers and preferred facilities in our DCE
network. Our participation in the DC Model has enabled us to moved beyond the MA
market and target the Medicare fee-for-service (FFS) market, which is the
largest segment of Medicare. We believe that expanding into the FFS market is
not only a strategic milestone for Clover but also demonstrates the scalability
of the Clover Assistant. Additionally, on June 9, 2021, we announced our plans
to scale our in-home primary care program, Clover Home Care, through our DC
operations. Clover Home Care was designed to better identify and care for our
most medically complex members, with a focus on health outcomes improvement and
medical expense reduction rather than risk adjustment.

As of September 30, 2021, we were partnering with providers to care for 129,099
Lives under Clover Management, which included 67,281 Medicare Advantage members
and 61,818 aligned DCE Beneficiaries. The number of Lives under Clover
Management as of September 30, 2021, was nearly double the number of Lives under
Clover Management as of January 1, 2021.


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Recent Developments
Geographic Expansion
We are making our MA plans available in an additional 101 counties and an
additional state beginning in 2022. The expansion will make our MA plans
available in a total of 209 counties across nine states. Together, these markets
represent approximately 5.2 million available Medicare lives as of August 2021.
Warrant Redemption
On September 14, 2021, we issued a press release announcing the results of the
completed redemption of all of our outstanding public warrants (the "Public
Warrants") and private placements warrants (the "Private Placement Warrants"
and, together with the Public Warrants, the "Warrants") to purchase shares of
our common stock that were issued under the Warrant Agreement, dated as of April
21, 2020, by and between the Corporation (f/k/a Social Capital Hedosophia
Holdings Corp. III) and Continental Stock Transfer & Trust Company, as warrant
agent. Prior to the redemption date, 33,932 Public Warrants were exercised for
cash at an exercise price of $11.50 per share of common stock, and 26,716,041
were exercised on a cashless basis in exchange for an aggregate of 6,685,865
shares of Class A common stock, in each case in accordance with the terms of the
Warrant Agreement, representing 96.9% of the Public Warrants. The remaining
unexercised 849,965 Public Warrants were redeemed by the Corporation for
$0.1 million. In addition, all of the Private Placement Warrants were exercised
on a cashless basis in exchange for an aggregate of 2,722,399 shares of Class A
common stock, in accordance with the terms of the Warrant Agreement. Total cash
proceeds generated from exercises of the Warrants were $0.4 million. In
connection with the redemption, the Public Warrants were delisted, and no
Warrants were outstanding at September 30, 2021.
CMS Stars
On October 8, 2021, we announced that CMS assigned Clover's PPO plan 3.5 stars
on the Medicare Star Ratings for its MA plans for the 2020 measurement year.
Over 90% of our MA membership is served through our PPO plan. The higher rating
could positively impact the reimbursement rate for our PPO plan beginning in
2023 as well as potentially positively impact the plan's image in the market.
Higher-rated plans may offer enhanced benefits and additional enrollment
opportunities compared to lower-rated plans. CMS assigns plans ratings each
year, and the Star Ratings system is subject to change annually by CMS, and
there is no guarantee that we will be able to improve or maintain our plans'
current Star Ratings.

Business Combination
On January 7, 2021, we consummated the previously announced domestication and
mergers (the "Business Combination") pursuant to that certain Agreement and Plan
of Merger, dated October 5, 2020 (the "Merger Agreement"), by and among Social
Capital Hedosophia Holdings Corp III, a Cayman Islands exempted company (SCH),
Asclepius Merger Sub Inc., a Delaware corporation and a direct wholly owned
subsidiary of SCH, and Clover Health Investments, Inc., a corporation originally
incorporated on July 17, 2014, in the state of Delaware (Legacy Clover), and us.
Additionally, in connection with the Business Combination, we issued and sold to
certain investors an aggregate of 40,000,000 shares of our Class A Common Stock
for an aggregate purchase price equal to $400.0 million (the "PIPE Investment")
concurrently with the completion of the Business Combination. For more
information, see Note 3 (Business Combination) to Financial Statements in this
report.
The Business Combination was accounted for as a reverse recapitalization in
accordance with accounting principles generally accepted in the United States of
America (GAAP). Under the guidance in Accounting Standards Codification (ASC)
805, Legacy Clover is treated as the "acquirer" for financial reporting
purposes. As such, Legacy Clover is deemed the accounting predecessor of the
combined business, and Clover, as the parent company of the combined business,
is the successor SEC registrant, meaning that Legacy Clover's financial
statements for previous periods are disclosed in our periodic reports filed with
the SEC.
The Business Combination has had a significant impact on our reported financial
position and results as a consequence of the reverse recapitalization. The most
significant change in our reported financial position and results is an
estimated net increase in cash (as compared to our consolidated balance sheet at
December 31, 2020) of approximately $670.0 million, which includes approximately
$400.0 million in proceeds from the PIPE Investment, offset by additional
transaction costs incurred in connection with the Business Combination. The
estimated transaction costs for the Business Combination were approximately
$61.0 million, of which $29.0 million represented deferred underwriter fees
related to the initial public offering of SCH.
As a result of the Business Combination, we became the successor to a public
company, which required us to hire additional personnel and implement procedures
and processes to address public company regulatory requirements and customary
practices. We expect to incur additional annual expenses as a public company
for, among other things, directors' and officers' liability insurance, director
fees, and additional internal and external accounting, legal, and administrative
resources.
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For additional information regarding the impacts of the Business Combination,
see Note 3 (Business Combination), Note 9 (Notes and Securities Payable), Note
10 (Warrants Payable), and Note 14 (Convertible Preferred Stock) to Financial
Statements in this report.

Impact of COVID-19
The societal and economic impact of the COVID-19 pandemic is continuing to
evolve, and the ultimate impact on our business, results of operations,
financial condition, and cash flows is uncertain and difficult to predict. The
global pandemic has severely impacted businesses worldwide, including many in
the health insurance sector. In response to the pandemic, we have implemented
additional steps related to our care delivery, our member support, and our
internal policies and operations. Current uncertainties relating to the COVID-19
pandemic that could impact our future results include the development of new
COVID-19 variants, such as the "Delta" variant, and the potential for further
deferrals of elective or preventive care due to additional COVID-19 outbreaks
and resulting stay-at-home orders, which in turn could result in exacerbated
health conditions, higher future medical costs, and/or a reduction in risk
adjustments and benchmarks against which future CMS bids will be assessed.
We refocused our clinical operations in mid-March 2020 and fully adopted the CMS
COVID-19 emergency policy changes, including multiple summary guidances issued
over a 12-week period, from March 2020 to June 2020. We implemented many changes
to provide continued care to members, including reorienting our in-home primary
care program (Clover Home Care) to provide care remotely, pivoting our
post-hospital discharge program to video and telephonic encounters, and helping
members receive their prescription medications at home.
Additionally, we rapidly enhanced our Clover Assistant platform to focus on
video and telephonic visits to ensure that our members received appropriate
levels of care despite their inability to physically visit a provider's office.
In total, we pivoted from 100.0% in-person Clover Assistant visits before the
COVID-19 pandemic to 82.0% and 64.0% virtual Clover Assistant visits during the
months of April and May 2020, respectively.
To ensure the safety of our members, we have implemented multi-channel member
communications to support COVID-19 vaccination access and availability, provider
network support for telehealth adoption by Clover Home Care practices and, most
recently, the provision of in-home COVID-19 vaccinations for our most vulnerable
members.
We are continuing to monitor the ongoing financial impact of COVID-19 on our
business and operations and are making adjustments accordingly. A large portion
of our membership is elderly and generally in the high-risk category for
COVID-19, and we have worked closely with our network of providers to ensure
that members are receiving necessary care. During the three months ended
September 30, 2021, we incurred elevated costs as compared to the prior-year
period to care for those members who have contracted the virus. While the direct
costs of testing and treatment related to COVID-19 have declined in recent
months, the indirect costs attributable to the COVID-19 pandemic have increased.
Deferral of services and increased costs related to conditions that were
exacerbated by a lack of diagnoses and treatment in the earlier periods of the
pandemic have contributed to increased utilization during the three months ended
September 30, 2021. We will continue to monitor the pandemic's impact on our
members. Additionally, CMS risk adjustment requires that a member's health
issues be documented annually regardless of the permanence of the underlying
causes. Historically, this documentation was required to be completed during an
in-person visit with a patient. As part of relief measures adopted pursuant to
the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"),
Medicare is allowing documentation prepared during video visits with patients to
serve as support for CMS risk adjustments. While we intend to leverage Clover
Assistant to increase the video visits for our members and document their health
conditions on a timely basis, given the disruption caused by COVID-19, we may be
unable to document the health conditions of our members as comprehensively as we
did in previous years, which may adversely impact the accuracy of our risk
adjustment factors and revenue in future periods.
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The quarterly information presented in the following table illustrates the
financial results for our MA segment operations as impacted by COVID-19:

                                                                                                                                              Three Months Ended
                          September 30, 2021                       June 30, 2021                        March 31, 2021                       December 31, 2020                        September 30, 2020                       June 30, 2020                        March 31, 2020
                        Total            PMPM (1)            Total             PMPM (1)            Total            PMPM (1)              Total              PMPM (1)              Total              PMPM (1)            Total            PMPM (1)            Total             PMPM (1)
                                                                                                               (dollars in thousands, except PMPM amounts)
Premiums earned,
net                 $  203,657          $  1,012          $ 195,357         

$ 980 $ 199,376 $ 1,005 $ 164,598

$ 950 $ 167,075 $ 972 $ 170,315

       $  1,000          $ 163,710          $     984
Net medical claims
incurred (2)           208,661             1,037            216,785              1,087            214,432             1,081               179,928              1,034               144,846                842            119,366               701            146,328                880

Medical care ratio,
net (MCR) (3)            102.5  %              -              111.0  %               -              107.6  %              -                 109.3  %               -                  86.7  %               -               70.1  %              -               89.4  %               -


(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.
(2) Net medical claims incurred related to MA only.
(3) Defined as our total net medical claims incurred divided by premiums earned,
net.
Beginning in late March and early April 2020, the COVID-19 pandemic caused an
increase in our inpatient hospital costs as members started to experience
admissions caused by the virus. The increase in hospital costs was ultimately
more than fully offset by a reduction in outpatient and office-based utilization
during the second quarter of 2020. In second quarter 2020, we experienced a
reduction in utilization across all settings, including inpatient hospital
admissions. By the end of the third quarter of 2020, our non-COVID-19
utilization of healthcare services returned to near pre-COVID-19 levels but
remained slightly below historical benchmarks. Since fourth quarter 2020, we
have continued to incur medical claims related to COVID-19, while seeing
increased utilization related to services that were deferred and increased costs
related to conditions that were exacerbated by a lack of diagnoses and treatment
in the earlier periods of the pandemic.
Due to the speed with which the COVID-19 situation is developing, the global
breadth of its spread and the range of governmental and community reactions
thereto, there remains uncertainty around its duration and ultimate impact, and
the related financial impact on our business could change and cannot be
accurately predicted at this time. For additional information regarding the
risks to our business and results of operations related to the COVID-19
pandemic, see the section entitled "Risk Factors-Risks Related to Clover's
Business and Industry-We are subject to risks associated with the COVID-19
pandemic, which could have a material adverse effect on our business, results of
operations, financial condition and financial performance" in Part II, Item IA
of this document.

Key Performance Measures of Our Operating Segments
Operating Segments

We manage our business with two reportable segments: Medicare Advantage and
Direct Contracting. The reportable segments are distinguished based on the
healthcare delivery business model. Our MA segment is an insurance business
model that focuses on leveraging the Clover Assistant at the point of care. Our
DC segment is similar to a cost management and care coordination model accounted
for as a performance guarantee, where Clover is responsible for coordinating
care, managing costs, and providing support to providers and their DCE
Beneficiaries through the use of Clover Assistant.

These segment groupings are consistent with information used by our Chief
Executive Officer, the Corporation's chief operating decision maker, to assess
performance and allocate resources. The Medicare Advantage segment consists of
MA plans that generally provide access to a wide network of primary care
providers, specialists and hospitals. The Direct Contracting segment consists of
our operations in connection with the DC Model, which provides options aimed at
reducing expenditures and preserving or enhancing quality of care for DCE
Beneficiaries.
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.
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Medicare Advantage

Through its MA operating segment, the Corporation provides PPO and HMO plans
that generally provide access to a wide network of primary care providers,
specialists and hospitals. We seek to improve care and lower costs by empowering
physicians with data-driven, personalized insights at the point of care through
our software platform, the Clover Assistant.

Nine Months Ended September 30,                            2021                                  2020
                                                 Total               PMPM              Total              PMPM
Medicare Advantage Data:                        (Premium and expense amounts in thousands, except PMPM amounts)
Members as of period end (#)                     67,281                   N/A          57,503                  N/A
Premiums earned, gross                       $  598,760           $  1,000          $ 501,483          $    986
Premiums earned, net                            598,390                999            501,100               985
Medical claim expense incurred, gross           641,300              1,071            411,243               808
Net medical claims incurred                     640,624              1,069            410,540               807
Medical care ratio, gross (1)                     107.1   %               N/A            82.0  %               N/A
Medical care ratio, net                           107.1                   N/A            81.9                  N/A

(1) Defined as our total gross medical claims incurred divided by premiums
earned, gross.

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 important metrics to assess
our financial performance because member growth 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 the Clover Assistant. Among other things,
the longer a member is enrolled in one of our MA 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 and documentation 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 revenue 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 Patient Protection and
Affordable Care Act (ACA).
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 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 revenue for the period including the
member months for which the payment is designated by CMS.
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
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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.
Gross Medical Claims Incurred
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.
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 expenses or any other measure
presented in accordance with GAAP.
Net Medical Claims Incurred (Medicare Advantage)
Net medical claims incurred are our medical expenses and consists 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 losses as well as to provide additional capacity for growth. 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 by dividing total net 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 MA 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.

Direct Contracting

Our DC segment consists of operations in connection with the DC Model. provides
a variety of programs aimed at reducing expenditures and preserving or enhancing
quality of care for DCE Beneficiaries. We measure Direct Contracting revenue and
medical claims on a per-beneficiary per-month (PBPM) basis. In the aggregate, we
view these as important metrics to assess our financial performance, including
our ability to reduce expenditures and preserve or enhance quality of care for
DCE Beneficiaries.

                                                                Nine Months Ended September 30, 2021
                                                                  Total                          PBPM
                                                        (Revenue and claims amounts in thousands, except PBPM
Direct Contracting Data(1)                                                  

amounts)

Beneficiaries as of period end (#)                                    61,818                              N/A
Direct Contracting revenue                              $            439,020             $           1,175
Net medical claims incurred                                          469,972             $           1,258
Direct Contracting margin(2)                                           107.1     %                        N/A


(1) We began participating in Direct Contracting in April 2021.
(2) Defined as net medical claims incurred divided by Direct Contracting
revenue.
Beneficiaries
A beneficiary is defined as an eligible Original Medicare covered life that has
been aligned to our DCE, Health Partners, via attribution to a DCE-participating
provider through alignment based on claims data or by beneficiary election
through voluntary alignment. A beneficiary alignment is effective as of the
first of the month, for the full calendar month, regardless of whether
eligibility is lost during the course of the month.
Direct Contracting Revenue
Direct Contracting revenue represents CMS's total expense incurred for medical
services provided on behalf of DCE Beneficiaries during months in which they
were alignment eligible during the performance year. Direct Contracting revenue
is calculated by taking the sum of the capitation payments made to us for
services within the scope of our capitation arrangement and FFS payments made to
providers directly from CMS. Direct Contracting revenue is also known in the DC
Model as performance year expenditures and is the primary component used to
calculate shared savings or shared loss versus the performance year benchmark.
Direct Contracting revenue includes a direct reduction or increase of shared
savings or loss, as applicable. Premiums and recoupments incurred in direct
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relation to the DC Model are recognized as a reduction or increase in Direct
Contracting revenue, as applicable. We believe Direct Contracting revenue
provides useful insight into the gross economic benefit generated by our
business operations and allows us to evaluate our performance without regard to
changes in our underlying reinsurance structure.
Net Medical Claims Incurred (Direct Contracting)
Net medical claims incurred consists of the total incurred expense that CMS and
we will remit for medical services provided on behalf of DCE Beneficiaries
during the months in which they are alignment eligible and aligned to the DCE.
Additionally, net medical claims incurred is inclusive of fees paid to providers
for Clover Assistant usage, care coordination, and any shared savings or shared
loss agreements with providers. Net medical claims incurred is presented on our
Condensed Consolidated Statements of Operations and Comprehensive Loss in
accordance with GAAP.
Direct Contracting Margin (DCM)
We calculate our DCM by dividing net medical claims incurred by Direct
Contracting revenue in a given period. We believe our DCM is an indicator of our
gross profitability and the ability to capture and analyze data over time to
generate actionable insights for returning beneficiaries to improve care and
reduce medical expenses.

Components of Our Results of Operations
In addition to the components described below, additional components of our
results of operations include Premiums Earned, net, Direct Contracting revenue
and Net Medical Claims Incurred, which are described in the "Key Performance
Measures of Our Operating Segments" section above.

Other Income
Other income primarily consists of income earned from rental agreements with
third parties for subleases of our leased office facilities In addition, other
income includes income generated from ceded allowances under reinsurance
agreements, which are amounts paid by the reinsurers to help cover certain
expenses incurred by the ceding party in relation to the ceded contracts, and an
immaterial amount of other income from commissions related to premiums ceded
under our reinsurance agreements. Commissions from premiums ceded under
reinsurance agreements are earned when ceded to reinsurers over the period of
policies. The amount of commissions we earn is dependent upon the terms of our
reinsurance contracts and the amount of premiums ceded.
Other income also includes interest earned from fixed-maturity securities,
short-term securities and other investments, the gains or losses on sales and
maturities of investments. Our cash and invested assets primarily consist of
fixed-maturity securities, and may also include cash and cash equivalents,
equity securities, and short-term investments. The principal factors that
influence net investment income are the size of our investment portfolio and the
yield on that portfolio. As measured by amortized cost (which excludes changes
in fair value, such as changes in interest rates), the size of our investment
portfolio is mainly a function of our invested equity capital along with
premiums we receive less amounts paid in costs of care.
Salaries and Benefits
Salaries and benefits consist of salaries, sales commissions, stock-based
compensation expense, employee benefit costs, severance costs and payroll taxes
for employees.
Following the consummation of the Business Combination, we have incurred and
expect to continue to incur significant additional expenses for salaries and
benefits as a result of expanding our headcount to support our increased
compliance requirements associated with operating as a public company or
otherwise and the growth of our business. As a result, we expect that our
salaries and benefits will increase in absolute dollars in future periods and
vary from period-to-period as a percentage of revenue.
General and Administrative Expense
General and administrative expense consists of legal, accounting, tax and other
professional fees, consulting fees, hardware and software costs, payments to our
third-party cloud infrastructure providers for hosting our software, travel
expenses, recruiting fees, certain tax, license and insurance-related expenses,
including industry assessments, advertising and marketing costs,
membership-driven administrative costs, lease and occupancy costs, statutory and
other fees and other overhead costs. Membership-driven administrative costs
consist of enrollment-related costs, broker commissions and call center
expenses.
We are subject to the ACA, which established insurance industry assessments,
including an annual health insurance industry fee. The annual health insurance
industry fee was suspended in 2019. In 2020, the fee incurred and paid by the
Corporation was approximately $8.0 million. The fee has been permanently
repealed beginning in 2021.
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Following the consummation of the Business Combination, we have incurred and
expect to continue to incur significant additional general and administrative
expenses as a result of operating as a public company, including expenses
related to compliance with the rules and regulations of the SEC and the listing
standards of Nasdaq, additional corporate, director and officer insurance
expenses, greater investor relations expenses and increased professional service
fees. As a result, we expect that our general and administrative expenses will
increase in absolute dollars in future periods and vary from period-to-period as
a percentage of revenue.
Premium Deficiency Reserve Expense (Benefit)
Premium deficiency reserves are established to the extent that the sum of
expected future costs, claim adjustment expenses, and maintenance costs exceeds
related future premiums. We assess the profitability of our contracts with CMS
to identify those contracts where current operating results or forecasts
indicate probable future losses. Premium deficiency reserve expense (benefit) is
recognized in the period in which the losses are identified. Premium deficiency
reserves are then amortized over the period in which losses were expected to
occur. The amortization is expected to have an offsetting impact to the
operating losses in that period. We may identify and recognize additional
premium deficiency reserves depending on the rates that are paid to us by CMS
based on our actuarial bids and the utilization of healthcare services by our
members.
Depreciation and Amortization
Depreciation and amortization consists of all depreciation and amortization
expenses associated with our property and equipment. Depreciation includes
expenses associated with property and equipment. Amortization includes expenses
associated with leasehold improvements.
Other Expense
Other expense consists primarily of debt issuance costs incurred in connection
with the issuance of an aggregate of $373.8 million initial principal amount of
convertible securities (Convertible Securities) in February, March, May, and
August 2019. The Convertible Securities were converted into shares of the
Corporation's Class B common stock upon the completion of the Business
Combination on January 7, 2021.
Change in Fair Value of Warrants Payable
Change in fair value of warrants payable is related to a mark-to-market
adjustment associated with warrants to purchase our capital stock. In connection
with the Closing, the warrants of Legacy Clover automatically converted into
shares of Class B Common Stock, and we are no longer required to re-measure the
value of those warrants. Change in fair value of warrants payable for our Public
Warrants and Private Placement Warrants assumed in connection with the Business
Combination reflects the mark-to-market adjustment associated with warrants to
purchase our Class A Common Stock from January 7, 2021, through the end of the
reporting period. The change in fair value of warrants payable is inclusive of
the warrant amortization expense associated with the warrants payable in each
period.
Interest Expense
Interest expense consists mostly of interest expense associated with our
previously outstanding non-convertible notes (Term Loan Notes) under a term loan
facility entered into by the Corporation on March 21, 2017, for an aggregate
principal amount of $60.0 million (the "Loan Facility"). All remaining principal
and accrued interest under the Loan Facility was voluntarily paid, and the
facility was terminated, as of June 29, 2021.
Amortization of Notes and Securities Discounts
Amortization of notes and securities discounts consists of amortization of the
debt discount associated with the Convertible Securities, warrants and debt
issuance costs associated with the Term Loan Notes.
(Gain) Loss on Derivative
(Gain) loss on derivative consisted of (gain) loss on embedded derivatives
contained in the Convertible Securities. The embedded derivatives related to the
conversion features of the Convertible Securities, which reflected a premium
above the principal and accrued interest thereon.
We recorded a gain or loss on derivative based on changes in fair value of the
embedded derivatives contained in the Convertible Securities. The carrying
amounts of these embedded derivatives were recorded at fair value at issuance,
marked-to-market as of each balance sheet date, and changes in fair value were
reported as either income or expense during the period.
To estimate the fair value attributable to these features, we estimated the
value of the Convertible Securities (i) with the embedded derivatives and
(ii) without the embedded derivatives. The incremental difference between the
two values was then used to estimate
                                       41
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the fair value of the embedded derivatives. A probability-weighted present value
of expected future returns model was then used to estimate the value of the
conversion features under various probable scenarios. The assumptions used to
arrive at the estimated fair value generally included the stock price, strike
price, volatility, risk-free rate, and time to maturity, among others.
On January 7, 2021, in connection with the Closing, the Convertible Securities
converted to shares of the Corporation's common stock and the associated
derivative liability was eliminated.
Results of Operations
Comparison of the Three Months Ended September 30, 2021 and 2020
The following table summarizes our consolidated results of operations for the
three months ended September 30, 2021 and 2020. The period-to-period comparison
of results is not necessarily indicative of results for future periods.
                                                Three Months Ended September 30,
                                                                                          Change               Change
                                                    2021                2020               ($)                   (%)
                                                         (in thousands)
Revenues
Premiums earned, net (Net of ceded premiums of
$120 and $126 for the three months ended
September 30, 2021 and 2020, respectively)      $  203,657          $ 167,075          $  36,582                    21.9  %
Direct Contracting revenue                         222,647                  -            222,647                          *
Other income                                           859              1,994             (1,135)                  (56.9)
Total revenues                                     427,163            169,069            258,094                   152.7
Operating expenses
Net medical claims incurred                        436,422            144,846            291,576                   201.3
Salaries and benefits                               73,364             16,628             56,736                   341.2
General and administrative expenses                 45,749             29,847             15,902                    53.3
Premium deficiency reserve expense (benefit)        20,761               (772)            21,533                  2789.2
Depreciation and amortization                          120                138                (18)                  (13.0)

Total operating expenses                           576,416            190,687            385,729                   202.3
Loss from operations                              (149,253)           (21,618)          (127,635)                  590.4

Change in fair value of warrants payable          (115,152)            20,029           (135,181)                 (674.9)
Interest expense                                       413              9,268             (8,855)                  (95.5)
Amortization of notes and securities discount           13              4,408             (4,395)                  (99.7)
Gain on derivative                                       -            (68,081)            68,081                  (100.0)
Net (loss) income                               $  (34,527)         $  12,758          $ (47,285)                 (370.6) %


* = Not presented because the 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 $36.6 million, or 21.9%, to $203.7 million for
the three months ended September 30, 2021, compared to the three months ended
September 30, 2020. The increase was mostly due to membership growth of 17.0%
from 57,503 Medicare Advantage members at September 30, 2020, to 67,281 Medicare
Advantage members at September 30, 2021. Additional risk adjustment revenue of
$4.6 million was recognized during the three months ended September 30, 2021.
Direct Contracting Revenue
Our participation in Direct Contracting launched in April 2021. Revenue related
to Direct Contracting was $222.6 million for the three months ended September
30, 2021. This revenue was attributable to the alignment of Original Medicare
beneficiaries to our DCE, which numbered 61,818 at September 30, 2021.
                                       42
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Other Income
Other income decreased $1.1 million, or 56.9%, to $0.9 million for the three
months ended September 30, 2021, compared to the three months ended September
30, 2020. The decrease was primarily due to lower net investment income of
$0.6 million and decreased rental income of $0.2 million in the three months
ended September 30, 2021.
Net Medical Claims Incurred
Net medical claims incurred increased $291.6 million, or 201.3%, to
$436.4 million for the three months ended September 30, 2021, compared to the
three months ended September 30, 2020. The increase was primarily due to the
launch of Direct Contracting in April 2021, MA membership growth, and the impact
from the COVID-19 pandemic. Notably, in third quarter 2020, our non-COVID-19
utilization of healthcare services was below historical benchmarks. Utilization
was higher during the three months ended September 30, 2021, as compared to the
three months ended September 30, 2020, due to deferral of services and increased
costs related to conditions that were exacerbated by a lack of diagnoses and
treatment in the earlier periods of the pandemic. See also "-Impact of COVID-19"
above.
Salaries and Benefits
Salaries and benefits increased $56.7 million, or 341.2%, to $73.4 million for
the three months ended September 30, 2021, compared to the three months ended
September 30, 2020. The increase was primarily driven by higher stock-based
compensation expense of $45.3 million due to increased headcount and additional
awards issued in connection with the Business Combination.
General and Administrative Expenses
General and administrative expenses increased $15.9 million, or 53.3%, to $45.7
million for the three months ended September 30, 2021, compared to the three
months ended September 30, 2020. The increase was driven in part by increases in
professional fees to support our growth and additional costs related to
operating as a public company. Software application expense also increased due
to the continued development of platform and information technology capabilities
within the organization. For the three months ended September 30, 2021, we also
recognized $1.1 million in amortization expense related to deferred acquisition
costs. There was no amortization expense related to deferred acquisition costs
recognized for the three months ended September 30, 2020.
Premium Deficiency Reserve Expense (Benefit)
A $20.8 million premium deficiency reserve expense was recorded for the three
months ended September 30, 2021, which includes amortization associated with a
previously recorded reserve and a reserve deemed necessary for the remainder of
2021. For the three months ended September 30, 2020, there was a benefit of $0.8
million related to amortization associated with a reserve deemed necessary as of
the end of fiscal year 2019 for fiscal year 2020. The change was primarily due
to management's assessment of actual and anticipated experience related to the
profitability of contracts.
Change in Fair Value of Warrants Payable
We reported an increase of $115.2 million on the change in fair value of
warrants payable for the three months ended September 30, 2021, compared to a
decrease of $20.0 million for the three months ended September 30, 2020. The
increase was due to the mark-to-market adjustment in the three months ended
September 30, 2021, of the Public Warrants and Private Placement Warrants. The
decrease for the three months ended September 30, 2020, was related to an
increase in the valuation of the legacy warrants during the period. For
additional information, see Note 5 (Fair Value Measurements) and Note 10
(Warrants Payable) to Financial Statements in this report.
Interest Expense
Interest expense decreased $8.9 million, or 95.5%, to $0.4 million for the three
months ended September 30, 2021, compared to the three months ended September
30, 2020, primarily related to the conversion of the Convertible Securities to
shares of the Corporation's common stock in connection with the completion of
the Business Combination on January 7, 2021.
Amortization of Notes and Securities Discounts
Amortization of notes and securities discounts decreased $4.4 million, or 99.7%,
to an immaterial amount for the three months ended September 30, 2021, compared
to the three months ended September 30, 2020. The decrease related to the
completion of the Business Combination on January 7, 2021, whereby the
unamortized discount associated with the August 2019 tranche of the Convertible
Securities was accelerated.
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Gain on Derivative
There was no gain on derivative for the three months ended September 30, 2021,
compared to a $68.1 million gain on derivative for the three months ended
September 30, 2020. The change related to the capital contribution treatment of
the elimination of the derivative associated with the Convertible Securities
upon completion of the Business Combination on January 7, 2021.
Comparison of the Nine Months Ended September 30, 2021 and 2020
The following table summarizes our consolidated results of operations for the
nine months ended September 30, 2021 and 2020. The period-to-period comparison
of results is not necessarily indicative of results for future periods.
                                                 Nine Months Ended September 30,
                                                                                           Change                 Change
                                                     2021                2020                ($)                   (%)
                                                         (in thousands)
Revenues
Premiums earned, net (Net of ceded premiums of
$370 and $383 for the nine months ended
September 30, 2021 and 2020, respectively       $   598,390          $ 501,100          $   97,290                     19.4  %
Direct Contracting revenue                          439,020                  -             439,020                           *
Other income                                          2,550              5,555              (3,005)                   (54.1)
Total revenues                                    1,039,960            506,655             533,305                    105.3
Operating expenses
Net medical claims incurred                       1,109,375            410,540             698,835                    170.2
Salaries and benefits                               201,555             57,339             144,216                    251.5
General and administrative expenses                 129,983             79,798              50,185                     62.9
Premium deficiency reserve expense (benefit)         48,661            (16,357)             65,018                    397.5
Depreciation and amortization                           398                413                 (15)                    (3.6)
Other expense                                           191                  -                 191                           *
Total operating expenses                          1,490,163            531,733             958,430                    180.2
Loss from operations                               (450,203)           (25,078)           (425,125)                 1,695.2

Change in fair value of warrants payable            (66,146)            31,903             (98,049)                  (307.3)
Interest expense                                      2,817             25,560             (22,743)                   (89.0)
Amortization of notes and securities discount        13,681             14,935              (1,254)                    (8.4)
Gain on derivative                                        -            (87,475)             87,475                   (100.0)
Net loss                                        $  (400,555)         $ (10,001)         $ (390,554)                 3,905.1  %


* = Not presented because the 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 $97.3 million, or 19.4%, to $598.4 million for
the nine months ended September 30, 2021, compared to the nine months ended
September 30, 2020. The increase was primarily due to membership growth of 17.0%
from 57,503 Medicare Advantage members at September 30, 2020, to 67,281 Medicare
Advantage members at September 30, 2021. Additional risk adjustment revenue of
$7.7 million was recognized during the nine months ended September 30, 2021.
Direct Contracting Revenue
Our participation in Direct Contracting launched in April 2021. Revenue related
to Direct Contracting was $439.0 million for the nine months ended September 30,
2021. This revenue was attributable to the alignment of Original Medicare
beneficiaries to our DCE, which numbered 61,818 at September 30, 2021.

Other Income
Other income decreased $3.0 million, or 54.1%, to $2.6 million for the nine
months ended September 30, 2021, compared to the nine months ended September 30,
2020. The decrease was primarily due to lower net investment income of
$1.9 million and decreased
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rental income of $0.4 million during the nine months ended September 30, 2021,
and the receipt of a $0.5 million state subsidy during the nine months ended
September 30, 2020, that was not received in the nine months ended September 30,
2021.
Net Medical Claims Incurred
Net medical claims incurred increased $698.8 million, or 170.2%, to $1,109.4
million for the nine months ended September 30, 2021, compared to the nine
months ended September 30, 2020. The increase was primarily due to the launch of
Direct Contracting in April 2021, MA membership growth, and the impact from the
COVID-19 pandemic as discussed in further detail immediately below.
As background, beginning in late March and early April 2020, the COVID-19
pandemic caused an increase in our inpatient hospital costs as members started
to experience admissions related to the virus. The increase in hospital costs
was ultimately more than fully offset by a reduction in outpatient and
office-based utilization during the second quarter of 2020. In second quarter
2020, we experienced a reduction in utilization across all settings, including
inpatient hospital admissions. By the end of the third quarter of 2020, our
non-COVID-19 utilization of healthcare services returned to near pre-COVID-19
levels but remained slightly below historical benchmarks. Deferral of services
and increased costs related to conditions that were exacerbated by a lack of
diagnoses and treatment in the earlier periods of the pandemic contributed to
increased utilization during the nine months ended September 30, 2021.
Salaries and Benefits
Salaries and benefits increased $144.2 million, or 251.5%, to $201.6 million for
the nine months ended September 30, 2021, compared to the nine months ended
September 30, 2020. The increase was primarily driven by higher year-over-year
stock-based compensation expense of $127.6 million due to increased headcount
and additional awards issued in connection with the Business Combination.
General and Administrative Expenses
General and administrative expenses increased $50.2 million, or 62.9%, to $130.0
million for the nine months ended September 30, 2021, compared to the nine
months ended September 30, 2020. The increase was driven in part by increases in
professional fees to support our growth and additional costs related to
operating as a public company. Software application expense also increased due
to the continued development of platform and information technology capabilities
within the organization. For the nine months ended September 30, 2021, we also
recognized $9.6 million in amortization expense related to deferred acquisition
costs. There was no amortization expense related to deferred acquisition costs
recognized for the nine months ended September 30, 2020.
Premium Deficiency Reserve Expense (Benefit)
A $48.7 million premium deficiency reserve expense was recorded for the nine
months ended September 30, 2021. This expense includes amortization associated
with a previously recorded reserve and a reserve deemed necessary for the
remainder of 2021. For the nine months ended September 30, 2020, there was a
benefit of $16.4 million related to amortization associated with a reserve
deemed necessary as of the end of fiscal year 2019 for fiscal year 2020. The
change was primarily due to management's assessment of actual and anticipated
experience related to the profitability of contracts.
Change in Fair Value of Warrants Payable
We reported an increase of $66.1 million on the change in fair value of warrants
payable for the nine months ended September 30, 2021, compared to a decrease of
$31.9 million for the nine months ended September 30, 2020. The increase for the
nine months ended September 30, 2021, was due to the mark-to-market adjustment
of the Public Warrants and Private Placement Warrants as of September 30, 2021,
compared to the initial measurement value as of January 7, 2021. The decrease
for the nine months ended September 30, 2020, was related to an increase in the
valuation of the legacy warrants during the period. For additional information,
see Note 5 (Fair Value Measurements) and Note 10 (Warrants Payable) to Financial
Statements in this report.
Interest Expense
Interest expense decreased $22.7 million, or 89.0%, to $2.8 million for the nine
months ended September 30, 2021, compared to the nine months ended September 30,
2020, primarily related to the conversion of the Convertible Securities to
shares of the Corporation's common stock in connection with the completion of
the Business Combination on January 7, 2021.
Amortization of Notes and Securities Discounts
Amortization of notes and securities discounts decreased $1.3 million, or 8.4%,
to $13.7 million for the nine months ended September 30, 2021, compared to the
nine months ended September 30, 2020. The decrease primarily relates to the
completion of the Business Combination on January 7, 2021, whereby the
unamortized discount associated with the August 2019 tranche of the Convertible
Securities was accelerated. The decrease was also driven by $0.6 million of
amortization of debt discount associated with the Convertible Securities during
the period from January 1, 2021, to January 7, 2021.
                                       45

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Gain on Derivative
There was no gain on derivative for the nine months ended September 30, 2021, as
compared to a $87.5 million gain on derivative for the nine months ended
September 30, 2020. This change relates to the capital contribution treatment of
the elimination of the derivative associated with the convertible securities
upon completion of the Business Combination on January 7, 2021.
Liquidity and Capital Resources
As of September 30, 2021, we had cash, cash equivalents, and short-term
investments of $420.7 million. Additionally, as of September 30, 2021, we had
$168.0 million of available-for-sale and held-to-maturity investment securities,
an outstanding balance of $21.6 million on convertible notes issued by an
indirect, wholly-owned subsidiary, and no outstanding balance on our Term Loan
Notes. Our cash equivalents, short-term investments, and investment securities
consist primarily of money market funds and U.S. government debt securities.
Since inception, we have financed our operations primarily from the proceeds we
received through private sales of equity securities, issuances of convertible
notes, premiums earned under our MA plans, borrowings under our term loan
facility and, most recently, with our Direct Contracting revenues. We expect
that our cash, cash equivalents, short-term 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. In the event that
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.

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 operating subsidiaries. Cash, cash equivalents, and
short-term investments at the parent company were $236.0 million and $5.4
million as of September 30, 2021, and December 31, 2020, respectively. This
increase at the parent company primarily reflects proceeds from the Business
Combination offset by capital contributions made to insurance subsidiaries,
operating expenses, and repayment of debt. Our unregulated subsidiaries held
$38.0 million and $44.6 million of cash, cash equivalents, and short-term
investments as of September 30, 2021, and December 31, 2020, respectively. Our
regulated insurance subsidiaries held $146.7 million and $46.4 million of cash,
cash equivalents, and short-term investments as of September 30, 2021, and
December 31, 2020, respectively. Additionally, our regulated insurance
subsidiaries held $98.2 million and $54.7 million of available-for-sale and
held-to-maturity investment securities as of September 30, 2021, and
December 31, 2020, respectively. Our use of operating cash derived from our
non-insurance 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 additional information, please refer to the parent
company financial statements and accompanying notes in Schedule II-Parent
Company Financial Information contained in our Consolidated Financial Statements
included in the Form 8-K/A.
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 22, 23, and 24 to our Consolidated Financial
Statements included in the Form 8-K/A.
Cash Flows
The following table summarizes our consolidated cash flows for the nine months
ended September 30, 2021 and 2020.