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OSCAR HEALTH, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this filing. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A."Risk Factors" of this Annual Report on Form 10-K. The following discussion and analysis does not include certain items related to the year endedDecember 31, 2020 , including year-to-year comparisons between the year endedDecember 31, 2021 and the year endedDecember 31, 2020 . For a comparison of our results of operations for the fiscal years endedDecember 31, 2021 andDecember 31, 2020 , 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 endedDecember 31, 2021 , filed with theSEC onFebruary 25, 2022 .
Overview
Oscar is the first health insurance company built around a full stack technology platform and a relentless focus on serving our members. We offer innovative and consumer-oriented health plans in the Individual,Small Group and Medicare Advantage markets. Our full stack technology platform has enabled arrangements with other payors and providers in which health plans and products are powered by our platform. As we continue to build and scale our technology, we may seek out additional opportunities to monetize our +Oscar platform.
Recent Developments, Trends and Other Factors Impacting Performance
+Oscar Arrangements
OnJanuary 19, 2023 , we entered into a termination and settlement agreement withHealth First Shared Services, Inc ("Health First") under which we agreed (i) to terminate the administrative services agreement with Health First (the "HF Agreement") and transition services from +Oscar to Health First effectiveDecember 31, 2022 , (ii) to provide run-off services through the end of 2023 and (iii) to forgo an immaterial amount of services revenue in exchange for a settlement and release on mutually agreeable terms.
Reinsurance
We believe our reinsurance agreements help us achieve important goals for our
business, including risk management, capital efficiency, and greater
predictability in our earnings in the event of unexpected significant
fluctuations in MLR. Specifically, reinsurance is a financial arrangement under
which the reinsurer agrees to cover a portion of our medical claims (ceded
claims) in return for a portion of the premium (premiums ceded). Our reinsurance
agreements are contracted under two different types of arrangements: quota share
reinsurance contracts and excess of loss ("XOL") reinsurance contracts.
Reinsurance agreements do not relieve us of our primary medical claims incurred
obligations.
Quota Share Reinsurance
We currently use quota share agreements to limit our risk and capital
requirements, which has enabled us to grow while optimizing our use of capital.
In quota share reinsurance, the reinsurer agrees to assume a specified
percentage of the ceding company's losses arising out of a defined class of
business in exchange for a corresponding percentage of premiums. Premiums for
quota share reinsurance are based on a percentage of premiums earned before
ceded reinsurance. Each quota share reinsurance agreement includes a ceding
commission payment from the reinsurer to Oscar to cover administrative costs. To
the extent ceded premiums exceed ceded claims and commissions, we typically
receive an experience refund.
Because reinsurers are entitled to a portion of our premiums under our quota
share reinsurance arrangements, changes in the amount of premiums ceded under
these arrangements affect our revenue. Furthermore, reductions in the amount of
premiums ceded under quota share reinsurance arrangements may result in an
increase to our minimum capital and surplus requirements, and an increase in
corresponding capital contributions by Holdco to our health insurance
subsidiaries.
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-------------------------------------------------------------------------------- Table of Contents The Company currently has quota share reinsurance arrangements with more than one counterparty with multiple state-level treaties. These arrangements are accounted for under both reinsurance accounting and deposit accounting. Our premiums ceded under quota share reinsurance agreements for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , are as follows: Year Ended December 31, Summary of Quota Share Reinsurance Program 2022 2021
Percentage of premiums ceded under reinsurance programs
(reinsurance accounting)
29 % 34 % Percentage of premiums covered under reinsurance programs (deposit accounting) 18 % - % XOL Reinsurance We use XOL reinsurance to limit our exposure to large catastrophic risk from individual claims. Under XOL reinsurance, the reinsurer agrees to assume all or a portion of the ceding company's losses in excess of a specified amount. The premium payable to the reinsurer is negotiated by the parties based on losses on an individual member in a given calendar year and their assessment of the amount of risk being ceded to the reinsurer. Under our XOL reinsurance contracts in 2022, the reinsurer is paid to cover claims related losses over a$750,000 attachment point, but the amount of the attachment point may change year over year based on a variety of factors. Risk Adjustment The risk adjustment programs in the Individual,Small Group , and Medicare Advantage markets we serve are administered federally byCenters for Medicare & Medicaid Services ("CMS") and are designed to mitigate the potential impact of adverse selection and provide stability for health insurers. Under this program, each plan is assigned a risk score based upon demographic information and current year claims information related to its members. The risk score is used to adjust plan revenue to reflect the relative risk of the plan's enrolled population. We reevaluate our risk transfer estimates as new information and market data becomes available until we receive the final reporting from CMS in later periods, up to twelve months in arrears. Our risk transfer estimates are subject to a high degree of estimation and variability, and are affected by the relative risk of our members, and in the case of ACA, relative to that of other insurers. In theIndividual and Small Group lines, there is a higher degree of uncertainty associated with estimates of risk transfers at the beginning of the policy year resulting from composition of the risk score being based on concurrent claim data. Furthermore, there is additional uncertainty for blocks of business that experience high growth compounded by the lack of credible experience data on the newly enrolling population. Actual risk adjustment calculations and transfers could materially differ from our assumptions.
Impact of COVID-19
The COVID-19 pandemic continues to evolve and have an impact on our business.
To date, we have experienced and may continue to experience changes in the utilization patterns of our members, as the pandemic continues to affectthe United States , and our members continue to change the way they utilize care. We experienced depressed non-COVID-19 related medical costs as a result of the pandemic and as vaccination rates have increased nationally, members began to resume their utilization of healthcare including care that was deferred, resulting in increased medical claims expenses. However, this trend may reverse if COVID-19 variants continue to proliferate, or COVID-19 vaccines are not effective against new strains or become less effective over time. We also experienced, and may continue to experience, increased COVID-19 testing and treatment costs. We monitor external trends closely as these dynamics result in increased uncertainties around our expectations of both COVID-19 and non-COVID-19 related medical costs. We cannot accurately estimate the future net potential impact, positive or negative, to our medical claims expenses at this time. Although theBiden Administration announced that the public health emergency ("PHE") for COVID-19 will end onMay 11, 2023 , the duration, severity and full extent of the impact of this pandemic is unknown and the extent of the business disruption and financial impact depends on factors beyond our knowledge and control. 55
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Regulatory Update InAugust 2022 ,Congress enacted the Inflation Reduction Act, which extended the APTCs under the American Rescue Plan Act for a three year period through the end of 2025. Furthermore, inOctober 2022 , theTreasury Department issued a final rule to address the "family glitch" in the ACA, which relates to determining who is eligible for premium subsidies. InDecember 2022 ,Congress passed the omnibus spending bill which delinked the Medicaid continuous coverage from the PHE declaration, and imposed a date ofApril 1, 2023 , for states to begin the Medicaid eligibility redetermination process. It is anticipated that the extension of the APTCs, the "family glitch" fix, and Medicaid redeterminations could lead to significant growth in the ACA marketplace. As a result of the changing market dynamics following IFP market exits by certain carriers, the Company proactively engaged its regulators regarding options to manage its membership growth. Prior to Open Enrollment for 2023, the Company requested that regulators limit its membership growth inFlorida above a certain threshold so that total membership across all markets would be within its previously announced target range of 900,000 to 1,100,000 members at the close of Open Enrollment, which the Company believed would enable it to prudently manage its capital position. Due to strong Open Enrollment performance, the threshold was met and the Company temporarily stopped accepting new members inFlorida in the fourth quarter of 2022; however, current members were still able to re-enroll. For further information, see "Risk Factors - Risks Most Material to Us - Our business, financial condition, and results of operations may be harmed if we fail to execute our growth strategy and manage our growth effectively." 56
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Financial Results Summary and Key Operating and Non-GAAP Financial Metrics
We regularly review a number of metrics, including the following key operating
and non-GAAP financial metrics, to evaluate our business, measure our
performance, identify trends in our business, prepare financial projections, and
make strategic decisions. We believe these operational and financial measures
are useful in evaluating our performance, in addition to our financial results
prepared in accordance with GAAP.
Financial Results Summary
Year Ended December 31,
2022 2021
(in thousands)
Premiums before ceded reinsurance $ 5,334,520 $ 2,712,988
Reinsurance premiums ceded (1,463,403) (881,968)
Premiums earned $ 3,871,117 $ 1,831,020
Total revenue $ 3,963,638 $ 1,838,715
Total operating expenses $ 4,553,505 $ 2,383,196
Net loss $ (609,552) $ (571,426)
Key Operating and Non-GAAP Financial Metrics
Year Ended December 31,
2022 2021
Members (as of December 31st) 1,151,483 598,169
Direct and Assumed Policy Premiums (in thousands)
Medical Loss Ratio
85.3 % 88.9 % InsuranceCo Administrative Expense Ratio 20.6 % 21.8 % InsuranceCo Combined Ratio 105.8 % 110.7 % Adjusted Administrative Expense Ratio 24.6 % 28.9 % Adjusted EBITDA(1) (in thousands)$ (462,255) $
(429,826)
(1)Adjusted EBITDA is a non-GAAP measure. See "Adjusted EBITDA" below for a
reconciliation to net loss, the most directly comparable
for information regarding our use of Adjusted EBITDA.
Members
Members are defined as any individual covered by a health plan that we offer directly or through a co-branded arrangement. We view the number of members enrolled in our health plans as an important metric to help evaluate and estimate revenue and market share. Additionally, the more members we enroll, the more data we have, which allows us to improve the functionality of our platform. Membership increased 93% to 1,151,483 as ofDecember 31, 2022 , from 598,169 as ofDecember 31, 2021 . The increase is driven largely by strong retention and growth in core Individual markets during open enrollment, including inFlorida ,Georgia andTexas as well as growth in C+O products. 57
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Direct and Assumed Policy Premiums
Direct Policy Premiums are defined as the premiums collected from our members or from the federal government during the period indicated, before risk adjustment and reinsurance. These premiums include APTC, or premium subsidies, which are available to individuals and families with certain annual incomes. Assumed Policy Premiums are premiums we receive primarily as part of our reinsurance arrangement under our C+O small group plan offering. We believe Direct and Assumed Policy Premiums is an important metric to assess the growth of our individual and small group plan offerings going forward. Management also views Direct and Assumed Policy Premiums as a key operating metric because each of our MLR, InsuranceCo Administrative Expense Ratio, InsuranceCo Combined Ratio and Adjusted Administrative Expense Ratio are calculated on the basis of Direct and Assumed Policy Premiums. Direct and Assumed Policy Premiums increased 99.1% to$6.8 billion as ofDecember 31, 2022 from$3.4 billion as ofDecember 31, 2021 , driven primarily by higher membership, rate increases, and mix shift to higher premium Silver plans. Medical Loss Ratio Medical loss ratio is calculated as set forth in the table below. Medical claims are total medical expenses incurred by members in order to utilize health care services less any member cost sharing. These services include inpatient, outpatient, pharmacy, and physician costs. Medical claims also include risk sharing arrangements with certain of our providers. The impact of the federal risk adjustment program is included in the denominator of our MLR. We believe MLR is an important metric to demonstrate the ratio of our costs to pay for health care of our members to the premiums before ceded reinsurance. MLRs in our existing products are subject to various federal and state minimum requirements. Below is a calculation of our MLR for the periods indicated. Year EndedDecember 31, 2022 2021 (in thousands)
Direct claims incurred before ceded reinsurance (1)
Assumed reinsurance claims
143,147
21,656
Excess of loss ceded claims (2) (18,632)
(12,500)
State reinsurance (3) (30,544)
(14,655)
Net claims before ceded quota share reinsurance (A)
Premiums before ceded reinsurance (4)$ 5,334,520 $
2,712,988
Excess of loss reinsurance premiums (5) (31,502)
(16,266)
Net premiums before ceded quota share reinsurance (B)
Medical Loss Ratio (A divided by B)
85.3 %
88.9 %
(1)See Note 4 - Reinsurance to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a reconciliation of direct claims incurred to claims incurred, net appearing on the face of our statement of operations. (2)Represents claims ceded to reinsurers pursuant to an excess of loss treaty, for which such reinsurers are financially liable. We use excess of loss reinsurance to limit the losses on individual claims of our members. (3)Represents payments made by certain state-run reinsurance programs established subject to CMS approval under Section 1332 of the ACA. (4)See Note 3 - Revenue Recognition to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of premiums before ceded reinsurance. (5)Represents excess of loss insurance premiums paid.
MLR improved for the year ended
related costs, pricing actions, and mix shifts in our member population and
medical management actions, partially offset by the impact of prior period
development.
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InsuranceCo Administrative Expense Ratio
InsuranceCo Administrative Expense Ratio is calculated as set forth in the table
below. The ratio reflects the costs associated with running our combined
insurance companies. We believe InsuranceCo Administrative Expense Ratio is
useful to evaluate our ability to manage our expenses as a percentage of
premiums before the impact of quota share reinsurance. Expenses necessary to run
the insurance company are included in other insurance costs and federal and
state assessments. These expenses include variable expenses paid to vendors and
distribution partners, premium taxes and healthcare exchange fees,
employee-related compensation, benefits, marketing costs, and other
administrative expenses. The numerator and denominator in the calculation below
reflect an adjustment to remove the impact of the Company's quota share
arrangements. Below is a calculation of our InsuranceCo Administrative Expense
Ratio for the periods indicated.
Year Ended December 31,
2022 2021
(in thousands)
Other insurance costs $ 706,439 $ 410,363
Impact of quota share reinsurance(1) 154,741 82,246
Stock-based compensation expense (51,495) (42,295)
Federal and state assessment of health insurance subsidiaries 281,049
138,369
Health insurance subsidiary adjusted administrative expenses (A)
Premiums before ceded reinsurance (2)$ 5,334,520 $ 2,712,988 Excess of loss reinsurance premiums (31,502) (16,266) Net premiums before ceded quota share reinsurance (B)$ 5,303,018 $ 2,696,722 InsuranceCo Administrative Expense Ratio (A divided by B) 20.6 % 21.8 %
(1)Includes ceding commissions received from reinsurers, net of the impact of
deposit accounting of
(2)See Note 3 - Revenue Recognition to our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for an explanation of
premiums before ceded reinsurance.
The InsuranceCo Administrative Expense Ratio improved for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 , primarily due to operating expense leverage and scale efficiencies, partially offset by higher distribution expenses. InsuranceCo Combined Ratio InsuranceCo Combined Ratio is defined as the sum of MLR and InsuranceCo Administrative Expense Ratio. We believe this ratio best represents the core performance of the consolidated insurance business, prior to the impact of quota share and net investment income. Year Ended December 31, 2022 2021 Medical Loss Ratio 85.3 % 88.9 % InsuranceCo Administrative Expense Ratio 20.6 % 21.8 % InsuranceCo Combined Ratio 105.8 % 110.7 % The InsuranceCo Combined Ratio improved for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 , consistent with the improvement in the MLR and InsuranceCo Administrative Expense Ratio. 59
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Adjusted Administrative Expense Ratio
The Adjusted Administrative Expense Ratio is an operating ratio that reflects
the Company's total administrative expenses ("Total Administrative Expenses"),
net of non-cash and non-recurring items (as adjusted, "Adjusted Administrative
Expenses"), as a percentage of total revenue, including quota share reinsurance
premiums ceded and excluding excess of loss reinsurance premiums ceded and
non-recurring items ("Adjusted Total Revenue"). Total Administrative Expenses
are calculated as Total Operating Expenses, excluding non-administrative
insurance-based expenses and the impact of quota share reinsurance. Adjusted
Administrative Expenses are Total Administrative Expenses, net of non-cash and
non-recurring expense items. Adjusted Administrative Expenses exclude
insurance-based expenses, non-cash expenses and non-recurring expenses. We
believe Adjusted Administrative Expense Ratio is useful to evaluate our ability
to manage our overall administrative expense base. This ratio also provides
further clarity into our overall path to profitability. Below is a calculation
of our Adjusted Administrative Expense Ratio for the periods indicated.
Year Ended December 31,
2022 2021
(in thousands)
Total Operating Expenses $ 4,553,505 $ 2,383,196
Claims incurred, net (3,280,798) (1,623,995)
Premium deficiency reserve release 25,033
55,325
Impact of quota share reinsurance (1) 154,741
82,246
Total Administrative Expenses$ 1,452,481 $ 896,772 Stock-based compensation expense/warrant expense (112,329) (99,152) Depreciation and amortization (15,283) (14,605) Other non-recurring items (2) - (898) Adjusted Administrative Expenses (A)$ 1,324,869 $ 782,117 Total Revenue$ 3,963,638 $ 1,838,715 Reinsurance premiums ceded 1,463,403 881,968 Excess of loss reinsurance premiums (31,502)
(16,266)
Adjusted Total Revenue (B)$ 5,395,539 $ 2,704,417 Adjusted Administrative Expense Ratio (A divided by B) 24.6 %
28.9 %
(1)Includes ceding commissions received from reinsurers, net of the impact of deposit accounting of$(7,205) for the year endedDecember 31, 2022 . The Company did not apply deposit accounting to its reinsurance contracts during the year endedDecember 31, 2021 . (2)Represents approximately$0.9 million of non-recurring expenses incurred in connection with the Company's initial public offering ("IPO") during the year endedDecember 31, 2021 . The Adjusted Administrative Expense Ratio improved for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . The improvement was due to operating expense leverage and scale efficiencies, partially offset by distribution expenses. Adjusted EBITDA Adjusted EBITDA is defined as net loss for the Company and its consolidated subsidiaries before interest expense, income tax expense (benefit), depreciation and amortization as further adjusted for stock-based compensation, warrant contract expense, changes in the fair value of warrant liabilities, and other non-recurring items as described below. We present Adjusted EBITDA because we consider it to be an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Adjusted EBITDA is a non-GAAP measure. Management believes that investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate Adjusted EBITDA in the same manner. 60 -------------------------------------------------------------------------------- Table of Contents Management uses Adjusted EBITDA: •as a measurement of operating performance because it assists us in comparing the operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core operations; •for planning purposes, including the preparation of our internal annual operating budget and financial projections; •to evaluate the performance and effectiveness of our operational strategies; and •to evaluate our capacity to expand our business. By providing this non-GAAP financial measure, together with a reconciliation to the most comparableU.S. GAAP measure, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or a substitute for net loss or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Year Ended December 31, 2022 2021 (in thousands) Net loss$ (609,552) $ (571,426) Interest expense 22,623 4,720 Other expense (income) (2,415) 1,201 Income tax expense (benefit) (523) 846 Depreciation and amortization 15,283 14,605 Stock-based compensation/warrant expense(1) 112,329 99,152 Other non-recurring items(2) - 21,076 Adjusted EBITDA$ (462,255) $ (429,826) (1)Represents (i) non-cash expenses related to equity-based compensation programs, which vary from period to period depending on various factors including the timing, number, and the valuation of awards, (ii) warrant contract expense, and (iii) changes in the fair value of warrant liabilities. (2)Represents debt extinguishment costs of$20.2 million incurred on the prepayment of our Term Loan (refer to Note 15 - Long-Term Debt to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K) and approximately$0.9 million of non-recurring expenses incurred in connection with the IPO during the year endedDecember 31, 2021 .
Components of our Results of Operations
Premiums Before Ceded Reinsurance
Premiums before ceded reinsurance primarily consist of premiums received, or to be received, directly from our members or from CMS as part of the APTC program, net of the impact of our risk adjustment payable. Premiums before ceded reinsurance are generally impacted by the amount of risk sharing adjustments, our ability to acquire new members and retain existing members, and average size and premium rate of policies. Reinsurance Premiums Ceded Reinsurance premiums ceded represent the amount of premiums written that are ceded to reinsurers either through quota share agreements that pass risk transfer or XOL reinsurance. We enter into reinsurance agreements, in part, to limit our exposure to potential losses as well as to provide additional capacity for growth. Reinsurance premiums ceded are recognized over the reinsurance contract period in proportion to the period of risk covered. The volume of our reinsurance premiums ceded is impacted by the level of our premiums earned and any decision we make to increase or decrease limits, retention levels, and co-participations.
Administrative Services Revenue
Administrative services revenue includes income earned from administrative
services performed as part of the +Oscar platform.
Investment Income and Other Revenue
Investment income (loss) and other revenue primarily includes interest earned
and gains on our investment portfolio, along with sublease income.
61 -------------------------------------------------------------------------------- Table of Contents Claims Incurred, Net Claims incurred, net primarily consists of both paid and unpaid medical expenses incurred to provide medical services and products to our members. Medical claims include fee-for-service claims, pharmacy benefits, capitation payments to providers, provider disputed claims and various other medical-related costs. Under fee-for-service claims arrangements with providers, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of hospital and physician services. Medical claims are recognized in the period health care services are provided. Unpaid medical expenses include claims reported and in the process of being settled, but that have not yet been paid, as well as health care costs incurred but not yet reported to us, which are collectively referred to as benefits payable or claim reserves. The development of the claim reserve estimate is based on actuarial methodologies that consider underlying claim payment patterns, medical cost inflation, historical developments, such as claim inventory levels and claim receipt patterns, and other relevant factors. The methods for making such estimates and for establishing the resulting liability are continuously reviewed and any adjustments are reflected in the period determined. Claims incurred, net also reflects the net impact of our ceded reinsurance claims.
Other Insurance Costs
Other insurance costs primarily include distribution costs, including broker commissions, wages, benefits, marketing, rent, costs of software and hardware, unallocated claims adjustment expenses, and administrative costs associated with functions that are necessary to support our health insurance business. Such functions include, but are not limited to, member concierge services, claims processing, utilization management, and related health plan operations, actuarial, compliance and portions of information systems, legal and finance. This line item also includes ceding commissions we receive from our reinsurance partners, net of the impact of deposit accounting.
General and Administrative Expenses
General and administrative expenses primarily include wages, benefits, costs of software and hardware, and administrative costs for our corporate and technology functions. Such functions include, but are not limited to executive management, and portions of legal, finance and information systems, including product management and development.
Federal and State Assessments
Federal and state assessments represent non-income tax charges from federal and state governments, including but not limited to healthcare exchange user fees, premium taxes, franchise taxes, and other state and local non-premium related taxes.
Premium Deficiency Reserve Release
Premium deficiency reserve release is the year over year change in the premium
deficiency reserve liability. Premium deficiency reserve liabilities are
established when it is probable that expected future claims and maintenance
expenses will exceed future premium and reinsurance recoveries on existing
medical insurance contracts.
Interest Expense
Interest expense consists primarily of interest expense associated with our debt arrangements, including amortization of debt issuance costs and discounts and revolving credit facility fees.
Other Expenses (Income)
Other expenses (income) consists primarily of miscellaneous expenses or income that are not core to our operations, including profit sharing arrangements with our co-branded health plans and changes in the fair value of financial instruments.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists primarily of changes to our current and
deferred federal and state tax assets and liabilities. Income taxes are recorded
as deferred tax assets and deferred tax liabilities based on differences between
the book and tax bases of assets and liabilities. Our deferred tax assets and
liabilities are calculated by applying the current tax rates and laws to taxable
years in which such differences are expected to reverse.
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Results of Operations
Year Ended
The following table sets forth our results of operations for the periods
indicated:
Year Ended December 31,
2022 2021 $ Change % Change
(in thousands)
Revenue
Premiums before ceded reinsurance $ 5,334,520 $ 2,712,988 $ 2,621,532 97 %
Reinsurance premiums ceded (1,463,403) (881,968) (581,435) 66 %
Premiums earned 3,871,117 1,831,020 2,040,097 111 %
Administrative services revenue 61,047 5,394 55,653 1,032 %
Investment income and other revenue 31,474 2,301 29,173 1,268 %
Total revenue 3,963,638 1,838,715 2,124,923 116 %
Operating Expenses:
Claims incurred, net 3,280,798 1,623,995 1,656,803 102 %
Other insurance costs 706,439 410,363 296,076 72 %
General and administrative expenses 309,783 265,078
44,705 17 % Federal and state assessments 281,518 139,085
142,433 102 %
Premium deficiency reserve release (25,033) (55,325)
30,292 (55) % Total operating expenses 4,553,505 2,383,196 2,170,309 91 % Loss from operations (589,867) (544,481) (45,386) 8 % Interest expense 22,623 4,720 17,903 379 % Other expenses (income) (2,415) 1,201 (3,616) *NM Loss on extinguishment of debt - 20,178 (20,178) *NM Loss before income taxes (610,075) (570,580) (39,495) 7 % Income tax expense (benefit) (523) 846 (1,369) (162) % Net loss$ (609,552) $ (571,426) $ (38,126) 7 % *NM - not meaningful
Premiums Before Ceded Reinsurance
Premiums before ceded reinsurance increased by$2.6 billion , or 97%, to$5.3 billion for the year endedDecember 31, 2022 , from$2.7 billion for the year endedDecember 31, 2021 . The increase was primarily due to higher membership driven largely by growth in the Individual line of business, as well as increases due to serving new C+O members and a mix shift towards higher premium plans. Oscar's growth also reflects strong retention and growth in core markets during open enrollment, including inFlorida ,Georgia andTexas , despite having the lowest cost plan in only 8% of its markets.
Reinsurance Premiums Ceded
Reinsurance premiums ceded increased$581.4 million , or 66%, to$1.5 billion for the year endedDecember 31, 2022 , from$882.0 million for the year endedDecember 31, 2021 . The increase is driven by growth in premiums before ceded reinsurance discussed above.
Administrative Services Revenue
Administrative services revenue increased$55.7 million , or 1,032%, to$61.0 million for the year endedDecember 31, 2022 , from$5.4 million for the year endedDecember 31, 2021 . This increase was driven by theJanuary 2022 launch of our arrangement with Health First, which has since been terminated. 63 -------------------------------------------------------------------------------- Table of Contents Investment Income and Other Revenue Investment income and other revenue increased to$31.5 million , or 1,268%, for the year endedDecember 31, 2022 , from$2.3 million for the year endedDecember 31, 2021 , primarily due to changes in interest rates.
Claims Incurred, Net
Claims incurred, net, increased$1.7 billion , or 102%, to$3.3 billion for the year endedDecember 31, 2022 , from$1.6 billion for the year endedDecember 31, 2021 , which was primarily volume-driven due to growth in membership.
Other Insurance Costs
Other insurance costs increased
the year ended
commissions and higher headcount, which were driven by the increase in
membership.
General and Administrative Expenses
General and administrative expenses increased$44.7 million , or 17%, to$309.8 million for the year endedDecember 31, 2022 , from$265.1 million for the year endedDecember 31, 2021 . The increase was primarily attributable to higher headcount and other employee-related costs related to servicing the +Oscar business.
Federal and State Assessments
Federal and state assessments increased
million
ended
Premium Deficiency Reserve Release
Premium deficiency reserve release decreased$30.3 million , for the year endedDecember 31, 2022 , from$55.3 million for the year endedDecember 31, 2021 . The change was due to the lower premium deficiency reserve established at the end of 2021 as compared to the reserve established at the end of 2020 as well as the lower premium deficiency reserve established at the end of 2022 as compared to the reserve established at the end of 2021.
Income Tax (Benefit) Provision
Our effective tax rate for the year ended
2021
Liquidity and Capital Resources
Overview
We maintain liquidity at two levels of our corporate structure, through our
health insurance subsidiaries and through
excluding our regulated insurance subsidiaries.
The majority of the assets held by our health insurance subsidiaries is in the form of cash and cash equivalents and investments. As ofDecember 31, 2022 andDecember 31, 2021 , total cash and cash equivalents and investments held by our health insurance subsidiaries was$2.9 billion and$1.8 billion , respectively, of which$17.7 million and$17.0 million , respectively, was on deposit with regulators as required for statutory licensing purposes and are classified as restricted deposits on the balance sheet. 64 -------------------------------------------------------------------------------- Table of Contents Our health insurance subsidiaries' states of domicile have statutory minimum capital requirements that are intended to measure capital adequacy, taking into account the risk characteristics of an insurer's investments and products. The combined statutory capital and surplus of our health insurance subsidiaries was$701.5 million and$474.8 million atDecember 31, 2022 andDecember 31, 2021 , respectively, which was in compliance with and in excess of the minimum capital requirements for each period. The health insurance subsidiaries historically have required capital contributions from Parent to maintain minimum levels. The health insurance subsidiaries may be subject to additional capital and surplus requirements in the future, as a result of factors such as increasing membership and medical costs, which may require us to incur additional indebtedness, sell capital stock, or access other sources of funding in order to fund such requirements. During periods of increased volatility, such as the current macroeconomic environment, adverse securities and credit markets, including due to rising interest rates, may exert downward pressure on the availability of liquidity and credit capacity for certain issuers, and any such funding may not be available on favorable terms, or at all. For additional information on the steps we've taken to balance growth and our capital position, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments, Trends and Other Factors Impacting Performance-Regulatory Update." In the future, when our health insurance subsidiaries become profitable or if their levels of reserves and capital become excessive, we may make requests for dividends and distributions from our subsidiaries to fund our operations, which may or may not be approved by our regulators. For additional information see Risk Factors - Risk Related to our Business - If state regulators do not approve payments of dividends and distributions by our health insurance subsidiaries to us, we may not have sufficient funds to implement our business strategy. Our health insurance subsidiaries also utilize quota share reinsurance arrangements to reduce our minimum capital and surplus requirements, which are designed to enable us to efficiently deploy capital to fund our growth. During the year endedDecember 31, 2022 and 2021, Parent made$423.5 million and$540.9 million of capital contributions, respectively, to the health insurance subsidiaries. We estimate that had we not had any quota share reinsurance arrangements in place, the insurance subsidiaries would have been required to hold approximately$446.8 million of additional capital as ofDecember 31, 2022 , which Parent would have been required to fund. The actual amount of any required capital contributions to our insurance subsidiaries may differ at any given time depending on each insurance subsidiary's capital adequacy. For additional information on our capital contributions and reinsurance arrangements, see "Risk Factors - Risks Related to our Business - We utilize quota share reinsurance to reduce our capital and surplus requirements and protect against downside risk on medical claims. If regulators do not approve our reinsurance agreements for this purpose, or if we cannot negotiate renewals of our quota share arrangements on acceptable terms, or at all, enter into new agreements with reinsurers, or otherwise obtain capital through debt or equity financings, our capital position would be negatively impacted, and we could fall out of compliance with applicable regulatory requirements" and "Risk Factors - Risks Most Material to Us - Our business, financial condition, and results of operations may be harmed if we fail to execute our growth strategy and manage our growth effectively." Short-Term Cash Requirements The majority of the assets held byHoldco are in the form of cash and cash equivalents and investments. As ofDecember 31, 2022 andDecember 31, 2021 , total cash and cash equivalents and investments held byHoldco was$342.0 million and$738.6 million , respectively, of which$9.8 million and$11.0 million was restricted for 2022 and 2021, respectively. Based on our current forecast, we believe the cash, and cash equivalents and investments held byHoldco , not including restricted cash, will be sufficient to fund our operating requirements for at least the next twelve months. Our cash flows used in operations may differ substantially from our net loss due to non-cash charges or due to changes in balance sheet accounts. The timing of our cash flows from operating activities can also vary among periods due to the timing of payments made or received. Some of our payments and receipts, including risk adjustment and subsequent reinsurance receipts, can be significant. For example, during the third quarter of 2022, we made a payment through our health insurance subsidiaries of$783.8 million into the risk adjustment program for the 2021 policy year. Therefore, the timing of these payments can influence cash flows from operating activities in any given period which would have a negative impact on our operating cash flows. 65
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The Company's cash requirements within the next twelve months include subsidiary capital infusions,Holdco expenses, and interest expenses. Payments into the risk adjustment program are made annually in the third quarter. We expect the cash required to meet these obligations to be primarily funded by cash available for general corporate use, funds primarily generated through equity or debt financing transactions, cash flows from current operations, and/or the realization of current assets, such as accounts receivable. Long-Term Cash Requirements Our long-term cash requirements under our various contractual obligations and commitments include: •Operating leases. See Note 13 - Leases to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail of our obligations and the timing of expected future payments. •Interest payable. See Note 15 - Long-Term Debt to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail of our obligations and the timing of future payments. •Noncontrolling interests. See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail. We do not have any material required redemptions in the next twelve months.
We expect the cash required to meet our long-term obligations to be primarily
generated through future cash flows from operations.
Convertible Senior Notes
OnJanuary 27, 2022 , we entered into an investment agreement (the "Investment Agreement") pursuant to which we agreed to issue and sell$305.0 million in aggregate principal amount of 7.25% convertible senior notes due 2031 (the "2031 Notes") in a private placement to funds affiliated with or advised byDragoneer Investment Group, LLC, Thrive Capital, LionTree Investment Management, LLC andTenere Capital LLC . The transaction contemplated by the Investment Agreement closed onFebruary 3, 2022 (the "Closing Date"). In connection with the issuance of the 2031 Notes, onFebruary 3, 2022 , we entered into an Indenture between us andU.S. Bank National Association , as trustee. The 2031 Notes bear interest at a rate of 7.25% per annum, payable in cash, semi-annually in arrears onJune 30 andDecember 31 of each year, commencing onJune 30, 2022 . The Company may determine in the future to repurchase portions of the outstanding 2031 Notes from time to time in accordance with applicableSEC and other legal requirements and in consideration of market and other conditions. See Note 15 - Long-Term Debt to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
Revolving Credit Facility
OnFebruary 21, 2021 , we entered into a senior secured credit agreement withWells Fargo Bank, National Association as administrative agent, and certain other lenders for a revolving loan credit facility (the "Revolving Credit Facility"), in the aggregate principal amount of$200 million . The Revolving Credit Facility is guaranteed byOscar Management Corporation (formerlyMulberry Management Corporation ) andOscar Management Corporation of Florida , each wholly owned subsidiaries of Oscar, and all of our future direct and indirect subsidiaries (subject to certain permitted exceptions, including exceptions for guarantees that would require material governmental consents or in respect of joint venture) (the "Guarantors"). Our Revolving Credit Facility is secured by a lien on substantially all of our and the Guarantors' assets (subject to certain exceptions). Proceeds are to be used solely for general corporate purposes of the Company. The Revolving Credit Facility is available untilFebruary 2024 , provided we are in compliance with all covenants. The Revolving Credit Facility permits us to increase commitments under the Revolving Credit Facility by an aggregate amount not to exceed$50 million . The incurrence of any such incremental Revolving Credit Facility will be subject to the following conditions measured at the time of incurrence of such commitments: (i) no default or event of default, (ii) all representations and warranties must be true and correct in all material respects immediately prior to, and after giving effect to, the incurrence of such incremental Revolving Credit Facility and (iii) and any such conditions as agreed between the Borrower and the lender providing such incremental commitment.
As of
Revolving Credit Facility.
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Interest Rate, Commitment Fees
The interest rate applicable to borrowings under our Revolving Credit Facility
is determined as follows, at our option: (a) a rate per annum equal to an
adjusted London Inter-bank Offered Rate ("LIBOR"), plus an applicable margin of
4.50% (LIBOR is calculated based on one-, three- or six-month LIBOR, or such
other period as agreed by all relevant Lenders, which is determined by reference
to ICE Benchmark Administration Limited , but not less than 1.00%), or (b) a rate
per annum equal to the Alternate Base Rate plus the applicable margin of 3.50%
(the "Alternate Base Rate" is equal to the highest of (i) the prime rate, (ii)
the federal funds effective rate plus 0.50%, and (iii) LIBOR based on a
one-month interest period, plus 1.00%). A commitment fee of 0.50% per annum is
payable under our Revolving Credit Facility on the actual daily unused portions
of the Revolving Credit Facility. The Revolving Credit Facility also contains
LIBOR replacement provisions in the event LIBOR becomes unavailable during the
term of this facility.
The Revolving Credit Facility requires us to comply with certain restrictive
covenants, including but not limited to covenants relating to limitations on
indebtedness, liens, investments, loans and advances, restricted payments and
restrictive agreements, mergers, consolidations, sale of assets and
acquisitions, sale and leaseback transactions and affiliate transactions.
In addition, the Revolving Credit Facility contains financial covenants that
require us to (i) maintain specified levels of direct policy premiums (as
defined in the Revolving Credit Facility) for each fiscal quarter, (ii) maintain
a minimum liquidity (as defined in the Revolving Credit Facility) of $150
million (or $200 million if the liquidity decreased by a specified amount over
the prior six month period) as of the last day of each quarter, and (iii) not
exceed a maximum combined ratio (as defined in the Revolving Credit Facility) of
108% for fiscal year 2022 and 102% for fiscal year 2023, in each case, as of the
last day of each quarter. As of December 31, 2022 , we were in compliance with
all financial covenants under the Revolving Credit Facility.
Investments
We generally invest cash of our health insurance subsidiaries inU.S. treasury and agency securities. We primarily invest cash of the Company in investment-grade, marketable debt securities to improve our overall investment return. These investments are purchased pursuant to board-approved investment policies that reflect our obligations under our credit agreement and conform to applicable state laws and regulations. Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of a maximum of three years from the settlement date. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments in a loss position. Our restricted investments are invested principally in cash and cash equivalents andU.S. treasury securities; we have the ability to hold such restricted investments until maturity. The Company maintains cash and cash equivalents and investments on deposit or pledged to various state agencies as a condition for licensure. We classify our restricted deposits as long-term given the requirement to maintain such assets on deposit with regulators. Summary of Cash Flows Our cash flows used in operations may differ substantially from our net loss due to non-cash charges or due to changes in balance sheet accounts. The timing of our cash flows from operating activities can also vary among periods due to the timing of payments made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant. Therefore, their timing can influence cash flows from operating activities in any given period. The potential for a large claim under an insurance or reinsurance contract means that our health insurance subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative impact on our operating cash flows. 67
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The following table shows summary cash flows information for the periods
indicated:
Year Ended December 31,
2022 2021 Change
(in thousands)
Net cash provided by (used in) operating activities $ 380,349 $ (181,745) $ 562,094
Net cash used in investing activities (226,519) (774,515) 547,996
Net cash provided by financing activities 301,110 1,238,712 (937,602)
Net increase in cash and cash equivalents and
restricted cash equivalents $ 454,940
Operating Activities
Net cash provided by (used in) operating activities increased$562.1 million to$380.3 million for the year endedDecember 31, 2022 , compared to$181.7 million used in operating activities for the year endedDecember 31, 2021 , primarily due to membership growth, which resulted in increased premiums and accounts receivable and reinsurance recoverable under our quota share reinsurance program. Our risk adjustment transfer payable also increased as a result of membership growth and the health status of our members, who continue to have lower than average risk scores compared to the health status of other participants in ACA plans.
Investing Activities
Net cash used in investing activities decreased$548.0 million to$226.5 million for the year endedDecember 31, 2022 , compared to$774.5 million for the year endedDecember 31, 2021 . The decrease was primarily due to lower purchases of investments in 2022 compared to 2021.
Financing Activities
Net cash provided by financing activities decreased$937.6 million to$301.1 million for the year endedDecember 31, 2022 , compared to$1.2 billion for the year endedDecember 31, 2021 . The decrease was primarily due to net proceeds received from the sale of common stock during our IPO inMarch 2021 , slightly offset by net proceeds received from the issuance of convertible notes inFebruary 2022 . Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingent assets and liabilities in our financial statements. We regularly assess these estimates; however, actual amounts could differ from those estimates. The most significant items involving management's estimates include estimates of benefits payable, reinsurance, premium deficiency reserve, risk adjustment, stock-based compensation, and income taxes. The impact of changes in estimates is recorded in the period in which they become known. An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition, or operating performance. The accounting policies that reflect a significant level of estimation and that are most likely to have a material impact on our reported financial results are described below. Other significant accounting policies such as reinsurance, premium deficiency reserve, risk adjustment, stock-based compensation, and income taxes do not involve significant levels of uncertainty and are disclosed in Item 8, Financial Statements and Supplementary Data in this Annual Report on Form 10-K. Benefits Payable Benefits payable includes estimates of our obligations for health care services that have been rendered on behalf of members, but for which claims have either not yet been received or processed. Depending on the health care professional and type of service, the typical billing lag for services can be up to 90 days from the date of service. Approximately 90% of claims related to health care services are known and settled within 90 days from the date of service and substantially all within 12 months from the accepted claims submission. 68 -------------------------------------------------------------------------------- Table of Contents In each reporting period, our operating results include the effects of more completely developed benefits payable estimates associated with previously reported periods. If the revised estimate of prior period health care claims is less than the previous estimate, we will decrease reported health care claims in the current period (favorable development). If the revised estimate of prior period health care claims is more than the previous estimate, we will increase reported health care costs in the current period (unfavorable development). Health care costs in the years endedDecember 31, 2022 andDecember 31, 2021 included unfavorable health care claim development related to prior years of$1.3 million (net of reinsurance) and favorable development of$16.3 million (net of reinsurance), respectively. In developing our benefits payable estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For example, in recent months, we estimate claim costs incurred by applying assumed medical cost trends to the PMPM medical costs incurred in prior months for which more complete claim data is available, supplemented by a review of near-term completion factors. Additional consideration is also given to settled claims that may reopen as a result of provider disputes. Completion Factors A completion factor is an actuarial estimate, based upon historical experience and analysis of current trends, of the percentage of incurred claims during a given period that have been adjudicated by us at the date of estimation. Completion factors are the most significant factors we use in developing our benefits payable estimates. For periods prior to the two most recent months, completion factors include judgments related to claim submissions such as the time from date of service to claim receipt, claim levels, and processing cycles, as well as other factors. If actual claims submission rates from providers (which can be influenced by a number of factors, including provider mix and electronic versus manual submissions) or our claim processing patterns are different than estimated, our reserve estimates may be significantly impacted. For the most recent two months, the completion factors are informed primarily from forecasted per member per month claims projections developed from our historical experience and adjusted by emerging experience data in the preceding months which may include adjustments for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, changes in member cost sharing, changes in medical management processes, product mix, and workday seasonality. The following table illustrates the sensitivity of the estimated potential impact on our benefits payable estimates gross of reinsurance, for those periods as ofDecember 31, 2022 to an increase (decrease) in the underlying completion factors: Changes in Estimates Increase (Decrease) in Benefits Payable (in thousands) (1.00)% $ 83,319 (0.75)% 62,332 (0.50)% 41,450 (0.25)% 20,673 0.25% (20,570) 0.50% (40,918) 0.75% (60,487) 1.00% (78,832) Management believes the amount of benefits payable is reasonable and adequate to cover our liability for unpaid claims as ofDecember 31, 2022 ; however, actual claim payments may differ from established estimates as discussed above. Assuming a hypothetical 1% difference between ourDecember 31, 2022 estimates of benefits payable and actual benefits payable, excluding any potential offsetting impact from premium rebates, net earnings for the year endedDecember 31, 2022 would have increased by approximately$83.3 million or decreased by approximately$78.8 million .
For more detail related to our medical claims expenses, see Note 2 - Summary of
Significant Accounting Policies to our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.
69
-------------------------------------------------------------------------------- Table of Contents Risk Adjustment The risk adjustment programs in the Individual,Small Group , and Medicare Advantage markets we serve are designed to mitigate the potential impact of adverse selection and provide stability for health insurers. The Company estimates the receivable or payable under the risk adjustment programs based on its estimated risk score compared to the state average risk score. The Company may record a receivable or payable as an adjustment to premium revenues to reflect the year-to-date impact of the risk adjustment based on its best estimate. The Company refines its estimate as new information becomes available. Under theIndividual and Small Group risk adjustment program, each plan is assigned a risk score based upon demographic information and current year claims information related to its members. Plans with lower than average risk scores will generally pay into the pool, while plans with higher than average risk scores will generally receive distributions.
In the Medicare Advantage risk adjustment program, each member is assigned a
risk score that reflects the member's predicted health costs compared to an
average member. Plans receive higher payments for members with higher risk
scores than members with lower risk scores.
Guaranteed continuous Medicaid coverage ending
AFLAC INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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