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OSCAR HEALTH, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our prospectus, datedMarch 2, 2021 , filed with theSecurities and Exchange Commission ("SEC") in accordance with Rule 424(b) of the Securities Act onMarch 4, 2021 (the "Prospectus") in connection with our initial public offering ("IPO"). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving 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 in Item II, Part 1A, "Risk Factors" and other factors set forth in other parts of this Quarterly Report on Form 10-Q.
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 Individual & Family,Small Group and Medicare Advantage plans. We have also partnered with Cigna through the Cigna + Oscar partnership, which unites Oscar's highly-differentiated member experience with Cigna's broad provider networks, to exclusively serve theSmall Group employer market. We started Oscar over eight years ago to create the kind of health insurance company we would want for ourselves-one that behaves like a doctor in the family, helping us navigate the health care system in our moments of greatest need. In the years since, we have built a suite of services that permit us to earn our members' trust, leverage the power of personalized data, and help our members find quality care they can afford. We call this our member engagement engine, and it is powered by a differentiated full stack technology platform that will allow us to continue to innovate like a technology company and not a traditional insurer in the years ahead. Our business model is built around our member engagement engine and full stack technology platform, which drive high engagement and trust among our members, collect and integrate data to produce real-time personalized insights, and help our members find high quality care options, including innovative virtual care solutions that we develop in partnership with theOscar Medical Group . We believe the investments we have made to date lead to better outcomes and a better experience for our members, and that our competitors will not be able to replicate our differentiated suite of services without access to a full stack technology platform such as ours. Recognition of our innovative model has already enabled partnerships with other payors and providers in which health plans and products are powered by our platform. InApril 2021 , we launched +Oscar, our tech-driven platform designed to help provider and payor clients drive improved efficiency, growth and superior engagement with their members and patients. Through +Oscar, we provide services and access to our efficient, full-stack platform and health plan infrastructure to our customers, including our health insurance company subsidiaries, Cigna + Oscar, andHealth First Health Plans . The attractive economics of these deals often include both risk-sharing and/or fee-based compensation for use of our innovative technology.Individual and Small Group The Individual market primarily consists of policies purchased by individuals and families through Health Insurance Marketplaces.The Small Group market consists of employees of companies with up to 50 full-time workers in most states and up to 100 full-time workers in selected states. We offer health plans in the Individual market on exchange and off-exchange under the five "metal" plan categories defined by the ACA: Catastrophic, Bronze, Silver, Gold, and Platinum. These differ based on the size of the monthly premium and the level of sharing of medical costs between Oscar and our members, with the Catastrophic and Bronze plans having the highest level of sharing.Individual and Small Group premium rates, along with specific rate changes, are required to be approved by applicable state and federal regulatory agencies in accordance with the ACA. Additionally, various federal and state laws have minimum Medical Loss Ratio ("MLR") requirements. We elect to participate in a given Individual orSmall Group market on an annual basis. In substantially all cases, our base premiums are subject to a risk adjustment based on the health status of our members relative to the overall health status of all individuals in a given state or market. 33
-------------------------------------------------------------------------------- Table of Contents Medicare Advantage We began providing plans in the Medicare Advantage program in 2020 to adults who are age 65 and older and eligible for traditional Medicare, but who instead select coverage through a private market plan. We enter into contracts with theCenters for Medicare & Medicaid Services ("CMS") under the Medicare Advantage program to provide healthcare benefits to Medicare beneficiaries. In exchange, we receive a fixed per member per month ("PMPM") premium that varies based on a variety of factors, including theCMS Star ratings of our health plans, as well as member geographic location, demographics, and health status. CMS also uses a risk adjustment system to adjust the premiums paid to Medicare Advantage plans that reflects the predicted healthcare costs of their members compared to an "average" beneficiary based on health status and other factors. Medicare Advantage premiums paid to us under our CMS contracts are subject to annual review by CMS, as well as federal government reviews and audits. We elect to participate in a given Medicare geographic region on an annual basis.
Partnerships
As we have built our full stack technology platform, we have started to monetize the platform we have built through co-branded partnerships with leading providers, payors and other innovators. Our co-branded partnerships are proof points of our ability to deploy our technology to support innovative healthcare use cases and create value by enabling other payors and providers to leverage the strength of our full stack technology platform to power health plans. We currently have co-branded partnerships with (1) theCleveland Clinic in the Individual market, which launched in 2018, (2) Montefiore in the Medicare Advantage market, which launched in 2020, and (3) Cigna in theSmall Group market, which launched in 2020. We also announced a co-branded plan with Holy Cross and Memorial in the Medicare Advantage market, which began selling in 2020 for enrollment in 2021. Our platform helps power the plans of each of these co-branded partnerships. In addition, inJanuary 2021 , we entered into a new partnership with Health First, where we will provide certain administrative services and provide their individual commercial and Medicare Advantage members with access to our full stack technology platform largely beginning onJanuary 1, 2022 . While the economics of a partnership may vary, we often monetize through a risk-sharing or fee-based arrangement, depending on the services we are performing.
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). Each quota share reinsurance agreement includes a ceding commission payment from the reinsurer to Oscar to cover administrative costs. We currently use quota share agreements to limit our risk and capital and surplus requirements, which has enabled us to grow while optimizing our use of capital. Premiums for quota share insurance are based on a percentage of premiums earned before ceded reinsurance. For the years endedDecember 31, 2019 and 2020, all premiums and claims ceded under our quota share arrangements were shared proportionally with our reinsurers, up to a limit specified in each agreement, which varied from 100% to 105% of ceded premiums. In 2021, our reinsurance agreements withAxa France Vie do not include any MLR-based limitations on claims ceded. To the extent ceded premiums exceed ceded claims and commissions, we typically receive an experience refund. Reinsurance recoveries are recorded as a reduction to claims incurred, net. We entered into statutory trust agreements withAxa France Vie in compliance with the credit for reinsurance laws and regulations of the state of domicile of each ceding company in connection with reinsurance ceded to an unauthorized reinsurer. Each trust account is funded at 102% of the ceding entity's health care costs incurred but not yet reported, or IBNR. Acceptable assets deposited into the trust accounts include cash, certificates of deposit, and instruments that are acceptable to the commissioner of the insurance department of the ceding entity's state of domicile. We also use excess of loss ("XOL") reinsurance to limit our exposure to large catastrophic risk from individual claims. Under our 2020 and 2021 XOL reinsurance contracts, the reinsurer is paid to cover claims related losses over a$500,000 and$750,000 attachment point, respectively. Our reinsurance treaties do not relieve us of our primary medical claims incurred obligations. 34 -------------------------------------------------------------------------------- Table of Contents The table below presents a summary of the percentage of premiums ceded under quota share reinsurance agreements: %
of Premiums Ceded under Quota Share Reinsurance
Three Months Ended Nine Months Ended Reinsurance September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020Axa France Vie 32 % 34 % 32 % 32 %Berkshire Hathaway Specialty Insurance Company - % 46 % - % 48 % Canada Life Assurance Company(1) - % - % 3 % - % Total Premiums Ceded 32 % 80 % 36 % 80 %
(1)In
Assurance Company
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 our holding company ("Holdco") to our
health insurance subsidiaries.
Seasonality
Our business is generally affected by the seasonal patterns of our member enrollment and medical expenses and, to a lesser extent, marketing spend in advance of an Open Enrollment Period or Annual Election Period. Medical expenses are historically highest towards the end of the year due to a number of factors discussed below. Direct policy premiums earned are historically highest in the first quarter, primarily due to the annual enrollment cycles and the enrollment of our members.
Members
For Individual and Medicare Advantage products, the majority of our member growth occurs in connection with the annual Open Enrollment Period and Annual Election Period. Individual plan membership is historically at its highest at the beginning of the year, while Medicare Advantage plan membership typically increases throughout the year. For theCigna + Oscar Small Group products, a large portion of membership is acquiredbetween December 1 and January 1 , with the remaining members acquired throughout the balance of the year. Our membership is concentrated in the Individual market and typically declines throughout the year due to individuals disenrolling before they become effectuated members and the removal of members for non-payment or in accordance with our fraud, waste and abuse, and other operating policies. During the three months endedSeptember 30, 2021 , seasonal membership declines for Individual products were offset by membership growth as a result of the creation of the 2021 Special Enrollment Periods and Cigna + Oscar membership growth, resulting in a net increase in members for the period. Our membership by offering as ofSeptember 30, 2021 and 2020 is presented in the table below: Membership by Offering As of September 30, 2021 2020 Individual and Small Group 582,236 418,268 Medicare Advantage 3,881 1,850 Cigna + Oscar (1) 8,167 - Total 594,284 420,118
(1)Represents total membership for our co-branded partnership with Cigna.
During the Open Enrollment period for the 2022 plan year, we will offer Individual plans for the first time inArkansas ,Illinois , andNebraska , with expanded state footprints inColorado ,Florida ,Georgia ,Iowa ,Missouri ,Oklahoma ,Pennsylvania , andTexas . Cigna+Oscar expansion markets includeKansas andGeorgia as ofOctober 1, 2021 , andIllinois 35 -------------------------------------------------------------------------------- Table of Contents andMissouri as ofJanuary 1, 2022 , bringing the C+O small group plan offering to eight states. With this expansion, we will have a footprint in a total of 22 states across ourIndividual and Small Group , Medicare Advantage, and Cigna+Oscar plans. Claims Incurred Our medical expenses are generally expected to be lowest in the first quarter and highest in the fourth quarter of the year and are impacted by seasonal effects of medical costs such as the utilization of deductibles and out-of-pocket maximums over the course of the policy year, which shifts more costs to us in the fourth quarter as we pay a higher proportion of claims. As a result, we typically have higher levels of medical costs in the third and fourth quarters of a calendar year. Our medical costs can also vary according to the number of days and holidays in a given period. 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. Under theIndividual and Small Group risk adjustment program, each state 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. This amount is calculated based on the risk score of each plan's members. We reevaluate our risk transfer estimates as new information and market data becomes available until we receive the final report from CMS in June of the following year. 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. Our risk transfer estimates are subject to a high degree of estimation and variability, and are affected by the relative risk of our members 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. In addition, CMS and theOffice of Inspector General for Health and Human Services ("HHS") perform risk adjustment data validation ("RADV") audits of health insurance plans to validate the coding practices of and supporting documentation maintained by health care providers, and such audits have in the past and may in the future result in adjustments to risk transfer payments. 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, including its effect on the macroeconomic environment, and the response of our local, state, and federal governments to contain and manage the virus, continues to have an impact on our business. Governmental authorities have begun to lift or have already lifted restrictions on elective medical services, but the emergence of COVID-19 variants inthe United States and abroad continues to prolong the risk of additional surges of COVID-19. As a result, our MLR may be subject to additional uncertainty as certain segments of the economy and workforce come back on line, members resume care that may have been foregone, and the broader population continues to become vaccinated. In addition, continued COVID-19 care, testing and vaccine administration, and the risk of new COVID-19 variants (which may be more contagious or severe, or less responsive to treatment or vaccines) may also result in increased future medical costs and drive changes in the way members utilize healthcare.
To date, we have experienced or expect to experience the following impacts on
our business model due to COVID-19:
•Medical Costs. 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 vaccination rates stall, COVID-19 variants continue to proliferate, or COVID-19 vaccines are not effective against new strains or become less effective over time. During the quarter, we also experienced, and may continue to experience, increased COVID-19 testing and treatment costs. We will be monitoring 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. 36 -------------------------------------------------------------------------------- Table of Contents •Member Solutions. We continue to remain compliant with federal and state mandates, including providing benefit coverage in areas such as COVID-19 care and testing, telemedicine, and pharmacy benefits, and offering additional enrollment opportunities to those who previously declined employer-sponsored offerings. •Work From Home Arrangements. We have taken significant steps to support our employees to protect their health and safety, while also ensuring that our business can continue to operate and that services continue without disruption. We have implemented our business continuity plans and have taken actions to support our workforce. We have transitioned the vast majority of our employees to work from home, allowing us to continue to operate at close to full capacity, while continuing to maintain our internal control focus. As a result, we have experienced and expect continued incremental costs due to investments and actions we have already taken and continued efforts to protect our members and employees and the communities we serve. •Virtual Care. The utilization of telehealth in primary care visits for Oscar's subscribing members significantly increased. We intend to continue to offer our members flexible options when seeking care, including our Oscar virtual care solutions. In the first quarter of 2021, we launched innovative virtual primary care plan designs in key states for a more convenient, efficient, and cost-effective doctor experience. Overall measures to contain the COVID-19 outbreak may remain in place for a significant period of time, as certain geographic regions have experienced a resurgence of COVID-19 infections and new variants of COVID-19 that appear to be more transmissible have emerged. Although the number of people who have been vaccinated has been increasing, the duration and severity of this pandemic is unknown and the extent of the business disruption and financial impact depends on factors beyond our knowledge and control. Regulatory Update OnMarch 11, 2021 ,President Biden signed into law the American Rescue Plan Act of 2021 ("American Rescue Plan"), which builds upon many of the measures in the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"). Under the American Rescue Plan, startingApril 1, 2021 , APTC subsidies are now available for 2021 and 2022 plan year for most individuals and families making more than 400% of the federal poverty level ("FPL"), and APTC subsidies are temporarily increased for all income brackets. The American Rescue Plan also provides for$350 billion in state and local funding, additional Medicaid andChildren's Health Insurance Program funding for COVID-19 vaccines and treatment to be matched at 100% of the federal medical assistance percentage ("FMAP"), incentives for states to expand Medicaid, enhanced flexibility for states to extend Medicaid eligibility to women for 12 months postpartum, and a temporary 10% FMAP increase for states to improve Medicaid home- and community-based services for one year. In addition, fromApril 1, 2021 , throughSeptember 30, 2021 , individuals with employer-based insurance meeting certain criteria are eligible for a premium subsidy of 100% of COBRA continuation coverage cost. OnMarch 23, 2021 ,President Biden announced that CMS is extending access to a Special Enrollment Period untilAugust 15 to enable consumers to take advantage of the new subsidies available through the American Rescue Plan. This special enrollment period includes the extended period fromFebruary 15, 2021 , throughAugust 15, 2021 , for the health insurance marketplace operated by the federal government for most states, and similar periods for the state-based marketplaces run byColorado (startingFebruary 8, 2021 , throughAugust 15, 2021 ), andPennsylvania (startingFebruary 15, 2021 , throughAugust 15, 2021 ). This also includes the extended Open Enrollment Periods inCalifornia andNew York , running throughDecember 31, 2021 , and inNew Jersey , running throughNovember 30, 2021 . Key Factors Affecting Performance Our financial condition and results of operations have been, and will continue to be, affected by a number of factors that present significant opportunities for us but also pose risks and challenges. For discussion of these factors, see "Key Factors Affecting Performance" in the Management's Discussion and Analysis section of our Prospectus, and in Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 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 37 -------------------------------------------------------------------------------- Table of Contents 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 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. Investment Income and Other Revenue Investment income and other revenue primarily includes interest earned and gains on investments inU.S. Treasury and agency securities, corporate notes, certificates of deposit, commercial paper and municipalities. 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, 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 wages, benefits, marketing, rent, costs of software and hardware, distribution costs, unallocated claims adjustment expenses, and administrative costs associated with functions that are necessary to support our health insurance business and are net of ceding commissions we receive from our reinsurance partners. Such functions include, but are not limited to, information systems, legal, finance, compliance, concierge, and claims processing. General and Administrative Expenses General and administrative expenses primarily include wages, benefits, research and development, costs of software and hardware, and administrative costs for our corporate and technology functions. Such functions include, but are not limited to information systems, executive management, legal, and finance. Research and development expenses include expenses related to developing our platform. 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. Health Insurance Industry Fee The ACA includes an annual, nondeductible insurance industry tax that is levied proportionally across the insurance industry for risk-based health insurance products, which we were subject to in 2020. The HIF has been permanently repealed, beginning in 2021. It is calculated based on a ratio of our applicable net premiums written, compared to the totalU.S. health insurance industry applicable net premiums written during the previous calendar year. We record the health insurance industry fee, or HIF, liability in accounts payable and accrued liabilities at the beginning of the calendar year. A corresponding deferred cost is recorded in receivables and other assets that is amortized to HIF in the consolidated statement of operations using a straight-line method of allocation over the calendar year. 38
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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 without consideration of investment income. For
purposes of determining premium deficiency losses, contracts are grouped
consistent with our method of acquiring, servicing, and measuring the
profitability of such contracts which is generally on a line of business basis.
Income Tax Expense
Income tax expense 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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Table of Contents
Results of Operations
Three Months Ended
30, 2020
The following table sets forth our results of operations for the periods
indicated:
Three Months Ended September 30,
2021 2020 $ Change % Change
(in thousands)
Revenue
Premiums before ceded reinsurance $ 673,460 $ 414,505 $ 258,955 62 %
Reinsurance premiums ceded (231,717) (315,360) 83,643 (27) %
Premiums earned 441,743 99,145 342,598 346 %
Investment income and other revenue 2,236 2,555 (319) (12) %
Total revenue 443,979 101,700 342,279 337 %
Operating Expenses:
Claims incurred, net 453,576 85,392 368,184 431 %
Other insurance costs 111,302 38,674 72,628 188 %
General and administrative expenses 61,267 36,546 24,721 68 %
Federal and state assessments 35,453 20,469 14,984 73 %
Health insurance industry fee - 4,813 (4,813) (100) %
Premium deficiency reserve release (4,675) (4,064) (611) 15 %
Total operating expenses 656,923 181,830 475,093 261 %
Loss from operations (212,944) (80,130) (132,814) 166 %
Interest expense 398 - 398 *NM
Loss before income taxes (213,342) (80,130) (133,212) 166 %
Income tax (benefit) provision (597) (998) 401 (40) %
Net loss $ (212,745) $ (79,132) $ (133,613) 169 %
*NM - not meaningful
Premiums Before Ceded Reinsurance
Premiums before ceded reinsurance increased $259.0 million , or 62%, to $673.5
million for the three months ended September 30, 2021 , from $414.5 million for
the three months ended September 30, 2020 , which was primarily driven by an
increase in direct and assumed premiums due to higher membership in existing
markets driven by growth in the Open Enrollment Period and as a result of the
creation of the 2021 Special Enrollment Periods, expansion into new markets, and
a mix shift towards higher premium plans. This increase in direct and assumed
premiums was partially offset by an increase in the risk adjustment payable
required under the ACA program and the results of the RADV audit performed by
CMS.
Reinsurance Premiums Ceded
Reinsurance premiums ceded decreased $83.6 million , or 27%, to $231.7 million
for the three months ended September 30, 2021 , from $315.4 million for the three
months ended September 30, 2020 . This decrease was primarily driven by a
decrease in average quota share cession rates from 80% for the three months
ended September 30, 2020 to 32% for the three months ended September 30, 2021 .
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Claims Incurred, Net Claims incurred, net, increased$368.2 million , or 431%, to$453.6 million for the three months endedSeptember 30, 2021 , from$85.4 million for the three months endedSeptember 30, 2020 . The increase was primarily driven by higher claims volume due to increases in membership compared to the prior year, increased COVID-19 costs, increased non-COVID-19 healthcare costs as a result of lower utilization in 2020 due to the COVID-19 pandemic, and a decrease in quota share reinsurance. Other Insurance Costs Other insurance costs increased$72.6 million , or 188%, to$111.3 million for the three months endedSeptember 30, 2021 , from$38.7 million for the three monthsSeptember 30, 2020 . The increase was attributable to member-driven administrative costs including broker commissions, provider network costs and vendor costs, and the introduction of the Cigna + Oscar business which began in the fourth quarter of 2020. A decrease in reinsurance commissions resulting from a decrease in quota share reinsurance also contributed to higher other insurance costs. Stock-based compensation expense also contributed to the increase due to the issuance of new equity incentive awards with higher valuations. General and Administrative Expenses General and administrative expenses increased$24.7 million , or 68%, to$61.3 million for the three months endedSeptember 30, 2021 , from$36.5 million for the three months endedSeptember 30, 2020 . The increase was attributable to headcount-related growth to support strategic partnerships, platform technologies and costs to support requirements to operate as a public company. Stock-based compensation expense also contributed to the increase due to the issuance of new equity incentive awards with higher valuations. Federal and State Assessments Federal and state assessments increased$15.0 million , or 73%, to$35.5 million for the three months endedSeptember 30, 2021 , from$20.5 million for the three months endedSeptember 30, 2020 , which was primarily due to higher healthcare exchange fees and premium taxes driven by membership and premium increases. Health Insurance Industry Fee The health insurance industry fee has been repealed in 2021. The fee incurred for the three months endedSeptember 30, 2020 was$4.8 million . Income Tax Provision Our effective income tax rate for the three months endedSeptember 30, 2021 andSeptember 30, 2020 was approximately 0.28% and 1.25%, respectively. 41 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2021 compared to Nine Months EndedSeptember 30, 2020 Nine Months Ended September 30, 2021 2020 $ Change % Change (in thousands) Revenue Premiums before ceded reinsurance$ 2,007,486 $ 1,232,493 $ 774,993 63 % Reinsurance premiums ceded (669,047) (934,373) 265,326 (28) % Premiums earned 1,338,439 298,120 1,040,319 349 % Investment income and other revenue 4,209 7,008 (2,799) (40) % Total revenue 1,342,648 305,128 1,037,520 340 % Operating Expenses: Claims incurred, net 1,141,503 225,120 916,383 407 % Other insurance costs 285,929 119,222 166,707 140 % General and administrative expenses 175,240 104,379 70,861 68 % Federal and state assessments 102,841 61,724 41,117 67 % Health insurance industry fee - 14,438 (14,438) (100) % Premium deficiency reserve release (15,139) (4,326) (10,813) 250 % Total operating expenses 1,690,374 520,557 1,169,817 225 % Loss from operations (347,726) (215,429) (132,297) 61 % Interest expense 4,323 - 4,323 *NM Loss on extinguishment of debt 20,178 - 20,178 *NM Loss before income taxes (372,227) (215,429) (156,798) 73 % Income tax (benefit) provision 957 1,526 (569) (37) % Net loss$ (373,184) $ (216,955) $ (156,229) 72 % *NM - not meaningful Premiums Before Ceded Reinsurance Premiums before ceded reinsurance increased$775.0 million , or 63%, to$2,007.5 million for the nine months endedSeptember 30, 2021 , from$1,232.5 million for the nine months endedSeptember 30, 2020 , which was primarily driven by an increase in direct and assumed premiums due to higher membership in existing markets driven by growth in the Open Enrollment Period and as a result of the creation of the 2021 Special Enrollment Periods, expansion into new markets, and a mix shift towards higher premium plans. This increase in direct and assumed premiums was partially offset by an increase in the risk adjustment payable required under the ACA program and the results of the RADV audit performed by CMS. Reinsurance Premiums Ceded Reinsurance premiums ceded decreased$265.3 million , or 28%, to$669.0 million for the nine months endedSeptember 30, 2021 , from$934.4 million for the nine months endedSeptember 30, 2020 . This was primarily driven by a decrease in average quota share cession rates from 80% for the nine months endedSeptember 30, 2020 , to 36% for the nine months endedSeptember 30, 2021 . Investment Income and Other Revenue Investment income and other revenue decreased to$4.2 million for the nine months endedSeptember 30, 2021 , from$7.0 million for the nine months endedSeptember 30, 2020 primarily due to lower interest rates and a lower credit spread environment. 42
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Table of Contents Claims Incurred, Net Claims incurred, net, increased$916.4 million , or 407%, to$1,141.5 million for the nine months endedSeptember 30, 2021 , from$225.1 million for the nine months endedSeptember 30, 2020 which was primarily due to higher claims volume from increases in membership compared to the prior year, increased COVID-19 costs, increased non-COVID-19 healthcare costs as a result of lower utilization in 2020 due to the COVID-19 pandemic, and a decrease in quota share reinsurance. Other Insurance Costs Other insurance costs increased$166.7 million , or 140%, to$285.9 million for the nine months endedSeptember 30, 2021 , from$119.2 million for the nine months endedSeptember 30, 2020 . The increase was attributable to member-driven administrative costs including broker commissions, provider network costs and vendor costs, and the introduction of the Cigna + Oscar business, which began in the fourth quarter of 2020. A decrease in reinsurance commissions resulting from a decrease in quota share reinsurance also contributed to higher other insurance costs. Stock-based compensation expense also contributed to the increase due to the issuance of new equity incentive awards with higher valuations. General and Administrative Expenses General and administrative expenses increased$70.9 million , or 68%, to$175.2 million for the nine months endedSeptember 30, 2021 , from$104.4 million for the nine months endedSeptember 30, 2020 . The increase was attributable to headcount-related growth to support strategic partnerships, platform technologies and costs to support requirements to operate as a public company. Stock-based compensation expense also contributed to the increase due to the issuance of new equity incentive awards with higher valuations. Federal and State Assessments Federal and state assessments increased$41.1 million , or 67%, to$102.8 million for the nine months endedSeptember 30, 2021 from$61.7 million for the nine months endedSeptember 30, 2020 , which was primarily due to higher healthcare exchange fees and premium taxes driven by membership and premium increases. Health Insurance Industry Fee The health insurance industry fee has been repealed in 2021. The fee incurred for the nine months endedSeptember 30, 2020 was$14.4 million . Premium Deficiency Reserve Release Premium deficiency reserve release increased$10.8 million for the nine months endedSeptember 30, 2021 , from$4.3 million for the nine months endedSeptember 30, 2020 , which was primarily driven by a higher premium deficiency reserve balance atDecember 31, 2020 driving higher amortization in the quarter. Income Tax Provision Our effective income tax rate for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 was approximately (0.26)% and (0.71)%, respectively. 43 -------------------------------------------------------------------------------- Table of Contents Key Operating and Non-GAAP Financial Metrics We regularly review a number of metrics, including the following key operating and non-GAAP financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, and make strategic decisions. We believe these operational and financial measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with GAAP. As of September 30, 2021 2020 Members 594,284 420,118 Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 September 30, 2021 September 30, 2020
Direct Policy Premiums (in thousands)
Medical Loss Ratio
99.7 % 90.5 % 85.8 % 77.7 % InsuranceCo Administrative Expense Ratio 23.1 % 22.4 % 20.9 % 23.0 % InsuranceCo Combined Ratio 122.8 % 112.9 % 106.7 % 100.7 % Adjusted EBITDA(1) (in thousands)$ (188,659) $
(70,975)
(1)Adjusted EBITDA is a non-GAAP measure. See "Adjusted EBITDA" below for a reconciliation to net loss, the most directly comparable GAAP measure, and for information regarding our use of Adjusted EBITDA. Members Members are defined as any individual covered by one of our health plans. 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 41% to 594,284 as ofSeptember 30, 2021 , from 420,118 as ofSeptember 30, 2020 . The increase is attributable to growth inFlorida ,Arizona andCalifornia , expansion into new markets, and growth within the Cigna+Oscar plan. Membership growth was also driven by the American Rescue Plan, which allowed for the creation of the 2021 Special Enrollment Periods, expanded APTC eligibility and increased APTC subsidies. Direct 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. ThroughMarch 31, 2021 , APTC was available to those individuals and families with annual incomes between 100% and 600% of the federal poverty level inCalifornia and 100% and 400% of the federal poverty level in all other states under the ACA. StartingApril 1, 2021 , consumers enrolling in Individual health plans through a health insurance marketplace could take advantage of additional subsidies available under the American Rescue Plan, which caps premium payment at 8.5% of household income, and expands maximum coverage subsidies to anyone who received unemployment insurance benefits in 2021. We believe direct policy premiums are an important metric to assess our growth. Direct policy premiums increased for both the three and nine months endedSeptember 30, 2021 . The increases for both the three and nine months endedSeptember 30, 2021 were primarily attributable to the growth in our membership in existing and new states and by a shift towards higher premium plans. Additional membership increases were due to the creation of the 2021 Special Enrollment Periods. 44 -------------------------------------------------------------------------------- Table of Contents 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. Three Months Ended Nine Months EndedSeptember 30 ,September 30, 2021 2020
(in thousands)
Direct claims incurred before ceded
reinsurance (1) $ 668,966 $ 370,329
Assumed reinsurance claims
5,504 - 9,589 (2) Excess of loss ceded claims (2) (3,432) 1,824 (13,005) (8,671) State reinsurance (3) (4,700) (3,091) (9,869) (7,420) Net claims before ceded quota share reinsurance (A)$ 666,338 $ 369,062
Premiums before ceded reinsurance (4)
Excess of loss reinsurance premiums (5) (5,083) (6,568) (11,295) (15,167) Net premiums before ceded quota share reinsurance (B)$ 668,377 $ 407,937
Medical Loss Ratio (A divided by B)
99.7 % 90.5 % 85.8 % 77.7 % (1)See Note 4 - Reinsurance to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q 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 - Premiums Earned to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for an explanation of premiums before ceded reinsurance. (5)Represents excess of loss insurance premiums paid. MLR increased for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . The increase was primarily driven by increased COVID-19 costs driven by pandemic outbreaks primarily concentrated in the central and southeast markets and non-COVID-19 healthcare costs as a result of lower utilization in 2020 due to the COVID-19 pandemic, an unfavorable prior period development driven by RADV-related exposure on the 2020 plan year risk transfers driven by 2019 plan year audit results, and the impact of significant SEP membership growth. MLR increased for the nine months endedSeptember 30, 2021 . The increase was primarily driven by lower utilization in 2020 due to the COVID-19 pandemic, as well as higher levels of utilization in 2021 resulting from both COVID-19-related treatment and testing costs and non-COVID-19-related costs. 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 ceded 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. Below is a calculation of our InsuranceCo Administrative Expense Ratio for the periods indicated. 45
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Table of Contents
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 September 30, 2021 September 30, 2020
(in thousands)
Other insurance costs $ 111,302 $ 38,674 $ 285,929 $ 119,222
Ceding commissions 18,214 31,609 57,986 96,884
Stock-based compensation expense (10,122) (3,785) (28,988) (11,144)
Health insurance industry fee - 4,813 - 14,438
Federal and state assessment of health
insurance subsidiaries 35,112 20,191 102,326 60,905
Health insurance subsidiary adjusted
administrative expenses (A) $ 154,506 $
91,502 $ 417,253 $ 280,305
Premiums before ceded reinsurance (1)
Excess of loss reinsurance premiums (5,083) (6,568) (11,295) (15,167) Net premiums before ceded quota share reinsurance (B)$ 668,377 $
407,937
Insurance Co Administrative Expense Ratio (A
divided by B)
23.1 % 22.4 % 20.9 % 23.0 %
(1)See Note 3 - Premiums Earned to our consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q for an explanation of
premiums before ceded reinsurance.
The InsuranceCo Administrative Expense Ratio increased for the three months endedSeptember 30, 2021 . The increase was primarily driven by increases in member-driven administrative costs and unfavorable prior period development driven by RADV-related exposure on the 2020 plan year risk transfers driven by 2019 plan year audit results. The InsuranceCo Administrative Expense Ratio decreased for the nine months endedSeptember 30, 2021 . The decrease was primarily driven by operating leverage and the repeal of the health insurance industry fee, partially offset by an increase in investments for our Medicare Advantage and our Cigna + Oscar offering. 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 current overall performance of our insurance business for activities that can be compared to peers. InsuranceCo Combined Ratio increased for the three months endedSeptember 30, 2021 . The increase was attributable to higher levels of utilization of both COVID-related and non-COVID-related care and unfavorable prior period development. InsuranceCo Combined Ratio increased for the nine months endedSeptember 30, 2021 . The increase was primarily driven by lower utilization in 2020 due to the COVID-19 pandemic, as well as higher levels of utilization in 2021 resulting from both COVID-19-related treatment and testing costs and non-COVID-19-related costs. This was partially offset by better operating leverage and scale efficiencies from our full stack technology platform and the repeal of the health insurance industry fee. Adjusted EBITDA Adjusted EBITDA is defined as net loss for the Company and its consolidated subsidiaries before interest expense, income tax (benefit) expense, 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. 46 -------------------------------------------------------------------------------- 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 comparable 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. Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 (in thousands) Net loss$ (212,745)
Interest expense
398 - 4,323 - Income tax (benefit) expense (597) (998) 957 1,526 Depreciation and amortization 3,645 2,925 10,635 7,990 Stock-based compensation/warrant expense(1) 20,640 6,230 70,884 21,475 Other non-recurring items(2) - - 21,076 - Adjusted EBITDA$ (188,659) $ (70,975) $ (265,309) $ (185,964) (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 the Company's Term Loan (refer to Note 9 - Debt and Warrants) and approximately$0.9 million of non-recurring expenses incurred in connection with the IPO. Liquidity and Capital Resources Overview
We maintain liquidity at two levels of our corporate structure, through our
health insurance subsidiaries and through
The majority of the assets held by our health insurance subsidiaries is in the form of cash and cash equivalents and investments. As ofSeptember 30, 2021 andDecember 31, 2020 , total cash and cash equivalents and investments held by our health insurance subsidiaries was$1.5 billion and$1.3 billion , respectively, of which$16.7 million and$16.8 million , respectively, was on deposit with regulators as required for statutory licensing purposes and are classified as restricted deposits on the balance sheet. Our health insurance subsidiaries' states of domicile have statutory minimum capital and surplus 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$448.8 million and$199.1 million atSeptember 30, 2021 andDecember 31, 2020 , respectively, which was in compliance with and in excess of the minimum capital and surplus requirements for each period. The health insurance subsidiaries historically have required capital contributions fromHoldco to maintain minimum levels. Our health insurance subsidiaries also utilize quota share reinsurance arrangements to reduce our minimum capital and surplus requirements, which enables us to efficiently deploy capital to fund our growth. During the nine months endedSeptember 30, 2021 and the year endedDecember 31, 2020 ,Holdco made$337.4 million and$366.2 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 an additional approximately$140 million of capital as ofSeptember 30, 2021 , whichHoldco would have been required to fund. The actual amount of any required capital contributions to our insurance subsidiaries may differ 47 -------------------------------------------------------------------------------- Table of Contents at any given time depending on each insurance subsidiary's capital adequacy. For additional information on our capital contributions, see "Risk Factors-Risks Related to Our Business-If state regulators do not approve payments of dividends and distributions by our subsidiaries to us, we may not have sufficient funds to implement our business strategy." The majority of the assets held byHoldco are in the form of cash and cash equivalents and investments. As ofSeptember 30, 2021 andDecember 31, 2020 , total cash and cash equivalents and investments held byHoldco was$1.0 billion and$264.4 million , respectively, of which$6.5 million was restricted for each year. 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 2021, we made a payment of$461.8 million into the risk adjustment program for the 2020 policy year. Therefore, their timing can influence cash flows from operating activities in any given period which would have a negative impact on our operating cash flows. Term Loan Facility OnOctober 30, 2020 , we entered into the term loan credit agreement withHPS Investment Partners, LLC , as administrative agent, and certain other lenders for the term loan facility, or Term Loan Facility, in the aggregate principal amount of$150 million . In connection with the IPO, we repaid in full outstanding borrowings, including fees and expenses, under our Term Loan Facility, including a prepayment premium equal to 6.50% of the principal amount of the Term Loan Facility plus accrued and unpaid interest through the six-month anniversary of the closing date of the Term Loan Facility. For additional information regarding the Term Loan Facility, see Note 9 - Debt and Warrants of our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Revolving Credit Facility OnFebruary 21, 2021 , we entered into a senior secured credit agreement (the "Revolving Credit Facility"), withWells Fargo Bank, National Association as administrative agent, and certain other lenders for a revolving loan credit facility, or the Revolving Credit Facility, in the aggregate principal amount of$200 million . The Revolving Credit Facility is guaranteed byOscar Management Corporation (formerlyMulberry Management Corporation ), a wholly owned subsidiary 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.
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 the Adjusted LIBO Rate plus an applicable margin of 4.50% (Adjusted London Interbank Offered Rate, or LIBO rate, is calculated based on one-, three- or six-month LIBO rates, or such other period as agreed by all relevant Lenders, which is determined by reference toICE 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) the Adjusted LIBO Rate 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 48 -------------------------------------------------------------------------------- Table of Contents on the actual daily unused portions of the Revolving Credit Facility. The Revolving Credit Facility also contains LIBO rate replacement provisions in the event LIBO rate 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 maintain specified levels of direct policy premiums and liquidity and require compliance with a maximum combined ratio.
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 which 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 where the loss position of those investments exceeds certain levels. 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 assets 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.
The following table shows summary cash flows information for the periods
indicated:
Nine
Months Ended
2021 2020 Change
(in thousands)
Net cash (used in) provided by operating activities $ (216,224) $ 133,749 $ (349,973)
Net cash (used in) provided by investing activities (754,678) (359,353) (395,325)
Net cash provided by financing activities 1,225,739 226,434 999,305
Net increase in cash and cash equivalents and
restricted cash equivalents $ 254,837 $ 830 $ 254,007
Operating Activities
Net cash used in operating activities increased $350.0 million to $216.2 million
for the nine months ended September 30, 2021 , compared to $133.7 million
provided by operating activities for the nine months ended September 30, 2020 ,
primarily
49
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Table of Contents
due to cash paid into the risk adjustment program during the three months ended
September 30, 2021 . Our risk adjustment transfer payable 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. Additionally, the change in receivables due from
reinsurance programs resulting from decreases in our quota share reinsurance
program contributed to the cash used in operating cash flows.
Investing Activities
Net cash used in investing activities increased to $754.7 million for the nine
months ended September 30, 2021 , compared to $359.4 million for the nine months
ended September 30, 2020 , an increase of $395.3 million . The increase was
primarily due to the use of a portion of our IPO proceeds to fund the growth of
the investment portfolio, as increased purchases more than offset sales and
maturity of investments.
Financing Activities
Net cash provided by financing activities increased $999.3 million to $1.2
billion for the nine months ended September 30, 2021 , compared to $226.4 million
for the nine months ended September 30, 2020 . The increase was primarily due to
net proceeds of $1.3 billion from the sale of common stock during our IPO, a
portion of which was used to repay in full the outstanding balance of the Term
Loan.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable
regulations of the SEC , that are reasonably likely to have a current or future
material effect on our financial condition, results of operations, liquidity,
capital expenditures, or capital resources.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.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 we believe to
reflect our more significant estimates, judgments and assumptions that are most
critical to understanding and evaluating our reported financial results are:
benefits payable, reinsurance, premium deficiency reserve, risk adjustment,
stock-based compensation, and income taxes.
The critical accounting policies that reflect our more significant judgments and
estimates used in the preparation of our consolidated financial statements
include those described in the Prospectus under "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Critical Accounting
Policies and Estimates" and in Note 2 to our consolidated financial statements
included in the Prospectus.
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
disclosed in the Prospectus.
REINSURANCE GROUP OF AMERICA INC FILES (8-K) Disclosing Change in Directors or Principal Officers
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