You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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 under "Risk Factors" and in other parts of this Annual Report on Form 10-K. A discussion of the year ended
December 31, 2020compared to the year ended December 31, 2019has been reported previously in our final prospectus filed pursuant to Rule 424(b)(4) (File No. 333-252809), filed with the SECon March 4, 2021, under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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 Groupand 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 the Small Groupemployer market. In April 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 clients, including our health insurance company subsidiaries, Cigna + Oscarand Health First Health Plans.
Recent Developments, Trends and Other Factors Affecting Performance
Initial public offering
March 5, 2021, we completed our IPO, in which we issued and sold 36,391,946 shares of Class A common stock at the public offering price of $39.00per share. We received aggregate net proceeds of $1.3 billion, after deducting underwriting discounts and commissions. For additional information, see Note 1 - Organization to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Growth Factors During the year ended December 31, 2021, we experienced significant membership growth due to expansion in existing and new states and the 2021 Special Enrollment Periods. This increase was most significant in our Individual and Cigna + Oscar small group offerings. This growth has continued into 2022. During the 2022 Open Enrollment period, we entered into three new states and expanded our membership to over one million members as of January 31, 2022, driven largely by strong growth in our Individual plans and Cigna + Oscar small group offering. 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 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. All premiums and claims ceded under the Company's quota share arrangements are shared proportionally with the reinsurers. For the year ended December 31, 2021, the Company was party to quota share reinsurance agreements, primarily with Axa France Vie. In 2022, we continued our reinsurance agreements with Axa France Vieand entered into new reinsurance agreements with Canada Life Assurance Company. 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 with Axa France Viein 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. 54
The table below presents a summary of the percentage of premiums ceded under
quota-share reinsurance agreements:
Year Ended December 31, Reinsurance 2021 2020
Axa France Vie32 % 32 % Berkshire Hathaway Specialty Insurance Company - % 45 % Canada Life Assurance Company(1) 2 % - % Total Premiums Ceded 34 % 77 %
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 to our health insurance subsidiaries. Refer to "Liquidity and Capital Resources" for more information. 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
$500,000and $750,000attachment point, respectively. Our reinsurance treaties do not relieve us of our primary medical claims incurred obligations. Risk Adjustment The risk adjustment programs in the Individual, Small Group, and Medicare Advantage markets we serve are administered federally by 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. Plans with lower than average risk scores relative to the estimated market average risk score, when applied to the statewide average premium, will have a risk adjustment payable into the pool. Inversely, plans with higher than average risk scores relative to the estimated market average risk score, when applied to the statewide average premium, will have a risk adjustment receivable from the pool. 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. 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 the Individual and Small Grouplines, 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, 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. 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. 55 -------------------------------------------------------------------------------- Table of Contents To date, we have experienced and may continue to experience changes in the utilization patterns of our members, as the pandemic continues to affect the 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 2021, 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. 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. 56
Summary of Financial Results and Key Operational 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, 2021 2020 (in thousands) Premiums before ceded reinsurance
$ 2,712,988 $ 1,672,339Reinsurance premiums ceded (881,968) (1,217,304) Premiums earned $ 1,831,020 $ 455,035Total revenue $ 1,838,715 $ 462,801Total operating expenses $ 2,383,196 $ 865,067Net loss $ (571,426) $ (406,825)Key Operating and Non-GAAP Financial Metrics As of December 31, 2021 2020 Members 598,169 402,044 Year Ended December 31, 2021 2020
Direct and assumed premiums (in thousands)
Medical loss rate
88.9 % 84.7 % InsuranceCo Administrative Expense Ratio 21.8 % 26.1 % InsuranceCo Combined Ratio 110.7 % 110.8 % Adjusted Administrative Expense Ratio 28.9 % 34.3 % Adjusted EBITDA(1) (in thousands)
$ (429,826) $ (402,447)
(1) Adjusted EBITDA is a non-GAAP measure. See “Adjusted EBITDA” below for a
reconciliation with net loss, the most directly comparable
and for information regarding our use of Adjusted EBITDA.
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 49% to 598,169 as of
December 31, 2021, from 402,044 as of December 31, 2020. The increase is attributable to growth in Floridaand Arizona, 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. 57
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.
Policy premiums assumed are the premiums we receive primarily as part of our
reinsurance agreements as part of our Cigna+Oscar small group plan offering.
We previously presented Direct Policy Premiums as a key operating metric for the year ended
December 31, 2020, and for each of the quarterly and year-to-date periods ended March 31, June 30and September 30during our 2021 fiscal year and the corresponding periods in our 2020 fiscal year, as we had received only insignificant Assumed Policy Premiums prior to the launch of our Cigna+Oscar small group plan offering for the 2021 plan year. 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. Year Ended December 31, 2021 2020 (in thousands) Direct policy premiums $ 3,420,328 $ 2,287,319Assumed premiums 16,298 299 Direct and assumed premiums $ 3,436,626 $ 2,287,618Direct and Assumed Policy Premiums increased for the year ended December 31, 2021as compared to the year ended December 31, 2020. The increase in Direct Policy Premiums was primarily attributable to the growth in our membership in existing and new states and by a shift towards higher premium plans. 58
Medical loss rate
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 Ended
December 31, 20212020 (in thousands)
Direct claims occurring before ceded reinsurance(1)
Reinsurance claims covered
Excess of loss ceded claims (2) (12,500)
State reinsurance (3) (14,655)
Net claims before quota share reinsurance ceded (A)
Premiums before ceded reinsurance (4)
Excess of loss reinsurance premiums (5) (16,266)
Other non-recurring items (6) -
Net premiums before ceded quota share reinsurance (B)
Medical loss ratio (A divided by B)
(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 - Premiums Earned 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. (6)Represents adjustments for litigation settlements recognized during the year ended
December 31, 2020related to risk corridor and risk adjustment programs. Refer to Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. MLR increased for the year ended December 31, 2021as compared to the year ended December 31, 2020. The increase was primarily driven by lower utilization in 2020 due to the COVID-19 pandemic, higher levels of utilization in 2021 resulting from both COVID-19-related and non-COVID-19-related costs and the impact of significant SEP membership growth. 59
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. Year Ended December 31, 2021 2020 (in thousands) Other insurance costs
$ 410,363 $ 216,534Ceding commissions 82,246 126,840 Stock-based compensation expense (42,295) (18,299) Health insurance industry fee - 19,251
Federal and state assessment of health insurance subsidiaries 138,369
81,199 Other non-recurring items (2) $
Adjusted administrative expenses of the health insurance subsidiary (A)
Premiums before ceded reinsurance (1)
$ 2,712,988 $ 1,672,339Excess of loss reinsurance premiums (16,266) (24,066) Other non-recurring items (2) - (64,538) Net premiums before ceded quota share reinsurance (B) $ 2,696,722 $ 1,583,735Insurance Co Administrative Expense Ratio (A divided by B) 21.8 % 26.1 % (1)See Note 3 - Premiums Earned to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of premiums before ceded reinsurance. (2)Represents adjustments for litigation settlements recognized during the year ended December 31, 2020related to risk corridor and risk adjustment programs. Refer to Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. The InsuranceCo Administrative Expense Ratio decreased for the year ended December 31, 2021as compared to the year ended December 31, 2020. 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 offerings.
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. The InsuranceCo Combined Ratio remained flat for the year ended
December 31, 2021. 60
Adjusted administrative expense ratio
The Adjusted Administrative Expense Ratio is an operating ratio that reflects the Company's total administrative expenses (or "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 (or "Adjusted Total Revenue"). Total Administrative Expenses are calculated as Total Operating Expenses, excluding non-administrative insurance-based expenses and ceding commissions. Adjusted Administrative Expenses are Total Administrative Expenses, net of non-cash and non-recurring expense items. We believe Adjusted Administrative Expenses is a useful measure of our administrative expenses, as it excludes 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, 2021 2020 (in thousands) Total Operating Expenses
$ 2,383,196 $ 865,067Claims incurred, net (1,623,995) (309,353) Premium deficiency reserve release 55,325 (71,816) Ceding commissions 82,246 126,840 Total Administrative Expenses $ 896,772 $ 610,738Stock-based compensation expense/warrant expense (99,152)
Depreciation and amortization (14,605)
Other non-recurring items (1)(2) (898)
Adjusted Administrative Expenses (A)
$ 782,117 $ 546,381Total Revenue $ 1,838,715 $ 462,801Reinsurance premiums ceded 881,968 1,217,304 Excess of loss reinsurance premiums (16,266) (24,066) Other non-recurring items (2) - (64,538) Adjusted Total Revenue (B) $ 2,704,417 $ 1,591,501Adjusted Administrative Expense Ratio (A divided by B) 28.9 %
$0.9 millionof non-recurring expenses incurred in connection with the IPO during the year ended December 31, 2021. (2)Represents adjustments for litigation settlements recognized during the year ended December 31, 2020related to risk corridor and risk adjustment programs. Refer to Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. 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. 61 -------------------------------------------------------------------------------- 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 U.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, 2021 2020 (in thousands) Net loss $ (571,426) $ (406,825)Interest expense 4,720 3,514 Other expense 1,201 - Income tax (benefit) expense 846 1,045 Depreciation and amortization 14,605 11,285 Stock-based compensation/warrant expense(1) 99,152
Other non-recurring items(2)(3) 21,076 (52,436) Adjusted EBITDA
$ (429,826) $ (402,447)(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 millionincurred on the prepayment of our Term Loan (refer to Note 15 - Debt and Warrants to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K) and approximately $0.9 millionof non-recurring expenses incurred in connection with the IPO during the year ended December 31, 2021. (3)Represents adjustments for litigation settlements recognized during the year ended December 31, 2020related to risk corridor and risk adjustment programs. Refer to Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
Components of our operating results
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 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 income
Investment and other income primarily includes interest earned and capital gains
on our investment portfolio, as well as income from the administration
services provided within the framework of the +Oscar platform.
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 62 -------------------------------------------------------------------------------- Table of Contents 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, 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 and are net of ceding commissions we receive from our reinsurance partners. 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.
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. Health Insurance Industry Fee The ACA includes an annual, nondeductible insurance industry tax that was levied proportionally across the insurance industry for risk-based health insurance products, which we were subject to in 2020. Beginning in 2021, the HIF has been permanently repealed. 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. 63 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table sets forth our results of operations for the periods indicated: Year Ended December 31, 2021 2020 $ Change % Change (in thousands) Revenue Premiums before ceded reinsurance
$ 2,712,988 $ 1,672,339 $ 1,040,64962 % Reinsurance premiums ceded (881,968) (1,217,304) 335,336 (28) % Premiums earned 1,831,020 455,035 1,375,985 302 % Investment income and other revenue 7,695 7,766 (71) (1) % Total revenue 1,838,715 462,801 1,375,914 297 % Operating Expenses: Claims incurred, net 1,623,995 309,353 1,314,642 425 % Other insurance costs 410,363 216,534 193,829 90 %
General and administrative expenses 265,078 166,655
98,423 59 % Federal and state assessments 139,085 81,458 57,627 71 % Health insurance industry fee - 19,251 (19,251) (100) % Premium deficiency reserve release (55,325) 71,816 (127,141) (177) % Total operating expenses 2,383,196 865,067 1,518,129 175 % Loss from operations (544,481) (402,266) (142,215) 35 % Interest expense 4,720 3,514 1,206 34 % Other expense 1,201 - 1,201 *NM Loss on extinguishment of debt 20,178 - 20,178 *NM Loss before income taxes (570,580) (405,780) (164,800) 41 % Income tax (benefit) provision 846 1,045 (199) (19) % Net loss
$ (571,426) $ (406,825) $ (164,601)40 % *NM - not meaningful
Premiums before ceded reinsurance
Premiums before ceded reinsurance increased by
$1,040.6 million, or 62%, to $2,713.0 millionfor the year ended December 31, 2021, from $1,672.3 millionfor the year ended December 31, 2020. This increase 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. Premiums before ceded reinsurance incorporates our estimated risk adjustment payable required under the ACA program, which represents approximately 21% and 27% of direct and assumed policy premiums for the years ended December 31, 2021and 2020, respectively.
Ceded reinsurance premiums
Reinsurance premiums ceded decreased
$335.3 million, or 28%, to $882.0 millionfor the year ended December 31, 2021, from $1,217.3 millionfor the year ended December 31, 2020. The decrease was primarily driven by a decrease in average quota share cession rates from 77% for the year ended December 31, 2020to 34% for the year ended December 31, 2021.
Claims incurred, net
Claims incurred, net, increased
$1,314.6 million, or 425%, to $1,624.0 millionfor the year ended December 31, 2021, from $309.4 millionfor the year ended December 31, 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. 64 -------------------------------------------------------------------------------- Table of Contents Other Insurance Costs Other insurance costs increased $193.8 million, or 90%, to $410.4 millionfor the year ended December 31, 2021, from $216.5 millionfor the year ended December 31, 2020. The increase was primarily attributable to distribution fees including broker commissions and exchange fees, 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. Additionally, stock-based compensation expense 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
$98.4 million, or 59%, to $265.1 millionfor the year ended December 31, 2021, from $166.7 millionfor the year ended December 31, 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
$57.6 million, or 71%, to $139.1 millionfor the year ended December 31, 2021, from $81.5 millionfor the year ended December 31, 2020, which was primarily due to higher healthcare exchange fees and premium taxes driven by membership and premium increases.
Health insurance industry fees
Health insurance industry fees were repealed in 2021. The fees incurred
for the year ended
Release of premium shortfall reserve
Premium deficiency reserve release decreased
$127.1 million, for the year ended December 31, 2021, from a net expense of $71.8 millionfor the year ended December 31, 2020. The improvement was driven by a higher premium deficiency reserve balance at December 31, 2020, resulting in higher amortization.
Cash and capital resources
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 are in the form of cash and cash equivalents and investments. As of
December 31, 2021and December 31, 2020, total cash and cash equivalents and investments held by our health insurance subsidiaries was $1.8 billionand $1.3 billion, respectively, of which $17.0 millionand $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. 65 -------------------------------------------------------------------------------- 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 $474.8 millionand $199.1 millionat December 31, 2021and December 31, 2020, 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 Holdcoto maintain minimum levels. Our health insurance subsidiaries also utilize quota share reinsurance arrangements to manage our risk, which reduces our minimum capital and surplus requirements, enabling us to efficiently deploy capital to fund our growth. During the year ended December 31, 2021and 2020, Holdcomade $540.9 millionand $366.2 millionof 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 $147.9 millionof additional capital as of December 31, 2021, which Holdcowould 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, 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." Short-Term Cash Requirements The majority of the assets held by Holdcoare in the form of cash and cash equivalents and investments. As of December 31, 2021and December 31, 2020, total cash and cash equivalents and investments held by Holdcowas $738.6 millionand $273.7 million, respectively, of which $11.0 millionand $9.7 millionwas restricted for 2021 and 2020, respectively. We believe the cash, and cash equivalents and investments held by Holdco, not including restricted cash, will be sufficient to fund our operating requirements for no less than 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, our insurance subsidiaries made payments of $461.8 millioninto 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. The Company's cash requirements within the next twelve months include subsidiary capital infusions, Holdcoexpenses, 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 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 of the Notes to the 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. •Noncontrolling interests. See Note 5 of the Notes to the 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. However, we also have the ability to generate cash to satisfy both our current and long-term requirements through increased commitments under the Revolving Credit Facility. We believe our capital resources are sufficient to meet future short-term and long-term liquidity needs. 66 -------------------------------------------------------------------------------- Table of Contents Term Loan Facility On October 30, 2020, we entered into the term loan credit agreement with HPS Investment Partners, LLC, as administrative agent, and certain other lenders for the term loan facility (the "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 15 - Debt and Warrants of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Revolving Credit Facility On February 21, 2021, we entered into a senior secured credit agreement, with Wells Fargo Bank, National Associationas 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 by Oscar Management Corporation(formerly Mulberry 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 until February 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.
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 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) 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 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. 67 -------------------------------------------------------------------------------- Table of Contents Convertible Senior Notes On January 27, 2022, we entered into an investment agreement (the "Investment Agreement") pursuant to which we agreed to issue and sell $305 millionin aggregate principal amount of our 7.25% Convertible Senior Notes due 2031 (the "2031 Notes") to funds affiliated with or advised by Dragoneer Investment Group, LLC, Thrive Capital Management, LLC, LionTree Investment Management, LLCand Tenere Capital LLC(collectively, the "Purchasers"). The transaction contemplated by the Investment Agreement closed on February 3, 2022(the "Closing Date"). In connection with the issuance of the 2031 Notes, on February 3, 2022, we entered into an indenture (the "Indenture") between us and U.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 on June 30and December 31of each year, commencing on June 30, 2022. The 2031 Notes are our senior, unsecured obligations and are (i) equal in right of payment with our existing and future senior, unsecured indebtedness; (ii) senior in right of payment to our existing and future indebtedness that is expressly subordinated to the 2031 Notes; (iii) effectively subordinated to our existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries. The 2031 Notes may be converted, subject to certain conditions, at an initial conversion price of approximately $8.32(subject to customary adjustments), which reflects a 38% premium to the price of our Class A common stock as of the close of business on January 26, 2022. Upon conversion, the 2031 Notes will be settled, at our election, in shares of Class A common stock, cash, or a combination of cash and shares of Class A common stock, subject to certain exceptions. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. Upon the occurrence of a fundamental change (as defined in the Indenture), holders of the 2031 Notes have the right to require us to repurchase all or some of their 2031 Notes for cash, subject to certain conditions. The repurchase price will be equal to the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. The 2031 Notes have a stated maturity of December 31, 2031, subject to earlier conversion, redemption or repurchase in accordance with their terms. Additionally, pursuant to the Investment Agreement, after the fifth anniversary of the Closing Date, the initial Purchasers of the 2031 Notes have the right to require the Company to repurchase all of their Notes for cash, on each of June 30, 2027, June 30, 2028, June 30, 2029and June 30, 2030(each, a "Repurchase Date"), subject to certain notice requirements as described in the Investment Agreement. We may not redeem the 2031 Notes prior to December 31, 2026. We may redeem all, but not less than all, of the 2031 Notes, at our option, on or after December 31, 2026and on or before the 35th scheduled trading day immediately preceding the maturity date, for a cash purchase price equal to the redemption price, but only if the last reported sale price per share of Class A common stock exceeds 200% of the conversion price on each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately before the date on which we send the redemption notice for such redemption. The redemption price will be a cash amount equal to the principal amount of the 2031 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The 2031 Notes include customary provisions relating to the occurrence of "Events of Default" (as defined in the Indenture), as well as customary covenants for convertible notes of this type, including restrictions on our ability to refinance our indebtedness and incur additional indebtedness.
Holdcoand our health insurance subsidiaries generally hold investments in U.S. Treasuryand agency securities. Holdcoalso invests 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 primarily include cash and cash equivalents and
investments until maturity. We maintain cash and cash equivalents and
investments on deposit or
68 -------------------------------------------------------------------------------- Table of Contents 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: Year Ended December 31, 2021 2020 Change (in thousands) Net cash (used in) provided by operating activities
$ (181,745) $ 222,732 $ (404,477)Net cash (used in) provided by investing activities (774,515) (344,714) (429,801)
Net cash (used in) provided by financing activities 1,238,712
611,707 627,005 Net increase in cash and cash equivalents and restricted cash equivalents
Net cash used in operating activities increased
$404.5 millionto $181.7 millionfor the year ended December 31, 2021, compared to $222.7 millionprovided by operating activities for the year ended December 31, 2020, primarily due to an increase in net loss for the year ended December 31, 2021, as well as cash paid into the risk adjustment program during the year ended December 31, 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 $774.5 millionfor the year ended December 31, 2021, compared to $344.7 millionfor the year ended December 31, 2020, an increase of $429.8 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.
Net cash provided by financing activities increased to
$1.2 billionfor the year ended December 31, 2021, compared to $611.7 millionfor the year ended December 31, 2020. The increase was primarily due to net proceeds of $1.3 billionfrom 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. 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. 69
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. 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 ended
December 31, 2021and December 31, 2020included favorable health care claim development related to prior years of $16.0 million(net of reinsurance) and unfavorable development of $1.0 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.
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 of
December 31, 2021to an increase (decrease) in the underlying completion factors: 70 -------------------------------------------------------------------------------- Table of Contents Changes in Estimates Increase (Decrease) in Benefits Payable (in thousands) (1.00)% $ 49,075 (0.75)% 36,713 (0.50)% 24,414 (0.25)% 12,176 0.25% (12,116) 0.50% (24,171) 0.75% (36,167) 1.00% (48,103) Management believes the amount of benefits payable is reasonable and adequate to cover our liability for unpaid claims as of December 31, 2021; however, actual claim payments may differ from established estimates as discussed above. Assuming a hypothetical 1% difference between our December 31, 2021estimates of benefits payable and actual benefits payable, excluding any potential offsetting impact from premium rebates, net earnings for the year ended December 31, 2021would have increased by approximately $49.1 millionor decreased by approximately $48.1 million.
For more details on our medical expenses, see note 2 – Summary of
Significant accounting policies in our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.