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 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 in Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q.
Oscar is the first health insurance company built around a full stack technology platform and a relentless focus on serving our members. We offer innovative and consumer-oriented health plans in the Individual,
Small Groupand Medicare Advantage markets. We have also partnered with Cigna through the Cigna + Oscar ("C+O") partnership, which unites Oscar's highly-differentiated member experience with Cigna's broad provider networks, to exclusively serve the Small Groupemployer market. Through +Oscar, we leverage our technology platform to sell services to providers and payers to directly enable their shift to value-based care and help our clients drive improved efficiency, growth and superior engagement with their members and patients.
Recent Developments, Trends and Other Factors Impacting Performance
We believe our reinsurance agreements help us achieve important goals for our business, including risk management, capital efficiency, and greater predictability in our earnings in the event of unexpected significant fluctuations in MLR. Specifically, reinsurance is a financial arrangement under which the reinsurer agrees to cover a portion of our medical claims (ceded claims) in return for a portion of the premium (premiums ceded). Our reinsurance agreements are contracted under two different types of arrangements: quota share reinsurance contracts and excess of loss ("XOL") reinsurance contracts. Reinsurance agreements do not relieve us of our primary medical claims incurred obligations. Quota Share Reinsurance We currently use quota share agreements to limit our risk and capital requirements, which has enabled us to grow while optimizing our use of capital. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company's losses arising out of a defined class of business in exchange for a corresponding percentage of premiums. Premiums for quota share reinsurance are based on a percentage of premiums earned before ceded reinsurance. Each quota share reinsurance agreement includes a ceding commission payment from the reinsurer to Oscar to cover administrative costs. To the extent ceded premiums exceed ceded claims and commissions, we typically receive an experience refund. Reinsurance recoveries are recorded as a reduction to claims incurred, net. 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
Holdcoto our health insurance subsidiaries. The Company currently has quota share reinsurance arrangements with more than one counterparty with multiple state-level treaties. These arrangements are accounted for under both reinsurance accounting and deposit accounting. For the three months ended March 31, 2022and 2021, approximately 29% and 43%, respectively, of our premiums were ceded under quota share reinsurance agreements accounted for under reinsurance accounting. For the three months ended March 31, 2022, approximately 19% of our premiums covered under quota share reinsurance arrangements were accounted for under deposit accounting. XOL Reinsurance We use ("XOL") reinsurance to limit our exposure to large catastrophic risk from individual claims. Under XOL reinsurance, the reinsurer agrees to assume all or a portion of the ceding company's losses in excess of a specified amount. The premium payable to the reinsurer is negotiated by the parties based on losses on an individual member in a given calendar year and their assessment of the amount of risk being ceded to the reinsurer. Under our XOL reinsurance contracts, the reinsurer is paid to cover claims related losses over a $750,000attachment point. 26
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The risk adjustment programs in the Individual,
Small Group, and Medicare Advantage markets we serve are administered federally by Centers for Medicare & Medicaid Services("CMS") and are designed to mitigate the potential impact of adverse selection and provide stability for health insurers. Under this program, each plan is assigned a risk score based upon demographic information and current year claims information related to its members. The risk score is used to adjust plan revenue to reflect the relative risk of the plan's enrolled population. We reevaluate our risk transfer estimates as new information and market data becomes available until we receive the final reporting from CMS in later periods, up to twelve months in arrears. Our risk transfer estimates are subject to a high degree of estimation and variability, and are affected by the relative risk of our members, and in the case of ACA, relative to that of other insurers. In 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. Seasonality Our business is generally affected by the seasonal patterns of our member enrollment and medical expenses, health plan mix shift and, to a lesser extent, marketing spend in advance of an Open Enrollment Period or Annual Election Period. Direct policy premiums earned are historically highest in the first quarter, primarily due to the annual enrollment cycles and the enrollment of our members. Medical expenses are sensitive to the mix shift of the five "metal" health plan categories offered on the ACA, which differ based on the size of the monthly premium and the level of sharing of medical costs between us and our members. Medical expenses are historically highest towards the second half of the year due to a number of factors discussed below.
Our membership is measured as of a particular point in time and is concentrated in the Individual market. Membership 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. 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
Small Groupproducts, a large portion of membership is acquired between December 1 and January 1, with the remaining members acquired throughout the balance of the year. Claims Incurred Our medical expenses 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 generally shifts more costs to us in the second half of the year as we pay a higher proportion of claims. Our medical costs can also vary according to the number of days and holidays in a given period. In 2022, due to the mix shift to members with higher-premium/lower-deductible Silver plans, the medical claims pattern has shifted, resulting in steadier medical costs throughout the year rather than increasing medical costs as the year progresses.
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. Furthermore, the public health emergency extension for COVID-19 expires in
July 2022with Medicaid redeterminations expected to begin in August 2022. We will continue to monitor announcements related to the public health emergency and redeterminations and the potential impact on our membership and underwriting margin.
To date, we have experienced and may continue to experience changes in the
utilization patterns of our members, as the pandemic continues to affect
27 -------------------------------------------------------------------------------- Table of Contents 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. We also experienced, and may continue to experience, increased COVID-19 testing and treatment costs. We monitor external trends closely as these dynamics result in increased uncertainties around our expectations of both COVID-19 and non-COVID-19 related medical costs. We cannot accurately estimate the future net potential impact, positive or negative, to our medical claims expenses at this time. 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.
Financial Results Summary and Key Operating and Non-GAAP Financial Metrics
We regularly review a number of metrics, including the following key operating and non-GAAP financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, and make strategic decisions. We believe these operational and financial measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with GAAP. Financial Results Summary Three Months Ended March 31, 2022 March 31, 2021 (in thousands) Premiums before ceded reinsurance
$ 1,315,064 $ 610,099Reinsurance premiums ceded (359,663) (241,562) Premiums earned $ 955,401 $ 368,537Total revenue $ 972,765 $ 369,388Total operating expenses $ 1,041,294 $ 433,429Net loss $ (77,320) $ (88,881)
Key Operating and Non-GAAP Financial Metrics
As of March 31, Membership by Offering 2022 2021 Individual and Small Group 1,032,768 535,001 Medicare Advantage 4,607 3,628 Cigna + Oscar (1) 36,220 3,591 Total 1,073,595 542,220
(1) Represents total membership for our co-branded partnership with Cigna.
Table of Contents Three Months Ended March 31, 2022 March 31, 2021 Direct and Assumed Policy Premiums (in thousands)
$ 1,681,211 $ 823,225Medical Loss Ratio 77.4 % 74.4 % InsuranceCo Administrative Expense Ratio 19.8 % 19.8 % InsuranceCo Combined Ratio 97.2 % 94.2 % Adjusted Administrative Expense Ratio 23.8 % 26.0 % Adjusted EBITDA(1) (in thousands) $
(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 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 98% to 1,073,595 as of
March 31, 2022, from 542,220 as of March 31, 2021. The increase in membership is driven largely by growth in the Individual market, as well as increases due to serving new C+O members. Our growth also reflects strong retention and growth in core Individual markets during open enrollment, including in Florida, Texasand Georgia, despite having the lowest cost plan in only 8% of our markets.
Direct and Assumed Policy Premiums
Direct Policy Premiums are defined as the premiums collected from our members or from the federal government during the period indicated, before risk adjustment and reinsurance. These premiums include APTC, or premium subsidies, which are available to individuals and families with certain annual incomes. Assumed Policy Premiums are premiums we receive primarily as part of our reinsurance arrangements under our C+O small group plan offering. We believe Direct and Assumed Policy Premiums is an important metric to assess the growth of our individual and small group plan offerings going forward. Management also views Direct and Assumed Policy Premiums as a key operating metric because each of our MLR, InsuranceCo Administrative Expense Ratio, InsuranceCo Combined Ratio and Adjusted Administrative Expense Ratio are calculated on the basis of Direct and Assumed Policy Premiums. Direct and Assumed Policy Premiums increased for the three months ended
March 31, 2022as compared to the three months ended March 31, 2021, driven primarily by higher membership and mix shift to higher premium Silver plans. 29
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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
(in thousands) Direct claims incurred before ceded reinsurance (1)
$ 1,010,035 $ 457,219Assumed reinsurance claims 24,242 1,777 Excess of loss ceded claims (2) (11,433) (4,736) State reinsurance (3) (11,329) (2,343) Net claims before ceded quota share reinsurance (A) $
Premiums before ceded reinsurance (4) $
Excess of loss reinsurance premiums (5) (8,128) (2,935) Net premiums before ceded quota share reinsurance (B)
$ 1,306,936 $ 607,164Medical Loss Ratio (A divided by B) 77.4 % 74.4 % (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 - Revenue Recognition 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 ended
March 31, 2022as compared to the three months ended March 31, 2021. The increase was primarily driven by a mix shift towards Silver plans and change in prior period development, which was partially offset by favorable net impact of COVID-19.
InsuranceCo Administrative Expense Ratio
InsuranceCo Administrative Expense Ratio is calculated as set forth in the table below. The ratio reflects the costs associated with running our combined insurance companies. We believe InsuranceCo Administrative Expense Ratio is useful to evaluate our ability to manage our expenses as a percentage of premiums before the impact of quota share reinsurance. Expenses necessary to run the insurance company are included in other insurance costs and federal and state assessments. These expenses include variable expenses paid to vendors and distribution partners, premium taxes and healthcare exchange fees, employee-related compensation, benefits, marketing costs, and other administrative expenses. The impact of the Company's quota share arrangements is excluded from the numerator and denominator in the calculation below. Below is a calculation of our InsuranceCo Administrative Expense Ratio for the periods indicated. 30
Table of Contents Three Months Ended March 31, 2022 March 31, 2021 (in thousands) Other insurance costs
$ 165,402 $ 79,837Impact of quota share reinsurance (1) 36,479 19,306 Stock-based compensation expense (13,078) (9,695) Federal and state assessment of health insurance subsidiaries 70,211 30,598
Health insurance subsidiary adjusted administrative expenses (A)
Premiums before quota share reinsurance (2) $
Excess of loss reinsurance premiums (8,128) (2,935) Net premiums before quota share reinsurance (B)
$ 1,306,936 $ 607,164Insurance Co Administrative Expense Ratio (A divided by B) 19.8 % 19.8 % (1)Includes ceding commissions received from reinsurers, net of the impact of deposit accounting of $(1,832)for the three months ended March 31, 2022. (2)See Note 3 - Revenue Recognition 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 remained flat for the three months ended March 31, 2022as compared to the three months ended March 31, 2021, as higher distribution expenses were offset by operating leverage and variable cost efficiencies.
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 increased for the three months ended
March 31, 2022as compared to the three months ended March 31, 2021. The increase was attributable to the same factors that drove our MLR and InsuranceCo Administrative Expense Ratio. 31
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Adjusted Administrative Expense Ratio
The Adjusted Administrative Expense Ratio is an operating ratio that reflects the Company's total administrative expenses (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 the impact of quota share reinsurance. 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. Three Months Ended
(in thousands) Total Operating Expenses
$ 1,041,294 $ 433,429Claims incurred, net (734,566) (268,048) Premium deficiency reserve release 3,205 9,543 Impact of quota share reinsurance (1) 36,479 19,306 Total Administrative Expenses $ 346,412 $ 194,230Stock-based compensation expense/warrant expense (27,690) (31,971) Depreciation and amortization (3,799) (3,403) Other non-recurring items (2) - (898) Adjusted Administrative Expenses (A) $ 314,923 $ 157,958Total Revenue $ 972,765 $ 369,388Reinsurance premiums ceded 359,663 241,562 Excess of loss reinsurance premiums (8,128) (2,935) Adjusted Total Revenue (B) $ 1,324,300 $ 608,015Adjusted Administrative Expense Ratio (A divided by B) 23.8 % 26.0 % (1)Includes ceding commissions received from reinsurers, net of the impact of deposit accounting of $(1,832)for the three months ended March 31, 2022. (2)Represents approximately $0.9 millionof non-recurring expenses incurred in connection with the Company's initial public offering ("IPO") during the three months ended March 31, 2021. The Adjusted Administrative Expense Ratio improved for the three months ended March 31, 2022as compared to the three months ended March 31, 2021, primarily due to better operating leverage and scale efficiencies from our full stack technology platform. 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. 32 -------------------------------------------------------------------------------- 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 March 31, 2022 March 31, 2021 (in thousands) Net loss $ (77,320) $ (88,881)Interest expense 4,221 3,697 Other expenses 3,053 - Income tax expense 1,517 965 Depreciation and amortization 3,799 3,403 Stock-based compensation/warrant expense(1) 27,690 31,972 Other non-recurring items(2) - 21,076 Adjusted EBITDA $ (37,040) $ (27,768)
(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 the Company's Term Loan (refer to Note 10 - Long-Term Debt) and approximately $0.9 millionof non-recurring expenses incurred in connection with the IPO.
Components of our Results of Operations
Premiums Before Ceded Reinsurance
Premiums before ceded reinsurance primarily consist of premiums received, or to be received, directly from our members or from CMS as part of the APTC program, net of the impact of our risk adjustment payable. Premiums before ceded reinsurance are generally impacted by the amount of risk sharing adjustments, our ability to acquire new members and retain existing members, and average size and premium rate of policies. Reinsurance Premiums Ceded Reinsurance premiums ceded represent the amount of premiums written that are ceded to reinsurers either through quota share or XOL reinsurance. We enter into reinsurance agreements, in part, to limit our exposure to potential losses as well as to provide additional capacity for growth. Reinsurance premiums ceded are recognized over the reinsurance contract period in proportion to the period of risk covered. The volume of our reinsurance premiums ceded is impacted by the level of our premiums earned and any decision we make to increase or decrease limits, retention levels, and co-participations.
Administrative Services Revenue
Administrative services revenue includes income earned from administrative
services performed as part of the +Oscar platform.
Investment Income (Loss) and Other Revenue
Investment income and other revenue primarily includes interest earned and gains
on our investment portfolio, along with sublease income.
33 -------------------------------------------------------------------------------- Table of Contents Claims Incurred, Net Claims incurred, net primarily consists of both paid and unpaid medical expenses incurred to provide medical services and products to our members. Medical claims include fee-for-service claims, pharmacy benefits, capitation payments to providers, provider disputed claims and various other medical-related costs. Under fee-for-service claims arrangements with providers, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of hospital and physician services. Medical claims are recognized in the period health care services are provided. Unpaid medical expenses include claims reported and in the process of being settled, but that have not yet been paid, as well as health care costs incurred but not yet reported to us, which are collectively referred to as benefits payable or claim reserves. The development of the claim reserve estimate is based on actuarial methodologies that consider underlying claim payment patterns, medical cost inflation, historical developments, such as claim inventory levels and claim receipt patterns, and other relevant factors. The methods for making such estimates and for establishing the resulting liability are continuously reviewed and any adjustments are reflected in the period determined. Claims incurred, net also reflects the net impact of our ceded reinsurance claims.
Other Insurance Costs
Other insurance costs primarily include distribution costs, wages, benefits, marketing, rent, costs of software and hardware, unallocated claims adjustment expenses, and administrative costs associated with functions that are necessary to support our health insurance business. Such functions include, but are not limited to, member concierge services, claims processing, utilization management, and related health plan operations, actuarial, compliance and portions of information systems, legal and finance. This line item also includes ceding commissions we receive from our reinsurance partners, net of the impact of deposit accounting.
General and Administrative Expenses
General and administrative expenses primarily include wages, benefits, costs of software and hardware, and administrative costs for our corporate and technology functions. Such functions include, but are not limited to executive management, and portions of legal, finance and information systems, including product management and development.
Federal and State Assessments
Federal and state assessments represent non-income tax charges from federal and state governments, including but not limited to healthcare exchange user fees, premium taxes, franchise taxes, and other state and local non-premium related taxes.
Premium Deficiency Reserve Release
Premium deficiency reserve release is the year over year change in the premium
deficiency reserve liability. Premium deficiency reserve liabilities are
established when it is probable that expected future claims and maintenance
expenses will exceed future premium and reinsurance recoveries on existing
medical insurance contracts without consideration of investment income.
Income Tax Provision
Income tax provision 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. 34 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Three Months Ended
The following table sets forth our results of operations for the periods indicated: Three Months Ended March 31, 2022 2021 $ Change % Change (in thousands) Revenue Premiums before ceded reinsurance
$ 1,315,064 $ 610,099 $ 704,965116 % Reinsurance premiums ceded (359,663) (241,562) (118,101) 49 % Premiums earned 955,401 368,537 586,864 159 % Administrative services revenue 18,493 341 18,152 *NM Investment income (loss) and other revenue (1,129) 510 (1,639) (321) % Total revenue 972,765 369,388 603,377 163 % Operating Expenses Claims incurred, net 734,566 268,048 466,518 174 % Other insurance costs 165,402 79,837 85,565 107 % General and administrative expenses 74,664 64,572 10,092 16 % Federal and state assessments 69,867 30,515
39,352 129 %
Premium deficiency reserve release (3,205) (9,543) 6,338 (66) % Total operating expenses 1,041,294 433,429 607,865 140 % Loss from operations (68,529) (64,041) (4,488) 7 % Interest expense 4,221 3,697 524 14% Other expenses 3,053 - 3,053 *NM Loss on extinguishment of debt - 20,178 (20,178) *NM Loss before income taxes (75,803) (87,916) 12,113 (14) % Income tax provision 1,517 965 552 57 % Net loss
$ (77,320) $ (88,881) $ 11,561(13) % *NM - not meaningful
Premiums Before Ceded Reinsurance
Premiums before ceded reinsurance increased
$705.0 million, or 116%, to $1.3 billionfor the three months ended March 31, 2022, from $610.1 millionfor the three months ended March 31, 2021, which was primarily due to higher membership driven largely by growth in the Individual line of business, as well as increases due to serving new C+O members. Oscar's growth also reflects strong retention and growth in core markets during open enrollment, including in Florida, Texasand Georgia, despite having the lowest cost plan in only 5% of its markets. Reinsurance Premiums Ceded Reinsurance premiums ceded increased $118.1 million, or 49%, to $359.7 millionfor the three months ended March 31, 2022, from $241.6 millionfor the three months ended March 31, 2021. The increase is driven by the growth in premiums before ceded reinsurance discussed above. 35 -------------------------------------------------------------------------------- Table of Contents Administrative Services Revenue Administrative services revenue increased $18.2 millionto $18.5 millionfor the three months ended March 31, 2022, from $0.3 millionfor the three months ended March 31, 2021. This increase was driven by the launch of our newest +Oscar client, in January 2022, Health First Health Plans, which is utilizing our technology and services to support their Individual and Medicare Advantage members.
Investment Income (Loss) and Other Revenue
Other revenue decreased to
$1.1 millionloss for the three months ended March 31, 2022, from $0.5 millionincome for the three months ended March 31, 2021, primarily due to changes in market condition and interest rates.
Claims Incurred, Net
Claims incurred, net, increased
$466.5 million, or 174%, to $734.6 millionfor the three months ended March 31, 2022, from $268.0 millionfor the three months ended March 31, 2021. The increase was primarily volume-driven due to the growth in membership, as well as lower utilization in 2021 due to the COVID-19 pandemic, partially offset by favorable prior period development.
Other Insurance Costs
Other insurance costs increased
$85.6 million, or 107%, to $165.4 millionfor the three months ended March 31, 2022, from $79.8 millionfor the three months March 31, 2021. The increase was primarily attributable to higher broker commissions and user exchange fees, which were driven by the increase in membership.
General and Administrative Expenses
General and administrative expenses increased
$10.1 million, or 16%, to $74.7 millionfor the three months ended March 31, 2022, from $64.6 millionfor the three months ended March 31, 2021. The increase was primarily attributable to higher employee-related costs.
Federal and State Assessments
Federal and state assessments increased
$39.4 million, or 129%, to $69.9 millionfor the three months ended March 31, 2022, from $30.5 millionfor the three months ended March 31, 2021, which was primarily due to higher user exchange fees and premium taxes as a result of membership growth.
Premium Deficiency Reserve Release
Premium deficiency reserve release decreased
$6.3 millionfor the three months ended March 31, 2022, from $9.5 millionfor the three months ended March 31, 2021, due to the lower premium deficiency reserve established at the end of 2021 as compared to the reserve established at the end of 2020.
Income Tax Provision
Our effective tax rate for the three months ended
Liquidity 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 is in the form of cash and cash equivalents and investments. As of
March 31, 2022and December 31, 2021, total cash and cash equivalents and investments held by our health insurance subsidiaries was $2.7 billionand $1.8 billion, respectively, of which $17.5 millionand $17.0 million, 36 -------------------------------------------------------------------------------- Table of Contents 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 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 $688.7 millionand $474.8 millionat March 31, 2022and December 31, 2021, respectively, which was in compliance with and in excess of the minimum capital requirements for each period. The health insurance subsidiaries historically have required capital contributions from Holdcoto maintain minimum levels. The health insurance subsidiaries may be subject to additional capital and surplus requirements in the future, which may require us to incur additional indebtedness, sell capital stock, or access other sources of funding in order to fund such requirements. Any such funding may not be available on favorable terms, or at all. 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 three months ended March 31, 2022and the year ended December 31, 2021, Holdcomade $216.0 millionand $540.9 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 $450.7 millionand $147.9 millionof additional capital as of March 31, 2022and December 31, 2021, respectively, 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 Part I, Item 1A "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," in our Annual Report on Form 10-K The majority of the assets held by Holdcoare in the form of cash and cash equivalents and investments. As of March 31, 2022and December 31, 2021, total cash and cash equivalents and investments held by Holdcowas $735.3 millionand $738.6 million, respectively, of which $9.7 millionand $11.0 millionwas restricted for 2022 and 2021, 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 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, in 2022, we expect to make a payment through our health insurance subsidiaries of greater than $700 millioninto the risk adjustment program for the 2021 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.
Convertible Senior Notes
January 27, 2022, we entered into an investment agreement (the "Investment Agreement") pursuant to which we agreed to issue and sell $305.0 millionin aggregate principal amount of 7.25% convertible senior notes due 2031 (the "2031 Notes") in a private placement to funds affiliated with or advised by Dragoneer Investment Group, LLC, Thrive Capital, LionTree Investment Management, LLCand Tenere Capital LLC. 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 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. See Note 10 - Long-Term Debt for additional information.
Revolving Credit Facility
February 21, 2021, we entered into a senior secured credit agreement (the "Revolving Credit Facility"), with Wells Fargo Bank, National Associationas 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 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 37 -------------------------------------------------------------------------------- Table of Contents 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.
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("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 10 - Long-Term Debt of our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Interest Rate, Commitment Fees
The interest rate applicable to borrowings under our Revolving Credit Facility is determined as follows, at our option: (a) a rate per annum equal to an adjusted London Inter-bank Offered Rate ("LIBOR") plus an applicable margin of 4.50% ("Adjusted LIBOR"), is calculated based on one-, three- or six-month LIBOR, or such other period as agreed by all relevant Lenders, which is determined by reference to
ICE Benchmark Administration Limited, but not less than 1.00%), or (b) a rate per annum equal to the Alternate Base Rate plus the applicable margin of 3.50% (the Alternate Base Rate is equal to the highest of (i) the prime rate, (ii) the federal funds effective rate plus 0.50%, and (iii) the Adjusted LIBOR based on a one-month interest period, plus 1.00%). A commitment fee of 0.50% per annum is payable under our Revolving Credit Facility on the actual daily unused portions of the Revolving Credit Facility. The Revolving Credit Facility also contains LIBOR replacement provisions in the event LIBOR becomes unavailable during the term of this facility. The Revolving Credit Facility requires us to comply with certain restrictive covenants, including but not limited to covenants relating to limitations on indebtedness, liens, investments, loans and advances, restricted payments and restrictive agreements, mergers, consolidations, sale of assets and acquisitions, sale and leaseback transactions and affiliate transactions. In addition, the Revolving Credit Facility contains financial covenants that require us to maintain specified levels of direct policy premiums and liquidity and require compliance with a maximum combined ratio.
We generally invest cash of our health insurance subsidiaries in
U.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 and U.S.treasury securities; we have the ability to hold such restricted investments until maturity. The Company maintains cash and cash equivalents and investments on deposit or pledged to various state agencies as a condition for licensure. We classify our restricted deposits as long-term given the requirement to maintain such assets on deposit with regulators. Summary of Cash Flows Our cash flows used in operations may differ substantially from our net loss due to non-cash charges or due to changes in balance sheet accounts. 38
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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: Three Months Ended March 31, 2022 2021 Change (in thousands) Net cash provided by operating activities
$ 562,849 $ 317,691 $ 245,158Net cash provided by (used in) investing activities 102,811 (34,280) 137,091 Net cash provided by financing activities 298,775 1,211,550 (912,775) Net increase in cash and cash equivalents and restricted cash equivalents $ 964,435
Net cash provided by operating activities increased
$245.2 millionto $562.8 millionfor the three months ended March 31, 2022, compared to $317.7 millionprovided by operating activities for the three months ended March 31, 2021, primarily due to membership growth, which resulted in increased premiums and accounts receivable and reinsurance recoverable under our quota share reinsurance program. Our risk adjustment transfer payable also increased as a result of membership growth and the health status of our members, who continue to have lower than average risk scores compared to the health status of other participants in ACA plans. Investing Activities Net cash provided by investing activities increased to $102.8 millionfor the three months ended March 31, 2022, compared to $34.3 millionnet cash used in investing activities for the three months ended March 31, 2021, an increase of $137.1 million. The increase was primarily due to the sale and maturity of securities within our investment portfolio.
Net cash provided by financing activities decreased
$912.8 millionto $298.8 millionfor the three months ended March 31, 2022, compared to $1.2 billionfor the three months ended March 31, 2021. The decrease was primarily due to net proceeds received from the sale of common stock during our IPO in March 2021, slightly offset by net proceeds received from the issuance of convertible notes in February 2022.