CLOVER HEALTH INVESTMENTS, CORP. /DE – 10-K – Management report and analysis of the financial situation and operating results.

The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of our consolidated
results of operations and financial condition. The discussion should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2021, contained in this Annual Report on Form 10-K (the
"Form 10-K"). This discussion contains forward-looking statements and involves
numerous risks and uncertainties, including, but not limited to, those described
in the "Risk Factors" section of this document. Actual results may differ
materially from those contained in any forward-looking statements. Unless the
context otherwise requires, references in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" to "we," "us," "our,"
"Clover," the "Company," and the "Corporation" are intended to mean the business
and operations of Clover Health Investments, Corp. and its consolidated
subsidiaries subsequent to the closing of the Business Combination (as defined
below).

Overview

At Clover Health, we are singularly focused on creating great, sustainable
healthcare to improve every life. We have centered our strategy on building and
deploying technology that we believe will enable us to solve a significant data
problem while avoiding the limitations of legacy approaches. We leverage our
flagship software platform, the Clover Assistant, to help America's seniors
receive better care at lower costs. By empowering physicians with data-driven,
personalized insights at the point of care through our software, we believe we
can improve clinical decision making.

We operate Preferred Provider Organization (PPO) and Health Maintenance
Organization (HMO) Medicare Advantage (MA) plans for Medicare-eligible
consumers. We call our plans "Obvious" because we aim to provide great,
affordable healthcare for all-we offer most of our MA members (the "members")
the lowest average out-of-pocket costs for primary care provider co-pays,
specialist co-pays, drug deductibles and drug costs in their markets. Unlike
most MA plans, we deeply believe in providing our members provider choice, and
we consider our PPO plan to be our flagship insurance plan. An important feature
of our MA product is wide network access, and we often offer the same
cost-sharing (co-pays and deductibles) for visits with primary care providers
who are in- and out-of-network. We believe the use of the Clover Assistant and
related data insights allows us to improve clinical decision-making through a
highly scalable asset-light approach. As of January 1, 2022, we operated our MA
plans in nine states and 209 counties, with 84,403 MA members.

On April 1, 2021, our subsidiary, Clover Health Partners, LLC (Health Partners),
began participating as a direct contracting entity (DCE) in the Global and
Professional Direct Contracting Model (DC Model) of the Centers for Medicare and
Medicaid Services (CMS), an agency of the United States Department of Health and
Human Services. Our DCE assumes full risk (i.e., 100.0% shared savings and
shared losses) for the total cost of care of aligned Original Medicare
beneficiaries (the "DCE Beneficiaries" and, collectively with the members,
"Lives under Clover Management" or the "beneficiaries"). We operate our Direct
Contracting (DC) operations through Health Partners, which focuses on our
technology platform, the Clover Assistant, to enhance healthcare delivery,
reduce expenditures, and improve care for DCE Beneficiaries. As of December 31,
2021, we had approximately 720 contracted participating providers who manage
primary care for our DCE Beneficiaries. Additionally, as of December 31, 2021,
we had approximately 635 preferred providers and preferred facilities in our DCE
network. Our participation in the DC Model has enabled us to moved beyond the MA
market and target the Medicare fee-for-service (FFS) market, which is the
largest segment of Medicare. We believe that expanding into the FFS market is
not only a strategic milestone for Clover but also demonstrates the scalability
of the Clover Assistant. Additionally, in 2021, we announced our plans to scale
our in-home primary care program, Clover Home Care, through our DC operations.
Clover Home Care was designed to better identify and care for our most medically
complex members, with a focus on health outcomes improvement and medical expense
reduction rather than risk adjustment.

As of December 31, 2021, we were partnering with providers to care for 129,996
Lives under Clover Management, which included 68,120 Medicare Advantage members
and 61,876 aligned DCE Beneficiaries. The number of Lives under Clover
Management as of December 31, 2021, was approximately double the number of Lives
under Clover Management as of January 1, 2021.

RECENT DEVELOPMENTS

Geographic expansion

In January 2022, we launched our MA plans in 101 new counties and an additional
state, and we announced that our MA membership had grown by over 25% versus the
beginning of 2021. This expansion makes our MA plans available in a total of 209
counties across nine states. Additionally, after launching our DCE in eight
states in April 2021, we have grown our Direct Contracting presence to 22 states
in 2022.

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Issue of common shares

In November 2021, we completed an underwritten public offering of 52,173,913
shares of Class A Common Stock at $5.75 per share. We received net proceeds of
$283.8 million, after deducting underwriting discounts and commissions and other
offering costs.

CMS Stars

On October 8, 2021, we announced that CMS assigned Clover's PPO plan 3.5 stars
on the Medicare Star Ratings for its MA plans for the 2020 measurement year.
Over 90% of our MA membership is served through our PPO plan. The higher rating
could positively impact the reimbursement rate for our PPO plan beginning in
2023 as well as potentially positively impact the plan's image in the market.
Higher-rated plans may offer enhanced benefits and additional enrollment
opportunities compared to lower-rated plans.

Trade suit

On January 7, 2021, we consummated the previously announced domestication and
mergers (the "Business Combination") pursuant to that certain Agreement and Plan
of Merger, dated October 5, 2020 (the "Merger Agreement"), by and among Social
Capital Hedosophia Holdings Corp III, a Cayman Islands exempted company (SCH),
Asclepius Merger Sub Inc., a Delaware corporation and a direct wholly-owned
subsidiary of SCH, and Clover Health Investments, Inc., a corporation originally
incorporated on July 17, 2014, in the state of Delaware (Legacy Clover), and us.
Additionally, in connection with the Business Combination, we issued and sold to
certain investors an aggregate of 40,000,000 shares of our Class A Common Stock
for an aggregate purchase price equal to $400.0 million (the "PIPE Investment")
concurrently with the completion of the Business Combination. As a result of the
Business Combination, we became the successor to a public company, which
required us to hire additional personnel and implement procedures and processes
to address public company regulatory requirements and customary practices.

For additional information regarding the impacts of the Business Combination,
see Note 3 (Business Combination), Note 12 (Notes and Securities Payable), Note
13 (Warrants Payable), and Note 17 (Stockholders' Equity and Convertible
Preferred Stock) to Financial Statements in this report.

Impact of COVID-19

Advertising

The societal and economic impact of the COVID-19 pandemic continues to evolve,
and the ultimate impact on our business, results of operations,
the condition and cash flows are uncertain and difficult to predict. The Global
the pandemic has severely affected businesses around the world, including many in the
health insurance sector.

We are continuing to monitor the ongoing financial impact of COVID-19 on our
business and operations and are making adjustments accordingly. A large portion
of our membership is elderly and generally in the high-risk category for
COVID-19, and we have worked closely with our network of providers to ensure
that members are receiving necessary care. During 2021, we incurred elevated
costs as compared to 2020 to care for those members who have contracted the
virus, and indirect costs attributable to the COVID-19 pandemic increased as
well, as deferral of services and increased costs related to conditions that
were exacerbated by a lack of diagnoses and treatment in the earlier periods of
the pandemic contributed to increased utilization. We will continue to monitor
the pandemic's emerging treatment-related trends as well as the impact on our
beneficiaries. Additionally, CMS risk adjustment requires that a member's health
issues be documented annually regardless of the permanence of the underlying
causes. Historically, this documentation was required to be completed during an
in-person visit with a patient. As part of relief measures adopted pursuant to
the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), CMS is
allowing documentation prepared during video visits with patients to serve as
support for CMS risk adjustments. While our ability to document health
conditions was adversely impacted in 2020 and early 2021, the comprehensiveness
of the documentation improved throughout 2021. We intend to leverage the Clover
Assistant to increase in-person and video visits for our members and document
their health conditions on a timely basis, which we expect to have a positive
impact on risk adjustment and revenue for the applicable populations.
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The information presented in the following table illustrates the financial situation
results of our MA segment impacted by COVID-19:

Years ended December 31,                                     2021                                         2020
                                              Total                         PMPM (1)            Total             PMPM (1)
                                                                (dollars in thousands, except PMPM amounts)
Premiums earned, net                     $    799,414                     $     996          $ 665,698          $     976
Medicare Advantage net medical claims                     (2)
incurred                                      847,286                         1,056            591,038                866

Medical care ratio, net (MCR) (3)               106.0   %                          N/A            88.8  %                N/A


(1) Calculated per member per month (PMPM) figures are based on the applicable
amount divided by member months in the given period. Member months represents
the number of months members are enrolled in a Clover Health Plan in the period.

(2) Net medical claims incurred reported for Medicare Advantage differs from the
corresponding amount reported on the Consolidated Statements of Operations and
Comprehensive Loss due to the impacts of eliminations.

(3) Defined as net AD medical claims incurred divided by earned premiums, net.

For additional information regarding the risks to our business and results of
operations related to the COVID-19 pandemic, see the section entitled "Risk
Factors-Risks Related to Clover's Business and Industry-We are subject to risks
associated with the COVID-19 pandemic, which could have a material adverse
effect on our business, results of operations, financial condition and financial
performance" in Part I, Item IA of this document.

Main performance measures of our operating segments

Operating segments

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

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

We review several key performance measures, discussed below, to evaluate our
business and results, measure performance, identify trends, formulate plans, and
make strategic decisions. We believe that the presentation of such metrics is
useful to management and counterparties to model the performance of healthcare
companies such as Clover.
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Benefit of Medicare

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

Years ended December 31,                                     2021                                       2020
                                                Total                       PMPM              Total              PMPM
Medicare Advantage Data                           (Premium and expense amounts in thousands, except PMPM amounts)
Members as of period end (#)                    68,120                           N/A          58,056                  N/A
Premiums earned, gross                     $   799,903                  $     997          $ 666,297          $    975
Premiums earned, net                           799,414                        996            665,698               976
MA medical claim expense incurred, gross       848,288                      1,057            591,521               867
MA net medical claims incurred                 847,286      (1)             1,056            591,038               866
Medical care ratio, gross (2)                    106.0    %                      N/A            88.8  %               N/A
Medical care ratio, net                          106.0                           N/A            88.8                  N/A


(1) Net medical claims incurred reported for Medicare Advantage differs from the
corresponding amount reported on the Consolidated Statements of Operations and
Comprehensive Loss due to the impacts of eliminations.

(2) Defined as our MA gross medical claims incurred divided by earned premiums,
raw.

Membership and associated premiums earned and medical expenses

We define new and returning members on a calendar year basis. Any member who is
active on July 1 of a given year is considered a returning member in the
following year. Any member who joins a Clover plan after July 1 in a given year
is considered a new member for the entirety of the following calendar year. We
view our number of members and associated PMPM premiums earned and medical claim
expenses, in the aggregate and on a PMPM basis, as important metrics to assess
our financial performance because member growth aligns with our mission, drives
our total revenues, expands brand awareness, deepens our market penetration,
creates additional opportunities to inform our data-driven insights to improve
care and decrease medical claim expenses, and generates additional data to
continue to improve the functioning of the Clover Assistant. Among other things,
the longer a member is enrolled in one of our MA plans, the more data we collect
and synthesize and the more actionable insights we generate. We believe these
data-driven insights lead to better care delivery as well as improved
identification and documentation of members' chronic conditions, helping to
lower PMPM medical claim expenses.

Earned premiums, gross

Premiums earned, gross is the amount received, or to be received, for insurance
policies written by us during a specific period of time without reduction for
premiums ceded to reinsurance. We believe premiums earned, gross provides useful
insight into the gross economic benefit generated by our business operations and
allows us to evaluate our underwriting performance without regard to changes in
our underlying reinsurance structure. Premiums earned, gross excludes the
effects of premiums ceded to reinsurers, and therefore should not be used as a
substitute for premiums earned, net, total revenue or any other measure
presented in accordance with GAAP.

Earned premiums, net

Premiums earned, net represents the earned portion of our premiums earned,
gross, less the earned portion that is ceded to third-party reinsurers under our
reinsurance agreements. Premiums are earned in the period in which members are
entitled to receive services, and are net of estimated uncollectible amounts,
retroactive membership adjustments, and any adjustments to recognize rebates
under the minimum benefit ratios required under the Patient Protection and
Affordable Care Act (ACA).

Premiums earned, gross is the amount received, or to be received, for insurance
policies written by us during a specific period of time without reduction for
premiums ceded to reinsurance. We earn premiums through our plans offered under
contracts with CMS. We receive premiums from CMS on a monthly basis based on our
actuarial bid and the risk-adjustment model used by CMS. Premiums anticipated to
be received within twelve months based on the documented diagnostic criteria of
our members are estimated and included in revenue for the period including the
member months for which the payment is designated by CMS.

Premiums ceded is the amount of premiums earned, gross ceded to reinsurers. From
time to time, we enter into reinsurance contracts to limit our exposure to
potential losses as well as to provide additional capacity for growth. Under
these agreements, the "reinsurer," agrees to cover a portion of the claims of
another insurer, i.e., us, the "primary insurer," in return for a portion of
their premium. Ceded
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earned premiums are earned over the reinsurance contract period in proportion to
the period of risk covered. The volume of our ceded earned premium is impacted
by the level of our premiums earned, gross and any decision we make to adjust
our reinsurance agreements.

MA gross medical claims incurred

MA gross medical claims incurred reflects claims incurred excluding amounts
ceded to reinsurers and the costs associated with processing those claims. We
believe gross medical claims incurred provides useful insight into the gross
medical expense incurred by members and allows us to evaluate our underwriting
performance without regard to changes in our underlying reinsurance structure.

MA gross medical claims incurred excludes the effects of medical claims and
associated costs ceded to reinsurers, and should therefore not be used as
replace net incurred losses, total expenses or any other measure
presented in accordance with GAAP.

MA net medical claims incurred

MA net medical claims incurred are our medical expenses and consists of the
costs of claims, including the costs incurred for claims net of amounts ceded to
reinsurers. We enter into reinsurance contracts to limit our exposure to
potential catastrophic losses. These expenses generally vary based on the total
number of members and their utilization rate of our services.

Ratio of medical care, gross and net

We calculate our medical care ratio by dividing total MA medical claim expenses
incurred by premiums earned, in each case on a gross or net basis, as the case
may be, in a given period. We believe our MCR is an indicator of our gross
margin for our MA plans and the ability of our Clover Assistant platform to
capture and analyze data over time to generate actionable insights for returning
members to improve care and reduce medical expenses.

Direct contracting

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

                                                                    Year ended December 31, 2021
                                                                  Total                          PBPM
                                                        (Revenue and claims amounts in thousands, except PBPM
Direct Contracting Data(1)                                                  

the amounts)

Beneficiaries as of period end (#)                                    61,876                              N/A
Direct Contracting revenue                              $            667,639             $           1,194
Direct Contracting net medical claims incurred                       705,407                         1,262
Direct Contracting margin(2)                                           105.7     %                        N/A


(1) We started participating in Direct contracting in April 2021.

(2) Defined as Direct contracting net incurred medical claims divided by Direct
Contracting
income.

Beneficiaries

A beneficiary is defined as an eligible Original Medicare covered life that has
been aligned to our DCE, Health Partners, via attribution to a DCE-participating
provider through alignment based on claims data or by beneficiary election
through voluntary alignment. A beneficiary alignment is effective as of the
first of the month, for the full calendar month, regardless of whether
eligibility is lost during the course of the month.

Income from direct contracts

Direct Contracting revenue represents CMS' total expense incurred for medical
services provided on behalf of DCE Beneficiaries during months in which they
were alignment eligible during the performance year. Direct Contracting revenue
is calculated by taking the sum of the capitation payments made to us for
services within the scope of our capitation arrangement and FFS payments made to
providers directly from CMS. Direct Contracting revenue is also known in the DC
Model as performance year expenditures and is the primary component used to
calculate shared savings or shared loss versus the performance year benchmark.
Direct Contracting revenue includes a direct reduction or increase of shared
savings or loss, as applicable. Premiums and recoupments incurred in direct
relation to the DC Model are recognized as a reduction or increase in Direct
Contracting revenue, as applicable. We believe Direct
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Contract revenue provides a useful insight into the gross economic benefit
generated by our business operations and allows us to assess our performance
regardless of changes to our underlying reinsurance structure.

Direct contracts Net medical claims incurred

Direct Contracting net medical claims incurred consists of the total incurred
expense that CMS and we will remit for medical services provided on behalf of
DCE Beneficiaries during the months in which they are alignment eligible and
aligned to the DCE. Additionally, Direct Contracting net medical claims incurred
is inclusive of fees paid to providers for Clover Assistant usage, care
coordination, and any shared savings or shared loss agreements with providers.
Direct Contracting net medical claims incurred is presented on our Consolidated
Statements of Operations and Comprehensive Loss in accordance with GAAP.

Direct Contracting Margin (DCM)

We calculate our DCM by dividing Direct Contracting net medical claims incurred
by Direct Contracting revenue in a given period. We believe our DCM is an
indicator of our gross profitability and the ability to capture and analyze data
over time to generate actionable insights for returning beneficiaries to improve
care and reduce medical expenses.

Components of our operating results

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

Other Income

Other income mostly consists of income earned from rental agreements with third
parties for subleases of our leased office facilities. In addition, other income
includes income generated from ceded allowances under reinsurance agreements,
which are amounts paid by the reinsurers to help cover certain expenses incurred
by the ceding party in relation to the ceded contracts, and an immaterial amount
of other income from commissions related to premiums ceded under our reinsurance
agreements. Commissions from premiums ceded under reinsurance agreements are
earned when ceded to reinsurers over the period of policies. The amount of
commissions we earn is dependent upon the terms of our reinsurance contracts and
the amount of premiums ceded.

Other income also includes interest earned from fixed-maturity securities,
short-term securities and other investments, the gains or losses on sales and
maturities of investments. Our cash and invested assets primarily consist of
fixed-maturity securities, and may also include cash and cash equivalents,
equity securities, and short-term investments. The principal factors that
influence net investment income are the size of our investment portfolio and the
yield on that portfolio. As measured by amortized cost (which excludes changes
in fair value, such as changes in interest rates), the size of our investment
portfolio is mainly a function of our invested equity capital along with
premiums we receive less amounts paid in costs of care.

Other medical expenses

Other medical costs consist of other clinical services not included in Medicare
Advantage or Direct Contracting, and all other corporate overhead. Clinical
services is comprised of Clover Home Care and other clinical services that are
offered to eligible beneficiaries.

Salaries and benefits

Salaries and benefits include salaries, sales commissions, stock
compensation expenses, employee benefits, severance and payroll taxes
for employees.

Following the consummation of the Business Combination, we have incurred and
expect to continue to incur significant additional expenses for salaries and
benefits as a result of expanding our headcount to support our increased
compliance requirements associated with operating as a public company or
otherwise and the growth of our business. As a result, we expect that our
salaries and benefits will increase in absolute dollars in future periods and
vary from period-to-period as a percentage of revenue.

General and administrative costs

General and administrative expense consists of legal, accounting, tax and other
professional fees, consulting fees, hardware and software costs, payments to our
third-party cloud infrastructure providers for hosting our software, travel
expenses, recruiting fees, certain tax, license and insurance-related expenses,
including industry assessments, advertising and marketing costs, membership-
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incurred administrative costs, rental and occupancy costs, statutory and other
fees and other overheads. Administrative costs related to memberships consist of
registration costs, broker commissions and call center expenses.

We are subject to the ACA, which established insurance industry assessments,
including an annual health insurance industry fee. The annual health insurance
industry fee was suspended in 2019. In 2020, the fee incurred and paid by the
Corporation was approximately $8.0 million. The fee has been permanently
repealed beginning in 2021.

Following the consummation of the Business Combination, we have incurred and
expect to continue to incur significant additional general and administrative
expenses as a result of operating as a public company, including expenses
related to compliance with the rules and regulations of the SEC and the listing
standards of Nasdaq, additional corporate, director and officer insurance
expenses, greater investor relations expenses, and increased professional
service fees. As a result, we expect that our general and administrative
expenses will increase in absolute dollars in future periods and vary from
period-to-period as a percentage of revenue.

Reserve expense for insufficient premiums (benefit)

Premium deficiency reserves are established to the extent that the sum of
expected future costs, claim adjustment expenses, and maintenance costs exceeds
related future premiums. We assess the profitability of our contracts with CMS
to identify those contracts where current operating results or forecasts
indicate probable future losses. Premium deficiency reserve expense (benefit) is
recognized in the period in which the losses are identified. Premium deficiency
reserves are then amortized over the period in which losses were expected to
occur. The amortization is expected to have an offsetting impact to the
operating losses in that period. We may identify and recognize additional
premium deficiency reserves depending on the rates that are paid to us by CMS
based on our actuarial bids and the utilization of healthcare services by our
members.

Depreciation and amortization

Depreciation includes all depreciation
expenses associated with our property and equipment. Depreciation includes
expenditures related to property, plant and equipment. Depreciation includes charges
related to leasehold improvements.

Other expenses

Other expense consists primarily of debt issuance costs incurred in connection
with the issuance of an aggregate of $373.8 million initial principal amount of
convertible securities (Convertible Securities) in February, March, May, and
August 2019. The Convertible Securities were converted into shares of the
Corporation's Class B common stock upon the completion of the Business
Combination on January 7, 2021.

Change in fair value of warrants payable

Change in fair value of warrants payable is related to a mark-to-market
adjustment associated with warrants to purchase our capital stock. In connection
with the Closing, the warrants of Legacy Clover automatically converted into
shares of Class B Common Stock, and we are no longer required to re-measure the
value of those warrants. Change in fair value of warrants payable for our public
warrants (the "Public Warrants") and private placements warrants (the "Private
Placement Warrants") assumed in connection with the Business Combination
reflects the mark-to-market adjustment associated with warrants to purchase our
Class A Common Stock from January 7, 2021, through the end of the reporting
period. The change in fair value of warrants payable is inclusive of the warrant
amortization expense associated with the warrants payable in each period. We had
no Warrants outstanding following the exercises and redemptions of our Public
Warrants and Private Placement Warrants in the third quarter of 2021.

Interest charges

Interest expense consists mostly of interest expense associated with our
previously outstanding non-convertible notes (Term Loan Notes) under a term loan
facility entered into by us on March 21, 2017, for an aggregate principal amount
of $60.0 million (the "Loan Facility"). All remaining principal and accrued
interest under the Loan Facility was voluntarily paid, and the facility was
terminated, as of June 29, 2021. We also have interest expense associated with
the Seek Convertible Note entered into by Seek, an indirect wholly-owned
subsidiary, on September 25, 2020, for an aggregate principal amount of $20.0
million.

Amortization of tickets and discounts on titles

Amortization of notes and securities discounts consists of the amortization of
debt discount associated with the Convertible securitieswarrants and debt
issue costs associated with the term loan notes.

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(Gain) Loss on derivative

The (gain) loss on derivatives activity consists mainly of a (gain) loss on
embedded derivatives contained in Convertible securities. The integrated
derivatives related to the conversion characteristics of Convertible securities,
which reflected a premium above the principal and accrued interest thereon.

We recorded gains or losses on those derivatives based on the changes in fair
value of the embedded derivatives contained in the Convertible Securities. The
carrying amounts of these embedded derivatives were recorded at fair value at
issuance, marked-to-market as of each balance sheet date, and changes in fair
value were reported as either income or expense during the period.

To estimate the fair value attributable to these features, we estimated the
value of the Convertible Securities (i) with the embedded derivatives and
(ii) without the embedded derivatives. The incremental difference between the
two values was then used to estimate the fair value of the embedded derivatives.
A probability-weighted present value of expected future returns model was then
used to estimate the value of the conversion features under various probable
scenarios. The assumptions used to arrive at the estimated fair value generally
included the stock price, strike price, volatility, risk-free rate, and time to
maturity, among others.

At January 7, 2021as part of the Closing, the Convertible securities
converted into ordinary shares of the Company and the associated shares
the derivative liability has been eliminated.

Operating results

Comparison of years ended December 31, 2021 and 2020

The following table summarizes our consolidated operating results for
years ended December 31, 2021 and 2020. The comparison from one period to
results are not necessarily indicative of results in future periods.

                                                                                                       Change between
                                                             Years ended December 31,                  2021 and 2020
                                                             2021                   2020                           ($)                  (%)
                                                                 ($ in thousands)
Revenues
Premiums earned, net (Net of ceded premiums of $489
and $599 for the years ended December 31, 2021 and
2020, respectively)                                   $     799,414             $  665,698                    $  133,716                  20.1  %
Direct Contracting revenue                                  667,639                      -                       667,639                        *
Other income                                                  4,943                  7,190                        (2,247)                (31.3)
Total revenues                                            1,471,996                672,888                       799,108                 118.8
Operating expenses
Medicare Advantage net medical claims incurred              838,134                585,432                       252,702                  43.2
Direct Contracting net medical claims incurred              705,407                      -                       705,407                        *
Other medical costs                                           7,637                  4,650                         2,987                  64.2
Salaries and benefits                                       260,458                 71,256                       189,202                 265.5
General and administrative expenses                         185,287                120,830                        64,457                  53.3
Premium deficiency reserve expense (benefit)                110,628                (17,128)                      127,756                 745.9
Depreciation and amortization                                 1,246                    555                           691                 124.5
Other expense                                                   191                      -                           191                        *
Total operating expenses                                  2,108,988                765,595                     1,343,393                 175.5
Loss from operations                                       (636,992)               (92,707)                     (544,285)                587.1

Change in fair value of warrants payable                    (66,146)                80,328                      (146,474)               (182.3)
Interest expense                                              3,229                 35,990                       (32,761)                (91.0)
Amortization of notes and securities discount                13,681                 21,118                        (7,437)                (35.2)
(Gain) loss on derivative                                         -                (93,751)                       93,751                (100.0)
Net loss                                              $    (587,756)            $ (136,392)                   $ (451,364)                330.9  %


*  Not presented because the prior period amount is zero or the amount for the
line item changed from a gain to a loss (or vice versa) and thus yields a result
that is not meaningful.
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Earned premiums, net

Premiums earned, net increased $133.7 million, or 20.1%, to $799.4 million for
the year ended December 31, 2021, compared to the year ended December 31, 2020.
The increase was primarily due to membership growth of 17.3% from 58,056
Medicare Advantage members at December 31, 2020, to 68,120 Medicare Advantage
members at December 31, 2021. Additional risk adjustment revenue of $7.8 million
was recognized during the year ended December 31, 2021.

Income from direct contracts

Our participation in Direct Contracting launched in April 2021. Revenue related
to Direct Contracting was $667.6 million for the year ended December 31, 2021.
This revenue was attributable to the alignment of Original Medicare
beneficiaries to our DCE, which numbered 61,876 at December 31, 2021.

Other income

Other income decreased $2.2 million, or 31.3%, to $4.9 million for the year
ended December 31, 2021, compared to the year ended December 31, 2020. The
decrease was primarily due to lower net investment income of $2.4 million and
decreased rental income of $0.4 million during the year ended December 31, 2021,
and the receipt of a $0.5 million state subsidy during the year ended December
31, 2020, that was not received in the year ended December 31, 2021.

MA net medical claims incurred

MA net medical claims incurred increased $252.7 million, or 43.2%, to $838.1
million for the year ended December 31, 2021, compared to the year ended
December 31, 2020. The increase was primarily due to MA membership growth, the
impact of COVID-19 related treatment costs, and the return of healthcare
utilization that was reduced in 2020 in connection with the COVID-19 pandemic.

Direct contracts Net medical claims incurred

Our participation in Direct contracting launched in April 2021. Direct
Contracting
net medical claims incurred from $705.4 million for the year ended
December 31, 2021was attributable to alignment of Original Medicare
beneficiaries to our DCE.

Other medical expenses

Other medical costs increased $3.0 million, or 64.2%, to $7.6 million for the
year ended December 31, 2021, compared to the year ended December 31, 2020. The
increase was primarily related to an increase in beneficiaries receiving in-home
care services for a flat monthly fee.

Salaries and benefits

Salaries and benefits increased $189.2 million, or 265.5%, to $260.5 million for
the year ended December 31, 2021, compared to the year ended December 31, 2020.
The increase was primarily driven by higher year-over-year stock-based
compensation expense of $156.6 million due to the issuance of stock-based
compensation, increased headcount, and additional awards issued in connection
with the Business Combination.

General and administrative expenses

General and administrative expenses increased $64.5 million, or 53.3%, to $185.3
million for the year ended December 31, 2021, compared to the year ended
December 31, 2020. The increase was driven in part by increases in legal and
other professional fees to support our growth and additional costs related to
operating as a public company and higher costs associated with obtaining and
maintaining directors' and officers' liability insurance, partially offset by
the absence in 2021 of the ACA's health insurance industry fee of $8.0 million
that we incurred in 2020. Legal and professional fees increased $23.6 million
for the year ended December 31, 2021, compared to the year ended December 31,
2020, and directors' and officers' liability insurance costs increased $12.7
million over the same periods. Software application expense also increased due
to the continued development of platform and information technology capabilities
within the organization. For the year ended December 31, 2021, we also
recognized $10.7 million in amortization expense related to deferred acquisition
costs. There was no amortization expense related to deferred acquisition costs
recognized for the year ended December 31, 2020.

Reserve expense for insufficient premiums (benefit)

A $110.6 million premium deficiency reserve expense was recorded for the year
ended December 31, 2021, compared to a benefit of $17.1 million for the year
ended December 31, 2020. This expense includes amortization associated with a
previously recorded
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fully amortized reserve and a reserve deemed necessary to
fiscal year 2022. The change is due to management’s assessment of the
anticipated experience related to contract profitability.

Change in fair value of warrants payable

We reported an increase of $66.1 million on the change in fair value of warrants
payable for the year ended December 31, 2021, compared to a decrease of $80.3
million for the year ended December 31, 2020. The increase for the year ended
December 31, 2021, was due to the mark-to-market adjustment of the Public
Warrants and Private Placement Warrants recognized for the year ended December
31, 2021 prior to being fully exercised and redeemed, compared to the initial
measurement value as of January 7, 2021. The decrease for the year ended
December 31, 2020, was related to an increase in the valuation of the legacy
warrants during the period. For additional information, see Note 5 (Fair Value
Measurements) and Note 13 (Warrants Payable) to Financial Statements in this
report.

Interest Expense

Interest expense decreased $32.8 million, or 91.0%, to $3.2 million for the year
ended December 31, 2021, compared to the year ended December 31, 2020, primarily
related to the conversion of the Convertible Securities to shares of the
Corporation's common stock in connection with the completion of the Business
Combination on January 7, 2021.

Amortization of tickets and discounts on titles

Amortization of notes and securities discounts decreased $7.4 million, or 35.2%,
to $13.7 million for the year ended December 31, 2021, compared to the year
ended December 31, 2020. The decrease primarily relates to the completion of the
Business Combination on January 7, 2021, whereby the unamortized discount
associated with the August 2019 tranche of the Convertible Securities was
accelerated. The decrease was also driven by $0.6 million of amortization of
debt discount associated with the Convertible Securities during the period from
January 1, 2021, to January 7, 2021.

Gain (loss) on derivative

There was no gain on derivative for the year ended December 31, 2021, as
compared to a $93.8 million gain on derivative for the year ended December 31,
2020. This change relates to the capital contribution treatment of the
elimination of the derivative associated with the convertible securities upon
completion of the Business Combination on January 7, 2021.

Cash and capital resources

We manage our liquidity and financial position in the context of our overall
business strategy. We continually forecast and manage our cash, investments,
working capital balances, and capital structure to meet the short-term and
long-term obligations of our businesses while seeking to maintain liquidity and
financial flexibility.

As of December 31, 2021, we had cash, cash equivalents, and short-term
investments of $593.8 million. Additionally, as of December 31, 2021, we had
$197.4 million of available-for-sale and held-to-maturity investment securities,
an outstanding balance of $22.0 million on convertible notes issued by an
indirect wholly-owned subsidiary, and no outstanding balance on our Term Loan
Notes. Our cash equivalents, short-term investments, and investment securities
consist primarily of money market funds and U.S. government debt securities.

Since inception, we have financed our operations primarily from the proceeds we
received through public and private sales of equity securities, funds received
in connection with the Business Combination, issuances of convertible notes,
premiums earned under our MA plans, borrowings under our term loan facility and,
most recently, with our Direct Contracting revenues. We expect that our cash,
cash equivalents, short-term investments, and our current projections of cash
flows, taken together, will be sufficient to meet our projected operating and
regulatory requirements for the next 12 months based on our current plans. Our
future capital requirements will depend on many factors, including our needs to
support our business growth, to respond to business opportunities, challenges or
unforeseen circumstances, or for other reasons. We may be required to seek
additional equity or debt financing. In the event that additional financing is
required from outside sources, we may not be able to raise it on terms
acceptable to us, or at all. If we are unable to raise additional capital when
desired, our business, results of operations, and financial condition would be
adversely affected.

We operate as a holding company in a highly regulated industry. As such, we may
receive dividends and administrative expense reimbursements from our
subsidiaries, two of which are subject to regulatory restrictions. We continue
to maintain significant levels of aggregate excess statutory capital and surplus
in our state-regulated operating subsidiaries. Cash, cash equivalents, and
short-term investments at the parent company were $350.9 million and $5.4
million as of December 31, 2021, and December 31, 2020, respectively. This
increase at the parent company primarily reflects proceeds from the Business
Combination offset by capital
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contributions made to insurance subsidiaries, operating expenses, and repayment
of debt. Our unregulated subsidiaries held $55.7 million and $44.6 million of
cash, cash equivalents, and short-term investments as of December 31, 2021, and
December 31, 2020, respectively. Our regulated insurance subsidiaries held
$187.2 million and $46.4 million of cash, cash equivalents, and short-term
investments as of December 31, 2021, and December 31, 2020, respectively.
Additionally, our regulated insurance subsidiaries held $118.0 million and $54.7
million of available-for-sale and held-to-maturity investment securities as of
December 31, 2021, and December 31, 2020, respectively. Our use of operating
cash derived from our non-insurance subsidiaries is generally not restricted by
departments of insurance (or comparable state regulatory agencies). Our
regulated insurance subsidiaries have not paid dividends to the parent, and
applicable insurance laws restrict the ability of our regulated insurance
subsidiary to declare and pay dividends to the parent. Insurance regulators have
broad powers to prevent reduction of statutory surplus to inadequate levels, and
there is no assurance that dividends of the maximum amounts calculated under any
applicable formula would be permitted. State insurance regulatory authorities
that have jurisdiction over the payment of dividends by our regulated insurance
subsidiary may in the future adopt statutory provisions more restrictive than
those currently in effect. For additional information, please refer to the
parent company financial statements and accompanying notes in Schedule II-Parent
Company Financial Information contained in our consolidated financial statements
included in this Form 10-K.

For a detailed discussion of our regulatory requirements, including aggregate
statutory capital and surplus as well as dividends paid from the subsidiaries to
the parent, please refer to Notes 24, 25, and 26 to our Consolidated Financial
Statements included in this Form 10-K.

Cash flow

The following table summarizes our consolidated cash flows for the years ended
December 31, 2021 and 2020.

Years ended December 31,                                  2021            2020
                                                             (in thousands)
Consolidated Statements of Cash Flows Data:
Net cash used in operating activities                 $ (282,326)     $ 

(118,498)

Net cash (used) from investing activities (435,447) 137,404
Net cash provided by financing activities

                925,393           

5,844

2021 Cash Flow vs. 2020 Cash Flow

Increased cash flows provided by finance activities were primarily driven by the
business combination proceeds received in January 2021 and the underwritten
public offering proceeds received in November 2021. A significant portion of
these proceeds were invested for future use by the company. This was also partly
offset by net cash operating outflows due to higher medical claims disbursements
in 2021 due to COVID-19 and higher operating costs since becoming a public
company.

Cash needs

Our cash requirements within the next twelve months include medical claims
payable, accounts payable and accrued liabilities, current liabilities, purchase
commitments, and other obligations. We expect the cash required to meet these
obligations to be primarily generated through cash flows from current operations
and cash available for general corporate use.

Operational activities

Our largest source of operating cash flows is capitated payments from CMS. Our
primary uses of cash from operating activities are payments for medical benefits
and payments of operating expenses.

For the year ended December 31, 2021, net cash used in operating activities was
$282.3 million, which reflects net loss of $587.8 million. Non-cash activities
included a $66.1 million gain as a result of the change in fair value of
warrants payable and a $163.7 million charge to stock-based compensation
expense. Changes to our working capital included a $110.6 million charge to our
premium deficiency reserve and an increase of $12.6 million in surety bonds and
deposits related to Direct Contracting.

For the year ended December 31, 2020, net cash used in operating activities was
$118.5 million, which reflects a net loss of $136.4 million. Non-cash activities
primarily consisted of a $93.8 million gain on derivative, an $80.1 million loss
on the change in fair value of warrants payable, $28.3 million in paid-in-kind
interest expense, $21.1 million in amortization of notes and securities
discount, and $7.1 million of stock-based compensation expense.
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Investing activities

Net cash used in investing activities for the year ended December 31, 2021, of
$435.4 million was primarily due to $876.3 million used to purchase investment
securities, offset by $441.5 million provided from the sale and maturity of
investment securities.

Net cash provided by investing activities for the year ended December 31, 2020,
of $137.4 million was primarily due to $312.4 million provided from the sale and
maturity of investment securities, partially offset by $174.3 million used to
purchase investment securities.

For additional information regarding our investing activities, please refer to
Notes 2 and 4 to our Consolidated Financial Statements included in this Form
10-K.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2021,
of $925.4 million was the result of $666.2 million in proceeds from the reverse
recapitalization in connection with the Business Combination, net of transaction
costs, and $283.8 million in proceeds from the Class A common stock offering,
net of fees, partially offset by $30.9 million in principal payments on our
outstanding Term Loan Notes.

Net cash provided by financing activities for the year ended December 31, 2020,
of $5.8 million was primarily the result of $20.0 million in proceeds from the
issuance of the Convertible Securities, $3.9 million from the acquisition of our
noncontrolling interest, and $1.7 million in proceeds from the issuance of
common stock, offset by $18.8 million in principal payments on our outstanding
Term Loan Notes and $1.0 million in payments associated with the buyback and
subsequent cancellation of common stock.

Financing modalities

Term Loan Notes

We entered into a loan and security agreement with a commercial lender in March
2017, which provided for term loans in an aggregate principal amount of up to
$60.0 million. At that time, we borrowed $40.0 million as a term loan under the
agreement which was subject to an interest rate of 11.0%, payable monthly, and
had a maturity date of March 1, 2022. In October 2017, we borrowed the remaining
$20.0 million as a term loan under the agreement which was subject to an
interest rate of 11.25%, payable monthly, and had a maturity date of October 1,
2022. Each loan was payable in monthly installments of interest only for the
first 24 months, and thereafter interest and principal were payable in 36 equal
monthly installments. The loans were secured by substantially all of our assets,
including our intellectual property, and equity interests in our unregulated
subsidiaries.

At June 29, 2021the Company has voluntarily paid the balance of the principal of
$20.7 million and the interest of $0.2 millionthereby ending the Loan
Establishment.

Convertible securities

In December 2018, we entered into a convertible securities purchase agreement
with qualified institutional buyers, including entities affiliated with our
Chief Executive Officer and other holders of more than 5.0% of our common stock,
for an aggregate principal amount of up to $500.0 million. In February, March,
May, and August 2019, we issued an aggregate of $373.8 million initial principal
amount of convertible securities, or the Convertible Securities, under the
agreement.

In connection with and upon the closing of the Business Combination, the
Convertible Securities mandatorily converted into 74,694,107 shares of the
Corporation's Class B Common Stock. For additional information about the
Convertible Securities and the conversion of the Convertible Securities upon the
closing of the Business Combination, see Note 12 (Notes and Securities Payable)
to Financial Statements in this report.

Contractual obligations and commitments

We believe that funds from future operating cash flows, cash and investments
will be sufficient for future operations and commitments, and for the capital
acquisitions and other strategic operations, at least over the next 12 months.

Material cash requirements from known contractual obligations and commitments as
of December 31, 2021 include: (1) the recognition of a performance guarantee of
$36.9 million in connection with the Corporation's participation in the DC
Model, (2) operating lease obligations of $7.9 million, and (3) the outstanding
principal balance related to the Seek Convertible Note of $20.0 million. These
commitments are associated with contracts that were enforceable and legally
binding as of December 31, 2021, and that specified all significant terms,
including fixed or minimum serves to be used, fixed, minimum, or variable price
provisions, and the approximate timing of the actions under the contracts. There
were no other material cash requirements from known contractual
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obligations and commitments. For additional information regarding our remaining
estimated contractual obligations and commitments, see Note 12 (Notes and
Securities Payable), Note 16 (Leases), Note 21 (Commitments and Contingencies),
and Note 22 (Direct Contracting) to Financial Statements in this report.

Indemnification agreements

In the ordinary course of business, we enter into agreements, with various
parties (providers, vendors, consultants, etc.), of varying scope and terms
pursuant to which we agree to defend, indemnify, and hold harmless the other
parties from any claim, demand, loss, lawsuit, settlement, judgment, fine, or
other liability, and all related expenses which may accrue there from (including
reasonable attorney's fees), arising from or in connection with third party
claims, including, but not limited to, negligence, recklessness, willful
misconduct, fraud, or otherwise wrongful act or omission with respect to our
obligations under the applicable Agreement.

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements, as defined by applicable
regulations of the SEC, that are reasonably likely to have a current or future
material effect on our financial condition, results of operations, liquidity,
capital expenditures, or capital resources.

Significant Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The
preparation of the consolidated financial statements in conformity with GAAP
requires our management to make a number of estimates and assumptions relating
to the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenue and expenses during the period. We evaluate, on
an ongoing basis, our significant accounting estimates, which include, but are
not limited to, net claims and claims adjustment expense and revenue
recognition, including the risk adjustment provisions related to Medicare
contracts. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results could differ from those estimates under different assumptions or
conditions, impacting our reported results of operations and financial
condition.

We believe that the accounting policies and estimates described below involve a
significant degree of judgment and complexity. Accordingly, we believe these are
the most critical to aid in fully understanding and evaluating our Consolidated
Financial Condition and Results of Operations. For further information, see Note
2 (Summary of Significant Accounting Policies) to the Financial Statements in
this Form 10-K.

MA net medical claims incurred

MA net medical claims incurred is recognized in the period in which services are
provided and includes paid claims and an estimate of the cost of services which
have been incurred but not yet reported (IBNR) and certain other unpaid claims
and adjustments. IBNR represents a substantial portion of our unpaid claims, as
reflected below:

                                                                   Years ended December 31,
                                                             2021                                2020
                                                     Total              %                Total           %
                                                                    (dollars in thousands)
IBNR                                           $    125,436             92.0  %       $  93,553          90.0  %
Other unpaid claims                                   5,863              4.3              6,681           6.4
Claims adjustment expense                             5,018              3.7              3,742           3.6
Total unpaid claims and claims adjustment
expense                                        $    136,317            

100.0% $103,976 100.0%

Management determines the unpaid claims and claims adjustment expense with a
supplemental perspective provided by a third-party actuarial firm. We estimate
our unpaid claims by following a detailed actuarial process that uses both
historical claim payment patterns as well as emerging medical expense trends to
project the best estimate of claims liabilities. These data and trends include
historical data adjusted for claims receipt and payment patterns, cost trends,
product mix, seasonality, utilization of healthcare services, changes in
membership, provider billing practices, benefit changes, known outbreaks of
disease, including COVID-19 or increased incidence of illness such as influenza,
the incidence of high dollar or catastrophic claims and other relevant factors.
These factors are used to determine our lag-dependent completion factors, which
represent the average percentage of total incurred claims that have been paid
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through a given date after being incurred. Completion factors are applied to
claims paid through the period-end date to estimate the ultimate claim expense
incurred for the period.

The completion factors are the most significant factor impacting the IBNR
estimate. We continually adjust our completion factor with our knowledge of
recent events that may impact current completion factors when establishing our
reserves. Because our reserving practice is to consistently recognize the
actuarial best estimate using an assumption of moderately adverse conditions as
required by actuarial standards, there is a reasonable possibility that there
could be variances between actual completion factors and those assumed in our
December 31, 2021 and 2020, unpaid claim estimates.

Actuarial standards require the use of assumptions based on moderately adverse
experience, and as such, a provision for adverse deviation (PAD) is recognized
on current reserves and released on prior reserves. For further discussion of
our reserving methodology, including our use of completion factors to estimate
IBNR, refer to Note 2 (Summary of Significant Accounting Policies) within the
Financial Statements in this Form 10-K.

Direct contracts Net medical claims incurred

Direct Contracting net medical claims incurred is recognized in the period in
which services are provided and includes paid claims and an estimate of the cost
of services which have been incurred but not yet reported and certain other
unpaid claims and adjustments. IBNR represents a substantial portion of our
unpaid claims, as reflected below:

                                                            Years ended December 31, 2021
                                                            Total                        %
                                                                (dollars in thousands)
IBNR                                            $                    4,607                    100.0  %
Other unpaid claims                                                      -                        -
Claims adjustment expense                                                -                        -
Total unpaid claims and claims adjustment
expense                                         $                    4,607                    100.0  %


Our actuaries estimate the unpaid claims by following a detailed actuarial
process that uses historical claim payment patterns. We extrapolate in order to
form an opinion of ultimate incurred claims based on claims that have been paid
to date. This is generally most effective for mature coverage months under
stable periods of claims adjudication; therefore, for the estimates of Primary
Care Qualified Evaluation and Management expenses, we evaluate IBNR using the
historical rate of payment for services based on the lag between service date
and payment date. Under this approach, we include an average historical
"age-to-age" estimate, excluding the highest and lowest of the historical
factors. We also set a lower limit on the cumulative or "age-to-ultimate"
development factors at 1.0, to prevent negative amounts incurred but not paid as
a result of expected claim recoveries from being factored into our IBNR.

In addition, for more recent coverage periods we utilize historical estimates of
completed claims to estimate the cost of subsequent months based on either
expected or known changes in cost drivers. These cost drivers include weekday
seasonality, secular seasonality, direct COVID cases and other adjustments as
necessary, which enable our actuaries to estimate claims when the available
claims experience is either limited or ambiguous.

Our actuaries also consider this population's history of observed completion
percentages in estimating ultimate claims incurred, using completion percentages
that are consistent with historical ranges and informed by new information with
other functional departments.

Clover's reserving practice is to recognize the actuarial best estimate of our
ultimate liability for claims. Actuarial standards require the use of
assumptions based on moderately adverse experience, and as such, a provision for
adverse deviation is recognized on current reserves and released on prior
reserves. The PAD is lower for DCE than MA; for DCE, claims submission and
payment patterns support more precise estimates than are observed in MA.

Reserve expense for insufficient premiums (benefit)

A premium deficiency reserve is established when future premiums and current
reserves are not sufficient to cover future claim payments and expenses for the
remainder of a contract period. These reserves are required to monitor solvency
and help ensure that a reporting entity's contractual obligations will be
adequately funded. We assess the profitability of our MA contracts to identify
where current operating results or forecasts indicate potential future losses.
We do not assess the impacts of the premium deficiency reserve for our Direct
Contracting operations as that business segment is not an insurance plan and is
not accounted for under ASC 944- Financial Services-Insurance.
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The reserve is derived from the assessments performed and provides the amount
that insurance related expenses are expected to exceed insurance revenues. There
are key financial statement line items and associated drivers considered in
determining the reserve. The most significant of financial statement line items
considered when performing reserve assessments are premiums earned and MA net
medical claims incurred. Key inputs considered for premiums earned include,
expected enrollment changes, revenue rates, risk adjustment, and risk score
forecasts. Key metrics considered for MA net medical claims incurred include
claims experience, benefit changes, membership mix, membership changes, and
medical management programs. Administrative expenses are assessed for expenses
directly and indirectly incurred in order to operate the insurance entities and
cannot exceed a percentage of regulatory entity premiums earned due to
contractual agreements. There are other operating activities that are considered
in accordance with regulatory guidelines.

The premium deficiency reserve assessment is performed on a quarterly basis.
Every quarter, reserve assessments are made for the period following the most
recently ended period through to the end of the current year. For the fourth
quarter, assessments are made related to the entire subsequent fiscal year's
projected net performance. If a reserve is deemed necessary, a liability and
expense will be recognized as of the end of the quarter directly preceding the
period for which the future loss is projected. That reserve will be amortized
over the course of the contract period assessed to have expected insurance
expenses that will exceed insurance revenues. The amortization of the reserve
occurs ratably over the assessed contract period and will offset expected future
losses.

Revenue Recognition - MA

We receive monthly premiums from the federal government according to government
specified payment rates and various contractual terms. Revenue from premiums
earned is recognized as income in the period in which members are entitled to
receive services. Premiums received in advance of the service period are
reported as other liabilities and subsequently recognized as revenue in the
period earned.

CMS uses a risk-adjustment model which adjusts premiums paid to MA contracts,
based on member risk scores, which are meant to compensate plans that enroll
beneficiaries with higher-than-average health risks and to reduce payments for
healthier beneficiaries who have lower health risks. Risk scores are based on
member diagnoses from the previous year and are periodically adjusted
retroactively based on additional plan data collection. Risk adjustments can
have a positive or negative retroactive impact to rates. Prospective payments to
MA plans are based on the estimated cost of providing standard Medicare-covered
benefits to a member with an average risk profile. Under the risk-adjustment
methodology, all MA plans must collect and submit the necessary diagnosis code
information to CMS within prescribed deadlines. Estimated retroactive lump-sum
settlement payments are accrued within revenue for premiums earned to account
for the difference between lag risk scores, mid-year risk scores and final risk
scores. Any known or expected unfavorable risk score impacts related to quality
assurance diagnosis deletions or risk adjustment data validation audits are also
considered within accruals and are recorded as a reduction of revenue from
premiums earned, based on available information.

Medicare Advantage Part D

Payments received from CMS and members in connection with our participation in
the Medicare Advantage Part D program are determined from our annual bid and
represent amounts for providing prescription drug insurance coverage; these
amounts are recognized as premium revenue for providing this insurance coverage
ratably over the term of the annual contract.

Part D CMS payments are subject to risk sharing through risk corridor
provisions. The risk corridor provisions compare costs targeted in bids to
actual prescription drug costs, limited to actual costs that would have been
incurred under the standard coverage as defined by CMS. Variances exceeding
certain thresholds may result in CMS making additional payments to us or
requiring us to refund to CMS a portion of the premiums received. Management
estimates and recognizes an adjustment to premium revenue related to these
provisions based upon pharmacy claims experience and input from third-party
experts. Management records a receivable or payable at the contract level.

Rebates are paid by drug manufacturers to our pharmacy benefit manager (PBM)
which shares a portion of the rebates with us. Management estimates favorable
adjustments to medical expenses related to rebates negotiated by the PBM on our
behalf. Estimates are based on both actual and estimated pharmacy claims
experience throughout the year as well as input from third-party experts and the
PBM. Management records a receivable at the contract level.

There are additional cost-sharing elements that are recorded within medical
expenses and take into account factors such as member income levels, brand-name
versus generic drug spend, and total spend by member within a plan year.
Management estimates and recognizes adjustments to medical expenses based upon
inputs such as pharmacy claims experience, rebate activity, and input from
third-party experts. Management records a receivable or payable at the end of
the year based on these items.
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Revenue Recognition – DCE

Direct Contracting revenue represents CMS' total expense incurred for medical
services provided on behalf of DCE Beneficiaries during months in which they
were alignment eligible during the performance year. Direct Contracting revenue
is calculated by taking the sum of the capitation payments made to us for
services within the scope of our capitation arrangement and FFS payments made to
providers directly from CMS. Direct Contracting revenue is also known in the DC
Model as performance year expenditures and is the primary component used to
calculate shared savings or shared loss versus the performance year benchmark.
Direct Contracting revenue includes a direct reduction or increase of shared
savings or loss, which is calculated as the difference between the total
benchmark and the total cost of care. Premiums and recoupments incurred in
direct relation to the DC Model are recognized as a reduction or increase in
Direct Contracting revenue.

Direct contract receivable and performance year obligation

Performance year receivable and obligation represents the average Medicare
beneficiary's total cost of care for beneficiaries aligned to our DCE and refers
to the target expenditure amount that will be compared to Medicare expenditures
for items and services furnished to aligned beneficiaries during a performance
year. This comparison will be used to calculate shared savings and shared
losses.

The key inputs in determining the performance year receivable and obligation are
trends, risk score, and the number of beneficiaries aligned to the DCE. We begin
our benchmark estimation process with benchmark reports delivered from the
Centers for Medicare & Medicaid Services Innovation Center (CMMI) on a quarterly
basis, which drive the determination of whether certain inputs to that
calculation need to be adjusted or accrued as a result of more accurate data.
Prospective and retrospective trends are set at a national level, and while it
is unlikely we would deviate from CMMI's estimates, we could adjust from the
benchmark report due to new information received directly from CMMI, national
studies we complete ourselves, or other anticipated policy updates that we
believe are probable and estimable. The preliminary benchmark is set based on
risk scores with data captured as of a certain point in time. Once new data is
received, an updated analysis of claims provides an opportunity for the
benchmark to be adjusted. Lastly, beneficiary counts are updated through the
year and represent a timing difference between CMMI reporting, for which we
accrue. For the initial performance year, seasonality was assessed in the
calculation of the benchmark.

Warrants

Legacy Warrants

In September 2015, we issued warrants to purchase 2,100,000 shares of our common
stock. On March 21, 2017, we entered into a loan facility (the "Loan Facility")
for an aggregate principal amount of $60.0 million. In conjunction with the Loan
Facility, we issued 1,266,284 warrants to purchase shares of our Series D
preferred stock. The September 2015 warrants and the Loan Facility warrants were
determined to be freestanding instruments as they were detachable and separately
exercisable. These warrants were accounted for as derivative instruments in
accordance with ASC 815-40 and were presented within warrants payable on the
Consolidated Balance Sheet. The warrant liabilities were measured at fair value
at inception and on a recurring basis until redeemed, with changes in fair value
presented within change in fair value of warrants payable in the Consolidated
Statement of Operations and Comprehensive Loss.

In November 2016 and December 2017, we issued warrants to purchase 261,681
shares of our common stock to a service provider for services performed. For
warrants issued to non-employees as payment for services, such as the November
2016 and December 2017 warrants, we consider the warrants to be in scope of
stock-based compensation guidance to non-employees. To determine whether the
warrants should be classified as liabilities or equity awards, we evaluate the
criteria for debt accounting guidance because share-based payments classified as
liabilities under this guidance would also be classified as liabilities under
the stock-based accounting guidance. As the November 2016 and December 2017
warrants did not meet any of the criteria to be accounted for as debt, they were
classified as equity awards. On the grant date, these warrants were measured by
estimating the fair value of the equity instruments to be issued. Stock-based
compensation expense was recorded for the vested portion of the warrants.

At October 5, 2020we entered into the merger agreement with SCH and
simultaneously modified the terms of the mandates inherited, and they were
automatically converted into common stock as part of the business
Combination.

Public Warrants and Private Placement Warrants

We assumed, in connection with the Business Combination, public warrants and
private placement warrants to purchase shares of our Class A Common Stock. These
warrants were accounted for as liabilities in accordance with ASC 815-40 and are
presented within warrants payable on the Consolidated Balance Sheet. The warrant
liabilities were measured at fair value at inception and on a recurring basis
until redeemed, with changes in fair value presented within change in fair value
of warrants payable in the Consolidated Statement of Operations and
Comprehensive Loss. The Public Warrants were classified within Level 1 of the
fair value hierarchy because the fair value was equal to the publicly traded
price of the Public Warrants, and the Private Placement Warrants
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were classified within Level 2 of the fair value hierarchy because the fair
value was estimated using the price of the Public Warrant. On July 22, 2021, we
issued a press release stating that we would redeem all unexercised Public
Warrants and Private Placement Warrants. In connection with the redemption,
effective August 24, 2021, the Public Warrants were delisted and classified
within Level 2 of the fair value hierarchy as the fair value of the Public
Warrants was based on proportional changes in the price of our common stock.
There were no Private Warrants outstanding at August 24, 2021.

Derivative liabilities

We evaluated the embedded features of the Convertible Securities by applying the
derivatives accounting guidance. Derivatives embedded within non-derivative
instruments, such as convertible securities, are bifurcated from the host
instrument when the embedded derivative is not clearly and closely related to
the host instrument. The embedded derivatives associated with the Convertible
Securities were recognized as derivative liabilities and recorded at fair value.

For more information on fair value and data used in modeling
regarding warrants classified as passive, please refer to Note 13 (Warrants
payable) to our consolidated financial statements in this report.

Fair values of the legacy warrants and derivative liabilities related to the
Convertible Securities were estimated using a probability-weighted expected
return method, where the values of various instruments were estimated based on
an analysis of future values of our business, assuming various future outcomes.
The resulting instruments' values were based upon the probability-weighted
present value of expected future investment returns, considering each of the
possible future outcomes available to us, as well as the economic benefits
attributable to each class of instruments. The expected future investment
returns were estimated using a variety of methodologies, including both the
market approach and the income approach, where an observable quoted market does
not exist, and were generally classified as Level 3. Such methodologies included
reviewing values ascribed to our most recent financing, comparing the subject
instrument with similar instruments of publicly traded companies in similar
lines of business, and reviewing our underlying financial performance and
subject instrument, including estimating discounted cash flows. To estimate the
fair value attributable to the derivative liabilities, the "with and without"
approach is used. An evaluation of multiple scenarios for future payoffs for the
underlying Convertible Securities was performed using option pricing models, and
probability-weighted average value indications were used to arrive at the
estimated fair values.

For more information on the fair values ​​of public warrants and private warrants,
please refer to the section entitled “Warrants” above.

Stock-based compensation

We measure and recognize compensation expense for all stock-based awards,
including stock options, restricted stock units granted to employees, directors,
and non-employees, and stock purchase rights granted under the 2020 Employee
Stock Purchase Plan (ESPP) to employees, based on the estimated fair value of
the awards on the date of grant. The fair value of each stock option and ESPP
opportunity granted is estimated using the Black-Scholes option-pricing model.
The fair value of each RSU is based on the estimated fair value of our common
stock on the date of grant.

The measurement date for employee awards is the date of grant, and stock-based
compensation costs are recognized as expense over the employees' requisite
service period, which is the vesting period, on a straight-line basis. The
measurement date for non-employee awards is the date of grant without changes in
the fair value of the award. Stock-based compensation costs for non-employees
are recognized as expense over the vesting period on a straight-line basis.
Stock-based compensation expense is classified in the Consolidated Statements of
Operations and Comprehensive Loss within salaries and benefits. We recognize
stock-based compensation expense for the portion of awards that have vested.
Forfeitures are recorded as they occur.

We also grant certain awards that have performance-based vesting conditions,
including performance restricted stock units that become eligible to vest if
prior to the vesting date the average closing price of one share of our common
stock for ninety consecutive days equals or exceeds a specified price (Market
PRSUs). Stock-based compensation expense for such awards is recognized using an
accelerated attribution method from the time it is deemed probable that the
vesting condition will be met through the time the service-based vesting
condition has been achieved. The grant date fair value of the Market PRSUs is
recognized as expense over the vesting period under the accelerated attribution
method and is not adjusted in future periods for the success or failure to
achieve the specified market condition. The Corporation has also determined the
requisite service period for the PRSUs with multiple performance conditions to
be the longest of the explicit, implicit, or derived service period. The
determination of the grant-date fair value using an option-pricing model is
affected by the estimated fair value of our common stock as well as assumptions
regarding a number of other complex and subjective variables. These variables
include expected stock price volatility over an expected term, actual and
projected employee stock option exercise behaviors, the risk-free interest rate
for an expected term, and expected dividends. The assumptions used in our
option-pricing model represent our best estimates. These estimates involve
inherent uncertainties and the application of judgment. If factors change and
different assumptions are used, our stock-based compensation expense could be
materially different in the future.
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These assumptions are estimated as follows:

Expected term - For stock options considered to be "plain vanilla" options, we
estimate the expected term based on the simplified method, which is essentially
the weighted average of the vesting period and contractual term, as our
historical option exercise experience does not provide a reasonable basis upon
which to estimate the expected term.

Expected volatility - We perform an analysis of using the average volatility of
a peer group of representative public companies with sufficient trading history
over the expected term to develop an expected volatility assumption.

The grant date fair value of the Market PRSUs is recognized as expense over the
vesting period under the accelerated attribution method and is not adjusted in
future periods for the success or failure to achieve the specified market
condition. The grant date fair value of Market PRSUs is determined using a Monte
Carlo simulation model that incorporates multiple valuation assumptions,
including the probability of achieving the specified market condition, expected
volatility and risk-free interest rate.

See Note 18 (Employee benefit plans) to our consolidated financial statements at
this report for a full description of stock accounting
compensation awards.

Recently issued and adopted accounting pronouncements

See Note 2 (Summary of Significant Accounting Policies) to the Financial
Statements in this report for a discussion of accounting pronouncements recently
adopted and recently issued accounting pronouncements not yet adopted and their
potential impact to our financial statements.

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