Best's Review


Health Insurance
Public Equity Markets a Capital Lifeline for Three Early Stage Health Insurers

AM Best: All three companies have expanded rapidly in recent years. The five-year annual compounded membership growth rate was 48% for Oscar and 52% for Clover; the annual compounded growth rate for Bright Health was 165% over its three most recent years of operation.
  • November 2021
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Editor's Note: The following is an excerpt from Best's Special Report: Public Equity Markets a Capital Lifeline for Three Early Stage Health Insurers. Go to to access the full report.

New entrants to the U.S. health insurance industry are rare, especially for Major Medical or Medicare Advantage (MA). These markets have been dominated by large publicly traded companies and Blue Cross Blue Shield organizations. Surprisingly, not one, but three early stage health insurance carriers—Clover Health Investments Corp., Oscar Health Inc., and Bright Health Group Inc.—have gone public in 2021. These three companies share some attributes, such as a value proposition focused on using proprietary software to improve patient and provider outcomes, rapid membership growth, and a current inability to turn a profit, due in part to the startup nature of operations. They also have key differentiating features, including the markets in which they operate, the development of non-insurance businesses, the factors driving current unprofitability, and the capital management strategy employed to support the growth and manage losses.

Clover Insurance Group, the consolidation of Clover Health Investments Corp. statutory filing subsidiaries, offered MA plans in eight states, serving 58,000 members as of year-end 2020, but its business is concentrated in New Jersey. The company's value proposition is centered on its proprietary technology platform the “Clover Assistant,” a tool designed to assist providers in making clinical decisions. Clover's strategy is to attract physicians to its network by providing them with data insights powered by artificial intelligence (AI), which will allow them to provide better care more economically. Some of the savings can then be passed on to members in the form of low-cost or zero-premium MA plans.

Related: Special Report: Public Equity Markets a Capital Lifeline for Three Early Stage Health Insurers

Oscar Insurance Group, the consolidation of Oscar Health Inc.'s statutory filing subsidiaries, provided individual/family plans, small group plans, and limited MA plans to just over 400,000 members in 14 states as of year-end 2020. Oscar is focused primarily on the individual market, but began building more attractive offerings for small groups. In 2020, the company formed a partnership with Cigna Corp. to gain access to its provider network in a number of jurisdictions. Like Clover, Oscar's value proposition lies in lowering care and administrative costs through a proprietary software platform. The platform is designed to reduce medical expenses by more actively engaging with members to focus on preventive health, manage chronic conditions, and avoid increased morbidity, as well as to direct individuals to more efficient providers. Also like Clover, the insights are driven by AI systems applied to proprietary data sets.

Bright Health Insurance Group, the consolidation of Bright Health Group Inc.'s statutory filing subsidiaries, offered individual, small group, and MA plans to just under 200,000 members in 12 states as of year-end 2020. Like the other two companies, Bright Health has built a proprietary software platform aimed at lowering costs by improving care coordination between providers. Unlike the other two companies, Bright Health is actively marketing its software platform to providers under the brand NeueHealth.

Capital Accumulation Lags Premium Growth

All three companies have expanded rapidly in recent years. The five-year annual compounded membership growth rate was 48% for Oscar and 52% for Clover; the annual compounded growth rate for Bright Health was 165% over its three most recent years of operation. This rapid increase in membership, combined with consistent net losses, requires a capital management strategy to ensure solvency. The strategies of these three companies have some similarities as well as material differences.

All three groups are accumulating capital at a much lower rate than they are growing premiums, indicating they are stretching their balance sheets to accommodate growth. Oscar's five-year compounded annual premium growth rate exceeded its capital growth by 18% and Clover's, by 36%, with Oscar's net premiums written (NPW) growing from $126.5 million in 2015 to $437.4 million in 2020 and Clover's, from $52.5 million to $665.7 million. Oscar's capital and surplus (C&S) improved to $60.6 million in 2020 from $37.5 million at year-end 2015, and Clover's, to $79.4 million from $21.6 million. Oscar's C&S had fallen from a peak of $142.0 million in 2018 to $130.8 million in 2019, likely due in part to one-time ceding commissions from the purchase of additional reinsurance. From 2017 through year-end 2020, Bright Health experienced compound annual premium growth in excess of capital growth of 110%, driven heavily by the acquisition of Universal Care Inc., in 2020. C&S grew to $241.7 million as of year-end 2020, from just $27.2 million at year-end 2017.

Premium leverage at year-end 2020 was 8.4x for Clover, 7.2x for Oscar, and 4.8x for Bright Health. Clover and Oscar thus compare unfavorably with other publicly traded insurance groups such as Anthem Inc., CVS Health (Aetna), UnitedHealth Group Inc., and Cigna Corp., which together averaged premium leverage of 6.0x (peer data based on statutory consolidations of entities rated by AM Best).

Risk-Based Capitalization Depends on Equity, Parent Contributions, and Reinsurance

Bright Health and Oscar were moderately capitalized in 2020 from a risk-based-capitalization (RBC) (at the Company Action Level, CAL) perspective, with consolidated RBC of 430% for Bright Health and 653% for Oscar. However, the RBC of both companies has been highly volatile at both the consolidated level and the individual statutory entity level. Bright Health's consolidated RBC was 475% in 2017, which increased to 798% in 2018, before falling over the next two years to 430% in 2020. At the statutory entity level, RBC in 2020 ranged from as low as 169% at Bright Health Insurance Co. of Tennessee to 10,100% at Bright Health Company of Georgia. The year 2020 represents the highest regulatory capital position in Oscar's history, up from just 172% in 2016. The disparity in capitalization among statutory entities is similar to Bright Health's.

Related: AM Best: COVID-19 Dampened 2020 Commercial Health Sales

Oscar California was excluded from the RBC calculation because California is not an RBC state. The plan is compliant with the state's Department of Managed Health Care Tangible Net Equity requirements but has negative total equity due to a large amount of debt outstanding against a subordinated line of credit extended by the holding company to the plan to support its expanding operations. The volatility both over time and among entities seems to be due to a combination of mostly negative operating results and the timing of periodic capital injections from the parent company. Clover is the most thinly capitalized (consolidated RBC of 163% in 2020) of the three but has experienced the least amount of volatility, with its RBC ranging between 163% and 214% between 2017 and 2020.

All three companies rely on capital contributions from their parent holding companies to maintain sufficient equity. From year-end 2015 through year-end 2020, the three groups had accumulated just under $1.5 billion in contributed surplus combined. This does not include funds raised through equity offerings currently held at the parent company level, an estimated $2.6 billion in additional capital including preferred shares through year-end 2020. Oscar's 2021 public offering raised $1.3 billion and Bright Health's, $1.4 billion, for additional funds available to insurance subsidiaries at their parent companies. Clover also received over $600 million in net additional funding from a private investment in public equity (PIPE) in the first quarter 2021. Both companies also use surplus notes, $40.0 million for Clover and $15.7 million for Oscar, to augment unrestricted capital. In both cases, the notes are held by related parties.

In addition to raising funds from equity holders, Oscar and Bright Health also use reinsurance to manage capital. Oscar and Bright Health use reinsurance to alleviate the pressure of premium growth relative to enrollment growth, as a way to manage capital while still expanding their operational scale. Oscar retained only 32% of gross written premium in 2020, an amount that has declined from close to 100% in 2015. The company's share of ceded premium in 2020 was one of the highest in the industry and accounted for about 3% of total health insurance ceded premium. It uses high-quality counterparties such as Odyssey Reinsurance Co., Berkshire Hathaway Specialty Insurance Co., and AXA France Vie.

Reliance on highly rated reinsurers further alleviates balance sheet risks. The use of reinsurance has allowed Oscar to gain additional scale (member growth of 48.4% CAGR since 2015) while limiting additional underwriting risk (NPW growth of just 28.2% CAGR). Bright Health retains 89% of gross written premiums, which is down from 98% in 2017.

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