CLOVER HEALTH INVESTMENTS, CORP. /DE 10-K

Item 8. Financial Statements and Supplementary Data 77 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Clover Health Investments, Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Clover Health Investments, Corp. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss , changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021 , and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2022 expressed an adverse opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates. Valuation of incurred but not reported reserves Description of the Matter As of December 31, 2021, the Company’s unpaid claims were $140.9 million, of which, a significant portion is incurred but not reported reserves. As discussed in Notes 1 and 10 to the consolidated financial statements, the Company’s incurred but not reported (IBNR) liability for its Medicare Advantage and Direct Contracting Entity programs is determined by using actuarial methods that include a number of factors and assumptions, including completion factors, which seek to measure the cumulative percentage of claims expense that have been paid as of the reporting date based on historical claim payment patterns, and assumed medical cost trend factors, which represent an estimate of claims expense based on recent claims expense levels and medical cost levels. There is significant uncertainty inherent in determining management’s best estimate of completion and trend factors, which are used to calculate actuarial estimates of IBNR. Auditing management’s best estimate of the IBNR was complex and required the involvement of our actuarial specialists due to the highly judgmental nature of completion and trend factor assumptions used in the valuation process. These assumptions have a significant effect on the valuation of the IBNR liability. 78 We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s actuarial process for estimating the liability for incurred but not paid claims. These audit procedures included among others, testing management review controls over the application of the actuarial assumptions within the reserve models and the review and approval processes that management has in place for estimating the liability for incurred but not paid claims. How We Addressed the Matter in Our Audit To test the Company’s liability for IBNR, our audit procedures included, among others, testing the completeness and accuracy of data used in the calculation by testing reconciliations of underlying claims and membership data recorded in source systems to the actuarial reserving calculations, and comparing a sample of claims to source documentation. We involved actuarial specialists to assist with our audit procedures, which included, among others, evaluating the methodologies applied by the Company in determining the IBNR, evaluating the Company’s actuarial assumptions used in their analysis by comparing the significant assumptions to the Company’s historical claim experience, and independently calculating a range of IBNR estimates for comparison to management’s actuarial best estimate of the IBNR. Additionally, we performed a review of the prior period IBNR liabilities to subsequent claims development. Premium deficiency reserve Description of the Matter As of December 31, 2021, the Company had recorded a premium deficiency reserve of $110 million (PDR). As discussed in Note 1 to the consolidated financial statements, a liability for premium deficiency reserves is an actuarial estimate for anticipated losses on the Corporation’s Medicare Advantage and Medicare Advantage Part D business. Management establishes premium deficiency reserves to the extent that the sum of expected future costs, claim adjustment expenses, and maintenance costs exceeds related future premiums. Auditing management’s estimated PDR was complex and required the involvement of our actuarial specialists due to the significant estimation uncertainty surrounding the estimated future costs of care, claim expense and maintenance costs and trend assumptions utilized in the calculation of the PDR in comparison to the per month per member estimated premiums. We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s PDR calculation, including those over the Company’s selection of assumptions such as the expected future costs, claim adjustment expenses, and maintenance costs. How We Addressed the Matter in Our Audit To test the Company’s calculation of PDR, our audit procedures included, among others, testing the completeness and accuracy of data used in the calculation by testing reconciliations of premium, claim and claim related expense costs to source documentation. We involved actuarial specialists to assist with testing the significant assumptions described above, which included evaluating the methodologies applied by the Company in determining the premium deficiency reserve, evaluating the Company’s actuarial assumptions used in their claims expense analysis by comparing the significant assumptions to the Company’s historical claim experience and total cost of care trends. In addition to the Company’s historical claim experience, we also compared the Company’s claim and claim related expense costs to industry, market and economic trends to evaluate the assumptions utilized in the calculation of the PDR. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2018. New York, NY February 28, 2022 79 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts) December 31, 2021 December 31, 2020 Assets Current assets Cash and cash equivalents $ 299,968 $ 92,348 Short-term investments 293,851 4,098 Investment securities, available-for sale (Amortized cost: 2021: $ 21,142 ; 2020: $ 0 ) 21,131 — Investment securities, held-to-maturity (Fair value: 2021: $ 307 ; 2020: $ 266 ) 305 265 Accrued retrospective premiums 34,923 34,829 Other receivables 14,282 11,368 Healthcare receivable 48,042 38,745 Surety bonds and deposits 12,613 — Prepaid expenses 9,409 7,830 Other assets, current 18,022 299 Total current assets 752,546 189,782 Investment securities, available-for sale (Amortized cost: 2021: $ 177,527 ; 2020: $ 53,953 ) 175,604 53,963 Investment securities, held-to-maturity (Fair value: 2021: $ 364 ; 2020: $ 471 ) 335 429 Property and equipment, net 2,287 2,078 Operating lease right-of-use assets 5,367 7,882 Goodwill and other intangible assets 4,233 4,233 Other assets, non-current 10,432 8,885 Total assets $ 950,804 $ 267,252 The accompanying notes are an integral part of these consolidated financial statements 80 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts) December 31, 2021 December 31, 2020 Liabilities, Convertible Preferred Stock, and Stockholders' Equity (Deficit) Current liabilities Unpaid claims $ 138,604 $ 102,429 Due to related parties, net 2,320 1,547 Direct Contracting performance year obligation 36,891 — Direct Contracting payable 37,773 — Accounts payable and accrued expenses 28,129 30,671 Accrued salaries and benefits 15,147 3,978 Operating lease liabilities 3,059 4,795 Current portion of notes and securities payable — 20,803 Premium deficiency reserve 110,628 — Other liabilities, current 73 5 Total current liabilities 372,624 164,228 Notes and securities payable, net of discounts, and deferred issuance costs 19,938 106,413 Derivative liabilities — 44,810 Warrants payable — 97,782 Long-term operating lease liabilities 4,830 6,349 Other liabilities, non-current 14,095 13,116 Total liabilities 411,487 432,698 Commitments and Contingencies (Note 21 ) Convertible Preferred stock (Series Seed A, A-1, B, C, and D), $ 0.0001 par value; 0 and 155,387,025 shares authorized as of December 31, 2021, and 2020, respectively; 0 and 139,444,346 shares issued and outstanding as of December 31, 2021, and 2020, respectively; aggregate liquidation preference of $ 0 and $ 470,256 as of December 31, 2021, and 2020, respectively (1) — 447,747 Stockholders' equity (deficit) Class A Common Stock, $ 0.0001 par value; 2,500,000,000 and 0 shares authorized as of December 31, 2021, and 2020, respectively; 352,645,626 and 0 issued and outstanding as of December 31, 2021, and 2020, respectively 34 — Class B Common Stock, $ 0.0001 par value; 500,000,000 and 351,572,668 shares authorized; 118,206,768 and 89,206,266 issued and outstanding as of December 31, 2021, and 2020, respectively (1) 12 9 Additional paid-in capital 2,154,187 411,867 Accumulated other comprehensive (loss) income ( 1,934 ) 10 Accumulated deficit ( 1,616,738 ) ( 1,028,982 ) Less: Treasury stock, at cost; 14,730 and 0 shares held as of December 31, 2021 , and 2020, respectively ( 147 ) — Clover stockholders’ equity (deficit) 535,414 ( 617,096 ) Noncontrolling interest 3,903 3,903 Total stockholders' equity (deficit) 539,317 ( 613,193 ) Total liabilities, convertible preferred stock, and stockholders' equity (deficit) $ 950,804 $ 267,252 (1) Prior period results have been adjusted to reflect the exchange of Legacy Clover's common stock for Clover Class B Common Stock at an exchange ratio of approximately 2.0681 in January 2021 as a result of the Business Combination. See Note 3 (Business Combination) for additional information. 81 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Dollars in thousands, except per share and share amounts) Years ended December 31, 2021 2020 2019 Revenues: Premiums earned, net (Net of ceded premiums of $ 489 , $ 599 , and $ 832 for the years ended December 31, 2021, 2020, and 2019, respectively) $ 799,414 $ 665,698 $ 456,926 Direct Contracting revenue 667,639 — — Other income 4,943 7,190 5,340 Total revenues 1,471,996 672,888 462,266 Operating expenses: Medicare Advantage net medical claims incurred 838,134 585,432 446,692 Direct Contracting net medical claims incurred 705,407 — — Other medical costs 7,637 4,650 3,009 Salaries and benefits 260,458 71,256 91,626 General and administrative expenses 185,287 120,830 95,701 Premium deficiency reserve expense (benefit) 110,628 ( 17,128 ) 7,523 Depreciation and amortization 1,246 555 551 Other expense 191 — 363 Total operating expenses 2,108,988 765,595 645,465 Loss from operations ( 636,992 ) ( 92,707 ) ( 183,199 ) Change in fair value of warrants payable ( 66,146 ) 80,328 2,909 Interest expense 3,229 35,990 23,155 Amortization of notes and securities discounts 13,681 21,118 15,913 (Gain) loss on derivative — ( 93,751 ) 138,561 Net loss $ ( 587,756 ) $ ( 136,392 ) $ ( 363,737 ) Per share data: Net loss per share attributable to Class A and Class B common stockholders – basic and diluted (1) $ ( 1.42 ) $ ( 1.54 ) $ ( 4.14 ) Weighted average number of common shares outstanding Basic and diluted weighted average number of Class A and Class B common shares and common share equivalents outstanding (1) 412,922,424 88,691,582 87,829,419 Unrealized (loss) gain on available-for-sale investments $ ( 1,944 ) $ ( 36 ) $ 46 Comprehensive loss $ ( 589,700 ) $ ( 136,428 ) $ ( 363,691 ) (1) Prior period results have been adjusted to reflect the exchange of Legacy Clover's common stock for Clover Class B Common Stock at an exchange ratio of approximately 2.0681 in January 2021 as a result of the Business Combination. See Note 3 (Business Combination) for additional information. Because the Corporation had a net loss during the year ended December 31, 2021, and a net loss during the year ended December 31, 2020, the Corporation’s potentially dilutive securities, which include stock options, restricted stock, preferred stock and warrants to purchase shares of common stock and preferred stock, have been excluded from the computation of diluted net loss per share, as the effect would be anti-dilutive. The accompanying notes are an integral part of these consolidated financial statements. 82 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in thousands, except share amounts) Convertible Preferred stock Class A Common Stock Class B Common Stock Treasury Stock Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss) Noncontrolling interest Total stockholders' equity (deficit) Shares Amount Shares Amount Shares Amount Shares Amount Balance, December 31, 2018 67,427,138 $ 447,747 — $ — 42,243,445 $ 4 — $ — $ 25,318 $ ( 527,896 ) $ — $ — $ ( 502,574 ) Retroactive application of reverse recapitalization 72,017,208 — — — 45,119,147 5 — — ( 5 ) — — — — Adjusted balance, beginning of period 139,444,346 447,747 — — 87,362,592 9 — — 25,313 ( 527,896 ) — — ( 502,574 ) Stock issuance for exercise of stock options, net of early exercise liability — — — — 916,527 — — — 601 — — — 601 Stock-based compensation — — — — — — — — 3,301 — — — 3,301 Unrealized holdings gain on investment securities, available-for-sale — — — — — — — — — 46 — 46 Beneficial conversion feature — — — — — — — — 373,826 — — — 373,826 Net loss — — — — — — — — — ( 363,737 ) — — ( 363,737 ) Balance, December 31, 2019 139,444,346 $ 447,747 — $ — 88,279,119 $ 9 — $ — $ 403,041 $ ( 891,633 ) $ 46 $ — $ ( 488,537 ) Balance, December 31, 2019 67,427,138 $ 447,747 — $ — 42,686,624 $ 4 $ — — $ 403,046 $ ( 891,633 ) $ 46 $ — $ ( 488,537 ) Retroactive application of reverse recapitalization 72,017,208 — — — 45,592,495 5 — — ( 5 ) — — — — Adjusted balance, beginning of period 139,444,346 447,747 — — 88,279,119 9 $ — $ — 403,041 ( 891,633 ) 46 $ — ( 488,537 ) Stock issuance for exercise of stock options, net of early exercise liability — — — — 1,297,977 — — — 1,748 — — — 1,748 Stock-based compensation — — — — — — — — 7,078 — — — 7,078 Buyback and subsequent cancellation of common shares — — — — ( 370,830 ) — — — — ( 957 ) — — ( 957 ) Unrealized holdings loss on investment securities, available-for-sale — — — — — — — — — — ( 36 ) — ( 36 ) Interests issued — — — — — — — — — — — 3,903 3,903 Net loss — — — — — — — — — ( 136,392 ) — — ( 136,392 ) Balance, December 31, 2020 139,444,346 $ 447,747 — $ — 89,206,266 $ 9 — $ — $ 411,867 $ ( 1,028,982 ) $ 10 $ 3,903 $ ( 613,193 ) Balance, December 31, 2020 139,444,346 $ 447,747 — $ — 89,206,266 $ 9 — $ — $ 411,867 $ ( 1,028,982 ) $ 10 $ 3,903 $ ( 613,193 ) Stock issuance for exercise of stock options, net of early exercise liability — — 4,303,062 — — — — — 6,144 — — — 6,144 Stock-based compensation — — — — — — — — 163,723 — — — 163,723 Vested restricted stock units — — 526,346 — — — — — — — — — — Unrealized holdings loss on investment securities, available-for-sale — — — — — — — — — — ( 1,944 ) — ( 1,944 ) Preferred stock conversion ( 139,444,346 ) ( 447,747 ) — — 139,444,346 14 — — 447,733 — — — 447,747 Issuance of common stock related to exercises of legacy warrants — — — — 7,205,490 1 — — 97,781 — — — 97,782 Convertible debt conversion and other issuances — — — — 75,084,703 7 — — 16,052 — — — 16,059 Issuance of common stock in connection with Business Combination and PIPE offering — — 143,475,108 14 ( 49,975,104 ) ( 5 ) — — 666,232 — — — 666,241 83 Conversion from Class B Common Stock to Class A Common Stock — — 231,273,129 23 ( 231,273,129 ) ( 23 ) — — — — — — — Conversion from Class A Common Stock to Class B Common Stock — — ( 88,514,196 ) ( 9 ) 88,514,196 9 — — — — — — — Capital contribution for extinguishment of debt — — — — — — — — 126,795 — — — 126,795 Acquisition of Public and Private Placement Warrants — — — — — — — — ( 147,582 ) — — — ( 147,582 ) Issuance of common stock related to exercises of Public and Private Placement Warrants — — 9,408,264 1 — — — — 81,672 — — — 81,673 Issuance of common stock, net of stock issuance costs — — 52,173,913 5 — — — — 283,770 — — — 283,775 Treasury stock acquired — — — — — — 14,730 ( 147 ) — — — — ( 147 ) Net loss — — — — — — — — — ( 587,756 ) — — ( 587,756 ) Balance, December 31, 2021 — $ — 352,645,626 $ 34 118,206,768 $ 12 14,730 $ ( 147 ) $ 2,154,187 $ ( 1,616,738 ) $ ( 1,934 ) $ 3,903 $ 539,317 The accompanying notes are an integral part of these consolidated financial statements. 84 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Years ended December 31, 2021 2020 2019 Cash flows from operating activities: Net loss $ ( 587,756 ) $ ( 136,392 ) $ ( 363,737 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 1,246 555 551 Amortization of notes and securities discounts and debt issuance costs 13,681 21,118 15,913 Loss on disposal of property and equipment — — 23 Stock-based compensation expense 163,723 7,078 3,301 Paid-in-kind interest — 28,334 11,633 Change in fair value of warrants payable and amortization of warrants ( 66,146 ) 80,328 2,909 Change in derivative liabilities — ( 93,751 ) 138,561 Accretion, net of amortization 200 ( 195 ) ( 2,857 ) Net realized losses (gains) on available-for-sale securities 53 ( 1,114 ) ( 111 ) Asset impairment charges — — 1,632 Changes in operating assets and liabilities: Accrued retrospective premiums ( 94 ) ( 21,604 ) 7,546 Other receivables ( 2,914 ) ( 5,865 ) 4,115 Reinsurance recoverable ( 96 ) 481 63,610 Surety bonds and deposits ( 12,613 ) — — Prepaid expenses ( 1,579 ) ( 6,473 ) 600 Other assets ( 19,757 ) 1,003 ( 470 ) Healthcare receivables ( 9,297 ) ( 12,926 ) ( 14,511 ) Operating lease right-of-use assets 3,591 3,257 ( 11,933 ) Unpaid claims 36,948 26,090 23,882 Accounts payable and accrued expenses 5,307 10,845 6,298 Accrued salaries and benefits 11,169 186 ( 2,235 ) Premium deficiency reserve 110,628 ( 17,128 ) 7,523 Reinsurance premium payable — — ( 64,414 ) Deferred rent 68 — ( 2,677 ) Other liabilities 979 1,378 168 Performance year obligation 36,891 — — Direct Contracting payable 37,773 — — Operating lease liabilities ( 4,331 ) ( 3,703 ) 14,805 Net cash used in operating activities ( 282,326 ) ( 118,498 ) ( 159,875 ) Cash flows from investing activities: Purchases of short-term investments and available-for-sale securities ( 876,252 ) ( 174,318 ) ( 505,545 ) Proceeds from sales of short-term investments and available-for-sale securities 126,862 248,664 269,205 Proceeds from maturities of short-term investments and available-for-sale securities 314,666 63,751 46,415 Proceeds from maturities of held-to-maturity securities — — 9,220 Acquisition of business, net of cash acquired — — ( 1,180 ) Purchases of property and equipment ( 723 ) ( 693 ) ( 23 ) Net cash (used in) provided by investing activities ( 435,447 ) 137,404 ( 181,908 ) Cash flows from financing activities: Proceeds from issuance of convertible notes — 20,000 343,410 Deferred financing costs — ( 98 ) ( 363 ) Payment of notes payable principal ( 30,925 ) ( 18,752 ) ( 9,670 ) Issuance of common stock, net of early exercise liability 6,144 1,748 601 Proceeds from reverse recapitalization, net of transaction costs 666,241 — — Buyback and subsequent cancellation of common shares — ( 957 ) — Proceeds received for the exercise of Public and Private Warrants 390 — — Issuance of common stock, net of stock issuance costs 283,775 — — Payment for the redemptions of Public Warrants ( 85 ) — — Treasury stock acquired ( 147 ) — — Acquisition of noncontrolling interest — 3,903 — Net cash provided by financing activities 925,393 5,844 333,978 Net increase (decrease) in cash and cash equivalents 207,620 24,750 ( 7,805 ) Cash and cash equivalents, beginning of year 92,348 67,598 75,403 Cash and cash equivalents, end of year $ 299,968 $ 92,348 $ 67,598 Supplemental cash flow disclosures Cash paid during the year for interest $ 1,677 $ 4,578 $ 6,257 Cash paid during the year for health insurance industry fee — 8,022 — Supplemental disclosure of non-cash investing and financing activities Fair value of warrants issued in connection with notes payable $ — $ — $ 17,672 Settlement of bridge loan in connection with convertible notes — — 30,416 Conversion of preferred stock to common stock 447,747 — — Issuance of common stock related to convertible debt 16,059 — — Capital contribution for extinguishment of debt 126,795 — — Issuance of common stock related to warrants exercised 97,782 — — Acquisition of Public and Private Warrants 147,582 — — Issuance of common stock related to the exercise of Public and Private Warrants 81,283 — — Right-of-use assets obtained in exchange for lease liabilities 1,076 42 459 The accompanying notes are an integral part of these consolidated financial statements. 85 CLOVER HEALTH INVESTMENTS, CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Organization and Operations Clover Health Investments, Corp. (collectively with its affiliates and subsidiaries, "Clover" or the "Corporation") is singularly focused on creating great, sustainable healthcare to improve every life. Clover has centered its strategy on building and deploying technology through its flagship software platform, the Clover Assistant, to help America’s seniors receive better care at lower costs. Clover provides affordable, high-quality Medicare Advantage (MA) plans, including Preferred Provider Organization (PPO) and Health Maintenance Organization (HMO) plans, through its regulated insurance subsidiaries. The Corporation's regulated insurance subsidiaries consist of Clover Insurance Company and Clover HMO of New Jersey Inc., which operate the Corporation's PPO and HMO health plans, respectively. On April 1, 2021, the Corporation's subsidiary Clover Health Partners, LLC, 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. Medical Service Professionals of NJ, LLC, houses Clover's employed physicians and the related support staff for Clover's in-home care program. Clover's administrative functions and insurance operations are primarily operated by its Clover Health, LLC and Clover Health Labs, LLC subsidiaries. Clover's approach is to combine technology, data analytics, and preventive care to lower costs and increase the quality of health and life of Medicare beneficiaries. Clover's technology platform uses machine learning-powered systems to deliver data and insights to physicians at the point of care in order to improve outcomes for beneficiaries and drive down costs. Clover's MA plans generally provide access to a wide network of primary care providers, specialists, and hospitals, enabling its members to see any doctor participating in Medicare willing to accept them. Clover focuses on minimizing members' out-of-pocket costs and offers many plans that allow members to pay the same co-pays for primary care provider visits regardless of whether their physician is in- or out-of-network. Clover's DCE, which assumes full risk (i.e., 100.0 % shared savings and shared losses) for the total cost of care of aligned Original Medicare beneficiaries (DCE Beneficiaries), focuses on its technology platform to enhance healthcare delivery, reduce expenditures, and improve care for DCE Beneficiaries. Clover was originally incorporated as a Cayman Islands exempted company on October 18, 2019, as a special purpose acquisition company (SPAC) under the name Social Capital Hedosophia Holdings Corp. III (SCH). On October 5, 2020, SCH entered into a Merger Agreement (the "Merger Agreement") with Clover Health Investments, Inc., a corporation originally incorporated on July 17, 2014, in the state of Delaware (Legacy Clover). Pursuant to the Merger Agreement, and a favorable vote of SCH's stockholders on January 6, 2021, Asclepius Merger Sub Inc., a Delaware corporation and a newly formed, wholly-owned subsidiary of SCH (Merger Sub), was merged with and into Legacy Clover. Pursuant to the Merger Agreement, the separate corporate existence of Merger Sub ceased, Legacy Clover survived and merged with and into SCH, with SCH as the surviving corporation, and SCH was redomesticated as a Delaware corporation and renamed Clover Health Investments, Corp. (the "Business Combination"). The Business Combination was accounted for as a reverse recapitalization in accordance with generally accepted accounting principles in the United States (GAAP). Under the guidance in Accounting Standards Codification (ASC) 805, Legacy Clover is treated as the "acquirer" for financial reporting purposes. Legacy Clover is deemed the accounting predecessor of the combined business, and Clover, as the parent company of the combined business, is the successor SEC registrant, meaning that Legacy Clover's financial statements for previous periods are disclosed in periodic reports filed with the SEC. As a result of the Business Combination, there were simultaneous changes to Legacy Clover's convertible securities, warrants, and convertible preferred stock. See Note 12 (Notes and Securities Payable), Note 13 (Warrants Payable), and Note 17 (Stockholders' Equity and Convertible Preferred Stock) for additional information regarding these changes. See also Note 3 (Business Combination) for additional information related to the Business Combination. 2. Summary of Significant Accounting Policies Emerging Growth Company The Corporation was previously treated as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Effective January 1, 2022, the Corporation is no longer eligible for treatment as an emerging growth company in accordance with SEC’s Topic 10 - Emerging Growth Companies . Accordingly, the Corporation is now required to adopt all accounting guidance within the same period as all other large accelerated filers. The Corporation has adopted all new or revised accounting guidance as indicated below. 86 Basis of presentation The Corporation has prepared these consolidated financial statements in accordance with U.S. GAAP, which differs from the statutory accounting practices prescribed by various insurance regulatory authorities. The consolidated financial statements include the accounts of the Corporation and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidating these financial statements. Use of estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that impact the amounts reported in the consolidated financial statements and the accompanying notes. The areas involving the most significant use of estimates are the amounts of incurred but not reported claims. Many factors can cause actual outcomes to deviate from these assumptions and estimates, such as changes in economic conditions, changes in government healthcare policy, advances in medical technology, changes in treatment patterns, and changes in average lifespan. Accordingly, the Corporation cannot determine with precision the ultimate amounts that it will pay for, or the timing of payment of actual claims, or whether the assets supporting the liabilities will grow to the level the Corporation assumes prior to payment of claims. If the Corporation's actual experience is different from its assumptions or estimates, the Corporation's reserves may prove inadequate. As a result, the Corporation would incur a charge to operations in the period in which it determines such a shortfall exists, which could have a material adverse effect on the Corporation's business, results of operations, and financial condition. Other areas involving significant estimates include risk adjustment provisions related to Medicare contracts and the valuation of the Corporation's investment securities, goodwill and other intangible assets, reinsurance, premium deficiency reserve, warrants, embedded derivative related to the convertible securities, stock-based compensation, recoveries from third parties for coordination of benefits, Direct Contracting benchmark specifically cost trend and risk score estimates that can develop over time, and final determination of medical cost adjustment pools. Reclassifications To conform to the current period presentation, prepaid expenses, which were previously included in other assets, current, are presented as a separate line item in the prior year’s Consolidated Balance Sheet. Certain amounts in the prior years’ Consolidated Statements of Cash Flows have been reclassified to conform to the current year’s presentation, primarily related to the amortization of notes and securities discounts and debt issuance costs, change in fair value of warrants payable and amortization of warrants, prepaid expenses, and other assets. Additionally, certain amounts in the prior years’ Consolidated Statement of Operations and Comprehensive Loss have been reclassified to conform to the current year’s presentation, primarily related to MA net medical claims incurred and other medical costs. These reclassifications had no effect on the previously reported Consolidated Financial Statements. Segment information The Corporation’s chief operating decision maker is the Chief Executive Officer. The chief operating decision maker manages operations, allocates resources, and evaluates financial performance on a company-wide basis. The Corporation operates in two reporting segments: the MA segment and DC segment. Performance guarantees Certain of the Corporation’s arrangements with third-party providers require it to guarantee the performance of its care network to CMS. As a result of the Corporation’s participation in the DC Model, the Corporation determined that it was making a performance guarantee with respect to providers of DCE Beneficiaries that should be recognized in the financial statements. Accordingly, a liability for the performance guarantee was recorded on the Consolidated Balance Sheet. Each month, as the performance guarantee is fulfilled, the guarantee is amortized on a straight-line basis for the amount that represents the completed performance. With respect to each performance year in which the DCE is a participant, the final consideration due to the DCE by CMS (shared savings) or the consideration due to CMS by the DCE (shared loss) is reconciled in the subsequent years following the performance year. The shared savings or loss is measured periodically and will be applied to the Direct Contracting performance obligation if the Corporation is in a probable loss position. Direct Contracting revenue is also known in the DC Model as CMS’ performance year expenditures and is the primary component used to calculate shared savings or shared loss versus the performance year benchmark. Direct Contracting revenue is representative of CMS’ total expenditures incurred for medical services provided on behalf of DCE Beneficiaries during months in which those beneficiaries were alignment-eligible and aligned to the DCE. Direct Contracting revenue is calculated by taking the sum of the capitation payments made to the Corporation for services within the scope of the Corporation’s capitation arrangement and fee-for-service (FFS) payments made to providers directly from CMS. Additionally, the DCE has entered into a surety bond agreement with CMS and a third-party surety to cover the reserve requirement, which is fifty percent of the amount determined by the CMS agreement. 87 Cash and cash equivalents Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments and other highly liquid investments with original maturities of 90 days or less. The carrying values of these instruments approximate their respective fair value due to the short-term maturity of these investments. At December 31, 2021 and 2020, the Corporation had cash and cash equivalents at financial institutions, which are insured by the Federal Deposit Insurance Corporation (FDIC). At times, balances may exceed the FDIC insured limits. Management believes that credit risk related to those balances is minimal. Investment securities Short-term investments Short-term investments consist of investments which the Corporation expects to convert into cash within one year of the balance sheet date, including time deposits and debt securities, which have original maturities greater than 90 days. Short-term investments are measured at their amortized cost. The carrying value of these instruments approximate their respective fair value due to the short-term maturity of these investments. Investment securities, available-for-sale Investment securities, which consist entirely of debt securities with fixed or determinable payments and fixed maturity dates, that the Corporation purchases that are not classified as held-to-maturity, are classified as available-for-sale financial assets. The Corporation’s available-for-sale investments are U.S. Treasury fixed maturity securities. Available-for-sale investments are measured at fair value, and unrealized gains and losses, if any, are recorded in other comprehensive income, net of applicable income taxes, until realized from a sale or an expected credit loss is recognized. Investment securities, held-to-maturity Investment securities, which consist entirely of debt securities with fixed or determinable payments and fixed maturity dates, where the Corporation has a positive intent and ability to hold to maturity, are classified as held-to-maturity financial assets. The Corporation’s held-to-maturity investments are comprised of U.S. Treasury fixed maturity securities. The held-to-maturity investments are measured at amortized cost using the effective interest method less impairment. Unrealized holding gains or losses are not recognized. Impairment of investment securities Effective January 1, 2021, the Corporation adopted the provisions of ASC 326 and modified its accounting policy for the assessment of available-for-sale and held-to-maturity securities for impairment, as further described below. Prior to January 1, 2021, the Corporation applied the other-than-temporary impairment model for available-for-sale securities in an unrealized loss position which did not result in impairments for 2020 or 2019. Beginning on January 1, 2021, the Corporation adopted ASC 326, which retained many similarities from the previous other-than-temporary impairment model but eliminated the consideration of the length of time over which the fair value had been less than cost. Additionally, under ASC 326, the expected losses on securities are recognized through an allowance for credit losses rather than as a reduction in the amortized cost of the security. The Corporation identifies securities that are in an unrealized loss position and could potentially have an impairment. This process involves monitoring market events that could impact issuers’ credit ratings, business climate, management changes, litigation and government actions, and other similar factors. This process also involves monitoring late payments, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit risks. The Corporation considers relevant facts and circumstances in evaluating the impairment of a security. Relevant facts and circumstances considered include (1) the extent to which the fair value has been below cost or amortized cost, (2) adverse conditions specifically to the financial condition of the issuer or related to the industry, (3) geographic area of the issuer, or the underlying collateral of a security including the current and future impact of any specific events, (4) the payment structure of the security, (5) changes in credit rating of the security by the rating agencies, and (6) the volatility of the fair value changes. There are a number of significant risks and uncertainties inherent in the process of monitoring impairments. These risks and uncertainties include (1) the risk that management’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) erroneous information or fraudulent financial statements could be provided to the Corporation’s management to determine the fair value 88 estimates and impairments, and (4) the risk that new information obtained by the Corporation, or changes in other facts and circumstances lead the Corporation to change its intent to hold the security to maturity or until it recovers in value. Any of these situations could result in a charge to operations in a future period. For available-for-sale securities whose fair value is less than their amortized cost which the Corporation does not intend to sell or is not required to sell, management evaluates the expected cash flows to be received as compared to amortized cost and determines if an expected credit loss has occurred. In the event of an expected credit loss, only the amount of the impairment related to the expected credit loss is recognized in income with the remainder, if any, of the loss recognized in other comprehensive income. To the extent the Corporation has the intent to sell the security or it is more likely than not that the Corporation will be required to sell the security before recovery of the amortized cost basis, management recognizes an impairment loss in income in an amount equal to the full difference between the amortized cost basis and the fair value. Expected cash flows to be received are evaluated as compared to amortized cost to determine if a credit loss has occurred. The amount of the credit loss component of the security is estimated as the difference between the amortized cost and the present value of the expected cash flows of the security. In developing the expected recovery analysis for debt securities, the Corporation reviews business prospects, credit ratings and available information from asset managers and rating agencies for individual securities. The present value is determined using the best estimate of future cash flows discounted at the implicit interest rate at the date of purchase. For the years ended December 31, 2021, 2020, and 2019, respectively, there has been no impairment loss reported. Held-to-maturity securities are evaluated for potential credit loss on a collective basis. The estimate of credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Allowance for expected credit losses The Corporation assesses outstanding receivables at each period for credit risk. The majority of receivables are from CMS, a United States government entity that presents very limited credit risk. Other income Other income consists of income from operating subleases, miscellaneous revenue, investment income, and commissions. Investment income includes interest, dividends received or accrued on investments, and realized gains or losses. Investment income is reported as earned and is presented net of related investment expenses and expected credit losses. Realized gains or losses are recognized based on the specific identification method. Purchases and sales are recorded on a trade-date basis. Fair value measurements Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. To determine the fair value of its investments, the Corporation utilizes third-party valuation service providers to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested under the terms of service agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates and other market observable information, as applicable. The valuation models consider, among other things, observable market information as of the measurement date as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector and, when applicable, collateral quality and other issue or issuer specific information. When market transactions or other observable market data is limited, the extent to which judgment is applied in determining fair value is greatly increased. Assets and liabilities measured at fair value are categorized into a fair value hierarchy based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs are those that market participants operating within the same marketplace as the Corporation would use in pricing the Corporation’s assets or liabilities based on independently derived and observable market data. Unobservable inputs are inputs that cannot be sourced from a broad active market in which assets or liabilities identical or similar to those of the Corporation are traded. 89 The fair value hierarchy includes three levels of inputs based on the degree to which the exit price is independently observable or determinable that may be used to measure fair value as described below: Level 1 – Valuations are based on quoted (unadjusted) market prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis; Level 2 – Valuations are based on observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; Level 3 – Valuations are based on techniques that use significant inputs that are unobservable and reflect management’s best estimate of what market participants would use when pricing the asset or liability, including assumptions about risk. The valuation of Level 3 assets and liabilities requires the greatest degree of judgment. These measurements may be made under circumstances in which there is little, if any, market activity for the asset or liability. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, the Corporation considers factors specific to the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair values of actively traded investments securities are based on quoted market prices. Fair values of other investment securities are based on quoted market prices of identical or similar securities or based on observable inputs, like interest rates generally using a market valuation approach, or, less frequently, an income valuation approach, and are generally classified as Level 2. The Corporation obtains at least one price for each security from a third-party pricing service. These prices are generally derived from recently reported trades for identical or similar securities, including adjustments through the reporting date based upon observable market information. When quoted prices are not available, the third-party pricing service may use quoted market prices of comparable securities or a discounted cash flow analysis, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include benchmark yields, reported trades, credit spreads, broker quotes, default rates, and prepayment speeds. Concentrations of credit risk Financial instruments that potentially subject the Corporation to concentrations of credit risk consist principally of cash and cash equivalents. Cash and cash equivalents are held with financial institutions of high quality. Balances may exceed the amount of insurance provided on such balances. The ceding of insurance does not legally discharge the Corporation from its primary liability for the full amount of the policy coverage, and therefore the Corporation will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. To minimize exposure to significant losses from reinsurance insolvencies, the Corporation evaluates the financial condition of its reinsurers and monitors concentrations of credit risk with its reinsurers. Capitalized software development costs - cloud computing arrangements The Corporation's cloud computing arrangements mostly comprise hosting arrangements which are service contracts, whereby the Corporation gains remote access to use enterprise software hosted by the vendor or another third party on an as-needed basis for a period of time in exchange for a subscription fee. Implementation costs for cloud computing arrangements are capitalized if certain criteria are met and consist of internal and external costs directly attributable to developing and configuring cloud computing software for its intended use. These capitalized implementation costs are presented in the Consolidated Balance Sheets in other assets, and are generally amortized over the fixed, non-cancelable term of the associated hosting arrangement on a straight-line basis. Deferred acquisition costs Acquisition costs directly related to the successful acquisition of new business, which is primarily made up of commissions costs, are deferred and subsequently amortized. Deferred acquisition costs are recorded as other assets on the Consolidated Balance Sheet and are amortized over the estimated life of the related contracts. The amortization of deferred acquisition costs is recorded in general and administrative expenses in the Consolidated Statement of Operations and Comprehensive Loss. As of December 31, 2021, there were no deferred acquisition costs as a result of the acceleration of amortization for deferred acquisition costs due to the recognition of a premium deficiency reserve during the year ended December 31, 2021. For the year ended December 31, 2021, amortization expense 90 of deferred acquisition costs of $ 10.7 million was recognized in general and administrative expenses. There was no amortization expense of deferred acquisition costs for the years ended December 31, 2020 and 2019. Property and equipment, net Property and equipment, net is reported at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, which are generally three to seven years . Leasehold improvements are amortized over the shorter of the remaining lease term or estimated useful life of the leasehold improvement. Repairs and maintenance costs are expensed as incurred. Costs related to the development of internal-use software that do not meet capitalization criteria are expensed as incurred. Gains and losses on sales or disposals of property and equipment are included in other income (loss). Property and equipment is reviewed for impairment periodically whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. Losses are recognized in operations when the undiscounted future cash flows expected to result from the use of the asset are less than its carrying value. An impairment loss is recognized based on the excess of the carrying value over the fair value of the asset. Goodwill and other intangible assets Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment on an annual basis at a level of reporting referred to as the reporting unit, and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. A component is considered a reporting unit if the component constitutes a business for which discrete financial information is available that is regularly reviewed by management. Management aggregates components into one reporting unit if they have similar economic characteristics. Goodwill is assigned to the reporting units that are expected to benefit from the specific synergies of the business combination. Management reviews goodwill for impairment to determine both the existence and amount of goodwill impairment, if any. Impairment tests are performed, at a minimum, in the fourth quarter of each year. Management first uses a qualitative assessment to determine if it is more likely than not that a reporting unit is impaired. The qualitative test is used as a screening to help determine if it is necessary to perform the quantitative test. If there are indicators that the fair value is less than the carrying amount of any reporting unit, management performs a quantitative assessment where management allocates the fair value of the reporting units to the assets and liabilities with the unallocated fair value representing an implied fair value of goodwill which is then compared to the carrying amount of goodwill. The impairment review requires management to make judgments in determining various assumptions with respect to changes in economic conditions, revenues, operating margins, growth rates and discount rates. There was no impairment of goodwill during the years ended December 31, 2021, 2020, and 2019, respectively. Other intangible assets arising from business combinations are initially recognized at fair value at the date of acquisition. Other intangible assets with indefinite useful lives are tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired. The annual impairment test for indefinite-lived intangible assets may be completed through a qualitative assessment to determine if the fair value of the indefinite-lived intangible assets is more likely than not greater than the carrying amount. The Corporation may elect to bypass a qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, the Corporation will test for impairment using a quantitative process. If the Corporation determines that impairment of its intangible assets may exist, the amount of impairment loss is measured as the excess of carrying value over fair value. The estimates in the determination of the fair value of indefinite-lived intangible assets include the anticipated future revenues of the Corporation and the resulting cash flows. As of December 31, 2021, 2020, and 2019, respectively, there were no circumstances that indicate that the carrying amount of intangible assets deemed to have an indefinite useful life may not be recoverable. Reinsurance In the normal course of business, the Corporation seeks to reduce losses by reinsuring certain levels of risk in areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. To minimize exposure to losses related to a reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially upon placement of the reinsurance and periodically thereafter. In addition to considering the financial condition of a reinsurer, the expected credit losses of reinsurance recoverable is evaluated based upon a number of factors. Such factors include the amounts outstanding, history of losses, ratings of reinsurers, disputes, any collateral or letters of credit held and other relevant factors. The Corporation had no material credit allowances for reinsurance recoverable as of December 31, 2021 and 2020, respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the liability associated with the reinsured business and consistent with the terms of the underlying contracts. Although reinsurance agreements contractually obligate reinsurers to reimburse the Corporation for their share of losses, they do not discharge the primary liability of the Corporation. The Corporation remains liable for unpaid claims and claims adjustment expenses associated with ceded 91 insured risks in the event the assuming reinsurers fail to meet their contractual obligations. The costs of the reinsurance are recognized over the life of the contract in a manner consistent with the earning of premiums on the underlying policies subject to the reinsurance contracts. Unpaid claims Unpaid claims and unpaid claims adjustment expenses include reported claims and incurred but not yet reported (IBNR) claims, as well as the estimated expense of processing these claims. Management develops an estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim experience. Although there is considerable variability in such estimates, management believes that the unpaid claims and unpaid claims adjustment expense liability is adequate and represents management’s best estimate of the ultimate cost of all reported and unreported claims incurred through the balance sheet date. The estimates are continually reviewed and adjusted as experience develops or new information becomes known. Changes in estimates are reflected in current consolidated operating results. Liabilities for both reported claims and IBNR not yet processed through the Corporation’s systems are determined in the aggregate, employing actuarial methods that are commonly used by health insurance actuaries and meet actuarial standards of practice. Actuarial standards of practice require that the claim liabilities be appropriate under moderately adverse circumstances. Clover determines the amount of the liability for incurred but not paid claims by following a detailed actuarial process that uses both historical claim payment patterns as well as emerging medical cost trends to project the best estimate of claim liabilities. Under this process, historical paid claims data is formatted into “claim triangles,” which compare claim incurred dates to the dates of claim payments. This information is analyzed to create “completion factors” that represent the average percentage of total incurred claims that have been paid 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. Actuarial estimates of incurred but not paid claim liabilities are then determined by subtracting the actual paid claims from the estimate of the ultimate incurred claims. The Corporation’s reserving practice is to consistently recognize an actuarial best estimate inclusive of a provision for moderately adverse conditions. This provision is reported as part of incurred claims. Medical claims incurred The Corporation recognizes the cost of medical claims in the period in which services are provided, including an estimate of the cost of medical claims IBNR. This methodology is applied for both the Corporation’s MA and Direct Contracting operations. Medical claim expense reported in the Consolidated Statements of Operations and Comprehensive Loss includes direct medical expenses. Direct medical expenses include amounts paid or payable to hospitals, physicians, pharmacy benefit managers, providers of ancillary services, mandatory supplemental benefits, and is inclusive of the medical expense related to the Corporation’s employed clinicians providing in-home care. Recorded direct medical expenses are reduced by the amount of pharmacy rebates earned, which are estimated based on historical utilization of specific pharmaceuticals, current utilization and contract terms. Pharmacy rebates earned but not yet received from pharmaceutical manufacturers are included in healthcare receivable in the Consolidated Balance Sheets. Overpayments to providers are recognized as a contra medical expense and reported as other receivables in the Consolidated Balance Sheets. Premium deficiency reserve A liability for premium deficiency reserves is an actuarial estimate for anticipated losses on the Corporation’s MA and MA Part D (MAPD) business. Management reassesses the profitability of contracts for providing insurance coverage to members when operating results or forecasts indicate probable future losses. Management establishes a premium deficiency reserve in current operations to the extent that the sum of expected future costs, claim adjustment expenses, and maintenance costs exceeds related future premiums under contracts without consideration of investment income. For purposes of calculating premium deficiency reserves, management groups contracts in a manner consistent with the method of acquiring, servicing, and measuring the profitability of such contracts. Losses recognized as a premium deficiency are recorded in the period in which such losses were identified and reflected in the Consolidated Statements of Operations and Comprehensive Loss. Losses recognized as a premium deficiency result in a beneficial effect in subsequent periods as operating losses under these contracts are charged to the liability previously established. 92 The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (the “Health Care Reform Law”) enacted significant reforms to various aspects of the U.S. health insurance industry. As part of the Health Care Reform Law insurance industry assessments were established, including an annual health insurance industry fee (HIF), which became effective in 2014. The HIF was applicable in 2018, suspended in 2019, and resumed for calendar year 2020. The HIF is not deductible for income tax purposes. The 2019 premium deficiency reserve was inclusive of the 2020 HIF. The Corporation estimates a liability for the HIF and records it in full once qualifying insurance coverage is provided in the applicable calendar year in which the fee is payable, with a corresponding deferred cost that is amortized ratably to expense over the same calendar year. The deferred cost is recorded in other assets on the Consolidated Balance Sheets. The Corporation paid the federal government approximately $ 8.0 million for the HIF in 2020, which is reflected in the Consolidated Statements of Operations and Comprehensive Loss. Notes and securities payable Debt issuance costs Costs incurred in connection with Corporation’s debt financings are capitalized and amortized to interest expense over the life of the related debt using the effective interest method. Debt issuance costs are presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Non-convertible notes The Corporation records the non-convertible notes at carrying value, net of discounts on the Consolidated Balance Sheets. Revenue recognition Premiums earned, net Premiums revenue is recognized as income in the period members are entitled to receive services, and is net of estimated uncollectible amounts, retroactive membership adjustments, and any adjustments to recognize rebates under the minimum benefit ratios required under the Health Care Reform Law. Premiums received in advance of the service period are reported as other liabilities on the Consolidated Balance Sheets and recognized as revenue when earned. Premiums anticipated to be received within twelve months based on the documented diagnostic criteria of the Corporation’s enrollees are estimated and included in revenue for the period including the member months for which the payment is designated by CMS. CMS uses a risk-adjustment model which adjusts premiums paid to MA contracts, based on risk scores that are compared with the overall average risk scores for the relevant state and market pool. Generally, if a risk score is below the average risk score the Corporation is required to make a risk adjustment payment into the risk pool, and if a risk score is above the average risk score the Corporation receives a risk adjustment payment from the risk pool. Risk adjustments can have a positive or negative retroactive impact to rates. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process whereby prospective payments are based on the Corporation’s estimated cost of providing standard Medicare-covered benefits to a member with an average risk profile. That baseline payment amount is adjusted to reflect the health status of enrolled membership. Under the risk-adjustment methodology, all MA plans must collect and submit the necessary diagnosis code information to CMS within prescribed deadlines. Estimated audit settlements are recorded as a reduction of premiums revenue in the Corporation’s Consolidated Statements of Operations and Comprehensive Loss, based upon available information. Retrospective premiums involve the evaluation of past claims experience for the purpose of determining the actual cost of providing insurance for the customer. This evaluation is performed once every year and retrospective premiums are recognized in the year earned. MAPD revenue Payments received from CMS and members from Clover’s participation in the MAPD program are determined from the Corporation’s annual bid and represent amounts for providing prescription drug insurance coverage and are recognized as premium revenue ratably over the term of the annual contract. Such 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 the Corporation or require the Corporation to refund to CMS a portion of the premiums received. As risk corridor provisions are considered in the overall annual bid process, management estimates and recognizes an adjustment to premiums revenue related to these provisions based upon pharmacy claims experience. Management records a receivable or payable at the contract level on the Consolidated Balance Sheets. 93 Reinsurance and low-income cost subsidies represent funding from CMS in connection with the MAPD program for which Clover assumes no risk. Reinsurance subsidies represent funding from CMS for its portion of prescription drug costs which exceed the member’s out-of-pocket threshold, or the catastrophic coverage level. Low-income cost subsidies represent funding from CMS for all or a portion of the deductible, the coinsurance and co-payment amounts above the out-of-pocket threshold for low-income beneficiaries. Payments from CMS for reinsurance and low-income cost subsidies are based on assumptions submitted with the annual bid. A reconciliation and related settlement of CMS’ prospective subsidies against actual prescription drug costs paid is made after the end of the year. Consumer discounts of 50.0% on brand name prescription drugs for participants in the coverage gap are funded by CMS and pharmaceutical manufacturers. The Corporation accounts for these subsidies and discounts in other assets in the Consolidated Balance Sheets and as an operating activity in the Consolidated Statements of Cash Flows. The Corporation does not recognize premiums revenue or claim expenses for these subsidies or discounts. Leases At the inception of an arrangement, the Corporation determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement including the use of an identified asset(s) and the Corporation’s control over the use of that identified asset. The Corporation does not recognize leases with a lease term of one year or less on its balance sheet. Leases with a term greater than one year are recognized on the balance sheet as right-of-use (ROU) assets and lease liabilities. The Corporation has sublease arrangements and recognizes sublease income from leasing excess space. Sublease income is recognized on a straight-line basis over the sublease term. As of December 31, 2021 and 2020, respectively, the Corporation does not have any financing leases. Lease liabilities and their corresponding ROU assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the ROU asset may be required for items such as incentives received or initial direct costs. When an option to extend the lease exists, a determination is made whether that option is reasonably certain of exercise based on economic factors present at the measurement date and as circumstances may change. As of December 31, 2021 and 2020, respectively, the Corporation has not included optional extension periods in the measurement of its leases as they are not reasonably certain of exercise. The Corporation monitors its plans to renew its material leases on a quarterly basis. Where the rates implicit in the Corporation’s leases are not readily determinable, the Corporation utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment over the lease term. Historically, the rate implicit in the leases has not been readily determinable and the appropriate incremental borrowing rate has been utilized. To estimate the appropriate incremental borrowing rate, a credit rating applicable to the Corporation is estimated using a synthetic credit rating analysis since the Corporation does not currently have a rating agency-based credit rating. Components of a lease are split into three categories: lease components, non-lease components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) are allocated, based on the respective relative fair values, to the lease components and non-lease components. The Corporation has elected to account for lease and non-lease components together as a single lease component for all underlying assets and allocate all of the contract consideration to the lease component only. In determining the classification of a lease as operating or finance, ASC 842, Leases , allows for the use of judgment in determining whether the assumed lease term is for a major part of the remaining economic life of the underlying asset and whether the present value of lease payments represents substantially all of the fair value of the underlying asset. The Corporation applies the bright line thresholds referenced in the lease guidance of 75.0% to represent “a major part” and 90.0% to represent “substantially all” as allowed in ASC 842 in evaluating leases for appropriate classification. These are applied consistently to the Corporation’s entire portfolio of leases. Stock-based compensation The Corporation accounts for all stock-based payment awards granted to employees and non-employees as stock-based compensation expense at fair value. The Corporation’s stock-based payments include stock options, restricted stock units, and grants of common stock, including common stock subject to vesting. The measurement date for employee awards is the grant date, 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. Nonemployee share-based payment equity awards are measured at the grant-date fair value of the equity instruments, similar to employee share-based payment equity awards. 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 accompanying 94 Consolidated Statements of Operations and Comprehensive Loss in salaries and benefits. The Corporation recognizes stock-based compensation expense for the portion of awards that have vested. Forfeitures are recorded as they occur. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected term of the Corporation’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Corporation has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future. For warrants issued to non-employees as payments for services, the Corporation considers 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, the Corporation evaluates 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 these warrants do not meet any of the criteria to be accounted for as debt, they are classified as equity awards. On the grant date, these warrants are measured by estimating the fair value of the equity instruments to be issued. Stock-based compensation expense is recorded for the vested portion of the warrants. Comprehensive income Comprehensive income is a measurement of certain changes in stockholders’ equity that results from transactions and other economic events other than transactions with the stockholders. The cumulative amount of these changes is reported on the Consolidated Balance Sheets. Contingent liabilities The Corporation records a provision for a contingent liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Federal income taxes The Corporation recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The Corporation also recognizes the future tax benefits such as net operating and capital loss carryforwards as deferred tax assets. A valuation allowance is provided against these deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Future years’ tax expense may be increased or decreased by adjustments to the valuation allowance or to the estimated accrual for income taxes. Deferred tax assets and deferred tax liabilities are further adjusted for changes in the enacted tax rates. As of December 31, 2021 and 2020, respectively, sufficient doubt existed over the Corporation’s ability to generate sufficient taxable income to realize its deferred income tax assets, and accordingly, the Corporation has provided a full valuation allowance against its deferred tax assets. The Corporation records tax benefits when it is more likely than not that the tax return position taken with respect to a particular transaction will be sustained. A liability for an uncertain tax position, if recorded, is not considered resolved until the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, or the tax position is ultimately settled through examination, negotiation, or litigation. The Corporation did not have any material uncertain tax positions during the years ended December 31, 2021 and 2020, respectively. The Corporation classifies interest and penalties associated with uncertain tax positions in its provision for income taxes. The Corporation did no t incur or record any interest and penalties related to uncertain tax positions as of or during the years ended December 31, 2021, 2020, and 2019, respectively. General and administrative expenses General and administrative expenses include professional service fees, outside legal, tax and accounting service fees, insurance, software application and system expenses, advertising and marketing, lease and occupancy costs and other overhead costs. General and administrative expenses also include claim adjudication and processing costs. 95 Net loss per share The Corporation follows the two-class method when computing net loss per share as the Corporation has issued shares that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potentially dilutive common shares. For purpose of this calculation, outstanding stock options, convertible preferred stock and warrants to purchase shares of convertible preferred stock are considered potential dilutive common shares. The Corporation’s convertible preferred stock contractually entitled the holders of such shares to participate in dividends but did not contractually require the holders of such shares to participate in losses of the Corporation. Accordingly, in periods in which the Corporation reported a net loss attributable to common stockholders, such losses were not allocated to such participating securities. In periods in which the Corporation reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Corporation reported a net loss attributable to common stockholders for the years ended December 31, 2021, 2020, and 2019. COVID-19 The societal and economic impact of the novel coronavirus (COVID-19) pandemic is continuing to evolve, and the ultimate impact on the Corporation’s business, results of operations, financial condition, and cash flows is uncertain and difficult to predict. The global pandemic has severely impacted businesses worldwide, including many in the health insurance sector. In response to the pandemic, the Corporation has implemented additional steps related to its care delivery, member support, and internal policies and operations. Recent accounting pronouncements Recently adopted accounting pronouncements Fair value measurements In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standard Update (ASU) 2018-13, Changes to Disclosure Requirements for Fair Value Measurements , the purpose of which is to improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements and is in effect for all entities in fiscal years beginning after December 15, 2019. This standard became effective for the Corporation on January 1, 2020, and did not have a material impact on the Corporation's disclosures. Cloud computing arrangements In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other (Topic 350) – Internal Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . This update changes the accounting guidance for cloud computing arrangements. If a cloud computing arrangement includes a license to internal-use software, the software license is accounted for by the customer by recognizing an asset for the software license and, to the extent that the payments attributable to the software license are made over time, recognizing a corresponding liability. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract and should expense any fees associated with the hosting element (service) of the arrangement as incurred. ASU 2018-15 is effective for nonpublic entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Corporation adopted ASU 2018-15 on January 1, 2021, on a prospective basis. The Corporation's cloud computing arrangements relate to the set-up of various platforms, including but not limited to clinical data repositories and other system integrations. The capitalized implementation costs are presented in the Consolidated Balance Sheet in other assets, current and are amortized on a straight-line basis over the term of the underlying cloud computing hosting contract, which is the noncancelable term of the arrangement plus any reasonably certain renewal periods. As of December 31, 2021, $ 5.9 million was recorded in other assets, current, as deferred implementation costs. For the year ended December 31, 2021, amortization expense associated with the Corporation’s cloud computing arrangements was $ 0.7 million. No 96 impairment was recognized during the year ended December 31, 2021, as there were no events or changes in circumstances to indicate that the carrying amount of the Corporation's cloud computing arrangements may not be recoverable. Credit losses In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which was subsequently modified by several ASUs issued in 2018 and 2019. The guidance introduces a new current expected credit loss (CECL) model for measuring expected credit losses for certain types of financial instruments measured at amortized cost and replaces the incurred loss model. The CECL model requires an entity to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount the entity expects to collect over the instrument's contractual life after consideration of historical experience, current conditions, and reasonable and supportable forecasts. This standard also introduces targeted changes to the available-for-sale debt securities impairment model. It eliminates the concept of other-than-temporary impairment and requires an entity to determine whether any impairment is the result of a credit loss or other factors. The Corporation’s investment portfolio consists primarily of available-for-sale and held-to-maturity debt securities. ASU 2016-13 is effective for nonpublic entities in fiscal years beginning after December 15, 2022, and public entities beginning after December 15, 2021. The Corporation adopted ASU 2016-13 on January 1, 2021. Due to the high concentration of the Corporation’s financial assets with the federal government, the Corporation has determined that most of these assets pose zero nonpayment risk; consequently, the adoption of ASU 2016-13 did not have a material impact on the Corporation’s financial statements. Goodwill and other intangible assets In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . This update removes Step 2 of the goodwill impairment test under current guidance, which requires a hypothetical purchase price allocation. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. Upon adoption, the guidance is to be applied prospectively. ASU 2017-04 is effective for nonpublic entities in fiscal years beginning after December 15, 2021, and public entities beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Corporation adopted ASU 2017-04 on January 1, 2021. The adoption of ASU 2017-04 did not have an impact on the Corporation’s financial statements. Income taxes In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The amendments in ASU 2019-12 remove certain exceptions to the general principles in ASC Topic 740. The amendments also clarify and amend existing guidance to improve consistent application. The amendments are effective for nonpublic entities in fiscal years beginning after December 15, 2021, and public entities beginning after December 15, 2020. Early adoption is permitted. The transition method (retrospective, modified retrospective, or prospective basis) related to the amendments depends on the applicable guidance, and all amendments for which there is no transition guidance specified are to be applied on a prospective basis. The Corporation adopted this standard on January 1, 2021. The adoption of ASU 2019-12 did not have an impact on the Corporation’s financial statements. Accounting for convertible instruments and contracts in an entity's own equity In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40) . The amendments in ASU 2020-06 simplify the accounting for convertible instruments by removing certain separation models for convertible instruments. Under the amendments in ASU 2020-06, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. ASU 2020-06 is effective for nonpublic entities for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and public entities beginning after December 15, 2021. The Corporation adopted this standard on January 1, 2022. The adoption of ASU 2020-06 did not have an impact on the Corporation’s financial statements. 97 3. Business Combination On October 5, 2020, Legacy Clover entered into a Merger Agreement with SCH, a SPAC, and Merger Sub. On January 7, 2021, as contemplated by the Merger Agreement and following approval by SCH's shareholders at an extraordinary general meeting held January 6, 2021 (the "Special Meeting"): • SCH filed a notice of deregistration with the Cayman Islands Registrar of Companies, together with the necessary accompanying documents, and filed a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, under which SCH was domesticated and continued as a Delaware corporation (the "Domestication"); and • Merger Sub merged with and into Legacy Clover, the separate corporate existence of Merger Sub ceased and Legacy Clover became the surviving corporation and a wholly-owned subsidiary of SCH (the "First Merger") and Legacy Clover merged with and into SCH, the separate corporate existence of Legacy Clover ceased and SCH became the surviving corporation, changing its name to "Clover Health Investments, Corp." (together with the First Merger, the "Mergers," and collectively with the Domestication, the “Business Combination”). As a result of the Mergers, among other things, (i) all outstanding shares of common stock of Legacy Clover immediately prior to the effective time of the First Merger were canceled in exchange for the right to receive, at the election of the holders thereof (except with respect to the shares held by entities controlled by Vivek Garipalli and the holders of convertible securities previously issued by Legacy Clover to certain holders who received only shares of Class B Common Stock, par value $ 0.0001 per share, of Clover (Class B Common Stock), which are entitled to 10 votes per share, an amount in cash, shares of Class B Common Stock, or a combination thereof, as adjusted in accordance with the Merger Agreement, which equaled in the aggregate $ 499.8 million in cash and 260,965,701 shares of Class B Common Stock (at a deemed value of $ 10.00 per share); (ii) shares of Legacy Clover held by entities controlled by Vivek Garipalli and the holders of the convertible securities immediately prior to the effective time of the First Merger were canceled in exchange for the right to receive shares of Class B Common Stock based on an Exchange Ratio (as defined in the Merger Agreement) of approximately 2.0681 ; and (iii) all shares of common stock of Legacy Clover reserved in respect of Legacy Clover stock options and restricted stock units outstanding as of immediately prior to the effective time of the First Merger, were converted, based on the Exchange Ratio, into awards based on shares of Class B Common Stock. The consideration that a Clover stockholder received was subject to pro rata adjustment depending on the election made by such stockholder, if any, in accordance with the terms of the Merger Agreement. The pro rata adjustments were made based on an Actual Cash/Stock Ratio (as defined in the Merger Agreement) of 32.3 %. In connection with the consummation of the Business Combination (the "Closing"), (i) each issued and outstanding Class A ordinary share, par value $ 0.0001 per share, of SCH (SCH Class A ordinary shares) converted automatically, on a one-for-one basis, into a share of Class A Common Stock, par value $ 0.0001 per share, of Clover (the "Class A Common Stock," and together with the Class B Common Stock, the "Common Stock"), which will be entitled to one vote per share, (ii) each of the issued and outstanding Class B ordinary shares, par value $ 0.0001 per share, of SCH, converted automatically, on a one-for-one basis, into a share of Class A Common Stock, (iii) each issued and outstanding warrant of SCH converted automatically into a warrant to acquire one share of Class A Common Stock (Warrant), pursuant to the Warrant Agreement, dated April 21, 2020, between SCH and Continental Stock Transfer & Trust Company, as warrant agent, and (iv) each issued and outstanding unit of SCH (SCH unit) that had not been previously separated into the underlying Class A ordinary share and underlying warrant of SCH upon the request of the holder thereof, was canceled and the holder thereof is entitled to one share of Class A Common Stock and one-third of one Warrant. As of January 7, 2021, there were public warrants outstanding to purchase an aggregate of 27,599,938 shares of Class A Common Stock (the "Public Warrants") and private placement warrants outstanding to purchase an aggregate of 10,933,333 shares of Class A Common Stock (the "Private Placement Warrants" and, together with the Public Warrants, the “Warrants”). Each whole Warrant entitled the registered holder to purchase one whole share of Class A Common Stock at a price of $ 11.50 per share, subject to adjustment at any time commencing on April 24, 2021, which was 12 months from the closing of SCH's initial public offering. Pursuant to the subscription agreements (the "Subscription Agreements") entered into on October 5, 2020, by and among SCH and certain investors (collectively, the "PIPE Investors"), Clover issued and sold to the PIPE Investors (substantially concurrently with the consummation of the Mergers) an aggregate of 40,000,000 shares of Class A Common Stock for an aggregate purchase price equal to $ 400.0 million (the "PIPE Investment"), of which 15,200,000 shares were purchased by affiliates of SCH Sponsor III LLC (the "Sponsor," and collectively, the "Sponsor Related PIPE Investors"). The Business Combination and PIPE Investment were approved by the SCH shareholders at the Special Meeting. Prior to and in connection with the Special Meeting, holders of 24,892 shares of SCH Class A ordinary shares (including those that underlie the SCH units) that were registered pursuant to the Registration Statements on Form S-1 (333-236776 and 333-237777) and the shares of Class A Common Stock issued as a matter of law upon the conversion thereof on the effective date of the Domestication (the "Public 98 Shares") exercised their right to redeem those shares for cash at a price of $ 10.00 per share, for an aggregate of $ 0.2 million. The per share redemption price of $ 10.00 for public shareholders electing redemption was paid out of the SCH Trust Account, which after taking into account the redemptions, had a balance immediately prior to the Closing of $ 827.9 million, which cash balance was used to pay the $ 499.8 million cash component of the merger consideration. Immediately after giving effect to the Business Combination and the PIPE Investment, there were 143,475,108 shares of Class A Common Stock, 260,965,701 shares of Class B Common Stock and 38,533,271 Warrants outstanding, equaling 404,440,809 total shares of common stock outstanding and 38,533,271 Warrants outstanding. The Corporation is authorized to issue 25,000,000 shares of preferred stock having a par value of $ 0.0001 per share. See Note 17 (Stockholders' Equity and Convertible Preferred Stock) for additional information. The Business Combination has had and will have a significant impact on the Corporation's future reported financial position and results as a consequence of the reverse recapitalization. The most significant change in Clover's future reported financial position and results is an estimated net increase in cash (as compared to the Corporation's consolidated balance sheet at December 31, 2020) of approximately $ 670.0 million. The redemption included approximately $ 400.0 million in proceeds from the PIPE Investment that was consummated substantially simultaneously with the Business Combination, offset by additional transaction costs incurred in connection with the Business Combination. The estimated transaction costs for the Business Combination were approximately $ 61.0 million, of which $ 29.0 million represents deferred underwriter fees related to SCH's initial public offering. The transaction closed on January 7, 2021, and on the following day the Corporation's Class A Common Stock and Public Warrants were listed on the Nasdaq Global Select Market (Nasdaq) under the symbols "CLOV" and "CLOVW," respectively, for trading in the public market. See also Note 12 (Notes and Securities Payable), Note 13 (Warrants Payable), and Note 17 (Stockholders' Equity and Convertible Preferred Stock) for additional information regarding changes to the instruments as a result of the Business Combination. 4. Investment Securities The following tables present amortized cost and fair values of investments as of December 31, 2021, and December 31, 2020, respectively: December 31, 2021 Amortized cost Accumulated unrealized gains Accumulated unrealized losses Fair value (in thousands) Investment securities, held-to-maturity U.S. government and government agencies and authorities $ 640 $ 40 $ ( 9 ) $ 671 Investment securities, available-for-sale U.S. government and government agencies and authorities 198,669 10 ( 1,944 ) 196,735 Total investment securities $ 199,309 $ 50 $ ( 1,953 ) $ 197,406 December 31, 2020 Amortized cost Accumulated unrealized gains Accumulated unrealized losses Fair value (in thousands) Investment securities, held-to-maturity U.S. government and government agencies and authorities $ 694 $ 43 $ — $ 737 Investment securities, available-for-sale U.S. government and government agencies and authorities 53,953 51 ( 41 ) 53,963 Total investment securities $ 54,647 $ 94 $ ( 41 ) $ 54,700 99 The following table presents the amortized cost and fair value of debt securities as of December 31, 2021, by contractual maturity: December 31, 2021 Held-to-maturity Available-for-sale Amortized cost Fair value Amortized cost Fair value (in thousands) Due within one year $ 305 $ 307 $ 21,142 $ 21,131 Due after one year through five years 15 16 172,564 170,820 Due after five years through ten years 210 201 4,963 4,784 Due after ten years 110 147 — — Total $ 640 $ 671 $ 198,669 $ 196,735 For the years ended December 31, 2021, 2020, and 2019, respectively, net investment income, which is included within other income in the Consolidated Statements of Operations and Comprehensive Loss, was derived from the following sources: Years ended December 31, 2021 2020 2019 (in thousands) Cash and cash equivalents $ 1 $ 108 $ 1,249 Short-term investments 195 1,722 2,904 Investment securities 348 1,146 386 Investment income, net $ 544 $ 2,976 $ 4,539 Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at December 31, 2021: December 31, 2021 Less than 12 months Greater than 12 months Total Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss (in thousands, except number of positions) U.S. government and government agencies and authorities $ 187,251 $ ( 1,555 ) $ 7,902 $ ( 398 ) $ 195,153 $ ( 1,953 ) Total $ 187,251 $ ( 1,555 ) $ 7,902 $ ( 398 ) $ 195,153 $ ( 1,953 ) Number of positions 18 4 22 The Corporation did no t record any credit allowances for debt securities that were in an unrealized loss position as of December 31, 2021. As of December 31, 2021, all securities were investment grade, with credit ratings of AA+ or higher by S&P. Unrealized losses on investment grade securities are principally related to changes in interest rates or changes in issuer or sector related credit spreads since the securities were acquired. The gross unrealized investment losses as of December 31, 2021, were assessed, based on, among other things: • The relative magnitude to which fair values of these securities have been below their amortized cost was not indicative of an impairment loss; • The absence of compelling evidence that would cause the Corporation to call into question the financial condition or near-term prospects of the issuer of the applicable security; and • The Corporation's ability and intent to hold the applicable security for a period of time sufficient to allow for any anticipated recovery. 100 Proceeds from sales and maturities of investment securities, inclusive of short-term investments, and related gross realized gains (losses) which are included within other income in the Consolidated Statements of Operations and Comprehensive Loss, were as follows for the years ended December 31, 2021, 2020, and 2019, respectively: Years ended December 31, 2021 2020 2019 (in thousands) Proceeds from sales of investment securities $ 126,862 $ 248,664 $ 269,205 Proceeds from maturities of investment securities 314,666 63,751 55,635 Gross realized gains 24 1,117 114 Gross realized losses ( 77 ) ( 3 ) ( 3 ) Net realized (losses) gains $ ( 53 ) $ 1,114 $ 111 As of December 31, 2021, and December 31, 2020, the Corporation had $ 11.1 million and $ 7.5 million, respectively, in deposits with various states and regulatory bodies that are included as part of the Corporation's investment balances. 5. Fair Value Measurements The following table presents a summary of fair value measurements for financial instruments as of December 31, 2021, and December 31, 2020, respectively: December 31, 2021 Level 1 Level 2 Level 3 Total fair value (in thousands) U.S. government and government agencies $ — $ 196,735 $ — $ 196,735 Total assets at fair value $ — $ 196,735 $ — $ 196,735 December 31, 2020 Level 1 Level 2 Level 3 Total fair value (in thousands) U.S. government and government agencies $ — $ 53,963 $ — $ 53,963 Total assets at fair value $ — $ 53,963 $ — $ 53,963 Derivative liabilities $ — $ — $ 44,810 $ 44,810 Warrants payable — — 97,782 97,782 Total liabilities at fair value $ — $ — $ 142,592 $ 142,592 See Note 12 (Notes and Securities Payable), Note 13 (Warrants Payable), and Note 14 (Derivative Liabilities) for additional information regarding liabilities. The fair value of the convertible securities was based on Level 3 inputs, which were unobservable and reflect management’s best estimate of what market participants would use when pricing the asset or liability, including assumptions about risk. There was no fair value associated with convertible securities at December 31, 2021, due to the conversion of the securities to shares of the Corporation’s common stock due to the completion of the Business Combination, and the estimated fair value of convertible securities was $ 949.6 million at December 31, 2020. The estimated fair value of the convertible securities and derivative liabilities at December 31, 2020, was calculated as the product of (i) the number of conversion shares at the valuation date and (ii) the marketable value per common share at the valuation date. 101 The significant unobservable inputs used in the Black-Scholes model to measure the warrants payable that are categorized within Level 3 of the fair value hierarchy, as of the year ended December 31, 2020, are as follows: December 31, 2020 Preferred stock purchase warrants Common stock purchase warrants Beginning stock price N/A $ 30.14 Strike price N/A 1.04 Expected volatility N/A 56.0 % Expected term N/A 0.02 years Risk-free interest rate N/A 0.09 % Discount factor N/A 13.0 The changes in balances of Level 3 financial liabilities during the years ended December 31, 2021 and 2020, respectively, are as follows: Convertible securities Derivative liabilities Warrants payable Total (in thousands) Balance, December 31, 2020 $ 949,553 $ 44,810 $ 97,782 $ 1,092,145 Issuances — — — — Settlements ( 949,553 ) ( 44,810 ) ( 97,782 ) ( 1,092,145 ) Transfers in — — — — Transfers out — — — — Total realized losses (gains) — — — — Balance, December 31, 2021 $ — $ — $ — $ — Convertible securities Derivative liabilities Warrants payable Total (in thousands) Balance, December 31, 2019 $ 251,885 $ 138,561 $ 17,672 $ 408,118 Issuances — — — — Settlements — — — — Transfers in — — — — Transfers out — — — — Total realized losses (gains) 697,668 ( 93,751 ) 80,110 684,027 Balance, December 31, 2020 $ 949,553 $ 44,810 $ 97,782 $ 1,092,145 In addition to the Level 3 financial liabilities in the table above, on September 25, 2020, Seek Insurance Services, Inc. (Seek), a field marketing organization and an indirect wholly-owned subsidiary of the Corporation, entered into a note purchase agreement with a third-party investor and issued a note (the “Seek Convertible Note”) in the principal amount of $ 20.0 million, for which the carrying value is approximately the same as the fair value. For additional information, see Note 12 (Notes and Securities Payable). As of December 31, 2021, and December 31, 2020, both the carrying values, which includes accrued interest, and the fair values of the Seek Convertible Note were $ 22.0 million and $ 20.4 million, respectively, and these were considered Level 3 financial liabilities. There were no transfers in or out of Level 3 financial assets or liabilities for the years ended December 31, 2021 or 2020. Warrants The 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 measured on a recurring basis, with changes in fair value presented within change in fair value of warrants payable in the Consolidated Statement of Operations and Comprehensive Loss. On July 22, 2021, the Corporation issued a press release stating that it would redeem all of its Warrants. The end of the redemption period was September 9, 2021, at which time the Corporation redeemed all unexercised Warrants at a price of $ 0.10 102 per warrant. Following the redemption exercise, no Warrants were outstanding. For additional information, please see Note 13 (Warrants Payable). Liability Measurement The Warrants were measured at fair value on a recurring basis. The Corporation classified the Warrants as a liability due to certain settlement terms and provisions related to certain tender offers and indexation characteristics following the Business Combination and accounted for them as liability instruments in accordance with ASC 815, adjusting the fair value at the end of each reporting period. Additionally, the Corporation determined that the Public Warrants were classified within Level 1 of the fair value hierarchy as the fair value was equal to the publicly traded price of the Public Warrants, and the Private Placement Warrants were classified within Level 2 of the fair value hierarchy as the fair value was estimated using the price of the Public 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 the Corporation’s common stock. There were no Private Warrants outstanding at August 24, 2021. See Note 13 (Warrants Payable) for additional information on the exercises and redemption of Warrants. The following table presents the changes in the fair value of warrants payable: December 31, 2021 Public and Private Placement Warrants (in thousands) Initial measurement, January 7, 2021 $ 147,582 Mark-to-market adjustment ( 66,214 ) Warrants exercised ( 81,283 ) Warrants redeemed ( 85 ) Warrants payable balance, December 31, 2021 $ — 6. Healthcare Receivables Included within healthcare receivables are pharmaceutical rebates which are accrued as they are earned and estimated based on contracted rebate rates, eligible amounts submitted to the manufacturers by the Corporation's pharmacy manager, pharmacy utilization volume and historical collection patterns. As of December 31, 2021, and December 31, 2020, the Corporation recognized rebate receivables of approximately $ 33.1 million and $ 26.6 million, respectively. In addition to pharmaceutical rebates, Medicare Part D settlement receivables, member premium receivables and other CMS receivables included in healthcare receivables totaled $ 14.9 million and $ 12.1 million at December 31, 2021, and December 31, 2020, respectively. 7. Related Party Transactions Related party agreements The Corporation has various contracts with IJKG Opco LLC (d/b/a CarePoint Health - Bayonne Medical Center), Hudson Hospital Opco LLC (d/b/a CarePoint Health - Christ Hospital) and Hoboken University Medical Center Opco LLC (d/b/a CarePoint Health - Hoboken University Medical Center), which collectively do business as the CarePoint Health System (CarePoint Health). CarePoint Health is ultimately held and controlled by Mr. Vivek Garipalli, the Chief Executive Officer and stockholder of the Corporation. The Corporation contracts with CarePoint Health for the provision of inpatient and hospital-based outpatient services. Expenses and fees incurred related to these contracts, recorded in net medical claims incurred, were $ 12.7 million, $ 11.1 million, and $ 9.7 million for the years ended December 31, 2021, 2020, and 2019, respectively. Additionally, $ 2.3 million and $ 1.5 million were payable to CarePoint Health as of December 31, 2021, and December 31, 2020, respectively. The Corporation has contracted with Rogue Trading, LLC (Rogue), a marketing services provider. The Corporation’s President and Chief Technology Officer, Andrew Toy, is related to the Chief Executive Officer of Rogue. Expenses and fees related to these contracts were $ 0.3 million, $ 0.3 million, and $ 0.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. The Corporation has a contract with Medical Records Exchange, LLC (d/b/a ChartFast) pursuant to which the Corporation receives administrative services related to medical records via ChartFast’s electronic applications and web portal platform. ChartFast is 103 ultimately owned and controlled by Mr. Garipalli. Expenses and fees incurred related to this agreement were $ 0.2 million for the years ended December 31, 2021 and 2020, and none for the year ended December 31, 2019. On July 2, 2021, the Corporation signed a contract with Thyme Care, Inc. (Thyme Care), an oncology benefit management company, through which Thyme Care will provide concierge cancer coordination services to the Corporation’s Medicare Advantage members in New Jersey and develop a provider network to help ensure member access to high-value oncology care. Mr. Garipalli is a member of Thyme Care’s board of directors. Expenses and fees incurred related to this agreement were $ 0.3 million for the year ended December 31, 2021. 8. Property and Equipment, Net Property and equipment, net consists of the following: December 31, 2021 2020 (in thousands) Capitalized software $ 1,416 $ 693 Leasehold improvements 3,035 3,088 Office furniture and fixtures 35 29 Equipment 113 104 Property and equipment, gross 4,599 3,914 Less: accumulated depreciation and amortization ( 2,312 ) ( 1,836 ) Property and equipment, net $ 2,287 $ 2,078 Depreciation expense recorded by the Corporation was approximately $ 0.3 million, $ 0.5 million, and $ 0.6 million for the years ended December 31, 2021, 2020, and 2019, respectively. Amortization expense recorded by the Corporation was approximately $ 0.2 million, $ 0.1 million, and no ne for the years ended December 31, 2021, 2020, and 2019, respectively. 9. Goodwill and Other Intangible Assets Other intangible assets was $ 3.0 million as of December 31, 2021 and 2020. The other intangible assets consist of licenses with indefinite useful lives that are related to Certificates of Operating Authority in 45 states and the District of Columbia. Goodwill was $ 1.2 million as of December 31, 2021 and 2020. Intangible assets with indefinite useful lives and goodwill are not amortized but are tested for impairment in the fourth quarter, or more frequently if events or changes in circumstances indicate that the assets may be impaired. As of December 31, 2021 and 2020, respectively, there were no circumstances that indicate that the carrying amount of goodwill and intangible assets deemed to have an indefinite useful life may not be recoverable. No impairment was recorded during the years ended December 31, 2021 and 2020, respectively. 104 10. Unpaid Claims Activity in the liability for unpaid claims, including claims adjustment expenses, for the years ended December 31, 2021 and 2020, is summarized as follows: Years ended December 31, 2021 2020 (in thousands) Gross and net balance, beginning of period (1) $ 103,976 $ 77,886 Incurred related to: Current year 822,300 599,147 Prior years 15,834 ( 13,715 ) Total incurred 838,134 585,432 Paid related to: Current year 692,116 496,303 Prior years 113,677 63,039 Total paid 805,793 559,342 Gross and net balance, end of period (1)(2) $ 136,317 $ 103,976 (1) Includes amounts due to related parties. (2) Differs from the total unpaid claims amount reported on the Consolidated Balance Sheets due to the fact the figure here excludes unpaid claims for the Corporation’s DCE of $ 4.6 million as of December 31, 2021. The Corporation uses a variety of standard actuarial techniques to establish unpaid claims reserves. Management estimates are supported by the Corporation's actuarial analysis. The Corporation utilizes an internal actuarial team to review the adequacy of unpaid claim and unpaid claim adjustment expense. The estimation of claim costs is inherently difficult and requires significant judgment. The estimation has considerable inherent variability and can vary significantly depending upon several factors, including medical cost trends and claim payment patterns, general economic conditions and regulatory changes. The time value of money is not taken into account for the purposes of calculating the liability for unpaid claims. Management believes that the current reserves are adequate based on currently available information. The Corporation counts a claim when either a claim or claim adjustment expense amount has been paid, or at any period end, when the Corporation has recorded a medical unpaid claim reserve. The cumulative number of reported claims for each claim year has been developed using historical data captured by claim systems. As such, the cumulative number of reported claims may not be comparable to similar measures reported by other companies. Unpaid Claims for MA Operations Unpaid claims for MA operations as reported on the Consolidated Statements of Operations and Comprehensive Loss as of December 31, 2021, were $ 136.3 million. During the year ended December 31, 2021, $ 113.7 million was paid for incurred claims attributable to insured events of prior years. The unfavorable development of $ 15.8 million was recognized during the year ended December 31, 2021, resulting from the Corporation's claims experience, partially attributable to the direct cost of COVID-19 and the increased utilization from the deferral of healthcare services as a result of the stay-at-home orders and closure of certain provider facilities throughout 2020 due to COVID-19 restrictions. A favorable development of $ 13.7 million was recognized during the year ended December 31, 2020, resulting from the actualization of fee-for-service claims. Original estimates are increased or decreased, as additional information becomes known regarding individual claims. The ratio of current year medical claims paid as a percentage of current year net medical claims incurred was 84.2 % for the year ended December 31, 2021, and 82.8 % for the year ended December 31, 2020. This ratio serves as an indicator of claims processing speed, indicating that claims were processed at a faster rate during the year ended December 31, 2021, than during the year ended December 31, 2020. 105 The following tables provide information regarding incurred and paid claims development for medical claims, as well as cumulative claim frequency and the total of incurred but not reported liabilities as of December 31, 2021, respectively: Cumulative incurred claims for the years ended December 31, Incurred year 2019* 2020* 2021 Total IBNR (1) Number of reported claims (in thousands) (in ones) 2019 and prior $ 962,373 $ 948,658 $ 947,323 $ 843 2,926,156 2020 599,148 616,316 5,289 1,433,039 2021 822,300 130,184 2,384,691 Total $ 962,373 $ 1,547,806 $ 2,385,940 $ 136,317 6,743,886 (1) Differs from the total unpaid claims amount reported on the Consolidated Balance Sheets due to the fact the figure here excludes unpaid claims for the Corporation’s DCE of $ 4.6 million as of December 31, 2021. Cumulative net paid claims through December 31, Paid year 2019* 2020* 2021 (in thousands) Incurred year 2019 and prior $ 894,877 $ 947,526 $ 946,480 2020 496,304 611,027 2021 692,116 Total $ 894,877 $ 1,443,830 $ 2,249,623 * Unaudited supplemental information The reconciliation of net incurred and paid claims development tables to unpaid claims and claims adjustment expenses for medical claims on the Consolidated Balance Sheets is as follows: December 31, 2021 (in thousands) Cumulative incurred claims, net $ 2,385,940 Less: cumulative paid claims, net 2,249,623 Net unpaid claims, including claims adjustment expenses (1) $ 136,317 (1) The following balance reflects the unpaid claims for Medicare Advantage only. The DCE and other medical unpaid claims should be included in order to reconcile to the total unpaid claims on the Consolidated Balance Sheets. 11. Reinsurance Medicare Advantage Reinsurance Agreement On January 1, 2021, the Corporation renewed a specific excess loss reinsurance agreement to reinsure its MA plan liabilities in excess of approximately $ 0.6 million per covered person per agreement terms for the year ended December 31, 2021, and $ 0.5 million per covered person per agreement terms for the years ended December 31, 2020 and 2019, respectively. The effects of the reinsurance agreements on the accompanying consolidated financial statements for the years ended December 31, 2021, 2020, and 2019, respectively, are as follows: 106 Years ended December 31, 2021 2020 2019 (in thousands) Premiums earned, gross $ 799,903 $ 666,297 $ 457,758 Premiums earned, ceded ( 489 ) ( 599 ) ( 832 ) Net premiums earned $ 799,414 $ 665,698 $ 456,926 Years ended December 31, 2021 2020 2019 (in thousands) Claims incurred, gross $ 839,136 $ 585,915 $ 448,308 Claims incurred, ceded ( 1,002 ) ( 483 ) ( 1,616 ) Net claims incurred $ 838,134 $ 585,432 $ 446,692 Reinsurance recoverable for the MA plan as of December 31, 2021 and 2020, respectively, were comprised of the following: Years ended December 31, 2021 2020 (in thousands) Reinsurance recoverable on paid claims, gross and net $ 96 $ — Direct Contracting Reinsurance Arrangement Within the DCE arrangement there is an option election for each direct contracting entity participant to elect participation in a reinsurance, which is not a separate contract and is included in the current DCE arrangement. The stop loss (charges) premiums and recoupments are incurred in accordance with the regulations set forth in the participation agreement in direct relation to the direct contracting program and will reduce the exposure of high dollar claims to the Corporation. The premiums (recoupments) will be recognized as revenue (contra-revenue), respectively, in Direct Contracting revenue on the Statement of Operations as there is a right to the recoupments as the point of attachment in the stop loss agreement. The effects of the DCE reinsurance arrangements on the accompanying consolidated financial statements for the year ended December 31, 2021 are as follows: Year ended December 31, 2021 (in thousands) Direct Contracting revenue, gross and net $ 667,639 Claims incurred, gross and net 705,407 Reinsurance recoverable, gross and net 12,170 Reinsurance recoverable represents the portion of paid claims and unpaid claims that are covered by reinsurance. Amounts recoverable from reinsurers are estimated in a manner consistent with the methods used to determine unpaid claims as detailed in Note 2 (Summary of Significant Accounting Policies). Clover acquired certain policies and related reinsurance agreements with the purchase of stock of Union Life Labor Insurance Company (Ullico) in April 2016. Ullico originally underwrote those policies which are primarily life policies and annuity contracts, prior to entering “run-off.” All of the underwriting risk related to those policies and contracts has been ceded to third party reinsurers. A large portion of these cessions are in the form of 100 % coinsurance where, in addition to the underwriting risk, administrative responsibilities, including premium collections and claim payments, are ceded to third party reinsurers. Approximately $ 5.3 million of life insurance reserves as of both December 31, 2021 and 2020, respectively, related to life insurance policies originally issued by Ullico are 100 % coinsured with Southern Financial Life Insurance Company (SFLIC), a Louisiana domestic company, in full transfer of risk related to these policies. The life reserves are computed principally in accordance with Net Level Premium Method using mortality and persistency assumptions based upon the Corporation’s experience and industry data. Interest rate assumptions used in establishing such reserves range from less than 1.0 % to 4.5 %. Under the arrangement, SFLIC is required to hold in trust all of the outstanding liabilities as of the reporting date. Approximately $ 0.9 million of annuity reserves as of both December 31, 2021 and 2020, respectively, related to annuity contracts originally issued by Ullico, are 100 % ceded to Sagicor Life Insurance Company, a Texas domestic company, in full transfer of risk related to these contracts. The annuity reserves are computed principally using assumptions based on the Corporation’s experience and industry data. Interest rate assumptions used in establishing such reserves range from less than 1.0 % to 5.8 %. Ceded life insurance and 107 annuity reserves are included in other assets and gross life insurance and annuity reserves are included in other liabilities on the Consolidated Balance Sheets, respectively. A reinsurance agreement between two entities transfers the underwriting risk and liabilities to the reinsurer while the insurer retains the contractual relationship with the ultimate insured. As such, these reinsurance agreements do not completely relieve the Corporation of its potential liability to the ultimate insured. However, given the transfer of underwriting risk, such potential liability is limited to the credit exposure which exists should the reinsurer be unable to meet its obligations under these reinsurance agreements. The Corporation evaluates its reinsurers on a regular basis including their ratings and financial conditions. 12. Notes and Securities Payable Non-convertible Notes On March 21, 2017, the Corporation entered into a loan facility (the "Loan Facility") for an aggregate principal amount of $ 60.0 million with the proceeds used to pay all obligations under a $ 30.0 million 2015 senior secured note, and to provide additional working capital for the Corporation's subsidiaries. The Loan Facility was secured by the assets of the Corporation. The initial obligation of $ 40.0 million had a maturity date of March 1, 2022, and was subject to an interest rate of 11.0 %, payable monthly, with the majority of principal payments commencing 36 months prior to the maturity date. The additional $ 20.0 million obligation had a maturity date of October 1, 2022, and was subject to an interest rate of 11.3 %, payable monthly, with the majority of principal payments commencing 36 months prior to the maturity date. In conjunction with the Loan Facility, the Corporation issued warrants. See Note 13 (Warrants Payable) for additional information. On June 29, 2021, the Corporation voluntarily paid the remaining principal of $ 20.7 million and interest of $ 0.2 million, thereby terminating the Loan Facility. Convertible Securities Pursuant to that certain Convertible Agreement, dated December 27, 2018, between the Corporation and certain qualified institutional buyers, including entities affiliated with the Corporation, for an aggregate principal amount of up to $ 500.0 million (the "Convertible Agreement"), the Corporation issued convertible securities during 2019 in multiple tranches. On October 5, 2020, the Corporation entered into the Merger Agreement with SCH and simultaneously amended the Convertible Agreement, pursuant to which the convertible securities of Legacy Clover converted into Class Z common stock in connection with the Business Combination. All Class Z common stock converted into Class B Common Stock as of the Closing. Additionally, the conversion incurred a 9.4 % charge to account for dilution after the Business Combination to convert the securities as if they had been converted under the mandatory qualified public offering conversion. On January 7, 2021, the Business Combination was completed and the convertible securities were redeemed or converted into a total of 36,117,708 shares of Class Z common stock depending on whether each tranche's conversion price was a conversion or share-settled redemption feature as follows: • Redemption: The February, March, and May 2019 tranches were redeemed for 34,806,921 shares of Class Z common stock pursuant to the share-settled redemption feature. The redemption of the convertible securities was accounted for as a debt extinguishment as they contained a beneficial conversion feature (BCF), and were redeemed prior to the stated maturity date. As the extinguishment date intrinsic value of the BCF was in excess of the fair value of the shares issued to settle the convertible securities, the full amount of the settlement consideration was treated as the price of reacquiring the BCF. As there was no remaining consideration available to allocate to the re-acquisition of the convertible securities, the extinguishment resulted in a gain equal to the full carrying value of the convertible securities of $ 126.8 million. This gain was treated as a capital contribution and was recorded as an increase in additional paid in capital as the convertible securities were issued to affiliates of the Corporation. The $ 126.8 million is comprised of: (a) the carrying value of the tranches of $ 74.6 million, (b) accrued interest of $ 7.4 million, and (c) the fair value of the embedded derivative of $ 44.8 million. • Conversion: The August 2019 tranche converted into 1,310,787 shares of Class Z common stock pursuant to the conversion feature. Prior to the conversion, the carrying value of the tranche was $ 2.6 million and accrued interest was $ 0.4 million. As the converted securities contained a BCF, the $ 13.0 million unamortized debt discount remaining at the date of conversion was recognized in amortization of notes and securities discount in the Consolidated Statements of Operations and Comprehensive Loss. After giving effect to the Exchange Ratio, pursuant to the terms of the Merger Agreement, these shares of Class Z common stock were converted into 74,694,107 shares of Class B Common Stock upon the closing of the Business Combination. See Note 3 (Business Combination) for additional information on the Business Combination. 108 The convertible securities bore a yield ("interest") at the increasing rates noted below which compounded semi-annually, and would mature April 1, 2023, unless earlier converted, repurchased, or extended. The interest rate and embedded feature discount factor varied based on the length of time elapsed from the issue date of the securities. The interest rates began at 6.5 % for the first twelve-month period through the first anniversary of the security issue date, increasing ratably on a semi-annual basis, to 13.5 % at the third anniversary of the security issue date until the convertible securities ceased to be outstanding. The embedded feature discount factors began at 75.0 % for the first twelve-month period through the first anniversary of the security issue date, decreasing ratably on a semi-annual basis, to 55.0 % at the forty-two month anniversary of the security issue date until the convertible securities ceased to be outstanding. The carrying amount of the convertible securities was $ 76.5 million at December 31, 2020. Since the carrying amount of the convertible securities was initially recognized as $ 0 , debt issuance costs incurred in the amount of approximately $ 0.4 million were expensed on the Consolidated Statements of Operations and Comprehensive Loss during the year ended December 31, 2019. The unamortized discount was $ 337.3 million at December 31, 2020. Amortization of the debt discount was approximately $ 21.1 million during the year ended December 31, 2020. Interest expense on the convertible securities was $ 31.1 million during the year ended December 31, 2020. The effective interest rate, inclusive of amortization of the discount and the contractual rate, was 90.1 % during the year ended December 31, 2020. The effective interest rate, inclusive of amortization of the discount and the contractual rate, was in excess of 100 % during the year ended December 31, 2019, as a result of the beginning convertible securities carrying value of $ 0 . The results presented as of and for the year ended December 31, 2021, above, reflect the impact of the conversion of the convertible securities into common stock in connection with the Business Combination. Seek Convertible Note On September 25, 2020, Seek issued the Seek Convertible Note in the principal amount of $ 20.0 million. The note bears simple interest at an annual rate of 8.0 % and matures on September 25, 2023, unless earlier accelerated, converted, or paid in full. The outstanding principal and any accrued but unpaid interest will become immediately due and payable at the election of the note holder upon the occurrence of any event of default as defined in the note. The outstanding principal and accrued but unpaid interest will convert into an equity interest in Seek if prior to maturity, repayment or conversion of the note: (1) the note holder elects to convert the note, (2) upon the closing of Seek's next equity financing; or (3) upon consummation of an initial public offering of Seek's common stock or a SPAC or reverse merger transaction with Seek. The Corporation analyzed the embedded features for derivative accounting consideration and determined that the features are clearly and closely related to the debt host and do not require separate accounting as a derivative. The carrying amount of the note was $ 19.9 million at both December 31, 2021, and December 31, 2020. The Corporation capitalized $ 0.1 million of issuance costs which are being amortized using the effective interest method over the term of the note. Unamortized debt issuance costs were $ 0.1 million at both December 31, 2021, and December 31, 2020. Amortization of the debt issuance costs and interest expense on the note were $ 1.6 million and $ 0.4 million during the years ended December 31, 2021 and 2020, respectively. The effective interest rate was 8.2 % during the years ended December 31, 2021 and 2020, respectively. The below table summarizes maturities of the Corporation’s securities payable over the next five years as of December 31, 2021: (in thousands) 2022 $ — 2023 — 2024 20,000 2025 — 2026 — Total $ 20,000 13. Warrants Payable Legacy Warrants In conjunction with the Loan Facility, the Corporation issued warrants to purchase 2,618,770 shares of the Corporation's Series D preferred stock at an exercise price of $ 4.53 per share. On October 5, 2020, the Corporation entered into the Merger Agreement with SCH and simultaneously amended the warrants to be automatically exercisable for common stock in connection with the Business Combination. The warrants were accounted for as derivative instruments, and the initial fair value of approximately $ 1.2 million, 109 which was calculated using a Black-Scholes based valuation model, was recorded as a discount to the carrying amount of the Loan Facility. This discount was being amortized using the effective interest method over the term of the Loan Facility. The warrants were recorded as liabilities and were being marked to market at each reporting period. In September 2015, the Corporation issued warrants to purchase 4,342,956 shares of the Corporation's common stock at an exercise price of $ 0.50 per share. The warrants were also contingently exercisable for an additional 4,342,956 shares based proportionally on the aggregate principal amounts of additional notes borrowed by the Corporation. Pursuant to the Merger Agreement, the Loan Facility warrants and the September 2015 warrants automatically converted into 3,484,154 shares of Legacy Clover common stock and, after giving effect to the Exchange Ratio converted into 7,205,490 shares of Class B Common Stock upon the closing of the Business Combination. Public Warrants and Private Placement Warrants As a result of the Business Combination, the Corporation assumed, as of January 7, 2021, Public Warrants to purchase an aggregate of 27,599,938 shares of the Corporation's Class A Common Stock and Private Placement Warrants to purchase an aggregate of 10,933,333 shares of the Corporation's Class A Common Stock. Each whole Warrant entitled the registered holder to purchase one whole share of Class A Common Stock at a price of $ 11.50 per share, at any time commencing on April 24, 2021. The 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. See Note 5 (Fair Value Measurements) for additional information. On July 22, 2021, the Corporation issued a press release stating that it would redeem all of its Warrants that remained outstanding on August 23, 2021, the redemption date, for a redemption price of $ 0.10 per Warrant. On August 25, 2021, the Corporation announced that it was extending the period during which holders of the Public Warrants could exercise the Warrants to September 9, 2021, at which time any unexercised Public Warrants would be redeemed at a price of $ 0.10 per Warrant. Payment upon exercise of the Warrants could be made either (i) in cash, at an exercise price of $ 11.50 per share of Class A Common Stock or (ii) on a "cashless basis" in which the exercising holder received 0.249 shares of Class A Common Stock per Warrant shares of Class A Common Stock. Prior to the redemption date, 33,932 Public Warrants were exercised for cash, and 26,716,041 were exercised on a cashless basis in exchange for an aggregate of 6,685,865 shares of Common Stock, in each case in accordance with the terms of the Warrant Agreement, representing 96.9 % of the Public Warrants. In addition, all of the Private Placement Warrants were exercised on a cashless basis in exchange for an aggregate of 2,722,399 shares of Common Stock, in accordance with the terms of the Warrant Agreement. In connection with the redemption, the Public Warrants were delisted and total cash proceeds generated from exercises of the Public Warrants were $ 0.4 million. The remaining unexercised 849,965 Public Warrants were redeemed by the Corporation for $ 0.1 million. Following the warrant redemption exercises, no Warrants were outstanding. 14. Derivative Liabilities In connection with the $ 373.8 million of convertible securities issued in 2019, the Corporation determined that certain of the conversion and redemption features were embedded derivatives and were bifurcated from the host instrument and accounted for as embedded derivative instruments. In connection with the convertible securities, the Corporation recognized a capital contribution of $ 44.8 million during the year ended December 31, 2021. This capital contribution of $ 44.8 million was recorded as an increase in additional paid in capital as the notes were issued to affiliates of the Corporation. The Corporation recognized a gain of $ 93.8 million and a loss of $ 138.6 million from activity related to derivative liabilities in connection with the convertible securities during the years ended December 31, 2020 and 2019, respectively, which was recognized in (gain) loss on derivative in the Consolidated Statements of Operations and Comprehensive Loss. Upon the completion of the Business Combination with SCH on January 7, 2021, the derivative balance was extinguished as of January 7, 2021. See Note 3 (Business Combination), Note 5 (Fair Value Measurements), and Note 12 (Notes and Securities Payable) for additional information. 110 15. Letter of Credit On April 19, 2018, the Corporation entered into a secured letter of credit agreement (the “Letter”) for up to an aggregate amount of $ 2.5 million with a commercial lender that renews on an annual basis. The Letter bears an interest rate of 0.75 %. There was an unused balance of $ 2.5 million at both December 31, 2021, and December 31, 2020. 16. Leases Operating Leases The Corporation leases office space in New Jersey, Minnesota, Tennessee, Georgia, Florida, California, and Hong Kong under non-cancelable operating leases. At December 31, 2021, the remaining terms of the operating leases were between four months and 75 months, and certain lease agreements contain provisions for future rent increases. For each lease the Corporation recorded a right-of-use (ROU) asset and lease liability at the earlier of the ASC 842 effective date or lease commencement date. The Corporation utilizes the straight-line method of recognizing lease expense. However, the Corporation is required to pay certain variable executory costs including common area maintenance, real estate taxes, and insurance that are expensed as incurred. These variable costs are excluded from the measurement of leases. Certain of the Corporation’s leases include options to renew, with renewal terms that can extend the lease term. The exercise of lease renewal options is at the Corporation’s sole discretion. The ability to terminate a lease is determined by the applicable lease terms and conditions. The Corporation is not reasonably certain that it will exercise the renewal or termination options. Therefore, these options are not recognized as part of the ROU asset and lease liability. The Corporation subleases certain of its leases to third parties for which it receives rental income to manage occupancy costs. These subleases are classified as operating leases. Mallory Green Lease: On September 22, 2021, the Corporation entered into an agreement to lease office space for its new corporate headquarters in Franklin, Tennessee, for a period of 37 months. Montgomery Lease: From May 2020 through April 9, 2021, the Corporation was in default with respect to its agreement to lease office space in Jersey City, New Jersey (the "Montgomery Lease"), for not paying rent owed to the lessor. The Corporation accrued for all interest owed and began reducing its security deposit asset in lieu of recording rental payments. On April 9, 2021, the Corporation replenished its security deposit and, therefore, was no longer in default with respect to the Montgomery Lease. Summary of Lease Costs Recognized Under ASC 842: The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Corporation's operating leases for the years ended December 31, 2021, 2020, and 2019: Years ended December 31, 2021 2020 2019 (in thousands) Operating lease cost $ 4,515 $ 4,533 $ 4,552 Variable lease cost 515 632 654 Short-term lease cost 45 20 58 Sublease income ( 2,727 ) ( 3,098 ) ( 989 ) Total lease cost $ 2,348 $ 2,087 $ 4,275 Other information Cash paid for amounts included in the measurement of lease liabilities $ 5,248 $ 4,979 $ 4,804 Weighted-average remaining lease term 5.0 years 4.4 years 4.8 years Weighted-average discount rate 10.36 % 10.17 % 10.05 % 111 The following table summarizes the Corporation's future lease payments for non-cancelable operating lease liabilities as of December 31, 2021: (in thousands) 2022 $ 3,164 2023 1,665 2024 1,319 2025 1,170 2026 1,155 Thereafter 1,486 Total lease payments 9,959 Less: imputed interest ( 2,070 ) Total $ 7,889 17. Stockholders' Equity and Convertible Preferred Stock Stockholders’ Equity The Corporation was authorized to issue up to 2,500,000,000 shares of Class A Common Stock as of December 31, 2021, and up to 500,000,000 and 351,572,668 shares of Class B Common Stock as of December 31, 2021 and 2020, respectively. As of December 31, 2021, there were 352,645,626 shares of Class A Common Stock issued and outstanding. There were 118,206,768 and 89,206,266 shares of Class B Common Stock issued and outstanding as of December 31, 2021 and 2020, respectively. Class B common stock has 10 votes per share, and Class A common stock has one vote per share. The Corporation is authorized to issue 25,000,000 shares of preferred stock having a par value of $ 0.0001 per share, and the Corporation's board of directors has the authority to determine the rights, preferences, privileges, and restrictions, including voting rights, of those shares. As of December 31, 2021, there were no shares of preferred stock issued and outstanding. Issuance of Common Stock In November 2021, the Corporation sold 52,173,913 shares of common stock at a public offering price of $ 5.75 per share for gross proceeds, before deducting underwriting discounts and commissions and other expenses payable by the Corporation, of $ 16.2 million. Convertible Preferred Stock Each share of Legacy Clover's preferred stock was convertible at the option of the holder, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into fully paid and non-assessable shares of common stock. Pursuant to the Merger Agreement, all outstanding shares of Legacy Clover's preferred stock automatically converted into 139,444,346 shares of Class B Common Stock after giving effect to the Exchange Ratio upon the closing of the Business Combination. See Note 3 (Business Combination) for additional information on the Business Combination. 18. Employee Benefit Plans Employee Savings Plan The Corporation has a defined contribution retirement savings plan (the “401(k) Plan”) covering eligible employees, which includes safe harbor matching contributions based on the amount of employees' contributions to the 401(k) Plan. The Corporation contributes to the 401(k) Plan annually 100.0 % of the first 4.0 % compensation that is contributed by the employee up to 4.0 % of eligible annual compensation. The Corporation's service contributions to the 401(k) Plan amounted to approximately $ 1.2 million, $ 1.2 million, and $ 1.3 million for the years ended December 31, 2021, 2020, and 2019, respectively, and are included in salaries and benefits on the Consolidated Statements of Operations and Comprehensive Loss. The Corporation's cash match is invested pursuant to the participant's contribution direction. Employer contributions are immediately 100.0 % vested. 112 Stock-based Compensation The Corporation's 2020 Equity Incentive Plan (the "2020 Plan") and 2020 Management Incentive Plan (the “2020 MIP”) provide for grants of restricted stocks units (RSUs) and/or options to acquire shares of the Corporation's common stock, par value $ 0.0001 per share, to employees, directors, officers, and consultants of the Corporation. During the year ended December 31, 2021, the Corporation approved the 2020 Plan and the 2020 MIP, and the Corporation’s 2014 Equity Incentive Plan (the “2014 Plan” and, collectively with the 2020 Plan and the 2020 MIP, the “Plans”) was retired. The maximum number of shares of the Corporation's common stock reserved for issuance over the term of the Plans, shares outstanding under the Plans, and shares remaining under the Plans, after giving effect to the Exchange Ratio, as of December 31, 2021, and December 31, 2020, were as follows: December 31, 2021 Shares Authorized Under Plans Shares Outstanding Under Plans Shares Remaining Under Plans 2014 Plan 54,402,264 41,905,875 N/A 2020 Plan 30,641,401 6,690,048 23,442,323 2020 MIP 33,426,983 33,426,983 — December 31, 2020 Shares Authorized Under Plan Shares Outstanding Under Plan Shares Remaining Under Plan 2014 Plan 54,402,264 36,557,759 17,844,505 Effective as of the closing of the Business Combination, the 2014 Plan terminated, at which time the outstanding awards previously granted thereunder were assumed by the Corporation, and no new awards are available for grant under the 2014 Plan. Shares that are expired, terminated, surrendered or canceled under the 2014 Plan without having been fully exercised are available for awards under the 2020 Plan. Shares may be issued from authorized but unissued Corporation stock. The Plans are administered by the Talent and Compensation Committee of the Corporation’s Board of Directors (the “Compensation Committee”). The options are subject to the terms and conditions applicable to options granted under the Plans, as described in the applicable Plan and the applicable stock option grant agreement. The exercise prices, vesting and other restrictions applicable to the stock options are determined at the discretion of the Compensation Committee, except that the exercise price per share of incentive stock options may not be less than 100.0 % of the fair value of a share of common stock on the date of grant. Stock options awarded under the Plans expire 10 years after the grant date. Incentive stock options and non-statutory options granted to employees, directors, officers and consultants of the Corporation typically vest over four or five years . RSU awards are subject to the terms and conditions set forth in the Plans and the applicable RSU grant agreement. Vesting and other restrictions applicable to RSU awards are determined at the discretion of the Compensation Committee. The number of shares of common stock subject to an RSU award is determined by dividing the cash value of an RSU award by the average closing price of a share of the Corporation’s Class A common stock over a specified period through the date of grant, and such awards typically vest over four years from the grant date. The total estimated fair value is amortized as an expense over the requisite service period as approved by the Compensation Committee. The Corporation granted options to purchase 1,937,968 shares of common stock during the year ended December 31, 2021. The Corporation recorded stock-based compensation expense for options, RSUs, and performance restricted stock units (PRSUs) granted under the Plans and discounts offered in connection with the Corporation’s 2020 Employee Stock Purchase Plan (ESPP) of $ 163.7 million during the year ended December 31, 2021, and such expenses are presented in salaries and benefits in the accompanying Consolidated Statements of Operations and Comprehensive Loss. Compensation cost presented in salaries and benefits in the accompanying Consolidated Statements of Operations and Comprehensive Loss were as follows: Years ended December 31, 2021 2020 2019 (in thousands) Stock options $ 7,998 $ 7,078 $ 3,301 RSUs 65,514 — — PRSUs 89,930 — — ESPP 281 — — Total compensation cost recognized for stock-based compensation plans $ 163,723 $ 7,078 $ 3,301 113 As of December 31, 2021, there was approximately $ 435.6 million of unrecognized stock-based compensation expense related to unvested stock options, RSUs, PRSUs, and the ESPP, estimated to be recognized over a period of 4.02 years. As of December 31, 2020, there was approximately $ 14.9 million of unrecognized stock-based compensation expense related to unvested stock options. Stock Options The assumptions that the Corporation used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted for the years ended December 31, 2021, 2020 and 2019, respectively, were as follows: Years ended December 31, 2021 2020 2019 Weighted-average risk-free interest rate 1.06 % 0.84 % 1.95 % Expected term (in years) 6.06 4.68 6.29 Expected volatility 37.74 % 34.66 % 28.37 % Expected dividend yield — — — A summary of option activity under the 2020 Plan during the year ended December 31, 2021 is as follows: Number of options Weighted-average exercise price Outstanding, January 1, 2021 — $ — Granted during 2021 1,937,968 8.88 Exercised — — Forfeited ( 184,169 ) 8.88 Outstanding, December 31, 2021 1,753,799 $ 8.88 A summary of option activity under the 2014 Plan during the year ended December 31, 2021 is as follows: Number of options Weighted-average exercise price Outstanding, January 1, 2021 36,513,193 $ 2.26 Granted during 2021 — — Exercised ( 4,284,070 ) 1.42 Forfeited ( 1,073,381 ) 2.79 Outstanding, December 31, 2021 31,155,742 $ 2.35 The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Corporation's common stock for those stock options that had exercise prices lower than the fair value of the Corporation's common stock. The weighted-average grant date fair value of stock options granted during the years ended December 31, 2021, 2020, and 2019 was $ 3.36 per share, $ 1.04 per share, and $ 0.62 per share, respectively. As of December 31, 2021, outstanding stock options, substantially all of which are expected to vest, had an aggregate intrinsic value of $ 52.5 million, and a weighted-average remaining contractual term of 6.80 years. As of December 31, 2021, there were 21,872,378 options exercisable under the Plan, with an aggregate intrinsic value of $ 39.2 million, a weighted-average exercise price of $ 2.32 per share, and a weighted-average remaining contractual term of 6.20 years. The total value of stock options exercised during the years ended December 31, 2021, 2020, and 2019, was $ 39.3 million, $ 5.8 million, and $ 1.3 million, respectively. Cash received from stock option exercises during the years ended December 31, 2021, 2020, and 2019, totaled $ 6.1 million, $ 2.1 million, and $ 0.7 million, respectively. Pursuant to the terms of the applicable Plan and stock option award agreement, employees may exercise options at any time after grant while maintaining the original vesting period. The proceeds from exercise of unvested options are recorded as a liability until the option vests at which time the liability is reclassified to equity. If the employee terminates or otherwise forfeits an unvested option that 114 has been exercised, the Corporation must redeem those shares at the original exercise price and remit payment of the forfeited portion of shares back to the employee. Restricted Stock Units A summary of total RSU activity for the year ended December 31, 2021, is presented below: Year ended December 31, 2021 Number of RSUs Weighted-average grant date fair value per share Granted 22,031,869 $ 14.34 Released ( 639,752 ) ( 6.64 ) Forfeited ( 97,276 ) ( 8.42 ) Outstanding, December 31, 2021 21,294,841 $ 14.60 The weighted-average grant date fair value of the RSUs was $ 14.34 per underlying share. Performance Restricted Stock Units The Corporation has granted PRSUs which become eligible to vest if prior to the vesting date the average closing price of one share of the Corporation's common stock for 90 consecutive days equals or exceeds a specified price (the "Market PRSUs"). Additionally, the Corporation has granted PRSUs that vest based on pre-established milestones including Corporation performance. 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. There were no Market PRSUs granted prior to 2021. The grant date fair value of Market PRSUs was determined using a Monte Carlo simulation model that incorporated multiple valuation assumptions, including the probability of achieving the specified market condition and the following assumptions: Year ended December 31, 2021 Expected volatility (1) 40.70 % Risk-free interest rate (2) 0.50 Dividend yield (3) — (1) Expected volatility is based on a blend of peer group company historical data adjusted for the Corporation's leverage. (2) Risk-free interest rate based on U.S. Treasury yields with a term equal to the remaining Performance Period as of the grant date. (3) Dividend yield was assumed to be zero as the Corporation does not anticipate paying dividends. A summary of total PRSU activity for the year ended December 31, 2021, is presented below: Year ended December 31, 2021 Number of PRSUs Weighted-average grant date fair value per share Granted 27,818,524 $ 9.58 Non-vested at December 31, 2021 27,818,524 $ 9.58 As of December 31, 2021, there was $ 173.7 million of unrecognized share-based compensation expense related to PRSUs, which is expected to be recognized over a period of 3.13 years. 2020 Employee Stock Purchase Plan On October 5, 2020, SCH’s board of directors adopted, and on January 6, 2021, stockholders approved the ESPP. The ESPP provides a means by which eligible employees and/or eligible service providers of either the Corporation or designated related corporations and 115 affiliates may be given an opportunity to purchase shares of Class A common stock at a 15.0 % discount from the fair market value of the common stock as determined on specific dates at specified intervals. Subject to adjustments provided in the ESPP that are discussed below, the maximum number of shares of common stock that may be purchased under the ESPP is 2,785,582 shares, and the maximum number of shares that may be purchased on any single purchase date by any one participant is 5,000 shares. As of December 31, 2021, 2,785,582 shares of Class A common stock were available for issuance under the ESPP. On the first day of each fiscal year, beginning with the 2022 fiscal year and ending on (and including) the first day of the 2030 fiscal year, the calculation of the maximum number of ESPP shares shall include automatic increases in an amount equal to the lesser of (i) 1.0 % of the total number of shares of Class A common stock outstanding on the last day of the calendar month prior to the date of such automatic increase, and (ii) such number of shares of Class A common stock as determined by the administrator of the ESPP; provided that the maximum number of shares of Class A common stock reserved under the ESPP shall not exceed 10.0 % of the total outstanding capital stock of the Corporation (inclusive of the shares reserved under the ESPP) as of January 7, 2021, on an as-converted basis. The initial offering period for the ESPP was five months , commencing on September 1, 2021, and ending on January 31, 2022. The second offering period will begin on March 14, 2022, and end on November 22, 2022, and the third offering period will begin on November 23, 2022, and end on May 21, 2023. As of the date of this report, 214,797 shares of the Corporation’s common stock have been purchased or distributed pursuant to the ESPP. The assumptions that the Corporation used in the Black-Scholes option-pricing model to determine the fair value of the purchase rights under the ESPP for the year ended December 31, 2021, were as follows: Year ended December 31, 2021 Weighted-average risk-free interest rate 0.06 % Expected term (in years) 0.42 Expected volatility 147.42 % Equity warrants In November 2016 and December 2017, the Corporation issued warrants to purchase 139,629 shares of the Corporation's common stock at an exercise price of $ 2.61 per share, and 122,052 shares of the Corporation's common stock at an exercise price of $ 3.45 per share, respectively, as part of payment to certain providers for services provided to the Corporation. These warrants were automatically exercised in connection with the Business Combination. See Note 3 (Business Combination) for additional information. The total fair value of warrants vested during the years ended December 31, 2021, 2020, and 2019 was $ 0.0 million , $ 7.0 million, and $ 0.9 million, respectively. A summary of activity relating to the warrants of the service providers during the years ended December 31, 2021 and 2020, respectively, is as follows: Number of warrants Weighted-average exercise price Outstanding, December 31, 2019 261,681 $ 3.00 Granted during 2020 — — Exercised — — Forfeited — — Outstanding, December 31, 2020 261,681 $ 3.00 Outstanding, December 31, 2020 261,681 $ 3.00 Granted during 2021 — — Exercised ( 261,681 ) 3.00 Forfeited — — Outstanding, December 31, 2021 — $ — 116 19. Income Taxes The provision for income taxes consisted of the following for the years ended December 31, 2021, 2020, and 2019, respectively: Years ended December 31, 2021 2020 2019 (in thousands) Current provision $ — $ ( 2 ) $ ( 2 ) Deferred expense — 2 2 Provision for income taxes $ — $ — $ — The provision for income taxes was different from the amount computed using the federal statutory rate of 21% for the years ended December 31, 2021, 2020, and 2019, respectively, due to the following: Years ended December 31, 2021 2020 2019 (in thousands) Income tax provision at federal statutory rate (21%) $ ( 123,429 ) $ ( 28,642 ) $ ( 76,385 ) Interest on convertible securities — 6,537 3,505 Interest on convertible securities discount 2,867 4,423 3,257 Debt issuance cost related to convertible securities — — 76 Derivative liability related to convertible securities — ( 19,688 ) 29,098 Warrant expense 13,905 16,823 596 Meals and entertainment 26 13 210 Health insurance industry fee — 2,715 — Stock based compensation ( 5,665 ) 350 — Other, net ( 365 ) ( 1,116 ) — Valuation allowance 112,661 18,585 39,643 Provision for income taxes $ — $ — $ — The Corporation issued convertible securities for which the interest expense recorded in 2021 was none , and approximately $ 31.1 million, and $ 16.7 million, for 2020, and 2019, respectively, and is not deductible for tax purposes. Deferred income tax balances reflect the impact of temporary differences between the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements and are stated at enacted tax rates expected to be in effect when the reported amounts are actually recovered or settled. 117 Principal components of net deferred tax balances at December 31, 2021 and 2020, respectively, were as follows: Years ended December 31, 2021 2020 (in thousands) Deferred income tax assets: Net operating loss carryforward (NOL) $ 207,713 $ 152,423 Stock based compensation 35,374 2,568 Premium deficiency reserve 23,232 — Unpaid claim reserve discounting 404 335 Operating lease liability 1,657 2,340 Fixed assets and intangible assets 2,267 1,786 Accruals 2,950 2,984 Other 3,434 2,472 Total deferred income tax assets 277,031 164,908 Less: valuation allowance ( 275,865 ) ( 163,204 ) Total deferred income tax assets, net of valuation allowance 1,166 1,704 Deferred income tax liabilities: Operating lease right-of-use assets ( 1,127 ) ( 1,655 ) Other ( 39 ) ( 49 ) Total deferred income tax liabilities ( 1,166 ) ( 1,704 ) Net deferred income tax assets $ — $ — Operating loss and tax credit carryforwards and protective tax deposits The Corporation has unused operating loss carryforwards available of approximately $ 989.1 million and $ 725.8 million as of December 31, 2021 and 2020, respectively, that may be applied against future taxable income. Losses incurred before 2018 in the amount of approximately $ 295.1 million begin to expire in 2033. The total net operating losses (NOL) is made up of NOLs generated by the consolidated group and NOLs obtained with the 2014 reorganization. A portion of the pre-consolidated NOLs may be limited by special rules known as Separate Return Limitation Year (SRLY) rules. SRLY NOLs can only be used in years that both the consolidated group and the entity that created the SRLY NOLs have taxable income. Due to these limitations and uncertainty regarding the Corporation’s ability to use the loss carryforwards and other deferred tax assets, a valuation allowance of approximately $ 275.9 million and $ 163.2 million was established in 2021 and 2020, respectively. The Corporation does not have deposits admitted under Section 6603 of the Internal Revenue Code. Impact of tax planning strategies The Corporation does not have any tax planning strategies that include the use of reinsurance and there are no deferred tax liabilities not recognized. The Corporation files income tax returns in the United States. The U.S. Internal Revenue Service (IRS) is not currently conducting any income tax audits. The Corporation’s federal income tax returns filed related to tax years subsequent to 2016 remain subject to examination by the IRS. The Corporation is not aware of any material adjustments that may be proposed as a result of any ongoing or future examinations and does not have material uncertain tax positions reflected in the Consolidated Balance Sheets. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law in the U.S. to provide certain relief in connection with the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief measures in response to the economic conditions in the wake of COVID-19. On December 27, 2020, the "Consolidated Appropriations Act, 2021" was signed into law in the U.S. to amend or extend several significant COVID related relief provisions of the CARES Act. The Corporation has determined that neither the CARES Act and Consolidated Appropriations Act nor changes to income tax laws or regulations in other jurisdictions had a significant impact on the Corporation’s effective tax rate. 118 20. Net Loss Per Share Net Loss Per Share Basic and diluted net loss per share attributable to Class A and Class B common stockholders was calculated as follows: Years ended December 31, 2021 2020 2019 (in thousands, except per share data) Net loss $ ( 587,756 ) $ ( 136,392 ) $ ( 363,737 ) Net loss attributable to Class A and Class B common stockholders ( 587,786 ) ( 136,392 ) ( 363,737 ) Basic and diluted weighted average number of Class A and Class B common shares and common share equivalents outstanding (1) 412,922,424 88,691,582 87,829,419 Net loss per share attributable to Class A and Class B common stockholders—basic and diluted $ ( 1.42 ) $ ( 1.54 ) $ ( 4.14 ) (1) Prior period results have been adjusted to reflect the exchange of Legacy Clover's common stock for Clover Class B Common Stock at an exchange ratio of approximately 2.0681 in January 2021 as a result of the Business Combination. See Note 3 (Business Combination) for details. Because the Corporation had a net loss during the year ended December 31, 2021, a net loss during the year ended December 31, 2020, and a net loss during the year ended December 31, 2019, the Corporation’s potentially dilutive securities, which include stock options, RSUs, PRSUs, preferred stock, and warrants to purchase shares of common stock and preferred stock, have been excluded from the computation of diluted net loss per share, as the effect would be anti-dilutive. Therefore, during these periods, the diluted common shares outstanding equals the average common shares outstanding. The Corporation excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to Class A and Class B common stockholders for the periods indicated because including them would have had an anti-dilutive effect: Years ended December 31, 2021 2020 2019 Options to purchase common stock (1) 32,879,626 36,557,759 24,344,848 RSUs 21,294,841 — — PRSUs 27,818,524 — — Convertible preferred stock (as converted to common stock) (1) — 139,444,346 139,444,346 Warrants to purchase common stock (as converted to common stock) (1) — 7,502,902 4,884,132 Warrants to purchase convertible preferred stock (as converted to common stock) (1) — — 2,618,770 Total anti-dilutive shares excluded from computation of earnings per share 81,992,991 183,505,007 171,292,096 (1) Prior period results have been adjusted to reflect the exchange of Legacy Clover's common stock for Clover Class B Common Stock at an exchange ratio of approximately 2.0681 in January 2021 as a result of the Business Combination. See Note 3 (Business Combination) for details. 21. Commitments and Contingencies Legal Actions Various lawsuits against the Corporation may arise in the ordinary course of the Corporation's business. Contingent liabilities arising from ordinary course litigation, income taxes and other matters are not expected to be material in relation to the financial position of the Corporation. At December 31, 2021, and December 31, 2020, respectively, there were no material known contingent liabilities arising outside the normal course of business. Securities Class Actions and Derivative Litigation In February 2021, the Corporation and certain of its directors and officers were named as defendants in putative class actions filed in the United States District Court for the Middle District of Tennessee: Bond v. Clover Health Investments, Corp. et al. , Case No. 3:21-cv-00096 (M.D. Tenn.); Kaul v. Clover Health Investments, Corp., et al. , Case No. 3:21-cv-00101 (M.D. Tenn.); Yaniv v. Clover Health Investments, Corp., et al. , Case No. 3:21-cv-00109 (M.D. Tenn.); and Tremblay v. Clover Health Investments, Corp., et al. , 119 Case No. 3:21-cv-00138 (M.D. Tenn.). The complaints asserted violations of sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act. The Kaul action asserted additional claims under sections 11 and 15 of the Securities Act. The complaints generally related to allegations published in an article issued on February 4, 2021, by Hindenburg Research LLC (the “Hindenburg Article”). The complaints seek unspecified damages on behalf of all persons and entities who purchased or acquired Clover securities during the proposed class period (which begins on October 6, 2020, and, depending on the complaint, ends on February 3, 2021, or February 4, 2021), as well as certain other costs. In April 2021, the Middle District of Tennessee class actions described above were consolidated under Bond v. Clover Health Investments, Corp., et al. , Case No. 3:21-cv-00096 (M.D. Tenn.) as lead case. The court appointed a lead plaintiff, approved a lead counsel and a liaison counsel, and approved the parties' proposed schedule for filing an amended complaint and the defendants' responses. In June 2021, the lead plaintiff and a named plaintiff filed the amended complaint, asserting violations of sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act. The amended complaint names Clover and certain of its officers and directors as defendants and removes certain defendants named in the initial complaints. The amended complaint generally relates to allegations published in the Hindenburg Article and seeks unspecified damages on behalf of all persons and entities other than the defendants who purchased or acquired Clover securities during the proposed class period (which begins on October 6, 2020, and ends on February 3, 2021), as well as certain other costs. The Corporation moved to dismiss the complaint on August 27, 2021; that motion is fully briefed and pending before the court. In light of the consolidation and appointment of lead counsel for the proposed class members, the plaintiffs in the Kaul and Yaniv actions filed notices of voluntary dismissal without prejudice on April 23, 2021, and January 28, 2022, respectively. Parallel shareholder derivative actions have also been filed, naming Clover as a nominal defendant. The first action was filed in the United States District Court for the District of Delaware and is captioned Furman v. Garipalli, et al ., Case No. 1:21-cv-00191 (D. Del.). The complaint asserts violations of sections 10(b) and 21D of the Exchange Act, breach of fiduciary duty, and waste of corporate assets against certain of the Corporation’s directors. It seeks unspecified damages and an order requiring Clover to take certain actions to enhance Clover's corporate governance policies, and procedures. The second and third actions were filed in the United States District Court for the Middle District of Tennessee and are captioned Sun v. Garipalli, et al ., Case No. 3:21-cv-00311 (M.D. Tenn.), and Luthra v. Garipalli, et al. , Case No. 3:21-cv-00320 (M.D. Tenn.). The complaints assert violations of section 14(a) of the Exchange Act, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty. The Sun action also asserts unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution under section 11(f) of the Securities Act, and sections 10(b) and 21D of the Exchange Act. The complaints name certain current and former officers and directors as defendants. They seek unspecified damages and an order requiring Clover to take certain actions to enhance Clover's corporate governance policies and procedures. The fourth action was filed in the United States District of Delaware and is captioned Wiegand v. Garipalli, et al. , Case No. 1:21-cv-01053 (D. Del.). The complaint asserts violations of sections 14(a) and 20(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, and waste of corporate assets. The complaint names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages and an order requiring Clover to take certain actions to improve Clover’s corporate governance and internal procedures. The fifth action was filed in the Supreme Court of the State of New York and is captioned Sankaranarayanan v. Palihapitiya, et al. , Index No. 655420/2021 (N.Y. Sup. Ct., N.Y. Cnty.). The complaint asserts breach of fiduciary duty and unjust enrichment. The complaint names certain former officers and directors as defendants. It seeks, among other things, unspecified damages and an order directing Clover to take certain actions to reform and improve its corporate governance and internal procedures. The sixth action was filed in the Delaware Court of Chancery and is captioned Davies v. Garipalli, et al. , No. 2021-1016-SG (Del. Ch.). The complaint asserts breach of fiduciary duty. The complaint names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages and an order directing Clover to take certain actions to reform and improve its corporate governance and internal procedures. The seventh action was filed in the Supreme Court of the State of New York and is captioned Uvaydov v. Palihapitiya, et al. , Index No. 656978/2021 (N.Y Sup. Ct., N.Y. Cnty.). The complaint asserts breach of fiduciary duty, unjust enrichment, and aiding and abetting a breach of fiduciary duty. The complaint names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages, restitution, and disgorgement of profits obtained by defendants. On May 10, 2021, the Middle District of Tennessee shareholder derivative actions described above were consolidated under Sun v. Garipalli, et al. , Case No. 3:21-cv-00311 (M.D. Tenn.) as lead case. The court designated co-lead counsel and liaison counsel and ordered the parties to submit a proposed schedule for the initial stage of the case. In June 2021, the parties in the Sun and Furman actions submitted joint stipulations and proposed orders to stay both actions. Soon thereafter, the courts in both actions approved the stipulations, thereby staying all proceedings and deadlines in the Sun and Furman actions pending a final decision on the motion to dismiss in the Middle District of Tennessee class actions consolidated under the Bond action, and approving the filing of an amended complaint. On November 30, 2021, the Sun and Luthra plaintiffs filed an amended complaint, asserting violations of section 14(a) of 120 the Exchange Act, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution under sections 10(b) and 21D of the Exchange Act. The amended complaint generally relates to the allegations published in the Hindenburg Article, and names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages and an order requiring Clover to take certain actions to enhance Clover's corporate governance policies and procedures. On September 16, 2021, the two District of Delaware derivative actions were consolidated under In re Clover Health Investments, Corp. Derivative Litigation , Case No. 1:21-cv-00191-LPS (Consolidated). The Furman complaint was deemed the operative complaint. All proceedings and deadlines in that matter are also stayed pending a final decision on the motion to dismiss in the Bond Action. On January 19, 2022, the court in Davies approved the parties’ joint stipulation and proposed order to stay all proceedings and deadlines in the action pending a final decision on the motion to dismiss in the Middle District of Tennessee class actions consolidated under the Bond action. The parties in the New York derivative actions agreed to stay and consolidate those two actions into one action. On February 2, 2022, the parties filed a stipulation with the court to that effect. Upon the court’s approval, the complaint in the Sankaranarayanan action will be deemed the operative complaint in the New York derivative actions and the parties will submit a proposed scheduling order for defendants’ response to that complaint. All of these cases remain in the preliminary stages. Given the inherent uncertainty of litigation and the legal standards that must be met, including class certification and success on the merits, the Corporation has determined that it is not probable or estimable that an unfavorable outcome or potential loss will occur. Clover intends to vigorously defend itself against the claims asserted against it. Provider Payment Disputes The Corporation is currently involved in multiple disputes with healthcare providers and facilities involving allegations that the Corporation failed to appropriately reimburse the providers/facilities for services provided to the Corporation’s Medicare Advantage plan members. These disputes include, but are not limited to, a suit filed on December 15, 2021 in the Superior Court of New Jersey that is captioned Columbus Ltach, LLC vs. Wellcare Health Plans, Inc., et. al. , Docket No. L-009587-21 (N.J. Super. Ct. Law Div.), in which the plaintiff claims underpayments of over $ 0.3 million, and seeks related relief. Guaranty Assessments Under state guaranty assessment laws, including those related to state cooperative failures in the industry, the Corporation may be assessed, up to prescribed limits, for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as the Corporation. 22. Direct Contracting In April 2021, the Corporation began participating in the DC Model, which utilizes a structured model intended to reduce expenditures and preserve or enhance quality of care for beneficiaries in Medicare FFS. As a participating entity in the DC Model with a global risk arrangement, the Corporation assumes the responsibility of guaranteeing the performance of its care network. The DC Model is intended to reduce the administrative burden, support a focus on complex, chronically ill patients, and encourage physician organizations that have not typically participated in Medicare FFS to serve beneficiaries in Medicare FFS. Key components of the financial agreement for Direct Contracting include: • Performance Year Benchmark The target amount for Medicare expenditures on covered items and services (Medicare Part A and B) furnished to a DCE’s aligned beneficiaries during a performance year. The Performance Year Benchmark will be compared to the DCE’s performance year expenditures. This comparison will be used to calculate shared savings and shared losses. The Performance Year Benchmark is established at the beginning of the performance year utilizing prospective trend estimates and is subject to retrospective trend adjustments, if warranted, before the Financial Reconciliation. • Performance Year A calendar year except for the commencement year, which began on April 1, 2021, and will end on December 31, 2021. • Risk-Sharing Arrangements Used in determining the percent of savings and losses that DCEs are eligible to receive as shared savings or may be required to repay as shared losses. 121 • Financial Reconciliation The process by which CMS determines shared savings or shared losses by comparing the calculated total benchmark expenditure for a given DCE’s aligned population to the actual expenditures of that DCE’s aligned beneficiaries over the course of a performance year that includes various risk-mitigation options such as stop-loss reinsurance and risk corridors. • Risk-Mitigation Options DCEs may elect a “stop-loss arrangement” each performance year, which is designed to reduce the financial uncertainty associated with high-cost expenditures of individual beneficiaries. The Corporation has elected participation in the program for the current performance year. Additionally, CMS has created a mandatory risk corridor program that allocates the DCE’s shared savings and losses in bands of percentage thresholds, after a deviation of greater than 25.0 % of the Performance Year Benchmark. Performance Guarantees Certain of the Corporation’s arrangements with third-party providers require it to guarantee the performance of its care network to CMS, which if not obtained, could potentially result in payment to CMS during the financial reconciliation period. As a result of the DC agreement, the Corporation determined that there was a performance guarantee with the providers of DCE Beneficiaries that should be recognized in the consolidated financial statements. The Direct Contracting performance year obligation and receivable were initially measured as the target amount for Medicare expenditures on covered items and services. The obligation and receivable were subsequently amortized on a straight-line basis for the amount that represented the completed performance. The DCE is entitled to all of the consideration under the arrangement for all aligned beneficiaries and in the performance year in which the DCE is a participant, the final consideration due to the DCE by CMS (shared savings) or the consideration due to CMS by the DCE (shared loss) is reconciled in the subsequent years following the performance year. The shared savings or loss is measured periodically and will be applied to the Direct Contracting performance obligation if the Corporation is in a probable loss position. The Corporation is unable to estimate the maximum potential amount of future payments under the guarantee. This is attributable to the stop-loss arrangement and the corridors (tiered levels) in the arrangement. A certain percentage of these arrangements will still be the responsibility of the Corporation in addition to a number of variables that are not reasonable for the Corporation to estimate such as, but not limited to, risk ratings and benchmark trends that have an inestimable impact on the estimate of future payments. The tables below include the financial statement impacts of the performance guarantee: December 31, 2021 (in thousands) Direct Contracting performance year receivable $ — Direct Contracting performance year obligation (1) 36,891 (1) This obligation represents the consideration due to providers, net of the shared savings or loss for the period and amortization of the liability. Year ended December 31, 2021 (in thousands) Amortization of the Direct Contracting performance year receivable $ ( 664,224 ) Amortization of the Direct Contracting performance year obligation 664,224 Direct Contracting revenue 667,639 23. Operating Segments The Corporation manages operations based on two reportable segments: Medicare Advantage and Direct Contracting. The reportable segments are distinguished based on the healthcare delivery business model. Its Medicare Advantage segment is an insurance business model that focuses on leveraging the Clover Assistant at the point of care. Its Direct Contracting 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 the Chief Executive Officer, the Corporation’s chief operating decision maker, to assess performance and allocate resources. There are certain revenues and expenses that are attributable to clinical services and corporate overhead; these amounts are reported separately from reportable segments in the tables presenting segment results below. 122 The operations of the Corporation are organized into the following two segments: • Medicare Advantage Segment includes operations related to the Corporation’s MA plans, which generally provide access to a wide network of primary care providers, specialists, and hospitals. • Direct Contracting Segment includes the Corporation’s operations relating to CMS’ DC Model, which provides options aimed at reducing expenditures and preserving or enhancing quality of care for beneficiaries. • Corporate/Other (Non-Segment) includes other clinical services not included in Medicare Advantage and 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. The table below summarizes the Corporation’s results by operating segment: Medicare Advantage Direct Contracting Corporate/Other Eliminations Consolidated Total Year ended December 31, 2021 (in thousands) Premiums earned, net (Net of ceded premiums of $ 489 ) $ 799,414 $ — $ — $ — $ 799,414 Direct Contracting revenue — 667,639 — — 667,639 Other income 216 — 94,090 ( 89,363 ) 4,943 Intersegment revenues — — 41,932 ( 41,932 ) — Net medical claims incurred and other medical costs (1) 847,286 705,407 7,637 ( 9,152 ) 1,551,178 Gross (loss) profit $ ( 47,656 ) $ ( 37,768 ) $ 128,385 $ ( 122,143 ) $ ( 79,182 ) Total assets $ 416,947 $ 58,027 $ 1,116,331 $ ( 640,501 ) $ 950,804 (1) Net medical claims incurred reported for Medicare Advantage in this footnote differs from corresponding amount reported on the Consolidated Statements of Operations and Comprehensive Loss due to the impacts of eliminations. A reconciliation of the reportable segments’ gross loss to the net loss included in the Consolidated Statements of Operations and Comprehensive Loss is as follows: Year ended December 31, 2021 (in thousands) Gross loss $ ( 79,182 ) Salaries and benefits 260,458 General and administrative expenses 185,287 Premium deficiency reserve 110,628 Depreciation and amortization 1,246 Other expense 191 Change in fair value of warrants payable ( 66,146 ) Interest expense 3,229 Amortization of notes and securities discounts 13,681 Net loss $ ( 587,756 ) 24. Dividend Restrictions The Corporation's regulated insurance subsidiaries are subject to regulations and standards in their respective jurisdictions. These standards, among other things, require these subsidiaries to maintain specified levels of statutory capital and limit the timing and amount of dividends and other distributions that may be paid to their parent companies. Therefore, the Corporation's regulated insurance subsidiaries' ability to declare and pay dividends is limited by state regulations including obtaining prior approval by the New Jersey Department of Banking and Insurance. As of December 31, 2021 and 2020, neither of the regulated insurance subsidiaries had paid any dividends. 123 25. Statutory Equity Applicable insurance department regulations require that the Corporation’s regulated insurance subsidiaries prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the department of insurance of the respective state of domicile. These practices vary in some aspects from U.S. GAAP, with significant differences including that (a) certain assets are not included in statutory surplus, (b) certain statutory reserves are established by a direct charge to surplus, and (c) certain charges are reported as charges to capital and surplus, rather than as a component of net income. The regulated insurance subsidiaries are subject to certain Risk-Based Capital (RBC) requirements specified by the National Association of Insurance Commissioners (NAIC). Under those requirements, the amount of capital and surplus maintained by the Corporation’s regulated insurance subsidiaries is to be determined based on various risk factors, such as (a) asset quality, (b) asset and liability matching, (c) loss reserve adequacy, and other business factors. Regulatory compliance is determined by a ratio of the Corporation’s regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Generally, a ratio in excess of the regulatory threshold requires no corrective actions by the Corporation or regulators. As of December 31, 2021 and 2020, the regulated insurance subsidiaries’ capital and surplus of $ 128.9 million and $ 79.4 million, respectively, exceeded the minimum RBC requirements of approximately $ 99.7 million and $ 75.8 million, respectively. 26. Regulatory Matters The Corporation operates in a highly regulated environment. It is regulated by federal and state of New Jersey regulators. The Corporation’s regulated insurance subsidiaries must be licensed by and are subject to regulation by New Jersey Department of Banking and Insurance, which requires periodic financial reports and enforces minimum capital and/or reserve requirements. The laws and regulations governing the Corporation’s business and interpretations of those laws and regulations are subject to frequent change. Legislative, administrative, and public policy changes to the Health Care Reform Law continue to be debated, and the Corporation cannot predict if the Health Care Reform Law will be further modified, repealed, or replaced. The broad latitude given to the agencies administering, interpreting and enforcing current and future regulations governing the Corporation’s business could require the Corporation to change how it conducts its business, restrict revenue and enrollment growth, increase health care and administrative costs and capital requirements, or expose the Corporation to increased liability in the courts for coverage determinations, contract interpretation and other actions. The health care industry is also regularly subject to negative publicity, including as a result of governmental investigations, adverse media coverage and political debate surrounding industry regulation. Negative publicity may adversely affect the Corporation’s financial position, results of operations and cash flows and damage its reputation. 124 CLOVER HEALTH INVESTMENTS, CORP. CONDENSED BALANCE SHEETS (PARENT COMPANY) (Dollars in thousands, except share amounts) Schedule I December 31, 2021 December 31, 2020 Assets Current assets Cash and cash equivalents $ 115,894 $ 5,432 Short-term investments 234,986 — Investment securities, available-for sale 79,268 — Investment securities, held-to-maturity 59 — Other assets, current 38 102 Total current assets 430,245 5,534 Intercompany interest receivable 4,958 4,958 Intercompany note receivable 40,000 40,000 Investments in consolidated subsidiaries 140,834 77,212 Total assets $ 616,037 $ 127,704 Liabilities, Convertible Preferred Stock, and Stockholders' Equity (Deficit) Current liabilities Accounts payable and accrued expenses $ 1,199 $ 13,140 Accrued salaries and benefits 1,640 229 Total current liabilities 2,839 13,369 Intercompany payable 76,211 27,251 Notes payable, net of discount and deferred issuance costs — 107,674 Derivative liabilities — 44,810 Warrants payable — 97,782 Other liabilities 360 — Total liabilities 79,410 290,886 Convertible Preferred stock (Series Seed A, A-1, B, C, and D), $ 0.0001 par value; 0 and 155,387,025 shares authorized as of December 31, 2021, and 2020, respectively; 0 and 139,444,346 shares issued and outstanding as of December 31, 2021, and 2020, respectively; aggregate liquidation preference of $ 0 and $ 470,256 as of December 31, 2021, and 2020, respectively (1) — 447,747 Stockholders’ equity (deficit) Class A Common Stock, $ 0.0001 par value; 2,500,000,000 and 0 shares authorized as of December 31, 2021, and 2020, respectively; 352,645,626 and 0 issued and outstanding as of December 31, 2021 and 2020, respectively 34 — Class B Common Stock, $ 0.0001 par value; 500,000,000 and 351,572,668 shares authorized; 118,206,768 and 89,206,266 issued and outstanding as of December 31, 2021, and 2020, respectively (1) 12 9 Additional paid-in capital 2,153,909 411,843 Accumulated other comprehensive loss ( 443 ) — Accumulated deficit ( 1,616,738 ) ( 1,022,781 ) Less: Treasury stock, at cost; 14,730 and 0 shares held as of December 31, 2021, and 2020, respectively ( 147 ) — Total stockholders’ equity (deficit) 536,627 ( 610,929 ) Total liabilities, convertible preferred stock, and stockholders’ equity (deficit) $ 616,037 $ 127,704 (1) Prior period results have been adjusted to reflect the exchange of Legacy Clover's common stock for Clover Class B Common Stock at an exchange ratio of approximately 2.0681 in January 2021 as a result of the Business Combination. See Note 3 (Business Combination) for additional information. 125 CLOVER HEALTH INVESTMENTS, CORP. CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY) (Dollars in thousands, except share amounts) Years ended December 31, 2021 2020 2019 Revenues: Other income $ 3,938 $ 3,685 $ 3,442 Total revenues 3,938 3,685 3,442 Operating expenses: General and administrative expenses 187 4,831 79 Other expense — — 363 Total operating expenses 187 4,831 442 Income (loss) from operations 3,751 ( 1,146 ) 3,000 Change in fair value of warrants payable ( 66,146 ) 80,328 2,909 Interest expense 1,593 35,556 23,155 Amortization of notes and securities discount 13,681 21,118 15,913 (Gain) loss on derivative — ( 93,751 ) 138,561 Equity in net losses of consolidated subsidiaries 648,580 91,995 186,199 Net loss $ ( 593,957 ) $ ( 136,392 ) $ ( 363,737 ) 126 CLOVER HEALTH INVESTMENTS, CORP. CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY) (Dollars in thousands, except share amounts) Years ended December 31, 2021 2020 2019 Cash flows from operating activities: Net loss $ ( 593,957 ) $ ( 136,392 ) $ ( 363,737 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of notes and securities discount and debt issuance costs 13,681 21,118 15,913 Intercompany stock-based compensation expense 163,470 7,078 3,301 Paid in kind interest — 28,334 11,633 Change in fair value of warrants and amortization of warrants ( 66,146 ) 80,328 2,909 Change in derivative liabilities — ( 93,751 ) 138,561 Accretion, net of amortization ( 163 ) — — Net realized losses on investment securities ( 53 ) — — Changes in operating assets and liabilities: Other assets 165 214 9 Accounts payable and accrued expenses ( 4,092 ) 7,669 5,728 Intercompany accrued salaries and benefits 1,411 229 ( 169 ) Intercompany interest receivable — ( 1,208 ) ( 1,200 ) Intercompany payable 48,960 23,158 ( 23,921 ) Net cash used in operating activities ( 436,724 ) ( 63,223 ) ( 210,973 ) Cash flows from investing activities: Purchases of short-term investments and available-for-sale securities ( 689,582 ) — — Proceeds from sales of short-term investments and available-for-sale securities 89,997 — — Proceeds from maturities of short-term investments available-for-sale securities 285,000 — — Investments in consolidated subsidiaries ( 63,622 ) 82,047 ( 154,469 ) Net cash provided (used in) by investing activities ( 378,207 ) 82,047 ( 154,469 ) Cash flows from financing activities: Proceeds from issuance of convertible securities — — 343,410 Deferred financing costs — — ( 363 ) Payment of notes payable principal ( 30,925 ) ( 18,752 ) ( 9,670 ) Issuance of common stock, net of early exercise liability 6,144 1,748 601 Buyback and subsequent cancellation of common stock — ( 957 ) — Proceeds from reverse recapitalization, net of transaction costs 666,241 — — Proceeds received for the exercise of Public and Private Warrants 390 — — Issuance of common stock, net of stock issuance costs 283,775 — — Payment for the redemptions of Public Warrants ( 85 ) — — Purchase of treasury stock ( 147 ) — — Net cash provided by (used in) financing activities 925,393 ( 17,961 ) 333,978 Net increase (decrease) in cash and cash equivalents 110,462 863 ( 31,464 ) Cash and cash equivalents, beginning of year 5,432 4,569 36,033 Cash and cash equivalents, end of year $ 115,894 $ 5,432 $ 4,569 Supplemental cash flow disclosures Cash paid during the period for interest 1,677 Cash paid during the year for health insurance industry fee — 8,022 — Supplemental disclosure of non-cash investing and financing activities Fair value of warrants issued in connection with notes payable — — 17,672 Settlement of bridge loan in connection with convertible notes — — 30,416 Conversion of preferred stock to common stock 447,747 — — Issuance of common stock related to convertible debt 16,059 — — Capital contribution for extinguishment of debt 126,795 — — Issuance of common stock related to warrants exercised 97,782 — — Acquisition of public and private warrants 147,582 — — Issuance of common stock related to the exercise of Public and Private Warrants 81,283 — — 127 CLOVER HEALTH INVESTMENTS, CORP. Notes to Condensed Financial Statements (Parent Company) 1. Organization and Operations Clover Health Investments, Corp. (the “Corporation”) is a holding company incorporated on July 17, 2014, in the state of Delaware. 2. Summary of Significant Accounting Policies The accompanying Condensed Financial Statements have been prepared using the equity method. Under the equity method, the investment in consolidated subsidiaries is stated at cost plus equity in undistributed earnings of consolidated subsidiaries since the date of acquisition. These Condensed Financial Statements should be read in conjunction with the Corporation’s consolidated financial statements. Use of estimates The preparation of the Condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Those estimates are inherently subject to change, and actual results may ultimately differ from those estimates. Reclassifications Certain amounts in the prior years’ Condensed Statements of Cash Flows have been reclassified to conform to the current year’s presentation, primarily related to the amortization of notes and securities discounts and debt issuance costs, change in fair value of warrants payable and amortization of warrants. These reclassifications had no effect on the previously reported Condensed Financial Statements 3. Insurance Subsidiaries Investments in consolidated subsidiaries include regulated insurance subsidiaries and unregulated subsidiaries. The Corporation holds $ 485.9 million and $ 50.0 million of cash, cash equivalents, short-term investments and investment securities at the parent and unregulated subsidiaries as of December 31, 2021 and 2020, respectively. The Corporation holds $ 305.3 million and $ 101.1 million of cash, cash equivalents, short-term investments and investment securities in regulated insurance subsidiaries as of December 31, 2021 and 2020, respectively. 4. Surplus Note Effective December 22, 2016, the Corporation contributed $ 40.0 million to Clover Insurance Company, a wholly-owned subsidiary, in exchange for a surplus note. The outstanding balance, including accrued interest, was due and payable on December 31, 2020, but remains unpaid with the payment terms under review for extension until December 31, 2024, by the Commissioner of Banking and Insurance of the State of New Jersey. No payment of principal or interest on the surplus note shall be made without the prior written approval of the Commissioner of Banking and Insurance of the State of New Jersey. 128 Schedule II CLOVER HEALTH INVESTMENTS, CORP. VALUATION AND QUALIFYING ACCOUNTS Additions (in thousands) Balance at beginning of period Charged to costs and expenses Charge to other accounts (Deductions) Balance at end of period Year ended December 31, 2020 Valuation allowance for deferred tax assets $ 144,619 $ 18,585 $ — $ — $ 163,204 Year ended December 31, 2021 Valuation allowance for deferred tax assets 163,204 112,661 — — 275,865 The accompanying notes are an integral part of these Condensed financial statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.