OSCR is not cheap and not a buy; FCF is misleading for insurers as funds are not permanently retained.

Oscar Health, which is a health insurance company, had a really great quarter. They've got fantastic revenue. Their subscriber base is growing. Free cash flow is positive. Everything looks great.

How do you run a reverse DCF on that company? What terminal rate would you use for a company like this? And so that got us thinking about how we would go about looking at this.

We'll give you a little information on the financials, but more about how you go about thinking about an insurance company, which is a financials company. They have a tech stack, but really what you need to think about this company is it is a health insurance company.

Revenues, free cashflow, growing both of those metrics, but is that really what you should be looking at? No. Free cashflow is not real free cashflow in this type of business.

This just illustrates their significant member growth. I think they're just over 3 million group members now, which they continue to grow each quarter. This is another look at a KPI, where they're getting their premiums from.

And then one more metric to look at is the MLR, the medical loss ratio. This is gonna come into play here in just a moment. This is what a company like Oscar Health has to pay out from all those premiums they collect.

For a small health insurance group, minimum they have to pay out 80%, and their guidance was, like, 81 to 82% is what they would pay out for full year 2026. So there's gonna be some volatility, but at the end of the year, needs to be at least 80%, right?

And so what that means is the revenue and free cashflow that comes in, that's not actually their money. They can earn some interest income off of it. They can invest that money before they pay it out.

That's called insurance float. But basically that's why free cash flow is not a good metric to use at all for an insurance company because the big influxes of free cash flow is not really theirs to keep, not for forever anyways, maybe for a quarter or two.

And you can calculate the insurance flow to figure out how much of it they have and how long they get to keep it for, and you can calculate how much interest income they earn off of that, but it's not their money for forever.

And this is one look at where that money is going and what they actually have on balance. The premiums are revenue. This is going to be under as reported when you're looking at financials for this. It's not the standardized reporting.

So the premium is revenue. Medical is what they have to pay out. So there's about a billion dollars in the last quarter between the two, and then from that you have to subtract SG&A and some other operating expenses as well.

So that leaves them with a limited amount of cash. That's where you have to look at the balance sheet and understand what they're doing with that cash, where they're investing that cash, and why.

And are they doing right by their shareholders? Short answer is use GAAP earnings per share. We're gonna get to that in just a moment, but really, to round this out, you can't just look at the revenue and the net income.

With any financials company, you have to look at the balance sheet, and there's no simple way to do this. So, the consolidated balance sheet items we have here are not going to cut it.

It's not gonna tell you the whole story. But there are some interesting things here just to point out, to give you some more information to dig into. Notice under assets, there's receivables from CMS at $180 million.

And then also under liabilities, you see payables to CMS. Over $6 billion.

So Oscar Health, you probably know if you follow them, they focus on not Medicare plans. They focus on… self-employed, small business owners.

They're talking about the gig economy all the time. This is something with the Affordable Care Act where if you have, a really healthy base of insureds, you actually have to pay to help subsidize insurance companies that have a bunch of really unhealthy people that make claims all the time, like a company that has a lot of Medicare plans.

And so that's actually an extra liability worth reading up on, that most definitely has to be managed by the balance sheet .

You also need to go through the notes, not just the consolidated balance sheet, but pull up the latest 10-Q or the latest annual report and read through the notes. What's actually on the balance sheet?

You're gonna learn a lot here. This is a smaller insurance company. They're still building up their assets on balance, their cash and investments that they can earn interest income on.

And as a result, most of those investments are going to be short-term investments, short-term US treasuries, maybe some shorter-term corporate bonds, but nothing sexy like what Berkshire Hathaway can do and go out and cut these really exotic deals with Google to help Google fund its data center build-out or make a really epic pick on Apple stock in 2014.

That happens when you become a bigger insurance company and you have more assets on balance to play with. But in the interim, you're kind of left with a company that you have to model for earning a minimal amount of interest income, let's say 3% or 4%.

And so this is where the reverse DCF using earnings per share would come in. So a couple scenarios here that Kasey ran to try to explain why the stock is seemingly cheap.

So this first one, it's a 10-year horizon, so a little bit longer. The second one we'll show you is much shorter. Used a terminal rate of 3% and a growth rate of 6%, which on the surface seems like nothing.

A 6% year-over-year growth in earnings per share it seems like it's absolutely nothing. But take into account all that you just said, there could definitely be some difficulties in achieving that.

And then here's a look at what a three-year horizon looks like. This is a more aggressive rate which is closer to what they're projecting, 15% growth rate over the next three years, and then a terminal rate of 3%.

And so the terminal rate is always going to converge on the risk-free rate of return. That's why the terminal rate has to be low. And this is basically what the market is baking into Oscar Health.

Yes, maybe they have a few more years of really exceptional growth because they're scaling off of very little profit to robust profit. But over time, you have to model for the company making the bulk of its profits, not from collecting premiums and controlling costs, but actually managing the assets on the balance sheet.

So that doesn't mean Oscar Health is not cheap, and that it's not a buy. There's a custom investment thesis checklist feature. Oscar Health, you can click on that start thesis button, and you can start putting in your notes, industry context.

Basic, just describe what you think you know about the company. But then there's these qualitative and quantitative metrics here. We've provided a few of those that we've talked about in the last year, but you can also create a custom thesis checklist including with financial metrics built in.

So obviously, Oscar Health, it's not really a software business. Software is a key part of what they do in controlling their operating expenses, but that's not how they make money.

Software is not how they make money. Selling insurance is how they ultimately are going to earn revenue and then keep some of that. So you're gonna need new financial metrics to analyze this.

Go to the financial validation part. So we've just added a few metrics here in this custom checklist.

What portion of the revenue does the company actually get to keep? Net income would be one way you could judge that. Of course, that also is going to include interest income, but that at this point is a smaller portion of their net income.

What is their expense control? Net income growth over the last few years is the second one.

Balance sheet health, total cash and equivalents. Also liabilities and customer claims, and then expense efficiency, SG&A to revenue. Just a few metrics we put together here.

And then, you can move on to the reverse DCF. If you wanna go back though to the last item and just add another metric.

So let's go down to financial checks and click on add check. You can type in whatever you wanna call this. Let's say, what is the company's ability to pay its interest on debt that it may have?

And then you can search through the financial metrics here. Let's go with the quick ratio.

And then it'll pull it up. 0.94. Anyways, just as an example. That can become part of your thesis. The metric is there. It auto-populates when that financial data gets updated each quarter.

Long story short, for insurance companies, you can't evaluate it the same way as you would a high-growth technology business, like a software company or a semi-conductor business.

You have to do a lot more work looking at the balance sheet and figuring out how the company is managing its liabilities and what kind of risk it's taking with its assets on balance.