Clover Health Investments Corp. Q1 2023 Earnings Call

Ladies and gentlemen, good afternoon, and welcome to the closer helps first quarter 2023 earnings conference call.

At this time all participants are in a listen only mode.

A question and answer session will follow the prepared remarks.

At that time, if you wish to ask a question. Please press star one on your telephone keypad.

As a reminder, today's call is being recorded.

I'd now like to turn the call over to Ryan Smith Investor Relations for Clover House. Please go ahead.

Good morning, everyone. Joining me on our call today to discuss the company's first quarter results are Andrew Toy Culverhouse, Chief Executive Officer, and Scott Lastly, the company's Chief Financial Officer, you can find today's press release and the accompanying supplemental slides in the investor events and presentations section of our website at investor.

Is that Clover House Dot Com. This webcast is being recorded and a replay will be available in the investor Relations section of the corporate website.

Also want to caution you that we may make forward looking statements during todays call are subject to risks and uncertainties, including expectations about future performance.

So that may cause actual results to differ materially from expectations are detailed in our SEC filings, including in the risk factors section of our most recent annual report on Form 10-K and.

Information about non-GAAP financial measures referenced including a reconciliation of those measures to GAAP measures can be found Americas materials available on our website with that I'll now turn the call over to Andrew.

Thank you Ryan and thanks, everyone for joining us today.

We're very excited to be reporting our first quarter results, which mark an extremely strong start to the year and highlight the progress we're making towards our goals for 2023 and beyond.

Starting with the headlines we are excited to have delivered strong results in key areas of our business.

We performed very well on insurance revenue growth, which has been increased year over year by approximately 14% in the first quarter.

This revenue growth has also helped deliver favorable Q1 insurance MCR of 86, 6% and will flow through to our strong projected full year insurance MTR as well.

And of course all of this resulted in significant improvement in our adjusted EBITDA.

This overall strong performance was driven by thoughtful plan optimization significant enhancements to core operations a focus on member retention as well as the improvement in our star ratings.

We have been anticipating this step function change in our performance since we shifted to a profitability mindset and I'm very pleased with how our team has executed.

Due to the operational enhancements mentioned previously.

We believe this progress is durable and we expect to sustain insurance revenue growth as part of our focus on delivering both revenue growth and positive MCR performance.

Our strategy of prioritizing our core markets has also generated a greater portion of returning members in our population mix than in years past and has granted us better line of sight into our members' care needs.

In the near term this intentional focus on member retention is one of the key levers for our path to profitability as a strongly affects MCR for both a revenue and a care management perspective.

This paired with our Kluver homecare progress is a dynamic we are really excited about.

We're also very excited about our recently announced partnership with Usg's health proof and industry leader, helping to service millions of members, allowing us to take advantage of their economies of scale and operational capabilities.

Not only will this deliver significant savings in SG&A, starting in 2024, but more importantly, as we grow we now have access to scale and efficiencies, which would be otherwise impossible for our plan our size.

Finally on the insurance segment, we want to call out that we anticipate the recent CMS changes around MA risk adjustments will have limited effect on <unk> in 2024.

We believe the changes were mainly targeting scenarios, where providers with revenue sharing network contracts were overusing certain codes.

Our wide network model Insulates us from exposure to these groups and types of contracts. We therefore feel good about the changes support cms's efforts to maintain Medicare program integrity and believe that the 2024 effect on fluor will be modest.

Moving onto our non insurance line of business, we delivered an NCR of 96, 1%.

While this makes us cautiously optimistic this number does include favorable prior period development. It is still too early in the year to judge total program performance.

This is due to the typical lag in receiving data from CMS, the same data lag, which created a variability in expectations throughout last year.

That said, we remain optimistic about our strategy and expect this business to be accretive to gross profit this year.

Beyond our two reportable segments I'd also like to provide a quick update regarding <unk> homecare.

<unk> by Clover assistant we aim to afford our most vulnerable members the ability to receive comprehensive personalized care directly in the comfort of their homes as often as necessary to support their needs, we see clover homecare as a step function upgrade from the home health programs offered by other Payors as our program.

Delivers active care by a physician led pods that include nurse practitioners medical assistance licensed social workers and patient care coordinators.

Our data shows that approximately 8% of our members accounted for nearly 30% of total MA medical expenses in 2022 when.

When we enroll these members in our Homecare program. In addition to high member satisfaction. We also see reduced near term costs achieved through reduced hospitalization and post acute care utilization.

We believe <unk> homecare is already one of the largest director whom practices in New Jersey and powered by Clover Assistant we're excited in our ability to scale this model to new markets and geographies in the future.

Before handing the call over to Scott I want to once again emphasize how excited I am and we have a clear roadmap to achieve our goals as an organization.

This quarter's results combined with our recent cost reduction initiatives showed great progress to accelerating our timeline to profitability.

Now I'll turn it over to Scott for a more detailed financial update.

Thanks, Andrew I'll first touch on this quarter's financial highlights and then review our updated outlook for full year 2023.

The first quarter of 2023 was highlighted by another period of significant MCR and gross profit improvements for both lines of business strong insurance revenue growth and the rollout of operating efficiencies that will result in meaningful SG&A savings once implemented.

Starting with our insurance segment MTR improved to 86, 6% this quarter from 96, 4% in Q1 of last year.

Our year over year improvement of nearly 1000 basis points was driven by continued operational enhancements, including improved performance from Clover assistant more efficient managed care activity a favorable mix of new versus returning members are balanced and sustainable plan design and an improved star ratings for our flagship <unk>.

<unk> plan.

Revenue for the insurance line of business grew 14% to $317 million in the first quarter and we continue to focus on insurance revenue growth.

This quarter non insurance revenue decreased to $206 million.

Primarily driven by our strategy to focus on a narrower group of participants providers. We recently received an updated view of our aligned beneficiary count from CMS, which came in slightly below our initial estimate this slightly lower beneficiary count we will have a minor impact on our revenue for the year, though this revenue effect may potentially.

Would be offset by other program factor as CMS finalizes, though.

Our non insurance segment MCR in the first quarter was 96, 1%, which compares favorably to MCR of 99, 8% in the prior year period.

As mentioned by Andrew. This result does include some favorable prior period development, but we remain optimistic about overall improvements in 2023.

I also note that because of the ACO reach relies on retrospective benchmark will likely be exposed to meaningful upside or downside prior period risks as final benchmark. So published by CMS for the 2022 plan year.

Prior period exposure is embedded in the program framework for all participants.

We expect to have more to share when we report our second quarter results.

First quarter, adjusted SG&A was $86 million, a minimal increase over Q1 of 2022.

The increase was driven by the rollout of our new rewards and incentives program, but partly offset by savings in other area.

<unk> adjusted SG&A remains a key focus of the company as we push towards profitability we have.

Made statements on the last several earnings calls without efficiency opportunities throughout the organization.

Recently, we announced the business transformation initiatives to realize some of these opportunities while also maintaining our own capabilities on investment with our true differentiator Clover system.

This transformation includes a reduction in force and the movement of select non core elements of our insurance operations to USD Ehealth proofs integrated technology platform.

As previously announced we expect a net annualized savings of approximately $30 million.

Starting in 2024 from our combined initiatives.

We will also be recording restructuring charges of between $7 million and $9 million in the first half of 2023.

These charges will be adjustment items in our non-GAAP adjusted SG&A and EBITA.

The outperformance of both lines of business drove significant adjusted EBITDA improvement from a loss of $71 million in Q1 of last year to a loss of $30 million in Q1 of this year.

We finished the first quarter with restricted and unrestricted cash cash equivalents and investments totaling $635 million on a consolidated basis.

And $331 million at the parent entity and unregulated subsidiary level.

Similar to what happened in Q3 of last year, we received both the March and April MAA payments from CMS. During the month of March. This resulted in an unusual working capital effect temporarily elevated in Q1 cash by about $108 million at both the regulated entity level and on a consolidated basis.

That will normalize in Q2.

Our focus on improving MCR and generating gross profit for both business segments, along with initiatives to achieve operational efficiencies and SG&A savings will help to protect our liquidity position.

I'll reiterate what we've said during prior earnings calls, which is that we consider our current liquidity to be sufficient to meet our 2023 operating needs. We also have a strong an unlevered balance sheet, which provides flexibility to pursue opportunistic financing.

<unk> said that our aim is to insulate ourselves from capital markets by accelerating our path to profitability.

Finally, I'll provide an overview of our full year 2023 guidance, which we updated in some areas based on strong Q1 results.

We are increasing our revenue guidance for the insurance line of business to between one and $1 8 billion and $1 billion to $3 billion.

We are also improving insurance MCR guidance to a range of <unk>, 87% to 89%.

We are maintaining our previous non insurance revenue guidance at a range of $750 million to $800 million.

And MCR between 98% and 100%.

These metrics cannot yet be updated due to the previously mentioned lag on data and key benchmarks under the program.

As mentioned, we will not realize the full effect of our recently announced transformation and cost savings initiatives until 2024. So while we remain focused here we are maintaining our previously issued guidance for adjusted SG&A of between $315 million and $325 million.

Finally, these changes result in an improved adjusted EBITDA guidance of between negative $125 million and negative $175 million.

I'd like to close by emphasizing that we view this quarter as a strong first proof point that the areas of strategic emphasis we have been talking about since last year are already paying off in 2023, we look forward to sharing more updates on our progress towards profitability in the coming quarters.

With that I'll turn the call back to Andrew for some final comments.

Thanks, Scott before we take questions I'd like to quickly discuss our Clover assistant progress.

As a reminder, <unk> assistance differentiated ability is to change the timeline of care through helping physicians with the early identification and management of chronic disease.

We continue to see a significant MTR benefit from physicians using clover assistant in the past we've shared the 1000 basis point MCR differential for returning members, whose pvp's used quicker assistance as compared to members, whose <unk> do not.

We continue to see this and actually our data shows that differential is often materially higher. This is due to our constant focus on making clover assistant the leading platform and helping physicians identify and manage disease earlier.

In addition, we've recently seen a significant improvement in the world of healthcare interoperability and this increased access to data combined with recent improvement in AI technologies make us very excited about progress on the Clover assistant front.

With that let's move on to Q&A.

Thank you Sir.

We will be taking questions first from Clover suite <unk> analyst.

At this time, if you wish to ask a question. Please press star one on your telephone keypad.

Remove yourself from the queue by pressing star Q.

The interest of time, we ask that you. Please limit yourself to one question and one quick follow up.

And we'll pause for a moment to allow questions to queue.

Our first question will come from Jonathan Young with credit Suisse.

Line is open.

Hey, Thanks for taking the question I just want to ask on the.

MLR there.

And as you kind of see in the corner, which the COVID-19 headwinds abate a lot.

The mix of inpatient utilization versus outpatient et cetera, but any color on that.

Yeah.

Yes, sure. So we definitely saw thanks for the question.

The environment, we're seeing is relatively stabilized I think at this point, we're not expecting to see anything.

Materially happening according to our data and I think that even from compared to a year ago, we're definitely seeing that things have stabilized.

Nothing really strongly to note on the Covid front.

Okay, but I guess just.

In terms of.

General coil utilization.

Are you seeing a bounce back with a few years going back to.

<unk> are you seeing it more in patient volume at all like that a little bit less than it would normally be in your mind.

Yeah. So I don't think we're that we're not seeing any suppress utilization definitely we're seeing that it's sort of like going back I think on trend with the numbers looking a little bit like what we would see.

Prior to Covid and so I.

I think that trend is what we'd say controlling for the fact that COVID-19 came in between.

You mentioned that now that we're seeing are probably what we would expect the space. So I don't think were seeing.

Extra utilization I don't think were seeing some fresh utilization either.

Okay, Great and then just kind of think.

Question on USG I guess is the reason for it.

Game initiatives not yielding anything at <unk> is more of a contract timeline or I guess, how come we didn't see any benefit in 2003 at this time or is it.

More logistical thanks.

Hey, Jonathan this is Scott.

So really that's just a function of implementation timeline.

Back office and related.

Non core operations that we are moving over to USD are fairly complex operations and the transition in a manner that.

Sure.

Mitigating any potential risk to the plan operations and so.

That being the case, we really target largely in early 2024 implementation timeline for the majority of the work streams that we're moving over.

Thanks.

Thank you.

A reminder, that is star one to ask a question.

And our next question will come from Richard close with Canaccord Genuity. Your line is open.

Hi, This is John any offer on for Richard Thanks for the question so with the Clover homecare.

So again as I get it all in New Jersey at this point and in spring 2023 for the foreseeable future is that expected to stay in New Jersey, and what exactly would be any type of expansion plans for that.

Yes, thanks, Jonathan.

So with Clover homecare as a reminder.

Really excited about that particular initiative and it is mainly serving in our New Jersey markets right now, which is where we launched the program.

Matured it there we're excited by the results that we see so we have planned about thoughts about how we might bring it to other markets certainly is a core part of our care management service. It uses clover assistance and so we wanted to have that operating in any market in which we have a strong material presence, but right now it does operate mainly in new Jersey.

Like I said in my remarks, we believe it's one of the largest homecare focused practices in New Jersey.

We have plans to bring it to other markets that we haven't formally announced that I think there yet.

Okay, great. Thanks.

And then also just on MA.

MTR as their own.

Any type of cadence quarter to quarter that you guys can call out or anything when we're thinking about modeling.

Yes.

Regarding seasonality basically.

Okay.

Yes, so we would typically expect to see slightly elevated.

<unk> levels in Q1 more pronounced in Q4 was kind of a flatter level of performance in the middle part of the year.

Okay, great. Thank you.

Thank you.

And as a reminder, that is star one to ask a question.

Alright, there are no further questions in the queue at this time.

I would now like to turn the call back over to Andrew <unk> for any additional or closing remark.

Sure. So thanks for the question so far.

Like to hand, the call, but just some thoughts on why I'm incredibly excited about the moment, we are at within the health care industry and our ability at Clover to use our technology to power an incredible acceleration in physician capabilities.

As a reminder, I have been involved with some of the most transformative moments of the last few decades.

Thats, where technology has really created a step function change and the capabilities of human beings are the previous company I founded helped deliver the mobile Revolution, a revolution that has a lot almost every person has to have access to supercomputing capability.

Much at all times.

Google I spend time focused on bringing the capability all of the cloud to businesses all around the world to provide a level of real time data interim interconnectedness that we've never really had before and the final piece of this puzzle has always been my work around artificial intelligence and machine learning incredible.

<unk> that I truly believe we'll be power fully additive to the capabilities of all of us as human beings.

These experiences are intersecting and I truly believe that the time is now for the realization of these benefits in health care.

Over we built clover assistance to be literally that an assistant to physicians to give them superpowers and let them access the power of cloud data telemedicine machine learning AI all at once.

As a technologist I knew that the key to this would be to make sure we get our platform implemented and <unk>.

Used every day by actual real world physicians on a wide work that has many different kinds of user personas.

In the slow moving world.

<unk> technology. This is no small feat so I am proud of what we've achieved.

I've always said that the one thing that makes my colleagues in the <unk>.

World jealous is the amount of usage that we have on Kluver assistant every single day, something that none of them really have access to.

Over we are providing real doctors real insights and we can see what they engage with more and what the engage with less and this usage like us to tweak and accelerate our product on AI and ml capabilities in a way that I really believe is truly transformational.

So the global Clover has always been to not just client the obvious local maxima, but to move the capabilities of physicians onto a different part of the curve entirely it's not about a better laptop. It's about a supercomputer phone it's not about a better data center, it's about existing entirely on the <unk>.

Loud and its.

Not about just simply building academic AI models, but about making sure that they are built to be useful to real world physicians every day.

It's taken a significant investment in time to create this platform, but now we are at be exciting space, where we can realize the benefits of our capabilities.

So I really see this first quarter the strong quarter of results is aligning clover business capabilities behind this transformative vision.

Tim Vision, we've had for the last few years I am excited about the additional progress we will deliver this year of course, but I'm also incredibly excited to be part of this critical moment in time for our entire society.

You all again for being part of that journey with us.

Thank you ladies and gentlemen, this concludes today's closer Health's first quarter 2023 earnings call and webcast.

You may disconnect. Your line at this time and have a wonderful day.

Yeah.

Okay.

Uh huh.

[music].