Q2 2023 Clover Health Investments Corp Earnings Call

Ladies and gentlemen, good afternoon, and welcome to the club or Health second quarter 20, twenty-three earnings conference call.

At this time, all participants already named 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.

A reminder, today's call is being recorded Oh now like to turn to call every two Ryan Smith Investor Relations for clever help. Please go ahead Sir.

Good afternoon, everyone. Joining me on a call today to discuss the company second quarter results are Andrew Toy Culverhouse, Chief Executive Officer, Scott Leffler, The company's Chief Financial Officer, you can find today's press release, and the accompanying supplemental slides and the investor events and presentations section of our website at <unk>.

Dot co for health Dot com.

Cast is being recorded.

<unk> will be available in the Investor Relations section of the Cobra Health website.

I'd also like to caution you that we may make forward looking statements turned today's call that a subject to risks and uncertainties, including expectations about future performance factors that may cause the actual results to differ materially from expectations are detailed in our SEC filings, including in the risk factor section of our most recent annual report on Form 10-K, another S U.

Filings information about non-GAAP financial measures reference, including a reconciliation of those measures. The GAAP measures can be found in the earnings materials available on our website would that I'll now turn the call over to Andrew.

Thank you Ryan and thanks.

For joining us.

Today, we reported very strong results that represent another significant milestone in our rapid journey towards sustained profitability.

Justin EBITDA basis, Q2 was our first profitable quarter as a public company.

Just an EBITDA was $10 million driven primarily by outperformance in our insurance segment.

Our strong performance is the result of the strategic initiatives that we began to implement in 2022 is a testament to the strength of our holistic approach of delivery Kluger assistant power care wherever our members needed.

Are wide network P. C p's two directly into home via our home care practice.

We've been laser focused on our strategies to achieve meaningful sustained profitability and I believe that this last quarter's momentum maybe we could quite reasonably achieve this without the necessity of raising additional capital.

Focusing first on our insurance business, we reported segment revenue of $314 million, representing an increase of 17% compared to Q chew up last year.

The segment also reported its best ever MCR as a public company at 77.2% for the quarter.

Is favorable prior period development in queue to most of which is related to keep one.

This is due to our appropriately conservative Q1 modeling of our in flight improvement initiatives, resulting in P. P. D. When real world performance exceeds that modeling and is booked into cute too.

Even our focus on continual improvement this year, we may indeed see more of this type of favorable P. P. D. As the year progresses based on more realized opportunities from our active initiatives.

Within our M. A plant operations, we continue to focus on optimizing a number of areas, including updates to our bid pricing refine network management and increased investment in our payment integrity functions.

Note Kluger assistant continues to be a cleared value driver. It are wide primary care network contributing well over a thousand basis points of MCR improvement for returning members, whose P. C. P. S use clear resistance as compared to those who do not.

We have also been continually launching C. A features I believe S. C H effectiveness I changing the trajectory of care is constantly improving.

We have also continued developing the capabilities of our in home care practice Kluver homecare to help manage the needs of our members.

As a reminder, kluver homecare is free to the number and delivers primary care house calls from our doctors and nurses.

Four members within homecare, we're continually seeing materially reduced inpatient utilization when compared to similarly sick members not enrolled in the program.

We're also see increased enrollment of end of life members in our palliative care and hospice programs.

As I mentioned, we are constantly looking to improve our capabilities and all of these areas and we expect to see more and more of their effects <unk> and our planet economics as we proceed through the year.

I'd also like to note that the results reported this year for our M a business or even more remarkable when you consider that bacup all our Medicare advantage book at our membership has a greater percentage of members who are considered low income as compared to other similar plans.

Studies have shown that this population generally has a higher disease burden I'd also have difficulty accessing appropriate care.

We believe that our ability to comprehensively support this population, while still delivering sustainable economics demonstrates the power of our technology centric model to support help equity.

G. M. S has recognized the importance of plans like ours that have prioritized health equity and has made it just missed it a star rating system for future years.

While this won't affect this current star cycle, we support the changes C. M S's, making I look forward to what we believe will be favourable tailwind down the road.

Turning now to growth against the backdrop of our strong performance in the first half of 2023 or 2024 bids strategy focuses on our core markets, where we look to leverage our original scale and accelerate C. A penetration amongst our membership.

Our core markets have driven our overall performance so far this year and we still maintain plenty of room to increase our market share.

Overall, we see our Kluver longterm growth advantage is the ability to sustain strong performance in the popular P. P O market because rather than rely on network contracting to managed care, we use kluber assistant to dynamically managed care protocols we.

We believe other plans lacked the technology and infrastructure to drive this level of agility and without it will find it difficult to maintain a sustainable P. P O, which will generally forced them to pull back on their feet as they look to compete with our software powered approach.

The attractiveness and marketability of P. P. S is evidence so we're well positioned to flip the switch back to growth once we establish the state profitability.

Looking ahead for insurance, we remain focused on the activities that are driving real value for the company like growing kluber homecare, adding <unk> assistant coverage.

In addition, we're not going to be resting on our laurels and are excited to continued logic additional exciting you care about the initiatives and <unk> features in the coming months to ensure that we build on our momentum going into 2024.

I don't think it's a more detail of these in the future, but we believe these efforts will build on the momentum of our first half results as we continue to prioritise profitability in our insurance business by growing revenue.

<unk> met X, while improving care adwords using adjusted SG&A.

These are our key levers to reaching longterm profitability.

Lastly for our insurance segment, we remain optimistic about our ability to among other things provide kluver assistant as a risk taking technology partner to providers.

Four Q2, the Noninsurance segment delivered an M. C. R. A 99.6 per cent on revenue of $194 billion.

We continued to see this as a gross margin positive segment and are making investments to drive increased value at profitability over the long term.

As we've said in the past. This line of business also offers the potential for various new revenue streams to diversify our portfolio I provides opportunities to better balance the overall risk profile at the entire business.

While our focus since last year has been getting this area right side in terms of total amount of risk. We think this will be a very exciting area going forward.

Come here.

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

Thanks, Andrew all first over the second quarter financial highlights and then review our improved outlook for full year 2023 is.

As Andrew mentioned adjusted EBITDA improved from a loss of $84 million in Q2 of last year to a first ever quarterly adjusted EBITDA profit as a public company.

$10 million in Q2 of this year driven by contributions from both lines of business and a reduction in adjusted SG&A relative to the prior year period.

For our insurance segment MCR improved to 77.2% in Q2 from 92.1% in Q2 of last year building on the strong momentum we have to start the year.

The second quarter result does include some prior period impact, but most of that prior period favorability related to Q1 of this year.

Similarly, our year to date M. P. R of 81.9 per cent contains only minimal P. P D.

Empty our performance was primarily driven by revenue growth of 17% in Q2 to $314 million and 16% growth year to date to $632 million.

There's been significant discussion in the market recently regarding utilization levels in our space.

We're seeing only modest increases in <unk> on a P. M. T M basis with P. M. P. M medical expenses up by two per cent for the second quarter and three per cent for the year to date period, both relative to their comparable prior year period.

<unk> said, we're always focused on initiatives to bend, the medical costs curb over time, including operational enhancements updates to our plan product design and network investing more in our payment integrity capabilities clinical initiatives from the home care business.

Increasing impact from C. A.

We believe these efforts are likely helping moderate the impact of any adverse macro medical expense headwinds.

Like R. Q1 results are Q2 performance was also favorably impacted by being paid on three and a half stars for our P. P. O plan this year.

At a high level I would say within the step change improvement in revenue performance supplemented by our well managed medical costs environment encouraged with us with the first half strength is sustainable will continue into the second half of 2023, and we believe position thus for adjusted EBITDA profitability for full year 2024.

Our Noninsurance segment revenue decline, 57% versus the prior year period to $194 million, primarily driven by our previously discussed strategic focus on a narrow or a group of participant providers.

Noninsurance M C. R. In the second quarter was 99.6% with a year to date M. P. R of 97.8%.

That performance represents a significant improvement from an M. C. R. A 106% in Q2 of last year and 102.9% for the junior to day period in 2022.

These results were in line with our expectations for the quarter given.

Given the typical lagging data from CMS under the program, which created variability in expectation throughout last year, we are maintaining a conservative approach to this segment.

Second quarter, adjusted SG&A improved to $67 million, a reduction of 7% from $72 million during Q2 of 2022.

You too as the first quarter that we are seeing the impact of some of the cost saving initiatives reported earlier this year.

I'll note. However that these savings were already contemplated at our previous guidance and that the broader transformation project our partnership with USC Health Bruce is actively underway and most of those benefits will only be realized beginning in early 2024.

We remain excited to take advantage of the economies of scale and operational efficiencies that USD help <unk> brain.

There are a number of transition related work screams that have some impact on a reported financial and I'll note that were intentionally accelerating payment of claims an inventory in order to facilitate a more orderly transferred to the U S T health proof ecosystem.

One example of how that manifests in our financial statements.

Near term decline and cleans outstanding has a higher proportion of our clients have already been cast subtle.

This has resulted in very high payments of claims and corresponding reduction in Kasson Kid too. We expect this affect the normalized as we complete the transition to return to a regular longer claims payment cycle.

Turning to the balance sheet, we finished with a second quarter with restricted and unrestricted cash cash equivalents and investments totalling $690 million on a consolidated basis with $299 million, the parent entity and unregulated subsidiary level.

Our intent is to improve our financial performance to the point, where we do not need additional capital and our step change improvement in performance and cute too is an important step towards that objective.

Having said that we do continue to consider opportunistic financing to increase liquidity.

Finally, I'll provide an update to our full year 2023 guidance.

We are increasing our revenue guidance for the insurance line of business can between 1.2 billion at $1.23 billion.

We are also improving insurance MCR guidance to arrange of 83% to 85%.

We are maintaining our previous noninsurance revenue guidance at a range of $750 million to $800 million and M. C. R. A 98% to 100 per cent.

We are maintaining our previously issued guidance for adjusted SG&A of between $315 million and $325 million.

These changes will result in an improved adjusted EBITDA guidance of between negative $70 billion in negative $120 million.

Our continued focus this year on improving M C R and generating gross profit for both business segments, along with initiatives to reduce SG&A and achieve operational efficiencies should create even more momentum for us heading into 2024.

Given our strong performance in the first half of 2023 and are updated expectation for the full year. We now have an even better line of sight to achieving profitability on and adjusted EBITDA basis for full year 2024.

Our aim is to build on our momentum in order to begin accelerating growth once on the other side of profitability.

We look forward to sharing more updates on our efforts that'd be are progressive.

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

Thanks Scott.

The connective tissue that ties to get our Medicare <unk> and homecare offerings is our kluber assistant platform.

We believe we have now shown that there's a compelling physician need for our technology and then it delivers a differentiated the ability to change the timeline of care by helping physicians with the early identification and management of chronic diseases.

We also want to reemphasize that we consider our platform highly differentiated it's level of adoption for software in health care certainly for clinical software bills by an insurer.

Our technology is being used by thousands of physicians across R. M. A plan network across our ACO in our home care practice.

The World we live in today is constantly evolving under the umbrella of technology at AI advancement and that's exactly what makes kluver, a fundamentally different health care company.

Not as care organizations bear the responsibility of both deep access to remember health data as well as accountability for health outcomes.

Kluver through Kluver assistance, we are constantly developing new ways to use that data to improve those outcomes.

We've recently rolled out a new medication adherence feature but I think it's a great example of this by linking together part D. M. P. B M data Kluber assistance is able to flag to physicians when their patients are not picking up their medications for specific chronic conditions, resulting in a subsequent increase in medications spills.

Highlights how physicians don't necessarily have the data they need readily at hand, even with their ehr's and how clueless just that can help them quickly improve care by sharing those data insights into an actionable way.

We've also recently shed a researched white paper, highlighting our work with chronic kidney disease.

According to a CMS report less than half of <unk> with a lab results, indicating C. T D stage, three actually have a clinical diagnosis.

Research also shows that earlier diagnosis and treatment of see Katie lowers the risk of negative health outcomes like kidney failure heart attacks and stroke.

In our paper, we outline that doctors use of kluber assistant is correlated with C. K D be diagnosed earlier in this progression and a reduction in the rate of kidney function decline after diagnosis.

We believe this paper demonstrates that doctors use include were assistance identify chronic kidney disease earlier, which that empowers dispositions to begin associated disease management earlier.

At its core Kluver assistant as a cloud based AI platform that aggregates synthesizers abnormalize as disparate data streams to generate actionable clinical insights we have peace taken Lee constructed a corpus of millions of clinical documents for well over 100 different types of sources, including directly each our connection's hopefully for.

Nation exchanges laboratory radiology providers hospitals pharmacy benefit managers regional registries and others that serve as the underpinning all all proprietary AI and machine learning algorithms.

Since Kluver assistance inception, thousands of real will providers have engaged with millions of these AI powered diagnoses and treatment recommendations.

I've always said that we are focused on building net new intellectual property, yeah, Kluver and to that end. We are proud to also have dozens of <unk> registered or pending for our unique internally built a platform.

We plan to share more of this and it's something that I'm very much looking forward to later this year is our kluver assistant showcase event, which will gratis, even more time outside of in earnings context to diabetes into our technology platform with you all <unk>.

Will provide the details on the event at a later date.

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

We will be taking questions from our <unk> research analysts at this time, if you wish to ask a question. Please press star one on your telephone keypad.

May remove yourself from the queue by pressing star too in the interest of time, we ask that you. Please limit yourself to one question and one follow up.

Our first question comes from Jason cause stolen city.

Citigroup.

Hi, everyone. Thanks for taking my question you have been Rossi on for Jason.

So I was thinking about you guys when you're twenty-three EBITDA guidance changes.

I'm thinking about some of the moving pieces of this year and your updated adjusted EBITDA guidance with negative 95 million at the midpoint.

Current year to date EBIT negative.

17 million I would suggest the back half of that negative 80 million towards at noon, bitcoin, which would suggest an imap about a $55 million give it a swing during the quarter I think I mentioned some of the accident prior period reserved development, but could you just kind of walk me through how that aided this to to figure and then could you help me bridge to the back half of the year that still assumes.

$80 million give it a <unk>. Thanks.

Sure. This is Scott. Thanks for the question. So you know I I think it's helpful in terms of.

Packing that just to to focus on the the year to date performance as your reference point and as we mentioned in our earlier comments are you here today M. A M. C. R V. 1.9% really is the the outstanding driver of outperformance in the first half of the of the year as we have said for a number of quarters going back.

<unk> in the last year in terms of any any guidance for any forward looking period, we we do like to be appropriately conservative and obviously are back after the year guidance for 2023 is gonna is gonna follow that model. So when you look at the year to date EBITDA performance, which again is being driven significantly by that M. A MCR.

Four months, there's just that same level of of appropriate conservatism that we've mentioned in the past.

And that in terms of changes to our guidance from the previously issued guidance.

We have not changed guidance for adjusted SG&A, nor have we changed the guidance for the Noninsurance line of business. So it. It really is the change in revenue in MCR performance for the non insurance I mean for the insurance line, where I am a business resides that's driving the front half outperformance and then the second half performance.

And you mentioned.

Got it okay and is that as a quick follow up on your M. A beds for looking ahead to 2025.

How would you describe your approach to benefit design in light of the latest reading now Smith for next year and some of the risk model changes through red meat.

Any thoughts on maybe some changes to your geographic footprint or maybe how you're incorporating some of your peripheral offering such as clever assistant with healthy rewards home health and some of the home.

Home health offerings in your ear go forward bidding strategy.

Thanks.

Yeah sure. So this is Andrew so more to come certainly in the future as we describe our offerings and we're excited to talk about that a little later in the year as we get closer to a P. At a high level. We did speak in our remarks that we intend to focus on our core geographies and so that means that we are not expanding as much. This.

Yes, we have historically asked me continue to follow through this strategy, starting last year, where we optimize within an hour core markets. We did also remind that mark core markets are driving a lot of that improvement that Scott mentioned, just now we think that there is additional progress can be made there. So you know having a great C. A coverage in those markets.

I'm, having a really strong remember you know desire for our products and our wide network P. P. O in those markets are going to continue to be our main strategy. We have seen popularity of things like our live healthy Ah rewards, we've mentioned that in the past whereby.

Those particular areas, where we reward members for healthy behaviors and in particular for getting clever system powered care is a virtuous cycle, where members can get rewarded for healthy behaviors and we get them dose data powered visits as well. So we continue to be excited by that going forward Lastly, I will remark that we do.

Really do think that our core advantage at <unk> is that we are built on this very popular P. P. O wide network harnessed, if the product we truly believe that people want out there I'll be continue to offer it and we think we were wanted the meters and offering that product and having the advantage of kluver assistant which lets us manage.

Care on that wide network is a fundamental moat for our model, it's something that other P. P. O is really don't have and it's why we feed with our a P. P O year after year.

Our next question comes from Kevin Fischbeck Bank of America.

Hey, How's it going this is Adam ran on for Kevin.

Just going back to the.

Utilization commentary this here I'm just curious.

You may have some comments about like the macro headwinds when you said I think that medical cost trends Pam Pam was only up single digits, but that's.

Pretty different from how some of your peers are talking about it. So just curious if you could elaborate more on that and what your visibility into claims. It's the first half and if you're saying anything you know post Q too that's potentially incorporate into the backup MLR ramp would be very helpful.

Sure. So I think what we mentioned during the previous comments is it on M. P. M. P. M basis, our year to date performance shows an increase of about three per cent <unk> P. M. P M and so I I think your observation. It is corrected that seems to be a better performance relative to what we've seen in some of the headlines and and I think I meant.

And my comments a minute ago that we believe that a lot of these internal initiatives, including some of the favorable impact from operational enhancements and the impact of C. A and so on are helping to insulate us from some of those macro oriented headwinds and so so I'm not saying that the three per cent were experiencing it.

Is consistent with the broader market I think that there's a good possibility is that better than the broader market, but we're off setting up with some of our organic initiatives.

And when you put together the bids for 2024.

Was this better performance contemplate isn't so in other words should.

You know, you're you're saying if you don't want to accelerate growth until the other side of profitability and so it sounds like you're not planning on growing much next year.

But it should we expect similar MLR performance give ya if you you know.

Notice the performance here today from similar benefit designs.

Yep. So we continue to be focused as you just said <unk>, making sure. We get you sustained profitability. So we are excited to return to growth definitely we do have these advantages of slack clover assistant like clothes or home care that Scott alluding to to help us manage <unk>. We are we are very familiar with our <unk>.

Core markets. So ask me focus on those when we bring all of that together, we are able to we believe I put forward a exciting bid product at the same time maintain our focus on M. O M. C are management as we have always indicated that we will continue to do and then add that all of these initiatives land.

Within an hour M C ours, I think you'll see a start to return to growth and certainly be able to return to some of those economics as well back to members as weird as we're excited to do to strengthen our plan product strengthened that wide area a P. P O and returned back to growth.

Just a reminder, if you would like to ask a question. Please press star one.

Our next question comes from Richard close Canaccord you needed.

Yes. Thanks for the questions. Congratulations I was wondering if you can just talk a little bit more about Clover assistant you know maybe the penetration within M a and.

You know just start there it seems like your hit an inflection point to some degree.

Then I have a follow up.

Yeah, absolutely. So we're always working on club or assistant getting spoke to see Ah Ah Ah Ah Ah Doctor or physician, who is using clover assist them in getting Clover assistant powered care Uhm as you say uhm simultaneously, we have constantly be releasing new features new capabilities unlocking your data sources into clue for assistance.

So the advocacy all clever assistant we believe it actually you know constantly improving as well because that's one of the effects of continuous software development on the actual product. So we've unlocked you ways for our members to be rewarded for getting <unk> system powered care like you mentioned the live healthy you Ah reward a part of that is accurate.

<unk> to get data driven enhanced primary care via Clover assistant and that's something which has been popular in which we look to continue so uhm. We are happy with the direction that headed we were happy with the direction to product is headed as well and I think that you'll see here and you can see in our results that it's landing within the economics.

But are you able to like.

You know convey any penetration rates like maybe in core markets, where you know it's over 50 per cent now with members or anything like that.

Yeah, but not sharing that information right now on a quarterly basis Uhm. It's nothing will consider doing however, I will say that you know we have always we used to share that number and I will say that we that you can use that as the older baseline to work out where cough and I would also say that we constantly are focused on moving that number upwards into the right.

Okay and my follow a question is is on home care is that in all the core markets now and is there some sort of you know.

Like percentage of the member base that that is applicable to just any thoughts on that.

Yeah. So basically the majority of the care is in our core markets right now for home care, but we are actively looking to expand that footprints into our other markets as well home care is a critical part all closing that last mile All care, where we can identify the core needs of our neediest population.

<unk>, the most vulnerable and were able to identify their unmet needs and then like I said close that last gap that last mile and really reduce things like inpatient admissions as I mentioned during the the earlier remarks. So we're very excited by its capabilities and we are looking to bring it to as many markets.

As possible.

Again, Please press star one if you would like to ask a question.

And that is star one.

Alright <unk>.

Sorry give me one more question.

Yes, we did have a another question from Kevin Fish Bank Bank of America.

Yeah, Hey, I just jump back in the queue.

So on the a C. A reached up I think glass quarter. You mentioned you had more than he would have more to share. This quarter on the 2022 is like direct contracting final of benchmarks I'm. So curious if you've heard anything there and then I have a few more questions on <unk>.

Yeah. So.

In terms of the 2022 performance at this point, we do have more reference points relating to 2022, and so we hadn't received any updates in relation to benchmark that really significantly change our view of 2022 performance. Just you know small amounts, but nothing significant so but <unk>.

There is still some risk as we approached final settlement is that an update may come there, but we think that the variability is significantly do risk.

Alright, and then one of your competitors sounded much more bullish on their performance here today in terms of how they're doing on a few reach in 2023.

And they were pointing to some.

Better I guess it depends what they were occurring for a bit better.

Trend adjustments coming out from CMS.

And they they gave their view on how they're performing versus the national benchmarks. So curious you know how how the data from CMS is comparing versus expectations and if you could share how ya doing the best that benchmark.

Yeah, we have to say, we believe that all participants are getting the same amount of data from CMS at the same time Uhm, what probably is Barry is about these the amount of conservatism being shared in terms of expressing that into our model than we are fairly conservative in doing that so we believe we all have the same data we might just be different not modeling it <unk>.

[noise] differently internally. So we feel good about the way you were doing that <unk> that things develop I would I would also note that I think for our particular area that we definitely see at Scott says that our insurance segment is leading the charge instead of driving our pathway to profitability here, but we are excited as I said in my <unk>.

<unk> about the more broad capability that we have from our Noninsurance segment, and you'll see us talk more about this in the future, but not insurance really means just that is our ability to bring kluver assistant power care to physicians in a way, where we might not be the insurance company, but we certainly can help them move towards.

Risk bearing relationship and we can provide clover assessed that AD fee for service that easier, which was just the first place. If you started with that and we have many more ideas to come in that area as well.

Just a reminder to ask a question. Please press star one.

Alright, I think we're clear on questions. So thank you for all your questions.

I really feel that this second quarter seconds strong quarter of resolve highlights our capabilities and transformative vision here at Clover, we continually shown the strength of the <unk> model. This year reporting off first profitable quarter as a public company on and adjusted EBITDA basis, driven by significantly improved M. C R as well as consistent insurance revenue.

Gross.

Our continued pushed towards sustained profitability coupled with the great differentiation discussed today is something I'm personally very excited about I.

I hope that you take away from this call our confidence in our ability to continue to provide even more proof points in the second half of this year and continue our momentum into 2024.

I also look forward to diving deeper into clearer assistant with you later this year at our clever assistant showcase event.

Thank you all again for being part of this exciting journey with us.

This concludes today's Cobra health, a second quarter of 2023 earnings call and webcast. You may disconnect. Your line at this time and have a wonderful day.

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