Clover Health Investments Corp
NASDAQ:CLOV

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Clover Health Investments Corp
NASDAQ:CLOV
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Price: 3.0969 USD -2% Market Closed
Market Cap: 1.5B USD
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Earnings Call Analysis

Summary
Q3-2023

Clover Health Q3 Strong, Nearing Profitability

Clover Health reported continued progress toward sustained profitability with another strong quarter, reflecting a strategic shift towards this goal and improved revenue guidance. Third-quarter insurance revenue climbed to $301 million, up 12% year-over-year, with a Medical Cost Ratio (MCR) at 78.5%, markedly better than Q3 of 2022. Adjusted EBITDA also showed significant improvement, posting a loss of only $5 million compared to a $56 million loss in the same quarter last year. The company is eyeing profitability next year on an adjusted EBITDA basis, without additional capital raising. Despite facing a disappointing 3-star Medicare rating for 2022, the firm is optimistic about regaining their 3.5-star rating soon and targeting high single to low double-digit growth for insurance segment revenue in 2024. The noninsurance segment struggled, with revenue down to $176 million and a Q3 MCR of 104.1%, but plans are in place to enhance performance and focus more on the Medicare Advantage.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

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Operator

Ladies and gentlemen, good afternoon, and welcome to the Clover Health Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. .

I would now like to turn the call over to Ryan Schmidt, Investor Relations for Clover Health. Please go ahead, sir.

R
Ryan Schmidt
executive

Good afternoon, everyone. Joining me on our call today to discuss the company's third quarter results are Andrew Toy, Clover Health's Chief Executive Officer; and Scott Leffler, 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 investors.cloverhealth.com. This webcast is being recorded, and a replay will be available in the Investor Relations section of the Clover Health website.

I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties, including expectations about future performance. Factors 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 other SEC filings. Information about non-GAAP financial measures in fans, including a reconciliation of those measures to GAAP measures can be found in the earnings materials available on our website.

With that, I'll now turn the call over to Andrew.

A
Andrew Toy
executive

Thank you, Ryan, and thanks, everyone, for joining us. Our results that we've reported today continue to highlight our progress towards sustained profitability and the great value derived from Clover Assistant. We've built upon our impressive first half of the year with our insurance segment once again delivering excellent results, driving strong overall company performance during the third quarter. Our results represent another proof point in our strategic shift to prioritize profitability this year, which in turn, has led us to once again improve upon our full year 2023 guidance ranges. .

We believe that our Q3 results, coupled with our first half momentum, further show our potential to achieve profitability next year on an adjusted EBITDA basis and without needing to raise additional capital. Before I dive more into our Q3 results, I hope that everyone was able to tune into our Clover Assistant showcase last month, where we highlighted our cloud-based AI-powered platform and gave real-world examples of the impact we've seen through the use of Clover Assistant. I'll touch more on this later in the call, but I encourage everyone to check out the replay of our event on our Investor Relations website if they haven't done so already.

Beginning first with our insurance results. We reported segment revenue of $301 million during the third quarter, representing an increase of 12% year-over-year. This segment continued its strong margin trajectory delivering an MCR of 78.5%, a great improvement as compared to Q3 of 2022. I'm proud that our efforts this year to optimize our MA plan operations grow revenue and blunt MedEx growth continue to shine through in our results. We're constantly looking to optimize our capabilities and aspect our MA plan improvements to only accelerate into next year.

We believe the performance of our Insurance segment further highlights how our technology and increasingly mature operations can truly support better care management within any MA population. As compared to other similar MA plans, our membership is more ethnically diverse and has a much higher percentage of members considered low income. Studies have shown that both low income and more diverse populations generally have a higher disease burden and also have difficulty accessing needed care. We believe that our ability to comprehensively support this population while delivering strong, sustainable economics demonstrates the power of our technology-centric model.

Now let's move on to the recent publication of STAR's performance for the measurement year 2022 cycle. While we receive stronger scores in many areas on our star rating, we received an overall 3-star rating for measurement year 2022, which dictates reimbursement for payment year 2025. This result is obviously disappointing to us, but we do see this cycle as an outlier. We came very close to 3.5 stars for measurement year 2022, even with the significant increase in cut points. And the significant number of stars improvement efforts we deploy for measurement in year 2023, plus the increased predictability given to us through the new CMS Stars guardrails gives us optimism about our ability to regain our 3.5 star rating in the near future. As an overall summary on Stars, we are disappointed in the 3-star rating but see it as likely a 1-year event for 2025. For that year, we're committed to having strong financial momentum to mitigate its effects, and we do not see it as a barrier to long-term sustained profitability, and we anticipate our star performance improving in future measurement years. Shifting over to growth. Similar to 2023, we intend to measure ourselves in terms of increasing top line insurance revenue, and we are targeting high single to low double-digit insurance segment revenue growth in 2024. Expect us to continue to index on profitable growth through a combination of new member lives, churn reduction and per member revenue initiatives. As our business continues to mature, we believe that this balanced approach is the right 1 to help us achieve our broader goal of reaching sustained profitability on an adjusted EBITDA basis next year. We'll obviously have more to talk about regarding our annual enrollment performance at our next earnings.

For our noninsurance segment, we reported a third quarter MCR of 104.1% on revenue of $176 million, bringing the year-to-date performance to an MCR of 99.7%. Even though we are continuing to target a noninsurance NCR below 100% for 2023, we continue to see challenges in the design of the program. and therefore, are committed to rightsizing our exposure to value-based original Medicare. Consistent with that approach, we again expect a reduction in the number of participating physicians next year as we continue to evaluate this segment's performance.

For the future of this segment, we very much believe in our ability to use Clover Assistant to help physicians go to value-based care for non-Clover MA plan patients with Medicare. We started this with ACO reach and original Medicare. But in the last couple of years, we have seen clear evidence that we have great strength in Medicare Advantage total risk management. As such, while we will likely continue to closely manage our exposure to original Medicare, you will see us increase investment in Medicare Advantage within our noninsurance segment. That is, we will look to enable physicians to use Clover Assistant across their entire MA panel for all MA plans and to be able to go to a value-based risk on those lives. We're incredibly excited by this adjustment to the noninsurance strategy, and we look forward to talking about it more.

With that, I'll now hand it to Scott for a more detailed financial update.

S
Scott Leffler
executive

Thanks, Andrew. I'll first cover the third quarter financial highlights and then review our improved outlook for full year 2023. Adjusted EBITDA significantly improved from a loss of $56 million in Q3 of last year, to an adjusted EBITDA loss of $5 million in Q3 of this year, driven by strong insurance performance and a continued reduction in adjusted SG&A relative to the prior year period. For our Insurance segment, MTR improved to 78.5% in Q3 from 86.3% in Q3 of last year, building on the strong momentum we delivered in the first half of this year. .

Our strong MCR performance was driven by revenue growth of 12% in Q3 to $301 million and 15% growth year-to-date to $933 million. As we have mentioned in the past, we have continued to see favorable impacts from various operating initiatives all year, and these initiatives resulted in modest amounts of TPD from earlier in 2023 impacting Q3. I -- our year-to-date MCR of 80.8% contains only minimal PPD and is a good representation of our underlying performance. During Q3, we experienced a similar medical cost trend to last quarter with PMPM Met down 1% sequentially versus Q2, showing now our general medical expense trend is holding steady. We're always focused on initiatives to manage MedEx through increasing impacts from Clover Assistant improvements to M&A plan operations, including optimization and planned product design, network, payment integrity capabilities and expansion of our clinical initiatives. More specifically, our Home Care program continues to be a key lever contributing to the performance of the MA plan, where we're focused on delivering in-home primary care powered by CA to our highest need numbers to reduce costly hospitalization and post-acute care utilization. We are increasingly enrolling higher risk new members into this program and are seeing lower inpatient admissions for participating members.

We also benefited from being paid on 3.5 stars this year for our PPO plan similar to earlier quarters this year. Our noninsurance segment revenue declined 70% versus the prior year period to $176 million primarily driven by the smaller group of participant providers at the start of this year. Our noninsurance MCR in the third quarter was 104.1% with a year-to-date MCR of 99.7%. This performance was relatively flat versus 104.2% for the third quarter of 2022. The deterioration from performance earlier in 2023 was largely driven by more conservative assumptions relating to benchmark used in determining performance under the program. To reiterate Andrew's earlier comments, we intend to improve the segment's performance with further reductions in our ACO reach participation in 2024. We believe this should reduce total participating positions by approximately 40% beginning in 2024.

I also wanted to provide an update regarding settlement on our 2022 performance in the noninsurance segment. As a reminder, there is a significant lag between the time we book profits or losses under the program versus when that performance is settled in cash with CMS. We've received the final settlement report from CMS for the 2022 performance year and expect to settle it during Q4. We currently estimate the total settlement amount owed to CMS as being approximately $147 million, $52 million of which accounts for our share loss. The remainder of the settlement relates to repayment of working capital obligations. Third quarter adjusted SG&A improved to $68 million, a 6% reduction year-over-year from $73 million in Q3 of 2022.

We continue to see a favorable impact this quarter from some of the cost savings initiatives we reported earlier this year. The UST Health Proof transition is actively underway for many of our MA plan operations with most of the benefits still yet to be realized starting in 2024. That said, many of the mission-critical work streams are already configured into the UST ecosystem. This includes operations related to claims, member enrollment, welcome kits, call center and administrative functions to name a few. We believe this sets us up for a successful changeover in 2024. We remain excited to take advantage of the economies of scale and operational efficiencies that we expect our partnership with USD Health Proof will capture and still expect to realize the full savings originally contemplated from the initiatives. Turning to the balance sheet.

We finished the third quarter with restricted and unrestricted cash, cash equivalents and investments totaling $672 million on a consolidated basis with $308 million at the parent entity and unregulated subsidiary level. Our strong Q3 performance is another important step in the right direction to achieve sustainable profitability. I'm proud of the continued step change improvement in our Assurance business this quarter, driving favorable adjusted EBITDA performance and giving us confidence that our results this year are sustainable. We believe that this positions us well to achieve profitability in 2024 for the full year on an adjusted EBITDA basis. I believe that we're progressing well on our mission to improve our financial performance so that we do not need any additional capital.

Finally, I'll provide an update to our full year 2023 guidance. This guidance is reflective of a certain amount of conservatism in Q4 in consideration of difficult seasonality risk in Q4. We -- we are narrowing our revenue guidance for the insurance line of business to between $1.21 billion and $1.23 billion. We are improving insurance MCR guidance to a range of 81% to 82%. We are maintaining our previous noninsurance revenue guidance at a range of $750 million to $800 million and MCR of 98% to 100%. We are also improving our adjusted SG&A to between $310 million and $315 million. These changes resulted in an improved adjusted EBITDA guidance of between negative $55 million and negative $80 million.

In conclusion, we delivered another durable proof point this quarter on our path to profitability with significantly improved adjusted EBITDA, continued momentum in our insurance results with strong insurance segment MCR and a further reduction in adjusted SG&A from our previous initiatives. I believe that our great execution this year, coupled with our updated expectations for the full year should set us up well to achieve profitability goals in 2024. Our aim is to continue this momentum and accelerate growth for our business on the other side of sustained profitability.

Now let me turn the call back to Andrew for some closing comments.

A
Andrew Toy
executive

Thanks, Scott. As always, I'll close with some commentary on Clover Assistant. From our own MA plan to the future of the noninsurance segment, what gives us great confidence in our strategy is that Clover Assistant is continually demonstrating that arming physicians with the right data helps them make the right decisions. And when they do that, the patient gets better outcomes and Medicare Advantage plans get better medical economics. .

We continue to derive great value from our technology with over 1,000 basis points of MCR improvement for returning members whose PCPs used clip resistance as compared to those who do not. Last month, we published an in-depth analysis, further highlighting CA's clinical efficacy, showing how emissions using our technology are diagnosing and managing diabetes earlier, resulting in improved patient outcomes. Diabetes is a very common disease in the Medicare population that unfortunately can result in many severe complications. That's why diabetes care has been an important focus of Clover Assistant from its inception. And in our diabetes research paper, we outlined how the use of CA is associated with earlier diagnosis, earlier treatment, a reduction in hyperglycemia and hypoglycemia plus reduced treatment with insulin.

During our recent Clover assistance showcase, we put on display the incredible impact and efficacy we see from our platform. We demonstrated how we're leveraging new advancements in AI and machine learning so that clinicians have the information they need to better care for their patients and how we're increasing accessibility to the platform through deep EHR integration. Most importantly, we shared in-depth analysis of how Clover Assistant is associated with earlier identification and management of chronic conditions to illustrate how we're improving patient care coordination through timely clinical insights. Lastly, and what's even more exciting than our current results is the untapped potential of our platform going forward. We've shared in the past that we currently have over 100 machine learning models in active use alongside dozens of active or patent-pending technologies and algorithms. We're constantly launching and testing new features as Clubrsystems is always learning and always improving.

Our conviction in our technology is such that we have based our entire model upon it. and we believe we are the only managed care organization whose entire focus is on managing Medicare risk through AI-powered physician-focused software. We've made plenty of comments today, demonstrating the strength of the Clover model and our exciting progress on our push towards sustained profitability. I am proud of all we've been able to accomplish 3 quarters into the year, and while we have 1 more quarter to go, I applaud the entire Clover team for the great momentum we've generated so far this year.

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

Operator

[Operator Instructions]

Our first question comes from Jason Cassorla, Citi. .

J
Jason Cassorla
analyst

Great. Just a quick clarification on the CMS settlement. You said you have $157 million that's due in the fourth quarter. Just making sure I heard that right. And then it sounds like you noted you wouldn't need to raise additional capital, but just given the implied fourth quarter EBITDA losses within guidance to settlement dollars. Can you just maybe help us or help bridge your cash position over the next few quarters would be helpful.

S
Scott Leffler
executive

Yes. This is Scott. I'll take that question. So yes, you heard that right. The settlement that we're anticipating in Q4 was a total of $147 million, a little over $50 million of that relates to our share loss under the program -- and then the remainder is just related to the working capital dynamics into the program, where international desettlement you pay back a certain amount of working capital that was advancing the program. But in terms of a cash flow bridge, yes, I'll just kind of reiterate our expectation that we have no need for operating capital. certainly at least for 2023. And as I think we indicated, our objective is to reach profitability and cash flow positivity without needing any incremental capital in 2024 in future years. As far as cash flow bridge, I mentioned we do -- we finished the quarter with $308 million of cash and cash equivalents and investments as we parent entity and unregulated sub level. And so that settlement amount is due to CMS would come out from that -- and then to the extent that we do continue to deliver an EBITDA in Q4 going forward, it would come out of that amount as well. Although, obviously, we continue to look for opportunities to leverage the capital that we have remaining at the regulated entity level, and that's kind of an organic flow that occurs over time. But in general, we are comfortable with our capital position now and again, look to a strong 2024 to inflate ourselves from requiring any forte capital. .

J
Jason Cassorla
analyst

Okay. Got it. Helpful. And maybe just a follow-up. I wanted to ask about utilization trends in the quarter. Obviously, a strong result with the 78.5% MLR. But it looks like medical cost per member per month grew about 11% year-over-year. I know you're more than covering that with a 22% revenue PMPM. But just curious on what you saw on the utilization front, if there's any caveats that are driving that year-over-year medical cost per member per month trend versus kind of the 2% to 3% you were doing in the first and second quarter would be helpful. .

S
Scott Leffler
executive

Yes. So I'll comment on that. First, at a high level, it tells you from a utilization standpoint, -- we're not seeing anything very different from what we've seen earlier in the year. And as a reminder, when we reported Q1 and Q2, we indicated that we were seeing fairly benign trends from a utilization standpoint. On the year-over-year increase in PMC and Medix that you're referencing is distorted a little bit by something that happened last year where we had some favorable PPV effects in our medic in Q3 of last year. which distorts the top a little bit. I think what's more representative, and we tried to anchor people last quarter and this quarter now, instead of to any 1 quarter, looking at our year-to-date performance as being more representative of the overall performance this year, especially compared to last year. And so as we've said in our prepared comments, we're running at about an 81% MCR on a year-to-date basis. And when you look at the year-to-date PMPM, Smadex is only up about 5%, which is more representative of the benign utilization trend that I referenced. .

Operator

Our next question comes from John Penny, Canaccord Genuity.

U
Unknown Analyst

John Penny on for Richard Close. Just want to talk about the applied adjusted EBITDA ramp in fourth quarter. Can you just possibly flesh that out? And what exactly you're expecting? I see some increased utilization, but any additional color would be great.

S
Scott Leffler
executive

Yes. So earlier this year, when we made updates to our guidance, we got similar questions around what was implied about the second half of the year. And the way we've been answering all year is that we continue to model our guidance with what we think is appropriate in services in the remaining part of the year. Q4, in particular, just due to seasonality risk, off in Q4 is 1 where you see elevated utilization level historically due to fleet season or more recently, of course, due to the risk Cod any kind of increased COVID-related utilization. And so the conservatism in that number is really driven by that exposure, but there's nothing specific that we're pointing to.

U
Unknown Analyst

Okay. Great. And then 1 follow-up. I guess we're pretty early in the annual enrollment period, but is there any commentary you can give on how that's proceeding or perhaps like what retention is looking like? Or any color you can give would be great there.

A
Andrew Toy
executive

Yes. This is Andrew. So we're not giving any guidance right now on the AEP. What we'll do is we'll obviously discuss it in a more fulsome way at the next earnings. But what I will do is reiterate that just like this year, we are looking to maintain growth in our insurance revenue. We discussed that during the remarks and that will come from a combination of membership growth through in AP, growth during the year of membership reduction in churn and per member revenue initiatives. So we are very focused on growing that insurance revenue in that single digit to low double-digit range as well as maintaining highly profitable growth, and that's where our attention is focused. .

Operator

[Operator Instructions] Our next question comes from Jason Cassorla, Citi.

J
Jason Cassorla
analyst

I just wanted to go indirect to your commentary around reducing exposure in the noninsurance business. Maybe can you just give us more color on the decision to reduce for the second time in 2 years. I think last year, you shifted towards working with higher-performing physicians to help offset on the profitability side, but it sounds like even in that context, you're still looking to get smaller there. I guess just any more color around that decision and then can you remind us that business has a relatively small SG&A loan, correct, as you think about reducing membership there? .

A
Andrew Toy
executive

Yes. So a couple of different points there. Thanks, Jason. Number one, I would just make sure that I'm -- we're clear in our remarks the noninsurance segment, which is where we do not play a role as an insurer, remains interesting to us. the remarks that we made earlier today are specifically to do with the original Medicare, the ACR reach component of the noninsurance business. And so what I discussed was the fact that the original Medicare area, we continue to reduce our exposure over there and to look to rightsize that business. while we are very excited about the possibility and our capability of increasing our exposure on the Medicare Advantage side, but also within the noninsurance segments. -- right? So that means we are not in assure, but we are helping providers manage Medicare Advantage risk. So I just want to make sure that I clarify that particular point. Your last question, yes, we said before that it's a relatively smaller part of our SG&A load, which makes sense because of the nature of that particular program.

And the last thing that I'll say there is that I think that what we're looking for in terms of partnerships and in terms of applying Clover Assistant is places where we can help providers move their entire book of Medicare risk at Medicare book towards risk, including MA, and that's part of our rightsizing of this program is introducing that MA side of the program versus looking at just original Medicare. So as we look at the future of the noninsurance segment, that's where you should expect us to go.

J
Jason Cassorla
analyst

Okay. Got it. Very helpful. And maybe just 1 last follow-up here. Just on that in terms of offering the non-transfer for the MA side of the Fed. Can you remind us, do you have any lives there now? Would that be kind of a new jump in at this point? I'm just trying to get a sense of where you're at there now. I would -- I thought that generally most of your membership in the noninsurance business is almost entirely or ACO reach, but just any color or clarity on where you're at there now.

A
Andrew Toy
executive

Yes, really fair question. So in terms of whether we have any of that right now, what we haven't actually shared the sizing of that particular program and the majority of it is in that original Medicare program, that's for sure. but we definitely see opportunities there. We've been approached. We've had discussions. And so while we haven't shared exactly where we are with that program, and we're sharing today that we're very excited about where we can go with that. we haven't actually given any of the numbers in terms of like how many lives we have there. .

Operator

[Operator Instructions] This concludes the Q&A portion of today's conference. I would now like to turn the call back over to Andrew Toy for any additional and closing remarks.

A
Andrew Toy
executive

Great. Thanks, everyone, for all of your questions. So I hope that our third quarter and year-to-date results really give everyone another durable proof point highlighting our ability to drive great results this year. And thank you all again for joining us on this exciting journey.

Operator

This concludes today's Clover Health Third Quarter 2020 Earnings Call and Webcast. You may disconnect your lines at this time. Have a wonderful day. .

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