Clover Health Investments Corp

NASDAQ:CLOV

Earnings Call Analysis

Clover Health's Strong Q3 Gains and Growth Outlook

Clover Health achieved significant progress in Q3 2024, reporting over $62 million in year-to-date adjusted EBITDA, improving its guidance for full-year profitability to between $55 million and $65 million. The company achieved a four-star rating for its flagship PPO, positioning it favorably against competitors facing declines. Insurance revenues increased by 7% year-over-year to $323 million, driven by effective cost management and member retention strategies. Clover plans to invest in growth initiatives for 2025, supported by cash flows of $130 million. The company maintains a strong balance sheet, with insurance benefits ratios significantly improved, reflecting solid operational performance in a competitive market.

Clover Health's Remarkable Third Quarter Performance

In the third quarter of 2024, Clover Health showcased impressive growth with insurance revenues reaching $323 million, a 7% increase from the previous year. Year-to-date, total revenues have hit $1.04 billion, marking a 9% growth, primarily fueled by their focus on member retention and lower total healthcare costs. This has translated into improved financial performance, with adjusted EBITDA soaring to $90 million for the quarter, a significant uptick from just $3 million in Q3 2023.

Cost Management and Profitability Enhancements

Clover has efficiently managed its costs, resulting in a remarkable improvement in their insurance benefits expense ratio (BER), which fell to 82.8%, down from 82.2% year-over-year. The medical care ratio (MCR) also showed signs of improvement, now at 78%, down from 78.5%. This success in cost control is attributed to Clover's innovative approach to managing total healthcare expenses through their technology-powered platform, Clover Assistance.

Strategic Focus on Growth Investments

Looking ahead, Clover Health is strategically reinvesting in its business. This includes an 11% decrease in selling, general, and administrative expenses (SG&A) year-over-year, alongside a plan to boost investments in membership growth and quality initiatives for 2025. They have raised their SG&A guidance for 2024 to between $290 million and $295 million, reflecting ambitions to drive growth and enhance member experiences.

Elevated Expectations for Future Performance

Clover is adjusting its full-year guidance for 2024, reaffirming expectations for insurance revenue between $1.275 billion and $1.350 billion. Though they anticipate tracking towards the lower end, they have raised their adjusted EBITDA forecast to between $55 million and $65 million. Furthermore, the improvements in BER and MCR highlight Clover's strong unit economics and potential for sustainable profitability.

Market Positioning with Star Ratings

Clover achieved a significant milestone by receiving a four-star rating for its flagship PPO plans, impacting payment year 2026. This rating positions Clover competitively within the Medicare Advantage market, especially as other plans experience declines. With 95% of its members enrolled in this four-star plan, Clover is poised to leverage this advantage to enhance member benefits and attract new members during the increasingly competitive annual enrollment period.

Expanding Opportunities through Technology Partnerships

Beyond its core operations, Clover is exploring new avenues for growth through its 'counterpart health' initiatives. This venture targets partnerships with third-party payers and risk-bearing providers, with the aim of further integrating Clover's technology into broader healthcare applications. A recent five-year partnership with the Iowa Clinic underscores this strategy, although the revenue impact is still developing.

Strong Financial Health and Operational Strength

As of the end of Q3 2024, Clover's balance sheet remains robust, with consolidated cash and equivalents totaling $531 million. The third quarter alone generated operating cash flow of $50 million, bringing the year-to-date total to $130 million. This financial strength not only supports ongoing operational needs but also provides a stable foundation for growth initiatives.

Conclusion: Positioned for Future Success

Clover Health is crafting a compelling narrative as it positions itself for sustainable growth amidst a dynamic market landscape. By focusing on profitability, managing costs, enhancing service offerings through technology, and improving star ratings, Clover is well-equipped to expand its market share and provide high-quality services to its members in the upcoming enrollment period and beyond.

Earnings Call Transcript 2024-Q3

[Operator]

Please stand by, your program is about to begin. If you need assistance on today's conference, please press star zero. Ladies and gentlemen, good afternoon and welcome to the Clover Health Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow with 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 would now like to turn the call over to Ryan Schmidt, Investor Relations for Clover Health. Please go ahead.

[Ryan Schmidt, executive]

Good afternoon, everyone. Joining me on our call today to discuss the company's Third Quarter 2024 results are Andrew Toy, Clover Health's Chief Executive Officer, and Peter Kuipers, the company's Chief Financial Officer. You can find today's press release in the accompanying supplemental slides, as well as the company's most recent investor deck 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 referenced, 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.

[Andrew Toy, executive]

Thanks, Ryan, and thank you, everyone, for joining us today. We have had a tremendous amount of progress at Clover that we're excited to talk through. Firstly, we delivered another quarter of meaningful, adjusted EBITDA profitability and positive operating cash flow.



As such, we are improving our full-year adjusted EBITDA guidance. We have always emphasized our focus on delivering a profitable Clover, and I feel that we have executed very well here. Secondly, we achieved another quarter of industry-leading loss ratios, driven by continued strong performance on both PMPM revenue as well as medical expense management.



We're particularly proud of this because we see this value being driven largely by the technology-powered performance of the independent fee-for-service position in our wide network. This is the part of the network where a lot of other Medicare Advantage plans are struggling to manage total cost of care. Thirdly, we are proud to have received upgraded star ratings for our plans, most notably a four-star rating for our flagship PPO for plan year 2025, impacting payment year 2026.



In fact, for plans with over 2,000 members, our PPO received the highest score in the entire country on core HEDIS measures with a score of 4.94, even edging out high-performing HMOs. Over 95% of our members are in this four-star plan. The key differentiator with Clover is that these results are driven by physicians using our technology, Clover Assistance.



Unlike almost every other high-performing MA plan, Clover's plans have almost no traditional value-based contracts or delegated risk. We do not pay traditional quality incentives around gap closure. Instead, what we focus on is having physicians use Clover Assistance, which acts as a GPS for physicians to better manage Medicare Advantage total cost of care and quality.



Between our network physicians and our internal Clover home care practice, which focuses on managing our most vulnerable members, we've historically delivered Clover Assistance-powered care to over two-thirds of our membership. We've demonstrated that our technology-first model of care, while unconventional, generates differentiated value. We've driven strong clinical and financial performance in our insurance business, highlighted by meaningful adjusted EBITDA profitability and strong insurance loss ratios.



I'm very proud that we've significantly increased our adjusted EBITDA profitability to over $62 million year-to-date on a membership base of 81,000 lives. These strong financial results position us well to invest in membership growth going into 2025. This AEP, we believe we are offering a highly appealing and competitive product for Medicare eligibles, and we are prioritizing both acquiring new members and maintaining strong retention rates.



With this strategy, we believe there is ample opportunity to expand our market share throughout 2025 in our core markets. We're particularly excited about the timing of our growth opportunity. Other plans have struggled to maintain star ratings and managed cost of care and are effectively being forced to make strategic retreats by making plan closures, dropping providers from their networks, and pulling back on benefits.



By maintaining our own benefit and network strength and leveraging our improved star ratings, we are set up to be in a very good position. While it's too early to discuss our 2025 posture in detail, our intent is to take advantage of the opportunity in front of us by focusing on growth while maintaining consolidated profitability by a strong management of our returning member cohorts. We're demonstrating a clear ability to grow into the strength of our model with our profitable existing member cohorts fueling growth and having a clear focus on bringing new members onto our care platform.



We'll obviously have more to talk about regarding our annual enrollment period performance in the future, but overall, we feel very good about how we positioned our business for growth in 2025 on the back of our strong performance in 2024. To be clear, though, we believe this growth opportunity will not be a one-year window. As I mentioned, we are very proud to have recently received a four-star rating for our flagship PPO plans.



By achieving this rating, we'll have tailwinds going into payment year 2026 that will allow us to continue to invest in our flywheel as we expand profitability while continuing to accelerate growth. And again, our star's improvement came at the same time as the broader industry saw star rating degradation, setting us up to continue to differentiate our products for our members. In summary, I'm very proud of our team's accomplishments and progress during the quarter, where we again achieved meaningful adjusted EBITDA, improved our full year 2024 adjusted EBITDA profitability guidance, and have positioned the company well for growth amidst a dynamic market spectrum. I'll now hand it over to Peter for the financial update.

[Peter Kuipers, executive]

Thanks, Andrew. I'm continually impressed with our ability to execute, deliver upon our goals, and drive strong business performance and momentum during this year while managing the total cost of care. I will begin by covering the third quarter and yesterday's financial highlights, and then review our updated guidance for the full year 2024.



Those fundamentals are strong. Gap in that loss and continuing operations for the third quarter improved significantly by $25 million to a loss of $9 million as compared to the same quarter last year. Similarly, adjusted EBITDA meaningfully improved to a profit of $90 million this quarter compared to $3 million in the third quarter of 2023.



On a year-to-date basis, we have significantly improved our adjusted EBITDA profitability by $87 million as compared to the same year-to-date period for 2023, delivering $62 million of adjusted EBITDA so far this year, driven by continued, durable MA prime momentum and further SDMA optimization. We have continued to deliver industry-leading benefit ratios for insurance business driven by our ability to control total cost of care. During the third quarter of 2024, our insurance benefits expense ratio or BER improved to 82.8% compared to [82.2%] in the same period of 2023. Similarly, insurance MCR improved to 78% in the third quarter this year from 78.5% last year. Specifically, within our medical costs, inpatient supplemental benefits and Part D costs during the trade revenue as compared to last quarter and are generally in line with our expectations. Our strong market performance was accompanied by insurance revenues of $323 million, representing year-to-year growth of 7% in the third quarter.



On a year-to-date basis, revenue was $1.040 billion or 9% growth year-to-year. On a year-to-date basis, BER was 80.6% and MCR was 75.6%, both of which represent strong improvements of over 500 basis points year-over-year. The strong growth and market performance was driven by our focus on returning member retention, our ability to deliver earlier and better health outcomes at lower total cost of care, continued MA plan operational maturation, solid core economics, and our ability to manage total cost of care for continued intra-year membership growth.



Similar to last quarter, we have experienced positive criteria development of PPD during the third quarter. As a reminder, PPD occurs when real-world performance exceeds our modeling and it is built to claim for finalized. Given our continued MA outperformance coupled with the continued normalization of our IBNR to a more historical level, it is logical that we would have varying amounts of PPD.



While the underlying business momentum and medical cost management that I touched upon earlier is driving our strong market performance, sustainable development has effectively also lowered our year-to-date BER to lower levels. Now moving to SG&A. In the third quarter, total SG&A decreased 11% year-to-year and adjusted SG&A for the third quarter of $62 million came in 8% lower versus the comparable period.



On a year-to-date basis, total SG&A decreased 12% and adjusted SG&A of $209 million decreased 12% as compared to the same period in 2023. Both periods continue to see a favorable impact year-to-year from the cost-saving initiatives associated with our new operational ecosystem and our workforce rationalization announced last year, partially offset by increased inter-year investments as a result of our inter-year growth. We're pleased with our optimization of the SG&A framework and will continue to enhance operational efficiencies with a focus on member delight.



That said, given a strong profitability profile, we have decided to strategically devalue an area of opportunity to reinvest into our business. As Andrew mentioned earlier, we believe that we are strongly positioned to invest in our membership growth opportunity for 2025 and beyond as a result of the 2024 performance, improved star ratings, and our ability to outperform during a period of market volatility. For these reasons, we plan to make creative investments that positions well to increase long-term growth.



These investments include additional growth-focused spend to support the annual enrollment period, or AEP, as well as quality-focused spend focused on further improving outcomes for our members, including continued R&D to further enhance pro-assistive capabilities. We believe that now is the optimal time to do this in light of our strong performance. As such, you will notice that we have increased our full-year 2024 SG&A guidance.



Although it is very important to note that we're also increasing our total year 2024 EBITDA guidance to reflect our underlying business momentum. We continue to believe that any near-term assessments in the long-term of the trajectory of our business will prove to drive strong returns in the future. Turning to the balance sheet, we ended the third quarter of 2024 with restricted and unrestricted cash, cash equivalents, and assessments totaling $531 million on a consolidated basis to $306 million at the parent entity and unregulated subsidiary level.



In the fourth quarter, we anticipate unregulated liquidity levels to be impacted by the final payment of $39 million related to our 2023 ACO REACH participation. We also expect further normalization of our IBNR levels by the year end. Cash flow from operating activities for the third quarter was $50 million, bringing our year-to-date cash flow from operating activities to $130 million.



I am proud that our strong business momentum continues to further improve our already strong balance sheet and enables us to continue to operate in a position of strength and effective growth. Next, I will provide an update to our full year 2024 guidance in light of the continued strong business momentum and fundamentals. We are reaffirming our 2024 insurance revenue guidance of between $1.350 billion and $1.275 billion, reflecting continued strong year-to-year top-line growth.



That said, we are likely tracking towards the lower end of the range driven by intra-year shifts in our member mix. We continue to execute very well on unit economics, and as a result, we are improving our cost ratios as follows. We are improving our 2024 insurance BER guidance to be between 81% and 82%.



We are improving our 2024 insurance MCR guidance to be between 76% and 77%. We are raising our 2024 adjusted SG&A guidance to be between $290 million and $295 million, reflecting our anticipated investments to drive 2025 growth and quality initiatives. We are increasing our full-year 2024 adjusted EBITDA guidance to be between $55 million and $65 million.



In summary, we have exceeded our profitability goals with industry-leading benefit ratios and improved our already strong balance sheet and created the ability to execute on our growth opportunities. We have recently achieved a four-star rating during the most recent rating cycle. Sort of validating the strength of the differentiated model.



We look forward to receiving the 5% quality bonus to benchmark rates associated with this rating, starting for payment year 2026. That allows us the opportunity to further invest into our member benefits, quality initiatives, and growth. Beyond the business momentum in our own Medicare Advantage Insurance business, we have good momentum in a strong pipeline for counterpart health.



It provides a fast and second-in-service solution for third-party payers and risk-bearing providers. Demonstrating this during the third quarter, we announced another five year partnership with the Iowa Clinic to utilize counterpart assistance for MA and MSSP patients, marking our inaugural extension into the Midwest. While this is exciting, we're still in the early innings and expect counterpart revenue impact this year to be insufficient.



We look forward to sharing more detailed financial guidance and expectations in the future as we further develop and grow our counterpart fast and second-in-service offering. Now let me turn the call back to Andrew for closing comments.

[Andrew Toy, executive]

Thanks, Peter. I'm proud of the achievements the Clover team has delivered over the first three quarters of the year. First, we have been increasing our adjusted EBITDA profitability and demonstrating our ability to care for our membership cohorts profitability.



Second, we are delivering industry-leading loss ratios and Medicare Advantage performance on a wide network of providers, almost all of whom are still on fee-for-service arrangements. Third, we have achieved strong star rating performance on this same network, fueling our go-forward financial momentum and positioning us with a strong multi-year growth opportunity. All of this is enabled by our differentiated care platform and technology, Clover Assistant.



We continue to be very excited about the progress and long-term opportunity to bring our technology to other value-based providers and MA plans via our counterpart health, fast and tech-enabled services offering. As a reminder of our core strategy, we plan to grow our own MA plans significantly and profitably within our current markets, and we plan to also expand to new geographies. For markets where we don't have an MA plan, counterpart health allows us to bring in our model of Medicare Advantage managed care via partnerships with local providers and plans.



Since we launched the offering earlier this year, we have had significant interest in the platform, and this interest has accelerated since we announced our Stars results, particularly the fact that our PPO plan received the highest HEDIS score for core HEDIS measures for plans over 2,000 members. Not only do we offer strong performance, but what others find particularly compelling is that we specialize in improving the performance of wide network, fee-for-service, independent physicians. Most managed care entities have no real solution for this component of the care ecosystem, and so the fact that we are able to drive excellent results in this area gives us unparalleled product market fit.



While this is exciting, we're still in the early innings. We believe that demand for counterpart assistance will only increase as more and more industry players face the market pressures that many insurers and healthcare providers have signaled this year. As we engage with prospective partners, we do expect the larger health organizations to have longer sales cycles and the smaller groups to have shorter sales cycles.



That said, we're looking to onboard more partners in both 2025 and 2026 when the industry STARS headwinds will come to fruition. Stay tuned for more updates about counterpart, including us signing up additional partners in the future. Clover is truly at an exciting inflection point, making it a great time to be along for the ride. With that, let's go to questions.

[Operator]

We will now be taking questions from Clover's research analysts. [Operator Instructions]. Thank you. We'll take our first question from Jonathan Young of UBS.

[Jonathan Young, analyst]

It sounds like you're feeling pretty good about how AEP is shaping up for 2025. Just any color you could provide there on what you're seeing and what stands out and if the STARS rating improvement is helping you attract more members.

[Andrew Toy, executive]

Definitely in AEP, a couple of different things. As a reminder, our four-star rating does affect payment year 2026, but it does affect plan year 2025, so we are appearing as a four-star plan in the plan finder right now. What that means is because we have also maintained our general product richness between the two, four stars and the product richness, and some of our competitors are going down in STAR ratings, we are positioned very well in the overall comparison between our plans and everyone else due to the retreat of others. So we feel good about where we sit from a product richness perspective. We feel good about the relative STAR rating.



And I would even note that even before this AEP, we did have material growth lead up to AEP on an intra-year basis. So we're carrying some of that momentum through as well. So overall, excited to go back to growth, feel really good about how we manage our cohorts as well.

[Jonathan Young, analyst]

And then just in relation to the investments you're doing, I guess, in this fourth quarter here, can you talk about what those investments are and how much of it will be kind of one-time in nature versus permanent? And also, how much was the PPD benefit in the quarter?

[Peter Kuipers, executive]

It's Peter. So as far as the investments in the fourth quarter in SG&A, you should think about, you know, a big portion of that is go-to-market marketing. Given the fact that Andrew just discussed as well, we feel strong and we'll disclose more on how AEP is going later on. And then another good chunk of the increased investment is really quality, quality initiatives. I think in the prepared remarks, we also talked about the HEDIS clinical score, right? So we'll continue to invest and improve our platform. And as far as PPD, we don't disclose that on the call here the specifics of PPD, but it's a smaller impact than it was in prior quarters. And of course, we're normalizing also, as you know, IBNR over time, giving change, and then also our new ecosystem.

[Operator]

We'll take our next question from John French of Leerink Partners.

[John French, analyst]

I was wondering, if you could talk about how you were factoring in the IRA and its change on plan viability into your drug costs into your bids. Thanks.

[Andrew Toy, executive]

So basically the way we looked at this is that while we're not disclosing exactly the mechanics of the bid, we, like everyone else in the industry, had to react a little bit as that more of the IRA was being phased in, how much of the subsidy is coming in, the direct subsidy, how much it affects the amount of revenue that we're going to be getting versus the amount of benefit we provide. Overall, I think we feel pretty good about where we bid against that. We feel that it's probably going to be something we need to test going into next year versus actual claims experience.



But where it netted out, given the amount of variability, we think we should be in pretty good shape. What you'll also see is that in our actual plan products, we were able to maintain quite a bit of strength in our Part D offering, where we did see a bit of a retreat from those competitors in our markets. So we expect our Plan D offering to actually be quite favorable for the purposes of plan richness.

[Operator]

[Operator Instructions]. And it appears that we have no further questions at this time. I'd be happy to return the call to Mr. Toy for any concluding remarks.

[Andrew Toy, executive]

All right. Thanks, everyone. Thank you for joining us today. Thank you all for your questions. As I said earlier, I'm very proud of the team and of the results that we've had this quarter and year to date. I feel really good about the CARE platform and the results that we're generating on our cohorts.



I feel very much that our investments in quality, Star and performance is excellent. And now the phase in front of us is looking forward to the growth opportunity ahead of us that we've outlined today. So we look to maintain and continue our strength and our performance on the financial side and to be adding to top-line growth, membership growth. Thanks again for joining our call. And we're looking forward to sharing our full year results and the results of our AEP during our next earnings call. Thanks so much, everyone.

[Operator]

This concludes today's Clover Health's third quarter 2024 earnings call on Webcast. You may now disconnect your line at this time. Have a wonderful day.