Clover Health Investments Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 5, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, good afternoon, and welcome to the Clover Health Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the prepared remarks. And 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.

Operator

Please go ahead, Mr. Schmidt.

Speaker 1

Good afternoon, everyone. Joining me

Speaker 2

on our call today to discuss the company's Q2 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 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.

Speaker 2

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 ks 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.

Speaker 1

Thank you, Ryan, and thanks to everyone joining our call. Today, we're very pleased to report another set of strong financial results as well as improved full year guidance driven by meaningful profitability from our core insurance plan operations. Underlying these strong results is our assistant care platform that enables physicians to identify and manage chronic disease earlier. We believe that this focus improves outcomes for our members, improves total cost of care and therefore drives our overall financial momentum. Ultimately, that is our goal.

Speaker 1

At Clover, we develop AI and data driven technology that is differentiated at managing the clinical outcomes and total cost of care for people with chronic diseases. We believe our financial results demonstrate that our model is working with physicians in our own MA plan. Next, we intend to bring our approach via our counterpart offering to physicians who serve other plans as well. On that note, let me begin with some high level takeaways from our 2nd quarter performance. First, we achieved meaningful profitability this quarter, highlighted by our increasing adjusted EBITDA as well as positive net income for the first time as a public company.

Speaker 1

We're very proud to have achieved this milestone. Given these results, we fully expect to deliver profitability this year on an adjusted EBITDA basis and are happy to update our full year guidance to reflect this strong performance, which Peter will walk you through later in the call. 2nd, we've again delivered double digit top line revenue growth with further margin improvement in our core insurance offering. Our impressive Medicare Advantage performance is driving our ability to deliver consistent, meaningful adjusted EBITDA profitability this year. 3rd, our performance improves upon our already healthy balance sheet allowing us to operate from a position of strength.

Speaker 1

We expect to be able to self fund meaningful growth in the next phase of our business. Lastly, our strong first half results continue to highlight our unique ability to operate a profitable Medicare Advantage plan almost entirely on a PPO chassis. Unlike other plans that rely on narrowing their networks within an HMO to funnel patients to specific doctors, our approach is fundamentally different and allows us to meet the needs of more of the total addressable market. Clover Assistant's proprietary and patented technology allows us to work with any doctor, improving both their clinical outcomes and total cost of care. This capability is crucial for our PPO model.

Speaker 1

Our vision is to build physician enablement technology that brings great healthcare to all Medicare beneficiaries. This is precisely why our strategy is anchored on wide network PPOs. Put simply, most people want the freedom to choose their own doctors, not have their insurance plans pick their doctors for them. In contrast, the challenge for the broader industry is that traditional HMO cost management frameworks are not easily executed within PPOs as there is less network control. Plans used to selecting doctors definitionally cannot rely on that selective network narrowing to drive value based results in the PPO.

Speaker 1

This is why we expect other managed care organizations to continue to struggle to balance consumer preference with managing cost pressures. For Clover, we aim to solve this problem by managing quality not by network narrowing, but by equipping physicians with our proven AI powered software platform to better manage total cost of care and improve clinical outcomes. We do this through a focus on identifying and managing chronic diseases as early as possible. Coupled with Clover Home Care's high touch clinical capabilities, we believe that our differentiated care model creates a sustainable growth mode in our business and uniquely positions us for success despite broader industry challenges from regulatory changes and shifting consumer preferences. Most importantly, with CA, we are constantly learning from physician interactions and improving to drive better clinical results.

Speaker 1

Since this last quarter, we're very excited about our technology innovation featuring several capabilities we developed. This includes clinical enhancements around heart disease severity and progression to better help physicians identify and manage CHF. We're also streamlining clinician workflows around care gap closure to help them quickly and easily leverage the assistance access to robust data sources beyond what's available in their EHR. And finally, AI and LLMs allow for quick prototyping and implementation of features like ambient scribing and document summarization that allow us to quickly iterate and deploy features focused on physician workflow and quality of life. With our continued investment in assisted platform development, we believe that we will continue our momentum in our overall MA business as we both focus on generating sustainable meaningful profitability and returning to top line membership growth.

Speaker 1

It's also important to note that we expect to drive meaningful That said, since launching this offering, we have continued to receive strong market interest for our platform with more potential partnerships in the works. We believe we have a robust pipeline and unique product market fit in a broader MA market that has cited utilization issues and other headwinds over the past year. To this point, the strong MA results in our own plans is a key differentiated advantage that validates our pitch to third party customers. My strong belief is that we kick started a unique and powerful virtuous cycle with our Clover Insurance offering leveraging our technology to drive quality. That in turn should drive better results on our internal book of business, which then serves as validation to 3rd party customers for Counterpart.

Speaker 1

Each piece is both complementary and interconnected and builds upon the other. We're continuing to build out this SaaS and tech enabled services offering and we plan to share more specific financial guidance and expectations at a later date. Before handing it to Peter for the financial update, I'll touch on how we are thinking about MA Plan growth. As a reminder, our focus during 2024 has been on retention and margin improvement in our returning member cohorts. We're executing against this and our first half results strongly position us to deliver upon these goals for the full year.

Speaker 1

For our 2025 growth strategy and bids, we're holding off on sharing specific details until more industry and competitor information is available. That said, CMS' recent recalculation of our PPO star rating up to 3.5 stars has resulted in an exciting shift in our go forward approach as we now have more flexibility to reinvest in planned benefit design to help drive growth. It's also important to note that we were the only plan in our primary markets to get a star rating increase from this recalculation. Our intent next year is to continue to grow top line insurance revenues in excess of the market, while simultaneously improving our underlying cohort economics to drive increased long term profitability. Ultimately, we'll have to see how the competitive positioning plays out, but we feel very good about our pricing and how we've positioned our business next year to build on our 2024 performance and momentum.

Speaker 1

With that, I will now pass it over to Peter.

Speaker 3

Thank you, Andrew. Before diving into our results, I would like to share a few quick notes on the company from my perspective as I've settled into my role. Overall, I'm fairly pleased to join Clover at such an exciting time and I'm continually impressed by the industry leading AI, power technology, talent, and general business momentum of the company. I believe that our business is steadily improving its profitability profile, and I am excited to be part of a company that has created a unique framework to improve the lives of people with chronic diseases, while simultaneously building an attractive and scalable financial opportunity. I'm also excited by the opportunity to expand the use of our proven technology through our counterpart health, SaaS and tech enabled services offering.

Speaker 3

Turning back into our earnings content. I will first cover the second quarter financial highlights and then review our improved guidance for full year 2024. Clovis' core fundamentals are strong. As Andrew mentioned, the 2nd quarter was Clovis' 1st positive GAAP net income from continuing operations quarter as a public company. 2nd quarter GAAP net income was a profit of $7,000,000 as compared to a GAAP net loss of $29,000,000 in the Q2 of last year.

Speaker 3

Similarly, adjusted EBITDA improved to a profit of $36,000,000 in the Q2 of this year compared to $10,000,000 in the Q2 of last year. Year to date, we have significantly improved our year over year cost visibility profile, driven by strong MA plan momentum and a continued focus on optimizing adjusted SG and A. As a result, we've incorporated this first half capability into our full year outlook to significantly improve our adjusted EBITDA profitability guide for full year 'twenty four. As a reminder, last quarter, we shared that we would introduce a new operational metric to further improve transparency in our insurance performance and to better align with industry standards. This is the insurance benefits expense ratio or insurance DER.

Speaker 3

We calculate the DER by defining the sum of total insurance medical claim expenses and quality improvement costs by insurance premiums. The PER does not affect our adjusted EBITDA calculation in any way as the quality improvement costs fit within our SG and A. We believe that by also including spend related to enhancing healthcare quality in the numerator of the calculation, we are more accurately reflecting our assessment in healthcare quality and member engagements. This better comparability into our performance versus industry peers. During the Q2, insurance BER improved to 76.1% in 2024 as compared to 82.1% in the Q2 of 20 23.

Speaker 3

MCR also improved to 71.3% in the 2nd quarter from 77.2% in the Q2 of last year. Our strong margin performance was coupled with continued year over year top line organic insurance revenue growth of 11% in the 2nd quarter to $350,000,000 10% growth year to date to $692,000,000 driven by strong member retention, cohort unit economics and the return to intra year growth outside of AEP. On a year to date basis, DER was 79.6% and MCR was 74.5%, both of which represent strong improvements of over 700 basis points year over year. During both periods this year, we benefited from the continued maturation of our core MA plan operations and the focus on returning member retention with strong unit economics that Andrew touched upon earlier. We've also experienced high period developments on both revenue and net ex, both in 2Q as well as on a year to date basis, which has depressed our year to date BER to lower levels.

Speaker 3

That said, we expect our BER to be between 81% and 82% full year 2024 and to land in the mid-80s percentage on a full year incurred basis after normalizing for the aforementioned prior period development. Of note, BarriSilva still undulcated by elevated IBNR levels. As mentioned during our last call, this was and is due to the changed healthcare disruption and the transition to our new MA client ecosystem at the start of 2024. We continue to expect normalization of our IBNR levels by year end. On the SG and A front, during the Q2, total SG and A spending was down 4% year over year, while adjusted SG and A of $72,000,000 was modestly higher than the comparable period.

Speaker 3

On a year to date basis, total SG and A was down 12% and adjusted SG and A of 147,000,000 dollars was down 3% as compared to the same period in 2023. Our year to date 2024 results continue to include a temporary accounting reserve of approximately $2,500,000 related to the increase in claims inventory estimates we flagged during the Q1 as a result of the changed healthcare disruption and our internal MA plan operationalization. As our processing visibility continues to normalize throughout the year, we expect this accounting reserve to occur. Furthermore, both periods continue to see a favorable impact year over year from the cost saving initiatives associated with our new operational ecosystem and our workforce less than a last year, partially offset by increased growth costs, driven by strong OEP and SAP growth. Looking ahead, we remain on track to achieve meaningful full year adjusted SG and A savings versus last year.

Speaker 3

That said, and in light of our strong adjusted EBITDA profitability performance to the first half of the year and the growth opportunity we now have, we expect to strategically reinvest into our business during the second half of the year to build a foundation for long term sustainable growth. As such, we anticipate coming in at the high end of our adjusted SG and A outlook for the full year and we believe that any near term investment in the long term trajectory of the business will prove to drive strong returns in the future. Turning to the balance sheet. We ended the Q2 of 20 24 with total restricted and unrestricted cash, cash equivalents and investments totaling $483,000,000 on a consolidated basis, the $201,000,000 at the parent entity and unregulated subsidiary level. Cash flow from operations, excluding discontinued operations for the Q2 was $46,000,000 and I am proud that this has improved the company's already strong balance sheet.

Speaker 3

We continue to expect that our cash flow from operating activities during the full year 2024, excluding the impact from discontinued operations, will be positive. Taking this into account, we continue to expect our year end 2024 unregulated liquidity to be between $145,000,000 $165,000,000 Lastly, and as Andrew mentioned earlier, we have strong conviction that this allows us to operate from a position of strength and we expect to continue to be able to sell from growth in the next phase of our business. Additionally, we remain committed to the share repurchase program that we announced in connection with our Q1 earnings. As a reminder, our Board of Directors authorized the company to buy back up to $20,000,000 of the company's Class A common stock over the next 2 years. Starting in May this year, we began returning capital to our shareholders, repurchasing approximately $2,000,000 of stock during the quarter.

Speaker 3

We expect to continue to be nimble and prudently manage our capital allocation strategy to maximize value for our shareholders. Finally, I will provide an update to our improved full year 2024 guidance in light of our continued strong business momentum and fundamentals through the first half of the year. We are increasing our revenue guidance for the insurance line of business to now be between $1,360,000,000 $1,375,000,000 We are also introducing full year guidance for insurance BER to be within a range of 81% to 83%. As I mentioned earlier, we expect this operational metric to be in the mid-eighty percent range on an incurred basis. We are improving our insurance MCR to be within a range of 77% to 79%.

Speaker 3

We are maintaining our adjusted SG and A outlook to be between $270,000,000 $280,000,000 We are increasing our full year 2024 adjusted EBITDA guidance to be between $50,000,000 $65,000,000 As Andrew touched upon, our profitability arc to date is driven by a strong insurance plan performance. We've proven this year that can deliver significant returns with just a 3.5 star rating with the opportunity for even better potential results if and when we achieve higher star ratings. Going beyond our MA plans, I'm particularly excited about our counterparts that add to our performance in the future as we grow our external solution offerings. Counterpart Health continues to garner strong market reception for this robust pipeline. We expect this to only strengthen our ability to execute and improve the company's already strong core fundamentals.

Speaker 3

In summary, our goal at Clover is to maintain the momentum that we have developed in the last couple of years and continue to improve our business performance. I believe this is exactly what we've done during the first half of the year, positioning us well to achieve our adjusted EBITDA profitability goals in 2024 and improve our underlying core economics in 2025 to increase our long term profitability

Speaker 1

In conclusion, I'm very pleased with our performance during the first half of the year and would like to thank the entire Clover team for their continued efforts in delivering such strong financial results. Before we head to Q and A, let me reiterate the key takeaways of the quarter from my perspective. One, we delivered positive net income for the first time as a public company and improved our full year 2024 adjusted EBITDA outlook. 2, business fundamentals are strong with double digit top line revenue growth and industry leading loss ratios. 3, we improved our already healthy balance sheet and believe that we have the ability to self fund future membership growth.

Speaker 1

4, we're well positioned for long term growth in Medicare Advantage via our PPO centric approach. And 5, our strong performance in our own MA plan is driving interest in our counterpart third party offerings. Today's results demonstrate that we're able to perform well where others don't. We thrive in fragmented markets and we don't rely on anchor health systems or value based contracts. For most MA plans, these are challenging dynamics, but our technology centric approach allows us to profitably sustain a benefit rich wide network PPO plan.

Speaker 1

We're generating meaningful adjusted EBITDA profitability at a 3.5 star rating, positioning us well for even better results if and when we achieve higher ratings. And unlike almost every other MA plan, we see ourselves accountable for the total cost of care for our entire focus business as opposed to others who heavily rely on risk delegation and capitation. Our strong insurance fundamentals coupled with our counterpart offerings make for an exciting time to be a part of the Clover Health journey. Once again, thank you to everyone and I very much look forward to providing more updates later in the year as we continue to execute against our goals. With that, let's go to questions.

Operator

We'll go first this afternoon to Richard Close of Canaccord Genuity.

Speaker 4

Yes. Thanks for the questions. Congratulations on the execution. Peter, I was wondering if you could comment a little bit just from a modeling perspective as we think about it. Salary and benefits, looks like it decreased about $3,000,000 sequentially.

Speaker 4

And I was just curious if there's anything specific there that drove that and how we should think about that, I guess, in the second half? Is it pretty much steady state at this 2nd quarter levels? We'll leave it there.

Speaker 3

Hey, Richard. Glad to be here. Thanks for the question. So overall, I would say SG and A, of course, we continue to optimize as we scale as well. If you kind of look at quarterization for your own model purposes, of course, there's some seasonality in the Q4 as you make investments both the quality and otherwise.

Speaker 4

But nothing specific to the second quarter why that went down so much sequentially?

Speaker 3

Just continued optimization. Okay.

Speaker 5

Andrew, maybe

Speaker 4

as my follow-up question on the home care business, there's been several, I guess, articles out in the journal about home visits and I guess questioning the validity of that. I was curious if you could just walk us through the home care business for Clover, what you're doing there and maybe how it's different than, I guess the home visits that referenced in the journal articles.

Speaker 1

Yes. Thanks, Richard. And just on your previous question, I just want to note that, as Peter says, there's nothing new that we're doing. But for year over year comparisons on SG and A, we spoken for several quarters prior to Peter joining as well, I talked about how we were transitioning to a new operating infrastructure with our partnerships and how we're moving some operations to some partners. And I think that you're seeing some of that effect flow through just as we discussed about a year ago at this point.

Speaker 1

So nothing new, but just want to remind everybody that that's us executing upon our plans that we discussed starting from the middle of last year. Regarding the home care and the and how we do things differently, I think there's a couple of different dimensions here that I want to emphasize. Number 1, we are very focused on looking after the sickest and most complicated within members within the home. And we believe that the home setting is the best place for that. That's why we have in our home care system, we do have nurse practitioners, but we also have MDs, we have DOs, and we are actually taking over primary care for a lot of the folks in our home care practice.

Speaker 1

So we see the sickest as being looked after from a primary care perspective and that is our focus and that's what I discuss a lot. We also do some nursing visits, but a lot of the times those nurses are looking at chronic diseases, making sure that they're being managed properly, and then most importantly, referring into that primary care system. So if we think that someone is getting sicker and they need more close attention, we take over that primary care relationship. But I think that's very different and a very different home care strategy than what you see others basically focusing on. I think another dimension that we should talk about here is that our technology Clover Assistant and the Assistant platform brings together the care team between primary care, nursing visits and to make sure that data is moving back and forth between these various areas.

Speaker 1

And so when you get a visit from a member of our home care care team, our members are being looked after in the home, but that information and data we also share to any user of CA and that's available within the inter operability ecosystem in a longitudinal way using Gluttover Assistant. So I think both those things are very key aspects that differentiate our program from others. As a final note, we are very proud that our home care program has an extremely high net promoter score and that's something we monitor very closely in terms of whether people would recommend the program to others.

Speaker 4

That's very helpful. Thank you.

Operator

Thank you, Richard. Thank you. We go next now to Jason Casorla at Citi.

Speaker 5

Great. Thanks. Good afternoon. Congrats on the quarter. Peter, can you give us a sense on what the MRA true up adjustment was in the quarter?

Speaker 5

And I wanted to double check on the normalized DER for 2024. It sounds like that would be in the mid-80s range, excluding this favorable reserve development. Is that the right baseline we should be thinking about for jump off next year? And then in guidance kind of will suggest a bit of a steep step up in cost trends in the back half of 'twenty four. Just is there anything kind of outside of normal seasonality or your conservative posturing that you're seeing?

Speaker 5

And maybe what you're seeing just maybe just broadly cost trend wise for July would be helpful.

Speaker 3

Thanks. Thank you for the question. I think there's about 5 in there. So I will try to answer all of them. As far as DER, like in the prepared remarks, we expect on an incurred basis to be around the mid-80s percentage.

Speaker 3

As far as developments in the month of July, we do see more processing of IBNR and paid claims, the volume is picking up nicely in the month of July. And then as far I think as far as the adjustment midyear, I don't think we have previously disclosed that and I don't think we will on this call either.

Speaker 5

Okay. Got it. So just to be clear everyone, just the mid-80s incurred is the right jump off, are there other nuances?

Speaker 3

Yes, we haven't given specific guidance yet for fiscal payment year of 'twenty five, if you will. But for 'twenty four, we expect the EER on the current basis to be in the mid-80s percentage. If you pencil that in for total year, yes, of course, it's a jump off point into 25, but I think we want to be clear that we haven't necessarily commented on 25 yet.

Speaker 1

Sure. Of course. Okay, got it.

Speaker 5

And then maybe this is my follow-up. I want to make sure I heard this right too. It sounds like you're looking to perhaps spend away incremental upside on MCR for business reinvestment purposes. Should I just want to make sure, did I hear that correctly? And then maybe in that context, can you walk us through the unregulated cash bridge for 2024?

Speaker 5

It sounds like you're still keeping that 145 to 165 expectation for year end. Obviously, you had a better EBITDA result kind of year to date than expected. I was just hoping you could bridge the cash for us as well. Thanks.

Speaker 3

Yes. Thank you for the so that's two questions. So maybe start with the cash first, right? So as per the prepared remarks, we have $201,000,000 of unregulated cash. And if you walk that forward to the end of the year, we have an ACO REACH repayment, if you will, of a deposit of around $39,000,000 so that gets you to around $160,000,000 of earned regulated cash.

Speaker 3

So we're being a little bit conservative on the second half in the outlook, if you will, but we feel good overall. So that gets you to that range, if you will. As far as investments in the business for long term profitability and growth. So we're increasing over time, of course, the capacity and the capability of the model to produce increasingly profitability. So you should think about quality investments as well and system investments, right?

Speaker 3

And of course, also sales investments over time, although we'll stay shy of discussing specifically our sales strategies as we go to market later this

Speaker 1

year. Okay. Thank you.

Speaker 3

Yes. Thank you.

Operator

We'll go next now to Whit Mayo at Leerink Partners.

Speaker 6

Hey, thanks. Good afternoon. I know that you don't want to disclose the MRA payment, but I just wanted to maybe understand what's driving it. It seems like you confirmed that you did have an MRA payment, which happens in the Q2. And was there a higher than average favorability in that payment this year?

Speaker 3

Yes, I don't think we disclosed it necessarily.

Speaker 6

Okay. Maybe just second question. There's been a lot of industry chatter on the 2 midnight rule and just curious if you're seeing any noticeable movement there that you can detect? Thanks.

Speaker 1

Yes, we've been following this, Andrew. To midnight, like we've been following the rule obviously for a little while. We've always been following the CMS guidance on this. And so I think we've been a little less perturbed by this as others. And so things are basically proceeding as we foresee no real net impact for us.

Speaker 6

Okay. Thanks guys.

Speaker 1

Just one quick point as well. I think that as we look at all these and as we introduce the various numbers here having we used MCR before and a few of you are asking about the DER number here. I think that the idea is that I would note that we are sharing the incurred number into the mid-80s and that incurred number would be obviously not carrying forth any PPD. And so that's why that number will be slightly different than the number in the guidance.

Speaker 6

Andrew, can I follow-up on one other thing?

Speaker 5

Sure.

Speaker 6

Just when you talk about July, I'm not exactly sure I'll follow exactly what you mean by more claims processing. Is that is this a good thing, bad thing? I mean, maybe just elaborate a little bit more on what you're

Speaker 3

saying. Yes, I can answer that one. So as you saw in the prepared remarks for this quarter, but also last quarter, both because of the change health care incident, if you will, plus then our switch over to a new provider, the new partner. We have elevated IBNR levels in the unpaid claims, right? So that comment regarding July is really that we see good progress in the processing volume of those unpaid claims.

Speaker 3

So we expect that balance to further reduce through this quarter and next year.

Speaker 6

Okay. So that wasn't a comment on utilization, it was a comment on working through the backlog. Okay.

Speaker 1

Yes, that work in the

Operator

Thank you.

Speaker 1

All right, folks. Thanks for all the questions. So just to reiterate, we believe that we are the only technology powered managed care company in the market that's aiming to deliver better clinical outcomes, better cost of care as well as physician choice. Really, we believe that this is the future of Medicare Advantage, and we look forward to continuing to lead in this aspect via Clover's unique tailwinds and technology powered care platform. Thank you all again for joining our call today, and I look forward to sharing more on our achievements in the second half of the year.

Speaker 1

Thanks everyone.

Operator

Thank you, Mr. Toye. This concludes today's Cloverhill's Q2 2024 earnings call and webcast. You may disconnect at your line at this time and have a wonderful day. Goodbye.

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