Ladies and gentlemen, good afternoon, and welcome to the Clover Health Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. [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.

Good afternoon, everyone. Joining me on our call today to discuss the company's second 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 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.

Thank you, Ryan, and thanks everyone for joining us. Today, we reported very strong results that represent another significant milestone in our rapid journey towards sustained profitability. On an adjusted EBITDA basis, Q2 was our first profitable quarter as a public company. Adjusted 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 and is a testament to the strength of our holistic approach of delivering Clover Assistant powered care wherever our members need it, from our wide network PCPs to directly in the home via our homecare practice. We've been laser focused on our strategies to achieve meaningful sustained profitability, and I believe that this last quarter’s momentum means 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 Q2 of last year. The segment also reported its best ever MCR as a public company at 77.2% for the quarter. There is favorable prior period development in Q2, most of which is related to Q1. This is due to our appropriately conservative Q1 modeling of our in-flight improvement initiatives, resulting in PPD when real world performance exceeds that modeling and is booked into Q2. Given our focus on continual improvement this year, we may indeed see more of this type of favorable PPD as the year progresses, based on more real life opportunities from our active initiatives. Within our MA plan operations, we've continued to focus on optimizing a number of areas, including updates to our bid pricing, refined network management, and increased investment in our payment integrity functions. Of note, Clover Assistant continues to be a…

Thanks, Andrew. I'll first cover the second quarter financial highlights and then review our improved outlook for full year 2023. 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 of $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 had 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 MCR of 81.9% contains only minimal PPD. MCR 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 MedEx on a PMPM basis, with PMPM medical expenses up by 2% for the second quarter and 3% for the year-to-date period, both relative to their comparable prior year periods. As Andrew said, we are always focused on initiatives to bend the medical cost curve over time, including operational enhancements, updates to our planned product design and network, investing more in our payment integrity capabilities, clinical initiatives from the homecare business and the increasing impact from CA. We believe these efforts are likely helping moderate the impact of any adverse macro medical expense headwinds. Like our Q1 results, our Q2 performance was also favorably impacted by being paid on 3.5 stars for our PPO plan this year. At a high…

Thanks, Scott. The connective tissue that ties together our Medicare, ACO and homecare offerings is our Clover Assistant platform. We believe we have now shown that there's a compelling physician need for our technology, and that it delivers a differentiated 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 in its level of adoption for software in healthcare, certainly for clinical software built by an insurer. Our technology is being used by thousands of physicians across our MA plan network, across our ACO and in our homecare practice. The world we live in today is constantly evolving under the umbrella of technology and AI advancements, and that's exactly what makes Clover a fundamentally different healthcare company. Managed care organizations bear the responsibility of both deep access to member health data as well as accountability for health outcomes. At Clover, through Clover Assistant, we are constantly developing new ways to use that data to improve those outcomes. We've recently rolled out a new medication adherence feature that I think is a great example of this. By linking together Part D and PBM data, Clover Assistant 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 medication fills. This highlights how physicians don't necessarily have the data they need readily at hand, even with their EHRs, and how Clover's system can help them quickly improve care by sharing those data insights in an actionable way. We've also recently shared a research white paper highlighting our work with chronic kidney disease. According to a CMS report, less than half of MA enrollees with a lab result…

We will be taking questions from our Clover’s research analysts. [Operator Instructions]. Our first question comes from Jason Cassorla, Citigroup.

Hi, everyone. Thanks for taking my question. You have Ben Rossi on for Jason. So thinking about your 2023 EBITDA guidance changes, as I'm thinking about some of the moving pieces that’s here in your updated adjusted EBITDA guidance with negative 95 million at the midpoint and your current year-to-date EBITDA of negative 17 million, I would suggest a back half of about negative 80 million towards that new midpoint, which would suggest by my math about a 55 million EBITDA swing during the quarter. I think I mentioned some of the actions with prior period reserve development. But could you just kind of walk me through how that aided this 2Q figure? And then could you help me bridge to the back half of the year that still assumes 80 million of EBITDA losses? Thanks.

Sure. This is Scott. Thanks for the question. So I think it's helpful in terms of unpacking that just to focus on the year-to-date performance as your reference point. And as we mentioned in our earlier comments, our year-to-date MA MCR of 81.9% really is the outstanding driver of outperformance in the first half of the year. As we have said for a number of quarters going back in the last year, in terms of any guidance for any forward-looking period, we do like to be appropriately conservative, and obviously our back half of the year guidance for 2023 is going to follow that model. So when you look at the year-to-date EBITDA performance, which again is being driven significantly by that MA MCR performance, there's just that same level of appropriate conservatism that we've mentioned in the past. Other than 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 non-insurance line of business. So it really is the change in revenue and MCR performance for the insurance line where our MA business resides. It's driving the front half outperformance and then the slight second half performance.

Got it, okay. And with that, I have a quick follow up on your MA bids looking ahead to 2025. How would you describe your approach to benefit design in light of the latest rate announcement for next year and some of the risk model changes through [indiscernible]? Just any thoughts on maybe some changes to your geographic footprint or maybe how you're incorporating some of your peripheral offerings such as Clover Assistant, LiveHealthy Rewards, Home Health in some of the -- Home Health offerings in your go-forward bidding strategy? Thanks.

Yes, 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 AEP. 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 year as we have historically, as we continue to follow through the strategy starting last year where we optimize within our core markets. We did also reflect that our core markets are driving a lot of that improvement that Scott mentioned just now. And we think that there is additional progress to be made there. So having great CA coverage in those markets, having really strong member -- desire for our products in our wide network PPO in those markets are going to continue to be our main strategy. We have seen popularity of things like our LiveHealthy rewards. We've mentioned that in the past, whereby those particular areas where we reward members for healthy behaviors, and in particular for getting Clover Assistant powered care is a virtuous cycle where members can get rewarded for healthy behaviors, and we get them those data powered visits as well. So we continue to be excited by that going forward. Lastly, I will remark that we really do think that our core advantage as Clover is that we are built on this very popular PPO wide network harness is the product we truly believe that people want out there. We continue to offer it. We think we were one of the leaders in offering that product. And having the advantage of Clover Assistant, which lets us manage care on that wide network, is a fundamental moat for our model. It's something that other PPOs really don't have, and it's why we lead with our PPO year-after-year.

Our next question comes from Kevin Fischbeck, Bank of America.

Hi. How’s it going? This is Adam Ron on for Kevin. Just going back to the utilization commentary this year, I'm just curious. You made even some comments about like the macro headwinds and you said I think that medical cost trend PMPM 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 is for first half, and if you're seeing anything post Q2 that's potentially incorporated into the back half MLR ramp, would be very helpful?

Sure. So I think what we mentioned during the previous comments is that on a PMPM basis, our year-to-date performance shows an increase of about 3% MedEx PMPM. And so I think your observation is correct that that seems to be a better performance relative to what we've seen in some of the headlines. And I think I mentioned in 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 CA and so on, are helping to insulate us from some of those macro-oriented headwinds. So I'm not saying that the 3% we're experiencing is consistent with the broader market. I think that there's a good possibility that that's better than the broader market, but we're offsetting it with some of our organic initiatives.

And when you put together the bids for 2024, was this better performance contemplated? And so in other words, should -- you're saying 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 shouldn't we expect similar MLR performance if you notice the performance year-to-date in similar benefit designs?

So we continue to be focused, as you just said, on making sure we get to sustained profitability that we are excited to return to growth, definitely. We do have these advantages like Clover Assistant, like Clover Homecare that Scott's alluding to, to help us manage MedEx. We are very familiar with our core markets. So as we focus on those, when we bring all of that together, we are able to, we believe, put forward an exciting bid product, at the same time, maintain our focus on MCR management, as we have always indicated that we will continue to do. And then as all of these initiatives land within our MCRs, I think you'll see us start to return to growth and certainly be able to return some of those economics as well back to members as we're excited to do to strengthen our planned product, strengthen that wide area of PPO and return back to growth.

[Operator Instructions]. Our next question comes from Richard Close, Canaccord Genuity.

Yes. Thanks for the questions and congratulations. I was wondering if you can just talk a little bit more about Clover Assistant, maybe the penetration within MA and just start there. It seems like you've hit an inflection point to some degree. And then I have a follow up.

Yes, absolutely. So we're always working on Clover Assistant, getting folks to see a doctor or clinician who is using Clover Assistant and getting Clover Assistant powered care, as you say. Simultaneously, we have constantly be releasing new features, new capabilities, unlocking new data sources into Clover Assistant. So the efficacy of Clover Assistant we believe is actually constantly improving as well, because that's one of the effects of continuous software development on the actual product. So we've unlocked new ways for our members to be rewarded for getting Clover Assistant powered care, like we mentioned, the LiveHealthy reward, a part of that is actually to get data driven enhanced primary care via Clover Assistant. And that's something which has been popular and which we look to continue. So we are happy with the direction that's headed. We were happy with the direction the 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 convey any penetration rates like maybe in core markets where it's over 50% now of members or anything like that?

Yes. We’re not sharing that information right now on a quarterly basis. It's something we'll consider doing. However, I will say that we have always -- we used to share that number. And I will say that you can use that as the older baseline to work off. And I would also say that we constantly are focused on moving that number upwards and to the right.

Okay. And my follow-up question is, is on homecare. Is that in all the core markets now? And is there some sort of like percentage of the member base that that is applicable to, just any thoughts on that?

Yes. So basically, the majority of the care is in our core markets right now for homecare, but we are actively looking to expand that footprint into our other markets as well. Homecare is a critical part of closing that last mile of care where we can identify the core needs of our neediest population, the most vulnerable, and we're able to identify their unmet needs. And then, like I said, close that last gap, that last mile and really reduce things like in-patient admissions, as I mentioned during the earlier remarks. So we're very excited by its capabilities. And we're looking to bring it to as many markets as possible.

[Operator Instructions].

All right. Thank you, folks. Sorry, is there one more question?

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

Yes, hi. I just jumped back in the queue. So on the ACO Reach, I think last quarter you mentioned you had more -- you would have more to share this quarter on the 2022 is like direct contracting final benchmarks. I'm still curious if you've heard anything there. And then I have a few more questions on ACO Reach.

Yes. 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 small amounts but nothing significant. But obviously, there is still some risk as we approach final settlement dates that an update may come there. But we think that that variability is significantly derisked.

All right. And then one of your competitors sounded much more bullish on their performance in terms of how they're doing on ACO Reach in 2023. And they were pointing to some better -- I guess it depends what they were accruing for, but better trend adjustments coming out from CMS. And they gave their view on how they're performing versus national benchmarks. I’m curious how the data from CMS is comparing versus expectations. And if you could share how you're doing on the reset benchmark?

Yes. We believe that all participants are getting the same amount of data from CMS at the same time. What probably is variant is about the amount of conservatism being shared in terms of expressing that into our models. And we are fairly conservative in doing that. So we really -- we offer [ph] the same data, we might just be different modeling it slightly differently internally. So we feel good about the way we're doing that. And we'll share more as things develop. I would also note that I think for our particular area that we definitely see, as Scott says, that our insurance segment is leading the charge and sort of driving our pathway to profitability here. But we are excited, as I said in my remarks, about the more broad capability that we have from our non-insurance segment, and you'll see us talk more about this in the future. But non-insurance really means just that. It's our ability to bring Clover Assistant powered care to physicians in a way where we might not be the insurance company. But we certainly can help them move towards a risk-bearing relationship and we can provide Clover Assistant and fee-for-service and ACR which was just the first place we started with that. And we have many more ideas that come in that area as well.

[Operator Instructions].

All right. I think we're clear on questions. So thank you for all your questions. I really feel that this second strong quarter of results highlights our capabilities and transformative vision here at Clover. We've continually shown the strength of the Clover model this year reporting our first profitable quarter as a public company on an adjusted EBITDA basis, driven by significantly improved MCR as well as consistent insurance revenue growth. Our continued push towards sustained profitability, coupled with the great differentiation discussed today, is something I'm personally very excited about. 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 Clover Assistant with you later this year at our Clover Assistant showcase event. Thank you all again for being part of this exciting journey with us.

This concludes today's Clover Health second quarter 2023 earnings call and webcast. You may disconnect your line at this time, and have a wonderful day.