Ladies and gentlemen, good afternoon, and welcome to the Clover Health Third 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 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 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. 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 in more into our Q3 results, I hope that everyone was able to tune in to 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 I expect our MA plan improvements to only accelerate into next year. We believe the performance of our insurance…

Thanks, Andrew. I'll first cover the third quarter financial highlights and then review our improved outlook for full year of 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, MCR 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've 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 PPD from earlier in 2023 impacting Q3. 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 MedEx down 1% sequentially versus Q2, showing how our general medical expense trend is holding steady. We're always focused on initiatives to manage MedEx through increasing impact from Clover Assistant, improvements to MA plan operations, including optimization of plan 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're increasingly enrolling higher risk new members into this program and are seeing lower inpatient admissions for participating…

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

Great. Thanks. And, good afternoon. 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. Thanks.

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 losses 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 further capital.

Okay. Got it. Thanks. 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% MA MCR. 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. Thanks.

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 MedEx that you're referencing is distorted a little bit by something that happened last year where we had some favorable PPD effects in our MedEx 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 one 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, MedEx is only up about 5%, which is more representative of the benign utilization trend that I referenced.

Our next question comes from John Pinney, Canaccord Genuity.

Hi. John Penny on for Richard Close. Thanks for the question. 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 assume some increased utilization, but any additional color would be great. Thanks.

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 conservatism in the remaining part of the year. Q4 in particular is due to seasonality risk. Often Q4 is the one where you see an elevated utilization level historically due to flu season or more recently, of course, due to the risk of COVID - 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 towards.

Okay, great. And then one 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. Thanks.

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

Great. Thanks for letting me back in the queue. I just wanted to go, Andrew, back to your commentary around reducing exposure in the non-insurance business. Maybe can you just give us more color on the decision to reduce for the second time in two years. I think last year, you shifted towards working with higher performing physicians to help offset on the profitability front. But, you know, it sounds like even in that context, you're still looking to get smaller. I guess just any more color around that decision. And then can you remind us, that business has a relatively small SG&A load, correct, as you think about reducing membership there?

Yes, so a couple of different points there. Thanks, Jason. Number one, I would just make sure that we're clear in our remarks. The non-insurance segment, which is where we do not play a role as an insurer, remains interesting. In the healthcare area, we continue to reduce our exposure over there and to look to it that we right-size 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 non-insurance segment, right? So that means we're not an insurer, but we are helping providers manage Medicare Advantage risk. 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 - Medicare book towards risk, including MA. And that's part of our right-sizing 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 non-insurance segment, that's where you should expect us to go.

Okay. Got it. Thanks. Very, very helpful. Maybe just one last follow-up here. Just on MA side, in terms of offering the non-insurance for the MA side of the fence. 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 ACO Reach, but just any color or clarity on where you're at there now. Thanks.

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.

Okay. Thank you.

[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.

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.

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