Ladies and gentlemen, good afternoon, and welcome to the Clover Health Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. 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.

Good afternoon, everyone. Joining me on the call today is our CEO, Vivek Garipalli; Andrew Toy, our President; and Mark Herbers, who served as our interim CFO during the second quarter. We will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our second-quarter earnings materials, including the release, are available on our website at cloverhealth.com. 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 our expectations are detailed in our SEC filings, including in the Risk Factors section of our most recent Annual Report on Form 10-K and in our other SEC filings. Information about non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in earnings materials available on our website. With that, let me now turn over the call to Vivek.

Thanks, Ryan, and thanks, everyone, for joining us today. We continue to build upon our strong start to the year, with second-quarter results proving to be another positive step forward. We remain excited about the continued progress against our goals as well as the strategies we are laying out for 2023 and beyond. We believe that we can deliver above-average industry growth and improved margins by providing primary care at scale. Let me now cover the highlights from the second quarter before handing it over to Andrew for a more in-depth discussion. Firstly, our Q2 revenue of $847 million was more than double our revenue in the second quarter of last year. Our total lives in corporate management also nearly doubled year-over-year to over $255,000. We accomplished this while simultaneously slowing the growth of operating expenses. Insurance MCR and non-insurance MCR improved versus the second quarter of 2021 to 92.1% and 106%, respectively. Clover System continues to be a differentiator, showing materially improved insurance MCR for members whose PCPs used the older system versus those who don't. Finally, we've continued to strengthen our leadership team this past quarter and are excited to welcome Scott Leffler as our permanent CFO. Since he has only been with us for a couple of weeks, we start on today's call and look forward to introducing him properly during the next set of earnings. In that same vein, I'd like to extend a heartfelt thank you to Mark and the entire Clover team. He was an excellent partner over the past year and provided us with the necessary time to bring in an exceptional leader like Scott. Thank you, Mark. With that, let me turn the call over to Andrew.

Thanks, Vivek. I'm very pleased with our Q2 results, and I'm cautiously optimistic about the second half of the year. I'm excited to report year-over-year revenue growth of 105% and 99% growth in our lives under management. This highlights how the Medicare population values physician's choice. Clover Systems' ability to work beyond the confines of an HMO allows us to tap into previously ignored and underserved markets. This means we have access to a bigger, largely uncontested total addressable market. Further, our non-insurance beneficiary growth of 172% year-over-year illustrates our unique ability via Clover Assistance to support more doctors and therefore, more patients in transitioning to value-based care. There's no question that by offering wide networks with high physician choice, we've proven our ability to grow rapidly. We believe that this focus is differentiated and will remain differentiated even as Medicare Advantage plans continue to proliferate. That said, while we were so focused on growth in the past, fewer resources were dedicated to fine-tuning core operations, which now provides us with significant upside potential in a number of areas. This year, we've turned our attention to sustainability, specifically to reduce MCR and operating expenses. We're proud of what we've accomplished in the first half of the year. Let's take MCR. Our insurance MCR of 92.1% reaffirmed that we can drive near-term efficiencies while continuing to provide high-quality care across a wide network. This is a result of systemic improvements to our internal operating processes over the year, which we expect to be the foundation of tighter, more predictable internal models going forward. On the operating expense side, we see meaningful improvement in reducing OpEx as a percentage of revenues, with a focus on building a path to profitability. These efforts will be a priority for the organization throughout the remainder of the year and into the future. These efforts carry over to the non-insurance side. As one of the largest DCEs, we believe we are in a tremendous position to take the data learnings from last year to influence our go-to-market strategy for 2023. Our goal with DCE reach is to maintain our leading position while moving toward having a strong, profitable program. Again, we are pleased with our Q2 results. That said, I think we can all agree that there's a lot of uncertainty in the world right now. So despite these improvements and a lower COVID impact during the quarter, we are maintaining a healthy degree of conservatism in our expectations for the rest of the year. Now let's turn to Clover Assistant. As we focus on building a sustainable and efficient growth model, we believe Clover Assistant is a true differentiator. We believe Clover Assistant has significant untapped potential, and we continue to invest heavily into the platform. We are enthusiastic about our CA accomplishments to date, including significant year-over-year growth in lives under Clover Assistant management, continued increased clinician use, and our rapid product iteration cycle. CA efficacy continues to improve, and there is a material difference in MCR between members whose providers use Clover Assistant and those who do not. To build on this momentum and manifest the product's full potential, we have a roadmap of new capabilities and features designed to further augment clinical value. I want to reiterate Clover Assistant's capacity to bring more clinicians into value-based care on both the Medicare Advantage and the original Medicare fronts. Our goal, from a CA product standpoint, is to allow for total Medicare panel coverage with any given PCP, including those that have never participated in value-based care, and we continue to orient the business with this in mind. We are continually working on ways for clinicians to use CA for more of their Medicare panel and we see a number of future opportunities to advance the reach of Clover Assistant. Finally, I want to give a special shout-out to our compliance and operations team as CMS recently issued its final report, and we received the best score allowed to receive on a CMS program audit. I believe this result reflects the operational diligence we've developed at Clover as well as the efforts of the stellar team that works hard every day to maintain our high standards. With that, I will now hand it to Mark for the financial update.

Thanks, Andrew. We more than doubled our revenue year-over-year, delivering $847 million in revenue during the second quarter. Our outsized growth continues to be driven by strong year-over-year growth in lives due to our differentiated ability to participate in both Medicare Advantage as well as original Medicare. Moving to medical expenses, our net medical claims incurred for the quarter were $859 million. Our GAAP insurance MCR was 92.1%, down approximately 1,900 basis points compared to the second quarter of 2021. This MCR improvement includes favorable prior period development and gives us confidence in our previously reported guidance ranges. As Andrew said, we are also remaining conservative with our expectations. Our non-insurance MCR was 106%, down nearly 600 basis points year-over-year and in line with internal expectations given seasonal trends and prior period development, largely due to a CMS rate adjustment. CMS benchmarks in the program do not currently take into account seasonality, so we consider a quarterly fluctuation somewhat normal. Second quarter non-GAAP adjusted operating expenses were $75.4 million, representing 8.9% of total revenues, down 590 basis points year-over-year. This quarter is evidence that our initial efforts to decrease operating expenses as a percentage of revenues have been successful by improving vendor management as well as moderating headcount. Our GAAP net loss for the quarter was $104.2 million. Our adjusted EBITDA loss for the second quarter was $87.5 million. Note that our adjusted EBITDA excludes $27.7 million of non-cash premium deficiency reserve benefit as that is not reflective of operating results. Our cash, cash equivalents, and investments totaled $682 million, with cash, cash equivalents, and investments at the parent company and unregulated subsidiaries of $440 million. We have 477 million common shares outstanding as of June 30, 2022. We see no immediate need to raise new capital. As Andrew mentioned, we are focused on meaningfully reducing our insurance and non-insurance MCRs while calibrating our business model for smart, sustainable growth. Finally, we are maintaining our previously guided ranges. Now let me turn the call over to Vivek for some closing comments.

Thank you, Mark. To close, I'm sure many of you saw the press release issued earlier today. As of January 1 of next year, I will transition the role of CEO to somebody you all know very well, our President, Andrew Toy. I'll continue along with many existing responsibilities in the role of executive chairperson, working closely with Andrew to ensure a seamless transition and long-term collaborative relationship. I have always believed that the right long-term leader for Clover would have a technology-first mindset. When I first met Andrew, I saw a unique strategist operating in the intersection of business and technology, with the fastest learning speed of anyone I've ever met. He's a true founder in every sense of the word, having built companies from scratch, given the abundance needed to solve the hardest problems in healthcare. Since joining as a CTO in 2018, he has been an integral part of Clover, and this transition is the culmination of a succession plan we've had in place since then. As for my role as Executive Chair, I'm not going anywhere. I will continue to remain the largest individual and institutional shareholder of Clover. I will continue to be active at the company well into the foreseeable future, just in a more strategic fashion. As CEO, Andrew will oversee all day-to-day operations. I firmly believe this marks the beginning of a new chapter where we both play to our strengths and continue working closely together in Clover's mission to improve every life. So with that, let's take some questions.

In the interest of time, we ask that you please limit yourself to one question and one quick follow-up. We'll take our first question from Richard Close with Canaccord Genuity.

I have a couple of questions on the direct contracting. Can you go over the number of lives that seemed to decrease sequentially a little bit? And then second of all, with respect to the reimbursement adjustment, I think you called that out in the non-insurance MCR. Can you talk a little bit about how that impacts any type of revenue guidance for non-insurance in the back half of the year?

Yes. So thanks, Richard. First of all, for the actual lives under management, what we are generally seeing is that in the ACO, if they are in our DCE, we will generally see a decrease in life due to mortality or people moving out of the program. That's not unexpected. Obviously, but we generally see that, so it's more mortality driven. So maybe you see something different in the numbers you're looking at. For the second dimension in terms of the rate adjustment, we've priced in a significant portion of this due to our own calculations. I think that there have been a few other ACOs where the effect of the rate adjustment might have been more significant, to be honest, because the Q1 adjustment had a little bit more fluctuation in those other ACOs. Our team has been careful in terms of calculating based upon trends from last year and this year to sort of smooth that out. So we are maintaining and reiterating our general views on this. We don't see a major change in the program.

On the MCR for the second quarter, was the true-up from the first quarter included in that? And if so, to what degree?

So we had some prior period development that was actually included in the second quarter from Q1, and that was due to the rate adjustment with the prospective rate adjustment guidance that came out. Again, that was generally smaller than the effect of some other ACOs reported. The second dimension that I want to make sure that we emphasize is that CMS does look at NCR for the ACO program on an annualized basis, not on a quarterly basis. So we do expect seasonal fluctuations, and we see some of that seasonal fluctuation in the Q2 number as well. Between the two of those, I think we are comfortable that we're seeing what we expected within the ACO.

We will take our next question from Kevin Fischbeck with Bank of America.

Okay. Great. Maybe stick with the DCE. Can you talk a little bit about your thoughts on the profitability and the growth outlook of that business? Your MLR is obviously better year-over-year, but still well above what a lot of the peers seem to be talking about. So can you give any update on kind of how you think about the trajectory in that business, but then also how you're thinking about the growth? I know in the past, you talked about leveraging Clover into other ACO-type arrangements. So any thoughts there about how that's shaping up for next year?

Yes. Thanks, Kevin. With respect to the MCR within the DCE, we are one of the largest DCEs, as you will have seen, ACOs out there, and it's been growing rapidly. I think that's a testament to our ability to work with many systems, a lot of doctors who want to come into value-based care, but haven't had the opportunity, which we could provide through our platform and Clover Assistant. We've grown rapidly within there. What you'll see us do is focus on growth in the ACO, but also knowing that there’s been a lot of appetite for this model. We are looking at participant dynamics, geographic dynamics with MCR in mind, as well. We feel this is a very complementary part of our strategy, something that we can bring to a profitable business for sure.

Okay. Great. Are there any specific insights regarding the second half of the year? It seems like you're adopting a cautious approach, but the results on the MA side are significantly better than anticipated. Is there anything else to share aside from this cautious outlook for the latter part of the year?

Yes, absolutely. With the current macro environment around the world, it makes sense for us to look at the back half of the year. Even something like COVID, which we said in our remarks, does not significantly play right now in our data, it still exists, and the policies are still in place. We would love to see these policies move on; and removed, in this case, there's additional upside for us on the COVID side. To be clear, on the downside, we don't know if there's another resurgence coming. We don't think so; we think vaccines are getting to a good place, but you never know. So that conservatism comes into play because of the overall uncertainty. One thing I will point out is that we have focused very much on working on our core operations. I also indicated that, which I think is helping a lot with the management on the MA side, and we expect to continue to enjoy benefits there going forward.

We'll take our next question from Jason Cassorla with Citi.

Just a quick clarification. What was the total number of lives under Clover Assistant management in the quarter? Unless I missed it, it wasn't included in the press release.

Yes, that's correct. In the past, we have looked at the lives under Clover Assistant management. Going forward, we believe that there are some granular shifts in our quarter-to-quarter number on the ACO side that causes some fluctuations in the management number. So we aren't sharing that number because we think it's not indicative of overall CA performance anymore.

Okay. I guess there was a really quick follow-up to that. Could you give any context around the management penetration of your MA book in the least or any other clarity if it's improved quarter-to-quarter or year-over-year? Any kind of color on that?

MA books is helpful.

Yes, absolutely. We continue to grow that because we always want that number to be moving up into the right. So while we're not sharing the granular number, we don't see any concerns in that number. We continue to contract doctors. We see that penetration generally be a significant focus for us, and the total lives on the insurance side has been increasing.

Okay. Got it. And then I guess just as my follow-up question here, maybe just on the Medicare Advantage MLR, can you just walk through some of the drivers of improvement there sequentially? The COVID impacts were negligible, I guess, quarter-to-quarter. So I was hoping you could just share a better overview from lower utilization versus greater Clover Assistant penetration or any other considerations, just quarter-to-quarter MA MLR improvement?

On the MA side, as you said, on the insurance side, yes, absolutely. The improvement there has a couple of different elements. First of all, compared to last year, the COVID environment is significantly different. During the COVID period, we were very much working on improving Clover Assistant performance and our generalized coverage on the insurance side. This led to improved results, now that we don’t have that overarching pandemic influencing our outcomes. So all of those improvements are positives. We're also generally focused on our operations on getting more and more data, and we've seen a lot of improvements there year-over-year that have flowed through to better core-business performance as well.

And we'll take our next question from Gary Taylor with Cowen.

Just had a couple. Have you guys allocated or would you be willing to allocate on the PDR benefit? How much of that's been allocated to MA versus DCE?

I’m sorry, but I don't have that right at my fingertips, but we can get back to you.

Okay. And the reported MLRs by segment, do you include that benefit? I'm pretty sure, is that correct?

That's correct.

And then on the DCE per member per month, it does look like you took a pretty substantial step down in the first quarter. So I think you were only down about $10 sequentially. So to your credit, I do think you really started to think about this more conservatively. Can you tell us what the revenue adjustment was for the quarter on the retro trend?

We don't actually share that.

Yes, we don't actually have that right now. We can look and we can share that. I don't think that's actually in our release, and we'll follow up on that.

We received feedback that during the transition to ACO Reach, a significant number of applications were denied. Could you provide any additional insights regarding 2023 or your thoughts on contract retention for the DCE segment as we move into 2023?

Yes, absolutely. We feel pretty good overall as we look at about our movement from this year, still a DCE, as you said, into the ACO program next year. We feel good about that, feeling about our overall ACOs migration. As I mentioned, we are looking at participation within the program. We've grown it quickly. We see a lot of data now about where we're being successful and end up in a lot of different places. We're also seeing how that interacts with CMS rulings and the rulemaking decisions we've been going through as we move from PC into ACO. We've been providing a lot of feedback to CMS. You'll see us adjust the mix. We still want to work from small health systems to large health systems. We want to be in as many geographies as possible but we are looking at tuning that mix going into '23. So nothing to share right now. We still want to be strongly participating in this program, and we can do so in a really smart way, given how much data we have. So more to come as we report on that.

And we'll go next to Whit Mayo with SVB Securities.

Why don't I just hear you guys talk about how you're thinking about new county growth expectations? I know you press-released something maybe a week or so ago. It doesn't seem like you're planning to move into as many new markets and counties perhaps as prior years. It seems that there's probably more of a focus on where you have a presence today. But just maybe strategically, I just wanted to sort of make sure I understand how you guys are thinking about that, that new market growth expectation for 2023.

Yes. Thanks, Whit. We are very proud of all of the results we've had growing in our market. Our traditional markets in New Jersey and our newer markets, like Georgia and South Carolina, we are happy with. While we've traditionally had a lot of expansion in terms of geographic coverage, we are now allocating more resources to those areas where we're seeing significant penetration. We are getting to critical mass. We believe we can take a lot of market share in those particular areas. Irrespective of growth, part of our passion for expanding has been to bring our models to as many markets as possible. I talked about that on the ACO side for MA; it's all about getting that concentration for smart, sustainable growth, and that's why we're putting more resources into the specific markets that we're in right now, with a little less expansion as you noted. At Clover, I think you'll see that we're bringing the Clover Assistant model to larger geographies. We're just being smart about that blend between the ACO and the MA plan.

Okay. That's helpful. My second question is just around the strategy that you guys have with brokers, field marketing organizations, and distribution points in the marketplace. It seems like some of your peers are refining how they're investing, how they partnered. I didn't know if there's any change in your posture for 2023; anything that you would call out.

Yes. So I think that what we'll see is a couple of different things that I would call out. We had less exposure to the broker market, not no exposure. I talked about this before, but far less exposure than some of the other players in this space. I would say that we have talked about this a couple of years ago during the first few years of COVID, which hurt us a little bit in our growth strategy. But actually, because we were not in the e-channel as strongly, that was due to witnessing weakness and softness in the quality of leads and the quality of conversion coming from that market. I do think that you see other players, who were perhaps overexposed to the key broker market, now seeing that they have to move from there into the more traditional line brokerage market. So there's no change in our posture overall. We've always been strong in the individual broker market. We think our products are things that these brokers love to sell and that people love to see, brought into the various Medicare Advantage markets. It's the other plans that perhaps have been a little more reliant in that space now because of their overall over-reliance on brokers before.

And we'll take a follow-up from Richard Close with Canaccord Genuity.

I had a couple of follow-ups. Maybe on Whit's question, do you think not expanding into as many counties does negatively impact your growth at all? How should we think about the member acquisition costs or factors associated with just concentrating your efforts in existing counties?

Absolutely. In those new markets, and this is similar for most MA plans, as you know, the costs are disproportionately high in the newer markets, especially in those new expansion counties. The fixed costs of building brand awareness, establishing network positioning, and creating a reputation are all amortized over a smaller member base. That leads to higher acquisition costs in those areas. You also have a different new member versus returning member mix, which affects the MCR in those markets. We're in a good place where we think we can return to expanding aggressively on the MA side whenever we want. We've proven that out. We continue to contract on the ACO side across the country because that's a very advantageous program to bring Clover Assistant to many more doctors. We can be, as you said, much more efficient in CAC, really driving the high penetration within the markets we're currently operational in. So we actually like the pathway it paves for us towards becoming more efficient and effective in those existing markets.

And like the impact of growth at all?

No, I don't think so. We intend to maintain above-industry average growth, and that's what we're looking at. Even as we look at being more efficient, focusing on that cost equation, and working towards sustainability within the MCR, as you know, new members generally come with a higher MCR cost. All of those factors, we think, when combined with our differentiated products and wide network, still make us very appealing, and we should easily maintain strong growth. We aim to be sustainable and smart about our trajectory. I don't believe that reduced expansion into those counties negatively impacts us but rather makes our growth efforts more efficient. Considering the total number of eligible Medicare members within the markets we're focused on, there's still a very high potential for growth, and we do not approach saturation in those markets.

There are no further questions over the phone line. I will now turn the call over to Ryan Schmidt for any community questions.

Thank you, operator. We'll get started with the community questions. First off, Andrew, how do you plan to achieve profitability?

Yes. Thanks for that question. The process to profitability is a huge focus for us right now and requires a number of moving pieces to fall into place, but we're confident that we're well oriented to achieving that. Number one is getting our MCR moving downwards and reducing MCRs. We have a lot of progress towards that, as we reported this quarter on both the MA side and on the ACO side. We've seen insurance MCR improvement year-over-year. And even though non-insurance MCR is seasonally affected, that's also improving year-over-year. This, combined with looking intelligently at how we engage in various geographies, as we've said, allows us to deliver above industry average growth while bringing MCR down, resulting in overall sustainability and movement towards profitability. The second part is, of course, we're looking at controlling operating expense growth as a percentage of revenues. We're particularly improving on that front as well. We have many efficiencies that can be brought to bear. As I said during my remarks, we've been so focused on growth over the past few years that there are numerous optimization avenues available to us on the OpEx side, and you'll see us really focusing there.

Thank you. Our next question is how scalable and easily integrated is the Clover System? Any ongoing challenges seen there?

Yes. Very interestingly, the biggest factor we can see and the biggest question we're asked is providers coming to us and saying, how can I use Clover Assistant to look after more of my Medicare panel? I understand why you want us to use it for your Clover members; I get that, and then even being able to add the fee-for-service original Medicare members, that's great for the providers doing that. We are just asked all the time how to really use it for more of their panel because this simplifies their workflows. We're aiming to make Clover Assistant tools that are designed to simplify doctors' lives easier and the broader its coverage, the better that's going to be. More coming soon on our strategy regarding that, but that's the number one question we're asked. It's something we are very focused on.

Our final community question is what are the prospects for Clover Assistant as a SaaS product?

Yes. As we look at the SaaS world, we have nothing to announce at this time. I've said that we want to cover all of the PCPs Medicare panel. SaaS is one business model we could use to get there. We, however, really do think that we are in the business of managing medical risk and helping providers manage that risk. So blending a SaaS-like approach along with a risk management approach is something I think Clover can uniquely do. I'm really excited to develop that more, and we'll talk about that in the coming quarters.

Thank you. Operator, we'll turn it back to you.

We'll take our next question from Jonathan Yong with Credit Suisse. It's Nick Giovacchini on for Jonathan today. Just looking ahead, can you talk about how you're thinking about the payment year of '24, especially with CMS starting to roll off some of its COVID flexibilities?

Yes, absolutely. On the year, what we've seen is quite an interesting and challenging environment right now because of all the adjustments that we made during COVID, and now CMS is rolling some of those adjustments back, as you said—the cut points are moving around much more than they normally have been. We are seeing that environment; I think other plans are seeing that environment too. That said, we've always guided that we would look for 3.5 stars coming out of the 2021 measure this year. We are continuing to reiterate that guidance. It would be a great achievement for us in the current landscape if we were able to push through to that. We think we can still accomplish that, and we will have more to share in the coming few months.

And this concludes the Q&A portion of today's conference. I would now like to turn the call over to Vivek Garipalli for any additional and closing remarks.

Andrew, great job today. Just to close, while we feel good about where we are today, there's really great and hard work being done this year to drive further progress. Just to reiterate, enabling all of our accomplishments, the Clover Assistant provides us with a growing technology moat, making a meaningfully positive impact in health equity and advancing our mission to improve every life. Thank you all for joining us today.

And this concludes today's Clover Health Second Quarter 2022 Earnings Call and webcast. You may disconnect your lines at this time, and have a wonderful day.