Please stand-by, your program is about to begin. Ladies and gentlemen, good afternoon, and welcome to the Clover Health Third 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. [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.

Good afternoon, everyone. Joining me on the call today to discuss the company’s third quarter results are Vivek Garipalli; Clover Health Chief Executive Officer, Andrew Toy, the company’s President; and Scott Leffler, our 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 cloverhealth.com. This webcast is being recorded, and a replay will be available at 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. 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 will now turn the call over to Vivek.

Thank you, Ryan, and thanks, everyone, for joining us today. Our wide network approach powered by Clover Assistant, enabling great primary care, helped deliver a solid set of results for the third quarter. I'm proud of the hard work being done by everyone at Clover so far this year, leading to consistently improving financial results in our insurance line business and a maturation of our noninsurance business. Importantly, I also believe that this quarter's results further illustrate our positive momentum towards achieving profitability. Before handing it over to Andrew, I would like to briefly touch on some key highlights from the third quarter. We delivered significant improvement in insurance MCR, continued stability in adjusted SG&A spending and strong revenue and live growth relative to the prior year period. Clover Assistant continues to be a key differentiator in our mission to improve every life, by supporting physicians in catching and treating conditions earlier. We continue to see MCR performance that is over 1,000 basis points better for returning members, who’s PCPs used Clover Assistant, as compared to members whose PCPs do not. We believe this differential in MCR performance is evident that Clover Assistant is in fact, helping to improve clinical outcomes. Finally, I am pleased by our increased focus on operational excellence at Clover, which contributed to our maintaining 3.5 stars on our flagship PPO plan. We look forward to continued execution against our strategy, as we head into 2023. With that, I will turn the call over to Andrew.

Thanks, Vivek. It really is exciting to see the result of our hard work, manifest an increasing momentum across the business. Our Q3 results were highlighted by significant improvement in our insurance MCR to 86.3%, and I am excited to see that our focus on sustainable insurance operations, bringing Clovers to more doctors and our consistent improvement of Clover Assistant platform capabilities are having such a meaningful impact on performance. As a reminder, we are being paid this year on three stars. Therefore, our 2022 results are not yet reflective of the favorable impact that we expect from being paid on 3.5 stars beginning in 2023. Furthermore, we recently announced maintaining the 3.5 star rating for another year, continuing the favorable revenue effect into 2024. While some uncertainty exists due to typical end of year seasonality in medical expenses, as well as the ongoing risk of COVID surges, we are revising our 2022 insurance MCR guidance to reflect our overall improved performance and positive momentum. We now expect a range of 93% to 94%, favorably updated from the previous range of 95% to 99%. As I've previously discussed, we are now highly focused on striking the right balance between growth and profitability. We believe our coal assistant enabled model gives us a structural advantage over other industry participants, allowing for profitable above-market growth. However, it is a well-understood attribute all MA plans as new members typically represent a headwind to MCR as it takes a year or two to comprehensively diagnose health conditions and bring members under care management. This transition period for new members impacts both MCR and star ratings. In the past, we emphasized growth in life, even as we understood this would result in a near-term profitability headwind. As our business matures, we've adopted a more balanced…

Thanks, Andrew. I'll first cover the third quarter 2022 highlights and then review our updated 2022 outlook. I also want to echo that I am proud of Clover's performance this year, and look forward to building upon our positive momentum next year, when we're paid at 3.5 stars on our flagship PPO plan. As Vivek and Andrew mentioned, our Q3 results were highlighted by significant improvement in insurance MCR, which improved to 86.3% this quarter from 102.5% in Q3 of last year. This improvement was driven by favorability in underlying operational trends as our portfolio continues to mature. Our year-to-date insurance MCR through Q3 also demonstrates the meaningful improvement over a more extended period, with Q3 year-to-date MCR improving to 91.7% from 107.1% in the Q3 year-to-date period last year. We believe that these improvements are a reflection of our focus on building best-in-class insurance operations and expanded Clover Assistant coverage and capabilities in addition to the benefit from normalizing COVID-related medical expenses compared to last year. In general, we won't be sharing prior period development in our results. That said, the insurance MCR does reflect favorability from prior periods and we don't view 86.3% as a go-forward run rate. We do feel that our full year guidance range of 93% to 94% is a fair representation of the overall underlying run rate of the business in 2022. This sets us up to do well in 2023 when we layer in the incremental benefits of being paid on 3.5 stars maturation of our portfolio and other operational tailwinds. Our non-insurance MCR was 104.2%, elevated versus Q3 of 2021. As Andrew mentioned, we're excited about the changes we're making to the program, which we believe will result in an MCR below 100% for the non-insurance line in 2023. During the third…

Thank you, Scott. First, a big thank you to the entire Clover team and all of the extremely hard work that has led to a very good quarter. The continued evolution of Clover Assistant is having a bigger and bigger impact on our results, and I believe that trend will only continue. This will be my last earnings call as CEO, so I thought it'd be good to lay out a few thoughts on the long-term. Firstly, Andrew's transition to CEO is going extremely well, and there's no better person and leader to be at the helm of Clover for the next many years to come. And speaking as the largest Clover shareholder, I am very confident he will deliver for me and for all of our current and future shareholders in ways that will be spectacular and shocking in a good way over the next many years. Now looking ahead, Firstly, it's important to remember that the public and private markets and yet to see a healthcare company achieved a positive disruptive impact at scale versus just the slice of it. It simply never happened before. And has occurred in other industries, consumer retail at Amazon, phones with Apple, knowledge acquisition of Google, entertainment with Netflix, cars with Tesla, space travel at SpaceX, short distance travel with Uber and hotels with Airbnb. Healthcare, education and energy production are three industries where positive disruptive impact at scale has not yet been proven out. Until that occurs, shareholders, current and future should expect and embrace the skepticism that we face. The human mine is not geared to believe something that has not yet been proven. Our job at Clover is to demonstrate that proof. Healthcare is a vast and complicated system. I've been fortunate to be a part of building and…

[Operator Instructions] We'll take our first question from Jason Cassorla from Citi.

Great. Thanks. Good evening, guys. Just wanted to start with the decision to scale back your non-insurance business with the ACO REACH program. Just can you discuss the decision a bit more, what the main drivers of that movement away from where you were with the drug contracting? And then maybe just high level, could you give more detail into the potential other areas for Clover Assistant such as the MSSP perhaps and how your participation in those types of programs could differ from contracting the ECL program? Thanks.

Yeah, absolutely. Thanks for the question. So as you said that we are very excited about our presence in fee-for-service. We've seen a lot of data about how Clover Assistant performs well within the fee-for-service environment and physicians are really enjoying using it for a majority of the Medicare panel. What we are moving away from it having in the entirety of our fee-for-service presence come from the CMMI program, the direct contracting now ACO REACH program, which is not yet a statutory program. What that means is that those rules can still change, rates are being tweaked, the models being adjusted, so we still intend to be one of the larger participants in that program, but we're very excited to extend fee-for-service into other areas too. Like you said, MSSP is already statutory. It's rules are much more defined. Rule making is much more defined like it is on the Medicare advantage side. And we think we've identified from our data is a lot of physicians who will do well in that particular program as well. So you'll see us move away from having everyone is fee-for-service just an ACO REACH, and then we'll discuss more about motion into MSSP and having a blended portfolio for fee-for-service, and we'll talk more about that in the future.

Okay. Got it. And then I guess just as a follow-up here, just coupled with that decision. I just wanted to go back to commentary on how you're thinking about 2023, right, including the benefit from this year's star performance on revenue. I think for next year, I think you flagged that before in the past there's a 300 to 500 basis point benefit to insurance MCR. So just any confirmation there? And then any early thoughts into cost trend expectations for MA, the improvement on insurance margin? Just any other puts and takes that we need to be mindful of as you try to go for profitability generation and balancing that between growth and profits? Thanks.

Jason, thanks for the question. This is Scott speaking. So, yeah, there's a number of different drivers that we have going into 2023 that we think will take us from our -- what we think is a significantly improved performance and run rate here in 2022. I think that we mentioned in our comments earlier that we view the run rate coming out of 2022 is being more or less in line with the full year 2022 guidance of 93%, 94%. And in terms of the insurance line MCR, you're right, we have made comments in the past around the incremental impact from the 3.5 -- being paid on 3.5 stars is being 300 to 500 basis points. And then we do expect some incremental impact from operational improvements and continued expansion of CA. At this point, we're not ready to come out with guidance or more detail on that. We're just very excited about the momentum that we have going into 2023.

Our next question comes from Richard Close from Canaccord Genuity.

Yeah. Thanks for the question. Can you hear me okay?

We can hear you.

Yeah.

Okay, great. Thanks. Sorry about that. Just as we're entering the AEP period for this year, and you guys pulled back on the number of counties, new counties you were going after. Can you just talk a little bit about how you're viewing the sales and marketing spend and effectiveness of that? I know you said you're expecting maybe a little bit lower growth rate versus past years because of the competitiveness, but still above market rates. But just if you could talk a little bit about the annual enrollment period would be helpful.

Yeah, definitely. So the way we think about growth is we feel like growth is really a differentiator for us and that our ability to offer a wide network product is really core to our growth ability and then what we've demonstrated in the past is that that's really what Medicare eligibles want is that wide network. And Clover Assistant lets us manage care on that wide network. So we've always spent not that much on marketing. We've always tuned how we look at growth, because we are able to grow without having to put a lot of capital into marketing. So this year, we really are adjusting our growth rate, not because of competitiveness, but because the faster we grow, the more new members we have, and because it takes a year or two to bring them under care management that provides a headwind to MCR and our path to profitability. So because we are absolutely focused on MCR profitability and operating expenses, we decided to moderate growth a little bit, and therefore, that will provide a tailwind towards that pathway in our breakeven point.

Okay. That's helpful. And then in the first quarter, you provided some MCR on different regions. And Southern New Jersey stuck out. Have you guys seen any improvements there over the last couple of quarters, or any update you can provide?

Yeah. Southern New Jersey definitely stuck out there. So we'll look forward to discussing this more early next year. Again, in that same vein there, the more returning members we have who are under Clover Assistant management, that's where we see our model really coming to a turn. So because we're choosing down growth a little bit this year and going into next season, we'll have more of those returning members, especially in South Jersey, in Georgia. And because that percentage of returning members will be higher, we expect to see significant improvements in MCR and we look forward to reporting more on that next year.

Okay. Thank you.

[Operator Instructions] We’ll take our next question from Kevin Fischbeck from Bank of America.

Great. Thanks. I wanted to understand a little bit more about the decision to scale back on DCE. I guess what happened to your experience has differentiated the doctor between when that's good and high performing and when that isn't. And then I guess when you say you're declining by two-thirds, -- are those -- that one-third is going to be with are they already at your 100 MLR? And is there any G&A deleveraging to think about throughout this process?

Yes, Kevin, thanks for the question. So a couple of different things. Not every single doctor is at that 100% MLR as they go through, but we have a strong belief that they engage well with the model, they have care management programs in place that are complement to our care management programs and so we really feel like there’s a lot of tailwinds that haven't performed well as they go into next year. The other dimension that I would say here is that as the rules change, like I'll give you a simple example, CMS continues to maintain the benchmark on a national basis. And because that benchmark is not nationally, different regions performed differently, which means that some doctors just have more of a headwind to perform even if they do deliver savings than other physicians. So if you look at things like that. If you look at Clover assisted engagement, got the individual usage, our physician usage. We look at care management synergies. And with that algorithm, we get sure then who we look at admin for next year.

And G&A…

Pardon, Kevin?

Are you saying the G&A, is there a G&A deleveraging, we should be thinking about from exiting this, or is there not much incremental G&A that gets stranded as you shrink the size of that business?

I would say that there is some opportunity there. And more broadly, we are looking across the entire business to make sure that we're operating at the most efficient level, and it's an area that we're going to prioritize as we get into 2023, just as part of our overall broader efforts towards profitability, not necessarily something I would like specifically for the DCE side of the business. I was going to add to Andrew's comments as well, Kevin, that we had made a comment earlier that we view the order of magnitude of the go forward, non-insurance line of businesses being around $1 billion and not revenue. And obviously, that's going to be dependent on final attribution of life under the program. So the number will differ from that, but we just wanted to give a general order of magnitude for how large the scale of the business would be.

All right. Thanks.

[Operator Instructions] We’ll take our next question from Whit Mayo from SVB Securities.

Thanks. I think we've covered most of everything. But back on DCE, did any of the physicians give an indication to you that they didn't want to renew or participate in the program. And in 2023 or was this exclusively a Clover-driven decision?

As I said in my comments, back Whit, we actually had a lot of applications. So we could have grown the program quite significantly, like this year. We actually chose to make an adjustment so that it could be more strategic, and we could actually broaden that portfolio into other statutory programs. So I'm not going to say that sounds to every single physician. But by and large, it was our decision because we could have grown it quite significantly.

Got it. So if you -- if you're standing up some type of MSSP offering in 2023, what does this look like? Is this a software-driven business? Maybe any help would be helpful for us.

Yes, absolutely. So all it would be underwritten and driven by Clover Assistant. I think the way that we should look at it is that the pathway into value-based care is probably not straight from fee-for-service into upside downside, which is what if your reach is, but we provide -- we plan to provide a more gradual pathway where people can go enter. I have a lot of folks, like I said, we have a lot of applicants and they could move into an upside-only program like MSSP move through the various stages of MSSP and then when appropriate graduate is there something like the ACO reach program. We think that's closer to what CMS envisions anyway, and it's unusual that will be ACO reach up about, as to having multiple sort of peers that they can participate in the fall this data from Clover Assistant in serving us, which here they should be in, we think can provide a very strong advantage in terms of selecting the right program for a doctor.

Got it. And I don't know if you gave any disclosure around any retro activity in the DC segment in the quarter. So just asking that question.

If you look at the…

Do you mean like the prior period development impacting the financial performance?

Well, given the underlying benchmark that keeps changing and some of the assumptions that CMS is providing to the industry.

Yes. So certainly, we're impacted by that. There was not a significant impact from any kind of prior period through relating to that in the quarter.

Okay. Thanks.

[Operator Instructions] It appears we have no further questions at this time. I will now turn the program back over to Andrew Toy for any additional or closing remarks.

Thank you, and thank you all for joining us today. I'm looking very much looking forward to 2023, when I will share our next quarter results with you all as CEO of Clover. I'm very proud that Clover is strong, purposefully evolving, and we're definitely heading in the right direction. I wouldn't be here today without Vivek. His vision inspiration, I believe that health care can truly be both different and better than what it currently is are all core to Clover philosophy and integral to why I began this particular journey. In the last few years, there are many things that Clover has executed on under Vivek’s leadership and vision that were far from common wisdom and were deemed to be impossible. But we are not seeing these things come to fruition. When Clover started, we were the only plan really offering incredibly strong plan benefits on a PPO, and we see now that other plants are copying our model. Years ago, we launched our own Complex Care Program betting at the future of Chronic Care Management was in the home. We now have a Clover Home Care practice powered by Clover Assistant that has grown tremendously. We believe it's actually one of the largest in New Jersey, and we see others moving to that model of care. And of course, we have always believed that primary care is critical and a forming physicians with technology to simply help them make better decisions without forcing them to do anything they don't want to do is crucial. Clover Assistant was born from that insight. And we've yet to see anyone who can compete with us on that front. There's one last piece of Vivek's vision yet to address and that is that the future of healthcare can only be realized by a true technology leader at the helm of a scaled healthcare company. I'm proud to step into that role, and I look forward to presenting to you all as CEO next quarter. Thank you.

This does conclude today's Clover Health Third Quarter 2022 Earnings Call and Webcast. You may disconnect your line at this time. Have a wonderful day.