Oscar Health, Inc. (NYSE:OSCR) Q4 2022 Earnings Call Transcript February 9, 2023
Operator: Good afternoon. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health’s 2022 Fourth Quarter and Full Year Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn it over to Cornelia Miller, Vice President of Corporate Development and Investor Relations, to begin the conference.
Cornelia Miller: Thank you, Regina, and good evening, everyone. Thank you for joining us for our fourth quarter and year-end 2022 earnings call, where we’ll discuss our execution against our annual plan, our expectations around InsuranceCo profitability, and our path to total co-profitability. Mario Schlosser, Oscar’s Co-Founder and Chief Executive Officer; and Sid Sankaran, Oscar’s Chief Financial Officer will host this afternoon’s call, which can also be accessed through our Investor Relations website at ir.hioscar.com. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website. Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our quarterly report on Form 10-Q for the quarterly period ended September 30, 2022 filed with the SEC and our other filings with the SEC, including our Annual Report on Form 10-K to be filed with the SEC. Such forward-looking statements are based on current expectations as of today. Oscar anticipates that subsequent events and developments may cause estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the fourth quarter 2022 press release, which is available on the company’s IR website.
With that, I would like to turn the call over to our CEO, Mario Schlosser.
Mario Schlosser: Thank you, Cornelia. Good evening, everyone, and thank you for joining the call today. Before we get to fourth quarter and full year 2022 results, I would like to provide some context on our story to dates. For the past five years, we have seen a 75% compound annual growth rate for Direct and Assumed Policy Premiums. We have improved the medical loss ratio by approximately 12 points since 2017. Our Net Promoter Score has increased more than 20 points with the same time periods. Our members were the first to get access to free virtual urgent care. Our $3 drug list has made medications more affordable for them and our $0 virtual primary care medical group has been helping more of our members get importance preventative care.
Fast forwards to today, the fourth quarter capped off a transformative year for the company. We have talked about how we have talked a lot about how 2022 was a year of monumental growth for the business. We nearly doubled membership and crossed the 1 million member milestone and while that is impressive, what’s more impressive for us is how we managed that growth. We knew that heading into 2022, the step change in membership required us to put all of our focus on operating at scale and that our technology, our operations, our people, would be under pressure to deliver our target at MLR and expense ratios. To meet these challenges, we organize the company around three key objectives, medical cost management, sculpting the portfolio and admin cost management.
As our year end results show, we were able to execute against the plan, we set out for the business in these areas and we applied our learnings gathered throughout the year to position the company for profitability. Let’s first take a look at medical cost management, despite doubling in size and welcoming a large number of new members that we knew little about, reduced the medical loss ratio by 360 basis points hitting 85% for 2022. We applied the best of our technology to our efforts and we also spent the year implementing and scaling the traditional managed care processes in medical or social managements. We realigned operations against a more localized operating model to respond to regional trends more quickly and we developed targeted medical cost mitigation strategies.
We were able to drive higher utilization of less invasive, more cost effective procedures and reduce hospital readmission rates supported by changes to medical policies and by thoughtful case managements. We also applied our member engagements to medical cost managements utilizing our campaign builder’s capabilities, the team develops campaigns and strategies to ensure our members seek the highest quality, lowest cost options for site of care and for drugs. We believe that our member engagement model allowed us to make further progress in bringing down medical costs in 2022 and we’re very excited here for what else we will deploy in the course of 2023. With regards to the seconds of our levers portfolio sculpting, heading into 2023, we prioritized margin overgrowth in our IFP strategy and we took high-single digit rates increases on average across the book.
Our localized operating model has also enabled us to restructure our networks in certain markets, reduce unit costs, and drive improved quality with our provider partners. We continue to scalps our portfolio both in terms of plan designs and markets to ensure we allocate our capital in places we view as most attractive and most sustainable. As the third lever, we tackled the challenges of bringing down our administrative costs. Throughout 2022, we took a disciplined approach to expense managements, which improved our insurance company admin ratio by 125 basis points year-over-year. This work, which included leveraging our technology defines fixed admin cost efficiencies across our customer service operations as well as increasing automation throughout our clinical operations has set us up very well for 2023.
As part of this app and efficiency work, we also moderated the acquisition costs of our 2023 IFP book and we took other decisive cost actions that positioned us to enter the year with a lower cost base. Overall coming into 2023, on the cost and margin side, we have already completed much of the work needed to achieve our 2023 targets and with a greater portion of our book consisting of returning members than ever before in our history, we have better line of sights into our member population and the related cost structure. In summary, we proved our technology can scale and they continue to be opportunities for efficiency going forwards. We also did all of this while delivering an all-time high Net Promoter Score of now 47. In 2023, we expect the majority of our tech resources will be focused on impacting insurance company operating results near-term that means less focus on growing +Oscar platform revenue, that being said, we have continued to develop our first +Oscar standalone module campaign builder, and during this quarter we signed our first campaign builder deal with a South Florida based MSO, which is leveraging the tool to power their value-based care operations, drive primary care utilization and manage medical expense.
We intend to grow campaign builder at a thoughtful pace with a modest rollout pace in 2023 as we build our execution muscles here and insurer is successful deployments with our initial clients. As we think about +Oscar longer-term, we believe that focusing our tech on increasing efficiency and profitability in our insurance business will translates to even better capabilities we can bring to the markets. And before I hand it over to Sid, I want to talk about we like to call internally the Oscar magic, our member engagements. This part of our company continued to be a differentiator for us in 2022, we maintained high levels of digital engagements and as our membership has grown and changed from a demographics perspective, we have added channels to increase engagement with members who have historically been harder to reach.
If one example here, in SMS campaign we launched to drive active renewals and autopay enablements, that campaign saw about a 33% response rates compared to about a 2% rate you would get for a similar email campaign targeting similarly non-digitally engaged members and then 78% of those members that responded yes to keeping their plan ultimately renewed into their same plan and nearly 10% activated autopay. We made some exciting strides towards leveraging this member engagements engine with our provider partners as well. We told you that here we are investing to bring our tools to be our providers and we’ve begun to use our real-time data more and more to deepen our provider relationships on the grounds with the most closely aligned provider partners we have, we are co-creating campaigns to improve outcomes and to lower total cost of care.
For example, we spend 2022 piloting campaigns focused on annual wellness visits, closing these gaps and other care quality campaigns. In fact, you can see a demo of this technology on our IR site, ir.hioscar.com I think clearly, right? Yes. Go there and click. And we are excited to scale these campaigns and with nuance to our 2023 as well. There’s a lot successes we think in 2022 once that gives us a strong momentum into 2023 across the business. And here we believe we are better positioned than ever before to hit profitability based on discipline execution in 2022. We’ve got a very clear roadmap for the organization achieve our goals for the year, which is profitability in insurance business in 2023 and total company profitability in 2024.
And we believe we have enough cash to get us there and Sid will walk you through the plan for this in his part of the prepared remarks. Fundamentally, Oscar is a growth company and we are positioned well in any environments where the consumer has increasingly greater choice in buying power. The ACA continues to be the fastest growing health insurance segments projected to hit 20 million enrollees in the near-term, and we see shifts to what programs like individual coverage hedge ratesas another signal that the marketplace offers unique value for individuals and increasingly also employers. With these market tailwinds, we are excited to return the top line growth in 2024. Now with that, let me get Sid on here and he will walk you through the numbers in more detail.
Sid Sankaran: Thanks, Mario, and good evening, everyone. It’s great to be back and I’ve enjoyed reconnecting with all of you again. Our full year 2022 results were largely consistent with our expectations and guidance range. We believe last year’s performance offers a solid baseline for our 2023 targets, which I’ll discuss in greater detail in a few moments. Turning to the results, we ended the year with nearly 1.2 million members, reflecting growth of 93% year-on-year. A robust membership growth also drove a direct and assumed policy premium significantly higher. Full year direct and assumed policy premiums increased 99% to $6.8 billion driven by membership, mix shifts to higher premium plans, rate increases as well as improved lapse rates and higher SEP growth rates in the second half of 2022.
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Even with our sizable membership growth, our 2022 medical loss ratio improved 360 basis points year-on-year to 85.3%, primarily driven by lower COVID costs, mix and pricing, as well as execution on our total cost of care program. Excluding negative prior year development of $28 million in the calendar year, the MLR would’ve been 84.8%. Our fourth quarter MLR of 91.6% improved 630 basis points year-on-year, largely driven by the same factors as the annual MLR. However, the quarter includes $13 million of favorable intra-year development driven by favorable reserving trends relative to our pricing assumptions, partially offset by more cautious view on 2022 risk adjustment given our growth. Overall, claims trends have been favorable in total with inpatient and professional utilization coming in better than expected offset in part by higher RX spend than projected.
Switching to our admin costs, our InsureCo administrative expense ratio improved 125 basis points year-on-year to 20.6%, driven by operating leverage benefits and admin efficiencies from our enhanced scale, partially offset by higher distribution expenses. As we’ll discuss in guidance, we see 2022 as the high water mark of distribution expenses. Our fourth quarter InsureCo admin ratio of 22.3% improved 220 basis points year-on-year due to the items I just mentioned. Our overall combined ratio, the sum of our MLR and admin ratio was 105.8% for the full year 2022, an improvement of 490 basis points year-on-year driven by the aforementioned improvements in each of the individual metrics. We believe our nearly five points of margin improvement coupled with a top line growth, demonstrates the power and sustainability of Oscar’s model through disciplined execution of our business plan.
Our adjusted admin expense ratio, which includes expenses in our holding company, was 24.6% in 2022, an improvement of 440 basis points year-on-year, primarily due to operating leverage and scale efficiencies. For the fourth quarter, our adjusted admin expense ratio was 26% an improvement of 840 basis points year-on-year. Moving to our overall company profitability, our adjusted EBITDA loss was $462 million for the full year 2022, which was in line with our initial guidance range for the full year. This was better than our most recent expectation due to higher than expected net investment income in the fourth quarter, as well as admin savings to right size our cost as we tightly manage headcount ahead of 2023. The full year adjusted EBITDA loss reflects a 7 point year-over-year improvement as a percentage of premiums before quota share reinsurance.
Our fourth quarter adjusted EBITDA loss was $190 million, an increase of $26 million year-on-year, which was largely driven by higher premiums. The fourth quarter adjusted EBITDA reflects a 9 point year-on-year improvement as a percentage of premiums before ceded reinsurance. Turning to the balance sheet, we ended the year with $3.2 billion of total cash and investments including $340 million of cash and investments at the parent company. Our subsidiaries end of the year with approximately $700 million of capital and surplus, which exceeded our internal targets by $170 million. Note, we also set our internal capital targets is that at a higher threshold than regulatory minimums in order to ensure we maintain a strong balance sheet. As we look to 2023, we intend to continue to be disciplined and are already executing on our plan to improve core margins and profitability.
This is reflected in our 2023 guidance, which we’ll discuss today. Our outlook for the year reflects largely stable premiums year-on-year with continued meaningful combined ratio and adjusted EBITDA improvements, driven by targeted actions the company has taken and will continue to implement to reach profitability. Specifically, we expect our direct and assumed policy premiums will be the range of $6.4 billion to $6.6 billion. This is consistent with our prior commentary, but our membership will be largely flat between 2022 and 2023. As a reminder, we proactively work with regulators to pause accepting new members in Florida. And therefore we do not expect new enrollments in that state in the first half of the year. We expect to begin receiving Medicaid redetermination members in the rest of our states beginning early in the second quarter.
Overall, we’re projecting lower SEP members as a portion of the overall book this year. This should be favorable to our MLR, however, it’ll be a net headwind to premiums. Our expected medical loss ratio range of 82% to 84% reflects over 200 basis points of improvement at the midpoint versus last year, driven by rate increases, mix shifts and total cost of care management programs. We are renegotiating our PBM contract, which will result in meaningful savings beginning in 2023, and as an example of one of our cost of care initiatives. We do expect our MLR seasonality will look similar to last year, albeit with a more modest slope. Switching to admin, we expect our InsureCo admin ratio will be 17% to 18%, reflecting an improvement of 300 basis points year-on-year at the midpoint, primarily due to the identified cost savings that we have discussed previously.
These savings largely consist of lower distribution expenses and vendor savings achieved by our increased scale. Importantly, the majority of these savings have already been achieved. And as a result, we are turning our attention to generating further efficiencies for 2023 and beyond. We expect our admin seasonality will be different from last year with the first quarter highest and declined gradually throughout the year with 3Q and 4Q ratios fairly similar. We would call out that for 2023 we are targeting a combined ratio at or less than a 100%. We are entirely focused on execution here as this remains the primary metric we use to assess core business margins and profitability. In order to better allow investors to understand the profitability dynamics of our statutory insurance subsidiaries and their underlying capital profile, we’re introducing a new metric, our InsureCo adjusted EBITDA, which includes the combined ratio, investment income and the cost of our quota share reinsurance.
We believe this metric will allow investors to better understand the capital and cash flow relationship between our insurance subsidiaries and our parent company. Unlike our competitors, given our startup nature, Oscar has historically not had meaningful investment yield on our portfolio relative to market competitors who’ve had longer duration portfolios yielding 3% or more. With the return to a more normal interest rate environment, investment income is expected to have a significantly positive impact on the InsureCo profitability in 2023. We ended 2022 with $2.9 billion of cash in investments at our subsidiaries. For 2023, we are estimating our cash and investment portfolio will yield 3.5% with the range of 3% to 4% for the year depending on Fed actions in the shape of the yield curve.
With respect to our quota share reinsurance agreements, we have restructured our quota share contracts to maintain a similar ceding percentage year-on-year while lowering the cost. I’d also note that our new quota share contracts required deposit accounting upon their one-one effective date. So you’ll see a diminimus amount reflected in reinsurance premium ceded going forward. Incorporating all these items, we’re projecting solid earnings and capital positions for our insurance company. For 2023, we project our insurance company adjusted EBITDA will be $20 million to $120 million resulting in profitability across the entities. Switching to our total co, we projected an adjusted admin expense ratio range of 20.5% to 21.5%, an improvement of 360 basis points year-on-year at the midpoint, largely due to cost savings previously outlined.
In 2022, admin services revenue was $61 million and we generated a modest bottom-line margin. For 2023, we agreed to terminate the Health First arrangement and will receive no further fee income, while occurring a modest amount of transition related costs. For our ongoing +Oscar arrangements, we expect fees of approximately $20 million to $25 million generating a positive contribution to our results in 2023. Our projected adjusted EBITDA loss range of $175 million to $75 million reflects an improvement of $335 million year-on-year at the midpoint, largely driven by improvement in our core underwriting margins as well as meaningfully higher investment income with rising interest rates. The midpoint of guidance reflects approximately five points improvement in the adjusted EBITDA loss as percentage of premiums before ceded reinsurance year-on-year.
We enter the year with a very strong balance sheet including $340 million of parent cash and investments. In our base case, we believe we have sufficient cash and liquidity to fund the company to total company profitability, which is expected next year. Specifically, we expect limited capital contributions to the insurance subsidiaries in 2023 with potential upside in our free cash flow driven by our insurance company adjusted EBITDA profitability. This is a substantial improvement from 2022 where we infused $420 million into our subsidiaries due to growth and net losses. As a reminder, as our insurance subsidiaries become profitable, there upstream tax earned payments from the subsidiaries to our holding company. We do not expect to be a cash taxpayer at the holding company for the foreseeable future given our sizable deferred tax asset.
Given our substantial progress on insurance company profitability, our holding company costs net of revenue are now the primary use of funds for the company. As we’ve said previously, we are targeting total co profitability in 2024. With that, let me turn it back to Mario for his closing remarks.
Mario Schlosser: data so I will close out with some very simple thoughts. The risk equation for a company has changed dramatically towards the positive. We are projecting full company profitability next year and we expect we will have enough cash to get us there. We’ve done the work to bring down our medical loss ratio in line with other industry incumbents. Our admin costs are coming down in line with our plan. We took on membership this year at a sustainable margins that set us up for the future. We have a differentiated products in the fastest growing insurance markets in the country and remains attractive to brokers and members alike. Having our own infrastructure that has proven scalable and being clearly advantaged in our ability to engage with members, those are massive differentiators.
We are builders and I find it personally very exciting to continue to build on top of this infrastructure. There is ample runway to get even more automated and efficient and that is where we will continue to focus in the coming year. So the 2023 plan is straightforward. We know what needs to be done, we simply need to continue on the path that we are on. Before I close, I’d like to thank the Oscar employees who’ve been so committed to building on the momentum of the past few years. We have great ambition and an even greater team. And with that, let’s turn over to the operator for the Q&A portion of the call.
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Q&A Session
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Operator: Our first question will come from the line of Michael Ha with Morgan Stanley. Please go ahead.
Michael Ha: Hi, thank you. So I understand this year you’re targeting lower distribution expenses and vendor savings from increased scale. And I think you have mentioned majority of these savings were already achieved and now you’re focused on further efficiencies. I was wondering if you could talk about what these efficiencies are? How that could yield additional savings and whether that presents opportunity for upside to earnings? And also on Health First, I think you mentioned incurring a modest amount of transition related costs. How should we think about the magnitude of those stranded costs?
Mario Schlosser: Yes, Michael. Let me take the first question and then Sid you can talk about the second part of the question. I will point you back to the three levers we tackled in 2022 across admin, medical cost managements and portfolio sculpting in all three of these, we have more, I think, way more room to go. Start with the admin side, we renegotiated things like chart collection vendor contracts pretty much every medical management vendor we have contracts there, PBM vendor, things like that. Where the additional savings lie in the future is in my view a lot in further automation really across our claims operation, across eligibility and billing operation, across the killing operation. These are now nicely scaled and I think we know what we’re doing in these now, both from point of view of whether any errors occur or any other issues happen there.
But also from the point of view of how sort of front footed we can be on these and across the Board there, we can still do more scale as we scale the future and high membership growth, this is automating more of these types of conversations. An example last year on the customer service sites and we’re sending a lot more conversations through this automated systems that can ping directly into our real-time systems, whether it’s about eligibility, claims status, things like that, supporting the provider service and customer service sites. Sid, maybe on the second question transition costs.
Sid Sankaran: Yes. Sure. Thanks, Michael. Appreciate the question. Really with respect to the runoff expenses, there is some modest expenses performing runoff services in 2023. We wouldn’t expect them to occur in 2024 and we really wouldn’t comment beyond that.
Michael Ha: Got it. Thank you. And if I could squeeze one more in, if I’m not mistaken, I think Florida’s one of the most capital in central states. I think the statutory cap requirements are something like 25% for the first five years, but I believe Oscar first enter Florida back in 2019. So presumably you’d be nearing the end of that, so you might get a decent chunk with cash back. I was wondering is that true? And if so, what would the timeline be on receiving that cash and would your statutory capital requirements drop to 10% or 15% thereafter? Thank you.
Sid Sankaran: Well, Michael, again, thank you for that. It’s a great question. Yes. Your read of the statutory regulations is consistent with ours and those startup seasoning requirements would effectively run through the end of this year. Beyond that, I mean we think as Mario said, we have a lot of potential for the company growing organically becoming more capital efficient in some of our structures. And so we’d of course evaluate that, but I think you’re absolutely right to call out that, that we would see that as an upside potentially.
Operator: Our next question will come from the line of Jonathan Yong with Credit Suisse. Please go ahead.
Jonathan Yong: Hey, thanks for taking my question. I just want to hit on redeterminations and how you’re thinking about the risk pool of the members that you may end up recaption. Do you have an assumption of how many members you think that you will actually gain from redeterminations and kind of how are you thinking about their MLR coming on to your books later in the year? Thanks.