On March 1, Clover Health (NASDAQ:CLOV) posted losses and mediocre results for the quarter and year ending Dec. 31, 2020. As a result, CLOV stock is sick in bed, having fallen 8% in the past month. At $7.21 as of time of publication, the stock is down nearly 55% from $15.90 on Jan. 8 when it started trading after its SPAC (special purpose acquisition company) merger.
Don’t expect this situation to dramatically turn around anytime in the near future. That is, CLOV stock is stuck until there are at least some prospects of potential profits at this Medicare Advantage insurer.
Moreover, given that Clover has negative equity on its balance sheet, concerns are growing that it is not capitalized well enough to handle forecast losses. That could also be weighing on the stock.
Financial Losses Despite a Positive MCR Ratio
The good news is that Clover Health’s Q4 revenue grew 45.6% year-over-year, despite the effects of Covid-19 on its business. The bad news is that its Q4 net loss grew to $81.6 million compared to negative $78.7 million last year. However, in all of 2020, the company lost $91.6 million, much better than the $316 million in losses during 20119.
Moreover, its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) numbers were lousy as well. This reflects the level of cash flow of its health insurance business, although it omits mandatory interest and tax payments. The adjusted EBITDA losses were $63.4 million in Q4 and $74.4 million for all of 2020. Nevertheless, the 2020 losses still show much improvement over the $175.5 million in losses during 2019.
One bright spot is the fact that Clover Health now has a better-than-expected medical care ratio (MCR). This ratio takes total net medical claim expenses incurred by premiums earned. It is sort of like the combined ratio used by property and casualty companies. The main point is that any ratio below 100% implies that the insurance business can be profitable. The MCR does not include selling expenses like the combined ratio.
For example, Clover said that its stated GAAP MCR was 109.3% for the quarter and 88.7% for the year. The annual number was much better than the 98.6% ratio for 2019. This implies that Clover Health is keeping its claims expenses under control in comparison with its premium revenue.
That’s the only good news. The MCR does indicate the company will be profitable. There are layers of expenses on top of this, including selling, general and administrative, plus financing costs, taxes and extraordinary charges. That is why Clover has losses but MCR shows profitability.
Issues With Its Capital Base
Right now Clover Health has negative equity. It is expected to continue to pile on further losses for the next several years. I pointed this out in my last article on Clover Health, as the stock is not likely to rise with this forecast.
These losses might lead to issues with the capital base. For example, Clover Health has just $151 million in cash as of Dec. 31, and negative $568.3 million in shareholder equity. In fact, that negative equity balance worsened by $80 million or 16.3% in 2020. That is what happens when your insurance business remains unprofitable.
Moreover, the $151 million in cash cannot sustain more $80 million to $90 million net income losses this year and next. I suspect that CLOV stock is likely dropping in anticipation of another equity capital raise if the next several quarters show more losses.
What to Do With CLOV Stock
Watching Clover Health shows us that setting up a health insurance company focused solely on selling Medicare Advantage policies is a big struggle. You have to get scale. The company is trying to expand across numerous other states this year, but that has incurred additional expenses. Therefore, until Clover Health can get a substantial core of policies, it will always bleed money. That is no good for CLOV stock.
However, there are three analysts that cover Clover Health, and they are not as gloomy as I am on CLOV stock. For example, TipRanks.com indicates that the average price target is $12.67, a potential upside of nearly 77% above the current price.
So, take what I am saying with a grain of salt. Nevertheless, the patient investor might want to wait until there is some hint of profitability at Clover Health. Until then, CLOV stock is likely to languish.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
