When I last wrote about Clover Health (NASDAQ:CLOV) stock in early September, it was trading around $9.45. It has since lost 18% of its value and trades less than $2 off its 52-week low. Gone are the days in early June when the 52-week high tested $30.
In the end, I suggested that while I wouldn’t invest in the stock in a million years, investors with a penchant for risk might. However, wherever you find yourself on the risk spectrum, an investment in Clover Health will take patience, not to mention a focus on revenues and economies of scale. Profits ought to be your last concern.
However, after reading InvestorPlace contributor Ian Bezek’s most recent comments about the insurance technology platform, I’m not even sure a focus on the top line will be able to save CLOV stock.
In May and early June, Clover Health appeared to have some promise. Now it seems to have fallen off the wagon and is barely hanging on.
Unless Clover can demonstrate it knows how to run an insurance company, all the technology in the world will not help it get out of the current hole it finds itself.
CLOV Stock and Poor Underwriting
As my colleague points out, for every dollar of premiums it earned in the second quarter, it spent $1.11 providing medical coverage for a Medical Care Ratio (MCR) of 111%. Lower is better.
Now, as I said in September, Clover can’t hold a candle to UNH’s 6.39 million Medicare Advantage customers. Clover has approximately 1% of UnitedHealth’s comparable customer base, which provides the $385 billion health care giant with the scale necessary to generate a decent profit from many customers.
In Q2 2021, UNH had a net margin of 6%, 470 basis points less than a year earlier. Nonetheless, it is a million times better than Clover. In addition, UnitedHealth had $5.42 billion in operating profits in the second quarter, while Clover had an operating loss of $181.9 million.
Even when you use a normalized Medicare Advantage MCR ratio of 97.0%, it’s still 1,400 basis points higher than UNH.
“Insurance companies, as a baseline, are supposed to have MCRs under 100% to earn a profit. Ideally, they’d be significantly below 100%, as is the case at most major health insurers. Instead, Clover is losing money just operating its essential insurance business,” Bezek wrote on Sep. 27.
Bezek points out that Clover, according to analysts, will continue to generate operating losses through the end of 2023.
The Bull’s Argument
If you take a closer look at its Q2 2021 10-Q, there are a couple of bright spots.
The first is that its net medical claims incurred during the first quarter of $458.5 million accounted for 77.1% of its total operating expenses. In Q2 2020, net medical claims incurred during the second quarter were $119.4 million, or 80.2%, or 310 basis points higher.
If it can figure out how to get the net medical claims incurred figure lower, it’s doing a reasonable job keeping a lid on salaries and general overhead. In Q2 2021, its salaries, benefits, general and administrative expenses accounted for 18.1% of its total operating expenses. In Q2 2020, they accounted for 27.3% of its total.
There is a pathway to profitability here, but it has to put a lid on its underwriting losses, which is easier said than done.
In mid-September, I suggested that CLOV will require significant growth over the next four quarters if it has any hope of going to $20 any time soon. However, sequentially, increasing revenue and lives under management with a focus on keeping its overhead in check should help push its quarterly losses lower in 2022 and into 2023.
The analysts are probably right on the money when they project losses through the end of 2023.
In the meantime, CLOV shareholders are waiting patiently for the genuine Clover Health stock to stand up and be counted as more than just a meme stock.
The tug-of-war continues. If you own CLOV stock, you will need the patience of Job.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.