Clover Health: Insurance Losses Lead to Anemic Stock Price

Clover Health (NASDAQ:CLOV) has been one of the year’s biggest disappointments. The so-called King of SPACs (special purpose acquisition companies), Chamath Palihapitiya, took the health insurer public via one of his Social Capital Hedosophia SPACs. CLOV stock shares almost immediately tumbled after short sellers revealed that it had failed to disclose a government investigation into its business practices.

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CLOV stock has largely continued to decline since that point. There was one brief shining moment when CLOV stock surged from $7 to $28 in June on a successful short squeeze. With the short sellers out of the picture, however, CLOV stock soon dropped right back to the single digits.

Clover enjoyed a moment of excitement earlier in August on its Q2 earnings report. Traders looking at just the top-line numbers thought Clover had performed well and bid up the stock up. However, a closer investigation of those results showed that Clover is continuing to flounder.

Good Earnings, Right?

Traders looking at the Clover Health earnings release might have thought it was good news. CLOV stock acted that way for a minute, in any case.

The reason for the excitement was from the revenue number. Clover reported $412 million of revenue, which was a gigantic 140% leap from the same period last year. This number, not surprisingly, was way ahead of analyst expectations. Clover also guided to much higher revenues going forward compared to the consensus estimates.

Surely this sort of torrid revenue growth must represent a booming business, right? If Clover were a software company, this sort of excitement would make perfect sense. However, in insurance, things are a bit different.

Insurance Is Not A Top Line Business

In insurance, more isn’t always better. An insurer makes profit in two ways. One, it takes customers’ premiums (known as the float) and invests them in assets. Berkshire Hathaway (NYSE:BRK.B) became incredibly successful because Warren Buffett used the float from Geico to buy up numerous other businesses at attractive prices.

The second thing that made Buffett so successful, as it relates to insurance, is that his firm doesn’t chase customers. If other insurers want to sell uneconomic policies to drum up traffic, Buffett is happy to let customers defect to the imprudent competitor. Buffett has been clear about not taking on bad insurance risk simply to give the appearance of growth.

Clover Is Failing As An Insurer

Chamath Palihapitiya likes to compare himself and his investments to Buffett and Berkshire Hathaway. Unfortunately, Palihapitiya’s Clover hasn’t learned the key lessons of Geico. Namely, only underwrite insurance when it makes economic sense to do so.

This past quarter, Clover had an appalling 111% medical cost ratio. This means that for every $100 Clover took in of insurance premiums, it had to pay out $111 in medical benefits. Needless to say, no insurer will remain in business for long if it loses 11% on every policy it underwrites. Generally, insurers actually make money underwriting insurance policies. At minimum, they at least try to break even. Clover’s growth at any cost model, however, has shown minimal success historically in the industry.

Clover’s Excuses

The company tried to hand-wave away its disastrous results. For one thing, it blamed Covid-19 for the extra expenses and said it would have been marginally profitable in underwriting sans the pandemic.

There’s two issues with that. One, other health insurers reported better numbers this quarter as opposed to previous ones, whereas Clover’s medical loss ratio continued to worsen. Secondly, there is always something that comes up in insurance. People buy insurance to guard against unforeseen disasters. It’s a pretty weak argument to say Clover would have made money if no unexpected issues had come up. The point of insurance is precisely to manage such unknown hazards.

It’s particularly underwhelming seeing Clover’s lousy underwriting given the Clover Assistant. The big selling point is that Clover can better manage risk due to its sophisticated artificial-intelligence (AI) powered process. Instead, even with big data, it is producing worse results than the industry as a whole.

I’ll let you in on a little secret. The big health insurance companies are using sophisticated data in their processes as well. It seems increasingly clear that all the hype and buzz around Clover’s supposedly superior technology was unfounded. Clover hasn’t reinvented the wheel here.

CLOV Stock Verdict

I recently warned traders that they should stop trying to rejuvenate Clover Health stock. Reddit keeps trying to meme CLOV stock into reality. But fundamentals point to a tough road ahead for CLOV stock.

My most recent warning initially fell on deaf ears; CLOV stock popped 25% on the most recent earnings release. But shares gave back all those gains and then some within a few days as cooler heads prevailed. Simply put, a data-driven insurance company that can’t successfully underwrite insurance is a hard sell. There’s one main task to prioritize here, and Clover isn’t getting it done.

Clover Health has a lot of excuses for why its insurance underwriting is so lackluster. The time has long since passed to give Clover’s management the benefit of the doubt, however. The company needs to prove that its supposedly superior business model actually works. Until then, expect CLOV stock, like so many SPACs, to keep trending lower.

On the date of publication, Ian Bezek held a long position in BRK.B stock. He held no position in CLOV stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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