2020 was a record-setting year for IPOs, and among the new stocks were several high-flying tech-enhanced insurance companies. Lemonade is perhaps the best-known, and it was one of last year's hottest new stocks. But a number of other insurance outfits making their public debuts are also worth exploring. Three to put on your watchlist are Clover Health Investments (CLOV 0.93%), GoHealth (GOCO 0.84%), and Root (ROOT -0.73%).
Clover Health: A SPAC goes the way of Medicare
Clover bills itself as a "next-gen Medicare Advantage" company -- a private health insurance option for those on Medicare. Clover just became a public concern through its recent merger with a SPAC (special purpose acquisition company) created by former Facebook executive turned venture capitalist Chamath Palihapitiya. The insurer is still small, debuting with an enterprise value of $3.7 billion, so there's massive opportunity -- Medicare Advantage spending was $270 billion in 2019, and it's expected to expand to $590 billion by 2025.
This is a different type of Medicare insurer, though. Rather than find and engage with its members via third-party agent, Clover works directly with both its insured parties and their chosen primary care physicians. It does so through its own software, including video conferencing tools and a data-collection platform, to drive better patient outcomes and cost reductions. This platform is delivered through the "Clover Assistant," a portal where member physicians can work with patients and the Clover team. As a result, the company boasts better care at a lower cost than the typical Medicare Advantage plan, and it thinks the Clover Assistant can be applied in other healthcare applications down the road.
While Clover checks off some important boxes for a potential long-term winner, like big market opportunity and disruptive service, there's a catch: The company only operates in 34 counties and has only 57,315 members signed up. This equated to revenue of just $507 million through the first nine months of 2020 (a 46% year-over-year increase), and a net loss of $10 million. However, this insurance outfit raised over $1.2 billion in cash from its IPO, giving it a big war chest to expand coverage to the rest of the U.S. Given how quickly Clover has been able to acquire enrollees in the limited markets it currently operates in, suffice it to say this is a promising company.
A lot is riding on Clover's ability to disrupt the current Medicare insurance status quo, and a business model based on increasing health outcomes coming from the insurer side of the equation isn't particularly easy to understand. I'm waiting to see a quarter or two of financial results before I decide to buy. But the stock is worth keeping a close eye on, as Clover could represent an early opportunity to invest in the disruption of a very large industry.
GoHealth: An online marketplace for shopping health plans
Speaking of Medicare, GoHealth is another way to invest in this fast-growing segment of the health insurance industry. However, where Clover is itself a health insurer, GoHealth is one of the very third-party vendors helping distribute Medicare plans that Clover is trying to circumvent.
Given the size of the private-pay Medicare market, though, I think there's room for more than one player. GoHealth is also a small up-and-coming business, debuting as a public company last summer and raising nearly $1 billion in the process. Flush with cash and operating an online marketplace to connect people with medical plans -- all during a year in which e-commerce got a huge boost from the pandemic -- GoHealth has made great strides growing its operation.
Specifically, revenue grew 72% year over year to $431 million through the first nine months of 2020. The pace is slowing, but the boom in business during the pandemic has helped this digital insurance marketplace turn a corner on profitability. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization, which backs out one-time expenses related to the IPO) through three quarters of 2020 was $101 million, versus just $40.7 million a year ago.
I broke one of my investing rules and bought GoHealth too soon last summer after it made its public debut, and since then shares are down some 25%. But the stock is making a comeback, one that could continue if the double-digit revenue and profitability growth rate can be maintained. And with a market cap of just $4.8 billion, this is still a small company. It isn't as high-tech as Clover, but this marketplace for Medicare insurance remains on my watchlist as households look for help and convenience when selecting health coverage.
Root: Auto insurance gets a mobile upgrade
For my final insurance tech watchlist add, I'm shifting gears from health insurance to auto coverage. Root was designed to be a completely mobile insurance shopping experience, using data on a person's driving ability to help provide better rates. It has also expanded into renters insurance with a similar goal of using digital data to optimize insurance premiums.
This expansion is a big deal. It can build on its early success in one area, and now has lots of existing customers to offer insurance bundles. It's one of the reasons Lemonade -- which started out offering renters and homeowners insurance -- has gone viral since it went public. Like Lemonade, Root also uses data science to optimize premiums for its customers, and as auto insurance is generally a requirement by law and worth about $270 billion a year in the U.S., Root could be a promising name in the industry long-term.
But while Lemonade stock has skyrocketed, Root has done the opposite. At Thursday's prices, shares were down about 20% from where they made their public debut in October, giving the insurance upstart a market cap of roughly $5 billion. Root's fortunes could change, though. Revenue was up 61% to $296 million through the first nine months of 2020 as collected insurance premiums grew at a double-digit pace. And much of the pessimism can be chalked up to Root's loss-generating operation. Free cash flow (revenue minus cash operating expenses and capital expenditures) was negative $98.7 million over the same period. But Root had $442 million in cash, equivalents, and short-term investments as of the end of September, and raised another $724 million in cash during its IPO. Put another way, this company has ample liquidity as it attempts to steal drivers from the auto insurer incumbents.
I'm not a buyer here, at least not yet, but Root is certainly on my radar. Besides picking up more policies, it will also need to prove that its data analytics engine can help it reduce losses and eventually start turning a profit on collected premiums. But thus far this young company has proved itself as a successful disruptor of the existing auto insurance status quo. That's enough for me to add it to my list of promising businesses to watch.