On this week’s pod, we take a look at another hypergrowth investment opportunity, the US pet insurance company, Trupanion. Trupanion is North America’s largest publicly traded provider of pet insurance. It has focused exclusively on pets during its two-decade operating history, and currently insures over 940,000 cats and dogs in the United States, Canada, Australia, and Puerto Rico (an increase of 37% YoY).
- Pet ownership has grown significantly during the pandemic, many households have bought or adopted a pet to help them get through the social isolation of lockdown. In the US, 23 million households acquired a pet between March 2020 and May 2021, and today 67% of American households own at least one kind of pet
- The North American pet insurance market was worth $1.9B in 2020 and is expected to grow to $3.8B by 2027. However, today less than 2% of North America’s 200 million dogs and cats have pet insurance, presenting a large growth opportunity
- Trupanion were recently rated as the #2 US pet insurer, just behind Healthy Paws. They have a 4.4 / 5 score on trustpilot, and their customers and vets are strong advocates for the company – an interesting contrast to their insurtech competitor, Lemonade, who score a woeful 2.6! However Trupanion are one of the more expensive pet insurance offerings, and a price-sensitive consumer may find that other insurers offer better value
- In Q1 2021, Trupanion’s monthly average revenue per pet was $62.97. Costs per pet currently exceed revenue by around $1, primarily driven by high subscription acquisition costs. The ‘lifetime value per pet’ insured by Trupanion is $634, however over $270 is spent acquiring a pet, so a customer needs to be retained for three years before Trupanion realises a return on the high acquisition cost
- 2021 Q1 results showed revenue of $155M, an increase of 39% YoY. Average monthly retention was 98.73% compared to 98.59% in the prior-year period, and the average pet’s life with Trupanion increased to 79 months, up from 71 months in the prior 12-month period. The company recognise that they still have opportunities to improve the retention of pets that drop out after one year
- The company’s financial position is strong with cash and assets of over $500M. The net loss for Q1 2021 was $12.4M, compared to a net loss of $1.1M in the same period last year. This was primarily driven by increased stock-based compensation expenses and a one-time performance grant to all employees that totalled $4.3M
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Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Sunday the 6th of June.
Luke: Welcome to the Telescope Investing podcast.
Intro
Luke: Hey Albert, let’s do another hyper-growth stock this week. We haven’t looked at one of those for a couple of weeks.
Albert: Yeah, I think we only done two, Luke, CuriosityStream and Nanox Imaging, and it’s been about a month since we’ve done the last one.
Luke: And so far, I’ve got a hundred percent strike rate on the hyper-growth stocks that we’ve looked at. I bought both of those.
Albert: And by strike rate, you mean they’re both down, right?
Luke: Exactly. Yes, they’re in my portfolio and they’re in the red. So let’s maybe add another red option today.
Albert: Well, you’re not alone, Luke. I also bought both CuriosityStream and Nanox Imaging. I’m feeling the pain as well.
Luke: Well, we love a bit of pain. It’s good for the constitution. So what are we going to look at today?
Albert: It’s a company called Trupanion, which deals in the insurance market. Specifically, in pet insurance.
Luke: They broadly fit our hyper-growth criteria, which we’ve published to the website. They’ve nearly got under a $3 billion market cap. Today it’s about three and a half billion.
One of our other criteria is that they should have over 10% quarter-over-quarter growth for the last three quarters. Actually, Trupanion have shown 20% revenue growth for 54 quarters. I’m looking at a revenue growth graph over the last 10 years or so. It is nuts. It looks like the start of a roller coaster.
Albert: Like exponential growth, but how long can this continue? That’s the question for today.
Luke: That is. And then our other two qualifying criteria are that their current revenue should be less than 10% of their total addressable market, meaning they’ve got loads of room to grow. Actually, that’s not the case for Trupanion. They had fiscal year 2020 revenue of about half a billion dollars while the whole North American pet insurance market was just under $2 billion, but we think that market’s growing.
And our last qualifying criteria is that there should be at least 10% insider ownership. And again, they missed the mark on that a little bit. The founder has 4% and total insider ownership is 6%. So it’s not a perfect match for our hyper-growth criteria, but definitely worth a look
Albert: But before we get to it, you want to tell the listeners why we’re recording on a Sunday?
Luke: Yeah, absolutely. Well, I’m away from home this weekend. We’re off with a bunch of friends celebrating my wife Katrina’s big birthday. She’s got a milestone birthday coming up in the next couple of days, so we’re trying to follow the COVID rules in the UK. We’ve rented a big house and we’ve got a bunch of friends coming and going over the next 10 days or so. A lot of fun. I think I spent more hours in a hot tub than I’ve spent out in the last two days.
Albert: Well, I hope everybody’s been vaccinated, Luke, given that you’re sharing a hot tub.
Luke: Uh, we’re all in good shape, very healthy here. But, you know, someone we’ve had to sadly leave behind is our cat Sushi. I was looking on the cameras just now and he sat in the garden, balefully looking at the garden gate, perhaps waiting for us to come home.
Albert: Aw poor Sushi. Who’s he with now?
Luke: He’s got his auntie Jo popping in a couple of times a day to feed him.
Albert: Oh, I’m glad to hear that, Luke.
Luke: You know, if Sushi ever gets ill, I’m reassured that he’s had pet insurance from the day he was born and I know I’m never going to get caught out with those potentially scary medical costs.
Albert: And I guess this is the point of Trupanion, which provides pet insurance for mainly North American customers. Their aim is to reduce the shock of high healthcare costs for pets.
Luke: So we’re going to do our usual Telescope lens breakdown of this company. We’ll start off with a background and then we’ll look at them through a whole bunch of other lenses. And we’re going to look at today’s stocks, all the Telescope lenses, but before we do, let’s just cover some background. What do Trupanion actually do?
Background
Albert: Trupanion provide pet insurance, mostly in the North America region of the US and Canada. Actually, it was founded in Vancouver in 1999 with the original name Vetinsurance, but it’s now based in Seattle in the US.
Luke: In their first year of business in 2001, they only insured a hundred pets. And last year, they’ve scaled that up to 863,000 pets. Massive growth.
Albert: By pets, they actually only insure cats and dogs, but cats and dogs make up the majority of pets in North America.
Luke: Trupanion IPO’d in July 2014 at an IPO price of $10, and they’re currently priced at around $87. So that’s about a 7 or 8x since IPO.
Albert: Buy we should add that a lot of this growth came last year when the stock almost tripled. From July 2004 to February 2020, the stock price only went from $10 to $30, which is still a compound annual growth rate of around 22%, which isn’t bad.
Luke: But that tripling last year, that was the pandemic effect in full flow once again. I guess people are stuck at home, they want a bit of company, and they’re buying a pet, usually, a cat or a dog, to help keep them sane.
Albert: Just to put some numbers behind that, in the US, 23 million households acquired a pet from March 2020 to May 2021 this year, according to the American Society for the Prevention of Cruelty to Animals. And in total now, 85 million households have at least one kind of pet. That’s 67% of households in North America.
Luke: Yeah, that’s a huge penetration of households having cats and dogs, and I think it’s mostly dogs in the US. I saw a stat that most households have kept their pets. 90% of people that got a dog during lockdown have kept it, but that’s still sadly a ton of people who changed their mind.
Albert: 90% of households that got a dog have kept them, but only 85% of households that got a cat kept theirs. Why am I not surprised?
Luke: Are you not a cat person, Albert?
Albert: I’m actually more of a dog person. I don’t mind cats, but my girlfriend is a cat person. She loves cats.
Luke: How are you going to reconcile that one then when you finally decide to get a pet? Who wins?
Albert: Well, we’ll probably have a discussion and then we’ll get a cat.
Luke: Well, you know, apparently being a cat or a dog person tells you a little bit about your personality type. I’m a cat person and that supposedly means I’m neurotic and introverted. Whereas if you’re a dog person, you’re a real extrovert.
Albert: I don’t see myself as extrovert, Luke, but I actually do prefer dogs to cats.
Luke: Well, whatever you get, don’t be one of those 10 or 15% of people who changes their mind. A pet’s for life. It’s not just for lockdown.
Albert: Actually, this trend of getting a pet on lockdown wasn’t just in the US but also in other countries. For example, in the UK, around 3 million households acquired a pet during the pandemic last year, and it was mostly driven by young people. Under 35s accounted for about 60% of new pet owners.
Luke: And in the UK, we’ve got much higher levels of people having pet insurance. I guess we’re used to having insurance in place for those unexpected emergencies.
Albert: And the increased number of households with a pet, which has increased the demand for things like pet food, which has skyrocketed and has seen shortages recently. And what has also seen an increase in demand has been pet insurance and Trupanion stock, as we said before, has tripled since the start of the pandemic.
Total addressable market
Luke: Well, let’s take a look at their total addressable market because they do seem to be already pretty penetrated into that. But if you look at how many pets could be insured across North America, only 2% of America’s 200 million dogs and cats have insurance. That’s a huge untapped market of uninsured pets.
Albert: According to Graphical Research, the North American pet insurance market was valued at $1.9 billion in 2020, but it’s expected to reach 2.2 billion in 2021 and then expand at a compound annual growth rate of 9.7% until 2027. If only 2% of the pets are insured and the market is only 2.2 billion, if all pets were in that market could be worth $120 billion.
Luke: Now, clearly it’s unrealistic to expect that a hundred percent of cats and dogs are going to get insurance, especially in North America, perhaps where people tend to be under-insured even for their own healthcare. But still, I’d agree there seems to be a lot of growth there.
Albert: The percentage of pets insured in North America is pretty low at 2%. It’s much higher in say, Europe where around five to 10% of household pets are insured in most countries, and in some countries such as the UK, it can be as high as 25%. And if the US were to reach that level, that market could increase substantially.
Luke: It is surprising to me that that stat is so low in North America. I know a lot of folks self-insure and put away cash instead of buying pet insurance. Actually, I read an interesting comment on Reddit I think the other day. One wily pet owner is buying stock in Trupanion every year rather than paying for their insurance, and her plan is to draw down on her stock position if a pet needs treatment, but I can’t help but think there’s a ton of pet owners out there who haven’t really planned for a potentially big bill if their pet gets seriously sick. That could lead to some pretty tough decisions one day.
Albert: Actually, this happened to the founder of Trupanion, Darryl Rawlings. He said that when he was a child, his family dog Mitzy suffered a twisted stomach and they couldn’t afford to pay for the operation to save her life, and he said that this experience gave him the inspiration to start Trupanion many years later.
Luke: Yeah, that’s a nice founding story. Let’s talk about leadership a little bit. So Darryl founded the company and he’s still the CEO today, and actually, his first own dog Monty was the first-ever pet insured with their insurance coverage in the year 2000.
Albert: And in the first year of business in 2001, they insured another hundred dogs.
Luke: They’ve grown the company to about a thousand employees today, and the company overall has a Glassdoor rating of four out of five, with Darryl getting a 83% CEO rating. That’s a chunk lower than we normally see when we look at these tech companies, but it’s not a terrible score.
Albert: And if you look at the insider ownership, Darryl Rawlings has around 4% of the company and the total insider ownership is around 6%. So that again is a bit lower than what we expect for a young company.
Luke: It is low for a company with a market cap hovering around the three to $4 billion mark. Let’s take a look at the lens of costs of production.
Cost of production
Albert: Trupanion has a unique pricing model. It is an insurance business, but it runs itself as a subscription-based business. We can summarize this business model by saying, it uses data on historical claims to figure out what it would cost to pay for the medical bills, on average, for different pets over the course of its life, and it adds 30% margin onto this cost. And this cost plus pricing model makes Trupanion’s business model more like a subscription business than a traditional insurance company.
Luke: You did a bit of a deep dive into their Q1 numbers. Do you want to try and break that down? See how their profitability shows.
Albert: For their subscription business, their monthly average revenue per pet is around $63 and they pay out around 72% of that in claims. And operating expenses such as salaries take up 9.6% of revenue, and fixed costs are around 4.9%. This leaves them around $9 per month per pet of profit, but a lot of that is used to acquire new customers.
Luke: Actually, quite a lot, in fact, more than they have because they’re still running an unprofitable business model. So after they factor in all the costs of acquiring new pets, they’re still running a deficit of about negative $1 per pet insured.
Albert: But what they’ve done is they’ve worked out the lifetime value per pet. For Q1 of this year, it’s $634 and the average pet acquisition cost is $279, and the difference between those two is the profit that they make per pet.
Luke: So they’re forecasting that they’re going to turn profitable later this year. I’m a little bit sceptical looking at the way these numbers scale out. We were chatting about this before we started the recording on the episode. They’re such a mature company and they’ve got those 54 quarters of growth, quarter after quarter, but they’re still not profitable. How do they turn on the profit machine?
Brand
Albert: Maybe it will become more clear when we look at their financials later, Luke, but looking at their brand and reputation, Trupanion get a 4.5 out of five score on Trustpilot, and this compares to 2.6 for Lemonade. And you had quite a laugh looking at the reviews for Lemonade.
Luke: Geez, I did. They are hilarious. I love reading bad restaurant reviews and I might have to spend the next couple of months surfing bad Lemonade reviews. I was thinking about buying stock in the company but some people are horrified. I’ll give you just a couple of the titles of some of Lemonade’s customers’ reviews: “Do yourself a favour and use a real insurance company” and “Run, don’t walk away from this company. It is a joke.” People seem to hate Lemonade. I had not realized that.
Albert: These are not one-offs, right? With a score of 2.6, that seems pretty consistent.
Luke: This isn’t the Lemonade review, but I now having read those Trustpilot reviews would not touch that stock with a barge pole. It seems people are really put off by this AI assessment model when they have a claim. Having their claims declined and you cannot talk to a human to try and challenge it.
Albert: Another interesting stat is that the number of people searching for Trupanion has grown by 57% in the US and 78% in Canada. While the search term for pet insurance has been flat or slightly down. I’m a bit surprised about this because in the huge increase of people acquiring a pet, I would expect the searches for pet insurance to be much higher.
Luke: But it’s good to see that in some ways Trupanion search results are going up while everyone else is going down. I guess that’s showing that they’re coming to the front as perhaps one of the leading insurers.
Albert: And I’ve read that a lot of vets actively recommend Trupanion to their pet-owning customers because they know that Trupanion’s policies will help them pay for unexpected injuries and illnesses. And Trupanion partner with over 2,300 animal hospitals and over 10,000 vets so that they can pay them directly and [the] customer does not need to settle the bills at the time.
Luke: Yeah, they provide pretty comprehensive coverage of all sorts of accidents and infections but also hereditary conditions, congenital conditions, and all the other miscellaneous stuff that can go along with your loved one.
Albert: They cover 90% of the healthcare costs and there are no payout limits. And when I looked at their website, I also saw that they offer an additional recovery and complementary care package on top of this basic medical insurance, and it was amusing to see that this covers treatments such as acupuncture and homeopathy. I didn’t realize that the placebo effect worked on cats and dogs.
Luke: I’ll challenge that, Albert. I’m sure homeopathy is just as effective on cats and dogs as it is on humans.
Customers
Albert: I think we said that before in a previous episode, but let’s move on to customers! Actually, speaking of cats and dogs, Luke, I guess the customer is the pet owner. The way that Trupanion measures their results is often per pet and the number of pets enrolled with Trupanion, as of the 31st of March this year, the total number of pets enrolled with Trupanion is around 943,854, which is an increase of 37% year-over-year.
Luke: And they do break out subscription pets from enrolled pets. I think they do like a business-to-business model as well, where they’re underwriting pet insurance for their competition.
Albert: The total number of subscription pets is around 610,000, which is an increase of 20% year-over-year. And once a pet is enrolled with Trupanion, the pet tends to stay enrolled until the end of its life, and on average, a pet stays with Trupanion for about 77 months.
Optionality
Luke: We often look at optionality when we study a company through the Telescope lenses. It’s a bit thin, to be honest, for a company like Trupanion. They do have a pet food product, but that’s pretty niche and not competitive against some of the large national providers.
Albert: Companies like Mars and Nestle own a huge percentage of that market, and they have huge economies of scale. Another way they could expand their business is to provide coverage for animals other than cats and dogs, but I’m not sure there’s much of a market here. Cats and dogs make up the majority of pets in North America. As of August last year, about 48 million households had dogs and 31 million had cats, and the next one is much, much lower with 1 million households having fish and the pets below that quickly dwindle in number of households.
Luke: And you’re not going to insure your goldfish are you, let’s face it? Sorry, buddy. If the goldfish dies, you’re going to quietly replace him and hope your kid doesn’t notice.
Albert: I guess by the time you realize your fish is sick, it’s probably dead. But I was surprised that only 153,000 households have rabbits. I thought they will be more popular.
Luke: Maybe the cats are busy killing all the other small mammals and rabbits and poultry. Sushi is a real bastard at killing other little livestock. We had our good friends Taiji and Duniya come over with their kids, and their daughter Maya is planning to get a cat really soon. We had a fun barbecue last weekend, and Maya was having great fun playing with Sushi until mid-afternoon, he appears with a small bird in his mouth and everybody looked horrified. I had to save the bird, throw it over the fence to get away, but I’m pretty sure Sushi was going back for him as soon as no one was looking.
Albert: This is nature, Luke. There’s no morality in nature.
Luke: Survival of the fittest, Albert, indeed.
Albert: Another way that Trupanion could expand is by expanding into other regions. At the moment, they’re only operating in Canada, United States, Australia, and Puerto Rico, but they could expand into other regions such as the UK and Europe, but then they have to deal with the competition from the regional incumbents.
Competition
Luke: Let’s talk about competition. So Trupanion are pretty highly rated in North America. In the US News’ best pet insurance company rating published just last week in May, Trupanion rated as number two just behind Healthy Paws.
Albert: I looked at this article and compared the sample premiums for dogs and cats, and it does look like that Trupanion has a much higher premium than most of their competitors, almost double most of their competitors, actually.
Luke: Wow. Double. I didn’t realize it was so high. I’ve got to say I’m pretty price-sensitive when it comes to insurance of all sorts. I get really irked by that business model of all different insurance companies relying on their customers to be lazy and not price check. I do that religiously whenever my vehicle insurance, pet insurance or any home insurance has come up for renewal. And often you call these companies and they’ll give you a massive discount just because you phoned them.
Like, why are you messing me around and causing me this administration? If I could just find a company that was transparent with their pricing and didn’t offer discounts to new customers, they just kept it consistent, I’ll stick with them for life.
Albert: Actually, this is a problem with Trupanion, right? People assume that the premium won’t change over the lifetime of the pet, but in fact, because it’s a subscription business, it does increase over time. The subscription that you pay depends on the breed and also the age of the animal.
Luke: If we look at their model compared to someone like Lemonade, one of their big and growing competitors, even though I’ve already said I wouldn’t touch Lemonade with a barge pole, Lemonade are distinguished by their extensive use of AI in both the purchase of insurance and in their claims process.
Albert: But it was interesting to read that in the Q1 earnings call, Trupanion said that they were investing in claims automation capabilities to reduce future frictional costs and to deliver a more differentiated member experience. This suggests that they may take a similar approach to reduce costs by using machine learning and AI.
Luke: But as you say, if they’re twice the price of their competitors, particularly Lemonade who give a 10% bundling discount if you add pet insurance to an existing insurance plan, that’s a hard sell. I suppose when a potential new customer does their research, they’re going to see Trupanion up there; one of the best ratings, second-best insurer in the country, but twice the price. If you’re price-sensitive and maybe that’s the reason you’re buying insurance in the first place to protect yourself from that potentially difficult decision, maybe you’re going to suck it up and just go bottom dollar.
Albert: Actually, the largest pet insurer in North America is a company called Nationwide, which isn’t public, it’s a private company. They were the first insurance company to offer pet insurance, but in the US News comparison, they were number nine in the list.
Luke: When we talked about the numbers earlier, it seems really important that Trupanion hang on to their customers because it’s so expensive to acquire a new customer, a couple of hundred dollars. So their monthly retention rates are critical in making the business model work and they’re doing great here. Their monthly retention rate is exceeded 98% for years. But I guess that’s just turned some of their competitors onto the potential of this market. We keep mentioning Lemonade, despite those bad reviews, they’re growing fast, and I guess they’ve been attracted by the retention rates that companies like Trupanion are publishing.
Financials
Albert: Let’s have a look at their financials, Luke, and they released the full-year 2020 results in February this year. And the revenue last year was $502 million, an increase of 31% over the previous year. And at the end of last year, 862,298 pets [were] enrolled on the insurance plans, an increase of 33% over the previous year, and they’re growing at a high rate.
Luke: If we drill into their latest quarter results released just a month and a half ago at the end of April, their revenue was just under $155 million, beating estimates by a couple of million, but they missed their earnings per share. And that key figure of monthly average revenue per pet was $62.97, an increase of 6.8% year-over-year.
Albert: That revenue of $155 billion was an increase our 39% over the same period in the previous year. They are growing quite quickly or maybe this is an effect of the pandemic where so many households acquired a new pet.
Luke: One of the things that hit their profitability this year, and it seemed to have surprised analysts, was their stock-based compensation. They shared $55 million of their profits in stock grants with the team, including a $4 million one-time bonus to all team members.
Albert: And this pushed their net loss for the quarter to around $12.4 million, which is an increase from $1.1 million loss last year.
Luke: Yeah, so they’re less profitable than they were the year before and that’s pandemic year. It is interesting. It does make me scratch my head about the business model a little bit.
Albert: And high stock-based compensation is a bit of a red flag.
Luke: So the company are projected a rosier time ahead. Their outlook for full-year 2021 is total revenue around $680 million and they’re expecting subscription revenue for the whole year to be around $490-$496 million, which is going to be 27% growth year-over-year again.
Albert: And with cash and assets over $500 million, I think they can absorb the pet acquisition costs for quite a while.
Key takeaways
Luke: Let’s bring it round to key takeaways, and whenever we do a deep dive on a company, the key takeaway is really, are we going to invest?
Albert: I like the business and the economies of scale will improve as the number of pets enrolled increases, but I’m a bit worried about competition. There are about 20 pet insurers in North America and newcomers such as Lemonade, despite the poor customer reviews, can eat into market share. And I’m quite worried that their pet acquisition costs are increasing while the premiums are not that competitive.
Luke: And for my part, I’m pretty tempted. It’s a good business. I think their numbers are solid and they’ve got a great track record. Competition’s a big concern for me, even given that low penetration of the volume of insured cats and dogs in North America today. Like, maybe Lemonade wakes more people up to the benefit of pet insurance and grows the whole market, but Trupanion, they’re highly ranked but they’re expensive. And I think new customers are going to be somewhat price-sensitive a bit like myself when they go looking for insurance. I’m just not sure Trupanion have much of a competitive advantage or moat.
Albert: Maybe I would feel differently if I had a cat or a dog, but for now, I think I’ll hold off investing.
Luke: I’ve got a cat. He’s insured. I’m a fan of this sector. I like the company, but I don’t like it enough to make it a part of my portfolio.
Albert: Well, it seems, Luke, that we like the business, but we don’t think it’s growing fast enough for our hyper-growth portfolio.
Luke: We started the episode two for two, but I guess, for now, two for three if neither of us are going to choose Trupanion for our portfolios.
Albert: Maybe it’s too safe a pick, Luke. It seems to be growing regularly and it’s not exciting enough for us. We need those huge drawdowns to get us going.
Luke: Well, I guess I’m going to look forward to sitting on the sidelines and watching Trupanion keep turning out 27% growth, becoming profitable, and achieving the hyper-growth objectives while we miss out.
Albert: Maybe I will buy Trupanion behind your back and win our competition.
Luke: You bastard. I need to insure my portfolio against you doing something like that.
Albert: Well, happy birthday to Katrina. Send our love from me and Chloe.
Luke: Which I’ll do. Maybe I’ll pop you up in Zoom in the hot tub later today and you can say hi.
Albert: Is your phone waterproof, Luke?
Luke: Uh, it is. We put that to the test yesterday. I’ve learned all about the complexities of doing boomerangs and reels on Instagram as one of our friends, Priscilla, is the Instagram queen.
Albert: I have no idea what you’re talking about, Luke, but let’s leave it there.
Wrap
Albert: That’s all for this week. Thanks for listening.
Luke: If there’s a future topic you’d like us to cover, you can message us on Twitter. I’m @LukeTelescope.
Albert: And I’m @AlbertTelescope, or you can email us at feedback@telescopeinvesting.com.
Luke: If you enjoyed today’s episode, you can find more content at our website, telescopeinvesting.com, where you can leave us a comment or a review.
Albert: And if this is your first time tuning in, perhaps consider subscribing to the website so that you’re the first to hear about new articles and episodes as they drop.
Luke: Good one today, Albert. Thanks.
Albert: Thanks, Luke. Have fun.
