Pet Insurance Stock Deep Dive – Trupanion (TRUP)

Inspired by a thread I saw on Twitter, I wanted to do a little bit of a deep dive into an industry. The thread I saw was a fantastic write up on how the US healthcare system functioned and all of the major players in the industry. The industry that I settled on was the pet industry.

I’ve got a thesis that in the next 50 years family pets will be treated more like another human member of a family rather than an animal. I think we’ve already seen the start of this in many of our own homes and if not, with family and friends. The pet industry is almost a $100 billion industry currently, which mainly comes from pet food. My hunch is that people will be willing to spend more money on pets outside of just feeding them in the future.

American Pet Products Association

I don’t think the growth in the pet industry will come from more people owning pets, even though that would certainly help. Currently, about 2 in 3 households in the United States owns a pet. This has held steady over the past 5 years, but it will be interesting to see what these numbers look at the end of 2021. I know many people have toyed around with the idea of getting a pet due to being stuck at home with nothing to do, but I’m not sure how many people have actually turned those words into action.

Spot.com

Another thing I like about the pet industry is that I believe it is fairly recession proof. People will spend less during a recession, but they’ll cut out buying a luxury good before feeding their family dog. This all goes back to the thesis that I think pets are going to be considered an even greater part of the family. They might cut back on the organic dog food, but they’ll still be putting food in their bowl. Heck, maybe in 50 years that wouldn’t be tolerated and the dog would have an actual spot at the dinner table.

I broke down the pet industry into three main categories – Veterinary Care, Pet Supplies, and Pet Insurance. Doing some research on publicly traded pet companies, I found a handful of pure plays, many of which made up the ETF, PAWZ. PAWZ has rewarded its shareholders since its inception in 2018. It has outpaced the S&P 500 by about 40% since late 2018, with a total return of 81.95% as of 1/22/21. 

PAWZ return as of 1/22/21 at 4pm 

Pet Insurers

For this post, I just wanted to focus on pet insurers. This was honestly the part of the pet industry that I was most excited learning about. This is the space where I could see the largest growth. Currently, only 1.6% of pet owners have pet insurance. With people willing to spend more on their pets’ healthcare, it would only make sense they would look to insurers to help cover some of those costs. While doing my research in the space, there aren’t too many pure play public pet insurance companies. The only one that I was able to come across was Trupianon (TRUP). 

TRUP IPO’d in 2014 and has seen tremendous growth since it went public. Some people might be turned off to see that it has returned over 900% since going public, but I like seeing a company that has performed well. I want to invest in winning companies and thus far, the market has very muched enjoyed the presence of Trupanion.

Looking at their most recent 10-Q to get an understanding of what their company does, I saw a lot of great investor buzzwords that I like in a company. Some notable lines are “Our data-driven, vertically-integrated approach enables us to provide pet owners with what we believe is the highest value medical insurance for their pets” and “Our growing and loyal member base provides us with highly predictable and recurring revenue.” This is an insurance company, so I hope that their revenue would be predictable and growing!

Their revenue is broken down into two areas – money which gets generated from the policies they market, which is referred to as their “subscription business” and they also underwrite policies on behalf of third parties which is classified into their “other business” segment. For their subscription business, they generate a considerable amount of these sales through veterinarian offices. They have their sales team contact vets to promote their brand as an option for their customers. Revenue is also generated for the subscription business through direct marketing to customers and through referrals from existing customers.

Q3 10-Q (Quarterly period ended September 30, 2020)

The subscription business makes up about 78% of their revenue for the current fiscal year compared to about 84% last year. Initially, when looking at this, I asked myself if I really cared about the split between how their revenue was generated between their subscription business vs other business? Looking a little closer, the policies from their other business segment could be different from what they offer from their subscription business and they do not incur any direct marketing cost from their other business. Their gross profit percentage is also about the same, so there isn’t that much of a difference between the two in my head. 

Year over year, they have also seen stable revenue growth in the mid to high 20%. In addition to the stable growth of their revenues, they’ve also seen growth in their expenses in the mid 20% range over the past several years. It should also be said that they are not a profitable company. They’ve lost money every year they’ve operated as a public company. You would hope that an insurance company would turn a profit and create the glorious float which Buffet has raved about.

Revenue by Year 2017FY – 2020FQ3

A couple of other key metrics that I found interesting from their latest 10-Q is their total pets enrolled, the lifetime value of a pet, the average pet acquisition cost, and the average monthly retention rate. I would hope to see growth in the total number of pets they are insuring on a year over year basis. On a year over year basis, they have indicated a growth of their total number of pets increased by 31%. This would be a metric that I would want to track in future earnings reports.

In addition to the number of pets, I want to know how much value they are generating from a pet as well as how much they are paying to get a pet under their umbrella. According to their most recent calculations, the expected lifetime value of a pet is $615, which is a significant jump since the previous year at $511. This is just an estimate of the value of a pet based on the expected length a pet remains on a policy. 

I was taken back a little by how much they are paying to acquire a pet onto their plans. They have seen significant growth in the difference of the average lifetime value minus the acquisition cost in the last year, but I would like to see the acquisition cost decrease. This is spread that I would want to reevaluate in future earnings calls.

The thing which really stuck out to me is the retention rate of over 98%, which has held constant. This is one sticky business, which I love to see. If they can keep the retention rate this high, while increasing the total number of pets and decreasing the cost they incur to acquire the pet, I think it is a fair assumption that this company’s value will continue to grow. 

Some information that I was unable to find, which I was hoping for, was to have a better understanding of the market share. It is unfortunate that most of the other players in the space are private companies. It does give Trupanion a little bit of an advantage since it is where money will have to flow if an investor wants exposure to the space. Just because they are the leader in the public markets doesn’t mean that this will guarantee growth in their valuation.

Another piece which is critical to an investment is the management team. It’s hard to get a good idea about this from just reading the earnings reports, but management is everything behind the numbers. The current CEO, Darryl Rawlings, founded Trupanion back in 1998 and still remains at the helm today. Some people like investing in founder lead businesses. As a bonus, check out their executive leadership page on their site – the best I’ve ever seen! 

In summation, Trupanion seems like an interesting investment. I wish there were more direct public competitors in the space so we could get an idea of how they compare. I do like the idea of trying to get exposure to the space and Trupanion seems like a viable option as a long term investment. I really enjoy how sticky their business is and it has been added to my watch list.