TRUP - TRUPANION: AN INNOVATOR IN THE PET MEDICAL INSURANCE INDUSTRY
TRUPANION: AN INNOVATOR IN THE PET MEDICAL INSURANCE INDUSTRY
Trupanion, Inc. (NASDAQ: TRUP) is a leading medical insurance provider for cats and dogs. The Company operates throughout the United States, Canada, Europe, Puerto Rico, and Australia. Trupanion develops and offers high-value medical insurance products explicitly priced for each pet’s unique characteristics and coverage level through its data-driven, vertically-integrated approach.
Trupanion, Inc. (NASDAQ: TRUP)
Market Cap: $843.88M; Current Share Price: $20.47
Data by YCharts
The Company
Trupanion operates in two business segments: subscription business and other business. The Company generates revenue in the subscription business segment primarily through subscription fees from direct-to-consumer products.
The Company’s monthly subscription products, explicitly priced for each pet’s unique characteristics and coverage level, help pet owners budget for unforeseen medical expenses.
Trupanion has been collecting comprehensive pet health data for over 20 years, which provides it with a greater understanding of anticipated veterinary costs. The Company leverages this information to price subscription plans for each pet based on their specific circumstances, such as breed, age (at enrollment), geography, desired deductible or co-payment, and coverage level.
The other business segment consists of revenue from other product offerings that generally have a business-to-business relationship and different margin profiles than the subscription segment, including income from writing policies on behalf of third parties and revenue from other products and software solutions.
We’ll discuss critical factors that make Trupanion an exciting watch.
- Large Underpenetrated Markets
As measured by insured pets, the Company’s target markets are large and under-penetrated.
According to the Insurance Information Institute and Canadian Animal Health Institute, there are approximately 200 million household dogs and cats in the United States and Canada. The North American Pet Health Insurance Association estimates that the penetration rate for medical insurance for cats and dogs in North America is approximately one to two percent. Over the long term, the North American penetration rate is expected to reach levels comparable to the U.K., where, according to Global Market Insights, approximately one in four cats and dogs has medical insurance.
Regarding market opportunity, out of 200 million household dogs and cats in the United States and Canada, about 120 million visit the veterinarian annually. Moreover, about 12 million puppies and kittens are born yearly, translating into 1 million new pet leads every month. There are about 25,000 veterinary hospitals in North America, which means about 40 new puppies and kittens will visit per hospital per month.
Thus, it is no surprise that pet medical insurance is a growing one billion-plus category.
The graph above shows that industry revenue was $3.5 billion in 2022, up 24% YoY. The industry added $670 million in revenue in 2022, consistent with the prior year. During the same year, Trupanion Inc. was the most significant contributor to the category’s growth at 29% and was the largest provider of medical insurance for pets in North America.
In other words, Trupanion is well prepared to benefit from the upcoming opportunity in the pet medical insurance industry, and this is primarily due to its effective subscription-based business model and proprietary patented software.
- Practical Business Model and Sturdy Defensible Moats
Veterinarians designed the Company’s core product to enable them to practice the best medicine – thus recommending the optimal treatment for the pet. Trupanion members visit their veterinarian more frequently and spend more money on the best pet treatment. This results in better health outcomes for pets, which creates a flywheel effect that has been the critical driver of growth for Trupanion’s subscription business.
Additionally, using proprietary, patented software designed to communicate directly with a veterinary hospital’s practice management software, Trupanion offers a differentiated experience to pet owners. Using the software, veterinary hospitals can receive payment from the Company directly for approved invoices in seconds, with their clients only paying their deductible or co-payment of covered treatments. This unique solution, offered free to veterinarians and pet owners, transforms the insurance experience and makes it extremely popular among pet owners and veterinarians.
Overall, the business model followed by the Company has automatically created defensible moats, such as
- Deep veterinary relationships
- Superior value proposition
- Data-driven advantage
- Patented, automated, and direct veterinary invoice payment.
- Strong Financial Returns
Thus, it would be challenging for competitors to replicate Trupanion’s success in the industry or match up to it in the future.
The Company already has industry-leading, high retention rates that demonstrate its popularity amongst customers, resulting in steadily increasing revenues.
Revenues are also boosted due to the compounding, monthly recurring cash flow established by the Company’s business model.
In addition, the Company is actively pursuing growth strategies such as increasing its number of stores in North America, improving same-store sales (more leads/ higher conversion), providing different subscription offerings (more coverage/ less coverage/ different channels), adjunct business lines such as other pet subscription products, and expanding to international markets 50K+ hospitals target.
In other words, Trupanion seems poised to grow exponentially on the back of a lucrative business model, effective defensible moats, and a robust growth strategy.
Trupanion offers strong returns on invested capital.
The Company has consistently displayed strong revenue growth over the last few quarters.
Most recently, for Q1 FY23, total revenue was $256.3 million, an increase of 24% compared to Q1 FY22. Total enrolled pets (including pets from the other business segment) was 1,616,865 on March 31, 2023, an increase of 28% over Q1 FY22.
Subscription business revenue was $165.2 million, an increase of 18% compared to Q1 FY22 (20% on a constant currency basis).
Darryl Rawlings, Trupanion’s founder, CEO, and Chair of the Board, commented,
“In Q1, veterinary inflation increased 15% year-over-year, approximately 3% higher than our assumptions. While these ongoing but necessary increases in veterinary inflation pressured margins in the quarter, they also continued to drive demand for Trupanion, as evidenced by our strong revenue growth. The entire Trupanion team is focused on successfully executing the second half of our 60-month plan and achieving our margin targets.”
For FY22, the Company reported total revenue of $905.2 million, an increase of 29% compared to FY21. Total enrolled pets (including pets from THE other business segment) was 1,537,573 on December 31, 2022, an increase of 31% over FY21.
Subscription business revenue was $596.6 million, an increase of 21% compared to FY21 (22% on a constant currency basis).
It is expected that the Company will continue to perform well due to the highly under-penetrated market and its successful business model. Compared to competitors, Trupanion is more popular amongst pet owners due to reasons such as higher coverage, lower overall cost, proprietary database, and patented proprietary software, which allows the Company to pay veterinary invoices directly at the time of treatment.
Hence it is reasonable to assume that Trupanion is moving on an upward trajectory and should be watched out for.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Reference:
https://www.sec.gov/ix?doc=/Archives/edgar/data/1371285/000137128523000146/trup-20230331.htm
https://www.sec.gov/ix?doc=/Archives/edgar/data/1371285/000137128523000047/trup-20221231.htm