Summary
- We first bought Trupanion during Q3’18.
- Trupanion’s has grown subscription pets at an 18% CAGR and average revenue per pet (ARPP) at a 5% CAGR, providing a 23% subscription segment revenue CAGR.
- Current GAAP earnings are a poor reflection of Trupanion’s earning power today.
- Given TRUP's strong track record of earning a 30-40% ROI on pet acquisition spend, co. should continue to invest as much as possible to grow earnings power far into the future.
The following segment was excerpted from this fund letter .
Trupanion ( TRUP )
The Portfolio first bought Trupanion during Q3’18. Trupanion provides pet insurance to help owners budget for vet expenses if their pet needs care. While pet insurance has historically been a bad product with confusing, if not misleading, coverage that left pet owners and veterinarians distrustful of pet insurance, Trupanion simplified the product by providing comprehensive coverage and increased transparency to help customers and vets understand the value proposition.
Trupanion’s competitive advantage primarily comes from being a low-cost provider. It integrates all the parts of the value chain that matter which creates efficiencies and a better customer experience. Unlike most competitors, Trupanion underwrites its own policies and doesn’t reinsure their policies. They have their own call centers, a national salesforce of Territory Partners, and process their own claims. The combination of these efforts reduces operating costs by ~20% relative to peers.
These savings are used to offer customers higher payout ratios (~70% of premiums earned are paid out in vet claims) compared to an average of 50% for peers. This naturally attracts more customers over time which helps Trupanion scale operating costs further, which can further be share with customers. Other factors like the relationships that Territory Partners have with vets and hospitals, which typically take 2-3 years to build through repeated visits and its integrated automated claims software called Trupanion Express all feed into building its durable competitive advantage.
From a financial performance perspective, Trupanion’s operating results have almost perfectly matched my initial expectations from four years ago. They have grown subscription pets at an 18% CAGR and average revenue per pet (ARPP) at a 5% CAGR, providing a 23% subscription segment revenue CAGR. Their business model has proven to be very predictable.
I also want to note that Trupanion’s financials are a great example of a company that is investing through their income statement which results in no GAAP earnings and essentially breakeven cash flow. Trupanion spend a lot on growth marketing spend but should be viewed more as an investment to acquire an asset (new pet subscription) that lasts on average seven years. Therefore, current GAAP earnings are a poor reflection of Trupanion’s earning power today. A better reflection of earning power is operating income before pet acquisition spend which is adjusted operating income in the chart below.
A test of whether they are actually earning a strong return on their investment marketing spend would be if they continued to invest available cash flows today yet experienced no growth in new pet subscriptions. This would indicate either bad investments or the need to invest so heavily to simply run-in place, suggesting a much lower earnings power. However, with only a ~2% penetration rate in North America vs. 5-25% in many other developed nations, and Trupanion’s strong track record of earning a 30-40% ROI on pet acquisition spend, the company should continue to invest as much as possible to grow earnings power far into the future.
Source: Company filings, Factset, Saga Partners Note: 2022E values are Factset consensus expectations, market cap and share price are as of 6/30/22. Adjusting operating income is operating income from existing pets before pet acquisition spend. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Saga Partners - Trupanion: GAAP Earnings A Poor Reflection Of True Earning Power