TRUP - Trupanion

[EricSchleien]

I was surprised not to find another thread of this company. Will anyone be attending the Annual Meeting or listening to the webcast? Would be great to discuss and compare notes. The meeting is June 7 2017

 

http://investors.trupanion.com/news-and-events/press-releases/press-release-details/2017/Trupanion-Announces-Date-of-2017-Annual-Meeting-of-Stockholders/default.aspx

[Travis Wiedower]

I'll be at the annual meeting on Wednesday. Don't own it, but I've been doing a lot of research on it lately. I like the company, industry, and management, but can't get there on valuation. As of now it's a great company to have already researched and sitting on my watch list.

[Travis Wiedower]

To add more content to the thread, I wanted to copy some thoughts I had on valuation. Hopefully I'm way off base and someone can convince me it's cheap  ;D

 

"It looks like they could hit $1B in revenue around 2025. At that point they'd be at scale targeting a 15% discretionary margin (per management). Discretionary margin doesn't include sales and marketing expense and stock-based comp. If sales and marketing margin is 3% at scale (vs 7.9% in 2016) and stock-based comp is 1% at scale (vs 1.5% in 2016), that puts pre-tax margins at 11% (15% - 3% - 1%). By then their NOLs should be burned off so they'd be paying 34% in taxes, which puts their net margin at 7.26%  (11% * (1 - .34)).

 

So $1B revenue * 7.26% net margin = $72.6M net income / 35M shares outstanding (2% share dilution per year from now until then) = $2.07 EPS. $2.07 EPS * 25 (high quality company with plenty of runway still left) = $51.75. A $51.75 share price after 2025 earnings gives us a 10.8% IRR from today's price.

 

Given the above, it seems like the market is pricing it fairly. And most of those assumptions above are based on management's own guidance of what their financials will look like at scale. This means for the company to be significantly undervalued today, Darryl's own guidance would have to be way too conservative, which almost never happens from management.

 

FWIW, using my same 2025 results above, today's share price would have to be $10 to get a 20% IRR, which obviously isn't happening anytime soon."

[SlowAppreciation]

To add more content to the thread, I wanted to copy some thoughts I had on valuation. Hopefully I'm way off base and someone can convince me it's cheap  ;D

 

"It looks like they could hit $1B in revenue around 2025. At that point they'd be at scale targeting a 15% discretionary margin (per management). Discretionary margin doesn't include sales and marketing expense and stock-based comp. If sales and marketing margin is 3% at scale (vs 7.9% in 2016) and stock-based comp is 1% at scale (vs 1.5% in 2016), that puts pre-tax margins at 11% (15% - 3% - 1%). By then their NOLs should be burned off so they'd be paying 34% in taxes, which puts their net margin at 7.26%  (11% * (1 - .34)).

 

So $1B revenue * 7.26% net margin = $72.6M net income / 35M shares outstanding (2% share dilution per year from now until then) = $2.07 EPS. $2.07 EPS * 25 (high quality company with plenty of runway still left) = $51.75. A $51.75 share price after 2025 earnings gives us a 10.8% IRR from today's price.

 

Given the above, it seems like the market is pricing it fairly. And most of those assumptions above are based on management's own guidance of what their financials will look like at scale. This means for the company to be significantly undervalued today, Darryl's own guidance would have to be way too conservative, which almost never happens from management.

 

FWIW, using my same 2025 results above, today's share price would have to be $10 to get a 20% IRR, which obviously isn't happening anytime soon."

 

I looked at it recently too, and I came away liking it more than I thought I would. There's a ton of runway, they require no capital, are differentiated in a commoditized market (insurance), and have a nice balance sheet.

 

The reason I haven't pulled the trigger is because 1) the growth is pretty impossible to predict and 2) it's even harder to predict the quality of the policies of an insurance company—let alone a relatively new one. That's just too many unknowns for me, plus the valuation isn't great as you've mentioned. But definitely one on my watch list.

[LC]

Some resources:

 

http://www.iii.org/fact-statistic/pet-statistics

https://www.avma.org/KB/Resources/Statistics/Pages/Market-research-statistics-US-pet-ownership.aspx

 

 

[magneto23]

You guys, this stock is ridiculously overvalued, and it's not even close. Remember this is an insurance company, not a tech company. The analysts who write on it are ALL tech/software/internet analysts. If you're familiar w/ those biz models, it's all about the "subscriber base" and recurring revenue base over a small amount of fixed cost. Of course, all insurance can also be described as "recurring revenue" since policies lapse at a somewhat infrequent rate. But variable costs are extremely high, that's the nature of insurance and why they trade at multiples of book value not double digit revenue multiples on huge growth rates out 5 years a la SAAS. Mgt intentionally encourages this false narrative in their disclosure/classification and their investor communication. Even so, the stock is ABOVE the target prices for all of these uber optimistic tech analysts, except for the last report that the guy compared to AMZN (it is literally the worst "professional" sell-side research report I've read in my career). Anyway, there is plenty of competition. Go do some channel checks regarding when people opt for pet insurance (when problems are on the horizon = adverse selection), what you think the majority of pet owners' willingness to pay in this country ($50 / month? hmm, maybe wealthier set, but throwing around the UK/Sweden penetration rates when they pay ZERO for human health insurance in those countries is not exactly the best comp, and how much do people pay in recession conditions? It makes more sense to "self-insure" unless you have a chronic issues). Of course, HUMANIZATION OF PETS is a sexy growth concept, and the competition aren't (stand-alone) public companies so this is one of the only ways to bet on it. Why are insiders selling? What do we make of the reserves on the balance sheet being so small, especially if we figure out how to keep pets alive longer w/ more procedures a la humans? What do we make of the huge marketing spend and expense base. Lifetime Value of a Pet? Give me a break.

[racemize]

To add more content to the thread, I wanted to copy some thoughts I had on valuation. Hopefully I'm way off base and someone can convince me it's cheap  ;D

 

"It looks like they could hit $1B in revenue around 2025. At that point they'd be at scale targeting a 15% discretionary margin (per management). Discretionary margin doesn't include sales and marketing expense and stock-based comp. If sales and marketing margin is 3% at scale (vs 7.9% in 2016) and stock-based comp is 1% at scale (vs 1.5% in 2016), that puts pre-tax margins at 11% (15% - 3% - 1%). By then their NOLs should be burned off so they'd be paying 34% in taxes, which puts their net margin at 7.26%  (11% * (1 - .34)).

 

So $1B revenue * 7.26% net margin = $72.6M net income / 35M shares outstanding (2% share dilution per year from now until then) = $2.07 EPS. $2.07 EPS * 25 (high quality company with plenty of runway still left) = $51.75. A $51.75 share price after 2025 earnings gives us a 10.8% IRR from today's price.

 

Given the above, it seems like the market is pricing it fairly. And most of those assumptions above are based on management's own guidance of what their financials will look like at scale. This means for the company to be significantly undervalued today, Darryl's own guidance would have to be way too conservative, which almost never happens from management.

 

FWIW, using my same 2025 results above, today's share price would have to be $10 to get a 20% IRR, which obviously isn't happening anytime soon."

 

I looked at it recently too, and I came away liking it more than I thought I would. There's a ton of runway, they require no capital, are differentiated in a commoditized market (insurance), and have a nice balance sheet.

 

The reason I haven't pulled the trigger is because 1) the growth is pretty impossible to predict and 2) it's even harder to predict the quality of the policies of an insurance company—let alone a relatively new one. That's just too many unknowns for me, plus the valuation isn't great as you've mentioned. But definitely one on my watch list.

 

I apologize for my ignorance here, but what makes them differentiated from other pet insurance and/or allows no capital?  FFH made a pet insurance acquisition a few yreaes back so I'm interested in how this one can be much different than the rest.

[atbed]

To add more content to the thread, I wanted to copy some thoughts I had on valuation. Hopefully I'm way off base and someone can convince me it's cheap  ;D

 

"It looks like they could hit $1B in revenue around 2025. At that point they'd be at scale targeting a 15% discretionary margin (per management). Discretionary margin doesn't include sales and marketing expense and stock-based comp. If sales and marketing margin is 3% at scale (vs 7.9% in 2016) and stock-based comp is 1% at scale (vs 1.5% in 2016), that puts pre-tax margins at 11% (15% - 3% - 1%). By then their NOLs should be burned off so they'd be paying 34% in taxes, which puts their net margin at 7.26%  (11% * (1 - .34)).

 

So $1B revenue * 7.26% net margin = $72.6M net income / 35M shares outstanding (2% share dilution per year from now until then) = $2.07 EPS. $2.07 EPS * 25 (high quality company with plenty of runway still left) = $51.75. A $51.75 share price after 2025 earnings gives us a 10.8% IRR from today's price.

 

Given the above, it seems like the market is pricing it fairly. And most of those assumptions above are based on management's own guidance of what their financials will look like at scale. This means for the company to be significantly undervalued today, Darryl's own guidance would have to be way too conservative, which almost never happens from management.

 

FWIW, using my same 2025 results above, today's share price would have to be $10 to get a 20% IRR, which obviously isn't happening anytime soon."

 

I looked at it recently too, and I came away liking it more than I thought I would. There's a ton of runway, they require no capital, are differentiated in a commoditized market (insurance), and have a nice balance sheet.

 

The reason I haven't pulled the trigger is because 1) the growth is pretty impossible to predict and 2) it's even harder to predict the quality of the policies of an insurance company—let alone a relatively new one. That's just too many unknowns for me, plus the valuation isn't great as you've mentioned. But definitely one on my watch list.

 

I apologize for my ignorance here, but what makes them differentiated from other pet insurance and/or allows no capital?  FFH made a pet insurance acquisition a few yreaes back so I'm interested in how this one can be much different than the rest.

 

We're considering pet insurance ATM for a new pup.

 

I thought this was a helpful review by a third-party:

https://www.caninejournal.com/pet-insurance-comparison/

 

The site has Healthy Paws and Pet Plans ahead of Trupanion.

1. TRUP has the following to say about Healthy Paws:

http://trupanion.com/pet-insurance-comparison/trupanion-vs-healthypaws

2. and Pet Plans:

http://trupanion.com/pet-insurance-comparison/trupanion-vs-petplan

 

TRUP seems to believe they are better b/c they provide a combination of some of the following benefits: (1) direct pay, (2) no price increases due to age, (3) 24 hour access 7 days a week, (4) waiting periods, and/or (5) some coverage differences

 

Although direct pay is a great feature, I don't believe TRUP is that differentiated. They are still working on rolling out direct pay, and I don't think it is available everywhere. I think investors are mainly excited by the general growth of the entire industry. TRUP is only insurer solely focused on pet care and 20%+ revenue growth is extremely attractive and seems sustainable for quite some time.

 

The focus seems to be on potential positive cash flow near term and positive net income in the intermediate term.

 

I'm very surprised that they have a deminimis float...

 

[muscleman]

I've done research on IHC and after talking to their management, they mentioned TRUP as one of the few other pet insurers.

I think IHC is much more compelling.

[Jurgis]

Screw pet insurance.

 

 

But you guys already knew that.

 

8)

[atbed]

Screw pet insurance.

 

 

But you guys already knew that.

 

8)

 

Lawl

 

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

[DooDiligence]

ACA doesn't cover pre-existing in pets. Does anyone offer funeral services?

 

http://uglymule.com/images/preexisting-pet-conditions-not-covered.png

[Jurgis]

With insurance one of the parties (usually) gets screwed. In catastrophic, it's usually the customer, but they usually don't care, since the probability of cat is very low and overpaying probability-wise even X00% is still cheaper than if cat strikes. For non-cat insurance, especially self-paid customers may care if they get screwed (if someone else pays - e.g. your employer and you cannot get that money in cash instead, that changes things).

 

So - pet insurance.

 

Either insurer is screwing you via exclusions and prices - in which case it's not a great business for customer.

 

Or possibly insurer is giving you great deal and either A) they gonna lose money like heck B) they are pyramid scheme where the growth masks the A.

 

You guys can try to figure out which of the three possibilities TRUP is.

 

I don't have pet insurance and I won't get one. Anecdotally friends think it's too expensive for things covered and/or the insurer tries to screw you when they have to cover something expensive (like DooDiligence said "pre-existing conditions"). But that might be anecdotal. It's possible that TRUP is really giving great prices and A or B.

 

BTW, I heard someone sold pet wine idea on Shark Tank. I have at least 20 more pet crap ideas for anyone interested. 8)

 

Have fun.  8)

[muscleman]

Screw pet insurance.

 

 

But you guys already knew that.

 

8)

 

Lawl

 

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

 

IHC has cheap valuation and profitable. TRUP is just another hype. Good luck buying an insurer at 14x book value.

[atbed]

Screw pet insurance.

 

 

But you guys already knew that.

 

8)

 

Lawl

 

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

 

TRUP is just another hype. Good luck buying an insurer at 14x book value.

 

Thx

 

I ended up passing on TRUP at 17 b/c of this line of thinking. But absolutely not regretting that, because I just don't know TRUP or the insurance business well enough yet.

[Ballinvarosig Investors]

Screw pet insurance.

 

 

But you guys already knew that.

 

8)

 

Lawl

 

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

 

IHC has cheap valuation and profitable. TRUP is just another hype. Good luck buying an insurer at 14x book value.

Book value not always a good determinant of value for an insurer. I own a little Admiral Group (UK insurer) and it has as similar high price to book. They focus on quality underwriting and low costs and cede premiums to reinsurers, giving up the float an investment income. I am not familiar with TRUP - so it may be a similar case and hence not as well understood?

[atbed]

Screw pet insurance.

 

 

But you guys already knew that.

 

8)

 

Lawl

 

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

 

IHC has cheap valuation and profitable. TRUP is just another hype. Good luck buying an insurer at 14x book value.

Book value not always a good determinant of value for an insurer. I own a little Admiral Group (UK insurer) and it has as similar high price to book. They focus on quality underwriting and low costs and cede premiums to reinsurers, giving up the float an investment income. I am not familiar with TRUP - so it may be a similar case and hence not as well understood?

 

That's very interesting. I wasn't aware of any other low float insurers. Thx for sharing

[angelinvestor]

Hey guys, we wrote a report on Trupanion. Hope you like it and let us know if you have questions.

https://variantviews.com/2017/07/05/trupanion-a-long-term-compounder/

[ScottHall]

I gave this a shot but got off it b/c the insurance didn't seem like good value for money. Maybe others have a different experience, just my own.

[Travis Wiedower]

angelinvestor,

 

Good write-up. Two comments:

 

1. In my opinion, you're underplaying the importance of Express. Insurance is generally a commodity business and I think Express is the (only?) thing that will keep Trupanion from earning commodity-like returns at scale. Express installs lead to very sticky vet customers that are then less likely to support other insurers. Given Trupanion is the only insurer with a nationwide sales force, if they can get a significant percentage of vets using Express the game will be over.

 

2. Do you have a source for the 18-20% frictional cost to have a third party underwriter? Trupanion underwrites Pet's Best business for an 8-10% take and the rest goes to Pet's Best (Darryl discussed this at the annual meeting last month). I assumed that 8-10% number was industry standard but I don't know.

 

I've been working on a Trupanioon write-up as well, hopefully I'll have it posted next week. It's taking me forever to write with how much there is to talk about--it's already 8 pages long!

[muscleman]

Screw pet insurance.

 

 

But you guys already knew that.

 

8)

 

Lawl

 

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

 

IHC has cheap valuation and profitable. TRUP is just another hype. Good luck buying an insurer at 14x book value.

Book value not always a good determinant of value for an insurer. I own a little Admiral Group (UK insurer) and it has as similar high price to book. They focus on quality underwriting and low costs and cede premiums to reinsurers, giving up the float an investment income. I am not familiar with TRUP - so it may be a similar case and hence not as well understood?

 

Regulators require a max leverage of 3x-8x of book, depending on the line of business. The book value limits the max profits the insurer may make.

 

[mrholty]

Travis-

 

The 8-10% you mention is normal in the insurance space in general if a little high depending on exactly what they do vs Pet's best but its certainly closer than 18-20% for other insurance businesses.

[vinod1]

This is a very interesting find, one with potentially long runaway for growth. My concerns are:

 

Weak Customer Value Proposition

 

1. The company targets a medical loss ratio (MLR) of 70%, which means it pays out 70% of what it collects from its customers back to them. Most other companies are in the 50% range. Even with a 70% MLR, it means customer costs are 40% higher compared to those who are self-insured. So customers should be willing to pay 40% more just for smoothing out their vet expenses.

 

2. There are often very large discounts on medical expenses for humans when they go through a health plan because the managed care company has large scale which allows it to negotiate lower prices for various treatments. These discounts are often in the 50% range. There are no such discounts at vets because they do not mark up the costs. So there are no additional cost savings for going through insurance. This is unlikely to change as no insurance company has enough scale to demand discounts and the prices the vets charge are already low with little room for any discounts. Further, vets would not want to change the existing model, given all the downsides they see with health plans.

 

3. Even the most expensive treatments are surprisingly affordable. Even for all the treatments that cost above $1000, the 10 most common are still in the $2000 to $3000 range. There are some treatments where the costs run into the $20,000 to $40,000 range. But in this case owners have the choice of "economic euthanasia".

 

Thus the company does not seem to have a strong value proposition for customers and it is unlikely that it would be widely adopted by pet owners. This would limit the company's total addressable market to a smaller fraction of the potential market than what an investor might hope for.

 

If the company can increase its MLR target to 85% and also able to negotiate discounts with vets for treatments, then it changes customer value proposition. Until then competitors "catastrophic insurance" coverage might be more attractive to consumers even if they pay out only in the 50% range.

 

(For Example: Pay $500 for insurance at a competitor, losing only $250 in frictional costs. Or pay $1000 to Trupanion and lose $300 in frictional costs.)

 

Adverse Selection

 

The company's policy of covering 90% of costs with no limits on lifetime expenses are likely to lead to an adverse selection where sicker pets are likely to end up with the company which increases costs to its members thus reducing its attraction to the broader customer base.

 

So to me there are two things that need to change before the company becomes attractive:

 

1. Company MLR target increases to about 85%

 

2. Company starts getting enough scale that it can get discounts from vets for treatments

 

Of course the market would price the company differently the moment these become visible, but to me these would be the clincher.

 

Vinod

 

[Travis Wiedower]

All valid points. Economic euthanasia happens at a lower price point than you may realize--the average in 2016 was $1,433. Also, don't forget industry penetration just passed 1%. 90% of pet owners could never buy pet insurance and Trupanion may still turn out to be a fine investment.

 

Increasing the loss ratio and negotiating vet discounts will only be possible far off in the future. Darryl's goal is to get to an 80% loss ratio, but I asked the question at the annual meeting and he said that's very far off (10-20 years was the impression I got).

[GregS]

Hey guys, we wrote a report on Trupanion. Hope you like it and let us know if you have questions.

https://variantviews.com/2017/07/05/trupanion-a-long-term-compounder/

 

angelinvestor,

 

I'm confused about something in your valuation.  You are assuming a 13.5% sustainable EBIT margin w/ 20% GM, 5% fixed expense and 1.5% maintenance capex, but doesn't management's "discretionary margin" exclude sales and marketing expense?