TRUP - Trupanion

[rogermunibond]

vinod1's points stand out on adverse selection.  say if you are a breeder of certain varieties like bulldogs, boston terriers, or boxers.  all have genetic mutations that mean they are at risk for apnea, cardiac stuff, brachycephaly related things.  you could easily recommend your buyers purchase coverage.  same for breeders who have hip dysplasia prone breeds.  meanwhile those with less problematic breeds or those who adopt from the pound have hardier pets with hybrid vigor.

 

this kind of insurance can be gamed.

[Travis Wiedower]

rogermunibond,

 

All breeds are priced differently to account for that. Prices change based on location as well. A bulldog in New York City will be more expensive than a bulldog in Des Moines, Iowa for example. And a pug in NYC will be more expensive than the 100 other dog breeds in NYC that have less health problems than pugs.

 

One of the benefits of Trupanion Express is they get more and better data from the vets because Trupanion is tied into their systems. Their thought is that as Express rolls out to more vets their pricing will be able to improve in step.

[SlowAppreciation]

https://valueinvestorsclub.com/idea/TRUPANION_INC/140560

[Liberty]

Writeup here (sub required):

 

https://www.scuttleblurb.com/trup/

[Liberty]

The link is now open to non-subscribers:

 

https://www.scuttleblurb.com/trup/

[Snorky]

Does anyone happen to have Artem Fokin's thesis by Caro-Kann Capital and can they make it available to me?

 

Best Regards,

 

Benjamin

[cubsfan]

Why don't you contact Artem directly?

 

He shared the presentation with the Manual of Ideas, and he may be happy to share with you.

[cubsfan]

Does anyone happen to have Artem Fokin's thesis by Caro-Kann Capital and can they make it available to me?

 

Best Regards,

 

Benjamin

 

Just as an aside, Artem has posted the last 2 presentations he did for Manual of Ideas on his website (Commerce Hub & Trip Advisor), he may do the same for Trupanion.  And the Trip Advisor presentation was outstanding.

[mwtorock]

Does anyone happen to have Artem Fokin's thesis by Caro-Kann Capital and can they make it available to me?

 

Best Regards,

 

Benjamin

 

Just as an aside, Artem has posted the last 2 presentations he did for Manual of Ideas on his website (Commerce Hub & Trip Advisor), he may do the same for Trupanion.  And the Trip Advisor presentation was outstanding.

 

Yeah agreed that TripAdvisor presentation was awesome.

[Snorky]

I e-mailed Artem directly and he send me the thesis. Thanks anyway guys.

[Cigarbutt]

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.

 

I came to TRUP after reviewing pet insurance and looking at a relevant Fairfax sub.

https://www.cfpetinsurance.com/

 

So TRUP can maintain a relatively low level of capital because of the predictability and short tail nature of policies. It has chosen to use a subscription-like model to develop the business and to report financials but they still need to file with regulators under the property/casualty rubric even if the design of policies is more like health premiums (!). TRUP is a strange animal. From the following document, it looks like TRUP needed to elevate its game in terms of regulatory requirements.

https://www.dfs.ny.gov/insurance/exam_rpt/12190f14.pdf

 

For valuation, future developments are likely to be positive but the exercise is one of discounting. Need to do more work to assess moat (quality and durability). The strategy to enter the market through the vets is the right one and scale effects support the idea behind the internal funding of the growth. Will they become a truly low cost operator?

 

The recent share issue (large and IMO at a premium to IV, to buy the HQ) is puzzling.

 

On balance, this is shaping up to be a potentially interesting idea.

[peterHK]

It's an insurance co trading at 20x book value, only covered on the street by software analysts. The CEO has deliberately tried to market himself as an "outsider" and all the compounder bros love this.

 

I don't get how the business model makes sense or why it should trade at 20x book value, or why the traditional methods of valuing an insurance company shouldn't apply here. It goes in the same bucket as people who think Tesla is like Apple and deserves a steady state 20x multiple.

[Broeb22]

How comparable do you think a business like FTDR is to TRUP? Frontdoor was spun out of Servicemaster and they operate home service plans under the American Home Shield banner and a few others.

 

There are some interesting similarities to FTDR and TRUP:

 

Pets and Home appliances have finite lives and require regular care and sporadic large costs.

 

Both make heavy use of marketing because most people are skeptical of their benefits. Marketing goes through realtors with home service plans, while pet insurance goes through the vet.

 

Both are in theory underpenetrated but a decent percent of the "potential" market has already tried the service before and had a poor experience.

 

Home service is considered insurance by many, particularly since FTDR's competitors are held by insurance companies.

 

Notably, for those questioning the lack of book value here, FTDR spun out with negative equity from SERV.

 

So perhaps either there is a big problem for FTDR as well because it does not have the equity to absorb abnormally high losses, or perhaps FTDR is a decent example of another insurance-like business that holds very little capital.

 

I guess the other point this whole mental exercise proves is that perhaps both fields do not price their products competitively enough if they truly make a profit every year and they don't really need to hold capital because they make money hand over fist? But who would come in to offer products that price this risk more fairly (and cheaply) to consumers? I don't know that Bezos wants to insure Ol' Yeller's heartworm condition...

[peterHK]

How comparable do you think a business like FTDR is to TRUP? Frontdoor was spun out of Servicemaster and they operate home service plans under the American Home Shield banner and a few others.

 

There are some interesting similarities to FTDR and TRUP:

 

Pets and Home appliances have finite lives and require regular care and sporadic large costs.

 

Both make heavy use of marketing because most people are skeptical of their benefits. Marketing goes through realtors with home service plans, while pet insurance goes through the vet.

 

Both are in theory underpenetrated but a decent percent of the "potential" market has already tried the service before and had a poor experience.

 

Home service is considered insurance by many, particularly since FTDR's competitors are held by insurance companies.

 

Notably, for those questioning the lack of book value here, FTDR spun out with negative equity from SERV.

 

So perhaps either there is a big problem for FTDR as well because it does not have the equity to absorb abnormally high losses, or perhaps FTDR is a decent example of another insurance-like business that holds very little capital.

 

I guess the other point this whole mental exercise proves is that perhaps both fields do not price their products competitively enough if they truly make a profit every year and they don't really need to hold capital because they make money hand over fist? But who would come in to offer products that price this risk more fairly (and cheaply) to consumers? I don't know that Bezos wants to insure Ol' Yeller's heartworm condition...

 

You mean the same FDTR that's down 30% today?

 

 

[Broeb22]

Congratulations, you correctly looked up a ticker.

 

For what it's worth, I'm not picking sides in this. I have no position.

 

But Trupanion is potentially an interesting business if I could ever get comfortable with its underlying profitability. I currently have no idea what that is, but FTDR maybe offers a comparison point for those searching for one. I have found my current cash flow-focused investing has not served me as well when I don't see the value being created by an Amazon or Salesforce or you name it. So I want to be open-minded to the possibility that there could be value in TRUP, but it's honestly tough to do.

 

Overall probably not a good sign that FTDR is worth 3x as much as TRUP when it has 4x the revenue of TRUP, and FTDR actually generates cash.

 

[Cigarbutt]

...

But Trupanion is potentially an interesting business if I could ever get comfortable with its underlying profitability. I currently have no idea what that is, but FTDR maybe offers a comparison point for those searching for one. I have found my current cash flow-focused investing has not served me as well when I don't see the value being created by an Amazon or Salesforce or you name it. So I want to be open-minded to the possibility that there could be value in TRUP, but it's honestly tough to do.

...

Initial reflex was to look elsewhere but the company sells what appears to be a good product (customer perspective) using what looks like a reasonable strategy (vertical integration, based on adherence of vets) in a growing market.

 

The classic insurance premiums and reserves concept is incomplete because of the relative predictability of cash flows, capacity to rapidly adjust underwriting pricing to costs and because there is a significant service aspect based on contracts that have an implicit longevity with low churn rates.

 

The gap between intangible and tangible is significant, but likely not enough to justify today's valuation.

[bathtime]

Brian Bares (Bares Capital) has a large position in TRUP and they do intensive due diligence on their investments.

[Spekulatius]

How comparable do you think a business like FTDR is to TRUP? Frontdoor was spun out of Servicemaster and they operate home service plans under the American Home Shield banner and a few others.

 

There are some interesting similarities to FTDR and TRUP:

 

Pets and Home appliances have finite lives and require regular care and sporadic large costs.

 

Both make heavy use of marketing because most people are skeptical of their benefits. Marketing goes through realtors with home service plans, while pet insurance goes through the vet.

 

Both are in theory underpenetrated but a decent percent of the "potential" market has already tried the service before and had a poor experience.

 

Home service is considered insurance by many, particularly since FTDR's competitors are held by insurance companies.

 

Notably, for those questioning the lack of book value here, FTDR spun out with negative equity from SERV.

 

So perhaps either there is a big problem for FTDR as well because it does not have the equity to absorb abnormally high losses, or perhaps FTDR is a decent example of another insurance-like business that holds very little capital.

 

I guess the other point this whole mental exercise proves is that perhaps both fields do not price their products competitively enough if they truly make a profit every year and they don't really need to hold capital because they make money hand over fist? But who would come in to offer products that price this risk more fairly (and cheaply) to consumers? I don't know that Bezos wants to insure Ol' Yeller's heartworm condition...

 

I think FTDR and TRUP is fairly comparable in terms of the overall business model (not the target market). TRUP does need a lot of capital because there isn’t really any correlated risk like with casualty insurers where a huge storm can devastate huge areas at once, causing a lot of correlated claims. TRUP insurers a bunch of really small uncorrelated claims and rates can be fairly quickly adjusted too. . It is similar to a health insurers, which by the  way often have negative tangible equity (look at UNH for example).

[Broeb22]

 

 

I think FTDR and TRUP is fairly comparable in terms of the overall business model (not the target market). TRUP does need a lot of capital because there isn’t really any correlated risk like with casualty insurers where a huge storm can devastatehuge areas at once, causing a lot of correlated claims. TRUP insurers a bunch of really small uncorrelated claims Nd rates can be fairly quickly adjusted too. . It is similar to a health insurers, which by the  way often have negative tangible equity (look at UNH for example).

 

Didn't know that re: health insurers. Will have to look at that.

 

So what happens to health (or pet) insurers in an environment where there is a contagious disease like the Bubonic Plague or the Flu Epidemic in 1921? I assume these guys get blown up unless they can re-price policies faster than a disease spreads.

[Jurgis]

 

I think FTDR and TRUP is fairly comparable in terms of the overall business model (not the target market). TRUP does need a lot of capital because there isn’t really any correlated risk like with casualty insurers where a huge storm can devastatehuge areas at once, causing a lot of correlated claims. TRUP insurers a bunch of really small uncorrelated claims Nd rates can be fairly quickly adjusted too. . It is similar to a health insurers, which by the  way often have negative tangible equity (look at UNH for example).

 

Didn't know that re: health insurers. Will have to look at that.

 

So what happens to health (or pet) insurers in an environment where there is a contagious disease like the Bubonic Plague or the Flu Epidemic in 1921? I assume these guys get blown up unless they can re-price policies faster than a disease spreads.

 

They are not life insurers, so deadly disease won't impact them much.

Huge hospitalizable chronic disease might, but likely (I guess) it would overwhelm hospitals and doctors first, so that would provide a buffer for insurers. I am trying to remember what were the big losses in health insurers in the past. I think it was mostly wrong policy pricing (due to competition?).

[Cigarbutt]

^From the risk-based capital perspective, NAIC differentiates life, property and casualty, health and fraternal.

Interestingly, from a regulatory perspective, TRUP files under P+C (because dogs and cats are considered "property") but the regulator likely adjusts the RBC calculation (lower buffer required) because of the nature of the business which is more like health benefits.

 

I think that, for health benefit insurers in general, the big (often latent) risk is adverse selection (cheap policy) but this can be assessed by the regulator (and the investor) by looking at the historical record (frequency, severity and variability in the mismatch). For TRUP, the policy price is based on a long term set of data, adjusted frequently (pay-as-you-go scheme) and literally based on their 70% of revenue vet cost invoices.

 

I am slowly evaluating this company and suggest the following reference. "Insurance sounding stuff" section. One has to be careful not to drink what management says but the exercise of answering questions before reading their answers was useful.

http://investors.trupanion.com/resources/top-investor-questions/default.aspx

 

If one is worried about the bubonic plague, residual value in one's investment in a pet insurer may not be the most pressing issue on one's mind then. :) On a more serious note, this type of issue may require some kind of reinsurance agreement. TRUP has a reinsurance arrangement for their canadian operations but, on a net basis, I understand that they now retain 100% of the risks.

 

 

 

[Spekulatius]

Losses and bankruptcies occurred with health insurers mostly due to underpricing policies or they went out of business because they became uncompetitive ( costs too high, bad customer selection, network cost uncompetitive, underestimating cost inflation). . In most cases, these are just one off factors that can be adjusted annually but if the issue is structural, then it may result in bankruptcy.

[Cigarbutt]

Q3 is out and in line with longer term trends.

The competitive landscape is interesting. A difficulty here is that most if not all relevant competitors are private or held as a sub within a larger organization (in North America and Europe).

 

Nationwide Pet Insurance appears to have leading market share (40 to 50%) and continues to build market share albeit at a smaller pace than TRUP.

 

Arguments for growth are quite compelling. The fast growth explains the low bottom line results and, at least for me, it remains very hard to predict (exactly) the profitability levels at or near steady state and when that stage will be reached.

 

There was a question during the conference call that was IMO incompletely answered. Basically the point is that a customer facing a sudden increase in a monthly bill will tend to terminate the coverage and then, the pet owner who is felt to be "value sensitive" becomes more "price sensitive". That part is fine because I understand that management responds rapidly to correct underwriting mismatch and they report that 1-the downward revisions equate the upward revisions and 2-they are getting better over time with the deviations between price and value for the different categories of pets.

 

But, given the nature of their model (policy price = vet invoice + 30% margin), there is no built-in pressures to contain vet costs. Vets will like the product (and will promote it accordingly, because insured pets and the quasi-automatic 90% coverage will result in higher spend in their hospitals) but, with CAGR of annual premiums at 6 to 7% (past, present and future), eventually (in comparison to other competitors who use "containment" tools such as deductibles, copays and others and in comparison to uninsured owners) the customers are likely to become more price sensitive as the insurance costs occupy a gradually larger part of overall expenditures. TRUP could respond by lowering coverage from 90 to 80% or (as they have mentioned) increase the vet invoice/revenue ratio above 70% but, over time, this price to value path is likely to impact growth and profitability.

 

The scenario for TRUP also implies that competitors will not respond effectively to its offering.

 

I will do scuttlebutt on this one and any personal experience with pet insurance at vet hospitals would be appreciated. Of course, this would be "indirect" experience because value conscious investors would not buy pet insurance, they would simply set funds aside.

[Peregrino]

Brian Bares (Bares Capital) has a large position in TRUP and they do intensive due diligence on their investments.

 

Think you may have his positions mixed up.

 

He has a position in TripAdvisor (ticker TRIP), not Trupanion (ticker TRUP).

 

https://whalewisdom.com/filer/bares-capital-management-inc#tabholdings_tab_link

[tripleoptician]

Read about 8 hours of conference calls/presentations/shareholder letters and a bit about the short thesis so far this weekend to try to understand the qualitative aspect of this business.

 

Have yet to look at the quantative/annual reports yet.

 

The long argument appears apparent/easy to understand and noted above in the write ups above with large TAM, potentially inproved competitive position secondary to alignment with vets and superior payments processing etc

 

The short argument I want to pay attention to is the qualitative argument vs just that it trades at a crazy book value multiple for an insurance company.

 

The best stated short argument I see is that the actual pricing model for their upfront monthly costs are at an unprofitable level. Then over the life of the ~6.5 yr avg term, Trup will need to increase insurance premium cost based on supposed cost inflation of that subgroup. The argument is that it isnt cost inflation that drives the increased premiums, it was just horrible initial underwriting.

 

The continued revenue growth from adding new pets masks the fact that the actual underwriting is of poor quality.

The shorts would say that the 70% passed onto the consumer is not sustainable and it is essentially a ponzi scheme where if growth stopped revenue would fall and the supposed adjusted margin driving the growth would collapse.

The evidence for this appears to be request filings to the state to increase premiums as much as 15-20% suddenly (I have not read/seen these filings)

 

My instincts would say that Trup has been around long enough to have a reasonable actuarial representation of what the cost plus model should be. DR states "inflation" cost in health related expenses might be 6-8%/yr based on utilizing higher cost stuff like CT instead of xray etc.

 

But how would they be so off to need 15-20% jumps suddenly?

 

The next part of the short argument would be that churn will happen in the mid to late cycle of the pet life when Trup tries to increase premiums significantly once health costs are going up.

 

The increased churn of these mid to late cycle contracts ( yr 3-6) would be masked by the last few quarters of onboarding new pets early. This would allow the churn rate to seem stable at 1.6% for last several quarters.

 

Do any longs have a counter-argument to this? I genuinely want to like this company but want to protect downside first and foremost.

 

Thanks in advance!