A: Trupanion is solving four problems below:
A: We provide medical insurance for cats and dogs. We offer a simple, fair and comprehensive medical plan that pays 90% of actual veterinary costs for unexpected accidents and illnesses, without payout limitations. Generally, the only costs not covered by our plan are those relating to conditions existing prior to the pet's enrollment, routine or preventative care, including examination fees, and taxes. Our medical plan can be used to cover the member's veterinary costs at any licensed veterinary practice, emergency care center or specialty hospital selected by the pet owner within the United States, Canada and Puerto Rico.
A: 'Traditional pet insurance' providers have made, in our view, a number of mistakes in their offerings that result in poor customer and veterinarian experiences. Focusing on keeping the monthly cost low, traditional providers excluded the types of unexpected accidents and illnesses most likely to happen to pets. In essence, these traditional products failed the pet owner when the pet owner needed them the most, resulting in a bad experience. For the veterinarian who recommended that faulty coverage, it resulted in a bad experience for him or her as well.
Here are some specific examples:
A: We believe we provide pet owners with a superior product and value proposition over 'traditional pet insurance' providers; our product aligns the interests of pet owners and veterinarians. How do we do it? Our vertically integrated approach eliminates significant frictional costs that constrain many of our competitors such as underwriting and/or branding. Our strategy has been to pass those cost savings on to our members in the form of a superior value proposition. By vertically integrating our business, we can control critical functions of our business more effectively and efficiently, allowing us to offer pet owners a superior value proposition.
We also believe we are unique in our focus on veterinarians. We design our medical plans to facilitate their business goals and support the mutual interests of them and pet owners – caring for pets. Veterinarian recommendations of our medical plan are critical to our business and we design our medical plan to ensure that veterinarians can feel confident recommending us to their customers.
A: A wellness plan allows pet owners to finance the annual cost of expected, routine care for their pet, such as vaccinations, dental cleanings, annual examinations, etc. We are not a wellness plan. We reimburse pet owners for their veterinary costs related to unexpected accidents and illnesses. In our view, wellness plans are best provided by the treating veterinarian/hospital.
A: Predictability of costs and peace of mind. Our cost-plus model is designed to spread the risk evenly within each category of pets. Our goal is to charge each pet the appropriate amount for their specific circumstances (e.g., breed, age at enrollment, geography, etc.) so that, in aggregate, the extra amount paid by lucky pets covers the veterinary costs incurred by unlucky pets. Some categories of pets tend to be more expensive than others, on average, and our goal is to adjust pricing within each category to reflect those differences so that all pets (e.g., dogs, cats, poodles, bulldogs, young, old) have similar margins.
Superior value proposition. We offer a comprehensive medical plan with no limitations for chronic, congenital or hereditary conditions, no payout limits and no mandates to veterinarians on the cost of treatment. We focus on providing high value to our members, rather than simply minimizing the monthly price. If monthly price is a key consideration, our members can select a deductible up to $1,000 to increase their share of future unexpected treatments.
Our members don't know if they will have an unlucky pet. Our members do know that if they have an unlucky pet, self-insuring is not a viable option because unexpected veterinary bills are unaffordable for most. They view their pets as family members and want to provide their pets with quality veterinary care. Our members understand that if their pet is lucky, they will have overpaid us; that is a good outcome for them! They also feel confident that if their pet is unlucky, their veterinarian can provide the appropriate treatment for their canine or feline family member – without the cost dictating the type of treatment.
Exceptional member experience. We are highly focused on providing an exceptional member experience. We offer a simple and easy to understand medical plan that is comprehensive. We have designed our claims process to be fair, efficient and transparent. We strive to pay claims quickly. With Trupanion Express, we eliminate paperwork and enable reimbursements to occur instantaneously.
A: Freedom to be the most effective advocate for pets. Our medical plan does not limit how much can be paid for an injury or illness. This provides veterinarians with the freedom to practice veterinary medicine at the highest level and be the most effective advocate for the health of the pets.
More loyal client base. Our members visit veterinarians more frequently, which can generate significantly more annual revenue for veterinarians compared to clients without pet medical coverage. Furthermore, pet owners with medical coverage typically spend significantly more on their seriously injured or ill pet; our medical plans are designed to prevent economic euthanasia. The result is a client base that is more engaged, spends more money on care and has healthier cats and dogs.
Reduces potential conflicts with cost-sensitive pet owners. We enable veterinarians to recommend optimal treatment without having their decisions dictated by the cost of treatment and the financial burden on the pet owner. As a result, we believe veterinarians are able to establish stronger ties with their clients and help pets with fewer economic restrictions.
A: Our members come from all different ages, geographies and socio-economic statuses. Our members currently are more likely to be from urban, higher density areas where veterinary medicine utilizes more sophisticated and expensive treatments. Not coincidentally, these are the areas most likely to have Territory Partners at present.
A: We think all pet owners benefit from our medical plan. 60% of our members come from regions with average incomes of less than $80,000/yeari . In regions with higher average incomes, we have higher conversion rates. Pet owners love their pets, regardless of their income level.
iTrupanion Study. Data through Q2 2015.
A: Our goal is to price each pet on a cost-plus basis, taking into consideration each pet's unique risk profile. We currently spend over 70% of subscription revenue paying veterinary invoices. By comparison, many "traditional pet insurance" providers may spend only 50-60% of their premium revenue on claimsii. We believe this gives us a best-in-class value proposition. At the same time, we've been investing heavily in our infrastructure for the long-term. As our business scales, we should have the ability to pass even more benefits back to the consumer.
iiRegulatory rate filings
A: Our proprietary database has been built over 15 years using over 9.5 million pet months of information and includes over 1.4 million member claims as of the end of Q3 2015. We price each pet using a number of factors that may include the type of pet (dog vs. cat), breed, age, spay/neuter, zip code, hospital, service pet (discounted) and chosen deductible. In combination, these factors results in about 1,200,000 different potential pricing permutations, or categories, each with varying levels of significance and detail. Our team of actuaries leverages our proprietary data to segment our members' pets within these pricing categories to ensure that our pricing and lifetime value to acquisition cost (LVP:PAC) are in line with our objectives.
A: Our goal is understand the average veterinary costs each pet will incur so we can adjust pricing to reflect each pet's unique risk profile within all of our membership, including our 30% margin. The specific monthly subscription fee for a member pet varies greatly depending on that pet's characteristics, including species, breed, age, gender and pet location. For example, a newly enrolled male Siberian Husky puppy living in the 19121 zip code of Philadelphia, Pennsylvania and having a $250 deductible may have a monthly subscription cost of about $40 while a newly enrolled seven year old female American Bulldog living in the 10021 zip code of Manhattan, New York and having the same deductible may have a monthly subscription cost of $169. These differences in prices reflect our understanding of the average lifetime veterinary cost of each pet. Significantly, although each member pays substantially different amounts per month, they are both priced to receive the same value – we apply 70% of their membership fees towards the payment of veterinary invoices (assuming their pet has an average veterinary experience over its life). If the pet in Manhattan is 'unlucky' while the pet in Philadelphia is relatively 'lucky' in terms of unexpected treatments, the Manhattan pet owner will have had a better 'deal' financially because they more fully experienced the upside of a Trupanion medical plan. Importantly, our members do not want this outcome, in the same way that we do not want our children to become sick or injured simply because we have good medical plans for them.
A: Our average monthly adjusted revenue per pet (ARPP) was about $48 for a dog and about $32 for a cat as of June 30, 2015 (in U.S. currency).
A: We are continually adjusting our subscription pricing, up or down, as appropriate to approximate a cost plus 30% target for each pet, although any specific pet's membership subscription price only changes once per year. Our pricing also takes into consideration changes in the costs of veterinary medicine. Rate changes are subject to regulatory approval within the United States, which may create short-term variances from our targets in those jurisdictions.
A: Darryl Rawlings has established a 10b5-1 plan to realize a small portion of his Trupanion equity value. Darryl founded Trupanion in 1999 and, in 2014, over 95% of his personal net worth was in Trupanion equities. His 10b5-1 plan that contemplates the sale of 2% of his Trupanion ownership interest each year to supplement his income. He anticipates continuing this program for 10 years. On that basis, he would still hold 75% of his current holdings in 2025, allowing him to remain strongly aligned with shareholders to drive long-term shareholder value.
A: Recent estimates peg the number of household dogs and cats in the United States and Canada at 177 million. United States represents approximately 163.6 millioniii and Canada represents approximately 13.4 millioniv . In 2014, pet industry expenditures in the United Stated and Canada exceeded $64v billion.
The penetration rate for pet insurance in North America is approximately 1%, while Western Europe ranges between 5% and 25%. We believe that the same penetration rates are achievable in North America by providing a high value medical plan and customer experience, but it will take time to get there.
At our average monthly adjusted revenue per pet, every 1% of penetration would equal approximately $1 billion in revenue for the industry each year ($45 ARPP * 1.77M pets * 12 = $956M).
iiiAmerican Pet Products Association http://www.americanpetproducts.org/press_industrytrends.asp
ivCanadian Veterinary Medical Association https://www.canadianveterinarians.net/media-centre/statistics
vUSA is $58B per American Pet Products Association. Canada is $6.5B per Pet Industry Joint Advisory Council of Canada
A: According to The North American Pet Health Insurance Association (NAPHIA), total premium grew 12.8% in 2014vi . As a point of comparison, Trupanion's revenue grew approximately 38% in 2014vii . Within NAPHIA, there are multiple groups offering different products:
a. Most NAPHIA members offer an accident and illness plan. These represented 87% of the industry premium in 2014. In general, all of these companies use a reimbursement model that repays their customers for veterinary costs already incurred. In many cases, certain types of treatments are excluded or subject to limitations on how much can be reimbursed.
b. As noted above, some companies offer additional coverage riders at an additional cost, such as for cancer treatments. These represented 12% of the industry premium in 2014.
c. Some NAPHIA members offer accident-only coverage. These policies represented 1% of the industry premium in 2014.
As we look at the competitive landscape, we believe that companies offering high value plans grew at nearly twice the rate of the 'traditional pet insurance' companies. We believe the plans we consider "high value" have seen their market share increase, while 'traditional pet insurance' has diminished. We believe that Trupanion's growth in recent years was well in excess of the other high value plans, which we believe is attributable to our high value proposition, customer experience, focus on veterinarians, and direct payments.
viThe 2015 North American Pet Health Insurance Industry Report
viiTRUP 2014 10K
A: There are a number of companies offering pet insurance. We are not simply trying to position ourselves within that group, we are creating a new medical insurance category for pet owners. In this category, pet owners know whether their claim will be covered before they leave the veterinarians office and don't have to seek reimbursement by filling out insurance paperwork in the days following treatment. With Trupanion Express, our pet owners have their treatment reviewed and paid while they are still at the veterinarians' office with their pet. We are the only company doing this and, as a result, we don't view any pet insurance companies as 'competitors' in the traditional sense.
When compared to companies offering pet insurance products, Trupanion has the second largest number of total enrolled pets at approximately ¼ million. We believe that VPI, a division of Nationwide, has approximately 500,000 subscribed pets, although they have been in the market since 1982 whereas we only began writing policies in the United States in 2008, and even then in only 14 states. We weren't approved to offer our medical plan in all 50 states until 2013.
Because the market is so massively underpenetrated, we are focused on generating members without any form of coverage for their pet.
Similar to Netflix's view of HBO's streaming service, we believe that the improvement and continued growth of the category would be a net positive to Trupanion's business.
A: There are a number of factors that we believe drove the higher penetration rates in Britain and other European countries. Various European markets have had decades of strong products and veterinarian support, while that process has only recently started in North America. Most significantly in our opinion, is that quality medical insurance for cats and dogs was introduced early in part of Europe. Meanwhile, the United States only had 'traditional pet insurance' offerings that were, in our view, low quality products that offered a poor value to the pet owner and alienated veterinarians. In many cases, these products included wellness coverage, creating confusion about what pet owners need. These offerings alienated many pet owners and veterinarians and created confusion.
A: We have not shared this information across our book for competitive reasons. We have in the past given examples of geographic cohorts. For example, in August 2015 we noted the following:
To provide you with an example of a single, mature cohort, we can take a look at a region in Canada where we've had an experienced territory partner building veterinarian relationships for more than ten years. In this region, we estimate that 65% of veterinarian hospitals in this area were active with Trupanion in the second quarter. In this region where the human population is approximately 2.7 million and therefore the populations of cats and dogs is estimated at 1.3 million, Trupanion has over 18,000 enrolled pets.
Most significantly, because we now have a high percentage of active hospitals and pet owner referrals in this region, we are getting better traction with the owners of newly acquired cats and dogs. We estimate that we have a "quotes per new pet ratio" of 1:4, and we are signing up what we believe is approximately 5% of newly homed cats and dogs each month. This bodes well for us for the long term. After more than ten years in this particular market, we experience an annual pet growth rate of 23% in 2014 and 31% annual revenue growth in this cohort. In addition, our LVP-to-PAC ratio exceeds our 5:1 target in this market.
For competitive reasons, we are not intending to update this information.
A: We fundamentally believe that support from veterinarians is critical to driving broader acceptance of medical insurance for pets in North America. We have built our success around this belief, making pet owners aware of our solution by using Territory Partners to educate veterinarians, and encouraging them to actively recommend Trupanion in their hospitals.
Since 2003, we have been building an independent sales force dedicated to cultivating direct veterinary relationships and building awareness of the benefits that our medical plan offers both veterinarians and their clients. Territory Partners build relationships and trust with veterinarians as the local face of Trupanion. We estimate that, in 2014 alone, our Territory Partners made over 80,000 in-person visits to veterinarians in the United States, Canada and Puerto Rico.
Trupanion Territory Partners are independent business owners operating within a particular region in North America and may have their own employees/contractors, which we include under the umbrella term "Territory Partners".
Territory Partners are assigned an exclusive geographic region historically containing roughly 250 veterinary practices.
A: Veterinary practices represent our largest referral source, accounting for approximately 70% of our leads in 2014 (excluding existing members adding pets and referring their friends and family members). Forming meaningful long-term relationships with veterinarians is critical to our continued success; we believe veterinary recommendations are highly persuasive to our existing and prospective members and represent the key to continued growth in our membership.
Our Territory Partner model was designed to facilitate frequent, in-person, face-to-face communications with veterinarians about the benefits of Trupanion. We estimate that, in 2014 alone, our Territory Partners made over 80,000 in-person visits to veterinarians in the United States, Canada and Puerto Rico.
A: The first Territory Partner was engaged in 2003.
A: At the end of 2014, we had 70 Territory Partners in the field and we expect to have 85 by the end of 2015. We report this number annually and will provide the number of Territory Partners as of the end of 2015 in the 2015 Annual Report's CEO Letter to Shareholders.
A: The market for veterinary services is highly fragmented and includes many sole-owner veterinary practices and small veterinary practices that are difficult to reach. We believe that no other company has a sales force group that even comes close to the scale of our Territory Partners and that it would be difficult, costly and time consuming to try to replicate our strategy.
A: Territory Partners are independent contractors who exclusively market our medical plan within their designated region. We pay Territory Partners fixed dollar amounts per pet in their territory. We believe this compensation structure aligns our interests in continued, long-term pet growth, while at the same time providing a way for our business to scale as our average monthly adjusted revenue per pet (ARPP) increases.
A: An 'active hospital' is defined as a hospital that has had a new pet enrollment attributed to it within the previous three (3) month period. At the end of 2014, we reported having over 6,000 active hospitals.
There are approximately 28,000 veterinary clinics/hospitals in the United States and Canada. We have enrolled pets from, and in 2014 our Territory Partners made face-to-face visits to, approximately 17,000 unique hospitals. We don't consider these hospitals, or any hospitals that simply display our materials, as 'active' unless a new pet enrollment has been attributed to the hospital during the previous three (3) months.
A: At the end of 2014, we reported having over 6,000 active hospitals. We report this number annually and will provide the number of active hospitals as of the end of 2015 in the CEO's Letter to Shareholders as part of our 2015 Annual Report.
A: Trupanion Express™ is our software solution that revolutionizes the member experience by eliminating the reimbursement model. The reimbursement model of filing paperwork in the days following treatment, where the pet owner has to pay for all treatment and then seek reimbursement, is fundamentally flawed. Trupanion Express is designed to eliminate it.
We believe Trupanion Express delivers meaningful benefits to all users:
For more information please visit http://trupanion.com/trupanion-express
A: We target an average 5:1 LVP:PAC ratio, though we anticipate some volatility period-to-period due in part to the timing of sales & marketing expenses. As a reminder, our LVP is calculated on a trailing twelve month basis while our PAC reflects all in-period sales and marketing expense (including internal headcount).
A: We evaluate our long-term margin structure using a top down approach. We first estimate revenue in a future period, reduced by the anticipated variable expenses (approximately 80%) associated with generating that revenue. The difference approximately 20% of revenue) is then further reduced by general and administrative expenses including information technology (approximately 5% at scale). The resulting amount (approximately 15% at scale) is what we internally refer to as our 'discretionary' income that we consider before we incur expenses related to sales and marketing.
A: We have stated that we expect to achieve operational scale at 650,000 to 750,000 pets. At operational scale, it is our goal to deliver discretionary margin of approximately 15%.
A: In the next five years, we plan to achieve operational scale, which we define as 650,000-750,000 pets. At operational scale, our target is to have 5-6% fixed expenses and a 15% discretionary margin from our subscription business (before sales and marketing), with our discretionary income funding all of our growth, including all of our capital requirements.
A: We tend to focus on 2 measures of profitability. First, we operate our business with a focus on maximizing the lifetime value of each pet while sustaining a favorable ratio of lifetime value relative to acquisition cost. This is designed to ensure that we're optimizing our expenses relative to our long-term revenue projections. The LVP:PAC ratio does not, however, factor in fixed expenses. For that reason, we also focus on our discretionary margin, our internal term for the Company's profitability before incurrence of any sales and marketing expense to maintain or grow our business.
At operational scale, we expect to continue to grow as fast as possible while staying either cash flow break-even or slightly positive. Recall that our pet acquisition costs are all incurred up front while the expected revenue from the acquired pets is earned over the course of their expected membership (currently about 6 years), which delays the accounting benefit we see from new members.
A: Our average monthly retention was 98.7% for the second quarter of 2015.
A: Nearly half of our churn comes from pet owners no longer owning the pet (in most cases, the pet has passed away) or billing issues such as credit card expirations or insufficient funds. The majority of our 'controllable' cancellations are due to financial reasons, including where the customer reports they can't afford the premium or don't see the value. Only about 15% of our member cancellations (equating to 1-2 cancels per 1000 subscribed pet months) are in direct response to our actions, such as due to increases in rates or denied claims (usually due to pre-existing conditions).
A: As of August 2015, we had 429 employees in the following categories:
A: We are very focused on controlling dilution; however, we have not provided forward-looking dilution forecasts.
A: We have stated publicly that we expect to become cash flow break even by the end of Q3 2016.
A: Our other business segment contains pets with a business-to-business (B2B) component, as compared to our direct-to-consumer subscription business. In the second quarter of 2015, our other business segment comprised 10% of our total revenue and enrolled pets.
A: In the second quarter of 2015, approximately 22% of our total revenue was derived from our Canadian business. This exposes our top line revenue to fluctuations in the foreign exchange rate, although the impact to our bottom line is less significant because many of our expenses are also incurred in local currencies.
Last updated: February 16, 2016
This presentation contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to, among other things, expectations, plans, prospects and financial results for Trupanion, including, but not limited to, its expectations regarding its ability to execute its business plans and financial objectives and its future operating results and expenditures. These forward looking statements are based upon the current expectations and beliefs of Trupanion's management as of the date of this presentation, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward looking statements. All forward looking statements made in this presentation are based on information available to Trupanion as of the date hereof, and Trupanion has no obligation to update these forward looking statements.
In particular, the following factors, among others, could cause results to differ materially from those expressed or implied by such forward looking statements: the ability to achieve or maintain profitability and/or appropriate levels of cash flow; the accuracy of assumptions used in determining appropriate member acquisition expenditures; the severity and frequency of claims; fluctuations in the Canadian currency exchange rate; the ability to maintain high retention rates; the accuracy of assumptions used in pricing medical plan subscriptions and the ability to accurately estimate the impact of new products or offerings on claims frequency; actual claims expense exceeding estimates; regulatory and other constraints on the ability to institute, or the decision to otherwise delay, pricing modifications in response to changes in actual or estimated claims expense; the effectiveness and statutory or regulatory compliance of our Territory Partner model and of our Territory Partners, veterinarians and other third parties in recommending medical plan subscriptions to potential members; the ability to increase the number of Territory Partners and active hospitals; the ability to protect our proprietary and member information; the ability to maintain our culture and team; the ability to maintain the requisite amount of risk based capital; the ability to protect and enforce Trupanion's intellectual property rights; third party claims including litigation and regulatory actions; the ability to recognize benefits from investments in new solutions and enhancements to Trupanion's technology platform and website; and compliance by us and those referring us members with laws and regulations that apply to our business, including the sale of a pet medical plan.
For a detailed discussion of these and other cautionary statements, please refer to the risk factors discussed in filings with the Securities and Exchange Commission (SEC), including but not limited to, Trupanion's Annual Report on Form 10K for the year ended December 31, 2014 and any subsequently filed reports on Forms 10Q and 8K. All documents are available through the SEC's Electronic Data Gathering Analysis and Retrieval system at www.sec.gov or the Investor Relations section of Trupanion's website at http://investors.trupanion.com.
In addition to U.S. GAAP financials, this presentation includes certain non-GAAP financial measures. These non-GAAP measures are in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with U.S. GAAP. A reconciliation of relevant non-GAAP financial measures to the corresponding GAAP measures is available within this investor relations website.
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