Product Differentiation

Q: Why did Darryl start the business?

A: Darryl: “When I was a teenager, my 2-year old dog Mitsy had a twisted stomach and needed surgery to save her life.  The surgery would have cost approximately $3,000 but my parents simply could not afford the cost of this relatively-routine procedure.  As a result, we had to leave the veterinary clinic without our pet. This was a terrible result for our pet, for me, my family, and for the veterinarian.  The experience stayed with me – I knew there had to be a better way of handling the problem faced by so many pet owners – how to fund unexpected veterinary invoices when your pet becomes sick or injured.  The idea stuck with me for fifteen years and in 1998, after I sold a cigar business I had started, I used the proceeds to bootstrap Trupanion.”

Q: What drives us at Trupanion?

A: Our desire to help the pets we all love receive the best veterinary care.

Q: What do we want to become when we grow up?

A: The world’s undisputed authority in providing medical insurance for cats and dogs.

Q: What problem is Trupanion solving?

A: At a macro level, it is very difficult for pet owners to budget for veterinary expenses if/when their pets become sick or injured. What compounds this problem is:

  1. Pet owners do not know how to budget for the “average” cost of medical care for their pets, which varies dramatically by geography and pet breed.

    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, on average, than others, and our goal is to adjust pricing within each category to reflect those differences.

    Once we understand the “average” cost for each sub-category, we add 30%, which results in Trupanion spending 70% of a pet owner’s monthly costs paying veterinary invoices for pets that have become sick or injured.  A Trupanion member should have the same value proposition if one of their pets is $20 per month (e.g., a domestic short-haired cat in Boise, Idaho) and the other is $200 per month (e.g., an English Bulldog in Manhattan, NY). 

    “I liken our value proposition to the Costco model, where Costco members inherently understand that whether they are purchasing a large flat screen TV, a bottle of Bordeaux, a can of tuna, or a roll of toilet paper, they are always getting the best value.” – Darryl Rawlings

  2. Pet owners don’t know whether their pet will be “average”, lucky or unlucky, so being able to budget for the “average” is not an effective solution for an individual pet owner.

    As noted above, we spread the risk among thousands of pet owners so that, in aggregate, the extra amount paid by lucky pets covers the veterinary costs incurred by unlucky pets.

    Said another way -  Any pet owner could get a quote for their specific breed or location and multiply their monthly quote by 70% to determine the average monthly veterinary costs for accidents and illness.  They could put this money in a piggy bank every month, revisit it annually to understand the impact of inflation and utilization in their geographical area, and follow this pattern for their pet’s entire life.  If their pet ends up being “average” they will have zero money in their piggy bank at the end of their pet’s life. 

    The problem with this piggybank approach is that nobody knows whether their pet will be “average”, “lucky” or “unlucky”.

  3. Even if a pet ends up being “average” over its life, the timing of its accidents or illnesses may not align with its owner’s budgeting approach.

    To an informed, responsible and loving pet owner, Trupanion is a 30% hedge to help them budget for the unexpected cost of veterinary care if/when their pet becomes sick or injured.

Q: What is Trupanion’s product?

A: Trupanion provides high-quality medical insurance for the life of a cat or dog.  Our product is simple and fair, our key tenets are as follows:  

  1. We cover all unexpected illnesses and injuries. This includes the things most likely to happen to a particular breed of pet, frequently excluded in other providers’ fine print as “congenital or hereditary”.  

  2. We pay 90% of actual veterinary costs if a pet becomes sick or injured, this includes all diagnostic tests, surgeries and medications.

  3. The only medical issues we do not cover are the problems that the pet had prior to being protected by Trupanion.

  4. We provide coverage for the pet’s entire life. Medical problems don’t start or stop on birthdays or anniversaries and we do not believe that annual plans make sense due to pre-existing conditions not being covered (in an annual plan, a condition in one year could be considered a pre-existing condition in the following year). Pet owners want to know what will be covered over their pet’s life.  

  5. Pets need care or treatment outside of normal business hours so we make ourselves available 24/7, 365 days a year.

  6. Trupanion members can use any veterinarian in the United States and Canada, including any referral or specialty hospital.

  7. We aim to pay veterinarians directly, within five minutes of the invoice being created and prior to the pet owner checking out – thus eliminating the traditional reimbursement model.  Through the reimbursement model, the pet owner is required to pay the entire veterinary bill out of pocket upon check out, and then must wait for not only the reimbursement, but also confirmation the treatment was covered.

  8. Trupanion exists to help one budget for the unexpected. Trupanion does not cover things a responsible pet owner can budget for on their own, which would include food, vaccinations or wellness visits.  Trupanion does not pay for veterinarian exam fees or most taxes.

Q: What is Trupanion’s pricing promise?

A: a. Trupanion’s pricing promise is to share risks equally and fairly among the “lucky,” “unlucky,” or “average” pet. We accomplish this promise by putting an individual pet into a group or sub-category of pets.  The main factors we use today are:
          i. Breed
          ii. Local cost of Veterinary care down to a zip/postal code level
          iii. Age of the pet when they are enrolled with Trupanion
          iv. Selected deductible

b. Trupanion does not attempt to control the cost of veterinary care in any way. We simply understand the “average” cost across each category of pets and add a 30% margin.

c. Trupanion does not try to predict the future cost of veterinary care.  

d. The average annual increase in veterinary care for the past 15 years has been +5% to +10%. Trupanion members should anticipate their monthly subscription to reflect these averages. In addition to inflation, these increases reflect advancements in care, diagnostic tests and the utilization of more advanced treatment.  These advancements have greatly improved the care for our beloved pets and expect them to continue for decades to come.

e. We encourage customers to enroll their pets as puppies and kittens so they remain in this pricing category for the life of their pet. Once enrolled, the monthly cost for an individual pet will not go up or down based on pet aging. Enrolling a pet as a puppy would be based on an average cost for age 0-13 years, while enrolling at 5 years would be based on the average cost for age 5-13.

f. Once we have a sub-category like “Golden Retrievers” we learn/monitor the average cost for the group and add our 30% margin to determine the group’s pricing. Inside any group there will be a fair distribution between “lucky” pets, “unlucky” pets and the “average” pets:

g. Once enrolled, the monthly cost for an individual pet will not go up or down based on its specific situation. For example, rates will not go up if a pet becomes “unlucky” and we have paid out thousands of dollars for care of unexpected accidents and/or illnesses.  We do not penalize unlucky pets!

h. As Trupanion receives more data from an increasing number of pets (which is constantly happening!), our ability to accurately price sub-categories improves. When we split a sub-category into two, one side will go up and the other down.  In these scenarios members may experience changes outside the average annual +5 to +10%.  When Trupanion started over 15 years ago, we had 4 pricing sub-categories; today, we have millions.

Q: Why does Trupanion derive a competitive advantage from its proprietary data?

A: We believe we have the largest number of pets enrolled in North America with high-quality lifetime coverage if their pets become sick or injured. We have been collecting this data for over 17 years. The data from these pets, we believe, provides us with a significant strategic advantage. For example, we believe our understanding of the anticipated veterinary costs across more sub-categories is of substantially greater accuracy than others. In addition, we understand the lifetime value for each of these pet sub-categories, allowing us to spend a targeted amount of money to acquire new pets while optimizing our IRR (internal rate of return).

We have been investing heavily building a team of actuaries and data scientists in this area for over a decade.

Q: Trupanion states its proprietary data is a competitive advantage – why is Trupanion’s data better than other players like Nationwide (formerly VPI), who have been in the market longer and have more pets than Trupanion?

A: There are a few reasons for this. Traditional pet insurance companies did not cover items such as congenital and hereditary conditions and / or used benefit schedules and, therefore they were not able to accumulate the data to differentiate the expected costs between the hundreds of different dog and cat breeds in North America. Additionally, traditional pet insurance companies tended to only price to the state level vs. zip-code, so their data did not capture the difference in, for example, pet care in Beverly Hills vs. Bakersfield, California.

We believe our granular data not only allows us to price our policies much more accurately than other companies in the industry, but also detect fraud at a higher rate

Q: How does Trupanion benefit Veterinarians?

A:a. 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 and better alignment with their pet owner clients. Our members tend to visit veterinarians more frequently and select the best course of treatment for their pet regardless of cost. We estimate pet owners with Trupanion visit their veterinarian twice as often and spend twice as much on veterinary care as compared to non-Trupanion pet owners, this averages $3,000 extra per pet.

b. Our medical plans reduce economic euthanasia.

c. Trupanion reduces paperwork.

d. Trupanion increases their bottom line profit percentage by an estimated 15% by reducing credit card fees when we pay the invoice directly before the pet owner checks out.

e. Trupanion does not dictate or control fees.

f. Trupanion and veterinarians are aligned. Trupanion does not dictate the cost or control the standard of care. Rather, we support accurate care for a pet, and maintain our value proposition through all levels of care and pricing.  

Q: What is Trupanion’s membership demographic?

A: Given the broad-based ownership of pets across the U.S. and Canada, our members are highly diverse, as are their pets. As the industry is only 1-2% penetrated, we expect the diversity of both our members and pets to increase substantially as we gain market share. Historically, members were more likely to be from urban, higher-density areas, however our membership base has diversified as our footprint has expanded.

We do not believe our product is specialized for a specific demographic of pet owner. Trupanion member conversion rates, retention rates and penetration rates are relatively consistent across economic and demographic categories. Responsible, loving pet owners are not defined by their income.  

Q: What is the average payout ratio for a Trupanion member and how does this compare against competitors?

A: Our goal is to build this category by providing the highest possible value in our product. We currently target and spend approximately 70% of subscription revenue on paying veterinary invoices.  By comparison, we believe that our competitors target to spend approximately 50%-60%, though they may underprice at times to drive shorter-term growth – we do not view this as a sustainable long-term strategy.  More importantly, while most would deem a lower payout as better, we think differently.  We will continually evaluate opportunities to reduce frictional costs and further enhance our value proposition as long as we can achieve our targeted 15% adjusted operating margin. 

Remember, a payout ratio underpins our value proposition, but it does not stand alone.  Our comprehensive product coverage, 24/7 customer service, efforts to pay veterinarians directly before checkout, and efforts to improve pricing accuracy, all combine to provide what we believe is the best value proposition to pet owners.

Q: How does Trupanion differ from ‘traditional pet insurance’ that is prevalent in the North American market?

A: ‘Traditional pet insurance’ providers have historically focused on keeping costs low, primarily by excluding many events and illnesses most likely to be experienced by our beloved pets, failing to provide them with much-needed care.

Here are some specific examples:

  1. ‘Traditional pet insurance’ excluded congenital and hereditary conditions – the things most likely to happen to that particular pet. Cancer and other conditions likely to occur also were excluded.

  2. ‘Traditional pet insurance’ is a reimbursement model. The pet owner pays out of pocket when picking up their pet from the veterinarian, then fills out some paperwork and then waits by their mailbox for 2-4 weeks hoping they get reimbursed something. In short, they front the costs of care without certainty of repayment.

  3. ‘Traditional pet insurance’ is an annual policy. Annual policies don’t make sense for cats and dogs for the following reasons:
    1. They have start and stop dates, which is not helpful if your pet has a condition that lasts beyond the arbitrary dates.
    2. They have the ability to limit or change policy coverage based on a pet’s current or past health, which is not helpful if your pet has a condition that lasts through such a change in coverage.
    3. A pet re-enrolling each year is forced to pay a higher monthly cost based on its current age, therefore not benefiting from their foresight for enrolling years prior. Often, pet owners will see their monthly cost rise 2x-4x, not including inflation, as their pet ages.

  4. ‘Traditional pet insurance’ dictates a reimbursable amount for specific types of veterinary treatments based on what the insurance company, rather than the veterinarian, considered to be appropriate for such procedures. This often meant that conditions were only partially reimbursed and implied that that the veterinarian was charging an excessive amount. The pet owner received less than they were expecting, reducing their loyalty. By suggesting that the veterinarian was overcharging, the experience also reduced the likelihood that the veterinarian would recommend insurance in the future.

  5. ‘Traditional pet insurance’ imposes caps on the maximum amount of benefit the pet owner can recover under the policy. As a result, if a condition qualified for coverage but the cost of treatment exceeded an annual or lifetime maximum allowable amount, the pet owner would only receive a partial reimbursement.

  6. ‘Traditional pet insurance’ sometimes only offered accident-only coverage, representing just a small portion of the unexpected things that could cause a pet to need medical care.

Q: What factors contribute to Trupanion being the low cost operator relative to other medical insurance for pets’ providers?

A: Unlike Trupanion, the vast majority of our competitors are not vertically integrated, meaning they do not own their own insurance company. Rather, they are marketing companies that require the use of a third party to underwrite the policies they offer. Trupanion estimates our vertical integration saves us approximately 12 – 15 points of frictional costs. In addition, companies that do not own their own brand lose an additional 3 – 5 points of brand franchising expense. In total, Trupanion’s model saves up to an estimated 15 - 20 points of frictional costs, which we have chosen to return to pet owners by way of a superior value proposition.

Q: What does a monthly medical plan subscription cost on average?

A: Our average revenue per pet (ARPP) was about $54 per month as of December 31, 2018 (in U.S. currency). There is a significant variance in costs depending on each pet’s risk profile, which can be driven by numerous factors such as breed and geography. For example, targeting an average payout ratio of 70 cents on the dollar, the average monthly subscription for an English Bulldog puppy, with a modest deductible, living in Boston was about $95 per month.

For more details on pricing, please refer to question 6.

Q: How often does Trupanion change subscription costs?

A: We are continually adjusting our subscription pricing, up or down, as appropriate to approximate a consistent cost‑plus target for new members. Existing members’ monthly cost will be locked-in for a minimum of 12 months from their last rate change. 

Q: Do membership subscription costs increase automatically as the pets get older?

A: No, unlike competitors, we do not automatically increase pricing simply because a pet gets older. We price by age at enrollment, which translates into a loyalty discount. As an example, a pet owner who enrolls a 12-week old mixed breed dog would pay about $54 per month, compared to about $89 per month if that same owner were to enroll that same pet at 8-years old.

For more details on pricing, please refer to question 6.

Q: Do membership costs increase for a pet that gets sick or injured?

A: No! Trupanion does not punish unlucky pets. We expect some pets to be unlucky and some pets to be lucky. Our job is to price the category of pets appropriately up front and then adjust for veterinary inflation in general rather than for the risk associated with an individual pet.

Q: How is Trupanion different from wellness plans?

A: A wellness plan usually allows pet owners to finance the cost of expected, routine care for their pet, such as vaccinations, dental cleanings, annual examinations, etc. They are sold based on a ROI; for example, annual routine care is budgeted at approximately $300, but if you purchase a wellness plan, you’ll pay the veterinarian $20 per month or $240 per year.   

We believe wellness plans offered by veterinarians are a win for both the veterinarian (creates a sticky client) and a win for the pet owner. 

Pet owners are often confused between “wellness plans offered by their veterinarian” and “medical insurance offered by a 3rd party”.  To add the confusion, in North America the terminology “pet insurance” is often mistaken for wellness plans offered by a veterinarian. 

We believe the combination of medical insurance for your pet, and wellness plans offered by a veterinarian, when explained together, often presents a good value proposition to the pet owner.

Q: Why has Trupanion chosen to not offer a wellness plan?

A: Wellness plans don’t make sense for Trupanion, as a pet owner would be paying a premium for services they can easily budget for on their own. We view wellness plans as an opportunity for pet owners to complement Trupanion insurance to ensure complete coverage of their pet.

Market Share/Competition

Q: What is the size of the total addressable market and how much growth is it seeing on an annual basis?

A: Recent estimates peg the number of household dogs and cats in the United States and Canada at 200 million. United States represents approximately 184 millionii and Canada represents approximately 16 millioniii.  In 2016, pet industry expenditures in the United Stated and Canada are estimated to have exceeded $63 billioniv.

The penetration rate for medical insurance for cats and dogs in North America is approximately 1-2%, while Western Europe has ranged between 5% and 25%. We believe that, given enough time, the same penetration rates are achievable in North America by providing a high value medical plan and member experience.

At our average revenue per pet, every 1% of penetration would equal approximately $1.3 billion in revenue for the industry each year (As of December 31, 2018: $54.34 ARPP * 2.0M pets *12 = $1,304M).

We are the fastest growing provider of pet medical insurance in North America. NAPHIA produces a report available for purchase that presents this information in greater detail.

Q: According to the American Pet Products Association (APPA) National Pet Owners Survey approximately 10% and 5% of dog and cat owners respectively, had insurance for their pet at the end of 2016, yet Trupanion states that penetration is closer to 1 – 2% in North America – what is the cause of this discrepancy?

A: The APPA survey is based off of approximately 2,500 tabulated pet owner surveys, in which pet owners were asked about pet insurance. Generally speaking, when pet owners are asked about ‘pet insurance’ they often include wellness plans in their response. We have made an effort to differentiate ourselves from ‘pet insurance’, creating a category of ‘medical insurance for pets’ in part to help clarify this issue. We reference several sources to validate the estimated 1% penetration of medical insurance for pets in North America, including NAPHIA’s 2018 NAPHIA State of the Industry Report.

Q: Why is the penetration rate in European markets much higher than in North America?

A: There are a number of factors that we believe helped drive the higher penetration rates in Britain and other European countries relative to North America. In our view, time in market with a high-value product that veterinarians and their staff recommend is the key difference. Various European markets have had decades of high-value products and veterinarian support. Meanwhile, the United States only had ‘traditional pet insurance’ offerings at the outset that were, in our view, relatively low quality products that offered a poor value to the pet owner and alienated veterinarians.

Q: When do you believe the U.S. market will hit 5% penetration? What about 20%+ penetration?

A: In the U.K., it took approximately 20 years (roughly two pet generations) to hit the first five points of penetration and another 20 years to hit 25 points of penetration. While some variants of medical insurance for cats and dogs have been available in the U.S. since 1982, the industry has had to overcome negative perceptions and a poor value proposition.  Today, we believe we are at least one pet generation away from approaching penetration levels of 5% in the U.S.

Q: Who does Trupanion compete against in the market?

A: Broadly, we view our biggest competitor as credit cards and the choice pets owners make to self-fund their veterinary procedures.  At the branded level, at any time in our operating history, we have competed against 12 – 20 brands, or over 40 brands in aggregate.  Our competitors generally fall into two segments: traditional providers that are unlikely to cover the things most likely to happen to pets (i.e., congenital and hereditary conditions) and higher-value providers that do cover most hereditary and congenital conditions in some form of an annual plan.

When compared to other 3rd party companies providing insurance or wellness products for pets, Trupanion’s revenue was $304M at the end of 2018, making us second largest to VPI, a division of Nationwide.

Q: How has the competitive market evolved over the past few years?

A: With approximately 200 million cats and dogs in the United States and Canada and penetration rates of 1-2%, we view the largest opportunity to grow the market is educating pet owners about medical insurance and why it is an important part of responsible pet ownership. This includes educating pet owners on the increases in the cost and quality of veterinary care, as well as overcoming negative preconceptions about traditional pet insurance.  Generally speaking, pet owners do not switch medical insurance providers for their pet – it would be too costly and prohibitive to do so, due to pre-existing conditions not being covered. Rather, we believe Trupanion is attracting new entrants into the category.

Q: What is Trupanion’s market share in longer established regions?

A: We value transparency with our team and with our shareholders. However, for competitive reasons we have not shared geographic-specific information. Instead, we have in the past given a geographic cohort example (this information was provided in August 2015 and has not been updated since that time):

To provide you with an example of a single, more 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 of 2015. 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 enrolling what we believe is approximately 5% of newly homed cats and dogs each month. After more than ten years in this particular market, we experienced 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 5:1 in this market.

Marketing Channels

Q: What is a Territory Partner and how many Territory Partners currently support Trupanion?

A: Territory Partners are our team of individuals having face-to-face visits with veterinarians and their staff. The model is similar to the early Coca Cola model, whereby independent entrepreneurs owned the bottling rights for an exclusive territory. Similar to Coca Cola, where the bottlers drove around in Coca Cola trucks visiting and servicing corner stores and vending machines, our Territory Partners drive around in Trupanion branded vehicles visiting veterinarians, shelters and other pet related businesses.

We fundamentally believe that support from veterinarians is critical to driving broader acceptance of medical insurance for pets in North America and we have built our success around this belief. This was also the primary strategy employed in the U.K., where penetration levels today are approximately 25%. Since 2003, our Territory Partners have been cultivating direct veterinary relationships and building awareness of the benefits high-quality medical insurance offers both veterinarians and their clients. We estimate our Territory Partners have made over 800,000 visits to over 30,000 veterinarians in the United States, Canada and Puerto Rico.

Territory Partners cover exclusive geographic regions that often contains approximately 250 veterinary practices. At the end of 2017, we had over 105 Territory Partners in the field. We provide an updated number for this on an annual basis in connection with our founder’s shareholder letter published in April.

Q: What is the strategic rationale behind the Territory Partner model?

A: Veterinary practices represent our largest referral source, and combined with referrals from members, accounted for approximately 73% of our leads in 2018. Our Territory Partner model was designed to facilitate frequent, in-person, face-to-face communications with veterinarians and their staff about the benefits of Trupanion and high-quality medical insurance for the life of a pet.

The most important job of a Territory Partner is to build strong relationships with each veterinarian hospital, so the staff can trust and recommend Trupanion. This is not just about new pet referrals however, as alignment with veterinarians is critical for a positive customer experience, long term retention and pet owner referrals. Similar to countries like the UK or Sweden, we strongly believe that earning the trust of veterinarians and their staff is the 1st step to successfully building/creating our category in North America.

Q: How unique is your access to the veterinary channel?

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 that compares in scale to our Territory Partners and that it would be extremely difficult, costly and time consuming to replicate.

Q: How are Territory Partners compensated?

A: Territory Partners are independent contractors who are compensated through a combination of referral fees for new pet enrollment and residuals tied to pet retention within their territory. Referral fees for new enrollments are recorded as an acquisition cost in PAC (sales and marketing expense) while the ongoing residual fees are recorded as part of the variable expenses associated with maintaining our members (other cost of revenue). Our residual fees are a fixed dollar amount and therefore scale as our average monthly revenue grows.

Q: Are Territory Partners licensed to sell Trupanion medical insurance?

A: Territory Partners generally do not sell or solicit Trupanion policies direct to consumers; rather their role is to create meaningful, long-term relationships with veterinarians and to educate those veterinarians about the benefits of high-quality medical insurance for the veterinarians’ base of clients. Some Territory Partners choose to become licensed, such as where they may engage separately in sales or solicitation activities. Licensing is unrelated to their status as independent contractors. The licensing process, which all of our call center sales team goes through, typically involves a week of home study to pass a property & casualty test. Thereafter, licensing appointments are made and filing fees in applicable states are managed. In aggregate, it costs about $200 - $300 per year to maintain a property and casualty insurance license in 2-3 states.

Q: Are Trupanion Territory Partners full-time or contracted employees? Are they exclusive?

A: Territory Partners are independent contractors who exclusively operate within a designated region. As independent contractors, directly contracted Territory Partners are not ‘full-time’ in an employment sense. They are exclusive to Trupanion within the Veterinary Channel; they generally are not permitted to discuss unrelated products or services in Trupanion sales channels.

Q: What is the average retention rate of a Territory Partner?

A: In the first two years, we lose approximately 50% of our directly contracted Territory Partners; while a very demanding role, if such a Territory Partner makes it through the first few years, retention is very high thereafter. Our model is set up to retain the top performers. Of those that have been directly contracted since 2013, we have retained over 90% of those that completed their first 2 years with Trupanion.

Q: How does our Inside Sales Team support our Territory Partners?

A: Our Territory Partners typically will make in-person visits to hospitals in their territory once every 60 days. Our inside sales team is designed to support our Territory Partners by giving their hospitals support on the other 59 days of the month. In particular, our inside sales team will leverage Trupanion Express to provide dynamic information about their business. This program began in 2017 and we are excited about its prospects.

Q: Do you view your national salesforce of Territory Partners as a sustained competitive advantage?

A: Absolutely. We fundamentally believe that veterinarian buy-in and support is essential to the long-term success of medical insurance for pets. Our Territory Partners’ national footprint is unique; they have made over 800,000 visits to approximately 30,000 vet hospitals since our inception. We were first to market with this strategy and we believe potential competitors would face significant challenges from veterinarians in establishing their value proposition, particularly where we have existing relationships.

A few additional points:

  • Veterinarians are not asked to sell or solicit insurance.
  • Trupanion does not pay any compensation to veterinarians or their staff based on the sale of insurance.
  • Territory Partners do not sell or solicit Trupanion direct to consumers unless they have elected to obtain a license. Their role is instead to communicate and to build relationships with veterinarians and their staff, primarily through face-to-face interactions.
  • Territory Partners and veterinarians do not enroll policyholders. Trupanion sells insurance to pet owners online and through its telephonic service center via licensed representatives.
  • Directly contracted Territory Partners directly are compensated through a combination of referral fees for new pet enrollment and residuals tied to pet retention within their territory. Their fee compensation is the same flat amount without regard to how the member enrolled.

Q: How does the Company’s exam day offer work?

The program works as an Offer to get 30 days of coverage on a trial basis if the person calls us or activates the Exam Day Offer online. After this trial period, the pet owner can elect to convert to a paying policy or not. There are some operational and accounting variations regarding our Exam Day Offers in some states due to regulatory preferences, although these variations are eliminated on a consolidated financial basis. We do not include activated Exam Day Offers in our enrollment count, and do not recognize revenue if the pet owner does not convert their activated Offer within the 30 day window. Revenue recognition occurs at the time of conversion from the exam day offer to an enrollment.

Q: What percentage of your leads are generated through the online channel and how do conversion rates compare to that of your other lead sources?

A: Less than 10% of our leads are generated online. We have tested, and will continue to test, our acquisition through the direct-to-consumer channel such as TV, radio and social media channels. We carefully track the resulting metrics including leads, conversion and lifetime value and are disciplined in our spending to ensure we allocate our spending in these channels appropriately.

Historically, we have generated significantly higher conversion rates from leads sourced through our call center. As our brand awareness continues to grow, we believe we have a lot of potential to improve online, but we are early in our spending on this channel. Our primary focus has been and we expect it will remain in the veterinary channel. Each month, 1,000,000 puppies and kittens are added into veterinarians’ practice management software systems and we view this as our target market. In comparison, pet owners searching for pet insurance online may be doing so because their pet already has a problem, which could result in either adverse selection or a negative customer experience. We believe we are uniquely positioned to avoid these issues.

Insurance Sounding Stuff

Q: Why does Trupanion choose to own its own insurance entity?
Q: Why does Trupanion have multiple financial statements?
Q: Why does Trupanion file separate statutory filings for American Pet Insurance Company?
Q: What are the differences between American Pet Insurance Company Financials and Trupanion, Inc. Consolidated Financials?
Q: Can you provide more detail on American Pet Insurance Company’s margin profile? Specifically, what expenses are classified within loss adjustment expenses (LAE)? What expenses are classified within other underwriting expense?
Q: What is the difference between veterinary invoice expense, which is reported in Trupanion’s consolidated financial statements, and the Loss and LAE ratio reported in American Pet Insurance Company’s statutory filing? Why has it increased since 2016?
Q: How has the overall profitability of American Pet Insurance Company trended in recent years?
Q: Isn’t Trupanion just an insurance company?
Q: Why doesn’t Trupanion use common insurance terms such as “losses” in its consolidated financial statements? Why does Trupanion not discuss its combined ratio in the consolidated financial statements?
Q: What are Trupanion’s statutory capital and surplus requirements?
Q: How are surplus capital requirements calculated?
Q: Why does Trupanion have such low float or claims reserves?
Q: Does Trupanion set up a reserve for old age?
Q: At a macro level, please comment on your process of obtaining rates that are filed and approved with regulators.

Q: Why does Trupanion choose to own its own insurance entity?

A: We do not need to own our own insurance entity. Rather, we choose to own our insurance entity! Trupanion’s operational structure is unique in our industry. Within the medical insurance for pets’ category, we are the only mono-line player that owns its own insurance entity.  Owning an insurance entity has the benefits of decreasing unwanted frictional cost (estimated at 10% - 12% savings) that do not provide value to members. We pass these savings back to our customers in the way of a higher value proposition. In addition, owning our own insurance entity allows for direct relationships with individual state regulators. These direct relationships allow for improved communications and we believe present the opportunity to better serve our members.

In the United States, as well as most developed countries around the world, insurance products have regulatory oversight to make sure:

  1. Consumers are treated fairly and all “like” groups are provided a reasonable value proposition.
  2. That the insurance entity behind the product is adequately capitalized (i.e., holding cash or cash equivalents in a trust account to “ensure” there are sufficient funds available if most member pets were to become seriously sick or injured at the same time).

Similar to a public company, an insurance entity needs to file its own financials on a quarterly and annual basis. These filings are not done with in accordance with GAAP accounting, but rather are done on a statutory basis of accounting.

The majority of Trupanion’s competitors are marketing companies that rely on a separate third-party company to provide the “insurance” product. As a result, they do not control key aspects of their business, including pricing.

Q: Why does Trupanion have multiple financial statements?

A: Trupanion is made up of over a half dozen wholly-owned subsidiaries that consolidate into one Delaware corporation (“Trupanion Inc.”). One of the many companies we own is an insurance entity named American Pet Insurance Company (APIC). As discussed above, we choose to own this particular entity which enables us to reduce frictional costs. A reduction in frictional costs is what allows a corporation, or more specifically, a company that specializes in monthly recurring revenue, to provide the best sustainable value to its members or customers. In our 2014 shareholder letter (click Here), we quoted Warren Buffett who stated:

I have always been attracted to the low cost operator in any business and when you can find a combination of (1) an extremely large business, (2) a more or less homogeneous product, and (3) a very large gap in operating costs between the low cost operator and all of the other companies in the industry, you have a really attractive investment situation. That situation prevailed twenty five years ago when I first became interested in the company, and it still prevails.”

In our case, we believe that owning our own underwriter saves approximately 10% - 12% relative to a marketing company, which we in turn pass back to our members in the of way of a higher target value proposition.

As Trupanion is made up of a group of different companies, we have inter-company agreements.  For example, our underwriting entity contracts with, and pays a commission to, our operating entity in exchange for numerous services including claims, technology, sales and marketing and general and administrative services. These inter-company agreements can change depending on a number of factors. Because inter-company agreements can change, we believe consolidated financials are the only effective way to review and compare the company’s performance over a period of time. Berkshire Hathaway, one of the many companies that we admire, owns multiple entities and also reports on a consolidated manner.

Q: Why does Trupanion file separate statutory filings for American Pet Insurance Company?

A: As required by American Pet Insurance Company’s primary regulator, the New York Department of Financial Services (NYDFS), American Pet Insurance Company files stand-alone statutory financial statements with the NAIC. The financial profile can be found here: APIC financials by searching under our NAIC # 12190. Information is presented based on the filing year and period (quarterly vs. annual). 

American Pet Insurance Company’s stand-alone financials reflect our USA insurance operations, are prepared using the statutory basis of accounting and audited as such, and reflect inter-company agreements as applicable from time to time, including between American Pet Insurance Company and our USA operating entity Trupanion Managers USA, Inc. (Trupanion Managers).

We focus our financial discussion on our consolidated financials, which we believe is most appropriate as it presents the complete, consistent financial picture of our business, including our loss and loss adjustment expenses (in our consolidated financials, we refer to these ‘losses’ as veterinary invoice expense in order to provide additional transparency regarding the nature of these expenses). Changes in historical American Pet Insurance Company loss and loss adjustment expense are primarily due to changes in statutory accounting classifications, as well as our inter-company agreements, and are not due to any significant increase in actual losses.

Q: What are the differences between American Pet Insurance Company Financials and Trupanion, Inc. Consolidated Financials?

A: American Pet Insurance Company is Trupanion’s regulated insurance subsidiary in the U.S.  Its financials consolidate into Trupanion, Inc. U.S. revenue from our subscription and other business segments flow through this entity. As mentioned above, we also have a U.S. operating entity for our subscription business, Trupanion Managers, where all U.S. employees reside, and the operating activities occur. This operating entity earns commissions from American Pet Insurance Company via a General Agency Agreement that is approved by the NYDFS. This agreement sets forth the profit percentage American Pet Insurance Company retains and the commission payments that American Pet Insurance Company makes to Trupanion Managers. It also provides for payment to Trupanion Managers in exchange for its provision of operations  functions, including those relating to member care, claims administration, general administration and technology. On American Pet Insurance Company’s statutory financials, the payments to Trupanion Managers are classified as loss adjustment expenses (LAE) or other underwriting expenses, based on the nature of expenses incurred.  

Similarly, we have an operating entity in Canada, Trupanion Brokers Ontario, Inc., which also consolidates into Trupanion Inc.’s financials, although our Canadian underwriting structure is different from that in the U.S. Specifically, Canadian revenue runs through Wyndham Insurance Company (SAC), Ltd. and is not part of American Pet Insurance Company’s financials.

Within the broader insurance industry, we view our structure as straightforward and common.

American Pet Insurance Company’s financials are prepared under the statutory basis of accounting, while our consolidated Trupanion Inc. financials are prepared under US Generally Accepted Accounting Principles (GAAP). American Pet Insurance Company’s statutory basis financials are audited in the same way as our consolidated financials.

In sum, American Pet Insurance Company’s financial statements reflect the activity related to the underwriting of its current products in the United States. The consolidated company financials reflect this activity in addition to our Canadian operations and investments to grow our business, including investments in Trupanion Express, claims automation, other pet products and direct-to-consumer efforts, among others.  

Q: Can you provide more detail on American Pet Insurance Company’s margin profile? Specifically, what expenses are classified within loss adjustment expenses (LAE)? What expenses are classified within other underwriting expense?

A: Loss adjustment expenses (LAE) are an inter-company charge between APIC and one of our entities Trupanion Managers. The amount of the charge is intended to reflect an appropriate expense or charge for processing claims and related services, whether direct or indirect. Commission payments made to the operating entity that are used for claims processing (primarily salaries for claims employees) and indirect expenses (such as rent expense related to claims employees or technology expenses related to claims systems) are recorded as LAE on American Pet Insurance Company’s statutory financials with respect to our U.S. revenue from both business segments.  Other commissions paid, regulatory fees, and premium taxes currently have been classified as other underwriting expenses.

The methodology in which we calculate and charge these expenses has changed multiple times over the years; therefore our consolidated statements provide the most accurate period over period comparisons.

Q: What is the difference between veterinary invoice expense, which is reported in Trupanion’s consolidated financial statements, and the Loss and LAE ratio reported in American Pet Insurance Company’s statutory filing? Why has it increased since 2016?

A: Summary of our consolidated financial performance is shown below. In the table, we highlight adjusted operating income, which are the funds available to us before we invest in pet acquisition. At operational scale, which we define as total enrolled pets of between 650,000 to 750,000, we target an adjusted operating margin of 15%.

A summary of American Pet Insurance Company Financials is shown below.

As we discuss above in greater detail, changes in inter-company agreements can make it difficult to look at the financials of one subsidiary such as this in isolation. In particular, changes to intercompany agreements complicate attempts to compare periods of a single subsidiary. The cost of veterinary invoices within APIC’s statements have remained relatively consistent over the periods presented above. In 2016, we changed the General Agency Agreement to calculate commission paid to Trupanion Managers on a percentage basis (i.e., after losses and American Pet Insurance Company’s profit margin). Previously, American Pet Insurance Company paid commissions to Trupanion Managers on a per pet basis. This change was done to align with American Pet Insurance Company’s agreements with unaffiliated brands it underwrites.

We also used the opportunity to better classify the commission payment between LAE (if the payment is used for claims processing) and other underwriting expenses. Previously the full commission was classified as other underwriting expenses. Beginning in 2016, this accounting change resulted in LAE expense increasing and other underwriting expenses decreasing (by a corresponding amount). We provide this information in an effort to be transparent about the operations of certain of our subsidiaries, particularly the regulated entity. We expect to continue to focus our financial discussion on our consolidated financials, which we believe is appropriate as it presents the complete, consistent financial picture of our business, including our loss and loss adjustment expenses. Trupanion, Inc. consolidated financial statements include all operations (USA + Canada) and all expenses incurred, without fluctuations caused by reasons other than changes to our business (such as changes to expense classification within inter-company agreements). We believe that focusing on our consolidated financials therefore also allows investors to more easily compare profit and loss items between periods.

Q: How has the overall profitability of American Pet Insurance Company trended in recent years?

A: As reflected in the table above, from 2015 through 2018, American Pet Insurance Company’s overall profitability has increased over 400% from $2.8M in 2015 to $14.4M in 2018. The margins have expanded as well. That being said, APIC’s financials on their own are incomplete and do not tell the full story. Over that same time period, we have not been profitable on a consolidated basis, primarily because we have been reinvesting as much of our available free cash flow as possible into acquiring new pets with an outsized internal rate of return. As a result, we have been targeting operating at or around EBITDA and cash flow break-even. 

Q: Isn’t Trupanion just an insurance company?

A: We live and breathe in the Animal Health world. We help responsible loving pet owners budget for the cost of veterinary care if/when their pet becomes sick or injured by providing a high-quality medical insurance product that is designed for the pet’s entire life and that is aligned with veterinarians and their staff.

Our company is fairly unique and can be difficult to categorize for those looking to understand us by comparison. Specifically:

  • We operate as a consumer-focused business, that is heavily reliant on data and technology to drive a high value service for pet owners and veterinarians. We are focused on generating growth through cost-effective pet acquisition and by maximizing the lifetime value of our member pets.
  • We are a cost-plus model. Our pricing is based on understanding the underlying average cost for a given pet with ~30 points of margin.
  • We do not try to predict or control the cost of veterinary care. By contrast, we believe rising costs in veterinary care are likely to create greater demand for our product.
  • We do not have an annual product where a consumer can easily switch from provider to provider. Our product is monthly and designed for the life of a pet.
  • Our historical organic growth rates differ from what most insurance companies are accustomed to seeing. Unlike most consumer insurance markets, our market is approximately 1-2% penetrated and we believe growth is predominantly organic ( e., make market) rather than competitive ( i.e., take market). 
  • We don't have "losses". We like to pay big veterinary invoices! In fact, we ring a bell when pay a big invoice because it reinforces our mission to help responsible pet owners care of their "unlucky" pet. Helping our members pay for their pet’s care is why we exist.
  • We tend to have relatively high frequency (number of invoices) but relatively low severity (per invoice dollar amounts). By contrast, traditional consumer insurance companies (such as home/auto) tend to have low frequency but high severity of claims (in insurance lingo).
  • We do not have a large claims reserve on our balance sheet (which represents claims reimbursements that have been incurred but where we have not yet received the invoice from our members). We are not a “float” business. Approximately 95% of invoices are paid within 3 months from the invoice date, and we continue to work towards the day when 95% of invoices are paid directly to veterinarians and in under 5 minutes (and most in seconds).
  • Many insurance companies operate with a tight 0-5% margin, which they describe as a combined ratio. A 100% combined ratio means that such a company is making zero profit on its operations. A 95% combined ratio means a 5% margin on a book of business. It is the combination of operating margin plus investment gains that generate shareholder returns.

Trupanion’s business model is very different. Trupanion is focused on growing adjusted operating income, which are the funds available to us before we invest in pet acquisition.  Trupanion targets to have 15% adjusted operating margin at operational scale, which we define as total enrolled pets of between 650,000 to 750,000, on its existing book of business, and to reinvest most its returns acquiring new pets with an outsized internal rate of return. (See Table 1).


In 2018, adjusted operating margin was 10.5%, an increase from 2.4% in 2015. Expansion in adjusted operating margin is largely derived from scale in our fixed expenses, which are comprised of our technology and general & administrative expenses. For more information on how we think about adjusted operating margin, please see our Annual Shareholder Letters which can be found Here.

  • Many insurance companies do not know their true operating margin for several years after they report because estimates of the invoices that they are liable for in a given year do not materialize, or close, until future periods. The size and frequency of our invoices have been fairly predictable. In insurance terminology, this is known as a ‘short tail’ (no pet pun intended). We are not a float business.
  • Most insurance companies have inherent non-execution risks associated with their business:
    • We do not believe our member pets carry material rate risks as we can, and do, frequently adjust pricing of policies based on actual experiences. For this reason, we intentionally retain any ‘risk’ associated with our members’ pets and do not use third parties for risk transfer (such as reinsurance). This helps us avoid additional frictional costs that don’t benefit our members! We also do not believe that we have significant investment risk – our capital reserves generally are invested in government-backed money market accounts, short-term T-bills, and our home office.
    • We do not believe that we are subject to catastrophic risks, which is unlike most traditional insurance companies, due in part to the nature of pet medicine and our geographic diversification.
    • Our business is not particularly sensitive to credit ratings, unlike most traditional insurance companies.
    • As a result, we believe that our ability to generate free cash flow is much higher than traditional insurance companies, whose businesses can be far more capital intensive and dependent on interest and investment income for their profits.

Q: Why doesn’t Trupanion use common insurance terms such as “losses” in its consolidated financial statements? Why does Trupanion not discuss its combined ratio in the consolidated financial statements?

A: Within our Trupanion, Inc. consolidated financial statements we include all required disclosures. We report and discuss our financial statements in the same manner as we run the business internally. Investors are free to reformat our financial statements on their own if they are more familiar with insurance terminology, but we do not operate our business like most traditional insurance companies (see our note above “Isn’t Trupanion just an insurance company?”) because we believe the characteristics of our business are dramatically different. For example, while a combined ratio may be meaningful for understanding the trend in profitability for our underwriter subsidiary American Pet Insurance Company (as discussed above), we feel it is less meaningful at the consolidated level where we have been reinvesting as much of our available free cash flow as possible to grow the business.

Q: What are Trupanion’s statutory capital and surplus requirements?

A: In the United States, Trupanion is underwritten by its wholly-owned insurance company, American Pet Insurance Company (APIC). APIC must hold certain capital amounts in order to comply with the statutory regulations. APIC’s surplus requirements are included in our public filings. As of December 31, 2018, APIC was required to maintain at least $53.4 million of risk-based capital to avoid additional regulatory oversight. As of December 31, 2018, APIC maintained $56.2 million of risk-based capital.

For purposes of a rough calculation, we anticipate holding capital to maintain a revenue to surplus capital ratio of approximately $4.5:$1 (on a consolidated basis, inclusive of both the US and Canada), which factors in APIC’s 10-year average loss ratio of 69%.

Previously, the Company had guided to a revenue to surplus capital ratio of approximately $5:$1 for our US business and $10:$1 for our Canadian business. Prior to 2018, our business had not been seasoned from a regulator’s perspective and thus, surplus capital requirements were based on the NAIC industry average loss ratio of 56% for the “Special Property” category (which includes the Inland Marine line of business where pet insurance currently is accounted for).

Trupanion aims to offer a higher value proposition, targeting a 70% loss ratio. The use of APIC’s average 10-year loss ratio, in addition to revenue growth and other relatively minor adjustments, caused an adjustment to APIC’s 2018 surplus capital requirements; specifically, APIC’s surplus capital requirements increased from $22.2 million at the end of 2017 to $53.4 million at the end of 2018.

The Company does not anticipate additional future changes to its guided revenue to surplus capital ratio.

Q: How are surplus capital requirements calculated?

A: The RBC requirement is a complex calculation based on a number of different risk factors. For APIC, the primary component driving the calculation is subscription revenue growth. For additional detail, please refer to the prior question.

Q: Why does Trupanion have such low float or claims reserves?

A: Trupanion is designed as a cost-plus, pay-as-you-go model. Member monthly costs are adjusted as necessary to result in the average pet having approximately 70% of its monthly membership fees spent paying veterinary invoices. As Trupanion aims to pay out for covered treatments as quickly as possible (often within 24 hours), outstanding invoices at any point in time have tended to be relatively minor; we intentionally try to have very little ‘float’. We don’t try to make money by investing our members’ money. Our business model isn’t set up to do so. We make money by understanding the cost of a sub-category of pets if/when they become sick or injured, then adding 30 points of margin. We process high-frequency, low severity claims – on average 35,000 claims per month at an average of $300 per claim. Our monthly plans are set up to be money-in, money-out during the same month (on average). In fact, it is our desire to pay the majority of our members’ invoices within 5 minutes of the invoice being created (or faster). In 2016, we paid approximately $30 million in claims directly to hospitals. As a result, Trupanion carries very little float.

Q: Does Trupanion set up a reserve for old age?

A: No – Trupanion uses a cost-plus, pay-as-you-go model. By using an ‘age at enrollment’ pricing methodology, the expected costs of care for the pet are averaged over the life of the pet (as compared to other approaches in the industry). It is worth noting that health costs are less concentrated at end-of-life in animals than in humans. Accidents are more prevalent in younger animals (puppies) than older ones. Furthermore, humane euthanasia is more prevalent at end-of-life in domestic cats and dogs than it is for humans; typically, pet owners decide against unnecessarily prolonging treatment when their pet’s quality of life has deteriorated significantly.

Q: At a macro level, please comment on your process of obtaining rates that are filed and approved with regulators.

A: In general, our rates in the Unites States are approved at the state-level. We strive to have good relationships with the state insurance regulators and to engage in constructive dialogue about our business. We constantly analyze the appropriateness of our rates within each geographic region (and within each subcategory in that region) and generally file one or more rate adjustments within a particular state per year to adjust rates as appropriate based on the cost of care for each sub-category. On average, rates generally increase to reflect the increasing cost and utilization of veterinary medicine. All of our rates are targeted on a cost plus model where we aim to spend 70 cents of each dollar paying veterinary invoices for pets that have become sick or injured.

Active Hospitals

Q: How does Trupanion define an ‘active hospital’?

A: There are approximately 30,000 veterinary clinics/hospitals in the United States and Canada. We believe as we continue to grow the number of Territory Partners, we will eventually be visiting over 25,000 hospitals across North America. With enough time and perseverance, and based on markets where we have been established for over 10 years, we believe we have the potential to achieve success in establishing active hospital classification with approximately 70% of these hospitals.

In 2016, we had new enrollments from over 15,000 different hospitals, though many of the referrals are inconsistent. An ‘active hospital’ is defined as a hospital that has recently had a new pet enrolled.

In 2018, we reported the number of active hospitals recommending Trupanion at 9,000. This was up from 2016’s peak at 8,100 active hospitals.

We have addressed our strategy around active hospitals in our 2016 shareholder letter, in particular, in the section “Active Hospitals and Same-Store Sales” beginning on page 19.

Trupanion Express

Q: What is Trupanion Express™?

A: Trupanion Express™ is our proprietary software that integrates with a hospital’s practice management software helping facilitate our ability to pay the hospital directly and timely.  When an invoice is created, the hospital can click a payment button that will send the appropriate information to Trupanion.  Our service goal is to then turn around and pay the hospital by electronic money transfer into their bank account in less than 5 minutes. 

Upon check-out, the pet owner is then responsible only for their 10% of the veterinary invoice plus any deductible.  For example, for a $1,000 veterinary bill in covered costs (see question 5 under “Product Differentiation” for a more comprehensive discussion of covered costs), Trupanion would pay $900 and the pet owner would only owe the veterinarian $100.

For the Veterinarian hospital, payment from Trupanion is similar to a credit card - there is a near immediate approval process before the money is then deposited into their bank.  However, unlike with a credit card, Trupanion doesn’t charge any additional service fee, improving the veterinarians’ bottom line by approximately 15% (equating to a 2% EBITDA improvement, if they operate at typical 10% - 15% EBITDA margins).

The rest of the industry operates on a reimbursement model that requires the pet owner to pay out of pocket at the time of checkout, complete paperwork related to the veterinary procedure, and then wait for confirmation that the procedure will be covered, and ultimately what the determined reimbursement amount will be. We believe this old fashioned method is flawed.

We have addressed this topic in the 2014 shareholder letter, in particular, in the section “Defensible Solution” beginning on page 5.


Q: Can you elaborate on the increase in the Company’s accounts receivable balance from 12/31/2017 to 12/31/2018?

There were 2 main components of our accounts receivable balance in this period: 1) receivables that relate to our direct-to-consumer subscription business that are for deposits in transit at the end of a period (as of 12/31/2018 this comprised approximately 10% of our accounts receivable balance); and 2) receivables related to policies we underwrite in our other business segment (as of 12/31/2018 this comprised approximately 80% of our accounts receivable balance).

The recent increase in our accounts receivable balance has been driven by the growth in our other business segment. The majority of the other business that we underwrite offer annual insurance policies (as opposed to Trupanion’s subscription policies which are monthly) and the accounting treatment for annual insurance policies is to record a receivable for the full year up front. As such, the increase in accounts receivable is the result of annual policy accounting treatment and is not indicative of any collectability issues.

Q: If Trupanion were to operate with 15% operating margins today, would it be able to invest more aggressively in pet acquisition to increase its rate of growth?

A: We continue to view our long-term revenue growth rate of 20 – 30% as an appropriate level of growth for this very large and under penetrated market. In 2016, we had an adjusted operating income of $15M, or 8% of total revenue.  We re-invested the majority of this profit – approximately $14.5M to acquire approximately 100,000 new pets.  We estimate the IRR of this investment to be 31% (on a per-pet basis).  We explain the methodology behind this calculation in more detail in our 2016 Annual Letter to Shareholders, in particular, in the section “2016 Financial Performance” beginning on page 6.

On a per pet basis, investing $14.5M to acquire 100,000 pets equates to $145 per pet.  With a long term IRR target of approximately 40%, and assuming the same ARPU and a 15% margin, our allowable PAC increases to $240 per pet.  This increase in our allowable PAC and our compounding adjusted operating income will allow us to be more aggressive in pet acquisition in the future.

We discuss our thoughts around pet acquisition, IRR and adjusted operating income in greater detail in our 2016 Annual Shareholder Letter, in particular, in the section “2016 Financial Performance” beginning on page 6.

Q: What is Trupanion’s long-term target ratio for LVP:PAC?

A: Historically, we targeted a 5:1 LVP:PAC ratio, though we have had period-to-period variability resulting from the timing of sales and marketing expenses. We believe that an LVP to PAC ratio of 5:1 has been appropriate historically since it has enabled us to achieve our cash flow targets and also a favorable internal rate of return on our acquisition spend.  As a reminder, LVP is calculated on a trailing twelve-month basis and represents the contribution margin of a pet multiplied by the number of expected months the pet will remain with Trupanion.  As mentioned in our 2014 Annual Shareholder Letter, the contribution margin does not include our fixed expenses, which makes the LVP less relevant when trying to calculate an IRR or cash flow break-even. As we continue to scale our adjusted operating margin, we calculate the internal rate of return (IRR) on our pet acquisition spend in order to determine the appropriate LVP to PAC ratio for that period.

Our IRR methodology is illustrated below and considers the return we expect to achieve on an "average" pet, taking into consideration the adjusted operating income we expect to achieve from the average pet, the expected time the average pet will be enrolled with us (derived from our average monthly retention rate), capital charges and pet acquisition cost.

  1. Our illustrative example assumes an average pet will contribute adjusted operating income, calculated as the average monthly revenue of $48.81 multiplied by a constant adjusted operating margin of 7.9%, for an average subscriber life of 71.4 months (calculated as the quotient obtained by dividing one by one minus an average monthly retention rate of 98.6%).
  2. To reflect the cost associated with funding our required surplus capital, our calculation of the internal rate of return includes a capital charge to reflect the interest expense we incur on the debt we may draw to fund our operations. This is necessary to offset profits that are retained in our insurance entity to meet capital requirements.  As of November 2017, this expense was estimated assuming average monthly revenue of $48.81 and a premium-to-surplus ratio of 6.0, multiplied by an interest rate of 5.00%, and is assumed to be incurred for the average subscriber life of 71.4 months.
  3. Pet acquisition cost of $123 was calculated by taking 2016 LVP of $631 divided by 5.1, our LVP:PAC ratio for 2016.

At operational scale, if we have a 15% adjusted operating margin, using the above methodology we would only require an LVP:PAC ratio of 3.2x to achieve a 45% IRR. Between now and when we achieve operational scale, we would expect to be targeting our IRR around 40%. Longer term, we do not anticipate targeting an IRR above 45% as our market opportunity is just too large for us to not play more aggressively. By keeping IRR below 45% and accepting lower LVP:PAC ratios, we keep the door open to additional acquisition channels.

We have addressed this topic, and our strategy around IRR and LVP:PAC, further in the 2016 shareholder letter, in particular, in the section “Key Metrics for Today and the Future” beginning on page 20.

The above table illustrates the internal rate of return on our acquisition spend for 2016, assuming that all pets will be in line with an average pet.

Q: What is Adjusted Operating Income or Margin?

A: Our adjusted operating income represents the cash we generate from our existing members in a given period of time. It also represents the cash we have available in that given period of time to acquire new pets. We believe this metric, along with our IRR on invested capital to acquire new pets, are the two most important metrics for driving shareholder value.

In our 2014 Annual Shareholder Letter we discussed operational scale, which we believe we will achieve at 650,000 to 750,000 total enrolled pets. At operational scale, we target an adjusted operating margin of 15%. To get to this target, we use a top down approach: Revenue, reduced by paying veterinary invoices (approximately 70%), less variable expenses, which are the expenses we incur to serve our existing members (approximately 10%). The difference (approximately 20% of revenue) is then further reduced by fixed expenses, which include general and administrative expenses and technology expenses, (approximately 5% at scale). The resulting amount (approximately 15% at scale) is what we internally refer to as our ‘adjusted operating income’ that we consider before we incur expenses related to pet acquisition, and excluding stock based compensation and depreciation expense

We have addressed this metric further in the 2015 shareholder letter, in the section titled “Adjusted Operating Income” beginning on page 2.

Q: How does Trupanion evaluate its profitability, intrinsic value and cash flow?

A:Increasing our intrinsic value consistently over 5 and 10 year spans is what drives our strategic thinking. Cash flow is our second consideration. Profitability is our third.

The key components that drive our intrinsic value model are our lifetime value of a pet, our adjusted operating income and the IRR we expect to earn when we acquire a new pet.  

The lifetime value of a pet is driven by average revenue per pet, retention and contribution margin. 

We have addressed this topic, and our strategy around IRR and LVP:PAC, further in the 2016 shareholder letter, in particular, in the section “Key Metrics for Today and the Future” beginning on page 20.

Our strategy is to invest in growth to the extent that we are able to cost-effectively acquire pets as measured by an acceptable rate of internal return.  As a result, our profitability is a direct function of how quickly we grow and the rate at which we acquire pets. 

See more above in question #2 under “Financials”.

Q: What is Trupanion’s retention rate? Is it good?

A: Our average monthly retention was 98.60% for 2018. Our average monthly retention over the period 2010-2016 was 98.5%.

Pet cancellations are primarily in 3 areas: 1) loss of pet ownership (in most cases, because the pet has passed away or has been re-homed) 2) failed payments 3) pet owner dissatisfaction. Pet owner dissatisfaction comprises the biggest component of pet cancellations but also represents the biggest opportunity for improvement. Pet owner dissatisfaction tends to be front loaded (i.e., pet owner enrolls with a pre-existing condition, not understanding that those issues would not be covered). Typically our retention rates improve after the first 90 days.

We believe Trupanion has higher retention rates than any pet insurance provider in North America.

Other Business

Q: What comprises Trupanion’s non-subscription or “other business” revenue?

A: Our other business segment contains pet revenue that has a business-to-business (B2B) component, as compared to our direct-to-consumer subscription business. Generally, these businesses are pursuant to contracts for multiple pets. For the full year 2018, our other business segment comprised 15% of our total revenue and 17% of our enrolled pets. Currently, we underwrite policies on behalf of veteran affairs programs, employer sponsored programs and other marketing companies that provide some form of health insurance for pets to consumers.

We have addressed this topic further in our 2016 shareholder letter, in particular, in the section “Growth” and beginning on page 16.

Q: Can you speak to the rationale behind Trupanion’s “other business”? Why would Trupanion choose to partner with what some would deem as its’ competitors?

A: We believe that over the next 10 to 20 years, Trupanion can be a major catalyst for growth in the category of medical insurance for pets in North America. If this is true, there should be other interesting product offerings and distribution models that will find their niche. Instead of sitting on the sidelines, our strategy is to participate through business-to-business partnerships. We are reasonably confident that we have the infrastructure, people, and data to help the companies behind these distribution models and niche products – without losing sight of our ultimate goal of building the category around the Trupanion brand and continuing to offer the highest value proposition in the industry while maintaining strong alignment with the veterinary community.  Additionally, the profits generated from our other business can be re-invested in growing Trupanion.

We have addressed this topic further in our 2016 shareholder letter, in particular, in the section “Growth” and beginning on page 16.

Insider Ownership

Q: What ownership do the CEO, management, and team have in Trupanion?

A: In aggregate, the CEO and executive team hold approximately 10% of Trupanion.

CEO & Founder: As of March 31, 2018, Darryl Rawlings’ holdings represented approximately 7% of Trupanion’s ~35 million fully diluted shares outstanding. In aggregate, he held approximately 2.4M fully diluted shares, comprised of 1.5M shares (including 120k shares held in trust), 928K options, and 19.5K restricted stock units.

Executive Team: As of March 31, 2018, the executive team’s holdings represented approximately 3% of Trupanion’s ~35 million fully diluted shares outstanding. In aggregate, they held approximately 1.1M fully diluted shares, comprised of 50K shares, 906K options, and 137K restricted stock units.

Team: In addition to the above, every employee of the company has equity in the business. Equity ownership is as important part of our compensation philosophy.

(The fully diluted calculation used in this analysis is comprised of the number of shares issued and outstanding as of March 31, 2018, plus options, awards, and warrants granted and outstanding as of March 31, 2018. This calculation excludes shares available for issuance under our equity incentive plan and also excludes the number of shares available for purchase under a stock purchase plan that was setup but never activated.)

Q: What is the rationale for insider trading to date?

A: Trupanion’s CEO, Darryl Rawlings, founded Trupanion in 1998 in his late 20s. He is not independently wealthy and the vast majority of his personal assets are in Trupanion stock. He sold none of his shares in the initial public offering. Since 2015, he has maintained 10b5-1 plans to liquidate a small portion of his Trupanion shares bi-monthly, which he intends to continue to maintain through 2025. In total, his intention is to slowly divest approximately 25% of his Trupanion holdings over this 10-year period, meaning that he intends to continue to hold 75% of his equity position following the IPO by 2025. In addition, a portion of Darryl’s stock options will expire if not exercised on, or prior to, December 2018 per the terms of Trupanion’s equity compensation plan. To fund the exercise price and associated taxes on these options, Darryl intends to enter into an additional 10b5-1 plan in the back half of the year. Following this transaction, we estimate he will hold approximately 2.1 million fully diluted shares (including 120k shares held in trust), including unexercised options, or approximately 6% of Trupanion, based on approximately 35.1 million fully diluted shares outstanding as of March 31, 2018.

Others members of the executive team are compensated primarily in equity and, as such, they may engage in similar plans/sales from time to time.

Other Miscellaneous Questions

Q: What is the current status of Trupanion’s regulatory position?

A: We are not aware of any regulatory matters that we think will have a material impact on our current or future business. We can and do, receive inquiries from state regulators in due course. No state has reached any conclusions or findings that impact our current operations. If we ever were subject to an investigation that was likely to materially affect our business, we would report it in our capital markets filings (as we did in 2014).

Regulatory fines levied against Trupanion/American Pet Insurance Company (APIC) in recent years have not been material and all have related to the licensing issues from prior years. We have addressed and resolved these issues with numerous states, we are in conversations with other states, and we anticipate being in conversation with more jurisdictions in the future in connection with these legacy issues. We do not believe they hold any material implications for our business operations today.

Q: How many full-time employees do you have?

A: As of December 31, 2018, we had 586 employees.

Q: How much annual dilution should investors expect from employee stock option exercises?

A: We are very focused on controlling dilution. We have created an equity compensation structure that, we believe, aligns the interests of shareholders with all employees by awarding equity primarily based on growth in our estimated intrinsic value year over year. We calculate intrinsic value using a discounted cash flow analysis.

Using this approach, there would be minimal dilution unless intrinsic value growth is at least 10%. Beyond 10%, more value is shared with the team in the form of an overall company performance pool. For more context around our dilution strategy, we would direct you to our annual shareholder letters (and, in particularly, the 2016 letter), which include the following analysis:

YoY increase to intrinsic value @ the enterprise level

Overall company performance pool %**

Net increase in intrinsic value per share

1 - 10%


1 - 10%





























































*The above table is designed to be used as a guideline. The board may adjust at its discretion. The overall company performance pool is calculated from fully diluted weighted average shares outstanding.

**There likely will be some level of dilution when the increase in intrinsic value is below 10% due to new-hire and board grants, which may also increase other grant levels above what is stated in the table.


We address this topic further in the 2016 Annual Shareholder Letter, in the section titled “Financial Performance Per Share” beginning on page 3.

Q: Have you considered tapping into the equity markets to raise more growth capital?

A: With strong execution, we believe we can deliver consistent revenue growth in the range of 20 – 30% without tapping into the equity markets. If, however, we are in a position to cost effectively deploy more cash than is available to us, at a favorable IRR, we will evaluate additional opportunities to raise capital that would support us maintaining our position as category leader, while maintaining focus on controlling dilution and the impact of the per share growth of our intrinsic value.

Q: What percentage of Trupanion’s revenues are U.S. versus Canadian?

A: As of December 31, 2018, approximately 19% 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 most of our expenses are also incurred in local currencies.

Q: Have you considered growing through M&A?

A: At 1-2% penetration, we are most focused on growing organically through cost effective pet acquisition. While we regularly look at acquisition opportunities, we would be opportunistic if we believed one could deliver our targeted IRR over time. Growth by acquisition is not part of our core strategy.

i Trupanion internal study (data as of June 30, 2014)

ii American Pet Products Association

iii Canadian Veterinary Medical Association

iv USA is $63B per American Pet Products Association. Canada is $6.5B per Pet Industry Joint Advisory Council of Canada

v The 2016 North American Pet Health Insurance Industry Report

vi Trupanion 10-K filed February 15, 2017


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 press release, 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 press release 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 in future periods; the accuracy of assumptions used in determining appropriate member acquisition expenditures; the severity and frequency of claims; 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; 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; fluctuations in the Canadian currency exchange rate; the ability to protect our proprietary and member information; the ability to maintain contractual relations with third parties; the ability to realize benefits from strategic initiatives; 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; and the ability to recognize benefits from investments in new solutions and enhancements to Trupanion’s technology platform and website.

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 10-K for the year ended December 31, 2016 and any subsequently filed reports on Forms 10-Q and 8-K. All documents are available through the SEC’s Electronic Data Gathering Analysis and Retrieval system at or the Investor Relations section of Trupanion’s website at

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 non-GAAP financial measures to the corresponding GAAP measures is provided on our Investor Relations website.