Trupanion, Inc. (TRUP) Earnings Call Transcript & Summary

Well, welcome, everybody. I'm Josh Shanker. This is the Bank of America's first annual and hopefully, recurring Insurtech Conference. I'm broadcasting live from New York City, where my cellphone just rang that we're in a heat wave and I should conserve electricity. I got to watch out for those rolling brownouts. But right now, I'm at Bank of America headquarters here in Times Square at One Bryant Park, and we are really excited to be going on with our conference. Tricia Plouf is here, the Co-President of Trupanion. Tricia has spent a long time in Trupanion serving as the CFO and Controller before she was the Co-President. Prior to that, she managed compliance at Concur Technologies, and was an author at KPMG. And now she loves animals, and we do, too. And so I'm going to let be the Tricia show for a little bit. So Tricia, welcome. I think that maybe it requires no introduction, but can you please tell people here who are joining us today what is Trupanion and what does the company do?

Sure. And thank you for having me. Great to be here. So Trupanion, we are about pet medical insurance, particularly cats and dogs. So really those pets that you consider part of your family and you want to make sure you can give them the best possible care. We are focused on accident and illness coverage. So we're focused on the things that would be really hard to budget for because you don't know if they're going to happen and you don't know if they're going to happen tomorrow or 5 years from now. So our business model is really about providing that best level of care to our pet and doing that by paying us a monthly amount and then knowing that if things come up, they're covered as opposed to the uncertainty. So we're kind of a hedge against uncertainty, if you will, and having sort of that known payment instead of that unknown $2,000 bill that could happen at any time based on what may happen to your pet. We are really focused on having broadest coverage and trying to return as much as possible to the average customer by that high value proposition. So we really look at returning about 70% of every dollar back to the customer in terms of claims payments, then we add our 30 points on top, and that's what drives our pricing. And pricing and data at a very granular level is core to what we do as a great member experience and high value proposition drives high retention and high referral. The other thing I'll mention, Joshua, that's really core to what we do is having strong relationships with veterinary hospitals and strong relationships with veterinarians because that generates the majority of our leads as well as existing customers, adding pets or referring their friends. So we're really focused on supporting that community and having a product that they really get behind and adding that value. And to that point, we have patented software that we have at the hospitals that allows us to integrate directly with them and pay that invoice in a matter of seconds so that a customer never even has to come out of pocket when they do have that claim, which helps to drive that elevated number experience. And that's key to what we do and a competitive advantage. So that's a high-level overview.

That's a great overview. Now I have a lot of the questions I'm going to ask, and I hope the hot lights don't get too aggressive here. But the -- I'm going to be an easier questioner than the audience. [Operator Instructions] But I'm going to start, can you talk a little bit about the Trupanion leadership team's background? Is Trupanion a company made of people with a background in technology, in veterinary sciences, in logistics? At the founding points of Trupanion through today, has there been a thread of sort of what kind of company this is? And what drives the thought process that's being successful?

Yes, it's a good question. I mean I don't think there is anything singular. I mean as a company, we definitely have a lot of people, whether they're in leadership or in individual contributor roles with backgrounds at veterinary hospitals. And that is core to everything we do to drive that alignment. And so, particularly within our revenues team, there's a lot of knowledge there when it comes to distribution and product. My counterpart, Margi, as Co-President, she came from the largest pet insurer in the U.K., which is much more penetrated than here in the U.S. So she brings that wealth of knowledge. My background was in, really, high-growth companies and help -- through the various fields that drives this altogether?

So I guess this is the quiz show part of the Q&A. You don't have these questions, right, but just trying to frame some things for investors. How big is the pet insurance market or at least Trupanion's pet insurance market, which is the U.S.? Who are the major players besides Trupanion? And I mean I think that among investors, almost certainly, people associate pet insurance with Trupanion. But in the way the business is -- are you guys -- are you the biggest player? Can you give that sort of framing?

Sure. So we're currently the second largest in terms of overall -- so with the overall market in North America, there's about 180 million cats and dogs. The market is between 1% and 2% penetrated. So still a huge opportunity within the North America market. I would say, in general, we're not looking at enrolling all pets, although, of course, we would love to. We're focused on puppies and kittens that we can enroll and then they'll be with us for their entire lives. And on average, there's about 1 million puppies and kittens a month. So we consider that our target market that we're focused on. And obviously, a large opportunity still there even with our great growth to continue to capitalize on that. At any given point in time, there's 15 to 20 different brands in the market. Some come, some go, some get consolidated. Many of them are small, and many of them really play online. There's about 3 players, and 1 of them being us, that tend to make up 70-plus percent of the market. We've been growing steadily. The 1 player that's larger than us is VPI, owned by Nationwide. And they have been around the longest in the space. I think they started around 1980. So they're -- they've been around for a long time and have been focused a lot in the workplace benefit space. And then the third player sort of moves around in any given year. So there's a variety of players, but 2 primary ones in the marketplace. And really, I mean, our main competitor is the credit card. This isn't really a market where you're looking to steal customers from competitors. We're looking to enroll this 98% of people that, for some reason or another, are deciding to just roll the dice with their credit card instead of having insurance. So that's where we stay focused.

And when we think about the last 18 months or so during the pandemic, pet ownership has accelerated rather significantly, I guess, due to people seeking companionship in times of isolation. Have those new pet owners been more likely to buy pet insurance than past cohorts? Is the take-up rate on, I guess, our current pet owners a better -- trending towards better adoption?

I think it's interesting. We obviously -- I can't speak for the whole market. It's not -- Trupanion is more transparent than any other company in the market. But we've definitely seen growth, accelerated growth, some from initiatives that we've been working on for long periods of time. And some from really what we've said for a long time, which is many times, in periods of uncertainty, economic uncertainty, pets become even more important. And particularly, in the pandemic, I think what we saw was a factor of when you're at home, a pet becoming even a more important member of the family and noticing maybe things that you want to make sure don't happen to them or they don't get into in your house and keeping insurance top of mind. Because our main lead generation channel is through the veterinarian and having those conversations about pet ownership and responsible pet ownership. And once someone does enroll in Trupanion, they really have the benefit of their veterinarian knowing about us and saying, "Well, that was a smart decision. We like Trupanion. They do what they say." All of these things help make that customer very sticky. And in addition to accelerated enrollment, we've seen higher retention rates as well.

Now Trupanion has brought a number of innovations to the pet insurance market. But before we get to that, can you talk a little bit about how pet insurance has been sold about -- like, how the customer has been approached historically? What's gotten customers to buy the product? Are they -- you're targeting puppies and kittens, so oftentimes, I imagine there might be a scare that has brought someone to say, "Oh, I'd like to buy pet insurance now." But that's not your target market. You're looking for young healthy animals to insure. What's been the value proposition historically that's brought people into the pet insurance world?

Sure. And you're right, this -- once things have happened to a pet, those typically would be excluded from coverage from any provider. So -- that's why the target is puppies and kittens because they'll have the best experience of getting coverage before anything happens so that nothing is excluded. And that can obviously drive better referrals and higher retention. Our primary go-to-market strategy, like I mentioned, has been through the veterinarian. So a typical experience would be, I just got a Yorkie puppy a couple of months ago. So I take Yorkie into the veterinarian, they would talk to me about shots and flee control and when he should get neutered. And then they would say, "As a responsible pet owner, you also think about insurance. Yorkie's are known for knee issues, and each one can cost thousands of dollars. You might want to just get insurance so you don't have to worry about being able to afford that." And then we offer what's called an exam day offer that if the pet is healthy, a veterinarian can give the pet owner this offer of 30 days coverage at no cost. And then a customer could call us and get that coverage. And at that point, we can convert them to a paying customer. So that is the primary way that we would generate leads, and then we're working on conversion. Obviously, our ideal conversion process is someone calls us on the phone. If we speak to someone on the phone through our sales agents, we convert 50% of them into customers. It's lower if someone goes online. And online is, like I mentioned, where nearly all of our competitors play. They bid on the keyword Trupanion when someone is searching for Trupanion, and that's where sometimes leads are lost and enroll with others. And so we're focused on increasing that overall conversion rate. But that, as a primary lead generation, is how we're generating awareness when there isn't as much and really having a conversation about your specific pet and why -- particularly, a new pet owner might not realize how expensive it can be when things happen and having that conversation.

And one of the things that I thought about being selling up the veterinarian, which I think maybe I don't want to be presumptuous, but I feel the greatest differentiator for Trupanion is its ability to reimburse the customer at the point of sale, and that being a seamless operation. Can you talk about that a little bit? Can you talk about a couple of assets? One is how important do you think that is to the Trupanion value proposition to the customer as opposed to another insurance company providing coverage? And how difficult would that be to duplicate for someone else? And I guess, even the third thing, what percentage of veterinarians accept Trupanion coverage directly, and the market opportunity of expanding your market by bringing more veterinarians into your direct payments offer?

Yes. So I mean we think this is a huge competitive advantage. You don't solve a problem with pet medical costs if the customers still have to pay for them all out of pocket and then wonder if an insurance company is ever going to reimburse them. So the concept of still being at the vet hospital and your pet comes out after getting whatever treatment, whether it was just $100 or $1,000, and the person at the front desk says, oh, Trupanion is paying their 90%. Your amount is just $10 or $100, is a big impact. And that's why we've invested so heavily in it. We've patented the technology that interacts with the veterinary practice management system, so that's our appointment and invoicing system. As well as the primary practice management systems that are in place, we do have long-term agreements with them as well. So it is hard for others to replicate. And we've done that intentionally because we feel that it is such a strong differentiator for us that we're highlighting. And I'm sorry, Josh, I forgot the second part of your question. Can you remind me?

The opportunity to grow market share by expanding into more veterinarians and just by virtue of how is that expansion going on in the past? Can you just sort of model that expansion forward, that's going to continue? Ways to think about your market opportunity?

Yes. It's a great question. 20,000 about hospitals in North America, we've got this in over 6,000 currently. Obviously, trying to get that in the vast majority. I would say last year was slow. COVID definitely was a setback, people moving to curbside and vet hospitals. Trying to operate with fewer people at a given point in time did make it more difficult to talk about a change in kind of payment workflow and things like that. So it's definitely something that is ramping up now as we return to a more normal environment and they have the time. It's really about the time to have the right conversation with a decision-maker about having the integration. But once we get to those people, it's a pretty easy sell given not having to worry about accounts receivable, not having to worry about credit card fees and having less paperwork overall in their vet hospital. So great differentiator for us now, but still a ways to go in getting it more broad.

And given that what I might argue is a better service. For this increased service, can Trupanion garner a premium price for the product they sell? Or is it a competitively priced product that grows because of the better service? And is this -- how does this tie into customer loyalty, I guess, over time? Do customers' comparison shop their insurance needs and find increasingly, they want to be a Trupanion customer?

Yes. I mean I would say it's interesting, and it can be challenging, particularly online, to differentiate between the products. But for us, we are not trying to be the lowest priced product, we're trying to have the highest level of coverage and the best value. So returning 70% back to the average pet owner is our primary goal as opposed to increasing the price and then only returning 60% back because that would result in lower retention and lower referral rates. So we're always kind of balancing the 2. I think the main thing we're looking to do is make it more clear, particularly online, where we don't have a conversation why Trupanion has the highest value proposition and the best member experience and is clearly differentiated from the competition. One thing we're doing, which we've talked about more recently, is introducing 2 lower-coverage, lower-priced products into the market under different names. One intention of that is to make it clear how Trupanion stands above the other products in the market. And also if somebody, for some reason, does not want to enroll in Trupanion and would normally go with one of our competitors at a lower price, instead they can enroll in a product that Trupanion owns, and it's still a good value.

And Trupanion sells the product under the Trupanion brand name? I think there's also some while labeling that goes on with -- through third-party sales. Can you talk about the relationship between the Trupanion-branded product and the non-Trupanion-branded product?

Sure. So I mean our main business to our subscription business has been the Trupanion-branded product. We are looking to introduce new brands, like I mentioned, those will be wholly-owned by Trupanion. We do have another business segment, which we do participate in sort of other avenues mainly through B2B, and we underwrite other products that we don't own the brand. So we really offer -- we're sort of an underwriter for those products that are growing in the marketplace. It has a different margin profile for us, that's lower margin, but it does give us good data insights as well as some level of profitability that we can reinvest into our core business. But it's not a key growth strategy for us. It's been helpful for us in the past. Our main focus moving forward is now that we have achieved operating scale and we have more money available to drive growth. More of our focus will be on fully owning brands that we offer and growing those as opposed to underwriting brands owned by others.

And can we talk about underwriting sophistication a little bit? Is there any way that you can demonstrate or that you know that your underwriting precision is stronger or best in class and whatnot versus new entrants? How hard is it to gain a history of data that's deep enough that you can make smart underwriting decisions? I'm just throwing a bunch of things out there, but the gap -- what is the gap between a good pet underwriter and a mediocre pet underwriter in terms of loss ratio difference? I don't know, there's a bunch of -- how do we demonstrate acumen in the underwriting business?

Yes. It's a good question. I mean I can tell you our philosophy, and I don't have all the visibility into how the others work, but many of our competitors, they own brands and then they contact with third-party underwriters, some of the bigger names, to be the insurance underwriter for their product. And so while they would set their target loss ratio of 60% or something like that, they don't have necessarily as much control over the pricing strategy, and it's usually one actuary looks at it for a few weeks, a month or a year and sets the pricing. Our philosophy is pet is all we do. We own the underwriter, and we're really looking at it end-to-end, and we're looking at it very granular. It's very important to us, and this is where our data comes into play, and others don't have access to the data to be as granular as us, especially if they move underwriters a lot. My Yorkie here in the Seattle area, the price, because of the cost of care and the claims experience for the average Yorkie, should be different than necessarily a Yorkie in Boise, Idaho. And we want to make sure, regardless of what breed you're enrolling, the age that they enroll, the geography that they enroll that you, as a customer, could feel like, on average, if you have an average pet, you're going to receive 70% back over the course of their life. Now if you have a very unlucky pet that gets cancer or other things, you might receive much more than that. And if you have a lucky pet for a given year or so, maybe you don't receive anything back. So on average, it is insurance. But that's really important to us. If a Yorkie in Seattle is priced the same as the Yorkie in Boise, Idaho, they'd be priced too low in Seattle and too high in Boise. So you'd naturally have -- you'd get a bunch of enrollments in Seattle, and not very many enrollments in Boise, Idaho, and then you have a pricing problem, right, that catches up with you over time. You're priced too low and you're getting a lot of enrollments. So that's where data focus, we've got a large actuary team looking at this at a granular level, is very critical to us and staying ahead of this to have that value proposition, not only for pricing purposes and maintaining -- when I talk about that 70%, we're very accurate at being able to maintain that over long periods of time, part of it is because it's a really high frequency, highly used product. Many of the things that come in for are luckily not huge, they're small things like, my pet vomited or my pet needs some medication, those types of things. But it helps us just get more and more granular from a financial perspective. But also that impacts, obviously, referral rates and retention rates when people feel that reimbursement and feel the fairness of the pricing. Does that makes sense?

Do people in Idaho treat their pets a lot better than people in Washington? I mean I'm not surprised as there's -- might be some underwriting difference but enough for it to affect price. I mean I'm listening around, I'm just finding that a fascinating fact that Yorkies in Boise have a much better life, I guess.

I wouldn't put it that way. What I meant was think about it this way. Okay. So typically, where you have more population, there's more people who live in the Seattle area, you tend to then have more pets. Where you have more pets, then you're more likely to have veterinarians opening more specialty centers and, like, specialty type with higher diagnostics and other equipment, cancer centers because there's a pet population to feed into there. So where you have more population and more pets, you tend to then have the higher and more expensive level of care. So that's why our claims data, we probably would see higher claims dollars coming through because you may have vet hospitals with MRI machines or advanced diagnostics, more people getting cancer treatment than more rural areas where -- or less densely populated, where there just aren't the availability of care there. And that's why we exist. Any time there's a higher level of care available that would typically be too expensive to pay out of pocket, that's the importance of insurance. We want to be there for our clients when their pets do have those issues that require an advanced level of care for them to recover, and we want to be there for them. And so that typically will drive the price up, and we want to see that in the data and price for it as opposed to just having a flat price everywhere. Does that help?

Yes. I don't want to get off the rest, but it's fascinating though. If I buy a pet insurance for my pet through my veterinarian, is -- do I have exclusive requirement to seek medical care through that vet? Or can I go to another Trupanion-affiliated hospital and get care for my pet if I think that I'll get better care somewhere else? Maybe I should get on a plane and fly to Seattle or Boise if my pet is sick because it might get better care?

Yes. You absolutely can. We are not -- you can take your pet anywhere that you would like to take it. We'll price it based on the claims where you live or where you primarily get care. You don't -- nothing is tied specifically to your vet hospital other than you typically will hear about it through a veterinarian, but then you would enroll with Trupanion. And you could move that hospital, you could fly to get specialty care in another area, we just typically see there's a certain sort of range around where someone lives where they get their care.

A couple of times this afternoon, you've cited the 70% loss ratio statistic. A lot of times, in this marketplace, this conference with these companies that are Insurtech, they talk a lot about LTV or CAC ratios. Is there a way we should think about long-term value to customer acquisition cost ratio?

Yes. So it's a good question. We do look at it that way. Rather than looking at the ratio, because we try to include all of our expenses in the calculation, we translate it into an internal rate of return calculation, which is between 30% and 40% internal rate of return on the average pet. When we look at how much we spend upfront versus what we get back over time. It translates to about a -- currently about a 3:1 ratio. That being said, our lifetime value, we include everything. Some companies only include their contribution margin, but we include all the way down to fixed expenses and drive that internal rate of return. So we do look at that. Our main kind of key metrics that we hold ourselves accountable to is before we spend on customer acquisition, we're looking for a 15% profit margin. And then we try to deploy as much of that remaining profit to acquire pets at that 30% to 40% internal rate of return.

I have a question coming through from the audience, I guess, related to our last part dialogue. They want to know, are there certain procedures that Trupanion would view as too expensive that your coverage would not cover?

No. I mean as long as it's through a veterinarian and coming through their charge, we don't try to control the cost. We're just relying on them to provide the best medical care and then paying our portion. The main thing we do is we keep up with that, obviously, in our data, and that will impact our pricing going forward.

I -- as a sort of conventional insurance analyst, I've covered progressive for a very long time and they've said that their strategy is to run at a 96% combined ratio and grow as fast as they can, even though they've never really hit a 96%, that's kind of the company mantra. You talked about the 70% number. How do you think about what is the right level of profitability? What is the right level of growth? What if you were to be willing to return 75% or 80% of premiums and grow a lot faster? Or is it such the case that cutting your price is not going to change your growth strategy by too much that it's already fairly efficiently priced and people are going to either buy the pet insurance or they're not?

Yes, it's a good question and something we do think about. We don't want to increase that ratio if we can't afford to do so. So the way we look at it is, yes, if we could return more value to the customer, we would if we're driving scale in other areas. For scaling, how much it costs to process the claim or other efficiencies, we will look to return them back to the customer. That being said, we are looking to drive that 15% profit margin that we can invest in customer acquisition and not necessarily squeeze that because we want those funds available to invest in growth. When we think about, particularly, over the next 5 years our profitability, we're not necessarily looking to drive certain profit target. To a certain extent, when you have so much -- so many pets but aren't insured, us retaining profit really would be a sign of there not being enough growth opportunities available because if we can redeploy that capital, a good lifetime value to pet acquisition cost, that creates the most long-term value. So that's what we're primarily focused on currently as opposed to profit. So as long as we're hitting that 15% and we're not being inefficient with our spend kind of on our existing customers.

And when we think about a market with a penetration of just 1% to 2%, it seems like if the market were 3% or 4%, we're still underpenetrated. When we look at Trupanion's growth over the last few years about growth going forward, should we basically expect the growth trajectory of the company to be fairly steady going forward to compare what it's been the last few years?

I mean we have -- there's a few factors to that question. My general answer is, yes, we would expect to have continued steady growth with data that we really, over the next 5 years, strive to grow revenue at least 25% year after year after year and maintain consistent margins. And there's, like you said, plenty of opportunity available to do so. What's interesting about your question beyond that is we did release our 60-month plan earlier this year, and we're looking to do more things that could be additive to that growth. Now exactly what year they begin the ramp-up, how successful they are, remains to be seen. But when we talk about adding 2 new products to the market, we've talked about expanding internationally and potentially adding a third product through the veterinary channel that could sort of co-mingle with our Trupanion-branded insurance and kind of cross-sell there. So there's opportunities, I think, for acceleration. It's just obviously, those remain to be seen, and we still need to execute on them. But within our core, plenty of opportunities to just continue to consistently grow. And not only grow in pets, but retention is obviously key in our business and keeping those pets enrolled their whole life.

And so just a couple of ways, right, I think about this 1% to 2% penetration. Is the penetration rate among the 1 million of new kittens and puppies per year, 1% to 2%? Or is that 1% to 2% of the entire population of pets is insured?

Yes. That is the entire 180 million pet population. We do believe in the puppies and kittens number, particularly in certain markets. It's probably closer to 5%. It's hard to get perfect data on that beyond our own. So that's mainly where we're focused in those initial conversations with the veterinarian. And obviously, pets with an average of 12 years. So as you cycle through various pet generation, you'll see the 5% become more predominant and then that can grow to 10% penetration, and then 25% over time is the target.

And then the -- if we think about -- I mean it's a market that I know very well. Are there capital requirements for pet insurance? Are -- is the NAIC involved? Is this a different regulatory body?

There are. There are capital requirements, and the NAIC is involved. So current state, and this is the way it's been the pet insurance market started. It's under property and casualty insurance. And there's no separate bucket. So it's sort of in this catch-all bucket of inland marine. And so as you can imagine, in the catch-all bucket, some of the requirements and ratios are not very relevant to pet. So currently, the requirement is it boils down to we have to hold $1 of capital for every $5 of premium. The NAIC, because the pet insurance market as a whole did cross the $1 billion in revenue a couple of years ago, it came on to the NAIC's radar because there's not a lot of -- outside of Trupanion, there's not a lot of transparency about what's going on. Many of the other insurance companies underwrite pet as well as many other lines of business and it all gets lumped together. So there is work going on with the NAIC. There's the pet insurance working group. Right now has gone a little slow this past year due to COVID, trying to get better standards around closure transparency. And then over time, we believe pet will go into its own bucket under P&C insurance, and likely have better capital requirements than now. They're a little expected in our opinion now because they just fall into that catch-all bucket. But definitely being looked at, and we're supportive of the work that's being done to drive better disclosure and transparency in general, but also to the customer as to what they're getting.

Interesting. So there might be a new -- you're saying a new schedule in the regulatory financials for pet insurance as a premium-spending item in the future? That would be very interesting.

Yes. We would see that happening. When remains to be seen. But we do see that happening and then, likely, risk-based capital calculations and schedules would all be more focused on pets as opposed to random industry metrics, and that would be a good thing.

And in life cycle, I mean I'm just trying to -- so I get a new pet and I buy Trupanion early on. I'm guessing I might save a lot of money in year 1. There's a lot of shots and things that new pets get, and there's a good value in year 1 from being insured? Am I thinking about this correctly?

We don't cover routine. So anything that you know you're going to spend, shots, upfront exam, we don't cover because you can easily budget for that. You don't need insurers marking that up. What we do is we cover the unexpected things, which there's a lot of in the early years with a puppy eating something it shouldn't have, jumping off the sofa and getting a little limp for a couple of days. So we do cover all of those things that come up that you aren't expecting. And for those who have pets, there's many of them, particularly in the first few years. And then some of the bigger things can happen later in life and with the mid-life with carrying an ACL as common in certain breeds. And so there's a variety of things over the life that we cover that our customers would experience with us.

And is this priced like a term life policy that my price won't change as long as I'm consistently insured with you through the life? Or would my price change over time?

It does that change over time based on the claims experience of what category you fall into, your location, your breed. It's not a full life policy. It's a recurring renewal monthly policy, and it can be repriced every 12 months based on those factors.

Okay. Well, we are unfortunately out of time. I'm always interested in learning more. I'm sure the audience is as well, but I think that we have to close shop right now. But I really appreciate the time, Tricia. It's interesting. Obviously, the story has been incredible. And congratulations to you on your progress at the company and all the success that you've had. And that's the end. This is the -- you're the closing speaker in the first insurance conference. Everybody, whether you're in Seattle or in New York, minimize your intake of A/C today. I guess, we're having some new numbers. And on the other side of this heat wave, we'll go outside and play in the sprinklers. Thanks, Tricia. Be well, and talk to you soon.

Thank you.