Trupanion: Ensuring humanization of pets via insurance

Disclosure: I am long shares of TRUP

“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.”-Darryl Rawlings, Founder and CEO of Trupanion

When I first read this story, I instinctively treated this narrative as the corporate PR version of the founding story that almost requires to be a bit embellished. In his 2019 letter, Rawlings also educated investors how to build a DCF model for Trupanion which is perhaps considered bit of a red flag in most analyst’s or investor’s book. However, as I kept reading shareholder letters by Rawlings, I understood Mr. Rawlings is a bit quirky CEO and while he obviously thinks highly of Trupanion, he is not necessarily depicting an exaggerated picture of his business. In one of his annual letters, he graded himself and the company’s metrics. The report card was filled with Bs and Cs and just one A-. Clearly, while grade inflation reached almost every corner of American universities, Rawlings seems to grade himself/the company in the old school fashion.

Of all the businesses I have studied so far, Trupanion’s Investor Relations page on their website is, by far, the most helpful and well-organized to understand the business. I wish every company followed Trupanion in this regard. After studying the business, I am sufficiently impressed by Rawlings, and what and how he built Trupanion over the last two decades. Here’s the outline for this month’s deep dive:

Section 1 Why don’t we buy insurance for our pets? Given <2% pet insurance penetration in North America, I explored this question and mentioned some of my hypotheses.

Section 2 Trupanion business model: I discussed TRUP’s business model, why it was misunderstood by some investors, and how it is differentiated from competitors.

Section 3 Unit economics of a pet: I provided a detailed explanation on the unit economics of an incremental average pet in this section.

Section 4 Future growth prospects: TRUP’s ambitions beyond its core Trupanion brand for the next five years are highlighted here.

Section 5 Valuation and model assumptions: Implied expectations in the current stock price was discussed.

Section 6 Management and incentives: I opined on management and mentioned the incentive structure of the Named Executive Officers (NEOs).

Section 7 Final words: Concluding remarks on TRUP, and a very brief discussion on my overall portfolio.

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