Hey, everybody, this is Kaumil, Jefferies' new Consumer Stapes Wellness, including Pet Analyst. We have here Darryl Rawlings, CEO of Trupanion. Nice to see you again, Darryl.
Nice to see you. Thanks for having me.
Let's kick off. Let's start with a bit of an introduction to the business and maybe more specific, the kind of business philosophy.
Sure. Well, if you're a pet owner, and there's about 200 million of them, cats and dogs in North America, it's pretty difficult to budget if and when they become sick or injured, and it's very difficult because you don't know if you're gonna have an average pet, lucky or an unlucky one. What we do is we provide medical insurance, and we share the risk between the lucky and the unlucky. We look at the average cost, we put a small margin on top of it, and that's what we charge the pet owner or the consumer. Our go-to-market strategy is largely informed around the veterinarian. The veterinarian is not only a great lead source for us, but when a pet becomes sick or injured, we want to make sure that their customer experience is seamless.
We, as a company, try to pay the hospital back or the vet clinic back directly in under five minutes, 24 hours a day, seven days a week. Our product does not have a lot of fine print. It's pretty basic. If you enroll your pet as a puppy or kitten, and you haven't had any problems before you enrolled, during its entire life, if they become sick or injured, we'll pay 90% of the veterinarian's actual invoice. We don't penalize individual pets for being unlucky. And we share the risk between breeds and the local cost of veterinary care, and we monitor the inflationary costs over time, and we adjust those to our members over the pet's life. Pets could stay with us for 12 or 15 years.
So we're not trying to project or pretend that we know what the cost is gonna be in 10 or 15 years from now. We're monitoring the actual cost and adjusting it, trying to adjust it in real time, the best way that we can.
Got it. I think one of the most common questions that we get is almost a kind of immediately comparing it to human health insurance. Can you talk a bit about the pet insurance market and maybe compare and contrast it to human insurance?
Well, it's dramatically different in a number of ways. First of all, we're only at 3% market penetration. So of the 200 million plus cats and dogs, only about 3% of them are currently insured. So that's the big opportunity ahead of us, is increasing the penetration rate. In countries that have been doing it longer and doing it better than it has been done in North America, U.K. and Sweden. U.K. is over 28% market penetrated, so one in four pets, a little bit more than that. In Sweden, it's one in two pets, over 50% market penetrated. And we believe in the decades to come, that the same thing will happen in North America. So market penetration is a big one.
The other one is, pets are different than humans in a number of ways. Number one, they age seven times faster.
Right.
A lot of people are surprised to hear that the highest frequency of claims or invoices or medical problems that we have are in the pet's first year of life. So, first year of life can be expensive. And then in the human side, the end of life is extremely expensive on the human side. But the human care doesn't have what veterinary medicine has is compassionate euthanasia.
Right.
We all love our furry friends. They're family members, our cats and dogs.
Mm-hmm.
But our members, with or without Trupanion, are not trying to do heroic end-of-life things, where to extend the pet's life by a month or two months, when that just means they're gonna be living in a cage in a vet hospital on an IV.
Mm-hmm.
It's quite a bit different than human health. Veterinarians deliver veterinary medicine in a very efficient way, but they're typically independent hospitals or corporately owned small groups of hospitals, and the delivery is much better. We think we have a much better alignment with the veterinarians than the friction between human health.
Yeah. Those are two things you mentioned, I think we should dig into a little more because I feel it's important. The first is the how low the market penetration is. Why, then the second thing will be your relationship with the vets. On the market penetration, why is it so low?
Well, so, I started the company in Canada. We issued our first policy in the year 2000, so 23 years ago. When I entered the market in Canada, there had been other companies before us, in fact, dating back to 1980.
Mm-hmm.
... but the products were designed with a lot of fine print, and they weren't meeting the needs. So they weren't covering the things most likely to happen to a pet. They had congenital and hereditary exclusions. So if you had a German Shepherd, they wouldn't cover hip dysplasia. If you had Golden Retriever, they wouldn't cover cancer. And that was all in the fine print, so consumers were disappointed. In addition to that, they paid, either off of a fee schedule or a very small percentage of what the veterinarian actually charged. And so if they, if they did happen to have coverage, it was maybe only covering 40%-50% of the veterinarian's invoice, so it wasn't really solving the problem. The last one was-
Mm-hmm
... they were all reimbursement models. So if you're buying this so that you have confidence, go to the veterinarian, and you're not worried about having to come out of pocket. You had to come out of pocket. You had to file paperwork and wait for three to four weeks, cross your fingers and hopes that you're gonna get enough money back to pay you back. So none of those-
Right.
that consumer promise never really resonated. And then when we came-
Right
... to the marketplace, we've been changing that. So we've grown from a tenth of 1% to about 3%. Every one point of penetration is about $1 billion in revenue. And I'm talking about the category. In the United States, we entered in 2008. We were licensed in all 50 states in 2013. And we went public in 2014 with about $100 million of revenue. Our current run rate is about $1 billion. So in under 10 years, we've more than 10-folded the revenue. We've been growing over 20% revenue year- after- year, and the category itself is growing nicely as well.
All right, got it. And then, Mr., did you provide your share and how it's trended?
Sorry, I-
You didn't-
Can you ask the question again?
I'm sorry. Did you what's your, what's your share, and how is it, how it's, how it's-
Oh, market share.
Right.
Yeah, market share, we are, we're number one in revenue, number one in market share, number one in growth from best information that we have.
Mm.
There's about 20 competitors or 20 brands in the space. But we've competed against about 60 brands in our 20 years, so they come and go.
Yeah.
When we entered the U.S. market, there was one dominant player that had about 90% market share, and we passed them in market share one to two years ago.
Okay, great. In the context of competition, how do you compete with the pet offerings from some of the larger, you know, human insurance and auto and the house, home insurance plans or companies?
Well, well, well, often we're the company behind it, so State Farm offers it.
Oh
... we're the company behind it. So there isn't any large players that have made any significant impact without the help of a company like Trupanion.
Right.
A number have tried, but they haven't lasted in the marketplace for very long. What we do is unique. The data we have is unique, the people, the staff, the claims handling, the IT systems, the licensing, and our go-to-market strategy, where we have, a field of, we call them Territory Partners, but people that, visit the veterinarians and help educate them on what we do and how we can support the client when, they're in need. We've got about 160 of those calling on about 25,000 vet hospitals in North America, so our approach is very unique.
Got it. Well, like I said, we didn't get to the relationship with the vets, and how that, you know, you've built out as a bit of a competitive moat. Maybe can you talk about that relationship? You mentioned briefly on how the payment and such works. Can you go over that in a bit more detail to, I think, give everybody a sense of, you know, why that's different from, perhaps a different insurer?
Yeah. So, if I back up a bit, I started the company after an incident that happened when I was about 14 years of age, and I was in a vet hospital with my parents, and my parents were good, loving pet owners and, but lived on a tight budget. They did not have any type of insurance, and we went to the veterinarian with a two-year-old dog, and the veterinarian said: "No problem, we can do surgery. He'll live another 12 years." But my parents didn't have the money to pay upfront.
Mm.
From the beginning, having an insurance model where the pet owner has to pay upfront and wait for a reimbursement, to me, never seemed like it was gonna be compelling to solve the problem that we set out to solve.
Mm.
So what we do is we integrate with practice management softwares. We have some patents in that area, but most importantly, we have relationships with the veterinarians so that they feel comfortable to work with us. And when an invoice is created, it can be sent to us 24 hours a day, and we will look at turning it around and paying the invoice directly to the veterinarian, putting the money into their bank account in under five minutes.
Mm.
So that the pet owner, when they see the invoice at the front counter, it could say, you know, it was $5,000, Trupanion paid $4,500 or $10,000 and, you know, et cetera. So, we're just trying to make it easier for everybody in the ecosystem.
Mm.
It's a win for the veterinarians in that we don't charge credit card fees.
Okay.
In addition to it, they make an extra about three points in their bottom line.
Yeah.
The customer experience is a win for the pet owner.
Right. And it's your software that's in there, if I understand correctly. Right?
We have our own software, but it integrates with the various types of Practice Management Software that they use to manage their business with inventory and...
Mm
... billing, you know, their CRM systems.
Okay, got it. Can you talk about bringing in new customers? What? How do you develop awareness somebody gets a new pet? How do you make sure that Trupanion's, what's top of mind, is something they need to buy, along with a crate and whatever else they're purchasing?
Yeah. Well, you're... First of all, your question is pointed in the right direction because our target customer is somebody getting a new pet.
Mm.
So we're not trying to go after somebody that has had a dog for 13 years, and thinking that we're gonna be able to solve all their problems because that pet's likely gonna have had a lot of medical issues.
Mm.
They may be coming to us because they're more prone to medical problems, and-
Mm
... we don't know how to underwrite pre-existing conditions. So, if we get them enrolled as puppies and kittens, and the veterinarian says they're healthy, then we can cover any medical problems moving forward. And so it's really about that veterinarian awareness, letting the veterinarian let a pet owner, a new pet owner know during one of their typical early wellness exams, vaccinations, their spay or neuter, that the cost of veterinary care can be very expensive, and have they thought about how they're gonna budget for it? They can talk about their experience with Trupanion and us pay directly, and not having fine prints and doing the things the way that we do. And that is our number one lead source. And that could represent, in a market, anywhere from 50%-80% of our new leads.
The second biggest lead source is where people get their pets. So often, they'll get them from a breeder. That breeder-
Mm-hmm
... might do their best to make sure that they're delivering healthy puppies or kittens, but they certainly don't want them going back if in three to six months there's a problem, and they'll often be able to say, "If you're gonna be a responsible pet owner, you're gonna need to be prepared for the unexpected. You might wanna think about Trupanion." That's-
Mm
... our number two lead source. Our number three is actually our existing customers telling their friends or adding pets. And our fourth lead source is, besides our partnerships with companies like State Farm, other distribution platforms, would be direct-to-consumer.
Got it.
But direct-to-consumer is a very small percentage of what we're doing. We really feel like the perfect lead at the right time is the veterinarian on either their first or second visit with their new pet to the household.
I see. How do you think about how much to invest in some of those initiatives? Is it referral program with vets? Is it advertising at the animal hospital? And then how do you think about amounts? Maybe, and I'll, the natural follow-up will be what the long-term value is for somebody who does convert at that moment.
Yeah. So, what we do is we... Our math is pretty simple. We say, "What is the average cost for a pet?" That average cost might range from $20 a month on average, and I'm just talking the cost of accident and illness, to maybe $100-$150 for certain breeds in Manhattan or something.
Yeah.
And then once we understand the average cost, that's between lucky, unlucky, and average, we would put on about a 30% margin, and that's what we would charge the customer. And of, of that 30% margin, it is our goal that about 15% of it is to cover our overhead variable and fixed expenses. About $0.71 on the dollar goes to paying the veterinary invoice, leaving us a target margin of about 15%. We would then take that 15% margin, multiply it by their monthly cost, so their ARPU, which varies from $40 a month to as high as $200 a month, and multiply that by the retention rate, how long we expect the pet to stay with us, and that would inform our lifetime value. So what would be the, the stream-
Mm
... of cash flow before inflation that we would-
Right
... expect from a pet?
Mm-hmm.
And then we do reverse math to determine what we could afford to spend to get a 30% internal rate of return.
Mm-hmm.
And then we'll use a myriad of activities for lead generation as well as conversion-
Mm-hmm
... to be able to acquire a pet within that constraint of our 30% Internal Rate of Return.
Right, I see.
Um, and, and-
And then-
... it's roughly spent about half of it is spent on leads, and half of it is spent on conversion. There is a small component of our; we call it our pet acquisition cost or PAC cost.
Mm
... which is all of our sales and marketing divided by the number of pets enrolled in a period. That also includes kind of their, a kind of a white glove treatment in the first 90 days, making sure that they get off to a good start.
Got it. Before we move to financial, maybe we just—I'd like to just briefly, if there's anything that we should discuss as it relates to the evolution of the business, whether it's new services, new products, anything ancillary. You obviously have these relationships with pet owners. If there's anything you wanted to discuss there, we can do that. Otherwise, we can move to some financial.
Yeah, I mean, I'll touch on it briefly, but for anybody that might be listening that might be interested in... Several years ago, we launched what we call the 60-month plan, a five-year strategy. In that plan, we built upon what we talked about when we initially went public. So if you read the 2014 shareholder, that gives you the nuts and bolts of our business. And in 2021, we came up with a five-year strategy that runs through to the end of 2025. The main areas of that strategy were in increasing the number of distribution channels beyond the vet-
Mm
... increasing the product offerings. So the product that we offer through the veterinarian is, has the broadest coverage, the one a veterinarian would want to recommend.
Mm.
But if you're selling through employee benefits or through some other channels, you might want a product that has less coverage and a lower cost point. And in addition to that, we were looking at expanding our addressable market. So to include adding new geographies, new countries, which we've been in the process of doing. The North American market has 25,000 vet hospitals. Ultimately, we want to get to about 50,000, and our goal in the 60-month plan was to get to about 35,000. We've been making good strides in that area. So those are the main initiatives that we've been doing that has been newer in the last few years-
Right
... and they're at different stages of development. But the majority of our revenue in our business is the same blocking and tackling, which is have a territory partner build relationships with about 200-250 vet hospitals, earn their trust over time, and become part of their daily workflow, so that if a pet becomes sick or injured, we're there to be there. We can pay them directly.
35,000 near term, long term, 50,000. How many are you in now?
So we visit about 25,000, and we have about just over 15,000, what we call active vet hospitals. So it's taken us 20 years to get to about two-thirds of veterinarians kind of trusting and being kind of regular contributors to our business. And we've increased the addressable market to about 35,000. And we're, you know, in the stages of earning their trust, and that will take, typically, in a region, it takes about five years to get to about 80% penetration of those hospitals-
Right
... actively recommending you.
Okay. Is it, perhaps, I don't know if it's easier or harder, but now that many of those hospitals have been consolidated by some private equity firms, are you able to strike deals at a more of a corporate level that flows out to all of them, or does it still need to be done market by market, region by region, the way that it's been done, you know, for a long time?
It's a two-part answer because there has been more corporate ownership. So, 20 years ago, it was less than 10% of hospitals were corporately owned, so the vast majority independently owned by veterinarians. That number is probably 50/50 now.
Right.
So there's private equity and corporate owners and different groups that have gone in. There's some that have been very long-term committed, like the Mars group, et cetera, that are the biggest players.
Mm-hmm.
It's generally quite easy for us to get commitment at the corporate level because they tend to be bottom-line motivated, and our clients visit twice as frequently and spend more than twice as much money. We pay directly, and we eliminate the credit card fees, so it's just good business.
Right.
But at the end of the day, you have to go hospital by hospital and earn-
Mm-hmm
... the trust of the people on the front line. So regardless if there's corporate buy-in, you still have to have boots on the ground and build those relationships because it's the, you know, the individuals at the hospitals that are the ones interacting with the pet owner. So it's a combination.
Got it. Let's get to a few financial things as we close this out. Let's start with how you think about your long-term algorithm, starting, of course, with the top line and how that should work its way down the P&L.
Sure. So large, underpenetrated market, as we've kind of touched on a few times.
Mm-hmm.
We believe there's an opportunity to grow 20%-25% top-line revenue for the next one to two decades. Doesn't mean we'll do it every year, but it does mean that we want to be in a position... have put ourselves in a position that if we execute well, that we can achieve those milestones.
Mm-hmm.
We wanna have a 15% operating profit before we spend money on growth.
Mm-hmm.
So today, run rate is about $1 billion in revenue. If you, grow that at 20%-25% for the next 10 years, you can do the math. And ultimately, we'd like to have a operating profit, before we spend it on growth. We call it adjusted operating income. So it's above our GAAP income.
Right
... of about a 15% margin, and then we will deploy as much of that 15% margin, well, as long as we hit two criteria.
Mm-hmm.
The first criteria is that we're getting a 30+% Internal Rate of Return.
Mm-hmm.
That's when we will be happy to deploy capital. And for most of our life, we've also had the goal of being cash flow positive.
Mm-hmm.
We took a $200 million investment from a strategic partner, Aflac, a couple of years ago, and with the beginning of our 60-month plan and knew we'd be cash flow negative for a short period of time. And we've committed to being— our goal is to be cash flow positive by Q4.
Mm-hmm.
That has been a little bit more challenging. There's been margin compression for our first time as the cost of veterinary care has increased dramatically coming out of COVID, and it takes us-
Yeah
... it takes us about 12-18 months to reprice our existing book, so we've had some margin compression. But our goal is to margins to continue to expand and ultimately grow top line at 20% and hit a 15%, on average, percent margin and 30% internal rate of returns while being cash flow positive.
Okay. Great, you have a new CFO.
Yeah.
Anything you'd like to add in terms of how things will change, if there's any particular area of focus, why it was, you know, the right person?
Well, we hit some margin compression, and I was. If you read my shareholder letters last year, you'll know that I was disappointed in the previous year's results. We made some management changes.
I came through clearly.
... and, yeah. And if you're disappointed, you make changes. And you know, I think in the last, particularly in the last six or seven months, we've made a lot of good progress. We were missing our forecasts for a period of time and being surprised, and we seem to be getting ahead of that now. So, yeah, just moving forward.
Well, great. Congratulations on finding who you want. We've got, actually, less than 60 seconds left. Anything you wanna say to close it out?
Not really. For those that haven't read the shareholder letters, yeah, we'll just keep moving forward.
I should maybe do one you can answer very quickly, so it just came in, is on how the current economic environment is impacting your business.
Well, vet inflation is real.
Mm-hmm
... which means that the cost of veterinary care is growing faster than people's savings accounts or their real earnings, which increases the demand or need for a product like ours. Pet owners don't have a problem budgeting, and it doesn't matter if it's $50 a month or $100 a month. I mean, one night of doggy daycare is equivalent to a month of Trupanion. So, but what is important is that they can budget for it, so that they know how much to do it. And underlying, as the cost of care goes up, the demand and need for a product will continue to increase.
Got it. Okay, perfect. Thank you very much. I kept you a minute late, but I think it was worth it and important to answer the question. I'll... We'll all talk soon. Thanks, everybody, for joining us.
Thanks for having me.
Bye.