Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: Og on June 05, 2017, 11:36:24 AM

Title: TRUP - Trupanion
Post by: Og on June 05, 2017, 11:36:24 AM
I was surprised not to find another thread of this company. Will anyone be attending the Annual Meeting or listening to the webcast? Would be great to discuss and compare notes. The meeting is June 7 2017

http://investors.trupanion.com/news-and-events/press-releases/press-release-details/2017/Trupanion-Announces-Date-of-2017-Annual-Meeting-of-Stockholders/default.aspx
Title: Re: TRUP - Trupanion
Post by: Travis Wiedower on June 05, 2017, 01:28:28 PM
I'll be at the annual meeting on Wednesday. Don't own it, but I've been doing a lot of research on it lately. I like the company, industry, and management, but can't get there on valuation. As of now it's a great company to have already researched and sitting on my watch list.
Title: Re: TRUP - Trupanion
Post by: Travis Wiedower on June 05, 2017, 01:55:01 PM
To add more content to the thread, I wanted to copy some thoughts I had on valuation. Hopefully I'm way off base and someone can convince me it's cheap  ;D

"It looks like they could hit $1B in revenue around 2025. At that point they'd be at scale targeting a 15% discretionary margin (per management). Discretionary margin doesn't include sales and marketing expense and stock-based comp. If sales and marketing margin is 3% at scale (vs 7.9% in 2016) and stock-based comp is 1% at scale (vs 1.5% in 2016), that puts pre-tax margins at 11% (15% - 3% - 1%). By then their NOLs should be burned off so they'd be paying 34% in taxes, which puts their net margin at 7.26%  (11% * (1 - .34)).

So $1B revenue * 7.26% net margin = $72.6M net income / 35M shares outstanding (2% share dilution per year from now until then) = $2.07 EPS. $2.07 EPS * 25 (high quality company with plenty of runway still left) = $51.75. A $51.75 share price after 2025 earnings gives us a 10.8% IRR from today's price.

Given the above, it seems like the market is pricing it fairly. And most of those assumptions above are based on management's own guidance of what their financials will look like at scale. This means for the company to be significantly undervalued today, Darryl's own guidance would have to be way too conservative, which almost never happens from management.

FWIW, using my same 2025 results above, today's share price would have to be $10 to get a 20% IRR, which obviously isn't happening anytime soon."
Title: Re: TRUP - Trupanion
Post by: SlowAppreciation on June 05, 2017, 03:52:35 PM
To add more content to the thread, I wanted to copy some thoughts I had on valuation. Hopefully I'm way off base and someone can convince me it's cheap  ;D

"It looks like they could hit $1B in revenue around 2025. At that point they'd be at scale targeting a 15% discretionary margin (per management). Discretionary margin doesn't include sales and marketing expense and stock-based comp. If sales and marketing margin is 3% at scale (vs 7.9% in 2016) and stock-based comp is 1% at scale (vs 1.5% in 2016), that puts pre-tax margins at 11% (15% - 3% - 1%). By then their NOLs should be burned off so they'd be paying 34% in taxes, which puts their net margin at 7.26%  (11% * (1 - .34)).

So $1B revenue * 7.26% net margin = $72.6M net income / 35M shares outstanding (2% share dilution per year from now until then) = $2.07 EPS. $2.07 EPS * 25 (high quality company with plenty of runway still left) = $51.75. A $51.75 share price after 2025 earnings gives us a 10.8% IRR from today's price.

Given the above, it seems like the market is pricing it fairly. And most of those assumptions above are based on management's own guidance of what their financials will look like at scale. This means for the company to be significantly undervalued today, Darryl's own guidance would have to be way too conservative, which almost never happens from management.

FWIW, using my same 2025 results above, today's share price would have to be $10 to get a 20% IRR, which obviously isn't happening anytime soon."

I looked at it recently too, and I came away liking it more than I thought I would. There's a ton of runway, they require no capital, are differentiated in a commoditized market (insurance), and have a nice balance sheet.

The reason I haven't pulled the trigger is because 1) the growth is pretty impossible to predict and 2) it's even harder to predict the quality of the policies of an insurance company—let alone a relatively new one. That's just too many unknowns for me, plus the valuation isn't great as you've mentioned. But definitely one on my watch list.
Title: Re: TRUP - Trupanion
Post by: LC on June 05, 2017, 05:45:35 PM
Some resources:

http://www.iii.org/fact-statistic/pet-statistics
https://www.avma.org/KB/Resources/Statistics/Pages/Market-research-statistics-US-pet-ownership.aspx

Title: Re: TRUP - Trupanion
Post by: magneto23 on June 07, 2017, 09:26:54 AM
You guys, this stock is ridiculously overvalued, and it's not even close. Remember this is an insurance company, not a tech company. The analysts who write on it are ALL tech/software/internet analysts. If you're familiar w/ those biz models, it's all about the "subscriber base" and recurring revenue base over a small amount of fixed cost. Of course, all insurance can also be described as "recurring revenue" since policies lapse at a somewhat infrequent rate. But variable costs are extremely high, that's the nature of insurance and why they trade at multiples of book value not double digit revenue multiples on huge growth rates out 5 years a la SAAS. Mgt intentionally encourages this false narrative in their disclosure/classification and their investor communication. Even so, the stock is ABOVE the target prices for all of these uber optimistic tech analysts, except for the last report that the guy compared to AMZN (it is literally the worst "professional" sell-side research report I've read in my career). Anyway, there is plenty of competition. Go do some channel checks regarding when people opt for pet insurance (when problems are on the horizon = adverse selection), what you think the majority of pet owners' willingness to pay in this country ($50 / month? hmm, maybe wealthier set, but throwing around the UK/Sweden penetration rates when they pay ZERO for human health insurance in those countries is not exactly the best comp, and how much do people pay in recession conditions? It makes more sense to "self-insure" unless you have a chronic issues). Of course, HUMANIZATION OF PETS is a sexy growth concept, and the competition aren't (stand-alone) public companies so this is one of the only ways to bet on it. Why are insiders selling? What do we make of the reserves on the balance sheet being so small, especially if we figure out how to keep pets alive longer w/ more procedures a la humans? What do we make of the huge marketing spend and expense base. Lifetime Value of a Pet? Give me a break.
Title: Re: TRUP - Trupanion
Post by: racemize on June 07, 2017, 09:48:23 AM
To add more content to the thread, I wanted to copy some thoughts I had on valuation. Hopefully I'm way off base and someone can convince me it's cheap  ;D

"It looks like they could hit $1B in revenue around 2025. At that point they'd be at scale targeting a 15% discretionary margin (per management). Discretionary margin doesn't include sales and marketing expense and stock-based comp. If sales and marketing margin is 3% at scale (vs 7.9% in 2016) and stock-based comp is 1% at scale (vs 1.5% in 2016), that puts pre-tax margins at 11% (15% - 3% - 1%). By then their NOLs should be burned off so they'd be paying 34% in taxes, which puts their net margin at 7.26%  (11% * (1 - .34)).

So $1B revenue * 7.26% net margin = $72.6M net income / 35M shares outstanding (2% share dilution per year from now until then) = $2.07 EPS. $2.07 EPS * 25 (high quality company with plenty of runway still left) = $51.75. A $51.75 share price after 2025 earnings gives us a 10.8% IRR from today's price.

Given the above, it seems like the market is pricing it fairly. And most of those assumptions above are based on management's own guidance of what their financials will look like at scale. This means for the company to be significantly undervalued today, Darryl's own guidance would have to be way too conservative, which almost never happens from management.

FWIW, using my same 2025 results above, today's share price would have to be $10 to get a 20% IRR, which obviously isn't happening anytime soon."

I looked at it recently too, and I came away liking it more than I thought I would. There's a ton of runway, they require no capital, are differentiated in a commoditized market (insurance), and have a nice balance sheet.

The reason I haven't pulled the trigger is because 1) the growth is pretty impossible to predict and 2) it's even harder to predict the quality of the policies of an insurance company—let alone a relatively new one. That's just too many unknowns for me, plus the valuation isn't great as you've mentioned. But definitely one on my watch list.

I apologize for my ignorance here, but what makes them differentiated from other pet insurance and/or allows no capital?  FFH made a pet insurance acquisition a few yreaes back so I'm interested in how this one can be much different than the rest.
Title: Re: TRUP - Trupanion
Post by: atbed on June 07, 2017, 11:36:32 AM
To add more content to the thread, I wanted to copy some thoughts I had on valuation. Hopefully I'm way off base and someone can convince me it's cheap  ;D

"It looks like they could hit $1B in revenue around 2025. At that point they'd be at scale targeting a 15% discretionary margin (per management). Discretionary margin doesn't include sales and marketing expense and stock-based comp. If sales and marketing margin is 3% at scale (vs 7.9% in 2016) and stock-based comp is 1% at scale (vs 1.5% in 2016), that puts pre-tax margins at 11% (15% - 3% - 1%). By then their NOLs should be burned off so they'd be paying 34% in taxes, which puts their net margin at 7.26%  (11% * (1 - .34)).

So $1B revenue * 7.26% net margin = $72.6M net income / 35M shares outstanding (2% share dilution per year from now until then) = $2.07 EPS. $2.07 EPS * 25 (high quality company with plenty of runway still left) = $51.75. A $51.75 share price after 2025 earnings gives us a 10.8% IRR from today's price.

Given the above, it seems like the market is pricing it fairly. And most of those assumptions above are based on management's own guidance of what their financials will look like at scale. This means for the company to be significantly undervalued today, Darryl's own guidance would have to be way too conservative, which almost never happens from management.

FWIW, using my same 2025 results above, today's share price would have to be $10 to get a 20% IRR, which obviously isn't happening anytime soon."

I looked at it recently too, and I came away liking it more than I thought I would. There's a ton of runway, they require no capital, are differentiated in a commoditized market (insurance), and have a nice balance sheet.

The reason I haven't pulled the trigger is because 1) the growth is pretty impossible to predict and 2) it's even harder to predict the quality of the policies of an insurance company—let alone a relatively new one. That's just too many unknowns for me, plus the valuation isn't great as you've mentioned. But definitely one on my watch list.

I apologize for my ignorance here, but what makes them differentiated from other pet insurance and/or allows no capital?  FFH made a pet insurance acquisition a few yreaes back so I'm interested in how this one can be much different than the rest.

We're considering pet insurance ATM for a new pup.

I thought this was a helpful review by a third-party:
https://www.caninejournal.com/pet-insurance-comparison/

The site has Healthy Paws and Pet Plans ahead of Trupanion.
1. TRUP has the following to say about Healthy Paws:
http://trupanion.com/pet-insurance-comparison/trupanion-vs-healthypaws
2. and Pet Plans:
http://trupanion.com/pet-insurance-comparison/trupanion-vs-petplan

TRUP seems to believe they are better b/c they provide a combination of some of the following benefits: (1) direct pay, (2) no price increases due to age, (3) 24 hour access 7 days a week, (4) waiting periods, and/or (5) some coverage differences

Although direct pay is a great feature, I don't believe TRUP is that differentiated. They are still working on rolling out direct pay, and I don't think it is available everywhere. I think investors are mainly excited by the general growth of the entire industry. TRUP is only insurer solely focused on pet care and 20%+ revenue growth is extremely attractive and seems sustainable for quite some time.

The focus seems to be on potential positive cash flow near term and positive net income in the intermediate term.

I'm very surprised that they have a deminimis float...
Title: Re: TRUP - Trupanion
Post by: muscleman on June 07, 2017, 05:09:03 PM
I've done research on IHC and after talking to their management, they mentioned TRUP as one of the few other pet insurers.
I think IHC is much more compelling.
Title: Re: TRUP - Trupanion
Post by: Jurgis on June 07, 2017, 08:23:24 PM
Screw pet insurance.


But you guys already knew that.

 8)
Title: Re: TRUP - Trupanion
Post by: atbed on June 08, 2017, 09:41:21 AM
Screw pet insurance.


But you guys already knew that.

 8)

Lawl

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business
Title: Re: TRUP - Trupanion
Post by: DooDiligence on June 08, 2017, 10:44:23 AM
ACA doesn't cover pre-existing in pets. Does anyone offer funeral services?

(http://uglymule.com/images/preexisting-pet-conditions-not-covered.png)
Title: Re: TRUP - Trupanion
Post by: Jurgis on June 08, 2017, 03:39:54 PM
With insurance one of the parties (usually) gets screwed. In catastrophic, it's usually the customer, but they usually don't care, since the probability of cat is very low and overpaying probability-wise even X00% is still cheaper than if cat strikes. For non-cat insurance, especially self-paid customers may care if they get screwed (if someone else pays - e.g. your employer and you cannot get that money in cash instead, that changes things).

So - pet insurance.

Either insurer is screwing you via exclusions and prices - in which case it's not a great business for customer.

Or possibly insurer is giving you great deal and either A) they gonna lose money like heck B) they are pyramid scheme where the growth masks the A.

You guys can try to figure out which of the three possibilities TRUP is.

I don't have pet insurance and I won't get one. Anecdotally friends think it's too expensive for things covered and/or the insurer tries to screw you when they have to cover something expensive (like DooDiligence said "pre-existing conditions"). But that might be anecdotal. It's possible that TRUP is really giving great prices and A or B.

BTW, I heard someone sold pet wine idea on Shark Tank. I have at least 20 more pet crap ideas for anyone interested. 8)

Have fun.  8)
Title: Re: TRUP - Trupanion
Post by: muscleman on June 08, 2017, 06:02:15 PM
Screw pet insurance.


But you guys already knew that.

 8)

Lawl

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

IHC has cheap valuation and profitable. TRUP is just another hype. Good luck buying an insurer at 14x book value.
Title: Re: TRUP - Trupanion
Post by: atbed on June 08, 2017, 07:35:59 PM
Screw pet insurance.


But you guys already knew that.

 8)

Lawl

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

TRUP is just another hype. Good luck buying an insurer at 14x book value.

Thx

I ended up passing on TRUP at 17 b/c of this line of thinking. But absolutely not regretting that, because I just don't know TRUP or the insurance business well enough yet.
Title: Re: TRUP - Trupanion
Post by: Ballinvarosig Investors on June 09, 2017, 01:02:12 AM
Screw pet insurance.


But you guys already knew that.

 8)

Lawl

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

IHC has cheap valuation and profitable. TRUP is just another hype. Good luck buying an insurer at 14x book value.
Book value not always a good determinant of value for an insurer. I own a little Admiral Group (UK insurer) and it has as similar high price to book. They focus on quality underwriting and low costs and cede premiums to reinsurers, giving up the float an investment income. I am not familiar with TRUP - so it may be a similar case and hence not as well understood?
Title: Re: TRUP - Trupanion
Post by: atbed on June 09, 2017, 06:15:27 AM
Screw pet insurance.


But you guys already knew that.

 8)

Lawl

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

IHC has cheap valuation and profitable. TRUP is just another hype. Good luck buying an insurer at 14x book value.
Book value not always a good determinant of value for an insurer. I own a little Admiral Group (UK insurer) and it has as similar high price to book. They focus on quality underwriting and low costs and cede premiums to reinsurers, giving up the float an investment income. I am not familiar with TRUP - so it may be a similar case and hence not as well understood?

That's very interesting. I wasn't aware of any other low float insurers. Thx for sharing
Title: Re: TRUP - Trupanion
Post by: angelinvestor on July 05, 2017, 04:48:47 PM
Hey guys, we wrote a report on Trupanion. Hope you like it and let us know if you have questions.
https://variantviews.com/2017/07/05/trupanion-a-long-term-compounder/
Title: Re: TRUP - Trupanion
Post by: ScottHall on July 05, 2017, 08:40:50 PM
I gave this a shot but got off it b/c the insurance didn't seem like good value for money. Maybe others have a different experience, just my own.
Title: Re: TRUP - Trupanion
Post by: Travis Wiedower on July 06, 2017, 07:25:20 AM
angelinvestor,

Good write-up. Two comments:

1. In my opinion, you're underplaying the importance of Express. Insurance is generally a commodity business and I think Express is the (only?) thing that will keep Trupanion from earning commodity-like returns at scale. Express installs lead to very sticky vet customers that are then less likely to support other insurers. Given Trupanion is the only insurer with a nationwide sales force, if they can get a significant percentage of vets using Express the game will be over.

2. Do you have a source for the 18-20% frictional cost to have a third party underwriter? Trupanion underwrites Pet's Best business for an 8-10% take and the rest goes to Pet's Best (Darryl discussed this at the annual meeting last month). I assumed that 8-10% number was industry standard but I don't know.

I've been working on a Trupanioon write-up as well, hopefully I'll have it posted next week. It's taking me forever to write with how much there is to talk about--it's already 8 pages long!
Title: Re: TRUP - Trupanion
Post by: muscleman on July 06, 2017, 07:50:53 AM
Screw pet insurance.


But you guys already knew that.

 8)

Lawl

Muscleman, how come you like IHC better? I see they are also involved in other insurance lines of business

IHC has cheap valuation and profitable. TRUP is just another hype. Good luck buying an insurer at 14x book value.
Book value not always a good determinant of value for an insurer. I own a little Admiral Group (UK insurer) and it has as similar high price to book. They focus on quality underwriting and low costs and cede premiums to reinsurers, giving up the float an investment income. I am not familiar with TRUP - so it may be a similar case and hence not as well understood?

Regulators require a max leverage of 3x-8x of book, depending on the line of business. The book value limits the max profits the insurer may make.
Title: Re: TRUP - Trupanion
Post by: mrholty on July 06, 2017, 09:08:07 AM
Travis-

The 8-10% you mention is normal in the insurance space in general if a little high depending on exactly what they do vs Pet's best but its certainly closer than 18-20% for other insurance businesses.
Title: Re: TRUP - Trupanion
Post by: vinod1 on July 10, 2017, 05:13:28 AM
This is a very interesting find, one with potentially long runaway for growth. My concerns are:

Weak Customer Value Proposition

1.   The company targets a medical loss ratio (MLR) of 70%, which means it pays out 70% of what it collects from its customers back to them. Most other companies are in the 50% range. Even with a 70% MLR, it means customer costs are 40% higher compared to those who are self-insured. So customers should be willing to pay 40% more just for smoothing out their vet expenses.

2.   There are often very large discounts on medical expenses for humans when they go through a health plan because the managed care company has large scale which allows it to negotiate lower prices for various treatments. These discounts are often in the 50% range. There are no such discounts at vets because they do not mark up the costs. So there are no additional cost savings for going through insurance. This is unlikely to change as no insurance company has enough scale to demand discounts and the prices the vets charge are already low with little room for any discounts. Further, vets would not want to change the existing model, given all the downsides they see with health plans.

3.   Even the most expensive treatments are surprisingly affordable. Even for all the treatments that cost above $1000, the 10 most common are still in the $2000 to $3000 range. There are some treatments where the costs run into the $20,000 to $40,000 range. But in this case owners have the choice of "economic euthanasia".

Thus the company does not seem to have a strong value proposition for customers and it is unlikely that it would be widely adopted by pet owners. This would limit the company's total addressable market to a smaller fraction of the potential market than what an investor might hope for.

If the company can increase its MLR target to 85% and also able to negotiate discounts with vets for treatments, then it changes customer value proposition. Until then competitors "catastrophic insurance" coverage might be more attractive to consumers even if they pay out only in the 50% range.

(For Example: Pay $500 for insurance at a competitor, losing only $250 in frictional costs. Or pay $1000 to Trupanion and lose $300 in frictional costs.)

Adverse Selection

The company's policy of covering 90% of costs with no limits on lifetime expenses are likely to lead to an adverse selection where sicker pets are likely to end up with the company which increases costs to its members thus reducing its attraction to the broader customer base.

So to me there are two things that need to change before the company becomes attractive:

1.   Company MLR target increases to about 85%

2.   Company starts getting enough scale that it can get discounts from vets for treatments

Of course the market would price the company differently the moment these become visible, but to me these would be the clincher.

Vinod
Title: Re: TRUP - Trupanion
Post by: Travis Wiedower on July 10, 2017, 08:26:20 AM
All valid points. Economic euthanasia happens at a lower price point than you may realize--the average in 2016 was $1,433. Also, don't forget industry penetration just passed 1%. 90% of pet owners could never buy pet insurance and Trupanion may still turn out to be a fine investment.

Increasing the loss ratio and negotiating vet discounts will only be possible far off in the future. Darryl's goal is to get to an 80% loss ratio, but I asked the question at the annual meeting and he said that's very far off (10-20 years was the impression I got).
Title: Re: TRUP - Trupanion
Post by: GregS on July 12, 2017, 11:52:40 AM
Hey guys, we wrote a report on Trupanion. Hope you like it and let us know if you have questions.
https://variantviews.com/2017/07/05/trupanion-a-long-term-compounder/

angelinvestor,

I'm confused about something in your valuation.  You are assuming a 13.5% sustainable EBIT margin w/ 20% GM, 5% fixed expense and 1.5% maintenance capex, but doesn't management's "discretionary margin" exclude sales and marketing expense?
Title: Re: TRUP - Trupanion
Post by: rogermunibond on July 12, 2017, 12:07:37 PM
vinod1's points stand out on adverse selection.  say if you are a breeder of certain varieties like bulldogs, boston terriers, or boxers.  all have genetic mutations that mean they are at risk for apnea, cardiac stuff, brachycephaly related things.  you could easily recommend your buyers purchase coverage.  same for breeders who have hip dysplasia prone breeds.  meanwhile those with less problematic breeds or those who adopt from the pound have hardier pets with hybrid vigor.

this kind of insurance can be gamed.
Title: Re: TRUP - Trupanion
Post by: Travis Wiedower on July 12, 2017, 04:52:13 PM
rogermunibond,

All breeds are priced differently to account for that. Prices change based on location as well. A bulldog in New York City will be more expensive than a bulldog in Des Moines, Iowa for example. And a pug in NYC will be more expensive than the 100 other dog breeds in NYC that have less health problems than pugs.

One of the benefits of Trupanion Express is they get more and better data from the vets because Trupanion is tied into their systems. Their thought is that as Express rolls out to more vets their pricing will be able to improve in step.
Title: Re: TRUP - Trupanion
Post by: SlowAppreciation on August 23, 2017, 08:34:42 AM
https://valueinvestorsclub.com/idea/TRUPANION_INC/140560
Title: Re: TRUP - Trupanion
Post by: Liberty on December 29, 2017, 06:39:47 AM
Writeup here (sub required):

https://www.scuttleblurb.com/trup/
Title: Re: TRUP - Trupanion
Post by: Liberty on February 13, 2018, 07:36:39 AM
The link is now open to non-subscribers:

https://www.scuttleblurb.com/trup/
Title: Re: TRUP - Trupanion
Post by: Snorky on July 31, 2018, 06:11:11 AM
Does anyone happen to have Artem Fokin's thesis by Caro-Kann Capital and can they make it available to me?

Best Regards,

Benjamin
Title: Re: TRUP - Trupanion
Post by: cubsfan on July 31, 2018, 10:14:32 AM
Why don't you contact Artem directly?

He shared the presentation with the Manual of Ideas, and he may be happy to share with you.
Title: Re: TRUP - Trupanion
Post by: cubsfan on July 31, 2018, 10:27:00 AM
Does anyone happen to have Artem Fokin's thesis by Caro-Kann Capital and can they make it available to me?

Best Regards,

Benjamin

Just as an aside, Artem has posted the last 2 presentations he did for Manual of Ideas on his website (Commerce Hub & Trip Advisor), he may do the same for Trupanion.  And the Trip Advisor presentation was outstanding.
Title: Re: TRUP - Trupanion
Post by: mwtorock on July 31, 2018, 11:05:30 AM
Does anyone happen to have Artem Fokin's thesis by Caro-Kann Capital and can they make it available to me?

Best Regards,

Benjamin

Just as an aside, Artem has posted the last 2 presentations he did for Manual of Ideas on his website (Commerce Hub & Trip Advisor), he may do the same for Trupanion.  And the Trip Advisor presentation was outstanding.

Yeah agreed that TripAdvisor presentation was awesome.
Title: Re: TRUP - Trupanion
Post by: Snorky on July 31, 2018, 10:10:31 PM
I e-mailed Artem directly and he send me the thesis. Thanks anyway guys.
Title: Re: TRUP - Trupanion
Post by: Cigarbutt on November 05, 2018, 04:24:55 PM
To add more content to the thread, I wanted to copy some thoughts I had on valuation. Hopefully I'm way off base and someone can convince me it's cheap  ;D
"It looks like they could hit $1B in revenue around 2025. At that point they'd be at scale targeting a 15% discretionary margin (per management). Discretionary margin doesn't include sales and marketing expense and stock-based comp. If sales and marketing margin is 3% at scale (vs 7.9% in 2016) and stock-based comp is 1% at scale (vs 1.5% in 2016), that puts pre-tax margins at 11% (15% - 3% - 1%). By then their NOLs should be burned off so they'd be paying 34% in taxes, which puts their net margin at 7.26%  (11% * (1 - .34)).
So $1B revenue * 7.26% net margin = $72.6M net income / 35M shares outstanding (2% share dilution per year from now until then) = $2.07 EPS. $2.07 EPS * 25 (high quality company with plenty of runway still left) = $51.75. A $51.75 share price after 2025 earnings gives us a 10.8% IRR from today's price.
Given the above, it seems like the market is pricing it fairly. And most of those assumptions above are based on management's own guidance of what their financials will look like at scale. This means for the company to be significantly undervalued today, Darryl's own guidance would have to be way too conservative, which almost never happens from management.
FWIW, using my same 2025 results above, today's share price would have to be $10 to get a 20% IRR, which obviously isn't happening anytime soon."
I looked at it recently too, and I came away liking it more than I thought I would. There's a ton of runway, they require no capital, are differentiated in a commoditized market (insurance), and have a nice balance sheet.
The reason I haven't pulled the trigger is because 1) the growth is pretty impossible to predict and 2) it's even harder to predict the quality of the policies of an insurance company—let alone a relatively new one. That's just too many unknowns for me, plus the valuation isn't great as you've mentioned. But definitely one on my watch list.
I apologize for my ignorance here, but what makes them differentiated from other pet insurance and/or allows no capital?  FFH made a pet insurance acquisition a few yreaes back so I'm interested in how this one can be much different than the rest.

I came to TRUP after reviewing pet insurance and looking at a relevant Fairfax sub.
https://www.cfpetinsurance.com/

So TRUP can maintain a relatively low level of capital because of the predictability and short tail nature of policies. It has chosen to use a subscription-like model to develop the business and to report financials but they still need to file with regulators under the property/casualty rubric even if the design of policies is more like health premiums (!). TRUP is a strange animal. From the following document, it looks like TRUP needed to elevate its game in terms of regulatory requirements.
https://www.dfs.ny.gov/insurance/exam_rpt/12190f14.pdf

For valuation, future developments are likely to be positive but the exercise is one of discounting. Need to do more work to assess moat (quality and durability). The strategy to enter the market through the vets is the right one and scale effects support the idea behind the internal funding of the growth. Will they become a truly low cost operator?

The recent share issue (large and IMO at a premium to IV, to buy the HQ) is puzzling.

On balance, this is shaping up to be a potentially interesting idea.
Title: Re: TRUP - Trupanion
Post by: peterHK on November 06, 2018, 06:41:53 AM
It's an insurance co trading at 20x book value, only covered on the street by software analysts. The CEO has deliberately tried to market himself as an "outsider" and all the compounder bros love this.

I don't get how the business model makes sense or why it should trade at 20x book value, or why the traditional methods of valuing an insurance company shouldn't apply here. It goes in the same bucket as people who think Tesla is like Apple and deserves a steady state 20x multiple.
Title: Re: TRUP - Trupanion
Post by: Broeb22 on November 06, 2018, 10:12:46 AM
How comparable do you think a business like FTDR is to TRUP? Frontdoor was spun out of Servicemaster and they operate home service plans under the American Home Shield banner and a few others.

There are some interesting similarities to FTDR and TRUP:

Pets and Home appliances have finite lives and require regular care and sporadic large costs.

Both make heavy use of marketing because most people are skeptical of their benefits. Marketing goes through realtors with home service plans, while pet insurance goes through the vet.

Both are in theory underpenetrated but a decent percent of the "potential" market has already tried the service before and had a poor experience.

Home service is considered insurance by many, particularly since FTDR's competitors are held by insurance companies.

Notably, for those questioning the lack of book value here, FTDR spun out with negative equity from SERV.

So perhaps either there is a big problem for FTDR as well because it does not have the equity to absorb abnormally high losses, or perhaps FTDR is a decent example of another insurance-like business that holds very little capital.

I guess the other point this whole mental exercise proves is that perhaps both fields do not price their products competitively enough if they truly make a profit every year and they don't really need to hold capital because they make money hand over fist? But who would come in to offer products that price this risk more fairly (and cheaply) to consumers? I don't know that Bezos wants to insure Ol' Yeller's heartworm condition...
Title: Re: TRUP - Trupanion
Post by: peterHK on November 06, 2018, 10:34:13 AM
How comparable do you think a business like FTDR is to TRUP? Frontdoor was spun out of Servicemaster and they operate home service plans under the American Home Shield banner and a few others.

There are some interesting similarities to FTDR and TRUP:

Pets and Home appliances have finite lives and require regular care and sporadic large costs.

Both make heavy use of marketing because most people are skeptical of their benefits. Marketing goes through realtors with home service plans, while pet insurance goes through the vet.

Both are in theory underpenetrated but a decent percent of the "potential" market has already tried the service before and had a poor experience.

Home service is considered insurance by many, particularly since FTDR's competitors are held by insurance companies.

Notably, for those questioning the lack of book value here, FTDR spun out with negative equity from SERV.

So perhaps either there is a big problem for FTDR as well because it does not have the equity to absorb abnormally high losses, or perhaps FTDR is a decent example of another insurance-like business that holds very little capital.

I guess the other point this whole mental exercise proves is that perhaps both fields do not price their products competitively enough if they truly make a profit every year and they don't really need to hold capital because they make money hand over fist? But who would come in to offer products that price this risk more fairly (and cheaply) to consumers? I don't know that Bezos wants to insure Ol' Yeller's heartworm condition...

You mean the same FDTR that's down 30% today?

Title: Re: TRUP - Trupanion
Post by: Broeb22 on November 06, 2018, 12:53:22 PM
Congratulations, you correctly looked up a ticker.

For what it's worth, I'm not picking sides in this. I have no position.

But Trupanion is potentially an interesting business if I could ever get comfortable with its underlying profitability. I currently have no idea what that is, but FTDR maybe offers a comparison point for those searching for one. I have found my current cash flow-focused investing has not served me as well when I don't see the value being created by an Amazon or Salesforce or you name it. So I want to be open-minded to the possibility that there could be value in TRUP, but it's honestly tough to do.

Overall probably not a good sign that FTDR is worth 3x as much as TRUP when it has 4x the revenue of TRUP, and FTDR actually generates cash.
Title: Re: TRUP - Trupanion
Post by: Cigarbutt on November 06, 2018, 01:52:31 PM
...
But Trupanion is potentially an interesting business if I could ever get comfortable with its underlying profitability. I currently have no idea what that is, but FTDR maybe offers a comparison point for those searching for one. I have found my current cash flow-focused investing has not served me as well when I don't see the value being created by an Amazon or Salesforce or you name it. So I want to be open-minded to the possibility that there could be value in TRUP, but it's honestly tough to do.
...
Initial reflex was to look elsewhere but the company sells what appears to be a good product (customer perspective) using what looks like a reasonable strategy (vertical integration, based on adherence of vets) in a growing market.

The classic insurance premiums and reserves concept is incomplete because of the relative predictability of cash flows, capacity to rapidly adjust underwriting pricing to costs and because there is a significant service aspect based on contracts that have an implicit longevity with low churn rates.

The gap between intangible and tangible is significant, but likely not enough to justify today's valuation.
Title: Re: TRUP - Trupanion
Post by: bathtime on November 06, 2018, 08:34:27 PM
Brian Bares (Bares Capital) has a large position in TRUP and they do intensive due diligence on their investments.
Title: Re: TRUP - Trupanion
Post by: Spekulatius on November 07, 2018, 03:53:31 AM
How comparable do you think a business like FTDR is to TRUP? Frontdoor was spun out of Servicemaster and they operate home service plans under the American Home Shield banner and a few others.

There are some interesting similarities to FTDR and TRUP:

Pets and Home appliances have finite lives and require regular care and sporadic large costs.

Both make heavy use of marketing because most people are skeptical of their benefits. Marketing goes through realtors with home service plans, while pet insurance goes through the vet.

Both are in theory underpenetrated but a decent percent of the "potential" market has already tried the service before and had a poor experience.

Home service is considered insurance by many, particularly since FTDR's competitors are held by insurance companies.

Notably, for those questioning the lack of book value here, FTDR spun out with negative equity from SERV.

So perhaps either there is a big problem for FTDR as well because it does not have the equity to absorb abnormally high losses, or perhaps FTDR is a decent example of another insurance-like business that holds very little capital.

I guess the other point this whole mental exercise proves is that perhaps both fields do not price their products competitively enough if they truly make a profit every year and they don't really need to hold capital because they make money hand over fist? But who would come in to offer products that price this risk more fairly (and cheaply) to consumers? I don't know that Bezos wants to insure Ol' Yeller's heartworm condition...

I think FTDR and TRUP is fairly comparable in terms of the overall business model (not the target market). TRUP does need a lot of capital because there isn’t really any correlated risk like with casualty insurers where a huge storm can devastatehuge areas at once, causing a lot of correlated claims. TRUP insurers a bunch of really small uncorrelated claims Nd rates can be fairly quickly adjusted too. . It is similar to a health insurers, which by the  way often have negative tangible equity (look at UNH for example).
Title: Re: TRUP - Trupanion
Post by: Broeb22 on November 07, 2018, 07:59:09 AM


I think FTDR and TRUP is fairly comparable in terms of the overall business model (not the target market). TRUP does need a lot of capital because there isn’t really any correlated risk like with casualty insurers where a huge storm can devastatehuge areas at once, causing a lot of correlated claims. TRUP insurers a bunch of really small uncorrelated claims Nd rates can be fairly quickly adjusted too. . It is similar to a health insurers, which by the  way often have negative tangible equity (look at UNH for example).
[/quote]

Didn't know that re: health insurers. Will have to look at that.

So what happens to health (or pet) insurers in an environment where there is a contagious disease like the Bubonic Plague or the Flu Epidemic in 1921? I assume these guys get blown up unless they can re-price policies faster than a disease spreads.
Title: Re: TRUP - Trupanion
Post by: Jurgis on November 07, 2018, 08:19:51 AM

Quote
I think FTDR and TRUP is fairly comparable in terms of the overall business model (not the target market). TRUP does need a lot of capital because there isn’t really any correlated risk like with casualty insurers where a huge storm can devastatehuge areas at once, causing a lot of correlated claims. TRUP insurers a bunch of really small uncorrelated claims Nd rates can be fairly quickly adjusted too. . It is similar to a health insurers, which by the  way often have negative tangible equity (look at UNH for example).

Didn't know that re: health insurers. Will have to look at that.

So what happens to health (or pet) insurers in an environment where there is a contagious disease like the Bubonic Plague or the Flu Epidemic in 1921? I assume these guys get blown up unless they can re-price policies faster than a disease spreads.

They are not life insurers, so deadly disease won't impact them much.
Huge hospitalizable chronic disease might, but likely (I guess) it would overwhelm hospitals and doctors first, so that would provide a buffer for insurers. I am trying to remember what were the big losses in health insurers in the past. I think it was mostly wrong policy pricing (due to competition?).
Title: Re: TRUP - Trupanion
Post by: Cigarbutt on November 07, 2018, 09:16:19 AM
^From the risk-based capital perspective, NAIC differentiates life, property and casualty, health and fraternal.
Interestingly, from a regulatory perspective, TRUP files under P+C (because dogs and cats are considered "property") but the regulator likely adjusts the RBC calculation (lower buffer required) because of the nature of the business which is more like health benefits.

I think that, for health benefit insurers in general, the big (often latent) risk is adverse selection (cheap policy) but this can be assessed by the regulator (and the investor) by looking at the historical record (frequency, severity and variability in the mismatch). For TRUP, the policy price is based on a long term set of data, adjusted frequently (pay-as-you-go scheme) and literally based on their 70% of revenue vet cost invoices.

I am slowly evaluating this company and suggest the following reference. "Insurance sounding stuff" section. One has to be careful not to drink what management says but the exercise of answering questions before reading their answers was useful.
http://investors.trupanion.com/resources/top-investor-questions/default.aspx

If one is worried about the bubonic plague, residual value in one's investment in a pet insurer may not be the most pressing issue on one's mind then. :) On a more serious note, this type of issue may require some kind of reinsurance agreement. TRUP has a reinsurance arrangement for their canadian operations but, on a net basis, I understand that they now retain 100% of the risks.


Title: Re: TRUP - Trupanion
Post by: Spekulatius on November 07, 2018, 09:17:19 AM
Losses and bankruptcies occurred with health insurers mostly due to underpricing policies or they went out of business because they became uncompetitive ( costs too high, bad customer selection, network cost uncompetitive, underestimating cost inflation). . In most cases, these are just one off factors that can be adjusted annually but if the issue is structural, then it may result in bankruptcy.
Title: Re: TRUP - Trupanion
Post by: Cigarbutt on November 08, 2018, 03:07:10 PM
Q3 is out and in line with longer term trends.
The competitive landscape is interesting. A difficulty here is that most if not all relevant competitors are private or held as a sub within a larger organization (in North America and Europe).

Nationwide Pet Insurance appears to have leading market share (40 to 50%) and continues to build market share albeit at a smaller pace than TRUP.

Arguments for growth are quite compelling. The fast growth explains the low bottom line results and, at least for me, it remains very hard to predict (exactly) the profitability levels at or near steady state and when that stage will be reached.

There was a question during the conference call that was IMO incompletely answered. Basically the point is that a customer facing a sudden increase in a monthly bill will tend to terminate the coverage and then, the pet owner who is felt to be "value sensitive" becomes more "price sensitive". That part is fine because I understand that management responds rapidly to correct underwriting mismatch and they report that 1-the downward revisions equate the upward revisions and 2-they are getting better over time with the deviations between price and value for the different categories of pets.

But, given the nature of their model (policy price = vet invoice + 30% margin), there is no built-in pressures to contain vet costs. Vets will like the product (and will promote it accordingly, because insured pets and the quasi-automatic 90% coverage will result in higher spend in their hospitals) but, with CAGR of annual premiums at 6 to 7% (past, present and future), eventually (in comparison to other competitors who use "containment" tools such as deductibles, copays and others and in comparison to uninsured owners) the customers are likely to become more price sensitive as the insurance costs occupy a gradually larger part of overall expenditures. TRUP could respond by lowering coverage from 90 to 80% or (as they have mentioned) increase the vet invoice/revenue ratio above 70% but, over time, this price to value path is likely to impact growth and profitability.

The scenario for TRUP also implies that competitors will not respond effectively to its offering.

I will do scuttlebutt on this one and any personal experience with pet insurance at vet hospitals would be appreciated. Of course, this would be "indirect" experience because value conscious investors would not buy pet insurance, they would simply set funds aside.
Title: Re: TRUP - Trupanion
Post by: Peregrino on November 09, 2018, 05:46:00 AM
Brian Bares (Bares Capital) has a large position in TRUP and they do intensive due diligence on their investments.

Think you may have his positions mixed up.

He has a position in TripAdvisor (ticker TRIP), not Trupanion (ticker TRUP).

https://whalewisdom.com/filer/bares-capital-management-inc#tabholdings_tab_link
Title: Re: TRUP - Trupanion
Post by: tripleoptician on November 11, 2018, 10:22:44 AM
Read about 8 hours of conference calls/presentations/shareholder letters and a bit about the short thesis so far this weekend to try to understand the qualitative aspect of this business.

Have yet to look at the quantative/annual reports yet.

The long argument appears apparent/easy to understand and noted above in the write ups above with large TAM, potentially inproved competitive position secondary to alignment with vets and superior payments processing etc

The short argument I want to pay attention to is the qualitative argument vs just that it trades at a crazy book value multiple for an insurance company.

The best stated short argument I see is that the actual pricing model for their upfront monthly costs are at an unprofitable level. Then over the life of the ~6.5 yr avg term, Trup will need to increase insurance premium cost based on supposed cost inflation of that subgroup. The argument is that it isnt cost inflation that drives the increased premiums, it was just horrible initial underwriting.

The continued revenue growth from adding new pets masks the fact that the actual underwriting is of poor quality.
The shorts would say that the 70% passed onto the consumer is not sustainable and it is essentially a ponzi scheme where if growth stopped revenue would fall and the supposed adjusted margin driving the growth would collapse.
The evidence for this appears to be request filings to the state to increase premiums as much as 15-20% suddenly (I have not read/seen these filings)

My instincts would say that Trup has been around long enough to have a reasonable actuarial representation of what the cost plus model should be. DR states "inflation" cost in health related expenses might be 6-8%/yr based on utilizing higher cost stuff like CT instead of xray etc.

But how would they be so off to need 15-20% jumps suddenly?

The next part of the short argument would be that churn will happen in the mid to late cycle of the pet life when Trup tries to increase premiums significantly once health costs are going up.

The increased churn of these mid to late cycle contracts ( yr 3-6) would be masked by the last few quarters of onboarding new pets early. This would allow the churn rate to seem stable at 1.6% for last several quarters.

Do any longs have a counter-argument to this? I genuinely want to like this company but want to protect downside first and foremost.

Thanks in advance!



Title: Re: TRUP - Trupanion
Post by: Cigarbutt on November 11, 2018, 12:55:52 PM
Read about 8 hours of conference calls/presentations/shareholder letters and a bit about the short thesis so far this weekend to try to understand the qualitative aspect of this business.

Have yet to look at the quantative/annual reports yet.

The long argument appears apparent/easy to understand and noted above in the write ups above with large TAM, potentially inproved competitive position secondary to alignment with vets and superior payments processing etc

The short argument I want to pay attention to is the qualitative argument vs just that it trades at a crazy book value multiple for an insurance company.

The best stated short argument I see is that the actual pricing model for their upfront monthly costs are at an unprofitable level. Then over the life of the ~6.5 yr avg term, Trup will need to increase insurance premium cost based on supposed cost inflation of that subgroup. The argument is that it isnt cost inflation that drives the increased premiums, it was just horrible initial underwriting.

The continued revenue growth from adding new pets masks the fact that the actual underwriting is of poor quality.
The shorts would say that the 70% passed onto the consumer is not sustainable and it is essentially a ponzi scheme where if growth stopped revenue would fall and the supposed adjusted margin driving the growth would collapse.
The evidence for this appears to be request filings to the state to increase premiums as much as 15-20% suddenly (I have not read/seen these filings)

My instincts would say that Trup has been around long enough to have a reasonable actuarial representation of what the cost plus model should be. DR states "inflation" cost in health related expenses might be 6-8%/yr based on utilizing higher cost stuff like CT instead of xray etc.

But how would they be so off to need 15-20% jumps suddenly?

The next part of the short argument would be that churn will happen in the mid to late cycle of the pet life when Trup tries to increase premiums significantly once health costs are going up.

The increased churn of these mid to late cycle contracts ( yr 3-6) would be masked by the last few quarters of onboarding new pets early. This would allow the churn rate to seem stable at 1.6% for last several quarters.

Do any longs have a counter-argument to this? I genuinely want to like this company but want to protect downside first and foremost.

Thanks in advance!
Also at the evaluation phase.

An interesting aspect is that the company has been around for a very long time so the churn rates and poor underwriting arguments should have played out if that significant.

-Reported monthly retention ratios have been remarkably low high and stable for a very long time.

-Looking at reported numbers and filings at regulators, here are the combined ratios:

2012-4 (3 years): avg CR 96,3%
2015: 98%
2016: 95%
2017: 94%

-growth in monthly average revenue per pet: 2017 $52.07   2016 $47.82   2015 $45.04   2014 $44.14   2013 $42.56
CAGR: 5,2%

Top-line growth can help to hide red flags and growing pains but the above numbers don't suggest poor underwriting practices and a company trying to catch up.

Also (relying partly on specific company disclosures but also on other sources), the evolution of claim activity during the life of the pet does not correlate well with the human side of health benefits. I understand that the claim activity is more linear with accidents higher when pets are young and end-of-life expenses mitigated by a more "humane" (!?) approach (euthanasia) compared to the explosive growth of expenses for humans nearing the end.

FWIW, I value underwriters who act decisively and rapidly with the realization that certain lines are not profitable even if it means lost business.
Edit: correction made above
Title: Re: TRUP - Trupanion
Post by: bathtime on November 11, 2018, 05:33:12 PM
Brian Bares (Bares Capital) has a large position in TRUP and they do intensive due diligence on their investments.

Think you may have his positions mixed up.

He has a position in TripAdvisor (ticker TRIP), not Trupanion (ticker TRUP).

https://whalewisdom.com/filer/bares-capital-management-inc#tabholdings_tab_link

My bad, TRUP at last reporting date was 27% of Nine Ten Capital's public positions which is apparently another of Bares' vehicles.
Title: Re: TRUP - Trupanion
Post by: tripleoptician on November 11, 2018, 09:53:50 PM
https://www.barrons.com/articles/YMtOBspdDX

See more on a bit of the short thesis.

My instincts are similar to yours Cigarbutt

A request to the State for significant premium raises isn't defacto implying that the business is underpricing dramatically and therefore having large underwriting losses.

I suppose the short thesis is presuming without excessively low premiums to start they would not be able to attract new pet policies.

This whole situation feels a bit like the Ebix shorting process, but that had solid cash flow that was continuing to be used to by a business.

I still dont get the capital raise to buy their building. I dont see how that competes with reinvesting at 30-40% IRR's.

Some twitter short comments were talking about this was needed to shore up statutory capital which Trup badly needs.

My weekend work has put this in the too hard pile i think!
Title: Re: TRUP - Trupanion
Post by: maybe4less on November 11, 2018, 10:17:13 PM
https://www.barrons.com/articles/YMtOBspdDX

Some twitter short comments were talking about this was needed to shore up statutory capital which Trup badly needs.


I'm not an expert here, but this is what I couldn't figure out. It seems like they need a lot of statutory capital to grow as fast as they have been and it wasn't clear to me where they were going to get it. I suppose stock sales may be the answer if this is true.
Title: Re: TRUP - Trupanion
Post by: Peregrino on November 12, 2018, 05:58:28 AM
Brian Bares (Bares Capital) has a large position in TRUP and they do intensive due diligence on their investments.

Think you may have his positions mixed up.

He has a position in TripAdvisor (ticker TRIP), not Trupanion (ticker TRUP).

https://whalewisdom.com/filer/bares-capital-management-inc#tabholdings_tab_link

My bad, TRUP at last reporting date was 27% of Nine Ten Capital's public positions which is apparently another of Bares' vehicles.

I stand corrected!
Title: Re: TRUP - Trupanion
Post by: Cigarbutt on November 12, 2018, 01:41:23 PM
https://www.barrons.com/articles/YMtOBspdDX
See more on a bit of the short thesis.
...
I suppose the short thesis is presuming without excessively low premiums to start they would not be able to attract new pet policies.

This whole situation feels a bit like the Ebix shorting process, but that had solid cash flow that was continuing to be used to by a business.

I still dont get the capital raise to buy their building. I dont see how that competes with reinvesting at 30-40% IRR's.

Some twitter short comments were talking about this was needed to shore up statutory capital which Trup badly needs.

My weekend work has put this in the too hard pile i think!
...
I'm not an expert here, but this is what I couldn't figure out. It seems like they need a lot of statutory capital to grow as fast as they have been and it wasn't clear to me where they were going to get it. I suppose stock sales may be the answer if this is true.
Surprisingly, I am slowly getting more comfortable with the company.
For regulators, TRUP is a question mark as their model and niche are quite unique.
Basically, the theme is to grow the premiums rapidly and get more profitable with scale as the main vector of value creation.

These are some numbers to help with perspective.
-(reported statutory capital and surplus)/(required statutory capital and surplus)
2014:104,7%     2015:106,4%     2016:118,0%     2017:167,5%
-(revenue as a proxy of net premiums written)/(reported statutory capital and surplus)
2014:489,9%     2015:563,8%     2016:618,1%     2017:652,5%

So TRUP has built a growing cushion over required risk-based capital and it's not clear how much of this was purely voluntary. But funds going in that direction constitute negative investing cashflows and this is related to the cost of growing the business.

From previous exam reports from regulators, it's been mentioned that they were comfortable with the higher ratios in the second category: "However, the Department is not concerned with the results of this ratio due the nature of the company’s business.", referring to the 300% NAIC benchmark (slightly different ratio: premium written to capital and surplus) and that makes sense. However, at some point, the very high growth (unusual rate of growth in the insurance business) of premiums must be raising questions and may have been a driving force behind the growing margin over the required risk-based capital and surplus and, in that light, helps to understand the move to issue shares and buy their "home office" of which I understand they are occupying 40% of the space now. The share issue in my book was made at a premium, will help to drive down the fixed expenses ratio and it seems that the real estate value will be included in the capital and surplus amount. Unusual move but IMO a nice way to deal with statutory uncertainty.

Interesting because as I feel more comfortable with the model, the market today seems to discover that it has second thoughts. ???

When valuing an insurance company, I typically use a two-column approach with 1-the underwriting profitability, growth and cycle management and 2-the float.

With TRUP, the float aspect has minimal value so the valuation exercise rests mainly on the profitable growth "story". Will spend some time trying to figure a way to translate their reported numbers into an underwriting-type model and try to narrow down the intrinsic value range which, at this point, does not really include the market price.

It would be interesting to read an opinion on the price they paid for the acquisition of the real estate. The price paid seems to be typical for comparable transactions but this is not an area of stength for me.
https://news.theregistryps.com/trupanion-planning-to-buy-its-georgetown-headquarters-in-seattle-for-65mm-from-benaroya-company/
Title: Re: TRUP - Trupanion
Post by: Spekulatius on November 12, 2018, 04:34:09 PM
I have a little trouble to see how they can achieve high returns on equity in the long run. sure, there is a first mover advantage, but wouldn’t it be possible for competitions like an insurance company to offer add on insurance or for a health clinic pet store (Petsmart runs clinics on their premises) to offer add on insurance? Insurance per say isn’t moaty, unless there is a cost advantage. I am nothing auf there is much of a short case here, but is there really that much upside?
Title: Re: TRUP - Trupanion
Post by: Cigarbutt on November 13, 2018, 08:36:40 PM
Not sure either.
Have been reviewing WRBerkley, RLI and EverestRE and a few others lately and come to the conclusion that many roads lead to Rome, in terms of ROE. I agree that moat is the exception rather than the rule in the insurance industry and would say that the classical low cost advantage is only one of the ways to stand out from the crowd.

TRUP has a consistent operating history showing that they have a good product which is distributed in an efficient way and, so far, most or all relevant competitors have been slow to react. There appears to be some noise at this point concerning a strategic part of the moat, but, at this point, my feeling is that it's only noise.
https://seekingalpha.com/article/4221796-trupanion-naic-address-pet-insurance-weekend

I emphasize the balance sheet when valuing insurance companies and the following reference is a reflection of what I'm trying to get at in this post.
http://www.scmessinacapital.com/blog/2017/8/16/why-are-insurance-companies-valued-at-pb-instead-of-pe

IMO TRUP "deserves" to be looked at using a different lens. For other industries, the Dupont decomposition of ROE=NPM*AT*leverage can be useful to "isolate" the driving forces. For an insurance firm with the TRUP profile, I suggest a variant on the above ROE equation:

ROE being a function of 1-underwriting profit, 2-growth in market share and 3-NPW/statutory capital.

When I look at EverestRE from that angle, for years 2013-7, they report an avg CR of 88,8%, a CAGR of NPW of 5,5% and a NPW/equity of 0,65 to 0,75. Using the above-described ROE function, numbers look poor but obviously, for EverestRE, other significant factors need to be taken into account including the value of float.

When I look at TRUP,
For 1-, they have consistently reported below 100% underwriting, with an attempt to reduce corporate costs with scale (slowly happening) and voluntarily allowing for higher vet costs in order to provide not a cheaper option but a better value option for the customer, contributing to 2.

For 2-, NPW have shown a CAGR of 32,7% for the 2013-7 period and there appears to be further room to run.

Note: I'm reading Sam Walton's Made in America these days and he describes that when he started out with his first variety store in Newport, Arkansas (1945!), he noticed, among other things, that he could sacrifice his own profit margins (by selling cheaper or "lowering the markup", or offering better value to his customers) in the pantyhose category and still optimize his bottom line (and I presume his ROE although he does not say) because the decreased margin was more than compensated by the much higher turnover.

For 3-, they have been able to maintain very high and growing NPW/capital ratios.

For 3-, over time (maybe it's starting to happen now), the ratio may have to come down causing a lower ROE but, at that point, it would mean that they are building float that could contribute to their bottom line mitigating the effect of lower "leverage" measures.

This will be interesting to follow because it will tend to converge to the margin between investors looking for subscription-type of firms and more classic insurance investors and there may be an opportunity during the period when the "story"-type investors get bored and before the traditional insurance investors notice.