IPO Report: Trupanion (TRUP)

Trupanion (TRUP) provides monthly medical insurance for cats and dogs. It is headquartered in Seattle, WA.

Eleven other companies are scheduled to IPO for the week of July 14, 2014. The full IPO calendar is available at IPOpremium.

The manager and co-managers are RBC Capital Markets, Barclays, Stifel. The joint managers are Canaccord Genuity, Cowen.

TRUP scheduled a $100 million IPO with a market capitalization of $372 million at a price range midpoint of $14 for Friday, July 18, 2014 on the NYSE. SEC filings

TRUP Overview

TRUP provides monthly medical insurance for cats and dogs.

Top line revenue grew 51% for 2013 vs 2012, and grew 44% for Q1 '14vs Q1 '13.

90% of Q1 '14 revenue came from recurring monthly subscriptions.

In 2013 losses were 10% of revenue. For Q1 '14 losses increased to 19% of revenue.

Gross margins are in the 19-20% range.

TRUP Valuation

Glossary

TRUP Conclusion

TRUP appears to be expanding the market for cat and dog insurance, receiving a large percentage of new business from referrals.

The gross margin is low at 19-20%, but after all TRUP is an insurance company.

Because of recent top line revenue increases, the rating on TRUP is neutral. 

Given the current IPO market, it seems reasonable to expect TRUP to price quite a bit below range.

One caveat, however, it's not clear what the loss/payout ratio is for TRUP.

TRUP Business

TRUP is a direct-to-consumer monthly subscription service providing a medical insurance plan for cats and dogs throughout the United States, Canada and Puerto Rico. TRUP’s data-driven, vertically-integrated approach enables it to provide pet owners with what it believes is the highest value medical plan for their pets, priced specifically for each pet’s unique characteristics.

TRUP’s growing and loyal member base provides it with highly predictable and recurring revenue. TRUP operates its business with a focus on maximizing the lifetime value of each pet while sustaining a favorable ratio of lifetime value relative to acquisition cost.

TRUP’s target market is large and underpenetrated. TRUP has pioneered a unique solution that sits at the center of the pet medical ecosystem, meeting the needs of pets, pet owners and veterinarians, and it believes it is uniquely positioned to disrupt the pet medical insurance market and drive increased market penetration.

The number of pets enrolled in TRUP’s medical plan has increased every quarter for the last ten years.

More recently, TRUP’s total enrolled pets grew from 31,207 on January 1, 2010 to 181,634 on March 31, 2014, which represents a compound annual growth rate of 51.4%.

TRUP generates revenue primarily from subscription fees for its medical plan. TRUP’s medical plan automatically renews on a monthly basis, and members pay the subscription fee at the beginning of each subscription period.

TRUP’s vertically integrated infrastructure eliminates significant frictional costs that constrain many of its competitors, which allows it to provide superior value to its members. For example, while many traditional providers spend approximately $0.45 to $0.64 per dollar of premium on claims, TRUP spent $0.67, $0.68, $0.70 and $0.70 per subscription dollar in 2011, 2012, 2013 and the first quarter of 2014, respectively.

Since 2010, at least 88% of TRUP’s subscription business revenue every quarter has come from existing members who had active subscriptions at the beginning of the quarter.

Retention rates

Due to its focus on providing a superior value proposition and member experience, TRUP’s members are very loyal, as evidenced by its 98.5% average monthly retention rate over 2011, 2012 and 2013.

This loyalty is also reflected in TRUP’s retention of annual cohorts of members, both on an average monthly and cumulative basis.

For example, the pets that TRUP enrolled in its medical plan in 2010 had average monthly retention rates of 98.15%, 98.85% and 99.07% at the end of 2011, 2012 and 2013, respectively, which resulted in a cumulative impact of 56% of the original cohort pets remaining enrolled at December 31, 2013.

Leads & Referrals

TRUP generates leads through both third-party referrals and online member acquisition channels, which it then converts into members through its website and contact center.

TRUP’s website, Trupanion.com, is critical to converting leads from all of its member acquisition channels, with over 85% of its new members in the three months ended March 31, 2014 visiting TRUP’s website prior to or during the enrollment process.

Veterinary practices represent TRUP’s largest referral source.

While these referrals accounted for a majority of its enrollments in 2013 and the first quarter of 2014, TRUP does not pay commissions to or otherwise compensate veterinarians for their referrals.

TRUP engages a national referral network of independent contractors who are paid fees based on activity in their regions, which it refers to as its Territory Partners.

TRUP Dividend Policy

No dividends are planned.

Intellectual Property

As of March 31, 2014, TRUP had two pending patent applications in the United States, one pending international patent filed under the Patent Cooperation Treaty, one pending patent application in Europe and no issued patents.

TRUP also had five registered trademarks in the United States, including “Trupanion,” and three additional trademark applications. TRUP has three pending trademark applications in Canada.

Many of TRUP’s unregistered trademarks, however, contain words or terms having a common usage and, as a result, may not be protectable under applicable law. TRUP also currently hold the “Trupanion.com” Internet domain name and numerous other related domain names.

TRUP's Competition

TRUP competes with consumers that self-fund with cash or credit, as well as traditional pet insurance providers and new entrants to its market.

The vast majority of pet owners in the United States and Canada do not currently have medical coverage for their pets.

TRUP is primarily focused on expanding the overall size of the market by improving the value proposition for consumers.

TRUP views its primary competitive challenge as educating pet owners on why its medical plan is a better alternative to self-funding.

Additionally, there are traditional insurance companies that provide pet insurance products, either as a stand-alone product or along with a broad range of other insurance products.

The largest of these traditional providers is Veterinary Pet Insurance Company, a division of Nationwide Insurance.

In addition, new entrants backed by large insurance companies with substantial financial resources have attempted to enter the market in the past and may do so again in the future.

Further, traditional providers may consolidate, resulting in the emergence of new providers that are vertically integrated or able to create other operational efficiencies, which could lead to increased competition.

TRUP believes that it has competitive strengths that position it favorably, including a compelling value proposition, a unique member acquisition strategy, a vertically integrated approach that reduces frictional costs, actionable data insights, powerful technology infrastructure and an experienced management team.

5% stockholders

Entities affiliated with Maveron  33.7%

Entities affiliated with Highland Consumer Fund  16.3%

RenaissanceRe Ventures Ltd.     12.7%

Darryl Rawlings             13.0%   

Use of Proceeds

TRUP expects to net $89 million from its IPO. Proceeds are allocated as follows:

working capital and other general corporate purposes, including investments in growth-related initiatives and new technologies designed to expand its membership and to enhance its member experience.

TRUP also intends to use a portion of the net proceeds TRUP receives from this offering to repay $12 million of outstanding principal under its subordinated term loan, which it incurred for working capital purposes.