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Why Trupanion's Pet Insurance Business Is Booming

The number of pets in the U.S. has grown at a healthy rate as more families have become inclined to bring cats, dogs, and other animals into their lives. Unfortunately, the cost of taking care of those pets has also risen, which has made it less affordable to provide the best healthcare to our furry friends.

Trupanion (NASDAQ: TRUP) provides health insurance for pets. The company prides itself on providing comprehensive healthcare coverage, which means customers won't be surprised by things not covered in their plans.

Trupanion has seen its business boom in 2020, reporting strong top-line and bottom-line growth. Why has the company seen such strong demand for its products? The COVID-19 pandemic has led to record pet adoptions as people have had more time to take care of a new animal as they work and relax from home.

Image Source: Getty Images.

Record second-quarter earnings

Trupanion's business saw record-breaking service across the board, from the speed at which inquiries were answered to how quickly the company was able to process veterinary invoices. And the company's refer-a-friend and add-a-pet channels increased the number of monthly subscriptions for its insurance plans.

Financial Metrics Q2 2020 Q2 2019 YOY Change
Revenue $117.9 million $92.2 million 28%
Gross profit $19.9 million $14.7 million 35%
Operating income $1.5 million ($2.1 million) 29%
Net income $1.4 million ($1.9 million) 30%

Data source: Trupanion. YOY = year over year.

Why was the company's business so strong? 2020 has also been a record-setting year for pet adoptions. Shelters have seen soaring demand leading many to run out of pets to adopt. And the best time to get pet insurance is when the animal is still young, so you can lock in a lower rate and cover any problems that come up during its life without any carveouts for pre-existing conditions.

Trupanion has also executed well on building relationships with veterinarians. Veterinarians are important because many pet owners rely on their vets for recommendations on which insurance provider to use. Unlike other pet insurance companies, Trupanion uses a direct sales approach and sends its sales team to directly meet and establish relationships with animal hospitals. The company counts over 11,000 active hospitals that actively recommend its insurance products, contributing to a healthy stream of customer referrals.

What is great about Trupanion's business model is that once a customer signs up for insurance, they pay health insurance premiums for the duration of their pet's life or until they cancel their policy. This is a stream of recurring revenue that will continue well beyond 2020.

Achieving Nirvana

Trupanion uses an internal metric called "Nirvana" to measure success at the company. Trupanion defines Nirvana as when member referrals equal or exceed the number of members who cancel their monthly subscriptions. This metric is pivotal for the company being able to sustain its growth for the future. During the pandemic, Trupanion was able to achieve Nirvana in six of its geographic territories in North America.

The company was also able to retain more customers compared to its historical levels. Customer retention is measured as the number of customers who do not cancel, or churn, over a 12-month period. The company reported it retained roughly 98% of customers at the end of the second quarter.

This shows that even during tough economic times, customers are still willing to pay for their pet's healthcare and are willing to refer Trupanion to their friends and family. These are great indicators of customer satisfaction and growing brand equity.

Long-term growth

The operating environment is still quite uncertain due to the ongoing COVID-19 pandemic. However, Trupanion's management team remains confident it will see double-digit growth for this fiscal year.

While the first half of 2020 was a good period for Trupanion to acquire new customers, the company will benefit from this customer growth for years as it collects the recurring health insurance premiums and retains customers at a high rate.

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Luis Sanchez CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Trupanion. The Motley Fool has a disclosure policy.


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