Trupanion: Further Growth Potential On Rising Pet Insurance Demand – Seeking Alpha

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Investment Thesis: Trupanion (NASDAQ:TRUP) could see further growth as a result of rising demand for pet insurance going forward.

Trupanion is a pet insurance company that has seen strong growth as a result of rising pet ownership – particularly during the COVID-19 pandemic.

When looking at revenue by quarter since 2010, we can see that there has been strong growth over this period:

Trupanion: Fourth Quarter and Full Year 2021 Results

The purpose of this article is to determine future growth potential for this stock going forward.

Recent Performance

When looking at price in isolation, we can see that while the stock saw a strong climb in 2020, there have been strong oscillations in price since then as the stock has traded between a range of $80-150.

On the one hand, pet ownership has climbed significantly during the pandemic. For instance, pet ownership climbed from 67% of households to an unprecedented high of 70% in 2020 according to the American Pet Products Association. Compared to the ownership rate of 56% in 1988, long-term growth has been quite significant. This, in turn, has led to an increase in demand for pet insurance as owners seek to guard against accidents or other health issues for their pets.

However, as the effects of the pandemic start to fade and mobility returns to pre-pandemic levels – it is reasonable to question whether the growth in pet ownership could be reaching a saturation point.

While it is reasonable to assume that growth across any market will eventually hit a ceiling, we can see that growth by total pets enrolled for Trupanion continued to see strong growth even up till the end of 2021 – when COVID-19 restrictions had lessened in severity.

Trupanion: Fourth Quarter and Full Year 2021 Results

From the above, quarterly growth for pets enrolled from March to June 2020 was 8.33%, while growth was 6.56% from September to December 2021. In addition, the average monthly retention had climbed slightly while the monthly average revenue per pet had climbed from $58.96 at the beginning of the period to $63.89 at the end of the period.

According to the North American Pet Health Insurance Association, dogs accounted for 83% of gross written premiums in 2020, while they account for 69% of all U.S. households that own a pet.

American Pet Products Association’s 2021-2022 National Pet Owners Survey

That said, given the costs of running a subscription business model, cost of revenue has also increased significantly alongside actual revenue growth in the past year:

Trupanion: Fourth Quarter and Full Year 2021 Results

From a balance sheet standpoint, we see that cash and cash equivalents have shown a significant drop while current liabilities have concurrently risen:

Trupanion: Fourth Quarter and Full Year 2021 Results

Looking Forward

With macroeconomic concerns revolving around the potential impacts of inflation going forward, this might be one risk factor that could result in lower pet demand under the worst-case scenario. The cost of keeping a pet is significant, and if households are forced to be more economical as a result of higher prices, then pet ownership might become less appealing.

With that being said, even as inflation rates climbed to over 5% by mid-2021, growth in the company’s subscription business did not particularly show signs of slowing. In this regard, while higher inflation could be a concern – demand for pet insurance is unlikely to see a steep fall.

In addition, owning a pet without insurance can prove to be quite costly when it comes to emergency veterinary bills – which in turn outweighs the costs of taking out pet insurance. For this reason, insurance will continue to remain an attractive option for pet owners who wish to guard against this.

With that said, as demand for pet insurance has risen, so has competition in the pet insurance industry. Trupanion is ranked one of the ten best pet insurance companies in February 2022 by money.com. That said, the company is cited as having high premium rates relative to competitors. Of course, this is somewhat of a blanket statement and depends on the policy being offered in the first instance. However, it is a risk factor that greater competition in the industry could place pressure on such premium rates and hinder revenue growth going forward.

Conclusion

The pet insurance market remains strong and I take the view that Trupanion could see further growth from here. However, inflation and increasing competition in the pet insurance market remain risk factors.