Trupanion presentation

~ Travis Wiedower

Two weeks ago I gave a presentation on Trupanion at the Value Investing Seminar in Italy. The presentation is brief for two reasons:

  1. I only had 20-minutes to present.
  2. I don’t like reading slides when presenting (kind of defeats the point of presenting), so most slides contain high-level thoughts that were explained more in-depth by me.

I wish I would have had 30-40 minutes to present. That way I could have done a deeper dive into the business. Nonetheless, I think some readers will get value out of it.  Click below to view the presentation.

TRUP Presentation – VIS 2018 – Travis Wiedower

13 thoughts on “Trupanion presentation”

    1. That short thesis isn’t different than the many other short write-ups that are around the Internet. The bears mostly focus on valuation and regulatory issues. On valuation, the argument is that an insurance company selling for 10x+ book value is overpriced no matter. I of course disagree. Most insurance companies aren’t growing 25% every single quarter with a runway that might be decades long. Also, a company is worth its future free cash flow discounted back to today and that’s it. By making what I believe to be reasonable assumptions about the next 5-10+ years, today’s price appears to be very fair (though not as undervalued as when I bought it).

      Likewise, I believe the regulatory issues are overblown. I think it’s important that Trupanion already went through investigations with the Washington and California state insurance regulators a couple years ago and Trupanion basically got a slap on the wrist. Also, Trupanion was approved long ago to sell insurance in all 50 states and they are very clear about their business model in their insurance filings. It’s not like the state insurance regulators don’t know how Trupanion sells their insurance. A few states have taken issue with their 30-day trial certificates, but no states that I’m aware of have made them change their territory partner model. To address your other comment, I did speak to a Texas state insurance regulator and he helped me to understand the regulatory risks and which ones may be overblown.

      Speaking higher level, Trupanion came into this industry with a business model that was/is very different than the incumbents. It’s extremely common for disruptive companies to have regulatory issues as they grow. Almost by definition, a company that does things differently than everyone else is inevitably going to run into industry resistance at some point. Despite being 20-years old, I believe Trupanion is much very an early-stage company. And companies that are growing fast with a unique business model are going to make mistakes and have some bumps along the way (e.g. the issues that Washington state found).

      Trupanion absolutely has risks (like all companies), but I disagree with the oft-touted bear case. A few things I worry about include the accuracy of their underwriting (some pet segments have been significantly underpriced), slowing growth as of late, Healthy Paws, the effect of a few states forcing them to change their 30-day trial certificates, and some regulatory issues (but more things that will affect the entire industry, not Trupanion-specific).

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      1. If you read the insurance regs in some states the rules are quite broad and vague. I don’t think regs get involved unless there is clear harm to consumers.

        I think there will always be some pricing issues in some breeds as the market grows. Nothing will be perfect.

        Also, bumps are to be expected. I have never seen a rapidly growing franchise not have their stock price sell off 50% to 60% along the way. Note WMT, AMZN (85%!), Apple, etc.

        I am not saying TRUP is in that league, but nothing will be perfect. The issue is the underlying competitive moats gaining strength.

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      2. Unfortunately, all of their competitors use third-party underwriters, so it’s much harder to find their pricing in the insurance filings. With that being said, I have found some filings that show pretty significant increases. Thus, the mispriced pet segments are not specific to Trupanion. I do agree with you that it will never be perfect – pricing will always have to be adjusted as more data comes in and the industry matures.

        Similar to what you said, one of my main takeaways from my conversation with the Texas insurance regulator is that insurance commissioners are focused on finding frauds and companies that are outright screwing consumers over. As long as a company is providing legitimate insurance and is adding value to consumers, the regulators aren’t going to do anything too detrimental. We discussed the possibility of territory partners having to get licensed and he didn’t think that was a big deal at all. His opinion was that even if Texas made that decision, they probably wouldn’t even fine Trupanion, and if they did, it wouldn’t be material. And getting 100 territory partners licensed would not be a big deal (hell, I could go get licensed in a month or two if I wanted to).

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  5. I read Rawlings’ 2017 Shareholder Letter, wherein he stated that “Since going public we have only raised equity once, on July 18, 2014 when we IPO’d. I believed at the time, and continue to believe today, that the shares were priced within +/- 20% of our intrinsic value.” He goes on to say that if the stock were trading below intrinsic value, they might repurchase shares.

    So, if Rawlings thought the stock’s intrinsic value was the same as the IPO price back in 2014 (i.e., $10), and if the stock’s intrinsic value has grown 25% per year since then, then the stock’s intrinsic value would be $25.92 today.

    Which makes what Trupanion did earlier this year (i.e., sell stock at $33.00 per share) a rational response to a stock that was trading significantly above its intrinsic value.

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    2. Nope. they were blowing up regulatory maximums and were completely out of cash to fund the back office. Through filings you can see where all the cash is in the subs, and credit line was 1 quarter away from being completely drawn down. As this company grows without earnings it will continue to come back to you for capital.

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    1. I disagree strongly with his valuation thoughts. I rarely put much value in comparing the valuations of different companies, even if they’re in the same industry. Every company has different ROICs, growth prospects, competitive positions, management teams, balance sheets, company culture, and a host of other things that make comparing valuations difficult. And with Pet’s Best, all we have is a high-level acquisition price and how many pets they insure – hardly enough info to go off. I actually wrote about my distaste for peer group valuation two years ago: https://traviswiedower.com/2017/01/31/peer-group-valuation-is-mostly-useless/

      Also, scale matters in this industry. All things being equal, a pet at a larger company is worth more than a pet at a smaller company (not in the literal lifetime value of a pet sense, just in the sense that the author was discussing).

      With all that being said, pet insurance does seem like a good complement to CareCredit’s current veterinary offering. The big question is how good CareCredit’s relationships are with the 20,000 vets they work with. Do they have the equivalent of a territory partner who maintains a relationship with vets on a regular basis? If CareCredit is able to get Pets Best into a lot of the vets that offer CareCredit, that could obviously be an issue for Trupanion. Overall, this seems like a negative for Trupanion, but jumping to the conclusion that this kills their business model seems a little hasty.

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