Trupanion, Inc. — Fiscal 2014 Form 10-K Summary
Business context and reporting period
Trupanion provides monthly medical-plan subscriptions for cats and dogs in the United States, Canada and Puerto Rico, supplemented by an “other business” segment that writes policies for third parties and a federal government program. The filing covers the fiscal year ended December 31, 2014, including fourth-quarter results. The company became publicly traded on the NYSE in July 2014 under the symbol TRUP.
- Subscription pets enrolled at year-end: 218,684; aggregate enrolled pets, including the other business segment: 232,426.
- Average monthly retention: 98.68%.
- The company had 413 employees at December 31, 2014.
Financial performance and key metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total revenue | $115.9 million | $83.8 million | 38% increase |
| Subscription revenue | $105.1 million | $76.8 million | 37% increase |
| Gross profit | $19.9 million | $15.6 million | 27% increase |
| Gross margin | 17% | 19% | Down 2 points |
| Operating loss | $(15.9) million | $(7.0) million | Loss increased |
| Net loss | $(21.2) million | $(8.2) million | Loss increased |
| Adjusted EBITDA | $(10.3) million | $(4.4) million | Loss increased |
| Cash used in operating activities | $(10.8) million | $(1.0) million | Higher use of cash |
Subscription gross profit was $18.7 million, or an 18% margin, compared with a 19% margin in 2013. Claims expenses were $79.9 million, representing 69% of consolidated revenue and 72% of subscription revenue. Total operating expenses were $35.8 million, including $11.6 million of sales and marketing, $9.9 million of technology and development, and $14.3 million of general and administrative expenses.
- Monthly adjusted revenue per pet increased to $44.27 from $42.57, primarily due to pricing increases.
- Lifetime value of a pet was $590, compared with $612 in 2013.
- Average pet acquisition cost increased to $119 from $103.
- Sales and marketing expenses were $11.6 million; the company generally targets a lifetime-value-to-acquisition-cost ratio of 5:1.
- Fourth-quarter 2014 revenue was $31.9 million, gross profit was $5.5 million and net loss was $(4.3) million.
Liquidity, capital resources and balance sheet
| Balance-sheet item | December 31, 2014 |
|---|---|
| Cash and cash equivalents | $53.1 million |
| Short-term investments | $22.4 million |
| Total assets | $98.3 million |
| Total liabilities | $39.0 million |
| Debt | $14.9 million |
| Stockholders’ equity | $59.3 million |
| Claims reserve | $5.1 million |
Trupanion received approximately $72.8 million of net IPO proceeds in July 2014. Financing activities provided $60.9 million during the year, while investing activities used $11.9 million. Management stated that existing cash, cash equivalents and short-term investments were sufficient to fund operations and statutory capital requirements for at least the following 12 months.
The company’s Square 1 Bank facility had $14.9 million outstanding, was secured by substantially all assets, bore interest at the greater of 5.0% or 1.5% plus prime, and matured in July 2016. Trupanion reported compliance with its financial and non-financial covenants at year-end. APIC, the insurance subsidiary, maintained $23.7 million of risk-based capital against a $22.6 million required amount, leaving limited excess capital relative to the regulatory threshold.
Material changes versus the prior comparable period
- Revenue increased 38%, led by 29% growth in subscription pets enrolled and a 4% increase in adjusted revenue per pet.
- Claims expenses grew faster than subscription revenue, increasing the subscription claims ratio from 70% to 72% and reducing subscription gross margin from 19% to 18%.
- Technology and development expense increased 103% to $9.9 million as the company expanded infrastructure and claims-processing technology.
- General and administrative expense increased 65% to $14.3 million, including IPO-related stock compensation, public-company readiness costs and regulatory expenses.
- Interest expense increased to $6.7 million, primarily because of debt discounts and costs associated with debt repayment and refinancing.
- Cash and investments increased substantially following the IPO, while debt declined from $26.1 million to $14.9 million.
- All outstanding convertible preferred stock converted into common stock in connection with the IPO. Warrant liabilities were reclassified to equity, producing a $1.6 million gain from warrant remeasurement.
Guidance, outlook, commentary and risks
Management did not provide specific numerical revenue or earnings guidance in the filing. It expects to continue investing significantly in member acquisition, technology, infrastructure, customer service and public-company compliance. Management also expects claims expense and cost of revenue as a percentage of revenue to remain elevated during 2015 because pricing increases are implemented on members’ annual renewal dates.
- Claims and pricing risk: Actual claim frequency, severity, veterinary-cost inflation or pricing assumptions may differ from estimates. Claims reserves are inherently uncertain, and the company does not transfer its insurance risk to third-party reinsurers.
- Regulatory capital: Growth may require additional statutory capital. APIC’s $23.7 million of risk-based capital only modestly exceeded the $22.6 million No Action Level requirement.
- Liquidity and losses: The company has incurred recurring losses and negative operating cash flow and expects negative operating cash flow to continue for the foreseeable future.
- Competition and acquisition costs: Larger insurers and new entrants may have greater financial, marketing and technology resources. Acquisition costs may rise or projected pet lifetime values may not materialize.
- Foreign exchange: Canada represented approximately 25% of 2014 revenue; foreign exchange movements reduced Canadian revenue by approximately $2.1 million year over year. A hypothetical 10% change in the Canadian dollar could have affected annual revenue by approximately $2.9 million.
- Legal and regulatory matters: APIC accrued $0.4 million for a California Department of Insurance matter and $0.2 million for a Washington State insurance regulator matter. The California matter was resolved in February 2015 for an aggregate payment of $0.4 million, while potential losses beyond the Washington accrual could not be estimated.
- Other contingencies: The company accrued $0.9 million for Canadian GST/HST obligations related to prior-period intercompany fees.
- Post-year-end change: Effective January 1, 2015, the company restructured its Canadian fronting and reinsurance arrangement and formed a Bermuda segregated account.
Most important facts for investors to verify
- Whether enrollment growth and high retention can offset rising claims costs and acquisition expenses.
- The adequacy of the $5.1 million claims reserve and the effect of future claims severity and frequency.
- APIC’s statutory capital relative to increasing risk-based capital requirements as enrollment expands.
- Compliance with the Square 1 credit facility’s revenue, EBITDA, cash-balance and insurance-capital covenants.
- The company’s path to positive adjusted EBITDA, operating cash flow and GAAP profitability.
- The status and financial impact of the Washington regulatory examination and any additional regulatory or licensing matters.
- The durability and economics of the unaffiliated general-agent business, which contributed $10.0 million of 2014 revenue but carries lower margins and can be terminated.
- The effect of Canadian currency movements and the January 2015 Canadian/Bermuda restructuring on future results.