Trupanion, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Trupanion provides medical insurance for cats and dogs in the United States, Canada, Puerto Rico and Australia. The company reports two segments: subscription business and other business, which includes policies written for third parties and software-related offerings. This filing covers the fiscal year ended December 31, 2020, including fourth-quarter results. The company had 862,928 total pets enrolled and 911 employees at year-end.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $502.0 million | $383.9 million | +31% |
| Subscription revenue | $387.7 million | $321.2 million | +21% |
| Other business revenue | $114.3 million | $62.8 million | +82% |
| Operating loss | $4.9 million | $1.9 million | Higher loss |
| Net loss | $5.8 million | $1.8 million | Higher loss |
| Net loss per share | $0.16 | $0.05 | Higher loss |
| Net cash from operations | $21.5 million | $16.2 million | +33% |
- Gross margin was approximately 16% on a consolidated basis, compared with approximately 17% in 2019. Subscription segment cost of revenue declined to 81% of subscription revenue from 82%; other business cost of revenue was 92% of segment revenue.
- Subscription pets increased 17% to 577,957. Monthly average revenue per pet increased 5% to $60.37, while average monthly retention improved to 98.71% from 98.58%.
- Lifetime value per pet, including fixed expenses, increased to $653 from $523. Average pet acquisition cost increased to $247 from $212, reflecting higher acquisition spending.
- Sales and marketing expense increased 35% to $47.8 million; reported net acquisition cost was $41.0 million. Stock-based compensation expense was $8.9 million, up from $6.8 million.
- Cash, cash equivalents and short-term investments totaled $229.7 million at year-end. Working capital was $186.6 million, and total assets were $498.3 million.
- The company had no debt at December 31, 2020 after terminating its revolving credit facility and repaying $32.5 million of debt during the year.
- Cash flow from investing activities was negative $76.7 million, principally reflecting the $48.3 million net cash acquisition of Aquarium Software Limited and $7.5 million of property and equipment purchases.
Material changes versus the prior comparable period
- Revenue growth accelerated in absolute dollars, with total revenue increasing $118.1 million. The other business segment grew faster than the subscription business and represented 23% of total revenue versus 16% in 2019.
- Veterinary invoice expense increased to $351.1 million from $270.9 million, driven by enrollment growth and higher veterinary care costs and utilization.
- Technology and development expense rose 42% to $9.9 million, general and administrative expense rose 19% to $21.8 million, and sales and marketing expense rose 35% to $47.8 million.
- The company raised $192.3 million of net proceeds through a private placement to Aflac of 3,636,364 shares at $55 per share. The shares are subject to a minimum three-year holding period.
- In October 2020, Trupanion acquired Aquarium Software Limited, a U.K.-based insurance software provider, for approximately $48.3 million. The transaction added $31.4 million of goodwill and $19.5 million of identifiable intangible assets on a preliminary basis.
- Fourth-quarter revenue was $142.7 million, up 35% from $105.5 million in the fourth quarter of 2019. Fourth-quarter net loss was $3.5 million compared with net income of $0.6 million in the prior-year quarter.
Guidance, outlook, risks and unusual items
- The filing does not provide a clear numerical full-year 2021 revenue or profitability guidance figure. Management states that existing liquidity is sufficient to fund operations and capital requirements for the next 12 months, while noting that additional financing may be pursued.
- Management reported that COVID-19 had not caused a material adverse impact through the filing date. Substantially all employees worked remotely, and the company modified cancellation practices and monitored enrollment, retention, veterinary invoice expense and partner impacts.
- Key operating risks include continued net losses, rising pet acquisition costs, retention and enrollment execution, pricing and reserve accuracy, competition, reliance on veterinarians and Territory Partners, technology and cybersecurity risks, and extensive insurance regulation.
- The reserve for veterinary invoices was $28.9 million at year-end. The reserve depends on actuarial assumptions regarding claim frequency, severity, timing and processing costs; actual liabilities may differ materially.
- American Pet Insurance Company had statutory capital and surplus of $93.2 million versus a $79.1 million level identified to avoid additional regulatory oversight. Four IRIS ratios were outside the usual range, although the filing states that this is not a failing result.
- The Canadian business requires a trust account that held CAD $5.8 million at year-end. Approximately 16% of total revenue was generated in Canada, creating foreign-exchange exposure.
- Legal and regulatory matters include inquiries concerning whether certain employees previously required insurance licenses. The company states that prior matters were resolved in non-material amounts and that it has adequately reserved for remaining matters.
- The company has approximately $157.8 million of U.S. federal net operating loss carryforwards, subject to expiration beginning in 2027 and potential limitations under Sections 382 and 383 of the Internal Revenue Code.
Most important facts for investors to verify
- Whether subscription growth and retention remain strong enough to offset rising pet acquisition costs and veterinary invoice expense.
- Whether Trupanion can achieve sustained profitability while continuing to invest in member acquisition, technology and international operations.
- The performance, integration costs and strategic benefits of the Aquarium acquisition and the expected benefits of the Aflac alliance.
- The adequacy of veterinary invoice reserves and the effect of increasing veterinary treatment utilization on future margins and liquidity.
- Regulatory capital requirements, restrictions on subsidiary dividends, Canadian trust obligations and the ability to fund future growth without dilution or additional debt.
- The concentration and margin profile of the other business segment, including reliance on unaffiliated general agents and one general agent contributing more than 10% of total revenue.
- The impact of COVID-19, foreign-exchange movements, cybersecurity events, regulatory changes and competitive pricing on future operating results.