Business Context and Reporting Period
Trupanion, Inc. provides subscription-based medical insurance for cats and dogs in the United States, Canada and Puerto Rico. This Form 10-K covers the fiscal year ended December 31, 2015; fourth-quarter results are included where disclosed. The company operates subscription and other business segments and had 291,818 total enrolled pets, including 272,636 subscription pets, at year-end.
Financial and Operating Metrics
| Metric | FY 2015 | FY 2014 | Q4 2015 |
|---|---|---|---|
| Total revenue | $147.0 million | $115.9 million | $40.2 million |
| Subscription revenue | $133.4 million | $103.5 million | $36.7 million |
| Gross profit | $25.2 million | $19.9 million | $7.3 million |
| Gross margin | Approximately 17% | Approximately 17% | Approximately 18% |
| Operating loss | $(16.8) million | $(15.9) million | $(3.0) million |
| Net loss | $(17.2) million | $(21.2) million | $(3.0) million |
| Adjusted EBITDA | $(11.3) million | $(10.3) million | $(1.6) million |
| Cash flow from operations | $(10.4) million | $(10.8) million | Not separately disclosed |
- Subscription cost of revenue was $109.4 million, or 82% of subscription revenue. Consolidated claims expense was $103.3 million.
- Sales and marketing expense increased to $15.2 million; technology and development was $11.2 million; general and administrative expense was $15.6 million.
- Average monthly retention was 98.64%, monthly adjusted revenue per pet was $45.04, lifetime value per pet was $591 and average pet acquisition cost was $132.
- Cash and cash equivalents were $18.0 million and short-term investments were $25.3 million at year-end. Including long-term investments, total investments were approximately $27.7 million.
- The company had no outstanding debt at December 31, 2015 and had $18.4 million available under its revolving credit facility, subject to covenants and a $1.1 million letter of credit.
- Total assets were $70.9 million, total liabilities were $25.6 million and stockholders’ equity was $45.4 million. The accumulated deficit was $74.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 27% to $147.0 million, driven primarily by 27% growth in subscription pets enrolled and a 2% increase in adjusted revenue per pet.
- Subscription gross profit increased 31% to $24.0 million, while the subscription gross margin remained approximately 18%.
- Net loss improved from $21.2 million to $17.2 million, primarily reflecting substantially lower interest expense following debt repayment in 2014. The company remained loss-making on both a GAAP and adjusted EBITDA basis.
- Operating cash use was broadly stable at $10.4 million, but cash and cash equivalents declined by $35.1 million during 2015 due to operating losses, investment purchases, capital expenditures and debt repayment.
- Average pet acquisition cost increased from $121 to $132, while lifetime value per pet remained $591. The reported LVP-to-PAC relationship therefore weakened.
- The other business segment grew revenue 9% but gross profit declined 19% to $1.3 million, with gross margin falling from 12% to 9%.
- Prior-period segment data and metrics were recast to reflect the movement of certain enterprise-marketed pets from the subscription segment to the other business segment.
Outlook, Commentary, Risks and Unusual Items
- Management expects to continue investing in member acquisition, technology, member service, Territory Partners and infrastructure. The filing does not provide a clear quantitative revenue or profitability forecast.
- Management stated that existing cash, short-term investments and the available credit facility were expected to fund operations and statutory capital requirements for at least the next 12 months.
- APIC maintained $26.1 million of statutory capital and surplus against a $24.5 million requirement to remain at the highest risk-based-capital level. Continued enrollment growth may require additional capital.
- The claims reserve was $6.3 million at year-end, compared with $5.1 million in 2014. Actual claims costs may differ materially from estimates, and the company does not purchase third-party reinsurance for its retained risk.
- Approximately 21% of 2015 revenue was generated in Canada. Management estimated that a hypothetical 10% change in the Canadian dollar could affect annual revenue by approximately $3.0 million.
- The company entered into a Seattle lease with total obligations of approximately $21.0 million over an initial 10-year term. Total operating lease commitments were $21.5 million.
- The Washington State Office of the Insurance Commissioner issued examination findings concerning licensing matters. Trupanion had accrued $0.4 million, but adverse outcomes beyond the accrued amount were reasonably possible and the potential additional loss could not be estimated.
- The company remains exposed to insurance regulation, pricing approvals, claims frequency and severity, retention, competition, data security, technology disruptions, regulatory capital requirements and its continued dependence on veterinary referrals.
- Federal net operating loss carryforwards were approximately $63.5 million, but a full valuation allowance was recorded and future use may be limited by ownership-change rules.
Key Facts for Investors to Verify
- Whether subscription growth and retention remain strong enough to offset rising acquisition costs and continued operating losses.
- Whether claims ratios, pricing actions and regulatory approvals support sustainable improvement in subscription gross margins.
- The company’s ability to maintain APIC’s risk-based capital above required levels while funding growth.
- Cash burn, use of restricted insurance-company assets and the availability of the revolving credit facility under its financial covenants.
- The ultimate outcome and cost of the Washington insurance-regulatory matter and any other pending examinations or litigation.
- The performance and termination risk of the unaffiliated general-agent relationship, which generated 6.7% of 2015 revenue and carried lower margins than the core business.
- The effect of Canadian foreign-exchange movements and the company’s retained insurance risk on future earnings and liquidity.