Trupanion, Inc. 2021 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. It reports two segments: subscription business, primarily Trupanion-branded products, and other business, including policies written for third parties and software solutions. This filing covers the fiscal year ended December 31, 2021. The filing is an annual report, not a standalone quarterly filing; fourth-quarter data is included where relevant.
At December 31, 2021, total pets enrolled were 1,176,778, including 704,333 subscription pets. The company had 1,131 employees and 161 independent Territory Partner business owners and associates.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $699.0 million | $502.0 million | Up 39% |
| Subscription revenue | $494.9 million | $387.7 million | Up 28% |
| Other business revenue | $204.1 million | $114.3 million | Up 79% |
| Gross profit | $104.3 million | $81.9 million | Gross margin decreased to approximately 14.9% from 16.3% |
| Operating loss | $35.2 million | $4.9 million | Materially higher loss |
| Net loss | $35.5 million | $5.8 million | Net margin approximately negative 5.1% |
| Net loss per share | $0.89 | $0.16 | Basic and diluted |
| Cash flow from operations | $7.5 million | $21.5 million | Down 65% |
| Cash, cash equivalents and short-term investments | $213.4 million | Not clearly stated as a combined figure | Year-end liquidity |
| Debt | None reported | None reported at year-end | Credit facility terminated in 2020 |
Subscription cost of revenue was $407.7 million, or 82% of subscription revenue, compared with 81% in 2020. Total cost of revenue was $594.6 million, or approximately 85% of total revenue. Veterinary invoice expense was $486.1 million, including $356.4 million in the subscription segment.
Operating expenses were $139.4 million, including $78.6 million of new pet acquisition expense, $31.9 million of general and administrative expense, $16.9 million of technology and development expense, and $12.0 million of depreciation and amortization. Stock-based compensation increased to $28.2 million from $8.9 million.
Year-end total assets were $562.6 million, total liabilities were $230.4 million, and stockholders' equity was $332.2 million. The reserve for veterinary invoices was $39.7 million. Accounts receivable increased to $165.2 million, principally from the other business segment's annual policies with monthly payment terms. Working capital was $167.3 million.
Operating metrics and fourth quarter
- Subscription pets increased 22% year over year, from 577,957 to 704,333.
- Total pets enrolled increased 36%, from 862,928 to 1,176,778.
- Monthly average revenue per subscription pet increased 5% to $63.56 from $60.37.
- Average monthly retention improved slightly to 98.74% from 98.71%.
- Average pet acquisition cost increased 16% to $287 from $247. Fourth-quarter PAC was $306.
- Reported lifetime value of a pet, including fixed expenses, increased to $717 from $653.
- Fourth-quarter revenue was $194.4 million, up from $142.7 million in the fourth quarter of 2020.
- Fourth-quarter net loss was $7.0 million, compared with a $3.5 million loss in the fourth quarter of 2020.
Material changes versus the prior comparable period
- Revenue growth remained strong, but profitability deteriorated. The operating loss increased from $4.9 million to $35.2 million and the net loss increased from $5.8 million to $35.5 million.
- New pet acquisition expense increased 64% to $78.6 million, while average acquisition cost rose 16%. Subscription acquisition cost, a non-GAAP measure, was $69.0 million, or 13.9% of subscription revenue, versus 11.4% in 2020.
- Subscription veterinary invoice expense increased 28%, broadly in line with subscription revenue growth, while subscription variable expense increased as a percentage of revenue to 9.8% from 9.1%.
- Technology and development expense increased 70%, including $3.7 million of spending on pre-revenue initiatives. General and administrative expense increased 46%, driven by compensation, facilities, legal, tax and professional fees.
- Operating cash flow fell to $7.5 million from $21.5 million, primarily because of increased acquisition spending, faster claims payments and working-capital timing.
- Cash used in investing activities was $51.9 million, principally for investments supporting statutory capital and purchases of property, equipment and internally developed software.
- The 2021 results included substantially higher stock-based compensation and increased amortization related to the Aquarium Software acquisition completed in October 2020.
Liquidity, capital and regulatory position
Cash, cash equivalents and short-term investments totaled $213.4 million at December 31, 2021. Cash, cash equivalents and restricted cash declined by $45.3 million during the year. Management stated that existing liquidity and operating cash flow were sufficient for operations and capital requirements for the next 12 months, while noting that additional equity, equity-linked or debt financing could be considered.
Trupanion had no debt at year-end and had terminated its revolving credit facility in December 2020. Insurance subsidiaries restrict the movement of capital: APIC maintained $124.2 million of statutory capital and surplus against a $116.0 million required level. The company also maintained a Canadian trust account containing CAD $7.7 million and had $8.0 million of cash segregated in trust for veterinary invoice payments. The board authorized a share repurchase program through May 2026, but no shares had been repurchased as of year-end.
Outlook, management commentary, risks and unusual items
Management emphasized continued investment in member acquisition, retention, conversion, automated claims payment, veterinary relationships, technology, international expansion and additional products. The filing does not provide a clear numerical revenue or profitability guidance target for 2022.
- COVID-19 had not materially adversely affected the business through year-end, but future effects on enrollments, cancellations, veterinary utilization, staffing, partner activity and operating costs remained uncertain.
- Veterinary care inflation and utilization, claims reserves, and increased use of direct-pay software could pressure margins and liquidity. The reserve for veterinary invoices is actuarially estimated and was identified as the critical audit matter.
- The business has incurred significant cumulative losses; accumulated deficit was $126.9 million at year-end. Management may not sustain profitability or historical growth rates.
- Insurance regulation requires substantial statutory capital and can restrict pricing, product changes, dividends and the use of subsidiary cash. APIC had four IRIS ratios outside the usual range, although none was described as a failing result.
- The other business segment grew rapidly but had lower margins and dependence on third-party general agents. One general agent sourced policies representing more than 10% of total revenue, and general-agent premiums represented 27% of total revenue.
- Canada represented approximately 16% of revenue, creating foreign-exchange exposure. A hypothetical 10% change in the Canadian currency exchange rate would have affected 2021 revenue by approximately $11.3 million and net income or loss by approximately $7.1 million.
- Trupanion invested $7.0 million in preferred stock of Baystride, a pet food company, and had a $4.5 million outstanding loan balance to that entity at year-end. It also had an Australian joint-venture commitment of up to AUD $2.2 million, of which AUD $0.8 million had been contributed.
- The company has approximately $218.3 million of U.S. federal net operating loss carryforwards, which begin to expire in 2026, subject to potential ownership-change limitations.
- Management, the independent auditor and the filing reported effective internal control over financial reporting, with an unqualified audit opinion.
Investor verification checklist
- Reconcile consolidated cash and investments with amounts legally available outside regulated insurance subsidiaries and restricted trusts.
- Monitor veterinary invoice frequency, severity, reserve development and the subscription payout ratio, particularly as direct-pay software adoption increases.
- Assess whether acquisition-cost growth remains justified by retention, lifetime value, payback period and sustainable subscription margin.
- Separate subscription economics from the lower-margin other business segment and evaluate concentration in general-agent relationships.
- Verify APIC's statutory capital cushion, regulatory requirements, IRIS ratios and the capital needs of the newly formed ZPIC and QPIC subsidiaries.
- Review the effect of $28.2 million of stock-based compensation, outstanding unvested awards and future dilution.
- Track cash burn, operating cash flow and any future financing needs given continuing GAAP losses and planned growth investments.
- Review foreign-exchange exposure, Canadian trust requirements, litigation and regulatory matters, and the valuation and funding commitments related to Baystride and the Australian joint venture.