Trupanion's Q1 2018: Better Than Before But Still Too Expensive

Summary

• On first of May, Trupanion reported its results for the first quarter of 2018.
• The company showed a positive trend on revenues, which grew by more than 27%.
• However, the company remains unprofitable on the underwriting side, if I am confident on the margin improvement at the end of 2018.
• Nevertheless, I will not invest in Trupanion at the current price, considering that the market euphoria is too high.

Executive Summary

Trupanion (NASDAQ:TRUP) is an insurance company providing insurance coverage for pets. On 1^st of May, Trupanion published its results for the first quarter of 2018. As expected, Trupanion showed double-digit growth in its revenues; however, on the underwriting side, the company remained unprofitable. Nevertheless, the market appreciated the results and the stock price grew by more than 4% after the market close. From a personal opinion, I do not understand the market euphoria even if I have seen a positive trend and expect a positive underwriting result for 2018.

Increase In Revenues Is Not Equal To Profit Growth

Increasing the revenues does not mean growing its profit for a company.

For an insurer, this statement is even more exact, because it pays claims and the claims amount could be higher than the premiums it received.

In Q1 2018, Trupanion reported total revenues of $69.8 million or a 27% growth on a year-over-year basis.

Source: Trupanion’s Q1 Report

The company exceeded the high end of its guidance for the quarter, largely due to better-than-expected enrolled pet growth in the other business segment. For Q2 2018, Trupanion’s management expects quarterly revenue in the range of $72 million to $73 million, representing 24% year-over-year growth at the midpoint.

Regarding the commercial development, I cannot deny the fact that Trupanion is expanding rapidly and is succeeding to maintain a double-digit growth over the years. My problem is Trupanion is an insurance company, a pet insurer. It receives money to cover pet health costs. If the operational costs are higher than the overall premium amounts, then Trupanion loses money on the underwriting side. Unfortunately, it was still the case in Q1 2018. With a combined ratio of 102.1%, the company lost $2 per $100 the company received from its policyholders.

All Is Not Doom And Gloom

As reported by the company, the operating loss increased by 10.8% to $1.5 million. Meanwhile, the revenues increased by 27% to $69.8 million.

Source: Trupanion’s Q1 Report

In other words, the margins increased slightly on a year-over-year basis. The combined ratio improved by 40 bps to 102.1%. The margin enhancement was mainly driven by the drop in the expense ratio, which improved by almost two percentage points to 29%.

Source: Trupanion’s Quarterly Reports

The improvement in the loss ratio was mainly driven by the revenue growth and the slight decrease in the technology expenses. In my opinion, the IT costs should remain flat relatively, as most of the efforts to develop the IT tools have been made in the past. More generally, I guess that the fixed expenses will be lower, relatively speaking, over the next quarters.

However, the loss ratio worsened slightly to 73.1% (a 1.5 percentage point deterioration) offsetting the efforts made on the operating expenses partially.

Source: Trupanion’s Quarterly Reports

Crick, Don’t Be So Short-Term Oriented

When you invest in a stock, sometimes you have a long-term horizon. Then, you can be patient and wait for the catalysts which will show to the market the real value of the company. For Trupanion, people are bullish and expect a lot from the company. Trupanion’s management is smart enough to make waiting easier for the impatient investors by showing them some metrics: the revenue growth, the increase in the monthly revenue per pet, the excellent average monthly retention rate.

Source: Trupanion’s Q1 Report

I cannot deny the facts. However, I remain circumspect regarding the value of the company. After the quarterly result release, the stock price was volatile and went up and down to $27.98 per share. The market capitalization grew by around 4% to $839 million, whereas the company still loses money. With FY2018 revenue of $300 million and a likely drop in the fixed expenses, the company could be profitable at the end of 2018. In my opinion, the assumptions made by the management during the conference call regarding the level of revenues were prudent. I like that; however, I am still concerned about the margin level of the company. Trupanion is and remains an insurance company.

The business model could be disruptive, technology-oriented, whatever you call it the truth is the same: Trupanion is an insurer. To make money at the underwriting level, the premiums received from the policyholders should be higher than the operating and claims costs. For the moment, it is not the case, even if I am optimistic about the fact that Trupanion can deliver for 2018 a positive underwriting result.

Undoubtedly, a part of the readers will disagree with me and tell me “Crick', you are too short-term oriented.” Maybe I am. But I have one rule that I try to follow: “If you do not understand the business, the potential catalysts or where the hidden value is, do not invest.” When I have not followed this rule, I have lost money. Then, I follow this rule and stay away from Trupanion, until I do see a clear safety margin.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.