There Is Still Work To Do For Trupanion
Summary
- On the 2nd of August, Trupanion, a pet insurer, reported a quarterly loss of $0.4 million.
- Losing money for many years, Trupanion continues to improve its margins over the quarters.
- Nevertheless, the company could continue to burn cash, thanks to the new stock issuance.
- Even if I see green lights, I stay away from the stock, considering that the euphoria of the investors is too massive.
Executive Summary
Trupanion (NASDAQ:TRUP) is an insurance company providing insurance coverage for pets. In Q2, the company reported a quarterly loss of $0.4 million. Between the first and the second quarter of 2018, Trupanion successfully issued news stocks for a total amount of about $69 million. Full of cash, Trupanion has now more time to reach its long-term targets. Nevertheless, I stay away from the stock, even if I love the niche market in which the insurer is present.
The Impossible Equation Of Trupanion
One of the marketing arguments to urge the investors to wait for better results is the moat construction. By acquiring new pets, Trupanion plans to reach the critical mass to be able to deliver a positive underwriting return on a long-term horizon. To achieve this target, the company has to sacrifice its profitability on a short-term view.
I could understand that point. But there are two problems; for many years, the pet insurer has focused its strategy on developing its insurance portfolio, and the underwriting margins are still negative. Secondly, the insurer is only present in the pet insurance market. Unlike other insurers, Trupanion is not able to cover the losses from the pet insurance activities thanks to higher margins in another market.
Reduced Losses Driven By The Margin Enhancement
In Q2 2018, the underwriting loss was down by 56% to $0.3 million from Q2 2017. The reduction in the underwriting loss was related to the improvement in the combined ratio, which dropped by 0.6 percentage point to 100.4%. The enhancement of the combined ratio was mainly due to the expense ratio reduction, which improved by 1.6 percentage points to 29.0%.
Source: Trupanion’s Quarterly Reports
On a year-to-date basis, the combined ratio was still above 100% at 101.2% but improved by 0.5 percentage points thanks to the reduction in the expense ratio partially offset by a deteriorated loss ratio.
Source: Trupanion’s Quarterly Reports
The improvement in the expense ratio was mainly driven by the revenue growth partially offset by the increase in the fixed and marketing expenses. Nevertheless, the efforts made on the operating costs were not sufficient to offset the deterioration in the loss ratio, which worsened by 0.7 percentage point in Q2.
Source: Trupanion’s Quarterly Reports
I do understand that it is challenging for an insurer to steer the claims costs accurately. I do comprehend as well that Trupanion is focused on the portfolio growth. Nonetheless, the investors should keep in mind that Trupanion is an insurance company. Hence, the claims and operating costs could be higher than the received premiums.
In my opinion, even if the efforts have been made during the beginning of 2018, it will be challenging for the company to reach the targets I have set up previously. As a reminder, in a prior article, I tried to figure out the underwriting gain level by the end of 2018. Under my worst-case scenario, with a combined ratio of 99.8%, the pre-tax underwriting profit would amount to $0.6 million for the FY2018.
Source: Internal
Even if the revenues growth planned for 2018 seems to be above my estimations, the underwriting margin is still negative.
Crick’ Give Trupanion More Time
The long-term shareholders of the pet insurer could blame me by arguing that I am a short-term oriented guy. I might be, to tell you the truth; however, Trupanion remains an unprofitable company since many years, and I do not like the strategy of the company's management to talk about free cash flow metric whereas Trupanion is and remains a non-life/health insurance company.
However, Trupanion will not die soon. With the new stock issuance, Trupanion is now full of cash.
Source: Trupanion’s Q2 Report
With a net cash position of more than $79 million, Trupanion will be alive for several years, especially if the margin improves in the future.
Even if the purchase of the home office building amounted to $60 million, it would mean that the pet insurer would have still $19 million in cash. Then, the insurer would have plenty of time to improve its margins. In my view, this stock issuance is a double-edged sword. In one hand, Trupanion has gained time to continue making growing its portfolio. On the other hand, the insurer will not be encouraged to reduce its costs, as the cash will be there to offset the losses.
Takeaways
Even if the company is present in a niche market, I do not currently invest in the stock. As I mentioned previously, I prefer waiting to see a positive trend on the margins, with a year-to-date combined ratio below 100%. It is not the case currently, even if Trupanion has made efforts to reduce the level of its expenses and has maintained its commercial development.
This article was written by
I am a mid-30-ish-old man working as an actuary for an insurance company. Hence, I started to analyze insurance and reinsurance companies, primarily in non-life insurance markets. I invest in the USA, Canada, Scandinavia, France, and the UK.
Certainly, one of the rarest Frenchies in Seeking Alpha.
I am currently contributing articles to Darren McCammon's service Cash Flow Club, the investment community where your "Cash Flow is King"
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (36)
For tech companies and other similar businesses I can see the idea of growing into a valuation and really only if you have some kind of moat like a first mover advantage that brings benefits or network effects. Trupanion has no advantage and will always be price constrained by competing pet insurance companies. Do a quick google search as if you were a pet owner looking to purchase pet insurance. What do you find? Trupanion doesn't look like it is rated even in the top few. How will they ever be able to charge enough margin on their revenue to make the company worth over $1 billion? And if you think they can reach earnings in the $50 million - $100 million range to support such a valuation, when could that happen? If you can't answer that, you shouldn't own it.
