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There Is Still Work To Do For Trupanion

Aug. 04, 2018 2:38 AM ETTrupanion, Inc. (TRUP)36 Comments


  • 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

This article was written by

The CrickAnt profile picture

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)

This pig is ready to fry, lets hope by friday my puts expire lolol
Rolling.BH profile picture
Shorting is not a good business. I heard about a lot of examples. I enjoy more appreciating the forest instead of looking at the trees.
blacky_ profile picture
this is too generic. I would not see why shorting, in every case, may be a bad idea. But of course it is risky and one needs to know what potential downsides are involved.
futyike profile picture
Are we sure that "pet insurance" laws and licensing regs are the same as "human insurance?" I don't know, but I think it's an important question.
Tyrann1 profile picture
it's amazing how little fundamental work the longs have actually done...

It's all regulated the same! By the state insurance commissioners. I know we (short sellers) have done this fundamental work. Have longs?!

TRUP has been allowed to exceed the permitted ratio of premiums to reserves in New York, I think they're north of 5x now which would indicate that although TRUP is essentially in violation of the ratio (and tons of other different rules, including having unlicensed agents paying compensation to vets, taking them on trips to Hawaii..plenty more too, TRUP violates tons of insurance rules on a daily basis), but the regulators don't seem to care as much. Presumably because it's pets and not humans and the pets can't complain like humans would. It's still pretty awful what they're up to and the house of cards eventually collapses. But, I'm skeptical until it gets really ridiculous - just denying claims left and right, or running out of money (a more dire and relevant situation here than goofball longs realize...you need cash flow and profits to maintain book value, to underwrite more premiums!) or something like that - the regulators will do anything. Regulators seem content to let TRUP break the rules until people get really pissed off. Which might just happen, given how rapidly TRUP is raising rates and was denying claims.

I will add, THIS is the reason they did the equity offering. Because they need cash. They hit the floor with the max premiums they can underwrite running on fumes of equity, and virtually nil reserved. And of course they're not profitable so they're not adding to equity except through raising it on the long suckers' backs. This is not going to end well.

But yes, this is regulated by precisely the same groups who regulate "human" insurance. It's not differentiated.

And my recommendation to the longs in general: do some actual financial analysis and research, and read up on insurance. Instead of just lapping up the CEOs absurd statements and annual letters. The questions and/or assumptions coming from longs are what I would assume you do in the first two hours investigating this company. Don't say you weren't warned when you lose 90% in this piece of crap.
blacky_ profile picture
stop whining tyrann1. this is a bit embarassing.
Tyrann1 profile picture
@blacky_ lol, "embarrassing". Yes, you got me.

Haha what's amazing is how the attitude of clueless long investors in TRUP is similar to fraud shorts I've been involved with. It's a blend of delusion, limited and/or awful work, defensiveness, worried about the shorts, absolute loyalty to the CEO or whatever executive is running the usually one-man show, and just being overall clueless about the financials overall. You guys are peas in a pod. wait until it starts to crack. then it will get really fun.
John Chew profile picture
Trup with insurance regulators in every state get "investigated" on a daily basis. What is the news? Probably noise.
John Chew profile picture
Added to shorts above $38--like shooting fish in a barrel--tomorrow lower. Same song, same dance.

CrickAnt needs to get short with the team.
Can you do a write-up on the short thesis? There's really no good one
Rolling.BH profile picture
TRUP is a relatively new company in a relatively young industry. It is still a rapidly growing niche business. I like it and am willing to take the risk. Actually it is only loss-making company stock that I am holding. I do not consider typical evaluation too much because there are no good ways at this stage. The founder has his own vision and strategies that are maybe right or maybe wrong. I chose to believe it is doable when I bought in. The revenue is still rapidly growing, which is an indicator I value at a early stage small company. The underwriting margins are still not positive yet. That is OK. A lot of well-run companies use this strategy to reach the scale economy. I am a share holder, and I am taking my risk. Let the flywheel going!
BrutalHonesty profile picture
Insurance companies don't try to grow into a valuation that is this extreme. They start with an underwriting profit, like GEICO, and suck up market share because they have some kind of advantage - with GEICO it was going directly to the consumer. Given the current market capitalization and current sales, even at enormous growth rates it is hard to figure out how many years it will take for TRUP to achieve profitability, if they ever do.
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.
Rolling.BH profile picture
Looking at the same facts, I see a lot of positive progressions. The management is excellent so far in my eyes. I am going to hold tight onto my shares.

I wish people still loan shares from me and pay me at a rate of 5.5%. They returned shares back to me a couple of weeks ago. I bet that is too expensive for them to short TRUP.
BrutalHonesty profile picture
Did you bother to do the google search on pet insurance? That is the simplest and easiest first due diligence any investor in this company should do.
BrutalHonesty profile picture
Insurance companies are usually valued on a price to book basis. This thing is at crazy levels and would have to achieve unusual underwriting profits and even then probably can't grow quickly enough to justify a value anywhere close to where the market is placing it today. Disclosure: I am short.
BrutalHonesty profile picture
Insurance companies are usually valued on a price to book basis. This thing is at crazy levels and would have to achieve extremely unusual underwriting profits and even then probably can't grow quickly enough to justify a value anywhere close to where the market is placing it today. Disclosure: I am short.
blacky_ profile picture
I am generally a fan of the company and long (average market price on purchase: ~20 USD per share). However the demonstrated growth rate does not give enough reason to stay positive, at least mid term. Believing in the regression to the mean I may decide to terminate my position or reduce it to take off presure from potential risks of market price reductions.
Charles Agbakwu profile picture
Its a dead short after the outside day today. Super bearish.
buddyrow4 profile picture
i agree
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