The Business Model

Trupanion offers pet insurance, or as the company prefers to call it: “medical insurance for pets”. Funny enough, though it sounds obscure, this market is definitely a hot one, where Trupanion is battling it out against competitors that have almost half the market in their pocket. Though this company is still a scrappy upstart that’s really just half the size of their largest competitor, they’ve been growing faster than any player in the industry; and there’s plenty more room to grow since pet insurance hasn’t been widely adopted in North America (yet), with only an estimated 2% of pets insured by their owners.

Source: Trupanion’s 2017 Annual Report

But one has to wonder if Trupanion really is a pet insurance company at all, when they use terms like ‘subscription fees’, ‘members’, and ‘territory partners’. Are they really a Software-as-a-Service (“SaaS”) business? Their vocabulary is more akin to what you’d find when you’re reading the latest TechCrunch article than some stodgy insurance business. The answers to these questions fall under the category of “a little of this and a little of that.”

Pricing Risk Like Insurance Companies

Like any subscription service, Trupanion charges its members a monthly fee. But in return, they cover 90% of a pet owner’s vet bill, which sounds a lot like a straight insurance company. So which category do they truly fall under? Could the difference be found in how they make money? In that case, what would happen if every single pet became sick or injured? What this last question just uncovered is called ‘risk’ and at the macro-level, they manage their risk like any other insurance company—by spreading it.

Insurance companies make money by ‘pricing’ risk. This means that they have to assess the likelihood of something bad happening and group those levels of chance into categories. Insurance companies have lots of data on how often bad things happen and on the costs they incur when they do. These categories are then priced at a ‘cost plus’ model, where the insurance company takes an amount equivalent to their customer’s expected expenses, and adds a fixed amount to it as a take home for themselves. This is why analyzing such categories and other conditions (‘underwriting’) are integral to the business model. But if it’s simply a math game, and one where the insurance company is taking a profit margin on top of the cost, why do customers play at all?

Why We Gamble with Insurance

Whether you’re buying insurance for your home or insurance for a pet, we can’t deny that we’re being pushed a little by our ‘availability bias’. This is our tendency to extrapolate recent events, or what’s vividly memorable, and assume that it is more likely to occur than what’s actually the case. For example, if you have a friend who has been robbed, you’re more likely to buy renter’s insurance since you believe that the likelihood of you being robbed is higher than the actual base rate.

Traditional Insurance Motivators

Another reason why we buy traditional insurance is because we understand that in the event of an accident, paying for the resulting bills would notably disrupt our lives. It’s our chance at avoiding the scarcity trap, where we’re pushed onto a frantic treadmill trying to keep up with the bills from an accident we simply couldn’t factor into our plans.

Pet Insurance Motivators are Different

Pet insurance is a little different. If you’re a cat/dog owner, do you know how much it would cost to take care of your pet’s broken leg? Do you know how much it would cost to take care of three new teeth if they lost them in an alley brawl with other animals? Do you have the time to figure that out or the exact health of your pet at any given time? I’m not sure anyone does, or that any standard estimations are even readily available. At the end of the day, most pet owners couldn’t tell you how much a particular injury would cost for their pet or the likelihood of that injury occurring, let alone factor it into their budget. By paying for pet insurance, they’re essentially paying to rid themselves of this uncertainty. Our pets can be like family members to us. So as owners we want to know that, no matter what happens, we can afford to take care of our little guy in their hour of need.

How Trupanion Does It

Now that we know the fundamental customer-side difference between traditional life insurance and pet insurance, we can take a look at how Trupanion does it. In line with what was mentioned above, Trupanion first assesses ‘sub-categories’ for their pets, which is determined by factors including: breed, location, and past health (adorably classified as either being ‘lucky,’ ‘unlucky,’ or ‘average’). They then assess the average cost for treating particular injuries by different vets in different areas, which helps them justify charging ‘unlucky’ pets more than the ‘lucky’ ones. Ultimately the extra money coming from the lucky ones (since they’re hardly injured or sick), covers the costs for the unlucky ones.

If you want a more specific understanding (if not, you can skip this), Trupanion identifies the average cost of veterinary expenses for each sub-category and adds a 30% profit margin on top. Effectively, 70% of the revenues Trupanion collects from its member fees, goes towards paying for the medical costs of those pets that become injured or sick. This results in the following pricing model:

Source: Trupanion

A Focus on Pet Acquistion &
Lifetime Value of a Pet

Though everything up until this point has made Trupanion sound a lot more like an insurance company than a SaaS one, there are a few notable differences in their approach to growth than typical insurance companies. Typical insurance companies don’t just make money from the methods discussed above.

Since the money they receive often stays in their hands for a long period of time before they need to pay it out to ‘unlucky’ claimants (e.g. life insurance), they take that money (now considered ‘float’) and invest it into interest-generating assets, which are really friendly, revenue-wise, towards that long lag time. However, Trupanion pays out many small claims quickly, instead of a few large claims infrequently, so float isn’t much of a factor for them.

Instead, Trupanion’s CEO is primarily focused on the company’s Internal Rate of Return (“IRR”) per pet, which is his “anticipated return on spend on pets”. This has SaaS written all over it. In a SaaS business, you want to know your growth and customer profitability, so you calculate two metrics: Customer Acquisition Cost (“CAC”) and Customer Lifetime Value (“CLV”). Your CAC represents how much it costs to get someone to become your customer, which includes ALL marketing efforts—from websites to signage. Your CLV represents how much you make from a customer during the time of their being customers of your business. I.e. How much money are they going to spend with you until they hit cancel or stop shopping? In SaaS, we take this ratio to understand profitability, with a general thesis outlining that a lower CAC than CLV is good and that the reverse is bad. As you can tell, this makes a lot of sense with subscriptions and recurring revenue models.

This is why Trupanion is so interesting from a business perspective. They disclose surprising metrics like their PAC (Pet Acquisition Cost), LVP (Lifetime Value of a Pet), and other SaaS-like measures like ARPU (Average Revenue Per User/Unit). In 2017, Trupanion spent $18.4 million of their annual operating income to acquire 105,180 new pets, or a PAC of $152 per pet. Each pet has an average LVP of $727, resulting in a LVP/PAC of 4.8x and an IRR of 36% for the average pet. Not bad.

Trupanion’s North Star

Aside from the interesting mix of business metrics that undeniably work, what stood out to me was the CEO, Darryl Rawlings himself. This letter is a good example of high quality leadership in action.

Repeating Integrity

One of the tell-tale signs of a great leader is repetition. I’m not talking about the type of repetition that happens when your mother keeps telling you to get a real job (thanks mom). I’m talking about the type of repetition that exists when a founder or executive doesn’t even notice they’re repeating the same things over and over in different ways. The type of repetition that’s fed by interest, passion, and authenticity because that founder whole heartedly believes in the mantra that they keep repeating. In Wu-Tang terminology, this is called “gusto”. Darryl most definitely has the gusto, and will likely hate me if he reads this.

Darryl constantly references past letters that cleanly outline their model and beliefs; including excerpts from their 2014 letter, stating that “discounted cash flow is how [they] internally view [their] long-term strategic choices. It is purely mathematical and … if you keep the inputs of terminal growth rates and weighted average costs of capital constant, you can determine if your choices move the needle in the right direction”. He speaks prescriptively and assertively.

This also tells me that he knows his shareholders and he’s found the type of shareholders that directly align with his vision; to the point where he is unapologetically transparent. Don’t believe me? Read on…

A Transparent Focus on
Intrinsic vs Market Value

Darryl’s goal is to keep his company’s year over year (YoY) revenue growth rate to 20-30%. This means that every year, the company’s revenue is allowed to grow by up to 30%. But what about higher? Doesn’t Darryl want to build a rocket ship that blasts his team into outer space and back again for a few VC meetings? Nah. If you remember his mantra, he (and his business model) truly believe in steady intrinsic growth; which means the actual value of the business, not what the market thinks it is today.

…we believe our team (all of the employees) should not benefit or suffer from impacts [of changes to interest rates], and most importantly, we use past performance to model future results. This way we are measuring execution achieved versus execution modeled.

Darryl Rawlings, Ceo

Let me unpack the above quotation. If you’re measuring execution achieved, you’re looking at the hard results you’ve accomplished and adjusting efforts from that outlook. The goal in this scenario is to adhere to a pattern. Such a pattern (as long as it’s a pattern for growth) will indicate a business model that has a chance to kill it in the long-term because, just like a relationship, only fools rush in — because those same fools tend to rush out. Part 1: Identify the steady growth pattern for acquiring more customers. Part 2: Identify the steady growth pattern for making those customers increase in worth over time. He’s so blatantly transparent about this that though the 2017 results show that Trupanion achieved 29% growth (at the top end of the target range), Darryl tells us to disregard the 29% since their annual ARPU growth rate was higher than normal. He informs us that they had been undercharging certain sub-categories of pets in price and needed to increase the monthly fees for these pet owners. He goes on to tell us that this is significant since, combined with dilution from share based compensation, it brings their performance for revenue growth per share from the top of the range down to the bottom.

Traditional Sales Activities

Another interesting focus of Darryl’s is his love for traditional sales activities. He boasts of having many years of experience in call centres, and it’s obvious that this leader has an old school appreciation for genuine human connection. This appreciation manifests itself in his approach to phone conversations and site visits.

Phone Conversations

Darryl truly believes in the power of sales calls and often finds himself visiting their call room and sitting alongside sales reps while listening in to their scripts. I love his hands-on approach and relentless dedication to ensuring company (and service) values are delivered in the best way possible.

Territory Partner Visits

We ended 2017 with 107 Territory Partners visiting approximately 20,000 unique veterinary clinics. In total, we estimate that we made an additional 85,000 face-to-face visits during the year, and in aggregate have made over half a million such visits since we entered the US market in 2008.

Darryl Rawlings, ceo

Another tried-and-true traditional sales tactic is feet-on-the-street sales. Think about how political parties go “door knocking” to convert voters; this is where sales leaders get out there and perform site visits to prospects so we can convert them into customers. Again, I have to admire this guy for focusing on what’s important. His Territory Partner initiative is largely supported by these sales tactics.


Trupanion has grown from $56 million in annual revenue in 2012 to $243 million at the time of this letter (and to $304 million in 2018). The company’s success has come as a result of being steered by a passionate, focused, and dedicated CEO. Every piece of information, from assertive statements on what indicates success to unapologetic statements that rip apart their own mistakes, show that this is a CEO who believes in his North Star and in pushing that North Star for the team. He’s an executive that knows the importance of planning out their initiatives, knowing success indicators at the ground level, and not letting his ego pull him into metrics that might indicate success in another industry (but would conflict with his core model).

I believe that this shareholder letter is a fine example of unstoppable leadership in what I believe to be a very unlikely place: insurance.

North Star Performance22% Growth out of a 20-30% Growth Goal
Initiatives$18.4 Million towards Pet Acquisition Efforts
Activities• Territory Partners
• Call Center Conversations
• Veterinary Clinic Site Visits
• TruUniversity Training
• Automated Claims Processing
TransparentWith a focus on “steady state” growth, Trupanion’s CEO (Darryl Rawlings) would rather their shareholders know that a significantly lower % (22% instead of 29%) is more representative of their performance, given that one time price increases should be taken into account
Hands-OnHaving years of experience working in a call centre himself, Darryl naturally finds himself sitting next to calls at the office in order to stay in the know of sales efforts
Customer-FocusedDarryl clearly outlines and re-visits the company’s value propositions, with logical breakdowns of how their business solves each and every one of them

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