Darryl Rawlings (Trupanion): What is Trupanion doing to win the pet insurance market?

Tilman Versch [00:00:00] Hi, I’m Tilman from Good Investing, and I helped Rob with supporting his event with a live stream. Sadly, this video needs a bit of an introduction, because we had technical problems while streaming it. So the stream is a bit messed up. The audio is clear and crisp to hear. But sadly, the video isn’t really working. We have a kind of picture stream so you get an impression from the discussion, but no clear video. But the podcasts or the audio format is great. So please enjoy it.

Rob Vinall [00:00:32] Darryl.

DRDarryl Rawlings [00:00:35] Yes.

Rob Vinall [00:00:35] Welcome. So I actually invited you to come to the meeting in January of last year, and you very graciously agreed to come. And of course, we had to cancel. And then I invited you back again for January of this year. And you very graciously agreed to come. But we had to postpone. And so it’s third time lucky. And thank you so much for your persistence.

DRDarryl Rawlings [00:00:57] No problem. I’m excited to be here.

Rob Vinall [00:01:00] So one thing you have to know about the business owner investors is that they’re a tough bunch. So typically, when I meet with them, they want to hear about where I invested in. And a few years ago, there was a lady. And I explained to her that we’re invested in a pet insurance company. And she asked me a little bit about what pet insurance was. And she was looking kind of confused. And then she said, “Yeah, but why wouldn’t you just buy a new dog if it gets sick?” Now, I won’t say where she’s from, because it’d be very unfair to my South African friends.

Rob Vinall [00:01:45] But having said that, I should also say there’s a different reaction, which I also get sometimes as to people it’s completely clear why you have pet insurance. It’s not even a topic that if your dog was sick, they would spend a lot of money on it. But maybe you can start us off by saying, from your perspective, what is the problem you’re solving for people? What is the reason for pet insurance?

DRDarryl Rawlings [00:02:08] Well, for about half of humanity, we live with pets. And at least half of those people, so one in four people, the pet is a big part of the family. And for many people, maybe it’s not quite as high as their children’s, but it is very close. In some cases, it’s higher than their spouse.

We know that pets give us unconditional love. And it’s hard for humanity to give us unconditional love every day. I know that when I show up late from work and get home, my wife is often mad at me, but my dogs are happier to see me. So for that percentage of the world, it’s very, very difficult for people to budget if and when the pet becomes sick or injured, or how much that’s going to be.

The simple math of this equation is if I was to say a golden retriever, a common breed in the United States and if you came into a veterinarian, and you said, “I have a golden retriever. It’s a puppy. How much should I budget over their entire life?” First of all, it’d be very difficult for somebody to know the answer to that. Fortunately, we do. And I’m going to make up the number, and give you an example. Let’s say $10,000 is the average over the pet’s entire life that they’re going to need to spend on veterinary care. But the difficult part is it ranges between a lucky and unlucky one. And an unlucky one might be $60,000 and a lucky one might be $1000. And with such a wide variety, it’s very difficult for people to budget. So our goal is to make it easier for people to budget. We understand what it is. We put a small margin on top of it. And then regardless of where the pet lies and being lucky or unlucky, we’re there for them 24 hours a day, seven days a week for the life of the pet.

Rob Vinall [00:04:17] Just to give people a sense, how big can a vet bill become if a dog is really sick?

DRDarryl Rawlings [00:04:26] $30-40,000 is something that we pay daily. So, $5-10,000 is happening 1000s of times per day, and $50-60,000, happens more than people think. To run a veterinary hospital, the equipment that you need and everything you need is the same as you do for humans. The same equipment, the same costs. And yet, often people don’t know what the cost of human care is. But if a human being has had surgery and then needs to stay in the hospital for five or six days, that could be $100,000. And for a pet, veterinarians don’t charge as much as they need to, but for a pet, it could be $45,000.

Rob Vinall [00:05:34] Yes. And sadly, if people can’t afford those bills, then the dog is euthanized, right?

DRDarryl Rawlings [00:05:42] Yes. I mean, it’s too frequently that happens. And if you start to interchange your ‘pet’ with the word your ‘child’, it becomes pretty obvious why we’re solving a problem.

Rob Vinall [00:05:57] Yes. So going back a little bit. What I always love to hear when I have the opportunity to speak to entrepreneurs is the origin story. So where did the idea come from? How did you get started?

DRDarryl Rawlings [00:06:10] So, today I’m 52 years old. Born and raised in Vancouver, British Columbia. And when I was about their age over here, I went to a vet hospital on the weekend with my parents. We had our two-year-old dog. And our dog wasn’t feeling very good. So I went with my mother and father and our dog. We were waiting in the waiting room. The veterinarian came out to us and said, They had a mask on, like some of us in the room today. Kind of came up without their mask, and they said, “We know what’s wrong with your dog. The good news is we’re going to be able to solve it. It’s a pretty simple surgery. And it’s quite common. And your dog’s going to live another 12 or 14 years after.” And the veterinarian was very relieved. And what had happened is the dog’s stomach had twisted, which is quite common for the breed of dog that we had. It was a standard poodle. But my parents didn’t have the money. They said how much it was for the surgery. And my parents couldn’t afford it. So we left that day without our dog. And it was a horrible experience for everybody involved.

I’m a teenager, and I’ve just lost my buddy, my family friend. I saw the despair in the veterinarians and their staff who spent their entire life trying to be able to fix and help pets. And they were devastated. My parents didn’t only lose their own pet but they were deeply embarrassed that in front of their son, they weren’t able to budget and prepare for it. So it stuck with me. And roughly 14 years later, I started Trupanion.

Rob Vinall [00:08:12] What were some of the big milestones? How did you get started? What was the journey?

DRDarryl Rawlings [00:08:21] Well, I graduated college at a very early age. I graduated at 19 with a major in advanced technology marketing, which basically was like selling stuff with blinking lights. And I spent about four or five years of my life wearing suits, selling to the cellular industry in the early 90s. You don’t have time for the whole story. But eventually, I left that. And I decided that I wanted to do something bigger in my life.

I wanted to start Trupanion and I didn’t have the money to do it. So I used a $5,000 credit card and I started a cigar business. My dog was with me, Monty was with me every day at the cigar business, and reminding me, “Don’t forget to do Trupanion.” And I built and sold that business. Sold it for half a million dollars and then took that money and started the Trupanion about 23 years ago.

Rob Vinall [00:09:30] Yes, and the first policy you wrote was for Monty, right?

DRDarryl Rawlings [00:09:33] That’s right.

Rob Vinall [00:09:35] What were some of the biggest challenges? I mean, like, if you want to start a coffee shop or I know a car dealership or something like that, I can see a path there. But insurance sounds difficult and regulated. How on earth do you start that?

DRDarryl Rawlings [00:09:50] Well, it’s hard. I think being blindly naive helped. There were many people that said, “Listen, this is heavily regulated.” And I just said, “I don’t care.” I mean, there’s a problem to be solved, we should be able to fix it. The people that were in the market tried to do it. We’re doing it very well. And, I just asked a lot of people for help. And eventually, over a long period of time, and a lot of noise and a lot of rejections, people eventually said yes. There’s a gentleman named Ross Totten, who was a big help in getting things going in Canada. And his wife, Joan Totten loved her cats. And probably, if Joan Totten didn’t have those cats, I probably may have not worked out. But yes, just getting help from people.

Rob Vinall [00:11:00] Yes. And you mentioned, why is this something that nobody else has really done? I mean, I remember when we got our dog seven years ago, here in Switzerland. One of the first things my wife said to me was, “We should get insurance.” But the reality is, in Switzerland, there is no pet insurance. I mean, there are people willing to sell you a policy, but it’s not a policy that really works. Why was no one really addressing this?

DRDarryl Rawlings [00:11:25] Well, we’ll talk about the Switzerland problem maybe a little bit later. A gentleman was talking to me over here. He talked about Trupanion having a big opportunity. And an opportunity might be spelled by some people by saying, this is a way, a place to make money. And I never started the company to make money. I started the company to solve the problem. And if you solve a problem, well, it needs to be economically viable for it to be sustainable. If we’re going to be able to impact tens of millions of pets, which we will do, it needs to be economically viable. But it’s not the starting point. And most people that are in insurance, if they’re thinking about getting into this, are thinking about how to make money. And I just think it’s the wrong starting place. I mean, do we want to make money off of our children’s health? No. Not where I want to spend my day.

So I think it’s just the orientation. It makes a difference. I mean, we ring a bell when we pay a $10,000 invoice. We get excited because we know that, The bigger the invoice that we pay, the more excited we are that we know that we made an impact. So yes, I think it’s just a different point of view.

Rob Vinall [00:13:26] So you mentioned market opportunity. How big do you think the market is? And how much of that market over time do you think you can serve?

DRDarryl Rawlings [00:13:37] Which market are you talking about?

Rob Vinall [00:13:40] Pets, dogs, and cats in North America.

DRDarryl Rawlings [00:13:43] In North America?

Rob Vinall [00:13:43] Well, let’s start with North America, then we can talk about outside North America?

DRDarryl Rawlings [00:13:48] Well, there’s about 200 million cats and dogs in North America.

Rob Vinall [00:13:53] Against a population of around 300 million?

DRDarryl Rawlings [00:13:56] Yes. So about 300 million humans. About 200 million cats and dogs. About one in two households have a pet and the average household has 1.4 pets. So about 50 million there in Canada and the United States. And we will be increasing our addressable market by expanding, doubling that size at least to other places in the world. So I think our addressable market, I’m not saying we’ll get 100 million, but in the market so we’re addressing over time, 100 million pets.

Rob Vinall [00:14:43] Yes. What presumably not everyone is in the market for insurance? Sort of those pets, how many do you think, not necessarily with Trupanion, with one of your competitors, but how many do you think would over time get insurance?

DRDarryl Rawlings [00:15:01] 100 million. So yes, I mean if you look at it, Let’s just focus on North America. There are 200 million pets. As I opened up, it’s about one and four pet owners who really think about their pet as a part of their family. They’re sleeping on the beds or on the sofas with them. Their Christmas cards. They’re at that level? Maybe you had somebody that was from some country at some point that may have had a pet but thought of a more of as a farm animal that they’re replaceable. And then there are people that don’t have them at all. But yes, what one in four pet owners. Sorry, pet owners, one in four.

Rob Vinall [00:15:53] Yes. And just to give some context around that today, you’re at around 600,000 pets that you insure?

DRDarryl Rawlings [00:16:00] Yes, on Trupanion, that’s about 600,000. We have a little bit more with some other brands and stuff.

Rob Vinall [00:16:07] Yes, yes. So it’s a big market opportunity. I don’t think anyone doubts that. If there’s a question market around the unit economics of the business, maybe you can talk a little bit about how you see those.

DRDarryl Rawlings [00:16:21] So we understand what the average cost is. Let’s say it was $10,000 for a Golden Retriever. We add a margin on top of it. Our margin is about a 28% or 29% margin on top of it. So, we would charge, let’s make it easier and say 30% on top of it. So we would charge $13,000 over the pet’s life. And we would break that into monthly payments, and the pet owner would pay that over their life. It does adjust with inflation year after year. So it’s not a static number.

Rob Vinall [00:16:57] So, on average, 50 $60 a month would be the…

DRDarryl Rawlings [00:16:59] Today, we’re averaging about $65 a month. When I started the company, we were about $20 a month. So there is a lot of inflation in veterinary medicine. And with that margin, about half of it is used for us to be able to be there for the pet 24 hours a day, 7 days a week, including credit card processing fees, paying accountants, lawyers, and everything else we need to do it. And we end up with about a 15% margin. So with that 15% margin, I think it’s a good value proposition for the pet owner because they don’t know if their pet’s going to be average or not. So you’re basically paying a small premium to us, a 30% premium to have that benefit.

Rob Vinall [00:17:47] Certainty that under all circumstances you can pay for the cat.

DRDarryl Rawlings [00:17:50] Yes. So if I get a pet enrolled and I make $1,500 off of every pet I enroll. Those unit economics seem pretty good as long as it doesn’t cost me $1,500 to enroll. If I’m spending $300 to enroll a pet and I get $1,500 back over their life, think those unit economics are pretty simple.

Rob Vinall [00:18:15] So we have a large market opportunity. We have attractive unit economics that typically attracts competition. There are some very large successful insurance companies out there and I think of Geico, some of the large guys, some specialist players, how come they can’t eat your lunch?

DRDarryl Rawlings [00:18:42] It’s hard for me to say that somebody can’t do something in the future. But I mean, I’ve competed against now over 60 brands. And with people that had, companies that had not 100 times more our size but 10000s and 100,000 times more our size and money than we’ve had.

Rob Vinall [00:19:11] I think there was once a joint venture between Berkshire Hathaway and Nestle or some of that?

DRDarryl Rawlings [00:19:15] There’s been a lot. There have been some big companies.

Rob Vinall [00:19:19] To imagine a more powerful combination.

DRDarryl Rawlings [00:19:23] At the end of the day, this is all we do. We’re vertically integrated. We’re trying to be as efficient as we can. We’re trying to be the low-cost operator so that we can give as much back to the pet owner. Right now I told you, we’re targeting about a 28-29% margin. Our goal in the future is to target a 25% margin. And we’ll do that by eliminating more frictional costs. We’re gonna keep our 15% profit margin, but every dollar we save above that goes back to the pet owner. So kind of think of like a Costco model.

Rob Vinall [00:20:05] I was going to say that. It reminds me of another company in Seattle.

DRDarryl Rawlings [00:20:08] Yes. The other part that is interesting is we’re the only company that has people visiting veterinarians on a regular basis. They’re called territory partners for us, and they’re visiting a veterinarian on a regular basis, and if, let’s say, some other brand runs a Superbowl ad or a TV ad, and they get a pet enrolled. And then when that pet becomes sick or injured, they go to the veterinarian, and the pet owner has to pay out of pocket and fill out a bunch of paperwork, experience is difficult and hard. The likelihood of that person staying or telling their friends is low. Whereas we have relationships with veterinarians so that when a Trupanion pet walks into the door, that client is going to get as good of an experience as possible. And the reasons that a veterinarian likes and supports us are unique to us.

One is we have the highest value proposition. Number two is we’re covering the most that we can possibly cover. And number three, we are designed to be able to pay a hospital directly in under five minutes so the pet owner doesn’t need to be in a pocket. And our relationship with a veterinarian, we have now to date made over 2 million face-to-face visits to veterinarians. Geico hasn’t made any visits. They haven’t built those relationships. And if they were to start, I don’t think they have a compelling pitch. I don’t think they’re gonna say, “Oh, we’re willing to pay out 85 cents on the dollar.” The unit economics don’t work. The people that are dealing with our claims are not transportable. The same person doesn’t auto claim can’t, Everybody that does ours have worked in a vet hospital for three years. So what we have is unique, it’s not saying it can’t be copied, but it’s not easy to copy.

Rob Vinall [00:22:19] One of the things that have influenced me as an investor which I talked about in my letter this year, was the way, We investors are looking for competitive advantage and entry barriers when we look at companies and as many of you know, entry barriers and brands and network effects and that kind of stuff. And Trupanion for sure has a strong brand and other competitive advantages. What’s always impressed me is the attention you guys pay to just improving the business day after day after day. Maybe you can give some examples of that. I’m thinking maybe around conversion or installing the software. Take it where you want to go.

DRDarryl Rawlings [00:22:58] Yes. The best way to think about our business is that people pay us monthly, so they can cancel a month they want. So, we’re a monthly recurring revenue business. And literally, every month we start in the same place. How many pets we’re going to enroll this month? How many pets are going to get sick? How many invoices are we going to pay? How many pets are going to cancel? How many pets are we going to end up with at the end? And that retention rate for Trupanion, when we first went public in 2014 was about 98.5% per month. So about 98.5% of people kept it per month. And today, we’re about 98.7% per month. That incremental improvement from going from 98.5 to 98.7 has meant that our stream of cash flow that a pet stays with us has increased by over two and a half years. This means we can spend more money to acquire a pet. And the incremental effort it takes to have…

We already had the best retention rates in the world in our category. But it’s on every telephone call, it’s every time we communicate, it’s every time we pay a hospital directly. And it’s monitoring and managing in a very small way. So, incremental improvements.

Rob Vinall [00:24:46] And in a spreadsheet, a move from 98.5 to 98.7 from the perspective of an investor looks like a small rounding error. But that’s what you guys work on every day, right?

DRDarryl Rawlings [00:24:56] That’s right. Yes, it’s a difference between going from roughly 58 months to 80 months the average pet stays with us.

Rob Vinall [00:25:09] And then at the end of it, people say, “Oh, this is a great business, because look how sticky the customers are.” But the customers are sticky because you do a great job, not because of a brand or moto, whatever.

DRDarryl Rawlings [00:25:20] Yes. I mean, they stay with us because we have relationships with the veterinarians. They stay with us because we’re paying the veterinarians directly. The reason the veterinarians allowed that is because for years we’ve been visiting them and telling them why we offer value. I mean, so it’s not something…

I read your letter as well. Moats are not a decision. By definition of the moat, it’s very, very difficult to copy. To copy our moat would take somebody 15 years. I mean, it took us 22. So I mean, they could take our footprint, and say, “I’m gonna copy what they did.” But you can’t do it in a year. It’s not possible. I couldn’t do it during the year. I could maybe do, I could replicate what Trupanion has done probably in 15 years if I had to start from scratch.

Rob Vinall [00:26:21] So up until 2020, the focus of the business was primarily on Trupanion Pet Insurance North America. And then a year ago, you and your team published a 60-month plan with a number of much more ambitious goals outside of North America and in different markets. Maybe you could talk about some of those opportunities you see, the ones you’re most excited about?

DRDarryl Rawlings [00:26:49] Well, one of my jobs at the company is to make sure that I make it easier for the team to be successful. And if you’re reliant on one area, some people think that is going to drive better focus. But I would tell you that it also creates a lot less opportunity for new people in the company. And it creates a fair amount of stress. So in 2005, we were adding stores, adding vet hospitals recommending us. And I did not know how to increase same-store sales. I couldn’t figure out how to get them to recommend us more frequently. But I could get them to recommend us. And our average same-store sales was one new pet per vet hospital per month. I knew I could get that better, but I didn’t know how yet.

Rob Vinall [00:28:00] How many pets were typically registered? How many new puppies would come in a month typically?

DRDarryl Rawlings [00:28:05] To an average vet hospital, we would have about 30 opportunities. 30 new puppies and kittens. And we were getting one.

Rob Vinall [00:28:12] Yes, so 1 in 30.

DRDarryl Rawlings [00:28:14] So in 2005, I said, let’s make it easier for us. So we expanded from Canada to the United States. Canada had roughly 3000 vet hospitals and the US had another 23,000. So we didn’t have to learn a new trick. But it didn’t mean that I didn’t want to improve same-store sales. It meant that now we had two levers to grow from. And at any given time, maybe my new stores could slow down or we could have a hiccup or a challenge. But if my same-store sales were increasing, that would do.

So, I had two growth levers. And what we’ve done now with our 60-month plan is we’ve added about another five levers. And we’ve added it by adding some new products and channels. We’ve added it by adding new geographies. And that means for a company that is trying to, I’m trying to grow intrinsic value 20-25% every year.

Rob Vinall [00:29:28] Increase the value of the company by that much every year?

DRDarryl Rawlings [00:29:30] Yes, 20-25% per share every year, for the next decades. And we have done that consistently for the last two decades. And I don’t want to just do it for two decades. I want to do it for at least four or five decades. And I don’t want to do that for money. I want to do it because there are hundreds of millions of pets that we’re not helping. So for us to fulfill our mission, we need to get a lot bigger. And having those multiple levers means that you can hire and attract great people. And sometimes they can stumble and fall, and it’s okay. Everyone doesn’t need to be running perfectly at every moment. People will take a breath. They can get off the treadmill if they need to. Life happens, right? And so those new opportunities we have.

Rob Vinall [00:30:35] Which are the big ones? Which are the ones you’re most excited about?

DRDarryl Rawlings [00:30:39] Well, I mean, we can go in reverse order. We’re gonna double the size of our addressable market by going to Europe and Asia. So we’re going to go from 25,000 vet hospitals to 50,000 over a long period of time. Our goal by the end of 2025 is to add 10,000 hospitals to our addressable market.

We’ve added two new products, a low and a medium price product meant to be sold primarily online. It’s not something a veterinarian would ever want to recommend, because it doesn’t cover as much. But it does mean that when some customers are more price-sensitive, they could buy another product from us. We’re also looking at adding pet food as a potential product extension to help our pet owners budget care for their pets. So those are kind of the, And then we’ve got some distribution channels as well.

Rob Vinall [00:31:46] Yes, I think the pet food one is intriguing because you’ve run tests that if the pet is compliant with the food regime, then it leads to a healthier pet which can feed through into lower insurance prices.

DRDarryl Rawlings [00:31:58] Well, it’s more of a hypothesis right now. Have you guys read the book where that guy ate McDonald’s every day for two years or something, and he grew a third head and a leg fell off and a bunch of weird things. The theory is similar. If you were to eat the same processed food over and over and over again, there’s probably a better way. So we think that if you eat high-quality food with the right amount of calories, you can have a better health outcome. And most veterinarians would say, “Yes, that’s pretty obvious.” But there’s never been data to study it.

With monthly recurring revenue, monthly subscription food companies now and food being delivered to the house, now you’re able to know what pet is being fed. And if you know what they’re being fed, you’re going to be able to measure it. And if you’re able to measure it, and a pet that eats one type of quality food is 23% healthier than the average pet, then we could give them a 23% discount on our insurance. And giving a 23% discount on our insurance reinforces that you should buy that food because why would a crazy insurance company give you a discount unless it actually made your pet healthier? So we think the two of them are connected and that we could get veterinarians to help us share that message. And the light is on.

Rob Vinall [00:33:43] One final question, then I’ll turn over the microphone to the floor so they can ask their questions as well. You’ve said you plan to step down as CEO in 2025. So the primary operational head of the company will become chairman which is more of a super uninvolved position but more of a supervisory one. And in 2035, in long-term planning, you plan to step down as chairman. What is the rationale behind this plan?

DRDarryl Rawlings [00:34:18] Founder-led companies have a lot of benefits but they have a number of trappings. Well, first of all, a founder may not scale. I may not scale next year or the year after. So I’ve got a board and if I don’t, they’ll chop my head off and I’ll be gone. But it is very difficult often for other strong voices in a company to have an impact in a company if there is a founder that is around too long, with too strong of a voice.

Starting last year, I have rarely shown up to a management meeting. And last year, we created more intrinsic value per share than we’ve ever done in the company’s past. So, I mean, if I just look at the math, that says “Darryl Rawlings, don’t show up to work.”

Now, I think it’s important that the values that we have and the culture and some of the things remain instilled. I’ve got a very deliberate plan to make sure that. The team takes things and runs with them over a period of time. So I just think it is the healthiest and the best thing. To be able to attract the best talent, you have to give room. And I’ve been reminded recently, when people stay in power too long, what happens to them. We were all watching it, and it’s not healthy. I think it’s just the right thing to do.

Now, personally, I’ll give you another reason. That is really important to me as well. If Trupanion requires me to be successful, then I failed. Absolutely. 100% failed. You want your children to leave the house and carry on in their life and to do it on their own. And you want them to be better than you have ever been in your life. There’s no difference.

Rob Vinall [00:37:06] I’ve seen many times with founders that their ultimate dream is for the company to work without them being there for something that can outlive them.

DRDarryl Rawlings [00:37:14] Yes.

Rob Vinall [00:37:19] And if it runs into trouble, you can do like another one of your neighbors in Seattle, Howard Schultz, and make a comeback.

DRDarryl Rawlings [00:37:27] So my plan was first announced in 2014. In 2014, I said when we would be cash flow positive when we got to a certain stage. I said, when we would do a number of things, I said at that point, I’m committed to being CEO if I’m capable until 2025. And then I will remain on the board if interested until 2035. This is not something new. This is something that we’ve been talking about and planning for a long time. The last year was great to see the team that they did really well without me being super hands-on.

Rob Vinall [00:38:24] Yes, you have an incredible team. I’ve had the privilege to meet many of them. Really an exceptional bunch of people. Okay. With that, we have about 15 minutes left. So I want to give you guys also the opportunity to ask a question. My two daughters, Emily and Olivia have microphones. So just raise your hand and they’d be happy to pass you the microphone. And if you don’t mind stating briefly, your name and where you’re from, that would be great.

[00:38:55] Alex: Alex, from the north of Italy. Thank you for having me, Rob, and thank you for your presentation. I’m not a big specialist in your business, unfortunately. But I want to ask about the inflation aspect that you mentioned before. So it seems to me that if the prices of the premiums go up from $20 to $65, and the veteran cost is increasing on par, your benefit from reading in that your margin on the single is going up. It’s a larger amount of money. Isn’t there an intrinsic limit to this? So basically benefit from veterinary costs. But the pet ownership could become too expensive. So could that be a problem for you in the long term?

DRDarryl Rawlings [00:39:40] So, I’ve been hearing this question for over 20 years. The average rate of inflation for veterinary medicine is been 6% a year for us every year. Now in one region, it might be going up 12% a year and in another one, it might be going up 1%. But on a blended basis, it’s been going up about 6%. First of all, just as a reminder, currently 2% of pets are currently insured in North America. And we talked about an addressable market that we can get to 1 in 4, 25%. We are simply a Cost Plus model.

So imagine that veterinarians are charging so much that the affordability is so challenging. It is going to affect the 3 out of 4 pets who are not insured way before it’s going to affect somebody that has broken up into monthly budgeted ways. So, we pay for what a veterinarian charges. We don’t tell them what to charge. But it is the same amount for an insured versus a non-insured client. So, in your hypothetical model, let’s say that they put it up to 200% this year, 200% next year, 200% the year after, 200%, and at some point, they broke the back of it, it would break the backs of the non-insured before the insured client. And in fact, the more that veterinarians increase their costs when their costs are going up faster than people’s disposable and discretionary income, it is actually increasing the demand or need for our product. If we got to 1 in 4, right now we’re 2 out of 100, our biggest competitor is people self-insuring. It’s people saying I got this on my own.

[00:41:58] Yan: Hi and thank you for being here. My name is Yan, and I’m from Switzerland. And my question is, at the moment you’re currently spending almost all of the adjusted operating income on pet acquisition costs, pet acquisition spending. And that makes totally sense. Of course, as long as the internal rate of returns is high. But if you’re looking into the far further future, when you don’t find enough for a high internal rate of return and spending, what are the use of your adjusted operating income will look like? So what would you think? Is it like other insurances using the flow to invest or things like that?

DRDarryl Rawlings [00:42:38] I don’t know. I might want a 15% dividend. I mean, if we ever got to the point that we said we got to 10 million pets enrolled, and we decided, “You know what? I don’t want 10 million in one pet. I am confident that I could have a 10% profit margin.” And as an individual, I’m the single largest shareholder of the company. There are institutions that are bigger than I am. I wouldn’t mind a 15% dividend. Maybe after taxes, I’ll be able to pay, a 10% or 11% or 12% dividend. But we could do that.

You know, there are lots of things. I’m not sure I’m not going to be alive when that happens to be honest with you. I mean, literally, we have decades of the runway. We have veterinary hospitals where 25% of their pets are insured just with Trupanion today. And the way that that works is it’s not that we go out to every pet in the vet hospital. It’s what are all the new pets that come in, puppies and kittens that year, and 1 in 4 ends up enrolling with us. And then you do that for 14 years in a row, that one hospital is now fully penetrated. I mean, think of where we are today and how long that is going. I mean, that’s not going to happen 20 years from now. Maybe in 30, maybe in 40.

Now we are disciplined. So we try to be very disciplined in that. If we can’t acquire pets to get a 30-40% internal rate of return, I’m not spending the money. So we may grow slower and be more profitable. And that would be disappointing. But I’d be willing to do that. At the beginning of COVID, the first quarter of COVID, we pulled back our spending dramatically. And people were like, “Wow, look at profit. They’re so much more profitable now.” I was like,” Yeah, we didn’t enroll as many pets.” So as long as we’re getting the rates of return, we’ll continue to do it. If we can’t get the rates of return, then we can do dividends or do whatever else we want.

[00:45:18] Rafael: My name is Rafael. I’m a Brazilian based in Germany. My question to you is how can you protect the business from some greedy veterinarians that might feel motivated to recommend surgeries that are more beneficial to their pocket than really necessary for the pets?

DRDarryl Rawlings [00:45:40] So the question is how do we protect ourselves from unethical vets? The first part of my answer is I think the most important part, is very few veterinarians are unethical. The average veterinarian makes less than 25% of what a human doctor makes. A human doctor makes less than a dentist makes. It’s easier to get into dental school than it is to get into veterinary school. So if you’re starting from a place of greed, you are messing with people’s teeth, not their pets. So the filtering system solves it largely.

Now, it doesn’t mean that there are no crooked vets. There are a few. But at the end of the day, we price down to the neighborhood. We’re tracking the average cost at a vet hospital level. So in the event, that an individual vet hospital was acting unethical and the average cost went up, we would change that. The people they would be hurting are their clients on Trupanion at their hospital. And maybe they would end up canceling. Maybe they go to our competitor. Maybe they just stop doing pet insurance. But it ultimately wouldn’t hurt us because we’re a Cost Plus model. And there are a lot of steps in between that. We’re just trying to understand what the average cost is and put a small margin on top of it. And if we see somebody that’s being unethical, we can have a conversation with them.

Typically the first conversation solves it. I mean, in North America, a veterinarian could lose their license if they were part of the fraud. So there are a lot of mechanisms in it. But I mean, if you play out, one extreme, we would price for it, and maybe we’d have a lower penetration rate at that hospital. On the other end, veterinarians are good human beings and don’t happen very often. And in between, there are conversations and monitoring. With our software where we pay hospitals directly, we get access to the invoices of both insured versus non-insured clients. So we know what they’re charging for non-insured clients versus an insured client. So it’s very easy for us to have triggers and flags to tell us if there’s anything we need to look into.

Rob Vinall [00:48:56] So we have time for one final question. But Darryl is here the whole weekend. So feel free to continue the conversation with him during the breaks and dinner this evening.

JTJonathan Tana [00:49:06] Hi. Thanks so much, Jonathan Tana here from London. Thanks, Rob, again, for putting on this beautiful event in this beautiful city. It’s really great to have everybody together. And thanks, Darryl, for your insightful talk. I had a question regarding the penetration. I know there’s a huge TAM there. But in the UK, pet insurance is something like 25% penetration, even higher. I mean, they must love their pets more than people in the US. I’m not sure. I guess they have all these dog shows etc, etc.

DRDarryl Rawlings [00:49:37] Well, it’s not true. It’s about 20% of pets are insured in the UK. But the UK started doing this in 1970. In Sweden, it’s over 50%. And they’ve started over 100 years ago. So the biggest thing is really time and doing it well.

JTJonathan Tana [00:49:57] Yes. Also even in Australia, I think it’s 6% or 7%, or something like that. Yeah. So what are the KPIs of your management team to sort of getting that penetration higher? This is the first part of the question. And secondly, I’m just thinking about the competition. I know you’re unique in what you do in pet insurance in the US. But are there other competitors in separate channels? Like, there are a few of these wellness animal hospitals which sell these wellness plans? Maybe talk about that in terms of competing with separate channels? Thanks very much.

DRDarryl Rawlings [00:50:33] Yes. So the KPIs that we have at the company is long, and I’ll go over a bunch of them. But for over 15 years, my board members receive a daily metrics report of today about 42 daily KPIs. And it doesn’t just go to the board. It goes to every single employee in the company daily. So they include the number of leads or quotes we received in a day. Our conversion rate, our conversion rate on the phone versus the web, the number of active hospitals and same-store sales and the number of 30-day trials that were given, the number of claims that came in the day, how many were paid directly to the hospital, how many hospitals got our software, retention rates, first-year retention, ongoing retention. So there are many, many, many metrics.

Most of the penetration rates that we’re looking at it on a per hospital level. So you talked about 5%, 7%, and 27%. When we dig in, we’re tracking that down to a hospital level. Because that’s where we can affect most of the change. There are competitors both in North America and globally, that do some things a lot better than we do or things that we don’t even try to do. Sometimes because we don’t think it’s a great business model. Sometimes we don’t think it’s solving the problem that we don’t want. And other times we just haven’t got around to it yet. We’ve been busy growing 20+%.