Trupanion (NASDAQ:TRUP) is one of the largest medical insurance providers for cats and dogs with over 400,000 pets enrolled. However, that represents only a small portion of the over 150 million cats and dogs kept as pets in the U.S. -- a massive market opportunity that could spell years of growth for the 17 year-old company.
In this interview, Tom Gardner and Andy Cross sit down with Trupanion founder and CEO Darryl Rawlings and board member Dan Levitan to learn more about the story behind this Foolish, fast-growing business.
A full transcript follows the video.
This interview was originally recorded on Oct. 31, 2017.
Tom Gardner: Well, I think we have about an hour together, which is really great. If anybody should drop off before then it's totally understood, but anyone can jump in anytime. This is more of a conversation than anything else.
I'll just kick it off with some sort of formal-sounding beginning. Andy Cross and I are joined by Darryl Rawlings and a board member of Trupanion, Dan Levitan, who also was an investor in The Motley Fool going back from the late 1990s forward about a dozen years, so it's great to be able to talk to you both and have a conversation about Trupanion.
Darryl, we were talking offline about the founding of Trupanion. Maybe you could just give us a little picture of what you were doing right before you started the company and what the catalyst was for starting the company.
Darryl Rawlings: Well, let me answer the catalyst and then I'll go in order. At about 13 or 14 years of age, I was with my parents and our two-year-old dog, Mitzi, who was not feeling well. We went to Westport in Vancouver where there is a specialty veterinarian hospital. The vet took a look at our dog, came out to the waiting room, and said, "We know what's wrong with your dog. It's pretty common. I can fix your dog. He'll live another 10, 12, or 14 years but we need to do the surgery. We need to do it pretty quickly."
The dog's stomach had twisted and my parents didn't have the money. It was a horrible outcome for everybody. We left without our dog. The veterinarian wasn't able to do what [he was] trained to do. My parents not only lost their dog and part of their family, but it was embarrassing and difficult that they weren't able to budget for this.
It stuck with me. Fast forward about 10 years later. I wanted to start a business. I wanted to start Trupanion. I had no money. The only thing I [had] was a credit card I found in my mailbox with a $5,000 limit, so I took that credit card and started a cigar business. I had my dog, Monty, [with me every day] building that business. He was named after Montecristo cigars. I built that business for a few years and then sold that for about $500,000. That was in 1998. I took my proceeds from that and started Trupanion and issued our first policy to my dog Monty in 2000.
Gardner: And just for anyone who hasn't read our buy report -- and I presume you all know or I hope you all know -- we selected you in our Rising Stars solution that represents the 40 smaller-cap companies that we love the most. They're all U.S.-domiciled companies [except for] maybe one or two outside the U.S. There are a lot of things we love about Trupanion and so we're excited to learn more about it. But for somebody who hasn't read that report from us, can you just break down how the business works?
Rawlings: If you start at a high level, I've been trying to solve the problem that my parents faced, which was it's really difficult for pet owners to be able to budget for the unexpected costs of when and if their pet becomes sick or injured. It's complicated. How much money would you put aside? It's even more complicated when you think about all the different breeds and when you think about all the different costs of veterinary care in one city versus the other.
So our product is pretty simple. We pay 90% of a veterinary invoice if a pet becomes sick or injured after they get Trupanion. It's lifelong coverage. We hope to get pets enrolled as puppies and they stay with us for the life of the pet. And the underlying economic value is we understand what the cost is. I'll use an example. [For] the average cost of a Golden Retriever we add 30 points on top of that and that's what we charge to the pet owner.
The reason a pet owner would want to pay the surcharge and, say, a 30% hedge is a pet owner doesn't know if their pet is going to be average or not. You could have an unlucky Golden Retriever or a lucky one. Even if they end up with an average one, over their pet's entire life they don't know about timing. You could have all the problems in the first month that you own the pet and have no problems for the rest of its life or it could all end up in the last month. So we're just trying to solve that uncertainty and our product is designed to share that risk fairly among pet owners.
When I started, the company we had four different price subcategories, but over time we learned that Toronto was more expensive than Winnipeg. We wanted to have the same value proposition so we've done that, now, by over 1.2 million subcategories. We're pricing down to zip code levels every type of breed so that the pet owner makes sure that they have the right coverage and they're being charged a fair price.
Gardner: Dan, when did when Maveron get involved with Trupanion and why?
Dan Levitan: Well, basically Maveron discovered Trupanion in 2006. I took a trip to a place called Bowen Island outside of Vancouver and met the nine-person Trupanion team at the time. It was a super small company. They had 5,000 pets that they insured at the time. And one of the people I talked to was a guy named David Rawlings. I said, "You've got the same name as the CEO. What's your relation?" He said, "I'm Darryl's dad. " I said, "Oh, that's interesting. Tell me about Darryl." And the first word out of Darryl's dad's mouth was Darryl has always wanted to build a pet insurance company.
One of the things that Maveron looks for as a private investor [is] great people. And [finding] great people in great businesses before they're discovered is an advantage to the CEO who, for some reason, is not going to fail and is just motivated to do something. We found that out in 2006. We ended up leading Darryl's Series A round in 2007 and we've had the pleasure of being both on the board and a shareholder for the last decade.
Gardner: And obviously, Dan, I know how close you and Howard Schultz are (the founder of Starbucks). My memory is a little fuzzy, but I remember Howard's story about his father and a health insurance issue [with his dad] that I think arose in his childhood. Or maybe it was something along the lines of a financial issue that came up.
Levitan: You have the story right. His father got hurt delivering something. [Howard] came home and saw his father laid up with no insurance and that was an incredible motivator for [Howard].
I think one of the things that having had the privilege of being involved with the Starbucks IPO in 1992, and being involved there somewhat in the last 25 years, [is] we look for common themes in these businesses. Great leaders who can grow and scale over time, large markets that are particularly conducive to building large businesses, a highly differentiated product, and an approach to a market and an authenticity to deliver that product.
And as I think of my career, whether or not it's Starbucks in 1992, or in 1999 two wacky guys named Tom and David Gardner in a business called The Motley Fool, or Darryl Rawlings in a business called Trupanion in 2007; there's a certain similarity to the leaders, and to the willingness to take a differentiated approach on what the product and service is, and a core value proposition of being authentic to the end user/consumer.
Andy Cross: Dan, that's fantastic. This is Andy Cross. I work with Tom on Motley Fool ONE, the Rising Stars portfolios, and our Discovery portfolios. I'd like to dig a little deeper into the differentiating factor that you mentioned in your list at the end. When I think about Trupanion and the business model they're building -- the way you go about providing insurance and solutions to your customers (if you call them customers) or to your clients' customers in a different way -- I'd like Darryl to talk a little bit about the importance of trying to do things a little bit differently.
I've really been impressed. I hope anyone who listens to us has a chance to go read Darryl's shareholder letters, because they're really inspiring when you think about communicating to a shareholder base. They're written in a different way. Darryl, I wanted to ask you to talk a little about how important being unique and differentiating, especially in the insurance space, is for you.
Rawlings: I think the outcome is we think very differently, but not for the sake of being different. We're just trying to solve the problem and that's forced us to think differently. For example, most of our previous competitors would be trying to figure out how to control costs. To sell something for a certain price point and then working backwards from there. We flipped that on [its] head and said that if we have the best underlying value proposition, price is not an issue. Let's cover what the pet owner needs covered.
That meant that over the last 17 years we've had to learn specific data: the difference between a Golden Retriever and a Shih Tzu, and the difference between the local cost of veterinary care in Manhattan versus Albany versus Boise, Idaho. We also don't think a reimbursement model is any way for this category to grow, so we want to pay hospitals directly before the pet owner picks up their pet. There's a whole bunch of things we do [in] trying to solve the problem for the pet owner which is counterintuitive to most people in the insurance business. We rejoice [when] paying invoices because we know when pet owners have an unlucky pet, they become our biggest spokesperson.
And at the core of who we are, it's about [enabling] the veterinarians [to provide] the level of care that they want and are trained to do, and that the pet owners are aligned with the veterinarian and that cost is removed from that barrier. We're the only company with a national sales force calling on veterinarians. We've made over 500,000 face-to-face visits since we entered the U.S. market in 2008. A lot of these things differentiate us, but we've done it with the purpose of trying to solve the problem for the pet owner and for the veterinarian.
Gardner: Darryl, you have 10 chips to place, let's say, in a marketing message. You can place those chips on communicating to a pet owner about the importance of having insurance because they love their pet. That's one. And the second place you can place chips is you're communicating with the pet owner about the importance of a smart financial decision [when] having insurance given the costs of veterinary care. Where do you place the emphasis? What are pet owners telling you matters to them as they make this decision?
Rawlings: Let's talk about the size of the market. There's about 176 million cats and dogs in North America. Currently 1% to 2% of them have some form of medical insurance. But when a veterinarian recommends it to their clients, and particularly to people with a new puppy, new kitten, or a new five-year-old they just adopted from a shelter; one out of four people enroll.
The market is responsible, loving pet owners. We don't have to tell pet owners to love their pet anymore. We're just saying that we have an authentic solution that is going to make it easier for you to be a pet owner. And that's the message. The message is reinforced by veterinarians saying, "To be a good, responsible pet owner feed your dog good food, make sure you walk them, do regular, routine wellness (vaccinations, flea control), and you need to have a solution when and if your pet becomes sick or injured."
Our product is not something that happens infrequently. It's not infrequently used. Close to 15% of our clients have an invoice every single month. Pets become sick. They become injured. Pets are aging seven times faster than humans. A lot of us have children. I've got two boys 10 and 12. Can you imagine not having to go see the doctor for 10 years? Well, that's a year and a half in a pet's life.
So the message is saying we're just making it easier for you to take care of your pet. We're making it easier for you to budget for them. Listen to your veterinarian and we'll take care of everything else. The veterinarian is a key part of our message. Over 60% of all our pets are referred by veterinarians. When we enter a new market, that number is closer to 90% and then over time it is our existing clients that are having good experiences that tell their friends which is our second biggest lead.
Cross: Darryl, a quick story. My sister-in-law is a veterinarian. When I asked her about Trupanion, she instantly raved about it. She and my brother have five pets (dogs, cats, and all kinds of things). She said she had switched pet insurance companies four or five times before she found Trupanion. She said now she's hooked for life. It's just the best solution out there, so kudos there.
The follow-up question I wanted to [ask] is something you wrote about in your 2016 annual letter under the heading "2016 Learnings". [You wrote] that in America we love our pets so much and we have such an emotional connection to our pets. Can you talk a little bit about some of the negative reviews you may read about on some of the other sites? Considering there's such an emotional connection we have with our pets, if someone has a [bad] experience and they write negative reviews do you see some of those reviews? From the business and culture sides, how does your team handle [negative reviews]?
Rawlings: I think what you're talking about is online reviews, like a Yelp or something else. Anytime you read something that's not positive, it may hurt at first. The best thing to do is if you can learn from it, go ahead and learn from it. Unfortunately, a lot of online reviews are not authenticated online reviews, so when somebody writes a review, it is as likely to be from somebody trying to short the stock or from a competitor as it may be from a consumer having a negative experience. When we see something, we try to identify [if we made] this mistake. Can we reach out? Is there a pet owner that went through this solution and tried to solve it?
On the flip side, I think the total number of online reviews for Trupanion, if you aggregated every site together, would be 3,000 to 4,000. But to give you an idea, in any given month we're paying out over 70,000 invoices. We do internal reviews in the magnitude of about 10,000 customer reviews a month, and our aggregate scores on that are much closer to 10 than they are [to] 9, so above 9.5. We know most of the time we have great customer experiences. Occasionally we make mistakes, but when we do make a mistake it's an opportunity to improve for every other customer in the future.
Our overall take is we're very early in building this category. [We're not babies. We're toddlers]. We know how to talk but we fall down frequently and occasionally we still wear pull-up diapers because that would make a mess in our pants. We are learning. I think in 2025 we'll be good at what we do.
We've got a clear line on the customer experience we want to have and the value proposition. We know the data we're trying to build. We know the relationships, one hospital at a time, that we're trying to build and there's 28,000 total. We don't, for any moment, think that we've got this nailed or that we're perfect. We're trying to make continuous improvements.
Gardner: You've already shared one or two examples, but could you provide two or three more examples of everything from how you're pricing the insurance to how you're building relationships with your vets or your sales force? Unique ways that you're using data to make smarter decisions for your stakeholders.
Rawlings: [To understand] the core of what we need to do we can go right back to the story about my parents. We're trying to help people budget. And to help people budget, we need to understand what the average cost is and we need to do that by a whole bunch of subcategories. It wouldn't be fair for us to charge the same amount for a Shih Tzu as we do for a Bulldog. I own two Bulldogs. Bulldogs are the equivalent of a 1976 Maserati. They're not the most reliable but we love them dearly. A Shih Tzu is much more like a Toyota Corolla.
We need to understand the underlying costs. We add 30 points on top of it. About 10 points of that is for us to service our clients, so we're 24/7. If a pet gets sick at three o'clock in the morning, we want to pay veterinarians directly. We need to be able to help them, so our customer service includes things like premium taxes, credit card processing fees, and everything it takes for us to keep a pet enrolled. We end up with about a 20% contribution margin. In my shareholder letters I say that we've got a pathway to ending with a 15% ultimate margin after you include our fixed expenses, which we're still scaling.
But that ends up telling us what the free cash flow is that we generate for a Bulldog, for example. Let's say an average Bulldog is $100 a month. Our net margin will be $15 after we paid claims and serviced the pet. If we keep that pet on average for 70 months, then we know what the lifetime value of that pet is. We know what that constant forward stream of cash flow is. [That] then informs us how much money we can spend to acquire while getting outsized internal rates of return for our shareholders.
So the data that we have is not just being used to help us price more accurately. It's being able to show us what the lifetime value of a subcategory of pets is. It could be New York. It could be Golden Retrievers or a breed. And then it informs us on how much money we can spend to try to acquire that pet. We use the data to help inform us how hard we want to reach out for conversion rates. We use the data to inform us how we can [add] compensation packages for our employees so that they can have great wages while getting good returns.
The data streams everywhere inside of our building. We run five-year plans. We're currently working on our 2020 plans that we developed in 2014. We know what certain metrics we want to reach and we use our data to tell us back on a given year where we are in that process, but more importantly down by each department how we're progressing not only by month but by day and by minute. We've got TV screens saying how we are tracking at the speed of paying invoices, or how many pets are enrolling, or what our retention rates are. The data tells us if we're doing a good job. If we're not. If we need to improve.
Those are things we've been doing for a number of years. We have paid over 2 million veterinary invoices. That invoice data is giving us a pathway to learn about claims automation and right now, when we pay hospitals directly which is our preferred method, they have a human touch and we're doing them in under five minutes 24 hours a day.
Using our data will allow us, someday, to be able to automate a percentage (hopefully a large percentage) so that we can start to pay things in 10 seconds. So being faster, quicker, and more efficient is a way that we can give more back to the consumer and have a better value proposition, which increases retention rates and increases conversion rates, which increases our lifetime value and allows us to invest more money to try to grow this category. So those are some examples of how we live and think about data, but they don't fit in just one department. They're cross-functional across the company.
Gardner: Thank you. Some large insurance companies have taken a shot at this category and exited. Why?
Rawlings: This product is not like anything that they have. Let me start at just a high level. I mentioned before that I have two sons. They're 10 and 12 years old. If I came home to my wife and said, "Honey, I just saw the cheapest health insurance for our children," what do you think would happen to me?
Gardner: There'd be a ...
Rawlings: ... Caroline would be upset.
Gardner: ... a skeptical look.
Cross: In the doghouse.
Rawlings: Yeah. This is not the type of product that you want cheap. I tell people in the building there's two things you don't want cheap in life: sushi and health insurance. We want value and having the underlying value is critically important in what we do.
That's not the typical mindset of a large insurance company. Large insurance companies are in fully commoditized products where they've already built out a category, and the only way they'd make money, typically for most lines of business, is by in their minds choosing lower risk and being able to price something cheaper.
We are fundamentally the opposite. We want to be able to offer the coverage that people need, in the local market they need it, for the breed that they need it and have all the coverage. We have to have the confidence that when we pay out seventy cents on the dollar for the average pet owner that we're able to pay out a higher target than is sustainable by others.
This means we eliminate frictional costs. We own everything. We own our own insurance company. We don't use reinsurance. It's our own 24-hour call center. We have our own national sales force. Anytime we can eliminate frictional expense and give more back to the consumer, we do that.
When traditional insurance companies try to come into the marketplace, they think this is an awareness game. It's not. This is an acceptance game. Is it accepted at veterinarians? Do they get behind it? Do they believe in it? And having your own national sales force calling on veterinarians. Having 17 years of data to price at 1.2 million categories. We have about 500 employees in our Seattle office. Over 300 of them have worked for five-plus years in a veterinary hospital.
We are vet-centric. We understand it. Those are not skills that work if you sell life insurance, car insurance, or traditional liability insurance. Our skill set is unique. It's difficult for somebody to come in and try to leverage what they have. Their people paying the invoices would not be able to read a veterinary invoice, the actuaries don't have the data to be able to price, and you need to be able to take a very long-term approach. [With] our business the big bets that we make are five and 10-year decisions. Most companies are making decisions that are one to three years old.
So the types of things that we go after, that we're aggressive on, that differentiate us to build moats around us are 10-year moonshots. Building a national sales force. We now have over 100 people in the field. We've been building that for over 15 years. Integrating with practice management software so that we can pay them directly. We've invested well over $20 million and we're now about six or seven years into it and we're still in the process of getting deployed.
So I think the aggregate of our point of view -- the reason that we have, at any given day 250 dogs in our office -- and the fact that we love our mission are all ways that differentiate us from a typical, large competitor. This is not about who's got the biggest wallet. This is not about who can put up the most awareness ads. It's a combination of value proposition, relationships with the veterinarians, understanding your data, and being long-term focused.
Cross: That's great, Darryl. Thank you so much for that overview. I want to ask a question about the climate for your clients; specifically, for veterinarians and veterinarian hospitals. We saw Mars come in earlier this year, I believe, and buy up VCA. I'm curious as to how consolidation in that space impacts you. Does that affect you? Is it a pro? Is it a con? Do you not think about it? [Does it affect you] from a client perspective?
Rawlings: At a macro level there's about 28,000 veterinary clinics or hospitals throughout North America. The average hospital has about 1.5 veterinarians and about 2,500 pets that actively visit that hospital. [The number of] hospitals or vet clinics that are corporately owned is a little over 2,000. Between 2,000 and 2,500.
The Mars family is the largest aggregate owner of that 2,000. They have owned Banfield [for years], which has, I believe, about 800 to 900 hospitals. They own Blue Pearl, which is the largest referral and specialty hospitals [group] and really, I think, one of the grand jewels that Mars owns. The work and level of care they offer is incredible. They have another group called Pet Partners, which is about 150 hospitals and then they recently purchased VCA that had about 700 to 800 hospitals.
We were partnered with the majority of them, so we partnered with Blue Pearl, Pet Partners, and VCA before the acquisition. There is private equity money coming into the space where private equity is buying 20 hospitals here, 50 hospitals there. I think Mars is a very good long-term owner. Everything I know about them as a company is they're thinking about 10 and 20 years. But the vast majority of our space is independently-owned entrepreneurs. That's 25,000 or 26,000 of the 28,000 hospitals.
Those that are corporately owned might be a little bit more financially motivated and they've been buying hospitals at maybe 12x EBITDA [or] 14x EBITDA. For those corporately-owned hospitals to get a reasonable or an improved return on their investments, the best thing that they can do is increase same-store sales and the best tool for them to do that is to get more clients on Trupanion. So our clients visit, on average, twice as frequently as clients without insurance and they spend over twice as much money. The average client has an extra $3,000 being spent on accidents and illness over the pet's life.
So I think we've got very good alignment with all the corporately owned. I think if they want to get a better return, the more clients that are on Trupanion the better; but I think as important or more important are the other 25,000 independently-owned hospitals. They're small, independent businesses that are going to be trying to compete against the larger corporate ones, and a lot of revenue is left to that channel. A lot of pharmacy has moved to places like 1-800-PetMeds or to the Wal-Marts of the world. If you think about a lot of food it's left the vet channel.
So a lot of what was auxiliary revenue to the vet is leaving and they're being left with providing good, regular, routine, preventative care and being able to offer great care if the pet is sick or injured; and when the clients don't have that financial barrier when they have Trupanion, we really help the business, corporately owned or not.
I expect the trend will continue that more corporately owned will go down the line, probably led by private equity and then maybe a couple of people rolling up from there, but I think we're well partnered and well aligned with them. And ultimately remember that we do not believe the 25% of pet owners who buy us when recommended are price sensitive. We're think they're value sensitive. The more veterinarians can do -- the more veterinarians can charge -- actually increases the demand or need for our product.
Thirty years ago, an expensive veterinary invoice might be $1,000 and people's disposable and discretionary income or their credit card might have been able to handle that. Today if you have a pet that's at a referral or specialty hospital that needed surgery and had a multiday stay, you're going to be looking at $20,000 to $25,000.
So we are very well aligned with the more a veterinarian can do, the more referral and specialty hospitals out there, the more advancements of care they do, the greater the demand is for our products. And we've seen our monthly costs go up on average 5% to 6% year over year for the last 17 years that's reflecting that kind of inflationary cost to veterinary medicine, and during that time we've had higher conversion rates and retention rates reinforcing the fact that pet owners are not viewing their pets as disposable or discretionary. They're part of the family.
Gardner: One of our business heroes here at the Fool is Reed Hastings and Netflix. His first company [was a merger of] Pure [Software] with Atria Software in the late 1990s for about $850 million. When he completed that merger he said, "Yeah, I'd like to congratulate myself on doing a mediocre job. We got more bureaucratic as we grew."
I'm wondering. With the growth and success of your business, what steps are you taking to enhance your culture as you grow and what challenges are you facing in doing so?
Rawlings: I had a question about this a couple of days ago. The way that they asked the question was, "In the earlier days versus now, what are the challenges in culture?" What surprised me was when Dan first met me and I had less than 10 employees working with me, it was pretty easy to understand the culture. We all sat in one room. We shared one bathroom. We worked together. We could hear everything.
But what surprised me is that when we had 30 or 40 people, the culture started to weed out those that were not aligned. When you have bigger numbers and you're really focused on your culture, it makes it harder for people that become bureaucratic, or slow moving, or non-innovative, or in our world not pet loving or caring, or understand our mission, or are data centric. They don't fit in.
I wrote about it, I think, in our 2015 shareholder letter. Our culture has ebbed and flowed over time. I think what's really important for us is that we are spending a lot of time on education and informing new people that come into the company what our core values are, because our values have guided us through every hard spot that the company has had for the last 17 years. And making sure that people are empowered. That they understand the values of the company and how that fits into our culture.
In essence, I think that's our strategy, and when it's working well, having large numbers can actually help, but you need to constantly be focused on it. You can't take it for granted. I'm not much of a person that likes gardening, but I would think it's very similar. It's a lot easier to stay on it daily than to try to attack it once a month. It's critically important and our values drive us and guide us through it.
Gardner: Dan, if I read the 14A filings correctly, Maveron owns more than 15% of Trupanion. Just for a member of our service who's become a shareholder of Trupanion and is maybe learning about the ownership structure of a business and how a board works, what does it mean for you and Maveron to own that large stake of the business? Typically, we see VCs or venture investors begin to disappear a couple of years into the public market run of a business, but here you are on the board north of a 15% stake if I do have that correctly. Maybe talk to us a little bit about your role, Maveron's stake, and how you think about it in the future.
Levitan: I think it's probably best to give a little historical context. As I said, we had the privilege of leading the Series A in 2007 and so pre-IPO I think we owned 22% of the business. Something like that. As a venture capitalist what you do is you make an investment and you join the board. Darryl and I shook hands that he picked me to try and help him build this company. As we approached being a public company, the company had grown a lot and the board and the sophistication around him had grown a lot, also.
The company went public in 2014 and we've been very slowly distributing our stock. We have no rush to get out of these businesses and, frankly, waiting has proved particularly financially rewarding, here. But I think Darryl's always had a strong think-like-an-investor orientation around the board, so similar to the way you guys felt around your board at The Motley Fool, I think Darryl has always wanted a big voice of the investor in the boardroom and that's one of the roles that Maveron and I specifically play.
Gardner: Darryl, what do you think about your tenure? It sounds like this could be ...
Levitan: I'll answer it. I'll answer it.
Gardner: I love it. Take it, Dan.
Levitan: One of the many reasons why I invested in this business 10 years ago -- one of the many reasons why I haven't sold a share that I've been fortunate enough to get -- is this is what Darryl was put on this planet to do and he'll do this the next 15 or 20 years. The reason why I inappropriately cut him off to answer that question is it's one of the few things that I know for a certainty. The long-term commitment to make a business work and the feeling that I was put on this earth to do this is embodied with Darryl Rawlings. I think he's made it clear that it's his family, surfing, and Trupanion.
Gardner: Darryl, just so you know, we're taking that as a contractual agreement you just struck with us as outside shareholders, because as you may or may not know, our perspective and my perspective as an investor is to be a long-term owner, partner, and stakeholder in the business. I want the businesses that I invest in to help me learn more about the world. To find things that I believe in and to profit from it, as well.
So, in our Rising Star service we're mandated. We may not sell any stock in less than five years and what we're doing engaging in this service now is each quarter we'll be adding new capital to our 40 businesses. We won't reinvest in all 40 of them and we will not reinvest equally in the ones that we do reinvest in, but we will not be selling any of the shares of the 40 companies that we've recommended to our members and invested in ourselves.
So one of the things I'm looking for is leadership that has the same time frame as I do, and I've heard you say, Darryl, a couple of times Mars is an organization we like because they talk in 15 to 20-year periods and think that way. Companies like Costco do, as well. Are there one or two businesses or business leaders out there that you've learned from and that are reaffirming for you in the way you think about the commitment you have to Trupanion?
Rawlings: There's a lot of people I admire and I've tried to learn from. I've been fortunate enough to have interfaced with Howard Schultz and what he's done with Starbucks is incredible. But at the core of what's important is he's cared about every store and the employees in the stores. He's stuck with his values from the beginning, so that's been inspiring.
I love the guys at Costco. They're constantly focused on the value proposition for their members. It would have been so easy for them to try to increase the price on toilet paper because they could have, but they said, "No. We're going to be focused on making profits from the membership and selling the products at the best value we can."
I'm just going to go around Seattle ...
Cross: A good place to go.
Rawlings: What Bezos has done at Amazon and how he thinks about his P&L and reinvesting for long-term moats is incredible. I love leaders in companies that have demonstrated that they care about making sure that the customer wins and they get alignment along there in making those big investments. Those are three companies that are in Seattle, but I could keep going down the line.
Gardner: No, that's helpful.
Rawlings: Just thinking in five and 10-year chunks is different than most.
Cross: Darryl, we only have a few more minutes. Just two [more questions] from me. Obviously, there's loads of opportunity in this space, mostly around [pet owners of] cats and dogs. I'm curious about how Trupanion and the business thinks about insuring other pets and is that a market for Trupanion?
Rawlings: The short answer is we're not yet as good as we think we should be on cats and dogs. I think we're exponentially better than most, but we are not where we want to be there.
Cross: Fair enough.
Rawlings: And the cats and dogs sleep on our beds. I think 75% of cats and dogs sleep on our beds, now, and if they're not in the beds they're sleeping on our couch. It's a different psychological contract than a pet that's in an aquarium or in a barn. It doesn't mean people don't love those.
We really connect with that bond with the cats and dogs, and we want to get good at that first. I think we're more likely to add geography (going to another country) rather than trying to figure out horse insurance or something else.
Cross: My wife just told me about a crazy story she read about someone who slept with their snake. I won't go into that, but just a crazy story.
Rawlings: Snakes scare me.
Cross: Yes, exactly. My last question. In your great 2014 letter you said your values are, "We do what we say. Simple is better. We do not punish unlucky pets. We're innovative, and fair, and we love pets." My question, though, is [whether the values are] listed in order of priority. Just a little background on how you think about those core values and then how hard it was for you and your team to prioritize those. What kind of discussion happened behind the prioritization of those core values, because "we love pets" is last in that list.
Rawlings: Yes, they are because you could love pets but not do what you say, and that's not going to fly. If you think about our product, I was very envious when Steve Jobs was able to walk out onto a stage, pull the iPhone out of his pocket, hold it up, and say, "This damn thing's going to be the best thing and it's going to change your world." People would buy it. They'd open that white box. It wouldn't have an instruction manual and inside of 30 seconds or a minute they'd have it in their hands and they'd be telling their friends how cool it is. That's the definition of a tangible product. We are the opposite.
Our product is a bunch of words and a staple that quite frankly nobody reads. Our product is having pet owners and veterinarians trust that we're going to do what we say. That has to be the leading guide for us. Loving pets is a requirement to get into the building but it's not enough.
Gardner: My final question, Darryl, is that a business writer and thinker that I admire is Nassim Taleb who wrote Antifragile which is a wonderful book, but in this case I'm going to refer all the way back to The Black Swan, which is [also] a wonderful book. The subtitle of The Black Swan is The Impact of the Highly Improbable.
And one of the things Taleb says is what people don't realize is most of the black swan events are very positive. It's like you wouldn't have expected Google to come along and blow up as it has. Of course, there are the black swan negative events. That book was published right before the financial crisis.
I'm wondering if you could share with us what you see as a highly improbable negative that keeps you up or a risk you're trying to manage over the next five to 10 years at Trupanion, and then what you think a highly improbable huge positive is that could emerge for Trupanion.
Rawlings: At the core of our business we have a very large, underpenetrated market. Every one point of penetration rate is about $1 billion in revenue at our monthly costs. In Europe, for example, in the UK 27% of cats and dogs have medical insurance. In a lot of Western Europe it's 5% to 15%. Australia and New Zealand. I'm not concerned about the size of our market. We've got a very large market.
When I think about our strategy of having everything wrapped around the veterinarian, it is a hard strategy. Building a national sales force is difficult, and building relationships one hospital at a time is difficult, but I'm totally confident that the strategies this company has and the moats that we have around our business are long term and sustainable.
What keeps me awake at night is just execution. Do we have the right people on the right seats of the bus with the right sets of tools? Have we aligned everybody so they clearly understand what we're trying to do, how we're trying to do it, and can we measure it? Is our compensation model aligned with that? I think our biggest risk is ourselves. It's not the outside market. It's not competitors. It's really about us being able to execute on our plan.
I think the biggest upside for us is we get a tipping point where veterinarians across North America change one simple thing that the dentists have already done, and that is to ask every single client at check-in who your medical insurance is with. And if we can just have that one simple question asked at 28,000 hospitals for every pet at every check-in like dentists do when they ask who your insurance provider is or has it changed, then the awareness and acceptance of our product will grow and our positioning and our value proposition will allow us to have a good, healthy market share.
Gardner: Well, we're learning from you, Darryl, and from your company. We're a part of something that we believe in -- the work that you do -- and we're getting an opportunity to profit from it, together, over the next five to 10 years. So thanks so much for spending the hour with us Darryl and Dan, and to everyone that's working at Trupanion. We're the active shareholder of Trupanion. Not the active trader. We're the active thinker about what you are creating. We really admire what you've created and we're rooting for you, of course. Thanks so much for spending the hour with us.
Rawlings: Thank you for trusting us.
Levitan: Thank you.
Cross: Thanks, Darryl. Thanks, Dan.
Gardner: We'll see you all in Seattle.
Rawlings: See you in Seattle.
Gardner: Right on.
Cross: Fool on! Cheers!