Imagine facing the agonizing situation of your beloved pet requiring expensive surgery that you cannot afford. This isn't a rare scenario, especially with pet ownership rising.
The good news is that there's a way to avoid this scenario. Pet insurance works like your own medical insurance. You pay premiums and typically pay deductibles, with the pet insurance covering much of the cost of veterinary medical care for your pet.
Pet insurance companies are meeting a significant need and creating opportunity for investors. Here are the top pet insurance stocks and what you should consider before investing in the pet insurance sector.
Top pet insurance stocks in 2023
Several pure-play pet insurance companies are privately held, but some publicly traded companies offer pet insurance as either part or all of their business. Three top pet insurance stocks are:
1. Lemonade
Lemonade is best known for providing renter and homeowner insurance. However, the company also offers life insurance products and pet insurance, and it has announced plans to expand into the auto insurance market.
The company began offering pet insurance in 2020. It uses artificial intelligence (AI) and behavioral economics research to make it easy for customers to buy insurance online and receive payment for claims. Lemonade's renter and homeowner insurance business gives it a great opportunity to market its pet insurance products. So far, the company's pet insurance business has far exceeded its internal goals.
Lemonade is growing fast by attracting new customers. However, the company remains unprofitable, in large part due to its increasing sales and marketing expenses.
2. Synchrony Financial
Synchrony Financial ranks as a major player in the consumer financial services market. The company offers products and services that include credit cards and online banking for individuals. In 2019, it acquired pet health insurance pioneer Pets Best.
The pet insurance business operates with the company's CareCredit healthcare credit card platform. Synchrony doesn't provide many details about its pet insurance unit in its operational updates. However, as of the first quarter of 2021, the Pets Best division insured more than 350,000 pets, up from around 125,000 at the time of the 2019 acquisition. CEO Brian Doubles noted in the company's 2022 fourth-quarter update that Synchrony has expanded its Pets Best business "very significantly" since the acquisition.
Synchrony's core consumer financial services business was hit hard by the COVID-19 pandemic, but it is now recovering. The insurer remained profitable despite those headwinds.
3. Trupanion
Unlike Lemonade and Synchrony, Trupanion focuses exclusively on the pet insurance market. It's also been in the market the longest, with more than two decades of selling medical insurance for cats and dogs.
Trupanion was providing coverage for more than 1.4 million pets by the end of the third quarter of 2022, and that number has continued to grow at a brisk pace. One of Trupanion's competitive advantages is that it maintains solid relationships with veterinarians in the U.S. and Canada. It's also the only pet insurer with software that enables direct payments to veterinarians at checkout.
The company's revenue is growing quickly. However, Trupanion continues to post net losses, with its stock-based compensation costs being a major reason for its current unprofitability.
Identifying the best pet insurance stocks
You can evaluate pet insurance companies like you would any company -- and especially any health insurance company. Some key aspects to consider:
- Revenue mix: Some companies derive all their revenue from pet insurance, while pet insurance is a smaller source of revenue for others. It's important to understand how a company generates most of its revenue to gain a better understanding of its growth prospects and risks.
- Cash position: Pet insurers need enough money to pay all legitimate claims filed by pet owners. Pet insurance companies must have solid cash positions, including cash, cash equivalents, and short-term liquid investments.
- Free cash flow: The amount of cash remaining after a company pays for all of its operating costs and capital expenditures -- physical assets such as property and equipment -- is its free cash flow (FCF). A pet insurer that doesn't generate stable FCF could be forced to tap its cash holdings too heavily, which could lead to problems if the FCF shortfall continues.
Risks of investing in pet insurance stocks
Every stock investment carries risks. These key risks are especially relevant for pet insurance stocks:
- Declining pet ownership: While pet ownership in the U.S. is currently increasing, it's possible that this trend could reverse. Major economic downturns, for example, could make owning a pet too costly. Any significant negative shift in pet ownership would hurt pet insurance stocks.
- Increased competition: Competition in the pet insurance market could increase as pet insurance becomes more popular. More competition could cause pet insurers' profits to decline as costs rise from higher marketing spending and potential pricing pressures.
- Unforeseen medical costs: Pet insurers rely on projections of medical costs that are within normal historical levels. It's possible, though, that medical costs for pets could unexpectedly spike. For example, a new virus could emerge that directly affects cats or dogs and causes unusually high claims activity. This scenario could negatively affect pet insurers' bottom lines.
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Pet insurance stocks could be long-term winners
Despite the risks, there are good reasons to expect that pet insurance stocks will perform well for investors over the long term. Pet ownership in the U.S. and many other countries is consistently rising. With more people working from home, having pets has become increasingly common.
Pet insurance markets, particularly in the U.S. and Canada, remain largely unpenetrated. Only about 2% of pets in these markets are currently insured. In the U.K., though, roughly one in four pets is covered by insurance.
The geographic discrepancy underscores how big the market opportunity could be for pet insurers -- and for investors in pet insurance stocks.
