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1 Insurance Stock That Could Be a Huge Winner

By Matthew Frankel, CFP® and Brian Feroldi - Apr 8, 2021 at 7:03AM

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This insurer is an emerging leader in a largely untapped market.

Most people have health insurance, and auto and life insurance are also quite common. But only about 1% of Americans have insurance for their pets, and that's why Trupanion (TRUP 2.34%) could be such an exciting stock to watch. In this Fool Live video clip, recorded on April 1, contributors Brian Feroldi and Matt Frankel, CFP, discuss why this pet insurer deserves a spot on investors' watch lists. 

Brian Feroldi: Trupanion. For some reason I think this is in Matt's world because it's an insurance company.

Matt Frankel: It's on pets. I see comments in the chat about my dogs behind me. They're pretty much characters on our show.

Feroldi: Which is digging a hole in your couch. Trupanion, this is a roughly $3 billion company. It is down significantly from its high but man, has it been a long-term winner. I think you guys know what Trupanion does. Their mission is to help pets. We all love, receive the best veterinary care. It has been a true compounding machine, but it's a company focused on pet insurance. Their pitch to pet owners is, pay us a monthly recurring fee, we will cover almost all of your variable fees. If you are one of those people that has an unlucky pet that has thousands of dollars of medical care, we'll cover that for you. If you're somebody that has a pet that doesn't have any medical care, you lose money on it. That's insurance, isn't it? I can tell you, I have a friend that just this week their dog was running in the woods and got hit by a stick so badly that they needed eight hours' worth of surgery. That was an unexpected medical event, and I'm sure it was thousands of dollars to have that fixed. Would've been nice if you are on Trupanion and could have had that done. What's interesting about this business is I think that they actually have a pretty defensible position. One is the brand name. The brand name is associated with pet care. Two, they have a whole bunch of data so that they can make decisions around pricing. Three, they have automated payment systems set up directly with veterinarian offices. If when a vet submits a bill, they get paid fast, like really, really fast. That is attractive if you are a vet practice. Go to this practice, become a Trupanion certified because when you submit for reimbursement, you get it quickly. The pet market typically does not have reimbursement, so it is a cash business. I think that this is a really important thing. They have long-lasting relationships with veterinary offices. This is a business that makes money in two ways. First is just subscription pet insurance. That is the vast majority of revenue. However, they also have the business where they help other pet insurance business to write policies. Other pet insurance businesses can use their data and information to write their own policies. I kinda like that, two different ways. When it comes to consistent growth, does it get any better than this? I mean, every quarter, they add on new pets and they keep -- they have a really high retention rate with their existing pets. In fact, their retention rates are so good, you think that the only way they're losing pets is when pets go to pet heaven, basically on the lifespan of pets. But this company has just grown ridiculously consistently. Look over 2020. Growth didn't skip a beat over the entirety of 2020. You could argue that the year helped them because so many people got pets for the very first time. But man, is this a consistent business. If you look at this which shows revenue by year that they came in, again, shows you that they are capturing people, they are capturing pet owners and then they are keeping them for a long period of time. Love to see that as an investor. The big potential here is the market for pet insurance in U.S. is very, very underpenetrated. It's about 1 percent in the U.S., it's about 2 percent in Canada. In Europe, where pet insurance is far more popular, in Sweden, it's 40%. Forty percent of pets are covered by pets insurance. In the U.K., that's a semicomparable market, it's 25%. In the U.S., it's 1%. Is there room between those two numbers for Trupanion to make a dent? I think so. I think the economics are pretty favorable for pet owners. Meanwhile, the stock, well, it has been a long-term winner, has been smacked around recently. It's down 38% from its recent high. The valuation multiples are hard. I honestly don't know what the best way is to value this company. On the one hand, it's an insurer, so price-to-book is a useful metric. That's 5.3 here. That's a high number for an insurer. On the other hand, the price-to-sales ratio here is 5. However, this isn't a SaaS company, but it's SaaS-like attributes, but not SaaS-like margins. The company's gross margin is under 20%. Therefore, it should not trade at some sky-high price-to-sales ratio.

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