Trupanion(TRUP) - 2022 Q4 - Annual Report

Part I Business Trupanion provides pet medical insurance through direct subscriptions and B2B services, driven by vet partnerships and proprietary payment software - The company operates in two segments: a direct-to-consumer subscription business and an "other business" segment focusing on B2B relationships, such as underwriting policies for third parties[18][19] - Trupanion's core product is designed to enable veterinarians to provide the best medical care without financial constraints, which in turn drives growth through better pet health outcomes and stronger client relationships[23] - A key differentiator is the company's proprietary, patented software that allows for direct payment to veterinary hospitals in seconds, simplifying the claims process for members[24] Market Size and Penetration | | North America | Continental Europe | Australia | | :--- | :--- | :--- | :--- | | Household dogs and cats (in thousands) | 200,000 | 139,000 | 8,900 | | Market penetration | 2.0% | 5.6% | 11.2% | - The company's total enrolled pets grew at a compound annual growth rate (CAGR) of 35% from January 1, 2010, to December 31, 2022, reaching 1,537,573 pets[26] - Key growth strategies include increasing leads from veterinary hospitals via Territory Partners, improving member retention, automating invoice payments with AI, expanding internationally, and pursuing non-insurance offerings like a pet food initiative[27][30][32][33] - As of December 31, 2022, the company employed 1,187 people and was supported by 158 field sales Territory Partner business owners[42] Risk Factors The company faces risks from persistent net losses, reliance on third-party acquisition channels, substantial regulatory compliance, and competitive and operational challenges - The company has a history of significant cumulative net losses, with a net loss of $44.7 million in 2022 and an accumulated deficit of $171.6 million as of December 31, 2022[67] - A primary competitive challenge is educating pet owners on the benefits of medical insurance over self-insuring, as the majority of pet owners in its markets do not have insurance[36][100] - The company's insurance subsidiaries are required to maintain minimum levels of surplus capital, with APIC required to maintain $142.4 million in risk-based capital as of December 31, 2022[57][95] - The business relies significantly on leads generated through third parties, including veterinarians (via Territory Partners) and strategic partners, with veterinary leads representing the largest member acquisition channel[81][83] - For the year ended December 31, 2022, premiums from policies sourced by general agents in the "other business" segment accounted for 32% of total revenue, with one general agent accounting for over 10% of total revenue[125] - The company is exposed to foreign exchange risk, as approximately 15% of its total revenue for the year ended December 31, 2022, was generated in Canada[130] - In March 2022, the company entered into a credit agreement for up to $150.0 million, having drawn $75.0 million in term loans as of December 31, 2022[156] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[196] Properties The company's principal executive offices are located in a building it owns in Seattle, Washington, where it occupies 120,124 square feet - The company owns its headquarters office building at 6100 4th Avenue South, Seattle, Washington, which it purchased in August 2018[197] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 9 of the Financial Statements - Information on legal proceedings can be found in Note 9 of Item 8, "Financial Statements and Supplementary Data"[198] Mine Safety Disclosures This item is not applicable to the company - Not applicable[199] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Trupanion's common stock trades on NASDAQ under 'TRUP', with no cash dividends paid or planned, and its performance is compared against market indices - The company's common stock trades on the NASDAQ Global Market under the symbol "TRUP"[203] - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[204] Five-Year Cumulative Total Return Comparison | | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Trupanion Inc. | $100.00 | $85.89 | $125.59 | $408.99 | $451.08 | $162.38 | | S&P Small Cap 600 Index | $100.00 | $90.25 | $109.07 | $119.51 | $149.71 | $123.63 | | NASDAQ-100 Technology Sector Index | $100.00 | $93.96 | $138.78 | $192.33 | $244.21 | $146.69 | | Russell 2000 Index | $100.00 | $87.13 | $108.38 | $128.61 | $146.23 | $114.70 | Selected Financial Data This section summarizes five years of financial and operational data, highlighting consistent revenue growth and widening net losses, alongside strong growth in enrolled pets Consolidated Statements of Operations Data (2018-2022) | (in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenue | $905,179 | $698,991 | $502,028 | $383,936 | $303,956 | | Operating loss | $(43,001) | $(35,196) | $(4,927) | $(1,920) | $(1,045) | | Net loss | $(44,672) | $(35,530) | $(5,840) | $(1,809) | $(927) | Consolidated Balance Sheet Data (as of Dec 31, 2018-2022) | (in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $65,605 | $87,400 | $139,878 | $29,168 | $26,552 | | Total assets | $671,627 | $562,582 | $498,250 | $257,200 | $207,510 | | Total liabilities | $366,330 | $230,382 | $158,311 | $120,440 | $78,337 | | Total stockholders' equity | $305,297 | $332,200 | $339,939 | $136,760 | $129,173 | Key Operational Data (2018-2022) | | 2022 | 2021 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total pets enrolled (at period end) | 1,537,573 | 1,176,778 | 862,928 | 646,728 | 521,326 | | Total subscription pets enrolled | 869,862 | 704,333 | 577,957 | 494,026 | 430,770 | | Monthly average revenue per pet | $63.82 | $63.56 | $60.37 | $57.52 | $54.34 | | Average pet acquisition cost (PAC) | $289 | $287 | $247 | $212 | $164 | | Average monthly retention | 98.69% | 98.74% | 98.71% | 98.58% | 98.6% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2022 financial results, highlighting 29% revenue growth to $905.2 million despite a widened net loss, with liquidity supported by operations and a credit facility Revenue by Segment (2022 vs 2021) | (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Subscription business | $596,610 | $494,862 | 21% | | Other business | $308,569 | $204,129 | 51% | | Total revenue | $905,179 | $698,991 | 29% | - The 21% increase in subscription business revenue was primarily due to a 19% increase in total subscription pets enrolled (excluding acquisitions), while the 51% increase in other business revenue was driven by a 41% increase in enrolled pets in that segment[258] - Cost of revenue for the subscription business increased to 83% of its revenue in 2022 from 82% in 2021, primarily due to a 2.5% increase in veterinary invoice expense per pet, reflecting higher cost and utilization of veterinary care[260] - Operating expenses increased across several categories in 2022 compared to 2021: Technology and development expenses rose 49% to $25.1 million, General and administrative expenses increased 23% to $39.4 million, and New pet acquisition expense grew 14% to $89.5 million[262][263][264] - Net cash used by operating activities was $8.0 million in 2022, a shift from $7.5 million provided by operating activities in 2021, driven by increased pet acquisition spending and faster payment of veterinary invoices[271][275] - The company's primary sources of liquidity are cash from operations and a credit facility with $75.0 million remaining available as of December 31, 2022[272] - The reserve for veterinary invoices, a critical accounting estimate, was $43.7 million as of December 31, 2022, representing the estimated future amount to be paid for invoices dated on or before the balance sheet date[281][282] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and foreign currency exchange, with a 10% change in Canadian exchange rates potentially impacting net income or loss by $3.8 million - The company is exposed to interest rate risk through its investment portfolio and its Credit Facility, which bears a floating interest rate, though a 10% change in market interest rates is not expected to have a material impact[286][287] - The company faces foreign currency exchange risk, with approximately 15% of its revenue generated in Canada, where a 10% change in the Canadian exchange rate could have resulted in a net impact of $3.8 million on income or loss for 2022[289] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2020-2022, including an unqualified auditor's opinion on financial statements and internal controls - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting as of December 31, 2022[296][297] - A critical audit matter identified was the "Reserve for Veterinary Invoices" due to the complexity and subjective judgment involved in estimating the reserve based on assumptions like loss frequency, severity, and development factors[300][301] Consolidated Statements of Operations (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $905,179 | $698,991 | $502,028 | | Total cost of revenue | $782,994 | $594,645 | $420,127 | | Operating loss | $(43,001) | $(35,196) | $(4,927) | | Net loss | $(44,672) | $(35,530) | $(5,840) | | Net loss per share | $(1.10) | $(0.89) | $(0.16) | Consolidated Balance Sheets (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $469,096 | $390,954 | | Total assets | $671,627 | $562,582 | | Total current liabilities | $289,616 | $223,696 | | Total liabilities | $366,330 | $230,382 | | Total stockholders' equity | $305,297 | $332,200 | Consolidated Statements of Cash Flows (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(8,000) | $7,458 | $21,544 | | Net cash used in investing activities | $(67,516) | $(51,913) | $(76,747) | | Net cash (used in) provided by financing activities | $60,743 | $(1,125) | $170,848 | - In 2022, the company acquired PetExpert for approximately $12.3 million and Smart Paws for approximately $2.8 million, both managing general agents in Europe, to expand its international presence[353][357] - As of December 31, 2022, the company's New York-domiciled insurance subsidiary, APIC, maintained $162.2 million of statutory capital and surplus, exceeding the required amount of $142.4 million[408] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[421] Controls and Procedures Management concluded its disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a conclusion affirmed by the independent auditor - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective[422] - Management assessed its internal control over financial reporting as effective as of December 31, 2022, based on the COSO 2013 framework[423] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion, stating that the company maintained effective internal control over financial reporting as of December 31, 2022[429] Other Information The company reports no other information for this item - None[436] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[437] Part III Part III incorporates information from the 2023 Proxy Statement covering directors, executive officers, compensation, security ownership, related transactions, and accountant fees Directors, Executive Officers and Corporate Governance Information required for this item is incorporated by reference from the company's 2023 Proxy Statement Executive Compensation Information required for this item is incorporated by reference from the company's 2023 Proxy Statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required for this item is incorporated by reference from the company's 2023 Proxy Statement Certain Relationships and Related Transactions, and Director Independence Information required for this item is incorporated by reference from the company's 2023 Proxy Statement Principal Accountant Fees and Services Information required for this item is incorporated by reference from the company's 2023 Proxy Statement Part IV Part IV lists exhibits filed with the Form 10-K, including corporate governance documents, material contracts, certifications, and financial statement schedules Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and all exhibits filed as part of the Annual Report on Form 10-K Form 10-K Summary The company reports no summary for this item - None[452]