Trupanion(TRUP) - 2020 Q4 - Annual Report

PART I Business Overview Trupanion offers pet medical insurance in North America and Australia, using a data-driven, vertically-integrated model to provide high-value coverage and direct vet payments - Trupanion operates in two business segments: subscription business (Trupanion branded products) and other business (B2B relationships, third-party policies, software solutions)[21] - The company's core 'Trupanion' product uses proprietary, patented software for direct payment to veterinary hospitals, transforming the insurance experience for members[25] Subscription Business Growth Metrics (2010-2020) | Metric | 2010 | 2020 | CAGR (2010-2020) | | :----------------------- | :----- | :----- | :--------------- | | Total Enrolled Pets | 31,207 | 862,928 | 35% | | Revenue (in millions) | $19.1 | $502.0 | - | | Average Monthly Retention | - | 98.5% (since 2010) | - | - The North American pet medical insurance market is significantly under-penetrated (1-2%) compared to the U.K. (approx. 25%), indicating substantial long-term growth potential[27] - The company employs 911 people across the U.S., Canada, and the U.K., supported by 152 field sales Territory Partners, and offers comprehensive benefits including 100% company-paid medical insurance for employees and one pet[43][45] Mission & Company Overview Trupanion's mission is to help pet owners budget and care for their pets for life by providing medical insurance for cats and dogs across North America and Australia, utilizing a data-driven, vertically-integrated approach - Mission: To inform and help loving, responsible pet owners budget and care for their pets—for life[19] - The company provides medical insurance for cats and dogs in the United States, Canada, Puerto Rico, and Australia[20] - Operations are divided into two business segments: subscription business (Trupanion branded products) and other business (B2B relationships, third-party policies, software solutions)[21] Business Model & Value Proposition Trupanion's business model helps pet owners manage unpredictable veterinary expenses through monthly subscription products, priced individually based on pet characteristics and leveraging 20 years of health data. Its proprietary software allows direct payments to veterinarians, enhancing member experience and fostering loyalty, evidenced by a 98.5% average monthly retention rate since 2010 - The company's monthly subscription products are priced specifically for each pet's unique characteristics using approximately 20 years of comprehensive pet health data[23][24] - A proprietary, patented software allows veterinary hospitals to receive direct payments for approved invoices in seconds, with members only paying their deductible or co-payment[25] - The subscription business has maintained a 98.5% average monthly retention rate since 2010, leading to predictable and recurring revenue[26] Strategy Trupanion's strategy focuses on attracting and retaining members by enhancing value and experience. Key initiatives include increasing veterinary hospital leads and member referrals, improving conversion and first-year retention, automating invoice payments, exploring new acquisition channels, expanding internationally, and diversifying product offerings, such as a pet food initiative and B2B software solutions - Key strategic focuses include increasing leads from veterinary hospitals and member referrals, improving conversion rates, and enhancing first-year retention[29][30][31] - The company aims to automate veterinary invoice payments using machine learning to process invoices in seconds without compromising decision quality[32] - Strategic initiatives also include exploring new member acquisition channels, expanding internationally (currently in Australia via JV, exploring others), and broadening product offerings (e.g., pet food initiative, B2B software solutions)[33][34][35] Sales and Marketing Trupanion generates leads primarily through veterinary community engagement via 'Territory Partners' and referrals from existing members, converting them into members through its contact center and website. This unique, relationship-based approach with veterinarians is considered a significant competitive advantage - Leads are generated through diverse channels, primarily veterinarians and existing member referrals, and converted via the contact center, website, and direct-to-consumer activities[36] - The company builds brand awareness through 'Territory Partners,' independent contractors who foster long-term relationships with veterinarians to educate them on medical insurance benefits[37] Competition Trupanion competes with pet owners who self-fund veterinary costs and over 20 pet insurance brands. The company focuses on expanding the overall market by offering superior value, broad coverage, and 24/7 service. Its competitive advantages include a vertically integrated structure, unique Territory Partner acquisition strategy, a 20-year proprietary health data database for precise pricing, and patented software for direct vet payments - Primary competition comes from pet owners who self-fund veterinary costs and over 20 existing and new pet insurance brands[38][39] - Competitive advantages include broader coverage, a superior value proposition from vertical integration, a unique Territory Partner acquisition strategy, a 20-year proprietary pet health data database for precise pricing, and patented software for direct veterinary invoice payments[40] Intellectual Property Trupanion protects its intellectual property through federal, state, common law, and international rights, contractual restrictions, and a combination of trade secrets, patents, copyrights, trademarks, and domain names. The company holds two U.S. utility patents and one U.S. design patent related to its proprietary software, with additional applications pending - The company relies on various intellectual property rights, including trade secrets, patents, copyrights, trademarks, and domain names, along with contractual restrictions, to protect its proprietary technology[41] - Trupanion holds two U.S. utility patents and one U.S. design patent related to its proprietary software, with multiple additional patent applications pending in the U.S. and other jurisdictions[41] Human Capital Resources Trupanion emphasizes its mission-driven, diverse team, comprising 911 employees and 152 Territory Partners. The company offers comprehensive benefits, including onsite childcare, wellness programs, sabbaticals, paid volunteer time, and 100% company-paid medical insurance for employees and one pet. It is committed to diversity, equity, and inclusion, with over 65% women in leadership and initiatives to increase representation of people of color, alongside pay equity analyses and career development programs - As of December 31, 2020, Trupanion employed 911 people across the U.S., Canada, and the U.K., supplemented by 152 independent Territory Partners[43] - Benefits for all team members include 100% company-paid medical, dental, and vision coverage, onsite childcare, free gym access, sabbaticals, paid volunteer time, and 100% company-paid Trupanion medical insurance for one pet[45] - The company is committed to Diversity, Equity, and Inclusion (DEI), with over 65% women in leadership positions, a goal to increase representation of people of color, and regular pay equity analyses[46][48][49] Regulation Trupanion's U.S. insurance subsidiary, American Pet Insurance Company (APIC), is domiciled in New York and licensed in all 50 states, Puerto Rico, and D.C., subjecting it to extensive state and federal regulations, including NAIC risk-based capital requirements. Canadian operations are underwritten by Omega General Insurance Company, requiring a Canadian trust account, while its Bermuda segregated cell (WICL) is regulated by the Bermuda Monetary Authority - APIC, Trupanion's U.S. insurance subsidiary, is domiciled in New York and licensed in all 50 states, Puerto Rico, and D.C., making it subject to comprehensive state and federal insurance regulations[51] - APIC is subject to NAIC risk-based capital requirements, needing to maintain a surplus of $79.1 million as of December 31, 2020[57] - Canadian insurance is written by Omega General Insurance Company, with Trupanion retaining financial risk and required to fund a Canadian trust account of CAD $5.8 million as of December 31, 2020[59] Corporate Information Trupanion, Inc. was founded in Canada in 2000 as Vetinsurance Ltd., reorganized in 2006, began operating as Trupanion in 2007, and formally changed its name in 2013. Its principal executive offices are located in Seattle, Washington - The company was founded in Canada in 2000 as Vetinsurance Ltd., and formally changed its name to Trupanion, Inc. in 2013[61] - Principal executive offices are located at 6100 4th Avenue S, Suite 200, Seattle, Washington 98108[61] Available Information Trupanion files annual, quarterly, and other reports with the SEC, which are available free of charge on its investor relations website and the SEC's website. The company also uses its investor relations website, SEC filings, press releases, and social media to communicate material financial and company information - The company files annual, quarterly, and other reports (10-K, 10-Q, 8-K) with the SEC, accessible on its investor relations website (investors.trupanion.com) and www.sec.gov[62](index=62&type=chunk) - Material financial information is communicated through various channels, including the investor relations website, SEC filings, press releases, and social media[63] Risk Factors Investing in Trupanion's common stock carries a high degree of risk, encompassing operational challenges like the COVID-19 pandemic's impact, the company's history of net losses, and the ability to sustain revenue growth and member retention. Regulatory risks are significant due to the heavily regulated insurance industry, including capital requirements and compliance with diverse state and international laws. Furthermore, risks related to common stock ownership include market volatility, lack of dividends, concentrated ownership, and anti-takeover provisions - Investing in Trupanion's common stock involves a high degree of risk, including potential adverse impacts from the COVID-19 pandemic, significant net losses, and challenges in maintaining revenue growth and member acquisition/retention[65][66][68][69][75] - The company faces risks related to its reliance on Territory Partners (independent contractors), the accuracy of subscription pricing, potential for veterinary invoice expenses to exceed reserves, and the need to maintain specific surplus capital levels under insurance regulations[84][88][91][95] - Compliance with numerous and evolving federal, state, provincial, and territorial insurance laws and regulations poses significant risks, including potential for fines, license revocation, and increased operating expenses[157][161][168] Summary of Material Risk Factors Trupanion's business is subject to numerous risks, including potential adverse impacts from the COVID-19 pandemic, a history of significant net losses, challenges in growing and retaining its member base, and the complexities of its subscription pricing and veterinary invoice expenses. Other key risks involve regulatory compliance, competition, infrastructure scaling, reliance on key personnel, and the volatility of its common stock - Key risks include adverse impacts from the COVID-19 pandemic, significant net losses since inception, and challenges in achieving or maintaining profitability and revenue growth[66][68][69] - Risks also relate to the ability to grow and retain the member base, manage member acquisition costs, ensure accurate subscription pricing, and maintain required surplus capital under insurance regulations[66] - Other material risks encompass competitive challenges, brand maintenance, infrastructure scaling, reliance on key personnel, international expansion, internal controls, and compliance with various laws and regulations[66] Risks Related to Our Business and Industry Trupanion faces significant business and industry risks, including the uncertain long-term impacts of the COVID-19 pandemic on growth and operations, a history of net losses, and challenges in sustaining revenue growth due to factors like market penetration, member retention, and effective sales and marketing. The company's reliance on independent Territory Partners, the accuracy of its subscription pricing, and the potential for veterinary invoice expenses to exceed reserves are critical. Competition, brand reputation, infrastructure scalability, and the success of strategic investments and partnerships (like Aflac and the Aquarium acquisition) also pose substantial risks, alongside foreign exchange rate fluctuations from international operations Net Losses (2019-2020) | Year | Net Loss (in millions) | | :--- | :--------------------- | | 2020 | $5.8 | | 2019 | $1.8 | - The company's ability to maintain revenue growth depends on improving market penetration, converting leads, maintaining high retention rates, increasing lifetime value per pet, and managing relationships with veterinarians and Territory Partners[70] Average Pet Acquisition Cost (PAC) (2018-2020) | Year | Average PAC | | :--- | :---------- | | 2020 | $247 | | 2019 | $212 | | 2018 | $164 | - The company's subsidiary, APIC, must maintain a surplus of $79.1 million as of December 31, 2020, under risk-based capital regulations, and a Canadian trust account of CAD $5.8 million[95] - The acquisition of Aquarium Software Limited in October 2020 for $48.3 million, intended to improve back-end software and facilitate growth, carries integration risks and may not yield anticipated benefits[116] Risks Related to Compliance with Laws and Regulations Trupanion operates in a heavily regulated environment, facing risks from failing to meet risk-based capital requirements, which could constrain capital and operations. The complexity and evolving nature of insurance laws across multiple jurisdictions (U.S. states, Canada, Bermuda) expose the company to non-compliance, fines, license revocations, and reputational damage. Specific concerns include regulatory approvals for pricing/products, mandatory participation in state plans, licensing for sales/claims personnel, conflicting legal interpretations, and compliance with privacy, data security, and electronic communication laws - APIC's ability to operate is contingent on maintaining risk-based capital levels (e.g., $79.1 million surplus as of December 31, 2020), with failure potentially leading to additional regulatory oversight or contractual breaches[95][154][155] - The company's business is heavily regulated by federal, state, provincial, and territorial governments, with non-compliance potentially resulting in significant liability, license revocation, and increased operating expenses[157][161] - Risks include delays or disallowances of pricing changes by state regulators, mandatory participation in state insurance plans, and potential misinterpretation of licensing requirements for personnel involved in sales or claims processing[165][166][167] - Compliance with evolving privacy and data security laws (U.S. and Canadian) and regulations governing internet, email, and texting communications is critical, with potential for liabilities, reputational damage, and increased costs[169][170][171][172] Risks Related to Ownership of Our Common Stock Ownership of Trupanion's common stock is subject to risks including significant volatility in market price, influenced by operating results, guidance, and analyst coverage. The company does not intend to pay dividends, limiting investor returns to stock value appreciation. Concentrated ownership by directors and principal stockholders, along with anti-takeover provisions in corporate documents, could deter acquisition proposals and depress stock price - The market price of common stock has been and is likely to continue to be volatile, influenced by operating results, guidance, analyst expectations, and macroeconomic conditions[183] - The company does not intend to pay dividends on its common stock, meaning returns are limited to stock value appreciation, and dividend payments are restricted by insurance laws for its subsidiaries[184] - Directors and principal stockholders own a significant percentage of stock, enabling them to exert control over stockholder-approved matters, and anti-takeover provisions in corporate documents could discourage changes in control[185][186] Item 1B. Unresolved Staff Comments Trupanion, Inc. reported that there were no unresolved staff comments from the SEC as of the filing date of this Annual Report on Form 10-K - There are no unresolved staff comments[192] Item 2. Properties Trupanion's principal executive offices are located in Seattle, Washington, in a building the company purchased in August 2018 and occupies 91,437 square feet - The company's principal executive offices are located at 6100 4th Avenue S, Seattle, Washington[193] - Trupanion purchased its office building in August 2018 and occupies 91,437 square feet[193] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 8 (Note 9 in the actual notes) of the Financial Statements. The company has resolved past state insurance regulator inquiries regarding unlicensed employees and is currently addressing similar legacy issues, for which it believes it has adequately reserved. No other current legal matters are deemed individually or in aggregate material - Information on legal proceedings is incorporated by reference from Note 8 of Item 8, 'Financial Statements and Supplementary Data,' under the caption 'Legal Proceedings'[194] - The company has resolved past state insurance regulator inquiries regarding unlicensed employees for telephone enrollments and is currently engaged with a limited number of state regulators to resolve the same legacy issue, for which it believes it has adequately reserved[375] - No other legal proceedings arising in the ordinary course of business are currently considered material individually or in the aggregate[376] Item 4. Mine Safety Disclosures This item is not applicable to Trupanion, Inc.'s operations - Mine Safety Disclosures are not applicable to the registrant[195] PART II Item 5. Market for Registrant's Common Equity, Related Stock Holder Matters and Issuer Purchases of Equity Securities Trupanion's common stock (TRUP) transitioned from NYSE to NASDAQ in June 2016. The company has never paid cash dividends and intends to retain earnings for business growth, with future dividend decisions at the board's discretion and subject to regulatory restrictions on its insurance subsidiaries. As of February 4, 2021, there were 32 registered stockholders. The stock performance graph shows significant outperformance against benchmark indices over the five years ended December 31, 2020 - Trupanion's common stock (TRUP) began trading on the NYSE in July 2014 and transferred to the NASDAQ Global Market in June 2016[198] - The company has never declared or paid cash dividends and intends to retain all available funds for business development, with future dividend payments subject to board discretion and regulatory limitations on its insurance subsidiaries[199] Stock Performance (December 31, 2015 - December 31, 2020) | Index | 12/31/2015 | 12/31/2020 | | :----------------------------- | :--------- | :--------- | | Trupanion Inc. | $100.00 | $1,226.54 | | S&P Small Cap 600 Index | $100.00 | $166.57 | | NASDAQ-100 Technology Sector Index | $100.00 | $326.10 | | Russell 2000 Index | $100.00 | $173.86 | Item 6. Selected Financial Data This section provides a summary of Trupanion's selected consolidated financial data, including statements of operations, balance sheet, and key operating metrics, for the fiscal years ended December 31, 2016 through 2020. The data highlights significant revenue growth, increasing pet enrollment, and changes in profitability and financial position over the five-year period Consolidated Statements of Operations Data (in thousands) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :-------------------------- | :----- | :----- | :----- | :----- | :----- | | Total revenue | $502,028 | $383,936 | $303,956 | $242,667 | $188,230 | | Total cost of revenue | $420,127 | $319,012 | $252,590 | $199,617 | $154,942 | | Total operating expenses | $86,702 | $66,492 | $52,411 | $45,692 | $39,986 | | Net loss | $(5,840) | $(1,809) | $(927) | $(1,503) | $(6,896) | Consolidated Balance Sheet Data (in thousands) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :-------------------------- | :----- | :----- | :----- | :----- | :----- | | Cash and cash equivalents | $139,878 | $29,168 | $26,552 | $25,706 | $23,637 | | Total assets | $498,250 | $257,200 | $207,510 | $105,859 | $82,345 | | Total liabilities | $158,311 | $120,440 | $78,337 | $57,425 | $37,630 | | Total stockholders' equity | $339,939 | $136,760 | $129,173 | $48,434 | $44,715 | Other Operational Data | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :---------------------------------- | :----- | :----- | :----- | :----- | :----- | | Total pets enrolled (at period end) | 862,928 | 646,728 | 521,326 | 423,194 | 343,649 | | Total subscription pets enrolled | 577,957 | 494,026 | 430,770 | 371,683 | 323,233 | | Monthly average revenue per pet | $60.37 | $57.52 | $54.34 | $52.07 | $47.82 | | Average monthly retention | 98.71% | 98.58% | 98.60% | 98.63% | 98.6% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an in-depth analysis of Trupanion's financial performance, highlighting its two business segments and the impact of the COVID-19 pandemic. It details key operating metrics, non-GAAP financial measures, and components of operating results. The discussion covers revenue and expense trends, particularly for 2020 compared to 2019, and factors influencing performance such as pet acquisition investments, retention rates, and geographic sales mix. The company experienced significant revenue growth in 2020, driven by increased pet enrollment and average revenue per pet, alongside rising operating expenses - Trupanion provides medical insurance for cats and dogs across the U.S., Canada, Puerto Rico, and Australia, operating in subscription and other business segments[211] - The company's response to the COVID-19 pandemic included instituting a work-from-home policy, monitoring veterinary invoice data for COVID-19 related claims (none material), and providing member support by slowing subscription cancellation processes[214] Key Operating Metrics (2018-2020) | Metric | 2020 | 2019 | 2018 | | :---------------------------------- | :----- | :----- | :----- | | Total pets enrolled (at period end) | 862,928 | 646,728 | 521,326 | | Total subscription pets enrolled | 577,957 | 494,026 | 430,770 | | Monthly average revenue per pet | $60.37 | $57.52 | $54.34 | | Lifetime value of a pet, including fixed expenses | $653 | $523 | $449 | | Average pet acquisition cost (PAC) | $247 | $212 | $164 | | Average monthly retention | 98.71% | 98.58% | 98.60% | - Net acquisition cost, a non-GAAP measure, is calculated as sales and marketing expense, excluding stock-based compensation and other business segment sales and marketing expense, offset by sign-up fee revenue[220] Overview Trupanion offers medical insurance for cats and dogs across North America and Australia, utilizing a data-driven, vertically-integrated model. It operates in two segments: subscription (Trupanion branded) and other business (B2B, third-party policies, software solutions). The subscription segment focuses on achieving target margins and acquiring pets at a targeted internal rate of return, with leads primarily from veterinarians and existing member referrals - Trupanion provides medical insurance for cats and dogs in the United States, Canada, Puerto Rico, and Australia, using a data-driven, vertically-integrated approach[211] - The company operates in two business segments: subscription business (Trupanion branded products) and other business (primarily writing policies for third parties and offering software solutions)[212] - Lead generation for the subscription business primarily comes from veterinarians and referrals from existing members, converted through the contact center and website[213] Our Response to the COVID-19 Pandemic In response to COVID-19, Trupanion implemented a work-from-home policy for most employees, monitored veterinary invoice data for pandemic-related claims (finding no material impact to date), and provided member support by temporarily slowing subscription cancellation processes. The company continues to monitor the financial impact, acknowledging the high uncertainty of the pandemic's effects - The company instituted a work-from-home policy for substantially all employees in early March to ensure team safety[214] - Trupanion monitored its proprietary database and found no material COVID-19-related veterinary invoices to date[214] - Member support included slowing the process on subscription cancellations related to failed payments, shifting approximately 1,300 cancellations from Q2 to Q3[214] Key Operating Metrics Trupanion tracks key operating metrics including total pets enrolled (862,928 in 2020), total subscription pets enrolled (577,957 in 2020), monthly average revenue per pet ($60.37 in 2020), lifetime value of a pet ($653 in 2020), average pet acquisition cost ($247 in 2020), and average monthly retention (98.71% in 2020). These metrics indicate business growth, unit economics, and member satisfaction Key Operating Metrics (Annual) | Metric | 2020 | 2019 | 2018 | | :---------------------------------- | :----- | :----- | :----- | | Total pets enrolled (at period end) | 862,928 | 646,728 | 521,326 | | Total subscription pets enrolled | 577,957 | 494,026 | 430,770 | | Monthly average revenue per pet | $60.37 | $57.52 | $54.34 | | Lifetime value of a pet, including fixed expenses | $653 | $523 | $449 | | Average pet acquisition cost (PAC) | $247 | $212 | $164 | | Average monthly retention | 98.71% | 98.58% | 98.60% | Key Operating Metrics (Quarterly Q1 2019 - Q4 2020) | Metric | Dec. 31, 2020 | Sept. 30, 2020 | Jun. 30, 2020 | Mar. 31, 2020 | Dec. 31, 2019 | Sept. 30, 2019 | Jun. 30, 2019 | Mar. 31, 2019 | | :---------------------------------- | :------------ | :------------- | :------------ | :------------ | :------------ | :------------- | :------------ | :------------ | | Total pets enrolled | 862,928 | 804,251 | 744,727 | 687,435 | 646,728 | 613,694 | 577,686 | 548,002 | | Total subscription pets enrolled | 577,957 | 552,909 | 529,400 | 508,480 | 494,026 | 479,427 | 461,314 | 445,148 | | Monthly average revenue per pet | $62.03 | $60.87 | $59.40 | $58.96 | $58.58 | $58.12 | $57.11 | $56.13 | | Lifetime value of a pet, including fixed expenses | $653 | $615 | $597 | $535 | $523 | $511 | $482 | $471 | | Average pet acquisition cost (PAC) | $272 | $261 | $199 | $247 | $222 | $208 | $213 | $205 | | Average monthly retention | 98.71% | 98.69% | 98.66% | 98.59% | 98.58% | 98.59% | 98.57% | 98.58% | Non-GAAP Financial Measures Trupanion uses 'Net Acquisition Cost' as a non-GAAP financial measure to evaluate the efficiency of its sales and marketing programs. This metric excludes stock-based compensation and other business segment sales and marketing expenses, offset by sign-up fee revenue, providing a more comparable view across periods for assessing new member acquisition effectiveness - Net acquisition cost is a non-GAAP financial measure calculated as sales and marketing expense, excluding stock-based compensation expense and other business segment sales and marketing expense, offset by sign-up fee revenue[220][222] Net Acquisition Cost Reconciliation (in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------------------------------- | :----- | :----- | :----- | | Sales and marketing expense | $47,837 | $35,451 | $24,999 | | Net of sign-up fee revenue | $(3,292) | $(2,957) | $(2,587) | | Excluding: Stock-based compensation expense | $(2,773) | $(2,120) | $(1,335) | | Excluding: Other business segment sales and marketing expense | $(820) | $(414) | $(377) | | Net acquisition cost | $40,952 | $29,960 | $20,700 | Components of Operating Results Trupanion's operating results are segmented into subscription and other business. Revenue is primarily from subscription fees and third-party policy underwriting. Cost of revenue includes veterinary invoice expenses (claims, administration) and other costs (member service, Territory Partner fees, premium taxes, commissions). Operating expenses are categorized into technology and development, general and administrative, sales and marketing, and depreciation and amortization, with personnel costs being a major component. The company also reports gain/loss from joint venture investments - Revenue is generated from subscription fees for pet medical insurance (subscription business) and from writing policies for third parties and software solutions (other business)[227][228] - Cost of revenue includes veterinary invoice expense (claims, administration, member services, accrued invoices) and other costs such as Territory Partner renewal fees, credit card transaction fees, premium taxes, and commissions to general agents[229][230] - Operating expenses are classified into technology and development, general and administrative, sales and marketing, and depreciation and amortization, with personnel costs being the largest component for most categories[231] Factors Affecting Our Performance Trupanion's performance is influenced by average monthly retention, which depends on perceived value and member experience, and can be impacted by rapid new pet enrollment. Investment in pet acquisition, including sales and marketing spend, is crucial for growth, with costs varying based on initiatives. The timing of new initiatives and price adjustments can cause fluctuations in revenue and profitability. Geographic mix of sales (U.S. vs. Canada) affects average revenue per pet and foreign exchange exposure. The other business segment's performance is subject to contract termination risks and lower margins - Average monthly retention is a key performance driver, influenced by perceived value, member experience, and the ease of veterinary invoice processing; rapid new pet enrollment can temporarily lower the average retention rate[238] - Investment in pet acquisition, measured by net acquisition cost, is critical for growth, with costs varying based on marketing initiatives and desired return on investment[239] - Geographic mix of sales (e.g., U.S. vs. Canada) impacts monthly average revenue per pet and foreign exchange exposure, as Canadian prices are generally higher[241] Results of Operations Trupanion's total revenue increased 31% to $502.0 million in 2020, driven by a 21% rise in subscription business revenue (due to 17% pet enrollment growth and 5% higher average revenue per pet) and an 82% surge in other business revenue, partly from the Aquarium acquisition. Total cost of revenue increased, with subscription cost at 81% of revenue. Operating expenses, including technology and development, general and administrative, and sales and marketing, all saw increases, reflecting investments in growth. The company reported a net loss of $5.8 million in 2020, an increase from $1.8 million in 2019 Revenue by Segment (in thousands) | Segment | 2020 | 2019 | Change (2020 vs 2019) | | :---------------- | :----- | :----- | :-------------------- | | Subscription business | $387,732 | $321,163 | 21% | | Other business | $114,296 | $62,773 | 82% | | Total revenue | $502,028 | $383,936 | 31% | Cost of Revenue by Segment (in thousands) | Segment | 2020 | 2019 | Change (2020 vs 2019) | | :---------------- | :----- | :----- | :-------------------- | | Subscription business | $314,875 | $262,139 | 20% | | Other business | $105,252 | $56,873 | 85% | | Total cost of revenue | $420,127 | $319,012 | 32% | Operating Expenses (in thousands) | Expense Category | 2020 | 2019 | Change (2020 vs 2019) | | :----------------------- | :----- | :----- | :-------------------- | | Technology and development | $9,947 | $7,025 | 42% | | General and administrative | $21,847 | $18,384 | 19% | | Sales and marketing | $47,837 | $35,451 | 35% | | Depreciation and amortization | $7,071 | $5,632 | 26% | | Total operating expenses | $86,702 | $66,492 | 30% | Net Loss (in thousands) | Year | Net Loss | | :--- | :--------- | | 2020 | $(5,840) | | 2019 | $(1,809) | Item 7A. Quantitative and Qualitative Disclosures about Market Risk Trupanion is exposed to market risks primarily from interest rate fluctuations and foreign currency exchange rates. The company's interest rate risk is minimal due to short-term investments and the termination of its line of credit. However, with 16% of revenue from Canada, foreign currency exchange rate changes, such as a 10% shift, could materially impact revenue, expenses, and net income - The company's primary market risks are related to interest rate sensitivities and foreign currency exchange risk[281] - Interest rate risk is limited as the company terminated its line of credit in December 2020, and most investments are short-term, with a 10% change in market rates not expected to have a material impact[282] - Approximately 16% of total revenue is generated in Canada, exposing the company to foreign currency exchange rate fluctuations; a hypothetical 10% change could impact total revenues by $8.1 million, total expenses by $5.2 million, and net income by $2.9 million for 2020[283] Item 8. Financial Statements and Supplementary Data This section presents Trupanion's audited consolidated financial statements for the years ended December 31, 2020, 2019, and 2018, including statements of operations, comprehensive loss, balance sheets, stockholders' equity, and cash flows. Ernst & Young LLP provided an unqualified audit opinion, highlighting critical audit matters related to the reserve for veterinary invoices and the Aquarium acquisition. The notes detail significant accounting policies, business combinations, property, goodwill, investments, fair value measurements, commitments, debt, stock-based compensation, leases, stockholders' equity, segment information, dividend restrictions, and income taxes - Ernst & Young LLP issued an unqualified opinion on Trupanion's consolidated financial statements and internal control over financial reporting for the period ended December 31, 2020[290][291] - Critical audit matters included the complexity of estimating the $28.9 million reserve for veterinary invoices due to management assumptions, and the estimation uncertainty in determining the fair value of identified intangible assets ($19.5 million) from the Aquarium Software Limited acquisition[297][300] - The notes to the financial statements provide detailed information on accounting policies, including revenue recognition, stock-based compensation, and the valuation allowance for deferred tax assets[315][331][339][342] Report of Independent Registered Public Accounting Firm Ernst & Young LLP provided an unqualified opinion on Trupanion's consolidated financial statements and internal control over financial reporting for the fiscal year ended December 31, 2020. The report highlighted critical audit matters concerning the estimation of the reserve for veterinary invoices and the fair value determination of intangible assets from the Aquarium acquisition, both involving complex judgments and assumptions - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting for the fiscal year ended December 31, 2020[290][291] - Critical audit matters included the complexity of estimating the reserve for veterinary invoices ($28.9 million) due to sensitivity to management assumptions (frequency, severity, development factors)[297] - Another critical audit matter was the estimation uncertainty in determining the fair value of identified intangible assets ($19.5 million) from the Aquarium Software Limited acquisition, particularly developed technology and customer relationships[300] Consolidated Statements of Operations The Consolidated Statements of Operations show Trupanion's financial performance, reporting total revenue of $502.0 million in 2020, an increase from $383.9 million in 2019. Despite revenue growth, the company incurred a net loss of $5.8 million in 2020, compared to a net loss of $1.8 million in 2019, with basic and diluted net loss per share at $(0.16) in 2020 Consolidated Statements of Operations (in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------------------- | :----- | :----- | :----- | | Revenue | $502,028 | $383,936 | $303,956 | | Total cost of revenue | $420,127 | $319,012 | $252,590 | | Total operating expenses | $86,702 | $66,492 | $52,411 | | Operating loss | $(4,927) | $(1,920) | $(1,045) | | Net loss | $(5,840) | $(1,809) | $(927) | | Net loss per share (Basic and Diluted) | $(0.16) | $(0.05) | $(0.03) | Consolidated Statements of Comprehensive Loss The Consolidated Statements of Comprehensive Loss indicate a net loss of $5.8 million in 2020, which, when combined with other comprehensive income (primarily from foreign currency translation adjustments and unrealized gains on available-for-sale debt securities), resulted in a comprehensive loss of $3.0 million for the year Consolidated Statements of Comprehensive Loss (in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------------------------------- | :----- | :----- | :----- | | Net loss | $(5,840) | $(1,809) | $(927) | | Other comprehensive income (loss), net of taxes | $2,821 | $1,003 | $(661) | | Comprehensive loss | $(3,019) | $(806) | $(1,588) | Consolidated Balance Sheets Trupanion's Consolidated Balance Sheets show total assets increased significantly to $498.3 million in 2020 from $257.2 million in 2019, primarily driven by a substantial increase in cash and cash equivalents to $139.9 million and the recognition of goodwill and intangible assets from the Aquarium acquisition. Total liabilities also increased to $158.3 million, while total stockholders' equity rose to $339.9 million Consolidated Balance Sheets (in thousands) | Metric | December 31, 2020 | December 31, 2019 | | :-------------------------------------- | :---------------- | :---------------- | | Cash and cash equivalents | $139,878 | $29,168 | | Total assets | $498,250 | $257,200 | | Total liabilities | $158,311 | $120,440 | | Total stockholders' equity | $339,939 | $136,760 | | Goodwill | $33,045 | $0 | | Intangible assets, net | $27,134 | $7,731 | Consolidated Statements of Stockholders' Equity The Consolidated Statements of Stockholders' Equity reflect a significant increase in total stockholders' equity to $339.9 million in 2020 from $136.8 million in 2019. This was primarily due to the issuance of common stock from a private placement, which generated $192.3 million in net proceeds, alongside stock-based compensation expense and other comprehensive income, partially offset by the net loss Consolidated Statements of Stockholders' Equity (in thousands) | Metric | December 31, 2020 | December 31, 2019 | | :-------------------------------------- | :---------------- | :---------------- | | Total Stockholders' Equity | $339,939 | $136,760 | | Additional Paid-in Capital | $439,007 | $232,731 | | Accumulated Deficit | $(91,360) | $(85,520) | | Issuance of common stock from private placement | $192,265 (2020) | - | | Stock-based compensation expense | $9,147 (2020) | $7,050 (2019) | Consolidated Statements of Cash Flows Trupanion's Consolidated Statements of Cash Flows show net cash provided by operating activities increased to $21.5 million in 2020 from $16.2 million in 2019. Net cash used in investing activities significantly increased to $76.7 million in 2020, primarily due to the Aquarium acquisition. Net cash provided by financing activities surged to $170.8 million in 2020, mainly from $192.3 million in net proceeds from a common stock private placement, resulting in a net increase of $115.6 million in cash and cash equivalents Consolidated Statements of Cash Flows (in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------------------------------- | :----- | :----- | :----- | | Net cash provided by operating activities | $21,544 | $16,157 | $12,680 | | Net cash used in investing activities | $(76,747) | $(28,008) | $(81,451) | | Net cash provided by financing activities | $170,848 | $14,044 | $71,229 | | Net change in cash, cash equivalents, and restricted cash | $115,629 | $2,616 | $1,646 | - The increase in financing cash flows was primarily due to $192.3 million in net proceeds from the sale of common stock to Aflac, partially offset by the repayment and termination of the line of credit facility[270] Notes to Consolidated Financial Statements The notes detail Trupanion's accounting policies, including revenue recognition, stock-based compensation, and income taxes. Key disclosures include the $48.3 million acquisition of Aquarium Software Limited, resulting in $19.5 million in intangible assets and $31.4 million in goodwill. The company's reserve for veterinary invoices totaled $28.9 million in 2020. It also outlines investments, fair value measurements, contractual commitments, debt repayment, and segment reporting, emphasizing regulatory restrictions on dividends and statutory surplus requirements for its insurance subsidiaries - The company acquired 100% of Aquarium Software Limited for approximately $48.3 million in net cash in October 2020, recognizing $19.5 million in amortizable intangible assets and $31.4 million in goodwill[352][354] - The reserve for veterinary invoices, an estimate of future claim payments, totaled $28.9 million as of December 31, 2020, with $19.9 million for the subscription business and $9.0 million for the other business segment[275][378][380] - Trupanion terminated its $50.0 million revolving line of credit facility in December 2020, repaying all outstanding obligations[386] - APIC, the New York-domiciled insurance subsidiary, maintained $93.2 million in statutory capital and surplus as of December 31, 2020, exceeding the required $79.1 million[407] - As of December 31, 2020, the company had U.S. federal net operating loss carryforwards of approximately $157.8 million (tax-effected $37.0 million) that will begin to expire in 2027, with a full valuation allowance recorded against U.S. federal deferred tax assets[148][411][412] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Trupanion, Inc. reported that there were no changes in or disagreements with its accountants on accounting and financial disclosure matters during the period covered by this report - There were no changes in or disagreements with accountants on accounting and financial disclosure[422] Item 9A. Controls and Procedures Trupanion's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective as of December 31, 2020. Management also assessed and concluded that internal control over financial reporting was effective, excluding the recently acquired Aquarium business due to its immateriality and ongoing integration. Ernst & Young LLP concurred with management's assessment, providing an unqualified opinion on the effectiveness of internal control over financial reporting - Management, with CEO and CFO participation, evaluated and concluded that disclosure controls and procedures were effective as of December 31, 2020[423] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO 2013 framework[424] - The assessment of internal control over financial reporting excluded the Aquarium business, acquired in October 2020, as it was immaterial (less than 10% of total assets and 1% of total revenue) and not yet fully integrated[425][432] - Ernst & Young LLP provided an unqualified opinion on the effectiveness of Trupanion's internal control over financial reporting as of December 31, 2020[431] Item 9B. Other Information Trupanion, Inc. reported that there is no other information required to be disclosed in this item - No other information is required to be disclosed[439] PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from Trupanion's definitive proxy statement for the 2021 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[442] Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from Trupanion's definitive proxy statement to be filed for the 2021 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[443] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details regarding security ownership of certain beneficial owners and management, along with related stockholder matters, are incorporated by reference from Trupanion's definitive proxy statement for the 2021 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[444] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from Trupanion's definitive proxy statement for the 2021 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[445] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from Trupanion's definitive proxy statement for the 2021 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[446] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements filed as part of the Annual Report on Form 10-K, including Schedule I Condensed Financial Information of Registrant, and provides a comprehensive table of exhibits incorporated by reference or filed herewith, such as corporate governance documents, equity compensation plans, and reinsurance agreements - The financial statements listed in the Index to Financial Statements are filed as part of this Annual Report on Form 10-K, including Schedule I Condensed Financial Information of Registrant[449] - A comprehensive list of exhibits, including corporate organizational documents, equity compensation plans, and various agreements (e.g., with Aflac and Omega General Insurance Company), are either filed herewith or incorporated by reference[450][451][452] Item 16. Form 10-K Summary Trupanion, Inc. reported that there is no Form 10-K Summary provided in this Annual Report - No Form 10-K Summary is provided[454] Signatures This section contains the required signatures of Trupanion, Inc.'s Chief Executive Officer, Chief Financial Officer, and members of the Board of Directors, affirming the filing of the Annual Report on Form 10-K - The report is duly signed on behalf of Trupanion, Inc. by Darryl Rawlings, Chief Executive Officer, and Tricia Plouf, President and Chief Financial Officer, along with other directors[458][462] Parent Company Financials This section provides condensed unconsolidated financial statements for Trupanion, Inc. (Parent Company Only), including statements of operations and comprehensive loss, balance sheets, and cash flows for the years ended December 31, 2018, 2019, and 2020. These statements show the parent company's financial position and performance, with investments in subsidiaries accounted for using the equity method and cash dividends received from a subsidiary Condensed Statements of Operations and Comprehensive Loss (Parent Company Only, in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------------------------------- | :----- | :----- | :----- | | Total expenses | $12,855 | $10,246 | $7,674 | | Operating loss | $(12,963) | $(10,451) | $(7,674) | | Net loss | $(5,840) | $(1,809) | $(927) | | Comprehensive loss | $(3,019) | $(806) | $(1,588) | Condensed Balance Sheets (Parent Company Only, in thousands) | Metric | December 31, 2020 | December 31, 2019 | | :-------------------------------------- | :---------------- | :---------------- | | Total assets | $341,463 | $164,275 | | Total liabilities | $1,524 | $27,515 | | Total stockholders' equity | $339,939 | $136,760 | | Advances to and investments in subsidiaries | $209,031 | $138,174 | Condensed Statements of Cash Flows (Parent Company Only, in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------------------------------- | :----- | :----- | :----- | | Net cash provided by (used in) operating activities | $7,319 | $4,305 | $2,963 | | Net cash used in investing activities | $(73,359) | $(19,678) | $(72,285) | | Net cash provided by financing activities | $170,848 | $14,482 | $71,150 | | Net change in cash, cash equivalents, and restricted cash | $104,808 | $(891) | $1,828 | - Trupanion, Inc. received cash dividends from a subsidiary of $4.7 million, $3.9 million, and $2.2 million for the years ended December 31, 2020, 2019, and 2018, respectively[469]