Pets Best to change underwriters says current underwriter and Trupanion CEO, explaining it’s “not capital efficient”

Last week, Trupanion (NASDAQ: TRUP), which, in addition to the core subscription product bearing its namesake also underwrites Pets Best, released its fourth quarter financial results and annual report.  CEO and founder Darryl Rawlings dropped something of a bombshell: Trupanion would no longer be underwriting Pets Best.

Trupanion reported that growth in the company’s Other Business segment, which is how the company classifies “revenue from other product offerings that generally have a business-to-business relationship..”  was projected “to slow in 2023 as our partner [Pets Best] transitions to an additional underwriter for their new book of business. We currently expect growth in this segment to approximate 10% in 2023, but keep in mind that timing may shift.”

“The cost of capital has become more expensive,” Trupanion founder and CEO Darryl Rawlings explained the day following the company’s earnings report at a conference hosted by Bank of America. “I mean, we’re living in a world where the cost of capital is more expensive. [T]he Pets Best business has the same capital requirements as Trupanion. That business has about a two to three percent margin,” Rawlings further explained about Pets Best. “And we’re targeting a 15 [percent margin] for Trupanion.”

Pet insurance needs its own category, but regulators have been slow to act

The regulatory framework in place for “inland marine,” which is the subcategory within the family of  property and casualty insurance under which pet insurance is now classified, has relatively high capital reserve requirements compared to what’s required for human health insurers because human health insurance companies are classified under health, Rawlings explained last week.

Although state insurance regulators have been working diligently since completing the pet insurance model legislation at drafting reporting requirements for what are called Market Conduct Annual Statements or MCAS, consumer liaison Birny Birnbaum told TCR he’s not optimistic that the requirements will bring about much if any improvements for consumers because the information the insurance companies must report is kept confidential. Note: Much more to come in forthcoming reporting on pet insurance MCAS regulatory work.

Reclassification is one way the lack of transparency in the pet insurance category could be addressed. For years, Trupanion’s leaders have led this charge. Another major challenge reclassification would address (or would have) where Trupanion is concerned: Pets Best. Currently, unlike human health insurance products, pet insurers are held to the same capital reserve requirements as other property and casualty insurers because they need to be able to sustain catastrophic losses, e.g., natural disasters. Rawlings explained that Trupanion has higher margins than Pets Best, which means that it would be required to keep much more capital, proportionately, in reserve for Pets Best than it would for its own insurance. And with interest rates no higher than in the recent past, that is apparently a burden Trupanion does not want to absorb.

“Right now, we’re around 12 ish,” the Trupanion CEO told investors, referring to Trupanion’s profit margin. “You would be much better off using that capital for Trupanion,” he explained. “The reality is that the Pets Best business has been way more capital intensive because there’s a growth rate penalty on how much you need to hold. If you’re growing faster, the faster you grow, the more the departments of insurance make you hold as a percentage of revenue. And it applies to all of it. They’ve been growing 40 plus percent a year,” he continued, referring to Pets Best, “and that growth penalty has been costing us capital reserves, not just for the 60 million that we’ve needed to hold for them, but it has made us have to hold more capital for our Trupanion products. So, it’s been not capital efficient.”

In other words, the combination of the high cost of the necessary capital reserves, because of interest rate increases, plus Pets Best fast growth, makes it an inefficient partner for Trupanion.

Pets Best Leaders Decline To Discuss Implications For Policy Holders

Pets Best parent company Synchrony CEO Brian Doubles would not respond to requests for comment on implications for policy holders, nor would Jonathan Wainberg who oversees Synchrony’s pet division, including Pets Best. Despite repeated requests for insight into how the change in underwriters will impact consumers, Pets Best would only issue this statement through a press aide (we were told to attribute to Melissa Gutierrez, Pets Best general manager):

“At Pets Best, our commitment has always been, and remains, to offer pet parents the most comprehensive, personalized, and affordable pet health insurance coverage. As a managing general agent, Pets Best works with multiple underwriters to ensure we offer the best insurance plans for our customers. We’ve seen significant growth over the past several years, and proactively work to make sure we have the best underwriter for our customers. We do not anticipate any impacts on our current policyholders and would notify customers if there ever was a change impacting their policy.”



Trupanion (NASDAQ: TRUP) released its fourth quarter financial results and annual report after the close of trading on Wednesday, February 15. From the annual report SEC filing 2/15/2023:

“We expect to roll off a portion of our other business starting in 2023 in order to allow us to utilize capital for other purposes, but we do not control the timing or extent of this roll off and, accordingly, it may not proceed as we expect, which could cause our results to fluctuate or have other unexpected impacts on our business. Changes to this business may be volatile due to the nature of the relationships. Further, this business historically has had, and we expect it to continue to have,
lower margins than our core business. As a result of this business, we are subject to additional regulatory requirements and scrutiny, which increase our costs
and risks, and may have an adverse effect on our operations. Further, administration of this business and any similar business in the future may divert our time
and attention away from our core business, which could adversely affect our operating results in the aggregate….”