Recent progress by the National Association of Insurance Commissioners to provide more granular detail about individual property and casualty business lines in annual and quarterly statement blanks could further benefit from the addition of a distinct line to capture one of the sector's fastest-growing niches.
Jab Holding Co. SARL's June 20 agreement to acquire Crum & Forster Pet Insurance Group and an affiliate from Fairfax Financial Holdings Ltd. for the combination of $1.15 billion cash and $250 million in seller notes offered a reminder of the rapid expansion and significant market opportunity that has been associated with the pet health business.
Increases in pet ownership during the pandemic in combination with rapidly rising veterinary costs provide fertile ground for the expansion of a business with a low penetration rate in the U.S. market relative to other developed economies.
Regulatory changes in the way the product is classified could provide additional insight into the growth and profitability of the business while potentially affording new and existing underwriters with an ability to expand at an even more rapid pace.
Standardized reporting
In an effort to promote consistency of reporting, the NAIC has implemented standard line-of-business disclosures across Parts 1 and 2 of quarterly statements as well as the Underwriting and Investment Exhibit, state pages and Insurance Expense Exhibit of annual statements.
The changes included the addition of 16 new rows of premium and incurred-loss data on the quarterly statement blank to break out line-of-business-level reporting in a manner that is generally consistent with certain annual statement disclosures. What had previously been private-passenger auto liability in quarterly statements now is broken out as no-fault business and other private auto liability, for example. Categories of accident and health business now align with those used on life and health statement blanks including through the creation of separate lines for dental, disability, vision and long-term care insurance.
The additional granularity has already proven essential as the industry attempts to get a handle on the extent to which economic inflation has caused loss costs to surge in the private auto physical damage business, one of the lines that is newly broken out on a quarterly basis. But it also highlights an increasing need to break out pet insurance as a distinct offering as opposed to its current status as one of numerous lines classified as inland marine business as the industry's presence in several of the newly added lines is considerably smaller.
Pet insurance appears poised to gain an even more prominent position to the extent it can continue to grow at rates well in excess of the U.S. P&C industry, overall.
The big get bigger
Based on a combination of disclosures in 2021 annual statements and recent rate filings, we were able to arrive at an estimate of more than $2 billion in direct pet insurance premiums reported on the inland marine line: $634.8 million for Trupanion Inc.'s American Pet Insurance Co., $282.0 million among Chubb Ltd.'s Westchester Fire Insurance Co. (PA) and Indemnity Insurance Co. of North America (PA), $176.6 million for Nationwide Mutual Insurance Co.'s Veterinary Pet Insurance Co., $172.8 million for American Modern Home Insurance Co. and $145.4 million for AXA SA's XL Specialty Insurance Co., among others including relatively recent market entrant Lemonade Inc.
United States Fire Insurance Co. Inc., the Fairfax Financial company that serves as the underwriter for pet insurance products written using the ASPCA, Hartville, Pumpkin, Petco Health and Wellness Co. Inc., Roamly, Doggo and Spot brands, reported $296.4 million in inland marine direct premiums written in 2021. North River Insurance Co., another Fairfax Financial company that underwrites pet insurance in partnership with the affiliated Pethealth Inc., reported $33.6 million in 2021 inland marine direct premiums written. Pethealth, which will be sold as part of the pending M&A deal, operates under the 24Pet brand.
Both carriers have other active policy forms under the inland marine line and pet insurance does not fully account for their total inland marine writings. A recent rate filing showed that pet insurance accounted for 71.2% of United States Fire's $33.3 million in inland marine direct premiums earned in California in 2020. Travel and bloodstock coverages represented the vast majority of the rest.
Independence American Insurance Co., which is ultimately controlled by the same investor group that is acquiring the Crum & Forster Pet business, generated $101.3 million in inland marine direct premiums written in 2021. But that does not fully account for its pet insurance business based on the $133.3 million in pet health direct premiums written associated with four managing general agencies as reported on Note 19 of its 2021 annual statement.
Jab Holding in the June 20 announcement estimated that combined gross premiums written and pet health services revenues from its global pet insurance and ecosystem platform would top $1.2 billion by 2023.
A proxy statement filed in conjunction with a series of transactions in 2021 projected that Independence Pet Group would generate $243 million in revenue in 2023 with an associated agency business that incorporates traditional and tech-enabled distribution would produce $51 million in revenue that year. Jab Holding also holds positions in multiple providers of pet health care services, including National Veterinary Associates Inc.
Options under consideration
The deal announcement referenced North American Pet Health Insurance Association data that showed year-over-year growth rates in U.S. premium volume in excess of 20% in each of the last four years, with the pace of expansion increasing to 27.5% in 2020 and 30.4% in 2021. Total U.S. inland marine direct premiums written increased by 26.3% between 2017 and 2021.
U.S. pet insurance penetration rates were 3.9% of dogs and less than 1.0% of cats, the organization said, leaving plenty of room for future upside. There has also been a significant push for rate increases in an inflationary environment where the Consumer Price Index for veterinary services increased by 7.4% in May. S&P Global Market Intelligence obtained 73 filings for double-digit pet insurance rate increases on a year-to-date basis through June 23, including 16 from Lemonade Insurance Co. This does not include results from Florida where pet insurance rates must be filed on a distinct livestock and live animals business line.
To the extent the business continues to expand at 20% per year, which seems plausible under a scenario characterized by significant increases in both exposures and pricing, it would exceed $6 billion in annual premium volume by 2026.
The implications of the rapid expansion of the business have not gone unnoticed by regulators.
Minutes of an April 2021 meeting of the NAIC's Pet Insurance Working Group show that the Rhode Island Department of Business Regulation had been considering whether the inland marine line remained the most appropriate place for the business given a view that some of its elements more closely resemble human health insurance than property insurance.
Physicians Mutual Insurance Co., a provider of dental and Medicare supplement business that files life and health statement blanks, changed its certificate of authority to P&C in its domiciliary state in anticipation of the recent launch of its pet insurance product.
While there could be similar complexities associated with a pet insurance re-designation, minutes of a December 2021 meeting showed support for at a minimum finding a way for data associated with the business to be disclosed on annual statements.
Trupanion CEO Darryl Rawlings predicted in his most recent annual letter to shareholders that the NAIC could assign pet insurance its own category within a five-to-10 year period. In addition to the transparency being sought by some regulators and consumer groups, Rawlings projected that such a change could result in improved leverage for the industry.
Trupanion's current capital requirements for the business are approximately 5:1 based on the inland marine classification, Rawlings said, and the company's primary insurance unit ran a ratio of net premiums written to average capital and surplus of nearly 6:1 in 2021.
"While we don't want to overly speculate, we believe [a separate designation] will result in better leverage than we see today," Rawlings wrote. "If and when this occurs, we would expect to be able to self-fund higher growth rates than we can today."