While activity in the pet insurance space has heated up in 2022, pet insurance specialist Trupanion Inc.'s stock price has had another year to forget.
Trupanion's shares underperformed in both 2021 and 2022 despite company expansion and opportunities presented by a growing market. One possible reason is Trupanion's vulnerability, like many other companies, to macroeconomic factors like inflation, Piper Sandler analyst John Barnidge said in an interview.
The pet insurer's stock has fallen about 60% year-to-date.
Similar to what is happening in the auto space, loss costs for pet insurance are going up "astronomically," Kaenan Hertz, managing partner with Insurtech Advisors, said in an interview. Hertz said veterinary costs are up about 18% year over year.
"That's the difficulty right now ... expenses are going up faster than these insurtechs and pet insurers can keep up with from a pricing perspective," Hertz said. "Distribution costs and places you can go to find larger groups of pet owners are probably becoming smaller and smaller."
Trupanion's loss ratios have been steadily rising since the fourth quarter of 2021, and the pet insurer has filed for several rate increases due to higher expenses.
But despite the stock's struggles, Barnidge said Trupanion has recorded "strong growth" in 2022. The pet insurer has also done well with some international bolt-on acquisitions, Barnidige said, noting that Trupanion has good growth avenues and channels across the globe.
Trupanion's shares were essentially flat for the week ending Dec. 2.
Partnerships, M&A
In contrast, Petco Health and Wellness Company Inc.'s shares surged this week after it released third-quarter results and hosted an earnings call where executives shared further details about its recently announced partnership with Nationwide Mutual Group, which will enable new insurance offerings with a focus on pet care to be fulfilled through Petco's animal medical centers.
Petco CEO Ronald Coughlin said Nationwide had initially approached him about the partnership and he sees insurance as having "significant upside."
"If you look at it today, it's about a $2.6 billion market, but penetration in the United States is relatively low vis-a-vis Europe," Coughlin said. "Europe has roughly 25% penetration; the U.S. is a fraction of that."
The pet insurance space has also seen elevated activity this year when it comes to M&A.
Earlier this year, Jab Holding Co. SARL unit Independence Pet Group Inc. acquired Crum & Forster Pet Insurance Group and an affiliate from Fairfax Financial Holdings Limited in a deal valued at about $1.4 billion.
One obstacle to fully understanding the exact size of the market is that pet insurance is not broken out as a separate category in regulatory filings. Changes in the way the product is classified would provide additional insight into the profitability and growth of the business line, which might serve to attract new underwriters to the market.
Insurtechs sitting it out
Chubb Ltd., Nationwide and Trupanion are among the largest players in the pet insurance space and have a fairly dominant hold on the market.
That control by a few established incumbents is likely causing insurtechs to be a little warier of jumping into that space, according to Hertz. A few digital startups have ventured into the space.
Lemonade Inc., whose stock has fallen dramatically over the two last years, has been in the pet insurance business since it launched its health offering for cats and dogs in July 2020. In October of this year, Chewy Inc. announced a partnership with the insurtech to expand its suite of insurance and wellness offerings with new plans provided by Lemonade.
Lemonade reported $92.3 million of inland marine premium, of which pet insurance is a large part, year-to-date through the third quarter. That marks a year-over-year increase of 105%.
Although Hertz finds the relationship between Chewy and Lemonade to be positive, he said the biggest challenge is still that the marketplace is dominated by a few "very large, entrenched competitors."
"Playing at the margin means you have to really find a unique niche in order to be successful," Hertz said.
Lemonade finished the week down 1.72%.
The S&P 500 climbed 1.13% to 4,071.70 for the week, while the S&P 500 U.S. Insurance index ticked up 0.59% to 610.27.