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Pethealth currently
offers its PetCare pet insurance programs in 10 provinces, 48 states and Washington, D.C.
Financial
Insurance
(TSXV: PTZ)
Pethealth Inc.
Suite 400, 710 Dorval Drive
Oakville ON Canada L6K 3V7
Phone: 905-842-2615
Mark Warren
President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
April 7, 2005
BIO:
Mr. Warren Mark Warren
President and Chief Executive Officer
Mr. Warren is a graduate of the University of Toronto and The London School of Economics.
He spent 11 years holding a number of senior positions with a U.K. merchant bank working
in its London, Tokyo and Toronto offices. Following his departure from the bank, Mr.
Warren was involved in a number of financial start-ups (including the mutual fund and
insurance industries). He is the Company´s largest shareholder and enjoys the
companionship of his 4 dogs and 2 cats.
Company Profile:
Founded in February 1998, Pethealth, the second largest provider of pet insurance in North
America, is currently offering its PetCare pet insurance programs in 10 provinces, 48
states and Washington, D.C. In addition to the PetCare Pet Insurance Programs, Pethealth
offers its pet insurance programs under a variety of names, including QuickCare Pet
Insurance Programs, ShelterCare and Union Plus Pet Insurance. As of September 30th 2004,
Pethealth's paid policies in force exceeded 137,000.
In the United States, the PetCare Pet Insurance Programs are underwritten by Lincoln
General Insurance Company and administered by PetCare Insurance Brokers Ltd. and PetCare
Insurance Agency, Ltd. Coverage is available in all states other than AK and MA. PetCare
is a trademark of PETCO Animal Supplies, Inc. and is used with permission. In Canada, the
Company’s pet insurance is underwritten by ING Novex Insurance Company of Canada and
Kingsway General Insurance Company, administered by PetCare Insurance Brokers Ltd., and
distributed in Quebec by P. Morin Courtier en assurances Inc. Coverage is available in all
provinces, excluding the Territories. In Canada, PetCare is a registered trademark of
Pethealth Inc.
In addition, Pethealth, through its wholly owned subsidiaries Pethealth Services Inc. and
Pethealth Services (USA) Inc., is a leading provider of companion animal microchip
technology and related pet recovery and database managed services. Pethealth operates this
under the trade name 24PetWatch. Pethealth is based in Oakville, Ontario.
CEOCFOinterviews: Mr.
Warren, what was your vision when you started Pethealth?
Mr. Warren: “With respect to the vision, it was narrower
when we started than it is now. We had identified that there was an opportunity for us to
move in and rapidly establish ourselves as a leading provider, if not ‘the’
leading provider, of pet health insurance or major medical insurance for dogs and cats. It
has expanded beyond that to the point where Pethealth’s vision is to become the
largest owner of comprehensive medical information for dogs and cats. We believe we can
create a series of revenue streams off of that data base through the provision of not only
insurance but other related services to pet owners, clinics and shelters throughout North
America.”
CEOCFOinterviews: Will
you tell us about the market?
Mr. Warren: “I think the market is still very much in
its infancy. One could make the argument that we could readily do with a few more players
coming into the space. It is dominated by two providers in the United States, ourselves
and a competitor that is based in California and then in Canada, by two providers,
ourselves and another one. The numbers vary but I suspect we are still operating at less
than one percent pet owner usage of medical insurance for dogs and cats. It has a lot of
upside to it. Our position in the market is that we are the largest provider of pet health
insurance in Canada. We estimate that we have somewhere between 54 and 57% of the market.
In the United States, we believe we are roughly about a 25 or 27% market share right now.
The numbers are not exact, one of our competitors actually gives us a 30% share, but we
will take a slightly more conservative tack. Our view is that the market will continue to
grow and that we will grow about twice the industry average.”
CEOCFOinterviews: Why do
so few pet owners have pet insurance?
Mr. Warren: “I think that if we are honest with
ourselves and our competitors, we are not competing against one another. Our principal
competition is lack of awareness. I believe pet insurance will move mainstream and we are
not too far from seeing some of the major retailers moving into the space. We are
delighted to be the exclusive provider of pet insurance through PETCO. They are a great
company that bought into our vision long ago, and is the best example of a partnership
between a pet insurance provider and major retailer. I am a little surprised that others
have not done the same but I think we are getting very close, so I think that will help
create a much greater awareness. There are two other key factors and the first is the love
of pets. More pets are being considered members of the family and that is certainly a
precondition to people actually wanting to buy major medical coverage for their dogs and
cats. The other thing is what your vets are charging you. Veterinary fees are increasing
and have been increasing over-and-above the rate of inflation. That is not in any way to
suggest that the vets are overcharging for their services. The range of quality care that
is being made available to pet owners allows them to have treatments done that were not
imaginable five or seven years ago. We have paid out claims for pacemakers for dogs, so
that gives you an idea of where the veterinary industry is going. These higher quality
treatments come with higher costs.”
CEOCFOinterviews: In
what other ways do you increase awareness?
Mr. Warren: “We have a great program with shelters. We
looked at the shelters as a potential distribution channel, and recognized that there was
no insurance offering that was specifically tailored to newly adopted pets coming out of
shelters. The big issue for us was how to achieve distribution given the fact that the
shelter world in the United States is very fragmented. We were fortunate through PETCO to
be introduced to the people at Petfinder.com and Petfinder has created a site that allows
shelters to load their pets onto the Petfinder site. That site promotes the adoption of
pets very effectively. There is a tremendous amount of traffic and allows shelters to
broaden the base of adopters from their immediate vicinity around the shelter to right
across the country and sometimes across borders. We were then able to execute a deal with
Petfinder and create a program called ShelterCare. That program, which offers a pre-paid
thirty-day insurance policy for pet owners with newly adopted pets, courtesy of Petfinder,
provides a great lead source for us to convert into longer-term policy sales. We have had
over 5000 animal welfare organizations make use of the insurance program and we have had
over 500,000 adopted pets go through that program to date.”
CEOCFOinterviews: Do you
have a high renewal rate?
Mr. Warren: “The renewal rate varies. Canadians have a
higher renewal rate than Americans do. We are the only pet insurance provider operating in
both Canada and the United States, so I think our blended rate is higher than our
competitors in the United States are. Renewal, to a large extent, is driven by usage. With
pet insurance, you have a higher usage rate that you would for claims for your home or
automobile. That drives retention if you have very good service, which we have. We are the
leaders in terms of service provision. That will drive a higher renewal rate.”
CEOCFOinterviews: You
mentioned a comprehensive source for pet health, what else are you doing?
Mr. Warren: “We are a leading provider of microchip or
RFID technology in North America. We entered the market fairly recently. In Canada, we are
the largest provider of microchips to shelters and clinics in terms of chip sales on an
annual basis. We estimate that we have between sixty and sixty-five percent market share
in Canada. In the United States, we have entered more recently and we did not go national
in the United States until early last year. We estimate that we already have somewhere
between fifteen and seventeen percent, maybe higher, of microchip sales for dogs and cats
principally through shelters and to a lesser extent through vet clinics. It is our view
that ultimately, pet owners will want to have access to comprehensive medical information
for dogs and cats and the best way to do that is to have it linked through a microchip
number. Microchips are rice-grain-sized transponders that are inserted between the
shoulder blades of a dog or cat and that microchip number is then registered in the
database. It has been principally used in bringing lost cats and dogs home. In shelters or
clinics, they have a reader that scans the microchip and the number comes up. They phone
the database manager and the manager has the information on where to get a hold of the pet
owner. Our view is that there are much broader applications for RFID microchip use in
companion animals that we will be branding with the 24PetWatch name. For instance,
we also have a medical information platform that has been created as part of our
involvement as a leading provider of pet medical insurance. It is our view that pet owners
will want to have greater access to their pet’s medical information. We are the only
ones that can link the medical information to the microchip number, allowing pet owners
the convenience of online access to their pet’s medical history."
CEOCFOinterviews: Do you
do any direct-to-consumer advertising?
Mr. Warren: “We were the first in North America to do
direct-to-consumer television advertising and we continue to do that. We have had ads
running in the Los Angeles and San Diego areas this month. We have done advertising in the
Atlanta area and various parts of Florida, and in northern California. We do move it
around and we do a fair amount of television advertising in southern Ontario and to a
lesser extent in other metropolitan areas and Canada. Our view is that insurance will go
mainstream. It is our view that major retailers will look to be offering services as a
whole to their customer base and pet insurance will be one of those services. We think
that over the long-term, that is the best means for distribution.”
CEOCFOinterviews: Why
are companies like PETCO choosing you to be their provider?
Mr. Warren: “I think with PETCO, we had a vision that
was very different from others. I am not looking to establish my brand, I am looking to
add value to theirs, meaning my partners. I think that was a fresh approach that they had
not heard before. With respect to service provision, we completely redefined the standards
of service, particularly with respect to the time it takes to turn around a claim. We were
the first to represent that we would turn around claims in five business days. Once we
received the invoices and completed claims forms, a check will be issued to the pet owner
within five business days. After mail delivery, you should have your check within ten to
twelve days. That is certainly better than what the industry was providing. We have even
gone a step further. We launched in Canada, demonstrated in the U.S., and will be
launching in April the first dot.net online claims adjustment tool for clinics.
Traditionally, pet insurance has operated on a reimbursement basis. The vet presents you
with a bill, say, for $1,700. You pay the $1,700 and wait to be reimbursed by the insurer.
Now, with PetCare, that claim can be adjusted online at the clinic. I just have to pay the
deductible and walk out the door and that money shows up in the vet’s bank account in
approximately 48 hours. This is a value added in terms of relationship building for the
clinic and the pet owner. It is a value-added service that the vet can advertise to his
clients and it makes our business more efficient and makes the pet owners a lot happier.”
CEOCFOinterviews: Will
you tell us about the financial condition of the company?
Mr. Warren: “The financial picture moves onward and
upward. We will be releasing our 2004 numbers next week. Revenue growth continues to grow
on a year-on-year basis and continues to grow nicely. Policy growth continues to go up. We
have disclosed that it is our long-term intention to establish a reinsurance operation in Barbados
with our model being to act in the U.S. as we do right now, as a managing general agent,
and then to add a reinsurance component for our U.S. risk. We believe that is the best
model for us to maximize the profitability for the U.S. business. As a result, we are
focusing as much on lost ratios as we are on policy growth. Normally, an MGA would be not
so concerned about loss ratios and just try to grow policy sales. If you are intending to
take risks yourselves, you have to be concerned with the quality of policies you are
taking on. We have become increasingly more attentive there. Our loss ratios continue to
be well within our established bands, and we believe they are the best in the industry.
The two principal measurements that I look at in terms of how this business is going are
acquisition cost for policy, which continues to decline but even more importantly, our
administration cost for policy. There is a suggestion out there that administration cost
for policy, your target is about 15% of your premium. Ours is lower, which I think makes
us the leaders. Ours equates to about nine dollars per policy per quarter, which is a
level that our competitors cannot match. That is what I focus on and things like being
able to adjust claims online will make the administration side of our business even more
efficient.”
CEOCFOinterviews: In
closing, why should potential investors be interested and what should they know that they
might not realize when they first look at the company?
Mr. Warren: “I think that they would have to buy into
several things with the notion that the quality of care available in vet clinics continues
to expand and the cost of that care will continue to rise. As pet owners continue to see
their pets as members of the family, financial euthanasia becomes less of an option and as
a result, major medical insurance coverage for their pets becomes more viable. You have to
buy into that and the notion that we are operating at 1% of dogs and cats being insured.
After a seven-year period, we are going to see 13-15% of pets insured and that is the
total industry. If you buy into that, then you are going to want to have an investment in
this space. The question is which company do you want to put your money on? I think our
model is heads and shoulders above anyone else in the industry. The fact that we have
positioned ourselves as the major owner of comprehensive medical information for dogs and
cats, linked to RFID technology and our ability to drive a more finely tuned insurance
business off that, is something investors can accept quite readily. The big question is
what other revenue streams can come from that and how successful will we be at creating
additional revenue streams outside of insurance. Our view is that we are in a good
position, and no-one else has a comparable model. There are some large entities out there
trying to figure out how they copy it. We are in a good position to go out there and
execute on a model that will see us generating significant revenues coming from
non-insurance related services that pet owners, clinics and shelters will all want to take
advantage.”
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