Pet Insurance Stock Trupanion: Dogged By Rumors

Small cap pet insurance stock Trupanion Inc (NASDAQ: TRUP) is the tenth most shorted stock on the NYSE with short interest of 35.19% according to Highshortinterest.com and shares have been falling off since the summer. That might seem odd given how big the pet industry is and how much people love their pets; but the Company seems to be dogged by rumors of government investigations.

Founded in 2000 and headquartered in Seattle, Trupanion provides medical insurance for cats and dogs throughout the United States and Canada who's policies are issued in the United States by its wholly-owned insurance entity American Pet Insurance Company and in Canada by Omega General Insurance Company.

In June, Trupanion had closed a public offering of 1,818,182 shares of its common stock as well as 272,727 additional shares for $33.00 per share and estimated aggregate net proceeds of approximately $65.6 million. The Company said it was seeking to reduce its fixed expenses, expand the funds available to invest in growth and drive other strategic initiatives and fund the purchase of its home office building in Seattle.

It wasn't until mid-July when shares peaked and started falling heading into the early August Q2 2018 earnings release which, on the surface, were not that bad:

Total revenue was $73.4 million, an increase of 26% compared to the second quarter of 2017. Total enrolled pets (including pets from our other business segment) was 472,480 at June 30, 2018, an increase of 23% over June 30, 2017. Subscription business revenue was $63.9 million, an increase of 21% compared to the second quarter of 2017. Subscription enrolled pets was 401,033 at June 30, 2018, an increase of 16% over June 30, 2017. Net loss of $(0.4) million, or $(0.01) per basic and diluted share, compared to net income of $0.4 million, or $0.01 per basic and diluted share, in the second quarter of 2017.

In September, Raymond James analyst John Ransom had also initiated coverage by saying:

"Our investment thesis is that the company's underwriting expertise, superior product design, superior payment technology (Trupanion Express), Territory Partner sales force model and continued improvement in operating leverage are defensible and will drive a sustainable trend of 20-percent-plus top-line growth and improving profitability."

However, what seems to be causing the company trouble was something reported by theFly in March that had been circulating among traders and short sellers since then: 

Trupanion rewards program 'may run afoul' of state laws, Capitol Forum says Trupanion's system of non-cash rewards for veterinary practices "may run afoul" of state insurance licensing laws, Capitol Forum reports, citing interviewed experts.

theFly also noted in August:

Washington State OIC has open investigation of Trupanion, Capitol Forum says A spokesperson for the Washington State Office of the Insurance Commissioner said in an email to The Capitol Forum that the department has an open investigation into Trupanion. This is a "separate investigation," and not related to ongoing oversight in connection with any prior market conduct examinations or investigations into Trupanion or American Pet Insurance Company, according to the spokesperson, Capitol Forum told subscribers of its service in a new report.

In late September, Trupanion issued the following statement:

In a report issued on September 26, 2018, The Capitol Forum incorrectly alleged that there is an active investigation by the New York Department of Financial Services into Trupanion. The Capitol Forum subsequently corrected the report.

Trupanion can confirm that there is no current investigation by the New York Department of Financial Services into Trupanion, nor do they anticipate one.

Nevertheless and what everyone needs to remember is that there are 50 US states with 50 different sets of regulations regarding insurance – meaning there is always the possibility of running afoul of regulations or being scrutinized in one particular state by an ambitious Insurance Commissioner. After all, elected state Insurance Commissioners are often professional politicians aspiring to higher office. It therefore makes sense that Trupanion might have some hidden risks for investors as even rumors of investigations have been enough to impact shares and attract short sellers.