Investment Analysis of Trupanion by University of Notre Dame Investment Club

University of Notre Dame Investment Club Trupanion (NASDAQ: TRUP) Analyst: Nick Bufalino September 20, 2018

Investment Thesis Trupanion will continue to leverage its three-fold advantage to capitalize on growth opportunities however, intrinsic valuation suggests that TRUP might be fairly valued Accumulation of proprietary data over two decades enables TRUP to accurately assess individual risk profiles and protect its gross margins 1 Extensive Territory Partners network creates and maintains valuable relationships with veterinarian hospitals across the nation 2 Superior value-proposition reduces churn, encourages brand loyalty, and fosters predictable recurring-revenue growth 3 Target Price: $35.99 Current Trading Price: $33.53 Upside: 7.3% Recommendation: HOLD 2 Note: Share price data as of 9/19/2018

High TAM Industry with Strong Growth Prospects US Pet Insurance Industry Growth Outlook US pet insurance industry revenue expected to reach ~$1.5bn by 2023; number of pets to grow to ~232mn Failure to transform legacy insurance model has fostered stagnant domestic industry growth Incremental 1% growth in penetration implies $1bn in revenue for Trupanion Highly concentrated industry with low penetration rate relative to international markets (5%-40% elsewhere) $1,800 250 $1,453 230 $1,400 210 $934 $1,000 190 $600 170 7.3% Nationwide Pet Insurance $200 150 7.0% 44.6% Trupanion Number of Pets (mn) Revenue ($mn) 11.8% US Pet Industry Expenditures ($bn) ASPCA Pet Health Insurance 2015 $60 Petplan Pet Insurance 2016 $67 2017 $70 29.3% Other 2018 $72 $55 $60 $65 $70 $75 Sources: IBIS World, ASPCA 3

Historical Share Price Performance TRUP announces $60m equity follow-on 310.0% 4,500,000 4,000,000 260.0% TRUP beats top-line estimates for FY2017 and improves profitability 3,500,000 210.0% 199.8% 3,000,000 160.0% 2,500,000 110.0% 2,000,000 60.0% 46.8% 1,500,000 10.0% 1,000,000 7/18/2014 7/18/2015 7/18/2016 7/18/2017 7/18/2018 -40.0% 500,000 -90.0% 0 Volume TRUP Return S&P 500 Return Despite a recent pull-back, Trupanion stock has substantially outperformed the broader S&P 500 since going public in 2014 the company has historically beaten top-line revenue estimates and demonstrated a sustained ability to drive member growth 4

Trupanion Company Analysis Business Overview How the Product Works & Current Initiatives You pay Trupanion a premium, and they cover 90% of your pet medical expenses The company utilizes a monthly subscription-based recurring revenue business model the company has averaged a 98.6% retention rate since 2012Z Nearly 40 quarters of consistent growth in quarterly revenue Management continues to invest in pet acquisition in order to grow its consumer base and reach scale (650,000 750,000 enrolled pets) by 2020 at which point it expects to report a 15% adjusted operating margin Trupanion offers insurance for pets, mainly cats and dogs Founded in 2000 by Darryl Rawlings (with the help of Starbucks CEO Howard Schultz) headquartered in Seattle with 574 employees Trupanion is the only publicly-traded pet insurance provider its top competitors are private You should not think about Trupanion as a traditional insurance company CAGRs: Enrollment: 21.9% Revenue: 23.4% Pet Enrollment & Revenue Trends $300 500,000 $243 $250 400,000 423,194 $188 $200 $147 343,649 $150 300,000 $116 291,818 $84 $100 232,450 200,000 $50 182,497 $0 100,000 2013 2014 2015 2016 2017 5 Subscription Pets Enrolled Total Pets Enrolled Total Revenue

The Trupanion Competitive Advantage Trupanion will leverage its three-fold competitive advantage to capitalize on growth opportunities: Accumulation of proprietary data over two decades enables TRUP to accurately assess individual risk profiles and effectively control its input costs 1 TRUP uses its proprietary data to assess the risk characteristic of each individual pet based on its risk profile (breed, geography, life expectancy, etc.), charging a unique price for each client millions of different price points Enables the company to consistently spend approximately 70% of total revenues on invoice expenses and subsequently improve operating margins as enrollment growth continues Pet medical expenses expected to rise as increasingly expensive treatment options gain traction competitors that can successfully predict these costs as sales grow will outperform their peers 2012A 2013A 2014A 2015A 2016A 2017A ($ in millions) Total Revenue Total Cost of Goods Sold Invoice Expenses Invoice Expenses as % of Sales Gross Income Total Operating Expenses Operating Income $55.5 (43.7) (37.9) 68.2% 11.8 (16.7) (4.9) $83.8 (67.5) (56.6) 67.6% 16.3 (22.7) (6.3) $116.0 (95.3) (79.9) 68.9% 20.7 (35.8) (15.1) $147.0 (121.0) (103.3) 70.3% 26.0 (42.0) (16.0) $188.3 (154.2) (133.5) 70.9% 34.1 (40.0) (5.9) $242.7 (198.9) (170.1) 70.1% 43.8 (44.8) (1.0) 6

The Trupanion Competitive Advantage Trupanion will leverage its three-fold competitive advantage to capitalize on growth opportunities: Extensive Territory Partners network creates and maintains valuable relationships with veterinarian hospitals across the nation 2 107 Territory Partners visited ~20,000 unique veterinary clinics in 2017; an additional 85,000 face-to-face visits were made during the year > 500,000 visits made since entering US market in 2008 Aggressively investing in on-the-ground marketing campaign drives top-line growth at Trupanion and translates into improving operating margins Trupanion could invest in pet acquisition more aggressively than analysts expect Referral Channels 7% Fiscal Years Ending December 31, 2014A 2015A 2012A 2013A 2016A 2017A ($ in millions) 26% Total Revenue Sales & Marketing Total Operating Expenses Operating Income $55.5 (7.1) (16.7) (5.6) $83.8 (9.1) (22.7) (7.0) $116.0 (11.6) (35.8) (15.8) $147.0 (15.2) (42.0) (16.7) $188.3 (15.2) (40.0) (6.6) $242.7 (19.1) (44.8) (1.7) 67% Third parties Existing Members Other 7

The Trupanion Competitive Advantage Trupanion will leverage its three-fold competitive advantage to capitalize on growth opportunities: Superior value-proposition reduces churn, encourages brand loyalty, and fosters predictable recurring-revenue growth 3 90% of pet medical expenses are covered under Trupanion No cap on claims requests (unlucky pets are not penalized) Trupanion Express system automates the invoice process outstanding claims are paid in a matter of seconds (no more reimbursements) Improves the experience of both customers and vets, reflected in high retention and low churn rates 2013 2014 2015 2016 2017 Average Monthly Retention Rate 98.65% 98.69% 98.64% 98.60% 98.63% 8

Discounted Cash Flow Analysis Unlevered Free Cash Flow Calculation Calendar Year Ending December 31, 2017A 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 EBIT Less: Tax Expenses Plus: Depreciation Less: Capital Expenditures Less: Increase in Net Working Capital Unlevered Free Cash Flow Discount Period Present Value of Free Cash Flows ($1.7) (0.4) 4.2 (3.1) 7.1 (7.3) $5.3 0.7 5.4 (4.0) 3.4 2.5 0.95 $2.4 $12.9 2.2 6.9 (4.8) 7.8 5.1 0.86 $4.3 $21.7 3.9 7.8 (5.6) 9.6 10.4 0.77 $8.0 $33.9 6.4 8.6 (6.5) 11.8 17.8 0.70 $12.4 $50.6 9.7 9.2 (8.1) 14.5 27.3 0.63 $17.1 $73.2 $103.8 $145.0 14.4 20.6 11.5 14.3 (10.2) (12.7) 17.7 22.0 42.4 62.8 0.56 0.51 $24.0 $32.0 29.2 16.3 (15.9) 27.3 88.9 0.46 $40.8 9

WACC Analysis WACC Risk-Free Rate Market Risk Premium Multiplied by: Smoothed Beta Cost of Equity Multiplied by: CMA E/(D+E) Cost of Equity Portion 3.0% 5.0% 0.98 7.9% 97.2% 7.7% Cost of Debt Tax Rate After-Tax Cost of Debt Multiplied by: CMA D/(D+E) Cost of Debt Portion 12.5% 21.0% 9.9% 2.8% 0.3% Size Premium 1.0% WACC 8.9% 10

Terminal Value Calculation Perpetuity Growth Method Exit Multiple Method Present Value of Free Cash Flows 2025E Free Cash Flow Growth Rate Terminal Value at 2025 PV of Terminal Value Enterprise Value Less: Debt Plus: Cash Equity Value Shares Outstanding Implied Share Price 156.4 88.9 3.5% 1,691.5 889.8 1,046.2 Present Value of Free Cash Flows 2025E Free Cash Flow Exit Multiple Terminal Value at 2025 PV of Terminal Value Enterprise Value Less: Debt Plus: Cash Equity Value Shares Outstanding Implied Share Price 156.4 161.3 12.0x 1935.8 1018.3 1174.7 9.3 2.4 9.3 2.4 1167.8 29.6 $39.47 1039.3 29.6 $35.12 Sensitivity Analysis 2.5% $25.31 $23.24 $21.43 $19.83 $18.41 $35.12 9.9% 10.4% 10.9% 11.4% 11.9% 2.0% $23.91 $22.05 $20.40 $18.94 $17.64 3.0% $26.90 $24.59 $22.58 $20.83 $19.28 3.5% $28.74 $26.14 $23.89 $21.95 $20.25 4.0% $30.90 $27.92 $25.40 $23.22 $21.34 Price Weight Perpetuity Growth Method $35.12 80% Exit Multiple Method $39.47 20% Implied Share Price $35.99 11

Final Recommendation Trupanion has historically demonstrated a consistent ability to translate increased investment in pet acquisition into higher than expected top-line growth 1 Trupanion has a compelling three-fold competitive advantage that is very difficult for its peers to replicate 2 Intrinsic valuation suggests that investors might already recognize this more research must be done to determine if there is opportunity for alpha 3 Target Price: $35.99 Current Trading Price: $33.53 Upside: 7.3% Recommendation: HOLD 12

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