ipet Insurance is Japan’s second-largest provider of pet insurance. The company differs from other pet insurance companies in three main ways.
a) Categorized as a “non-life” insurer: Most pet insurance companies are small-amount, short-term insurance companies that register with local Ministry of Finance bureaus and have a capital requirement of JP10mn. Being categorized as a non-life insurer, ipet is licensed by the Financial Services Agency and has a minimum capital requirement of JPY1.0bn. ipet is also a member of the Non-life Insurance Policyholders Protection Corporation of Japan, which functions as a safety net for policyholders. b) Over-the-counter payouts: Like industry leader Anicom Holdings (TSE1: 8715), insurance payouts are settled over the counter at major animal hospitals around Japan. c) Online sales channels: The company has cultivated fast-growing online channels. Expertise in this area has helped keep the overall loss ratio under control and secure profits.
Insurance
Executive summary
Business overview
In October 2020, ipet Holdings was established as the wholly owning parent of ipet Insurance Co., Ltd., through a single share transfer. The company’s core subsidiary, ipet Insurance, sells pet insurance and has a market share in the pet insurance industry of nearly 27%, second only to Anicom Holdings, which has a market share of 40.5%. ipet Holdings’ only reporting segment is the Nonlife Insurance business, which accounted for 98.9% of recurring revenue and 96.5% of recurring profit in FY03/21.
The company sells its mainstay pet insurance to general consumers, especially pet owners, to cover a certain percentage of the cost of surgery or other medical treatment for illness or injury, mainly for dogs, cats, and other pets kept in households (policy length is one year). This insurance is similar in function to medical insurance for humans (third-sector insurance), but the Insurance Business Act defines it as “insurance to cover damages suffered by the policyholder due to accident” (nonlife insurance). Products covering the risk of injury to pets were originally operated by mutual aid associations. The predecessor of ipet Insurance was established in 2004, but the earlier mutual aid associations were reorganized into nonlife or small-amount short-term insurers following a 2005 revision of the Insurance Business Act. Companies competing in the pet insurance industry include five nonlife insurers licensed by the Financial Services Agency (including the company itself) and 10 small-amount short-term insurers registered with Local Finance Bureaus.
The pet insurance sales and underwriting business, which is the company’s main business, is a recurring-revenue business in which the company collects premiums monthly from policyholders. Revenue can be explained in terms of the policy count and premium amount, but profits are affected by insurance accounting. The company first books premium revenue, and insurance payouts (cost of revenue) occur later, with unearned premiums for the next and subsequent insurance periods being carried forward as underwriting reserves, so profits straddle fiscal years. In the case of ipet Insurance, the number of policies in force is increasing rapidly, and Shared Research understands that it will remain difficult for the company to generate accounting profits for the time being. It will be important to maintain or even improve the policy renewal rate and increase productivity.
The following are some key points that differentiate ipet Insurance from competitors: 1) it is a nonlife insurer licensed by the Financial Services Agency (with good credibility as a listed company), 2) it is a member of a safety net called the Non-life Insurance Policy-holders Protection Corporation of Japan, 3) it is able to provide over-the-counter settlement services at major veterinary hospitals nationwide alongside industry leader Anicom Holdings (TSE: 8715, a nonlife insurer), and 4) it has experience and expertise in developing online channels, which are seeing rapid growth (its accumulation of expertise has allowed the company to control the overall loss ratio and secure profits).
ipet Insurance has grown to hold a 27% market share in the pet insurance industry with more than 600,000 policies in force as of FY03/21. Hereafter, the company will focus on restructuring its management base as it works to complement its pet insurance and produce derivative products with the aim of diversifying its Nonlife Insurance business. The company established a pure holding company (ipet Holdings, Inc.) on October 1, 2020, and now plans to establish group companies based on appropriate procedures.
In May 2021, the company formulated and disclosed a new medium-term management plan, positioning the next three years as a phase for laying the groundwork for new growth. It is targeting FY03/24 recurring revenue of JPY37.3bn, adjusted recurring profit of JPY1.4bn, and adjusted net income of JPY910mn, based on the assumption that it can reach 884,000 policies in force. Together with the medium-term plan, the company also announced new KPIs. To its conventional KPI (number of policies in force), it has added lifetime value (LTV), policy acquisition cost (PAC), and internal rate of return (IRR), for a total of four indicators it will use in evaluating performance. It intends to calculate its business value as (LTV per policy) x (average remaining years / average years of renewal) x number of policies in force to date + (LTV per policy – PAC per policy) x (projected increase in number of policies in force).
Earnings trends
For FY03/22, the company reported consolidated recurring revenue of JPY28.7bn (+25.3% YoY), adjusted recurring profit (non-GAAP) of JPY1.8bn (+61.1% YoY, a record high), and adjusted net income (non-GAAP) of JPY1.2bn (loss of JPY195mn in FY03/21). The company posted a profit increase because the Pet Insurance business had a steady top-line increase while the loss ratio fell below the company projection.
For FY03/23, the company forecasts recurring revenue of JPY32.9bn (+14.7% YoY), adjusted recurring profit of JPY1.1bn (-40.7% YoY), and adjusted net income of JPY770mn (-35.8% YoY).
Strengths and weaknesses
ipet Holdings’ strengths include 1) the fact that OTC insurance payouts are an entry barrier, 2) it is a pioneer of online channels, and 3) it has a low-priced product that enables sales expansion without cannibalization. The company’s weaknesses include 1) an unchanged product design since its founding, 2) effect of reserves on recurring profit, and 3) inadequate management resources.
Shared Research believes ipet has the following attributes:
Strong market position in growing online channels
Product mix that enables sales growth of low-priced products without fear of cannibalization
Ability to strengthen business foundation and pioneer new markets through CRM
Potential to improve business efficiency (many inefficiencies in current business processes)
Key financial data
The company transitioned to a holding company structure on October 1, 2020, so Q3 FY03/21 was its first consolidated accounting quarter since it was established
Recent updates
Upward revision to the full-year FY03/22 earnings forecast
On March 24, 2022, ipet Holdings, Inc. announced an upward revision to its full-year FY03/22 consolidated earnings forecast.
On March 24, 2022, the company upgraded its forecasts again. The revised forecast is recurring revenue of JPY28.6bn (unchanged from the previous forecast), recurring profit of JPY700mn (up JPY450mn), net income of JPY450mn (up JPY370 mn), and EPS of JPY41.57 (JPY7.39 in the previous forecast). Adjusted recurring profit is JPY1.6bn (up JPY450mn YoY), and adjusted net income is JPY1.1bn (up JPY370mn YoY). The reasons for the revision include: (1) Operating and SG&A costs at subsidiary ipet Insurance are forecast to be lower previously assumed due to improved operational efficiency; (2) the increase in the loss ratio has been narrower than previously forecast.
Trends and outlook
Quarterly trends and results
Notes: Net loss ratio = (Net claims paid + loss adjustment expenses) ÷ net premium revenue
E/I loss ratio = Incurred loss ÷ earned premiums
Incurred loss = Net claims paid for the current financial year +loss adjustment expenses + provision for reserve for outstanding losses and claims
Earned premiums = Underwriting revenue minus provision for underwriting reserves (unearned premiums basis)
The company transitioned to a holding company structure on October 1, 2020, so Q3 FY03/21 was its first consolidated accounting quarter since it was established.
Note: The company transitioned to a holding company structure on October 1, 2020, so Q3 FY03/21 was its first consolidated accounting quarter since it was established.
Note: The company transitioned to a holding company structure on October 1, 2020, so Q3 FY03/21 was its first consolidated accounting quarter since it was established.
Note: The company transitioned to a holding company structure on October 1, 2020, so Q3 FY03/21 was its first consolidated accounting quarter since it was established.
Note: The company transitioned to a holding company structure on October 1, 2020, so Q3 FY03/21 was its first consolidated accounting quarter since it was established.
Note: The company transitioned to a holding company structure on October 1, 2020, so Q3 FY03/21 was its first consolidated accounting quarter since it was established.
Full-year FY03/22 results
Key Points
Recurring revenue rose 25.3% YoY. The company sold many new policies thanks to strong demand for pets. The average number of new policies sold on a monthly basis reached a record high. The number of policies in force reached 728,724 at end-March 2022 (+17.1% YoY), exceeding the company projection. The policy renewal rate was 89.0%, compared with 89.6% of end-FY03/21 (-0.6pp YoY).
The company changed its system-development schedule. Thus, development costs were lower than initially projected.
E/I loss ratio (based on earned premiums) was up 0.1pp YoY to 52.3%, reflecting an expansion in insurance payouts in line with increases in the number of insurance claims and costs per claim. The loss ratio, which had been rising because insured pet owners increased their vet visits as they spent more time at home, began to stabilize somewhat in 2H. The loss ratio fell below the company projection as a result.
Adjusted recurring profit was JPY1.8bn (+61.1% YoY), a record high. Adjusted net income was JPY1.2bn, compared with a loss for FY03/21.
Relocation of head office functions: the company moved its head office functions from Minato-ku, Tokyo to Koto-ku, Tokyo in order to reduce fixed costs, improve management efficiency, and promote workstyle diversity (May 6, 2022).
Outlook for FY03/23
For FY03/23, the company forecasts recurring revenue of JPY32.9bn (+14.7% YoY), adjusted recurring profit of JPY1.1bn (-40.7% YoY), and adjusted net income of JPY770mn (-35.8% YoY).
For details regarding the FY03/23 earnings forecast, we will update this report at a later date after interviewing the company.
Medium-term management plan
Medium-term management plan (FY03/22–FY03/24)
The number of policies in force topped 600,000 in FY03/21, and the company secured a solid position in the pet insurance market, with a market share of nearly 27%. In October 2020, it transitioned to a holding company format and, in March 2021, made Pet’s All Right Co., Ltd., a subsidiary. It plans to keep expanding its business under the holding company format hereafter.
In this context, the company formulated and disclosed a new medium-term plan (FY03/22–FY03/24) on May 14, 2021, and over the next three years intends to lay the groundwork for growth. Key objectives of the plan are to improve the top line with quality, increase productivity, and enhance the management base. The company will celebrate its 20th anniversary in May 2024.
Priority initiatives
Key objective 1: Improve the top line with quality
Key objective 2: Increase productivity (1)
The company finished upgrading its backbone system in December 2020. Next, it will be promoting the DX Project, which aims to make its administrative systems more resilient. The DX Project represents a change of direction in terms of backbone system development such as that carried out as part of the “promotion of digitalization” conducted under the previous medium-term plan.
Previously, the company developed its entire backbone system in-house, which required a large number of staff and ongoing investment in updates. Development itself was also difficult due to the complexity of pet insurance operations. Hereafter, the company will have an outside vendor develop the backbone system based on a SaaS-type system. It will not have to bear depreciation costs, since it will not own the software as assets. In addition, since development involves only partial customization at the time of SaaS implementation, expandability can be guaranteed. System updates will also be handled by the outside vendor.
Key objective 2: Increase productivity (2)
Key objective 2: Increase productivity (3)
Key objective 3: Enhance the management base
Group management
Pet’s All Right
In March 2021, the company made Pet’s All Right a wholly owned subsidiary. Pet’s All Right operates an online pet health consultation business that allows customers to consult with veterinarians, dog trainers, and holistic care counselors using their smartphones. The company says it aims to generate synergies by promoting the acquisition of new contracts for the consultation service through its pet shop channel, which is one of the group’s strengths. It also aims to improve its own renewal rate by providing an array of services that enrich pets’ lives.
P’s-first Insurance
P’s-first Insurance became a subsidiary of ipet Insurance on October 1, 2020. Since P’s-first does not underwrite policy renewals, existing customers can continue with ipet Insurance if they wish. P’s-first began referring customers to ipet Insurance for policies expiring in December 2020, and the inflow of customers has already exceeded ipet Insurance’s expectations, contributing to group synergy. Hereafter, P’s-first will maintain a system for appropriately responding to insurance claims from customers even after all of its policies have expired or been transferred to ipet Insurance. It also plans to develop new products as a small-amount short-term insurer capable of responding flexibly to customer needs.
Targets
Main KPIs
In formulating the new medium-term management plan, the company emphasized the profitability of its business over the medium to long term. For this reason, to its conventional KPI (number of policies in force), it has added lifetime value (LTV), policy acquisition cost (PAC), and internal rate of return (IRR), for a total of four indicators it will use in evaluating performance.
The company’s business value can be calculated using the following equation. As its mainstay business is a recurring-revenue business based on the assumption that pet insurance policies will be renewed, its business value comprises the value of policies in force to date plus the value of policies to be issued in the future. Business value can therefore be calculated as follows.
Business value = (LTV per policy) x (average remaining years / average years of renewal) x number of policies in force to date + (LTV per policy – PAC per policy) x (projected increase in number of policies in force)
Based on the company’s 2H FY03/21 results, LTV per policy is JPY67,545, average remaining years is 6.3, average years of renewal is 9.6, and there were 622,069 policies in force. Plugging these values (as disclosed by the company) into the equation, we can estimate that the value of policies to date is JPY27.5bn. Also, based on actual results, the company says PAC per policy was JPY18,325, and IRR for the pet insurance businesses was 46.1%. By adding the value of policies to be issued in the future, the company believes it can calculate a reasonable business value.
Business
Business model overview
Business description
Market share of nearly 27%, putting the company in second place in the pet insurance industry
In October 2020, ipet Holdings was established as the wholly owning parent of ipet Insurance Co., Ltd., through a single share transfer. The company’s core subsidiary, ipet Insurance, sells pet insurance and has a market share in the pet insurance industry of nearly 27%, second only to Anicom Holdings, which has a market share of 40.5%. ipet Holdings’ only reporting segment is the Nonlife Insurance business, which accounted for 98.9% of recurring revenue and 96.5% of recurring profit in FY03/21.
The company sells its mainstay pet insurance to general consumers, especially pet owners, to cover a certain percentage of the cost of surgery or other medical treatment for illness or injury, mainly for dogs, cats, and other pets kept in households (policy length is one year). This insurance is similar in function to medical insurance for humans (third-sector insurance), but the Insurance Business Act defines it as “insurance to cover damages suffered by the policyholder due to accident” (nonlife insurance). Products covering the risk of injury to pets were originally operated by mutual aid associations. The predecessor of ipet Insurance was established in 2004, but the earlier mutual aid associations were reorganized into nonlife or small-amount short-term insurers following a 2005 revision of the Insurance Business Act. Companies competing in the pet insurance industry include five nonlife insurers licensed by the Financial Services Agency (including the company itself) and 10 small-amount short-term insurers registered with Local Finance Bureaus.
The pet insurance sales and underwriting business, which is the company’s main business, is a recurring-revenue business in which the company collects premiums monthly from policyholders. Revenue can be explained in terms of the policy count and premium amount, but profits are affected by insurance accounting. The company first books premium revenue, and insurance payouts (cost of revenue) occur later, with unearned premiums for the next and subsequent insurance periods being carried forward as underwriting reserves, so profits straddle fiscal years.
The following are some key points that differentiate ipet Insurance from competitors: 1) it is a nonlife insurer licensed by the Financial Services Agency (with good credibility as a listed company), 2) it is a member of a safety net called the Non-life Insurance Policy-holders Protection Corporation of Japan, 3) it is able to provide over-the-counter settlement services at major veterinary hospitals nationwide alongside industry leader Anicom Holdings (TSE: 8715, a nonlife insurer), and 4) it has experience and expertise in developing online channels, which are seeing rapid growth (its accumulation of expertise has allowed the company to control the overall loss ratio and secure profits).
ipet Insurance has grown to hold a 27% market share in the pet insurance industry with more than 600,000 policies in force as of FY03/21. Hereafter, the company will focus on restructuring its management base as it works to complement its pet insurance and produce derivative products with the aim of diversifying its Nonlife Insurance business. The company established a pure holding company (ipet Holdings, Inc.) on October 1, 2020, and now plans to establish group companies based on appropriate procedures.
Policy on entering new businesses
Shared Research understands that ipet Holdings will focus on entering new businesses under its holding company structure by focusing on the pet industry and businesses with a large potential market size, and by actively making use of M&A and capital and business alliances with other companies, with an emphasis on synergies with the pet insurance business. In fact, in March 2021, ipet Holdings acquired all shares in Pet’s All Right Co., Ltd., which operates a platform service providing consultations on pet health and training and a range of pet-related information.
In FY03/21, the company’s recurring revenue grew 24.8% YoY due to steady gains in the number of policies in force. Adjusted recurring profit rose just 5.8% YoY due to an increase in expenses accompanying the influx of new policies and more frequent insurance claims.