Having recently become a dog owner I was faced with the dilemma of the merits of pet insurance and if it was a worthwhile cost. It seems with every year that goes by, there is some new monthly expense that I have to pay for the rest of my life and when you add up those costs over the long term (just like when looking at high MERs) it is enough to make you tear your hair out.  So needless to say, I try very hard to limit these types of expenses wherever I can but to make a long story short, we decided to get insurance and felt the cost was worthwhile simply for us not having to be in a situation where we had to make a decision between a pet and a budget.  I did not think much of it, however, until Fairfax Financial announced the purchase of Pethealth Inc. for $100 million which included a 26% premium on the share price of Pethealth. This was the second purchase of a pet insurance company by Fairfax and it makes you wonder what is happening in this industry.

Any one who even lightly watches Dragons Den probably knows the usual talking points of pet business pitches and how animals are becoming part of the family and the growth potential in the market but lets look at some statistics:

• In Canada for 2011, Industry Canada shows pet and pet supply stores generated $1.6 billion in revenue
• In the US, pet expenditures are expected to reach $58 billion in 2014
  • While ~39% is expected to be from food purchases,  ~50% is expected to be derived from supplies, medicine and vet care
• Total number of dogs owned in the US is roughly 83.3 million and cats are approximately 95.6 million. To add some context, the human population of Canada is around 35 million!

When looking at the market size and adding on the potential to bundle pet insurance with regular ‘human’ insurance products as well as a company that has the budget to market products heavily to consumers, Fairfax’s move into pet insurance begins to look pretty interesting. Couple this with the trend of households becoming more willing to spend money on their pets and one can see how it could be a huge business over time. 

So where can we look to gain exposure to the growing pet market trend? PetSmart (PETM) pays a modest dividend at around 1% and has 1,352 stores but same store sales growth has been on a decline since 2013. Petmed Express (PETS) offers pet medications and health products. It is a small company with a $273 million market-cap but 18% of this market-cap is composed of cash. Between a 5% dividend and the cash balance with no debt, Petmed is interesting but expected growth at the company is low. A much higher risk company but a pure-play in pet insurance is Trupanion (TRUP). This company provides cat and dog medical insurance in Canada, the US and in Puerto Rico. The company is small and losing money currently so we would consider it speculative, but after recent acquisitions by Fairfax, one has to imagine that larger insurers are ‘sniffing’ around at companies like this for a quick entry into a growing market. TRUP had over 207,000 pets enrolled as of Q3, 2013.  Finally, for the longer term and patient investor, Fairfax Financial (FFH) could be an interesting investment. The only downside, at this point, is that with a $11.7 billion market-cap and the purchase of Pethealth totaling $100 million, you would hope for the pet insurance business to really takeoff in order for it to have any material effect on a company of this size. Regardless, if the necessity of insuring your loved ones can be marketed effectively and extended to the pets within a household, it is easy to imagine the potential of this growing market and how larger insurance companies may want to get involved sooner than later.

Disclosure: As always, please ensure you perform your own due diligence before making an investment decision. The above securities mentioned should not be construed as any sort of recommendation to buy or sell. Finally, in an effort to remain truly independent, those employed by 5i Research do not hold any Canadian stocks that are mentioned through the 5i website but employees are able to own U.S. securities. The writer does not own any of the securities mentioned at this time and does not plan to.