For many North Americans, pets are family members. But when a pet becomes seriously sick or injured, owners can face painful decisions about how much they are willing to spend since veterinary bills can quickly escalate to human proportions.

Mark Warren, president and CEO of Oakville-based Pethealth Inc., says that while "financial euthanasia" occurs, it is commonplace for people to balk at the cost of treating non-life-threatening health issues as well.

"The vet is then put in the difficult position of having to promote a B- or C-course of treatment which is not in the pet's best interests and may lower its quality of life," he says.

A pet owner with four dogs and two cats of his own, Warren hopes his company can eliminate the need for such dilemmas.

Photo by Simon Wilson
Mark Warren of Pethealth Inc. expects new services will expand revenue opportunities in Canada and the United States.

The TSX Venture Exchange-traded company (TSXV:PTZ) is the leading provider of pet health insurance in Canada and No. 2 in the United States. And it has grown fast enough that Profit Magazine pegged it as the second-fastest growing Canadian business on its 2005 Profit 100 list after revenue grew to $11.3 million in 2004 from $134,000 in 1999.

Growth has not yet translated into profits, however, although the situation is brightening.

In 2004, the company lost $422,540 on revenue of $11.3 million compared to a loss of $1.9 million on revenue of $7 million in 2003.

In the first six months of 2005, revenue was $6.72 million, up 23.8 per cent compared to the same period in 2004. The company had a six-month loss of $175,614 in 2005 compared to $185,052 in 2004.

The stock currently trades around its 52-week low of 10 cents, while the 52-week high is 24.5 cents.

Warren says the numbers do not tell the whole story, however, and is quick to point out that the insurance side of the business is profitable. He adds that the relatively young, non-insurance side of the business, coupled with a significant decrease in the U.S. dollar, skewed the company's most recent net earnings.

The company got its start in 1998 after Warren returned to Canada from the United Kingdom, where pet insurance is more mainstream. Warren, who worked as an investment banker for 11 years in England and abroad, was struck by the lacklustre offerings in North America.

"The business models being employed were very questionable, product offerings were not great and the quality of service provision was terrible," he says.

"In addition, a study by KPMG indicated to me that vet fees would have to start increasing fairly significantly because vets had allowed their own incomes to deteriorate substantially," he says. "That, coupled with a growing love between pet owners and their pets, would create not only a value proposition but an eager market to buy pet health insurance."

Warren says Pethealth currently has about 130,000 active policies in force and is the only company offering services in Canada and the U.S. He adds that the company's success is the result of quality product offerings, exemplary service and the use of cutting edge-technologies.

Pethealth's PetCare products, for example, offer a wide range of pet insurance options from entry level to comprehensive, Warren says. CherryBlue, a simplified plan promoted by hockey icon Don Cherry, has fewer age restrictions and allows clients to choose deductibles. PetCare policies start at $10 per month.

Warren also says Pethealth has simplified the payment of claims. Typically, clients are compensated only after paying vet bills out of their own pocket first.

"But if your pet is insured under one of our PetCare programs now, you can walk into any clinic in Canada and have any accident claim paid online right at the clinic. Just pay the deductible and walk out the door," Warren says. He adds that by the end of the year "any claim under any of our programs can be adjusted online at the clinic."

The company has also introduced other innovations aimed at building customer awareness.

A 2001 report by the American Veterinary Medical Association estimates there are 130 million pet dogs and cats in the U.S. and Canada whose owners spent $19 billion on veterinary care in 1999. However, only one per cent of pet owners buy pet health insurance.

To capitalize on that, Pethealth expanded beyond traditional marketing channels where pet health insurance was primarily offered through veterinarians.

It has formed partnerships with well-known insurers such as MetLife and retailer Petco, a U.S. leader in pet-food supply. Warren says Petco represents 17 per cent of the company's new monthly business.

"Pethealth is very fortunate to be working in a space where all the demographics are with them," says Mike Woodard, Petco's senior vice-president of business development. "People are owning more pets these days and treating pets more like people and that includes getting insurance for them. I think that's what has allowed Pethealth to be as successful as they have."

The company has also partnered with emergency pet shelters and clinics. In conjunction with Petfinder.com, the largest searchable database of adoptable pets on the web, Pethealth offers a free, one-month entry-level program for newly adopted dogs and cats.

"We then look to up-sell those on the ShelterCare program into one of our core policies," Warren says. "It has been very successful. In the very near future, we will hit the 700,000 mark of dogs and cats enrolled."

To help shelters, including the approximately 5,000 facilities in the ShelterCare network, manage their operations, Pethealth also offers PetPoint, a free, Internet-based shelter-management tool. Warren says the shelters no longer have to incur software licensing, server and IT staff costs, and Pethealth collects customer data on thousands of new pet owners each month.

"Managing loss ratios on pet health insurance isn't that complicated," Warren says. "It's really keeping a proper mix between cats and dogs and your book of business as young as possible. The average age of dogs and cats from shelters is very young and with a company like Petco that has a database of 21 million members, I have the ability to segment that data and target."

"Unlike our competitors, we have a way to actually manage the age of the risk we take on," he says.

Pethealth's products are not limited to its core insurance products.

In 2003, the company also ventured into microchip identification.

Unlike other similar programs, which embed chips under a pet's skin to help retrieval of lost pets, 24PetWatch uses ISO-standard, radio frequency identification transponders. Identification can also be tied to the pet's medical records for $20 annually.

"These products truly are aimed at ensuring that pet owners can take care of their pets' health," says Dr. Duane Landals, registrar of the Alberta Veterinary Medical Association.

"The uniqueness of 24PetWatch, where the insurance is tied to microchipping, is that they have the ability to keep the database very fresh because they are in contact with their clients on a monthly basis," says Landals, who is also a former president of the Canadian Veterinary Medical Association.

"With other microchip databases, owners may move or change their phone number and the microchip becomes useless."

Warren estimates that Pethealth has between 65 and 70 per cent of the Canadian microchip market and more than 25 per cent in the U.S.

"The front end of the business has never been stronger and on the back end, our administration remains heads and shoulders above our competitors," he says. "Where we have struggled has been in changing our principally in-bound call centre-based business into an out-bound based business, so we aren't just sitting around waiting for the phone to ring.

"We are making changes to make it better and that will come, but overall I'm very pleased."

(Mike McLeod can be reached at mcleod@businessedge.ca)