Natasha and Chris Ashton were a month into their MBA programme at the Wharton school at the University of Pennsylvania when their year-old cat, Bodey, stopped eating. After a visit to the local clinic Bodey was transferred to a larger veterinary hospital where she was placed in intensive care for almost a week. Total bill: $5,000.
“When they told us, I could see the colour draining from Chris’s face,” recalls Ms Ashton. “We were already up to our eyeballs in debt from business school. But neither of us felt we could discontinue treatment: she was our baby.”
In retrospect, Bodey’s bout of pneumonia (the cat made a full recovery) might have been the best thing that happened to the entrepreneurial couple. On graduating from Wharton in 2003, the Ashtons founded Petplan North America, a pet insurance company, based in Philadelphia, that provides insurance for emergency veterinary costs and hereditary and congenital conditions.
They sold their first policy in 2006, broke even in 2009 and last year earned revenue of $39.5m. This year, Petplan North America is on track to earn more than $50m.
In the UK, the Ashtons’ native country, nearly 30 per cent of animal owners have insurance for their pets, according to market research reports from Mintel and Datamonitor. However in the US, where there are more than 140m cats and dogs, that figure hovers at between 1-2 per cent.
And yet the market is ripe. This year Americans will spend an estimated $55.5bn on their pets, about a quarter of that figure – $14.2bn – on veterinary care, according to the American Pet Products Association.
Advances in veterinary medicine and technology have allowed vets to keep animals healthier for longer but the price of treatment is steep. For instance, treatment for pet cataracts can cost up to $3,000 per eye and canine hip replacement surgery between $3,000-$5,000
“There is an incredible level of sophistication surrounding veterinary care but all of that comes at a cost,” says Mr Ashton. “Vets are starting to recognise that if they want people to be able to afford sophisticated treatments, they have to buy into the insurance industry.”
After their ordeal with Bodey, the Ashtons, who met at Oxford university and arrived at Wharton determined to start a company together, began working on their business. They took elective courses on regulations in the insurance industry and seminars on the legal issues related to start-up ventures.
“In our first year we didn’t have the flexibility in the curriculum [because of the required courses] but we used whatever space we could,” says Mr Ashton. “And every spare moment we had, we devoted to our business.”
They spent the summer between the first and second year of their MBA – a critical one for internships that often lead to job offers – gathering data on the pet insurance industry. They also took part in a Wharton incubator programme that helps students build and launch businesses.
In their final semester, the pair won $20,000 in the Wharton Business Plan Competition. Much of the prize money however was already spoken for – recall Bodey’s medical bill.
Robert Borghese, a law professor at Wharton who was an early adviser to Petplan North America and continues to offer advice, describes the founders as “focused” and “very passionate”.
“Passion carries you far when it comes to executing a business plan,” he says. “They were patient, they did a thorough analysis to make sure [their business] had a shot at being successful. Then they hit the market at precisely the right time.”
Still, the bootstrapping years were lean and progress was initially slow. The Ashtons raised a modest round of money from friends and family and ran the business from their spare bathroom.
“It’s a niche market and the insurance industry was struggling after September 11,” says Mr Ashton. “We were relatively young, neither of us had ever lived or worked in the US and neither of us had any experience in the insurance industry.”
Pet insurance remains something of a novelty in the US, largely because of the Byzantine structure of the country’s health insurance industry, according to Ms Ashton. “The US pet insurance industry is hampered by the human health model. It’s very complicated, restrictive and it hasn’t grown in the same way.”
Before they could write policies, they needed actuarial data. They partnered with the UK’s Petplan, the pet insurance provider, which had more than 30 years of actuarial data. (Today the company is wholly independent from Petplan in the UK, although the two occasionally exchange marketing or claims processing ideas.)
They then looked for an insurance company willing to back them and created company infrastructure to sell policies. Petplan North America’s policies cover emergency treatment, not routine care or vaccinations. The average annual premium is about $400.
In 2008, Vernon Hill, president and chief executive of Commerce Bancorp, now TD Bank, and Wharton alum, joined the company as chairman. “It was obvious to me that this business has potential,” says Mr Hill, who is also founder and chairman of Metro Bank in the UK. “Even if they insured just 1 per cent of the pet-owning population, they could have premiums of $1bn.”
The biggest challenge facing Petplan North America is that the US pet insurance industry is becoming more competitive, with large, recognised companies and start-ups entering the business. According to Packaged Facts, the market research group, revenue for US pet insurance plans is projected to hit $753m by 2014. Many expect consolidation in the future.
Ms Ashton is adamant they will not sell the company. “Vernon says he wants us to be a $1bn company. We say: why stop at a billion?”