Thank you all for coming. I'm Maria Ripps, Internet analyst here at Canaccord Genuity, and it's my pleasure to introduce Margi Tooth, Trupanion's CEO and President, and Fawwad Qureshi, CFO. Margi has been with Trupanion for over 10 years and was appointed CEO in August on August 1st, and Fawwad joined the company in September of last year.
10 years, 10 months.
First of all, Margi, congratulations on your new role, and thank you both so much for joining us today.
Happy to be here.
Perfect. So first of all, last week you reported pretty strong Q2 results. It was great to see a fourth straight quarter of 20% plus core subscription revenue growth and meaningful progress on margins. Maybe for those in the audience who may be a little bit less familiar with the story, could you share a brief overview of some of the inflationary dynamics that have been impacting the business and how you've been addressing some of those?
Yeah, sure. Hello. So if we look at the overall business and the industry we're in, we typically will see inflation somewhere between 5%-7% every year. In 2022, that inflation for the full year was 12%. In 2023, it was 15%, and this year, again, it's been 15%. So we've seen significant veterinary inflation that really for us, as a cost of goods model, is a massive need for us to then go and get rate. Since we saw that first inflationary step up in 2022, we've been working hard with regulators to ensure that we're filed appropriately, and we've been putting through significant rate increase across our book of business to make our margin up.
This means that as of now, we have well over 25% flowing through our book of business, which is now for the 24th month in a row where we've had very high elevated rate approvals. The good news is, typically it will take around a year to kind of make up the margin, 'cause you go to the regulator, you get the rate approved, you start to file that through your book of business, you get renewals and retention and new business on this new level. We've now done that for 2 years, so we're starting to see that margin expansion, which is what's showing up in our Q2 results. We expect that to continue.
We now have sufficient rate for the rest of this year, and assuming we see 15% again in Q1 of 2025, we'll be in good shape, which means any subsequent need for rate will be lower than the 20% threshold that we've been driving towards over the last few years. So it's been a massive inflationary difference. Pet parents are feeling a big strain of the cost of care.
Mm-hmm.
There's been a big leaning into Trupanion as a result of that, specifically for two reasons. One, people who don't have insurance can't afford to look after their pets, so the vet is leaning into the idea of high-quality medical insurance more than ever before. And secondly, we have a big unique selling point, which is that we pay the veterinarian directly at the time of invoice, so the pet parent is never having to be reimbursed. If you don't have money, and today we know discretionary dollars are going down, we had a much bigger solution today than we did five years ago.
Got it. And then, given that the economic conditions appear to be softening here a little bit, how do you think about your business's sort of resilience during a more challenging economic backdrop?
Yeah, I mean, it's. I was in the UK in 2008 when, you know, obviously, I don't have to say what happened in 2008. You know, it was. I was at a pet insurance provider at that time. There was a lot of stress around what's gonna happen. People choose insurance because it's a solution. When there is a time of an economic downturn-
Mm-hmm
... the folks that are choosing Trupanion and certainly choosing the high-quality medical insurance, have made a conscious decision to have that product. It is a very recession-proof product. It's sticky. We see that with retention rates. We see that with the pricing power. We continuously are needing to put through rate to maintain our margin, so we're not looking to increase our margin.
Mm-hmm.
And we've seen time and time again that retention rate remains despite that cost of care going up, and the need is greater than ever. So I think, you know, it bodes well. We work very closely with the veterinary industry. They are the partners. You know, we exist because we help them treat the pets that come to see them every day. And when you have a client who is needing to get that care, they help to reinforce the value that we bring to the table.
Mm-hmm.
So again, in terms of retention, that's an additional benefit to us.
Got it. So switching gears here a little bit, the National Association of Insurance Commissioners, NAIC, recently classified pet insurance as its own line of business under, within P&C, which is a huge step for the company and the industry overall. Maybe spend a few minutes talking about this development and what this means for your capital requirements and, and the business more broadly.
Yeah, it's a significant development. So, what we talked about from a Q2 perspective is our capital position relative to the minimum requirement for a surplus.
Mm-hmm.
At the end of the year, end of 2023, it was about $64 million. Again, surplus above that threshold.
Right.
Now it's a little north of $130 million, six months later, and there's kind of three major drivers of that. Half of it is what you mentioned, which is the NAIC change. So this is substantial. There's been a lot of work going back many years to convey to regulators the unit economics, the risk profile of the pet insurance industry, and so some of that is now manifesting in changing of some of these risk factors. So that was about half of it, and then the other half, we have a business as part of our other segment that's rolling off, that is pretty capital intensive. So as that rolls off, that frees up capital, and then we're just growing. And so as we grow, we contribute capital. So yeah, we feel very good about it.
So, we're now about 2x the minimum requirement, so that certainly gives us an array of choices in terms of how best to access that capital and where to deploy it.
I think there's also still a long way to go from an NAIC perspective. You know, the identification of pet as its own category is something that we've been driving hard as a business for the last 20 years. You know, very small category 20 years ago. It's still very small today. It's less than around 4% penetrated. So when you think about why would any insurance commissioner be needing to focus on that alone? 20 years ago, it wasn't the case. Today, we fast-forward to the money coming into the industry, the cost of care, which is in the headlines in a lot of places now. There is a growing need and an understanding of this is a big and growing category.
Every 1% of penetration is a little over $1.2 billion, so this is the insurance companies are starting to get their arms around that, insurance regulators. And I think for us, it's a really huge step forward strategically to allow us to lean into the fact that this is a-
Mm-hmm
... the category that's not going anywhere.
Any thoughts about sort of how to use this sort of incremental capital or capital that you're freeing up to invest in the platform sort of broadly?
Yeah, one of the things I, I really like about the company as I've joined is there's a framework that's used to basically assess investment. It's our IRR framework, so everything has to fit within 30%-40% return. And so, yeah, whatever investment we have in front of us, whether it's investing in growth, which has been sort of the traditional-
Mm-hmm
... form of investment or any other investment, you know, whether it's investing in technology within the business or doing sort of financial investments. Yeah, everything will go through the same framework, and-
Mm-hmm
... it gives us a way to assess investments and do the right comparisons.
Got it. And, Fawwad, you mentioned sort of, other, other business sort of rolling off. How should investors think about the pace of, pace of pets are rolling off within your, other business over the next, let's say, three to five years?
Yeah, I would say there's a couple of things I think are meaningful about the way you think about that business. One is, while it contributes a significant amount of our revenue, it's about a third of our revenue, it generates a very small amount of profit, so our arrangement is loss sensitive. So fluctuations in loss ratio doesn't necessarily impact us directly. So it's a fairly small portion of our adjusted operating income. And then from a capital intensity standpoint, and to your point, as it rolls off over the next few years, it'll just increasingly free up more capital for us to again, contribute to that surplus.
The advantage of the surplus is it gives us the ability to grow, and acquire more pets, and so we're not constrained necessarily by, you know, having to seek other forms of capital to finance that. So yeah, to us, it's a significant impact to the business.
Got it. So turning to pet acquisition, you've been concentrating your pet acquisition spend in your highest ROI channels-
Mm-hmm
... while you work through sort of achieving rate adequacy, right? As more sort of rate increases are approved and are flowing through your book of business, how should we think about the cadence of maybe pet acquisition spend in markets where you pulled back over the past, sort of maybe several months?
Yeah. We'll gradually start to deploy more pet acquisition spend-
Mm-hmm
... over the coming months. We really wanted to—the main thing for us was looking at that margin strength, ensuring we had the right rates flowing through, so every pet that we enroll today would be priced appropriately for the future. It's a horrible member experience, and it's not something that is set up in Trupanion's mentality of enrolling a pet knowing you're gonna have to give them a big rate increase. So that's really why we kind of pulled back on that growth lever. Now we have the margin across 85%+ of our book now. We can go into a lot more markets, and we can be a lot more aggressive with our spend profile. We're not gonna turn it on suddenly.
We're always going to adhere to those guardrails of 30%-40%, which means naturally there is a balancing act. We have to try and drive people through the funnel, so we'll be pushing through our baseline channels, which we always do. We've had record lead volume from the vet channel over the last couple of months because vets are leaning into the solution we bring.
Mm-hmm.
Now, it's a case of spending above the line, spending more brand spend, pulling people through, so you're educating consumers in their, in their purchasing cycle. So they really understand what they're getting and why they're getting it, and that in itself will start to return some high pet count.
Mm-hmm.
But I'd expect it to be very gradual through the year and then really kind of setting us up for a strong 2025.
Got it. So, I believe you now have roughly 40% rate increase flowing through in California following your May approval. How significant kind of an opportunity for new pet acquisition that state can be, just given the size of the state?
Yeah. It's definitely a big area of growth for us.
Mm-hmm.
I think, you know, again, it sort of leans into... We've been able to grow in California in some pockets, so we had our rate approval last year, which meant that we turned on more of California.
Right.
This year, again, it helps. And there are always places, there are always geographies, where we know that we need to get more rates. So where we are today is really. It's a really good spot. We will push harder through the hospitals in California to make sure that we've got that connection again with the vets. The territory partners on the ground there do a very good job. And you'll expect to see some kind of swell there, but again, it's got to live within those guardrails, so it won't be too aggressive, but it's nice to have California back on the map.
Got it. Is there anything you can share in terms of the sort of, the process of refiling with California for, for sort of for the balance of rate approval? I believe you requested 50% plus-
That's right
... originally, and you received about 29 or so. So anything you can kind of add on that, on the delta of 23%?
Yeah. So typically, with California, the rate doesn't get approved on a regular cadence. So and this is historically. So for the last sort of six years, we've had fairly sporadic rate approval, and that's down to really kind of the timing and the precedent of, of, who's leading that department. We had a good rate approval in August of 2022. Sorry, 2023, and we had another one this year. That does, to your point, take us to the combined rate. Because we didn't have consistency of rate approval, we tended to do a 24-month lookout of where we were trending those rates to.
In dialogue with California, what we said to them, and they actually brought this up to us: "We'd like to do a more frequent rate approval, which means that you're not gonna get as much rate as you initially asked for-
Right
... because we're gonna be talking to you again in six to eight months." We're very happy with that. The reality is, if you're trying to help someone budget for the unexpected cost of care, you have to have a somewhat consistent monthly amount that you're billing. If you go years without having a rate approval, that means you're gonna have a significant step up when you do have that approval for those people in California. So we're really happy to have more of a consistent, frequent trend, and I'd expect us to be asking for rate again with California in the new year, and then that should flow into an annual adjustment, which is far more in line with our thinking anyway.
Mm-hmm.
So it's good. If we were gonna get this much rate and then not have another approval for three years, that would be more of a challenge, but-
Got it.
That's not the case.
Got it. That makes sense. And, you talked about pretty strong retention-
Mm.
When you reported earnings last week, can you maybe just talk about some of the markets where you raised your rates pretty aggressively and how retention looks like, sort of in those markets?
Yeah. So across the board, our retention, so 55% of our book of business now has had a rate increase of over 20%. So when we think about the buckets of retention, that's usually the one that we haven't got many members in. Now, we have over half of our membership base there. Of that, you have some that have got, in Florida, 50+% increases.
Mm-hmm.
So some big increases going through. We've naturally seen a little bit of a step down in some of those areas for retention, but the revenue offset to allow for our cost of goods is more than outpace that. And then that, coupled with the fact that you have lead generation... I think, you know, back to your earlier point, this is a product that needs to be sold to people. So when they make that decision, they understand what they're buying. They do their homework, they speak to their friends, they look at the-- they speak to their veterinarian. Usually, their veterinarian's introduced them in the first place, and that combined doesn't make us a particularly easy-to-switch product. People have already made their decision, and so for us, we see that in our retention rate.
Mm-hmm.
It's not true of the industry at large, but certainly true of Trupanion membership, and I think that endorsement at the time of enrollment is so critical and what makes us different, too, to our competition.
Got it. So let's talk about your non-core subscription offerings, like, PHI Direct, Furkin, Chewy, Aflac, et cetera. So and, like all of those represented about, I believe, 10% or so of your-
Yeah
... gross additions in the quarter. Can you maybe talk about your approach to pet acquisition, kind of in this bucket, and how that's different from your core Trupanion, sort of brand?
Yeah. So Chewy, we don't do the acquisition for them. That's entirely done by Chewy. And then we manage them when they come through to us. But in terms of PHI, Furkin, and Aflac, it's really down to making sure we can grow within our guardrails. So each one of them is subject to the same guardrails. They're both PHI and Furkin are both very fledgling products. We're just about getting them to operational scale.
Mm-hmm.
We think they're close to their margin, but they're tiny, tiny books of business.
Mm-hmm.
And so as we looked at our margins as they were shrinking during the year last year, one of the things we wanted to do was deploy our, any of the pet acquisition dollars we have in areas where we have the highest rates of return. It wasn't in PHI and Furkin, so we, we naturally lowered the growth rate of those two products. They're there as an opportunity for us to lean into the difference between a mid-tier product and Furkin, and a low-tier product and PHI. It also helps to make sure everybody understands what they get when they get Trupanion. You don't get everything else, you get Trupanion. And we, we introduced them because we felt there was a lot of noise in the market and, and misunderstanding with consumers, that they thought all pet insurance was the same. The reality, it isn't.
So for us, they're great to have as a portfolio. They're not huge drivers of growth, as you mentioned.
Mm-hmm.
They're small at the moment, but great for future.
Mm-hmm. And then maybe, where do you see sort of operating metrics of these non-core products today, and sort of where can we sort of expect to see those sort of when these products scale?
I would think you're gonna see them in the next sort of 24-36 months.
Mm-hmm.
When we think about margin of our core business, we really want to focus there and double down and make sure that we have the growth rates in the right areas with the right product. Especially as the market's starting to grow and you're seeing more and more adoption rate of pet insurance in general. But we want Trupanion's core product to be the product that people know, and then we will look at expanding into those other areas. But there's an opportunity. We have them there now. There's nothing stopping us from going a little bit harder if we want to there, but really, I'd like to see the core Trupanion get back up to the higher growth rates in terms of pet adds-
Mm-hmm
... before we lean too heavily there.
Got it. So on your earnings call last week, you called out recent tech and automation investments that are leading to a higher proportion of claims being processed by Trupanion Express. Could you maybe provide a little bit more context of what this investment sort of entail? And how do you feel about where your software penetration stands today versus your expectations at the start of, like, maybe a few years ago, at the start of your 60-month strategic plan?
Yeah, maybe I'll take the first part of that.
Mm-hmm.
So from a technology perspective, yeah, a couple of things. So the company made an acquisition of a company called Aquarium a few years back, and that was a significant milestone because that gave us the platform, from a claims perspective, to really do a digital transformation. So one of the things I've been really impressed with coming into the company is the degree of... It's not fully AI, but machine learning that has been invested in over the years, and the degree of automation. And I kind of joke that while a lot of people are talking about AI, this company was investing in it, you know, years and years ago. So more than 50% of the claims that are processed are not necessarily being touched by a human. So the automation level is pretty high as a penetration rate.
And yeah, we feel good that that technology can scale. So this was the year for the claims platform. Next year will be the year for the policy platform, and that gives us two pieces of technology that really can not only scale the business, but increase efficiency, productivity, automation. And then the investment in technology, it's been a little bit elevated because of these investments. And obviously, over time, as we get more into maintenance and support, that'll be more of a steady state. Technology is part of our fixed expense, and so we have a model P&L that calls for technology as part of that to be about 5% of revenue. So we expect to, you know, largely stay within that range.
Yeah, just in terms of-
Mm-hmm
... software deployment, you know, we crossed 10,000 hospitals recently in terms of those that are interacting directly with us and have that full kind of suite of service. I think, you know, it's slower going than we would've liked at the beginning of the plan-
Mm-hmm
... when we put it together, but definitely able to lean into the fact that we now have record numbers with the software, and we're paying an exceptionally higher proportion of members' bills directly today. That has stepped up massively in the last six months.
Mm-hmm.
So for us, again, it's, it's solving that problem. People are understanding this is the benefit you get, rather than just coming to us with reimbursement. We know that not everyone's gonna have access to that straight away, which is why that deployment of, of dollars into a, a software system that allows us to reimburse quickly and drive more operational efficiency has, has been really critical.
Mm-hmm, that makes sense. Let's talk about international sort of strategy for a few minutes here. You acquired two European platforms-
Mm-hmm
... in 2022, and you've seen really nice momentum, sort of in your international business since then. Sort of how should we think about sort of the core building blocks to further scaling your business in Europe?
Yeah. So it's a very small part of our business today. And I think, you know, for us, when we made those purchases, it was really with a view to where is our next phase of growth beyond North America, acknowledging that we have a long way to grow still here in the market. Europe is woefully underpenetrated, much like the North American market, and we think there's an opportunity for a product like Trupanion and brands like the ones we're building, to go into market and work closely with the veterinary providers, which is why we purchased these companies. I think they, they're gonna feature a lot more in the future state, but gradually, as we start to unlock more P&C dollars, we will deploy them wherever we can get those internal rates of return.
It gives us a lot more of a diverse deployment, and I think, you know, we've seen the early indications suggest that vets have been waiting for Trupanion. When we went to London Vet Show, and we've been in Germany, and we've been wearing Trupanion, the vets know Trupanion. We have a reputation of being able to support what they're trying to do as an industry, as a category, and they want Trupanion there. So there's a huge demand for us. It comes down to making sure-
Mm-hmm
... we can do it and do it the right way.
Mm-hmm.
We're not just gonna be there because there's someone saying: "Can you come to Europe?" It's gonna be a case of when, when we're ready, and we can provide the same level of care for the members in Europe as we can for the U.S. So, definitely looking forward to exploiting that a little bit more. I think the teams are ready. We'll do very slow rollouts, but, I think that's really our kind of next phase of growth beyond what we're getting here in the U.S.
Mm-hmm. And, I think currently you use third-party underwriters-
We do. Mm-hmm. Yep.
... in Europe, sort of given sort of, regulatory restrictions. Is your plan still to kind of have your own licenses in certain countries? And I believe you were sort of in the process of getting your own license in Germany.
Yes.
So maybe just talk about where you are in that process.
Yeah. So we're still in the process of it. It takes a little while because you have to season the license, so it just takes several months before your application goes through, and then that happens. It's still very much our plan to be vertically integrated. We know that removes a lot of operational expenses, and for us, it's really critical that the people that are doing the pricing, doing the underwriting, understand the product that they're creating, and it just helps to have that full alignment. That's still very much the plan, and that will definitely help us lean in to more expense saving, and then we can push more into growth.
But it's probably about a year and a half away before we have that license, so we'll continue to operate with the MGA until that comes through.
Mm-hmm. Got it. I'm gonna ask another question, and then just see if we have any questions from the audience. We have a few minutes left here. So at a high level, sort of pet insurance penetration in North America sort of is still less than 5%. I think still around 4% or so. Can you maybe talk about what, what are sort of key drivers for incremental growth here in North America?
Yeah, I think it comes down to a couple of things. First of all, people don't tend to have a particularly good impression of insurance overall. And I think... And when you mention insurance to people, their eyes glaze over, and they don't have a great trust. You know, we, as a company, have really tried to engineer a very solid foundation where we have relationships and partnerships with veterinary professionals. We understand what they're trying to do as people that are treating these pets every day. And from our perspective, it's critical that we live up to the things that we said we were gonna do. As a category, we stagnated initially when we were first created in the late seventies, certainly in the U.S. market, where we didn't live up to those promises as a category.
Trupanion changed that. We're starting to see a higher rate of adoption. We're seeing it move around 75 basis points in the last year. That's happened now for the last couple of years, and we'll see that continue to grow. When I was in the UK market, we saw a growth rate of low single digits. When I left, it was, it was well into the high double digits. And we're, we're seeing a lot more of an understanding of what it can do, the fact that we're living up to our value proposition, the fact that we alleviate credit card fees for hospitals, we can pay clients directly. There is massive efficiency in the hospital, and these are people in the vet space that have been trained to take care of pets, and economic euthanasia is real. It's more real today than it was 2 years ago.
So I think as people lean into that, as pets are part of their family, we're gonna see more and more people who want to give their pets the best care and
Mm-hmm
... I think we'll see that adoption rate continue to improve. I can't see a reason why it couldn't get to the same levels of the UK, which is 25% penetration. We're on a journey to do that, and the only way we do that is by doing things the right way, which is what we're trying to do at Trupanion.
Got it. Well, I want to see if there are any questions from the audience. All right, so, maybe just to wrap up, so your stock has rallied nicely since early May, but given that it's still fairly shorted, is there anything that you feel like investors maybe don't understand or don't fully appreciate about the story at this point?
Well, I don't know if I would point to anything specific. I think, you know, you continue to execute, and people get more confidence from that, and so I think beginning at the start of last year, four quarters of sequential margin expansion, there's a seasonal nature to the business, so margins generally start low and then go higher as the year progresses. So, I think we're on a good start there. Free cash flow as a percent of revenue is a target that we set last year. We want to create our own destiny and have the cash to be able to invest, and so I think the confluence of a lot of those factors and just solid execution, hopefully, at least that's what I'd like to believe, is the reason.
Yeah, I, I would add to that. I think, you know, there, there's a lot of, a lot of worry around retention, a lot of worry around will they need to increase capital to grow? Will they need to raise capital to grow? The reality is that the fact that we have the capital that we have in the, in the insurance company, the fact that we have incredibly strong sequential retention rates year-over-year, we're seeing the quarter-over-quarter improvements, year-over-year improvements-
Mm-hmm
... record lead volume. There's a tremendous amount of market out there, and we're not gonna grow for the sake of growing. We're gonna grow with the right returns in mind, with the right margins in place. So, there's a lot of runway, and we're excited to be able to demonstrate that through execution.
Great. Well, I think we're out of time.