Great. Good morning, everyone. Welcome to the Raymond James Institutional Investors Conference, and I'm Greg Peters. I am one half of the insurance team that covers insurance-related stocks for Raymond James. My counterpart, Wilma, follows the next company that's presenting. She asked me to stand in her place. She'll be here later today. It's an honor, really, to welcome back Trupanion. It's participated in our conference before, and today, from management, we have Fawwad, who's the CFO, and we have Gil, who serves in their investor relations capacity. So I have some questions that have been fed to me from Wilma, but at the end of the day, it's a 30-minute conversation. It's meant to be interactive. So please feel free, as the conversation evolves, if you have a question to raise your hand. We'll certainly incorporate your questions if it's appropriate. Hh
So with that, before I run through the list of questions here, maybe you could step back and just give us an intro to Trupanion, tell us about the state of the business and the state of the company.
Yeah, thanks for having us here. So Trupanion, for those of you who don't know, is a pet insurance company. So we insure cats and dogs. And so the company started in the late 1990s. There's actually kind of an interesting story about the founder. He had had a kind of a difficult experience when he was a kid. His family had a dog, and they had to take the dog to the vet. And unfortunately, they didn't have the funds to be able to treat the dog, and they left the dog there. And as he recounts the story, years later, that experience led him to starting this company, Trupanion. First pet was enrolled in 2000. And today, we have over a million pets enrolled in our core subscription business. So it's quite an amazing growth story. Our primary channel is the vet channel.
So we've built up very deep relationships with vets over many years. And that's just through meeting them and going out and visiting vets every day. We have 200 Territory Partners who, as I'm sitting here, are probably, well, I hope they are, meeting with vets. And we really focus and obsess on the member experience. We want to provide surety to members. So one of the ways we do that is we have proprietary software. It's actually installed at the hospital. So if, for example, you go into a vet and you need, let's say, a $1,000 procedure for your dog, normally, you'd submit that claim through a normal claims process. In our case, if the software is installed at the vet, you get right at point of sale processing of that claim.
So let's say, in that example, instead of owing $1,000, you owe the $100, and the company pays $900 direct to the vet. So the vet gets surety that they got paid. The member gets the peace of mind that they don't have to be exposed for the $1,000 and the claims process. We just announced our 2024 results. The company has about a little under a billion in revenue, a little over $850 million in revenue in our core subscription business. It's grown pretty well over the years, about 20-ish% over the last decade. So it's a high-growth business. And it's a super interesting area. I didn't know that much about pet insurance when I joined a year and a half ago. There's about 4% penetration in the U.S. market. So there's a long way to go before we get to maturity in the industry.
Yeah, we're excited about the future and bringing our product to as many people as possible.
You know, as you were using the example of $1,000, as a dog owner, I'm trying to remember the last time I was able to go to a vet for nothing other than ordinary care that's less than $1,000.
Less than $1,000, yeah. I probably need to up that example.
So let's talk about the revenue growth rate for the company. Can you talk about what the outlook is for 2025, how that compares with previous years? Because I feel like there might be a minor step change in what the rate of growth is.
Yeah. So from a 2025 perspective, we're guiding to about 15% growth, and that's constant currency, and to your point, the company has grown faster than that. It grew about 20% for a decade, which is pretty remarkable to grow anything 20% that long, so two years ago, like most companies, we experienced inflation, and that led to margin compression, so margins effectively were cut in half, and it happened very quickly, and in response to that, the company, this is prior to my joining, the company started putting pricing through and also cut marketing spend, so with the reduction of marketing spend, if you think of over a 10-year period, marketing spend went up pretty much every year, and our gross adds, in terms of pets coming into the ecosystem, went up pretty much every year as well, in fact, on an accelerating basis.
The last two years, it's come down, the marketing spend, and as a result, the rate of growth is less. I think what we're excited about going into 2025 is we're back to investing again in marketing, so our expectation is that that spending goes up again. A lot of companies, they get themselves into trouble when they reach for market share, and so I think being disciplined about not reaching for share, waiting for pricing to be appropriate, making sure our margins were healthy before we tried to go out and acquire more pets. That took some time. It's not easy to be patient when you're a high-growth company. It's hard to say no to growth opportunities, but I've been really impressed with the company's discipline around just holding the line, making sure that there was margin recovery.
It also gave us a year to build up our financial capacity. So we're now in a position where we feel really confident about the ability to invest. And there's plenty of opportunities out there. So yeah, we're looking forward to 2025.
Yeah. So the inflationary pressures that you experienced are probably unique inside pet insurance, but the entire insurance market has been undergoing some inflationary issues with loss costs. Maybe one of the things that happens on the non-life side, as you know, is the pricing cycle. And there's always this balance of how much rate to get, how do you competitively price as you're seeking additional rate. Maybe you can walk us through where you are in the rate cycle, how much of the growth is going to be coming from price, and how you view that in a competitive dynamic?
Yeah, it's a great question. So if we just look at just the trends, our expectation, based on what we know right now, is inflation will continue at the same rate as last year, about 15%. In terms of year-over-year ARPU increase, we think it will have peaked in Q4. So if you look at just the year-over-year increase in rate, so pricing will be less than it was in 2024, but it's still going to be the dominant contributor to revenue. So if you look at 2024, it was about 60% driven by pricing, about 40% driven by pet count. So we're still adding pets. It's just not at the rate that has been the historical norm in terms of mix. I would say largely we expect that same relationship to occur between pricing and pet count. We hope, obviously, that pet count will start ticking up.
Historically, it was the other way. So it was more pet count driven and less pricing driven. But with inflation at 15%, at least based on what we see today, we'll certainly find out more in Q1. Q1 is usually when vets put their pricing through. So we'll get a better idea of how the year is going to potentially look. But that's our expectation right now.
And then just adjacent to that, as you're going through the reset phase on pricing, talk to us about how you're monitoring your competitive position inside the ecosystem?
Yeah. So one of the advantages we have is we have obviously a ton of data. We get information every day about cost of care in the market. To your point, the pricing cycle takes a while. I came from consumer products companies where the pricing cycle is like an hour or today. In insurance, a little bit different. So it can take time for it to flow through the book and for us to get the regulatory approvals. I think we're going to be a little bit more granular when we think about 2025. 2024, we had to raise price in a broader way. So I would say it's going to be a little bit more granular. It's market by market. I'm learning as I spend time at the company that it's really a state-by-state discussion. And so I think we will go through that process.
Our expectation is that we've certainly learned a lot in the last year in terms of what works with building the relationship with regulators and trying to put forth pricing.
Okay. In your previous answer, you talked about the penetration rate of pet insurance. Maybe you can provide us some perspective on, in North America, how many pets are actually getting insurance and your penetration rate, and then the expectation of how you expect to expand that. Is it education? How does the natural evolution of that evolve?
Yeah. So from a total available market standpoint, there are more households in the United States that have pets than have kids. So it's a lot of households. And then, obviously, you have homes with multiple pets in them. Part of it is awareness. I speak from personal experience. I didn't know a lot about pet insurance as a category before I joined the company. So certainly getting the word out in terms of what the product is and what it's supposed to do, I think that's part of it. I would say if you look at the history of the industry, there's been people that have come in and out. And so there's been a little bit of inconsistency. And when companies don't last for the long term, that can create kind of a sour taste in the minds of consumers. So it's probably both of those dynamics.
I would say the biggest thing is just awareness of the product, how it works. And it's always a challenge. And I'm certainly not an insurance expert. But I think, unlike other consumer products, Netflix, as an example, you get a daily validation of what you're paying for. If you watch it every day, it serves as a good reminder. In your example, it's going to the vet that gives you the reminder. So if there's a period of time where you don't go, you may not see the cost of care. But when you go and you see that a procedure that, let's say, you had last year was $100, is now $120, $130, that acts as a validation of the need for the insurance product.
Yeah, yeah, absolutely. Can you talk about, as you're describing the company, you talked about the relationship with the vets. And I assume that's your principal distribution mechanism. Can you talk about that relationship? Can you talk about the opportunity to grow the distribution inside the veterinarian specialty?
Sure. Definitely one of the economic moats of the business is the relationships that have been built up with vets, so I mentioned earlier, we have 200 Territory Partners that go out every day and meet with veterinarians. They've been doing that for 20 years. I had a chance when I first joined the company to go to a hospital and just spend time with a territory partner, and at least in that experience, the territory partner will do a presentation. The vet actually took over the presentation. They were so passionate about the product, and ultimately, vets want to be able to provide care. Our products generally provide the broadest coverage, and they want to ultimately treat the animal, and so, yeah, that experience was an interesting one where the vet kind of took over and started talking to his staff about the need for insurance products, obviously, broadly.
We want to go deeper with those relationships. I think the key is the software. Having the software installed in the hospitals is critical because it gives you that assurance at point of sale.
Through my own experience, I can tell you the vet is promoting you should buy pet insurance for your puppy, and it's long-term good value. But in my personal experience, not that it's an arbiter of everything that's going on, they're pushing a couple of different products. How do you push yourself to the top of the recommendation list as the vet's talking to their customers?
Yeah, it's a competitive market. I think at the end of the day, we try to position our product at the higher end to be able to meet the broadest possible coverage. And so ultimately, in a consumer business, you need to go where consumers are. You have to meet them where they are. So our product is positioned in that category. We also have some lower-cost products in Canada. But for the most part, our core Trupanion product, it's an assurance product where the broadest possible coverage that we can provide, we do, and then just ensuring that we're there for the long term. And I think having a, almost it'll be 25 years next year, having that long history certainly gives people more confidence.
Indeed, indeed. Maybe step back and give us a perspective because it seems like the market's pretty concentrated. Give us a perspective on how the market share is allocated for the companies that are writing pet insurance and how that might change. Do you feel like any of the companies have any pressure on them, ownership pressure, things like that?
Yeah, there's been some recent developments in the industry. There's been a large competitor that has been acquiring companies both in North America and Europe. So clearly, that has an impact. We look at it as a net positive because, obviously, if people are investing in the industry, that gives us sort of a tailwind of visibility, awareness. We have about 30% share. So we're one of the larger players. But yeah, there's been entrants that have come and gone. But for the most part, there's been a couple of companies that have really withstood the test of time.
Yeah, right. You're talking about the inflationary pressures. Is there a typical average annual rate of inflation? I assume the last couple of years, maybe there's been a step change upward on that. But how do you think about the longer-term inflation rate in terms of your loss costs?
Yeah, of course, it's difficult to predict where things will go long term. Normally, it's about mid-single digits. That's been kind of the historical norm. Last year, we had about 15% inflation. We expect the same 15% inflation. As I mentioned earlier, Q1 is when we'll find out a little more about rates that vets are putting through. So you typically see the rates go through in Q1, and then in Q2, you see higher frequency, so there's a seasonality to our business. We generate most of our profit or the majority of our profit in the second half, the majority of our free cash flow. Right now, our expectation is 15% will continue. I would like it to come down. That would be great. But at present, we don't see anything that would indicate, at least in the near term, that that's going to change.
Yeah. And do you see any, so from the loss costs, so that covers the severity, anything changing in the ecosystem around frequency?
Yeah, so industry-wide, not necessarily for us, the number of visits is down, and so that's putting additional pressure on veterinarians that they have to increase prices, so it's a couple of dynamics. It's just inflation industry-wide, and then if you have another factor of reduced visits, again, not for us, but for the industry more broadly, that's going to create more pressure on inflation, and to your earlier point, because it takes time for us to put pricing through, that puts pressure on margins.
Yeah. So I have an annual or automatic renewal on my policies. And so I just don't even think about them. But whether you're dealing in auto insurance or business insurance, there's renewals that come up. How do we think about the persistency of your customer set? And how do we think about initiatives to either improve or raise the level of persistency that's going on inside the company?
Yeah. One of the things I've been surprised as I've come into the industry is the retention rate and how high it is. I come from consumer brands where if you have a digital product and it's 50% retention, that's outstanding. In our case, when you look at monthly retention, it's above 98%. Even if you annualize it, it's in the 80-ish percentile. That is astounding for me because consumers, obviously, vote with their feet. You get a referendum on your product every day. We generally have monthly policies within our core business. And so there's an opportunity every month for a consumer to make a choice. And retention has been an area of strength, even with pricing going through. So if you think of the cohorts of pricing, we think of them in three cohorts. There's the people getting greater than 20% pricing increases.
There's those getting up to 20%, and then there's those that are first-time members. Actually, the first cohort, the ones getting greater than 20%, has been our strongest, which, again, has been surprising to me. I haven't been in a business where the retention starts with a 9, and I think at the end of the day, it's the validation that the product has value, and if you're going to the vet and you're seeing the cost of care increase, it just gives you a data point as to why the product is working or why the product makes sense for you. We're going to focus. The company is always focused on retention. Actually, to be honest, when I got to the company, I think one of the first meetings I was in, they were talking about a 10 basis points impact to one cohort.
I thought I didn't know what they were talking about because I said, "These numbers are amazing." But again, I think when you focus that much on it and you obsess it, whether it's 5 basis points, 10 basis points, there's a lot of effort that goes into that. Just briefly, when you think about the member experience, it's kind of in three pieces. There's obviously the digital experience. So what the member actually sees, the member portal. There's the claim processing. And so through technology, we've been able to automate a lot of our claims technology. Over 50% of our claims are automated. And the number continues to rise. So you get that claim process quicker. And then as we increase the number of hospitals that have the software, we feel like that obviously has a huge impact on member experience.
So yeah, retention is an area that, at least from my comparisons to other businesses I've seen, is a huge strength. I would say when you think about the economic moats of the business, I would add pricing to it. We don't necessarily raise prices because we want to. It's obviously in response to cost of care. But to be able to raise prices that much and have people stick with us, it gives me a lot of certainty that when they engage with the brand, when they see the product, they value it.
In other areas of the insurance market, technology is definitely playing a lead role, especially in the claims process, automating claims in car insurance, using your phone, capturing data, and sending it directly and getting direct response from the claims department of the carriers. Walk us through how the claim process has been automated at your company and how technology is improving the experience for your customers.
Yeah, this is something I'm really passionate about. I spent a lot of my career in technology. And most of us have seen technology projects. They start out with some PowerPoint slides, and then they take years and years. And sometimes you don't necessarily see the value. You see the cost, but not the benefit. This is not the case. This is actually a case where, I believe it was back in 2017, I might be a year off, the company started machine learning. And ultimately, what we're trying to do is replicate what a human claims adjuster would do. So you take the data based on the human interaction with claims, and then you replicate that through machine learning. So the automation of that process has been something the company has been investing in for a number of years. That's been crucial.
There were points where you reached certain breakpoints and that you just can't add more people to process claims, and so the technology has to aid that. Even with the human claims adjusters, the technology aids them in terms of being able to understand the data, obviously trying to standardize the data that comes in. So when a claim comes in, looking for patterns, looking for a way to be able to process that claim in an efficient way. So yeah, this is a case where I came in at a time when we're actually mining and harvesting the benefit of the technology platform. So our claims platform is now, I want to say 99% of claims are now through that platform, and then this year, the project is really around policy. When we have those two pillars running optimally, we feel like the automation rate should go up.
Yeah, that makes sense. Maybe when you speak about technology, maybe you can talk to us a little bit about how you mentioned how there could be technology projects that really don't have a good return. Maybe talk to us about your perspective as you're budgeting out for 2025 and 2026, how you approach your investments in technology to further enhance the customer experience. And then it's just not inside the claim experience. You're deploying technology in other parts of other facets of the business?
Yeah, absolutely. The key project this year is going to be our Vision Policy platform. So it'll be single source, one platform for policy. It'll effectively work as a twin to the Vision Claims platform. That's a huge project. It's been underway for a number of years. The company did an acquisition in the U.K. some years back that created the foundational layer to be able to build these two platforms. Once we do that, like a lot of companies, we have a ton of legacy software. We can start decrementing that and get efficiency both from an R&D perspective, as well as, more importantly, just from a member experience. The more seamless we can make that, the more intuitive we can make the member portal, the more content we can provide that gives people useful information as members. We feel like that's a huge differentiator.
Excellent. Well, yeah, I was going to. Oh, go ahead. Yeah.
So I'll say a couple of things. I think in terms of the.
Repeat the question because the people that's in the webcast couldn't hear his question, so.
Do you want to repeat it?
He was talking about the regulation going on, the consumer backlash that's happening in other markets outside of the U.S. I'm wondering if there's any sort of regulatory potential friction points for your company in terms of either state regulation or federal regulation in terms of consumer behavior?
Yeah, it's a great question. I mean, it's hard to predict that. It'd be difficult to know. I would say, based on my cursory knowledge of the industry, at least in the United States and Canada, there's a fair amount of competition. I mentioned that there was a large competitor that had come in and started acquiring various businesses. So it's obviously something that we are aware of and think about. In the end, I think there's enough history that shows companies come in and out of the industry that gives me some confidence that aggregation, maybe like what might be happening in the U.K., would be some years out. From a pricing perspective, our experience with pricing is it takes anywhere from 12-18 months to go through that process, and like any pricing approval, it's all data-driven.
We have to be able to make the case to say, "Here's why we believe these prices are necessary." It's all based on cost of care data that we have. So at this point, we don't see anything that would give us concern. There's enough competition in the market today. But again, things could always change.
Did I answer your question?
In the back of the minds of the listeners who have come to the panel, the extremes of valuation are quite high and low. Just standing back, what is it that the investors don't get about the story? Why is it that sometimes it's all or nothing? What's been covered this evening? It doesn't seem very well understood. What is it that people miss?
So the question is just talking about the valuation volatility and when it's trading at lower valuations, what's the Street missing versus the aspirations of it getting to a higher valuation?
Yeah. So the company experienced a pretty large increase in market cap some years back during COVID. I would say that the way we think about it is we try to invest with a mindset of 5, 10, 15 years out. And the business model is such where we reinvest most of the profits back into the business. And so from our perspective, that's the thing. I wouldn't say it's what investors are missing. It's just the model. That model has not really changed. Valuation has gone up and down.
But I think the thing that is of interest to me when I think about the long term for the company is as long as we can continue to invest, and 2025 will be a year of investment when it comes to marketing and pet acquisition, as long as we can continue to invest at high rates of return, we will put money back into the business and do so. We don't see anything right now that would indicate that we've reached a saturation point. This is going to be a really important year. If you ask me as the CFO, what's the one thing that I'm looking at? There's many things that I'm looking at, but one key indicator is going to be the rate of spend in marketing. Any company can spend on marketing and sort of, in a sense, throw the money away.
You have to get the return. And the company has been very, very disciplined over a long period of time to measure the returns to make sure that it's within our financial guardrails. So as long as we're falling within the guardrails, if you look at the rate of spend over the course of the year, that ought to be a reasonably good leading indicator of gross adds. So that's our model. It's not exactly the Amazon model. I would say it's in some way inspired by that, that if you can invest at high rates of return versus alternative uses of cash, giving money back in the form of, for instance, a dividend, we still see plenty of opportunity to reinvest.
We have time for one last question. Oh, there you go. There you go. One last question. Go ahead, sir. Question about marketing spend.
Yeah. I think the thing that I would emphasize is for 10 years, the company invested in marketing at increasing rates, and you saw increasing gross adds, so it was a pretty strong correlation over a decade. The last two years, it was the opposite, so marketing spend came down. It peaked at about $80 million in 2022, came down to $70-ish million in 2023, and then last year was all the way down to $64 million, and you saw the rate of gross adds decline. We still added pets. We still added more than 250,000 pets last year, over 500,000 pets over the last two years, while we're still bringing marketing spend down. This year, and I said it in the earnings call, we have the financial capacity. We have the free cash flow to now invest aggressively or more aggressively.
We'll do it gradually over the course of the year, but I would like to approach the levels that we invested in a couple of years back. Again, it's all dependent on the returns. The company is another thing that I've been surprised at, in addition to the retention, that there's a ton of discipline. I've actually had cases where we've turned down opportunities to spend because we don't feel the returns are there. And so that's why if you see the spending increasing and provided we're staying within those investment guardrails, you ought to feel some confidence about gross adds. Again, I'm talking about gross adds, people coming into the ecosystem, that those will start to increase at a faster rate.
Okay. So we're done with our 30-minute time slot, but we do have a breakout session downstairs where you can ask some additional follow-up questions. And thank you very much, Fawwad, for your time.
Yeah, thank you.