OK, good afternoon, everyone. Thanks for joining us here. My name is Brandon Vazquez. For those of you who haven't met, I'm the research analyst at William Blair that covers Trupanion. I'm required to inform you that you can go to our website at williamblair.com for a complete list of disclosures and potential conflicts of interest. With that, I'm happy to have Margi Tooth with us from Trupanion, the CEO. She's going to run us through a corporate presentation. If we have time, we'll do some questions. If not, after the breakout session, we'll get into a little more detail. With that, I'll hand it over to Margi.
Thank you very much. Hello, everybody. Happy to be here today to talk to you this afternoon. As Brandon mentioned, got some slides that we'll walk through. I'll try not to gallop through them too quickly. Hopefully, we'll have time for some questions. There is a breakout following. If you can't get your question answered today in this session, then we'll hopefully do it afterwards. I've been part of the team there for over 13 years. We're based in Seattle. We're 25 years old as an independent insurance company, Canadian-founded. We provide coverage for over a million pets across the North American market and just moved into European spaces. Let me see if I can get this into work. More disclosures for everybody. First and foremost, we are a growth company.
As Trupanion, this is obviously an industry that is large and under-penetrated in pet insurance. Less than 4% of pets across the North American market have pet insurance. I'll cover more details on this later on in terms of what that means in terms of the overall opportunity in front of us. The economics of our business are a cost-plus model with compounding monthly recurring cash flow. You can read all the words on the screen. I'm not going to read them out for you. We have moats. We've got deep moats we've been working on. I'll give you a sample of what those moats look like. Our financials are a monthly subscription revenue model. We have strong returns on invested capital. Our overall program is that we make money from the pets that we enroll. We reinvest that to grow the business.
As a position, we are industry-leading in terms of retention, in terms of our overall sustainable cost model. We are the most consistent and sustainable in terms of revenue growth. We've been doing this for a little bit of time now. That's Trupanion in a nutshell. Let's go into a little bit of detail. Our mission, we exist to help loving, responsible pet parents budget and care for their pets. No one knows when they get a pet if they're going to have a lucky or an unlucky pet. No one knows what the potential costs can run into. Today, it's significantly higher than it used to be. There's more of a need for someone to be protecting their pet and helping their pet than there used to be.
When we think about lucky and unlucky pet, our job is effectively to eliminate the uncertainty, as with any insurance company, to make sure that we are priced appropriately to be able to provide support to your pet parent for the life of the pet. As you can see here, we target $0.71 on the dollar. The average pet is right in the middle. Some people end up getting a much more unlucky pet than others. Some have a very lucky pet. Let me give you an example of one of our members, this very sad-looking beagle, six-year-old Sadie. I'm not going to read out all of the words on the screen here. This is something that comes into us every single day, the pet parents that we help and the way that we help.
As you can see in the middle of the screen, without Trupanion, we know we wouldn't have our precious girl. This is the mission-driven company that we are. We're supporting more people because we can help at the time of checkout by paying directly. That makes a massive difference when you have invoices, as this pet would have experienced, in the tens of thousands of dollars. Why Trupanion? This is not supposed to all come on the screen all at once. Forgive me. You're going to have to bear with me as I walk through this. It's not going to stagger on. If we start on the left-hand side, we've got the broadest coverage in the industry. What that means in real terms is we have comprehensive lifelong coverage if a pet becomes sick or injured.
That is effectively showing up in two ways in our product. The first is we have a lifetime deductible. That lifetime deductible is set up per condition. If your pet becomes sick or injured with diabetes or a chronic condition in year one, once that deductible is met, that is met for the life of the pet. You are going to see that continue. That retention rate is really strong because of that broad coverage that holds on to that pet for life. We have strong retention rates as a result of that. We have our lifetime pricing, which I will come on in the best value. These are components of our product base that really allow us to give the broadest coverage. We price for complete coverage. We do not have a network of care.
You can take your pet to any vet across North America. We will provide the same level of care. More importantly, we were the first provider in the industry to cover the things most likely to go wrong with your pet. We cover congenital and hereditary conditions. If you have a pet like I have an English bulldog, I should know better. I have an English bulldog. They are notorious for having all kinds of conditions. Everything that will hopefully does not go wrong with her would be covered by Trupanion. We bake that into the coverage that we have to ensure that it is complete and broad because that is essentially why you have insurance, to cover the things that are going to go wrong. The best value. Now, value can mean a lot of different things to many people.
The way we built the product is to create a product that will be $0.71 on the dollar for every pet parent. We have 1.2 million pricing categories across our book of business designed to carve out by species, by breed, by age, and by geography. Our goal is to make sure that whichever cohort you are in, you are getting the same value proposition as the next person. That is the highest sustainable value proposition in the category today. We do not have birthday pricing, which is the first bullet point in the middle there. This goes back to the lifelong approach that I mentioned beforehand. What birthday pricing is, is every time your pet has a birthday, providers increase the rate guaranteed because they know that pet is going to have specific issues.
Initially, what will happen with Trupanion, if you ran a quote today, you'd probably see Trupanion might be a little bit higher in terms of the cost. We bake in the age enrollment, and we lock it in at the age enroll, which means that by the time your pet's five or six years old, competitors' prices will be significantly higher than Trupanion's. We do that deliberately because we're designing our product to be there for the life of the pet. That makes a massive difference when it comes to retention because when you need us most, we're not going to increase your rates above norm. That does not mean we don't increase rates. We've been through a very big cycle of rate increases as margins have compressed. That's not related specifically to age. We have no payout limits.
We think about a product. You think about the capping. A few years ago, this probably did not seem quite as much of a sales piece as it does today. The cost of care, I do not know how many people have been to the vet recently, but you will have noticed there has been a significant increase in cost of care. Bills can run easily into the tens of thousands of dollars. Not having that payout limit allows the pet parent to say yes to the best form of treatment and not have to go for the second or third option. On the far right-hand side, our customer service, our member experience, we pride ourselves on being a member-first, member-based approach. Everything we do comes through the lens of the member and the veterinary industry.
What we mean here is, how do we help solve the biggest problem? The biggest problem is the friction of having to pay upfront and be reimbursed to the vet. We created a patented process with our software, which allows us to pay the vet directly at the time of checkout, the same way as any of you go to the dentist. It's completely frictionless. We integrate with the software, and it allows us to pay and just leave the pet parent paying for that portion of the bill. That's a massive reduction of friction between the care for the pet and also the lifetime of the pet. 24/7 customer service, we are the only provider across the world to offer a contact center 24/7.
If you are in the vet in the middle of the night because pets do not get sick at convenient times, you can call us. We will be there to help you. We will be on the phone for pre-approval for things when people really need you. In terms of brand advocacy, this is a really key part of our value proposition because people need to know there is someone on the phone to speak to when push comes to shove. Finally, we have on-the-ground support, which is significant for us. It means that we partner directly with veterinary hospitals across the 28,000 North American hospitals.
We have boots on the ground that can help us in real time understand if our product is doing what we think it should be doing, if the member experience is what it should be doing, and if we're solving the problem we set out to solve. Imagine this is like a constant focus group for us, constant feedback, which takes me to the defensible moats. The relationships we have through our territory partners are the things that make us nimble, allow us to adjust, and make sure that we're living up to our value proposition, which again feeds into that retention rate. That helps drive lifetime value.
We have the superior value proposition, which is built on not only the relationships and continuing to adjust our product, but also the data that we get that allows us to price quicker and more effectively than others in the industry. The integration that we have, both through the relationships and through our patented software, if I jump to the right-hand side there, gives us a lot of real-time insight into how we should be pricing, behavior changes, and cost changes, which is insight that other people do not have. Let's move on to the under-penetrated markets. The markets we operate in, these are all the global industries in front of you on the screen that currently have pet insurance in some form. The North American market, you can see, is just 4% penetrated. There are around 180 million cats and dogs in this market.
We have been around since the very late 1970s, early 1980s. That penetration rate has started to tip up nicely over the last few years. I am going to take you through, again, bear with me. If this was flashing on one by one, it would not be quite such an assault on you. If you just do not read down, do not cheat. If we start at the top, there are 180 million cats and dogs in the North American market. Around 120 million visit the veterinarian every year. They are the market we are talking to. We are talking to the people who actually do use their product. They listen to their vet. They listen to their recommended treatment plan and people who want to go and get the wellness visits and dental checks and vaccinations.
Of those 120 million, we see around 14 million new puppies and kittens born into just the North American market every year, which is around 1.1 million new pet leads. We would consider them our leads, our opportunities to enroll every single month. The market is colossal. Despite the COVID boom, and we did see eventually, we did see a COVID boom in puppies and kittens, that has now gone back to normal. We're still seeing a huge amount of pets. They're not getting insurance today. Massive opportunity. If we make that into a real light, how do you go after 1.1 million pets? This is how. There are around 28,000 veterinary hospitals in North America that we interact with every week, usually through our territory partners, either through our contact center, our account management teams, and through our distribution.
We're having constant conversations with these 28,000 vet hospitals. Now, there are more than 28,000 vet hospitals in the North American market. Many of them have large animal and are not necessarily practicing on the pets that we're looking to work with. If you divide that number just very crudely, you've got around 40 new puppies and kittens per month per hospital. Of course, you've got some that are bigger than others. Broadly speaking, when you break down the huge opportunity and you think about the per hospital activity, we're not asking for a huge amount of activity per hospital. You can see how we can go into this by having territory partners who can partner directly with the hospital to help them educate on the benefits of having insured clients. It's just in North America alone.
The category has grown on average 23% over the last few years. You can see we're starting to really ramp up as a category. The last three years, there's been significant margin compression, which has held back a lot of the investment that we were seeing in the middle of the COVID kind of COVID boom. You can see the massive opportunity. It's growing at $1 billion plus in a category that potentially could get to the same size as the European markets, which are on here. Not only are we in North America, I mentioned earlier, we're also now starting to enter into European spaces. We launched the Trupanion brand in Germany and Switzerland in August of last year. This was after a purchase of a very small company in the German market.
It gave us license into Europe to allow us to start to operate with the same standard of coverage that we have today in North America. We see an opportunity to pay the vet directly, to offer lifelong coverage. Comprehensive coverage into market that you can see is equally as under-penetrated. In Slovakia, Czech Republic, and Belgium, we purchased a different company called Pet Expert in 2022. This company is also going to be rebranded to Trupanion in the next few years as we start to kind of really find our footing in those markets. Tremendous opportunity. There are around 40 million pet parents in these markets that we are looking to target. You add that to the market we have, again, addressable market, looking at building on the same sort of sales, some big hospital numbers, and some big pet parents.
This is our brand list, the brands that we are most closely aligned to. We do provide support for other brands, but these ones are owned directly by Trupanion, so from end to end. The core Trupanion brand is our core product. It's one that we started in Canada. It's the bulk of our business, and it's where most of our revenue comes from and our high retention rates. This is a product that's predominantly distributed through the vet channel, also through breeders and members referring their friends. We have Furkin and PHI Direct. These are two brands we launched into the Canadian market. They're as yet to come out of Canada, but they will do over the next couple of years. These products are designed very specifically to speak to a different type of pet parent.
When you think about the market as we move into more adoption, we're seeing a different need from a different category of pet parents. They might not want the bells and whistles of a product. They might want something that's cheap and cheerful. They might need an entry-level product. That's what we now have with these three tiers. The final product on there is Pet Expert. This is the brand that we have in Czech Republic, Slovakia, and Belgium. That one will be changing over time. Currently, we have it by Trupanion, branded specifically to align because it does pay the vet directly. When we think about our point of difference, Pet Expert also has that within it. Okay, this is a chart that we pulled from the latest shareholder letter, which came out about six weeks ago.
This is a really important point. I've spoken to many of you in the room today about where are we in our journey. You can see that in terms of the model as we see it from, if we take a diffusion of innovation, you can see that if we were to get to 25%, which is where the U.K. market's at, it's a category that I was working in for eight years before I came to the U.S. I see no reason why we couldn't get there. If we just assume that 25% penetration, today, we are just about in that early majority phase. It's taken us a very long time as a category to get there.
As we start to see more adoption, which we're seeing with increased dollars being invested into the category, good competitors coming into the space who are pricing their products appropriately, who are giving people a good experience, we're seeing an increase in vet costs, which is driving high demand for our product and services. We're seeing that movement into the early majority. We are on the cusp of hopefully seeing that big inflection point. We see that directly within the Trupanion walls. When we have more hospitals raising their hand today, we had a record install rate in April for our software because people need to have that solution today. It is an exciting time for the category. Those of you that have followed us for a long time will recognize this chart. Kind of subscription revenue, it sort of speaks for itself.
Goes up and to the right. We've seen nice healthy growth from our book of business that we continue with a very strong retention rate to hold on to. To reiterate that retention rate, here are the cohorts by year. And you can see that we of the pet. That is our goal. We were a very small company in 2010. You can see how we all the way through to today. That is through having the ability to get care for that pet when they need it in timely fashion. This is not such a nice chart, although it is now looking a lot better than it did. You can see from 2014, as we were really starting out, we were working through our pricing with a target in mind of getting to a 15% adjusted operating margin.
In 2022, as you'll note, we saw significant inflation in the industry. Typically, the vet industry will raise our prices somewhere between 6%-7% a year. That was fairly consistent for us. We saw that, we recognize that every single quarter in Q1 of every year. In 2022, prices went up 6% in Q1. They continued to go up through the year. By the end of the year, we saw a 12% inflation. In 2023, that inflation went to 15%. In 2024, it went to 15%. This year, we're seeing around 15%. We've had massive inflation that took us the best part of two and a half years to pull back through the inflationary period to ensure we're pricing appropriately to manage the costs that we're seeing coming in. It's a cost-plus model.
If we do not get our pricing right, you can see our margin gets cut. It was actually cut in half in one of our quarters. As you think about how we then have to pivot, we go to the regulator. We filed our rates. We got very good at filing a lot of rate very quickly. We went quicker than anyone else in the market, which has allowed us to see that nice recovery at the end of 2024. We expect to see that consistency return, which allows us to get back on track to that 15% margin. All that being said, it has been a journey. It has been one that in that inflection point down, we were not heavily investing in growth during that period. For Trupanion, we reinvest our adjusted operating income to grow the business.
When we knew we were not priced appropriately for a majority of our new pets, we did not want to double down and grow the business at a time when we knew we'd have to give those people very high rate increases. As a result of that, we held back our investment. Now we're just starting to build that back up again. Instead, we focused on retention. We're seeing some really good early signs of testing from the retention results, which have far exceeded our expectations. I will not walk you through this whole chart. You'll be pleased to know. I do just want to point out a couple of things when we think about the business and how we reinvest our income. There are two things that are so important to us as a business when we think about investment.
First of all, what is the profit we're making per pet? If that profit goes down, you can see that number. If I can point properly in here. Oops, no, I've gone backwards. You can see the estimated profit per pet in that third line down. That being $8, that was at $1.6. It went down to $6. It's now going up. We're using a three-year look back here, which is important. It's not a 12-month look back. We need to get that profit to a healthy level. You will see that we multiply that by the number of months we retain a pet. We currently are retaining pets in 2024, at least, of 64.9 months, which, once you get people beyond that first year, that's effectively the life of that pet. You have to get them beyond that first year.
That number is now moving back in the direction it used to be. I expect over the next several years, we'll get that back on track to the $98,600-$98,700 levels. You can see the lifetime value of a pet of $528 when we have got the margin coming through that we need and we have the retention rate. For Trupanion, the big focus has been for the last six months, just make sure that pricing is right and make sure the member understands it before we push hard to acquisition. What this does do, though, is it shows you we have significant discipline in how we are reinvesting those dollars. Despite margin compression, despite pulling back, we were still able to grow the business and have a 37% intolerated return based on a three-year look back of margin.
It is somewhat conservative, given that we know the pets from rolling today have a much higher margin. I am going to leave on this slide. Hopefully, we have some time for questions as well. Just to think about the future and the opportunity, we have talked about the fact there are 28,000 hospitals. There are 40 pets per hospital that are going in every single month that we can speak to. We have a number of growth levers that we are continuing to build within Trupanion. The first and foremost is getting more leads, speaking to more of those puppies and kittens as they enter practice management systems, and having discussions around why insurance and why Trupanion. We increase the conversion rate, which has been a never-ending story as we continue to try and lean into why Trupanion.
Our phone conversion rate has never been higher than it is today. We are seeing some gap closing on a web conversion rate to be able to drive that high volume. That comes in tandem with a number of stores across North America, so how many hospitals are introducing the concept of medical insurance, and then talking about how do we get that to be a tool? How do we have more stores, more hospitals referring patients to Trupanion? We have different subscription offerings, so more coverage. We have add-ons we can give to our coverage. We have less coverage with PHI and Furkin. They are speaking to a different population but allow us to help the penetration rate move forward and different channels. We introduced Chewy as a partner a few years ago. We work with Aflac as a worksite benefits provider.
We have a number of different channels through those avenues that we did not have access to before. Not only have we got vets, breeders, shelters, members referring their friends, we are now looking at trying to drive different distribution channels that will allow us to get access to more pet parents. We have the ability that we have as a business to retain our members and articulate the monthly subscription revenue model. We have access to data and things that give us a competitive advantage that we believe we can start to add different product lines. For example, this particular box is calling out pet food. Pet food is something that we have been looking to advance into over the last few years.
We're getting to the point where we believe that over the next two to three years, we'll have an opportunity within pet food that not only gives us additional margin, but it also gives us a lot of diversification in terms of how do we take the money from the pet food to help reinvest in growth of insurance while also getting a larger share of wallet from the pet parent. We also believe that with pet food, we can help retention because if we know that someone feeding our food has got a healthier pet and the risk comes down, we'll pass that back on to the pet parent in the form of a discount, which helps drive overall retention rate and lifetime value. Lastly, on the slide, we've got the international markets. There's around 40,000 hospitals in the areas we're already actively in.
Now, we're not pushing aggressively in those spaces from an investment perspective. We have the opportunity to do so over the next few years as we bring them up to scale. We're gradually introducing our pet acquisition dollars. We'll continue to do so within that framework of the internal rate of return of 30%-40%. All that being said, huge growth opportunity, massive addressable market. We are currently the leader in terms of the way that we retain our members and the way we work with veterinary providers. We provide a solution to a problem that's got bigger than ever before as the cost of care goes up. Just leave you with a point in mind. Just for North America alone, every point of penetration, and we're under 5%, is worth $1.3 billion.
We think we have a massive opportunity that we're ready to take. With that, I'll pass it over to Brandon. Perfect. Questions.
All right. I'll throw us—maybe I'll ask one or two high-level questions here before we go to the breakout, and we'll get a little more specific. Margi, I think for people here who may be newer to the story, what might be helpful is you're kind of alluding to this in different parts of the slides. Talk to us about the period of the puppy boom, what happened after that, subsequent to that, and then what kind of actions needed to be taken to kind of right-size—not right-size your organization, but readjust to get back to your operating metrics that you guys are looking for. Where are you today? Right.
I think a lot of people are going to pull up stock chart, look at a little bit of a ride. Help level set everybody where we are today on that ride.
Yeah. The puppy boom, everybody was talking about a puppy boom in early 2020. Puppies do not just get produced by a manufacturing plant. They all have to be born. They did. They were born. Puppies and kittens were born in plenties. We saw at the end of 2020 and 2021 a real swell of leads coming into the business. People taking care of their pets as they wanted to, as they had nothing else to do. I mean, they take care of their pets anyway. They were literally constantly around them. The entire category grew quickly in that period.
We focused initially on retention because that's what we could control. Then we leaned into acquisition. You'll see a nice sharp growth curve from 2020 to 2022. What happened after the puppies started to ease off, you don't see as many pets coming through the market, still over a million in any given month. We started to see those margins shift. Vet hospitals were seeing a huge demand. Those of you that go to the vet will probably remember lines around the block. You can't get an appointment for several months without booking in advance. As vets saw that, they also were losing their team members because of the strain on them as an industry. We saw the cost to have employed vet techs, front desk staff, doctors, surgeons, specialists all went up.
The vets were struggling to keep hold of their people because of burnout. We then saw this surge of inflation come through in 2022 directly as a result of that labor cost. That started to, I mean, it's still higher than it used to be. I think we are probably towards the tail end of vets being comfortable. They had to charge more. They were undercharging as it was. I think now they've taken sufficient pricing action to really kind of put themselves in a better position as an industry and attracting more talent as an industry. I think now we're at the tail end of understanding where have they pushed to the right level. At this point, it's normalizing. I think we're through the worst of it for sure. The main thing as an insurance company is consistency.
If we see rate trend coming through in a consistent manner, we can price for that. We can take it to the regulators. They can see that trend. It's when it moves around in a very volatile fashion, it's very hard to get that consistent value proposition, which we know is what's critical for members to be able to budget for.
OK. One of the parts of the story that I've always thought is very interesting compared especially to the competitors is in any given period, most of your leads are coming from the veterinarians. We've done survey work around this. You guys disclosed many of the numbers. By far, they are recommending you. Talk to us a little bit why they're recommending you and how durable of kind of a competitive moat that is specifically for you guys.
Yeah.
I think when we first started, the idea behind the product was to create a product that would allow a vet to treat a pet the way that they trained to treat them. Vets are not trained in vet school to give option a, b, c, d. They are trained to treat that pet with the best medicine. Best medicine to one vet will be very different to another. It is not our job to dictate that care. It is our job to understand how much does it cost to take care of that pet and then price appropriately. The vets understand that. The territory partners are a significant moat to the business where they are going out every day and visiting the 28,000 hospitals, do not visit them all in one day, but 28,000 hospitals. They build a relationship. They can look people in the eye.
They get trust from people. They tell people, we will do what we say. That is, in insurance, a big deal. From that perspective, not only do they see the relationship and the trust, and do we react to what they give us in terms of feedback, the product is designed to support them as a practitioner. We continuously see vets are choosing Trupanion for themselves. We do not give them a discount. They have the Trupanion product because they know it is a good product. When someone asks the veterinarian, who are you insured with, and they say, Trupanion. That is all the endorsement you need. It is having a good product, showing that we do what we say, and aligning to the interests of the industry to help those pets get the care they need.
They know with Trupanion that they see a client coming in time and time again because we do not put barriers to entry in front of our product.
Yep. What does it mean from a commercial and a P&L perspective, especially when you compare the commercial strategy of you guys as getting leads from vets versus maybe more of the heavy DTC spend? How does that help you guys scale this business a little more durably than maybe some of the others might?
Yeah. I mean, we are always looking at our internal rate of return. When you have got a territory partner walking in the door and generating leads, we do not pay for that until we get an enrollment. First and foremost, that is expensive on the enrollment side. It is not from a lead generation perspective. The benefit that we get is we have the conversation at the vet.
What we then need to do effectively, and this comes down to execution, is pull that person through from the vet conversation to actually enroll with Trupanion. That's where we spend a lot of our dollars. When we think about our total pet acquisition cost, the adjusted operating income that we're redeploying, we've got a lead portion. We have an acquisition, a conversion portion. Then we have a keep portion. That keep is that first year retention. From an economic perspective, we're far more efficient from a lead generating point of view. In some areas, we're more efficient from a conversion perspective. Keep is something that we add on as we need to to support that first year retention. We're a lot more efficient.
It also means that because we're operating within the 30%-40% guardrail, we will not enroll a pet if it's going to be falling outside of that. So we are very disciplined. So we're not looking at growing rapidly. We're looking at growing judiciously and being very thoughtful around what journey we're going to give. Now, I think in the next 6 to 12 months, we might get a little bit more aggressive with our acquisition investment. But we're not going to do it unless we know we can get good returns. And having that adherence, those internal rates of return mean that we're not competing with our competitors in some of the spaces that cost a lot more to operate in.
OK. Great. We are going to go to the breakout room in Jenny A. And we'll go into a little bit more detail. Thanks, everyone.