Trupanion Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 1, 2025
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Operator

Good day, and welcome to the Trupanion First Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. Please note that this event is being recorded. I would now like to turn the conference over to Gil Melchior, Director of Investor Relations. Please go ahead.

Gil Melchior
Gil Melchior
Director of Investor Relations at Trupanion

Good afternoon, and welcome to Tupanion's first quarter twenty twenty five financial results conference call. Participating on today's call are Margituth, Chief Executive Officer and President and Prahlad Khourishy, Chief Financial Officer. For ease of reference, we've included a slide presentation to accompany today's discussion, which will be made available on our Investor Relations website under our quarterly earnings tab. Before we begin, please be advised that remarks today will contain forward looking statements. All statements other than statements of historical facts are forward looking statements.

Gil Melchior
Gil Melchior
Director of Investor Relations at Trupanion

These include, but are not limited to, statements regarding our future operations, key operating metrics, opportunities and financial performance, pricing and veterinary industry inflation. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed. A detailed discussion of these and other risks and uncertainties are included in today's earnings release as well as the company's most recent reports, including Form 10 ks, 10 Q and eight ks filed with the Securities and Exchange Commission. Today's presentation contains references to non GAAP financial measures that management uses to evaluate the company's performance, including without limitation, cost of paying veterinary invoices, variable expenses, fixed expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA and free cash flow. When we use the term adjusted operating income or margin, it is intended to refer to our non GAAP operating income or margin before new pet acquisition and development expenses.

Gil Melchior
Gil Melchior
Director of Investor Relations at Trupanion

Unless otherwise noted, all margins and expenses will be presented on a non GAAP basis and excluding stock based compensation expense and depreciation expense. These non GAAP measures are in addition to and not a substitute for measures of financial performance prepared in accordance with The U. S. GAAP. Investors are encouraged to review the reconciliations of these non GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release.

Gil Melchior
Gil Melchior
Director of Investor Relations at Trupanion

Lastly, I would like to remind everyone that today's conference call is also available via webcast onto Pennant's Investor Relations website. A replay will also be available on the site. I will now hand over the call to Margie.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Good afternoon, everyone. It's a pleasure to be with you today to discuss our first quarter results. The year is off to a strong start and I'm pleased to report overachievement on both total revenue and total adjusted operating income in the quarter. Most notable was the increase in our subscription adjusted operating income, which increased 53% year over year to over $30,000,000 Across the business, we executed two or better than plan with the delivery of steady improvements across key financial metrics and continued advancements in operating efficiencies in critical areas of the business. Within our core subscription business, revenue was $233,000,000 up 16% year over year.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

The majority of this growth was driven by increases in average revenue per pet, reflecting the pricing actions we've taken over the past two years and a modest additional lift from growth in enrolled pets. Our meaningful step up subscription adjusted operating income was driven by two key components, an improving loss ratio and efficiencies operationally. We made continued progress toward our annual target value proposition with a substantial year over year increase of three fifty basis points, ending the quarter at 71.8%. This coupled with efficiencies stemming from our transition to our internal technology platform Vision, has enabled some solid operational gains, allowing us to lower invoice processing costs while enhancing the member experience and reducing overall variable expenses. Since its rollout, we brought claims inventory to near record lows and meaningfully increased both the speed and frequency of invoice payments.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

As a monthly recurring revenue business, member retention is critical to our long term sustainable growth. In Q1, reported monthly average retention improved quarter on quarter for the first time in twelve quarters to 98.28%. This sequential uptick was largely driven by improvements within our core Sheplaneum product, especially among members who received rate increases greater than 20%. These rate changes were not taken lightly. They reflect a focused response to the rising cost of veterinary care and a commitment to maintaining long term sustainability.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Worth noting, while reported cost trends across the broader animal health industry suggest some pricing moderation, the costs we observe within our own book remain largely in line with our expectations. We continue to monitor trends very closely and partner with others across the industry to stay informed and to react as needed. That said, it's important to highlight that the Trupanion experience is fundamentally different. Our members visit the veterinarian more frequently and are more likely to follow their veterinarian's recommended treatment, which naturally results in a high use of our product. Trupanion's cost of care has consistently indexed above the CPI norm for these reasons.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Looking ahead, with the majority of pet parents transitioning out of our highest rate cohorts and into more stable pricing tiers, we will be placing even more emphasis on the early stage member experience. With this in mind, we've adjusted our pet acquisition investment to add resources and realigned our marketing structure to better integrate acquisition and retention. We're also expanding the use of our patented vet portal, which supports real time payments directly to the veterinary hospital, helping members avoid out of pocket costs while pursuing optimal treatment solutions for their pets. With the average subscription pets staying with us for fifty eight months, there is a long way to go to return to our historical average retention rate, yet I'm encouraged by our work on this front and its potential impact on member experience over time. Retention is a significant growth catalyst.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

New pet acquisition is another, and here too, we're quite pleased with our results. Pet acquisition investment, which is fueled by the healthy expansion in our adjusted operating income, increased 18 year over year in this first quarter and held between our guardrails at 31% internal rate of return. We saw a sequential increase in growth pet additions for the core Trupanion product, the direct benefit of compounding our investment in pet growth sequentially for the last three quarters. Disciplined acquisition spend, especially within our efficient veterinary channel, remains a priority, ensuring we maximize return on each dollar invested. The average profit per Trupanion PET was up 46% year over year, reflecting improved margins from focused pricing action and cost efficiencies.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

This growth in profitability combined with stable retention gives us even greater flexibility to reinvest in high quality growth opportunities in our large and underpenetrated addressable market, which is something discussed at length in this year's shareholder letter. When our packed deployment moves in line with our adjusted operating income growth, we see parallel growth curves and encouraging demonstration of the flywheel of our business. The combination of stronger retention and improved pet ads contributed to our first meaningful sequential increase in net pet addition in two years. In summary, Q1 was a strong start to the year. Performance is tracking largely ahead of our expectations.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

We're growing the dollars available for reinvestment and are beginning to see a return to growth in new pets. We'll continue to focus on the levers we can control, doubling down on member experience, operating efficiency, and disciplined growth. As we look to the future, we're mindful of the broader macro environment. It is at times such as these that true planning comes into its own. We are designed to support pet parents during times of uncertainty, and we've proven time and again the resilience of our business model.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Q1 was an encouraging indication that our strategy is working, and we look forward to building on our progress in the months and quarters ahead. Before handing it over to Fawad, I'd like to briefly refer you to our recently published shareholder letter, which can be found on our IR website. I've referenced it during this call and for good reason. It includes a comprehensive review of our 2024 performance, key strategic updates and a deeper dive into some of the more nuanced elements of our business. With that, I'll hand the call over to Fawad.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Thanks, Margie, and good afternoon, everyone. Today, I will share additional details around our first quarter performance as well as provide our outlook for the second quarter and full year 2025. Total revenue for the quarter was $342,000,000 up 12% year over year. Within our subscription business, revenue was $233,100,000 up 16% year over year and up 18% on a constant currency basis. Total monthly average revenue per pet for the quarter was $77.53 up 11% over the prior year period.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

As expected, ARPU for our Core Trepanion brand expanded faster at 12% year over year and 13% on a constant currency basis. Total subscription pets increased 5% year over year to approximately 1,053,000 pets as of March 31. This includes over 54,000 pets in Europe, a majority of which are currently underwritten through an MGA structure. Average monthly retention for the trailing twelve months for all subscription pets was 98.28%, down versus Q1 last year, which was 98.41%, but up sequentially from Q4, which was 98.25. The subscription business cost of paying veterinary invoices was $167,400,000 resulting in a value proposition of 71.8%, a healthy improvement from 75.3% in the prior year period and particularly impressive given the higher seasonality that our invoice costs generally experienced during the first half of the year.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

The drivers of this improvement were margin expansion from our ongoing pricing actions and continued efficiency in our cost of processing invoices. These improvements more than offset adverse development from prior periods in the quarter totaling $1,700,000 or approximately 70 basis points of revenue. Assuming cost of care continues to trend in line with our expectations, we anticipate the pace of year over year margin expansion will moderate as our pricing and claims experience become more closely aligned. As a percentage of subscription revenue, variable expenses were 9.1%, down from 9.6% a year ago. The primary driver of this improvement has been the strong performance of our claims and contact center teams, supported by the technology and operating investments we have made.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Fixed expenses as a percentage of revenue were 6.2%, up from 5.3% in the prior year period, in line with our expectations. The largest driver of this change was an increase in our Canadian underwriting fees that we highlighted last quarter. Our expectation is that we will see expense leverage throughout the year as we transition to our wholly owned underwriting entity for our Canadian business. Our subscription business delivered adjusted operating income of $30,000,000 an increase of 53% from last year and contributed over 96% of our total AOI for the quarter. Subscription adjusted operating margin was 12.9% of subscription revenue.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

This is up from 9.7% in the prior year and represents approximately three twenty basis points of margin expansion. Now I'll turn to our other business segment, which is comprised of revenue from other products and services that have a lower margin profile than our subscription business. Our other business revenue was $108,900,000 for the quarter, an increase of 4% year over year. We expect growth for this segment to continue to decelerate as we are no longer enrolling new pets in the majority of U. S.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

States for our largest partner, Pets Best. Adjusted operating income for this segment was 1,200,000.0 Adjusted operating margin for this segment was 1.1%, down from 1.6% last year. The lower margin was a result of higher fixed expenses offset to some extent by higher gross margins. In total, adjusted operating income was $31,200,000 in Q1, up 46% from Q1 last year and above our expectations. We deployed $17,600,000 of this approximately 63,700 new subscription pets.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Excluding the pets that are underwritten through an MGA structure, this translated into an average pet acquisition cost of $267 per pet in the quarter, up from $2.00 $7 in the prior year period. The estimated internal rate of return on the spend was 31% in the quarter. We also invested $1,400,000 in the quarter in development costs. Stock based compensation expense was $9,500,000 in the quarter. As a result, net loss for the quarter improved to $1,500,000 or $03 per basic and diluted share from a net loss of 6,900,000.0 or $0.16 per basic and diluted share in the prior year period.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

In terms of cash flow, operating cash flow was $16,000,000 in the quarter compared to $2,400,000 in the prior year period. Capital expenditures totaled $1,900,000 down from $3,100,000 in Q1 last year. As a result, cash flow was $14,000,000 up from approximately breakeven in the prior year's first quarter. We ended the quarter from a position of financial strength with $321,800,000 in cash and short term investments. Now I'll turn to our outlook.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

While we cannot predict the future, especially during these uncertain times, the recurring nature of our business model provides us with a higher degree of visibility into our future performance than most. For the full year of 2025, we are increasing our guidance to account for Q1 overperformance as well as favorable conversion rate movements. We now expect total revenue in the range of $1,390,000,000 to $1,425,000,000 We now expect subscription revenue in the range of $966,000,000 to $989,000,000 representing approximately 14% year over year growth at the midpoint. We now expect total adjusted operating income to be in the range of $122,000,000 to $142,000,000 or 15% year over year growth at the midpoint. For the second quarter of twenty twenty five, total revenue is expected to be in the range of $344,000,000 to $350,000,000 Subscription revenue is expected to be in the range of $238,000,000 to $241,000,000 representing approximately 15% year over year growth at the midpoint.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Total adjusted operating income is expected to be in the range of $27,000,000 to $30,000,000 This represents approximately 15% growth year over year at the midpoint. As a reminder, our revenue projections are subject to conversion rate movements predominantly between The U. S. And Canadian currencies. For our second quarter and full year guidance, we used a 72% conversion rate in our projections.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Let me now pass it back to Margie.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Thank you, Fuad. Before we close, I'm pleased to announce that we'll be hosting our Investor Day again this year on September 17 at our headquarters in Seattle, Washington. This annual event is a great deep dive opportunity for investors to hear directly from team members leading the execution of our sixty month plan in an open q and a forum. More immediately, in just two days time on Saturday, May 3, Pawan and I will be in Omaha for our annual investor q and a to follow Berkshire Hathaway's annual shareholder meeting. This is an event I personally look forward to every year and one that presents a unique opportunity to meet with many long term minded investors in a highly informative setting.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

We hope to see many of you there. Information and registration for both events can be found on our Investor Relations website. Finally, I'd like to close by reaffirming the solid results in the quarter. We achieved what we set out to do and we go into the rest of the year with a healthy tailwind of strong adjusted operating income, leveling of member rate increases, improved retention and an encouraging step up in pet ads. And with that, we'll open it up to questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Brandon Vasquez from William Blair. Please go ahead.

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

Hi, everyone. Congrats on the quarter and thanks for taking the question. I guess I'll start with one near term first one and a follow-up on a bigger picture one. But one thing obviously on everyone's mind now is are you guys seeing any notable changes after Q1 ever since the macro noise that we've seen in April? Talk to us a little bit how the business is maybe trending, if you're seeing anything around inflation changes or retention rate changes or conversion trend changes, you know, anything like that you could give us would be helpful.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yeah. Thank you for the question, Brandon. I would say as we've we've gone through the course, we've been monitoring things as you can imagine from a cost perspective and also performance overall just to to make sure that we're well on track. So far, we are seeing no changes in terms of what we're expecting. We are seeing strongly volume continuing to come to the vet traffic.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

I think in in q one, there was a a tiny bit down in February, which is somewhat consistent with what we've heard in the macro environment from animal health in general. That picked up again in March. So q one ended exactly where we expected, and q two is continuing in the same vein. So good lead volume, lots of opportunity ahead with conversion. We haven't seen

Margi Tooth
Margi Tooth
President and CEO at Trupanion

We haven't seen a dip down. We've seen strength there, and we've seen even more strength coming through retention. So we feel good about that too. So nothing nothing is yet and continuing as expected.

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

Great. And maybe as a follow-up, Margie, in the annual letter, you had there were some slides in there or some details around different conversion rates in different territories. So it sounds like you guys have done a lot of analysis there, kind of how you can close the gap in the underperforming conversion territories. So talk to us a little bit now as you're redeploying more pack spend. How do you kinda get all of these conversion territories to to close the gap to perform higher?

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

And then just in general, where are these pack spend dollars going, to continue to improve ads through the year? Thanks.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Right. Yeah. When we think about conversion, the reason we included that chart is really to help show the dynamic between more mature markets, some that are newer, some that have got different mixes in terms of media spend. So those particular markets were across the board in North America. We treat every single one of them as an an independent territory.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

They're all led by a territory partner. And we work with a territory partner to understand more about the lead volume coming through the the channels. So is it coming from vet? Is it coming from breeder? And then we look at dovetailing into that.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

How do you convert that pet parent through? So what we're looking at doing is making sure people understand specifically what is different about Trupanion. And that's the case regardless wherever you are. It helps more when you have a higher you have a higher referral rate from the vet channel naturally because that's something that people aiming into the endorsement from the the white coat. And for us, then it's really a question of understanding if you're in a a rural US area versus a metropolitan Canadian area, you've got very different messaging.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

So really being very centric to the location where the lead is coming from, helping to address the needs of that specific pet parent at that moment. And it's different if you have a cat versus a dog or a labradoodle versus the Yorkshire terrier. So it's very granular, and hopefully, the letter conveys some of the ways in which we think about it. But each time, regardless of the conversion rate we see, we are always leaning into that internal rate of return, which means you can do more in some markets and less than others because the lifetime value will be different. And that's the that's the beauty and and also the complexity of how we grow the business.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

But over the course of the next few months, I'm incredibly pleased with the fact that we've seen that adjusted operating income come up. It gives us a lot more fuel to do the testing, to push harder, and to see that growth come through, which we expect to see in the back half of the year.

Operator

Thank you.

Operator

The next question comes from Jon Block from Stifel. Please go ahead.

Jonathan Block
Jonathan Block
Managing Director at Stifel Financial Corp

Great. Thanks guys and good afternoon. Marty, maybe the first one, maybe you could just talk about the move away from Accelerant in terms of the underwriter that was in the filing and maybe what that means for the company, what it means for why this one might be booked for both of you guys, what it means from a capital perspective needed to underwrite these pets and just how we should think about that throughout 2025?

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yes. I can kick that off, John, and hand over to Ford. So overall, our strategy in terms of underwriting has always been to try vertically integrated. We've had APIC in The United States for a number of years now, and Canada was really a massive time for us to build that muscle to be able to create GPIC, which is our Canadian underwriting entity. Really pleased to have that milestone behind us and to have this entity there and start to transfer the book of business over to to our own underwriting unit.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

It really creates a a reduction in frictional cost. That's the sole purpose of doing it. And and I'll let Fawad speak to the the details there.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Yeah.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Hi, John. We've been planning for this transition for a while. As, you know, Margie mentioned in her letter, it's been part of our strategy. And from a capital perspective, there's kind of two components of it. The first is the the existing reinsurance agreement that we have.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

So we have some capital there. And then within GPIC, we've already seeded that. So there's existing capital that sits in the entity. So at this point, just based on the kind of profile of the business, we don't anticipate having to put additional capital in. You'll see and we talked about in the prepared remarks.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

In q one, you see that step up in the underwriting, charge. That was planned, and that was part of the negotiation and and, is obviously part of our guidance as well. So from a capital perspective, we're not anticipating anything different.

Jonathan Block
Jonathan Block
Managing Director at Stifel Financial Corp

Got it. Very helpful. And maybe just to shift gears, the NAPIA data that came out not too long ago seemingly shows another year of share losses for Trupanion. The rate of share loss in 2024 were actually accelerated versus 2023. And I think I get some of that, Mark.

Jonathan Block
Jonathan Block
Managing Director at Stifel Financial Corp

You maybe sort of argue, look, we pulled back on the pack spend until we rightsized the MLR, and now we're sort of going down that road. So maybe talk to the share losses. Is that sort of what you would lean on? Do you expect to have flattish share in '25, gain some back? And then sorry, just a quick tack on.

Jonathan Block
Jonathan Block
Managing Director at Stifel Financial Corp

I don't see the slides up yet. I don't know if you're still gonna be providing that information or you're pulling back on that. But any comments to around some of your European initiatives and if those are still moving forward, you know, as was the plan under the sixty months? Thanks, guys.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yeah. There's there's a lot in there. Let me, yeah, let me take the first one. So, Ash, I'll take the second point. I believe the slides are up, so they should hopefully be there for each of you, and we've got that that detail there.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

So we take a step back and think about our strategy, which has been very consistent. So as a business, we've always stressed that we're looking to grow our adjusted operating income in a highly underpenetrated market and invest that money to increase our pet count. We always look to deploy that in the highest lifetime value product, and we've always done it with our in our internal rates of return. So between that 30 to 40%. Now to your point, we absolutely doubled down on margin expansion in 2023 and '24.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

So we really want pushing hard on growth while we try to get that margin expansion back. We we have, I think, done a fantastic job of doing that. We've come into you in a really healthy position, and we're starting to dip our toe back into the water of growth. It's not surprising to me to see the market share is is different this year than it was last year. We haven't been trying to grow.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

And I would say the other thing for us is what really is driving this business is where do we drive intrinsic value over time. And market share is not a driver of our intrinsic value. It's why we don't chase it. Instead, we're committed to maintaining a discipline in our pricing and discipline in our growth strategy. And and, know, we as well as the industry pull back in general with growth.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

So you saw significantly less money being pushed into into pet insurance overall, which naturally, you know, it's it doesn't satisfy the appetite with the pet parent. You're not seeing as many people coming through. I think for us, you know, it it's something we're gonna continue to focus on the highest value product. And as I mentioned before, with Brandon, we've seen a good step up in leads, a good step up in in retention and conversions made some solid improvements. So overall, we will continue to do what we've always done.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

We've seen people come in and grow faster than us time and time again, and they they're not there now. So, you know, that that doesn't concern us. In terms of the other products from the sixty month plan, we're really doubling down our focus on the highest lifetime value products we have, and that, of course, is the core chipanion product. Doesn't mean that we are not happy with the progress. It really just means we've been prioritizing where we're gonna get the best return.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Over the course of the year, I'll expect to see that slight slightly shift back to to have focus on other areas as well. But for now, we're looking at the core chip planning business, and and we'll give you more details as and when that changes. Next question please.

Operator

Yes.

Operator

The next question comes from John Barnidge from Piper Sandler. Please go ahead.

John Barnidge
John Barnidge
Managing Director & Senior Research Analyst at Piper Sandler Companies

Thank you for the opportunity. Question on the subscription loss ratio in the quarter, seasonally a more active quarter in the first half of the year, I believe. Was there any favorable reserve development in the quarter at all? And how much was it seasonally elevated, would you say, from where ordinarily would be without that seasonality?

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Yeah. So the from a reserve perspective, the impact was about 1,700,000 in q one, so that's about 70 basis points impact. In terms of just q four to q one linearity, it's actually down a little bit versus historical. So pretty much in line with what we expect. That's put their rates in in q one, so we're we're always gonna see that increase.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

I would say it was slightly lower, than what we've seen kinda historically once you take into account the reserve impact.

John Barnidge
John Barnidge
Managing Director & Senior Research Analyst at Piper Sandler Companies

Do you think that's reflecting maybe a bit more dynamic pricing that can anticipate more bets with, like, that annual calendar year change pricing?

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Yeah. I think maybe it's a two part question. I think from a ARPU standpoint, we had talked about pricing, peaking from a year over year standpoint in q four, and it largely played out. So our expectation is, you know, entering this year that the rate of increase would start to diminish. But I can talk I can turn to margin in terms of anything that we've seen unique this quarter from a pricing perspective for vets.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yeah. I would say, overall, you know, it's pretty consistent with our expectations. You know, we we've we've had a big catch up in 2024, as you know, from a rate perspective. So that's sort of that shortfall that we had in prior periods wasn't there from q four to q one. So I think, you know, in terms of the dynamic pricing, vets have been there's there's been very erratic visit visit patterns.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

We're seeing wellness visits are down in general for them, but for us, that hasn't impacted it. We haven't seen any changes in pricing. We're constantly looking at that cost of care and moderating it over the various invoice levels. And mean, for us, it's really just case of making sure we can monitor and stay in line with it. But, I mean, seasonality is bad, but, you know, we're we are just continuing to execute on our plan, get a pricing as a cost of goods model.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

It's it's in line with our well, it's slightly ahead of our expectations, which is good news. But we'll keep monitoring for q two because there's a lot of noise out there in the industry and and making sure that we are in a good position to support the veterinary industry and and the members that choose us.

John Barnidge
John Barnidge
Managing Director & Senior Research Analyst at Piper Sandler Companies

Thank you for that. And one last one. I may have missed it, but the amount of capital in excess of the minimums, what was that this quarter? I wasn't able to pick that up. Thanks.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Yeah. So, Harvey talked about it in the shareholder letter that we ended last year from an APIC standpoint at about a and 40,000,000 of over capitalization. That's continued to grow. One of the biggest factors that we talked about last year is the new NAIC risk factors are now in place. So that's expanded even more.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

So we were more than two x overcapitalized versus the the required amount. If you look at q one, that continued to increase. We're now close with three x, a little bit over three x overcapitalized. I think we're pivoting the conversation to focus more on how do we monetize that surplus. So one of those avenues we talked about last year is the ordinary dividends that we've taken.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

So we've taken twi two of those. One was in, the latter part, q four of twenty three, and then another one, in the middle of last year. So as those conversations progress, of course, once we have something to announce, we we would be happy to do so. But we feel like we're in a good position. At the end, we wanna be responsible, and being overcapitalized to the level we are, we view as a positive.

John Barnidge
John Barnidge
Managing Director & Senior Research Analyst at Piper Sandler Companies

Thank you.

Operator

Thank you. Our next question comes from Katie Zekis from Autonomous Research. Please go ahead.

Katie Sakys
Equity Analyst at Autonomous Research

Yes. One quick clarification to start off. The 70 bps of year over year reserve development, that was an adverse impact. Correct?

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Yeah. That's right. It was an adverse impact.

Katie Sakys
Equity Analyst at Autonomous Research

Okay. Maybe if you can just kinda circle back to that line of questioning and delve a little bit deeper. I mean, it would be helpful to understand, you know, what what drove that adverse development. And, I mean, in in commentary earlier in the call, it kinda seems like, you know, Trupanion is assuming loss trend in the vet channel quite similar to to what we saw last year. So I'm just kind of curious, you know, how confident are you that this quarter's, you know, significant improvement to the subscription loss ratio, you know, is is being tipped at the right point and will ultimately result in, you know, adverse development in a year's time?

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Yeah. I think it's a I think it's a two part question. Just in terms of the, the reserve, I mean, there was no change to our process. And so there was nothing different in terms of the approach or methodology, that led to that. Yeah.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

We've seen, positive development, adverse development in over the course of the last few quarters. That's that was well within what we would expect in terms of normal range.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yeah. I'm not I would just add to that, Katie. I think in terms of to for what's point, the ebb and flow, you're gonna see some puts and takes through the year in terms of, you do we get that spot on? I think the actuarial reserving process is is such that when you have a software, you have different arrival patterns of invoices. And and also what you see is as people start to focus on their dollars, they're gonna send in those that are being reimbursed.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

They're gonna send in invoices after the fact. It's it's a normal course of business for us. It's something that we're constantly managing to try and get closer and closer to that number, but the reality is an insurance always gonna have a little bit of wiggle room there. And, you know, obviously, we will continue to improve on that, but but pleased overall with where our loss ratio ended up. It was it was definitely ahead of the curve.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

So in all in all, the quarter ended well.

Katie Sakys
Equity Analyst at Autonomous Research

Thank you for that. And then maybe maybe shifting to the retention figure. I mean, you know, great to see that that's sort of trending in the other direction this quarter, but obviously, you know, it's a it's a singular data point.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Mhmm.

Katie Sakys
Equity Analyst at Autonomous Research

Any reason to assume that this isn't a true inflection?

Katie Sakys
Equity Analyst at Autonomous Research

You guys have spoken about seasonality on subscription pet invoice ratio. Can we extrapolate any of that seasonality to expectations for retention? Are there any tailwinds that, you know, you guys might be expecting to see as the year progresses that could really help support continued retention improvements?

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yeah. It's a great question. It's a big, big focus for us, retention and acquisition this year. We came into the year knowing that having just had such incredibly high increases for our members, the retention was where we'd need to focus. And we were doing so at the back end of this year.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

And I think what you see is an inflection point. I think it's absolutely the result of the efforts of the team over the last few quarters to make sure that not only you're explaining why costs are going up, but helping to reinforce the value of of Japan and then making sure that our software is readily available, that people are using direct pay, and all the things that basically go into being a Japan member. So we're definitely seeing a focus on results related to that. There is absolutely a tailwind. Having had 20% plus for several years now, our members are now normalizing their rate adjustments and many of them will be below 20%.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

In the shareholder letter, I refer to the table where you see that cohort massively jumps to over 20, and that is naturally a pain point for us as a business and it's one that we're pleased to see some recovery from this year. So as we go through the year, we'll continue to really focus on this area as well as first year retention because we expect that cohort to pick up as we add new pets and anticipate we'll start making progress. It will be slow and steady, but we'll make progress toward what is our historical retention rate, which is higher than the ninety eight two eight that we have at the moment. All things being considered though, I think it's a it's a very good result and I'm pleased to saw those early green shoots recovery.

Katie Sakys
Equity Analyst at Autonomous Research

Thank you for your answers.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Thank you.

Operator

Thank you. Your next question comes from Wilma Burdis from Raymond James. Please go ahead.

Wilma Burdis
Wilma Burdis
Director at Raymond James Financial

Hey, good afternoon. Could you talk a little bit

Wilma Burdis
Wilma Burdis
Director at Raymond James Financial

about how you're thinking about getting additional rate throughout 2025? The loss ratio appears better than we would have expected for a 1Q. So do you do you need a lot more rate this year, or how are you thinking about it? Thanks.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yeah. We are continuing to work with regulators to get rate. We have around 40% of our book, if not a little bit more, are priced ahead of the curve. So what I mean by that is pet parents have got pricing in place that won't need to be massively adjusted over the next twelve to eighteen months. There are, as usual, for us, we we're now starting to refine that rate to continue to build on on what's needed as the cost of goods model.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

We've had good conversations with regulators. We're working with them as we always do on a a very regular basis to ensure we can get the rate we need. As such, we haven't had anyone saying we can't. We're still working with them to get rate, and that that's really part of the course of insurance, making sure that we're constantly adjusting, refining it as you know, and and we'll keep doing that. But our rate flow will come down.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

It won't be at the high the mid twenties as it has been for the last couple of years. So pleased to be returning to a more normal cadence, and and and that will show up in in our loss ratio through the year as we see continued expansion in that over the course of the next couple of quarters.

Wilma Burdis
Wilma Burdis
Director at Raymond James Financial

And the operating cash flow is pretty strong. Just curious, if that's a run rate, if there's something unusual, or how it should trend throughout the year. Thanks.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Yeah. We've been really happy with the progress on, both operating cash flow and free cash flow. When you break it down, the the majority of that progress is driven by AOI. So, you know, we talked in the past about a lot of companies will try and reduce spending as a way to maximize cash flow. We have not taken that approach.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

So, more than two thirds of that is coming directly from increased AOI. Yeah. And over the last, I think, four quarters, our our team has done a great job. We've delivered more than 15,000,000 of free cash flow. I think it's 53,000,000.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

If you compare that to the previous four quarters, it was about 12,000,000. Of course, this quarter going from was effectively breakeven to 14,000,000 positive. We talk about it all the time that this gives us capacity to be able to make investments, and that that's a good position for us to be in. We still have our guardrail and our focus on free cash flow as a percent of revenue for the full year being at 2.5%, and we're we feel good about start to the year.

Wilma Burdis
Wilma Burdis
Director at Raymond James Financial

Okay. Thank you.

Operator

Thank you. Your next question comes from Josh Shanker from Bank of America. Please go ahead.

Joshua Shanker
Joshua Shanker
Analyst at Bank of America

Yes. Thank you. A few questions. So looking at the shareholder letter, I noticed that the cohort of customers who received a 20% or greater increase went from 33% in 2023 to 46% of the portfolio in 02/2024. Is there any timing on that when that happened, or is that number coming down now?

Joshua Shanker
Joshua Shanker
Analyst at Bank of America

I was I was actually surprised to see it up so significantly year over year.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

I know. And I it's testament to the team to have been able to retain those members at that level. It's coming down. It's coming down now. It comes down every every week, every month as we start to put new rates through and and normalize that for the consistent rate adjustments we've seen.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

So as pricing has been at a level of 15%, we fully expect that now to be a a somewhat average increase for our members because that's now sort of a normalized rate for us. It builds over the course of of twenty four where we started to see an incredible number of people move into that. That book is more of that rate flow through, and we have the approvals. So now it's really a case of returning to what is normal for for the our members and for us. And I fully expect by the end of this year, you're gonna see a big shift back towards that under 20%.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

It doesn't mean people won't be getting rate increases in the high teens. They absolutely will. But we'll be normalizing that, and we know that that's a far more effective retention cohort for us. So pleased to be getting that tailwind and that benefit through the rest of the year.

Joshua Shanker
Joshua Shanker
Analyst at Bank of America

And then on the first year customers, retention went down dramatically for first year customers who didn't see any rate change at all. I know for many reasons, they're historically the hardest customers to retain and maybe you don't even want them. Those they're they're leaving they're leaving for a reason, But the retention dropped fairly sizably in that cohort. What's going on there?

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yeah. It's purely a matter of execution. When we think about attention, there are only so many things that the teams can focus on in any given point in time. And as you can see, there was such a shift into the over 20% group with that cohort. We were incredibly focused on making sure that we were paying attention to people who were getting those increases, helping them realize the value, understand the value proposition, understand what's happening in the industry that we really took our eye off the first year.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

A, because we weren't growing particularly quickly and we didn't have such a great such a large number, but also for us, our greater good was looking at the majority of pet parents who were already with Trupanion. So there's been a shift since the last beginning beginning of q four last year where we realigned some of our marketing structure to make sure the conversion retention teams work hand in hand. So the messaging that someone hears when they sign up is aligned to what they hear as a member. And also just really making sure we have resources to better educate the new pet parent, help getting them at times where there's typically buyers remorse, and putting in tactics that will help to improve that. We're already seeing improvement in that space.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

So I feel very good about the tactics we've started to deploy and expect that to improve as we continue to use more of our pack dollars in that first year bucket to see that move back into to levels that was at historically.

Joshua Shanker
Joshua Shanker
Analyst at Bank of America

And, Mark, you included a a graph in your letter about trying to show the relationship between pack spending increasing conversion for web versus phone based customers. And I looked at that chart, and I I I wasn't sure that I could see the correlation. I mean, obviously, the the text was not on that chart, but it it it was spoken about, like, in rhetorically. I noticed two things. One is that even if there is a boost, it's hard to boost it for more than a month.

Joshua Shanker
Joshua Shanker
Analyst at Bank of America

It seems to pop and then fall. Can you go into a little bit about how that tax spending works to increase the conversion and and and what that chart should be telling us?

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yeah. Well, you you you hit the nail on the head. I mean, the main thing is really the consistency of spend. And when you have reduced acquisition dollars and we really weren't spending a lot in the conversion space, we were turning it on and off. And there's a couple of things that play here.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

One is when you deploy it, it's easier or I would say, easier is probably the wrong word. It's it's more natural for phones or people on the phone to be able to listen to the response of a pet parent and help to learn and lean into how do you convert that member. So they tend to get the retention rate the conversion rate up higher quicker. But from a web based perspective, while you have a volume there, there's a lot of trial and error. There's lot of testing.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

And if we don't keep consistency of our investment, you don't get to build on the things that you're learning. And so, really, the key for that chart is helping people understand that if we turn on spend and turn it off the next month, we'll turn it on and turn it off the next quarter. It has a small blip in terms of an improvement, but it doesn't stay there. We have to maintain the level of investment, which is what we were doing for ten years prior to to reducing our pet acquisition spend, and we kept learning and kept building and kept increasing our conversion. So it's really a lesson of of let's make sure we're being consistent.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Let's make sure that our compounding AI dollars are being deployed in the right ways, in the right format, and doing it in a manner that allows us to learn. If we keep being erratic with it, we're not gonna get that learning. So that's essentially what that chart is is trying to demonstrate.

Joshua Shanker
Joshua Shanker
Analyst at Bank of America

Okay. Well, thank you very much for the answers.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yes. Thank you.

Operator

Thank you.

Operator

The next follow-up question comes from Katie Zacchis from Autonomous Research. Please go ahead.

Katie Sakys
Equity Analyst at Autonomous Research

Yes. Thank you for the follow-up. Just a quick one for me. Reading through the Sears shareholder letter, you guys circle back on on the subject of digital advertising and, you know, really make the point that a lot of online customer acquisition is frequently, you know, structured in a pay to play manner for the the current pet insurance industry. In years past, that's been something that you've, you know, specifically issued and said that you would not be participating in.

Katie Sakys
Equity Analyst at Autonomous Research

Is is there any reason to think, you know, as you realign your marketing strategy going forward that, you know, online acquisition will continue to be something that you avoid, or or would there be a point at which Trupanion starts to invest more in deep into d DTC marketing and and really competing for, you know, space in in online search results?

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Yeah. We do. There's a lot to unpack here, actually. I think one thing that we we are on we do advertise online. We do have direct to consumer marketing, but it really as I mentioned, Michelle, the letter is very much more a conversion tools that helps us to find people where they are, helps to educate them, pull them through the funnel.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

I think in terms of the way that competitors spend, my point there was, you know, we are adhering to internal rates of return, which means we have to be very disciplined with acquisition cost. And a lot of those sites or vehicles tend to be incredibly expensive on a CPC basis or a cost per click basis or cost per acquisition basis. So if we layer that on with our leads cost as well, it tends to fall outside of our guardrails. So we will do it. We'll test and refine it.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

As a brand, as a company, we've been quite deliberate in our choice of the platforms and the vehicles that we operate with. In a fledgling market, it's incredibly important to make sure that we're being clear and transparent with how brands and products show up. And, personally, I think sometimes that hasn't been clear, and we choose to operate with with with vehicles that actually are more clear in the way that they're displaying results. The the last thing that we would want to happen in this industry is have it commoditized before it's a commodity. And I think, you know, sometimes people see things and they believe them to be true.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

So if you see rankings, what they don't necessarily understand is that someone has paid a significant amount of money to be number one. Now that's fine. But for Japan, we have to always adhere to the IRR. So that's why you don't see us across every vehicle or everywhere. As the market picks up, I expect we will start to test a little bit more in some new spaces to make sure the brand can be be relevant and present, but it always has to fit within the IRR.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

So that that tends to be a a factor for us as we think about our strategy there.

Operator

Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Margie Tooth for closing remarks.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

Thank you, Sagar. We don't usually have closing remarks, but I did want to just reiterate to everybody what a strong start we had for the year. And just recognize our subscription margins expanded. We saw retention for the core Chupanian product improve, which demonstrates our pricing power. We've had inflection point, I think, in net pack growth, which is incredibly positive for us, and it leads us to the rest of the year from a position of strength with compounding adjusted operating income that we will reinvest in growth.

Margi Tooth
Margi Tooth
President and CEO at Trupanion

We look forward very much to updating you on our progress in in up and coming quarters. And as a reminder, Ford and I will be in Omaha, and we hope to see many of you there.

Operator

Thank you.

Fawwad Qureshi
Fawwad Qureshi
Chief Finance Officer at Trupanion

Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Executives
    • Gil Melchior
      Gil Melchior
      Director of Investor Relations
    • Margi Tooth
      Margi Tooth
      President and CEO
    • Fawwad Qureshi
      Fawwad Qureshi
      Chief Finance Officer
Analysts
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Key Takeaways

  • Trupanion delivered a strong Q1 with total revenue of $342 million (up 12% YoY) and subscription revenue of $233 million (up 16%), while subscription adjusted operating income surged 53% to $30 million due to higher revenue per pet and an improved loss ratio.
  • The subscription loss ratio improved to 71.8% (a 350 bps YoY gain) driven by multi-year pricing actions and operational efficiencies from the internal Vision platform, which lowered invoice processing costs and accelerated claim payments.
  • Monthly average retention rose sequentially for the first time in twelve quarters to 98.28%, led by members facing rate hikes above 20%, as Trupanion enhances its early-stage member experience and expands real-time vet portal payments.
  • Pet acquisition investment increased 18% YoY, sustaining a 31% internal rate of return, which helped deliver the first sequential growth in net new pets in two years and a 46% rise in average profit per pet, fueling further growth reinvestment.
  • Trupanion raised its FY 2025 guidance to total revenue of $1.39–1.425 billion (≈14% growth), subscription revenue of $966–989 million, and total adjusted operating income of $122–142 million, with Q2 revenue of $344–350 million and AOI of $27–30 million.
AI Generated. May Contain Errors.
Earnings Conference Call
Trupanion Q1 2025
00:00 / 00:00

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