Q1 2024 Trupanion Inc Earnings Call

Good day and welcome to the Japan in first quarter 'twenty 'twenty four earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation there will.

Unknown Executive: Good day, and welcome to the Trupanion First Quarter 2024 earnings call. All participants will be in listen-only mode.

Unknown Executive: Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Laura Bainbridge, Senior Vice President of Corporate Communications. Please go ahead.

I'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Laura Bainbridge Senior Vice President of corporate Communications. Please.

Laura Bainbridge: Go ahead.

Laura Bainbridge: Good afternoon, and welcome to Trupanion's first quarter 2024 financial results conference call. Participating on today's call are Daryl Rawlings, Chief Executive Officer and Chair of the Board, Margie Tooth, President, and Fawwad Qureshi, Chief Financial Officer.

Laura Bainbridge: Good afternoon, and welcome to trip Kenyans first quarter 'twenty 'twenty four financial results conference call participating on today's call are Darryl Rawlings, Chief Executive Officer, and chair of the board marquee tooth precedent for what Qureshi Chief Financial Officer for ease of reference we've included a slide presentation to accompany today's discussion.

Laura Bainbridge: 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 our remarks today contain forward-looking statements. All statements other than statements of historical facts are forward-looking statements. These include, but are not limited to, statements regarding our future operations, opportunities, and financial performance, our ability to remediate our material weaknesses, and the company's CEO succession efforts. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed.

Which will be made available on our Investor Relations website under our quarterly earnings tab.

Before we begin please be advised that remarks today contain forward looking statements all statements other than statements of historical facts are forward looking statements. These include but are not limited to statements regarding our future operations opportunities and financial performance, our ability to remediate our material weaknesses in the company's CEO succession.

Laura Bainbridge: Right.

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 Companys. Most recent reports on forms 10-K, and 8-K filed with the Securities and Exchange Commission.

Laura Bainbridge: A detailed discussion of these and other risks and uncertainties is included in today's earnings release, as well as the company's most recent reports on Forms 10-K and 8-K filed with the Securities and Exchange Commission. This presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including, without limitation, 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.

Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation variable expenses fixed expenses adjusted operating income acquisition cost 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.

Laura Bainbridge: Unless otherwise noted, margins and expenses will be presented on a non-GAAP basis, which excludes stock-based compensation expense and depreciation expense. These non-GAAP measures are an addition to, and not a substitute for, measures of financial performance prepared in accordance with 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 or on Trupanion's Investor Relations website under the Quarterly Earnings tab.

Laura Bainbridge: Unless otherwise noted margins and expenses will be presented on a non-GAAP basis, which excludes 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.

Laura Bainbridge: Results, which can be found in today's press release or on true opinions Investor Relations website under the quarterly earnings Tab Lastly, I would like to remind everyone that todays conference call is also available via webcast on true opinions Investor Relations website. A replay will also be available on the site with that I'll hand, the call over to Darryl.

Laura Bainbridge: Lastly, I would like to remind everyone that today's conference call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site. With that, I'll hand the call over to Daryl.

Darryl Graham Andrew Rawlings: Thanks Laura, and good afternoon. I'm honored to speak to you in my final earnings call as CEO. Today, we announced Margie's appointment as CEO effective August 1st. Speaking on behalf of myself and the board, we could not be more excited about this outcome. Today's announcement is the culmination of an involved multi-year process to identify my successor as CEO.

Darryl: Thanks, Laura and good afternoon, I'm honored to speak to you in my final earnings call as CEO today, we announced Mark his appointment as CEO effective August 1st.

Darryl Graham Andrew Rawlings: Speaking on behalf of myself and the board, we could not be more excited about this outcome.

Darryl Graham Andrew Rawlings: <unk> announcement is the culmination of an involved multi year process to identify my successor as CEO achieving this milestone ahead of the schedule reflects the board's unanimous support and confidence in <unk> ability to lead your banyan forward in.

Darryl Graham Andrew Rawlings: Achieving this milestone ahead of the schedule reflects the board's unanimous support and confidence in Margaret's ability to lead Trupanion forward. In the 10 years we've worked together, Margie has shown herself to be a proven leader with an adept ability to manage Trupanion's growth mandate. With her at the helm, I am confident in our continued success in our large underpenetrated market. Margie's track record extends beyond her time at Trupanion. She spent over seven years with the UK's largest insurance provider, during which time the category saw tremendous growth, reaching approximately 25 percent penetration.

Darryl Graham Andrew Rawlings: In the 10 years, we've worked together marquee has shown herself to be a proven leader with an adaptability to manage Japan's growth mandate with her at the helm I'm confident in our continued success in our large underpenetrated market.

Darryl Graham Andrew Rawlings: <unk> track record extends beyond her time at true opinion, she spent over seven years with Uk's largest pet insurance provider during which time the category saw a tremendous growth, reaching approximately 25% penetration.

Darryl Graham Andrew Rawlings: She's leveraged that experience here at Trupanion, starting with specific areas of growth and expanding over time. For the last 18 months, Margie has assumed oversight of every department at Trupanion, including overhauling key operational areas to drive improved efficiency and performance and drive a culture of accountability, collaboration, and action. Since joining Trupanion, the category has grown threefold, with Trupanion the largest contributor to the category's growth for three consecutive years. At over $1 billion in revenue today, Trupanion is the largest player in North America.

Darryl Graham Andrew Rawlings: She's leverage that experience here at Trepan Ewen, starting with specific areas of growth and expanding over time over the last 18 months marquee has assumed oversight of every department at your opinion, including overhauling key operational areas to drive improved efficiency and performance and drive a culture of accountability collaboration and <unk>.

Darryl Graham Andrew Rawlings: <unk>.

Since joining trepanning the category has grown threefold with true pinion the largest contributor to the categories growth for three consecutive years.

Darryl Graham Andrew Rawlings: At over $1 billion in revenue today true pinion as the largest player in North America.

The veterinary community is the heart of our growth model and our territory partners are important linked to that community.

Darryl Graham Andrew Rawlings: The veterinary community is the heart of our growth model, and our territory partners are an important link to that community. Margie, having wanted to be a veterinarian herself, holds great admiration for this community, and her understanding of our approach to the market has strengthened our ties. Through our strong growth, Margie has led the team in deploying increasing amounts of capital at consistently strong internal rates of return. When Margie joined Trupanion, the funds we had to invest in new pet acquisition, what we now call our adjusted operating income, were just about $4 million. Since then, we've grown our adjusted operating income to over $80 million last year.

Darryl Graham Andrew Rawlings: Marty having wanted to be a veterinarian herself holds great admiration for this community and her understanding of our approach to market has strengthened our ties.

Darryl Graham Andrew Rawlings: Through our strong growth margin has led the team in deploying increasing amounts of capital are consistently strong internal rates of return when.

Darryl Graham Andrew Rawlings: When bargain joined through opinion the funds, we had to invest in new pet acquisition, what we now call. Our adjusted operating income was just about $4 million. Since then we've grown our adjusted operating income to over $80 million last year beyond the numbers, However, and most important to me is Mark Hughes character.

Darryl Graham Andrew Rawlings: Beyond the numbers, however, and most important to me, is Margie's character. At Trupanion, we are nimble and courageous, curious and caring. We do what we say, we care for one another, and we simply work harder than most. Margie is all of these things. In short, she personifies the culture of Trupanion.

Darryl Graham Andrew Rawlings: True pan into weird nimble and courageous curious and caring we do what we say we care for one another and we simply work harder than most marquee as all of these things in short she personifies the culture of Japan yen.

Darryl Graham Andrew Rawlings: Over the past several years, Margie has come to lead our over 1,500 global team members. She has done so with compassion, humility, leads with trust, and is willing to make tough decisions when they need to be made. There is no one I trust more to lead Trupanion into our next phase of growth. It has been my privilege to serve as a resource to her over the past decade. As we've previously communicated, I am committed to continuing to serve as chair of the board for the next 10 years, if it is agreeable to shareholders.

Darryl Graham Andrew Rawlings: Over the past several years mortgages come to lead our over 1500 global team members.

Darryl Graham Andrew Rawlings: He has done so with compassion humility leaves with trust and is willing to make tough decisions when they need to be made.

Darryl Graham Andrew Rawlings: There is no one I trust more to lead Trapan in into our next phase of growth. It has been my privilege to serve as a resource to her over the past decade as we've previously communicated I'm committed to continuing to serve as chair on the board for the next 10 years, if agreeable to shareholders.

Darryl Graham Andrew Rawlings: Margie co-authored this year's shareholder letter, which was published just a few weeks ago. For those that have not done so, we encourage you to read it as it provides more insights into how we think and act at Trupanion. This letter can be found on our investor relations website. With that, I'll hand it over to Margie to walk you through the performance of the business.

Darryl Graham Andrew Rawlings: He co authored this year's shareholder letter, which was published just a few weeks ago for those that have not done. So we encourage you to read it as it provides more insights into how we think and act at your Banyan. This letter it can be found on our Investor Relations website.

Margie: With that I'll hand, it over to Marty to walk through the performance of the business.

Margaret Tooth: Thank you, Daryl. Good afternoon, everyone.

Margie: Thank you Darryl good afternoon, everyone let.

Margaret Tooth: Let me begin by saying what an honor it is to be appointed CEO of Trupanion. Trupanion's mission to help pet parents budget and care for their pets is one that resonates with me deeply. Since joining Trupanion over 10 years ago, I've seen our mission brought to life through the dedication of our team. It is truly inspiring to work alongside such pet-passionate people in support of our members every hour of the day and every day of the year.

Margie: Let me begin by saying it wasn't honor it is to be appointed C. I actually opinion.

Margaret Tooth: Couponing is mission to help pet parents budgets and Kathy that pets is one that resonates with me deeply.

Margaret Tooth: Since joining two pound in over 10 years ago I've seen them mission brought to life through the dedication of our team.

It is truly inspiring to work alongside such pet passionate people in support of our members every hour of the day and everyday of the year.

Margaret Tooth: Together in lock step with the best in the industry, we're making a meaningful impacts by supporting over one 7 million pads hang out over $2 million in battery invoices dating and helping tens of thousands of veterinarians practice lifesaving bathroom and K and we're just getting started despite how long history. We really are just scratching the sun.

Margaret Tooth: Together, in lockstep with the veterinary industry, we're making a meaningful impact by supporting over 1.7 million pets, paying out over $2 million in veterinary bills daily, and helping tens of thousands of veterinarians provide life-saving veterinary care. And we're just getting started. Despite our long history, we really are just scratching the surface.

Margaret Tooth: With less than 5% of pets insured in North America and an equally low number across most of Europe, there is so much more we can do to support pet parents and veterinarians globally to help pets receive the care they need. Today, Trupanion is at the forefront of an exciting growth story. I'm honored and humbled to lead Trupanion on this journey.

Margaret Tooth: Office with less than 5% of pets insured in North America, and an equally low number across most of Europe. There is so much more we can do to support pet parents and veterinarians globally to help pets received the care. They need today couponing is placed at the forefront of an exciting growth story I'm honored and humbled to lead couponing on this.

Margaret Tooth: I'm grateful for the continued support from Daryl and the board and look forward to our partnership moving forward. With that, I'll now discuss a performance overview for the first quarter of the year. Total revenue grew 19% in the quarter. Our subscription revenue grew even faster at 22% year-over-year, and our core Trupanion brand was the primary driver behind this growth. Our total adjusted operating income, or the amount of funds we have available to invest in growth, increased 37% year-over-year.

Speaker Change: Jenny I'm grateful for the continued support from Darryl on the board and look forward to our partnership meeting for it.

Margaret Tooth: Once again, adjusted operating income for our subscription business outpaced this total, increasing over 55% compared to the prior year period. Our PAC spend was highly efficient in the quarter. We reduced our investment in pet acquisition by 23%, and yet our gross pet ads declined just 9% year over year.

Margaret Tooth: With that I'll now discuss the performance of a view for the first quarter at the year total revenue grew 19% in the quarter. Our subscription revenue grew even faster at 22% year over year and without cool, Japan and brands. The primary driver behind this growth.

Margaret Tooth: Our total adjusted operating income or the amount of funds, we have available to invest in growth increased 37% year over year. Once again adjusted operating income for our subscription business outpaced this total increasing ava, 55% compared to the prior year period.

Laura Bainbridge: Our Pac spend with highly efficient and of course that we reduced our investment in patch acquisition by 23% and yet a grace pad adds declined just 9% year over year in total we acquired a 67000 pets at an estimated internal rates of return of 44%.

Margaret Tooth: In total, we acquired over 67,000 pets at an estimated internal rate of return of 44%. As expected, our revenue growth for the quarter was largely increased by revenue contribution from pricing actions taken over the past 18 months. This translated into total ARPU growth of 9.8% across our subscription business, the highest level since we became public 10 years ago. Within our core Trupanion brand, the average monthly increase in ARPU was even higher, at 11% year over year.

Margaret Tooth: As expected our revenue growth for the quarter was largely increased by a revenue contribution from pricing actions taken over the past 18 months. This translated into total ARPA growth of 9.8% across our subscription business the highest level since we became public 10 years ago.

Margaret Tooth: And then on cold she pontoon brand the average monthly increase in RP was even higher at 11% year over year against this backdrop of significant pricing increase it's flowing through to our members. The team has doubled down on communicating to pontoons value proposition to date, our efforts have yielded good outcomes either.

Margaret Tooth: Against this backdrop of significant pricing increases flowing through to our members, the team has doubled down on communicating Trupanion's value proposition. To date, our efforts have yielded good outcomes. For the last 12 months, over 40% of our book has received a pricing increase of 20% or more. Average monthly retention within this group was strong in the quarter and up year-over-year.

Margaret Tooth: Last 12 months over 40% above book has received a pricing increase of 20% or more.

Margaret Tooth: Average monthly retention within this group was strong and of course and up year over year. This is a testament to the value of members placed in the southeast Couponing provides along with the team's ability to communicate our value proposition and the why behind our actions.

Margaret Tooth: This is a testament to the value our members place in the service Trupanion provides, along with the team's ability to communicate our value proposition and the why behind our actions. Moving to the second component of our revenue growth, adding new pets. Our total enrolled subscription pets increased 11% in the quarter. We expect the balance between ARPU increases and growth in subscription pets to be maintained in the near term as we continue down the path of restoring margins before increasing the pace of growth within our subscription business.

Margaret Tooth: Moving to a second component of our revenue growth, adding new pets on total enrolled subscription pets increased 11% in the quarter, we expect the balance between auto increases and growth in subscription pets to be maintained in the near term as we continue down the path of restoring margins before increasing the pace of growth within our subscription business.

Margaret Tooth: The team has been consistently making progress against this mandate, as reflected in our year-over-year results. Compared to an eight-year low in Q1 of last year, our subscription adjusted operating margin expanded 210 basis points in the quarter. As expected, this is down from quarter four of last year, mirroring the behavior of vets typically raising their prices early in the year.

Margaret Tooth: The team has been consistently making progress against that mandate as reflected in our year over year results compared to a eight year low in Q1 of last year, our subscription adjusted operating margin expanded 210 basis points in the quarter as expected. This is down from quarter four of last year mirroring the behavior that's typically.

Margaret Tooth: You're raising their prices early in the year in aggregates operating assumption of 15% battery inflation prove sufficient in the first quarter for veterinarians charging sustainable rates as necessary to provide our pets with the cat they deserve and we stand behind them offering a product designed to align the needs of pets pet parents and veterinarian.

Margaret Tooth: In aggregate, our operating assumption of 15% veterinary inflation proved sufficient in the first quarter. For veterinarians, charging sustainable rates is necessary to provide our pets with the care they deserve. And we stand behind them, offering a product designed to align the needs of pets, pet parents, and veterinarians alike. As the cost of veterinary care continues to rise, outpacing consumers' discretionary income, the need for high-quality and dependable pet insurance solutions continues to rise with it.

Speaker Change: Like I.

Margaret Tooth: As the cost of battery CAG continues to rise outpacing consumers' discretionary income the need for high quality and dependable pass insurance solutions continues with it.

Margaret Tooth: This dynamic underscores the importance of having a lifetime solution that enables pet parents to budget effectively and offers reliable coverage. Trupanion stands out in the industry offering the only lifetime product providing pet parents with complete peace of mind and coverage for life, come what may.

Margaret Tooth: This dynamic underscores the importance of having a lifetime solution that enables pet parents to budget effectively and offers reliable coverage couponing stands out in the industry offering me only lifetime product, providing pet parents with complete peace of mind and coverage for life come what may.

Margaret Tooth: With this in mind, it's especially important for us to align our growth strategy with accurate pricing. And although our desire is to assist every pet, we must continue to be highly disciplined in our growth approach. To that end, we will not put our foot on the accelerator more aggressively to add more pets until we see greater strength in our margin. We know this creates the best, most consistent, and positive member experience and avoids rates being abruptly increased.

Margaret Tooth: With this in mind, it's especially important for us to align our growth strategy with accurate pricing and although our desire is to assist every patch we must continue to be highly disciplined in our growth approach.

Margaret Tooth: To that end, we will not push out, especially the acceleration more aggressively to atmel pass until we see greater strength in our margin. We know this creates the best most consistent and positive member experience and avoids rates being abruptly increased.

Margaret Tooth: We're committed to maintaining this approach and are encouraged by ARPU trends and conversion improvements at this early point in the year and look forward to expanding our pace of growth when margins allow. In terms of pet ads, our core Trupanion brand represented the bulk of the new pet growth in the quarter, as we continue to focus on growth in areas that are most closely aligned to our targeted value proposition. Our newer initiatives, including our Powered by Sweeter products with Chewy and Aflac, our Medium and Low ARPU products, Firkin and PHI Direct, and our products in Continental Europe comprised approximately 22% of our gross new pet ads in the quarter, up from quarter 4 and over 20% for the first time since we launched these products.

Margaret Tooth: We are committed to maintaining a surprise gentlemen, encouraged by off your trends and conversion improvements at this early point in the year and look forward to expanding our pace of growth when margins are low.

Margaret Tooth: In terms of pass as oncology pontoon brand represented the bulk of the new pet growth in the quarter as we continue to focus on growth in areas that are most closely aligned to our targeted value proposition, our newer initiatives, including our powered by a suite of products with chewy and aflac on medium and low RP products fucking M. P. H tried direct and.

Margaret Tooth: Our products in Continental Europe comprised approximately 22% about grace new pet ads in the quarter up from quarter, four and over 20% for the first time since we launched these products. We will continue to deploy a conservative amount of capital against these opportunities. Given these products are early in their lifecycle and subscale. However, it.

Margaret Tooth: We will continue to deploy a conservative amount of capital against these opportunities, given these products are early in their life cycle and subscale. However, it should be noted that we've made some encouraging progress with FERCIN and PHI Direct, with evidence of scale beginning to manifest. As our margins expand meaningfully into the second half of this year, we will look to adopt a more assertive approach in deploying our capital. In our large, underpenetrated market, this remains our overarching mandate.

Margaret Tooth: It should be noted that we've made some encouraging progress in fact can M. P. H I direct with evidence of scale beginning to manifest.

Margaret Tooth: As our margins expand meaningfully into the second half of this year, we will look to adopt a more assertive approach in deploying our capital.

Margaret Tooth: And a large underpenetrated market. This remains our overarching mandate, we will do so prudently however, gradually scaling up our acquisition spend as margins expand.

Margaret Tooth: We will do so prudently, however, gradually scaling up our acquisition spend as margins expand. In summary, I'm pleased with our quarter one results, which aligned with our expectations and were delivered through solid execution. This is a testament to the ongoing discipline and focus of the team. We're committed to maintaining this discipline while fulfilling our mission of supporting more pets and veterinarians. I'm excited about the future and the tremendous opportunities that lie ahead. With that, I'll hand it over to Fawwad to provide a detailed overview of our Q1 results. Thanks, Mark.

Fawwad: In summary, I'm pleased with our quarter, one results, which aligned with our expectations and wanted to live and through solid execution.

Fawwad: This is a testament to the ongoing discipline and focus as a team we committed to maintaining this discipline, while fulfilling our mission of supporting more pass and veterinarians.

Fawwad: Cited about the future and the tremendous opportunities that lie ahead with that I'll hand, it over to <unk> to provide a detailed overview of our Q1 results.

Fawwad Qureshi: Thanks, Margie. Today I will share additional details around our first quarter performance as well as provide our outlook for the second quarter and full year 2024. At a high level, I'll echo Margie's comments that it was a solid start to the year. Total revenue for the quarter was $306.1 million, up 19% year-over-year. Within our subscription business, revenue was $201.1 million, up 22% year-over-year. Additionally, total subscription pets increased 11% year-over-year to over 1,006,000 pets as of March 31st. This includes approximately 43,000 pets in Europe, which are currently underwritten by third-party underwriters.

Fawwad: Thanks, Marty today, I will share additional details around our first quarter performance as well as provide our outlook for the second quarter and full year 2024.

Fawwad Qureshi: At a high level I'll Echo Marty's comments that it was a solid start to the year.

Fawwad Qureshi: Total revenue for the quarter was $306 1 million up 19% year over year.

Fawwad Qureshi: Within our subscription business revenue was 201.1 million up 22% year over year total subscription pets increased 11% year over year to over 1.006 million pets as of March 31. This includes approximately 43000 pets in Europe, which are currently underwritten by third party underwriters.

Fawwad Qureshi: Total monthly average revenue per pet for the quarter was $69 79 up nine 8% over the prior year period.

Fawwad Qureshi: Total monthly average revenue per pet for the quarter was $69. Up 9.8% over the prior year period. The subscription business cost of paying veterinary invoices was $151.5 million, resulting in a value proposition of 75.3% and reflects a $225 basis point improvement over the prior year period. This improvement provides a clear representation of the actions we have taken to repair our margins, and we are pleased with this progress.

Fawwad Qureshi: The subscription business cost of paying veterinary invoices was 151.5 million, resulting in a value proposition of 75, 3% and reflects a 225 basis point improvement over the prior year period. This improvement provides a clear representation of the actions we have taken to repair margins and we're pleased with this progress.

Fawwad Qureshi: Due to the seasonality of vet pricing, as we highlighted earlier and last quarter, the cost of veterinary invoices as a percent of revenue increased 260 basis points from Q4. Our target value proposition for our subscription business remains 71%, and we expect to close the gap to our target by year end. As a percentage of subscription revenue, variable expenses, or 9.6%, down from 10.1% a year ago. Fixed expenses as a percentage of revenue were 5.3%, up from 4.7% in the prior year period due to increases in our technology and G&A expenses, including additional expenses incurred related to the remediation of our material weaknesses.

Fawwad Qureshi: Due to the seasonality of that pricing, we highlighted earlier and last quarter the cost of veterinary invoices as a percent of revenue increased 260 basis points from Q4.

Fawwad Qureshi: Our target value proposition for our subscription business remains 71% and we expect to close the gap to our target by year end as a percentage of subscription revenue variable expenses were nine 6% down from 10.1% a year ago.

Fawwad Qureshi: <unk> expenses as a percentage of revenue or five 3% up from 4.7% in the prior year period due to increases in our technology and G&A expenses, including additional expenses incurred related to the remediation of our material weaknesses.

Fawwad Qureshi: After the cost of paying veterinary invoices, variable expenses, and fixed expenses, we calculate our adjusted operating income. Our subscription business delivered an adjusted operating income of $19.6 million, an increase of 55% from last year. The Subscription Adjusted Operating Margin was 9.7% of subscription revenue. This is up from 7.6% in the prior year quarter and represents approximately 210 basis points of year-over-year margin expansion. Now I'll turn to our other business segment, which is comprised of revenue from our other products and services that generally have a B2B component and a different margin profile than our subscription business.

Fawwad Qureshi: After the cost of paying veterinary invoices variable expenses and fixed expenses, we calculate our adjusted operating income our subscription business delivered adjusted operating income of $19 6 million, an increase of 55% from last year.

Fawwad Qureshi: Subscription adjusted operating margin was nine 7% of subscription revenue. This is up from seven 6% in the prior year quarter and represents approximately 210 basis points of year over year margin expansion.

Fawwad Qureshi: Now I'll turn to our other business segment, which is comprised of revenue from our other products and services that generally have a beta V component and a different margin profile than our subscription business. Our other business revenue was 105 million for the quarter, an increase of 15% year over year. Adjusted operating income for this segment was 1.7 million a decrease of 41%.

Fawwad Qureshi: Our other business revenue was $105 million for the quarter, an increase of 15% year-over-year. However, adjusted operating income for this segment was $1.7 million, a decrease of 41% from last year. The decrease was driven by the previously mentioned increase in fixed expenses and a lower gross margin.

Fawwad Qureshi: From last year. The decrease was driven by the previously mentioned increase in fixed expenses and a lower gross margin in total adjusted operating income was $21 3 million in Q1 in line with our expectations. This was up 37% from Q1 last year, but down 22% from Q4 in Q1 are higher value.

Fawwad Qureshi: In total, adjusted operating income was $21.3 million in Q1, in line with our expectations. This was up 37% from Q1 last year, but down 22% from Q4. In Q1, our higher-value subscription business comprised approximately 92% of our adjusted operating income in the quarter. This is up from 84% for the full year in 2023. We expect this trend to continue as one of our partners in our other business, Pets Best, continues to enroll pets with their new underwriting.

Fawwad Qureshi: Obstruction business comprised approximately 92% of our adjusted operating income in the quarter. This is up from 84% for the full year in 2023, we expect this trend to continue as one of our partners and our other business pets best continues to enroll pets with their new underwriter.

Fawwad Qureshi: During the quarter, we deployed $15 million to acquire approximately 67,200 new subscription pets. Excluding the approximately 3,900 new European pets that are underwritten by a third party, this translated into an average pet acquisition cost of $207 per pet in the quarter, down from $247 in the prior year period and $217 in Q4.

Fawwad Qureshi: During the quarter, we deployed 15 million to acquire approximately 67200, new subscription pets, excluding the approximate 3900, new European pets that are underwritten by a third party. This translated into an average pet acquisition costs of $207 per pet in the quarter down from $247 in the prior year.

Fawwad Qureshi: Period and $217 in Q4.

Fawwad Qureshi: We also invested $1.2 million in the quarter in development costs. Stock-based compensation expense was $7.4 million during the quarter. As a result, the net loss was $6.9 million, or a loss of $0.16 per basic and diluted share, compared to a loss of $24.8 million, or a loss of $0.60 per basic and diluted share in the prior year period. In terms of cash flow, operating cash flow was $2.4 million in the quarter compared to a negative $6.9 million in the prior year period.

Fawwad Qureshi: We also invested $1 2 million in the quarter and development costs stock based compensation expense was 7.4 million during the quarter.

Fawwad Qureshi: As a result, net loss was $6 9 million or a loss of <unk> 16 cents per basic and diluted share compared to a loss of $24 8 million or a loss of 60 cents per basic and diluted share in the prior year period.

Fawwad Qureshi: Capital expenditures totaled $3.1 million. As a result, free cash flow was a negative $0.6 million, an $11.4 million improvement from the prior year's first quarter. Similar to our AOI, our free cash flow is impacted by the seasonal fluctuations we have discussed.

Fawwad Qureshi: In terms of cash flow operating cash flow was 2.4 million in the quarter compared to a negative $6 9 million in the prior year period capital expenditures totaled $3 1 million as a result free cash flow was a negative 0.6 million and 11.4 million improvement from the prior year's first quarter.

Fawwad Qureshi: Similar to our ally our free cash flow is impacted by the seasonal fluctuations. We have discussed it is for this reason we have set an annual free cash flow target at 2.5% of revenue. We believe this is a prudent amount given the strength of our capital position and our desire to grow in such a large underpenetrated global market.

Fawwad Qureshi: It is for this reason that we have set an annual free cash flow target at 2.5% of revenue. We believe this is a prudent amount given the strength of our capital position and our desire to grow in such a large, underpenetrated global market. Turning to the balance sheet, we ended the quarter with $275.2 million in cash and short-term investments. Outside of our insurance entities, we held $38.1 million in cash and short-term investments, with an additional $15 million available under our credit facility.

Fawwad Qureshi: Turning to the balance sheet, we ended the quarter with $275 2 million in cash and short term investments outside of our insurance entities, we held $38 1 million in cash and short term investments with an additional $15 million available under our credit facility.

Fawwad Qureshi: At the end of the quarter, we maintained $256.7 million of capital surplus at our insurance subsidiaries, which was $103.4 million more than the estimated risk-based capital requirement of $153.3 million. This is down from our year-end requirements as growth in our other business slows and the capital intensity of our business is lowered. Last quarter, we reported two material weaknesses as a result of the 2023 audit. In response to this, we have made investments in internal controls, technology, and SOX compliance.

Fawwad Qureshi: At the end of the quarter, we maintained $256 7 million of capital surplus at our insurance subsidiaries, which was 103.4 million more than the estimated risk based capital requirement of 153.3 million. This is down from our year end requirements has growth in our other business flows and the capital intensity of our business is lowered.

Fawwad Qureshi: Last quarter, we reported two material weaknesses as a result of the 2023 audits in response to this we have made investments in internal controls technology and Sox compliance. We have also hired pwc to assist us in the remediation of these material weaknesses and we're making progress in addressing these deficiencies.

Fawwad Qureshi: We have also hired PwC to assist us in the remediation of these material weaknesses, and we're making progress in addressing these deficiencies. We will look to regain more efficiency in our fixed expenses throughout the year while balancing our continued remediation efforts in earnest. I'll now turn to our own.

Fawwad Qureshi: We will look to regain more efficiency in our fixed expenses throughout the year, while balancing our continued remediation efforts in earnest.

Speaker Change: I'll now turn to our outlook, we are updating our full year revenue guidance, which is now expected to be in the range of $1.244 billion to $1.276 billion or 14% growth at the midpoint. This takes into account our slight over performance in Q1, we continued to expect to grow subscription revenue in the range of 842 million.

Fawwad Qureshi: We are updating our full-year revenue guidance, which is now expected to be in the range of $1,244,000,000 to $1,276,000,000, or 14% growth at the midpoint. This takes into account our slight overperformance in Q1. We continue to expect to grow subscription revenue in the range of $842 million to $862 million, representing 20% year-over-year growth at the midpoint. We also continue to expect total adjusted operating income to be in the range of $100 million to $120 million, or 32% year-over-year growth at the midpoint.

Fawwad Qureshi: Two 862 million, representing 20% year over year growth at the midpoint.

Fawwad Qureshi: We also continue to expect total adjusted operating income to be in the range of 100 million to 120 million or 32% year over year growth at the midpoint.

Fawwad Qureshi: As we think about the shape of the year, we expect that the first half of the year will start from a lower margin standpoint within our subscription business and build back to a 15% adjusted operating margin by Q4 of this year. Second, for the second quarter of 2024, total revenues are expected to be in the range of $306 million to $311 million, representing 14% year-over-year growth at the midpoint. Subscription revenue is expected to be in the range of $206 million to $208 million, or 20% year-over-year growth at the midpoint.

Fawwad Qureshi: As we think about the shape of the year, we expect that the first half of the year, we'll start from a lower margin standpoint within our subscription business and build back to a 15% adjusted operating margin by Q4 of this year.

Fawwad Qureshi: Second for the second quarter of 2024 total revenues are expected to be in the range of 306 million to 311 million, representing 14% year over year growth at the midpoint subscription.

Fawwad Qureshi: Revenue is expected to be in the range of 206 million to $208 million or 20% year over year growth at the midpoint total adjusted operating income is expected to be in the range of 21 million to $23 million. As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U S and Canadian currencies for the second quarter and full year of <unk>.

Fawwad Qureshi: Total adjusted operating income is expected to be in the range of $21 million to $23 million. As a reminder, our revenue projections are subject to conversion rate movements, predominantly between the U.S. and Canadian currencies. For the second quarter and full year of 2024, we used a 74% conversion rate in our projections, which was the approximate rate at the end of March.

Fawwad Qureshi: 'twenty 'twenty four we used a 74% conversion rate in our projections, which was the approximate rate at the end of March with that I'll hand, it back to Marty.

Margaret Tooth: With that, I'll hand it back to Mark.

Mark: Thank you for what.

Margaret Tooth: This weekend, Daryl and I will be joined by Fawwad in Omaha for our annual Q&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 long-term-minded investors. We hope to see many of you there.

Margaret Tooth: This weekend, Daryl and I will be joined by forward in Omaha for annual Q&A to fly back Shehata ways annual shareholder meeting.

Margaret Tooth: This is an event I personally look forward to every year, one that presents a unique opportunity to meet with long term minded investors. We hope to see many of you. There now before we open for questions I'd like to take a moment to pay tribute to Daryl.

Margaret Tooth: Now, before we open for questions, I'd like to take a moment to pay tribute to Daryl. Since the development of the Trupanion idea nearly 40 years ago, he has been an exceptional visionary, entrepreneur, and leader. He has also been a brilliant coach to many, not least to me. I am deeply humbled to be appointed as his successor and to follow in his footsteps. I'm proud to lead a company and a team that has such profound significance for so many.

Margaret Tooth: Since the development of the couponing idea in any 40 years ago, Daryl has been an exceptional visionary entrepreneur and leader. He has also been a brittian case to many not at least to me I am deeply humbled to be appointed as his successor and to follow in his footsteps I'm proud to lead a company and a team that has such a profound.

Margaret Tooth: Again, so many looking.

Margaret Tooth: Looking ahead, as we continue to grow and expand our reach and products in support of pet parents globally, Daryl has agreed to further develop the early work around our food initiative. On behalf of the Trupanion community everywhere, thank you, Daryl, for your mentorship, support, and the impact you've made across the world of animal health.

Margaret Tooth: Looking ahead as we continue to grow and expand our reach and products in support of pet parents globally down has agreed to further develop the early work around our food initiative on behalf of Sochi Ponting community everywhere. Thank you Darrell fill mentorship support on the impact you've made across the world of animal health.

Speaker Change: With that we'll open it up to questions.

Margaret Tooth: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your.

Unknown Executive: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Jian Li with Evercore ISI; please go ahead.

Jian Li: Question. Please press Star then two.

Unknown Executive: At this time, we will pause momentarily to assemble our roster.

Jian Li: The first question comes from John Lee with Evercore ISI. Please go ahead.

Jian Li: Great. Thank you for taking the question and.

Jian Li: Great. Thank you for taking the question, Margie. Congratulations on your appointment. Daryl will certainly miss you.

Jian Li: Maggie and congratulations on your appointment and there were certainly Matthew.

Margaret Tooth: So, Margie, first, maybe just on a high level, you've been with Trupanion for quite a while now. In this new capacity, like, how would you – how would your focus and priorities evolve? Like, if you could talk about a key area that you'd be focused on in the next 6 to 12 months, it sounds like profitability is a big focus for you, so if you can kind of talk through that a little bit.

Jian Li: So Mark you first maybe just at a high level you've been with two patio for quite a while now in this new capacity like how would you how does your focus on priorities evolve like if you didn't talk about our key areas you'd be focused on in the next six to 12 miles. It sounds like profitability is a big focus for you. So if you can kind of talk to that a little.

Margaret Tooth: And then the second question for US a lot on the the macro environment anything you're seeing in the macro environment. That's impacting your retention impacting D N a pricing flow through and you can and what kind of assumption is baked into your full year guide and also the I got the trajectory than linear.

Margaret Tooth: And then the second question for Fawwad is on the macro environment. Anything you're seeing in the macro environment that's impacting your retention, impacting the pricing flow through? And if you can, and what kind of assumption is baked into your 4-year guide? And also, I guess the trajectory, the linearity of your margin. Thank you.

Margaret Tooth: Your margin thank you.

Fawwad Qureshi: Thanks for the congratulations and I appreciate that he just said to pick up on that effect. Some priorities. During my time in Chicago and I came in really very heavily focused on the growth side of things and and initiate.

Margaret Tooth: Thanks for the congratulations, and I appreciate that. So just to pick up on the focus and priorities, I think during my time at Trupanion, I came in really, very heavily focused on the growth side of things. And initially, started very closely with both the website and also the territory partners, so working with our core foundational pillar of what makes Trupanion unique. That really has been where I continue to focus, and I think over the long haul, that will always be kind of the mainstay for the company in such a highly underpenetrated market.

Margaret Tooth: Places by the website and also their territory partners working with all our core foundational pillar of F. What makes Japan in unique.

Margaret Tooth: That really has been why I continue to think that and I think even a long haul, but we'll always be kind of the main safe at the company in such a highly under penetrated market.

Margaret Tooth: That said, to your point, really kind of where we're at now, the size of the company, it's about ensuring that we are operating within our core guardrails for every element of our P&L, ensuring that we can get scale and maintain that scale for years to come. So, you know, I'm very excited by what the team has been able to create so far and look forward to being able to move the business forward in that direction. Yeah, thank you for the question.

Margaret Tooth: And to your point really kind of where we're at now the size of the company. It's about ensuring that we are operating within all our call guardrails for every element of our P&L, ensuring that we can get scale and maintain that scale for years to come and say you know I'm very excited by what the team must be able to create so far and look forward to being able to see.

Margaret Tooth: Maybe the business forward in that direction.

Margaret Tooth: Yeah. Thank you for the question.

Fawwad Qureshi: Yeah, thank you for the question. So the way we think about the annual plan and what's baked into the guidance are really three key components that we're focused on as a leadership team. The first is pricing, as you mentioned. The second is, of course, expense management, as we think about higher costs related to some of the remediation work that we've invested in, and then retention. So I would say at a macro level that what we baked into our forecast was 15% inflation.

Fawwad Qureshi: So the way, we think about the annual plan.

Fawwad Qureshi: Baked into the guidance is really three key components.

Fawwad Qureshi: But we're focused on as a leadership team.

Fawwad Qureshi: Pricing as you mentioned the mechanism of course expense management as we think about.

Fawwad Qureshi: Higher costs related to some of the remediation work.

Fawwad Qureshi: <unk> invested in.

Fawwad Qureshi: Retention, so I would say at a macro level, what we baked into our forecast was 15% inflation.

Fawwad Qureshi: And at least from a Q1 perspective, that assumption was validated. So when we look at our expectation for where we were going to end up on subscription, and the cost of paying invoices, we came in pretty much on target. So that gives us a data point or a proof point to then model out the rest of the year. So, what we have assumed is a gradual build back to that over the course of the year, and very similar to what we saw in the first half of last year, where there was modest margin improvement from Q1 to Q2.

Fawwad Qureshi: And at least from a Q1 perspective that assumption was validated some of you when we look at our expectation for where we were going to end up on subscription.

Fawwad Qureshi: Opinion voices, we came in.

Fawwad Qureshi: Pretty much on target so that gives us a data point or a proof point to model out the rest of year.

Fawwad Qureshi: Think about the guidance.

Fawwad Qureshi: One point of the guidance for Q4, and so the objective.

Fawwad Qureshi: North Star for Us is to get to our target margin from our subscription cost of revenue at 71% and then of course, our adjusted operating income subscription at 15%. So what we've assumed is a gradual buildup backup to that over the course of the year.

Fawwad Qureshi: Typically, in Q1, that's where we'll put in price increases, so those then flow through, and then we see acceleration of margin expansion in the second half. That's effectively what we're modeling into our guidance, both for Q2 and then for full year. Obviously, we're vigilant when it comes to thinking about macro. And one of the beneficiaries of the company having a lot of data is that we're able to use that to try and be as predictive as possible.

Fawwad Qureshi: Very similar to what we saw in the first half of last year, where there was modest margin improvement from Q1 to Q2 typically in Q1, and that's what put in price increases so those things flow through.

Fawwad Qureshi: And then we see acceleration of margin expansion in second half.

Fawwad Qureshi: That's effectively what we're modeling into our guidance both for Q2 and then four for full year. Obviously, we're vigilant when it comes to thinking about macro and one of the beneficiaries of the company, having a lot of data as we were able to use that to.

Fawwad Qureshi: Finally, as predictive as possible and so when we think about pricing and the efficacy of our pricing efforts is very much crowded in the data that we're seeing so I would say so far so good we're not seeing anything surprising but.

Fawwad Qureshi: And so when we think about pricing and the efficacy of our pricing efforts, it's very much grounded in the data that we're seeing. So I would say, so far, so good. We're not seeing anything surprising, but obviously, more to come as the year progresses.

Fawwad Qureshi: I'll, just say more to come as the year progresses.

Speaker Change: Yeah very much.

Fawwad Qureshi: The next question comes from Josh Shanker with Bank of America. Please go ahead.

Joshua David Shanker: The next question comes from Josh Shanker with Bank of America. Please go ahead.

Fawwad Qureshi: Yes, thank you for taking my question. A few items on the medical loss ratio. You talked about the seasonality of the Medical Loss Ratio in the First Quarter. Can you talk about, when you think about the annual seasonality patterns, how much do you think, in a normal year, the first quarter loss ratio should be elevated versus the remainder of the year?

Joshua David Shanker: Yes. Thank you for taking my question of a few items on medical loss ratio you talked about the seasonality of the of the.

Fawwad Qureshi: Our medical loss ratio in the first quarter, you're talking about when you're thinking about the annual seasonality patterns. How much do you think a normal year, the first quarter loss ratio should be elevated versus the remainder of the year.

Speaker Change: Yeah I'll take that question I think the you know the assumption that we baked in as you can see from the actuals is about two 6% sequential increase from Q4 to.

Fawwad Qureshi: Yeah, this is Fawwad. I'll take that question. I think the, you know, the assumption that we've baked in, as you can see, is from the actuals is about a 2.6% sequential increase from Q4 to Q1. I think if you go back and look historically, that's not dissimilar to what we've seen in terms of patterns. The other thing that I would ground it in, or that we would ground it in, is free cash flow. So when we look at the free cash flow projection, we talked about it back in Q4, generally, the second half is higher than the first half.

Fawwad Qureshi: Q1, I think if you go back and look historically, that's not dissimilar to what we've seen in terms of patterns.

Fawwad Qureshi: The other thing that I would grounded we grounded in is free cash flow. So when we look at free cash flow projection, we talked about it back in Q4.

Fawwad Qureshi: Generally the second half is higher than the first half.

Speaker Change: So our expectation is that loss ratio will peak as it typically does in Q1, and then gradually reduce down to <unk>.

Fawwad Qureshi: So you know, our expectation is that the loss ratio will peak as it typically does in Q1, and then gradually reduce down to the 71% model P&L. Generally, though, you see flat Q1 to Q2. From a margin perspective, we see, you know, modest improvement, and then really the bulk of it happens in the second half.

Fawwad Qureshi: 71% model P&L generally, though you see flat Q1 to Q2 from a margin perspective, we see you know modest improvement and then really the bulk of it happens in second half.

Margaret Tooth: And I can, Josh, I can add to that as well. Just as we think about that flow of rates and it comes through, the reason for that slightly delayed margin expansion typically in the year is because the rates and prices go up in the first quarter of the year at the veterinary level, and then what happens is the visit pattern, so people actually go to the veterinarians and start to see those invoices and realize those invoices take a little bit of time to flow through the year.

Fawwad Qureshi: Josh It's Marc I can add to that as well just as we think about that flowing right and it comes through the reason for that is slightly delayed margin expansion typically in the year is because the rates. The prices go up in the first quarter of the air the battery level and then what happens as the visit pattern say people actually going to the bathroom, just hey, guys invoices and realizing nice invoices.

Speaker Change: That takes a little bit of time, just right through the years that by the time you get to Q2, you really can sustain that peak visit pattern as well.

Margaret Tooth: So by the time you get to Q2, you're really kind of seeing that peak visit pattern as well. So there's a little bit of a slope up until the half of the year, and then you start to see the loss ratio start to come in as it matches the prices that we're getting from invoices.

Margaret Tooth: The little bit of a slight up until the the half of the year and then you start to see the loss ratio start to come in as it matches with the prices that we're getting from invoices.

Margaret Tooth: Oh Q1'twenty to the subscription medical loss ratio was 71 one.

Joshua David Shanker: In 1Q22, the subscription medical loss ratio was 71.1, and now it's 75.3, so it's expanded by about 400 basis points over the past two years through a lot of inflation and followed by a lot of price action. Can you talk about whether that squares with what you look at as the loss cost trend increase over the past two years and how much price action you've taken?

Joshua David Shanker: And now at 75, three so it's expanded by about 400 basis points over the past two years through a lot of inflation and followed by a lot of price.

Joshua David Shanker: Can you talk about whether that squares with what you look at as the.

Joshua David Shanker: Loss cost trend increases over the past two years and how much price action you've taken.

Speaker Change: Yeah, I think that's a good thing to anchor too. So if you look at to the extent, we get to call. It a normal year I think calendar year 2022 suddenly you're right to say that we look at the same data.

Fawwad Qureshi: Yeah, I think that's a good thing to anchor to. So, you know, if we look at, to the extent we could call it a normal year, I think calendar year 2022. So you're right to cite that we look at the same data. And to your point, hitting target margin by Q4, this is obviously a little bit different situation, and that we're coming off of a higher peak and then a more accelerated drop to that level in the second half. I would expect that, you know, eventually, the model would get us if we achieve the model on an annual basis, it's going to look more like 20

Fawwad Qureshi: And to your point hitting.

Fawwad Qureshi: Target margin by Q4. This was obviously a little bit different situation that we're coming off of a higher peak and then.

Fawwad Qureshi: A more accelerated dropped to that level in the second half.

Fawwad Qureshi: I would expect that.

Fawwad Qureshi: Eventually the model would get us if we achieve the model on an annual basis, it's going to look more like.

Fawwad Qureshi: The thing we don't know, to the earlier point, is inflation. So it's going to take time for us to determine if 15% is the new normal, or more from a historical context, back in 2022, it might have been mid single digits. Ultimately, we'll get into equilibrium because our price, if we're successful with the increases, will just index to the rate of inflation. But obviously, right now, we're

Fawwad Qureshi: 2022, the thing we don't know.

Fawwad Qureshi: To the earlier point as inflation, so it's going to take time for us to determine is 15% the new normal or more from historical context back in 2022 might have been mid single digits.

Fawwad Qureshi: Ultimately, we will get into equilibrium because our price if we're successful with the increases.

Fawwad Qureshi: Well just index to the rate of inflation, but obviously right now we're playing catch up.

Margaret Tooth: Just a quick kind of, if we go back in time, Josh, to Q1 of 2022. So that was when everything in our, in everyone's eyes was normal.

Speaker Change: Just a quick kind of if we go back in time, Josh to that Q1 of 2022, so that was why everything and all and everyone's eyes was normal.

Fawwad Qureshi: We saw our usual Q1 entry into the year with a pricing increase of between 6% and 7% coming from vets. What we didn't anticipate was seeing it again in Q2 and Q3 and Q4. So what that culminated through the year was a 12% total increase year over year by the time we got to the 31st of December. We started to put those prices through at the midpoint of 2022, but by the end of the year, we were playing nice catch up. So we didn't see a huge shift.

Margaret Tooth: We saw our usual key one entry into their into the year with a pricing increase of between 67% coming from that's what we didn't anticipate within saying again in Q2, and Q3 and Q4. So all that culminated the year with a 12% total increase year every year by the time, we got to the 31st of December we started to put those prices through and the midpoint of 2022.

Fawwad Qureshi: But by the end of the year, we we were playing nice catch up.

Margaret Tooth: By Q1 of 23, we assumed 12% inflation, which again, at that point, was double the average; it went to 15. We then started to price again to get that 15% through, playing catch-up off the back of the prior year and now the new year. And now we've seen consistency again. So the really good thing about consistency is it doesn't create any volatility in the pricing patterns and the behaviors and cadence of our pricing and rates that we're asking for.

Fawwad Qureshi: So we didn't see a huge shift by Q1 of 'twenty, three we assume 12% inflation, which again at that point with double the average of it went to 15. We then started to priced again to get that 15% through playing catch up off the back of the prior year and now the new year.

Margaret Tooth: And now we've seen consistency again say the really good thing about consistency is it doesn't create any volatility in the pricing pattern for knee and behaviors and cadence of our pricing of rates that were asking for so now we've got the consistency we're in a place where if it holds at 15, Jeff Owens point, then the overall loss ratio starts to come down over time.

Margaret Tooth: So now we've got the consistency, and we're in a place where if it holds at 15 to Fawwad's point, then the overall loss ratio starts to come down over time as we get closer to each other, but you still have a jump from Q4 to Q1 by 400 basis points. So that's what we're taking into account in that first quarter shift. But we expect our loss ratio to come through, and as Fawwad mentioned, by the end of the year in Q4, we expect to be at our 15%.

Margaret Tooth: As we get that there's less of a jump from one together you still have it jumped from Q4. She key one by a 400 basis points. So that's what we're taking into account in the first quarter shift, but we expect our loss ratio to come through in an asphalt I've mentioned by the end of the year in Q4, we expect span of 15%.

Fawwad Qureshi: And just to underscore that, and thanks for indulging me, so 12% and 15% on top of each other, that's about 28-29% compounded over two years. Is it wrong to say that earned price increases have been about 24-25% over the last 24 months?

Margaret Tooth: And just to underscore that and thanks for indulging me.

Fawwad Qureshi: So at 12% and 15% on top of each other that's about 'twenty eight 'twenty nine strike.

Fawwad Qureshi: Two years is it wrong to say that that earned price increases have been about 24, 25% over the last 24 months.

Fawwad Qureshi: No that's about right yeah, I mean in terms of the way that the pricing is starting to the book of business Yes.

Joshua David Shanker: No, that's about right. Yeah. I mean, in terms of the way that the pricing is flowing through the book of business. Yeah. Okay. Thank you.

Unknown Executive: Okay, thank you very much.

Speaker Change: Okay. Thank you very much.

Unknown Executive: Thank you.

Unknown Executive: The next question comes from Maria Rips with Canaccord Genuity. Please go ahead.

Maria Ripps: The next question comes from Maria Ripps with Canaccord Genuity. Please go ahead.

Fawwad Qureshi: Great, thanks for taking my questions, and Margie, congrats on your new role, and Daryl, best of luck with your next chapter. First, I just wanted to sort of follow up on your adjusted degree of income in the quarter. So it seems like with a slightly higher subscription revenue in the quarter, adjusted UI was sort of marginally below the midpoint of your guidance. I mean, it's not a big delta, but given that investors are so focused on this metric right now, any color you can share on what kind of drove that delta versus your guidance, especially given that it seems like inflation was sort of in line with your expectations.

Maria Ripps: Hi, great. Thanks for taking my questions and Marty Congrats on your new role and Daryl Best of luck with your next chapter.

Fawwad Qureshi: First I just wanted to sort of follow up on your adjusted operating income in the quarter. So it seems like with the slightly higher subscription revenue in the quarter adjusted do I, what was sort of marginally below the midpoint of your guidance I mean, it's not a big delta, but given that investors are so focused on this metric right now sort of any color you can share on what.

Fawwad Qureshi: Trough that delta versus your guidance, especially given that it seems like inflation was in line with your expectations.

Speaker Change: Yes. Thanks for the question there was really one principal driver and that had to do with higher technology costs. So when we were forecasting.

Fawwad Qureshi: Yeah, thanks for the question. There was really only one principle driver, and that had to do with higher technology costs. So when we were forecasting The corridor from a technology perspective, there was more work that was needed for our digital transformation, our vision platform. So technology cost was the principal driver, so it was higher op-ex; it was the same from a cash perspective, lower cap-ex. As you think about the rest of the year, the bigger factor will be from a fixed expense perspective, the cost of remediation. In my prepared remarks, I mentioned that we had brought on PwC, so that's something that obviously we're taking extremely seriously and putting significant investment behind, which is driving our fixed expenses higher.

Fawwad Qureshi: The quarter from from a technology perspective, there's more work that was needed on sustaining for our digital transformation our vision platform. So.

Fawwad Qureshi: Cost was the principal driver. So it was higher Opex. It was the same from a cash perspective lower capex.

Fawwad Qureshi: As you think about the rest of the year the bigger factor will be from a fixed expense perspective, the cost of remediation.

Fawwad Qureshi: In my in my prepared remarks, I mentioned that we have brought on Pwc. So that's something that obviously, we're taking extremely seriously I'm, putting significant investment behind which is driving our fixed expenses higher it didn't have as big an impact on Q1, it will have bigger impacts as we roll through the year and as we mentioned at the onset our objective is to get to our target margin across the entirety of it.

Fawwad Qureshi: It didn't have as big an impact on Q1, but it will have bigger impacts as we roll through the year, and as we mentioned at the outset, our objective is to get to our target margin across the entirety of the P&L and, obviously, inclusive of AOM. So we're going to have to find productivity and efficiency within our fixed spend. The good news is the company has done that many times before, and we're trying to be very surgical about where we drive those efficiencies, but from a Q1 perspective, it was largely an additional expense in technology.

Fawwad Qureshi: The P&L, obviously inclusive of a O M. So we're going to have to find productivity inefficiencies within our our fixed been opinions that the company has done that many times before and we're trying to be very surgical about where we drive those efficiencies.

Fawwad Qureshi: But from a Q1 perspective was largely.

Fawwad Qureshi: The additional expense in technology.

Speaker Change: Got it.

Fawwad Qureshi: Got it. That's my And then a bigger picture question.

Fawwad Qureshi: Paul.

Speaker Change: And then Oh.

Darryl Graham Andrew Rawlings: In your shareholder letter, you are drawing sort of parallels with auto insurance. Could you maybe expand a little bit on sort of the key differences and similarities between pet and auto insurance as it relates to sort of this recent inflation dynamics? And with progressive and all state share prices sort of trading at all-time highs, sort of while your share price is not factoring a lot of recovery, what do you think is driving this gap in investor perception or in investor expectation?

Darryl Graham Andrew Rawlings: A bigger picture question in your shareholder letter you are drawing sort of parallels with what insurance could you maybe expand a little bit on kind of key differences and similarities between patent old insurance as it relates to set up this recent inflation dynamics and with progressive and Allstate share prices trading at all time highs.

Darryl Graham Andrew Rawlings: It's been a while youll share price does not factor in a lot of recovery.

Darryl Graham Andrew Rawlings: What do you think is driving sort of this gap and investor perception or investor expectations.

Speaker Change: You know from from my opinion, the auto insurance companies, which have been around for a long time have credit and the there their investor base understands that if it'll cost goes up that with a period of time, well, we'll recoup their margins.

Darryl Graham Andrew Rawlings: You know, in my opinion, the auto insurance companies that have been around for a long time have credit, and their investor base understands that if their cost goes up, that over a period of time, they'll recoup their margins. It happens in all lines of insurance. In fact, regulatory bodies require it.

Darryl Graham Andrew Rawlings: It happens in all lines of insurance in fact regulatory bodies require it.

Darryl Graham Andrew Rawlings: I think we are in a newer category and the Investor base thought that Mark just may continue to go down I'd also you know when the inflation hit for auto insurance. It was a combination of the cost of materials the cost of a bumper as well as the labor cost coming out of Covid for the vet.

Darryl Graham Andrew Rawlings: I think we are in a newer category, and the investor base thought that our margins may continue to go down. I'd also point out that when inflation hit for auto insurance, it was a combination of their cost of materials, the cost of a bumper, as well as the labor costs coming out of COVID. For the veterinary world, inflation is primarily driven by the cost of labor. And that is why we expect our inflation to remain at heightened levels at 15% for multiple years.

Darryl Graham Andrew Rawlings: The World is primarily driven by cost of labor and that is why we expect our inflation to remain at heightened levels at 15% for multiple years.

Darryl Graham Andrew Rawlings: And it kind of goes back to some of the earlier questions, when you know historically vet inflation has been five to six percent, and the difference between our Q1 and Q4 is about a hundred to maximum 200 basis point swings, but when you have 15 percent inflation and most of that hits in Q1, the difference between Q1 and Q4 is going to be about five to six hundred basis points, and that should be the natural shape of the year or the seasonality as long If you look at the fact that our subscription margin went up 55 percent year over year, if you look at the fact that our ARPU is up on our Trupanion subscription by 11 percent, we're starting to see the impact of all those rates flowing through, and it's just a matter of time until the margins fully expand and the investor base gains that confidence.

Darryl Graham Andrew Rawlings: And it kind of goes back to some of the earlier questions.

Darryl Graham Andrew Rawlings: When you know historically that inflation has been 5% to 6% and the difference between Q1 and Q4 is about 100 to maximum 200 basis point swings, but when you have 15% inflation in most of that hits in Q1. The difference between Q1 and Q4 is going to be about five to 600 basis point.

Darryl Graham Andrew Rawlings: And that should be the natural shape of the year the seasonality as long as that inflation stays at 15%.

Darryl Graham Andrew Rawlings: If you look at the fact that our subscription margin went up 55% year over year. If you look the fact that our ARPA was up on our Japan in subscription 11%, we're starting to see the impact of all of those rates flowing through and it's just a matter of time until the margins fully expand the investor base gains that covenants.

Speaker Change: Got it thank you very much for the color.

Maria Ripps: Got it. Thank you very much for the call.

Maria Ripps: Yes.

Speaker Change: The next question.

Jonathan David Block: The next question comes from John Block, with CFO. Please go ahead.

Maria Ripps: <unk> comes from Jon Block with Stifel. Please go ahead.

Margaret Tooth: Thanks, guys. Good afternoon.

John Block: Thanks, guys. Good afternoon, just as star the one to 24 gross adds I think you said down 9% year over year.

Jonathan David Block: Just to start, the 1Q24 gross ads, I think you said down 9% year-over-year. I don't think there's been any growth now on an LTM basis, and I understand that. Greater scrutiny on the PAC deployment until the MLR improves. Who was, and what are the plans for the MLR? I thought I heard that they would close the gap on 71% by year end. I thought that used to be that you would get there by year end 24.

John Block: I don't think theres been any growth now on an LTM basis, and I get it great.

Jonathan David Block: Greater scrutiny on the past deployment until the MLR improves.

Jonathan David Block: What are the plans for the MLR.

Jonathan David Block: Thought I heard close the gap.

Jonathan David Block: So did that change? And then, if it did, when will you recapture, you know, the main goal, which is 71%? And importantly, in the interim, do we just think about a company that you know is going to lose, call it, significant market share during that time? And then I'll ask my follow-up. Thank you.

Jonathan David Block: 71% by year end.

Jonathan David Block: They used to be that you would get there.

Jonathan David Block: By year end 'twenty four so did that change and then even did when will you recapture.

Jonathan David Block: The main goal, which is a 71%.

Jonathan David Block: And importantly in the interim do we just think about a company that.

Jonathan David Block: You know it was going to lose call. It significant market share during that time, and then I'll ask my follow up thank you.

Speaker Change: Sure. Thanks for the question I want I can't speak about market share I'll, let others chime in on that but just to make just to clarify no. Nothing has changed our expectation is to hit 71% by Q4.

Fawwad Qureshi: Thanks for the question. I won't I can't speak about market share. I'll let others chime in on that.

Speaker Change: Obviously, we're not satisfied with that because.

Speaker Change: Everything we've talked about first half versus second half in a typical year, but that's that's our objective hasn't changed.

Margaret Tooth: But just to clarify, no, nothing has changed. Our expectation is to hit 71% by Q4. Obviously, we're not satisfied with that because everything we've talked about first half versus second half in a typical year. But that's, that's our objective hasn't changed.

Fawwad Qureshi: Hum.

Margaret Tooth: Hudson just to touch on the ground now the market share side of things. So as we look at our growth year over year and to your point, yes. It has gone down 9%. The pack has come down 23% say significant efficiencies that when times are the category overall weight. The reports have come out from Nokia recently, which have indicated the total category growth of just under 22%.

Margaret Tooth: Hi John, it's Margie. Just to touch on the growth and market share side of things. As we look at our growth year over year, to your point, yes, it has gone down 9%. The pack has come down 23%, so there are significant efficiencies there. But in terms of the category overall, reports have come out from NAFIA recently that indicate a total category growth of just under 22%. Of that growth, Trupanion was 26.5%.

Margaret Tooth: All of that Great Couponing was 26, 5%. So I think in terms of market share yeah.

Margaret Tooth: So I think in terms of market share, ultimately, there's a huge market out there. We are just over 3% penetrated. We crossed $4 billion as a category for the first time, which is great and pure evidence that there's a massive opportunity out there for us. And as we start to see our margins expand, we will put the foot on the accelerator in terms of our overall pet acquisition, and we'll start to see that number moving in the right direction. At this point, everything is exactly where we'd expect it to be at this time of year.

Margaret Tooth: Ultimately that is a huge market out there where I just say the 3% penetration will be crustal billionaires in category for the first languishes great.

Margaret Tooth: Purely demonstrates that the massive opportunity out there for us and as we start to see our margins expand we will put the foot on the accelerator in terms of argue with that acquisition and we'll start to see that number maybe in the right direction at this point everything exactly where we'd expect it to be at this time.

Jonathan David Block: Okay, look, I get it, I just, again, Fawwad, I heard close the gap, not 71, you clean that up, and Margie, I get you on the 3%, but clearly, there's a Tam and there's a Sam, and I don't think the Sam is 3%, but, you know, maybe to shift to the second question, and I'll apologize in advance for the next question, The market's up 12. And to be fair, inflation has taken off during that time; I get it. It's been a big headwind. There are no other pure plays to compare it to.

Margaret Tooth: Okay.

Jonathan David Block: Just again pull out I heard close the gap not 71, you clean that up and I get you under 3%, but clearly there's a tam and there was a Sam but I don't think the sandwich is 3%.

Jonathan David Block: Maybe just shifting the second question and I'll apologize in advance for the next question, but I do think it's important.

Jonathan David Block: Mortgage since taking over as sole president of the stock's down over 70% the market's up 12 and to be fair inflation is taken off during that time I get it it's been a big headwind. There are no. Other pure plays to compare to but this is really been a painful time for shareholders. You were losing share that you just mentioned the MLR stubborn.

Margaret Tooth: But this has really been a painful time for shareholders. You're losing share, as I just mentioned. The MOR is stubbornly high, and new products under that 60-month plan have just taken much longer to launch.

Margaret Tooth: Hi, new products under that 60 months plan I've, just taken much longer to law and so can we just get pretty granular in it.

Margaret Tooth: So can we just get pretty granular? And if, you know, as CEO, congratulations. What are the top two or three things? Let's just isolate the top two or three priorities that you have in front of you that investors should focus on when we think about turning things around over the next 12 months. Thank you.

Margaret Tooth: Oh, congratulations what are the top two or three things, let's just isolate the top two or three priorities that you have in front of you that investors should focus on when we think about turning things around over the next 12 months. Thank you.

Margaret Tooth: Yeah, no, sure. Thanks, John. So I think, you know, first and foremost, it's really continuing the work the teams have been doing for the last year, which has been doubling down on the margin focus. So, you know, for Q1 year over year, we talked about 55% subscription AOI growth, and I'm really pleased to see that come through at that level. And I think, you know, that's testament to the fact that we're focusing, and we will continue to focus our top priority as our top priority on how do we continue that expansion of margin, which is making sure we're priced effectively, which is making sure that we're helping our members understand that value proposition, which pushes into retention. Member experience is always absolutely sacrosanct to us.

Speaker Change: Yeah, Yeah, no sure. Thanks John.

Margaret Tooth: I think first and foremost is really continuing to work. The teams have been doing for the last year, which has been doubling down on the margins like I say.

Margaret Tooth: Q1 year over year with about a 55% subscription they went crazy and I'm really pleased to see that come through at that level and I think that's testament to the fact that we're focusing and we will continue to think because I'll talk at all as a top priority on how can you continue that expansion of margin, which is making sure were priced eventually which is making sure that we're helping our members understand that.

Margaret Tooth: Ah you're proposition, which pushes into retention member experiences in ways, absolutely sacrosanct to us and in that case hand in hand with that margin expansion. So we'll continue that focus in terms of growth at that point. It comes down to why do we most effectively deploy the capital that we have and that starts to grind the pool and distribution channels that what part of that 16 month plant breeding.

Margaret Tooth: And that goes hand in hand with that margin expansion. So we'll continue that focus. In terms of growth, at that point, it comes down to where we most effectively deploy the capital that we have. As that starts to grow, the pool and distribution channels that were part of that 60-month plan really are expanding, which allows us to tap into more opportunities than we could have done before. Doing that diligently, we're not just going to turn everything on at once.

Margaret Tooth: Expanding which allow us to get into more opportunities than we could have done before doing.

Margaret Tooth: Doing that diligently we're not just going to suddenly turn everything all at once we will make sure that we eat that margin out soon so that we get the best internal rates of return and that may be in North America. It might be on a new product. It might also be in Europe. We didn't have those opportunities before and I'm pleased that we have right now and really then just ensuring that from a overall margin.

Margaret Tooth: We'll make sure that we eke that margin out to ensure that we get the best internal rates of return. That may be in North America, it might be on a new product, it might also be in Europe.

Margaret Tooth: We didn't have those opportunities before, and I'm pleased that we have those now. And really, just ensuring that overall margins across the business operate within our guardrails that we set not just for our growth metrics but also our loss ratio, our fixed expenses, our operational expenses, each one of those have to be in the right spot to be able to scale. So it's about getting us ready for long-term growth.

Margaret Tooth: Across the business our pricing within our guardrails that we sat and not just for our growth metrics, but I'll say a loss ratio of Opex expenses operational expenses. Each one of those have to be in the right spot to be able to scale.

Margaret Tooth: About getting us ready for the long term, great, but I think the ultimate policy for US moving forward is making sure that margin is where we where we need it to be unexpected to be as we continue through the rest of the year I'd say the answer to your question.

Margaret Tooth: But I think the ultimate priority for us moving forward is making sure that the margin is where we need it to be and expect it to be as we continue through the rest of the year. Hopefully, that answers your question.

Margaret Tooth: The next question comes from John Barnidge with Piper Sandler. Please go ahead.

John Bakewell Barnidge: The next question comes from John Barnridge with Piper Sandler. Please go ahead.

John Bakewell Barnidge: Good afternoon, Thank you for the opportunity.

Darryl Graham Andrew Rawlings: Good afternoon. Thank you for the opportunity. My first question is, can you talk about the opportunity for the food initiatives that you'll be involved in Darryl? What do you view as a TAM there? Is Trupanion going to retain 100% control? And will those expenses flow through the other business?

Darryl Graham Andrew Rawlings: My first question can you talk about the opportunity for the food initiatives that youll be involved and Darryl what do you view as the Tam there.

Darryl Graham Andrew Rawlings: And then you're going to retain 100% control.

Darryl Graham Andrew Rawlings: Well those expenses flow through the other business. Thank you.

Darryl Graham Andrew Rawlings: Oh, well, we we first talked about our food initiative and our 60 month plan.

Darryl Graham Andrew Rawlings: Well, we first talked about our food initiative in our 60-month plan. It's still very early days, but we believe it is a very large market.

Darryl Graham Andrew Rawlings: It's still very early days, we believe it is a very large tam.

Darryl Graham Andrew Rawlings: You know, if we get to 25% market penetration on insurance, 100% of pets are eating food.

John Bakewell Barnidge: You know, if we get to 25% market penetration on insurance, 100% of pets will be eating food. And we think we're in a unique position to understand the health outcomes. That's what we're focused on.

John Bakewell Barnidge: And we think we're in a unique position to understand the health outcomes. That's what we're focused on them, but we don't have any promises on how it when it's going to hit the P&L or where it will be flowing through so it's early days.

Speaker Change: Okay and then my follow up question can you talk about the growth in capital in excess of the minimums during the quarter. It looked like it went to one of 3.4 from 64.1.

Fawwad Qureshi: Okay, and then my follow-up question: can you talk about the growth in capital in excess of the minimum during the quarter? It looked like it went to 103.4 from 64.1. With growth slowing, should this continue to build as the year progresses? Yeah, thanks for the question.

Speaker Change: With growth slowing should this continue to build as the year progresses. Thank you.

Speaker Change: Yeah. Thanks for the question.

Fawwad Qureshi: Yeah, thanks for the question. Yeah, so the way we look at it, the excess capital or the overcapitalization with the insurance entities, it's driven by two things. As I think, you know, one is, as the business continues to grow from a subscription perspective, we contribute to that pool of capital. And then the other is the dynamic of PetsBest rolling off. So PetsBest, and this has been talked about in the past, the capital intensity of that business is higher. And so as that business's growth rate begins to diminish, and then, ultimately, it goes into secular decline, it frees up capital.

Fawwad Qureshi: So the way we look at it.

Fawwad Qureshi: The excess capital or the over capitalization with the insurance entities, it's driven by two things one is as the business continues to grow up from a subscription perspective, we contribute to that that pool of capital and then the other is the dynamic of pets best Rolling off so pets best and it's been talked about in the past the capital intensity of that business is.

Fawwad Qureshi: So a good portion of the $24 million increase in capital, again, above the minimum requirement, was due to that dynamic. And we look at it as positive for a couple of reasons. I think one, it gives us the capital to add more policies. So we now have the financial wherewithal to grow the subscription business where we see opportunities that meet our guardrails. The second is, obviously, it contributes to the RBC requirement. You know, those requirements are things that we pay close attention to; we've had very productive conversations with New York DFS. And then the third is a dynamic that I think we've all seen over the last year.

Fawwad Qureshi: Things that we pay close attention to we've had very productive conversations with new.

Fawwad Qureshi: And that's just that interest rates continue to remain elevated, at least where they were from a historical perspective. So now that is now generating cash. And as you saw in Q4, we took an ordinary dividend that was interest accrued on that cash. So there's utility in us having that. We've continued to discuss with New York DFS. I think they're open to the idea of us continuing to take ordinary dividends. So certainly, I would expect that to grow in proportion to the growth rate of our business, but the capital intensity of it because of the best best roll-off will diminish.

Fawwad Qureshi: Certainly I would expect that to grow in proportion to the growth rate of our business, but the capital intensity of it because of the pets best Roelof will diminish.

Speaker Change: Thank you.

Katie Sakys: The next question comes from Katie Sackey with Autonomous Research. Please go ahead. Hi, good evening.

Katie Sakys: Hi, good evening, and thank you. I want to start with you and Daryl, both congratulations on your respective new roles.

Katie Sakys: I want to clarify some things on the invoice ratio first, across both subscription and other PEPs. I think about a year ago, we were talking about somewhere in the field of one point of adverse development on that invoice ratio, and I just wanted to check in with you guys to see if there's any similar degree of revision included in this quarter's. Invoice ratio, and more broadly, if you could give us some color as to how you're feeling about the past year's loss picks holding up, that would be much appreciated.

Fawwad Qureshi: Sure, I want to make sure that we got the question right, so we can answer it. I think you're talking about the loss ratio and the trend. I think one of the things I would refer back to what we said about subscription; I think one of the things we didn't talk about is the loss ratio was elevated in Q1 related to the other business related to FETSBEST. And that's due to the same phenomenon that we've been seeing within our subscription business where rates are now being pushed through.

Fawwad Qureshi: And that's now, I think, manifest in a higher loss ratio from FETSBEST's perspective. But the nature of our agreement is that it's less sensitive. So from a Trupanion perspective, we're less concerned about that. So I would say that the increase in loss ratio that they're seeing is effectively the same thing that we saw. And we're putting prices through as a result in response to

Margaret Tooth: And Katie, just in terms of our reserves and our ABR, we did release a little reserve in the quarter just related to the much older claims that we've been holding back reserves for. The beauty of having the vet direct pay model where we pay those invoices directly is that we see a lot less development in those over time, and we're able to release that reserve, which I think could be where your question was aiming. Yeah, and if it's helpful.

Fawwad Qureshi: Yeah, and if it's helpful, I can give you a little bit more context specific to the reserve. So if you look at the reserve as a percent of revenue across the total book, it was down, it was down sequentially from 21.4 to 28.3. But if you look at it year over year, a year ago, it was 18.8. So there were some elevated claims that were paid from from elevated claims in Q4 that were paid in Q1. So we felt comfortable bringing the reserve down, but you index that 18.8 versus 20.3 with a 5.6% increase in pet count. So we feel relatively good that the reserve and revisions to it are unchanged.

Katie Sakys: Okay, yeah, thank you. That's a helpful clarification.

Fawwad Qureshi: And then, you know, we'll be turning to growth metrics. You know, I think the deceleration in Other pet enrollment is to be expected in the context of the Pets Best business agreement changes. But I was just wondering, are there any positive growth trends in that segment that are being masked by the Pets Best shift?

Fawwad Qureshi: I think the only thing I would refer to there is probably ARPU. I mean, back to my earlier comments that, you know, they're seeing increased ARPU and the ability to pass on prices to consumers. So I would say it's very similar to what we're seeing. If you're asking about the overall adjusted operating margin change and why it went down, there are two reasons for that. One is that we're now under a new agreement, and that new agreement has different revenue tiers.

Fawwad Qureshi: And so as the business is declining, we're no longer kicking in those revenue tiers. And the other, as I mentioned earlier, was higher fixed expenses related in part to remediation and some of the technology costs. If you look at those in conjunction, that's the driver, so to the 1.6% that we saw in Q1. I would expect, if you were thinking about it going forward, that that is the new normal in terms of profitability of that business; somewhere between 1.5% and 1.7% is what we're thinking. Forecast for the balance of the year. I hope that's helpful.

Wilma Carter Jackson Burdis: The next question comes from Wilma Burdis with Raymond James.

Fawwad Qureshi: Hey, good evening, and congratulations to Margie and also to Daryl. I have a couple quick questions for you guys. First, can you talk about the trajectory of adjusted operating income throughout 2024? Trupanion appears on track for $43 million in the first half of the year, which implies about $70 million of Adjusted Operating Income in the second half of the year to hit the guidance of $100 to $120 for $24. Can you just talk about the pieces to get there to that higher level in the second half of the year? Thank you.

Wilma Carter Jackson Burdis: Sure, the primary driver is pricing and pricing flowing through the book. So if you compare, and just look at adjusted offering margin, it's up about, you know, in the range of 200 to 450. And that is entirely driven by margin expansion through pricing. I would expect sequential improvement, I think, to my earlier comment, Q1 to Q2, largely flat from a margin perspective, and then acceleration in the back half of a year.

Fawwad Qureshi: Okay, thank you. And then the second question.

Wilma Carter Jackson Burdis: Can you talk about the ARPU, the higher ARPU in the other business? Should we expect a similar growth rate in pricing going forward? And if you look at contribution,

Fawwad Qureshi: Yeah, if you look at contribution to revenue, so the 15.2% year over year increase in the other business, almost all of it was ARPU. I think about 14, 13.9% was ARPU related. So we're getting a very small amount through the pet months because these are annual contracts. Total enrollments are down, but we'll see that trail off. So I would say that's largely driven by our

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