Q2 2024 Trupanion Inc Earnings Call

Rachel Smith: © BF-WATCH TV 2021 © BF-WATCH TV 2021

Operator: Good day, and welcome to the Trupanion second quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the call over to Gil Melchior, Director of Investor Relations. Please go ahead.

Rachel Smith: After today's remarks, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the call over to Gil Melchior Director of Investor Relations. Please go ahead good afternoon.

Gil Melchior: Good afternoon, and welcome to Trupanion's second quarter 2024 financial results conference call. Participating on today's call are Margaret Tooth, President and Chief Executive Officer, and Fawwad Qureshi, Chief Financial Officer.

Speaker Change: Welcome to <unk> second quarter 'twenty 'twenty four financial results conference call participating on today's call are muggy tube, President and Chief Executive Officer, and for a Crazy Chief Financial Officer for ease of reference. We've included a slide presentation to accompany today's discussion, which will be made available on our investor Relations website, and our quarterly earnings tab.

Gil Melchior: 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 will 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, pricing, and veterinary industry inflation, and our ability to remediate our material weaknesses. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed.

Gil Melchior: 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. Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including, without limitation, the cost of paying veterinary invoices, variable expenses, fixed expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA, and free cash flow.

Speaker Change: Before we begin please be advised that our remarks today will 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 pricing on veterinary industry inflation, and our ability to remediate our material weaknesses.

Gil Melchior: When we use the term adjusted operating income or margin, it is intended to refer to a non-GAAP operating income or margin before new pet acquisition and development expenses. 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 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.

Speaker Change: These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed.

Speaker Change: 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.

Speaker Change: Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation cost of paying veterinary invoices variable expenses fixed expenses adjusted operating income acquisition cost internal rate of return adjusted EBITDA and free cash flow.

Speaker Change: We use the term adjusted operating income pull of margin. It is intended to refer to our non-GAAP operating income or margin before new pet acquisition and development expenses.

Speaker Change: 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 another 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 with.

Marty: All of which can be found in today's press release on <unk> 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 <unk> Investor Relations website. A replay will also be available on the site with that I'll hand, it over to Marty.

Gil Melchior: 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 it over to Margi.

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

Marty: Thank you Gail and good afternoon, everyone.

Marty: After over a decade with the company I'm honored to join you today for my first call as the CEO of Japan, and I look forward to spending time with many of you at our upcoming Investor Day in September where I'll be joined by leaders from across the business for an extensive Q&A session now.

Margaret Tooth: After over a decade with the company, I am honoured to join you all today for my first call as the CEO of Trupanion. I look forward to spending time with many of you at our upcoming Investor Day in September, where I'll be joined by leaders from across the business for an extensive Q&A session. Now, moving on to our results.

Margaret Tooth: Quarter 2 was a strong quarter for the company, as shown in our key financial markers. Our subscription business remains the financial engine behind our business, and in the quarter, revenue from this segment increased by 20%. Breaking down the components of this growth, ARPU increased by 11% year-over-year, a record pace since we became publicly traded 10 years ago, and pet count increased by 8%. Within our core Trupanion brand, ARPU expanded even faster at 13% year-over-year.

Speaker Change: Now moving onto our results.

Speaker Change: T was a strong quarter for the company as shown in all key financial markets. Our subscription business remains the financial engine behind our business and in the quarter revenue from this segment increased by 20%.

Speaker Change: Breaking down the components of disgrace opex increased by 11% year over year, a record pace. Since we became publicly traded 10 years ago pet counts increased by 8%. We then I'll call Japan named brands also have expanded even faster at 13% year over year.

Margaret Tooth: Modulating between growth and pricing is a focus of the team as we continue the work to achieve our target value proposition of 71% in our subscription business. In our large and underpenetrated market, adding and helping more pets remains a guiding mandate. However, we will only do so when we're confident that we can deliver on the member experience for which Trupanion is known.

Speaker Change: 18 between greatest and pricing is a focus of the team as we continue to work to achieve our target value proposition of 71% and our subscription business.

Speaker Change: In a large and underpenetrated market, adding and helping more pets remains a guiding mandate. However, we will only do say when we're confident that we can deliver on the member experience for which to pinion is known.

Margaret Tooth: In the quarter, we had approximately 24% of pricing rolling through our book, and veterinary inflation remained consistent with our expectations at 15%. Against this backdrop, retention in the quarter was strong, with the average pet staying with us for over 60 months. This also includes our lower coverage and thus lower retention products.

Speaker Change: In the quarter, we had approximately 24% pricing rolling through our book and veterinary inflation remain consistent with our expectations at 15%.

Speaker Change: Against this backdrop retention and of course, it was strong with the average pet staying with us for over 60 months. It's also includes a lover coverage and thus lower retention products, we're pleased with eats yourselves.

Margaret Tooth: We're pleased with these results, a reflection of our efforts to communicate our value proposition and improve upon our member experience. Within our core Trupanion product, approximately half of our Trupanion members have received a pricing increase of 20% or more over the last 12 months. However, retention of this cohort continued to perform well in the quarter and was up both sequentially and year-over-year.

Speaker Change: Flexion of our efforts to communicate our value proposition and improve upon our member experience.

Speaker Change: We then I'll call, Japan M products approximately half of our two panel members have received a pricing increase of 20% or more over the last 12 months retention of this cohort continue to perform well in the quarter and was up sequentially and year over year. These results demonstrate our focus on the member experience and early benefits from the migration.

Margaret Tooth: These results demonstrate our focus on the member experience and early benefits from the migration to our new technology and automation platforms. This new claims administration system has been in development for some time, and we're pleased to see some initial benefits leading to a higher proportion of our claims being paid directly to the veterinarian, and with record reimbursement timelines for those being paid in the more traditional way. We expect to provide you with more details on these investments, the early performance metrics, and our ongoing member experience roadmap at our upcoming Investor Day in September.

Speaker Change: So a new technology and automation platforms.

Speaker Change: This new claims administration system has been in development for some time and we're pleased to see some initial benefits leading to a high proportion of all claims being paid directly to the veterinarian and with record reimbursement timelines today as being paid in a more traditional way.

Speaker Change: We expect to provide you with more details on these investments the early performance metrics and the ongoing member experience roadmap at our upcoming Investor Day in September.

Margaret Tooth: We recently received meaningful rate approvals in two of our largest states that are beginning to take effect. While these new rates will take time to run through our book, they should enable us to increase acquisition spending and pet growth in these regions now that we've re-established pricing that allows for estimated returns between 30 to 40% on new pet acquisition. Adjusted operating income represents the funds we have to invest in growth, and in the quarter, these funds grew 48% year over year.

Speaker Change: We recently received a meaningful raise approvals in two of our largest states that are beginning to take effect. While these new rates will take time to run through all book they should enable us to increase acquisition spending in pet growth in these regions now that we've reestablished pricing that allows for estimated returns between 30% to 40% on new pet acquisition.

Speaker Change: <unk>.

Speaker Change: Adjusted operating income represents the funds, we have to invest in growth and in the quarter. These funds grew 48% year over year.

Margaret Tooth: Adjusted operating income for our subscription segment grew even faster at 63% and represents an acceleration from the 55% growth we reported in the first quarter. As a percent of revenue, subscription adjusted operating margin expanded 280 basis points to 11% in the quarter, marking progress towards our goal of 15% adjusted operating margin. As for what we'll communicate, we remain on track to hit this target in the fourth quarter.

Speaker Change: Adjusted operating income for our subscription segment grew even faster at 63% and represents an acceleration from the 55% growth we reported in the first quarter as a percent of revenue subscription adjusted operating margin expanded 280 basis points to 11% in the quarter marks probably faster.

Speaker Change: Towards that goal of 15% adjusted operating margin as.

Speaker Change: That's about what we'll communicate we remain on track to hit that target in the fourth quarter.

Margaret Tooth: Operating our business within our target margin profile and IRR guardrails ensures the sustainability of our business, positioning us to help pets, pet parents, and veterinarians for decades to come. The health of the veterinary profession remains critical to our success. Two years ago, we highlighted the growing burnout of veterinarians and their teams due to the rising cost of care, staff shortages, and overwork. At the time, we noted the need for 30-50% price increases, an estimate that has since been validated by veterinary industry inflation. Our members put their trust in Trupanion 24x7, and the value proposition of our core product is designed with a unique aged enrolment pricing approach.

Speaker Change: Operating on business within our target margin profile in Iraq, Guardrails and shows the sustainability of our business positioning us to help pets pet parents and veterinarians for the decades to come.

Speaker Change: The health of the veterinary profession remains critical to our success two years ago, we highlighted the growing by an average of veterinarians and their teams due to the rising cost of care staff shortages and over whack.

Speaker Change: At the time, we noted the need for 30% to 50% pricing increases and estimate that has since been validated by veterinary industry inflation.

Speaker Change: All members put that trust in Japan in 24, seven and the value proposition of our core product is designed with a unique agent enrollment pricing approach. This removes the need for guaranteed annual rate increases simply because our patents had a bad day.

Margaret Tooth: This removes the need for guaranteed annual rate increases simply because a pet has had a birthday. We've created a solution that's designed to last, that can be relied on with the same dependability as our pets provide for us. Yet this past quarter, recent reports from across the pet insurance landscape demonstrate that not every insurer can or will be there in the same way. The rate of veterinary inflation has tested the most established of players, and now over 100,000 pets are without coverage due to mispricing. This outcome is very unfortunate, both for the pets without coverage and the industry overall. It underscores the importance of Trupanion's approach to lifetime coverage and our simple, sustainable cost-plus model.

Speaker Change: We've created a solution that's designed to law that can be relied on it with the same dependability as our pets provide to US yeah. This past quarter recent reports from across the pet insurance landscape demonstrate that not every insurer can oh, well won't be there in the same way the race in veterinary inflation has tested the most established players and now.

Speaker Change: 100000, pets or without coverage due to mispricing. This outcome is very unfortunate, but he said the pet's without coverage and the industry overall it underscores the importance of Japan enterprises, a lifetime coverage and our simple sustainable cost plus model.

Margaret Tooth: Unlike competitors who attract customers with low prices but limited coverage, we prioritize delivering the best value by offering comprehensive coverage and higher claims payouts. This approach ensures pets receive the care they need, resulting in higher customer satisfaction and exceptional lifetime value. By adding a fixed margin to our comprehensive plans, we maintain a sustainable business model with long-term benefits for our members, their pets, and the veterinary community. However, with low single-digit penetration across our addressable markets, we have a long way to go to make the difference we aspire to.

Speaker Change: Unlike in past it tends to attract customers with lower prices for limited coverage, we prioritize delivering the best value by offering comprehensive coverage on higher claims paths. This approach ensures pets received the care they need resulting in higher customer satisfaction and exceptional lifetime value.

Speaker Change: By adding a fixed margin to our comprehensive plans, we maintain a sustainable business model with long term benefits for our members that pets and the veterinarian community.

Speaker Change: With low single digit penetration across our addressable markets, we have a long way to go to make the difference we have spicy as margins move sequentially close to talk all of 15%. We're pleased to be turning our attention back to grace.

Margaret Tooth: As margins move sequentially closer to our goal of 15%, we're pleased to be turning our attention back to growth. With that in mind, moving back to the second quarter, we acquired 64,300 pets at an estimated internal rate of return of 37%. This represents a 15% decrease in new pets year-over-year on a reduction in pet acquisition spend of 17%.

Speaker Change: We that's in mind meeting back to the second quarter, we acquired 64300 pads as an estimated internal rates of return of 37%. This represents a 15% decrease in new pet theory of a year on a reduction in pass acquisition spend of 17%, while we're not yet maximizing our use of adjusted opera.

Margaret Tooth: While we're not yet maximizing our uses of adjusted operating income for growth, our margin expansion afforded us the opportunity to deploy approximately 6% more impact versus Q1. Our newer initiatives, including our Powered By suite of products with Chewy and Aflac, our medium and low ARPU products Firkin and PHI Direct, and our products in continental Europe comprised approximately 17% of our gross new pet ads in the quarter. We deployed $1.8 million against these opportunities, just 11% of our pet acquisition spend, a conservative amount of capital given these products are early in the life cycle and subscale.

Speaker Change: Income for Grace a margin expansion afforded us the opportunity to deploy approximately 6% more impact versus Q1.

Speaker Change: Our newer initiatives, including our powered by a suite of products with chewy and Aflac on medium and low L. P products fucking M. P H, our direct and our products in Continental Europe comprised approximately 17% of our gross new pet ads in the quarter, we deployed $1 8 million against these opportunities just 11%.

Speaker Change: Sent about pet acquisition spend a conservative amount of capital given these products are early in their lifecycle and subscale.

Margaret Tooth: Our continued discipline on acquisition spending, coupled with our increase in margin, led to $4 million of free cash flow in the quarter. In summary, we're pleased with the quarter. The team's hard work and solid execution is showing good results, which bodes well for our margin and free cash flow goals. With less than 4% of pets insured in the US, Puerto Rico, and Canada, and an equally low number across most of Europe, our mandate remains to enroll more pets.

Speaker Change: Our continued discipline on acquisition spending coupled with our increase in margin led to $4 million of free cash flow in the quarter.

Speaker Change: In summary, we're pleased with the quarter the team's hard work and solid execution is showing good results, which bodes well for our margin and free cash flow goals with less than 4% of pets insured in the U S, Puerto Rico, and Canada, and an equally low number across most of Europe, a mandate remains jimbo more pets, we will continue to do say pre.

Margaret Tooth: We will continue to do so prudently, gradually scaling up our acquisition spend and prioritizing accordingly across cohorts as margins expand. Now, before I hand over to Fawwad, I'd like to briefly touch on an important update to underwriting factors in the Property and Casualty Risk-Based Capital Calculation that was recently approved by the National Association of Insurance Commissioners, the NAIC. These updates significantly decreased the capital intensity of our balance sheet.

Speaker Change: <unk> gradually scale up our acquisition spend and prioritizing accordingly across cohorts as margins expand.

Speaker Change: Now before I hand over to you for what I'd like to briefly touch on an important update to underwriting factors in the property and casualty risk based capital calculation that were recently approved by the National Association of insurance Commissioners the N a I see.

Speaker Change: These updates significantly decrease the capital intensity of our balance sheet well. They patched insurance continues to be subject to the same risk based capital requirement factors as special property within this update pet insurance was designated as its own line of business.

Margaret Tooth: Although Pet Insurance continues to be subject to the same risk-based capital requirement factors as Special Property, within this update, Pet Insurance was designated as its own line of business. After more than two decades of discussions to recognize Pet Insurance in its own right, this is a big step forward for Trupanion and the category at large. With that, I'll hand over to Fawwad to provide a detailed overview of our Q2 results.

Speaker Change: After more than two decades of discussions to recognize passenger <unk> in its own right. This is a big set forth that your opinion and the Kashi Grand Lodge.

Speaker Change: With that I'll hand over to for one to provide a detailed overview of our Q2 results.

Fawwad Qureshi: Thanks, Margie, and good afternoon, everyone. Let me begin by congratulating Margie on assuming the role of CEO of Trupanion. I'm thrilled to be working with Margie to lead the company into our next phase of growth. Our mission to help pet parents and the opportunity to work with Margie are the reasons I joined the company.

Speaker Change: Thanks, Marty and good afternoon, everyone.

Marty: Let me begin by congratulating Marty on assuming the role of CEO of Japan, I'm thrilled to be working with Mark <unk> to lead the company into our next phase of growth our mission to help pet parents and the opportunity to work with Marquis are the reasons I joined the company with that I will turn to our Q2 results as well as provide our outlook for the third quarter and full year 2012.

Fawwad Qureshi: With that, I'll turn to our Q2 results, as well as provide our outlook for the third quarter and full year 2024. It was another strong quarter, with revenue and adjusted operating income coming in ahead of expectations. Total revenue for the quarter was $314.8 million, up 16% year-over-year. Within our subscription business, revenue was $208.6 million, up 20% year-over-year. Total subscription pets increased 8% year-over-year to 1,020,000 pets as of June 30th. This includes approximately 46,000 pets in Europe which are currently underwritten by third parties.

Speaker Change: For it was another strong quarter with revenue and adjusted operating income coming in ahead of expectations total revenue for the quarter was 314.8 million up 16% year over year within our subscription business revenue was $208 6 million up 20% year over year.

Speaker Change: Total subscription pets increased 8% year over year to 1.020 million pets as of June 30th. This includes approximately 46000 pets in Europe, which are currently underwritten by third parties.

Fawwad Qureshi: Average monthly retention for the trailing 12 months was 98.34%, down versus the second quarter last year. However, on a trailing three-month basis, retention was up from the first quarter of this year. Total monthly average revenue per pet for the quarter was $71.72, up 11.4% over the prior year period. The subscription business cost of paying veterinary invoices was $154.6 million, resulting in a value proposition of 74.1% and reflects a $290 basis point improvement over the prior year period.

Speaker Change: Average monthly retention for the trailing 12 months was 98.34% down versus the second quarter last year on a trailing three month basis retention was up from the first quarter of this year total monthly average revenue per pet for the quarter was $71.72 up 11, 4% over the prior year period.

Speaker Change: The subscription business cost of paying veterinary invoices was $154 6 million, resulting in a value proposition of 74.1% and reflects a 290 basis point improvement over the prior year period. The primary driver of this improvement was margin expansion from our ongoing pricing actions the quarter also benefited from prior period.

Fawwad Qureshi: The primary driver of this improvement was margin expansion from our ongoing pricing action. The quarter also benefited from prior period development of 2.1 million, or approximately 100 basis points of revenue. Our target value proposition for our subscription business remains 71 percent, and we expect to achieve this in the fourth quarter.

Speaker Change: <unk> of $2 1 million or approximately 100 basis points of revenue our target value proposition for our subscription business remains 71% and we expect to achieve this in the fourth quarter as a percentage of subscription revenue variable expenses were nine 5% down from 9.7% a year ago fixed expenses as a percentage of.

Fawwad Qureshi: As a percentage of subscription revenue, variable expenses were 9.5 percent, down from 9.7 percent a year ago. Fixed expenses as a percentage of revenue were 5.3 percent, up from 5.1 percent in the prior year period. Our remediation work on material weaknesses is ongoing, and this increase in spending continues to be in line with our expectations.

Speaker Change: New or five 3% up from 5.1% in the prior year period, our remediation work on material weaknesses is ongoing and this increase in spending continues to be in line with our expectations. After the cost of paying veterinary invoices variable expenses and fixed expenses, we calculate our adjusted operating income.

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 $23 million, an increase of 63% from last year. Subscription adjusted operating margin was 11% of subscription revenue. This is up from 8.2% in the prior year quarter and represents approximately 280 basis points of year-over-year margin expansion as pricing takes hold. Now I'll turn to our other business segment, which is comprised of revenue from other products and services that generally have a B2B component and a lower margin profile than our subscription business.

Speaker Change: Our subscription business delivered adjusted operating income of 23 million, an increase of 63% from last year subscription adjusted operating margin was 11% of subscription revenue. This is up from 8.2% in the prior year quarter and represents approximately 280 basis points of year over year margin expansion is pricing.

Holt: Holt now I'll turn to our other business segment, which is comprised of revenue from other products and services that generally have a BTB component at a lower margin profile than our subscription business. Our other business revenue was $106 2 million for the quarter, an increase of 9% year over year. The decelerating growth within this segment as expected as one of our park.

Fawwad Qureshi: Our other business revenue was $106.2 million for the quarter, an increase of 9% year-over-year. However, decelerating growth in this segment is expected as one of our partners, PetsBest, continues to enroll pets with their new underwriter. Adjusted operating income for this segment was $1.8 million, a decrease of 32% from last year driven by a lower gross margin. This is consistent with our revised agreement with Petsbest, which has lower capital requirements and a different margin profile.

Speaker Change: As pets best continues to enroll pets with their new underwriter.

Holt: Adjusted operating income for the segment was 1.8 million a decrease of 32% from last year driven by a lower gross margin. This is consistent with our revised agreement with Pet's, best which has lower capital requirements and a different margin profile in total adjusted operating income was $24 8 million in Q2 up 48% from Q2 last year.

Fawwad Qureshi: In total, adjusted operating income was $24.8 million in Q2, up 48% from Q2 last year and ahead of our expectations. In Q2, our higher-margin subscription business comprised approximately 93% of our adjusted operating income. This is up from 84% for the full year in 2023. As Margie mentioned earlier, we acquired approximately 64,300 new subscription pets in the quarter and deployed 15.8 million to do so, excluding the approximately 3,600 new European pets that are underwritten by a third party. This translated into an average pet acquisition cost of $231 per pet in the quarter, slightly down from $236 in the prior year period.

Mark: And ahead of our expectations in Q2, our higher margin subscription business comprised approximately 93% of our adjusted operating income. This is up from 84% for the full year in 2023 as Mark you mentioned earlier, we acquired approximately 64300, new subscription pets in the quarter and deployed 15.8.

Speaker Change: To do so excluding the approximate 3600, new European pets that are underwritten by a third party. This translated into an average pet acquisition cost of $231 per pad in the quarter slightly down from $236 in the prior year period. The estimated internal rates of return on the spend was 37% in the quarter.

Fawwad Qureshi: The estimated internal rates of return on this spend were 37% in the quarter, in line with our targets of 30% to 40%. We also invested $1.7 million in the quarter in development costs, which relate primarily to our expansion efforts in Europe. Stock-based compensation expense was $8.4 million during the quarter.

Speaker Change: <unk> in line with our target of 30% to 40%. We also invested $1 7 million in the quarter and development costs, which relate primarily to our expansion efforts in Europe.

Speaker Change: Based compensation expense was $8 4 million during the quarter as a result, net loss was $5 9 million or a loss of 14 cents per basic and diluted share compared to a loss of $13 7 million or a loss of 33 cents per basic and diluted share in the prior year period in terms of cash flow operating cash flow was $6 9 million in the quarter compared.

Fawwad Qureshi: As a result, the net loss was $5.9 million, or a loss of $0.14 per basic and diluted share, compared to a loss of $13.7 million, or a loss of $0.33 per basic and diluted share, in the prior year period. In terms of cash flow, operating cash flow was $6.9 million in the quarter compared to a negative $3.4 million in the prior year period. Capital expenditures totaled $2.9 million, down from $4.7 million in Q2 last year.

Speaker Change: To a negative $3 4 million in the prior year period capital expenditures totaled $2 9 million down from $4 7 million in Q2 last year as a result free cash flow was 4 million a 12.1 million improvement from the prior year's second quarter.

Fawwad Qureshi: As a result, free cash flow was $4 million, a $12.1 million improvement from the prior year's second quarter. As we mentioned in our last earnings call, our free cash flow is seasonal, with the majority typically generated in the second half of the year. So we are particularly pleased with our execution this quarter, achieving the highest Q2 free cash flow since the company went public. On our third-quarter 2023 earnings call, we introduced an annual free cash flow target of 2.5% of revenue.

Speaker Change: As we mentioned in our last earnings call. Our free cash flow is seasonal with the majority typically generated in the second half of the year. So we are particularly pleased with our execution this quarter, achieving the highest Q2 free cash flow since the company went public.

Speaker Change: On our third quarter 2023 earnings call, we introduced an annual free cash flow target at 2.5% of revenue I'm pleased to report that we are making great progress towards this goal and have now generated $23 9 million of free cash flow over the last four quarters. This compares to a negative $31 1 million in the previous four quarters and.

Fawwad Qureshi: I am pleased to report that we are making great progress towards this goal and have now generated $23.9 million of free cash flow over the last four quarters. This compares to a negative $31.1 million in the previous four quarters and represents an improvement of $55 million. Turning to the balance sheet, we ended the quarter with $277.2 million in cash and short-term investments. Outside of our insurance entities, we held $33.2 million in cash and short-term investments, with an additional $15 million available under our credit facility.

Zentz: Zentz, an improvement of $55 million.

Speaker Change: Turning to the balance sheet, we ended the quarter with $277 2 million in cash and short term investments outside of our insurance entities, we held $33 2 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 $263 million of capital surplus at our insurance subsidiaries, which was $130.3 million more than the estimated risk-based capital requirement of $132.7 million. Excess capital has increased by $66.2 million year-to-date due to our growth and our other business slowing, as well as recently approved changes to underwriting risk factors used in the calculation of risk-based capital requirements by the NAICS. We expect to discuss these changes in more detail during our upcoming Investor Day. Now, I will now turn to our retail business.

Speaker Change: At the end of the quarter, we maintained 263 million of capital surplus at our insurance subsidiaries, which was 130.3 million more than the estimated risk based capital requirement of 132.7 million excess capital has increased by $66 2 million year to date due to our growth in our other business flowing as well as <unk>.

Speaker Change: Suddenly approve changes to underwriting risk factors used in the calculation of risk based capital requirements by the NTIC, we expect to discuss these changes in more detail during our upcoming Investor day.

Speaker Change: I will now turn to our outlook, we are updating our full year revenue guidance, which is now expected to be in the range of 1.263 billion to 1.279 billion or 15% growth at the midpoint. This takes into account our over performance in first half.

Fawwad Qureshi: We're updating our full-year revenue guidance, which is now expected to be in the range of $1,263,000,000 to $1,279,000,000, or 15% growth at the mid-term. This takes into account our overperformance in the first half. We are narrowing the range for subscription revenue, which is now expected to be between $850 million and $858 million. The midpoint of the range is increasing slightly and represents 20% growth year-over-year. We are also narrowing the range of our Adjusted Operating Income guidance, now expected to be between $108 million and $115 million. We are raising the midpoint of the range, which represents 33% year-over-year growth.

Speaker Change: We are narrowing the range for subscription revenue, which is now expected to be between $850 million and $858 million the midpoint of the ranges, increasing slightly and represents 20% growth year over year.

Speaker Change: We are also narrowing the range of our adjusted operating income guidance now expected to be between 108 million and 115 million, we are raising the midpoint of the range, which represents 33% year over year graph.

Fawwad Qureshi: We continue to expect that our subscription margin will increase as we move through the year and build back to a 15% adjusted operating margin in Q4 of this year. For the third quarter of 2024, total revenues are expected to be in the range of $319 million to $324 million, representing 12% year-over-year growth at the midpoint. Subscription revenue is expected to be in the range of $217 million to $219 million, or 19% year-over-year growth in the mid-term.

Speaker Change: We continue to expect that our subscription margin will increase as we move through the year and build back to a 15% adjusted operating margin in Q4 of this year for.

Speaker Change: For the third quarter of 2024 total revenues are expected to be in the range of 319 million to $324 million, representing 12% year over year growth at the midpoint.

Speaker Change: Subscription revenue is expected to be in the range of 217 million to $219 million or 19% year over year growth at the midpoint total adjusted operating income is expected to be in the range of 27 million to $29 million.

Fawwad Qureshi: Total adjusted operating income is expected to be in the range of $27 million to $29 million. As a reminder, our revenue projections are subject to conversion rate movements, predominantly between the U.S. and Canadian currencies. For the third quarter and full year of 2024, we used a 73% conversion rate in our projections, which was the approximate rate at the end of June.

Speaker Change: As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U S and Canadian currencies for the third quarter and full year of 2024, we used a 73% conversion rate in our projections, which was the approximate rate at the end of June.

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

Speaker Change: With that I'll hand, it back to Marty.

Margaret Tooth: Before we take our first question, we'd like to invite you to our upcoming investor day on September 18th at our headquarters in Seattle. This annual event is a great opportunity for investors to hear directly from over 20 team members leading the execution of our 60-month plan in an open Q&A forum. We will provide updates across each of our P&Ls and dive into progress across key metrics such as retention rates, pricing, pet growth, hospital activity, and PAC. The team and I look forward to seeing many of you there. More details, including registration, can be found on our Investor Relations website. After that, we'll open it up for questions. We will now begin the test.

Marty: Thank you for what before we take our first question wed like to invite you to join us for our upcoming Investor Day on September 18th at our headquarters in Seattle.

Speaker Change: This annual event is a great opportunity for investors to hear directly from Eva 20 team members, leading the execution of our 60 month plan and an open Q&A Forum, we will provide updates across each of our P&L and dive into progress across key metrics, such as retention rates pricing pet Grace hospital activity and pack the T Mo.

Speaker Change: Look forward to seeing many of you there more details including registration can be found on our Investor Relations website.

Speaker Change: With that well open up for questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key.

Speaker Change: We will now begin the question and answer session.

Speaker Change: A question you May Press Star then one on your Touchtone phone.

Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys in the interest of time, please limit yourself to one question and one follow up.

Operator: In the interest of time, please limit yourself to one question and one follow-up. At this time, we'll pause momentarily to assemble a roster. Our first question comes from Maria Ripps from Canaccord. Please go ahead.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: Yeah.

Speaker Change: Our first question comes from our Europe's from Canaccord. Please go ahead.

Margaret Tooth: Great, thank you so much for taking my questions, and Margie, congrats. So now with the rate approval in California, can you maybe share a little bit more color around your plans to expand your customer acquisition efforts in your core geographies? And are there any sort of new strategies or new techniques that you may be planning to deploy now? And when should we see these efforts impacting the overall subscriber count?

Speaker Change: Great. Thank you so much for taking my questions and that market congrats.

Canaccord: So no now where do we need approval in California can you maybe share a little bit more color around your plans to expand your customer acquisition efforts in sort of in your core geographies and are there any sort of new strategies and new techniques achieved maybe planning to deploy now and when should we see sort of this efforts impact.

Speaker Change: And your overall subscriber count.

Margaret Tooth: Yeah, thank you, Maria. So, to start with, in terms of California, obviously, very pleased to get those two big state approvals during the quarter. That really does expand our overall addressable market now to over 85 percent, which is exactly what we were hoping for. We've stressed repeatedly that for us to be able to grow and put our foot on the gas in any of the different markets and cohorts we work with, it's really important that we have that margin strength, and we're priced appropriately for sustainable growth. We now feel that way for most of the country, as I mentioned, and most of North America.

Maryann: Yeah. Thank you maryann.

Speaker Change: So to start with in terms of California, obviously very pleased to get those cheesecake state approvals during the quarter that really does expand the overall market of all our addressable market now to over 85%, which is exactly what we were hoping for we have stressed repeatedly that philosophy I wish in Carrabba's and put our foot on the gas in any of the Jack up market and kind of what's your what quite as radiation.

Speaker Change: Show that we have that margin strength, we're priced appropriately for sustainable growth, we now feel that way for most of the country as I mentioned in my most of North America that we're looking forward to expanding gradually into California. The reality of that spend to the second part of your question really leans into ensuring that we have both a strong lead need development funnel, which is.

Margaret Tooth: So, we're looking forward to expanding gradually into California. The reality of that spend, to the second part of your question, really leans into ensuring that we have both a strong lead development funnel, which is really primarily from the VET channel, and then looking at the conversion side of the funnel, which is pulling people through in terms of education, making sure they understand why Trupanion and really reinforcing that sales point. So, for us, what we're looking at is expanding on the good lead development that's been happening over the last few weeks, not just in California but across the market, and then starting to pull more of those people through the funnel.

Speaker Change: Really primarily from the bad channel and then looking at the conversion side of the funnel, which is putting people through in terms of education, making sure. They understand why it's your opinion I'm really reinforcing that sales point say for US. We're looking at is expanding on the good lean development Thats been happening at the last few weeks are not just in California, but across the market and then starting to commoditize people through.

Margaret Tooth: I expect growth to start to pick up, like we've said before, very much in line with expectations towards the back half of this year. So, as we move into the summer months, as more people get their pets, they're out, they're thinking about pet health, we're starting to see that grow. So, I'd expect to see that growth really kind of predominantly show up in the back half of Q3, Q4, and then fully leading into next year as well. So, excited to see that coming through and really being able to put our foot on the gas a lot more, as we said, once we see that margin start to come back.

Speaker Change: The funnel I expect the growth to start to pick up like we've said before very much inline with expectations towards the back half of the she asked as we move into the they than the summer months as more people are getting that pets, they're out there thinking about pet health, we're starting to see that grow so I'd expect it to be really kind of predominantly show up in the back half of Q3.

Operator: All participants will be in listen only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero.

Operator: After today's remarks, there will be an opportunity to ask questions. If I ask a question, you may press star than one on your touchstone phone. To answer your question, please press star than two.

Speaker Change: Q4, and then floating eating and chat to next year as well. So we're excited to see that coming through and that really damaged preferred on the gas a lot more as we said once we see that margins start to come back.

Operator: Please note, this event is being recorded.

Gil Melchior: I would now like to turn the call over to Gil Melchior, Director of Investor Relations. Please go ahead. Good afternoon, and welcome to the Panion's second quarter, 2024 Financial Results Conference call.

Speaker Change: Got it that's that's very helpful. And then secondly can you maybe refresh us again on what's driving higher than expected other revenue and if it's still sort of largely driven by pets best can you maybe broadly without getting into a lot of specifics just broadly talk about sort of the relative economics of pets that you are acquiring now wishes are sort of why why you.

Fawwad Qureshi: Got it, that's very helpful. And then secondly, can you maybe refresh us again on what's driving higher than expected other revenue and if it's still sort of largely driven by PEDS-BEST? Can you maybe broadly, without getting into a lot of specifics, just broadly talk about sort of the relative economics of PEDS that you are acquiring now versus sort of why your previous agreement with PEDS-BEST?

Gil Melchior: Participating on today's call on Margie Tooth, President and Chief Executive Officer, and throughout Khajuria, Chief Financial Officer. For ease of reference, we've included a slight presentation to a company's today's discussion, which will be made available on our Investor Relations website and our quarterly earnings tab.

Speaker Change: Previous agreement with Pet's best.

Gil Melchior: Before we begin, please be advised that remarks today will contain forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. These include, but are not limited to, statements regarding our future operations, opportunities, and financial performance, pricing and veterinary industry inflation, and our ability to remediate our material weaknesses. 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 risk uncertainties are included in today's earnings release, as well as the company's most recent reports on forms 10K and 8K, followed with the Security and Exchange Commission.

Fawwad Qureshi: Sure. I can take that question.

Speaker Change: Alright, I can take that question the corner was from our other business for pets vessels largely similar to Q1. So what we talked about in Q1 was continued roll off of our pets. The revenue growth was driven by our AR.

Fawwad Qureshi: The quarter was from other businesses, or PetsBest was largely similar to Q1. So, what we talked about in Q1 was continued roll-off of pets. The revenue growth was driven by ARPU, and that repeated itself in Q2.

Speaker Change: That repeated itself in Q2, so the majority of the revenue increases related to that.

Fawwad Qureshi: So, the majority of the revenue increases related to ARPU, but that business continues to be in secular decline. Within our expectations, it's rolling off pretty much within our expected range. So, I would say we should continue to see that trend going forward. This was the first quarter on a year-over-year basis where we had single-digit revenue in that business. So, again, it speaks to the secular downturn as pets are falling off, and we expect that to continue.

Speaker Change: That business continues to be in secondary decline within our expectations is rolling off.

Margaret Tooth: Got it; that's very helpful. Thank you both.

Speaker Change: Pretty much within our expected range, so I would say.

Speaker Change: To see that trend going forward. This was the first quarter on a year over year basis, where we have single digit revenue in that business. So again it speaks to the the secular downturn as pets are rolling off.

Gil Melchior: Today's presentation contains references to non-gap financial measures that management uses to evaluate the company's performance, including without limitation, cost of paying veterinary invoices, variable expenses, fixed expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA, and free cash flow. When we use the term adjusted operating income for margin, it is intended to refer to a non-gap operating income or margin before new pad acquisition and development expenses. Unless otherwise noted, margins and expenses will be presented on a non-gap basis, which excludes stock-based compensation expense and depreciation expense.

Speaker Change: And we expect that to continue.

Speaker Change: Got it that's very helpful. Thank you both.

Speaker Change: Thank you.

Operator: The next question comes from Brandon Vasquez of William Blair. Please go ahead.

Speaker Change: The next question comes from Brandon Vazquez from William Blair. Please go ahead.

Margaret Tooth: Hi, everyone, thanks for taking the question. The first one, I think, if I heard you correctly, it said retention was up on a year-over-year basis and even sequentially. I'm kind of curious if you think that we have hit a trough here and we're kind of on the rebound back up, and we won't go backwards. I'd like your thoughts around that and really what's driving the improvement in retention despite the fact that you guys are still pushing through some decent price increases.

Brandon Vazquez: Hi, everyone. Thanks for taking my question first one I think if I heard you correctly, you said retention was up on a year over year basis, and even sequentially kind of curious if you think that we are.

Speaker Change: Our have hit a trough here and we're kind of on the rebound back up and we don't won't go backwards.

Gil Melchior: These non-gap measures are in addition to another substitute for measures of financial performance prepared in accordance with the US gap. Investors are encouraged to review the reconciliations of these non-gap financial measures to the most directly comparable gap results, which can be found in today's press release or on-to-premise investor relations website under the quarterly earnings tab.

Speaker Change: Curious your thoughts around that and really what's driving the improvement in retention. Despite the fact that you guys are still pushing through some decent price increases.

Margaret Tooth: Yeah, thank you for the question, Brandon. We are very pleased with retention. I think it's something that we've talked about now for the last 18 months, as one would expect with that high rate flow coming through. Those rates are driven through the cost of goods as we see higher inflation at every level.

Speaker Change: Yeah. Thank you for the question Brandon we all we are very pleased that retention I think it's been something that we've talked about now for the last 18 months as one would expect without high rate play coming through those rates are driven through cost of goods, because we used a higher inflation than foundry level and as a product that is something that we know our members are looking for that value. So in terms of attention a lot of what the teams have been.

Gil Melchior: Lastly, I would like to remind everyone that today's conference call is also available via webcast on-to-premise investor relations website. A replay will also be available on the site.

Margaret Tooth: And as a product, that's something that we know our members are looking for, that value. So in terms of retention, a lot of what the teams have been doing is leaning into our value proposition, leaning into the reason why people choose Trupanion to start with, helping to educate the veterinarians, which really does help when pets go back into the veterinarian and talk about their rate increases. For us, though, it's about ensuring that the largest bucket of members, so our largest member retaining group now is in the over 20% bucket.

Gil Melchior: With that, I'll hand it over to Margie. Thank you, Gail.

Margie Tooth: Good afternoon, everyone. After over a decade with the company, I am honored to join you all today for my first call as a CEO of Chewpanion. I look forward to spending time with many of you at our upcoming investor day in September, where I'll be joined by leaders from across the business for an extensive Q&A session. Now, moving on to our results. Quarter two was a strong quarter for the company, as shown in our key financial markets.

Speaker Change: Doing is leaning into our value proposition and leaning into the reason why people choose Japan into start with helping to educate Nevada true, which really does help when pets go back into the veterinarian and talk about that rate increases for us, though it's about ensuring that the largest bucket of members are our largest member retaining great now is in.

Speaker Change: Over 20% bucket. So this has evolved over the last 18 months as normal write his spine true and that's really where the focus has been across the business say from member communication dispatch area from a contact center point, Jamie, which we manage the claims that come through every element of the business has been ensuring that value proposition is.

Margaret Tooth: So this has evolved over the last 18 months as more and more rates have flowed through. And that's really where the focus has been across the business. So from a member communication perspective, from a contact center point of view, as we manage the claims that come through, every element of the business has been ensuring that value proposition is depicted in the right way.

Margie Tooth: Our subscription business remains the financial engine behind our business, and in the quarter, revenue from this segment increased by 20%. Breaking down the components of this growth, ARPU increased by 11% year-over-year, a record pace since we became publicly traded 10 years ago, and pet count increased by 8%. Within our quarter, Chewpanion brand, ARPU expanded even faster at 13% year-over-year. Modulating between growth and pricing is a focus of the team, as we continue the work to achieve our target value proposition of 71% in our subscription business.

Margaret Tooth: For us now, I think it's hard to say where we are in that journey, but I would tell you the sample size we have now is well over 55% of our members have received that high level of rate approval or rate increase. So at this point, we have some good data to suggest that we've gone through the bulk of that. And we look forward to having more and more of those rates come through as California and New York roll on.

Speaker Change: Depicted in the right way for.

Speaker Change: For US now I think it's hard to say you know where are we in that journey, but I would tell you that the sample size. We have now is well over 55% of our members have received that that high level of rate approvals that rate increase at this point, we have some good data to suggest that we are through the bulk of that and we look forward to having more and more of that is right.

Margie Tooth: In our large and under penetrated market, adding and helping more pets remains a guiding mandate. However, we will only do so when we're competent that we can deliver on the member experience for which Trupanion is known. In a quarter, we had approximately 24% pricing rolling through our book, and veterinary inflation remained consistent with our expectations at 15%. It gave this backdrop retention in the quarter was strong, with the average pet staying with us for over 60 months.

Speaker Change: It's come through with California, New York, New York Rolling on and then assuming that inflation remains consistent with expectations in Q1 of 2025, those high level rate approvals and rate needs should be part of in history. At this point, that's assuming 15, which means it gives us a lot of confidence to be able to ultimately return to those high levels of retention that we got you.

Margaret Tooth: And then assuming that inflation remains consistent with the expectations in Q1 of 2025, those high levels of rate approvals and rate needs should be part of history at this point. That's assuming 15, which means it gives us a lot of confidence to be able to ultimately return to those high levels of retention that we got used to 24 months ago. So I'm so good about the progress. We're not giving up. We keep focusing on this, and overall, we are very pleased that we have retention that we believe is still double that of the industry. The market that we're in, the vets, and the opportunity we have in front of us.

Speaker Change: Say 24 months ago.

Speaker Change: Good about the progress we're not giving up you know we keep focus I'm a baker's thing on this and I were all very pleased that we have retention that we believe still to be double that of the industry and our highlights.

Margie Tooth: This also includes our lower coverage and thus lower retention products. We're pleased with these results, a reflection of our efforts to communicate our value proposition and improve upon our member experience. Within our cordupanion product approximately half of our Trupanion members have received a pricing increase of 20% or more over the last 12 months. Retention of this cohort continued to perform well in the quarter and was up both sequentially and the year over year.

Speaker Change: They the market that we're in and in Nevada, and the <unk>.

Speaker Change: The opportunity we have in front of us.

Margaret Tooth: Great, okay. And maybe, as a follow-up, switching gears a little bit, now that your IRR has kind of gotten back into the 30-40% range and you're talking about increasing PAC, maybe talk to us a little bit about which of the buckets you should start putting a little bit more PAC into. I know in your prepared remarks you talked about the lower cost options, maybe some international. So as that starts to increase, where do we see it go, the next incremental dollar, and then how long does that usually take to flow through and start to re-accelerate net PET ads? Thank you. Yeah, no, thank you. So we

Speaker Change: Great, Okay, and maybe as a follow up.

Speaker Change: Switching gears a little bit.

Speaker Change: Your IRR has kind of gotten back into the 30% to 40% range and Youre talking about increasing pack, maybe talk to us a little bit about which of the buckets you start putting a little bit more pack into I know in the prepared remarks, you talked about the.

Margie Tooth: These results demonstrate our focus on the member experience, and early benefits from the migration to our new technology and automation platforms. This new claims administration system has been in development for some time, and we're pleased to see some initial benefits leading to a higher proportion of our claims being paid directly to the veterinarian, and with record reimbursement timelines for those being paid in a more traditional way. We expect to provide you with more details on these investments, the early performance metrics, and our ongoing member experience roadmap at our upcoming investor day in September.

Speaker Change: Lower cost options, maybe some international so.

Speaker Change: That starts to increase where do we see it go the next incremental dollar and then how long does that usually take to flow through and start to reaccelerate.

Net Pettit: Net pettit. Thank you.

Margaret Tooth: Yeah, no, thank you. So, we will go region by region, cohort by cohort. What we look at is a very granular level map of pet by pet, breed, species, geography, which now includes, as you mentioned, those other products. For us, it's about deploying every single PACT dollar diligently, and that will be a combination of what it takes to acquire a lead and what it takes to convert that pet and pull them through the funnel. And it's a different length of time in terms of attribution to those journeys, depending on the channel.

Speaker Change: Yeah no. Thank you. So we will go region by region cohort by cohort, but when you look at it it's a very granular level map of of pets by pet breach species geography, which now includes as you mentioned as other products for us it's about being deploying every single pactolus diligently and that will be a combination of what does that take to acquire a lead.

Margie Tooth: We recently received meaningful rate approvals and two of our largest states that are beginning to take effect. While these new rates will take time to run through our book, they should enable us to increase acquisition spending and peck growth in these regions, now that we've re-established pricing that allows for estimated returns between 30% to 40% on average. We have a new pet acquisition. Adjusted operating income represents the funds we have to invest in growth, and in the quarter, these funds grew 48% year over year.

Speaker Change: And what does it take to convert that Pat and pulling through the funnel and it's a different length of time in terms of attribution today's genies, depending on the channel side for us. The vet channel has has been and will always be a mainstay in terms of where we go in and seek to educate pet parents at the ground level, we will continue to do that.

Margaret Tooth: So, for us, the vet channel has been, and will always be, our mainstay in terms of where we go and seek to educate pet parents at the ground level. We'll continue to do that. I suspect you're going to see a little bit more noise from a media perspective above the line, so pulling people through from a brand point of view. That not only helps us from a conversion perspective, but it also leans in a little bit to retention as well, as people see their reinforcement and credibility of the brand.

Net Pettit: But you're going to stay a little bit more noise from a media perspective above the line. So pulling people three from a brand point of view that not only helps us from a conversion perspective, but it also means and little better retention as well as people see that reinforcement and credibility of the brands in terms of products. We have been very diligent in ensuring that we are acquiring pets and the right products at the right times.

Margie Tooth: Adjusted operating income for our subscription segment grew even faster at 63%, and represents an acceleration from the 55% growth we reported in the first quarter. As a percent of revenue, subscription adjusted operating margin expanded 280 basis points to 11% in the quarter, marked progress towards our goal of 15% adjusted operating margin. As for what we'll communicate, we remain on track to hit this target in the fourth quarter. Operating our business within our target margin profile and IRR guardrails ensures the sustainability of our business, positioning us to help pets, pet parents, and veterinarians for the decades to come.

Margaret Tooth: In terms of products, we have been very diligent in ensuring that we are acquiring pets in the right products at the right times. You know that from the fact that our newer products are reduced quarter over quarter as we really lean into the growth in our core. But we'll continue to lean into any of those products we can, as and when we see there is a 30 to 40% internal rate of return, we'll adhere to that discipline and look forward to actually starting to see that growth pick up, which I suspect you'll see, like I said, in the back half of this year, especially into Q4 as that pack has returned quarter over quarter at a high level.

Speaker Change: You know that from the fact that all other newer products reduce course I've of course show as we really learn tend to the growth and I'll call them, but you know, we'll we'll continue to lean into any of those products. The can as and when we see there is a 30% to 40% internal ratio for Chen will adhere to that discipline and look forward to actually starting to see that grades pick up which I suspect.

Net Pettit: You'll see like I said at the back half of that this year, especially into Q4 is that package returned kosher if of course, there are at a high level.

Margie Tooth: The health of the veterinary profession remains critical to our success. Two years ago, we highlighted the growing burnout of veterinarians and their teams due to the rising cost of care, staff shortages, and overwork. At the time, we noted the need for 30% to 50% pricing increases, an estimate that has since been validated by veterinary industry inflation. Our members put their trust in TruePanion 24.7, and the value proposition of our core product is designed with a unique aged enrollment pricing approach.

Operator: The next question comes from John Barnidge on behalf of Piper Sandler. Please go ahead.

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

Margaret Tooth: Good afternoon. Thanks for the opportunity. Congratulations, Margie.

John Barnidge: Good afternoon, thanks for the opportunity and congrats Margie.

Margaret Tooth: My question, Margie, on your comment about a market participant in the market that dropped out 100,000 pets. Member experience is important for products where the market penetration is low. What's your expectation for other market participants in the backdrop of rate need for some? And does it create an opportunity to acquire books to ensure customers have a good pet experience in a product with that low market penetration? Thank you.

John Barnidge: My question Maggie on your comment about a market participant in the market that dropped out 100000 pets member experience is important.

Margie Tooth: This removes the need for guaranteed annual rate increases simply because a pet has had a birthday. We've created a solution that's designed to last that can be relied on with the same dependability as our pets provide to us. Yet this past quarter recent reports from across the pet insurance landscape demonstrate that not every insurer can or will be there in the same way. The rate of veterinary inflation has tested the most established of players and now over 100,000 pets are without coverage due to mispricing.

Speaker Change: For products, where that market penetration is low.

Speaker Change: What's your expectation for other market participants and the rate and the backdrop of rate need for some it does it create an opportunity to acquire books to ensure customers have good pet experience and a product with that low market penetration. Thank you.

Margaret Tooth: Yeah, thank you, John. Yeah, obviously, for us, this is not a good thing, as you say. We never want anyone to have a bad experience in a category that's underpenetrated. We're really leaning into early adopters and helping people to have that best experience from the outset. We know from history that it hurt category growth back in the 80s when poor experiences were had.

Speaker Change: Yeah. Thank you John Yeah, obviously for US. This is this is not a not a good thing as you say, we never want anyone to have a bad experience in a category. That's underpenetrated says, we're really leaning into early adopters and helping people should have the best experience from the outset, we know from history that the category growth back in the eighties, when when our core expenses were hot.

Margie Tooth: This outcome is very unfortunate both for the pets without coverage and the industry overall. It underscores the importance of TruePanion's approach to lifetime coverage and our simple sustainable cost plus model. Unlike competitors who attract customers with low prices for limited coverage, we prioritise delivering the best value by offering comprehensive coverage and higher claims payouts. This approach ensures pets receive the care they need, resulting in higher customer satisfaction and exceptional lifetime value.

Margaret Tooth: I think, you know, the learning from here is, first and foremost, a horrible situation for those pet parents. And as a category, as an industry, what we need to do is be able to get behind the veterinarians and help them reinforce the fact that players such as Trupanion are creating a product that's sustainable. It really leans into the fact that you have got to understand the costs that go into pricing for those pets. Our aged enrollment pricing is very unique in the industry. We're the only people that do that.

Speaker Change: I think in either the learning from here is first of all nice horrible situation plays pet parents and as a category as an industry well, we need to do is be able to get behind the veterinarians and help them reinforced the fact that players such as Japan in all creating a product that is sustainable at reading things into the fact that you have got to understand the costs that go into pricing today is pets.

Margie Tooth: By adding a fixed margin to our comprehensive plans, we maintain a sustainable business model with long-term benefits for our members, the pets and the veterinary community. With low single-digit penetration across our addressable markets, we have a long way to go to make the difference we aspire to. As margins move sequentially closer to a goal of 15%, we're pleased to be turning our attention back to growth. With that in mind, moving back to the second quarter, we acquired 64,300 pets as an estimated internal ratio return of 37%.

Speaker Change: Our agent enrollment pricing is very unique in the industry with the people that do that and that allows us to have a very clear vision for the lifetime of that pet. It's not an easy thing to do I think if you think about the natural hurdles that you have coming into this industry. We've seen a lot of people come in and they are growing very quickly and they have not got that pricing right.

Margaret Tooth: And that allows us to have a very clear vision for the lifetime of that pet. But it's not an easy thing to do. I think if you think about the natural hurdles that you have coming into this industry, we've seen a lot of people come in, they've grown very quickly, and they've not got their pricing right. But we've proven over the last two years that we are ahead of the industry in terms of being able to react. Even though we berated ourselves 18 months ago for being slow, we were significantly faster than the competition.

Speaker Change: We've proven over the last two years that we are ahead of the industry in terms of being able to react even though we berated ourselves 18 months ago for being slightly we were significantly faster than the competition and for US I think we never going to chase a pet count over the the lifetime value and making sure that member experience is what it should be.

Margie Tooth: This represents a 15% decrease in new pets year over year on a reduction in pet acquisition spend of 17%. While we're not yet maximising our uses of adjusted operating income for growth, our margin expansion afforded us the opportunity to deploy approximately 6% more impact versus key one. Our newer initiatives, including our powered by sweeter products with chewy and aflach, our medium and low RP products, FURKIN and PHI Direct, and our products in continental Europe comprise approximately 17% of our growth new pet ads in the quarter.

Margaret Tooth: And for us, I think we're never going to chase a pet count over lifetime value and make sure that the member experience is what it should be. I think we'll lean into the Vet Channel. We'll continue to share the fact that we are here for the life of the pet. We're here for them. And I think when it comes to acquiring those pets, it's a challenge. The best member experience is having a puppy or a kitten or a new pet into the household that doesn't have pre-existing conditions so that we at Troupanion can cover everything for that pet in that instance. Many of those pets that are now without coverage will have pre-existing conditions.

Speaker Change: We'll lean into the vet channel will continue to share. The fact that we are here for the life of the pet we're here for them and you know I think when it comes to acquiring nice pets. It's it's a challenge you know the best member experiences, having a puppy or kitten or a new patch. The household it doesn't have preexisting conditions that we at Japan, Ian can cover everything for that pet in that.

Speaker Change: Instance, many of those pets that now without coverage will have pre existing conditions and that doesn't set the member of the best experience say for US will continue to focus on that early entry point and.

Fawwad Qureshi: And that doesn't set the member up for the best experience. So for us, we'll continue to focus on that early entry point. And obviously, I hope that this doesn't happen to others. And I think it's just a message to everyone that pricing has got to be critical. It's got to be on point, and I think we've proven that we're starting to see that come out on the other side of that. And hopefully, others will do so too.

Margie Tooth: We deployed 1.8 million against these opportunities, just 11% of our pet acquisition spend, a conservative amount of capital given these products are early in the lifecycle and sub-scale. Our continued discipline on acquisition spending, coupled with our increase in margin, led to $4 million of free cash flow in the quarter. In summary, we're pleased with the quarter, the team's hard work and solid execution is showing good results, which bodes well for our margin and free cash flow goals.

Speaker Change: I always say I hope that this doesn't happen for all of this and I think that's just a message to everyone that that that pricing is going to be critical let's call. It should be on point and I think we've proven that we're starting to see that come out the other side of fashion and hopefully others will too.

Speaker Change: Yeah.

Fawwad Qureshi: Thank you for that. My follow-up question may be on numbers one and two. On the two material weaknesses, what was the size of that cost in the quarter, and where did we see it in the financial results? Thank you.

Speaker Change: Thank you for that my follow up question, maybe numbers one on the two material weaknesses, what was the size of that cost in the quarter and where did we see in our financial results. Thank you.

Margie Tooth: With less than 4% of pets ensured in the US, Puerto Rico and Canada, and an equally low number across most of Europe, our mandate remains to enroll more pets. We will continue to do so prudently, gradually scale up our acquisition spend and prioritising accordingly across cohorts as margins expand.

Fawwad Qureshi: Yeah, you see the cost in fixed expenses. So fixed expenses were elevated. I think one of the advantages that we have as a company is we have a very clear model P&L. So that model P&L calls for fixed expenses to be 5% of revenue. They ticked up higher, as expected, primarily related to the material weakness. There's a couple of dimensions to it.

Speaker Change: Yeah, you see that cost and fixed expenses fixed expenses were elevated I think one of the advantages that we have as a company is we have a very clear model P&L. So that model P&L calls for fixed expenses to be 5% of revenue.

Margie Tooth: Now before I hand over to FURD, I'd like to briefly touch on an important update to underwriting factors in the property and casualty risk-based capital calculation that were recently approved by the National Association of Insurance Commissioners, the NAIC. These updates significantly decrease the capital intensity of a balance sheet. Although pet insurance continues to be subject to the same risk-based capital requirement factors as special property, within this update, pet insurance was designated as its own line of business. After more than two decades of discussions to recognise pet insurance in its own right, this is a big step forward for Tupanian and the Categray at large.

Speaker Change: They ticked up higher as expected.

Fawwad Qureshi: One cost is the costs of the actual remediation work. We talked in the last call about bringing in some resources, as well as some external expertise. And the other is just from a technology perspective because one of the MWs had to do with controls within technology. There's more engineering effort in remediation. And so you're seeing higher operating expense versus lower capex because of more maintenance and support around remediation versus development. And so you see it in fixed expenses.

Speaker Change: Primarily related to the material weakness, there's a couple of dimensions, who have one or the cost of the actual remediation work, we talked in the last call about bringing out some resources as well as some external expertise and the other is just from a technology perspective, because one of the <unk> had to do with <unk>.

Speaker Change: Controls within technology, Theres more engineering effort on remediation and so youre seeing higher operating expense versus lower capex, because more maintenance and support around remediation versus development. So you see it in fixed expense.

Speaker Change: Thank you.

Fawwad Qureshi: With that, I'll hand over to FURD to provide a detailed overview of our Q2 results. Thanks Margie, and good afternoon everyone.

Operator: The next question comes from John Block from Stiefel; please go ahead.

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

Margaret Tooth: Thanks, guys. Good afternoon.

Jon Block: Thanks, guys good afternoon.

Jon Block: Maybe just the first one I believe the variable expenses in other.

Fawwad Qureshi: Let me begin by congratulating Margie on assuming the role of CEO of Tupanian. I'm thrilled to be working with Margie to lead the company into our next phase of growth. Our mission to help pet parents and the opportunity to work with Margie are the reasons I joined the company. With that, I'll turn to our Q2 results as well as provide our outlook for the third quarter and full year 2024. It was another strong quarter with revenue and adjusted operating income coming in ahead of expectations.

Fawwad Qureshi: Maybe just the first one. I believe in variable expenses, and the other was up roughly $7 million Q over Q. Sort of like an unusual step up, you know, a low base. So call it like $17 million to $23 or $16.5 to $23 and change. So maybe you could just shed some light on that magnitude of the sequential step up. And then, you know, when I shift gears, and I just look at where the gross ads are coming from.

Speaker Change: Was up roughly $7 million of fewer refused sort of like an unusual step off a low base, so call it $17 million or 23 or 16 in 'twenty three and change.

Speaker Change: So maybe you could just shed some light on that magnitude of the sequential step up and then when it should gears and I just look at where the gross adds are coming from.

Fawwad Qureshi: One of the newer opportunities is sort of like in the other North American subscription, not the core, and I believe that stepped down from 10,000 and changed in one cue to, you know, 7,602 cue. I expect that channel to get, you know, better, not sort of materially worse cue over cue, as you sort of refine the plans and streamline that. Maybe you could just add some color to both of those, and then I'll ask a shorter follow-up.

Speaker Change: One of the newer opportunities as sort of like any other north American subscription not the core and I believe that stepped out over 10000 and change in one Q2.

Fawwad Qureshi: Total revenue for the quarter was 314.8 million up 16% year-or-year. Within our subscription business, revenue was 200 8.6 million up 20% year-or-year. Total subscription pets increased 8% year-or-year to 1 million 20,000 pets as of June 30. This includes approximately 46,000 pets in Europe, which are currently underwritten by third parties. Average monthly retention for the trailing 12 months was 98.34% down versus the second quarter last year. On a trailing three-month basis, retention was up from the first quarter of this year.

Speaker Change: 7600 in Chengdu.

Speaker Change: That channel to get better not sort of materially worse Q over Q as you sort of refine the plans and the streamlined that maybe if you could just add some color to both of those and then I'll ask a shorter follow up.

Fawwad Qureshi: I can take the first one on variable expense. So, as we talked about in the past, the agreement with PetsBest is loss-sensitive, and so our margin is relatively insulated from either a higher loss ratio or higher variable expense. The variable expense, in this case, had to do with higher commissions. As that loss ratio is coming down, there's a higher earn. It doesn't affect our operating margin, which is relatively flat quarter over quarter. In the Q1 call, I talked about that being the new run rate for that business based on the new agreement. That's largely consistent with our expectations being flat from Q1 to Q2.

Speaker Change: Yeah, I can take the first one on variable expense so.

Speaker Change: As we've talked about in the past the agreement with Pet's best as law sensitive and so our margin is relatively insulated from either higher loss ratio or higher a higher variable expense rather expensive. This case had to do with higher commissions is that loss ratio is coming down there's a higher earn it doesn't affect our operating margin that's relatively flat quarter over.

Fawwad Qureshi: Total monthly average revenue per pet for the quarter was $71.72 up 11.4% over the prior year period. The subscription business cost of paying veterinary invoices was $154.6 million, resulting in a value proposition of 74.1% and reflects a 290 basis point improvement over the prior year period. As a percentage of subscription revenue, variable expenses were 9.5% down from 9.7% a year ago. Fixed expenses as a percentage of revenue were 5.3% up from 5.1% in the prior year period.

Speaker Change: Quarter.

Speaker Change: In the Q1 call I talked about that being the new run rate for that business based on the new agreement, that's largely consistent with our expectations being flat Q on Q2.

Margaret Tooth: And just, hi John, just on the growth ads and the other products. So one of the things that we've been learning with those new products is really leaning into what makes a good cohort for us. So they are, they're younger.

Speaker Change: And just John just on the gross adds in the other product side one of the things that we've been learning what those new products is really leaning into what makes a good category for us. So they are then you are we're learning how to.

Margaret Tooth: We're learning how to both get leads and convert those pets and also ultimately retain them, so we're constantly looking at that IRR to understand what's the best lifetime value. What we realized during the quarter is some of those products are still subscale, so we don't want to be pushing too much in there as we get more rate for our core products. So you're seeing the balance moving back to the core but also really looking at growing the right way.

John Barnidge: Get leads and convert those pets nosedive ultimately retain them. So we're looking at that IRR constantly to understand what's the best lifetime value well, we realized during the course you raised some of those products ourselves subscale. So we don't want to be pushing too much in that as we get more rate for our core products are you, saying that the balance moving back to coal, but also really looking at growing the right way so.

Fawwad Qureshi: Our remediation work on material weaknesses is ongoing and this increase in spending continues to be in line with our expectations. 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 23 million and increase of 63% from last year. Subscription adjusted operating margin was 11% of subscription revenue. This is up from 8.2% in the prior year quarter and represents approximately 280 basis points of year-over-year margin expansion as pricing takes hold.

Margaret Tooth: So as we test and refine from a new product, new channel distribution perspective, we realized that some of the pets we're enrolling are not going to have the stickiness that we typically would be used to. So the teams have slowed down that growth very deliberately, and looked at how we really deploy that pack in the best way to get the right mix of pets.

John Barnidge: As we test and refine from a new product new channel distribution dispatch, if we realize that some of the pets are enrolling are not going to have that stickiness that we typically would be used to so the teams have slowed down that growth very deliberately looked at how do we deploy that pack and the best way to get the right mix of pets, and we're making some really good progress there.

Margaret Tooth: And we're making some really good progress there. So the beauty of having these different distribution channels, these different products, is that we do now have a choice. We don't just have to grow in one country, one geography, one product. And we're leaning into that flexibility, but always thinking about that 30% to 40% internal rate of return also.

John Barnidge: The beauty of having these different distribution channels the different products that we do now have a choice. We don't just have to grow in one one country, one geography, one product and we're leaning into that flexibility, depending but always thinking about that that she is a 40% internal rates of return alternately.

Fawwad Qureshi: Now I'll turn to our other business segment, which is comprised of revenue from other product and services that generally have a B2B component and a lower margin profile than our subscription business. Our other business revenue was $106.2 million for the quarter and increase of 9% year-over-year. The decelerating growth within this segment is expected as one of our partner's pets best continues to enroll pets with their new underwriter. Adjusted operating income for this segment was 1.8 million at decrease of 32% from last year driven by a lower gross margin.

Margaret Tooth: Got it. Helpful caller. Thanks for that. And then just the second question, sort of a follow-up to a question that was asked earlier, but from a different perspective.

Speaker Change: Got it helpful color. Thanks for that and then just the second question sort of a follow up to a question that was asked earlier, but from a different perspective on that competitor that churned off at one.

Margaret Tooth: On that competitor that churned out the 100,000 or so subscribers, what's been the reaction, not so much from the pet owner experience but from the veterinarian community? You know, your biggest channel is going through the vets. You want them to... Stand behind, endorse, you know, bring up pet insurance, and feel comfortable. One of the assets that you brought initially to the industry was a transparent plan that was simple and easy to explain. And, you know, when they hear about something like this going on, do they have more trepidation when they're engaging with pet owners?

Speaker Change: 100000 or so.

Speaker Change: Our subscribers.

Speaker Change: The reaction not so much from the pet owner experience, but from the veterinarian community. Your biggest channel is going through the beds you want them to.

Speaker Change: Stan behind indoors bring out pet insurance and feel comfortable what are the assets that you bought initially to the industry was a transparent and plan that was simple and easy to explain.

Fawwad Qureshi: This is consistent with our revised agreement with pets best, which has lower capital requirements and a different margin profile. In total, adjusted operating income was 24.8 million in Q2, up 48% from Q2 last year and ahead of our expectations. In Q2, our higher margin subscription business comprised approximately 93% of our adjusted operating income. This is up from 84% for the full year in 2023. As Margie mentioned earlier, we acquired approximately 64,300 new subscription pets in the quarter and deployed 15.8 million to do so.

Speaker Change: When they hear about something like this going on do they have more trepidation when they're engaging with pet owners. Thank you.

Margaret Tooth: Yeah, thank you. That is a great question. And honestly, for us, that's really where we felt the initial need to educate our territory partners. So, as you know, these are the people who are going in the doors of veterinary hospitals, speaking to vets. They had this conversation, it continues to be a pain point for vets, and, as you can imagine, many of their clients are going through this experience month over month. And it is, frankly, an opportunity for Trupanion.

Speaker Change: Yes. Thank you that is a great question and honestly for US that's really why we felt the initial need to educate our territory partners. So as you know they these are the people who are going in the doors of veterinary hospitals speaking to that they did have this conversation. It continues to be a pain point for us that says you can imagine many of the clients are going through this experience month over month and it frankly has not.

Fawwad Qureshi: Excluding the approximate 3,600 new European pets that are underwritten by a third party, this translated into an average pet acquisition cost of $231 per pet in the quarter, slightly down from $236 in the prior year period. The estimated internal rates of return on this spend was 37% in the quarter, in line with our targets of 30 to 40%. We also invested 1.7 million in the quarter in development costs, which relate primarily to our expansion efforts in Europe.

Speaker Change: Attunity if that's your opinion way that we can explain firsthand know any what that situation what leads to that type of situation, but it was such a reinforced the fact that in our coverage truepenny and cannot just cancel a patch because we feel like canceling a pet yeah. We are adhering to a lifetime value to our pricing promise then and from our perspective. It is critical that that's no doubt.

Margaret Tooth: We're there, we can explain firsthand not only what that situation is, what leads to that type of situation, but also to reinforce the fact that, in our coverage, Trupanion cannot just cancel a pet because we feel like canceling a pet. We are adhering to our lifetime value and our pricing promise. And from our perspective, it's critical that vets know that and trust it. What I would say is an indicator based on those conversations, as we've seen in the last few weeks, our veterinary lead traffic is higher than it's ever been before.

Speaker Change: Trust that what I would say is an indication based on those conversations as we're seeing in the last few weeks all veterinary lead traffic is higher than it's ever been before.

Fawwad Qureshi: Stock based compensation expense was 8.4 million during the quarter. As a result, net loss was 5.9 million or a loss of 14 cents per basic and diluted share compared to a loss of 13.7 million or a loss of 33 cents per basic and diluted share in the prior year period. In terms of cash flow, operating cash flow was 6.9 million in the quarter compared to a negative 3.4 million in the prior year period.

Margaret Tooth: We're not pushing too hard on that conversion funnel yet, but that's a very good sign. It shows that we're able to demonstrate how we're different and why we're different. And to that point you made, transparency in terms of our policy wording and our coverage has been critical to both gain the trust of the vets and also retain the trust of the vets as they see this type of thing happening in the industry.

Speaker Change: You know, we're not pushing too hard on that conversion funnel, yet, but that's a very good sign it shows that we're able to demonstrate how were different why were different and to that point you made that transparency in terms of all our policy wording in all coverage as being critical to both get the trusted the vast and also retain a trusted the bats as they see this type of thing happening in the industry.

Fawwad Qureshi: Capital expenditures totaled 2.9 million down from 4.7 million in Q2 last year. As a result, free cash flow was 4 million, a 12.1 million improvement from the prior year's second quarter. As we mentioned in our last earnings call, our free cash flow is seasonal, with the majority typically generated in the second half of the year. So we are particularly pleased with our execution this quarter, achieving the highest Q2 free cash flow since the company went public.

Speaker Change: Yeah.

Operator: Our next question comes from Katie Sakys from Autonomous Research. Please go ahead.

Kt <unk>: Our next question comes from Kt <unk> from Autonomous Research. Please go ahead.

Margaret Tooth: Hi, thank you. Good evening. I want to circle back really quickly on the retention discussion. Margie, would you be willing to quantify the extent to which retention improved on a trailing three-month basis for us?

Kt <unk>: Hey, Thank you good evening, I'm I'm going to circle back really quickly on the <unk>.

Speaker Change: And for retention Magee would you be willing to.

Kt <unk>: Quantify the extent to which retention improved on a trailing three month basis for.

Margaret Tooth: We haven't shared that level of detail, but from the perspective of our core business, we've seen it improve ahead of our other products, which for us is symptomatic of really focusing on that and doubling down on that big cohort, because now it's over 55% of our members. But the expansion is moving very nicely, and we're very happy with that performance. It's pretty much in line with expectations.

Speaker Change: We haven't shared that level of detail, but I think from the perspective of I'll call. Our core business. We've seen it improve ahead of other products, which for US is it's symptomatic everybody focusing on that and doubling down on that big cohort because it's now now today, it's over 55% of our members.

Fawwad Qureshi: On our third quarter 2023 earnings call, we introduced an annual free cash flow target at 2.5% of revenue. I'm pleased to report that we are making great progress towards this goal and have now generated 23.9 million of free cash flow over the last four quarters. This compares to a negative 31.1 million in the previous four quarters and represents an improvement of 55 million dollars. Turning to the balance sheet, we ended the quarter with 277.2 million in cash and short term investments.

Speaker Change: But the expansion is.

Speaker Change: It's moving very nicely and we're very happy with that performance is it's pretty much inline with expectation.

Speaker Change: Okay.

Speaker Change:

Fawwad Qureshi: Okay. Shifting to ARPU really quickly, it's impressively held at almost 10% for the second quarter in a row now. Can you guys give me color on where you expect that to trend over the back half of the year as the remaining 45% of the book experiences those rate increases, and then perhaps adjacent to that? Is there any portion of the book, and if so, what percentage, that would face those large rate increases in the beginning of 2025?

Speaker Change: Shifting to our two really quickly.

Speaker Change: Impressively held in at almost 10% for the second quarter in a row now can you guys give any color on where you expect that to trend over the back half of the year with the remaining 45% of the book experiences those rate increases and then perhaps adjacent to that.

Fawwad Qureshi: Outside of our insurance entities, we held 33.2 million in cash and short term investments with an additional 15 million available under our credit facility. At the end of the quarter, we maintained 263 million of capital surplus at our insurance subsidiaries, which was 130.3 million more than the estimated risk-based capital requirement of 132.7 million. Access capital has increased by 66.2 million a year today due to our growth in our other business flowing, as well as recently approved changes to underwriting risk factors used in the calculation of risk-based capital requirements by the NAIC.

Speaker Change: <unk>.

Speaker Change: Is there any portion of the book and if so what percentage that would you know.

Speaker Change: Face those large rate increases in the beginning of 2025.

Speaker Change: Yeah.

Fawwad Qureshi: Yeah, I can give them context just on the second half. You know, our expectation, kind of similar to what we saw in the first half, this was a year that was going to be driven by more so ARPU than pet count, given that we've been pulling back on acquisition spend. We saw that in Q2, where it was balanced, but a little bit more leaning towards ARPU as a contributor to top-line growth from a subscription perspective.

Speaker Change: Yeah, I can give some context just on second half our expectation kind of similar to what we saw in first half of this this was a year that was going to be driven by.

Fawwad Qureshi: We expect to discuss these changes in more detail during our upcoming investor day.

Speaker Change: More so our poorer than pet count given that we've been pulling back on acquisition spend and you saw that in Q2, where it was balanced but a little bit more leaning towards ARPA was a contributor to top line growth from a subscription perspective, we expect is that pricing flows through similar to what we saw in prior years, where you have first half and.

Fawwad Qureshi: I will now turn to our outlook. We are updating our four-year revenue guidance, which is now expected to be in the range of 1.263 million to 1.279 million or 15% growth at the midpoint. This takes into account our overperformance in first half. We are narrowing the range for subscription revenue, which is now expected to be between 850 million and 858 million. The midpoint of the range is increasing slightly and represents 20% growth year or year.

Fawwad Qureshi: We expect that pricing to flow through, similar to what we saw in prior years, where you have the first half being relatively flat sequentially, and then expansion of margin in the second half. A lot of that expansion in the second half is going to be driven by the benefit of that ARPU in our highest categories. As Margie mentioned, we are going to be increasing investment in acquisition. We're gradually increasing that, again, now that margins are closer to our target range.

Speaker Change: Flat sequentially.

Speaker Change: Expansion of margin in the second half a lot of that expansion in second half is going to be driven by the benefit of that harpoon and our highest categories as markets as Marty mentioned, we are going to be increasing investment and acquisition.

Fawwad Qureshi: We are also narrowing the range of our adjusted operating income guidance, now expected to be between 108 million and 115 million. We are raising the midpoint of the range, which represents 33% year or year growth. We continue to expect that our subscription margin will increase as we move through the year and build back to a 15% adjusted operating margin in Q4 of this year. For the third quarter of 2024, total revenues are expected to be in the range of 319 million to 324 million, representing 12% year or year growth at the midpoint.

Speaker Change: Gradually increasing that again now that margins are closer to our target range. That's more an investment that's going to benefit us in the first half of next year, we want to hit the ground running from an acquisition standpoint. So I would say second half is still going to be largely driven by our Po and then just in terms of the members facing larger increases in 2025 for us by the time, we get to the end of this year.

Fawwad Qureshi: That's more an investment that's going to benefit us in the first half of next year. We want to hit the ground running from an acquisition standpoint. So I would say the second half is still going to be largely driven by ARPU. And then just in terms of

Fawwad Qureshi: And then just in terms of the members facing large increases in 2025, for us, by the time we get to the end of this year, our book of business will have received the biggest increase unless we see an increase in inflation above 15% in Q1. Now that we've leveled the delta that we had from prior periods, we feel good about the fact that we have sufficient pricing flowing through the book of business that will affect the entire book.

Speaker Change: Our book of business, what I perceive that the biggest increase unless we see an increase in inflation above the 15% in Q1 now the way we've level set the delta that we had from prior periods. So we feel good about the fact that we have sufficient pricing flowing through the book of business that will have affected the entire book and by the time, we get to Q1, our pricing that we have today, we will hold to that.

Fawwad Qureshi: Subscription revenue is expected to be in the range of 217 million to 219 million or 19% year or year growth at the midpoint. Total adjusted operating income is expected to be in the range of 27 million to 219 million. As a reminder, our revenue projections are subject to conversion rate movements predominantly between the US and Canadian currencies. For the third quarter and full year of 2024, we used a 73% conversion rate in our projections, which was the approximate rate at the end of June.

Margaret Tooth: And by the time we get to Q1, our pricing that we have today will hold at that level, so we shouldn't see the need to go above the 20% increase again next year. Obviously, that's dependent on inflation. If we do see inflation move up, then our rates will move up again. But we feel like we're in a pretty stable state and look forward to being able to really focus on moving more of our members back to that sub-20% retention group over the next 12 months. Again, if you have a question, please...

Speaker Change: So we shouldn't see the need to go about the 20% increase again next year, obviously, that's dependent on inflation, if we see inflation move up in rates will move up again, but we feel like we feel like we're at a pretty stable states and look forward to being able to really focus on moving more of our members back to that sub 20% retention great play for the next 12 months.

Speaker Change: Thank you.

Speaker Change: Thank you.

Operator: Again, if you have a question, please press star, then 1. Our next question comes from Wilma Burdis from Raymond James. Please go ahead.

Margie Tooth: With that, I'll hand it back to Margie. Thank you forward.

Speaker Change: If you have a question. Please press Star then one.

Margie Tooth: Before we take our first question, we'd like to invite you to join us for our upcoming investor day on September 18th at our headquarters in Seattle. This annual event is a great opportunity for investors to hear directly from over 20 team members leading the execution of our 60 month plan in an open Q&A forum. We will provide updates across each of our panels and dive into progress across key metrics such as retention rates, pricing, pet growth, hospital activity and PAC. The team I look forward to seeing many of you there. More details including registration can be found on our investor relations website.

Speaker Change: And our next question comes from will Milner Burtis from Raymond James. Please go ahead.

Speaker Change: Hey, good afternoon, we've seen some industry articles discussing lower than normal that business into a huge worry for me.

Speaker Change: Just curious if you saw any of those types of trends in the quarter.

Margaret Tooth: Yeah, hi Wilma. But our data actually suggests otherwise. We've definitely been following those trends in the industry. Typically, what we find, and what we've always found with a Trupanion member is that they do go to the vet more frequently than an uninsured client. It removes barriers to care, it removes barriers to entry, so people when they see an issue with their pet will go to the veterinarian without waiting, without pausing. We've been listening a lot to the industry and hearing what's been happening from our territory partners and from the markets in general. And what we're hearing is there are a couple of things at play here.

Speaker Change: Yeah, well my.

Speaker Change: So are they show Archie suggest otherwise, we'd definitely be falling nice trends in the industry typically what we find and what we've always found with the Japan team member is that they do you guys do that more frequently than than an uninsured client.

Speaker Change: Remains bearish, a carat removes barriers to entries to people when they see an issue with that Pat will go to the veterinarian without waging without pausing, we'd be needing a lot to the industry and hearing what's been happening for much higher coupon is them from the market in general and what we're hearing is there there are a couple of things at play here one down to the fact that puppies and kittens are not being purchased in the same levels that they were.

Operator: With that, we'll open it up for questions. We will now begin the question and answer session. To ask a question you may press star than one on your touch tone phone. If you're using a speaker phone please pick up your handset before pressing the keys. In the interest of time, please limit yourself to one question and one follow-up. At this time we'll pause no materially to assemble a roster.

Margaret Tooth: One reason is that puppies and kittens are not being purchased at the same levels that they were two years ago. So, there are fewer new visits; there are fewer new clients coming to the hospital, which is driving part of that visit pattern down. The other issue is, anecdotally, we're hearing people are waiting to see how their pet does before they take them to the veterinarian, which obviously is not ideal for a pet parent to have to do.

Speaker Change: Two years ago. So there's less new visits there's less new clients coming into the hospital, which is driving part of that base that patent down the other raise anecdotally. We're hearing people are waiting to see how that Pat does before they take them to the veterinarian, which obviously is not ideal for a pet parents have to do it but when they're thinking about their finances and they can send about what you know what that's going to cost that way.

Maria Ripps: Our first question comes from Maria Ripps from Cannecourt. Please go ahead. Great, thank you so much for taking my questions and Margie Congrats. So now with the way to prove in California, can you maybe share a little bit more color around your plans to expand your customer acquisition efforts instead of in your core geographies? And are there any sort of new strategies or new techniques that you may be planning to deploy now? And when should we see sort of this efforts impact in your overall sort of subscriber count?

Margaret Tooth: But when they're thinking about their finances and they're concerned about what that's going to cost, they're waiting. And from our point of view, again, speaking to the point I made earlier, we're actually seeing more and more veterinarians leaning into the fact that they realize that a higher proportion of their clients that are coming in are Trupanian members. And so, they're recognizing the value that we offer to them and helping to generate more lead volume as a result of that.

Speaker Change: And from my point of view again speaking to the point I made earlier, we're actually seeing more and more veterinarians leaning into the fact that they realize the higher proportionate that clients that are coming in archery pandean members and so they are recognizing the value that we offer to them and helping to generate more lead volume as a result of that so.

Margaret Tooth: So, it's counterintuitive initially, but when you think about the type of person that we attract and the members we have, that's why our patterns are slightly different. We are seeing, I will just add, a slight downturn in July in terms of visits, so we'll wait and see what happens there, but so far, our assumptions are remaining at 15%. Okay, thank you. And then you raised the EBIT guide by $2 million for the quarter.

Speaker Change: It's counterintuitive initially, but when you think about the type of person that we are trying to the members. We have that's why all our patents are slightly different.

Margie Tooth: Yeah, thank you Maria. So to start with in terms of California, obviously very pleased to get those two big state approvals during the quarter. That really doesn't expand our overall market of all, addressable market now to over 85%, which is exactly what we were hoping for. We were stressed repeatedly that for us to be able to grow and put our foot on the gas in any of the different markets and cohort we've worked with is really to ensure that we have that margin strength.

Speaker Change: We are saying I would just add a slight downturn in July in terms of visits so we'll wait and see what happens there, but so far our assumptions are remaining at 15%.

Fawwad Qureshi: Okay, thank you. And then you raised the EBIT God by $2 million in the quarter.

Speaker Change: Okay. Thank you and then you raised it you raised the EBITDA by $2 million in the quarter.

Speaker Change: Could you just talk about where that pieces coming from or what business line is driven by a dozen other subscription or was there. Some other impact just if you could just help us bridge that.

Margie Tooth: We're priced appropriately for sustainable growth. We now feel that way for most of the country, as I mentioned, and most of North America, so we're looking forward to expanding gradually into California. The reality of that spend to the second part of your question really leans into ensuring that we have both a strong lead development funnel, which is really primarily from the vet channel. And then looking at the conversion side of the funnel, which is pulling people through in terms of education, making sure they understand why true planning and really reinforcing that sales point.

Fawwad Qureshi: Yeah, our profitability is primarily driven by subscriptions. The margin on the other businesses is relatively small.

Speaker Change: Yeah, our profitability is primarily driven by subscription overwhelmingly the margin on the other businesses is relatively small.

Fawwad Qureshi: So the contributors are largely AOI driven. So the more AOI we're generating as a result of the ARPA flow through that we talked about, as well as continuing to enroll pets. So feel good about it. Again, it is largely within line with our expectations. When we think about the overall plan, first half versus second half, we feel good about exiting the first half with some momentum and that that bodes well for us in terms of having some optimism in the second half. Thank you.

Speaker Change: So the contributors of course largely.

Speaker Change: And so the more you why we're generating.

Speaker Change: As a result of the ARPA flow through that we talked about as well as continuing general pets. So feel good about it again largely within line with our expectations.

Margie Tooth: So for us, what we're looking at is expanding on the good lead development that's been happening over the last few weeks, not just in California, but across the market, and then starting to pull more of those people through the funnel. I expect the growth to start to pick up, like we've said before, very much in line with expectations towards the back half of this year, as we move into the summer months, there's more people getting their pets around, they're thinking about pet health.

Speaker Change: We think about the overall plan first half versus second half we feel good about exiting the first half with some momentum and that that bodes well for us.

Speaker Change: In terms of having some optimism on second half.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you.

Operator: There are no more questions in the queue. This concludes our question and answer session. Thank you for attending today's presentation. You may now disconnect.

Speaker Change: There are no more questions in the queue. This concludes our question and answer session. Thank you for attending today's presentation. You may now disconnect.

Margie Tooth: We're starting to see that grow. So I'd expect to see that growth really kind of predominantly show up in the back half of Q3, Q4, and then fully leading into it to next year as well. So excited to see that coming through, and really being able to put a foot on the gas a lot more. As we said once we see that margin start to come back.

Operator: ["Pomp and Circumstance March No. 1"] ["Pomp and Circumstance March No. 1"]

Speaker Change: Okay.

Speaker Change: [music].

Fawwad Qureshi: So that's very helpful. And then secondly, can you make the refreshments again on what's driving higher than expected other revenue? And if it's still largely driven by pets best, can you maybe broadly, without getting into a lot of specifics, just broadly, talk about the relative economics of pets that you are acquiring now, which is why your previous agreement with pets best? Sure, I can take that question. The quarter was from a other business or pets best was largest summer in Q1.

Fawwad Qureshi: So what we talked about in Q1 was continued roll-off of pets, the revenue growth was driven by Arpov. Bad repeated itself in Q2. So the majority of the revenue increases related to Arpov. That business continues to be in secondary decline. Within our expectations is rolling off pretty much within our expected range. So I would say continue to see that trend going forward. This was the first quarter on a year-of-year basis where we had single-digit revenue in that business. So again, it speaks to the secular downturn as pets are rolling off. And we expect that to to continue.

Maria Ripps: Got it. That's very helpful. Thank you both.

Operator: Thank you.

Brandon Vazquez: The next question comes from Brandon Vazquez, from William Blair. Please go ahead.

Margie Tooth: Hi everyone. Thanks for taking the question. First one, I think if I heard you correctly, it said retention was up on a year of your basis and even sequentially. I'm kind of curious if you think that we are hit a trough here and we're on the rebound back up and we won't go backwards. Kind of curious your thoughts around that and really what's driving the improvement in retention despite the fact that you guys are still pushing through some decent price increases.

Margie Tooth: Yeah, thank you for the question, Brandon. We are very pleased with retention. I think it's been something that we've talked about now for the last 18 months as one would expect with that high rate flow coming through. Those rates are driven through cost of goods as we see higher inflation at a veterinary level. As a product, that's something that we know our members are looking for, that value. In terms of retention, a lot of what the teams have been doing is leaning into our value proposition, leaning into the reason why people choose to start with helping to educate from the vets through which really does help when pets go back into the veterinary and talk about their rate increases.

Margie Tooth: For us though, it's about ensuring that the largest bucket of members, so our largest member retaining group now is in the over 20% bucket. This has evolved over the last 18 months, more and more rate has flown through and that's really where the focus has been across the business. From a member communication perspective, from a contact center point of view as we manage the claims that come through, every element of the business has been ensuring that value for position is depicted in the right way.

Margie Tooth: For us now, I think it's hard to say where are we in that journey, but I would tell you the sample size we have now is well over 55% of our members have received that high level of rate approval, so rate increase. At this point, we have some good data to suggest that we've threw the bulk of that, and we look forward to having more and more of those rates come through with California, New York rolling on, and then assuming that inflation remains consistent with the expectations in key one of 2025, those high level rate approvals and rate needs should be part in history at this point.

Margie Tooth: That's assuming 15, which means it gives us a lot of confidence to be able to ultimately return to those high levels of retention that we got used to 24 months ago. So good about the progress. We're not giving up, we keep focusing on this, and overall, very pleased that we have retention that we believe still to be double out of the industry, and highlights the market that we're in and the vets and the opportunity we have in front of us.

Margie Tooth: Great. Okay. And maybe as a follow-up, switching gears a little bit, now that your IRR has kind of gotten back into the 30-40% range, and you're talking about increase in PAC, maybe talk to us a little bit about which of the buckets you start putting a little bit more PAC into. I know in the prepared remarks, you talked about the lower cost options, maybe some international. So as that starts to increase, where do we see it go, the next incremental dollar, and then how long does that usually take to flow through and start to re-accelerate net pet ads?

Margie Tooth: Thank you. Yeah. No, thank you. So we will go region by region co-oper by cohort. What we look at is a very granular level map of pet by pet breed species geography, which now includes, as you mentioned, those other products. For us, it's about being deploying every single pack dollar diligently, and that will be a combination of what does it take to acquire a lead, and what does it take to convert that pet and pull them through the funnel?

Margie Tooth: And it's a different length of time in terms of attribution to those journeys, depending on the channel. So for us, the vet channel has been, we'll always be our mainstay in terms of where we go and seek to educate pet parents at the ground level. We'll continue to do that. I suspect you're going to see a little bit more noise from a media perspective above the line, so pulling people through from a brand point of view.

Margie Tooth: That not only helps us from a conversion perspective, but it also leans in a little bit to retention as well. People see that reinforcement and credibility of the brand. In terms of products, we have been very diligent in ensuring that we are acquiring pets in the right products at the right times. You note that from the fact that our newer products reduce, quarter over quarter, as we really then tend to the growth in our core.

Margie Tooth: But we'll continue to lean into any of those products we can, as in when we see there is a 30% to 40% internal ratio return. We'll adhere to that discipline, and look forward to actually starting to see that growth pick up, which I suspect you'll see. Like I said, at the back half of this year, especially into Q4, is that package returned quarter over quarter at a high level.

John Barnidge: The next question comes from John Barnidge, from Piper Sandler. Please go ahead. Good afternoon. Thanks for the opportunity to grasp Margie. My question, Margie, on your comment about a market participant in the market that dropped out 100,000 tests. Member experience is important for products where the market penetration is low. Once your expectation for other market participants in a rate in the backdrop of rate need for some, it is a creative opportunity to acquire books to ensure customers have good pet experience in a product with that low market penetration.

John Barnidge: Thank you. Yeah, thank you, John. Obviously for us, this is not a good thing, as you say. We never want anyone to have a bad experience in a cast degree that's under penetrated. We're really leaning into early adopters and helping people to have that best experience from the outset. We know from history, that's hurt the cast degree growth back in the 80s when poor experiences were had. I think the learning from here is first and foremost horrible situation for pet parents and as a cast degree is an industry where we need to do is be able to get behind the veterinarians and help them reinforce the fact that players such as Trupanion are creating a product that's sustainable.

John Barnidge: It really needs into the fact that you have got to understand the cost that go into pricing for those pets. Our aged enrollment pricing is very unique in the industry where the only people that do that and that allows us to have a very clear vision for the lifetime of that pet. It's not an easy thing to do. I think if you think about the natural hurdles that you have coming into this industry, we've seen a lot of people come in.

John Barnidge: They've grown very quickly and they've not got their pricing right. We've proven over the last two years that we are ahead of the industry in terms of being able to react even though we berated ourselves 80 months ago for being slow, we were significantly faster than the competition. For us, I think we're never going to chase a pet count over the lifetime value and make you sure that member experience is what it should be.

John Barnidge: I think we'll lean into the vet channel, we'll continue to share the fact that we are here for the pet, we're here for them. I think when it comes to acquiring those pets, it's a challenge. The best member experience is having a puppy or a kitten or a new pet to the household. It doesn't have pre-existing conditions that we at TruePanion can cover everything for that pet in that instance. Many of those pets that are now without coverage will have pre-existing conditions and that doesn't set the member up for the best experience.

John Barnidge: So for us, we'll continue to focus on that early entry point and obviously hope that this doesn't happen for others. And I think it's just a message to everyone that that pricing has got to be critical and it's got to be on point. And I think we've proven that we're starting to see the come at the other side of that and hopefully others will too. Thank you for that.

Fawwad Qureshi: My final question maybe numbers one on the two material weaknesses. What was the size of that cost in the quarter and where did we see the financial results? Thank you. Yeah, you see that cost in fixed expenses. So fixed expenses were elevated. I think one of the advantages that we have as a company is we have a very clear model PNL so that model PNL calls for fixed expenses to be 5% of revenue.

Fawwad Qureshi: They ticked up higher as expected primarily related to the material weakness. There's a couple of dimensions to have one or the cost of the actual remediation work we talked in the last call about bringing on some resources as well as some external expertise. And the other is just from a technology perspective because one of the MWs had to do with controls within technology. There's more engineering effort on remediation and so you're seeing higher operating expense versus lower cap X because more maintenance and support around remediation versus development. So you see it then fixed expel. Thank you.

John Block: The next question comes from John Block, from Stiefel. Please go ahead. Thanks guys, good afternoon. Maybe just the first one.

Fawwad Qureshi: I believe the variable expenses in other was probably $7 million Q over Q is sort of like an unusual step up, you know, low bay, so call it like $17 million to $23,000 or $16.5 to $23 and change. So maybe you could just shed some light on that magnitude of this sequential step up and then when I shift gears and I just look at where the gross ads are coming from. One of the newer opportunities is sort of like any other North American subscription, not the core.

Fawwad Qureshi: And I believe that stepped down from $10,000 and changed in one Q to, you know, $7,600 and two Q. I took that channel to get, you know, better, not sort of materially worse Q over Q. As you sort of refine the plans and streamline that maybe you could just add some color to both of those and then I'll ask a shorter follow up.

Fawwad Qureshi: Yeah, I can take the first one on variable expense. So as we talked about in the past, the agreement with pets best is law sensitive. And so our margin is relatively insulated from either higher loss ratio or higher variable expense. We have expense of this case had to do with higher commissions as that loss ratio is coming down. There's a higher earn. It doesn't affect our operating margin. That's relatively flat quarter of recorder. In the Q1 call, I talked about that being the new run rate for that business based on the new agreement. That's largely consistent with our expectations being flat Q1 to Q2.

Fawwad Qureshi: And just I don't just on the gross ads and the other products. So one of the things that we've been learning with those new products is really leaning into what makes a good cohort for us. So they are the newer. We're learning how to both lead get leads and convert those pets and also ultimately retain them. So we're looking at that I or R constantly to understand what's the best lifetime value.

Fawwad Qureshi: What we realize during the quarter is some of those products are still some scale. So we don't want to be pushing too much in there as we get more rate for our core products. So you're seeing the the balance moving back to core, but also really looking at growing the right way. So as we test and refine from a new product, new channel distribution perspective. We realize that some of the pets are enrolling are not going to have that stickiness that we typically would be used to.

Fawwad Qureshi: So the teams have slowed down that growth rate deliberately looked at how do we really deploy that pack in the best way to get the right mix of pets. And we're making some really good progress there. So the beauty of having these different distribution channels is different products is that we do know how to choice. We don't just have to grow in one one country, one geography, one product. And we're leaning into that flexibility, depending, but always thinking about that 30 to 40% internal rate of return ultimately. Got it helpful color things for that.

Margie Tooth: And then just the second question sort of follow up to a question that was asked earlier, but from a different perspective on that competitor that churned off. You know the 100,000 or so a subscribers. What's been the reaction not so much from the you know pet owner experience, but from the veterinarian community. You know your biggest channel is going through the vets. You want them to stand behind and doors, you know, bring up pet insurance and feel comfortable.

Margie Tooth: One of the assets that you brought initially to the industry was a transparent plan that was simple and easy to explain. And you know when they hear about something like this going on, do they have more trepidation when they're engaging with pet owners? Thank you.

Margie Tooth: That is a great question. Honestly, for us, that's really where we felt the initial need to educate our territory partners, so as you know, these are the people who are going in the doors of veterinary hospitals, speaking to Vazquez. They did have this conversation. It continues to be a pain point for Vazquez, as you can imagine, many of their clients are going through this experience month over month. And it frankly is an opportunity for Trupanion.

Margie Tooth: We're there. We can explain firsthand not only what that situation, what leads to that type of situation, but also to reinforce the fact that in our coverage, Trupanion cannot just cancel a pet, because we feel like cancelling a pet. We are adhering to our lifetime value to our pricing promise. And from our perspective, it's critical that Vazquez know that I'm trusted. What I would say is an indicator based on those conversations as we're seeing in the last few weeks, our veterinary lead traffic is higher than it's ever been before.

Margie Tooth: We're not pushing too hard on that conversion funnel yet, but that's a very good sign. It shows that we're able to demonstrate how we're different, why we're different. And to that point, you made that transparency in terms of our policy wording and our coverage is being critical to both get the trust of the vets and also retain the trust of the vets as they see this type of thing happening in the industry.

Katie Sakys: Our next question comes from Katie Sackis from Autonomous Research. Please go ahead. Okay, thank you.

Margie Tooth: Good evening. I want to circle back really quickly on the discussions for retention. Maggie, would you be able to quantify the extent to which retention improved on a trailing three month basis for us? We haven't shared that level of detail, but I think from the perspective of our core business, we've seen it improve ahead of other products which for us is symptomatic of really focusing on that and doubling down that big cohort because it's now, now today it's over 55% of our members, but the expansion is moving very nicely and we're very happy with that performance. It's pretty much in line with expectation.

Fawwad Qureshi: Okay, maybe shifting to R2 really quickly. It's impressively held in at almost 10% for the second quarter in a row now. Can you guys give me a color on where you expect that to trend over the back half of the year as the remaining 45% of the book experiences those rate increases and then perhaps adjacent to that? Is there any portion of the book and if so, what percentage that would face those large rate increases in the beginning of 2025?

Fawwad Qureshi: Yeah, I can give them context just on second half. Our expectation comes similar to what we saw in first half. This was a year that was going to be driven by more so ARPU than PET count given that we've been pulling back on acquisition spend. We saw that in Q2 where it was balanced, but a little bit more lean towards ARPU as a contributor to top line growth from a subscription perspective.

Fawwad Qureshi: We expect is that pricing flows through similar to what we saw in prior years where you have first half being relatively flat sequentially and then expansion of margin in second half. A lot of that expansion in second half is going to be driven by the benefit of that ARPU in our highest categories. As Mark mentioned, we are going to be increasing investment in acquisition. We're gradually increasing that. Again, now that margins are closer to our target range, that's more an investment that's going to benefit us in the first half of next year.

Fawwad Qureshi: We want to hit the ground running from an acquisition standpoint. So I would say second half is still going to be larger than driven by ARPU. And then just in terms of the members facing knowledge increases in 2025, for us, by the time we get to the end of this year, our book of business will have received the biggest increase. Unless we see an increase in inflation above the 15% in Q1, now that we've level set the delta that we had from prior periods, we feel good about the fact that we have sufficient pricing flowing through the book of business that will have affected the entire book.

Fawwad Qureshi: And by the time we get to Q1, our pricing that we have today will hold at that level. So we shouldn't see the need to go above the 20% increase again next year. Obviously that's dependent on inflation. If we do see inflation move up, then our rates will move up again. But we feel like we're at a pretty stable state. And look forward to being able to really focus on moving more of our members back to that sub 20% retention group over the next 12 months.

Katie Sakys: Thank you.

Operator: Again, if you have a question, please press star then one.

Wilma Burdis: Our next question comes from Wilma Burdis from Raymond James. Please go ahead. Good afternoon.

Margie Tooth: We've seen some industry articles discussing lower than normal that business in 2Q24. Just curious if you saw any of those types of trends in the quarter. Thanks. Yeah, hi, Wilma. So our data actually suggests otherwise. We've definitely been buying those trends in the industry. Typically what we find and what we've always found with the Trupanion member is that they do go to the vet more frequently than an uninsured client. It removes barriers to care, it removes barriers to entry so people when they see an issue with their pet will go to the vet and they're in without waiting without pausing.

Margie Tooth: We've been meaning in a lot to the industry and hearing what's been happening from our territory partners and from the markets in general. And what we're hearing is there are a couple of things that play here one down to the fact that puppies and kittens are not being purchased in the same levels that they were two years ago. So there's less new visits, there's less new clients coming to the hospital, which is driving part of that visit pattern down.

Margie Tooth: The other is anecdotally we're hearing people are waiting to see how their pet does before they take them to the veterinarian, which obviously is not ideal for a pet parent to have to do. But when they're thinking about their finances and they concerned about what that's going to cost, they're waiting. And from our point of view, again, speaking to the point I made earlier, we're actually seeing more and more veterinarians leaning into the fact that they realize the higher proportion of their clients that are coming in, our Trupanion members.

Margie Tooth: And so they're recognizing the value that we offer to them and helping to generate more lead volume as a result of that. So it's a counterintuitive initially. But when you think about the type of person that we are trying to the members we have, that's why our patents are slightly different.

Fawwad Qureshi: We are seeing, I would just add, a slight downturn in July in terms of visits. So we'll wait and see what happens there, but so far assumptions are remaining at 15%. Okay, thank you. And then you raised that you raised that even by two million in the quarter. Could you just talk about where that piece is coming from or what business line is driven by? Was it in other subscription or was there some other impact if you could just help us bridge that?

Fawwad Qureshi: Thanks. Yeah, our profitability is primarily driven by subscription overwhelmingly. The margin on the other businesses is relatively small. So the contributors of a large area, AOI driven. So the more AOI we're generating as a result of the output flow through that we talked about as well as continuing general pets. So feel good about it. Again, largely within line or with our expectations. When we think about the overall plan, first half versus second half, we feel good about exiting the first half with some momentum. And that that votes well for us in terms of having some optimism on second half. Thank you.

Operator: There are no more questions in the queue. This concludes our question and answer session. Thank you for attending today's presentation. You may now disconnect. Thank you.

Operator: Dr. Ripps, Dr. Ripps, Dr. Ripps, Dr. Ripps,