What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-27 compared with 2023-02-16 · 186 added, 133 removed, 773 unchanged (29% of the section changed)

13 unchanged sentences

We have audited the accompanying consolidated balance sheets of Trupanion, Inc.

(the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”).

(the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 16, 2023 expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 2024 expressed an adverse opinion thereon.

Basis for Opinion

15 unchanged sentences

Description of the Matter The Company’s reserve for veterinary invoices totaled $63.2 million as of December 31, 2023.

As discussed in Note 1 to the financial statements, the Company’s reserve for veterinary invoices is based on an actuarial analysis of the Company’s historical experience including the number of veterinary invoices it expects to receive, the average cost of those veterinary invoices, the length of time between the date of the veterinary invoice and the date the Company receives the veterinary invoice and the members’ chosen deductibles.

Auditing the Company’s reserve for veterinary invoices is complex due to the sensitivity of the estimated reserve to management assumptions including frequency and severity of loss and development factors applied to paid and reported invoices.

How We Addressed the Matter in Our Audit We evaluated the design and tested the operating effectiveness of controls over the reserve for veterinary invoices process, including controls over the completeness and accuracy of the data used in management’s actuarial projections and the review and approval processes that management has in place for the methods and assumptions used by management’s actuaries in estimating the reserves.

To evaluate the reserve for veterinary invoices, our audit procedures included, among others, testing the completeness and accuracy of the underlying invoice data and related contracts.

As discussed in Note 1 and Note 10 to the financial statements, the Company’s reserve for veterinary invoices is based on an actuarial analysis of the Company’s historical experience where the Company makes assumptions to estimate the amount the Company will pay for veterinary invoices that haven't been processed or received but that are dated as of, or prior to, its balance sheet date.

The estimate of veterinary invoice reserves is subject to a number of variables, including historical trends involving payment patterns and amounts.

Auditing the Company’s reserve for veterinary invoices is complex and required the involvement of our actuarial specialists due to the sensitivity of the estimated reserve to management's assumptions.

Estimating the ultimate cost to settle the veterinary invoice reserve is subjective due to the possibility that the actual veterinary invoice payments may not be comparable to historical trends experienced by the Company.

How We Addressed the Matter in Our Audit To evaluate the reserve for veterinary invoices, our audit procedures included, among others, testing the completeness and accuracy of the historical veterinary paid invoice data used in management's actuarial projections.

We involved our actuarial specialists to assist in our evaluation of management’s methodologies and assumptions used in the calculation of the reserve and compared the Company’s recorded reserve to a range of reasonable estimates developed independently by our actuarial specialists.

5 unchanged sentences

Consolidated Statements of Operations

(in thousands, except per share data)

(in thousands, except share data)

Year Ended December 31,

16 unchanged sentences

Total operating expenses 171,456 164,933 139,371

Loss from investment in joint venture ( 253 ) ( 171 ) ( 126 )

Gain (loss) from investment in joint venture ( 219 ) ( 253 ) ( 171 )

Operating loss ( 40,659 ) ( 43,001 ) ( 35,196 )

2 unchanged sentences

Loss before income taxes ( 45,035 ) ( 44,196 ) ( 35,220 )

Income tax expense 476 310 113

Income tax expense (benefit) ( 342 ) 476 310

Net loss $ ( 44,693 ) $ ( 44,672 ) $ ( 35,530 )

26 unchanged sentences

Short-term investments 129,667 156,804

Accounts and other receivables, net of allowance for doubtful accounts of $ 540 at December 31, 2022 and $ 342 at December 31, 2021

Accounts and other receivables, net of allowance for credit loss of $ 1,085 at December 31, 2023 and $ 540 at December 31, 2022

267,899 232,439

3 unchanged sentences

Long-term investments 12,866 7,841

Property and equipment, net 90,701 77,950

Property, equipment, and internal-use software, net 103,650 90,701

Intangible assets, net 18,745 24,031

25 unchanged sentences

Treasury stock, at cost:

1,028,186 and 933,165 shares at December 31, 2022 and 2021

1,028,186 shares at December 31, 2023 and 2022

( 16,534 ) ( 16,534 )

7 unchanged sentences

Balance at January 1, 2021 39,450,807 $ — $ 439,007 $ ( 91,360 ) $ 3,071 $ ( 10,779 ) $ 339,939

Issuance of common stock from private placement 3,636,364 — 192,265 — — — 192,265

Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 1,024,378 — ( 1,117 ) — — — ( 1,117 )

Stock-based compensation expense — — 28,902 — — — 28,902

Repurchases of common stock ( 3,300 ) — — — — ( 78 ) ( 78 )

Other comprehensive income (loss) — — — — 6 — 6

3 unchanged sentences

Stock-based compensation expense — — 35,026 — — — 35,026

Repurchases of common stock ( 95,021 ) — — — — ( 5,755 ) ( 5,755 )

Other comprehensive income (loss) — — — — ( 9,378 ) — ( 9,378 )

3 unchanged sentences

Stock-based compensation expense — — 35,296 — — — 35,296

Repurchases of common stock (95,021) — — — — (5,755) (5,755)

Other comprehensive income (loss) — — — — 6,704 — 6,704

22 unchanged sentences

Maturities and sales of investment securities 190,270 239,210 57,869

Cash paid in business acquisitions, net of cash acquired ( 15,034 ) — ( 48,133 )

Purchases of property and equipment ( 17,088 ) ( 12,355 ) ( 7,451 )

Cash paid in business acquisition, net of cash acquired — ( 15,034 ) —

Purchases of property, equipment, and internal-use software ( 18,280 ) ( 17,088 ) ( 12,355 )

Other 1,585 ( 1,598 ) ( 1,755 )

1 unchanged sentence

Financing activities

Issuance of common stock, net of offering costs — — 192,265

Repurchase of common stock ( 5,755 ) — —

Proceeds from exercise of stock options 2,290 3,607 6,013

Shares withheld to satisfy tax withholding ( 4,359 ) ( 4,732 ) ( 1,115 )

Proceeds from debt financing, net of financing fees 60,102 69,138 —

Repayment of debt financing ( 1,717 ) ( 571 ) —

Repurchases of common stock — ( 5,755 ) —

Proceeds from exercise of stock options 2,655 2,290 3,607

Shares withheld to satisfy tax withholding ( 1,536 ) ( 4,359 ) ( 4,732 )

Other ( 378 ) — —

8 unchanged sentences

Noncash investing and financing activities:

Purchases of property and equipment included in accounts payable and accrued liabilities 1,324 729 861

Acquisition-related contingent consideration recorded as a liability — — 162

Purchases of property, equipment, and internal-use software included in accounts payable and accrued liabilities 887 1,324 729

Trupanion, Inc.

3 unchanged sentences

Trupanion, Inc.

(collectively with its wholly-owned subsidiaries, the "Company") provides medical insurance for cats and dogs throughout the United States, Canada, Puerto Rico, and Australia.

Through the Company's data-driven, vertically-integrated approach, the Company develops and offers high value medical insurance products, priced specifically for each pet’s unique characteristics and coverage level.

(collectively with its wholly-owned subsidiaries, the "Company") provides medical insurance for cats and dogs in the United States, Canada, Continental Europe, and Australia.

The Company's data-driven, vertically-integrated approach enables the Company to provide pet owners with products that the Company believes are the highest value medical insurance, priced specifically for each pet’s unique characteristics.

Basis of Presentation

8 unchanged sentences

At times, cash on deposit may be in excess of the applicable federal deposit insurance corporation limits.

The Company considers any cash account that is contractually restricted to withdrawal or use to be restricted cash.

The Company considers any cash account not held in trust for a third party that is contractually restricted to withdrawal or use to be restricted cash.

The Company is required to maintain certain restricted cash balances to comply with insurance company regulations.

1 unchanged sentence

Accounts and Other Receivables

Receivables are comprised of trade receivables and other miscellaneous receivables.

Accounts and other receivables are carried at their estimated collectible amounts.

Accounts receivable balance is primarily related to the Company’s other business segment where the Company generates revenue from underwriting policies through unaffiliated general agents.

Accounts and other receivables are comprised of trade receivables and other miscellaneous receivables and are carried at their estimated collectible amounts.

Trade receivables are primarily related to the Company’s other business segment where the Company generates revenue from underwriting policies through unaffiliated general agents.

These policies are typically annual policies, with monthly payment terms through the end of the twelve-month period.

The Company had $ 249.8 million and $ 220.8 million accounts receivable associated with underwriting these policies as of December 31, 2023 and 2022, respectively.

During the year ended December 31, 2023, the Company incurred a non-recurring $ 3.8 million settlement of accounts receivable due to uncollected premiums in connection with the transition of underwriting a third-party business to other insurers.

Deferred Acquisition Costs

The Company incurs certain costs, including premium taxes, fees and enrollment-based bonuses, and referral fees that directly relate to the successful acquisition of new or renewal customer contracts.

The Company incurs certain costs, including premium taxes, enrollment-based bonuses, and referral fees that directly relate to the successful acquisition of new or renewal customer contracts.

These costs are deferred and are included in prepaid expenses and other assets on the consolidated balance sheet and amortized over the related policy term to the applicable financial statement line item, either new pet acquisition expense or other cost of revenue.

2 unchanged sentences

The Company invests in investment grade fixed maturity securities of varying maturities.

Available-for-sale securities are reported at fair value with unrealized gains and losses included in accumulated other comprehensive loss.

Available-for-sale securities are reported at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss).

Held-to-maturity securities are reported at amortized cost.

Premiums or discounts on fixed maturity securities are amortized or accreted over the life of the security and included in interest income.

There have been no realized gains and losses on sales of fixed maturity securities.

The Company evaluates whether declines in the fair value of its investments below book value are other-than-temporary.

This evaluation includes the Company's ability and intent to hold the security until an expected recovery occurs, the severity and duration of the unrealized loss, as well as all available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable forecasts, when developing estimates of cash flows expected to be collected.

There were $ 0.3 million in realized gains and $ 0.9 million in realized losses on sales of fixed maturity securities during the year ended December 31, 2023, and no realized gains or losses on sales of fixed maturity securities during the years ended December 31, 2022 and 2021.

Each reporting period, the Company evaluates whether declines in fair value of its investments below carrying value are the result of expected credit losses.

This evaluation includes the Company's ability and intent to hold these investments until recovery of carrying value occurs, including an evaluation of all available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable forecasts.

Expected credit losses are recorded as an allowance through other expense (income), net on the Company's consolidated statements of operations.

Fair Value of Financial Instruments

8 unchanged sentences

The carrying amounts of accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of these instruments.

Property and Equipment

Property and equipment primarily consists of building, land and land improvements, office equipment, internally-developed software related to the Company’s website, and internal support systems, capitalized during the application development stage of the project.

Property, Equipment, and Internal-Use Software

Property, equipment, and internal-use software primarily consists of building, land and land improvements, office equipment, internal-use software related to the Company’s website, and internal support systems.

Internal-use software is capitalized during the application development stage of the project.

Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of the respective asset:

8 unchanged sentences

Acquired finite-lived intangibles are amortized on a straight-line basis over the estimated useful lives of the assets.

The Company has recognized no impairment loss on goodwill and indefinite-lived intangible assets for the years ended December 31, 2023, 2022, and 2021.

Asset Impairment

Long-lived assets, including property, equipment, and intangible assets, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Long-lived assets, including property, equipment, internal-use software, and finite-lived intangible assets, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Should an impairment exist, the impairment loss would be measured as the amount the asset's carrying value exceeds its fair value.

The Company has recognized no impairment loss on long-lived assets for the years ended December 31, 2022, 2021, and 2020.

The Company has recognized no impairment loss on long-lived assets, including property, equipment, internal-use software, and finite-lived intangible assets for the years ended December 31, 2023, 2022, and 2021.

Reserve for Veterinary Invoices

2 unchanged sentences

To determine the accrual, the Company makes assumptions based on its historical experience, including the number of veterinary invoices it expects to receive, the average cost of those veterinary invoices, the length of time between the date of the veterinary invoice and the date the Company receives it, the member's chosen deductible, and the Company's expected cost to process and administer the payments.

As of each balance sheet date, the Company reevaluates its reserve and may adjust the estimate for new information.

As of each balance sheet date, the Company reevaluates its reserve and adjusts the estimate for new information.

Deferred Revenue

Deferred revenue is primarily related to the Company’s other business segment where the Company generates revenue from underwriting policies through unaffiliated general agents.

These policies are typically annual policies, with monthly payment terms through the end of the twelve-month period.

These policies are typically annual policies for which revenue is recognized pro-rata over the twelve-month policy period.

Deferred revenue also consists of subscription fees received or billed in advance of the subscription services within the Company's subscription business.

1 unchanged sentence

The Company generates revenue primarily from subscription fees and through underwriting policies for unaffiliated general agents.

For the year ended December 31, 2023, premiums from policies sourced by general agents accounted for 34 % of our total revenue, and one general agent sourced members whose premiums accounted for over 10% of our total revenue.

Revenue is recognized pro-rata over the terms of the customer contracts.

Veterinary Invoice Expense

Veterinary invoice expense includes the Company’s costs to review veterinary invoices, administer the payments, and provide member services, and other operating expenses directly or indirectly related to this process.

The Company also accrues for veterinary invoices that have been incurred but not yet received or paid.

This also includes amounts paid by unaffiliated general agents, and an estimate of amounts incurred and not yet paid for the other business segment.

Veterinary invoice expense includes the Company’s costs to review and pay veterinary invoices, administer the payments, and provide member services, and other operating expenses directly or indirectly related to this process.

The Company also accrues for veterinary invoices that have been incurred but not yet received or paid and the estimated cost of processing these invoices.

Veterinary invoice expense also includes amounts paid by unaffiliated general agents on our behalf, and an estimate of amounts incurred and not yet paid for the other business segment.

Other Cost of Revenue

8 unchanged sentences

New pet acquisition expense primarily consists of costs, including employee compensation, to educate veterinarians and consumers about the benefits of Trupanion, to generate leads and to convert leads into enrolled pets, as well as print, online and promotional advertising costs.

New pet acquisition expense was previously termed “sales and marketing” on the consolidated statement of operations.

This update represents a change in name only.

It does not denote a change in method of accounting.

Other Income, Net

Other income, net, was $ 3.1 million, nil , and $ 0.6 million, including interest income of $ 3.0 million, $ 0.3 million, and $ 0.6 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Other Expense (Income), Net

Other income, net, was $ 7.7 million, $ 3.1 million, and nil , including interest income of $ 9.0 million, $ 3.0 million, and $ 0.3 million offset by credit losses of $ 1.7 million, nil , and nil for the years ended December 31, 2023, 2022, and 2021, respectively.

Advertising costs are expensed as incurred, with the exception of television advertisements, which are expensed the first time each advertisement is aired.

27 unchanged sentences

Cumulative translation adjustments of $( 0.1 ) million, $( 2.8 ) million, and $ 1.6 million were recorded in accumulated other comprehensive loss (income) as of December 31, 2023, 2022, and 2021, respectively.

Reclassifications

Certain reclassifications have been made to prior-year amounts to conform to current-year reporting classifications.

These reclassifications had no impact on net earnings, total assets, total liabilities, or total shareholders' equity.

Insurance Operations

15 unchanged sentences

government agencies and high-credit-quality issuers of debt securities.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 related to improving segment disclosures.

This ASU enhances disclosures about significant segment expenses, allows for multiple measures of a segment's profit or loss, and requires additional disclosures about the Chief Operating Decision Maker.

The ASU is effective for annual periods beginning after December 15, 2023, including interim periods within that reporting period, with early adoption permitted.

As of year-end, the Company is still evaluating the impact on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09 which improves and expands upon the income tax disclosures, primarily related to the rate reconciliation and income taxes paid information.

The ASU is effective for annual periods beginning after December 15, 2024, including interim periods within that reporting period, with early adoption permitted.

As of year-end, the Company is still evaluating the impact on its consolidated financial statements.

Net Loss per Share

17 unchanged sentences

The purchase price allocation recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Current assets, net of cash acquired $ 295

10 unchanged sentences

As of the acquisition date, the Company assumed a credit agreement entered into by PetExpert in 2021 that provides for a revolving line of credit.

The maximum credit limit at December 31, 2022 was $ 0.4 million.

To the extent not previously paid, the line of credit is due on May 31, 2023.

As of December 31, 2022, PetExpert had $ 0.4 million debt issued and outstanding under this assumed credit agreement.

This line of credit was due and paid in full in May 2023.

On August 31, 2022, the Company completed an acquisition of 100% of the equity of Smart Paws GmbH (Smart Paws), a managing general agent for pet insurance with operations in Germany and Switzerland, for approximately $ 2.8 million in net cash.

5 unchanged sentences

The results of PetExpert and Smart Paws operations have been included in the consolidated financial statements since the acquisition date, but were immaterial to the Company's consolidated financial statements.

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

Property, Equipment, and Internal-Use Software, Net

Property, equipment, and internal-use software, net consisted of the following (in thousands):

Land and improvements $ 15,911 $ 15,911

3 unchanged sentences

Construction in progress 34,627 21,415

Property and equipment, at cost 127,882 109,240

Property, equipment and internal-use software, at cost 145,738 127,882

Accumulated depreciation ( 42,088 ) ( 37,181 )

Property and equipment, net $ 103,650 $ 90,701

Depreciation expense related to property and equipment was $ 6.1 million, $ 7.1 million and $ 5.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Depreciation expense related to property, equipment, and internal-use software was $ 6.7 million, $ 6.1 million and $ 7.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Goodwill and Intangible Assets

Goodwill arises from business acquisitions in which the purchase price exceeds the fair value of tangible and intangible assets acquired less assumed liabilities.

The following is a summary of goodwill by reportable segment for the year ended December 31, 2022 (in thousands):

The following is a summary of goodwill by reportable segment for the years ended December 31, 2023 and 2022 (in thousands):

Subscription Business Other Business Total

Balance as of December 31, 2021 $ 32,709 $ — $ 32,709

Balance as of January 1, 2022 $ 32,709 $ — $ 32,709

Acquisitions 12,159 — 12,159

1 unchanged sentence

Balance as of December 31, 2022 41,983 — 41,983

Effects of foreign currency 1,730 — 1,730

Balance as of December 31, 2023 $ 43,713 $ — $ 43,713

The following table presents the detail of intangible assets other than goodwill for the periods presented (in thousands):

19 unchanged sentences

The Company is currently licensed in all 50 states, the District of Columbia and Puerto Rico.

Most licenses are renewed annually upon payment of various fees assessed by the issuing state.

Insurance licenses are renewed annually upon payment of various fees assessed by the issuing state.

Renewal costs are expensed as incurred.

This is considered an indefinite-lived intangible asset given the planned renewal of the certificates of authority and applicable licenses for the foreseeable future.

Insurance licenses are considered an indefinite-lived intangible asset given the planned renewal of the certificates of authority and applicable licenses for the foreseeable future.

Amortization expense associated with intangible assets was $ 5.7 million, $ 4.8 million, and $ 4.9 million for the years ended December 31, 2023, 2022, and 2021, respectively.

20 unchanged sentences

Other asset-backed securities 12,422 67 ( 53 ) 12,436

Municipal bond 1,000 — ( 6 ) 994

Corporate bonds 36,404 332 ( 123 ) 36,613

3 unchanged sentences

Certificates of deposit 12,298 — — 12,298

government funds 41,192 — — 41,192

$ 25,477 $ 21 $ ( 15 ) $ 25,483

3 unchanged sentences

Foreign deposits $ 7,683 $ — $ — $ 7,683

Municipal bond 1,000 11 — 1,011

$ 7,683 $ — $ — $ 7,683

Held-to-maturity investments

treasury securities $ 158 $ — $ ( 4 ) $ 154

$ 158 $ — $ ( 4 ) $ 154

Short-term investments:

Available-for-sale investments

treasury securities $ 42,833 $ 17 $ ( 203 ) $ 42,647

Mortgage-backed securities and collateralized mortgage obligations 8,015 8 ( 105 ) 7,918

Other asset-backed securities 11,286 8 ( 85 ) 11,209

Municipal bond 1,000 — ( 6 ) 994

Corporate bonds 37,793 95 ( 357 ) 37,531

$ 100,927 $ 128 $ ( 756 ) $ 100,299

Held-to-maturity investments

3 unchanged sentences

$ 56,505 $ — $ ( 58 ) $ 56,447

Maturities of debt securities classified as available-for-sale and held-to-maturity were as follows (in thousands):

Maturities of investments classified as available-for-sale and held-to-maturity were as follows (in thousands):

December 31, 2023

3 unchanged sentences

$ 92,698 $ 93,169

Available-for-sale collateralized:

Mortgage-backed securities and collateralized mortgage obligations $ 10,460 $ 10,454

Other asset-backed securities 12,422 12,436

$ 22,882 $ 22,890

Held-to-maturity:

3 unchanged sentences

The Company does not expect any credit losses from its held-to-maturity investments, considering the composition of the investment portfolio and the credit loss history of these investments.

For available-for-sale debt securities, the Company determined that there was $ 0.6 million of unrealized losses and nil for the years ended December 31, 2022 and 2021, respectively.

Further, any available-for-sale debt securities with unrealized losses have been in the loss position for less than twelve months.

The Company does not expect any credit losses from its available-for-sale debt securities, considering the composition of the investment portfolio and the credit rating of these investments.

For those securities, the Company determined it is not likely to, and did not intend to, sell prior to a potential recovery.

Proceeds from the sales of fixed maturities classified as available-for-sale were $ 43.0 million and nil during the years ended December 31, 2022 and 2021, respectively.

For available-for-sale investments, the Company determined that there were unrealized losses of $ 0.3 million and $ 0.8 million for the years ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, $ 18.9 million in available-for-sale investments have been in a loss position for more than twelve months, with total unrealized losses of $ 0.2 million.

As of December 31, 2023, $ 25.9 million available-for-sale investments have been in a loss position for less than twelve months, with total unrealized losses of $ 0.1 million.

As of December 31, 2022, no available-for-sale investments had been in a loss position for more than twelve months.

As of December 31, 2022, $ 76.3 million available-for-sale investments had been in a loss position for less than twelve months, with total unrealized losses of $ 0.8 million.

These losses relate to interest rate changes.

The Company does not expect any credit losses from its available-for-sale investments, considering the composition of the investment portfolio and the credit rating of these investments.

For those securities, the Company determined it is not likely to, and does not intend to, sell prior to a potential recovery.

Proceeds from the sales of fixed maturities classified as available-for-sale were $ 114.7 million and $ 43.0 million during the years ended December 31, 2023 and 2022, respectively.

Other Investments

Investment in Variable Interest Entity

The Company has invested $ 7.0 million in preferred stock of a variable interest entity, Baystride, Inc., a U.S.-based privately held corporation operating in the pet food industry.

The Company does not have power over the activities that most significantly impact the economic performance of the variable interest entity and is, therefore, not the primary beneficiary.

The Company has the option to purchase all of the outstanding common stock issued by the variable interest entity in 2023 at an amount approximating its expected fair value.

The preferred stock investment in the variable interest entity is accounted for as an available-for-sale debt security, and measured at fair value at each balance sheet date — see Note 8.

Additionally, the Company has extended a $ 5.6 million revolving line of credit to the variable interest entity to fund its inventory purchases.

Preferred Stock Investment

The Company has invested $ 7.0 million in the preferred stock of a variable interest entity, Baystride, Inc., a U.S.-based privately held corporation operating in the pet food industry.

The Company does not have power over the activities that most significantly impact the economic performance of the entity and is, therefore, not the primary beneficiary.

The Company has the option to purchase all of the outstanding common stock issued by the entity in August 2027 at an amount approximating its expected fair value.

The preferred stock investment in the entity is redeemable, and therefore, is accounted for as an available-for-sale debt security, and measured at fair value at each balance sheet date — see Note 8.

Additionally, the Company has extended a $ 7.0 million revolving line of credit to the variable interest entity to fund its inventory purchases, which will increase annually by $ 2.0 million until the note’s maturity in 2027.

Borrowing amounts are subject to limitations based on Baystride’s forecasted revenues and inventory balances.

The Company's investment and amounts loaned under the line of credit are recorded in other long-term assets on its consolidated balance sheet.

2 unchanged sentences

The Company provided $ 0.4 million and $ 0.8 million of these services for the years ended December 31, 2023 and 2022, respectively.

Allowance for Credit Loss

The Company regularly evaluates its investments for expected credit losses.

The Company considers past events, current conditions, and reasonable and supportable forecasts in estimating an allowance for credit losses.

Additionally, the Company considers the ultimate collection of cash flows from its investments and whether the Company has the intent to sell, or if it is more likely than not the Company would be required to sell the security prior to recovery of its amortized cost.

Such evaluations are revised as conditions change and new information becomes available.

Based on these considerations, the Company has established an allowance for credit losses related to its investment in the preferred stock of a variable interest entity.

The following table presents a rollforward of the allowance for credit losses for this investment.

Balance as of January 1, 2022 $ —

(Addition to) allowance for credit losses —

Balance as of December 31, 2022 —

(Addition to) allowance for credit losses ( 1,674 )

Balance as of December 31, 2023 $ ( 1,674 )

Investment in Joint Venture

4 unchanged sentences

Also included in this line item are income and expenses associated with administrative services provided to the joint venture.

Fair Value Disclosures

The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring basis, and placement within the fair value hierarchy (in thousands):

7 unchanged sentences

Foreign deposits 11,869 11,869 — —

Municipal bond 994 — 994 —

Treasury securities 44,687 — 44,687 —

Preferred stock in variable interest entity 4,115 — — 4,115

Preferred stock investment 5,326 — — 5,326

Total $ 188,745 $ 79,229 $ 104,190 $ 5,326

3 unchanged sentences

Fixed maturities:

Mortgage-backed securities and collateralized mortgage obligations 7,918 — 7,918 —

Other asset-backed securities 11,209 — 11,209 —

Corporate bonds 37,531 — 37,531 —

Foreign deposits 7,683 7,683 — —

Municipal bond 994 — 994 —

Preferred stock in variable interest entity 8,442 — — 8,442

Treasury securities 42,647 — 42,647 —

Preferred stock investment 4,115 — — 4,115

Total $ 113,730 $ 9,316 $ 100,299 $ 4,115

The Company measures the fair value of money market funds and foreign deposits based on quoted prices in active markets for identical assets.

Our fixed maturity investments classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including pricing vendors, dealers/market makers, and exchange-quoted prices.

The fair value of our fixed maturity investments classified as Level 2 is based on either recent trades in inactive markets or quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.

The Company measures the fair value of money market funds and foreign deposits, classified as Level 1, based on quoted prices in active markets for identical assets.

The Company's fixed maturity investments classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including pricing vendors, dealers/market makers, and exchange-quoted prices.

The fair value of the Company's fixed maturity investments classified as Level 2 is based on either recent trades in inactive markets or quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.

Held-to-maturity investments are carried at amortized cost and the fair value and changes in unrealized gains (losses) are disclosed in Note 6, Investments.

The fair value of these investments is determined in the same manner as available-for-sale securities and are considered either a Level 1 or Level 2 measurement.

The Company's preferred stock investment in the variable interest entity (see Note 7) is accounted for as an available-for-sale debt security, and measured at fair value at each balance sheet date.

The Company's preferred stock investment (see Note 7) is accounted for as an available-for-sale debt security, and measured at fair value at each balance sheet date.

The estimated fair value of the preferred stock investment is a Level 3 measurement, and is based on certain unobservable inputs such as the value of the underlying enterprise, volatility, time to liquidity, and market interest rates.

An increase or decrease in any of these unobservable inputs would result in a change in the fair value measurement.

Estimated fair value was $ 4.1 million and $ 8.4 million as of December 31, 2022 and 2021, respectively, recorded in other long-term assets on the Company's consolidated balance sheet.

A $ 4.3 million unrealized loss and a $ 0.5 million unrealized gain was recorded in the statement of other comprehensive income for the year ended December 31, 2022 and 2021, respectively.

The Company considers the unrealized loss of $ 2.9 million as of December 31, 2022 to be temporary in nature.

The estimated fair value was $ 5.3 million and $ 4.1 million as of December 31, 2023 and 2022, respectively, and is recorded in other long-term assets on the Company's consolidated balance sheet.

The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer.

There were no transfers between levels for the years ended December 31, 2023 and 2022.

The following table presents the change in fair value of the Company’s investment carried at fair value and classified as Level 3 as of December 31, 2023 (in thousands):

Preferred Stock Investment

Balance as of January 1, 2021 $ 7,949

Unrealized gain included in other comprehensive income (loss) 493

Balance as of December 31, 2021 $ 8,442

Unrealized loss included in other comprehensive income (loss) ( 4,327 )

Balance as of December 31, 2022 $ 4,115

Reversal of cumulative unrealized loss included in other comprehensive income (loss) 2,885

Credit loss included in earnings ( 1,674 )

Balance as of December 31, 2023 $ 5,326

Fair Value Disclosures - Other Assets and Liabilities

The Company's other long-term assets balance also included notes receivable of $ 6.8 million and $ 9.3 million as of December 31, 2023 and 2022, respectively, recorded at their estimated collectible amount.

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Based upon the terms of the debt, the carrying amount of long-term debt approximated fair value at December 31, 2023.

The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer.

There were no transfers between levels for the years ended December 31, 2022 and 2021.

Commitments and Contingencies

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Reserve for Veterinary Invoices

The reserve for veterinary invoices is an estimate of the future amount the Company will pay for veterinary invoices that are dated as of, or prior to, its balance sheet date.

The reserve for veterinary invoices is an estimate of the future amount the Company will pay for veterinary invoices that haven't been processed or received but that are dated as of, or prior to, its balance sheet date.

The reserve also includes the Company's estimate of related internal processing costs.

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Reserve at end of period $ 31,548 $ 21,543 $ 22,407

The Company's reserve for the subscription business segment decreased $ 0.9 million from $ 22.4 million at December 31, 2021 to $ 21.5 million at December 31, 2022.

This change was primarily comprised of $ 436.9 million in expense recorded during the period less $ 433.5 million in payments of veterinary invoices.

This $ 436.9 million in veterinary invoice expense incurred included a reduction of $ 2.8 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends.

The Company's adjustments to prior year reserves were a reduction of $ 1.4 million and an increase of $ 0.2 million as a result of analysis of payment trends in the years ended December 31, 2021 and 2020, respectively.

The Company had unfavorable development on veterinary invoice reserves for the subscription business segment of $ 2.8 million for the year ended December 31, 2023, favorable development on veterinary invoice reserves of $ 2.8 million for the year ended December 31, 2022, and favorable development on veterinary invoice reserves of $ 1.4 million for the year ended December 31, 2021, all of which were the result of ongoing analysis of recent payment trends.

Summarized below are the changes in total liability for the Company's other business segment (in thousands):

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Reserve at end of period $ 31,690 $ 22,191 $ 17,264

The Company’s reserve for the other business segment increased $ 4.9 million from $ 17.3 million at December 31, 2021 to $ 22.2 million at December 31, 2022.

This change was comprised of $ 212.9 million in expense recorded during the period less $ 207.9 million in payments of veterinary invoices.

This $ 212.9 million in veterinary invoice expense incurred included an increase of $ 1.1 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends.

The Company's adjustments to decrease prior year reserves were $ 0.2 million and $ 0.2 million as a result of analysis of payment trends in each of the years ended December 31, 2021 and 2020, respectively.

Veterinary invoice expenses

The Company had unfavorable development on veterinary invoice reserves for the other business segment of $ 0.5 million for the year ended December 31, 2023, unfavorable development on veterinary invoice reserves of $ 1.1 million for the year ended December 31, 2022, and favorable development on veterinary invoice reserves of $ 0.2 million for the year ended December 31, 2021, all of which were the result of ongoing analysis of recent payment trends.

Reserve for veterinary invoices, by year of occurrence

In the following tables, the cumulative number of veterinary invoices represents the total number received as of December 31, 2023, by year the veterinary invoice relates to, referred to as the year of occurrence.

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Total amounts unpaid and recorded as a liability $ 31,690

On March 25, 2022 , the Company entered into a credit agreement with Piper Sandler Finance, LLC that provides the Company with $ 150.0 million in credit (the Credit Facility) consisting of:

On March 25, 2022 , the Company entered into a credit agreement with Piper Sandler Finance, LLC, acting as the administrative agent, that provides the Company with $ 150.0 million in credit (the Credit Facility) consisting of:

(a) an initial term loan in an aggregate principal amount of $ 60.0 million (Initial Term Loan), which was funded at closing;

(b) commitments for delayed draw term loans in an aggregate principal amount not in excess of $ 75.0 million (Delayed Draw Term Loans, and together with the Initial Term Loan, the Term Loans), which may be drawn from time to time until September 25, 2023 .

On December 29, 2022, the Company borrowed a Delayed Draw Term loan of $ 15.0 million;

On December 29, 2022, February 17, 2023, and September 21, 2023, the Company borrowed Delayed Draw Term loans of $ 15.0 million, $ 35.0 million, and $ 25.0 million, respectively;

(c) commitments for revolving loans in an aggregate principal amount at any time outstanding not in excess of $ 15.0 million (Revolving Loans), which may be drawn at any time prior to March 25, 2027 .

The Credit Facility bears interest at a floating base rate plus an applicable margin.

The stated interest rate as of December 31, 2022 was approximately 9.7 % for the original $ 60.0 million term loan and for the $ 15.0 million term loan.

The stated interest rate as of December 31, 2023 was approximately 10.5 % for the original $ 60.0 million term loan and for the aggregate $75.0 million term loans.

The Company incurred total debt issuance cost of approximately $ 5.9 million, which is reported in the consolidated balance sheet as a direct reduction from the carrying amount of the Credit Facility, and is amortized as interest expense over the term of five years.

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The Credit Agreement contains financial and other covenants .

As of December 31, 2022 , the Company was in compliance with all financial and non-financial covenants .

As of December 31, 2023 , the Company was in compliance with all financial and other covenants .

To the extent not previously paid, the Initial Term Loan is due and payable on March 25, 2027 , the Delayed Draw Term Loans are due and payable on the earlier of the five-year anniversary of their initial funding or March 25, 2028 , and Revolving Loans are due and payable on March 25, 2027 .

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As of December 31, 2023, the Company had 714,382 unvested restricted stock units.

Stock-based compensation expenses of $ 82.3 million related to unvested restricted stock units are expected to be recognized over a weighted average period of approximately 2.6 years.

Stock-based compensation expense of $ 44.6 million related to unvested restricted stock units are expected to be recognized over a weighted average period of approximately 2.4 years.

In March 2023, two executives terminated employment with the Company and one executive signed a separation agreement effective June 1, 2023.

In conjunction with these departures, the Company accelerated the vesting of certain RSUs as of the termination date and extended the purchase date of certain vested options from 90 to 365 days.

These award modifications resulted in the recognition of $ 4.8 million share-based compensation expense during the year ended December 31, 2023.

Stock Options

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The Company didn't grant any stock options in these three years.

Weighted Average Grant Date Fair Value per Share Fair Value of Options Vested

Fair Value of Options Vested

(in thousands)

2020 $ — $ 1,105

2021 $ — $ 313

Restricted Stock Awards and Restricted Stock Units

The below table summarizes the Company’s restricted stock award and restricted stock unit activity for the years ended December 31, 2022, 2021 and 2020:

A summary of the Company’s restricted stock award and restricted stock unit activity for the years ended December 31, 2023, 2022 and 2021 is as follows:

Shares Weighted Average

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In April 2021, the Board approved a share repurchase program, pursuant to which the Company may, between May 2021 and May 2026, repurchase outstanding shares of the Company's common stock.

The Company repurchased 95,021 shares during the year ended December 31, 2022.

The Company did not repurchase any shares under this program during the year ended December 31, 2021.

The Company repurchased no shares during the year ended December 31, 2023.

The Company repurchased 95,021 shares under this program during the year ended December 31, 2022.

Accumulated Comprehensive Income (Loss)

A summary of the components of accumulated other comprehensive income (loss) is as follows (in thousands):

For the year ended December 31, 2022 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total

Balance as of December 31, 2021 $ 1,624 $ 1,453 $ 3,077

Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total

Balance as of January 1, 2021 $ 2,120 $ 951 $ 3,071

Other comprehensive income (loss) ( 496 ) 502 6

Balance as of December 31, 2021 $ 1,624 $ 1,453 $ 3,077

For the year ended December 31, 2021 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total

Balance as of December 31, 2020 $ 2,120 $ 951 $ 3,071

Other comprehensive income (loss) ( 4,412 ) ( 4,966 ) ( 9,378 )

Balance as of December 31, 2022 $ ( 2,788 ) $ ( 3,513 ) $ ( 6,301 )

For the year ended December 31, 2020 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total

Balance as of December 31, 2019 $ ( 375 ) $ 625 $ 250

Other comprehensive income (loss) 2,712 3,992 6,704

Balance as of December 31, 2023 $ ( 76 ) $ 479 $ 403

The Company has two reporting segments:

The Company has two aggregated reporting segments:

subscription business and other business.

The subscription business segment generates revenue primarily from subscription fees related to the Company's direct-to-consumer products, while the other business segment is comprised of revenue from other product offerings that generally have a business-to-business relationship and a different margin profile than our subscription business segment, including revenue from writing policies on behalf of third parties and revenue from other products and software solutions.

The subscription business segment consists of products that have been created to meet the needs of their distribution channels and have similar target margin profiles.

This segment generates revenue primarily from subscription fees related to the Company's direct-to-consumer products.

The other business segment generates revenue primarily by underwriting policies on behalf of third parties.

The Company does not undertake marketing efforts for these policies and has a business-to-business relationship with these third-parties.

The other business segment also includes other products and insurance software solutions that have a different margin profile from the Company’s subscription business segment.

The chief operating decision maker reviews revenue and operating income (loss) to evaluate segment performance.

Revenue, veterinary invoice expense, other cost of revenue, and new pet acquisition expenses are generally directly attributed to each segment.

Other operating expenses, such as technology and development expense, general and administrative expense, and depreciation and amortization, are allocated proportionately based on revenue in each segment.

Other operating expenses, such as technology and development expense, general and administrative expense, and depreciation and amortization, are generally allocated proportionately based on revenue in each segment.

Interest and other expenses and income taxes are not allocated to the segments, nor included in the measure of segment profit or loss.

The Company does not analyze discrete segment balance sheet information related to long-term assets.

Operating income (loss) of the Company’s segments were as follows (in thousands):

O perating income (loss) of the Company’s segments were as follows (in thousands):

Year Ended December 31,

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Depreciation and amortization 4,453 3,716 3,471

Other business operating income (loss) ( 2,991 ) ( 1,060 ) ( 651 )

Loss from investment in joint venture ( 253 ) ( 171 ) ( 126 )

Other business operating loss ( 4,446 ) ( 2,991 ) ( 1,060 )

Gain (loss) from investment in joint venture ( 219 ) ( 253 ) ( 171 )

Total operating loss ( 40,659 ) ( 43,001 ) ( 35,196 )

Interest expense 12,077 4,267 10

Other expense (income), net ( 7,701 ) ( 3,072 ) 14

Loss before income taxes $ ( 45,035 ) $ ( 44,196 ) $ ( 35,220 )

The following table presents the Company’s revenue by geographic region of the member (in thousands):

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The Company’s business operations are conducted through subsidiaries, one of which is an insurance company domiciled in New York, American Pet Insurance Company (APIC), and one of which is a segregated cell business, Wyndham Segregated Account AX, located in Bermuda.

In 2022, the Company incorporated a new wholly-owned insurance subsidiary, GPIC Insurance Company (GPIC), domiciled in Canada.

In 2021, the Company established two new wholly-owned insurance subsidiaries in the United States, ZPIC Insurance Company (ZPIC) and QPIC Insurance Company (QPIC), domiciled in Missouri and Nebraska, respectively.

The Company is also awaiting final required approvals for a Canadian insurer, GPIC Insurance Company.

In addition to general state law restrictions on payments of dividends and other distributions to stockholders applicable to all corporations, insurance companies are subject to further regulations that, among other things, may require such companies to maintain certain levels of equity and restrict the amount of dividends and other distributions that may be paid to their parent corporations.

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Dividends, in larger amounts, known as extraordinary dividends, are subject to approval by the insurer's domiciliary state regulator.

None of the Company's insurance subsidiaries paid dividends to the Company during the years ended December 31, 2022, 2021, and 2020.

An extraordinary dividend or distribution is generally defined as a dividend or distribution that, in the aggregate in any 12-month period, exceeds the lesser of (i) 10% of surplus as of the preceding December 31 or (ii) the insurer’s adjusted net investment income for the 12-month period immediately preceding the declaration or distribution of the current dividend increased by the excess, if any, of net investment income over dividends declared or distributed during the period commencing thirty-six months prior to the declaration or distribution of the current dividend and ending twelve months prior thereto, and not including realized capital gains.

APIC paid dividends of $ 7.6 million to the Company during the year ended December 31, 2023.

None of the Company's U.S.

insurance subsidiaries paid dividends to the Company during the years ended December 31, 2022 and 2021.

The Company's insurance subsidiary in Bermuda is regulated by the Bermuda Monetary Authority.

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This insurance subsidiary paid the Company a dividend of $ 7.3 million, $ 6.9 million, and $ 5.6 million during the years ended December 31, 2023, 2022 and 2021, respectfully.

The statutory net income for 2022, 2021 and 2020 and statutory capital and surplus at December 31, 2022, 2021 and 2020, for the Company’s insurance subsidiary in New York were as follows (in thousands):

The statutory net income for 2023, 2022 and 2021 and statutory capital and surplus at December 31, 2023, 2022 and 2021, for APIC were as follows (in thousands):

As of December 31,

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Statutory capital and surplus $ 199,613 $ 162,232 $ 124,189

As of December 31, 2022, the Company’s insurance subsidiary in New York maintained $ 162.2 million of statutory capital and surplus which was above the required amount of $ 142.4 million of statutory capital and surplus to avoid additional regulatory oversight.

The Company has funded $ 8.0 million and $ 7.8 million of statutory capital to ZPIC and QPIC, respectively, as of December 31, 2022.

ZPIC and QPIC will each be required to maintain a level of surplus as determined by their respective domiciliary regulators.

As of December 31, 2022, neither ZPIC nor QPIC has begun underwriting any insurance policies.

As of December 31, 2023, APIC maintained $ 199.6 million of statutory capital and surplus which was above the required amount of $ 137.6 million of statutory capital and surplus to avoid additional regulatory oversight.

During the year ended December 31, 2023, the Company funded $ 3.8 million, $ 0.2 million, and CAD $ 8.5 million of statutory capital to APIC, ZPIC and GPIC, respectively.

During the year ended December 31, 2022, the Company funded $ 8.0 million and $ 7.8 million of statutory capital to ZPIC and QPIC, respectively.

ZPIC, QPIC and GPIC will each be required to maintain a level of surplus as determined by their respective domiciliary regulators.

As of December 31, 2023, neither ZPIC, QPIC nor GPIC has begun underwriting any insurance policies.

As of December 31, 2023, the Company had $ 14.6 million on deposit with various states in which it is licensed to write policies.

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At December 31, 2023, the Company had U.S.

federal and state net operating loss carryforwards of $ 63.8 million (tax-effected) and U.S.

federal, U.S.

state, and foreign net operating loss carryforwards of $ 71.2 million (tax-effected) and U.S.

federal income tax credits of $ 1.1 million.

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After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against its U.S.

Federal and the majority of its U.S.

State deferred tax assets as of December 31, 2022, 2021, and 2020 because the Company’s management has determined that it is more likely than not that these assets will not be fully realized.

Federal, the majority of its U.S.

State, and a portion of its foreign deferred tax assets as of December 31, 2023, 2022, and 2021 because the Company’s management has determined that it is more likely than not that these assets will not be fully realized.

For the year ended December 31, 2023, the Company recognized a net increase of $ 7.7 million in valuation allowance against its net deferred tax assets associated with U.S.

federal and certain state jurisdictions, primarily attributable to current year activity.

federal and certain foreign and U.S.

state jurisdictions, primarily attributable to current year activity.

The Company is open to examination by the U.S.

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The plan also allows the Company to make a matching contribution, subject to certain limitations.

To date, the Company has made no contributions to the 401(k) plan.

As of December 31, 2023, the Company has made no matching contributions to the 401(k) plan.

Related Parties

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data