What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-11-03 · 128 added, 201 removed, 357 unchanged (48% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We provide medical insurance for cats and dogs throughout the United States, Canada, Europe, Puerto Rico, and Australia.

We provide medical insurance for cats and dogs in the United States, Canada, Continental Europe, and Australia.

Through our data-driven, vertically-integrated approach, we develop and offer high value medical insurance products, priced specifically for each pet’s unique characteristics and coverage level.

Our growing and loyal membership base provides us with highly predictable and recurring revenue.

We operate in two business segments:

We operate in two aggregated reporting segments:

subscription business and other business.

Our 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.

We operate our subscription business segment similar to other subscription-based businesses, with a focus on achieving a target margin prior to our new pet acquisition expense and aiming to acquire as many pets as possible at our targeted average estimated internal rate of return.

We generate revenue in our other business segment primarily by underwriting policies on behalf of third parties that do not carry reference to the Trupanion brand.

We do not undertake the marketing efforts for these policies and have a business-to-business relationship with these third parties.

Our other business segment also includes other products and insurance software solutions that have a different margin profile from our subscription business.

We generate revenue in our subscription business segment primarily by subscription fees from direct-to-consumer products.

We operate our subscription business segment similar to other subscription-based businesses, with a focus on achieving a target margin prior to our new pet acquisition expense and acquiring as many pets as possible at our targeted average estimated internal rate of return.

Within our subscription business, we also provide "Powered by Trupanion" pet insurance product offerings marketed by third parties and, in Canada, low and medium average revenue per pet ("ARPU") products marketed under the brand names, Furkin and PHI Direct.

We are the underwriter and provide a full suite of services and support for these products.

They are designed to align with the target margin profile of our subscription business segment.

Within our subscription business segment, we also offer products in Continental Europe, which are currently underwritten using third-party underwriters.

Our other business segment is comprised of revenue from other product offerings with third parties with whom we generally have a business-to-business relationship.

This business segment has a different margin profile than our subscription segment and includes revenue from underwriting policies on behalf of third parties and revenue from other products and insurance software solutions.

This segment of our business is not part of our core business strategy and generally has a lower margin.

Over time, it is reasonable to expect changes to this segment that may impact the revenue contribution due to a partner or partners rolling off to the new underwriters.

We generate leads for our subscription business segment from a diverse set of member acquisition channels, which we then convert into members through our contact center, website and other direct-to-consumer activities.

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Key Operating Metrics

The following tables set forth total pets enrolled and key operating metrics for our subscription business for the nine months ended September 30, 2023 and 2022 and for each of the last eight fiscal quarters.

Nine Months Ended September 30,

Total Business:

Total pets enrolled (at period end) 1,712,177 1,439,605

Subscription Business:

Total subscription pets enrolled (at period end) 969,322 808,077

Monthly average revenue per pet $ 64.63 $ 64.09

Lifetime value of a pet, including fixed expenses $ 428 $ 673

Average pet acquisition cost (PAC) $ 232 $ 291

Average monthly retention 98.55 % 98.71 %

The following table sets forth total pets enrolled and key operating metrics for our subscription business for each of the last eight fiscal quarters.

Three Months Ended

31, 2024 Dec.

31, 2023 Sept.

30, 2023 Jun.

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30, 2022 Jun.

30, 2022 Mar.

31, 2022 Dec.

Total Business:

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Average monthly retention is measured as the monthly retention rate of enrolled subscription pets for each applicable period averaged over the 12 months prior to the period end date.

As such, our average monthly retention rate as of September 30, 2023 is an average of each month’s retention from October 1, 2022 through September 30, 2023.

As such, our average monthly retention rate as of March 31, 2024 is an average of each month’s retention from April 1, 2023 through March 31, 2024.

We calculate monthly retention as the number of pets that remain after subtracting all pets that cancel during a month, including pets that enroll and cancel within that month, divided by the total pets enrolled at the beginning of that month.

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We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes.

We believe that these non-GAAP financial measures, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance.

We believe that these non-GAAP financial measures, when taken collectively, may be helpful to investors in providing consistency and comparability with past financial performance.

However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for, the directly comparable financial measures prepared in accordance with GAAP.

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We define non-GAAP development expenses as operating expenses incurred to develop new products and offerings that are pre-revenue.

We define non-GAAP fixed expenses as the total of technology and development expense and general and administrative expense, less stock-based compensation expense, non-recurring transaction and restructuring expense, and development expenses related to exploring and developing new products and offerings that are in the pre-revenue stage.

The following tables present the reconciliation of our non-GAAP financial measures from corresponding GAAP measures for the periods presented (in thousands):

Nine Months Ended September 30,

Veterinary invoice expense $ 613,316 $ 473,654

Stock-based compensation expense (1)

(2,565) (3,155)

Other business cost of paying veterinary invoices (210,286) (152,911)

Subscription cost of paying veterinary invoices (non-GAAP) $ 400,465 $ 317,588

% of subscription revenue 76.8 % 72.5 %

Other cost of revenue $ 108,480 $ 96,980

Stock-based compensation expense (1)

(1,158) (1,818)

Other business variable expenses (56,455) (51,862)

Subscription variable expenses (non-GAAP) $ 50,867 $ 43,300

% of subscription revenue 9.8 % 9.9 %

Technology and development expense $ 15,434 $ 18,178

General and administrative expense 46,817 28,907

Stock-based compensation expense (1)

(16,072) (12,116)

Non-recurring transaction or restructuring expenses (2)

(4,175) (179)

Development expenses (3,417) (5,705)

Fixed expenses (non-GAAP) $ 38,587 $ 29,085

% of total revenue 4.7 % 4.4 %

New pet acquisition expense $ 60,183 $ 67,043

Stock-based compensation expense (1)

(5,433) (7,037)

Other business pet acquisition expense (123) (476)

Subscription acquisition cost (non-GAAP) $ 54,627 $ 59,530

% of subscription revenue 10.5 % 13.6 %

(1) Trupanion employees may elect to take restricted stock units in lieu of cash payment for their bonuses.

We account for such expense as stock-based compensation in accordance with GAAP, but we do not include it in any non-GAAP adjustments.

Stock-based compensation associated with bonuses was approximately $0.6 million for the nine months ended September 30, 2023.

(2) Consists of business acquisition transaction expenses, severance and legal costs due to certain executive departures, and a $3.8 million non-recurring settlement of accounts receivable in the first quarter of 2023 related to uncollected premiums in connection with the transition of underwriting a third-party business to other insurers.

Three Months Ended

31, 2024 Dec.

31, 2023 Sept.

30, 2023 Jun.

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30, 2022 Jun.

30, 2022 Mar.

31, 2022 Dec.

Veterinary invoice expense $ 233,569 $ 217,739 $ 212,441 $ 206,738 $ 194,137 $ 176,083 $ 171,112 $ 157,616

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Other business cost of paying veterinary invoices (4)

(81,213) (77,572) (72,694) (72,443) (65,149) (59,946) (58,197) (50,378)

Subscription cost of paying veterinary invoices (non-GAAP) $ 151,494 $ 139,282 $ 138,877 $ 133,439 $ 128,149 $ 115,238 $ 111,955 $ 106,216

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Other business variable expenses (4)

(16,498) (19,301) (20,482) (17,230) (18,743) (20,591) (17,346) (18,010)

Subscription variable expenses (non-GAAP) $ 19,407 $ 18,367 $ 17,415 $ 16,797 $ 16,655 $ 15,272 $ 14,810 $ 14,448

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Development expenses (3)

(1,178) (1,683) (1,594) (925) (898) (2,084) (2,435) (2,012)

Fixed expenses (non-GAAP) $ 16,197 $ 13,879 $ 12,610 $ 13,881 $ 12,096 $ 10,131 $ 9,448 $ 9,526

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Other business pet acquisition expense (4)

(13) (77) (10) (62) (51) (65) (181) (186)

Subscription acquisition cost (non-GAAP) $ 14,973 $ 15,545 $ 16,083 $ 18,985 $ 19,559 $ 20,313 $ 20,145 $ 20,195

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We account for such expense as stock-based compensation in accordance with GAAP, but we do not include it in any non-GAAP adjustments.

Stock-based compensation associated with bonuses was approximately $0.3 million for the three months ended September 30, 2023.

(2) Consists of business acquisition transaction expenses, severance and legal costs due to certain departures, and a $3.8 million non-recurring settlement of accounts receivable in the first quarter of 2023 related to uncollected premiums in connection with the transition of underwriting a third-party business to other insurers.

Stock-based compensation associated with bonuses was approximately $0.8 million for the three months ended March 31, 2024.

(3) Consists of costs related to product exploration and development that are pre-revenue and historically have been insignificant.

(4) Excluding the portion of stock-based compensation expense attributable to the other business segment.

When determining our PAC, we calculate net acquisition cost for a more comparable metric across periods.

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We offset sign-up fee revenue because it is a one-time charge to new members collected at the time of enrollment used to partially offset initial setup costs, which are included in new pet acquisition expenses.

The following tables reconcile GAAP new pet acquisition expense to non-GAAP net acquisition cost (in thousands) for the nine months ended September 30, 2023 and 2022 and for each of the last eight fiscal quarters:

Nine Months Ended September 30,

New pet acquisition expense $ 60,183 $ 67,043

Net of sign-up fee revenue (3,492) (3,793)

Stock-based compensation expense (5,433) (7,037)

Other business pet acquisition expense (123) (476)

Pet acquisition expense for commission-based policies (2,641) —

Net acquisition cost $ 48,494 $ 55,737

The following table reconciles GAAP new pet acquisition expense to non-GAAP net acquisition cost (in thousands) for each of the last eight fiscal quarters:

Three Months Ended

31, 2024 Dec.

31, 2023 Sept.

30, 2023 Jun.

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30, 2022 Jun.

30, 2022 Mar.

31, 2022 Dec.

New pet acquisition expense $ 16,843 $ 17,189 $ 17,772 $ 20,769 $ 21,642 $ 22,457 $ 22,434 $ 22,982

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Components of Operating Results

We operate in two business segments:

We operate in two aggregated reporting segments:

subscription business and other business.

Our 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 our direct-to-consumer products.

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

We do not undertake marketing efforts for these policies and have a business-to-business relationship with these third parties.

The other business segment also includes other products and insurance software solutions that have different margin profiles than our subscription business segment.

We generate revenue in our subscription business segment primarily by subscription fees from direct-to-consumer products.

We operate our subscription business segment similar to other subscription-based businesses, with a focus on achieving a target margin prior to our pet acquisition expense and acquiring as many pets as possible at our targeted average estimated internal rate of return.

Within our subscription business, we also provide "Powered by Trupanion" pet insurance product offerings marketed by third parties and, in Canada, low and medium ARPU products marketed under the brand names Furkin and PHI Direct.

We provide a full suite of services and support for these products and they are designed to align with the target margin profile of our subscription business segment.

Within our subscription business segment, we also offer products in Continental Europe, which are currently underwritten using third-party underwriters.

Our other business segment is comprised of revenue from other product offerings with third parties with whom we generally have a business-to-business relationship.

This business segment has a different margin profile than our subscription segment and includes revenue from writing policies on behalf of third parties and revenue from other products and insurance software solutions.

We generate revenue in our subscription business segment primarily from subscription fees for our pet medical insurance.

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Technology and development expenses primarily consist of personnel costs and related expenses for our technology staff, which includes information technology development and infrastructure support, including third-party services.

It also includes expenses associated with development of new geographies, products and offerings.

It also includes expenses associated with development in new geographies and new products and offerings.

General and administrative

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We have made and may continue to make significant investments to grow our member base.

Our net acquisition cost and the number of new members we enroll depends on a number of factors, including the amount we elect to invest in pet acquisition activities in any particular period in the aggregate and by channel, the frequency of existing members adding a pet or referring their friends or family, the effectiveness of our sales execution and marketing initiatives, changes in costs of media, the mix of our pet acquisition expenditures and the competitive environment.

Our pet acquisition cost and the number of new members we enroll depends on a number of factors, including the amount we have available and we elect to invest in pet acquisition activities in any particular period in the aggregate and by channel, the frequency of existing members adding a pet or referring their friends or family, the effectiveness of our sales execution and marketing initiatives, changes in costs of media, the mix of our pet acquisition expenditures and the competitive environment.

Our average pet acquisition cost has in the past significantly varied, and in the future may significantly vary, from period to period based upon specific marketing initiatives and estimated rates of return on pet acquisition spend.

We also may regularly test new member acquisition channels and marketing initiatives, which may be more expensive than our traditional marketing channels and may increase our average acquisition costs.

We also regularly test new member acquisition channels and marketing initiatives, which may be more expensive than our traditional marketing channels and may increase our average pet acquisition costs.

We continually assess our pet acquisition activities by monitoring the estimated return on PAC spend both on a detailed level by acquisition channel and in the aggregate.

Timing of price adjustments.

Our subscription business’s cost-plus model depends on our ability to estimate our operating costs and expenses, including veterinary invoice expenses, and to adjust our pricing to achieve our target returns.

We regularly reevaluate and adjust the price of our subscriptions, with a goal of achieving our targeted payout ratio, subject to the review and approval of regulators where applicable.

This makes it important for us to accurately estimate our costs and to promptly implement pricing adjustments, which generally roll onto our book of insured pets over the succeeding twelve months.

This makes it important for us to accurately estimate our costs and to promptly implement pricing adjustments, which generally roll onto our book of insured pets over the succeeding twelve months following any applicable regulatory approval.

As a result, we may have timing mismatches during which our pricing does not reflect our current expense profile.

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For example, prices from our plans could vary depending on the relative cost of veterinary care in different countries or areas or whether the pet is a dog or a cat.

As our mix of business between geographies changes, our metrics, such as our monthly average revenue per pet, and our exposure to foreign exchange fluctuations will be impacted.

As we expand into international markets and continue to explore other opportunities, we expect these effects to increase.

As our mix of business between products and geographies changes, our metrics, such as our monthly average revenue per pet, and our exposure to foreign exchange fluctuations will be impacted.

We expect our international business, additional product offerings and "Powered by Trupanion" plans to grow and, in turn, we expect these effects to increase.

Other business segment.

Our other business segment primarily includes other product offerings that have been, and we expect will be in the future, materially different from those in our subscription business segment.

We do not undertake marketing efforts for and are not the primary interface with the customers of the third parties for whom we write policies.

Our other business segment primarily includes other product offerings that have been materially different from those in our subscription business segment.

In addition, we expect the growth rate of this segment to be materially different from our subscription business segment.

We do not undertake marketing efforts for and are not the primary interface with the customers of the third parties for whom we underwrite other business segment policies.

Our relationships in our other business segment are generally subject to termination provisions and are non-exclusive.

Accordingly, we have limited influence on the volume of business.

Accordingly, we have limited influence on the volume of business of this segment.

Loss of an entire program via contract termination could result in the associated policies and revenue being lost over a period of 12 to 18 months, which could have a material impact on our results of operations.

In some cases, we have structured exclusive relationships, but those relationship have been and may continue to be subject to limitations on the number of enrolled pets as to which we will write policies for the third party.

We may enter into additional relationships in the future to the extent we believe they will be beneficial to us, which could also impact our operating results.

In some cases, we have structured exclusive relationships, but those relationships have been and may continue to be subject to limitations on the number of enrolled pets as to which we will write policies for the third party.

We may enter into additional relationships in this segment in the future, if we believe they will be beneficial, which could impact our operating results.

Results of Operations

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The period-to-period comparison of financial results is not necessarily indicative of future results.

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

(in thousands)

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Technology and development (1)

5,302 6,553 15,434 18,178

General and administrative (1)

9 unchanged sentences

Loss before income taxes (6,890) (24,971)

Income tax expense (benefit) (43) 496 (472) 491

Income tax benefit (38) (191)

Net loss $ (6,852) $ (24,780)

(1) Includes stock-based compensation expense as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

(in thousands)

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Total stock-based compensation expense $ 8,152 $ 12,331

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

(as a percentage of revenue)

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Loss before income taxes (2) (10)

Income tax expense (benefit) — — — —

Income tax benefit — —

Net loss (2) % (10) %

Stock-based compensation expense:

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

(as a percentage of revenue)

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Total stock-based compensation expense 3 % 5 %

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

(as a percentage of subscription revenue)

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Subscription business cost of revenue 86 88

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

Comparison of the Three Months Ended March 31, 2024 and 2023

Three Months Ended March 31, % Change

(in thousands, except percentages, pet and per pet data)

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Average monthly retention 98.41 % 98.65 %

Three months ended September 30, 2023 compared to three months ended September 30, 2022.

Total revenue increased by $52.1 million, or 22%, to $285.9 million for the three months ended September 30, 2023.

Revenue from our subscription business segment increased by $30.5 million, or 20%, to $182.9 million for the three months ended September 30, 2023 .

This in crease was primarily due to a 16% increase in pet months (the sum of pets enrolled for each month during a period) for policies underwritten by Trupanion during the respective periods and a 3% increase in monthly average revenue per pet.

Revenue from our other business segment increased by $21.6 million to $102.9 million, or 27%, for the three months ended September 30, 2023, primarily due to a 21% increase in pet months and a 5% increase in monthly average revenue per pet in this segment.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Total revenue increased by $153.6 million, or 23%, to $812.7 million for the nine months ended September 30, 2023.

Revenue from our subscription business segment increased by $83.3 million, or 19%, to $521.4 million for the nine months ended September 30, 2023.

This increase was primarily due to an 18% increase in pet months for policies underwritten by Trupanion during the respective periods and a 1% increase in monthly average revenue per pet.

Revenue from our other business segment increased by $70.3 million to $291.4 million, or 32%, for the nine months ended September 30, 2023, due to a 28% increase in pet months and a 4% increase in monthly average revenue per pet in this segment.

Three months ended March 31, 2024 compared to three months ended March 31, 2023.

Total revenue increased by $49.8 million, or 19%, to $306.1 million for the three months ended March 31, 2024.

Revenue from our subscription business segment increased by $35.9 million, or 22%, to $201.1 million for the three months ended March 31, 2024.

This increase was primarily due to an 11% increase in subscription pet months (the sum of pets enrolled for each month during a period) for policies underwritten by Trupanion during the respective periods and a 10% increase in monthly average revenue per pet.

Revenue from our other business segment increased by $13.9 million, or 15%, to $105.0 million for the three months ended March 31, 2024.

This increase was primarily driven by a 2% increase in pet months and a 14% increase in monthly average revenue per pet in this segment.

Cost of Revenue

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

Three Months Ended March 31, % Change

(in thousands, except percentages, pet and per pet data)

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Total subscription pets enrolled (at period end) 1,006,168 906,369 11

Monthly average revenue per pet $ 65.82 $ 63.80 3 $ 64.63 $ 64.09 1

Three months ended September 30, 2023 compared to three months ended September 30, 2022.

Cost of revenue for our subscription business segment was $157.4 million, or 86% of revenue, for the three months ended September 30, 2023, compared to $128.2 million, or 84% of revenue, for the three months ended September 30, 2022.

This increase of 23% in subscription cost of r evenue was primarily due to an 16% increase in pet months for policies underwritten by Trupanion during the respective periods.

The increase in cost of revenue was also attributable to a 6% increase in veterinary invoice expense per pet, including impacts of rising veterina ry invoice expenses in the current inflationary environment.

Cost of revenue for our other business segment increased by $17.6 million, or 23%, to $93.2 million for the three months ended September 30, 2023, primarily due to the 21% increase in pet months in this segment.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Cost of revenue for our subscription business segment was $455.1 million, or 87% of revenue, for the nine months ended September 30, 2023, compared to $365.9 million, or 84% of revenue, for the nine months ended September 30, 2022.

This increase of 24% in subscription cost of revenue was primarily due to an 18% increase in pet months for policies underwritten by Trupanion during the respective periods.

The increase in cost of revenue was also attributable to a 6% increase in veterinary invoice expense per pet including rising veterinary invoice expenses in the current inflationary environment.

Cost of revenue for our other business segment increased by $62.0 million, or 30%, to $266.7 million for the nine months ended September 30, 2023, primarily due to the 28% increase in pet months in this segment.

Three months ended March 31, 2024 compared to three months ended March 31, 2023.

Total cost of revenue for our subscription business segment increased $26.0 million, or 18%, to $172.1 million, for the three months ended March 31, 2024.

This increase was driven by a $23.4 million, or 18%, increase in veterinary invoice expense and a $2.7 million, or 16%, increase in other cost of revenue.

The 18% increase in veterinary invoice expense was driven by an 11% increase in total subscription pet months for policies underwritten by Trupanion and a 6% increase in veterinary invoice expense per pet month.

The 16% increase in other cost of revenue was primarily due to general increases in costs attributable to growth in our membership.

Subscription business cost of revenue decreased from 88% to 86% of revenue year-over-year.

Total cost of revenue for our other business segment increased by $13.9 million, or 17%, to $97.8 million for the three months ended March 31, 2024.

The increase was primarily driven by a $16.1 million, or 25%, increase in veterinary invoice expense offset by a $2.2 million, or 12%, decrease in other cost of revenue.

The 25% increase in veterinary invoice expense was primarily driven by a 2% increase in pet months in this segment and a 23% increase in veterinary invoice expense per pet month.

The 12% decrease in other cost of revenue was primarily driven by lower commissions due to third-party general agents.

Cost of revenue for the other business segment increased from 92% to 93% of revenue year-over-year.

Technology and Development Expenses

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

Three Months Ended March 31, % Change

(in thousands, except percentages)

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Percentage of total revenue 2 % 2 %

Three months ended September 30, 2023 compared to three months ended September 30, 2022.

Technology and development expenses decreased by $1.3 million, or 19%, to $5.3 million for the three months ended September 30, 2023, due to a decrease of $1.3 million in development expense as several initiatives that were pre-revenue in the prior year were launched and have begun generating revenue.

Expenses associated with these initiatives are now recorded within the income statement based on the underlying nature of the expense.

Technology and development expenses decreased from 3% to 2% of total revenue year over year.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Technology and development expenses decreased by $2.7 million, or 15%, to $15.4 million for the nine months ended September 30, 2023, driven primarily by a decrease of $3.9 million in development expense as several initiatives that were pre-revenue in the prior year were launched and have begun generating revenue.

Expenses associated with these initiatives are now recorded within the income statement based on the underlying nature of the expense .

This decrease was partially offset by a $0.5 million increase in contractor expenses and a $0.5 million increase in IT system hosting expenses.

Technology and development expenses decreased from 3% to 2% of total revenue year over year.

Three months ended March 31, 2024 compared to three months ended March 31, 2023.

Technology and development expenses increased by $2.1 million, or 42%, to $7.0 million for the three months ended March 31, 2024.

This increase was primarily due to increases of $0.9 million in general compensation and other employee-related expenses, $0.6 million in infrastructure related expenses, and $0.4 million in development expense .

Technology and development expenses remained constant at 2% of total revenue year-over-year.

General and Administrative Expenses

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

Three Months Ended March 31, % Change

(in thousands, except percentages)

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Percentage of total revenue 5 % 8 %

Three months ended September 30, 2023 compared to three months ended September 30, 2022.

General and administrative expenses increased by $2.4 million, or 23%, to $12.7 million for the three months ended September 30, 2023.

The increase was primarily due to a $1.2 million increase in compensation and employee-related expenses, a $0.4 million increase in professional services, and a $0.3 million increase in licensing fees.

General and administrative expenses remained at a consistent 4% of total revenue year over year.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

General and administrative expenses increased by $17.9 million, or 62%, to $46.8 million for the nine months ended September 30, 2023.

The increase in expense was primarily due to a $5.2 million increase in stock-based compensation, of which $4.8 million related to charges after certain executive departures, and a $3.8 million increase related to the negotiated settlement of uncollected premiums in connection with the transition of underwriting a third-party business to other insurers.

Additionally, there was a $4.5 million increase in general compensation and other employee-related expenses, a $1.3 million increase in consulting services, and a $0.7 million increase in licensing and regulatory fees.

General and administrative expenses increased from 4% to 6% of total revenue year over year, partially due to certain non-recurring expenses.

Three months ended March 31, 2024 compared to three months ended March 31, 2023.

General and administrative expenses decreased by $6.3 million, or 30%, to $14.7 million for the three months ended March 31, 2024.

The decrease in expense when comparing periods was driven primarily by two charges recorded during the first quarter of 2023, a $4.8 million stock-based compensation charge following certain executive departures and a $3.8 million charge related to the negotiated settlement of uncollected premiums in connection with the transition of underwriting a third-party business to other insurers.

These decreases in expense period over period were partially offset by increases of $0.7 million in general compensation and other employee-related expenses and a $0.5 million increase in professional services.

General and administrative expenses decreased from 8% to 5% of total revenue year-over-year, partially due to certain non-recurring expenses.

New Pet Acquisition Expense

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

Three Months Ended March 31, % Change

(in thousands, except percentages, pet and per pet data)

4 unchanged sentences

Average pet acquisition cost (PAC) $ 207 $ 247 (16)

Three months ended September 30, 2023 compared to three months ended September 30, 2022.

New pet acquisition expenses decreased by $4.7 million, or 21%, to $17.8 million for the three months ended September 30, 2023 driven primarily by a decrease in expenses to generate leads and conversion, as we focused on growth in our more efficient channels.

New pet acquisition expenses as a percentage of revenue was 6% for the three months ended September 30, 2023 compared to 10% in the same period last year, as we were able to stay disciplined with our discretionary pet acquisition spend while still maintaining a relatively high level of pet enrollment growth.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

New pet acquisition expenses decreased by $6.9 million, or 10%, to $60.2 million for the nine months ended September 30, 2023 driven primarily by a decrease in expenses to generate leads and conversion, as we focused on growth in our more efficient channels.

New pet acquisition expenses as a percentage of revenue was 7% for the nine months ended September 30, 2023 compared to 10% in the same period last year, as we were able to stay disciplined with our discretionary pet acquisition spend, while still maintaining a relatively high level of pet enrollment growth.

Three months ended March 31, 2024 compared to three months ended March 31, 2023.

New pet acquisition expenses decreased by $4.8 million, or 22%, to $16.8 million for the three months ended March 31, 2024.

This decrease was primarily due to a decrease in expenses related to generating leads and driving conversion, as we focused on growth in our more efficient channels.

New pet acquisition expenses as a percentage of revenue was 6% for the three months ended March 31, 2024 compared to 8% in the same period last year, as we were able to stay disciplined with our discretionary pet acquisition spend, while still managing to grow total enrolled subscription pets, excluding those related to managing general agent policies in continental Europe operations, by 10%.

Depreciation and Amortization

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

Three Months Ended March 31, % Change

(in thousands, except percentages)

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Percentage of total revenue 1 % 1 %

Three months ended September 30, 2023 compared to three months ended September 30, 2022.

Depreciation and amortization expense increased by $0.4 million, or 15%, to $3.0 million for the three months ended September 30, 2023 primarily driven by the amortization of acquired intangible assets.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Depreciation and amortization expense increased by $1.4 million, or 18%, to $9.4 million for the nine months ended September 30, 2023 primarily driven by the amortization of acquired intangible assets.

Three months ended March 31, 2024 compared to three months ended March 31, 2023.

Depreciation and amortization expense increased by $0.6 million, or 18%, to $3.8 million for the three months ended March 31, 2024 primarily driven by an increase in in-service internally developed software projects during the period.

Total Other (Income) Expense, Net

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

Three Months Ended March 31, % Change

(in thousands)

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Percentage of total revenue — % — %

Three months ended September 30, 2023 compared to three months ended September 30, 2022.

Total other (income) expense, net increased by $0.1 million to $0.6 million for the three months ended September 30, 2023 primarily due to an increase in interest expense incurred on the Credit Facility which was partially offset by an increase in interest earned on our investment portfolio.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Total other (income) expense, net increased by $0.8 million to $1.9 million for the nine months ended September 30, 2023 primarily due to an increase in interest expense incurred on the Credit Facility which was partially offset by an increase in interest earned on our investment portfolio.

Three months ended March 31, 2024 compared to three months ended March 31, 2023.

Total other (income) expense, net increased by $0.3 million to $0.8 million for the three months ended March 31, 2024 primarily due to an increase in interest expense incurred on the Credit Facility partially offset by an increase in interest earned on our investment portfolio.

Stock-Based Compensation

Stock-based compensation is included in the cost and expense line items in the consolidated statements of operations, discussed above.

Three months ended September 30, 2023 compared to three months ended September 30, 2022.

Stock-based compensation expense decreased by $1.8 million, or 20%, to $6.9 million for the three months ended September 30, 2023.

The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Stock-based compensation increased by $1.0 million, or 4%, to $25.9 million for the nine months ended September 30, 2023.

The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants.

In addition, there was a $4.8 million increase in stock-based compensation in the period as a result of charges after certain executive departures.

Three months ended March 31, 2024 compared to three months ended March 31, 2023.

Stock-based compensation decreased by $4.2 million, or 34%, to $8.2 million for the three months ended March 31, 2024.

The three months ended March 31, 2023 included $4.8 million in stock-based compensation as a result of charges after certain executive departures.

Liquidity and Capital Resources

The following table summarizes our cash flows for the periods indicated (in thousands):

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash provided by (used in) operating activities $ 2,434 $ (6,862)

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Our primary requirements for liquidity are paying veterinary invoices, funding operations and capital requirements, investing in new member acquisition, investing in enhancements to our member experience, and servicing debt.

We have certain contractual obligations in the normal course of business, including obligations and commitments relating to our credit facility (the Credit Facility) with Piper Sandler Finance, LLC, acting as the administrative agent, non-cancellable vendor purchase agreements, as well as future payments of veterinary invoices.

We have certain contractual obligations in the normal course of business, including obligations and commitments relating to our Credit Facility, non-cancellable vendor purchase agreements, as well as future payments of veterinary invoices.

Refer to Note 7, Reserve for Veterinary Invoices, included in Item 1 of Part I of this report, for further details on anticipated cash outflows.

Our primary sources of liquidity have been cash provided by operations and available borrowings from our Credit Facility.

Most recently, our primary sources of liquidity have been cash provided by operations and available borrowings from our Credit Facility.

We believe these sources are sufficient to fund our operations and capital requirements for the next 12 months.

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As our capital surplus grows relative to the rate of growth of our business, we may also generate cash, via dividends or other methods, from one or more of our underwriting entities.

As of September 30, 2023, the Company had $265.9 million in cash, cash equivalents and short-term investments, of which $228.0 million was held by the Company's insurance entities.

Outside of insurance entities, the Company held $37.9 million in cash, cash equivalents and short-term investments with an additional $15.0 million available under its Credit Facility.

The Company's insurance entities maintained $227.0 million of capital surplus, which was $60.8 million in excess of the estimated risk-based capital requirement of $166.2 million.

As of March 31, 2024, the Company had $275.2 million in cash, cash equivalents and short-term investments, of which $237.1 million was held by the Company's insurance entities.

Outside of our insurance entities, we held $38.1 million in cash, cash equivalents and short-term investments with an additional $15.0 million available under our Credit Facility.

Our insurance entities maintained $256.7 million of capital surplus, which was $103.4 million in excess of the estimated risk-based capital requirement of $153.3 million.

The ability to distribute any portion of this estimated $103.4 million excess to our parent company, and the timing of any distribution, may be subject to regulatory limitations.

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While our board of directors has approved the program, any repurchase activity is subject to quarterly assessment and board approval, based on various factors including available cash, our stock price relative to our estimated intrinsic value, forecasted operating results, and available opportunities to deploy capital.

We repurchased no shares under this program during the nine months ended September 30, 2023.

We repurchased no shares under this program during the three months ended March 31, 2024.

Operating Cash Flows

We derive operating cash flows primarily from the sale of our subscription plans, which is used to pay veterinary invoices and other cost of revenue.

Additionally, cash is used to support the growth of our business by reinvesting to acquire new pet enrollments, develop new product offerings and to fund projects that improve our members' experience.

Net cash provided by operating activities was $1.1 million for the nine months ended September 30, 2023, compared to $9.0 million net cash used for the nine months ended September 30, 2022.

The change was primarily driven by an increase in cash collections from members, a decrease in acquisition cost, and timing differences in other working capital activities.

Net cash provided by operating activities was $2.4 million for the three months ended March 31, 2024, compared to $6.9 million net cash used in operating activities for the three months ended March 31, 2023.

This increase was primarily driven by an increase in premium collection from members as our pricing actions flow through, a decrease in acquisition costs, and timing differences in other working capital activities.

Changes in accounts receivable and deferred revenue were primarily related to annual policies with annual payment terms within our other business segment.

Investing Cash Flows

Net cash provided by investing activities was $25.1 million for the nine months ended September 30, 2023, primarily consisting of $38.0 million in maturities of investment securities, net of purchases, offset by $14.3 million of capital expenditures primarily related to the development of internal-use software focused on member experience improvements.

Net cash used by investing activities was $37.0 million for the nine months ended September 30, 2022, primarily consisting of $21.2 million of purchases of investment securities, net of maturities, and $11.6 million of capital expenditures primarily related to the development of internal-use software focused on member experience improvements.

Net cash used by investing activities was $2.7 million for the three months ended March 31, 2024, primarily consisting of $3.1 million of capital expenditures mainly related to the development of internal-use software focused on member experience, claims processing and internal policy management improvements.

Net cash provided by investing activities was $33.9 million for the three months ended March 31, 2023, primarily consisting of $39.0 million in sales and maturities of investment securities, net of purchases, offset by $5.2 million of capital expenditures mainly related to the development of internal-use software focused on member experience, claims processing and internal policy management improvements.

Financing Cash Flows

Net cash provided by financing activities was $58.6 million for the nine months ended September 30, 2023, primarily consisting of $60.1 million in proceeds from the Credit Facility, offset by $1.4 million in repayments on the Credit Facility.

Net cash provided by financing activities was $46.1 million for the nine months ended September 30, 2022, primarily consisting of $54.3 million in proceeds from the Credit Facility, offset by $5.8 million in repurchases of common stock, and $3.8 million in shares withheld to satisfy tax withholdings.

Net cash used by financing activities was $0.3 million for the three months ended March 31, 2024, primarily consisting of $0.3 million in repayments on the Credit Facility.

Net cash provided by financing activities was $33.8 million for the three months ended March 31, 2023, primarily consisting of $35.1 million in proceeds from the Credit Facility, partially offset by $0.9 million in shares withheld to satisfy tax withholdings.

Long-Term Debt

Our Credit Facility provides us with up to $ 150.0 million of credit.

As of September 30, 2023, we issued term loans totaling $135.0 million under the Credit Facility.

As of March 31, 2024, we issued term loans totaling $135.0 million under the Credit Facility.

The Credit Facility is secured by substantially all of our assets and those of our subsidiaries.

Refer to Note 8, Debt, included in Item 1 of Part I of this report, for further details.

As of September 30, 2023, our insurance entities collectively held $115.5 million in short-term investments and $390.6 million in other current assets, including $112.5 million held in cash and cash equivalents to be used for operating expenses of our insurance subsidiaries.

As of March 31, 2024, our insurance entities collectively held $108.4 million in cash and cash equivalents, to be used for operating expenses for our insurance entities, $128.7 million in short-term investments and $277.5 million in other current assets.

Most of the assets in our insurance entities are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate.

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APIC must hold certain capital amounts in order to comply with the statutory regulations and, therefore, we cannot use these amounts for general operating purposes without regulatory approval.

As our business grows, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly, though risk-based capital requirements also take our overall rate of growth into consideration.

As of September 30, 2023, APIC was required to maintain at least $134.6 million of risk-based capital to avoid this additional regulatory oversight.

As of that date, APIC maintained $191.0 million of risk-based capital surplus.

The increase of capital surplus at APIC during the quarter was due to retained earnings from APIC's underwriting profit.

As our business grows, the amount of capital we are required to maintain to satisfy our risk-based capital requirements will also increase, though risk-based capital requirements also take our overall rate of growth into consideration.

Recently, our other business segment growth has slowed and, currently, we expect that to continue, which would reduce capital requirements.

APIC was required to maintain at least $120.1 million and $137.6 million of risk-based capital as of March 31, 2024 and December 31, 2023, respectively.

ZPIC Insurance Company (ZPIC), QPIC Insurance Company (QPIC), and GPIC Insurance Company (GPIC)

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We have funded required statutory capital to each of these new subsidiaries.

As of September 30, 2023, neither ZPIC, QPIC nor GPIC have begun underwriting any insurance policies, accordingly, each of these entities currently is overcapitalized relative to traditional risk-based capital requirements.

As of March 31, 2024, neither ZPIC, QPIC nor GPIC have begun underwriting any insurance policies, accordingly, each of these entities are currently overcapitalized relative to traditional risk-based capital requirements.

We formed these insurance subsidiaries to provide us flexibility as to the insurance entity we use to market and write policies.

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WICL Segregated Account AX was established by WICL, with Trupanion, Inc.

as the shareholder, to enter into a reinsurance agreement with Omega General Insurance Company.

as the shareholder, to enter into a reinsurance agreement with Accelerant Insurance Company of Canada, formerly known as Omega General Insurance Company.

All of the assets and liabilities of WICL Segregated Account AX are legally segregated from other assets and liabilities within WICL, and all shares of the segregated account are owned by Trupanion, Inc.

In February 2023, our parent entity received a dividend of $7.3 million from WICL Segregated Account AX as allowed under our agreements with WICL.

As required by the Office of the Superintendent of Financial Institutions regulations related to our reinsurance agreement with Omega General Insurance Company, we are required to maintain a Canadian Trust account with the greater of CAD $2.0 million or 120% of unearned Canadian premium plus 20% of outstanding Canadian claims, including all incurred but not reported claims.

As of September 30, 2023, the account held CAD $14.2 million.

In April 2024, our parent company received a dividend of $8.6 million from WICL Segregated Account AX as allowed under our agreements with WICL.

As required by the Office of the Superintendent of Financial Institutions regulations related to our reinsurance agreement with Accelerant Insurance Company of Canada, we are required to maintain a Canadian Trust account with the greater of CAD $2.0 million or 120% of unearned Canadian premium plus 20% of outstanding Canadian claims, including all incurred but not reported claims.

As of March 31, 2024, the account held CAD $12.0 million.

Though we are not directly regulated by the Bermuda Monetary Authority (BMA), WICL's regulation and compliance impacts us as it could have an adverse impact on the ability of WICL Segregated Account AX to pay dividends.

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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-Q

Item 2. Management’s Discussion and Analysis