TRUPANION, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We provide medical insurance for cats and dogs in the United States, Canada, Continental Europe, Australia, and Puerto Rico. 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 aggregated reporting segments: subscription business and other business. We generate revenue in our subscription business segment primarily from insurance premium payments, which we refer to as 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 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 certain countries in Continental Europe, which have been underwritten by third-parties who pay us commissions we recognize as revenue. Going forward our intent is to underwrite these products similar to our core Trupanion subscription products. 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 other 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. These channels include leads from third-parties such as veterinarians and referrals from existing members. Veterinary hospitals represent our largest referral source. We engage our “Territory Partners” to have face-to-face visits with veterinarians and their staff. Territory Partners are dedicated to cultivating direct veterinary relationships and building awareness of the benefits of high quality medical insurance to veterinarians and their clients. Veterinarians then educate pet owners, who visit our website or call our contact center to learn more about, and potentially enroll in, Trupanion. We also receive a significant number of new leads from existing members adding pets and referring their friends and family members. Our direct-to-consumer acquisition channels serve as important resources for pet owner education and drive new member leads and conversion. We monitor average pet acquisition cost to evaluate the efficiency in acquiring new members and measure effectiveness based on our targeted return on investment. 21 Key Operating Metrics The following tables set forth total pets enrolled and key operating metrics for our subscription business for year to date values as well as each of the last eight fiscal quarters. Nine Months Ended September 30, 2024 2023 Total Business: Total pets enrolled (at period end) 1,688,903 1,712,177 Subscription Business: Total subscription pets enrolled (at period end) 1,032,042 969,322 Monthly average revenue per pet $ 71.94 $ 64.63 Lifetime value of a pet, including fixed expenses $ 493 $ 428 Average pet acquisition cost (PAC) $ 227 $ 232 Average monthly retention 98.29 % 98.55 % Three Months Ended Sep. 30, 2024 Jun. 30, 2024 Mar. 31, 2024 Dec. 31, 2023 Sep. 30, 2023 Jun. 30, 2023 Mar. 31, 2023 Dec. 31, 2022 Total Business: Total pets enrolled (at period end) 1,688,903 1,699,643 1,708,017 1,714,473 1,712,177 1,679,659 1,616,865 1,537,573 Subscription Business: Total subscription pets enrolled (at period end) 1,032,042 1,020,934 1,006,168 991,426 969,322 943,958 906,369 869,862 Monthly average revenue per pet $ 74.27 $ 71.72 $ 69.79 $ 67.07 $ 65.82 $ 64.41 $ 63.58 $ 63.11 Lifetime value of a pet, including fixed expenses $ 493 $ 450 $ 428 $ 419 $ 428 $ 470 $ 541 $ 641 Average pet acquisition cost (PAC) $ 243 $ 231 $ 207 $ 217 $ 212 $ 236 $ 247 $ 283 Average monthly retention 98.29 % 98.34 % 98.41 % 98.49 % 98.55 % 98.61 % 98.65 % 98.69 % Total pets enrolled and total subscription pets enrolled include pet enrollments in European markets, where policies are currently underwritten by third parties and Trupanion is acting as an insurance broker. Per pet metrics, however, exclude these European policies, as their revenue is currently earned from commissions, as opposed to the subscription fees earned by the remainder of our subscription business. Total pets enrolled. Total pets enrolled reflects the number of subscription pets and pets enrolled in one of the insurance products offered in our other business segment at the end of each period presented. We monitor total pets enrolled because it provides an indication of the growth of our consolidated business. Total subscription pets enrolled. Total subscription pets enrolled reflects the number of pets in active memberships at the end of each period presented. We monitor total subscription pets enrolled because it provides an indication of the growth of our subscription business. Monthly average revenue per pet. Monthly average revenue per pet is calculated as amounts billed in a given period for subscriptions divided by the total number of subscription pet months in the period. Total subscription pet months in a period represents the sum of all subscription pets enrolled for each month during the period. We monitor monthly average revenue per pet because it is an indicator of the per pet unit economics of our subscription business. 22 Lifetime value of a pet, including fixed expenses. Lifetime value of a pet, including fixed expenses, is calculated based on subscription revenue less cost of revenue from our subscription business segment for the 12 months prior to the period end date excluding stock-based compensation expense related to cost of revenue from our subscription business segment, sign-up fee revenue, and the change in deferred revenue between periods. This amount is also reduced by the fixed expenses related to our subscription business, which are the pro-rata portion of general and administrative and technology and development expenses, less stock-based compensation, based on revenues. This amount, on a per pet basis, is multiplied by the implied average subscriber life in months. Implied average subscriber life in months is calculated as the quotient obtained by dividing one by one minus the average monthly retention rate. We monitor lifetime value of a pet, including fixed expenses, to estimate the value we might expect from new pets over their implied average subscriber life in months, if they behave like the average pet in that respective period. When evaluating the amount of pet acquisition expenses we may want to incur to attract new pet enrollments, we refer to the lifetime value of a pet, including fixed expenses, as well as our estimated internal rate of return calculation for an average pet, which also includes an estimated surplus capital charge, to inform the amount of acquisition spend in relation to the estimated payback period. Average pet acquisition cost. Average pet acquisition cost ("PAC") is calculated as net acquisition cost divided by the total number of new subscription pets enrolled in that period. Net acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as new pet acquisition expense, excluding stock-based compensation expense, other business segment expense, offset by sign-up fee revenue. We exclude stock-based compensation expense because the amount varies from period to period based on number of awards issued and market-based valuation inputs. 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. We exclude other business segment pet acquisition expense because that does not relate to subscription enrollments. We monitor average pet acquisition cost to evaluate the efficiency in acquiring new members and measure effectiveness based on our targeted return on investment. Average monthly retention. 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, 2024 is an average of each month’s retention from October 1, 2023 through September 30, 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. We monitor average monthly retention because it provides a measure of member satisfaction and allows us to calculate the implied average subscriber life in months. 23 Non-GAAP Financial Measures In addition to our results determined in accordance with U.S. GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance. 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 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. We calculate these non-GAAP financial measures by excluding certain non-cash or non-recurring expenses. We exclude non-recurring transactions and restructuring expenses as they are not indicative of our operating performance. We exclude stock-based compensation as it is non-cash in nature. Although stock-based compensation expenses are expected to remain recurring expenses for the foreseeable future, we believe excluding them allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies. 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 generally are in the pre-revenue stage or not at scale. 24 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, 2024 2023 Veterinary invoice expense $ 703,485 $ 613,316 Less: Stock-based compensation expense (1) (2,535) (2,565) Other business cost of paying veterinary invoices (4) (239,342) (210,286) Subscription cost of paying veterinary invoices (non-GAAP) $ 461,608 $ 400,465 % of subscription revenue 73.4 % 76.8 % Other cost of revenue $ 119,017 $ 108,480 Less: Stock-based compensation expense (1) (1,479) (1,158) Other business variable expenses (4) (57,713) (56,455) Subscription variable expenses (non-GAAP) $ 59,825 $ 50,867 % of subscription revenue 9.5 % 9.8 % Technology and development expense $ 23,083 $ 15,434 General and administrative expense 46,903 46,817 Less: Stock-based compensation expense (1) (14,465) (16,072) Non-recurring transaction or restructuring expenses (2) — (4,175) Development expenses (3) (4,307) (3,417) Fixed expenses (non-GAAP) $ 51,214 $ 38,587 % of total revenue 5.4 % 4.7 % New pet acquisition expense $ 53,025 $ 60,183 Less: Stock-based compensation expense (1) (5,426) (5,433) Other business pet acquisition expense (4) (31) (123) Subscription acquisition cost (non-GAAP) $ 47,568 $ 54,627 % of subscription revenue 7.6 % 10.5 % (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 $1.3 million and $0.6 million for the nine months ended September 30, 2024 and 2023, respectively. (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. (3) Consists of costs related to product exploration and development that are pre-revenue and historically have been insignificant. (4) Excludes the portion of stock-based compensation expense attributable to the other business segment. 25 Three Months Ended Sep. 30, 2024 Jun. 30, 2024 Mar. 31, 2024 Dec. 31, 2023 Sep. 30, 2023 Jun. 30, 2023 Mar. 31, 2023 Dec. 31, 2022 Veterinary invoice expense $ 238,814 $ 231,102 $ 233,569 $ 217,739 $ 212,441 $ 206,738 $ 194,137 $ 176,083 Less: Stock-based compensation expense (1) (830) (843) (862) (885) (870) (856) (839) (899) Other business cost of paying veterinary invoices (4) (82,507) (75,622) (81,213) (77,572) (72,694) (72,443) (65,149) (59,946) Subscription cost of paying veterinary invoices (non-GAAP) $ 155,477 $ 154,637 $ 151,494 $ 139,282 $ 138,877 $ 133,439 $ 128,149 $ 115,238 % of subscription revenue 71.0 % 74.1 % 75.3 % 72.7 % 75.9 % 77.0 % 77.6 % 72.7 % Other cost of revenue $ 39,263 $ 43,429 $ 36,325 $ 38,054 $ 38,179 $ 34,455 $ 35,846 $ 36,277 Less: Stock-based compensation expense (1) (536) (523) (420) (386) (282) (428) (448) (414) Other business variable expenses (4) (18,126) (23,091) (16,498) (19,301) (20,482) (17,230) (18,743) (20,591) Subscription variable expenses (non-GAAP) $ 20,601 $ 19,815 $ 19,407 $ 18,367 $ 17,415 $ 16,797 $ 16,655 $ 15,272 % of subscription revenue 9.4 % 9.5 % 9.6 % 9.6 % 9.5 % 9.7 % 10.1 % 9.6 % Technology and development expense $ 7,933 $ 8,190 $ 6,960 $ 5,969 $ 5,302 $ 5,232 $ 4,900 $ 6,955 General and administrative expense 16,977 15,253 14,673 13,390 12,664 13,136 21,017 10,472 Less: Stock-based compensation expense (1) (5,258) (4,949) (4,258) (3,797) (3,754) (3,497) (8,821) (5,019) Non-recurring transaction or restructuring expenses (2) — — — — (8) (65) (4,102) (193) Development expenses (3) (1,474) (1,655) (1,178) (1,683) (1,594) (925) (898) (2,084) Fixed expenses (non-GAAP) $ 18,178 $ 16,839 $ 16,197 $ 13,879 $ 12,610 $ 13,881 $ 12,096 $ 10,131 % of total revenue 5.6 % 5.3 % 5.3 % 4.7 % 4.4 % 5.1 % 4.7 % 4.1 % New pet acquisition expense $ 18,308 $ 17,874 $ 16,843 $ 17,189 $ 17,772 $ 20,769 $ 21,642 $ 22,457 Less: Stock-based compensation expense (1) (1,503) (2,066) (1,857) (1,567) (1,679) (1,722) (2,032) (2,079) Other business pet acquisition expense (4) (8) (10) (13) (77) (10) (62) (51) (65) Subscription acquisition cost (non-GAAP) $ 16,797 $ 15,798 $ 14,973 $ 15,545 $ 16,083 $ 18,985 $ 19,559 $ 20,313 % of subscription revenue 7.7 % 7.6 % 7.4 % 8.1 % 8.8 % 11.0 % 11.8 % 12.5 % (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 $0.2 million and $0.3 million for the three months ended September 30, 2024 and 2023, respectively. (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. (3) Consists of costs related to product exploration and development that are pre-revenue and historically have been insignificant. (4) Excludes the portion of stock-based compensation expense attributable to the other business segment. 26 When determining our PAC, we calculate net acquisition cost for a more comparable metric across periods. Net acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as GAAP new pet acquisition expense, excluding stock-based compensation expense, other business segment expense, and pet acquisition expense for commission-based policies, offset by sign-up fee revenue. We exclude stock-based compensation expense because the amount varies from period to period based on the number of awards issued and market-based valuation inputs. We exclude other business segment pet acquisition expense because it does not relate to subscription enrollments. We exclude pet acquisition expense for commission-based policies because the revenue of these products is earned from commissions from a third party underwriter, as opposed to the subscription fees earned by the remainder of our subscription business. 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 table reconciles GAAP new pet acquisition expense to non-GAAP net acquisition cost (in thousands) for the nine months ended September 30, 2024 and 2023 and for each of the last eight fiscal quarters: Nine Months Ended September 30, 2024 2023 New pet acquisition expense $ 53,025 $ 60,183 Net of sign-up fee revenue (3,155) (3,492) Excluding: Stock-based compensation expense (5,426) (5,433) Other business pet acquisition expense (31) (123) Pet acquisition expense for commission-based policies (2,220) (2,641) Net acquisition cost $ 42,193 $ 48,494 Three Months Ended Sep. 30, 2024 Jun. 30, 2024 Mar. 31, 2024 Dec. 31, 2023 Sep. 30, 2023 Jun. 30, 2023 Mar. 31, 2023 Dec. 31, 2022 New pet acquisition expense $ 18,308 $ 17,874 $ 16,843 $ 17,189 $ 17,772 $ 20,769 $ 21,642 $ 22,457 Net of sign-up fee revenue (1,100) (1,036) (1,019) (1,035) (1,084) (1,189) (1,219) (1,191) Excluding: Stock-based compensation expense (1,503) (2,066) (1,857) (1,567) (1,679) (1,722) (2,032) (2,079) Other business pet acquisition expense (8) (10) (13) (77) (10) (62) (51) (65) Pet acquisition expense for commission-based policies (634) (754) (832) (803) (826) (888) (927) (443) Net acquisition cost $ 15,063 $ 14,008 $ 13,122 $ 13,707 $ 14,173 $ 16,908 $ 17,413 $ 18,679 Components of Operating Results General We operate in two aggregated reporting segments: subscription business and other 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 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 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 have been underwritten by third-parties who pay us commissions we recognize as revenue. 27 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. Revenue We generate revenue in our subscription business segment primarily from subscription fees for our pet medical insurance. We also generate an immaterial amount of revenue in this segment in the form of one-time sign-up fees charged to members at enrollment. Subscription fees are paid at the beginning of each subscription period. In most cases, our members authorize us to directly charge their credit card, debit card or bank account through automatic funds transfer. Subscription revenue is recognized on a pro rata basis over the enrollment term. Membership may be canceled at any time without penalty, and we issue a refund for the unused portion of the canceled membership. We also generate a portion of our subscription business segment revenue through commissions earned in our European markets, where policies are currently underwritten by third parties and Trupanion is acting as an insurance broker. We generate revenue in our other business segment primarily from writing policies on behalf of third parties where we do not undertake the direct consumer marketing. This segment also includes revenue from other products and insurance software solutions that have a different margin profile from our subscription business. Cost of Revenue Cost of revenue in each of our segments is comprised of the following: Veterinary invoice expense Veterinary invoice expense includes our 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. We also accrue for veterinary invoices that have been incurred but not yet received and for the estimated internal costs of processing those invoices. This also includes amounts paid by unaffiliated general agents on our behalf, and an estimate of amounts incurred and not yet paid for our other business segment. Other cost of revenue Other cost of revenue for the subscription business segment includes direct and indirect member service expenses, Territory Partner fees upon policy renewals, payment processing fees and premium tax expenses. Other cost of revenue for the other business segment includes the commissions we pay to unaffiliated general agents, costs to administer the programs in the other business segment and premium taxes on the sales in this segment. Operating Expenses Our operating expenses are classified into four categories: technology and development, general and administrative, new pet acquisition expense, and depreciation and amortization. For each category, except depreciation and amortization, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses and stock-based compensation expense. Technology and development 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 in new geographies and new products and offerings. General and administrative General and administrative expenses consist primarily of personnel costs and related expenses for our finance, actuarial, human resources, regulatory, legal and general management functions, as well as facilities and professional services. New pet acquisition expense New pet acquisition expenses primarily consist of costs, including personnel costs, 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. 28 Depreciation and amortization Depreciation and amortization expenses consist of depreciation of property, equipment, and software developed for internal use, as well as amortization of finite-lived intangible assets. Gain (loss) from investment in joint venture Gain (loss) from investment in joint venture consists of the share of income and losses from our equity method investment in a joint venture, as well as income and expenses associated with administrative services provided to the joint venture. Stock-based compensation Stock-based compensation is included in the cost and expense line items above. Stock-based compensation will vary depending on corporate performance and terms of the awards under our equity incentive plan. For example, when we have delivered strong performance, stock-based compensation may increase as a result of incentive-based awards under our equity incentive plan. Factors Affecting Our Performance Average monthly retention. Our performance depends on our ability to continue to retain our existing and newly enrolled pets and is impacted by our ability to provide a best-in-class value and member experience. Our ability to retain enrolled pets depends on a number of factors, including the actual and perceived value of our services and the quality of our member experience, the ease and transparency of the process for reviewing and paying veterinary invoices for our members, the rate of veterinary inflation and of our pricing adjustments, and the competitive environment. In addition, other initiatives across our business may temporarily impact retention and make it difficult for us to improve or maintain this metric. For example, if the number of new pets enrolled increases at a faster rate than our historical experience, our average monthly retention rate could be adversely impacted, as our retention rate is generally lower during the first year of member enrollment. Investment in pet acquisition. We have made and may continue to make significant investments to grow our member base. 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 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 margins. 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 following any applicable regulatory approval. As a result, we may have timing mismatches during which our pricing does not reflect our current expense profile. In periods of rapid increases in veterinary invoice expenses, including periods of significant inflation, this timing mismatch may have a significant impact on our margin profile. Timing of initiatives. Over time, we plan to implement new initiatives to improve our member experience, make modifications to our subscription plan, introduce new coverage plans, pursue pet food or other adjacent opportunities, improve our technology, increase the number of veterinary hospitals using our patented direct pay software, and find other ways to maintain a strong value proposition for our members. The implementation of such initiatives could impact our expense profile and result in us incurring expenses that may not always directly coincide with revenue increases, resulting in fluctuations in revenue and profitability in our subscription business segment. Mix of sales. The relative mix of our business by geography, pet age, species, breed, and other factors impacts the monthly average revenue per pet we receive. 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 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. 29 Other business segment. 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 and margin profile 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 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 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. 30 Results of Operations The following tables set forth our results of operations for the periods presented both in absolute dollars and as a percentage of total revenue for those periods. 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, 2024 2023 2024 2023 (in thousands) Revenue: Subscription business $ 218,986 $ 182,906 $ 628,738 $ 521,369 Other business 108,470 102,947 319,639 291,379 Total revenue 327,456 285,853 948,377 812,748 Cost of revenue: Subscription business 177,365 157,444 525,237 455,055 Other business 100,712 93,176 297,265 266,741 Total cost of revenue (1) 278,077 250,620 822,502 721,796 Operating expenses: Technology and development (1) 7,933 5,302 23,083 15,434 General and administrative (1) 16,977 12,664 46,903 46,817 New pet acquisition expense (1) 18,308 17,772 53,025 60,183 Depreciation and amortization 4,381 2,990 12,542 9,445 Total operating expenses 47,599 38,728 135,553 131,879 Gain (loss) from investment in joint venture (34) 4 (184) (140) Operating income (loss) 1,746 (3,491) (9,862) (41,067) Interest expense 3,820 3,053 11,071 8,380 Other income, net (3,538) (2,465) (9,601) (6,445) Income (loss) before income taxes 1,464 (4,079) (11,332) (43,002) Income tax expense (benefit) 39 (43) (43) (472) Net income (loss) $ 1,425 $ (4,036) $ (11,289) $ (42,530) (1) Includes stock-based compensation expense as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Cost of revenue $ 1,401 $ 1,176 $ 4,186 $ 3,801 Technology and development 1,259 650 3,774 1,985 General and administrative 4,125 3,281 11,435 14,448 New pet acquisition expense 1,555 1,785 5,743 5,626 Total stock-based compensation expense $ 8,340 $ 6,892 $ 25,138 $ 25,860 31 Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (as a percentage of revenue) Revenue 100 % 100 % 100 % 100 % Cost of revenue 85 88 87 89 Operating expenses: Technology and development 2 2 2 2 General and administrative 5 4 5 6 New pet acquisition expense 6 6 6 7 Depreciation and amortization 1 1 1 1 Total operating expenses 15 14 14 16 Gain (loss) from investment in joint venture — — — — Operating income (loss) 1 (1) (1) (5) Interest expense 1 1 1 1 Other income, net (1) (1) (1) (1) Income (loss) before income taxes — (1) (1) (5) Income tax expense (benefit) — — — — Net income (loss) — % (1) % (1) % (5) % Stock-based compensation expense: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (as a percentage of revenue) Cost of revenue — % — % — % — % Technology and development — — — — General and administrative 1 1 1 2 New pet acquisition expense — 1 1 1 Total stock-based compensation expense 3 % 2 % 3 % 3 % Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (as a percentage of subscription revenue) Subscription business revenue 100 % 100 % 100 % 100 % Subscription business cost of revenue 81 86 84 87 32 Comparison of the Three and Nine Months Ended September 30, 2024 and 2023 Revenue Three Months Ended September 30, % Change Nine Months Ended September 30, % Change 2024 2023 2024 2023 (in thousands, except percentages, pet and per pet data) Revenue: Subscription business $ 218,986 $ 182,906 20 % $ 628,738 $ 521,369 21 % Other business 108,470 102,947 5 319,639 291,379 10 Total revenue $ 327,456 $ 285,853 15 $ 948,377 $ 812,748 17 Percentage of Revenue by Segment: Subscription business 67 % 64 % 66 % 64 % Other business 33 36 34 36 Total revenue 100 % 100 % 100 % 100 % Total pets enrolled (at period end) 1,688,903 1,712,177 (1) % 1,688,903 1,712,177 (1) % Total subscription pets enrolled (at period end) 1,032,042 969,322 6 1,032,042 969,322 6 Monthly average revenue per pet $ 74.27 $ 65.82 13 $ 71.94 $ 64.63 11 Average monthly retention 98.29 % 98.55 % 98.29 % 98.55 % Three months ended September 30, 2024 compared to three months ended September 30, 2023. Total revenue increased by $41.6 million, or 15%, to $327.5 million for the three months ended September 30, 2024. Revenue from our subscription business segment increased by $36.1 million, or 20%, to $219.0 million for the three months ended September 30, 2024. This increase was primarily due to a 13% increase in monthly average revenue per pet and an increase in subscription pet months (the sum of pets enrolled for each month during a period) for policies underwritten by Trupanion. Revenue from our other business segment increased by $5.5 million, or 5%, to $108.5 million, for the three months ended September 30, 2024. This increase was primarily driven by an 18% increase in monthly average revenue per pet in this segment, offset by a decrease in pet months in this segment primarily reflecting the expected run off of pets we historically insured for a third-party. Nine months ended September 30, 2024 compared to nine months ended September 30, 2023. Total revenue increased by $135.6 million, or 17%, to $948.4 million for the nine months ended September 30, 2024. Revenue from our subscription business segment increased by $107.4 million, or 21%, to $628.7 million for the nine months ended September 30, 2024. This increase was primarily due to an 11% increase in monthly average revenue per pet and an increase in subscription pet months for policies underwritten by Trupanion. Revenue from our other business segment increased by $28.3 million, or 10%, to $319.6 million for the nine months ended September 30, 2024. This increase was primarily driven by a 16% increase in monthly average revenue per pet in this segment, offset by a decrease in pet months in this segment primarily reflecting the expected run off of pets we historically insured for a third-party. 33 Cost of Revenue Three Months Ended September 30, % Change Nine Months Ended September 30, % Change 2024 2023 2024 2023 (in thousands, except percentages, pet and per pet data) Cost of Revenue: Subscription business: Veterinary invoice expense $ 156,307 $ 139,747 12 % $ 464,143 $ 403,030 15 % Other cost of revenue 21,058 17,697 19 61,094 52,025 17 Total cost of revenue 177,365 157,444 13 525,237 455,055 15 Other business: Veterinary invoice expense 82,507 72,694 13 239,342 210,286 14 Other cost of revenue 18,205 20,482 (11) 57,923 56,455 3 Total cost of revenue $ 100,712 $ 93,176 8 $ 297,265 $ 266,741 11 Percentage of Revenue by Segment: Subscription business: Veterinary invoice expense 71 % 76 % 74 % 77 % Other cost of revenue 10 10 10 10 Total cost of revenue 81 86 84 87 Other business: Veterinary invoice expense 76 71 75 72 Other cost of revenue 17 20 18 19 Total cost of revenue 93 % 91 % 93 % 92 % Total pets enrolled (at period end) 1,688,903 1,712,177 (1) 1,688,903 1,712,177 (1) Total subscription pets enrolled (at period end) 1,032,042 969,322 6 1,032,042 969,322 6 Three months ended September 30, 2024 compared to three months ended September 30, 2023. Total cost of revenue for our subscription business segment increased $19.9 million, or 13%, to $177.4 million, for the three months ended September 30, 2024. This increase was driven by a $16.6 million, or 12%, increase in veterinary invoice expense and a $3.4 million, or 19%, increase in other cost of revenue. The 12% increase in veterinary invoice expense was driven by an increase in total subscription pet months for policies underwritten by Trupanion and a 5% increase in veterinary invoice expense per pet month. The 19% increase in other cost of revenue was primarily due to general increases in costs attributable to growth in our membership and subscription revenue. Subscription business cost of revenue decreased from 86% to 81% of revenue year-over-year. Total cost of revenue for our other business segment increased by $7.5 million, or 8%, to $100.7 million for the three months ended September 30, 2024. This increase was primarily driven by a $9.8 million, or 13%, increase in veterinary invoice expense offset by a $2.3 million, or 11%, decrease in other cost of revenue. The 13% increase in veterinary invoice expense was primarily driven by a 27% increase in veterinary invoice expense per pet, offset by a decrease in pet months in this segment primarily reflecting the expected run off of pets we historically insured for a third-party. The 11% decrease in other cost of revenue was primarily driven by decreases in managing general agent ("MGA") and underwriting fees which are primarily a reflection of the loss sensitive nature of our MGA arrangements with minimal impact to our other business operating margin. Cost of revenue for the other business segment increased from 91% to 93% of revenue year-over-year. Nine months ended September 30, 2024 compared to nine months ended September 30, 2023. Total cost of revenue for our subscription business segment increased by $70.2 million, or 15%, to $525.2 million for the nine months ended September 30, 2024. This increase was driven by a $61.1 million, or 15%, increase in veterinary invoice expense and a $9.1 million, or 17%, increase in other cost of revenue. The 15% increase in veterinary invoice expense was driven by an increase in total subscription pet months for policies underwritten by Trupanion and a 6% increase in veterinary invoice expense per pet month. 34 The 17% increase in other cost of revenue was primarily due to general increases in costs attributable to growth in our membership and subscription revenue. Subscription business cost of revenue decreased from 87% to 84% of revenue year-over-year. Total cost of revenue for our other business segment increased by $30.5 million, or 11%, to $297.3 million for the nine months ended September 30, 2024. This increase was primarily driven by a $29.1 million, or 14%, increase in veterinary invoice expense as well as a $1.5 million, or 3%, increase in other cost of revenue. The 14% increase in veterinary invoice expense was primarily driven by a 20% increase in veterinary invoice expense per pet, offset by a decrease in pet months in this segment primarily reflecting the expected run off of pets we historically insured for a third-party. The 3% increase in other cost of revenue was primarily driven by increases in MGA, underwriting, and other premium-based expenses. 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 2024 2023 2024 2023 (in thousands, except percentages) Technology and development $ 7,933 $ 5,302 50 % $ 23,083 $ 15,434 50 % Percentage of total revenue 2 % 2 % 2 % 2 % Three months ended September 30, 2024 compared to three months ended September 30, 2023. Technology and development expenses increased by $2.6 million, or 50%, to $7.9 million for the three months ended September 30, 2024. This increase was primarily due to a $1.7 million decrease in capitalized expenditures related to internally-developed software projects launched in early 2024, a $0.8 million increase in general compensation and other employee-related expenses, including stock-based compensation expense, and a $0.2 million increase in infrastructure-related expenses, partially offset by a $0.1 million decrease in development expense. Technology and development expenses remained consistent at 2% of total revenue year over year. Nine months ended September 30, 2024 compared to nine months ended September 30, 2023. Technology and development expenses increased by $7.6 million, or 50%, to $23.1 million for the nine months ended September 30, 2024. This increase was primarily due to a $5.3 million reduction in capitalized expenditures related to internally-developed software projects launched in early 2024, a $1.2 million increase in infrastructure-related expenses, and a $1.2 million increase 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 2024 2023 2024 2023 (in thousands, except percentages) General and administrative $ 16,977 $ 12,664 34 % $ 46,903 $ 46,817 — % Percentage of total revenue 5 % 4 % 5 % 6 % Three months ended September 30, 2024 compared to three months ended September 30, 2023. General and administrative expenses increased by $4.3 million, or 34%, to $17.0 million for the three months ended September 30, 2024. This increase was primarily due to $2.0 million in general compensation and other employee-related expenses, including stock-based compensation expense, $1.5 million in professional services, and $0.6 million in underwriting fees related to our Canadian operations. General and administrative expenses increased from 4% to 5% of total revenue year over year. Nine months ended September 30, 2024 compared to nine months ended September 30, 2023. General and administrative expenses increased by $0.1 million, or 0%, to $46.9 million for the nine months ended September 30, 2024. Two charges were recorded during the first quarter of 2023 that led to decreases in expense when comparing periods, 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 were offset by increases of $3.9 million in general compensation and other employee-related expenses, $2.7 million in professional services, and $1.7 million in underwriting fees related to our Canadian operations. General and administrative expenses decreased from 6% to 5% of total revenue year-over-year. 35 New Pet Acquisition Expense Three Months Ended September 30, % Change Nine Months Ended September 30, % Change 2024 2023 2024 2023 (in thousands, except percentages, pet and per pet data) New pet acquisition expense $ 18,308 $ 17,772 3 % $ 53,025 $ 60,183 (12) % Percentage of total revenue 6 % 6 % 6 % 7 % Subscription Business: Total subscription pets enrolled (at period end) 1,032,042 969,322 6 1,032,042 969,322 6 Average pet acquisition cost (PAC) $ 243 $ 212 15 $ 227 $ 232 (2) Three months ended September 30, 2024 compared to three months ended September 30, 2023. New pet acquisition expenses increased by $0.5 million, or 3%, to $18.3 million for the three months ended September 30, 2024. The increase was primarily driven by expanded external marketing spend during the third quarter of 2024 for purposes of generating leads and driving conversion. New pet acquisition as a percentage of revenue remained constant at 6% of total revenue year over year. Nine months ended September 30, 2024 compared to nine months ended September 30, 2023. New pet acquisition expenses decreased by $7.2 million, or 12%, to $53.0 million for the nine months ended September 30, 2024. This decrease was primarily due to a decrease in expenses related to generating leads and driving conversion, particularly in the first half of 2024, as we focused on growth in our more efficient channels. New pet acquisition expenses as a percentage of revenue was 6% for the nine months ended September 30, 2024 compared to 7% 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 by 6%. 36 Depreciation and Amortization Three Months Ended September 30, % Change Nine Months Ended September 30, % Change 2024 2023 2024 2023 (in thousands, except percentages) Depreciation and amortization $ 4,381 $ 2,990 47% $ 12,542 $ 9,445 33% Percentage of total revenue 1 % 1 % 1 % 1 % Three months ended September 30, 2024 compared to three months ended September 30, 2023. Depreciation and amortization expense increased by $1.4 million, or 47%, to $4.4 million for the three months ended September 30, 2024 primarily driven by an increase in in-service internally developed software projects during the period. Nine months ended September 30, 2024 compared to nine months ended September 30, 2023. Depreciation and amortization expense increased by $3.1 million, or 33%, to $12.5 million for the nine months ended September 30, 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 2024 2023 2024 2023 (in thousands) Interest expense $ 3,820 $ 3,053 25% $ 11,071 $ 8,380 32% Other income, net (3,538) (2,465) 44 (9,601) (6,445) 49 Total other (income) expense, net $ 282 $ 588 (52) $ 1,470 $ 1,935 (24) Percentage of total revenue — % — % — % — % Three months ended September 30, 2024 compared to three months ended September 30, 2023. Total other (income) expense, net decreased by $0.3 million to $0.3 million for the three months ended September 30, 2024 primarily due to an increase in interest income from our investments partially offset by an increase in interest expense. Nine months ended September 30, 2024 compared to nine months ended September 30, 2023. Total other (income) expense, net decreased by $0.5 million to $1.5 million for the nine months ended September 30, 2024 primarily due to an increase in interest income from our investments partially offset by an increase in interest expense. 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, 2024 compared to three months ended September 30, 2023. Stock-based compensation increased by $1.4 million, or 21%, to $8.3 million for the three months ended September 30, 2024. The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants, calculated according to our equity incentive plan. Nine months ended September 30, 2024 compared to nine months ended September 30, 2023. Stock-based compensation decreased by $0.7 million, or 3%, to $25.1 million for the nine months ended September 30, 2024. The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants, calculated according to our equity incentive plan. Additionally, the nine months ended September 30, 2023 included $4.8 million in stock-based compensation as a result of charges after certain executive departures. 37 Liquidity and Capital Resources The following table summarizes our cash flows for the periods indicated (in thousands): Nine Months Ended September 30, 2024 2023 Net cash provided by (used in) operating activities $ 24,585 $ 1,131 Net cash provided by (used in) investing activities (31,914) 25,086 Net cash provided by (used in) financing activities (2,283) 58,557 Effect of foreign exchange rates on cash, cash equivalents, and restricted cash, net 19 (830) Net change in cash, cash equivalents and restricted cash $ (9,593) $ 83,944 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, 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. 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. As we continue to grow and consider strategic opportunities, however, we may explore additional financing to fund our operations and growth or for strategic purposes. Financing could include equity, equity-linked, or debt financing. Additional financing may not be available to us on acceptable terms, or at all. If our capital surplus grows relative to the rate of growth of our business, we may also generate cash for operations and growth, via dividends or other methods, from one or more of our underwriting entities. As of September 30, 2024, we had $293.1 million in cash, cash equivalents and short-term investments, of which $256.7 million was held by our insurance entities. Outside of our insurance entities, we held $36.4 million in cash, cash equivalents and short-term investments. We also had an additional $15.0 million available under our Credit Facility. Our insurance entities maintained $274.6 million of capital surplus, which was $139.9 million in excess of the estimated risk-based capital requirement of $134.7 million. The ability to distribute any portion of this estimated $139.9 million excess to our parent company, and the timing of any distribution, may be subject to regulatory limitations and may be delayed or limited from time to time. In April 2021, our board of directors approved a share repurchase program, pursuant to which we may, between May 2021 and May 2026, repurchase outstanding shares of our common stock. 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, 2024. Operating Cash Flows Net cash provided by operating activities was $24.6 million for the nine months ended September 30, 2024, compared to $1.1 million net cash provided by operating activities for the nine months ended September 30, 2023. This increase was primarily driven by expansion in our subscription operating margin and a decrease in acquisition costs offset by 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. Changes in our reserve for veterinary invoices are driven by multiple factors, including ongoing analysis of claims frequency and severity as well as changes in claims inventory at each period end. Investing Cash Flows Net cash used in investing activities was $31.9 million for the nine months ended September 30, 2024, primarily consisting of purchases of investment securities of $25.6 million, net of maturities, as well as $7.9 million of capital expenditures primarily 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 $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. 38 Financing Cash Flows Net cash used in financing activities was $2.3 million for the nine months ended September 30, 2024, primarily consisting of $1.0 million in repayments on the Credit Facility, as well as $1.4 million in shares withheld to satisfy tax withholding. 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. Long-Term Debt Our Credit Facility provides us with up to $ 150.0 million of credit. As of September 30, 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. Regulation As of September 30, 2024, our insurance entities collectively held $101.2 million in cash and cash equivalents to be used for operating expenses for our insurance entities, $155.5 million in short-term investments and $288.0 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. American Pet Insurance Company ("APIC") The majority of our investments are held by our insurance entities to satisfy risk-based capital requirements of our regulators based on requirements published by the National Association of Insurance Commissioners ("NAIC"). The NAIC requirements provide a method for analyzing the minimum amount of risk-based capital (statutory capital and surplus plus other adjustments) appropriate for an insurance company to support its overall business operations, taking into account the risk characteristics of the company’s assets, liabilities and certain other items . An insurance company found to have insufficient statutory capital based on its risk-based capital ratio may be subject to varying levels of additional regulatory oversight depending on the level of capital inadequacy. 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 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 $99.1 million and $137.6 million of risk-based capital as of September 30, 2024 and December 31, 2023, respectively. In July 2024, APIC distributed an ordinary dividend of $4.1 million to Trupanion, Inc. ZPIC Insurance Company ("ZPIC"), QPIC Insurance Company ("QPIC"), and GPIC Insurance Company ("GPIC") In 2021, we established two new wholly-owned U.S. insurance subsidiaries, ZPIC and QPIC, domiciled in Missouri and Nebraska, respectively, and in 2022, we established a new wholly-owned insurance subsidiary, GPIC, domiciled in Canada. We formed these insurance subsidiaries to provide us flexibility as to the insurance entity we use to market and write policies. We have funded the required statutory capital to each of these new subsidiaries. As of September 30, 2024, neither ZPIC, QPIC nor GPIC have begun underwriting any insurance policies. Due to anticipated lack of use, during the quarter ended September 30, 2024, we began the dissolution process for QPIC, which included a distribution of $4.4 million of previously required capital to Trupanion, Inc. We intend to fully dissolve QPIC and distribute remaining capital of $3.4 million to Trupanion, Inc. upon receiving necessary regulatory approvals. Wyndham Insurance Company (SAC) Limited ("WICL") Segregated Account AX, Wyndham Insurance Company (SAC) Limited Segregated Account Trupanion Germany, and Wyndham Insurance Company (SAC) Limited Segregated Account Trupanion Switzerland WICL is domiciled in Bermuda and regulated by the Bermuda Monetary Authority ("BMA"). WICL Segregated Account AX was established by WICL, with Trupanion, Inc. 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 April 2024, our parent company received a dividend of $8.6 million from WICL Segregated Account AX as permitted 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 September 30, 2024, the account held CAD $19.0 million. 39 WICL Segregated Account Trupanion Germany and WICL Segregated Account Trupanion Switzerland were established in the third quarter of 2024 by WICL, with Trupanion, Inc. as the shareholder, for purposes of entering into reinsurance agreements with underwriters in Germany and Switzerland, respectively. All of the assets and liabilities of WICL Segregated Account Trupanion Germany and WICL Segregated Account Trupanion Switzerland are legally segregated from other assets and liabilities within WICL, and all shares of the segregated accounts are owned by Trupanion, Inc. Though we are not directly regulated by BMA, WICL's regulation and compliance impacts us as it could have an adverse impact on our ability to secure dividends from our WICL segregated accounts. WICL is regulated by the BMA under the Insurance Act of 1978 ("Insurance Act") and the Segregated Accounts Company Act of 2000. The Insurance Act imposes on Bermuda insurance companies, solvency and liquidity standards, certain restrictions on the declaration and payment of dividends and distributions, certain restrictions on the reduction of statutory capital, and auditing and reporting requirements, and grants the BMA powers to supervise and, in certain circumstances, to investigate and intervene in the affairs of insurance companies. Under the Insurance Act, WICL, as a class 3 insurer, is required to maintain available statutory capital and surplus at a level equal to or in excess of a prescribed minimum established by reference to net written premiums and loss reserves. Under the Bermuda Companies Act 1981, as amended, a Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities. The Segregated Accounts Company Act of 2000 further requires that dividends out of a segregated account can only be paid to the extent that the account remains solvent and the value of its assets remain greater than the aggregate of its liabilities and its issued share capital and share premium accounts. Contractual Obligations We enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations and non-cancellable vendor service agreements. In March 2022, we entered into a credit agreement that provides us with up to $ 150.0 million of credit, including a $ 60.0 million initial term loan that was funded at closing and an aggregate $ 75.0 million of delayed draw term loans funded between December 2022 and September 2023. Refer to Note 8, Debt, included in Item 1 of Part I of this report, for further details, including interest and future principal payments. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. Critical accounting estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Generally, we base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. There have been no material changes to our critical accounting estimates as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. 40