Trupanion, Inc DEFA14A, filed May 1, 2025
Trupanion, Inc. (TRUP)
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2024 Shareholder Letter
We signed up for Trupanion rightafter we adopted our kitty, Clover.We are so grateful we did as shehad a post-surgical complicationafter her spay at 6 months thatrequired a second surgery andfollow-up care. We were able tojust focus on Clover getting backto herself and let Trupanion lookafter the rest!We use Trupanion to continue tolet Presley do the things Presleyloves to do without the worry of’what if’. This way, Presley can gofor boat rides, participate in hisfavorite doggy activities, andjust be the active boy he is.Thank you, Trupanion, for givingus the peace of mind we need tokeep up with this guy!– Crystal L.- Amber K.22024 Trupanion Shareholder Letter
Table of ContentsTo Our Shareholders 4A Category Coming of Age 6Expanding Growth in an Untapped Market 9Lead. Convert. Keep. 13Internal Rates of Return 25How We Are Different2024 in ReviewA 60-Month Plan UpdateThe TeamFinishing Strong2019 Shareholder Letter32024 Trupanion Shareholder Letter293644495157
To Our Shareholders42024 Trupanion Shareholder LetterIt is an honor to be writing this, my first shareholder letter to you. After over a decadeof working alongside our founder, Darryl Rawlings, I am excited to be at the helm ofTrupanion as we continue to compound and grow globally, and to be leading a teamwith such enormous potential in a vast and globally untapped market.Those who have had the pleasure of meeting any one of our 1,200+ pet passionateteam members will know that it is our mission that drives us. A mission fueled bylong-held ambitions to support the health and well-being of the pets that share ourbeds and give us unconditional love. Indeed, our mission is global, one thattranscends country and other boundaries, and unites us in our love for our fourleggedcompanions.We are a proudly Canadian-founded company, equally proud to operate across theUnited States and with a growing presence globally. As markets evolve and newdynamics emerge, we remain grounded in our mission and focus on those we serve:our team, members and partners. Amidst change and uncertainty is where we mostcomfortably sit. Our very goal is to serve as a robust and dependable support systemto pets, their families and the veterinary teams that care for them. This remainsunequivocally our purpose and ever more important.Throughout this year’s letter, I will touch on our progress in 2024 and revisit some ofour regular features: highlighting our field performance, retention by cohort andprovide a progress report on some of our initiatives in our 60-month plan. Before I gointo the details of the year, I’d first like to take the opportunity to provide insight intowhere we are in our journey, how we think about growth, the impact of retention anddive into one of the less well understood concepts of the business: Pricing theTrupanion way. I hope after reading this letter, you leave with a greaterunderstanding and a reinforcement of your excitement for what’s ahead for ourbusiness.Margi ToothChief Executive Officer & PresidentWith thanks,
52024 Trupanion Shareholder LetterThe Trupanion ExperienceHere’s a glimpse into what our members experience every day withTrupanion — from real-time vet payments to compassionate support andpeace of mind when it matters most. This is what sets us apart, and whypet parents continue to trust us with their best friends.
A CategoryComing of Age62024 Trupanion Shareholder Letter
A Category Coming of AgeThe market we entered 25 years ago looked quite different from today’s evolving animal healthlandscape. While adoption of pet insurance has historically been measured and steady, we’re nowseeing encouraging signs of momentum. Despite early challenges — including low awareness, limitedproduct coverage, confusing messaging, and underpriced offerings — the category has continued tobuild a strong foundation. Now, as penetration approaches the 4% mark, macro signals suggest thatlongstanding barriers are beginning to lift, paving the way for broader acceptance and growth.In many situations, regulatory oversight provides both credibility and a foundation for sustainablegrowth. In 2024, after nearly two decades of discussion, the National Association of InsuranceCommissioners (NAIC), officially recognized pet insurance as a category — classifying it as its ownline of business under the Property and Casualty umbrella. This recognition came alongside welcomerelief in risk-based capital requirements from the NAIC and with it, greater leverage for our New Yorkdomiciled insurance entity, APIC, which is now $140 million over-capitalized.Combined, these adjustments will promote increased transparency across the industry, which webelieve should, in-turn, support better conversion and retention for Trupanion. This move by the NAICand the changes it enables are strong signals that the category is finally “coming of age”.In North America alone — where I’ll focus this discussion given our stronger foothold — there are anestimated 180 million cats and dogs living in our households. In 2020, 40 years after the beginning ofpet insurance across North America, there were just 3 million pets insured. Today, only five years later,this number has grown to an estimated 7 million. The category continues to compound, finally gainingmomentum. At 4%, the market potential is significant, and as the need for high-quality pet medicalinsurance grows rapidly, we believe that it has the potential to reach equal, if not higher, levels ofpenetration as seen in the UK, which stands at approximately 25% today.For the 40 years prior to 2022, veterinary inflation was consistent and low — typically around 5 to 7%per year. For over 40 years and up until 2022, there was a much-needed shift across the veterinaryindustry to take more price. This has led to double-digit inflation for three consecutive years,compounding to over 40%, and so far, 2025 looks set to continue the same double-digit trend.This once in a generation inflationary period has increased the cost of veterinary care to a pointwhere more pet parents recognize the need to plan for the unexpected. At the same time, the humananimalbond has deepened, and advances in veterinary medicine have given us so much more tosolve for. If our problem was once a perceived lack of value in pet insurance, that is, in our experience,most definitely not the case today.72024 Trupanion Shareholder LetterOur Large, Under penetrated MarketThe Problem of How to Budget for Unexpected Veterinary Care is Increasing
0% 2019 Today 12.5%25%Fig 1.0 Diffusion of Innovation Model With pet parents in North America now opting to insure approximately 4% of pets - and similar levels in our newer European territories - we believe we are on the cusp of broader adoption—entering the early majority phase of growth.If we think about growth along this classic adoption curve, North America alone could see the number of insured pets rise to 45 million, akin to other countries, such as the UK. This would translate into a potential industry value of over $30 billion (assuming every percentage of penetration = $1.2 billion), and this doesn’t even take into account further growth opportunities from our European markets.[1] Rogers, EM (1962) Diffusion of Innovations
Expandingin anUntappedMarketGrowth92024 Trupanion Shareholder Letter
Expanding Growth in an Untapped Market At Trupanion, across all products, we pursue disciplined growth with strong, sustainable returns. Compounding that success has big advantages as we reinvest our growing adjusted operating income (AOI) to support our aggressive growth targets each year. In our large and under penetrated market, sustainable growth requires a clear understanding of the who, what, how and when. Over the coming pages, we’ll explore our approach to growth in more detail. 2024 Trupanion Shareholder Letter 10 In an under-penetrated market and unknown category, we have to work hard to get people near the top of the funnel. In this example, few pet parents are in a position to engage — most are unaware. As the category grows and the need becomes more obvious, pet parents learn and understand the value of insurance and make their way toward the top of the funnel. It’s our role to engage enough to pull them into the conversation — to ‘lead generate’. Pet Parent Ecosystem Under penetrated Funnel Pet Parent Ecosystem Maturing Funnel Fig 2.0 Sales Funnel in Under penetrated vs Maturing Ecosystems The Sales Funnel We first begin by thinking about the people we are trying to reach, which, in our case, is the pet parent. Once we have identified our target audience, we work through ways in which we can reach them to bring them into our ecosystem and ultimately, our sales funnel. In a new or unknown market, awareness is low, and as such, few pet parents are in, or near, the funnel. Over time, as the market comes of age and matures, awareness grows and an increasing number of pet parents naturally enter the funnel. The two diagrams below in Fig 2.0 demonstrate the difference between the two phases of market maturity. Understanding this behavior and need to drive education to bring an increasing number of pet parents into the funnel has been an important driver behind our core distribution strategy — most critically, driving awareness where it matters most — in the veterinary hospital.
2024 Trupanion Shareholder Letter 11 It would be impossible to talk about the importance of the veterinary hospital without also discussing Trupanion’s Territory Partners (TPs) and their teams (Territory Partner Associates – TPAs). This group of close to 200 people across North America and Europe has been established now for over 20 years. Combined, they have made hundreds of thousands of in-person visits and created a deep moat around our business through the power of their partnership with hospital teams. Last year, our Territory Partners enabled us to provide on-the-ground support and in-person connections to 27,200 hospitals across North America and the rest of the world. # of hospitals with software *** Actual average # of new pets per active hospital per month** Actual average # of active hospitals** Estimated aggregate # of face-to-face visits Est. # of hospitals we are visiting throughout the year* # of territory partners & associates # of hospitals in those countries # of countries we are in 2024 9 58,000 171 27,200 1,325,000 15,269 1.280 10,513 2023 9 58,000 185 26,900 1,191,000 15,914 1.376 9,504 2022 7 41,000 159 22,900 1,066,000 15,952 1.332 7,965 2021 3 28,000 161 17,000 971,000 14,736 1.260 6,430 2020 3 28,000 152 17,200 909,000 11,517 1.199 5,442 2019 3 28,000 130 21,600 852,000 10,315 1.141 4,534 2018 2 25,000 123 20,200 751,000 9,279 1.133 3,184 2017 2 25,000 107 19,800 662,000 8,242 1.063 n/a 2016 2 25,000 105 21,300 577,000 7,875 1.066 n/a 2015 2 25,000 84 19,000 490,000 7,359 1.093 n/a 2014 2 25,000 58 15,400 404,000 6,098 1.053 n/a 2013 2 25,000 40 16,200 324,000 5,531 1.008 n/a 2012 2 25,000 34 15,000 262,000 5,034 0.918 n/a *Hospitals are added when we get a new enrollment from a new hospital that we haven’t seen before or if we’re alerted by a Territory Partner that a new hospital has opened up in their area ** North America only ***Includes all hospitals with the ability to pay the veterinarian directly, through Vet Portal (software), Vet Portal Lite (software lite) and PIMS (Patient Information Management System) Fig 3.0 Veterinary Hospital Metrics Our Distribution Heartland: Veterinary Hospitals — The Power of Partnership Veterinary hospitals sit at the heart of Trupanion’s distribution strategy. We aim to provide products that enable veterinarians to practice their best medicine and position veterinary teams as trusted advisors to pet parents and advocates for pets. Through the pet itself, our interests align with the veterinary community, sharing the same clients with the same goal, and we strive to protect this bond.
2024 Trupanion Shareholder Letter 12 “Who is your medical insurance with?” We know that if a veterinary team simply asks “Who is your medical insurance with?” at check-in, this unimposing and straightforward question normalizes the concept of pet insurance and often mobilizes a pet parent on their quest for information. While our same store sales metrics came down in 2024 (as expected with fewer pets enrolling), it moved less than our overall growth rate, which, we believe, reflects the strength of our veterinary connections and our ability to fill the funnel at the veterinary level. Territory Partners help to create awareness – they start the conversation above and around the funnel, pulling people in. From there, we need to create leads, convert those leads and work tirelessly in support of our members. In recent years, we have stepped up our visit frequency to reiterate the importance of high-quality medical insurance and leaned more heavily into the moat of our Territory Partners. As our pet acquisition spend ebbs and flows, TP Nation has been the foundation that remains untouched. Our simple yet highly effective model compensates Territory Partners when a pet is enrolled, and for every month they remain enrolled, creating alignment between the business and TPs. If we don’t generate revenue, we don’t pay commissions. Our first shareholder letter as a public company in 2014 outlines this model in greater detail — and it remains a core competitive moat.
Lead. Convert. Keep. 13 2024 Trupanion Shareholder Letter
Leads originating from exam day offers issued at the veterinary hospital are often easier to convert than those generated from other sources. Lead. Convert. Keep. Those familiar with Trupanion will have heard these words in virtually every conference call, investor day and in most of our past shareholder letters. These words serve as a growth mantra to many in our team and are at the core of our go-to-market strategy. While simple in expression, the steps involved at each stage to guide people through the funnel are not entirely intuitive. To execute well, we require clear communication to ensure we operate within our internal rate of return guardrails of 30-40%. Over time, we have had our share of learnings when it comes to execution, and we will no doubt have more. 14 Lead Not all leads are created equal To us, a lead is defined as a quote, i.e. someone receiving a price for coverage for their cat or dog. Like many in our industry, we measure and obsess over the quote stage of the funnel — understanding that those taking out a quote are “in-market”. Most of these “leads” originate in the veterinary hospital, some come from friends of our existing members and some from breeders, shelters, partner brands, or social media. Each represents a distribution channel through which a pet parent hears about Trupanion for the FIRST time. As we have expanded the business, we have invested in creating new and complementary distribution channels to the veterinary heartland. Some of these are more expensive than others to support. Historically, lead, or quote volume, follows the level of investment we make in pet acquisition. As we invest consistently, our lead volume shows ongoing and steady expansion month over month, building on the brand presence from the prior month. Phone leads convert at roughly three times the rate of web leads. 2024 Trupanion Shareholder Letter
15 2024 Trupanion Shareholder Letter Convert In 2024, as our margin compression necessitated the need to pull back our pet acquisition investment, we doubled-down our focus and support of TP Nation and reduced investment in newer and less effective distribution channels. As a result, our total lead volume was rather consistent throughout the year, with moderate spikes during big activity periods at the hospital level. Veterinary leads performed well, largely stemming from a higher rate of new entrants into the funnel through our exam day offer. This helped sustain a steady monthly run rate of approximately 100,000 quotes, with conversion of those leads at a little less than 20%. Yet our lead volume from non-vet channels did not grow through the year given our lower pet acquisition spend (which I will discuss more in the financial review of 2024). The varying characteristics of each distribution channel call for tailored messaging to suit the point of introduction. This bespoke approach necessitates a collaboration between our growth insights team, TP Nation and our market and marketing teams, to drive lead performance within our guardrails. While the effectiveness of these introductions varies depending on the vehicle we use (for example, this could be an exam day offer or often just a brochure), in most cases, the lightest touch from each channel lends credibility to our category and plants a seed of awareness early on. These channels spark the conversation — but they are not responsible for converting leads. Once a pet parent has been introduced to Trupanion, they move into our conversion pathway — where we work to answer the most important question: “Why Trupanion?” At Trupanion, we see conversion as a journey that begins with early interest and continues through education and engagement. It does not literally mean ‘enroll’ at every step, although that is our eventual goal with any conversion tactic. Ultimately, this relates to the tactical plans designed to deliver relevant and meaningful messaging, with an objective each time to ‘convert’ a pet parent to the next stage in their decision-making. Every tactic should be designed to meet the pet parent where they are at, easing them closer to making that final purchase decision. Tactics such as TV, radio, paid search, direct mail and affiliates are, for Trupanion, part of our conversion toolkit. We do not think of them as lead generating (although this will change in a more heavily penetrated market with higher awareness). Rather, these are tools that enable us to convert a lead through the funnel, building on a pet parents’ understanding in a way that resonates. For example, when a pet parent searches for “Trupanion” in their search engine of choice — we know they’ve heard about us from somewhere or someone. We know this because Trupanion isn’t a term in everyday vocabulary — yet! As a result, we invest our AOI dollars in search engine marketing, essentially picking up the “conversation” started in the distribution channel. Similarly, in a market with low awareness and education, an advertisement on TV isn’t usually enough to trigger the purchase decision, but it does serve as a reminder to the pet parent about the conversation they had with their veterinarian, a friend, or their breeder, and often moves them forward in their consideration process, meaning they may call us back after an earlier quote, or they may just enroll following a timely reminder.
16 2024 Trupanion Shareholder Letter Each tactic needs to be carefully layered together using the right medium, at the right time, with the right message to convert. Through our deep insights, we assess each territory, its penetration rate and the lifetime value of a pet (LVP) to ensure we spend within our guardrails (more on that below), and we put that all together to create what we aim to be sufficient engagement to drive an actual enrollment. As we assess our data and develop AI based tools to support our understanding, it’s clear that not all markets behave consistently, nor do all channels. For example, the following chart (Fig. 4.0) highlights blended phone and web conversion rates by territory. Performance can be directly influenced by the Territory Partner or penetration rate among veterinary hospitals AND indirectly, by additional conversion investment (the brand being present in the market). The variability below makes it clear that managing all of these factors efficiently requires a high degree of diligence and skill to stay within our internal rate of return (IRR) guardrails — it also gives us a variety of experiences to learn from as we work with Territory Partners to help them grow their territories. Conversion tactics, by their nature, are generally more expensive and can be easier to dial up or down. As our adjusted operating income oscillates, so to does our pet acquisition cost per pet (PAC). In 2024, our conversion marketing investments dropped disproportionately, which in turn slowed growth as fewer people were being pulled through the funnel. Jan 24 Feb 24 Mar 24 Apr 24 TP 1 TP 2 TP 3 TP 5 TP 6 May 24 Jun 24 Jul 24 Aug 24 Sep 24 Oct 24 Nov 24 Dec 24 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Fig 4.0 Blended Phone and Web Conversion Rate by Territory
17 2024 Trupanion Shareholder Letter - Trenton Pet Hospital Daily, we see both the amazing stories of pets covered by insurance, but also the sad reality of the difficult decisions made for those who do not have insurance. Our hope is that every pet would be covered by insurance from birth.
18 2024 Trupanion Shareholder Letter Throughout 2024, our conversion performance trended quite well relative to the reduction in spend. The biggest variance came from our new, less developed distribution channels where focus was pulled back or paused. That said, we have several opportunities to improve our messaging (more on that below) and we have some programs in flight that are designed to create a more cohesive experience for a prospective pet parent as they move through the funnel. These things combined give us confidence that our conversion rate, most notably online, will improve in the coming months and years. The chart below highlights the conversion difference between phone (blue line) and web (orange line) for one of our strongest channels. This chart demonstrates some choppiness between periods which is largely driven by changes in our marketing approach. For example, aside from a one-off technical issue in February , which caused an increase in traffic to the phone, we can otherwise track what happens when we increase our spend. This first occurred at the end of Q1 . , which initially impacted the web. In June . we increased spend again. Initially, our increased investment in June yielded a small spike which is not maintained. This is not an uncommon occurrence. When additional investment brings in a broader mix of traffic, our phone and web teams learn how to speak to and convert the newly generated lead traffic through continuous evaluation and enhancement of our year-end and tactics. By year-end, our online conversion testing had stepped up further, driving even higher levels of traffic to the website. As the year ended, we were still working on the art of converting at higher levels and are continuing to focus here. 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Jan 24 Feb 24 Mar 24 Apr 24 May 24 Jun 24 Jul 24 Aug 24 Sep 24 Oct 24 Nov 24 Dec 24 Phone Conversion Web Conversion Fig 5.0 Phone and Web Conversion Rates for One Channel
19 2024 Trupanion Shareholder Letter Keep It’s this final component, members referring their friends and adding pets, that is so critical to our model. These pets often have the highest lifetime value and act as a catalyst in our business. Our members referring their friends and adding more pets is essentially our perpetual flywheel, and that starts with retention. One can see from the table below how much a step up or down the retention curve can move the needle for the business. What appears to be a rather small difference between 99.00% and 98.30% is 42 months of income difference! In a Monthly Subscription Model, Retention Power Is Everything Fig. 6.0 Retention rate and the implied average subscriber life Retention Rates 98.00% 98.10% 98.20% 98.30% 98.40% 98.50% 98.60% 98.70% 98.80% 98.90% 99.00% 50 52 55 58 62 66 71 76 83 90 100 Tenure (months) We are never seeking to “grow at all costs” Instead, we are always looking for the right enrollments. Adding pets and pet parents in a way that creates a foundation for true advocacy; lifetime members and pet parents willing to educate others about the merits of high-quality medical insurance.
202024 Trupanion Shareholder LetterOur 60-month plan (which can be read, in full, in our 2021 shareholder letter) set out a retentiontarget of 99%, a lofty goal that would have required some exceptional execution, coupled with morethan a smattering of good luck. Despite it’s near perfect appearance, this goal was, at the time,considered to be a stretch, yet achievable. This was based on our historically steady, predictableinflation, increasingly strong distribution partnerships and the knowledge that some of our existingmarkets were already experiencing monthly average retention of 99.3%!Yet 48 months in, we ended 2024 with an average monthly retention rate of 98.35% for our coreTrupanion product, and nearly half of our member base sitting in a cohort of renewing membersreceiving rate increases of over 20% — up from 7% in 2022. Not least, close to 50% of these receivedrate adjustments of over 30%! The compounding, high rates of inflation flowing through theveterinary industry meant we had to charge more to live up to our value proposition. Unsurprisingly,with this necessary upward price adjustment came a reduction in our member retention. The chartbelow shows the retention rate by % increase cohorts.94.00%96.00%98.00%100.00%First Year 0-10% 10-20% 20-30% 30- 40% 40-50% Over 50%Fig 7.0 2024 Average Monthly Retention Rate by Pricing Buckets for Core TrupanionCompounding increases at that level present a more challenging renewal communication to deliver toour members, yet failing to push these rates through was never a choice. It had to be done. That said,as is very apparent above, the outcome of our retention efforts yielded some very strong results.So here we are today – with just 8 months left to run in our strategic plan. We know we will fall wellshort of our 60-month target, yet I am encouraged by our progress and the team’s ability to test andrefine our messaging to ensure members understand the cause of our rate increases. While we sadlycan’t “save” everyone from cancelling, the data shows the exceptional staying-power of our memberbase.
According to third-party researcher, Recurly, subscription businesses can face monthly churn of 7.2%. If you look at this on an industry basis, monthly churn ranges from 5.6% to 8.3%. In comparison, a dip of less than half a point in our monthly churn, in the context of the price increases we have been required to take, demonstrates the value of Trupanion to our member base and the importance pet parents place on being able to take care of their pet.9%8%7% 9% 8%7%6%5% AllB2BB2CFig 8.0 Recurly 828 vs. 82C Potential Subscriber Loss 6%5%4% Consumer BusinessConsumerEducationHealthcareOTT/SVODMedia &SaasServices ServicesGoodsEntertainmentThis metric quantifies what percentage of total subscribers could be lost each month to involuntary churn if decline management strategies are not used.Fig 9.0 Recurly Potential Subscriber Loss by Industry[1] Recurly Research studied 1,200 subscription businesses over a four-month period and established benchmarks including analysis by industry and annual revenue per customer.
222024 Trupanion Shareholder LetterIf 2024 was a year mainly focused on marginrestoration, over the next several years, we willlook to get ourselves back on track to ourhistorical average.When approximately 90% of our core businessrevenue is locked in at the start of the year, if wewant to grow, then retention is power. This iswhy we sweat every basis point and agonizeevery lost pet and in doing so, we make membersatisfaction and honoring our promise ourobsession. It’s for good reason.In 2024, we generated a monthly profit per petof $9.15. Over the current expected lifetime of 57months, this will yield us $522 over the life ofthat pet. Yet without further margin expansion,if we can increase our retention rate to 65months, this contribution jumps up to $595. Ifwe then expand member tenure back to 70months (our average retention period over thelast 10 years), this contribution per pet becomesan even healthier $641.When you calculate that difference across ourexisting member base of one million pet parents,we would generate over $119 million more inadjusted operating income.As an example, if we assume a pet acquisitioncost of $235, the average in 2024, thisincremental amount alone will give us the fuel toadd another 506,400 pets to our book ($119million / $235), or would be further cash to ourbottom line.When we think about growth — we have tostart here — because retention power really iseverything.We measure our petacquisition investment bytracking our internal rate ofreturn per pet. Thecalculation for this is shownon page 26. We target returnsof between 30 - 40%.In 2023, we adjusted the way wemeasure our internal rate of returngiven the volatility of our margin andsubsequent retention rate. At the time,we chose to elect a more conservativeIRR methodology that smoothed outyear-over-year fluctuations andleveraged a more stable 3-year trend.While we use this when it comes topet acquisition dollar deployment, werecognize the true return on dollarsspent today creates a morepronounced improvement than thethree-year lag.Members are our Priority
232024 Trupanion Shareholder LetterWith that thought in our mind, we will be doubling down our efforts across each retention cohort.Below is our annual table of members by cohort for our Core Trupanion product.We intend to continue to execute tactics to further enhance our member experience, largely throughincreased use of our patented direct payment software, Vet Portal, and continued leverage of our“Vision” platform. Vision enables us to serve members more quickly with enhanced claimsautomation. It also creates convenient online access that we believe will drive a better memberexperience and reduce our cost to process invoices. Recall that driving efficiencies in our claimsprocess and reinvesting those savings back to members was a key pillar of our 60-month plan.Although record levels of veterinary inflation temporarily slowed our progress, we’re now beginning tosee a clearer path to delivering on that commitment.Just two years ago, this table reported less than 7% of subscription members in the over 20% cohort.Retention Cohort PerformanceYoY ChangeMonthlyretention rateDistribution Monthly ChurnNumber of cancelled petsActive pets at year-end2024Total 948,938 184,962 100.0% 1.65% 98.35% - 0.23%Rate Change >=20% 432,148 82,904 45.5% 1.64% 98.36% +0.08%Rate change < 20% 358,907 49,728 37.8% 1.14% 98.86% - 0.15%No rate change 157,883 52,330 16.6% 2.88% 97.12% -0.41%Fig 10.0 2024 Average Monthly Retention Rate for Core TrupanionFig 11.0 2022 Average Monthly Retention Rate for Core Trupanion
242024 Trupanion Shareholder LetterWith so many members moving into the over 20% rate change cohort, our efforts, and budgets, weredistracted from that all important onboarding and first-year member experience. As we prepare toincrease the number of pet parents in this first cohort, we have stepped up attention in this area,adding resources and realigning our organizational structure to bring our acquisition and retentionmarketing teams together — joining our prospect and member experiences together more seamlessly.Over the next several years, with an anticipated return to our regular monthly payment adjustmentsbelow the 20% level, combined with the efforts from the team, I expect that we will see improvementsin our member tenure and return closer to our historical 70-month average.Enhancing our first year member experience– Kimberly S.Trupanion became our family theday Mia came into our lives, inFebruary 2018. At less than 8weeks old, Mia joined our familyand has been our greatest goodmorning and sweetest goodnightkisser ever since. With Trupanion,we never have to worry aboutfinancials and can focus onMia’s health. All vet visits andclaims are processed in a timelymanner, allowing Mia to receivethe best care possible. Thankyou, Trupanion, for being a partof our extended family for 6 yearsand counting.
Internal Ratesof Return252024 Trupanion Shareholder Letter
Internal Rates of ReturnThe biggest influence over our deployment of pet acquisition spend is our decision to stay true to ourinternal rate of return guardrails of 30-40%. These guardrails are an immensely helpful measure ofself-imposed discipline which requires us to consistently assess and prioritize areas of spend, pushingus to be efficient, yet aggressive.If we find a channel where IRR is measured at 50%, we invest more aggressively in this channel tomaximize return at our accepted levels. Conversely, if we find a channel that performs at 20% IRR, wewill stop spending (until we adjust components that impact IRR, such as retention rate, profit per petetc.) to move the needle closer to 30%.For each channel, product and geography (so essentially, for each pet) there is a lifetime value perpet, which, in turn allows us to back into a target pet acquisition investment to operate within our IRRguardrails. These vary wildly for our different products, as one might expect. For example, within ourcore Trupanion product, we have, at times, spent well over $300 to acquire a pet that will remain withus for upwards of 65 months with a solid margin. However, for PHI Direct with ARPU (AverageRevenue Per Pet) in the $20 per month range, the lifetime value is lower and is not yet at scale, so theallowable PAC is significantly smaller.262024 Trupanion Shareholder LetterYear 0 1 2 3 4 5Cash flows $(191) $90 $90 $90 $90 $81 37%Pet acquisition cost $(235) 2024 IRRCapital charge** $(4) $(8) $(8) $(8) $(8) $(8)Estimated profit per pet $49 $98 $98 $98 $98 $89 $528$8 $8 $8 $8 $8 $8Estimated profit per petper monthMonths* 6 12 12 12 12 10.9 64.9Estimated trailing 3-yearprofit per pet per month(11.8% margin)X 64.9 months = $528(Lifetime value of a pet,including fixed expenses)Average revenue per new pet $69.092024*This represents the average subscriber life in months, for the period presented, which is calculated as the quotient obtained by dividing oneby one minus the average monthly retention rate**We include a capital charge in this calculation to estimate cost of capital on reserves which must be set aside to meet regulatory capitalrequirements. These reserves are included on our balance sheet.Fig 12.0 2024 Internal Rate of Return for our Subscription Business
27Measuring all of our product lines consistentlyhelps us to identify opportunities for growth —adjusting our approach to the performance ofeach product.In 2024, the team managed overall investmentthoughtfully, ending the year within ourguardrails at 37%. We’re pleased with theoverall IRR result, which reflects strongperformance at the subscription segment level.That said, a more granular look reveals areas forimprovement — particularly in how we allocatedadjusted operating income among P&Ls.For example, had we evaluated IRR solely on ourcore Trupanion product, we would have investedmore aggressively in that area — even if itmeant accepting a slightly lower overall blendedIRR. The strength of the blended number, whichincludes newer product areas that are not yetoperating at scale, made it less obvious thatadditional investment in core would have beenboth appropriate and beneficial.That said, it’s encouraging to see the meaningfulprogress in these other areas, which haveadvanced a little quicker as a result of theinvestment they received. We’re still working toimprove the granularity of how we allocatecapital across the portfolio. In the year ahead,we’ll continue refining our approach to AOIdeployment to ensure we’re making precise,data-driven investment decisions across brands,geographies, and product types.I have been asked recently if these guardrailshold us back from growing quicker. When PACinvestment is consistent quarter by quarter,accelerating at the pace of AOI growth, and wecan continuously invest more each month tobuild our brand in the market, these guardrailsare incredibly helpful. However, during times liketoday, moderating spend within these bracketsdoes somewhat limit our ability to drivemaximum brand engagement. Pet parents donot necessarily “buy in a quarter” andmeasuring each quarter independently means itwill take longer to build up our brand presenceonce again.2024 Trupanion Shareholder LetterIt’s worth noting that our IRRguardrails were adjusted from atwelve-month metric base to a threeyearlook back, consistent with ourintrinsic value measurement.We applied this adjusted formula in2023 when our margins in that timeframe had moved so erratically itwould have led to a virtuallyimpossible pet acquisition target.Today, we err on the side of cautionas both our margins and our retentionrates improve while we still lean intothe 30-40% return.If we see an opportunity for growth,then we may look to step over, orunder, the IRR guardrails in the shortterm(Q by Q) to meet them in themidterm (full year) to maintain ourannual discipline of capitalinvestment. This approach may giveus a longer runway, throttlinginvestment up and down to allow usto push more aggressively outside ofnatural market cycles. That said, inthe event we choose to makequarterly adjustments, we will not bechanging our overall approach to seekthose strong (between 30-40%)returns across our expandingaddressable market.IRR
282024 Trupanion Shareholder LetterWhile our journey begins with our core distribution channels, many competitors rely more heavily ondirect-to-consumer marketing to fill their funnels. As an industry, we’ve yet to experience consistent,multi-million-dollar ad spend. When that day comes, we believe it will significantly boost categoryawareness. In the meantime, some competitors turn to higher-cost acquisition tactics to drive theirlead volume. Among these are Google (by far the largest), price comparison sites and the growingaffiliate marketing space. With only a few exceptions, we’ve made a deliberate choice to limit ourpresence on these platforms. Participation is typically pay-to-play and often structured in ways thatprioritize provider incentives over pet parent needs. When someone searches for “what is the bestpet insurance?” they often assume the rankings are objective, not realizing how commercially drivenmany of these sites are. As a result, pet parents may be steered toward what’s cheapest, rather thanwhat offers the best value.Common Confusion about TrupanionTop 10, Best Pet Insurance, The right policy for your cat or dog...Where’s Trupanion?- Janice K.The $4,000 claim was approved immediately andpaid directly to the vet. I didn’t have to worry aboutpaying and eventually getting reimbursed likemost insurance companies. I am extremely happywith Trupanion and tell everyone how easy theprocess was.
How We AreDifferent292024 Trupanion Shareholder Letter
How We Are DifferentWhile I can point to general lack of educationaround the benefits of high-quality medicalinsurance and the under-appreciation of thevalue of being able to pay the veterinary hospitaldirectly at check-out, the biggest consumerconfusion, in my opinion, is the uniqueness of ourapproach to pricing — our lifetime productstructure. Ironically, this is, I believe, the mostimpactful component of what makes us better.The average pet parent, without accurateinformation, may naturally think (and as notedearlier, be “coached” by third party content) tobelieve that all products are created equal. Yetour market is not commoditized. There arefundamental differences between key players.We need people to understand the problemwe’re solving and the reason we stand apart.Talk of inflation has been front and center forour business since the summer of 2022. I won’tdwell on the story of inflation and its impact onour margin, but I think it’s important to note whyTrupanion’s experience of veterinary inflation isthat much higher than an average “basket ofgoods approach” showing up in CPI data points.A Trupanion member doesn’t wait to take theirpet to the hospital. Our per condition, lifetimedeductible means that we reduce barriers tocare (= increase in frequency). That, coupledwith the breadth of our coverage (diagnostics,specialty and emergency care, chronicconditions, etc.) means we enable treatment, nomatter the cost or the duration (= increase inseverity).302024 Trupanion Shareholder LetterCost of Care & Trupanion’s Problem-Solving ExperienceThe Consumer Price Index(CPI) measures the averagechange over time in theprices paid by consumersfor a basket of consumergoods and services.The CPI is calculated by comparingthe prices of a fixed basket ofgoods and services over time, butnot changes in wages or salaries,which at times, are costs notdirectly passed through toconsumers.
Most of all, our ability to pay the veterinary hospital directly at the time of check out removes thatfinal, critical hurdle that often prevents a pet parent from saying “yes” to the optimal care path fortheir much-loved family member (= increase in frequency and severity).When the average point at which treatment stops is around $1,400, there is no benefit to havinginsurance if you must first pay and then wait for reimbursement. Finding access to large amounts topay for unexpected care is hard for the average person who lives month-to-month, regardless ofincome. Having a smaller, budgetable monthly payment makes things much easier.On this basis, one might naturally assume all insurance can solve this problem, but it doesn’t. Withtraditional insurance, the problem is the same, as the pet parent still has to come out of pocket orseek emergency financing at the time of that upfront bill payment. Reimbursement does not solve theproblem.To solve this problem a scalable solution is needed that truly removes friction at checkout. That’swhere our patented direct payment software comes in. We’re the only ones in North America who canpay veterinarians directly at checkout.Adoption of our software continues to grow, alongside the number of claims we’re paying directly onbehalf of our members. The chart below highlights just how dramatically direct payments haveincreased since 2022 — a powerful signal that our solution is resonating.312024 Trupanion Shareholder Letter60%50%40%30%20%10%0%Jan 22Mar 22May 22Jul 22Sep 22Nov 22Jan 23Mar 23May 23Jul 23Sep 23Nov 23Jan 24Mar 24May 24Jul 24Sep 24Nov 24Fig 13.0 Software Paid Claims %
What is notably different for Trupanion is that when we quote for a pet, we will lock in that age factor at the time of enrollment. For example, a dog who enrolls as a puppy at Trupanion will always be sharing risk with all other puppies, regardless of how old they live to be. What this means is that if all things are equal (no inflation, change in cost of care or increase in coverage), then compared to competitors, our pricing would likely start out with a higher price and — and this is the bit people don’t understand — remain consistent for the life of the pet. Every single competitor starts with a lower age curve which means the price for that pet is guaranteed to increase as the pet ages. In every instance, that age-related increase can be dramatic! 32 2024 Trupanion Shareholder Letter Pricing the Trupanion Way Trupanion vs Competitors Yearly Price 0 $0 $2.5k $5k $7.5k $10k 3 6 Trupanion Competitor A Competitor B Competitor C 9 12 This example is based on a Labrador puppy in California, where we compared Trupanion’s lifetime cost with a group of competitors. Information was pulled from public filings as of March 1, 2025 and includes assumptions based on annual inflation. Fig 14.0 Monthly Premium over Lifetime for Pet enrolling as a Puppy in California In most cases, the quicker the pet is treated (during signs of early onset) the better the chance of recovery, with better long-term health and longer life expectancy. You put all of this together, and you’re left with high retention for Trupanion and increased practice revenue (by approximately 2x compared to an uninsured client) for the veterinary hospital — a win: win for everyone.
Important to Note: Age at enrollment pricing doesn’t mean a monthly rate remains locked in. As care for pets evolves and expands, and with typical inflationary impacts, prices do change. Trupanion’s approach removes one of the biggest variables to provide a smoother, more predictable experience for our members over the life of the pet. We put some of the strength of our retention rate down to this point of difference because our prices don’t escalate when you need us most. 33 2024 Trupanion Shareholder Letter Here’s a walk through of what this looks like today: In the early years (typically when the less catastrophic health issues crop up), prices stay somewhat close. But by the time a pet reaches 4 or older, a pet parent should expect some very large automatic and guaranteed pricing adjustments (these price adjustments are called “attained age pricing”). With this example in Fig. 14.0, taken from real 2025 rate filings, a pet with competitor A increases from less than $600 per year to over $9,000. Now if you layer in Trupanion’s age rate (in blue), it’s clear to see the dramatic change attained age pricing has on monthly premiums over a lifetime. We believe that the impact of using the Trupanion approach — age-at-enrollment — allows for a more stable (budgetable) monthly cost. Early Years Later Years Now it must be said, this level of coverage comes at a cost, which is why we have seen our costs impacted so aggressively over this period. It’s our job to make sure that the price associated with this genuine and reliable coverage is accurate and aligned to our value proposition. Critically, as the average monthly charge across the industry has increased over the last three years — the pet parent deserves to understand that in pet insurance, you get what you pay for. To do this, we have to be better at explaining why Trupanion costs what it does.
The Impact of Age We all inherently know that the older we get, the harder it is to keep our body and mind in good shape. Our (mostly) fur-covered companions are no different. We have a choice as an insurer to let the pet parent take more of that cost on as the pet ages (which shows up in the age factor over time) or contemplate more of a shared risk approach to smooth out the effect of aging on costs. Trupanion has opted to stand alone in the latter approach. As the previous chart showed us, using data from our competitors, the monthly costs and thereby the associated costs and exposure for an older pet can be multiples more at the time of enrollment. In such a heavily under penetrated market, education is key. We don’t yet have high penetration rates and therefore lack an abundance of consumer experience that would otherwise organically educate the mass market on our behalf. We have to push this information out into the market to help pet parents understand the nuances as they do their research. Without acknowledging this key point of difference, it means pet parents can’t accurately compare prices on websites — because pricing isn’t broken out in this way and regulators don’t require it be addressed at the point of sale. 34 2024 Trupanion Shareholder Letter Why does this matter?
So Why Be Different?
2024 in Review 36 2024 Trupanion Shareholder Letter
2024 in Review So armed with that as a backdrop to our business, I’m pleased to provide a comprehensive overview of our 2024 results. 2024 was a year of strong operational and financial progress. Total revenue was up 16% year-overyear to $1.286 billion, and AOI crossed the $100 million mark for the first time, reflecting a year-overyear jump of 37%. AOI represents the funds we have to invest in our business and in 2024, we put only $70 million of this to work in our growth and development initiatives. The majority of this was aimed at adding pets in our subscription business, and we also made strides in developing certain of our pre-revenue initiatives. 37 2024 Trupanion Shareholder Letter Net cash** Adjusted operating income per share Revenue per share Fully diluted share count* Net income (loss) YoY growth Adjusted operating income Invested capital to acquire new pets YoY growth Total Revenue Enrolled Pets Year 37% (9.6) 44.4 $28.96 $2.58 275.2 1164.5 4.5 1$ 6% 1,285.7 1,677,570 2024 242.0 $1(44.7) 43.5 $25.47 .92 -7 83.5 6% 0$ 22% .4 1,108.6 1,714,2 473 023 239.0 $2.0$2 9 1.1(44.7) 42.8 7 18 89.3 4% 0$9 29% .4 05.2 1,537,2 573 022 $ 294.3 1$ .83 1$699. 39% 69.5 78.5 37% (35.5) 42.8 6.32 1,1 0 76,2 778 021 30$ 2.6 1$ .35 1157. 29% (5.8) 42.4 .85 1 45.1 31$5 % 02.0 862,2 928 020 140$ .2 1.1$ 7 10.138. 2 0 (1646 $383.9 26% 33.3 44.2 39% .8) ,2 728 019 1$ 35.2 0$8. .84 0( 37.9 3 03 36% .9) 1$3 25% 23.7 .9 04.0 521,350 2018 $ 57.8 0( 35.4 $6.85 .66 123.4 58% .5) 1423 $242.7 29% 8.4 ,12 94 017 51$ .6 0$5.4 .42 0 3 (6.9) 34.9 17% 14.8 1$ 28% 4.7 1343 88.2 ,2 649 016 $ 45.6 0.10 $4.30 34.1 (13 7.2) 103.6 % 1$ 27% 4.8 147.0 291,812 8 015 61$ .5 0.0(2 33.8 $3.43 3 1.2) -80% 0.9 11.1 $ 38% 11232 5.9 ,450 2014 Note: Total revenue, invested capital, adjusted operating income, net income (loss), and net cash shown in $ millions. *Total share count plus options and warrants granted, which includes outstanding shares plus unexercised/unvested options and RSUs. ** Cash, investments, and our building assets minus debt. Fig 15.0 Key Consolidated Financial Metrics
Primarily non -cash items such as depreciation and amortization ($16 million) and stock-based compensation ($32 million) help bridge to our $9.6 million net loss — a significant and very intentional improvement over the prior three years. Our capital expenditures reduced by almost 50% year-over-year from $18.3 million in 2023 to $9.7 million, below $10 million for the first time since 2020. As a result, we generated over $38 million in free cash flow, representing a margin of 3.0% on total revenues, above our new annual target of 2.5%. As for the Balance Sheet, we ended 2024 in a stronger financial position with over $275 million in net cash. Our largest insurance entity, APIC, maintained over $245 million of capital surplus, an excess of $140 million over our estimated minimum regulatory requirement. We continue to work with the New York Department of Financial Services to assess our financial position over the long-term and are assured we have significant headroom for growth available. 38 2024 Trupanion Shareholder Letter Let’s take a closer look at the financials of our Subscription segment. While our Other Business Segment generates substantial revenue, its contribution to AOI and intrinsic value is limited given its low profit margins. The table on the next page provides insight into how we’ve evaluated our business since our IPO — focusing on the Subscription segment, with the Other Business Segment included only for its cash flow contribution. Trupanion’s Business Subscription
39 2024 Trupanion Shareholder Letter (in $ millions) 2020 2021 2022 2023 2024 10-yr CAGR Cash generated / (Cash used) *** 4.5 (3.4) (8.3) (5.1) 40.3 Minus capital expenditures ** (7.5) (12.4) (17.1) (18.3) (9.7) Minus Other PAC * (0.8) (0.5) (0.6) (0.2) (0.0) Add Other Adjusted Operating Profit (AOI) 3.0 7.5 9.9 13.4 6.2 Minus Subscription PAC * (44.2) (69.0) (79.8) (70.2) (64.4) 19.4% Adjusted Operating Profit Margin (AOM) 13.9% 14.3% 13.3% 9.8% 12.6% YoY Change 29% 31% 12% -12% 54% Subscription Adjusted Operating Profit (AOI) 54.0 71.0 79.3 70.2 108.3 55.6% Minus fixed expenses (20.4) (23.4) (25.9) (33.7) (46.4) Minus variable expenses (35.4) (48.5) (58.6) (69.2) (80.7) Minus paid veterinary invoices (277.9) (351.9) (432.8) (539.7) (621.1) YoY Change 21% 28% 21% 19% 20% Subscription Revenue $387.7 $494.9 $596.6 $712.9 $856.5 23.5% Enrolled Pets in Subscription Segment 577,957 704,333 869,862 991,426 1,041,212 17.1% *Pet acquisition cost (PAC) represents the capital we deploy to acquire new pets ** Excludes 2018 purchase of headquarter building *** Simplified measure of cash flow, does not tie to our Free Cash Flow metric which is defined as cash provided by operating activities minus capital expenditures (in $ millions) 2014 2015 2016 2017 2018 2019 Cash generated / (Cash used) *** (15.9) (16.2) (1.8) 1.6 3.8 5.6 Minus capital expenditures ** (5.6) (4.9) (1.9) (3.1) (4.4) (5.4) Minus Other PAC * (0.1) (0.1) (0.2) (0.2) (0.4) (0.4) Add Other Adjusted Operating Profit (AOI) (0.6) (0.8) (0.2) (0.5) 0.9 2.4 Minus Subscription PAC * (10.9) (14.7) (14.5) (18.4) (23.3) (32.9) Adjusted Operating Profit Margin (AOM) 1.3% 3.2% 8.7% 10.9% 11.7% 13.0% YoY Change 231% 249% 59% 30% 35% Subscription Adjusted Operating Profit (AOI) 1.3 4.3 15.0 23.8 31.0 41.9 Minus fixed expenses (17.3) (19.9) (17.3) (18.2) (17.7) (18.2) Minus variable expenses (10.9) (14.0) (16.6) (21.1) (24.6) (29.4) Minus paid veterinary invoices (74.0) (95.2) (124.4) (155.2) (190.5) (231.7) YoY Change 35% 29% 30% 26% 21% 22% Subscription Revenue $103.5 $133.4 $173.4 $218.4 $263.7 $321.2 Enrolled Pets in Subscription Segment 215,491 272,636 323,233 371,683 430,770 494,026 Fig 16.0 Key Financial Metrics for our Subscription Business and Total Cash Generation
$0.0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 $200.0 $400.0 $600.0 $800.0 $1,000.0 Fig 17.0 Subscription Revenue (in $ millions) $0.0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 $200.0 $400.0 $600.0 $800.0 $1,000.0 Pre-2014 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Fig 18.0 Subscription Revenue by Cohort (in $ millions) 40 2024 Trupanion Shareholder Letter Subscription revenue for the year came in right on target, growing 20% to $856 million. Historically growth in pet count has been the primary driver of revenue, followed by growth in ARPU. This year, reflecting our tough but necessary pricing actions, ARPU did the heavy lifting, increasing 12% year over year. It’s frankly a blessing and brilliant part of our business that enables us to seek growth through a number of means. Often we grow with pet count, last year we grew with ARPU.
Most notably, our core subscription segment AOI Grew 54% year-over-year and
In 2024, as in prior periods, the majority of our revenue was created from our flagship “core” Trupanion monthly subscription product. This offering not only generates over 95% of our subscription adjusted operating income — the essential fuel for our growth — but also reflects the strongest attributes of our model: deep moats, a highly aligned value proposition, and enduring member loyalty. And, with its high lifetime value and consistently strong internal rates of return, it remains the most strategically impactful part of our portfolio. Because of this, it has — and will continue to be in 2025 — the focal point of our subscription business. Having been surprised with the first inflationary hike two years prior, we doubled-down our pricing analysis and continued with our steady assumption of mid-teens inflation through the first quarter of the year. We were right. The member rate changes set in late ‘23 to flow through our books in H1 of ‘24, enabled strong ARPU growth and a steady continuation of our margin expansion. Growth in ARPU for the Core Trupanion product hit an all-time high in Q4 of 2024 – increasing over 14% year-over-year. And while we landed shy of our long-term margin target for the year, we made significant strides returning our business to double-digit adjusted operating margin and exited the year with over 90% of our book priced to target. Growing in territories where our margins are temporarily too low creates a sub-par member experience as pet parents are virtually guaranteed to receive a 20%+ rate increase after their first year. As noted earlier, first year attrition is always a challenge – and combining this with higher-than-average rate increases naturally leads to higher churn. Given the need across all regions to right-size our margins we made the decision to hold back some of our pet acquisition dollars to prioritize delivery of the best -in-class member experience. 42 2024 Trupanion Shareholder Letter Core Trupanion The beauty of a strong monthly recurring revenue business is the assurance that the machine keeps running — even when the power is turned off. In our case, we slowed spend due to margin compression, yet revenue from our existing members and newly referred pet parents continued to grow — driven by our strong distribution channel, brand awareness, focus on member experience, and ongoing demand for our product. However, as we found through the year, our historical brand presence began to fade, signaling the need for reinvestment. As a result of the reduced spend, year-end pet count additions came in light by Trupanion standards, with only a modest increase in total subscription pets for the full year (see the financial table on page 39). While we are far from satisfied with the reduced pace of pet growth, this year’s performance is encouraging — especially against the backdrop of two years of receding acquisition dollars, and once-in-ageneration rate increases driven by veterinary inflation. It underscores the huge opportunity ahead for Trupanion, as we plan to increase the deployment of our growing adjusted operating income once again.
While we continue to refine and adjust our pricing to align to our long-standing goal of 15% adjusted operating margin, we have made Trupanion immeasurably and sustainably healthier exiting 2024. It is from a position of strength that we look to achieve the primary goal for our core business in 2025 to improve our core Trupanion retention, with a fast-follow secondary initiative to reignite our “gross adds” pet engine. 43 2024 Trupanion Shareholder Letter – Carolyn S. Trupanion recently saw Watson through a bout of bronchopneumonia. Two emergency visits, four x-rays, and more than 2 months of medication later and Watson is back to his happy self. Are we ever glad we had insurance. Thank you Trupanion!
A Plan Update 60-Month 44 2024 Trupanion Shareholder Letter
Trupanion in Germany and Switzerland trYpanion.de In the last 12-months we successfully launched our first European Trupanion branded product to market in Germany and Switzerland, a market with approximately 12,000 veterinary hospitals combined and an estimated pet population of 29 million. While it is still early days, the reception from the veterinary community has been positive, and we are pleased to bring a direct payment solution to a market that, we believe, is unrivaled. Our investment since launch has been negligible (less than 2% of PAC in H2 last year) and will likely remain at similarly low levels throughout 2025. This year, it’s our intention to test and refine this new P&L, in support of moving closer to our target operational metrics, and before we drive growth more aggressively.
462024 Trupanion Shareholder LetterMuch like our core product, we have been focused on accurate pricing and strong member support forChewy, Aflac and State Farm (State Farm promotes the core Trupanion product).In all instances, therefore, we have seen moderate growth. Between these three brands we have 8different product types consisting of both insurance and wellness components. Every product hasperformed differently and are generally accretive to our intrinsic value, and we will continue to look atexpansion in-line with our partners’ ambitions and to bring them quickly to scale.Having launched into Canada in 2021, PHI Direct and Furkin have become more deeply rooted in theCanadian market. Designed specifically to showcase different “swim lane” products sold direct-toconsumer,we have been gradually iterating with both brands and have had some good learnings,albeit with mixed results.Furkin is further along the path towards scalability, with encouraging signs around cost-effectivecustomer acquisition and retention tracking at, or above, expectations. PHI Direct, as a lower ARPUoffering, naturally demands a more measured approach. We have learned the importance ofmaintaining discipline in spend, ensuring it aligns with our expectations of pet lifetime value. Theseinsights have helped us better calibrate our investment strategy across both brands, optimizing forsustainable growth.Soon, Furkin and PHI Direct will fall under our new underwriting entity in Canada, GPIC. This structurenot only brings operational and regulatory alignment, but also supports long-term scalability andflexibility in how we manage and grow our Canadian business.Distribution with Partners and ProductsMedium and Low ARPU Products: Furkin and PHI DirectOur market-leading team across Czechia, Slovakia and Belgium continue to expand across direct-toconsumerand veterinary channels. While we have yet to introduce the Trupanion brand to theseEuropean markets, we are making strong progress by deepening veterinary moats with key animalhealth partners and offering our unrivaled level of direct veterinary payment on behalf of ourmembers.In time, we will introduce the Trupanion-style product into these geographies; however havingrecently launched in Germany and Switzerland, we are mindful of the internal resources and supportrequired to have two brand-new insurance products in market, and we will bide our time to ensurewe can be confident in our market delivery.As our company expands, we are pleased to now have alternative channels for capital deployment.Our goal is to double our addressable market and ultimately to diversify our growth options. With astrong foundation in several key European markets, we’ve built meaningful optionality. These effortsare helping to establish a more flexible platform for growth, giving us the ability to pivot or reallocateas needed to maintain momentum. And as we look toward our next strategic plan, they will allow usto expand our active hospitals and same store sale metrics in multiple ways.PetExpert: Czechia, Slovakia and Belgium
472024 Trupanion Shareholder LetterOne of the more unique components of our 60-month plan was the introduction of a bold newproduct line in our pet food brand, Landspath. 2024 was a good year for this incubation project.Created using new food processing, this unique pet food recipe is really taking shape after havingbeen painstakingly crafted. The food itself is the result of “Test 73” (think WD40 +33!). In fact, asidefrom standard pet food testing, it has also passed stringent AAFCO testing — no mean feat and anexample of the standards we are intending to operate this new line of business to.Designed with the sole purpose of helping increase the health and wellbeing of our pets, when wedemonstrate a pet is healthier when eating Landspath, we expect we can, in-turn, reduce monthlyinsurance premiums and increase the value provided to the pet parent. As a reminder, this producthas also been designed to be sold exclusively through the veterinary channel, which will return along-lost revenue stream back to the hospital through monthly recurring commissions. As hospitalsstruggle with the slower frequency of visits, this is yet another way the broader Trupanion businesswill align to the needs of the veterinary community.When launched, Landspath will represent a meaningful step forward in the value we deliver to ourmembers, the veterinary community, and in Trupanion’s overall share of the pet wallet. While I won’tgo into detail for competitive reasons, our pet food team, consisting of Darryl (who’s having a lot offun with this new project!) and a collection of brilliant global pet nutrition and other gurus are makingbig strides forward. We have developed plans to build out capacity and look forward to sharing moreat our up-and-coming investor day in September.Long-term, having a diversified product portfolio creates choices for investment and reduces singularcategory risk. What unifies all our efforts is the mission to help pet parents to budget and care fortheir pets, and food is most definitely a component of that!Food Brand
intrinsic value per share
The Team492024 Trupanion Shareholder Letter
The Team502024 Trupanion Shareholder LetterIn 2024, our team, which now exists in 9 countries around the world, performed incredibly well.Like a proud parent, one might argue most leaders would say the same, but beyond good results, theTrupanion community showed up in ways it never has before. It cannot be underestimated howdifficult it is for a team so accustomed to managing rapid growth to instead take a pause, close ourmargin gap, learn new approaches and processes, and say farewell to their founding leader — all in asingle year. And yet, they did.For a company that has grown 20%+ in 9 of the last 10 years, whose psyche is always to help morepets, we took time in 2024 to bolster our structures and introduce processes that support a morestreamlined and organized workflow. Culturally, this has marked a shift for the business. But with itcomes a sense of awareness and an enhanced platform for reviewing and assessing the business toensure it continues to thrive and allows us to execute with the same tenacity and proactivity asbefore.Every single team member played a role, and I am immensely proud of how they rallied andshowcased their commitment to maintain growth and enhance our financial position whilesimultaneously remediating two material weaknesses. These are not tasks for the faint-hearted, andI’m tremendously grateful for their commitment to our mission.It’s for this reason that we were pleased to share an allocation of stock-based compensation with theteam, based on our per-share-growth in intrinsic value, as mentioned above. Looking ahead, I intendto be deliberate in making sure our global teams are set up for success.This means greater recognition for team members, expanding learning and development programs,clearer paths for growth and collaboration, and a renewed focus on role clarity — to reinforceaccountability, cross-functional execution, and the ability to move with speed, accuracy and diligence.While I don’t have the chance to see and talk with every team member, I say this from the heart whenI say we are committed to them — wherever and whoever they are — we will do what’s right for ourpeople.
FinishingStrong512024 Trupanion Shareholder Letter
Finishing Strong522024 Trupanion Shareholder LetterWith just 8 months left in our current strategic plan, the team is focused on ending the year, and theplan, strong. We will double-down on our core Trupanion brand, through prioritization of retentionand gross pet adds, leaning especially into the veterinary channel and the moat that has made us theleading brand in the industry. Returning to our roots is a welcome reset, and I’m looking forward toseeing the team operate with increased fluidity as they move into their more natural, growth-orientedhabitat.While our 60-month plan presented an exciting and ambitious array of market opportunities to rollout over a 5-year period, this final stretch calls for focus to execute on the initiatives that we havenow put in place. We will operate with a “less is more” mentality to achieve high quality execution.We will continue integrating our automation and tech platforms, with a goal of further enhancing ourmember experience, marketing performance and operational efficiency, and we look forward toending this year with a virtually completed integration of all North American products onto our newVision platform.Trupanion turns 25 this year and one quarter of a century in, we now support over 1 million pets andtheir families. By the end of the year, we’ll have paid out well over $3.5 billion in invoices — helpingour members access care and enabling countless veterinary teams around the world to practice theirbest medicine.As we have discussed, our current strategic plan is steeped in opportunity, bold expansion andtenacious growth; this ambition will be consistent in our next chapter, building on the foundations ofthe last plan. We are excited to be setting the stage for what’s to come, now that the foundationshave been laid. We will exit 2025 with a global TAM of over 50,000 veterinary hospitals and anaddressable market of over 300 million pet parents. If the current plan is considered as laying thegroundwork, the next will be a springboard for growth.To grow our intrinsic value per share, we will look to expand our active hospital count and same storesales. Combined with our North American market presence, our European endeavors unlocksignificant opportunity to do so in a consistent and compounding manner, setting up strong growthplans consistent with our past.While the next strategic plan is in the early stages of development, investors should expect that wewill double-down our focus on increasing the penetration of our core Trupanion productacross North America. The market is ripe for growth and with our compounding adjusted operatingincome — which we expect to reach $200 million in the next few years — we will have ampleresources to drive greater brand awareness in-parallel to the market adoption curve. We will bringthe Trupanion brand in front of pet parents wherever they may be and stay true to our alignment andsupport of the veterinary industry through our Territory Partners to grow our same store sales metricsacross North America and into Europe.61 Months and Beyond...
532024 Trupanion Shareholder LetterNow that many of our newer initiatives are built and at varying degrees of scaling, expect us to makeupdates to how we think about these fledgling lines. For competitive reasons we’ll keep our specificplans under wraps but needless to say, we have worked hard to give ourselves options and we will beselective and deliberate with our approach to allow us to seize the moment as the market expands.Outside of insurance, our food opportunity is starting to take shape, and we will continue to thinkproactively and innovative to evolve our technology and share our data insights that continue toenable our mission.In the closing of our 2023 letter we purposefully discussed the impact of a more mature balancesheet:“As we continue to grow and mature, we recognize our growth levers will modulate andexpand. We don’t always anticipate every dollar will be reinvested to add pets (althoughthe majority likely will), when we know the longer-term benefit to our mission is toenhance our balance sheet, enabled by our new free cash flow target. We are excited todo this for the long-term benefit of Trupanion and all of those in our ecosystem.”We have built on this concept in 2024 and it’s right to expect that the same ambition will be presentin the next strategic roadmap. We look forward to sharing more a year from now in our 2025 letter.Until then, we have every intention of continuing to be bold and aggressive in our chosen markets,proactively targeting growth opportunities and maximizing our returns.Reflecting on my past 13 years with Trupanion, it’s hard to remember a moment when we have beenquite as primed for strong execution and performance as we are today. We have never had morehospitals within reach, as many people in the field, been in such a strong capital position, or had asmuch money to invest in growth. Perhaps most impactful of all, we have certainly never seen a globalneed as prevalent as today.Since our inception, we’ve weathered recessions, political instability and emerged stronger whileothers have come and gone. We’ve been the first to respond, the most transparent, and we’ve grownthrough the hardest of times.Twenty-five years in, our model is proven. We are well established, with deep moats and strong,protected points of difference. In our large, under penetrated market spanning multiple, globalterritories, our simple and repeatable monthly subscription model demonstrates, time and again, ourpricing power and our member resilience.Whether you read this as a shareholder, team member, veterinarian or member, know that we exited2024 stronger, in every way. This resilient business is coming of age, and we look forward to youbeing part of our journey.
End Notes542024 Trupanion Shareholder LetterThis letter and other publicly available reports include certain non-GAAP financial measures. Thesenon-GAAP financial measures may not provide information that is directly comparable to thatprovided by other companies in its industry as other companies in its industry may calculate or usenon-GAAP financial measures differently. In addition, there are limitations in using non-GAAPfinancial measures because the non-GAAP financial measures are not prepared in accordance withGAAP, may be different from non-GAAP financial measures used by other companies and excludeexpenses that may have a material impact on Trupanion’s reported financial results. The presentationand utilization of non-GAAP financial measures is not meant to be considered in isolation or as asubstitute for the directly comparable financial measures prepared in accordance with GAAP.Trupanion urges its investors to review the reconciliation of its non-GAAP financial measures to themost directly comparable GAAP financial measures in its consolidated financial statements, and notto rely on any single financial or operating measure to evaluate its business. These reconciliations areincluded within our Supplemental Financial Information provided on Trupanion’s Investor Relationswebsite.Our internal rate of return is calculated assuming the new subscription pets we enroll during theperiod will behave like an average subscription pet. Cash outflows from an average pet includeaverage pet acquisition cost for the applicable period. Cash outflows also include a monthly capitalcharge, which we estimate as 1% of the monthly average revenue per pet for the four quarterspreceding the period end date. Cash inflows from an average pet are calculated based onsubscription revenue less cost of revenue from our subscription business segment for the 12 monthsprior to the period end date excluding stock-based compensation expense related to cost of revenuefrom our subscription business segment, sign-up fee revenue and the change in deferred revenue,minus fixed expenses related to our subscription business, which are the pro rata portion of generaland administrative and technology and development expenses, less stock-based compensation,based on revenues. Further details on the calculation for 2024 are included within our SupplementalFinancial Information provided on Trupanion’s Investor Relations website. Because of varyingavailable valuation methodologies, subjective assumptions and the variety of equity instruments thatcan impact a company’s non-cash expenses, Trupanion believes that providing various non-GAAPfinancial measures that exclude stock-based compensation expense and depreciation andamortization expense allows for more meaningful comparisons between its operating results fromperiod to period. Trupanion offsets new pet acquisition expense with sign-up fee revenue in thecalculation of net acquisition cost because it collects sign-up fee revenue from new members at thetime of enrollment and considers it to be an offset to a portion of Trupanion’s new pet acquisitionexpenses. Trupanion believes this allows it to calculate and present financial measures in a consistentmanner across periods. This letter also presents new pet acquisition expense on an after-tax basis,which management believes facilitates comparisons to companies that grow inorganically.Trupanion’s management believes that the non-GAAP financial measures and the related financialmeasures derived from them are important tools for financial and operational decision-making andfor evaluating operating results over different periods of time.
Disclaimer this letter contains
Disclaimer (ctd.) 56 2024 Trupanion Shareholder Letter You should not rely on forward-looking statements as predictions or guarantees of future events. Although we believe that the assumptions and expectations reflected in the forward-looking statements are reasonable based on our historical experience, these assumptions and expectations involve significant judgment and uncertainty, and in some cases these assumptions and expectations (and therefore the judgment and uncertainty) have been projected over an extended period of time. Future results, levels of activity, performance or events and circumstances reflected in the forwardlooking statements may not be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law.
2019 Shareholder Letter 57 2024 Trupanion Shareholder Letter
Please note that this letter highlighted in green numbers in blue
When I first drafted this letter, we were still very early into what has evolved into a global health pandemic. I had intended to open with the following:Trupanion’s mission is simple: helping loving, responsible pet owners budget and care for their pets.Today, our mission feels particularly relevant. Providing pet owners peace of mind in periods of uncertainty is why Trupanion exists! I can think of several other “crises” or periods of uncertainty in our 20 year history, but not one that so clearly embodies the challenges of an unexpected health crisis.Planning for the unexpected is the heart of the problem Trupanion was designed to solve. How do pet owners budget for veterinary expenses if and when their pet becomes sick or injured?So, how do we know if we are progressing or doing well? The basic answer, like our mission, is simple: the more pet owners and pets that we are helping, the better we are doing. In addition, we have key metrics, which when monitored on annual intervals, provide insight into the overall strength and health of our business.We have three key financial goals. We don’t expect we will achieve them each and every year, but you can be assured that we will try our best. These three primary annual goals are:Grow total revenue between 20% and 30% annually.Compound the cash from existing and new pets. The keys to compounding cash flow are growth in pets, average revenue per pet, and our adjusted operating margin per pet. For our monthly subscription pets, we target an adjusted operating margin of 15%.Re-invest our discretionary cash at internal rates of return between 30% and 40%. At these internal rates of return, we aim to invest as much discretionary cash as possible, while remaining free cash flow positive. Adjusted Operating Margin (AOM): The amount of Adjusted Operating Income (defined below) as a percentage of revenue generated from our members during the period.Discretionary Cash: This is a term that we use to describe our cash flow that could be returnedto shareholders in the way of dividends. or reinvested to grow the company.Internal Rate of Return (IRR): A calculation used to evaluate the return on an investment over time.Free Cash Flow: Cash we generated from operations. net of any cash used on capital expendituressuch as purchases of property or equipment and reinvested to grow the business. 01
02Table 1. Key Metrics2014 2015 2016 2017 2018 2019Revenue $115.9M $147.0M $188.2M $242.7M $304.0M $383.9MYoY revenuegrowth 38% 27% 28% 29% 25% 26%Adjusted operatingincome (AOI) $0.9M $3.6M $14.8M $23.4M $31.9M $44.2MAdjustedOperating Margin(AOM) 1% 2% 8% 10% 10% 12%Pet acquisition cost $11.1M $14.8M $14.7M $18.4M $23.7M $33.3M1Internal rate ofreturn (from newsubscription pets) N/A N/A 31% 35% 37% 40%2Free cash flow ($16.4M) ($15.3M) $3.1M $6.5M $8.3M3 $10.8M1The $33.3M acquisition spend noted in this table includes spend in our other business segment,$32.9M of which was spent acquiring subscription pets in 2019.2In 2019, we began to use the per pet unit economics specific to our subscription business as aninput for our internal rate of return calculation. Prior to 2019, per pet unit economics reflected ourconsolidated business.32018 free cash flow of $8.3 million reflects free cash flow of ($44.3) million, adjusted to excludethe $52.5 million used to purchase our building.Table 2. Financial Metrics/Performance 2012-2019Year Enrolled pets Revenue YoY revenuegrowthAdjustedoperatingincomeInvestedcapital toacquire newpetsIRR on anaverage petCash, short-terminvestments, ourbuilding assets,minus debtEarnings (NetLoss)2012 127,704 $55.5M 50% $3.0M $6.7M N/A $5.1M ($8.1M)2013 182,497 $83.8M 51% $4.3M $8.4M N/A $7.9M ($8.2M)2014 232,450 $115.9M 38% $0.9M $11.1M N/A $60.6M ($21.2M)2015 291,818 $147.0M 27% $3.6M $14.8M N/A $43.2M ($17.2M)2016 343,649 $188.2M 28% $14.8M $14.7M 31% $48.8M ($6.9M)2017 423,194 $242.7M 29% $23.4M $18.4M 35% $54.4M ($1.5M)2018 521,326 $304.0M 25% $31.9M $23.7M 37% $134.7M ($0.9M)2019 646,728 $383.9M 26% $44.2M $33.3M 40% $139.4M ($1.8M)
03Table 3. Key Financial Metrics Per ShareYear Total sharecount plusoptions, awardsand warrantsgranted1Revenueper shareYoYgrowthAdjustedoperatingincomeper shareYoYgrowthCash, short-terminvestments, ourbuilding assets,minus debt pershareYoYgrowthEarnings(loss) pershare22012 22,467,205 $2.47 53% $0.13 -7% $0.23 -30% $(9.76)2013 24,889,316 $3.37 36% $0.17 31% $0.32 39% $(6.23)2014 33,813,736 $3.43 2% $0.03 -82% $1.79 459% $(1.64)2015 34,138,237 $4.31 26% $0.11 267% $1.27 -29% $(0.62)2016 34,879,610 $5.40 25% $0.42 282% $1.40 10% $(0.24)2017 35,444,460 $6.85 27% $0.66 57% $1.53 9% $(0.05)2018 37,862,666 $8.03 17% $0.85 28% $3.56 133% ($0.03)2019 37,951,839 $10.12 26% $1.16 37% $3.67 3% ($0.05)1Share count includes outstanding shares plus unexercised options and unvested restricted stock,as well as shares granted in subsequent year pertaining to the year’s performance.2Loss per share is calculated using the GAAP basic weighted-average shares at year end.
04Table 4. Business SegmentsSubscriptionBusinessOther Business TotalBusinessSubscriptionBusinessOther Business TotalBusinessRevenue 100% 100% 100% $321.2M $62.8M $383.9MLess: Paying Veterinary Invoices 72% 61% 70% $231.7M $38.5M $270.3MLess: Variable Expenses 9% 29% 12% $29.4M $18.3M $47.7MLess: Fixed Expenses 6% 6% 6% $18.2M $3.6M $21.7MEquals Adjusted Operating Margin(AOM) or Income (AOI) 13% 4% 12% $41.9M $2.3M $44.2MExisting Pets New Pets2010 2011 2012 2013 2014 2015 2016 2017 2018 2019$120.00$100.00$80.00$60.00$40.00$20.00$02010 2011 2012 2013 2014 2015 2016 2017 2018 2019$120.00$100.00$80.00$60.00$40.00$20.00$0
My Report Card on the Year Same Store Sales BThis was an area of good progress and learning in 2019. Same store sales measures the penetration rate of Trupanion insured pets among our existing active hospital base. We endeavor to grow our active hospital count, while simultaneously increasing the rate at which pets are enrolling with Trupanion at veterinary hospitals. Doing so is really, really hard!The rate at which we add active hospitals can influence growth in same store sales. Hospitals further down the adoption curve naturally carry a lower penetration rate of Trupanion insured pets. In 2019, we were able to deliver 11% growth in active hospitals, while increasing the number of pets that enrolled per active hospital per month to 1.14 from 1.13 in 2018.Growth in same store sales was driven by increased leads, benefiting from the number of hospitals that have installed our software and have an assigned inside Account Manager to act as a hospital’s point of contact in between Territory Partner visits. We ended the year with over 4,850 hospitals with our software, and about three dozen inside Account Managers. For those hospitals that have had our software and an assigned inside Account Manager for at least six months, we’re seeing a consistent 48% increase in the number of pets enrolled per hospital, per month.Conversion Rates COur primary challenge in increasing conversion rates lies in more effectively communicating our value proposition to prospective members. Our efforts to do so during 2019 did not move the needle, despite a significant investment year over year.Q3 was a good quarter, where certain tests and initiatives worked well. In Q4, our tests did not work well. We have plenty of reasons to be optimistic; as I write this letter, we have seen some encouraging improvements to this metric. Execution, however, is not always up and to the right. We will have to put 2019 down as a year of learning.Attached and linked to this year’s letter is a member facing document titled: “Why Trupanion.” This document provides some of the key content that we need to learn how to share more effectively with pet owners who are trying to decide if they should choose Trupanion. We are already exceptionally skilled at delivering this content over the phone. The team needs to become more proficient at delivering this content via multiple formats and delivery mechanisms. This information needs to then be reinforced for new members to help increase retention during the first year. Not all new members will take the time to digest this information, but I’m confident that those who do will not only be more likely to convert, they are also more likely to become brand ambassadors. Some Store Soles: The overage number of pets enrolled per active hospital per month.Penetration Rote: In this context, our penetration rate is the number of Trupanion-insured clients that a particular hospital cares for as a percentage of their total number of clients.Active Hospitals: A veterinary hospital that has one or more net pets enrolled every three months.Account Managers: Team members who support veterinary hospitals in between visits from our Territory Partners.Territory Portner: Entrepreneurial team members who are responsible for educating the veterinarians in their exclusive geography about the benefits of pet owners having high -quality medical insurancefor pets. Once they have established a relationship with these veterinarians, Territory Partners will work with veterinary staff to ensure that Trupanion members have a great customer experience when their pet gets sick or injured, which increases our retention rates. Note that the majority of a Territory Partner’s compensation is tied to keeping pets enrolled, not enrollingthem in the first place, which we consider to be a variable expense.Our Software: Our software communicates with the Practice Management Software insidea hospital, which allows us to pay hospitals directly at time of invoice and eliminates a major barrier to care-thereimbursement model (see page 07 for definition).Conversion Rotes: The percentage of pet ownerswho enroll with Trupanion after receiving a quote.
Nirvana B Getting closer to achieving nirvana was a major focus in 2019.
We have three items that make it difficult for our teams to hit our target of using 71% of our revenue to pay veterinary invoices for the average pet owner.
Culture & Team B+ 2019 was a mixed
How We Make Strategic Decisions When we are making
How we build our 15-year DCF model:
How many new pet enrollments should we include in future years when building our model?
STEP 1 when building then 15-year discounted cash flow model, we
Expansion beyond North America will be necessary.13Table 6. 2018 Churn By Rate Change2018 Churn Active Pets at YearEndNumber of CancelledPetsPercentage of Pets in2018Monthly Churn MonthlyRetentionNo Rate Change(New Pets) 86,914 26,960 20.18% 2.79% 97.21%Rate Change < 20% 290,719 30,000 67.49% 0.93% 99.07%Rate Change > 20% 53,137 10,135 12.34% 1.69% 98.31%Total 430,770 67,095 100.00% 1.40% 98.60%
Calculate how many of the the pets enrolling Step 1: 11,498 new subscription pets in Jan ‘19x 2.79% monthly churn with no rate change in ‘18 (see Table 6)321 predicted cancellations in Jan ‘19Step 2: 11,177 remaining pets enrolled from this cohort at the end of Jan ‘19x 2.79% monthly churn with no rate change (‘18)312 predicted cancellations in Feb ‘19 for new subscription pets in Jan ‘1911,498 new subscription pets in Jan ‘19– 321 predicted cancellations in Jan ‘1911,177 remaining pets enrolled from this cohort at the end of Jan ‘1911,177 remaining pets enrolled from this cohort at the end of Jan ‘19– 312 predicted cancellations in Feb ‘19 for new subscription pets in Jan ‘19– 321 predicted cancellations in Feb ‘19 for new subscription pets in Feb ‘19+ 11,498 new subscription pets in Jan ‘1922,042 remaining pets enrolled from this cohort at the end of Feb ‘19Step 3: Repeat Step 2 for every month through December to calculate the totalretained pets who enrolled in the first year: 115,341.Table 7. Net New Subscription Pets, Year 1 ChurnJan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec 2019Remainingsubscriptionpets from priormonth 11,177 22,042 32,604 42,871 52,852 62,554 71,986 81,155 90,068 98,732 107,154Newsubscriptionpets 11,498 11,498 11,498 11,498 11,498 11,498 11,498 11,498 11,498 11,498 11,498 11,498Monthly churnFor new petsadded in year 1at 2.79% (321) (321) (321) (321) (321) (321) (321) (321) (321) (321) (321) (321)Monthly churnfor remainingsubscriptionpets at 2.79% - (312) (615) (910) (1,196) (1,475) (1,745) (2,008) (2,264) (2,513) (2,755) (2,990)Total 2019cohort of newpets 11,177 22,042 32,604 42,871 52,852 62,554 71,986 81,155 90,068 98,732 107,154 115,341 115,341The above shows 2019 gross pet adds averaged throughout the year. In reality, new petsadded build throughout the year and vary based on seasonality and the number of days in amonth. The variable enrollment growth within a year adds complexity without any meaningfulchange to the ultimate calculation.2
Project monthly cancellations 15Table 8. Monthly Retention of Existing PetsJan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec 2019Pets whohave beenenrolledlongerthan ayear 430,770 426,247 421,771 417,342 412,960 408,624 404,333 400,088 395,887 391,730 387,617 383,547Monthlychurn of1.05% (4,523) (4,476) (4,429) (4,382) (4,336) (4,291) (4,245) (4,201) (4,157) (4,113) (4,070) (4,027)Remainingpets whohave beenenrolledlongerthan ayear 426,247 421,771 417,342 412,960 408,624 404,333 400,088 395,887 391,730 387,617 383,547 379,520 379,520Step 1: 430,770 subscription enrolled pets as of December 31, 2018x 1.05% monthly churn4,523 Jan churn430,770 subscription enrolled pets as of December 31, 2018– 4,523 Jan churn426,247 remaining pets who have been enrolled longer than a year at the end of Jan ‘19Step 2: 426,247 remaining pets who have been enrolled longer than a year at the end of Jan ‘19x 1.05% monthly churn4,476 Feb churn426,247 remaining pets who have been enrolled longer than a year at the end of Jan ‘19– 4,476 Feb churn421,771 remaining pets who have been enrolled longer than a year at the end of Feb ‘19Step 3: Repeat Step 2 for every month through December to calculate remaining pets who havebeen enrolled longer than a year at the end of 2019: 379,520.3
16Table 9. Subscription Pet MonthsJan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec 2019Total 2019cohortretainednew pets 11,177 22,042 32,604 42,871 52,852 62,554 71,986 81,155 90,068 98,732 107,154 115,341Totalretainedexistingpets 426,247 421,771 417,342 412,960 408,624 404,333 400,088 395,887 391,730 387,617 383,547 379,520Totalretainedpets 437,424 443,813 449,946 455,831 461,476 466,887 472,074 477,042 481,798 486,349 490,701 494,8615,618,202PetMonthsNote that the sum of the bottom row of Table 9 is 5,618,202, which is what we call pet months.The above calculation is a simplified illustrative example compared to our actual model, andwhen we factor in the impact of new pets added in 2018 that have higher cancellations fora portion of 2019; the total pet months projected for 2019 was 5,602,431 in our model. This isthe number of subscription “pet months” we would use to project 2019 in our DCF model. Petmonths is a metric that we commonly use within the company and it will come up later in themodel analysis.Table 10. 2019 Churn By Rate Change2019 Churn Active pets atyear endNumber ofcanceled petsDistribution MonthlyChurnMonthlyRetentionNo Rate Change100,008 30,155 20.24% 2.70% 97.30%Rate Change < 20%306,681 34,138 62.08% 1.00% 99.00%Rate Change > 20%87,337 13,734 17.68% 1.41% 98.59%Total494,026 78,027 100.00% 1.42% 98.58%437,424 JanFebMarAprMayJunJulAugSeptOctNovDec443,813449,946455,831461,476466,887472,074477,042481,798486,349490,701+ 494,8615,618,202 pet months ‘194
Isolate the cash earned from a single average subscription 17Table 11. 2018 Per Pet Monthly Economics2018Average monthly cost (ARPU) $54.34 100.0%– Paying veterinary invoices (COGS) ($39.33) 72.4%– Variable expense (fast, 24/7 service) ($5.08) 9.3%= Contribution profit $9.93 18.3%– Fixed expenses (G&A + IT) ($3.65) 6.7%= Profit per pet per month $6.28 11.6%– a 1% capital charge ($0.54) 1.0%= the cash generated per month for the average pet $5.74 10.6%5
18Table 12. Cash Flow Per Month Margin ExamplesExample 1 Example 2 Example 3Average monthly cost (ARPU) 100% 100% 100%– Paying veterinary invoices (COGS) 68% 71% 73%– Variable expense (fast, 24/7 service) 11% 9% 8%– Fixed expenses (G&A + IT) 6% 5% 4%= Adjusted operating margin 15% 15% 15%– Capital charge for money we are required to hold in cash or assets 1% 1% 1%= Cash generated per month for the average pet after a capital charge 14% 14% 14%
19Table 13. Per Pet Unit Economics–Predicated Vs Actual2018 Actuals 2019 Predicted 2019 ActualsAverage monthly cost (ARPU) $54.34 100.0% $57.32 100.0% $57.52 100.0%– Paying veterinary invoices (COGS) ($39.33) 72.4% ($40.99) 71.5% ($41.56) 72.2%– Variable expense (fast 24/7 service) ($5.08) 9.3% ($5.45) 9.5% ($5.27) 9.2%= Contribution profit $9.93 18.3% $10.88 19.0% $10.69 18.6%– Fixed expenses (G&A + IT) ($3.65) 6.7% ($3.29) 5.7% ($3.26) 5.7%= Profit per pet per month $6.28 11.6% $7.59 13.2% $7.43 12.9%- Capital charge for money we are required to hold in cash or assets ($0.54) 1.0% ($0.57) 1.0% ($0.58) 1.0%= Cash generated per month for the average pet $5.74 10.6% $7.02 12.2% $6.85 11.9%
Table 14. Predictive Accuracy Of Cash Generated By The Average Subscription PetMonthly cash generated fromthe average subscription petTotal Pet Months Total cash generatedfrom subscription pets2019 Predicted $7.02 5,602,431 $39.3M2019 Actual $6.85 5,575,670 $38.2MTable 15. Discounted Cash Flow Model Inputs 1.1Monthly cash generated from theaverage subscription petTotal pet months Total cash generatedsubscription pets2018 Actual $5.74 4,843,802 $27.8M2019 Actual $6.85 5,575,670 $38.2M2020 $7.78 6,407,329 $49.9M2021 $8.47 7,280,343 $61.7M2022 $9.18 8,242,219 $75.6M2023 $9.81 9,304,305 $91.3M2024 $10.32 10,479,007 $108.1M2025 $10.86 11,781,547 $127.9M2026 $11.43 13,230,666 $151.2M2027 $12.04 14,850,112 $178.8M2028 $12.68 16,667,751 $211.4M2029 $13.37 18,707,901 $250.1M2030 $14.09 20,997,766 $295.9M2031 $14.86 23,567,914 $350.1M2032 $15.67 26,452,650 $414.4M
STEP Add the cash generated from our other business segment
22Table 16. Discounted Cash Flow Model Inputs 1.2Monthly cashgenerated fromthe averagesubscription petTotal PetMonthsTotal cashgeneratedsubscription petsTotal cashgeneratedother petsTotal cashgenerated2018 Actual $5.74 4,843,808 $27.8M $0.5M $28.3M2019 Actual $6.85 5,575,676 $38.2M $1.7M $39.9M2020 $7.78 6,407,329 $49.9M $1.6M $51.5M2021 $8.47 7,280,343 $61.7M $2.3M $64.0M2022 $9.18 8,242,219 $75.6M $3.1M $78.7M2023 $9.81 9,304,305 $91.3M $4.0M $95.3M2024 $10.32 10,479,007 $108.1M $4.8M $112.9M2025 $10.86 11,781,547 $127.9M $5.7M $133.6M2026 $11.43 13,230,666 $151.2M $6.9M $158.1M2027 $12.04 14,850,112 $178.8M $8.2M $187.0M2028 $12.68 16,667,751 $211.4M $9.9M $221.3M2029 $13.37 18,707,901 $250.1M $11.8M $261.9M2030 $14.09 20,997,766 $295.9M $14.3M $310.2M2031 $14.86 23,567,914 $350.1M $17.2M $367.3M2032 $15.67 26,452,650 $414.4M $20.8M $435.2MNote that actual cash generated by our other business in 2019 was $1.7M—an increase of $1.1Mover what the model would have predicted in 2018, because this segment grew more than20% in 2019.
23Table 17. Discretionary Cash Available For Acquisition Spend, Per PetContribution profit over thelife of an average petFixed expenses over thelife of an average petTotal profit over the life ofthe average pet*PAC Lead1 Convert22016 $631 $341 $290 $123 85% 15%2017 $727 $318 $409 $152 75% 25%2018 $710 $261 $449 $164 60% 40%2019 $753 $230 $523 $212 50% 50%1Please note that in our filings, we refer to this as our key metric called “LVP, including fixedexpenses.” We have titled this column to align with the row titled “Profit Per Pet Per Month” inTable 11 of this letter.2Historically, we have not tracked the attribution between our lead and conversion costs.Therefore, the percentages in Table 17 are internal management estimates.
24Table 18. Discounted Cash Flow Model Inputs 1.3Monthly cash generatedfrom The Averagesubscription petTotal PetMonthsTotal cashgeneratedsubscriptionpetsTotal cashgeneratedother petsTotal cashgeneratedAcquisition spendminus sign up feeCash afteracquisitionspend2018 Actual $5.74 4,843,802 $27.8M $0.5M $28.3M $21.1M $7.2M2019 Projected $7.02 5,602,431 $39.3M $0.6M $39.9M $30.4M $9.5M2019 Actual $6.85 5,575,670 $38.2M $1.7M $39.9M $30.4M $9.5M2020 $7.78 6,407,329 $49.9M $1.6M $51.5M $38.4M $13.1M2021 $8.47 7,280,343 $61.7M $2.3M $64.0M $46.7M $17.3M2022 $9.18 8,242,219 $75.6M $3.1M $78.7M $56.5M $22.2M2023 $9.81 9,304,305 $91.3M $4.0M $95.3M $67.4M $27.9M2024 $10.32 10,479,007 $108.1M $4.8M $112.9M $79.1M $33.8M2025 $10.84 11,781,547 $127.9M $5.7M $133.6M $93.0M $40.6M2026 $11.43 13,230,666 $151.2M $6.9M $158.1M $109.5M $48.6M2027 $12.04 14,850,112 $178.8M $8.2M $187.0M $129.3M $57.7M2028 $12.68 16,667,751 $211.4M $9.9M $221.3M $153.0M $68.3M2029 $13.37 18,707,901 $250.1M $11.8M $261.9M $180.9M $81.0M2030 $14.09 20,997,766 $295.9M $14.3M $310.2M $214.2M $96.0M2031 $14.86 23,567,914 $350.1M $17.2M $367.3M $253.4M $113.9M2032 $15.67 26,452,650 $414.4M $20.8M $435.2M $300.0M $135.2M
STEP The last component of the 15 Year discounted cash flow
27Table 21. Discounted Cash Flow Model Inputs 1.5Monthly Cash GeneratedFrom The AverageSubscription PetTotal Pet Months Total Cash GeneratedSubscription PetsOtherPetsTotal CashGeneratedPAC spend minussign up feeCash afterPAC spend2019 Actual $6.85 5,575,670 $38.2M $1.7M $39.9M $30.4M $9.5M2020 $7.78 6,407,329 $49.9M $1.6M $51.5M $38.4M $13.1M2021 $8.47 7,280,343 $61.7M $2.3M $64.0M $46.7M $17.3M2022 $9.18 8,242,219 $75.6M $3.1M $78.7M $56.5M $22.2M2023 $9.81 9,304,305 $91.3M $4.0M $95.3M $67.4M $27.9M2024 $10.32 10,479,007 $108.1M $4.8M $112.9M $79.1M $33.8M2025 $10.86 11,781,547 $127.9M $5.7M $133.6M $93.0M $40.6M2026 $11.43 13,230,666 $151.2M $6.9M $158.1M $109.5M $48.6M2027 $12.04 14,850,112 $178.8M $8.2M $187.0M $129.3M $57.7M2028 $12.68 16,667,751 $211.4M $9.9M $221.3M $153.0M $68.3M2029 $13.37 18,707,901 $250.1M $11.8M $261.9M $180.9M $81.0M2030 $14.09 20,997,766 $295.9M $14.3M $310.2M $214.2M $96.0M2031 $14.86 23,567,914 $350.1M $17.2M $367.3M $253.4M $113.9M2032 $15.67 26,452,650 $414.4M $20.8M $435.2M $300.0M $135.2MTerminalYear $16.51 27,978,852 $461.8M $23.9M $485.7M $154.4M $331.3MTable 22. Terminal Year P&LSubscription revenue $3,393MOther revenue $874MTotal revenue $4,267M 100%Cash earned after capital charge $486M 11%- PAC ($154M) 4%=Net profit before taxes $331M 8%
27Table 21. Discounted Cash Flow Model Inputs 1.5Monthly Cash GeneratedFrom The AverageSubscription PetTotal Pet Months Total Cash GeneratedSubscription PetsOtherPetsTotal CashGeneratedPAC spend minussign up feeCash afterPAC spend2019 Actual $6.85 5,575,670 $38.2M $1.7M $39.9M $30.4M $9.5M2020 $7.78 6,407,329 $49.9M $1.6M $51.5M $38.4M $13.1M2021 $8.47 7,280,343 $61.7M $2.3M $64.0M $46.7M $17.3M2022 $9.18 8,242,219 $75.6M $3.1M $78.7M $56.5M $22.2M2023 $9.81 9,304,305 $91.3M $4.0M $95.3M $67.4M $27.9M2024 $10.32 10,479,007 $108.1M $4.8M $112.9M $79.1M $33.8M2025 $10.86 11,781,547 $127.9M $5.7M $133.6M $93.0M $40.6M2026 $11.43 13,230,666 $151.2M $6.9M $158.1M $109.5M $48.6M2027 $12.04 14,850,112 $178.8M $8.2M $187.0M $129.3M $57.7M2028 $12.68 16,667,751 $211.4M $9.9M $221.3M $153.0M $68.3M2029 $13.37 18,707,901 $250.1M $11.8M $261.9M $180.9M $81.0M2030 $14.09 20,997,766 $295.9M $14.3M $310.2M $214.2M $96.0M2031 $14.86 23,567,914 $350.1M $17.2M $367.3M $253.4M $113.9M2032 $15.67 26,452,650 $414.4M $20.8M $435.2M $300.0M $135.2MTerminalYear $16.51 27,978,852 $461.8M $23.9M $485.7M $154.4M $331.3MTable 22. Terminal Year P&LSubscription revenue $3,393MOther revenue $874MTotal revenue $4,267M 100%Cash earned after capital charge $486M 11%- PAC ($154M) 4%=Net profit before taxes $331M 8%
Table 23. Valuation Sensitivity AnalysisDiscount rate 9.8% 10.8% 11.8%Terminalgrowth rate4.5% $1.56B $1.20B $0.96B5.0% $1.69B $1.29B $1.01B5.5% $1.86B $1.38B $1.07B
In closing As the CEO of Trupanion, it is my intention to share our key metrics as transparently as possible.
END NOTESIn this letter and our other publicly available reports, we present certain non-GAAP measures,including adjusted EBITDA, variable expenses, fixed expenses, adjusted operating income,adjusted operating margin, acquisition cost, and free cash flow. These non-GAAP financialmeasures may not provide information that is directly comparable to that provided by othercompanies in our industry as other companies in our industry may calculate or use non-GAAPfinancial measures differently. In addition, there are limitations in using non-GAAP financialmeasures because they are not prepared in accordance with GAAP and exclude expensesthat may have a material impact on Trupanion’s reported financial results. The presentationand utilization of non-GAAP financial measures is not meant to be considered in isolation oras a substitute for the directly comparable financial measures prepared in accordance withGAAP. Trupanion urges its investors to review the reconciliation of its non-GAAP financialmeasures to the most directly comparable GAAP financial measures in its consolidated financialstatements, and not to rely on any single financial or operating measure to evaluate its business.These reconciliations are included within our Supplemental Financial Information provided onTrupanion’s Investor Relations website.Our internal rate of return is calculated assuming the new pets we enroll during the year willbehave like an average pet. Specifically, our 2019 calculation assumes adjusted operatingincome (calculated as the average monthly revenue for new pets of $57.52 factored by theadjusted operating margin of 11.5%) for an average subscriber life of 70.4 months (calculated asthe quotient obtained by dividing one by the churn rate, which equals one minus the averagemonthly retention rate of 98.58%).Because of varying available valuation methodologies, subjective assumptions and the varietyof equity instruments that can impact a company’s non-cash expenses, Trupanion believesthat providing various non-GAAP financial measures that exclude stock-based compensationexpense and depreciation and amortization expense allows for more meaningful comparisonsbetween its operating results from period to period. Trupanion offsets sales and marketingexpense with sign-up fee revenue in the calculation of net acquisition cost because it collectssign-up fee revenue from new members at the time of enrollment and considers it to be anoffset to a portion of Trupanion’s sales and marketing expenses. Trupanion believes this allows itto calculate and present financial measures in a consistent manner across periods. Trupanion’smanagement believes that the non-GAAP financial measures and the related financial measuresderived from them are important tools for financial and operational decision-making and forevaluating operating results over different periods of time.
DISCLAIMERThis letter contains forward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, and section 27A of the Securities Act of 1933, as amended(Securities Act). All statements contained in this letter other than statements of historical fact,including statements regarding lifetime values of a pet, discounted cash flows and our intrinsicvalue model, future results of operations and financial position (including ARPU, AOM, AOI, IRR,PAC, new pets enrolled, retention and churn, active hospitals, international expansion, veterinaryinvoices, and variable and fixed expenses) our business strategy and plans and our objectivesfor future operations. In particular, this letter extensively discusses our internal discounted cashflow model, and you should regard substantially all parts of this discussion as forward-lookingstatements. In addition, the are forward-looking statements. The words “anticipate,” “believe,”“continue,” “could,” “estimate,” “expect,” “intend,” “may,” “model,” “plan,” “potentially,” “predict,”“project,” “target,” “will,” “would,” and similar expressions that convey uncertainty of future eventsor outcomes, are intended to identify forward-looking statements.These forward-looking statements are subject to a number of risks, uncertainties and assumptions,including risks relating to:• our net losses since inception, our ability to maintain revenue growth, maintain profitability,obtain returns on our investments in pet acquisition, and other financial risks;• our ability to attract online visitors, grow or member base, and maintain retention rates;• our ability to maintain relationships with Territory Partners, veterinarians and strategic partners;• our ability to remain competitive and maintain brand recognition;• our ability to scale our infrastructure, manage our growth, budget for veterinary invoiceexpenses, and other business risks;• our other business;• security breaches, payment processing, and related technology and intellectual propertymatters;• compliance with risk-based capital and other regulations;• litigation or regulatory proceedings;• dependence on key personnel;• compliance with covenants in our credit agreement;• international operations, including exchange rates;• investments or acquisitions, owning an office building, and other strategic matters;• tax, accounting and general economic matters;• being a public company; and• ownership of our common stock; and• those described under the heading “Risk Factors” in our Annual Report on Form 10-K and otherfilings we make from time to time with the Securities and Exchange Commission.Moreover, we operate in a very competitive and rapidly changing environment, and new risksemerge from time to time. It is not possible for our management to predict all risks, nor can weassess the impact of all factors on our business or the extent to which any factor, or combination offactors, may cause actual results to differ materially from those contained in any forward-lookingstatements we make. In light of these risks, uncertainties and assumptions, the forward-lookingevents and circumstances discussed in this letter may not occur and actual results could differmaterially and adversely from those anticipated or implied in the forward-looking statements.You should not rely on forward- looking statements as predictions or guarantees of futureevents. Although we believe that the assumptions and expectations reflected in the forwardlookingstatements are reasonable based on our historical experience, these assumptions andexpectations involve significant judgment and uncertainty, and in some cases these assumptionsand expectations (and therefore the judgment and uncertainty) have been projected over anextended period of time. Future results, levels of activity, performance or events and circumstancesreflected in the forward-looking statements may not be achieved or occur. We undertake noobligation to update publicly any forward-looking statements for any reason, except as requiredby law.