Trupanion, Inc. (TRUP) Earnings Call Transcript & Summary

Good morning, or to those of you who are joining from around the world, good afternoon, and good evening. Thank you for joining our annual founder-led Q&A. With me today are Darryl Rawlings, CEO and Founder; Margi Tooth; and Tricia Plouf, our Co-Presidents; and you may even see Tristan the bulldog running around. As many of you know, this Q&A is an annual event for Trupanion, traditionally held immediately after the Berkshire Hathaway Annual Shareholder Meeting in Omaha. COVID has required that we move this event virtually for the past 2 years, but the intent is the same, and that is to connect with long-term like-minded shareholders. The format of the event also remains unchanged, entirely Q&A, which means that the success of the event depends on your participation. So bring your questions. [Operator Instructions] Berkshire Hathaway meeting starts at about 10:00 a.m. Pacific Time. So that leaves us with about 2 hours for questions. So we'll go ahead and get started. But first, we'll wait for you to gather your questions.

Hi, everyone. Thanks for joining us.

All right. Somebody be brave and ask the first question.

Great. It looks like we have a question from the line of Shweta.

Well, I guess my question is, you laid out your 5-year, 60-month plan. And there were several catalysts that allow you to grow -- to get to your goal of 25% CAGR over the next 5 years. Could you probably talk to how much conservatism is baked into that -- perhaps with the rate you're going right now, just in your subscription business, and with the Trupanion branded product, I could see that growing about 25 -- at 25% CAGR, not even including some of your growth catalysts. So I would love to hear your thoughts on sort of the conservatism that's baked into your 60-month plan. And then the second is what excites you the most about your next 5 years? I mean you talked about a lot of things. But what are some of the top 2 or 3 things that you think or that you're most bullish on?

Thanks, Shweta. I'll start off. The 60-month plan really talks about the building blocks or the growth levers that we will have for the coming decades. But for a lot of those initiatives to get started, the first several years of them, they'll be very -- they'll have very little impact on the P&L. We know that when we enter a new region, it takes us up to 5 years to get to the point that about 50% of hospitals become active. So it takes a long time to build relationships. It takes a lot of time. And we have a number of initiatives in the plan, and I'm sure we'll cover many of them today. But if you added the potential of each of those, we would far outstrip 25% year-over-year revenue growth or growth in intrinsic value. But we are realistic in understanding that every initiative will not work out. So we'll have different teams and different owners taking on different areas like international expansion, product expansion, distribution expansion. Some will succeed. Some will be slower than we expect, and some will not work. But in aggregate, if we grow the company 25% a year for the next 5 years, we will have felt like we've created a lot of value for our shareholders and feel good about it. The second part of your question, I'll talk about what I think I'm most excited about, and then ask Margi and Trish to kind of weigh in. But we've used the term nirvana for a long time. We've recently changed the -- coined the term Trutopia. And that's what I'm most excited about. If we can have a value proposition and a customer experience where veterinarians and pet owners really trust and recommend us, then I think we can get to the point where the number of pets that are canceling or churning can be offset by existing pet owners telling their friends they're adding pets. And we've made some really good strides. We've been more bullish on our investments in that area. And then -- yes, I'm super excited about it.

PYes. Shweta, thank you for asking the first question. I think just to add to the building block question you had before, when we think about those building blocks, they are very individually minded, I'm very visual. I'm thinking about them building one another. They don't all start necessarily at the same time. So we're going into the 5-year plan, obviously, with the core subscription business being really strong, which is great. So lots of growth potential there. And then gradually layering on additional opportunities as we can, acknowledging to Darryl's point, that all of them will come off. So there is some conservatism. I think it's also realistic to expect that. So that's exciting. I think in terms of where I'm most excited, it's really, as we look at the brand today, Trupanion, the opportunity to be able to have a conversation with every single new pet owner in North America, and educate them, help inform them, help give them details about how they can take care of their pet in the best possible way. I think that's pretty cool. So seeing that brand starting to be recognized and actually really, really taking hold.

Yes. I think it's a great question. And I would piggyback a little bit off of what Margi said. I think it's really exciting to see how far the company, and particularly, the brand has come. I've been with Trupanion over 8 years now. And particularly in this past year, I feel like we've just built such a great brand that we're all proud of. And I think the Aflac investment is an example of that, of them really wanting to partner with us specifically because they felt that, that was the best avenue to success. And I think as we thought about our 60-month plan, one of the things that you might have noticed is we're not necessarily going to pursue every single opportunity because there are many more opportunities than we necessarily want to do at this point with the brand and the company we've built. And so we're going to focus on the things that we feel have the best chance of consistently hitting those growth rates and setting us up, frankly, for well beyond the next 5 years. And the only other thing I would say is we spent a lot of time, particularly Margi and I, building great teams. And I think we're really excited to execute with those people over the next 5 years and seeing the excitement on our team's faces to do this, and they were a part of building this plan, really motivating.

Okay. Next, we're going to take a question from Peter Keith.

So Darryl, my question, as I [ quoted ] in, was does your personal investment philosophy differ from Trupanion's corporate capital allocation philosophy? And if so, how?

That's a great question. So 96% of my net worth is in Trupanion. So I'm not sure that it is -- that it takes a wide differential. At Trupanion, we really think about building moats. We think about building something over decades. We have much higher hurdle rates than most of the companies that I look at for an investment. We're targeting a 35% internal rate of return. And I look for the same things. When I study other businesses out of curiosity, I look for those things. I'm a shareholder in only 2 other companies in Trupanion, and there's very, very tiny amounts. One company is a company that you guys will all be watching later today, Berkshire. Another one is a company, Amazon. I'm a huge fan of Costco. Those are the types of business models that I believe are very long-term endearing and have big moats around them. Also, I think it's really important that a company protect everybody inside of their ecosystem. So it needs to be a win for all. Those are the things that I would look for as a personal investment. But for the last 30 years of my life, I started this company with a $5,000 credit card. So I have not been flushed with cash, making investments if the focus has been building on Trupanion and -- but I study other businesses because I'm intellectually curious to learn.

Okay. It looks like we have a question from the line of Namir.

I had a question around your sort of revenue per pet. It has grown at sort of 5% to 6% per year over the past couple of years. So what has driven the above inflation type of growth? And then how should we think about that figure over the next 5 years?

Let me start it off. The -- it is growing by inflation. It's just not the inflation of North America. It's inflation of veterinary expenses, and in particularly, the inflation rate of veterinary expenses for an insured client. So clients of Trupanion visit twice as frequently and spend twice as much money, a little bit more than that when they get Trupanion. So imagine if Tristan down below started limping or vomiting diarrhea, some early clinical symptoms, a client with Trupanion is more likely to bring him in on day 1 instead of waiting and saying, "Oh, I hope he feels better tomorrow." And then when he was to -- when he is to go in, instead of veterinarians often saying, there's a couple of course of treatments, do you want to do this one? It's the least expensive or this is what I'd recommend if you can afford it, an insured client with Trupanion does the better level of care. And veterinary inflation includes for us greater use of diagnostics, greater use of emergency specialty hospitals. And that is what we've been tracking. Now that 5% to 6% rate has been consistent for 20 years. So I would be thinking that you should only expect the same for the next 20 years. Although if there's any veterinarians listening, we would -- we think there's a big challenge in the veterinary industry in being able to come up with enough compensation for veterinarians and their staff. The business model for veterinarians is extremely challenging. These are small businesses. It's a hospital that has its own HR, IT. Everything is built into it. And I would encourage veterinarians and their staff to charge more for their services. They bring an incredible amount of value to pet owners and to pets. And the share of wallet on what -- how much is being spent on veterinary care or the health of a pet compared to Halloween costumes or chew toys or doggy day care, it is a small percentage. Consumers, pet owners will happily pay more as long as they're getting good service. We make it easier for them to budget for the things that are unexpected. It's very difficult for a pet owner to come out of pocket for 3-year $5,000 or $20,000. But for something that is in a monthly recurring revenue, consumers don't have any problem spending on the pet. So I would like to see the inflation rate go up even higher to make sure that the veterinary industry is getting rewarded the way they should. The average veterinarian today is making about $75,000 a year, whereas the average dentist, I think, is making about 4x to 5x that. It's more difficult to get into veterinary school than it is to become a dentist or a human doctor. Veterinarians have the highest suicide rate of any profession. It is a very difficult demanding business. And the fact that our -- when a client is on Trupanion, they're willing to come in early, get the proper level of care. We refer out to a specialist if they need to. We think we're really not only helping solve the problem for the pet owner and for the pet, but also for the ecosystems of veterinarians. It's kind of a long answer, but did I miss anything?

The only thing I would add is related to your question about long term and Darryl said it very well. But when we think about it overall in terms of our business model. We're really, at the end of the day, making sure that those increases in the monthly cost are in line with, like Darryl said, the increases in the vet invoice expense and really hitting that 71%, and then in the 60-month plan, the 72% margin, that's ultimately the goal is to move in lockstep as opposed to driving it up or down. Just having it be where it needs to be to hit that margin, which then allows us to ultimately hit that targeted 15% adjusted operating income. So that's what we're really focused on, is pricing to hit the ratio and allowing the vets to practice the care in accordance with that.

And so how should we think about the -- because I mean, it sounds like your -- the increase in revenue per pet is tied to the increase in sort of claims costs. How should we think about when the revenue per pet is increasing, how is the lifetime value of the pet being impacted, please?

Well, if we maintain the same margin, and the ARPU is going up, then the margin percentage remains the same on the bottom, and you multiply that by the number of months. But when you're making a 15%, right now, we're above 13.5%, 14%, but our target is 15% [ and set ] margin on $50 a month, that gives you a different dollar amount than if it's $100 a month. And if -- as long as you're maintaining the same amount, you'll see the lifetime value increase. So absent any future margin expansion, we have a little bit more to hit our target. We should expect our lifetime value to be growing consistent with the ARPU. So probably within the next 2 to 3 years, expect it to grow 5%, 6%, 7% a year. And that's before potentially any changes with blend. So we've got some pet food initiatives that might drive ARPU -- much higher. We have some other ones that might drive it slightly smaller, but the margin profile should remain the same. Margi, do you have anything to add?

No. I mean I think when we think about the lifetime value -- sorry, yes, I do, have a thing to add. Hello. So when we think about the lifetime value, that obviously also comes back to when we think about our internal rates of return. So as the lifetime value gets more -- gets higher, that's more money that we can ultimately spend to acquire more pets. So that's good for us in terms of growth. It's definitely fitting in with our growth catalyst mentality.

Okay. And it looks like next, we have a question from Elliott Wilbur.

Can you hear me all right?

Yes. we can hear you great.

2 questions really. One -- first one, just a follow-up to your prior commentary around the long-term inflation rate. How do you think about the improvement in technology, particularly on the therapeutics side, with respect to more and more new molecular entities kind of entering the veterinary treatment paradigm. And we're looking at sort of the advent of monoclonal antibodies in certain therapeutic categories, with drugs, which historically, at least on the human health side, have significantly higher price points than traditional small molecules, and probably the same will hold true for the vet world. But it just seems like with the evolution of technology, particularly on the therapeutic side, there would seem to be more sort of natural kind of upward pressure on that longer-term 5% to 6% rate that you spoke about. And...

I wouldn't describe it as pressure. We embrace it. I mean the higher the costs of veterinary care, the greater the demand or need for our product is. And I don't know many business owners that would -- if I had a restaurant and somebody came in and said, I can spend $50 for dinner or I can spend $100, which would you rather do? As long as we're providing the same underlying value proposition and as veterinary care goes up, our need for our product becomes larger. So I know a lot of people that were born and raised in insurance think that paying invoices is a cost. And they celebrate when they lower their cost of goods. We don't feel that way. We absolutely embrace and support cutting-edge new technologies. Some of those will make the costs of veterinary care rise faster. Other ones will detect issues sooner. So there's a lot of diagnostic companies like IDEXX and therapeutic companies and all the ones. We are arm and arm and them bringing products to the market. And we don't care. I mean our job is not to try to control the costs. But our job is to understand them. So you may be right that the changes in therapeutics might drive it to 7% or 8%. I will tell you, I've been doing this for over 20 years, and I heard similar things. It's been pretty consistent, 5% to 6% year-over-year for 20 years. But I know I interrupted you. You could finish your conversation. I just want to make it a really clear point to anybody who's listening. We are not trying to control costs. We don't think it is a negative.

Okay. And then I want to ask you a question about the longer-term opportunity in international markets. Just some of the key differences between markets that you evaluated in the U.S. market. It's a Trupanion model, completely transportable given -- based on sort of the current U.S. model into some of these markets. How different would it have to be? And just sort of what the relative utilization of insurance is sort of outside the U.S. versus the U.S.? And is this something you can sort of approach on kind of a larger regional -- from a regional perspective? Or is it really more country by country?

Well, I'm going to hand that over to Margi to start and go from there.

Yes. Happy to. So I think when we think about anywhere we're going, the purpose of us going to new market is not just a sort of like the passport stamps, it's to make sure that we have access to more hospitals as a brand. So thinking about that as our initial kind of, okay, where do we have good penetration potentially? We've got the ability with software practice management systems, and we have some potential adoption of insurance already. And yes, there are different scales. There's different penetration rates when we think about Australia, versus the U.K., versus Germany, versus Sweden. Across the globe, there is a very different story to be told. Japan is interesting when we look at that model. To answer your question specifically about the Petplan brand and the Petplan -- sorry, the Trupanion brand, if you think about Petplan in the U.K., what they have -- they've got a stronghold in that market. Think about any brand in any product, we can take our product as it is today. And I feel very confident that, yes, there will be some tiny tweaks. The guardrails that hold us true to who we are as a company, being able to provide the broadest, most comprehensive coverage for people for the life of their pet will absolutely remain true to Trupanion wherever we are. And we want to be able to have that just like people are flying from different -- well, eventually, they will be flying from different countries. And we know that the world today is a far more mobile place, or hopefully, it will be again very soon. And so when people are moving, we want that brand to be synonymous with quality wherever they are. And we'll take the local knowledge from the areas we go to, to ensure that we're always learning from the people that understand the market. And like I said, if there will be little adjustments to it, ultimately, the product will be very similar, so people will understand who we are and what we do.

I would -- if you think about Trupanion for the last 21 years, it started in Canada. It basically started in British Columbia, around the Vancouver area. It just happened to be where I lived. And over a period of time, we expanded east across all of Canada. Now if you've done business in Quebec or Halifax or Toronto or Winnipeg or Red Deer or Calgary or Edmonton, Vancouver, Vancouver Islands, we had to learn as a business how to adapt to a different region. And in many cases, we live in a regulated world where there's different rules by provinces. There's definitely different rules by states. So when we entered the U.S. market, we bought an insurance entity. We were licensed in about 12 states and then eventually got licensed in all 50. Each of those have different set of rules. Each of them need to be priced differently. And in each area, we need to build relationships with the veterinary community. To me, it's not a significant difference if you're taking Western Europe. And you're picking a bunch of countries versus the states, sometimes, there's some language complexities. I think if you enter a market like Japan, China, I think those are a little bit more difficult if you're not using letters, if you're thinking about using -- exporting your technology. But I think the core of what we've built the company over time, which is we've expanded by adding geographies. And we just want to make sure that we have a pipeline of geographies to add in the future. And we will pick that off primarily by country by country because that's kind of the -- how you would regulate it. And then each area would have their own business plan. And -- but it will be based on the same tenants and guardrails. Now what's different about Trupanion today is, after 20 years, we are very close to being at operating scale. I mean I would say that -- I mean we are at operating scale, and we're right now choosing to invest more in our customer experience and a few technologies. But when we enter a new country, we get to leverage all of our variable and fixed expenses, all of our technology platforms, the data that we had. So I don't expect when we enter a new country, that is going to take us 20 years to get operating scale. In fact, after some early development expenses, which we've now pared out of our P&L, free revenue development expense, we should enter a country pretty close to being at operating scale. And that's a big advantage that we weren't able to do historically. And one of the reasons that we've waited as long as we have to do more international expansion.

It looks like we have a question from Nick Martin.

So Darryl, I always love reading the shareholder, that's always very comprehensive. And one of the sort of takeaways that I had this year, you noted a increase in the intrinsic value. I think you called out about 88% in 2020. And the way I kind of break that was the sort of operations of the business may be -- was maybe 25% of that and then a large proportion what was a reduction in the discount rate. And I think in the 2019 letter, you very comprehensively laid out your calculations for that. And I think you used 10.5% in that year. So just be good to hear a little bit about why the discount rate is coming down. Obviously, the business is quickly derisking almost day by day. So I'm sure that's played into it. And also, within those same 2 letters, I think the terminal year in the 2019 that has spoken about -- I think it was 2.3 million sort of pets. And now you're talking in the new 5-year plan about 3.5 million, which is obviously the opportunity set, and your optionality seems to be greatly improving. And just be good to hear a bit about that, and whether that's because of the international side, which you've obviously spoken already. But also you've got these 2 new direct-to-consumer brands which I think is widening your net and I think trying to increase your sort of conversions with your good leads that you've had as well. So sorry, it's a bit of a -- lots of questions in one there so apologies for that.

Yes. It is a great question. And fortunately, to my right, we have the person who drives and owns our model. Trish and I have spent many, many years working and fine-tuning the model, and it helps drive almost all of our strategic decisions. So I'll let you take the first crack at answering that.

Sure. I'll focus on particularly your intrinsic value question. And yes, we outlined our strong performance and increasing it 88%. 29% of that was related to the continued execution of our core business model and really updating our model for our performance in 2020. And we project the future -- just as a reminder for those who are less familiar with our model, and that was in our prior year shareholder letter. We project the future based on what historical average is rather than speculating on what could happen in the future. So that was 29%. And then, like you mentioned, we looked at our discount rate, which historically we used a 10.8% discount rate. And based on the continued just consistent execution of the company, the inclusion in the S&P 600 and other milestones really in terms of our model having a small company, the discount rate is made up a variety of factors. And one is a small company risk factor, which we hadn't changed since we created the model many years ago. So we reevaluated, looked at data and other qualitative factors, and brought the discount rate down to 10% in the updated model. So we do not move it by large amounts. We moved it by what we felt was very much substantiated by the various data points and circumstances. And now I'm not remembering the second part of your question. So maybe Darryl will answer that one.

Let me finish up on the model side. A lot of people have said, well, what are you speculating is going to happen from some of these other initiatives? And they are initiatives because we think that they can be -- have a material impact on our business, each and every one. And if they can have a material impact on the business, we're not wasting our time on it. Although from the outside perspective, it may look like we're trying to do a few more things, if you saw the number of opportunities we have in front of us, we are really taking a very small slice. We're taking things that are not easy quick wins that will fizzle out after 1 or 2 years, but things that can grow for 10, 15, 20 years consecutively. If you layer all those things on, and it kind of goes back to the first question of the day, you can either speculate on what all of those things may or may not happen and when they would, or you could say, you know what? I think there's -- I can lower the discount rate. There's a higher likelihood of having sustained growth rates that they've already consistently delivered year after year after year, going out further as long as they have these additional growth levers. And the other side of it was, with COVID, was the first time as a publicly traded company that people had an opportunity to realize that pets are not disposable or discretionary. There's -- I mean these are non-pet owning loving people. But there are people in the investment community that said or felt of, in an economic downturn and a recession, people are going to cancel Trupanion. And what happened in COVID is the exact same thing we've seen in regional problems or 2008 or '09 or in the dot-com crash or 9/11, regional downturns. And the pets are -- and a critically important part of the family. And it was the combination of month after month, year after year, quarter after quarter, being able to consistently deliver. Sometimes, we -- our net pet growth is a little higher, sometimes, a little bit lower. But our revenue has been very consistent. Right now, it's on a little bit of an uptick. But for all of those reasons, we felt like it was appropriate. I will point out that we also use the intrinsic value model to determine if we're going to share any of the value with the team that helps create it for our shareholders. And the only factor that we used for that was that 29% on the execution side. The outside factor is the length of time we've been in the business. The consistency wasn't something we felt that we should be bonusing management team with.

Fantastic. And then my second part of my very long first question, but it was just about -- I don't know where there's a change in tone, but I think the -- as I said, the '19 letter, I think, the sort of terminal value calculation after 15 years is based on a couple of million sort of pets, but it seems that your -- the canvas that you are now painting on is a lot broader with the 5-year plan. And I was just interested whether that was an international aspect to it or whether the 2 new direct-to-consumer brands that I think you're suggesting is going to help improve that sort of conversion you've had from sort of the leads for them that's coming through from your much stronger marketing and sort of customer awareness.

All right. I'm going to try to answer this question, and Trish can pull me aside if I screw it up. Our intrinsic value model has no future projections in it based on anything that is speculative. We don't have a single pet in there for Japan. We don't have anything in there for any of those initiatives. When you saw an increase, it was because we used the inputs of the growth rates on the number of active hospitals same-store sales from the 3-year trend prior. And with the growth that we had in 2020, when you add that on to the list, it brought the growth rate up in the future.

Yes. I mean the only thing that I would add, as you said, the model does continue to add pets and get to a larger number every year that goes by. One of the things we look at, because we want to make sure that the model makes sense and that we feel comfortable with the outputs, so we always look at -- particularly, currently, we look at within the North American market, U.S., Canada, where we are, what level of penetration in each year, what level of total insured, what level would our market share be, what level of penetration would that be, and does that make sense just within the North American market. And you're not getting to necessarily in the outer years levels that make us feel like it's unrealistic if we continue to consistently execute. The fact that we are expanding into new products, expanding into new geographies, and we haven't updated anything in the model to reflect that, frankly, gives us even more confidence in the numbers that are currently in the model. And then, of course, in the future, as we see real numbers come out of those initiatives, we can update the model accordingly. But that's generally how we look at it and make sure that it makes sense with the opportunities we have today.

We're going to go ahead and take a question from Greg Gibas.

Can you hear me okay?

We can.

I guess, first, was just kind of hoping you could discuss your future plans to expand at the worksite benefits, and maybe how you're going to leverage your partnership with Aflac there? And maybe can you discuss the timing of that launch, and what that part of your business would contribute from a financial perspective?

Sure. Margi?

Yes. Greg, so a good question. Aflac. The Aflac activity kicked off pretty much as soon as we were able to work with them in October. They've been really well -- they are a very well-aligned partner, as you can imagine. And so the stages, we've got kind of 3 real phases when we think about North America and worksite benefits, specifically in the U.S. market. So we have the direct-to-consumer play which we mentioned earlier this week, we have launched on aflac.com to drive traffic to Japan. And that's our first foray into a partnership together. So really kind of learning about the volume of traffic organically coming to Aflac looking for pet coverage, learning how we convert those [ leads ]. They're getting an early stage of, okay, how does this work kind of -- and sort of support things. So that's kind of from a partnership point of view. We're also simultaneously building out specific products for their direct-to-consumer play, but the worksite benefit play. So we wanted to try and understand the traffic and just see if it was a little bit different as a distribution channel in general. And then what we're doing, ideally, we'll be looking at launching early in 2022. So in Q1, we'll have worksite products that will be sold through brokers and on platforms initially, slowly to start with as we learn more about that data. And at the same time, we'll have an Aflac powered by Trupanion products that will sit on aflac.com direct-to-consumer. So we expect over the course of the next 5 years, as we think about our 60-month plan, that this is going to get to $100 million of revenue. They -- I think the collaboration between the teams, there's been a lot of foundational work done very quickly. So we're really happy with that time line. The third phase, outside of having direct-to-consumer and the worksite benefits, so the bigger brokers, is then engaging with the Aflac agent. So that's going to be happening in 2023. And the plan there is to have a product that will be sold directly through those small businesses. So by the end of the 48 month, we should kind of have some nice [ safety ] coming through some decent revenue and seeing some growth through that partnership. Does that answer your question?

Yes. Very much so. And I look forward to kind of the data coming from the business. So thanks for the help there, Margi. If I could follow up on, regarding your marketing channels, it seems like on the earnings call and then the latest annual report, continuing to see a solid amount of improvement in leads and then conversions across all the channels, particularly online in breeder, you talked about as well. Was just wondering, I guess, where you see the most opportunity for future continued marketing improvements or maybe what you're most excited about there for leading conversion growth.

Yes. So we're excited about them all. I mean, I think when everything is running -- trending upwards, is what you want to see for any of them. So it's really a case of where do you -- as long as it's hitting that return, we're always looking at that return. So charging between the 13% to 40% kind of going forward. So looking at breeder, as you mentioned, breeders got -- had tremendous growth for us over the last 4 years is really kind of picking up that pace, it continues to. So that's exciting. Social media is exciting. I think the vet channel continues and always will be the foundation of everything that we do. And then you've got a whole host of different distribution channels that are coming to play. I think the difference that we have today is that acknowledgment that we are creating that brand. So when we think about -- we've historically thought lead and convert. And you've got some channels that are very lead heavy and some that really just help to continue that conversation. What we're finding now is the interplay between them. So when we think about a distribution channel, we're thinking about a channel through which a person hears about Trupanion and insurance for the first time. So we're not thinking about picking up that conversation halfway through. And historically, what we were doing was we were driving a bulk of the leads into the market because of our relationships with the veterinarian, because that first point of contact with any loving responsible pet owner is that conversation here, you should think about insurance, and there's a [ brochure for ] Trupanion or there's an Exam Day Offer. What we're seeing now is the vet is playing both the lead and convert conversation there. So they're introducing it. But they're also having people coming in with their new puppy. And they're then reinforcing and then helping us to convert those leads. So that for us is a real shift that's really exciting. And then we haven't even explored all the distribution channels that we can go into yet. So I think when we think about what's most exciting, is what's coming up. So we're always looking very granularly at every channel that we operate in. And it's really how much can we put more investment in, continue to see those returns. Really excited to see conversion rates still going up. Really excited to see access to the [ EVs ] platforms that we're working with to get a conversation going with every single pet owner in the market. That, like I said earlier, is the thing that's probably most exciting to me because if you have that conversation, at some point in their journey, they're going to come back to Trupanion, and they're going to hear more about what we can do for them. And we're just going to keep growing. So I think we have a lot of tools now and there was a time when we would try something, and it didn't work. And now maybe we're in a hot streak, and we're trying things and they're working really well. But we'll just keep learning and keep building. And the expectation is we can continue to deploy more of that capital as effectively as we have done in the last few quarters and just keep going from there. Darryl?

Nothing to add.

We have a question from Emily Brill.

Can you hear me?

We can.

We can.

Okay. All right. So this is -- I'm good?

You're good.

Okay. So this is a long -- this is a 2-part question for Darryl. So I have a question about the expansion in the lower-tier products that you talked about in the 60-month plan. So regarding PHI Direct and Furkin, and expansion more generally, we know historically, sometimes, when great companies that do great customer service expand, the core business suffers, and customers feel the streamlining effects. So how do you plan to do quality control on 2 products that are inherently lesser without hurting the core brand Trupanion? And I know that I see that you said it's going to launch in Canada, but what does that mean for Trupanion members? Are they now going to be sharing their customer call center and their claims people with Furkin?

I think that's the first part of your question. You got another one after that?

One, okay.

I'll answer that first. It's a great question. I mean it's something that we -- by the way, this concept or idea is not new. If you go back to my 2017 shareholder letter or maybe '16, we actually -- we outlined potential growth channels. We are not, specifically not going on to Trupanion or Trupanion's website and offering bronze, silver and gold. We are not going to be, in any way, watering down our levels of customer experience or the value proposition that we bring with Trupanion. In fact, you'll see over the next year or 2 that we're actually turning up the customer experience for Trupanion. Our expectations on how fast, how quick. We -- in our 6-month plan, we talked about increasing the value proposition and actually broadening coverage. The idea with the PHI and Furkin in is to have completely independent brands in no way associated on the same website. We're not going to be cross-selling. We're not going to refer one to another. These brands would live on their own. And the reason that we're bringing them to market is, we believe we've been generating maybe, call it, 50% of the categories leads. But the consumer has been seeing about 20 different brands to choose from. We have been 1 of 20. Over the last number of decades, we've actually competed against 57 different brands. Every year, typically 2 or 3, 4 come in, 2 or 3 get merged, they go out of business, they get acquired, but from a consumer's perspective, they've -- we've always been 1 of 20 brands. We may be driving a lead, and some of those people end up converting with the different brands. The other brands typically say this, "Come get a quote and look at the price." And they give the impression to the consumer that all of these products and brands have equal levels of coverage or equal value proposition or equal service levels. And what we're doing with these products is bringing them to market. And first and foremost, they will have the same value proposition as Trupanion. We will be targeting $0.71 on the dollar or $0.71 going to the average pet owner back, which we believe is the highest sustainable level in the category. So first of all, if you had an apples-to-apples product, we would typically be 10% to 12%, 14% cheaper than any of our existing competitors, if it was apples to apples, but with those brands we are actually going to be very transparent to the consumer so they understand why that product is cheaper. We are going to explain to them. Listen, you can get products that are -- maybe have twice the average monthly cost, but they have considerably more coverage. The reason we're able to offer this one to you for less money is it has these limitations and you should expect these levels of service. So we will be sharing on the back-end technology systems. We will be sharing our finance department or legal department, which will allow those brands to get to operating scale quickly so we can offer a good value proposition, but from a marketing perspective, they will be completely independent brands. They will be sold and marketed only through online channels. And for those people that are searching for cheap pet insurance, they never found Trupanion before. They may find these other brands. For somebody saying, "I am looking for just 1 year of coverage. That's all I care about. I'm -- my -- what's going to happen? My life is going to be different later," we will have products available. And it's similar when we talk about Aflac or other distribution channels like State Farm. We think we have the skills to create products that are right for every distribution channel. Now the Trupanion product has been designed to be sold and recommended by veterinarians. It has the broadest amount of coverage with the least amount of restrictions, best value proposition and the best customer experience. And if you're a veterinarian, you want a very simple plan that covers everything that allows them to get the proper level of care, but if you are running an HR department for a company with 5,000 people and you have a budget to provide pet insurance to all 5,000 people, you may not be able to afford the best coverage. But offering something is better than nothing. And so us creating the right products for the right distribution channels is key, but we will not in any way create brand confusion. We actually believe we will be making swim lanes between the products that have low coverage and low price; and those that have medium coverage and medium price; and then Trupanion, which really we think swims on its own, but right now a consumer looks at it and it's more confusing. So ultimately we'll see how it plays out. Maybe...

But just to be clear: The answer is yes. Trupanion members are going to be sharing their customer service with Furkin, [ which is ]...

No. My -- no. The answer was -- when we talk about technology systems, when we talk about our finance department, when we talk about legal or accounting, the fixed expenses that we run in the business, yes, but the customer doesn't feel -- they don't know which bookkeeper puts something in a line item, in an Excel spreadsheet to make sure that we have a balanced bank account. What will matter is the service levels, right? And Trupanion will have the best service levels. These other products, we don't pay the hospital directly. Trupanion, we pay the hospital directly. So very distinct product coverage as well as customer experience. Does that make sense?

So yes. So let me get -- the second part of the question, though, is I was very intrigued by how you framed -- [ so I think ] -- so how you framed the rationale for launching the 2-tier products. You said, in short, we know that some customers may enroll in brands other than Trupanion, but that's okay if they're informed and understand the difference in coverage. If that occurs, you want to make them -- we want them to make an educated decision and enroll with a brand we own to provide high value and is not misleading. So what did you mean by educated decision? And who's going to do the educating? And how do you educate consumers and make sure they understand what they're getting in the lower tiers and what they're not getting?

I -- so I -- Darryl, [ if it's just all right ], I'll take this. So it's a great question. What we are planning to do is -- when you think about the swim lanes and we think about the different value and breadth of coverage you get from a Trupanion versus a Furkin, versus a PHI, at the moment, we believe very strongly that Trupanion is in a class of its own. So how do you articulate very clearly that you've got facts to be able to say to a consumer, "If you're looking for all of this coverage, this is what you're going to get with Trupanion?" If you're looking for this coverage which is less than Trupanion but it's still really good and it's basically competing with the majority of the market, you're going to get this coverage. You're going to pay this much. And then if you want something that is peace of mind, but it's not going to give you the breadth that the middle product is going to give you, it's not going to give you the breadth that Trupanion is going to give you, this is what you get. So when you compare them with facts and you build them transparently to acknowledge there are different products out there -- and to Darryl's earlier point, if you're going to get a quote, it is not like -- you can't compare a Mercedes with a Prius. Different cars, different brands. It's the same with the products in the market today within insurance, but people don't understand it. And so our job is -- as a leader in the category is to ensure that we are very clearly articulating the differences between the benefits you get with one product and another. And our hope is, if we're talking to all of the new pet owners that come into the market as Trupanion, we'll make sure that we clearly articulate the differences between Trupanion and PHI and Furkin. And then hopefully, we are driving that awareness in the industry and educating people that facts are out there. And we're hoping we will convert more of those products than other people. The chances are that -- as long as they leave us and they have a clear differential to know that Trupanion might be [ different priced ] to this product and this is why, then we think we're doing our job the right way. So hopefully, that answers your question. It's really kind of, when we think about our marketing channels and we think about the messaging and we think about we're in charge of the messaging from a perspective of what goes on the trupanion.com website is what a pet owner will see, we now have every single detail about PHI and Furkin. We can be very factually accurate about the comparison between the products and being very transparent. And the way that we're approaching the PHI and Furkin delivery is with the same transparency, so not going out there and claiming to be anything we're not. And for some people, they will instantly [ be like ], "I don't want to touch that product because it's not as broad as I need." And that's fine, but at least we're showing that. And then potentially they may look at Furkin or they may look at Trupanion. And then just to touch on the earlier question as well related to the customer services and customer experiences. Those [indiscernible] not being managed by the same people. Completely separate teams, completely separate brand identities, completely separate expectations for them. So the Trupanion brand is and will always be absolutely high quality. And we'll continue to invest in that member experience because we as -- we've built this company based on that brand value and we will not let that go. Does that answer your question?

Yes. I just -- it does, except that I just started to drill down on how you -- the lower-tier products. So how are they going to be cheaper? Are you going to put -- are they going to be in -- are they going to be -- are they going to have $10,000, like, lifetime limits? And then how do you make sure that these people understand the difference between those products and what we all know is a product that actually does something if your dog gets sick.

Emily, you're...

We all know that a $10,000 lifetime limit is useless in insurance, so I just -- how do you make sure they understand the difference?

Emily, the -- our job as a company is to solve problems for pet owners. It also involves educating. It is our job to properly educate and inform a consumer so that they clearly understand in a very transparent way what they're getting and what they're not getting. I mean we -- I mean, for us to have one product that has a cost of goods of $50 a month for the average dog and another one that has a cost of goods of $25, it's not hard for us to build that product. What we do is we take away coverage, and you keep taking away coverage until it goes from $50 down to $25. And it is imperative that you explain what you took away. And like if the consumer understands what was taking -- taken away and that's what they'd still prefer at the end of the day, okay, but it is very important that we are transparent to the consumer and educate them. Now if you can imagine, right now a consumer looks at -- if they're searching around, they look at 20 different brands. The -- those other brands are not saying, "Oh, by the way, the reason we're cheaper is because we don't cover this, this or this. We have a limit or a cap. Or the fact that [ your ] rates are going to be 4.5x higher than they are today because your pet hit the age of 7 or 8. I'm not telling you any of that information. My hope and my expectation is that you'll never read the fine print." We will debunk that theory. We will be going to the market and informing and educating them on what is covered and allow people. So what will happen now? Instead of there being Trupanion in 19 brands, there'll be Trupanion in 22. Our 2 new brands will cannibalize the other 19 to a certain degree because we will do it in a transparent way with ultimately a better value proposition because we will share the operating scale. And if it succeeds, great. If it doesn't succeed, that means that there's no company in the market that should be able to do it in a long-term sustainable way. So it doesn't have to be a roaring success for it to be a great success for our aggregate strategy of the business.

All right. That sounds great. I'll be watching to see how the -- how that does. Very interesting.

Okay, great. We have a question from [ Gotham ].

Okay. Can you guys hear me?

We can hear and see you. Actually I'll give a callout to the tech team here making all of this work as well as it does. So thanks, everybody.

It's awesome. So I'm a tech founder for start-ups, so this question is kind of biased, but I appreciate your perspective on this. While I obviously think about Amazon, Berkshire and Costco as great [ examples ] to understand Trupanion, I was wondering if there are any newer businesses, specifically like subscription-based SaaS businesses, technology businesses, that are catching your attention either from a business model, culture or execution standpoint that you'll see us doing something very interesting to get inspired from? And I'm -- the reason I'm asking this is I'm interested in what I'm seeing as increasing returns to scale from technology of these businesses, right? And so is there something that you guys are thinking about as you scale over the next decade? So any thoughts will be really interesting to me.

Well, I'm not going to go into these companies' business models in detail, but Constellation Software is an interesting one to kind of look at. The people have done, executed well on their strategy. This isn't a small company that I think you're kind of looking for, but if you want to talk about -- a monthly subscription business that has pivoted very well that I found very intriguing was Netflix. And they've made basically 3 pivots and they've done it in a -- that's interesting, to see companies do that. I'm not saying that that's -- needs to be an aspirational goal. I think they did it for their own reasons. And I think there's a lot of interest around monthly subscription, for all the right reasons. It's easier to manage your business, right? It's easier. We -- internally, people will say, oh, we'd like to do this or to get [indiscernible]. And if -- we say no, we don't have the money today, but don't worry. 3, 4, 5 months from now, we'll grow into it. Now I would say picking monthly subscription businesses that have a very large underpenetrated market is very different than a lot of SaaS companies and subscription companies that are going in and trying to disrupt what is already a business or a category. So we ultimately are trying to build the category. We don't -- we spend very little time thinking about competition. Our hardest critics are ourselves. We're always trying to make our product better. We're always trying to improve our customer experience, but you talk about Costco. Costco is the ultimate monthly subscription company. Their -- they make their profits off of their membership fees. And they know that's how their business model works, where they're going to provide the best value for the customers; make sure that all their employees are treated well and paid more than others; make sure that they have a work environment, a safe environment, that they do everything in a legal way; and then make their money off the membership fees. So I study a lot of subscription businesses when I see them to try to understand if there's something new, but the core tenets always come back, right? And the single most important thing is retention. Retention is it. The next thing is lifetime value. A lot of people will talk to us about pets. They'll say, oh, well, we could have -- you can enroll 10 more pets or do something like that. Well, you can't spend pets. You spend revenue. You need a margin for each of those pets in a lifetime value to be able to -- that you can reinvest more [ about ]. So I don't know if I'm directly answering your question. You can certainly hit me with a follow-up, but when I look at or study other monthly subscription businesses, I'm always intrigued on are they playing in a completely different ecosystem. And have they had to do something very different than what we have? But when a monthly subscription business has been in -- been around for 3, 7 years, it starts to go down the same pathway. You start saying, "What is the data that I need to understand to improve retention rate? What's the data that I need to understand to improve the lifetime value?" And that's it. Do you have any ones that I should be writing down and study, [indiscernible] maybe?

Well, I'm interested in the Constellation spinoff, which I'm trying to understand from the European market perspective, but if you don't mind, I have a unrelated follow-up. What are your guys' plans for India? I see pet adoption and spending go up to the roof there. I'm obviously visiting regularly so was wondering your take on that.

Yes. It's interesting. So a lot of people would not intuitively think that India would be a good market for us, but the middle and upper income in India, which is similar to the middle and upper income in Canada in size -- and Canada is a great market for us. So we would [ love to able to ] enter India at some point. We've done actually quite a bit of research over the last 24 months on India, and one of the challenges that we have right now is on the government side. There is a lot of protectionism around putting up barriers for new companies to be able to come in and get going, so the amount of cash or assets that would be required for us to enter are right now prohibitively high for getting the rates of return that we would want to get, but that's a market that's always developing and changing. And we'll keep our eye on it. And maybe there'll be a partnership or something else that can help us get into it, but yes, we look forward to being there someday. I wouldn't expect that it's going to be in the next 5 years, if I was going to make a big bet, but in the next 10 to 20, we'll be there.

Okay. I'll just end with one anecdotal data point, Darryl. My office in India is across a pet clinic. And I see these cars pulling every day, and every one of them is a Bentley or a Mercedes or a Jaguar. So all the best to you. The market potential is there, I guess, is my point. So great.

Yes. I -- we're excited about the market. There's a lot of markets. Brazil is a market we're very interested in. And we've done quite a bit of research into Mexico. Some of them, we think it's maybe a little early. Other ones are not obvious. India, for example, is not obvious to a lot of people, but yes, we think India could be really good. We've just got to -- we've got to figure out the government [indiscernible].

Great. The next question comes from [ Stefan ].

Can -- sorry. Can you hear me okay now?

Yes.

We can.

Wonderful. Well, thanks for building the tremendous value over the years both for the vets and the pets and the shareholders too. So much appreciated. I -- my question relates to growth. You've done a tremendous job growing the company, but with insurance, of course, with growth comes capital requirements. And my question relates to how do you find that balance between pet acquisition costs and raising capital through share issuance.

It's a really good question. We're a company with -- our unit economics is in our guardrails. So if we have roughly a 13% to 15% adjusted operating income -- so that's profit from an existing client. And we have internal rates of return between 30% and 40%. We can self-fund and self-grow the business 20% year-over-year-over-year-over-year. And we can self-fund that now forever, but when we grow at faster rates, if we grow at 30%, 40%, then the first place that has cash flow constraints is our money to acquire a pet. So you say, at a 35% internal rate of return, the midpoint of our guardrails, how much do we need to deploy to grow at 30% a year or 40%? You can do the math on it. And at a certain point, you get in a situation where, our adjusted operating income in a month, we -- you're spending more just to acquire a pet. And that number is between -- closer to the 40% range. Margi and her team -- last quarter, we had a record in our adjusted operating income. It was up 40% year-over-year, and we were able to deploy 100% of it at a 35% internal rate of return. The only thing better than doing 100% is to be 120% or 140%. So in those scenarios, you end up being cash flow negative. And you can put it into an intrinsic value model; and you can say, what is the value creation, additional value creation, by growing faster? And then how many -- how much capital would you need to raise to be able to afford that growth? And you divide it by a greater number of shares. And if that gets you a better year-over-year value creation than growing at a slower rate, then you choose to do that, as long as you believe that you can execute, meaning that you're not growing so fast that your customer experience is going to drop and it's going to give you a long-term bruised eye on your reputation. So we look at that balance, and for many years, we put a guardrail of being cash flow positive. I didn't care if I was $1 cash flow positive or $5,000 cash flow positive or $5 million. It just meant that we needed to be cash flow positive. Last year, we really strengthened our balance sheet and our cash position. We can grow today 40% year-over-year for 2 years and fund the growth of -- at a 35% IRR as well as the capital required that departments of insurance make sure that we keep money in the bank account just in case every dog got hit by a car on the same day. We can do both of that. And we will always try to maintain that we have a good runway ahead of us so that, if we have accelerated growth, we're able to take advantage of it, but there is a tipping point and we manage it and watch it very closely. By the way, growing is really hard. Adding 30% more people every year is really hard. What's harder is to grow erratically, so if you grow consistently year after year, the company can get into a rhythm. Sitting at this table right now, if we were a company that grew 5% or 10% a year, I don't know what we would do all day. Like it would be a very different feel. So we just need to monitor and measure it. And we have used other financial instruments in the past to cover the capital requirements. So you can use methods of reinsurance, or you can use some forms like basically a line of credit and service a line of credit. And both of those, if they come with the right terms and they don't have any bad covenants and they give you the flexibility and it's a long-enough window and you understand it and doesn't put the company at risk, I think, are good alternatives as well. So you may find -- if we enter periods of accelerated growth for 3 or 5 years consistently and -- at a certain level, we may want to use those instruments. Or we [ can ] use it with equity and we'll make that right balance to answer that question at the time, but that's how we think about it.

We have a question from Jon Block.

Hopefully, you can hear me okay.

We can hear you great.

Darryl, maybe for you, the first one. Just why now, for PHI and Furkin? Maybe talk to us. Is it because of the timing the company is reaching operating scale or at least be coming closer to operating scale? And then how do we think about the allowable PAC? Obviously these products imply having a lower ARPU. Do we think about a similar churn level, though, for these products, if you are properly educating the customer?

Yes, great questions. And so you answered the first one the -- exactly the way -- I mean the reason we're doing this today, I talked about and wrote about it 4 or 5 years ago. Well, reason we are doing it today is we have the operating scale with -- and our technology is much closer to being able to support it in a way -- it would have been -- it would have strained our technology before, and so we made an investment in technology at the end of last year. That helps us. And that team is larger. So that's a bandwidth constraint. The last one is the team size. Can we do this in a way that we're not going to distract from our core subscription business? And we wanted to make sure that we can do that. Now there's no guarantees we'll do that well. We'll have to monitor that, measure it, but operating scale was the biggest challenge that we had historically from doing it. And then we've built other 2 from technologies and systems. And then people were the next 2 things that we look at. Your lifetime value point of view or question is exactly what we expect. We expect in general, the lower the ARPU, you typically have lower retention rates or the number of months a pet will stay with you. And you multiply that by even the same margin profile, which we plan on operating all of our subscription businesses at the same margin profile. So it put -- it will produce a smaller incremental dollar multiplied by a smaller number of months, so the lifetime value will be much, much smaller. And therefore, our allowable pet acquisition spend will be much, much smaller. Now our point of view is we will be very disciplined on it. We will not spend $1 more than what is -- what will get us the internal rates of return, but if we can't make that work, no competitor should be able to make that work in a long-term sustainable way. If we are able to make it work, good for us, and we get all the benefits of doing the education. Trish, do you want to add anything on kind of the LVP side of it?

No. I think it's very well said. Obviously, Jon, to the extent that our education process yields higher retention, then we'll update our models for that, but we definitely are just going to be very disciplined in ensuring we hit our targets. But it's very important to just remember these will roll into our subscription business, and so mix of business will obviously impact some of those metrics moving forward.

Okay. Maybe a follow-up to that one was about...

[indiscernible] -- Jon, just one thing that -- I'll bring it up and then I'll hand it over to Margi. What a lot of people don't understand is we've had literally over 1,000 products in the marketplace for a long time. I mean we have a deductible that could be anywhere from 0 to 1,000. We have price ranges over 1 million different price categories. And forever, we are understanding the lifetime value of a golden retriever in New York versus a labradoodle in Kansas City. So Margi's team has done an exceptional job of targeting the right pet acquisition spends depending on channel, pets, et cetera. And it's really hard. And we don't do it perfectly, by any means, but I think we do it well. So we have that skill. Do you want to add anything there? I don't know if [ I left anything to add ]...

No. You didn't leave anything to add really. I -- no, I have nothing to add.

[ That's great ]. Well, maybe I'll give you something, Margi. I mean, just as a follow-up to that, I think investors think lower-end plans and they get worried about churn, right? You guys have done a great job with retention on your high-end Trupanion plan. Darryl, the way that you were describing it to an earlier question, it seems, if you guys can do a better job upfront with educating the consumer, right, really telling them what he or she is or is not getting for that particular plan, we shouldn't think about these offerings PHI and Furkin as, call it, industry-like churn rates, right? You can still get pretty good retention, as long as you're properly educating them upfront. Maybe not quite as good as your, call it, high-end gold-plated Trupanion but long-winded way of saying, Darryl, should PHI and Furkin still spit out, call them, better retention rates than a lot of the other competing products because you are making that concerted effort around educating upfront?

We anticipate that it will be -- we will hold a pet longer than the industry will for a similar price point, but typically, the lower the price point, on average, the lower the number of months you'll keep them. So that's what we would expect. We'll monitor it and measure it. We -- I mean we don't really care what others are doing, as far as that, but our expectations going in it are exactly [ what you just said ].

Okay. And last question for me is sort of a 5- and 10-year question. You mentioned the [ dental ] industry. It's another area that we follow. There's dynamics with consolidation, with practices; and some [ of that ] is very similar to what you see in the veterinary world, Darryl. So I'm just curious. What are you seeing? You talk about the active hospitals in the shareholder letter, but what do you see with the big corporate practices versus the independents? Are some more likely to embrace or, call it, endorse insurance? Are some of these easier to grow your business versus the other? So when we think about consolidation in the veterinary world, which seems more likely to continue, is that a tailwind or a headwind for your business? Just would love your long-term thoughts there.

I can answer this one. I'll get there first, Jon, and he can fill in the gaps. So consolidation absolutely is happening. It's a thing we see across the country and into Canada as well. And if you look at markets like the U.K.: 80% of the veterinarians are owned and consolidated groups now. So we expect the market to go in a similar fashion. We have partnerships with probably 95% of those groups right now. And in terms of the economics, when you start talking about the increased client retention, the increased revenue, the ability to see that client when they walk in a door, there's no barrier to the pet owner going to see the veterinarian. When you're speaking to a, at a corporate level, veterinary group, the balance is there in terms of what's the impact on the P&L, what's the impact on client retention, what's the impact on average premium -- or average income. They appreciate that. They get the numbers. And it does help. It can help in many instances because there's a better education process. And we can -- a lot of them have a central system from a software point of view, so it's easier for us to work through there. At the end of the day, though, the reason we have our territory partner model and the reason that it's so important is because you can have all the corporate conversations you like, but you have to speak to that veterinarian and their team at that level. And no matter how consolidated it becomes, that still is a main -- it's the main part of our overall program of education from a veterinary level. And that relationship and partnership has to happen in that hospital for anything to be truly effective. So it's certainly not a headwind or a tailwind. I think it's helpful. We have partnerships. We can work with them and we can look at data points together and make sure that we're actually helping to drive the care in appropriate fashion. And we talked earlier about, if you've got industry trends where there's new pharmacy coming through, new treatments, new diagnoses, we want to make sure that we can -- we've got that in our coverage so we're always prepared for that. So that helps us. And I will say that, across the board, every partnership we have adds value to us in one way or another. And when we think about our model and how the territory partners play such a massive part in that: The corporate level is really just another layer. So it helps. It doesn't hinder. And I think you've got some groups that are more aware of the impact of insurers and others. And we as a business have a strategy focused on that, and we've made fantastic progress over the last 5 years. And we'll continue to work with them at a corporate level, but like I said, the independent veterinarian and the localization [ of ] where the territory partner is, if you're not communicating at hospital level, you can have all the corporate stuff going on in the world, but you're not going to change behavior in the hospital. Does it answer your questions?

Great.

Okay.

Great. It looks like our next question is going to come from [ David Revill ].

I -- as always, your annual letter, Darryl, was a lot to read, really fun.

Sorry about that.

No, no, no. I love it. I think it's terrific. We use it as an example. So my question is about the 60-month plan. And sort of you are -- you have always been -- in the past 2 answers, you've been -- you've given us a primer about how you think about investing in PAC and how your existing results guide and create the guardrails for what you invest in PAC. Can you talk about how you think about these long-term initiatives in terms of what you might invest pre revenue? I mean obviously, if some of these things take off, all of us, we want you to pour the gas on as fast as it can be profitably ignited, but you've talked about sort of the pace, that you will have pacing, that all of these things aren't going to start at once, but how should we think about what you will be willing to invest in these projects over those 5 years given what -- sort of intermediate expectations for the base business?

I had this -- a Board member say this to me years ago, which I loved. He said, "Darryl, you're not betting the farm. You're betting the outhouse." And that's probably about the level. There's -- it's probably a -- you can think about it as a percentage of our adjusted operating income for a year. We won't go over a certain amount. We have a similar kind of guardrail for stock buybacks. If our stock ever got really, really cheap and we could get a 35% internal rate of return, we would never, for example, spend more than 25% of our adjusted operating income. Those types of guardrails. But it's a new muscle for us. The development expense is something that we'll watch. We're -- and we're not really good yet at having all of the data and the metrics to say, "How are we doing? And what's our return on it?" Some will just strike out, and some will get to the point of getting to revenue. There is another area that I, we need to focus on, which is our CapEx spending too and how we're measuring that. And we'll just keep evolving our thinking and our models to stay consistent with the challenges we have in our business. I mean, going to the earlier question about monthly subscription businesses, that's the benefit of monthly subscription businesses. You scratch your head. You say, what about this? How are we going to think about it? What is it going to mean for us in the short term, medium term, long term? And you go in and you solve for it. And we've got an amazing team. I'm looking forward for people -- I mean our shareholder meeting will be in person. Hopefully, people are vaccinated. We will have testing on site so that people feel as comfortable as possible, but we've got teams that are thinking about these challenges, thinking about these problems. And we've got other teams that can go out and find the answers, but I think my outhouse analogy is about as accurate as you're going to get at this point.

Yes. I wouldn't expect you to have more. I guess I would say, partly from your results and certainly from your communication, you've built up a tremendous amount of credibility among our investors, I would imagine. And I know, from the ones that we talk to, that makes perfect sense, so I appreciate that. Good luck. And I won't be traveling to Seattle, but -- this year, but I'm looking forward to seeing you in person as soon as I possibly can.

Sounds great. Thanks.

Our next question comes from [ Dawn Brock ].

I can see me, so hopefully, you can see me. So as always, thank you for the forum. It continues to be unique and refreshing to see the runway for the value proposition over the next 60 months and, as I hear you talk, probably more like 200-plus months based on the opportunity you've got, but throughout this conversation, you've touched a lot on technology and scalability. And by the way, I love the new tagline, Powered by Trupanion. Like that's pretty brilliant, but along those lines, I kind of wanted to focus on the proprietary software side of the value proposition. So Trupanion Express has obviously evolved. Understanding that there's still penetration potential in North America with the account manager kind of package, what are your thoughts around integrating this element or even another tech-enabled element into your new geographic aspirations? I guess I'm wondering if you consider it to be critical to scaling and to translating into supporting the value proposition or if you're thinking more along the lines of a different localized selling strategy.

We made the -- a very large investment for us last year, about $50 million, in a technology company, so hopefully, our actions speak that we think the -- technology is critical for us to be able to not only execute on our 60 months plan and -- from a support mechanism, to be the low-cost provider, have the best customer experience but also to have platforms that allow us to have more products in more channels, with the ability to measure and monitor what we're doing. I think they're critical, but let me kind of get Margi's point of view on -- kind of on the lead side of it and what we're thinking about on the growth side. And Trish really runs the operations side and how we're thinking about, in some cases, sharing technology platforms and then investing in others.

Yes. So when we're thinking about growth. You mentioned the account manager model and how we're layering on there. That model has worked really, really well because we have the territory partners. We have the software and we have the account manager. So while they're people, not technology, they -- when we think about that package, it does work very well for us. So anything we do in growth terms where we're looking at new geographies, new regions, we'll be trying to replicate as much of that as possible because we know that it works. In the event that -- as we look at building out the software, we're always trying to evolve it, make sure that experience is relevant for the market. So part of that investment we're looking at over the next 18 months, 2 years, at least, is really not only improving it for the North American market but making it more appropriate for each localized area we go to. So there'll be some commonalities in there, but they won't always be the same. So technology. Our ability to pay the veterinarian directly at the time of checkout very quickly is incredibly important as a value proposition. That isn't going to go away, and that in any market will put us head and shoulders above other players. So that's something that we'll continue to drive and invest in because we believe it's very important to us to differentiate ourselves. And it's a great experience for everybody involved. Trish?

Do you want to add kind of on the scale side and then on the operations side?

Yes. And I think, [ Dawn ], if I was understanding correctly, your question was mainly around our patented software, so I'll primarily focus on -- I agree with what Darryl said in terms of we've been making investments across the board to scale, but our patented software and particularly, like Margi said, our ability to pay directly at time of checkout is a core tenet of our philosophy anywhere we go. We want to be known as that company that is solving a problem immediately and not waiting for -- to reimburse somebody who had to come out of pocket. So our patented software and evolution of it is very critical to that philosophy. From an operations perspective -- and our teams have been doing a lot of work, particularly in the past year, in our claims process to really have that foundational technology piece in place to ensure that -- whether we're processing here, Canada, Australia, other geographies, other languages, that we can quickly automate those claims, pay them at the time of checkout. And that provides -- an automated solution provides the most scalability. And so we've been investing in that, but also how do we ensure if it's not, we don't have the ability to automate? We have the teams in various locations able to do so very quickly as well. And I think that's one of the reasons we say why now, because we are much more capable of doing that now than we ever were in the past. It's been a big focus.

[ What about just ] the addition of the account manager? I know that, that has been really a critical component of the success, so I guess I'm just wondering how that translates.

Well, when you think about -- the account manager is really about increasing touch points. Ultimately this is about us building a relationship with veterinarians and their staff and pet owners so that they can trust us. We don't have a tangible product. We've had a lot of conversations today about what's in the fine print or what's not. We need to ultimately be trusted. And the more interactions that you have with individuals, the greater opportunity you have to build trust. What the account managers did for us was increase the amount of touch points at a hospital level. And what -- in the "chicken and an egg" analogy, if one pet is enrolled, how often are you going to see a claim? How often are you going to interact with the staff? When you get to the point where 10% or 15% of pets are enrolled in a clinic or a hospital, which we have examples of, there -- we're touching them daily. There's a lot of interactions that are going on. And so the account manager allowed the territory partner to go out and build those new relationships or not get caught up in the quick transactional conversations and get -- spend the time talking about more of the long-term foundation. Why is this important? What are we doing? What's going to change? And the account managers really helped us with those day-to-day or minute-by-minute conversations. And it has been -- it is a really strong partnership between the territory partner and the account manager. And we couldn't have done the account managers effectively 5 years ago, 6 years ago because they didn't have the insight or the data that would be required to be supportive to the hospital. You put in our software. We see how many visits they're seeing, how many we pay directly. We get much more data and information to have a variable -- a good conversation. I remember, 15, 18 years ago, we'd be going and talking to a vet hospital. And the territory partners would say, "What's -- what color is our next calendar map going to be?" Because when -- once you've already talked to them about what we're going to be doing and why we do it, what is a reason for having that next conversation? So it was like, well, what's the next marketing piece I can bring in? Well, that's because at that point there wasn't a lot of pets enrolled. And there wasn't a lot of transactions and there wasn't a lot of activity. The account managers work when, every single day, we are sending money to the hospitals and solving those problems. It's another little flywheel in our business. The higher the penetration, the better trust, retention rate, referral rates, conversions that can occur. And we've seen it in our Canadian business. I mean, if our U.S. business grows consistently like our Canadian business does, the next 10 years are rosy. And if you talk about other countries, the next 30 years from now are rosy, but that's -- getting the flywheel started, it's hard.

Okay, great. I mean, if you could answer this just in any -- at any point in the next 20 minutes, it would be great, but because you're such a data-driven team, I am just super curious what research is driving your goal to reach $100 million in Landspath by 2025.

Oh. Well, that's easy. About 40% of all pet spend is on food. And in the U.S. alone, you don't -- you could have a very, very, very tiny market share of not even the core kibble products you -- and just non-kibble products to get to $100 million. You don't need -- one of the reasons that, that area is interesting is -- one is are we going to be able to prove over the next 10 to 15 years that eating a healthy food is going to have a better health outcome. And with that, it might give us the opportunities to partner with other pet food manufacturers or other companies, distribution, et cetera, but on its own, the ability of -- if we can create something that is exponentially better and exponentially has a better health outcome, the two will reinforce each other. If it's successful -- I mean the odds of success are not super high, but if it is successful, that number is not that -- you don't need much market penetration to get there -- sorry, [ market share-wise ]...

The next question comes from Dave Westenberg.

So let me start. I know you've gotten this question a lot. And the part I'm struggling with is Trupanion itself as a product is very transparent. I mean you pay 90% of invoices, and you pretty much pay. There's -- unless it's a preexisting condition, you cover it, so when you dial back coverage and you also maintain transparency, it just -- I know you've answered it like 5 different times, but I'm just kind of confused what layers are -- or what coverage you can roll back and still make it really, really easy to communicate the product. So what I mean is, is it 80% of payout ratio rather than 90%? Is it a cap? I just need to go like kind of concrete thing because, if you tell me like it is, we cover surgery but not drugs or something like that, it becomes a lot more difficult to communicate. Is what I'm saying [ clear here ]?

Yes, Dave, dialing back coverage is easy. I mean, if we didn't want to -- if we wanted to decrease our cost of goods by 1/7, we could say we don't cover anything on Mondays. What's important is that you would be able to articulate it and execute on it. I'm going to torture you a little bit because we have not yet released these. By the time we get to the shareholder meeting in June, you'll see a little bit more of it, but rest assured there will be an incredible amount of transparency.

Okay, okay. I'll wait. And then just in terms of the other revenue category. And I got this question yesterday, so I do want to ask this. The other revenue category has a lot of different -- you're reinsuring. I mean you're working as an underwriter. I mean I think you're doing stuff with like police dogs. You're doing all sorts of things like that. Growth was absolutely outstanding or just gigantic in the last quarter, and I was asked. Was there a -- is there becoming one category that's becoming predominantly bigger than others in that category? And if so, what is it? And if you can give us a little bit of a reminder of all the different things that are in the other revenue category, it would be helpful.

Okay. The other revenue category is not direct to consumer. It's B2B. And the goals of each of the small businesses that are in it are different. For example, we want the employees at a veterinary hospital to have Trupanion, and we would love it if the employer paid for it on behalf of the employee. We think that is net good for our business. We don't need to make a dollar from that. Our goal is to break even, so the more successful that is, it reinforces our aggregate strategy, but that has a unique goal. It's a B2B. We -- there could be 100 pets enrolled under that. And then the employer decides, "I don't want to pay for it next year, and we can lose all 100." We have another section where we deal with the government on areas. And RFPs start off with 1 year and sometimes go to 3 years, and they could just disappear one day. What's most important, I think, about the section of the other revenue is strategically it offers benefits to us, or at least we believe it does. That's why we're in it, but -- and it helps us scale our fixed expenses. It is beneficial in that way. It does produce a little bit of adjusted operating income for us, which we can then reinvest at a 35% internal rate of return, but we're -- it's almost like a sandbox, but it's a sandbox that has B2B or other reasons. Everywhere across the board has been growing at similar levels. So they're all doing very well, but they're off of smaller bases. The biggest area to it is where we're the company behind other brands, and that's the biggest section [ of it ], yes.

Yes, okay, all right. That's been growing, okay. That's really helpful. And then I got this actually from an investor today: What do you expect the -- what kind of contribution should we expect from international over the next 5 years either in terms of percent of revenue maybe 5 years out or percent of growth? I mean however you want to kind of help us kind of figure that one out.

We haven't given any of that guidance.

[indiscernible]

Let me give you an example, though. We entered Australia about 2 years ago, and still today in Australia, we are still fine-tuning in less than 20 hospitals. So one of the things that we are able to do at Trupanion today that I wasn't able to do 15 years ago is to wait until you get it right. We don't need any of these other initiatives to drive the growth rates that we expect over the next 5 years. Our core business can do that on its own. So when we're looking at adding anything, we're going to be adding it for strategic reasons. And we're going to be adding it when we think it's ready to go and to scale and do it the right way. We have guardrails. We will be always trying to target a 35% internal rate of return, and we'll be happy anywhere between 30% and 40%. We'll be targeting the same margins, but I don't think it's appropriate nor necessary that we set artificial dates or targets. I want to make sure that we do it right, and we have the time to do it. Now to my outhouse comment before. We're not going to be spending so much money in these development that it's going to put us, the company, at risk, so my -- the answer to that question is I'm not telling you. And I'm not telling you because we don't know yet, but I will tell you that all of the initiatives that we have in the 60 months plan, all of them, we think, if they'd went reasonably well, they could get to a $100 million run rate inside of 5 years. So any one of them needed to have at least that potential for us to be putting some resources and having teams focused on that.

That's great. And then I might know who that Board member is because I -- a former Board member did mention to me once that you guys need to be putting pedals on that a little bit more, [ on the way you spend ], but anyway, I'm going to go last long-term kind of a viewpoint or question here into a little bit more theoretical. Is Trupanion in the right category in terms of regulated as property and casualty insurance? And as there you see more and more growth in the category, do you think ever -- the regulators would ever maybe consider it its own category or moving into health care? I mean just I just want to end with that long-term kind of theoretical question and then I'll hop off.

In North America, we expect it will get its own distinct line of business. It will likely still fall under property and casualty in general, but the category will be big enough that it will get its own set of defined rules. And we've been working on that now. We've been working on that now for over 7 years and it's gaining traction. I can't tell you when in the next 5 years it will occur, but I'm pretty confident it will happen. And it will benefit Trupanion.

Great. Well, it looks like we have time for just a handful more questions, so if you have any questions, please raise your hand. And our next question will come from [ Eric Schlein ].

I'm sorry. My friend and my partner -- my friend and partner Eric, he invited me. And I didn't know it was under his name. My name is [ Kiera ]. Yes, so my question is, with your exponential growth, how much of that do you attribute to that being the internal culture of your company? And also how do you -- what's your process in your 5-year plan, all right? With things not going to plan, with so many things, different things happening, what's your process in that? And I would, yes -- what -- go ahead and answer that.

Trish, do you want to talk culture first?

Yes. I wasn't expecting you to ask me to talk about culture. I can if you would like. I mean overall the culture of the company is very, as you can imagine, pet focused, pet centric. And we are a company filled with very passionate people. And I think that helps us have a better chance in -- of success compared to a company without a strong culture. And it's something that we just -- the biggest thing that we want to be focused on is that -- as we grow, as we become a global company, that our culture remains as strong as ever. And it's something that particularly the three of us are probably -- are most focused on because we know that it's immensely important...

Margi, do you want to add anything culture?

Yes. I'm sorry. I'm being distracted by the beautiful screen. So yes, no. I mean culture is -- it's challenging, when you're growing as quickly, to make sure that you can maintain it and keep finger on the pulse, but like Trish said, we are really invested in it, not just us but throughout the company. We're thinking -- in COVID, it's been challenging to continue to communicate as effectively as we would if we were in the building, but what we've done really well is created a real ecosystem where people can kind of continue to talk and have open conversations. And that transparency is really key to all of our culture. It comes back to that trust and maintaining that through everything we do. So as we build new products, as we add new things, we've been very good, so far, at saying, "You can try, and if it fails, it's okay." We don't expect, as we've said in our 60-month plan, everything to work. And we've gone into that with the business. So we brought the business along as we were building the plan out. Very -- a huge number of the team helped us put that together as a plan, so they are brought into that. They're owners in that plan. And everyone in the company is an owner of the company. They have stock in the company, so they're very invested in making sure that their role is very clear, the value they create and add is very clear and how they can help one another. And I think simple things like the daily goals report that we share with every single member of our team. Every single day, the first thing they'll have in their inbox is an update on how we're doing with all of those key initiatives. And we've made no secret of the fact that we think some will be brilliant, we hope. And some may not be as good and that's okay, but because we're doing things that are always in keeping with our mission, I think it helps to kind of gel that culture together. And I think that's something that we've worked very hard and we'll continue to work very hard at maintaining.

I'll use 2 words to sum it up: data and heart. We try to mix the 2. That's, if an individual can be confident to be themselves and we have an environment that allows that, we can measure things with our data and we can lead with our mission in our hearts. We can do extraordinary things. So that's how we think about it. We've got written on the walls, "Be yourself. Everyone else is taken." We're all here because -- our love of pets. And ultimately why we all love pets is because they love us for who we are as humans. They -- it doesn't matter if we have a disability. It doesn't matter what size we are, if we're tall or if we're short. It doesn't matter, our skin color or religion or thoughts. Our pets universally love us. And when we create a culture that allows people to be their authentic self and we measure the effect that they're able to do on the company with the data and we can do that in monthly subscription and you can live in a company where we believe we are really helping the lives of pets and pet owners, you've got that heart, and you mix it together in Trupanion culture.

All right, well, that brings us to time and that feels like a great place to end. We also want to make sure we provide everyone time to hop over to the Berkshire Hathaway Annual Shareholder Meeting, so I think we'll wrap here, but before we do so, I want to just ask, Darryl or Margi or Trish, if you have any final comments.

Yes. Thanks for attending. Thanks for making this another good event. And enjoy the Warren and Charlie show. It should be great. Thank you.

Thank you, everyone. Bye.

Thanks, bye.

Bye.