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

Good morning. It's my pleasure to welcome you to Trupanion's Annual Investor Day. We want to thank those of you who have joined us in person here in Seattle, and also, those of you who are tuning in from around the world. We have a great day planned for you. As a reminder, the unique feature of this event is that it's almost entirely participant driven. So we have a number of leaders from across the business here today to answer your questions. We'll do so in a series of 3 Q&A sessions with a few breaks in between. For those of you who are joining us in person, those breaks provide a great opportunity to mingle to get to know the team a little bit better. I'll be back when we get to the Q&A sessions to go through some helpful reminders. But before we do that, I'm going to welcome our CEO and President, Margi Tooth, to the stage. And as she makes her way up here, I'll ask that you please familiarize yourself with our safe harbor statement.

Hello, everyone. Can you hear me? Yes. I'm seeing nods. Good. Well, it is obviously a pleasure to be standing here in front of you today as the President and CEO of Trupanion. We've got some nerves. So we're hoping you're going to have a wonderful time today. As Laura just mentioned, we really want you to make this your event. You've got questions, we want to hear your questions. If you want to dig in more, please ask the team anything and everything that you have in your mind that you haven't had a chance to ask them in person. You're going to meet 33 of our team members shortly. And before that, I'm going to walk you through a little bit of a story of where we've been so far. And just as a reminder of what we're doing and why we're here today. And hopefully, those calls, especially the last one, really helped to paint that picture as well because that last one is a bit -- it hits the heart a little bit. So I'm very much looking forward to taking the company through the next phase of growth. And before I kick off, I just want to say a huge thank you to the Board, many of whom are here, past and present I see, for giving me -- putting your trust in me and allowing me to lead the company over the next few years. So Board members, can you give us a wave? Thank you. Thank you for being here. Okay. So you may have seen, as you walked in the door, our mission statement up there loud and proud on the wall. We are a company on a mission. We're here to help loving, responsible pet parents budget and care for their pets. And you heard that loud and clear, but we also do that in a way where we are passionate, where we have fun, where we enjoy what we do, and it means so much to us as team members, as animal lovers, as pet parents ourselves, to be able to offer the same value proposition and pricing promise to our members wherever you are in the globe. So without further ado, what I want to do is play a little video for you in celebration of National Pet Month, we played this on Instagram and on social media in April. And it just gives you a little flavor of Trupanion and who we are as a character, as a culture in our office today. [Presentation]

Okay. So we are today -- we have proudly protected over 2 million pets with Trupanion coverage since 2000. That number is significantly greater when you add all the millions of pets that have also benefited from our Exam Day offer that have had that temporary cover for a period of time as well. So to do that, we need to make sure that we are giving everybody the same value proposition, the pricing promise, and we're excited to be able to do that. Now last year, those of you that were here will remember that we were celebrating in every break, we had a little ticket that was talking about our claims volume and how many claims will be paid in that hour or so far that day. And by the end of the day, we got to the hefty sum of $1 million a day. And at that point, we were close to -- let me see if this is going to work, we were close to $2.2 billion when we finished in July. Now fast forward, 469 days since we were all together in this room, that number has gone up to an average of $1.2 million a day. And our overall total claims paid to date is a massive $2.848 billion. That is why we're here. That's what makes the difference. That's the volume of invoices. Just as a quick reminder, in the year 2020, early in the year in February, we celebrated our first $1 billion. We're now in 2024, and we're just about to cross the $3 billion mark. That's how much people need Trupanion, and that's the difference that we're making today. It's really starting to pick up pace. And just imagine, at 4% penetrated the impact we can have as we get more and more adoption of what we're doing. So the tenets of our business, how do we make sure that more and more people have Trupanion, how do we make sure we can offer the same value proposition to as many people as possible. We just wanted to remind you all of the things that we build on to be able to create that solution. We start, of course, with the pet parents. We start with probably all of you and many more. And we start with thinking about what do you need as a pet parent, the person who's going to have their pet sleep on their bed. They're going to buy them a birthday present. They think of them as part of the family. They probably have a picture of them on their phone right now. They're the people that we're talking to. They are the people that treat them the way that they would want to be treated themselves. Then we think about the veterinarians, the partners in our business, these are the people who slave for hours to be able to give our pets the care they need, to be able to offer them the chance to practice best medicine, the medicine that they all trained for years to be able to offer. And of course, central to all of that, other pets like Tyco, the pet parents like Iris that we really want to support. So these 3 things come together to create the business that we are today and allow us to pay as many dollars in claims. Of course, we're a business, and this wouldn't be an Investor Day without this chart. So this is -- I think I've now spoken to this chart probably I don't know how many years we've been doing this. But for a number of years, Darryl gave me the pleasure of speaking to this many years ago. It is one of my favorite charts. That, coupled with the pet count. This one is the beauty of a monthly subscription revenue business, the predictability is there. By the beginning of any given year, 80% of our revenue is baked. So we know what we're going to see at the beginning of the year, and then we build on it. But look at this chart. What you have on here is our total revenue. Our subscription revenue has got -- since 2014 has had 36 quarters of over 20% growth. This is a market that is just getting started, and we're happy to continue that trend going up and to the right. Now this is one chart that is interesting. Now this is the second one. This is our total AOI and our -- so our adjusted operating income and our adjusted operating margin by quarter. It goes back to 2014. So you've got 10 years on here shown by quarter. And you can see as we -- the AOI, as it starts to tick up back in 2016, moves along. And you can see quite sharply there when we all met last year in 2023, we were seeing a sharp decline in our margin. Now what this doesn't show you is the margin that really matters, our subscription adjusted operating margin. So the story here, our target, as a reminder, is 15%. We have hit it once. We intend to hit it more than once. And you can see, it's moving quite nicely. You see a little seasonality in there by the quarters and then it cut in half. It's really hard to get back up from that when you have that cut in half because we use this money to grow our business. Yes. What we did is we focused. The team came together, they looked at the data, the actuarial team, many of whom, please ask some questions today are here, worked like Trojans to get us back to a position where we now see our margins in Q4 hitting that 13%, and we expect to be at 15% by the end of this year. So that's a huge accomplishment, and we have not wasted the crisis that this presented to us. It allowed us to double down and focus. And I'm very pleased to say that we have more money to be able to spend to acquire pets now. So as a reminder, this event is for you. We want you to ask questions. So if you have questions, I'm going to sow some ideas in your mind, ask questions about a model P&L. Talk to the team about expenses, ask them about our IRR, ask them about where we see opportunities in terms of spending to be able to grow. So let's talk about growth. There's a lot of underpenetrated markets out there. If you look at the chart where we have highlighted, I hope you can see them on the screen. We've got some little gray boxes around countries that we are currently in, and we currently have an opportunity. We've taken our addressable market in terms of hospital count from 25,000, 28,000 to 50,000 with our international expansions. And this is shown in the countries that you can see here that are highlighted in the gray boxes, but a massive opportunity and we're really leaning into that with what we're doing today. And you'll get to ask all of our teams, we have representatives here from the international teams. We have the folks and the North American team as well to talk about how we're going to go and do that. But you can see that with the exception of the U.K. and Sweden, the world is just getting started for this. So let's flip our attention to North America. We crossed the $4 billion mark in 2023. The NAPHIA report showcase that we are now at a $4.3 billion of industry revenue. And while this is not important to Trupanion, it's worth sharing for the second year, we had the #1 revenue growth rate in the category. This is in a year where we saw that margin compression come through. Now I say it's not important because this has never been a goal of ours. We have not looked to grow quickly. We've looked to grow with sustainability to make sure we can offer the best value proposition. And we do that to help 1.6 million, nearly 1.7 million pets today. They are under the Trupanion Inc. umbrella, so that's inclusive of all the pets that we underwrite as well as our core products. So if we think just about our core products, we're over 1 billion -- 1 million pets today. So that is our subscription pets. It's inclusive of our European pets. And we're finally crossed that magic marker. So we're excited to have that milestone, to reach that milestone and in a time when we haven't been growing, particularly for U.S.A. So talk about what's next. Those of you that are astute students at Trupanion, I walked through a similar slide about 2 years ago -- 3 years ago. The market opportunity is still massive. So there's around 200 million cats and dogs in North America today. That includes all of the pets. The puppies, the kittens, the old ladies, the old men, they're all there, and we love them dearly. There are 120 million of those that visit the veterinarian every year. Now they are our target market at a high level because we are going to obviously be solving a problem for them when they get their vet bill. 14 million, has gone up a little bit since last time, 14 million of them are puppies and kittens entering the North American market. And they're the sweet spot. That's where we want to be. That's where we are communicating because we know when we speak to a puppy or kitten owner, they're trying to be the best pet parent they can. We want to get them before the puppy has preexisting conditions, before the kittens has fallen off a curtain. We want to make sure that we're there for them from cradle to grave, and this is the best way to do it. It's the best member experience. And we're looking to have the most sustainable value proposition for them. That translates to a little more than 1 million leads a month. So keep that number in your mind, that's our goal as we think about what do we have as a business to do. And at Trupanion, you will know that we like data, and we like numbers. So we create goals for ourselves. That actually translates to around 1.16 million puppies and kittens entered into practice management systems every single month. That's quite a lot of leads. We're not there yet, so we'll talk about that coming up. But that number is huge. You divide that by around 28,000 veterinary hospitals that are our target audience. There are more hospitals in North America, but many of them are large animal and equine so they're not our target audience. That's around 40 puppies and kittens per month in America, and that's easy. It's nothing. It's a really easy thing to do. Please ask the team about how easy that is when they come up on stage, talk about the fact that it's really bloody hard to get that habit building because that's our stress. They're doing a lot, and we want to help them be their partners. But we do have some success stories, and we're looking forward to sharing with you. Switching gears a little. Hopefully, you can see some of these things on the screen as they come up on -- in front of you. This has been the backdrop of what's been happening in Animal Health for the last 2 years. Back in 2022, we talked about the fact that vets needed to increase their prices. We talked about an industry that was under stress. They had supported everybody, pat some people through the pandemic. They had vaccinated human beings. They had continued to keep their doors open and they were stressed. They needed to increase what they were paying their teams. They needed to charge appropriately and they started to do that. They did it in 2022 for the first time. When they doubled their veterinary inflation rate, it went to 12% rather than 6%. In 2023, they went to 15%. And in 2024, they put in 15% again. You know that story. That's where that margin started to get compressed, and these are the headlines these guys are facing. What that means for us is there has never been a greater opportunity for Trupanion than today. There is a growing need for what we provide, the solution we bring, and the help we can give to both the pet parents, the veterinarians and ultimately their pets. So we're solving a bigger problem today than we were 2 years ago and we're solving a bigger problem next year as we are -- than we are today. So I mentioned those over 1 million leads. Let's see how we're doing against that. We're just scratching the surface. Every single month, we get around 60,000 veterinary leads into the business. This is not our total lead volume. We're just focusing on the vet moat here. That's a 23% lift year-over-year from July to July, in a year where our growth rate has not been at 23%. So I just want you to think about that in context, the focus we've put on the vet channel deliberately, where we've leaned into our territory partners, 2 of whom are here today. They were able to get the conversation started. They were able to remind everybody the solution we bring, and we saw a huge increase in our vet leads year-over-year. Our active hospital number last year to this year. It hasn't changed. Yet our pet count has gone down, our new pet adds has gone down. The team is focused on continuing to keep the heartbeat in the hospitals we have today. They have been diligently going into hospitals to explain the benefit that we have. And as a result of that, we've had a massive increase in our active hospitals that are using our direct payment. Please ask the team about questions regarding operational efficiencies, claims payments and the huge milestones that we're crossing this year to support more and more of these people. But more vets that we've been working with for years are saying, I need the software. My clients don't have the money to pay for this anymore. That's a solution that we bring. And here is a little tidbit for you that I don't think we've necessarily shared. So the vet leads. So we have a vet channel and a non-vet channel, it's like veg and non-veg. We -- which I find interesting because that's -- it's not meat. But anyway, so conversion rate in non-vet channel is 2x the rate from a non-vet. So we want to go and get those vet leads. We know we can talk to them. We know we have a solution to the problem. And that's a massive impact when it comes to IRR, how much money we're spending to convert those pets is a lot more efficient to get a vet lead than it is to get a non-vet lead. So whether that's a breeder, a shelter, social media lead, all of the different lead volumes that we get. And also interesting that adds to the IRR equation is the retention rate. 80 basis points difference on a monthly retention rate uplift for the vet channel than a non-vet channel. That comes back to the conversation that you have in the hospital when someone's facing, should I keep it? My price has gone up every month, doctor, I don't know what to do. That's what happens. The power of the white coat, the veterinarian saying, you need Trupanion. This is really important for you now. It makes a difference. So I already gave you a teaser here, ask about our conversion rates. Ask about what's happening on the phone, on the web, the combined, especially with all these rates when you think that it will be really difficult thing to combat, people. I'll give you a clue, it's not as hard as you think. So it wouldn't be right to not have a reference to our Canadian TP, Shelley Skedden, many of you have met her. This is one of her hospitals. She has Team Skadden out in Newfoundland, Canada. This is just a case study. This is not the only hospital we have performing at this level, but we don't have many performing at this level. And we wanted to just showcase for you that there are 2,500 enrolled pets in this hospital, which also -- my understanding, and Jason can give you more context on this later, is serve as a bigger population, too. 45% veterinary referral rate year-to-date. They have a 70% examining offer activation rate. That is double the average of any other hospital that we have. 7 out of 10 people that get their Exam Day offer, they end up enrolling. We paid $2.6 million in invoices since 2012 and 93% of those are paid through our vet portal. That is why we're here. That's the reason that we do this, because we are solving that problem for virtually every single pet parent that goes into that hospital. Please ask questions about vet portal and how it's doing. And 86% of invoices are paid through in less than 5 minutes. Imagine a difference that makes. Those of you that have been in a vet hospital, when you're swiping the credit card, the amount of time you'd have to take in less than 5 minutes. It's actually less than 3 minutes. I think, isn't it, John? He's in the back. He'll answer later. Okay. So let's talk about how we continue to build on this. Vet portal, it's a crutch of what makes us unique, along with some pricing elements that teams can talk about later. But that's only part of our focus on member experience, that direct payment is critical. It solves a problem. Our service levels reduce the more pets that we're able to help directly. They're not the pet parents aren't calling in. They're not chasing an invoice, not questioning do we pay something, where is it in the process? Am I going to get fully reimbursed? And our value is felt. It's felt in real time. And we can add a lot more. So the team will talk to you about the things they've been doing over the last 18 months as those prices have gone up to really reinforce the value, especially for those people who are not using the product. If they're seeing that increase, they may not even know that vet costs have gone up that much. So we need to find ways to reinforce the value that we bring to their life. Of course, we still have our distribution channels outside of the vet. I don't want to forget these folks. So State Farm, Aflac and CarePlus by Chewy, 3 distribution channels that we introduced as part of our 60-month plan. And you'll remember the idea here is to be able to speak to new pet parents as they're finding their way, whether they're buying a pet bed or they're sorting out their worksite benefits or with their State Farm agent. In each of these ecosystems, we believe we're touching a different pet parent than we touched initially at the vet, and it gives us an additional opportunity to speak to them about who we are and why Trupanion is good for them. Ask about the distribution terminals, please? And also, how we're prioritizing capital against these opportunities because it's not all the same. We model them to the same P&L, but they are not all getting the same amounts of money. So with that in mind, we've got distribution channels. We've got this increasing need for Trupanion. But how are we, as Trupanion, evolving as we grow? We are evolving our culture. Culture always evolves, it grows. It's a living thing. And we're also evolving our processes. So we're not the scrappy little puppy that we once were and needed to be, but we're also still nimble and energetic and lively and probably a little [ visual ]-like, for those of you that know what a visual looks like, I know some of you do. So we are being very graceful on how we do this, and we're adapting who we are and how we are to be able to take advantage of this moment, to be the people that can lead the category forward. At over $1.2 billion worth of revenue today, we cannot afford to let people down. With 1 million pet parents being on us, we cannot afford to not be here. So we're doing things a little differently. We need to take our time, and we're introducing some priorities. So I'll start with the little blue circle. We want to grow in more areas where we're actively -- we're actually priced appropriately to value proposition. We have a little demo that we hope that you'll enjoy later to show how we're thinking about that when it comes to our margins. How do we ensure we're leaning into pets that we can't offer that value proposition to. And we want to spend in our most efficient channels and we want to make sure we're putting profitability over growth. When we think about growth, we're not growing at all costs. It's not just going, get as many pets as we can because remember, being #1 isn't what drives us. Being the best and adding value to our members is. We want consistent growth. So there have been times in the past where we've been able to take -- make the moment and take advantage of that moment. We will, of course, do that if something was to happen. But also, it's hard to manage our business when you've got -- you're almost kind of getting that growing pain or being a little company and being a big company, what comes with that is a lot of different processes and needs and demands of that member and you need to be able to help support every single one of them the way that we want to. So we're looking at consistency of growth, and we prefer that over spikes. Just like that model. We like that model and it goes up. It doesn't have to do that. It can do this. It's still going to go up and to the right. And then finally, capital allocation. So prudent capital allocation. We've talked about free cash flow. We've talked about a little bit of a different thinking there from a balance sheet perspective. And we really want to reinforce that when we are allocating PAC and we're allocating our PAC dollars, as our IOI starts to go up, we will do it prudently. There will be a lag. We're not going to expect to see an immediate acceleration just as there was a deceleration that came through slowly when we stopped spending, we expect the same on the way out, but we'll be allocating within our guardrails. And we'll do it very deliberately. So I promise you, I just have a couple more slides and then the team will be here. So our focus over the next 12 months. I think it's probably quite clear we're very member centric. I hope it's quite clear. We want to ensure that we can continue to give people the value proposition, which, of course, means that we need to ensure that we have all those data points coming through to allow us to do that. We want to enroll more pets. We haven't -- we've got 1 million today. I hope that we'll have 2 million in the not too distant future. Who knows, it may grow just like the claims cost. But we're going to do it sustainably, and I really want to stress that. We want to do this in a way that will help those pet parents recommend to their friends and those pets and next generation of Irises, who I think is probably an advocate of Trupanion's. And then we want to scale our expenses. So we've talked about doing this for a long time. We're on the verge of it, really helps when you've got technology that's delivering. Please ask Fawwad and John more about that, and provide exemplary partner support. We can't do any of this without our partners, our territory partners and the veterinary partners and the partners that help support us in the industry. We are part of the animal health ecosystem, and you're going to hear an awful lot more from Trupanion and Animal Health land as a result of that to really demonstrate the solution we bring from that level all the way through to shelters and to those who partner with us today. And kind of -- I couldn't have this slide without having this point on here. You can't do any of this unless you price appropriately. Our pricing has to remain accurate. The pricing team see and hear a lot from me, and they probably wish I would go away, but they are a brilliant team who've done a huge amount. And I think what they've started is going to be a wonderful thing to continue, but it will be a massive focus for us as a business. And all of it ultimately helps us to help more pets. So last slide. We're going to talk about our 60-month plan. So we have got 15 months left of our 60-month plan. And as a reminder, on here, you have our goals, which revenue and intrinsic value per share both of which were 25% year-over-year growth by 2025. You can see the top is going quite well, I would say. It's above goal. I remember, we talked about we'd feel good if we were at 20%, we'll be doing backflips when we were at 25%. We don't need to do backflips. I'm a little older. If I keep back flipping -- not that I can backflip, but if I could back flip, I imagine that my -- I would break my back. We got to 26%. Our AOI is a little lighter. We would expect that having just seen what that chart did. But I do think that the team has got significantly more confidence in terms of our journey towards making that greater. When we get to the CAGR at the end of 2025, we will continue to make progress this year, and we'll make even more progress next year. Of course, with the caveat that we assume inflation will remain at 15%. So without further ado, what I would like to do, Laura, can I do this? Or do you want to speak? No, I guess -- okay. I'd like you to meet the team. We have a basket of kittens on the screen, but you need to not be looking at the screen, you need to be looking at a team. We're going to go along like this and then the folks that are coming out are going to introduce themselves. You do have booklets in front of you that introduce the team, their bios, who they are, what they do, but I'd love you to speak to them and hear from them, and they are here for you to answer your questions. While they're all settling in, noisily behind me, I will just tell you that what you don't know about me is I actually have my 11th year anniversary next week at Trupanion. And I have 2 girls in my life. They are my precious dogs. I have Mable, an English Bulldog. Like Darryl, I got a bug several years ago. And even though we know we shouldn't, you can't help resist them. And I have a little [ multi-poodle ] called Gerti. She is quite special and unique, as they all are, and she's one of the reasons -- they're both the reasons that I'm here today. So I'm going to hand over to Rich, I think, who's going to stand up and say hello. So guys, this way around. Who are you, where you're from, how long have you been here, and what dogs do you have, cats do you have?

While I'm slightly larger than the kittens in the basket, my name is Richard Coe. I'm based in the U.K., founder of Smart Paws or one of the founders of Smart Paws. We've been part of the Trupanion family now for 2 years, just over. I'm now responsible for underwriter relationships and underwriting development over in Europe as part of our development across Europe and Trupanion. And I have 2 dogs. One is an absolute loon lurcher, cross between a saluki and a weimaraner. Got an older boy who's a springer dog, who's now 14 years, much slower. Angus, the angry cat, and 3 chickens.

My name is [ Dennis Kinger ]. I'm the country manager for Pet Expat by Trupanion in Czech Republic, Slovakia and Belgium. I joined the company 8 months ago. And I'm also a very proud pet parent. So I have a black Labrador, 3-year-old called Yoda; a Maine Coon called Johnny; and a British short hair called Bona. So nice to meet you all.

Hi, everyone. Good morning. My name is Mary Rothlisberger. I'm our Vice President of Growth Insights. So I lead a data analytics team that is really collaborating with all these folks here to really use data in conjunction with our growth strategy. I've been at Trupanion also for 11 years, like Margi. And I have one 9-year-old labra doodle name Gretchen, who is still puppy.

Good morning. I'm Dewald. I lead our learning and development team. I'm the resident pet sitter. I love traveling, so I get to pet pets around the world. I'm in the market for a Siamese kitten, which I'm very excited about. That's going to happen later in October that I might be getting my kitten. So yes.

I'm [ Marci Akiama ]. I hit my 4-month mark with Trupanion this week. I lead the People business partner team and the talent acquisition team here at Trupanion. I have 2 dogs and 2 cats. A boxer shepherd mix, Mika, she's the only other female in my family; and then we have Ren, our shepherd lab mix; and a tabby cat named Eli; and Sasha, who's my Siamese cat.

Hello. My name is [ Teddy Edmonson ], I've been with Trupanion for 1.5 years now. I look after -- I'm a territory partner in British Columbia. I look after most of British Columbia in Canada. And I have 2 pets. One name is Stormy. She is a dachshund Boston terrier, 14 years young. And I have a dachshund, 9 years old who is alive because of Trupanion.

Hi. Steve Rose, leading Trupanion Australia. I've been in the business for 6 years. Dad to Wiley, who is a 11-year-old mastidore. That is mastiff cross labrador. I have 2 cats, Pippy and Jelly as well as 11 Pecking ducks and 2 ponies.

I am Sven Isenberg, I'm the Managing Director for Smart Paws in the DACH region. Basically, this means Germany and Switzerland. I have boy, 10 years old [indiscernible] Balu, who joins me every morning for a nice run outside of the River Rhine in my hotel.

Hi. I'm Asher Bearman. I've been at Trupanion for over 11 years. I do Corporate Development and international, which means I work closely with a lot of the guys you just talked to, Rich, Dennis, Steve and Sven and Simon, who you'll meet in a second. And I have always had dogs. And most recently, I now have a 4-month old Shih Tzu Pomeranian who is fond of pooping in my office while I'm on a Zoom call. It's entertaining.

Hello, everyone. My name is Wei Li. As VP of Finance and Corporate Controller, oversee accounting, financial reporting, treasury and financial operations. Have been with Trupanion for 6 years. I guess, I bring a little bit of diversity to this group. I currently don't have any pet, but I enjoy being in the office, hanging out with all the lovely pets my colleagues bring in to the office.

Hi there, everybody. [ Sarah Helman Sparks ], I'm the Senior Director of our Financial Planning and Analysis team. I've been here for 7 years, anniversary is actually next week. And I'm a proud pet parent of dog name Leo, a miniature Australian shepherd and 3 cats, Sophie, Phil, and Frankie.

Hello. I am Jordan. I'm the VP of Data and I have I've been with Trupanion for 9 years. I have a husky, a 14-year-old, Tonks; a 15-year-old, Lupin, who's also a husky mix; and then a cat, who's 15.

Good morning. Just making a mental note, we need to send away a box of puppies or something, get them on the Board. I'm Jason Wasdin, I lead our Canadian team. I've been with the company -- so fortunate to be with the company for almost 15 years. I've got 3 guys on my own, I've got a 14-year-old cavalier King Charles spaniel. I've got a 7-year-old toy Australian shepherd. And if you don't tell the other 2 this, the love of my life is a, I think, 3-year-old Australian cattle dog, but I call him an Australian cuddle dog because we have a special bond. I watched him be abandoned before my very eyes one evening and took him home, wanted to find him forever home. Little did I know that home was going to be mine. So he tugs on my heart string, so we got a good thing going. So good to see everybody.

Hello, I'm Alan Schramberg, Director of Actuarial Insights. Been at Trupanion for 7.5 years now, and I have a 6.5-year-old golden doodle named Harper, who you'll see around today.

Hello, everyone. My name is Aaron Konichek, Head of Business Operations at Trupanion. I've been in Trupanion on for 4 years now, and I have a 4-month old who also likes pooping in the house named Moose. He's a labrador.

Hi, everyone. I'm Suzanne Cheadle. I'm the Director of Digital and Direct Marketing. I've been with Trupanion for just over 2 years, and I have a large and very lovable Bernese mountain dog called Curing, who thinks he's a lapdog. So great loads of fun.

Hi, everyone. Good morning. My name is Erica Lee. I'm the Director of Sales and Retention in the contact center. I've been here for 12 years. Actually, yesterday was my anniversary. I have an 8-year-old Boxer named Harley, a 2-year-old cat named Marshmallow, and an 18-month old American Bully named Ice Cube, and he is definitely the tornado of the family.

I guess, I'm next. Hopefully, this is working. Hi, everyone, Fawwad Qureshi. I have been here almost a year. It will be a year actually next week. And of course, I lead our finance function. And as far as pets, we have Siberian named Luna, She's a cat. And yes, she's a cat with dog-like qualities, so -- we don't quite have to walk her, but she's quite friendly. So we have a good thing going.

John Gallagher. I've been with Trupanion for 8.5 years, Chief Operating Officer. Two dogs, Willow and Milo. Willow is a Trupanion -- she is here because of Trupanion, and she's had over $55,000 in claims due to a blood disorder. And then Milo is my little shadow because I can't go anywhere in the house without him being right by my side.

Good morning. I'm MJ Hewitt. I lead the U.S. market, which means I spend all of my time awake and sometimes sleeping, thinking about growth across the U.S. I will hit 15 years on December 4 with Trupanion, and I have a grumpy old man, a miniature schnauzer, named Rex. And I have a Princess, my little pony. Pomeranian Yorkie mix named Winnie.

Good morning. My name is [ Hayden Embry ], I'm a territory partner in the Atlanta area. We have Georgia, and we go into Chattanooga, Tennessee as well. I've been with Trupanion, it will be 3 years next month. I have 3 pets, Maggie, a very masculine shichon with a pink collar that I walk around every day and get laughed at in the neighborhood. And then 2 cats, Oscar and Lilly.

Hi. I'm Emily Dreyer. I've been at Trupanion for 11.5 years, and I support our growth through retention, data insights, and the development of our new products. I have a 6-year-old dog named Timba. She's a rescue from Spain. Unlike the opposite of Fawwad, she's a very cat-like dog.

Hi. I'm Kelly Nealson. I lead our customer marketing team looking after member experience, life cycle and retention here at Trupanion. I've been here for 4.5 years. And I'm a proud pet parent to a 10-year-old spaniel mix named Ali. He enjoys coming into the office with me most of the time.

Hello, everyone. Dr. Steve Weinrauch. Really nice to see some familiar faces in the audience who feels like after so many years are also part of the team. So one day, maybe we can have all you guys get up and introduce yourselves as well, too. But I'm a veterinarian, Chief Product Officer, Chief Veterinary Officer. I've been with Trupanion coming on 11 years now. My dogs currently are Fergus and Flora. So a Russell Terrier and a Scottish Terrier puppy. We've got -- much like the other Dr. Steve Rose over here, I have 11 chickens now. About half of them are rosters, which is loud. And a bunny called Harry.

Hi, everyone. [ Chris Kerns ], General Counsel, Legal. I have an all-white Husky name Moose, who is a rescue from Puerto Rico. And I joined Trupanion earlier this year. Nice to meet you all.

Good morning. [ Adam Smith ], SVP, Legal & Regulatory. I joined earlier this year as well, about 8 months ago. My daughters convinced my wife and me to get a very fluffy black and white Pomeranian puppy named Bandit.

Hi. I'm Brenna McGibney. I now think I can talk about my tenure in years because I've hit 2, so it's no longer months. I have a small miniature poodle named Angus that wasn't initially mine, but we had a bit of a mutual love affair so he became mine. And I lead the L&D people ops and actuarial teams.

Hi. I'm Mike Gray, Head of Actuarial department. I have a 14-year-old cat, Carlos. I'm in the market for a dog. Unfortunately, Carlos does not approve of pets, so I'm going to have to wait on that a little bit. And I've been here 4 years.

[ Steve Ireland ]. I joined, I think, the same day as Adam, about 7 months ago, SVP of Marketing. I have one very neurotic Shih Tzu, who is 10 years old and is now getting used to the fun Seattle weather.

Good morning. Hi. I'm Brian Daley. I am fortunate enough to lead the contact center teams, including customer care retention and phone sales. Been here just about 3 years. I have 2 dogs: rottweiler, Hudson Stripes; and Daisy, the golden retriever.

Hi, everybody. I'm Jacquie Miro. I head up our claims team at Trupanion. I've been here just about 12 years. Jason, you can sign me up for a box of puppies, too, if you don't mind. We're in the market for a new dog, and I anticipate we'll be getting one soon.

Hi, everyone. My name is Simon Wheeler. I head up -- I'm EVP for Trupanion's International business. I have 2 horses that are treated just like large dogs. And I also have a beautiful little Border Terrier that, unlike Suzanne, I think it's a size of a Great Dane and has the most and uncanny way of knowing when I'm about to travel and give me totally the cold shoulder. I've been at Trupanion just about 3 years.

Great. Thank you, everyone. Okay. So we're going to get into the Q&A portion of the meeting. So we'll go for the first session, maybe about an hour. So if you have a question, please raise your hand. Gil, up here, our Director of IR, he will get a microphone in your hand. So just for the benefit of the online audience, if you could wait to ask your question until you have the microphone, that will ensure that everyone can hear. So who wants to kick us off with the first question? Give it to Jon.

Jon Block at Stifel. No one else took it, so I figured I'd take it. Margi, thanks for the slides. I think I caught this metric right. It was 1.029 subscriptions and that's running below our estimate. I think you talked about ramping some of the initiatives into 3Q, 4Q. We're not really seeing that convert. So maybe if you can just give us a little bit of color there, that would be helpful.

Yes. Thank you for asking the first question, Jon. Good to see you here. So when I talked in the priorities, financial priorities, one of the things that I want us to be really focused on is ensuring that we have an immense discipline in our PAC spend as we bring it back to market. It took a long time for us to turn it down. We felt like a long time, actually didn't show up as a long time in our numbers. But the impact of that was quite slow. It's going to be the same -- have the same lag effect as we go up on the other side. So we started to deploy more PAC in Q2, but it wasn't meaningful enough to make a huge impact. We're starting to see that build. And so those numbers are not really reflective of that build that we're bringing up now. And towards the back end of the year, we're going to see moderate growth, but we're going to see really -- my expectation is that takes big hold in Q1 of 2025. So it is the gross adds that are making that number look a little bit slopier. And retention overall is looking strong.

Okay. So sorry, just to push you a little bit. I thought on the 2Q call, I have to pull the script, but I thought you sounded a little bit more upbeat on gross adds not inflecting, but getting stronger 3Q, 4Q. Now you're saying more push that into...

No, no. We will go up. And I am upbeat about it. I think from a growth perspective, we have a massive opportunity. What I want to be very diligent is that we don't just throw money into it. It's -- if you throw money in, you might grow quickly, but the way that, that money behaves is going to be very different by channel. And there are only so many pets going through our channels right now that we see. We can't suddenly go and get hold of them quickly. So I'm upbeat. I was upbeat in Q2 and I'm upbeat now and will be for the rest of the year and probably the rest of time, sorry, team, because we are starting to deploy more. We are in a position. In Q1, we were holding back. We were having conversations being very disciplined about we're not ready to spend yet. In Q2, we started to relinquish a little more PAC, and we'll continue to do that as we go through the back half of this year. I could see that. I can see it Q2. The impact of that is going to just have a lag, a delay. But we will see an increase in pet count towards the end of the year.

Okay. And just last one. And I think it just gets at one of the questions that you wanted us to -- or to go down the road. I thought you threw up there, vet lead conversion was up 23%. I think it was July to July. Obviously, it doesn't look like gross adds are going to grow at that. And I know that's one channel. So maybe just talk to us about conversion a little bit. And then the second question that I've got that I just can't reconcile is if we look at Vet CPI, it has started to moderate. It went up and to the right but it's moderated and you're still building in this 15% assumption, I believe, in inflation. So why would you have that sort of implied decoupling? Your ARPU used to be up 6%, Vet CPI was up 4.5%. It seems like now you're assuming 15% and vet CPI might be up 8%, so there was that premium and spread. Maybe if you could talk to us a little bit about that.

Yes. No, definitely. So the first question. Just as a reiteration on that number, where we saw 60,000 vet leads, and we have the 23% year-over-year growth, that's related to vet leads, not increasing conversion rates. So just to make sure that, that point is clear. So we've seen our vet lead. So that's the Exam Day offers coming from the vet channel up 23%. That conversion is not up 23%. So I just want to make that point. Steve, do you want to -- can you pick up conversion just in terms of what we're seeing. And then, Michael, if you can speak to CPI and the dislocation to your point between CPI and Trupanion experiences, please?

Yes. So to Margi's point, we have seen more leads come in from the vet channel. We've seen more leads come into in non-offer quotes. And I would say web conversion and combined conversion have stayed relatively flat from a percentage perspective, even with those increased leads, which I look at as a positive. Now one of the things that we're working on closely to try to increase that is our messaging, really talking about why we're here, why we're different, bringing to life, I think the problems that we solve, not just for pet parents, but for the veterinary community. I spent the last 7 years working for Mars in the vet side of the business. I ran marketing and corporate affairs for Pet Partners and for Blue Pearl, which was a large specialty group. And I think that we have a really big opportunity to take our messaging and make it hit home more and show that we're not just a unique solution to make life better for pet parents, but we're a unique solution that can really help the vet community practice the medicine that they know will save pets. So I think as time goes on, you'll see us start to infuse more of that messaging in and drive that conversion rate up a little bit or drive enrollments up a little bit. Obviously, if we have more leads coming in, that could push conversion rate down. So I kind of look at the enrollment end of the stick.

The CPI question is -- I'm going to answer in 2 parts. One, CPI in August did tick back up to 7.6%. It had come down in June, July to 6.4%. We were -- we look at CPI carefully every month. Again, early in the morning that's released because we do track directionally with CPI. The CPI is a different metric. It doesn't connect directly to our trend, and there's a couple of basic reasons why. CPI is a wonderful statistic. It is research. They have a market basket of goods that they measure year-over-year. They sample the market very well, and it's very stable. It's a great metric. Our business is not done that way. We cover whatever claims come through the pipe. As you heard this morning, we encourage our members to use the vets as differently than they would if they were uninsured. And so we are naturally going to see claims that don't align perfectly with this market basket approach. They are directionally correlated but they're not the same amount. So we are still seeing trends in that 15% level. We did see a little moderation as CPI saw moderation but then it leveled out and we're still using 15% as our forecast. It's a bumpy road. It's not a perfect line that you could just follow. I wish it was a little bit more perfect, but we're following the bumps, and we're sticking with 15%.

And if I can just add to that as well, to give a bit more color. So you heard -- hopefully, you heard the call whether the lady called in and said, my dog has had an accident in the dog park, it's been attacked. What's the coverage? Where is it -- is it unlimited? It's not limited, right? She wanted to know if she could say yes to the care that, that pet was able to get when it needed it. When the vet said, okay, this pet needs something, whatever that would be. The difference with a CPI basket of goods is exactly that. It's not the services. We are there for the unexpected. We are there unlimited, which means that we're going to be able to give people greater access to care. That's why the 2 don't necessarily correlate. But to your point, there is a trend, there is a correlation, but there's a gap because we provide more than a pet parent would otherwise get. Steve, would you add anything to that, just to help bring more context around the differences in practice from a Trupanion product versus a non? And why CPIs got that disconnect?

Yes. Access to care and utilization of care consistently have increased. Our job is to shut up and pay the bill. Whether they go to somewhere that does a cruciate repair for $800 or whether they go somewhere else that charges $4,000. We don't create networks. We don't direct care. We're just there to allow pet parents to say yes to the kind of care that they're looking to have for their family. So these things are -- they'll be consistently changing and our methodology will not.

Josh Shanker from Bank of America. Trupanion has a number of constituents. Obviously, the customers are a very important constituency. You obviously have veterinarians who are making recommendations often and therefore, you want to be a reliable service partner, also the regulators and the pricing. If we go back and time about 18 months ago, obviously, price wasn't adequate given what was going on. One party is not a constituent are people who are not customers, and they might like the coverage. To what extent did Trupanion engage in closing the aperture of access to new customers, whereas they were happy to provide even underpriced business to existing customers because that was the guarantee? When we look at these conversion statistics, to what extent is Trupanion saying, we actually -- in certain places, we don't want the new business, but that obviously affects the vets who want to be able to recommend the product. And so when we're looking at these conversion statistics, to what extent are they artificially being impacted by a lack of desire to onboard new customers who currently have no responsibility to give care for?

Yes, that's a great question. And actually, it sets us up to showcase something that I've been excited to share with this group for a number of months. So one thing that's unique about Trupanion that I don't think is typically understood is the bulk of our lead volume comes in the vet channel. So we do not go on to social media, onto paid search and shout. We are educating about Trupanion for the first time. Our leads find us through the vet or through the breeder or through their friends. So there's already a level of control, if you will, around how we go and reach those pet parents initially. So if you've got a territory partner, and the TP is going to speak to this far better than I can, they are going to very deliberately and purposefully route their hospital visits or route their hospital visits based on where we're priced appropriately. So they will not go and knock on every door and then proactively generate leads. There is naturally fall out. You're actually going to get people that come through. We would still enroll those pets. We're just not proactively chasing them down. So when you think about -- we've talked a lot about lead convert keep, we generate the lead volume. Conversion off the back of that is then paid media, pulling people through the funnel and helping them to really understand why Trupanion. If we're pulling back our PAC spend, we're not going to pull through the pets and chase down, if you will, the pets that would be mispriced. We think it's wrong to do that. We think it's misrepresentative of what products they will ultimately get. And so we've been able to turn off that PAC spend, which means you're not actually wasting the lead that you're getting. You're just not getting it in the first place. But Aaron and his team, Aaron, I'm going to ask you to do a bit of a demo, if you will. Based on this thought process, Josh, we were trying to work out, okay, how do we give the team tools that will allow them to really lean into the information that we have to say, grow here, don't go here. And so Aaron, with help of the actuarial team, he is and actuary himself, created the tool that he's about to demo. So Aaron, do you mind showing?

Thanks, Margi. So hi, everyone. As a reminder, Aaron Konichek, Head of Business Operations. You might remember me from last year because you all asked me lots of questions about California because I was part of the actuarial team. So I worked with lots of brilliant people on the actuary team and those brilliant people came up with fantastic cutting-edge tool that I'd like to share with you today. As a reminder, this is a demonstration of data that is not real for competitive and confidentiality reasons, of course. And so just to explain it a little bit, this is a way that we can target our marketing spend in the same ways that Margi was discussing that we can make sure we're acquiring the pets that we want to acquire. And now to confirm, we obviously can't stop someone from signing up if they want to sign up with us, but this helps us direct our spend in the right direction. And so on this map, you'll see some different colors. As a reminder, it's dummy data, so it's not representative of the percentage of markets. We're comfortable and confident growing in 85% of markets right now. And so the colors that you'll see, the yellow color would be maybe cautionary. Red might be, we don't want to grow in this area right now. And then green and blue would be places where we'd want to be targeting growth. And so as you can see, we can drill into a particular region, if we can push play on the video. We can drill into a particular region in a market. And then inside that market, we can drill into a state and then down into the granular neighborhoods that we so diligently have priced and broken out. And so as you can see, we're going to Massachusetts here and then into our South Boston region. And we're able to really drill down and get granular with the way that we're targeting our marketing strategically. So that would be a layer 2 neighborhood and then we get into smaller layer, one neighborhood tier.

So Aaron, as we get new rate approved flowing through, this model gets updated?

Yes, exactly. So when rates go live in a new state, obviously, it would update. And we're -- on the actuary team, they're spending a lot of their time trying to make sure there's as many green and blue areas that we can grow across the country as possible at any one time. But even in states where you find that we might be mispriced in the state as a whole, it still gives us a lot of opportunities to target our marketing such that we can still grow in that state.

Thank you, Aaron. MJ, as a U.S. leader, how do you use that tool to grow? And I guess, coming back to Josh's question, how do you make sure that we're not effectively reaching pet parents that we don't necessarily want to give them the opportunity today to join us because of our pricing?

So what this tool does for us is it gives us a view under the hood. So gone are the days where we get a report that says we have -- we're mispriced in this particular state. We need to wait for these rates to come through. Pause on the resources that you're putting into growth there. Well, now I can look under the hood and I can see and break that down to a neighborhood level to say, the state is not close to me. I just need to figure out how to be smarter across our many, many pricing categories and where pets are, what age they are, where they're coming from, what hospitals they're going in, what neighborhood they received -- going to a neighborhood they receive care in. What's great about our territory partner model is that they've spent years building relationships, and they know these territories in and out. So when I show them this map, they can name every single hospital that's within one of those neighborhoods. They know who to go talk to. They know how to focus the conversation of what's being educated and what pet parents are being communicated to. And if you think about this from a growth perspective, we've grown in pet count, we've grown in leads, but what we've also done over the last year is grown in our footprint. Where our leads are coming from. We've extended the number of hospitals that are actually proactively having the conversation and providing Exam Day offers to their clients by 13% across the U.S., which means we have a lot of new hospitals that territory partners have focused on because they have this data to say, I'm going to stop working necessarily so hard on this particular hospital, and I'm going to go expand my footprint to these new hospitals in this neighborhood that's priced accurately.

Let's presume that maybe the wrong word is conversion and might be the leads that your appetite for leads was less in 2023 than it was in 2021. To what extent, given the lead generation, 60,000 per month, is that suppressed that if you had pricing correct everywhere you'd want to be, would you be looking for 80,000, 90,000 leads per month?

Yes. So we get over 110,000 leads on average a month. That's the vet leads that you're seeing up there. So when we're focusing on vets specifically because that's our heartland and really kind of the belief that we're working through, I think the goal would be to get to those 1 million that we shared, that's at least having a conversation. Then as we -- you're right, we were not looking to grow as quickly in 2023 as we were in 2021. A lot of the decisions there were around how do we deploy our PAC most efficiently. And we knew with Territory Partners the beauty of the Territory Partner model, which has been really hard for these guys over the last 2 years is that we do not pay anything unless we have enrolled a pet. So in terms of the ability to be more efficient with our PAC spend, Territory Partners have had to write shoulder to shoulder with us as our partners, as they always do, and a huge thank you to not only those in the room, but they've had a really tough time in the last 18 months. It's been difficult for them, but they've been going out there and that's testament to the model and how it works and how it feeds our lead generation. Our goal though is to speak to every pet parent, every puppy and kitten that's going to the vet, and then we will overlay additional channels to speak to them. Emily, do you mind talking a little bit about PAC allocation and how your team thinks about planning with that vet as a foundation and how you overlay breeder paid media, just other PAC deployment considerations you have?

Yes. So when we look at our PAC spend, we're largely bucketing that into 3 different categories. We're looking at our lead spend, our conversion spend and then our cap or retention spend. What you saw is we've gotten more efficient over time. A lot of that is to what Margi was saying in that We pulled back on some of our conversion spend. not because it was inefficient, but because we had to make some tough decisions, and we knew that we would still get our growth through that. So as we're thinking about planning and turning spend back on, we're leveraging tools like Aaron just showed you. We're leveraging all of our data to figure out exactly how much can we afford to spend to acquire a pet in this area, in this channel and being really diligent about measuring that against what we're actually delivering and being able to target our spend appropriately. So for example, we know that we can spend a certain amount to acquire a puppy in BC from a vet hospital is a different acquisition cost than a puppy in BC from a breeder.

Maria Ripps from Canaccord. I just wanted to ask about sort of the competitive environment more broadly now with JB sort of acquiring Pets Best. How does that change sort of the competitive dynamics in the space? And any color you maybe can share on what you think the strategy sort of maybe in the pet insurance vertical with multiple brands? And sort of how would that impact the continued sort of growth in consumer adoption?

Great question. I'll grab that one. It's -- what a great opportunity when private equity comes in over the next 5 to 7 or however many years, and invest cash to grow this category as a whole to get people to understand that insurance is something that they need. That's great for the veterinary ecosystem and its entirety. What a greater opportunity is for us with 170 territory partners in the field for many, many, many years with relationships with hospitals where we can differentiate ourselves. So when we look at private equity that might own, say, 14 to 20 different insurance brands that are branded differently, but could also be seen as a commodity to point out who we are, what we do, what our differentiators are, all at the same time as we have awareness going on in the channel, that is a fantastic opportunity for us here.

And just in terms of what we're seeing, I'm curious, Brian, your team in the contact center from a sales perspective, have you felt that -- are you hearing more about competitors? What is the overall noise from pet parents?

Yes, it's a good question. I think in a market that's about 4% penetrated. Our biggest competitor is still typically your credit card. It's Visa, Mastercard, Amex. So we do hear about competitors. We have talking points to really showcase our differentiation to each of them. But again, at 96% not penetrated, that's the people that we're mostly talking to.

I mean, I'll just add from a personal experience. So there are 2 other people in this stage with me that were a part of this journey when I worked Petplan with Allianz and the U.K. market was not a 25% penetrated in 2007. In 2007, Tesco, which I'm sure many of you are familiar with their brand, the global brand came into the market, and they were at that time, I think, 1 in every GBP 2 spent in the U.K. As Petplan, the specialist pet insurance provider, we were scared. We were the leader and we thought that suddenly, they were going to come and eat us for breakfast and lunch. The reality was what they did is they normalize the concept of insurance. They bought it to every single consumer at checkout and the supermarket checkout not a checkout in the vet. And they were able to instill a seed in someone's mind to then go off and start to research the best possible solution for what they were looking for, and that was Petplan. So we grew through that period. And the same thing will happen today because people trust their veterinarian there is a strategic reason why vets are the moat of this business. It is critical for us to partner with veterinarians because if you choose a product online and then you go to your vet and your vet says, why on earth did you buy this product? It's rubbish. The pet parent is going to listen to them. They will immediately go back, do their research, look at what Trupanion is and how we're different, and they will have a better understanding of why they would want good quality medical care that the veterinarian recommends. And that's why we focus so heavily on the vet channel. So I think JV coming into the market is, to echo Steve's point, it's a wonderful opportunity for us as a category to finally have some more cash coming in to help educate and raise awareness. There is no doubt that they will do that. We need some good quality, high-quality competition. And with as many brands as they have, they will have to be focused on pricing appropriately. That's what we have lacked from a competitive standpoint. We have consistently been up against people who come in and they sell too cheap and they skyrocket their rates at the end of life when pets need the most, and that's not good for the category. With JB, I think we'll have a very different high-quality competitor, and I'm excited to see what it does for everybody because to Brian's point, a 4% penetration when there's 1.14 million puppies and kittens every month, that's a long way to go before that's a problem for us.

Got it. That's very helpful. And then as it relates to your other business, how does this acquisition sort of impact the pace of Pets Best subscribers migrating to a new underwriter?

Yes, I can maybe give a little bit of color on that. So we've spoken about it in the past calls. From a Pets Best perspective, our other segment primarily comprised of Pets Best. That business is in secular decline, so it's been rolling off. We talked in Q3, it was sort of the peak in terms of total pet count. And then subsequently, it's been declining Q4, Q1, Q2. In terms of the pace of that, obviously, it's dependent on, first and foremost, making sure that we're doing the right thing for our partner and making sure that from a customer perspective, they're getting the right experience. I think the benefit of that from our standpoint, and we've talked a little bit about this from a financial perspective, it frees up a significant amount of capital. And so the capital consumption that Pets Best is occupied in part because of the growth. So as some of you may know, the way the risk-based capital works is one of the factors is the growth rate and the growth rate has been very high. So if you look at Q2 year-over-year, a year ago, it was north of 32% year-over-year growth. If you compare that to this last quarter, it's $9.2 million. And so I think that was the first single-digit year-over-year increase in revenue since, I think, 2016. So our expectation is that business will continue to decline. The majority of the revenue because you'll note that revenue is still increasing is due to ARPU. So they're going through the same thing that we have been going through in terms of flowing pricing through. For us, it's loss sensitive. So while it contributes a meaningful amount of revenue, it doesn't contribute a meaningful amount of profit. The profit profile that we talked about back in Q1, I had said that, that was roughly going to be the trajectory. So it's I think 1.6% adjusted operating margin, was 1.7% in Q2. So it will continue to grow slightly throughout the year, largely through ARPU. But that business, we expect to decline at a pretty steady pace.

Brandon Vazquez from William Blair. Can you talk a little bit about where the holes are in the conversion funnel? It seems like as you guys start to put incremental PAC spend back, that will be the key focus for you is how do you close that. So do you have line of sight on how to do those things? And just talk to us about how those incremental dollars go towards improving that conversion rate.

Steve?

It's a good question. Do we have line of sight into the holes? I think that -- I talked earlier about messaging. I think that's a big, big area of focus for us. We're definitely testing out more. I know Suzanne and team, and Suzanne can talk a little bit about some of the things that they've been testing, have seen some really early results that are really positive around that messaging working and it's starting to close that gap a little bit. But it's something that we're continually looking at and going to keep working on for the next few months to get it right. Suzanne, do you want to add anything?

Hi, everyone. So yes, I think from a conversion perspective, as Steve says, we're really trying to lean into our messaging. What we ideally want is for the people that are going through our quote enrollment funnel and see a price already understand why Trupanion is different. And in the post quote journey, continue to sort of dial up the proposition in a way that brings it to life. I think what we find is that there are 2 kind of key areas. There is the area that says, why Trupanion is different, why you should be aware of cheap insurance deals. As insurance, you get what you pay for. Generally, a low-cost deal means that you compromise on the coverage that you get when you actually need to use the coverage. But on the other side, looking at the reason for insurance and making sure that the people are getting quotes understand the potential cost of care that they might be facing, how Trupanion can help them really because our biggest competitor, as Brian said, is noninsurance at all. So I think we're coming at it from a sort of range of areas from a messaging point of view. And we've seen some success and hope to build on that as we go through the next few months and years.

I think Suzanne touched on a key point there, which is particularly important in terms of the price point. So what is still misunderstood today, and we continue to work on refining this as our agent enrollment and the fact that today, if you're looking at a price point and you see some competitive pricing, the odds are, we are going to be more expensive than the next person because we are not going to guarantee increase your price every year because your pet has lived longer. We all want our pets to live longer. That is not understood well today, and we've been working hard to try and generate materials that will help to really reinforce that. The other component that still isn't known well is a difference between wellness and insurance. Even today, if you did a research poll of -- and there are many that do pet parents, and I'm sure you did one yourself, do you have insurance, 25% of people raise their hand and say they have insurance. And we know that's not true because we have the [ Navia ] reporting, and we can see it's around 4%. The confusion is between the wellness and insurance. And what then happens is people get the wrong end of the stick when they go in and it's declined. It's not declined. It was never covered in the first place. So it's our job to continue to educate from the top of the funnel, which is, for us, that vet conversation to help them articulate the differences between them. And then talk about the solution we bring, which to this day, no one else can do when we pay that veterinarian directly at the time of invoice. That's the difference we make because no one has to think about their credit card. They don't have to think about what option A or B or C. I'd just take care of my pet. The vet team feels the same way. So those 3 components are really -- I talked years ago about a leaky bucket at this event and how we're trying to plug those holes. There's still similar holes, but we have been making progress. At that point, I think our conversion rate was around 8%. It's now much higher than that. Significantly higher than that. So we are definitely making an improvement. It just takes time to rinse and repeat. And as Suzanne said, look at the funnel in different stages to understand how do we move people in a more efficient way through every stage of that. And with the quote volume, the more we have, the more we can test, the faster we can do that. We're now at a point where we're going to be increasing that quote volume to test.

And can I just follow up on that real quick. We're talking -- it sounds like a lot of this is messaging around conversion rates. From a commercial perspective, how do you better portray that message? Is it just simply more windshield time with veterinarians and letting them know? Do you have to skip the veterinarians and go to the pet owners to some degree? How do you guys think about that next step with incremental dollars around messaging?

I think it's all of the above. I mean, I think that we need to make sure that we're continually staying in front of the veterinarians. We're talking to them. We're sharing why we're different. But I also think it's utilizing different channels to communicate with pet parents to tell them continually what problems are we solving for them not about us, not about we, we, we, but about you and using different formats that they're comfortable with to do that. So not getting so tied up on, oh, well, it's a web conversion or it's a phone conversion. It's making it easy for the consumer to interact with us in the way that they're comfortable and to learn from us in the format that they learn the best. So is that video? Is that podcast? Is that text on a page? Is that calling in and talking to one of Brian's team? It's about taking what we do, making it easily digestible for veterinarians, for veterinary staff and for pet parents alike.

Maybe one last one for me maybe for the actuarial team. We're focused heavily these days on vet inflation simply because it was so high recently. But I'm sure you guys can appreciate there's a lot of other moving pieces within the algorithm for the actuarial team. Can you guys talk to us, to what degree can you guys factor in innovation? You have companies now talking about oncology tests and then eventually pharmaceuticals, all of these things come with pricing. We have vet visits that are declining. Presumably, we'll eventually return to growth. To what degree can you guys bake all of these into your assumptions to give you comfort in future forecasting for ARPUs?

Well, we're pretty fortunate in that we have a pretty nice database that we're working from. That's always growing, and that is our primary focus. We are also constantly looking for other data sources to add to our own data to make sure we have the best forward-looking information. I mean, the problem with our own data is it's always -- it's what's already happened. So I feel like we're doing a good job of staying on top of those things. We have not seen a decline in visits in our insured data, by the way. I know that in general, for uninsured that is the case, but it's not true of our pets that we insure. So it's really a combination of mine your data, being really good with it, and connecting with these other data sources as they become available. That is the more future work that we're working on.

Jacquie, Steve, would you mind both of you from the vet profession, obviously, today, you're working with the invoices and vet partners. When you see those new initiatives come through, how do you -- what does your team do and how do we make sure that we're ready for them because they will impact our invoices in future?

Yes. When we see -- Steve, I'll let you talk, too, but when we see something new, we do, if it is a known treatment that we -- is proven and accepted, we just make sure that we're covering it and in close communication with the actuaries to make sure that they're aware of where we're seeing these trends, who's using these treatments so that they can get ahead to the degree that they can. If it's something brand new, we also have a vet panel that we work with to understand whether this new treatment has studies behind it, evidence behind it to make sure that we are covering things appropriately in line with our policy. Just anecdotally, also, just this morning, I was talking with some of the people in the room here about some new drugs that their dogs were on, and we were talking about how well this new drug is very prevalent, it's actually replacing a bunch of like try 7 different drugs and see what helps. Instead, people are going to this one. So while the one may be more expensive, if you understand the context behind it, it can help you to know that the care for this particular condition is probably going to come down with this one very effective drug. So Steve, what would you add?

Yes. We have over 1 million people that are insured with our products. In addition to those 1 million people, we call on every single hospital in North America on a 60- to 90-day call cycle, boots on the ground, in person, and we've been doing this for years. Our territory partner force is bigger than all field forces combined with all other companies. So between our vet portal that's in more than 1 in 3 hospitals in North America, between our field force, between all of our partnerships, we know pretty well damned here immediately even before anyone has even tried a drug before. So we can see these things real time. Let me kind of switch gears and remind everyone that there's a 3.69% penetration rate of insurance in the U.S., right? It seems microscopic. It's not. A number of years ago, at meetings like this, we were talking about 1%, right? So we've increased by quite a lot. What we have done to future-proof ourselves is taken this veterinary portal where we can have real-time data, access to real-time data. We've put it in hospitals that maybe we'll see 1 out of 100 pets with a Trupanion insured client. So by future proofing, I mean, we're starting to flex this muscle that most didn't know existed. The more pets that come in because they've heard more about insurance, we'll have access to the care that we can make accessible to them that we can provide, that their veterinary professionals can provide as well. The more they will utilize that, the more our product will grow and snowball really in a good way that we've been hoping to have happened. So we see these things before the rest of the industry does, which gives us an advantage as a first mover. We know what they cost. We know what they do. We can share them with the veterinary profession, and that's a pretty cool place to be. It's only going to get better.

And just for a question later, because then we have another question coming, but -- in as a result of the fact we can see so much from our database and the early insights we get. Steve spearheaded an initiative, which you may have seen a release about call The Public -- it's got the longest name of the world.

It's in public health, early warning and detection system.

It rolls off the tongue, but it does what it says on the tin. So please ask questions about that, too, because that's exactly an indicator of the fact that we can now play that role in animal health, and we couldn't do that before. We have so much data that we can help improve the lives of pets over the long term.

Wilma Burdis at Raymond James. If the business heads of the international businesses could stand up and just talk a little bit about your market, the products you have in that market, that would be great.

Should I kick that one off for a start, and then I'll introduce the team and make them talk about their own marketplaces and where we are. So I came on board 3 years ago, with a mandate to expand out of North America. So to start businesses that would start to drive serious growth in a number of years' time. But also to look at these businesses and nurture them to the Trupanion model. So very veterinary centric, and also establish a way of growing and a way of applying that Trupanion model without distracting North America. So I think with the market that we're in at the moment, we've achieved that foundation, and we'll talk a little bit later about one of the key milestones that we achieved this month. But just kick things off, if we just look at the territories in isolation, maybe we'll start with the territory we've been in most. If we start with Steve in Australia.

Yes. We started with Australia, the best place in the world to be. If I go back to the history of Australia and what we were aiming to achieve. It was really about proving out the concept of Trupanion as an end-to-end, not just product but service. So that's where we started 6 years ago, does Trupanion as a concept work. We started as a same-store sales, proof-of-concept. That was our Stage 1 and -- which we did succeed in. Our Stage 2 was about our new store sales, which was how many hospitals could we partner with, do hospitals on a broader sense, accept and want to recommend and choose Trupanion to be partnered with. Our third phase is, as we are now is scaling that new store and same-store sales approach into the broader market. And so Australia is as an addressable hospital market, about 2,500 hospitals. And we're now at that stage of adding to a territory partner model, adding our territory partners from up 3 up to 12. We're looking to add from our 300-odd hospitals up to 1,500 in the short term. So as a market, it's all about scale. It's about having a deliberate and considered approach in terms of our hospital distribution primarily. So again, proving out the concept and driving the same concept that's made Trupanion successful here in North America.

I think our next step was to look where else we wanted to go. And Mainland Europe, we saw a lot of emerging pet insurance companies who seem to be doing things quite strangely without the focus on pricing and for everyone that came into the marketplace, one was exiting the marketplace. Some driven by technology and by online marketing without really any grasp of establishing the foundation for the category. So when we looked at those marketplaces, we looked at 2 for partner companies that we could probably have the same aspirations and mission that we did. So starting with the vet and really growing from there. So it's not especially -- it's not going to be a tap you can turn on really quickly because you have to establish that relationship, gain the trust and then put the processes and proposals in place with the hospitals so that they can -- they have the confidence with the products that we're selling, products that will support them and their pet parents. So just under 3 years ago, we started a dialogue with a small company called Smart Paws and Sven leads Smart Paws. Smart Paws are in Germany and Switzerland, very much started by Richard Coe and another eminent vet [ Dick White ], who had established the largest veterinary referral hospital in Europe. So a really good pedigree with some great contacts around the marketplace. And we have -- we acquired Smart Paws. And this month, we have Trupanion Smart Paws. So Smart Paws is now Trupanion Switzerland and Germany. They have a Trupanion product, Trupanion pricing, Trupanion processes, totally veterinary centric, teams out calling on vet starting to build that network and those relationships, mandate to pay the vet directly. And as the experience builds, we'll be paying directly at the point of checkout. So maybe Sven, if you can just say a little bit about those 2 marketplaces.

Absolutely. Thank you very much, Simon. First of all, it's very fun to speak as a German to so many Americans in this room. Thank you very much for opportunity for that. Let me give you some facts and figures about the markets in Germany, in particular. We have some 10,000 vets in Germany, which grammatically correct, waiting actually for proper pet insurance in the market. So it was very fun and enjoyable to see that we have a product now which we can establish into the market. We are seeing in total 45,000 vets working on these practices, which by our network actually are very known from our side. We have a fantastic team with a fantastic international team. I want to also mention that at this stage, who have had actually to initialize and to make it possible that we were able to launch Trupanion Germany and Switzerland same time, which happened last or last week. And with a team -- with a very diverse and international team, we now are aiming for and preparing -- or already prepared the market for being able to issue EDOs and have a product in place, which is very unique across the competition and market situation in general, if that makes sense. And maybe it helps if you ask me directly questions, and I can answer that to summarize a little bit more from that side, if that's possible.

I'd like to know how you're Trupanionizing in Europe with what I would expect to be a much, much smaller data set for pricing and especially with agent enrollment pricing, how you're making sure not signing up underpricing for a long time and basically creating a really large contingent liability?

Well, I think I rather pass that question considering pricing over to the people actually who work on the pricing thing, and this is Alan.

Yes. No, that's a great question. I think given the kind of limited data set we have on Mainland Europe, we do have some good information from vet clinic invoices comparing costs from our North American business from our Australian business, and then we're able to also make some similar assumptions on utilization, assumptions on utilization ranging through the whole pet's life. So hoping to address that, come in with prices that are appropriate for our age enrollment pricing.

Yes. And if I can just embellish that as well. Obviously, we have a huge amount of data from North America. Things in terms of breed and species, mortality and morbidity don't vary tremendously from territory to territory when we have specific breeds. We had businesses across Europe already that were trading. So we had some of our own data, and we did a huge amount of market research, looking at what some of the competition we're doing, how they were adjusting prices. And that's sort of the blend of experience we put into the marketplace with our pricing. I think the difference in Europe is that we don't have to file for pricing. So we have ongoing analysis in terms of the claims we're seeing, and we can address those prices on a month-to-month basis that we need to. Of course, we have to manage that really, really carefully, but we haven't got to go through the process of filing prices and perhaps getting part of the increase we're looking for. We can charge the price that we need to without any recourse to regulators. Rich, if you want to add to that?

Yes, I can add a little bit more. In Germany, in particular, if we look at the veterinary prices in terms of invoicing, they are circa 50% of the U.K., which makes them probably 60% less than U.S. in terms of cost, but it's also controlled with -- I'm not going to even attempt to mention the German -- to pronounce the German word, but it's in abbreviation terms, it's the GOT. And that's a government-based chart pricing point for treatments in Germany. So that gives us a lot more control chamber by chamber through the different states in terms of what vets are going to be charging. So we're not going to be -- Germany has been caught with the veterinary inflation as is across the world where vets have been accelerating inflation way more than standard. So we are in that situation. But we have control with that, coupled with some, like Simon said, the existing data and we can react. Well. we're trying to be as proactive as we can be. But that we can react if there are trends, we can -- and we spot them, we haven't got to file and wait for a regulator to give us the okay. We can make that decision there and then. Does that cover it?

So we've just covered off the German and Swiss marketplaces, but we are also in another 4 territories in Europe. Shortly after we acquired the Smart Paws business, where we were looking what else was in Europe when we found a business of all places in the Czech Republic, somewhere where we probably wouldn't have looked for a start. But they had a storming start to the marketplace that established the market from nowhere, driven 3%, 3.5% penetration quite quickly dominated the marketplace. And they were very much focused on integrations technology-wise with the veterinarians. So the 7 PIMs platforms that support the Czech Republic, they had integrations with all of them giving them access to virtually the whole of the marketplace. And in a very similar way to how we operate in North America in terms of pairing the veterinarian directly and at the point of checkout. We had very, very similar functionality in the company in the Czech Republic, which was called PetExpert. And I think probably I'll ask Dennis who is Country Manager for the Czech Republic to talk a little bit more about Czechia and then we'll talk together probably about the other 3 territories of the PetExpert trade-in.

Yes, in fact, PetExpert was founded by 2 person who couldn't be here today. So I'm the country manager for Czech Republic. Czech Republic is a very is a very interesting market for those who know, as Simon says, it's probably not the one that you would target at first, but it's the country with the highest proportion of pets per inhabitants in Europe. So clearly, a very interesting marketplace for us, for Trupanion, for PetExpert. We are -- what was done over the last years is an incredible work with a partnership with over roughly 90% of all the veterinarians -- veterinary hospitals in the country and a very high level of acquisitions of new policies subscribed every day. So it's still a very underpenetrated market. We are -- if we include Slovakia, which is the nearby country, we are even less than 2% of penetration. So clearly, a high potential, and we will be working more and more on Trupanionizing these units.

I think we look at the Czech Republic, the business model varied slightly, whereas we had a really strong relationship with the veterinary profession on the service and claims side delivering that same level of service and efficiency, making and supporting the veterinarian in their day-to-day life and obviously, the pet parent. What we haven't done was really optimize the recommendation for enrollments from the veterinarian. So what we've done since, it was very much an online and social media-driven business, which is great. You can turn it on, you can turn it off. But the bottom line is when you turn it off, the enrollments stop. So establishing that distribution through vets and breeders is -- it was paramount because when you have that trust, when you have the process working, the new puppies and new kittens are coming in for a primary vaccination, that process just works, and they introduce them to you. So we're concentrating now on really establishing the enrollment side of the veterinary world and also bringing breeders into distribution as well. So it's beginning to shape and look far more like the North American business and tie in with the way we operate in North America. I think the other thing that's notable about the Czech Republic is the product was positioned for a start-up marketplace. And now we're sort of 4, 5 years in. And now the veterinarians are getting very used to having insured customers. They're now asking for a much better product, one that's far more comprehensive that allows them to prescribe and to treat animals up to the level they've been trained to do. So just as we put the Trupanion brand into Switzerland and Germany, we now look at how we do that around the rest of the marketplaces we're in. So that's the next step. We stabilized Germany and Switzerland, and then we definitely repeat elsewhere. The platform that we've put into Germany and Switzerland was primarily the Czech platform with some additional functionality around marketing communications, some AI language capability. So we've built a platform that is the foundation for the European expansion that's configurable. If we talk about the other territories that PetExpert have. So we have -- and Dennis also very recently looks after Belgium. Belgium marketplace is quite established over the territories we work in Europe has the highest penetration level of vet insurance and some quite strong competition. So we've started, but nobody really distributing pet insurance through the pet sector channels, for the veterinary channel to the breeder channel. So we're starting to do the same thing, establish that veterinary network. We've got strong PIMs integration, and building that integration with the claims side and with the lead generation paramount. Lastly, we're in Poland. Poland being quite an interesting territory. There are probably 11,000 clinics in Poland, a lot of them are quite small, one PIMs platform that has about an 80% penetration that we have integration with. We have some other software platforms that support that platform. So a strong foundation to go in. But one of the other things that was notable at Poland was a lot of the veterinarians in Poland have practiced in the U.K. through a combination of some bad decisions by the U.K. So Brexit and COVID, a lot of them have gone home again. So they've worked in clinics that have experienced the benefit of having insured clients. And they're in a marketplace that has very, very low pet insurance penetration. So already, we have a lot of advocates in the Polish marketplace. So again, same as before. Step and repeat Trupanion into those marketplaces. So the brand, the product that's appropriate for the marketplace, some pricing and the processes, so we can start to harmonize processes. And as we start to gain scale, start to get an operational efficiency by looking at how we service several territories from an operational base.

Is there a question down here? Okay. I think we're going to take one more question, and then we'll go to a break. So down here.

[ Anne Tomsek ], an individual investor and owner of a pet health-related company as well. I'm going to take us back to the -- some of the things that were said. You're paying out a lot of claims. It's going up. Utilization does affect pricing overall. Like Dr. Steve said, you're not in the business of dictating medicine, so you're going to shut up and pay and that's wonderful part about this company. Do you have any insight into your member personas? One of the data points you mentioned is that your members are not lagging and going to the vet, they're going to the vet more often. The industry as a whole is still seeing a lowering of wellness visits. Those continue to lag 16, 18, 19 months. So people are avoiding the wellness portion of care, which if your members participated in could recognize things earlier and maybe not just use insurance as a failsafe option. Do you have any data that understands your membership in terms of are they seeing the vet more often from a wellness perspective, because you're certainly not a wellness plan.

I didn't prompt that question, but no, I wish I had. So thank you for asking it. So there are a few people on the stage that probably are jumping up and down wanting to answer it. I'm going to hand it first of all to [ Steve Ireland ]. And then Emily, if you wouldn't mind kind of sharing a little bit, and Kelly, perhaps as well as the work that you 2 have done in tandem, looking at the member experience, who they are, how we speak to them. And I'm guessing that Dr. Steve is going to want to share some stats around wellness and insurance and how the 2 come together. So Steve, do you mind kicking us off, please?

Wellness. Yes. I mean, it's interesting. I think Margi said earlier, people still confuse kind of the wellness and the insurance. In fact, when I first started, there was an article in consumer magazine talking about pet insurance, and they had a Banfield wellness plan listed in there as insurance. What we saw in the practice was the insured people were coming in, the people who are the responsible pet parents were still coming into the practice. From our perspective, I think it's good to understand how we can educate those pet parents, our members to know that wellness is an important part of it. And using an insurance to stop gap isn't just -- it's bad. It's not good, right? It's not what responsible pet parents do, right? So as far as our personas go, I mean, our personas are the responsible pet parents. And we try to drive them to the vet any chance we can, whether we're talking about something serious or we're talking about taking your pet on a camping trip. If there's something wrong, take it to the vet because that's what responsible pet parents do. And I -- in my conversations with people in practice, they're still seeing people come in and they're referring to -- they're telling me that it's people who have Trupanion are still coming to the vet.

And from a data perspective, you can imagine we have a plethora of data on our members over the past 20-plus years. We certainly have demographic data. We understand the personas of who our members are, who our leads are. For us, the most impactful way to segment our members is actually based on their experience. So how did they come to us? What is their claims experience? What was their experience in the hospital? What's their rate experience? So I don't know if you want to talk a little bit more about how -- or maybe offer some examples of how we have done that. But for us, if we're talking about moving the needle in terms of conversion and retention, it's really around the experience that those pet parents have had with us.

Yes, I would just add is we're absolutely looking to understand our members who they are, whether they're a first-time pet parent, whether this is the fifth pet they've had enrolled with us, we're going to speak to and communicate with those members differently based on that. And one thing kind of speaking to wellness and education that we're really aiming to do is to position ourselves as a partner to those members and their pets as they go through the journey of pet parenthood, and we have a wealth of data and years of experience. So we want to be the expert that they can lean on. We want to educate them about things they can expect throughout their pet's life, which hopefully is going to help us with retaining them so that they know your pet may be healthy now. That's wonderful, and here is also what you can expect throughout their entire life and where we've seen a lot of success is through some of that educational content where we're telling members, here's what you can expect in your puppy's first year, if it's your first, I'm having a puppy. Even if it's not, members are looking for that information. So being able to provide it, being able to elevate the voice of the vet, encourage them to see their vet, forge a relationship with their vet, and it's also helping us as a brand to create stronger relationships with those members right from the start.

It's a great question, Anna, and thanks for asking it. Our product demands that people use preventatives, that you get your preventative vaccines, that you do your routine deworming, et cetera. So these are things that we check along the way as well. So yes, we do have data on what people are doing, so we can apply our policy and pay for those services that are needed later. We all know that early detection leads to early cure. It's in our best interest to detect things early, even though we find things early, think about it from a human perspective, things that are near and dear to my family's heart. If my wife or my mother found a lump in their breast, we'd want to find that early. Why would we want to find it early? Not to punish the insurance company, right? We want to find it early to keep them alive for many, many more years. The lifetime value will go up, we'll have done our jobs. People will add pets. They'll refer friends to us. What we don't want to do is take the wellness component away from the veterinary ecosystem, right? Ours is not to insert ourselves in the middle. Ours is to allow the vet to practice at the local level in a way that they feel is appropriate, to have clients become sticky to that veterinary practice. They will come in more for the wellness. They will come in more for the insurance. We'll all have done our job and the ecosystem thrives when we do that.

Okay. We're going to go ahead and take a break. So for the folks who are joining us online, we'll be back in about 20 minutes we are going to broadcast the slide up here for those folks who are online. If you want to go ahead and join us on online webinar, it will give you the option to submit some questions online. And we can take those throughout the day as we have time. I also wanted to note for the audience here in person, there's actually a QR code. So going through the day, you have a thought or question or just some feedback, please feel free to use that. And again, I think we'll start the next session with 1 or 2 questions that we get from either the in-person or online audience. So we'll be back at about 11:20. Thanks. [Break]

Okay. Great. We're going to go ahead and get started with the next Q&A session. Just a couple of reminders again for the folks in the room, just raise your hand, we'll make sure we get you a microphone. And we also broadcast opportunities for folks to join us online.

So while you're all thinking of your questions, we're going to go ahead and take a question that came in. And it came in from Jonathan Kim of the Singapore -- the public asset management hedge fund. And Jonathan's question is, Trupanion has the longest experience in the industry, so you can provide competitive prices to customers. But you have plenty of knowledge or statistics that which animals get what kind of disease. But what if other competitors who have a longer or wider experience, including some of those who might be in other geographies like Europe, expand into the U.S. or offer their information to competitors in the U.S.?

So I will start this. And anyone that wants to add, please shout. Don't shout into a microphone because that will be deafening. So just in terms of the data that we have. So we -- the reason our data is so rich, and I don't know if this is necessarily appreciated is because we have such a broad coverage. So when you cover everything from -- that is not preexisting, from puppy, from cradle to grave effectively, we get to see every single treatment that goes on in that pet's life. So that data is not available to other providers out there because our coverage is broader. Now there are definitely areas of the world that have got some breadth of coverage that will be helpful to somebody. But when you think about the tenure of that data and you think about the way that's been managed and you think about the age of enrollment, you are naturally going to see people dropping off from coverage, whereas with Trupanion, we keep them for life. So I would say our data set is unrivaled globally. And the fact that we not only have our own data set, we work with partners to ensure that we can enrich that and build upon it to ensure that we're getting smarter and sharper and you saw Aaron's display earlier and Mary talked about the insights that her team was providing to the growth teams, that level of data is comprehensive because of the breadth of coverage. And then now we're adding in the European, the Australian, the different metrics from other countries that help us to just enrich that global database, which, again, will help to build upon that. It doesn't mean that we wouldn't be considering how do we ensure we do more with that information, we do more with that data. But by and large, I don't think that's a big concern for us when you have such limited coverage across the world, as you saw in that chart earlier that I showed. Anyone care to add anything to that?

I'll emphasize and reinforce what Margi said, no one can touch our data. No one can touch our data globally. Speaking from someone who has practiced in the U.K. and someone who is in the insurance side in the U.K., it's not to be rivaled. It's not even close. We've seen many come from outside the U.S. into the U.S. and many are no longer here.

Yes. And I think -- just remind me something else. So one of the biggest barriers to entry, which we're actually really grateful for, and I think people think it's a challenge is a regulation. We've been pushing for decades for pet insurance to be recognized as its own line of business for people to appreciate the risk associated to a pet is very different to other things within property and casualty. That for someone coming into -- I can speak from personal experience going into the U.S., having spent time in the U.K. market, which is heavily regulated. It's a very different experience. And there is a lot of investment and time and effort that has to go into not only creating products for every single stage you then have to work with regulators and build up the data set. So you can't just drop in here with information and expect to get it approved tomorrow. So I think that, again, is great for us because we've been working hard at building relationships. We've added to our team, as you can see here on the stage, really helping from a regulation perspective. So I think that gives us another barrier to entry for competitors. And the U.S. is not an easy market to enter into. And we saw European very fast grower. Two years ago, came into the market and it's not really doing a huge amount in the U.S. because of that.

Moved the questions to the audience.

There was a nice step-up in a number of hospitals with installed software in 2023, just if you look at your shareholder letter, can you maybe talk about where you are today versus I think it was 9,500 at the end of last year? And where do you expect to be over the next, let's say, 12 or 18 months? And I guess, where is it on your kind of overall sort of priority list?

Yes. So it is absolutely a huge priority. It has been for years. John MJ, how would you talk about the plans we have? First of all, what would you give yourself in terms of a grade for where we are today? And then where do you think you can get to?

Yes. So I think from a -- what do we give ourselves as a great, I think I'd give myself a B- where we are because we understand that penetration software and installs has continued to climb and the activity and the engagement from those clinics has continued to climb. And I think that's the most important factor. I think there's a variety of areas that have software penetration north of 90%, and there's some younger territories that are in the teens. And so kind of working with the country leaders on developing those plans and strategies to enable that growth to catch up in the areas that is behind. It's not because we weren't trying. It's just because with turnover education, it gets tough. And I know MJ likes to say, we've sold the gym membership, but we have to teach people how to work out, so I won't steal that from you. That is your line. I gave you credit though. I could have stolen it. But I think overall, we have a tremendous opportunity there, but I'll let her speak specifically to the U.S.

Yes, I would say that you're probably going to see the same amount of growth year-over-year from 2023 to 2024 to 2024 to 2025. I think to the line, John just told for me. We've done very well at selling gym memberships. It's very hard -- it's easier to sell out the gym membership than to sell the value of working out. And what it can do for, in this case, client experience, there's a lot of factors that go into that. I think we need to put focus into those factors, which is making sure that we have easy and simple ways to educate the teams at these hospitals on how to use this, why it's value to use this. and build the trust. There has to be trust in stopping what you're already doing in a very busy chaotic environment to say, "I'm going to go this route because I believe in Japan, and I believe in their power to pay in under 5 minutes, and they're not going to slow me down." And I think part of the relationships that our territory partners are building and that trust is what's getting us not just installed, but seeing those numbers tick up as far as footprint utilization, 63% of our claims come from hospitals with that portal today. So we have a lot of work to do. If you can see a number of that direct pay claims across the U.S. in the amount that we can grow just in the hospitals that currently have that portal. That doesn't mean we're not going to take our -- we're not taking our foot off the gas as far as getting those installs, but I think that there's still a lot of work to do on getting that muscle memory in practice.

And I'll just add to MJ's comment there. We at Trupanion with our portal have the ability to change the narrative in the hospitals from how much to how soon can I get that treatment. When you're in a vet and you're talking to the text, the front end, the veterinarians, the most common question they get is how much is that procedure going to cost me? How much is that medication going to be to save my pet's life? We have the ability with our portal to change that narrative to how soon can you do that life-saving surgery? And how soon can I get the medication to save my pet's life?

And maybe 2 quick follow-ups on this. First, can you maybe refresh us on whether you're still seeing sort of an initial step-up in process claims and sort of cost of claims, again, initially as software gets rolled out. And then secondly, sort of what are you seeing in terms of higher lead volume and conversion -- stronger conversion in hospitals with software versus without?

I think the first part of the question is the increase in claims that we see when that portal is installed. I think that that's been consistent. I think what we get there is that people are able to get -- the veterinarian is able to get paid directly at the time of checkout, right? So it doesn't rely on the member to go home with their sick pet, be very busy, have an invoice but they later forget and down the road, maybe they forget to submit all together, they don't submit for several months. So we see that tick up because in real time, we're paying at the -- when it's convenient for them so that they don't have to pay out of pocket. I think the other side of that is we definitely see a stronger conversion from hospitals that have that portal. This is a hospital that's already raised their hand and said, I see the value, I want to do more of this and I want to educate my clients on cost of care, right? And I don't just want to educate on cost of care. I want to provide solutions to that. So we see that definitely in hospitals that have had that portal that have been able to integrate it into their daily life, their daily routine, not just, hey, we're able to pay your claim or get from Trupanion directly, but we have this conversation starting at check-in, who's your medical insurance provider. It's normalizing the concept of insurance. And with that portal, they have that reason to ask, right? They know that I'm asking you today because we can receive payment from Trupanion, we need to know how we're going to get paid today or we need to educate your own cost of care, and we need to provide you information that's going to be valuable to your journey as a pet parent. So I mean, there's numbers that can definitely be thrown out, but absolutely a greater conversion of hospitals that have that portal. That said, we are growing the number of hospitals ahead of that portal. I threw out the number earlier, but our issuing -- our number of hospitals issuing examine offers has increased significantly over the last year as we've continued to focus on those areas of opportunities where we're priced accurately. And so when you have any type of utilization, you have learning, learning curves. You have one person that knows it and three people that don't. And so it does take time.

Again, I'll just bounce off of MJ because I like coming off her comments. What I've noticed in the past while is rather than us our boots on the ground, getting into the veterinarians and asking them if they want the portal, we're fielding way more calls now where they're calling and ask -- telling us they need the portal. So that's changed. The mindset has changed because I think the veterinarians are understanding that what our portal besides just the ability to put claim directly, it takes the pressure off their staff. It's taking -- it's reducing the fatigue and it's increasing their retention of their stuff because it's taking that nobody wants to ask somebody for money they don't have or they could have a tough time coming up with. It's taking that away. So they see the value in it. So they're calling us now knowing the high value of it.

I just want to jump on what she just said. So one of the things that I think we need to really stress is the experience that Trupanion can bring to hospital teams. I mean, over the last few years, when I was on the vet side, we saw teams have a really hard time staffing, have a really hard time retaining their staff. And a lot of it came down to compassion fatigue. It came down to the difficult conversations that they have to have with pet parents around, we can save your pet, but it's going to cost you $8,000, $10,000, whatever the case may be or it's going to be a prolonged chronic type condition. And looking at pet parents and having them say like, well, I can't afford it or it has to come out. And that takes a toll on those teams. And what we saw was hospitals that were passionate about Trupanion hospitals that utilize the portal for claims to issue EDOs, whatever the case may be, their staff stayed. Their staff had a better experience. So again, we're not just helping the pet parent. We're helping medical teams hopefully have a great experience working in their practices and caring for those pets. I think two, to MJ's comment that John Stoll, however that went. We started this year, the vet team -- the vet marketing team, along with our field teams, hospital certification. And I think it's been less than a year now. It started before I got here, so forgive me. But we've got -- I think I saw 3,000 hospitals that are applied for the program. We have 15,000 tech and veterinary professionals who have gone through the program. So we're starting to do better about that muscle memory. We're starting to do better about [ even ] the membership to the gym and showing them how to use it. And what we're seeing are the hospitals that are taking part in this, they're submitting more claims. They're submitting more EDO. They're having more of those conversations with their patients about -- or with the pet parents about why it's important to plan for care for your pet. And I think -- it's just -- we're moving in the right direction in that aspect. And I think you're just going to see more and more of that muscle memory taking hold.

Aakash from P&R Investment Management. So it's clear based on everything we've heard today that the core Trupanion product has a moat, which is the -- one of the big ones is the web channel that has taken a long time to build. But if you talk about PHI and Furkin, there -- of course, they're not spending -- you're not spending as many [ PAC ] dollars right now. But what would be dissimilar like [indiscernible] because clearly, the web channel is not -- that part doesn't exist. So how would you differentiate in that aspect? And what gives you confidence that you'd be creating value?

Yes. I mean I'll kick us off and then hand it to Emily. But just as a reminder, the PHI and Furkin products were introduced because we were -- in a position where we could see the products that were not as comprehensive that were not for lifetime coming into the market, and we were not converting the pets for Trupanion, and we were losing them to other competitors who were essentially wolf in sheep's clothing. Is that the right way around? Yes. Wolf in sheep's clothing. I'm awful with analogies like that. But the reason behind me saying that is because we didn't need to do it. We have our core Trupanion product, we can definitely reach a lot of people still with what we have today as a product. What we need to be able to do is help demonstrate the difference between Trupanion, PHI and Furkin. They weren't brought into the market to have anything different other than they do what they say. It is a value proposition that is committed to the same -- just the same guardrails as a core Trupanion product, it's a lot less expensive, which means the coverage is a lot less, but it was never intended to have anything unique other than that. And the reality is, unfortunately, that is unique, outside of Trupanion. But we wanted to level a playing field and say, if you think that every other product is the same, this is actually what you get for this money. And this is different from the core Trupanion product. It is not the same as the other competitor, but you can put Furkin next to most of the U.S. market and the Canadian market and it's like-for-like. Trupanion in a class of its own, and that's really why we didn't -- we purposefully made them a direct-to-consumer brand. I mean do you want to speak to how your thoughts are on PHI and Furkin, and how they're doing and also the PAC allocation there?

Yes. So maybe I'll start with the PAC allocation piece first because I think it helps explain how those 2 brands have been growing. So like I was mentioning in the first Q&A, we had to be really thoughtful and deliberate, very disciplined in how we are going to spend our acquisition budget over the past 12 to 18 months. So that meant looking at where are we going to get the best return, which led to us not investing not investing as much as we had been before in PHI and Furkin. So we really scaled that back. The teams are now focused on how can we start to slowly increase that level of investment. We've become incredibly efficient. And the two brands are performing very differently, actually. So PHI is our lowest ARPU brand, and Furkin is like a middle ground. Furkin is performing better than PHI. Furkin is getting close to scale. So we've been excited about that. And for that team, it's again, it's really learning how to -- how can we slowly start to increase our spend back up while remaining disciplined to our efficiency goals as well.

One follow-up, if I may here. The challenge that has been sort of communicating the value proposition, which clearly is different from the other products out there in the market. But the challenge is already been in the core product. So I'd envision that's even much harder to communicate on a D2C channel, online marketing. Would that be correct because that's my initial intuition that will be much harder to do for PHI and Furkin.

Yes. I think there's going to be different challenges. Obviously, PHI and Furkin don't -- are not in the vet space. So it doesn't come with that strong recommendation. So your messaging, your placements, your creative online has to be spot on and the team is constantly testing and optimizing that. But it will be challenging for a different set of reasons than it's challenging for Trupanion.

And as a reminder, they're only in the Canadian market at this point. So the competitive landscape in the U.S. and Canada is very different. And I think kind of the learnings we get from the Canadian market is what we want to understand before we bring them to the U.S. to help direct focus, whether it's conversion, retention, even lead generation to be able to articulate it more and better. And then the data pool that we get from that different segment, the different audience that we're speaking to will help us enrich the behavior of all the products across the board.

Trupanion is on track for targeted 15% margin for full year 2025. Could you help us think through what assumptions that includes as far as rate increases? And does it reflect a full 15% vet cost inflation in January 2025? And a related question, is there any indication that vet cost inflation could come in below or I suppose, higher than Trupanion's expected 15% in January 2025?

I'll start with the second question, and then I think I hand over to our finance colleagues to answer the first part. Michael, do you want to speak about trends, what we're seeing cost of goods?

Yes. You want me to start? Yes. Yes, we always have to expect that there can be a change in vet trends and our own trends. It's been relatively consistent. And so we're going with that as a long-term view for now. We look at it every week, and we're trying to find as many sources as we can to inform our viewpoint. Rates go into effect for relatively long periods of time. So there's always a potential to miss that long-term view of trend and where your rates are. But right now, we're really comfortable that what we've been seeing over the last 12 months is consistent, and we are setting those rates at the right level to achieve those margin targets.

And just to piggyback on that a little bit. So when we last spoke or had an audience with people on our earnings call, I referred to the fact that we were seeing a little bit of a downturn in July with those trends, and we're going to watch it and just see what happens. At that time, it wasn't enough for us to adjust our assumptions. It is not enough for us to adjust our assumptions. We've seen those costs come back up much -- again, in line with CPI through August. So we would hold that assumption true. And we will not change that unless we see something robust enough for us to then rethink our strategy. But the pricing for us is -- we've learned our lessons from a few years ago when a huge amount of volatility came in. So Michael [ surely ] looks at every week. I'm hoping he looks every day, perhaps every hour. But all joking aside, it's something that we are hyper, hyper focused on because the second that changes, we do not want to be offering a poor value proposition to our members. So you're going to have to react quickly. It hasn't happened yet, and we'll keep you posted when it does. Fawwad, would you like to kick off the final product of that?

Yes. I think it's a good segue. One of the things that's unique about 2024 versus sort of a normal year is the contribution of pricing to growth. So if you think about relative contribution, the growth pricing has been driving a higher proportion, more than half. That's unusual. I mean, obviously, what we want is pet count to drive the majority of the growth. And then pricing, hopefully reverts back to a more historical cadence. So from a full year perspective, what we talked about was our objective remains getting 71% from a loss ratio standpoint and 15% subscription adjusted operating income in Q4. When you think about the model P&L, the model P&L really dictates that we would have that for the full year. So our objective going forward, of course, is going to be that as the North Star. But as we come out of this margin drop, we're building back, I think 4 sequential quarters of improvement in margin last year gave us some confidence. And then what we reported in the first half gives us a good indication of where we think we'll land for the year. I actually want to give Sarah a chance to give you a little bit more perspective.

Thank you. What I would just add is, of course, our initial target is to get to a point where, again, we are seeing a 15% margin for a quarter, something that we continue to march towards at the end of this year. Looking beyond that, we know that our business has elements of seasonality. And so beyond hitting this 15% margin, we're going to continue to strive for that consistency on a go-forward basis.

And the next question. So I think you guys guided to the 15% next year. And this year, it looks like [ per Street ] estimates you're probably going to come in around 12% to 13%, but you're seeking a significant amount of rate. So maybe just kind of talk about how that rate flows through to the margin.

Yes. I think -- so when we think about full year from a subscription revenue perspective, if you take the midpoint of the guidance, it's slightly below 20%. And then from a total AOI standpoint, it's about 33%. So the phenomenon you're seeing there is the inverse of what the company went through during the period of margin compression. Now you're getting margin expansion. So it's reverse leverage, which obviously is favorable for us. We haven't necessarily completed the planning process from a 2025 standpoint. I would just say our model P&L is unchanged. So whether it's top line growth, whether it's our expense ratios, whether it's ultimately an objective for subscription. Subscription, of course, is what we focus on, given that that's the future of the company. It's the core and the future. So that's what gives us confidence. But yes, we're still going through the planning process to get very specific about 2025. That seasonality that Sarah talked about, that's largely predictable. We think that, that will continue to sort of shape the year in Q1 if this has happened historically, that will put rates through -- you'll see a spike in loss ratio in periods of higher inflation as we're in today, that's exaggerated. So you see an even higher cadence from a Q4 to Q1 linearity standpoint. Frequency generally tends to be higher in Q2. And then it's the back half of the year that we see the margin expansion from the pricing rolling through. And then the Pet acquisition that we invest in, in Q4 of this year, Q1 of next year, that's an important foundation for us to realize that price across a wider base in second half.

[ Andrea Dorno ] from Italy. My question is about capital requirements. For a long period of time, I think the rule of thumb was about a ratio of 1 to 5 reserves to premiums. And I know that there is a sort of 40 sheets for which this number comes out. Based on the last call, my impression was that the capital requirement of about $130 million on an annualized revenue of about $1.2 billion was almost a 1:9 kind of ratio. So my question is, is this kind of a new rule of thumb? And I mean it seems quite a big deal going from 1:5 to 1:9 in terms of returns on equity.

Your math is correct. I think we have a slide that actually shows that. I think what has happened, and we talked a little bit about this in the Q2 call, with the changes in the NAIC factors. That's given us, obviously, a tailwind when it comes to capital requirements. So we went from -- if you look at the end of last year, we were about $60 million over capitalized relative to the minimum contribution we have to make in order to conduct insurance. It's now $130 million. About half of that change was the NAIC factor changes. Actually, I'll let Adam talk a little bit more about the factors. The significant piece of that was a very specific ratio that looks at premium growth. So we have that benefit. And then the other half of that is, as Pets Best has rolled off, as we talked about, that also releases capital. Do we necessarily predict that we'll be at 9.2% for the foreseeable future. That will depend obviously on changes in those factors and then obviously, growth in the business. But I think the important takeaway is we feel good in terms of answering the question, do we have the capital? Do we have the wearable to be able to grow in an unencumbered way. Obviously, this puts us in a much stronger position. We were already in a strong position before. We feel good about where we are.

In terms of the factory change, I mean, I'll just echo what Fawwad covered. It is a structural change for how all lines are viewed. But the change for us in the pet insurance line is particularly strong. It's something that the industry through the NAIC process calibrates based on how companies are operating and the performance of those companies. So over time, intermediate longer-term horizons, we can expect further changes unpredictable what direction those might be. But I think this is beyond just our numbers change, right? It's a continuing dialogue with the regulators to understand our business, to understand our performance and how we may be different than a traditional inland marine carrier, for example, the type of insurance that pet insurance is within. And it's also understanding the peculiarities and the strength of our business, how we operate on a lifetime monthly policy. We have that consistent premium flow in versus a traditional line that they're probably more used to seeing where you've got a semiannual or annual payment coming into the carrier. It's a much different financial flow than they may be used to seeing. So it's helping them understand how that impacts the ratios that Fawwad was referencing.

Maybe just a quick follow-up to make sure I understood what you just commented. I understand that these factors get changed quite regularly. And sometimes these changes have been improving in the sense that more capital light and sometimes the opposite. These last changes are -- do you feel they are part of the trend that can be sort of permanent about making the business more capital light? Or was it just, let's say, fortuitous change in an improvement, but could be reversed at the next review of the factors?

I'd say looking back, it was not fortuitous, so the NAIC looks at past data in order to evaluate or the factor change should go. I'd say it's impossible to predict what's going to happen in the future. I'll leave it at that.

Yes. I think the only thing I would add to that is, so there's the dimension of what's the requirements. So that's what we've been talking about. The other dimension is excess capital, what can we do with it? And can we get access to it? And so consistent with what Adam was saying, we've been having, obviously, a series of conversations. We expect those to continue to -- and I don't want to use the word educated. I think it's just to help convey the unique characteristics in terms of risk profile of this business. And I think certainly, there's a growing awareness that the riskiness of this relative to other lines of insurance suggest that at some point, we would like it to have its own categorization. But it does open up a conversation and we're beginning that dialogue of how do we take advantage? We've been on a sort of a consistent theme of make use of the strength of our balance sheet. And so that's clearly an asset for us. And so the monetization of that is going to be dependent on those conversations. And ultimately, what we would like is always to have a capital base makes us a responsible company. First and foremost, we have to have sufficient capital reserve. We don't want to get anywhere near the line. But in a situation where we're 2x and as you rightly pointed out, the ratio has changed significantly. We feel like it's an opportune time to have those conversations, we've begun those. Obviously, it's a process, and it's up to ultimately the regulators. But I think the case is there for us to say at least for the foreseeable future, we feel very good about competition.

I'm going to be a little bit more direct and they'll probably look at me like [ shut up and stop ] talking. But just from the perspective of the category, we've just crossed $4 billion. We just talked about that. Steve mentioned, it wasn't long ago that you were in this room with us and we were a $1 billion category. At that point, you're not going to get the attention of regulators because why would you? You're too small as a category, the risk isn't there. They're not going to spend time and calories and effort to understand why we're different and why the risk profile need to be different. When you think about the $4 billion and the clip that we're growing now, they're starting to realize at what point that actually this is something that is meaningful. It's impacting far more constituents today than it was 10 years ago. We don't want to run into the ramifications that we see in other areas and other lines of insurance across the U.S., especially. And so entertaining those conversations with us with a company that has a very unusual risk profile because not only is pet insurance in general, very short tail, no pun intended, but you don't see a risk kind of going too long with that because it's a relatively small dollar amount. You don't have high levels of catastrophic risk. We pay the vet directly. So the tail that we have is even shorter. So the known risk to us is, therefore, even more specific than it would be in any other situation. So I think we're in a very strong position. I personally think it's highly unlikely the NAIC would reverse it. Sorry, Adam, I'm going to say that. I think as the category continues to build, we will be absolutely front and center, making our voice known because we need to leave this category forward to be able to get the pets the care they need. And at 4%, there is a limitless as you saw where it can go, looking at Sweden and the U.K.

Jon Block with Stifel, again. Maybe if you guys can spend some time talking about corporates. I mean I hear numbers of corporate are now 30%, give or take, of vet practices, I'm sure some of those numbers vary. They should get it, right? Like it's a great opportunity to get people signed up on insurance. They've got to be more dependent on same-store sales growth now because the pricing power might be subsiding. But in the same respect, some of those corporates, I think you mentioned JAB earlier might also have their own network of animal hospitals. And -- so maybe if you could just talk through, are you seeing faster growth currently from corporates because they should be buying in? And then longer term, as they continue to expand their network, how do you sort of play one versus the other becoming the preferred provider, even though they might have 6 or 8 different offerings under their umbrella?

Yes. Steve, do you want to kick off or MJ, maybe add more color to what you're seeing?

Yes. Thanks, John. Good question. We partner with well over 60% of groups in North America. So depending on how you want to define corporate, whether it's 100 hospitals or 500 hospitals or dozens or a group of 5, we partner with them all. We're agnostic, right? It's smart for independent veterinarians to partner with us. It's smart for corporate veterinarians to partner with us. It doesn't matter what one charges versus another charges. We partner with them all. We do it through our software. We do it through direct to pay. We do it with the support of our territory partner model as well and our comprehensive offerings. So we welcome the competition because it allows us to differentiate ourselves. We have not seen anything on the market yet, even though, yes, private equity may own 14 or 20 brands, depending if you're looking in the U.S. or U.S. and Canada or globally, but we're not seeing them go straight to the veterinary channel. And I think we could all kind of smile [ and nod ] as to the reasons why we're not seeing that. Veterinarians and the authority of the white coat is what got us to where we are, and we'll continue to sustain us. So there's no concern there there's only more opportunity. MJ, if you have anything to on there?

I don't know anything to add. [ Hayden ] do you have any perspective from...

The only thing I will say is you're absolutely right. I think this is boding well for us because definitely, with these corporate consolidators, the onus on them now is to increase profits and it's much more difficult as they scale. And so having these pets insured within their practices is only going to be a positive thing. So it's just adding more opportunity for us. So I think you're right on that.

John, if I can add to that as well. Just in terms of the patterns to answer specifically that question, do we see different behavior between a corporate group and independent group, it really varies across the board, state-by-state, group by group, hospital size by hospital size. Some get it, some don't. The reality with the corporate group regardless of how big they are. They have to -- they might like it at head office, the reality of having what they like a head office executed on the floor of the hospital is very, very different. The one benefit that -- or the 2 massive benefits that [ Emily ] mentioned earlier, if you're a hospital team member and you don't have to have that heartbreaking conversation with a pet owner about having to put their pet to sleep because they can get the care because we can pay them directly. That's a benefit that they feel. The other benefit is very real. When you think about the 2 point -- the over $2 billion, nearly $3 billion we paid in claims, there are no credit card fees associated for hospital groups with that. So as a corporate group, especially the big guys. This is a massive benefit to them. So they are bought in to Steve's point, we work with the biggest and the best in the industry. We will work with every single person because our job is to help provide access to that care. And then it's about that habit that -- it's no different for independent versus corporate because everyone is an individual hospital. And those team members bounce from independent to corporate as well. So you're dealing with the people on the ground who have a very different focus. So focused on the pet in their day-to-day because they're in chaos mode all the time.

Got it. Very helpful. Maybe just a second question to shift gears. Fawwad for you, you've given us some snippets of '25, like the 71% MLR, the 15% adjusted operating income. Any thoughts on the ARPU and how it would flow through the P&L. So in other words, if you guys are targeting another 15%, like it seems as of today, do we see that flow through 15% to 8% ARPU, 10%? I think this year is sort of like roughly 20 to 10. So any thoughts there? And then if you could remind us why that delta which selfishly I always struggle with, like, why are you getting 15%, but we only see 8%. I'm guessing some of it is the mix shift, right, PHI, Furkin, but as many details as you can provide there?

Yes. So I think the second part of the question, we have a slide that we can walk you through. I think it was to give some insight and is helpful. I would say, just as it took time for pricing to take effect, I think the rough rule of thumb that effort is 12 to 18 months. our expectation is some of that pricing, I mean even the prices that were approved in the recent quarter are going to take time to flow through. So you'll still get that benefit. So if you're thinking about it from the standpoint of, are you going to see a structural tailwind going into next year vis-a-vis ARPU? Yes. Obviously, we want to couple that with pet count. I talked earlier about -- 2024 was a little bit different of a year because of the composition, the contribution of revenue being more indexed to ARPU. We'd like that to not be the case. Obviously, we want pet count. So I don't want to be overly optimistic. But if we think about the planning from a 2025 perspective, we would want the confluence of both happening. So the pricing that was put through as for instance, in back half of -- or first half of this year, we're going into next year. And then the resumption of growth becomes very important. I think one of the things that I've learned about the business is you have to make the marketing investment before the start of the year, that's sort of obvious. What I didn't necessarily into it is how early you want to make that investment. So that's why it's become very important for us to release [ PAC ] dollars in the second half so that we can generate the pet count, then hit the ground running from a Q1 standpoint. We've been very, very disciplined about that. We've said that there are a couple of things that have to happen. Obviously, any investment that we make has to fit within the 30% to 40%. We have to see the margins be sufficient in the market. So we don't want to just pursue growth at all cost. And then obviously, the leg of the stool is -- we have to have the balance sheet strength. We have to have the operating cash to be able to deploy those investments. And so those 3 are now in alignment, which gives us the confidence why we've been releasing dollars, some in Q2, our expectation is we released more in back half of the year. I think once again, I'll turn to Sarah to walk you through the slide that kind of gives you the composition of mix and the impact that has.

Thanks for the question, Jon. So what you touched on is this dynamic of we have a rate that has been filed for approved and then a dynamic of mix between what we are ultimately realizing in our ARPU metric. Presented here are our Q2 numbers really just to highlight the impact that, one, it is taking time from approval to come through renewals in our existing member base. Over that period of time, we're also growing in different ways. That could be deliberately focusing on specific geographies. It could be a different mix of breeds, large cats, large dogs, cats. Those all have an impact on ultimately the average premium that our member base is being charged. That's what's showing up in our ARPU metric. And what we wanted to underscore here is really to share the fact that even though more recently, we've been highlighting these figures around filed for and approved rates. There's always this dynamic of mix impacting what's been approved and ultimately, what flows through our financials. I'm going to hand it off to Alan to go a layer deeper and really underscore the dynamics of mix more specifically.

As Alan gets up there, I just want to add 1 thing. Go ahead, Alan. One of the most important things to keep in mind is this ARPU delta between how much ARPU increases and how much are rate flow increases applies equally to our claims. So you might think, oh, you needed [ 24 ], but you only get in [ 11 ]. Does that mean you're going to have a big margin problem? No, we don't -- that doesn't create a margin problem because that mix impacts claims the same way it impacts premium. And I'll have Alan give you the -- how it impacts premium.

Thanks for the segue, Michael. So if we think about what our primary pricing factors are, right? Our breed, our geography, deductible age, they all represent the risk of a pet. So like Michael said, if those change, we'd also expect changes in overall claims costs. some trends that have been kind of consistent over the last few years are -- we're continuing to expand into some lower-cost geographies, right? As our footprint grows, we're going into new areas, and they happen to be lower cost. Also for the age, the age enrollment of a pet has been decreasing over time. as we continue and continue and continue to focus on the younger pets, right? These are the pets that stay with us longer, then the pets that come in without preexisting conditions. Those are the pets that we really we want to treat. Recently, we've seen some slight changes in kind of what this mix of business is doing. There's been a higher percentage. So if you look at this chart and the down into the right, the purple line, kind of hard to see the colors, breed has been decreasing a little bit more in terms of impact to ARPU from what it had been recently. That's more small dogs, more cats coming into our portfolio. And then we've also recently seen a shift to higher deductibles. But to what the people before me said, as rate flow kind of starts to come down as our overall rate starts to come down this impact, we expect to do some moderation.

Brandon Vazquez again. We're kind of hitting on this subject now, and it's a question I get a lot from investors as we look at vet services or your -- the vet service inflation that you're seeing is about 15%. It's maybe close to double of what people are seeing in CPI, your vet visits are up in your book versus the rest of the market that's slightly down. And the question that this comes up a lot with investors is, is this simply a result of you have a sicker book of business than the rest of the market? And does this then impact your ability to kind of grow a little more sustainably because you'll always have to price increase. So maybe there's a good opportunity to -- you guys have a lot of data, talk to us a little bit about why you feel comfortable that, that's not the case? And what information may give us a little confidence around that, too.

This is another one nice question. I feel like there's a lot of people who want to answer it. Who wants to kick off. Steve, do you want to kick off? Do we have sicker pets on the book of business?

No, we don't have sicker pets. In fact, we have data shown that our pets live longer than without insurance or with any other insurance and some people on the team could maybe share a little bit of that study, but now that flies right in the face of that. I think the think the veterinary profession, the entire ecosystem has been undervalued, underpaid, under resource for a number of years. And what we're seeing in addition to the inflation that everyone is seeing on a can of tuna, for instance, is where backwards looking as an industry. We can't just change like Costco can change the price of tuna tomorrow. We have to wait and watch these things. We can do the best job we can do to predict them. Nobody could have predicted COVID, nobody did, but I'd say we did a pretty good job along the way. So what we're seeing is partially, I'll call it an accordion effect. We needed the veterinary profession to be able to catch up with the lack of value that they've been given over the number of years. So we look at debt-to-income ratio, which is huge in the veterinary profession. We look at how much vets have been paid when they come out of school that changes. What I've seen quite frequently recently is up to $350,000 signing bonuses for veterinarians retention bonuses for veterinary staff as well. We're seeing a lot of the corporates and the privates do this to -- just to get the talent in the door and keep them there where they need to. So that's part of this increase. It's not just sick pets. It's not just increased access or increased utilization. We do provide increased access. We do provide utilization. We do factor in the cost of care and the cost of care changes. We're also hearing from some of our partners along the way that -- he did we get this perfect. We're not quite sure. Did some of the groups overshoot on their prices and may they pull back, they may. Other groups didn't go as fast enough and maybe need to catch up to those others that hit the target a little bit more than where they wanted. So hopefully, that's the beginning of an answer to what these guys can...

Yes. And I'll fill in while others decided who wants to contribute, but I think -- just quickly, when we think about the Trupanion member and actually, it touches a little bit on the question we had earlier with demographics. When the costs have gone up 42% over the last 3 years if we look back to 2021, that's what we've seen in inflation. If you're a pet parent and you're going to the vet and you do not have insurance, you're going to wait until your pet is really sick to take them, that means you're probably not going for wellness visits as we heard. That means you're not going to go if you think your pets a bit of color, during the pandemic, everybody was looking at their pet all day long because they had nothing else to do, and they were taking pictures of it and posting on social media. And they recognize very quickly my best friend is not very well. I'm going to take them to the hospital. So that led to that big step-up in frequency, then you pick up things. So over time, severity isn't as high. Then you've got the impact of inflation that comes after the pandemic, which is the vets to Steve's point, trying to make away for themselves forward. And now you have a Trupanion client, they don't need to worry about the cost because they don't even have to pay out a pocket. That's why we're hearing about hospitals raising their hands, saying, we want the software now because actually, we recognize our costs are a lot more, and they are getting sticker shock from their clients when they have -- when they're going in for the first time in a year and they're seeing a 15% increase when they don't -- everything they read is so much lower. That's why these headlines are captivating everybody because they're shocked by the cost of care. It doesn't matter if you've got Trupanion. And that's the difference. That's why when we think about a basket of goods. A basket of goods is very different to being able to get the care without barrier without considering should I -- should I wait? If you wait, it will get worse. We all know that as human beings. We're trying to remove the burden of the pet parent thinking financially, I have to weigh up the health of my pet and my wallet, especially today in today's economic climate, it's our clients will go to the vet at least 2x more than an uninsured client. And that number will have dramatically shifted over the last 18 months because of the fact that we're bringing that confidence to go back to the vet visit. Michael?

That was a good answer, Margie. You said it in a much better way than I was about to, but I'll say it anyway. I think there's underutilization on the noninsured side. We've talked about that all day. We -- Darryl founded the company based on that principle that they couldn't get the care they want to get for their pet. When you are insured with Trupanion, you don't have that problem. So therefore, there's going to be an absolute difference in the way you use your vet care, which is exactly what we're trying to do. So when we look at things like CPI. And by the way, human health care, the medical CPI runs about half of medical trends in human health as well, that's, I think, just accidental. I'm not going to say use the 2x formula going forward, but it just happened to be that way, but there is just a fundamental difference in the way people are being treated if they're uninsured. We need to get more people insured so they can treat their pets appropriately. And to Dr. Steve's point, the ecosystem of the vets are going to be stable and there. So when you do need that someday, they're where you need them to be, and they have the appropriate best in place to help you.

Great. And Fawwad, maybe for you as you think about -- you're talking about now increasing PAC spend and you're balancing as you go into '25. I want to ask for '25 specifically. But as you look at this business 3 to 5 years out, you have an opportunity now to think about how you balance PAC spend and subscriber growth. What do you think that this P&L, you're talking about a model P&L. Is there anything you can tell us about what you view as this model P&L? Is there a certain level of growth on the top end that you guys are looking for over time?

Yes, of course, it's hard to predict that far out in time. I think one of the advantages -- certainly many advantages, but I think one of the advantages of the company is having a model P&L. I've worked in a lot of different companies. And I think there's also -- there was an aspiration to say, okay, I want to set a metric and I want to measure my investments against that. I want an IRR metric, but I have seen it more aspirational than in practice. I think at Trupanion, it's different. It very much informs day-to-day decision-making, medium- and long-term planning. Obviously, I can't predict the future, but this is a remarkable business in terms of its ability to grow, you have a decade of 20% plus growth and the market is still vastly underpenetrated. I'll confess. Before I came to Trupanion, I didn't know about the brand. I had to learn about it. And I think there's a lot more people out there that don't know about the products and the brand and [indiscernible]. So the model P&L is useful because it scales. So it's not a point in time. It's not sized for a medium-sized business or a small business. It's meant to be a set of principles that guide us going forward. And I think the thing that makes it really versatile is rather than set a bespoke target for, as for instance, in a particular year fixed expense, we do it as a percent of revenue. So there's the ability to make investments in the various areas. You can also overinvest for a period of time. Fixed expense, we've overinvested for reasons we've talked about, putting our compliance investment in place. But because we have top line growth, we can grow into that. So it gives you that versatility. So I can't predict the future, but I think the brilliance of the model P&L is it can scale for the foreseeable future, and it gives us a degree of predictability. So when we're thinking about intrinsic value and we're forecasting it out, I started my career as an analyst and the hardest thing was trying to figure out a CAGR to put on a business because you can't predict volatility. I think there's a higher degree of confidence because long track record of historical data. It gives us a little bit more predictability in terms of yes, that framework is going to scale, whether that changes at some point when the company is $5 billion or $10 billion, it's hard to say. But I don't see any limitations in terms of its of scale.

If I can just add to that as well. I completely agree. And I think the reason that we walked you through the size of the market today and the opportunity we have just in this country alone, then you add on Canada and then you think about the world. we're not just keeping ourselves ring fenced to a local market. We are looking at that long-term expansion because when you've got the people that when they love their pet, they will do anything for their pet. And they're not just 1 million of those in the world, there are hundreds of millions of people that we can go and talk to. And so this is a business that was having this conversation earlier. This is a business that comes down to execution. The opportunity is there. If we price it well and we live up to our value proposition and our pricing promise, then there is no reason why we cannot continue to grow at the clip that we have been growing at. Now it gets a much higher hurdle when you get to the $5 billion to the $10 million to expect a 20% growth at that level. We're not there yet. We have a long runway ahead of us, and it comes down to making sure that we have that diligence to that model P&L to execute to it to give us a longer runway. And that's why we've got the global expansion programs that you heard about earlier.

One thing I'd just add just to brag a little bit on behalf of everybody up here, it's really hard to turn down growth. It's really hard to stay disciplined to say, I'm only going to invest in growth when it meets my 30% to 40% IRR guideline. And with a mission-driven company in a vastly underpenetrated market, we obviously want to ensure as many pets as possible. We would love to insure tens of thousands, hundreds of thousands of more pets. But it takes a certain amount of discipline. So I would give us a little bit of credit that it's not just putting a metric out there. Certainly, I've seen companies do that. It's actually adhering to that in the tough moments. And the tough moment is when you have growth in front of you and you're saying, "No, I need to stay disciplined. I need to stick to my principles. I have to apply the guardrails consistently, and I have to at least take a decision based on that information. I've been here about a year now. And I've seen that in practice again and again. I think that's maybe one of the strengths of that discipline.

Trupanion has a relation with the vets and usually entry-level price for a pet on pure sticker basis is higher than competitors' prices. Those 2 things tend to act as gating factors that bringing a less price-sensitive customer compared to some of your competitor products. Obviously, we've just gone through a lot of price increases, which is hurting retention even among those customers. Price is a factor, and maybe we're coming to the end of that. I guess 2 sort of questions. One is what do you target being probably the bottom for the retention in terms of quarters as you're seeing things trends. Do you have any thought when the retention number bottoms in a given quarter? And two, if we add to the fact that recommendation plus higher initial entry cost plus you just got through to 15% rate increases upon renewal and you're still a Trupanion customer probably your persistency is higher than the average presidency of the average customer 2 years ago? Do you have any evidence that the remaining customers are more persistent than the customers who would have made up the book 2 years ago.

Yes. So thank you for that question. It's very thought. So I think we've got a couple of things. I wanted to touch a little bit on the price sensitivity component because I think Eric, Eric and Brian can share some insights that they're hearing directly from members that are getting -- having that conversation. And then Emily, talking a little bit about the data we're seeing. Obviously, we have a lot. I will just answer the first part of that question, then we think what's the floor. Obviously, we don't know. I will tell you now, we have got, to your point, the 15% rating increases. We've got 2 big states that we had approved at the back end of Q2 now flowing through our business. Logic would tell you that, that floor is probably going to be in the rest of this year and next year, assuming Q1 is 15%. The rate increase being given to our members is going to be a lot lower on average than because we will have caught up with [ the back ] that we had before. Brian, do you want to kick off with sensitivity and...

Yes, I'll kick it off. And Erica, you want to add on to it. So obviously, when we take phone calls, the sales phone calls, price is a factor, absolutely, people shop on price. We continue to train our staff on the value of our products and selling that value. And if you look at the value over the lifetime, it's a better value than our competitors. And so depending on which competitor we have different talk tracks, but we'll go out of our way to find out a few things right up front. Have you had a pet in the past? Have you had insurance in the past? And that really sets up the conversation for the value of our products. But I'll ask Erica to come up, share some things.

I think the biggest thing that I can echo that everyone has been saying already today is that our biggest competitor is self-insuring. And so when we can have the conversation with them about the value and the why and meaningfulness behind our benefit versus our future, then that helps us keep those members insured, making sure that their pets are protected for the rest of their life.

Yes. And I think to echo what Margie said about retention and renewal retention and specifically, like she said, we're still very much in the thick of our members receiving those rates. We have seen some strong changes year-over-year as the team has really dug in and learned how to retain members who are receiving higher rate changes than we might have had previously. So in that way, retention is going to be ever evolving. We're constantly going to be learning how to retain different distribution channels, different segments of pet owners, different experiences with us. One thing that we are excited to share with you all is our -- we look at retention in terms of 3 different segments. For those of you who don't know, it's our first year retention, members who are receiving a rate change under 20% and members are receiving a rate change over 20%. Over the past year, we've made -- we've put a lot of energy and a lot of resource into how do we retain that over 20% bucket knowing that our book was going to shift in that direction. Kelly can tell you a little bit more about like what her and her team have specifically done. But overall, we were looking at breaking that bucket down into more specific segments of pet owners. So we didn't just look at over 20%. We looked at what's the experience between 20 to 30 and how are we communicating that? What's the difference between 30 and 40, and how are we communicating that. And for that over 20% bucket, we've made some good improvement in that. Members who are having a rate change between 40% and 50%, we've improved that retention year-over-year by 0.5%. Members are receiving a rate change between 50% and 60%. We've improved that retention rate year-over-year by over 1.25%. So it's going to be ever evolving. And we've learned a lot about how to retain this new type of rate increase that we had this year.

Emily, can you maybe touch a little bit on -- I mean going to ask the question [indiscernible] potentially from the audience. When we think it's fantastic that we've seen those improvements across the board because we've been focused on it. when you look at retention opportunities, what is next for the team? And where do we see the biggest gap today?

Yes. I mean I think the slide outlines it pretty well. Our biggest opportunity is in our first year retention. First year retention has not been as strong this year for a couple of different reasons. First being understanding where the majority of our members were going to be in their experience and really shifting all of our resources and energy into how do we retain that over 20% pet. The second element of that is that when we look at -- we've been talking a lot about acquisition spend and how we've been refining that and becoming more efficient. Part of that is our part of what is included in our acquisition spend is our first year retention spend as well. So when that came down overall, it all came down for first year. And so that was an expected impact. And the third reason, which again, speaks to how retention we're just going to always be in learning mode. We've had some growth in some other channels outside of it. that has a lower retention rate. So the team is trying to understand, Kelly and her team have a very robust retention road map and testing plan. And so we're responding to that growth in some other channels that we're still trying to learn how to best retain some of those numbers that are coming out from vet.

If I can also just kind of speak to the second part of your question, when you were talking about the product and obviously, advocacy. But when we think about Trupanion, we've always been at a higher price point than our competitors because of the way that we price, because of aged enrollment, because it's not clear to people when they see everything, they think everything is equal, the reality, it isn't? And I think someone asked the question earlier, how do we better message out because that's the biggest component. Now where we are today, the delta between Trupanion and some of our competitors is actually a little smaller than it was before because they waited a long time to get the rate increases, and now they've got to get some big ones in. We've also seen in the industry where that didn't happen, and we know what happened to that book of business. But this is a product that has to be sold. And so there's a tendency to grow quickly. People want to [indiscernible] the pets, and you could do that. We could spend a lot of -- we could spend all of our AOI right now. And I can tell you the IRR on those pets would be 2%, 3%, 4%, 5%, 6%, 7%. That's not what we're trying to do. We're trying to make sure that we can convert efficiently. And when you convert efficiently, you have to be able to articulate your value proposition to those members. Our phone conversion rate is how high?

51%.

Yes. And it's the same levels it was at 2 years ago. That's remarkable given where we are, but the value proposition hasn't changed. You just need to be able to articulate where that person is at that time and helped to demonstrate the value that we bring. And so knowing that we have that fairly hefty upfront enrollment process where we need to sell to you as a pet parent. The retention is not -- certainly isn't easier, but it's -- you've already educated them to -- sufficiently that they stay around.

Maybe a more simple way to get the same question. At last month, 48% of the -- I guess, the renewal in that month were people who saw a 20% or greater rate increase. When do you think the proportion of the book peaks in terms of the amount of rate increase, knowing that New York and California obviously drive it. Are we near the peak at 48%? Or does it get to 60% before it goes back to 30%?

Yes, I'll take it. I don't have a firm answer for you. We have -- we haven't modeled the future. When we look at Alan, I don't think he has an answer either. But I think we're close to the peak. I do -- we do have big rate increases in New York and California. And so that will impact it. But I think we're going to be drawing down some rate increases in a lot of other areas at the same time. And 12 months from now, we should definitely be lower, and that percentage should go drop down. I'm not going to say all at historical levels, but definitely a lot closer to historical levels.

Yes. And Alan, I mean, both of you, when we think about the percentage of book, you mentioned California, New York, they are obviously big portions of our book of business. Now they are being priced appropriately. Assuming the rate stays at 15% in Q1 for everybody, including those states, the price that we have flowing through now will carry us into the back half of next year. So the reality is -- unless it goes to 18% in Q1, we're through the bulk of it.

Aakash from P&R again. Obviously, the last 2 years have been really tough with fundamental performance, share price volatility and short seller attacks. But it's great to see Trupanion now coming on the other side, both fundamentally and with the share price. But the question is more on the ground. How is it for you guys? If anyone could share some -- how was it for you guys going through all of that. If you want to share something, it would be interesting to hear how the experience was.

I don't want you to hear from me. So who would like to share.

Shall I speak first? So I joined 2 years ago and joined at a really interesting time. And so I leaded our people operations function. And it is amazing how resilient this team is. And I think one of the most important parts of the team is this commitment to our mission. I it is everywhere, but I also -- just even listening to the team talking about it, it's not only the commitment to the mission, the belief in it. It's the pride we take in what we do and the conversations that we have and I think about listening to Erica and Brian, talking about the conversations that our frontline team has to have with our members. And it is so empowering. And so even through the tough times, I'd like to say, at Trupanion we can do hard things. And we believe in our mission. We've got great leadership. We have recently started to survey our team members using an external firm, and we rank in the top tenth percentile of firms in terms of commitment to mission and leadership. You look at the people we've been able to hire and bring on board just on this stage. You look at the length of tenure of other teams. This is an amazing company. And I feel like I'm in recruitment mode all the time because I'm so proud to work here. So yes, it's been tough. We've had to make some hard decisions, but the team has done it together. So that's how I feel.

I mean, it didn't change anything for me. We, in my opinion, and I think in the opinion of all of those around me, we have a superior product in an underpenetrated industry and we have relationships that we've spent a lot of time building. We have just under 200 territory partners in the field building those relationships. The conversations when they walked into the hospitals were the same, the goal was the same. The questions might have been different. But what we have to offer, the value that we can bring veterinarians, pet parents and pets didn't change.

From my point of view, I was really worried I've been here 4 years. And when these rate increases start to flow through, I was really worried is what's going to happen? Are people going to pay this premium? Are we really going to make the margin at my spreadsheet said that we would make up -- and looking at Emily's retention numbers, it's remarkable. I'm just incredibly proud to be with a group of people that can follow through and make our rates right and make the margin right because of the work that they did. And it's been great.

Wilma Burdis again at Raymond James. I think last time you guys talked about this in 2Q, you said that you're rate adequate in about 85% of markets. I think one thing I'm hearing today is some optimism about being able to grow more. Has that number moved recently. Is it going to go to 100%? Or are there certain markets that just don't work? How do you guys think about that trajectory?

Yes. Great question. So it kind of depends on how you define markets, but the 85% that we've said historically, I would continue to say we're about there. But as we get key approvals in key states, right, there's a big 1 in California. And it opened up a whole bunch of neighborhoods. So at a state level, just state by state, we might say 90%. But if we can continue to work towards unlocking key categories, key neighborhoods, which we are -- we're optimistic.

And -- we would add to that, that this is not a metric that we used to share because we didn't need to. But the reality is, as you're growing and getting more data and as we start to think in a more granular fashion, we're never going to be at 100% rate adequacy because you've got new information, whether you have maybe a new emergency specialty will drive your prices up in a specific geography. Maybe you have a fashionable breed, which happens. Maybe you have some illnesses or something that changes the cost in another territory. So it's going to constantly change and evolve. And that's why the team has such a workload on their plate because they're not just trying to model future, say, cost and risk for today and high inflation. They are constantly going through thousands upon thousands of different categories, there's 1.2 million categories that we have, that will ultimately mean we are trying to drive as many of our members to rate adequacy, but there will always be pockets and perhaps species or breeds or locations that we need to get more rate for or we need to adjust our rates. So 85% in a market that's got over 1 million pets per month, it's a pretty big market to go after.

You talk a little bit specifically about what goes into PAC spend. If you could break down the categories, maybe digital marketing costs, traveling costs, brochures, that kind of thing? And then could you just also talk about the mechanisms of actually pulling back the PAC spend in certain markets? And how that impacts territory partners, just they're commission-based, does that lead to any attrition? Or just maybe discuss how that works.

Emily?

Yes. So I think there's maybe a couple of different questions in there, and I'll pass to you, and Jay afterwards. So our overall acquisition costs, we have 3 different categories. We're looking at our lead spend, our conversion spend and our deep or retention spend. In the lead bucket is probably what you would imagine. It's the brochures that you mentioned. It's really about generating all the costs that are needed to generate leads at that breeder shelter. In the conversion space, we're looking at things like our website, Brian and [ Argus ] sales team, Suzanne's team, different channels that we use some of our digital media spend to convert people who are coming from that breeder shelter and then our retention spend, which is largely headcount probably won't get into the nitty gritty of exactly what percentage is travel and whatnot. But we are very disciplined about how we are measuring that. And looking at if there's a new initiative, there are very clear goals about what we need to be hitting in order for this to be efficient and something that we can maintain going forward. So anytime the teams have a new initiative or looking at a new campaign, we've got a really clear understanding of what our pet acquisition cost can be for that type of initiative. And I think the second part of the question was around geography and...

Yes. So with a lot of the pullback, we had to look at how we were spending money. And quite frankly, we should be disciplined in doing this already, right? So this was an exercise that we were already doing, but we needed to get more finite with doing, right? So when you think about the materials that we have the materials that we thought were valuable, we needed to really dig into the data and figure out what materials do we need? What materials talks to driving leads, driving value and getting more hospitals to adopt that portal utilization. I think that we had a lot of learnings. We learned a lot about what we do need. We learned a lot about what we want and think we need, but doesn't actually produce or we can't track what it produces. I think from a territory partner perspective, and we have 2 in the room that can talk to this, but it was very challenging. They -- through some of the height of COVID and when they weren't able to actually walk into hospitals for a majority of that time. Their business has started to grow through other channels. We put a lot of investment into other channels. And when we pulled that investment back, it went back to the bet, and it was basically getting back to the roots of going into those relationships and getting the majority of their business coming from that bet channel, but also then pointing them in different directions where they may have had a smaller portion of their hospitals or their territories that were their primary producers of getting those insured pets. Now it was about expanding that footprint and looking at other areas and trying to drive that value, that growth, that same-store sales metric in those particular areas where we knew what you're priced correctly. So they had to look at what they were investing in their territories as well, and they saw that change, but I'll let them speak to that.

So I wasn't here in COVID, so maybe, Hayden, you could...

I think for us, it's just working a lot smarter, right? I mean we have a list of clinics that are to our -- that are on our list that we can call on and it's just a matter of having our TPA spend the time in the clinics where we're going to get the most bang for the buck. So now that we're through all that, we're seeing that that's really helping us now because we're seeing those efficiencies because we had to go through the downtime, so to speak. So we're seeing a lot of growth now that we didn't have in the past. So...

Yes. And I think we have inside sales and support teams that we also had to look at too, right? We had leads in front of us. We had hospitals in front of us. We had conversations that we wanted to have, and we had the teams to be able to have all of those conversations. We had the cohort. We had to start looking at hospitals and determining which conversations we needed to have. We needed to get role clarity across our teams and who was having what conversation and who is responsible for driving what. And we got frugal, but we continue to grow and we continue to go in the direction that was going to get us the most bang for our resource. Does that answer your question?

It does. But just I just want to refine it a little bit. Was there any -- I guess, the retention stayed pretty much the same when I look at some of my other companies that have a lot of in-person distribution. Many of them lost salespeople during COVID and then if rates weren't adequate. So you guys held steady or retention.

We did.

To the team, I think one thing that I was just going to say, when we think about the territory partners, we can give bells and whistles through the post. We can create fantastic posters. We can give them assets. That's one thing, but we're a people business. And you cannot replicate our people walking in the door and looking the vet in the eye and looking the team in the eye and saying, we're here for you. This is what we will do to help you. And that's the difference. Again, we talk about moats. That is an enormous [indiscernible]. That has taken us multiple million -- I don't know how many millions of visits we've done at this point. But every single day going in and doing that. And when a TP has given the chance to build that connection relationship, it's very hard to break it because you're looking at a person that you're going to let down if you don't help them in their business. So I think for us, it was a real focus on to MJ's point. What do we actually need here to be able to sell? And when the market inflation goes in the direction it's going, the need that we have doesn't need a brochure. A brochure isn't going to sell it, it's a person. And that's the -- for us from a PAC perspective why we push so hard into the vet space, and we'll continue to do so because we need to protect that sphere, so they can treat the pets the way they're trying to treat them.

Andrea. We touched earlier on excess capital and how conversations are ongoing to try to maybe upstream some of this capital. I am not so clear on what difference it would make to the value of the company. if we are successful at freeing this capital and bring it up or if it remains sort of at the subsidiary insurance level and so that we grow into it. So maybe could you describe a little bit what this capital would be for and how it connects to intrinsic value of the company?

Yes. It's a great question. So I think one thing that's really important, and I've certainly seen companies get into trouble with is they spend a lot of time thinking about sources of cash and not uses, they need to think about both, which is, I think, the heart of your question. So the cash that sits in the insurance entity today obviously generates some benefit to us with interest rates higher than they have been historically. We accrue interest income. It clearly gives us the financial wherewithal to take on growth. So we don't have to access other forms of capital to be able to grow the business as we wish. So there's certainly a benefit to having that. I think from the standpoint of the uses of cash, I'd actually go back to what I said previously, which is everything that we do from an investment perspective, whether it's an investment in, whether it's an investment in technology, whether it's an investment in a financial decision, ultimately, we'll go through a 30% to 40% IRR. So in a market that's underpenetrated, obviously, there's not a shortage of growth opportunities. They have to fit within that guardrail. But we would run whatever we were able to extract. So if those conversations were successful, and we could release some of that capital. Ultimately, we would only deploy that or we would deploy that in the highest investment that we could find, highest value -- highest return investment you could find with the minimum criteria, it has to be within the 30% to 40%. So that framework makes it much easier for me in terms of capital allocation as a CFO because ultimately, I will just index to whatever is going to deliver the most value based on a consistent metric. So the beauty of that metric is it gives you a comparative. So I can very easily run any investment through the same framework and choose the one that's going to generate the highest value.

But just to be clear, given that I think there is also the guardrail of being free cash flow positive, having extra cash are, what difference would that make? I mean would that -- wouldn't mean running again cash flow negative or...

Yes. So there's 3 things to consider when I think about sort of overall financial strength. So there's the 2.5% free cash flow as a percent of revenue, that's intended to give us the ability to control our own destiny. So to your point, have the capital available, should we see opportunities for investment. There's the capital required for the insurance entity in order to meet the requirements. And then there's our operating cash. And ultimately, I need all 3 of those things to fit within our guardrail, our internal expectations for what those should be. Anything above that, I mean, there's no intent to generate cash for the sake of generating cash. we want to deploy it. We are a growth company. We don't want to reach for growth, which is why that guardrail becomes important. I would say, if that cash was just sitting there generating 5% roughly what short-term treasurers are getting, that wouldn't be as interesting for us as obviously a 30% to 40% return in growth. So our index is always going to be whatever the higher value. Realistically, the majority of that, most of the time, that's going to index to putting money in PAC in order to grow the business because we're in an underpenetrated market. I'm not as interested in just accruing cash that ultimately is going to generate mid-single-digit return at best.

And if I can add to that as well, Andrea, when we think about deployment of PAC actually comes back to John's question earlier, talking about growth. We're not even though we have the adjusted operating income starting to be generated at a much higher clip now, we're not just going to throw -- we could just throw that into the market, we're not going to. So we will hold very, very tightly to those guardrails to ensure that we are constantly learning and leaning into where we will get the biggest return. But if we can't deploy it, we won't deploy it. We're not just going to grow for growth's sake because that's not great for anybody that hurt. And that's ultimately hard to structure the business to support that, too, because we go back to that slide where I talked about the consistent growth and repeatable growth. If you're volatile, that's really difficult. It's really hard for Brian to figure out what he's doing from a resourcing point of view. It's hard for Jacquie to do the same thing in claims. It's hard for our field team who are trying to support everybody. Our infrastructure today at the size at would infinitely make that harder. So it's about deploying as precisely and delicately as we can with scalpel-like precision to ensure that we are going to get the returns, which is why you're going to see a little bit of lag between today's spend and when we really put the foot on the gas.

Great. We're going to take a break. So we're going to break for lunch. Folks who are joining us online will be back right about 1:45 p.m. Pacific Time. And everyone who's here joining us in Seattle, there's a pizza truck outside and some salads and other food in the back. So please enjoy. [Break]

Okay. Thanks, everyone. Welcome back to our third and final Q&A session. We're happy to take as many questions as you all still have left. [Operator Instructions] Anyone want to get us started?

Jonathan Lindstrom with Kopion Asset Management. I was hoping you could just give us little insight on how the rollout of the vision claims and policy has been going? And how member experience might be trending to? I think it had maybe affected that earlier in the year.

Quick. It's like Formula One transition there. I'll hand over to Fawwad, who can talk a little bit from a tech perspective and then John, and I'm sure other team members as well can add some color to the member experience component.

Yes, I can kick things off and then also want to have Jordan talk a little bit about our use of machine learning. So I think we think about digital transformation, all of you, I'm sure, have seen or been a part of different efforts in different companies to try and effectively use technology as an accelerant to the business. So in the case of Trupanion vision, as you've described as you -- [indiscernible], is claims and policy. So the good news claims has launched. So having a single system, a single one ring to rule them all is incredibly important because you're moving from bespoke legacy technology into a system that not only is more proficient, but it's more scalable. And so when you think about the value proposition of vision, why invest in something like Vision, there's sort of 2 fundamental things. One is higher degree of automation. So in terms of how does that land with the member experience, it's enhancing that whole process. The other is just scalability in terms of as the business becomes larger, it gives us more opportunity for more product differentiation, more SKUs and the ability to handle that differentiation. I think we talked a lot about some of the work that Aaron has done. This is a business you have to understand at a granular level. And so tailoring products, tailoring experiences for members and consumers is what that technology ultimately is supposed to enable. So I would say great progress in terms of landing vision claims. It is now the single source platform, more than 90, I believe more than 95% of claims are processed through Vision. We're doing the work now in Vision policy. Our expectation is that we'll launch sometime next year. And again, that gives us a technology platform that we can then build hopefully, the next billion, multiple billions of revenue.

Yes. And from an operations standpoint, I think we have a chart on claims automation rates. And claims automation rates were high, but ultimately, it kind of plateaued for a long while. And with the implementation of Vision, we've seen, honestly, a significant jump in claims automation to the tune of about 10% in the short while we've been there. Jordon and Jacquie have been working diligently on what comes next now that it is the system of record. And honestly, I see no limitations on automation rates going higher and higher. With that also, the single platform is something that will be beneficial to all of Trupanion, because right now we have so many systems that team members are, I think Dewald shared with me, it's faster to train because they're only training on 1 system, not 6 or 7. And team members are understanding the system faster. So although the transition did take some time, and there was some pain during that, but now we're having record speeds of claims payouts. We're on pace to pay 600,000 claims in under 5 minutes this year, which is remarkable.

Yes. The 1 thing I wanted to add is that if you look, as John said, we were flat throughout most of 2023. But then as we turned on the Vision platform for claims, we did not change our underlying models. So those are just purely improvements from the Vision platform, being able to handle a wider scenario of claims. The Vision platform within claims is kind of like us getting a microscope. We can break up work items to a much finer level of detail, determine better associations and break that out across the entire business operationally and then just really start to improve our models. We're working on that right now. So everything that you see right there is that portal growth and then the Vision platform, just pure capabilities. So...

Yes. And I can speak a little bit about member experience. So as you mentioned, during the transition, there was some bumps in the road for sure. We're currently operating about 73% of claims done in 1 day and 98% done in 7 days. So we've really recovered and turned that around and are back to our very quick processing speeds.

One thing I'd add. I saw a statistic just a couple of years ago. I think it was effectively saying that for most digital transformations, 2/3 of -- 50% of them are late by a significant amount, and they generally get about 2/3 of the original stated value. So the point of that is these technology transitions are very, very hard. They look easier when you lay them out on a PowerPoint slide, but the actual implementation, taking even just the data, I mean think about the volume of data that we have, being able to transfer that and move it from unstructured data to structured data, that's an inordinate task. So I would say, for now, I'm not sure what I would grade it, I'm not as good as John at putting a grade on it, but I feel very good about the outcome. You ultimately make these investments and you want them to be successful. I would say, at least from the vantage point, I said, this was a successful investment.

If I could add, from a growth perspective, Vision has allowed us to fully invest in areas where we have multi-language needs. So earlier this year, we were able to flip that switch, which has allowed us to fully invest in places like Quebec, which is a big player for the Canadian market.

Just a picky question on that claims automation rate slide there. I remember maybe last year, early last year, there was an issue with new installs of the software that they were toggled to not have Autopay. And when we look at that unusual sort of like trending, is that the glitch that was fixed in the...

This would be unrelated to that specific thing. What you see there is, I mean, sometimes you have to take a step back to get 5 steps ahead, right? That's us turning on migration. We had to kind of take a step back. And then as we launched Vision, we moved up and scaled, but that was an unrelated glitch.

To that point, though, and Jacquie can speak to this far more than I can, that has led to -- turning on the automatic pay direct to hospital has led to an increase in hospitals paying directly.

Yes. Yes, we can pull up the slide on claims paid directly to the hospital in 5 minutes, which we are seeing a nice increase on as well. I think the piece you're speaking of is whether we were paying them directly or not. It's actually unrelated to automation. So this is looking at how often we are able to pay the vet directly in under 5 minutes, which we know is a really unique experience that solves the problem in a way that no other company is doing. So we love to see that trending up into the right, which we know that, that is an experience that is so valuable to our members and unmatched.

Maria Ripps from Canaccord. So it feels like it's been a while since you talked about TruTopia. Can you maybe refresh us on your thinking around sort of this self-sustaining growth effort? And are there any markets currently that are either in this state or close to this state?

Yes. So currently we don't have any markets in TruTopia. That is a bit of an expected result though. We knew that coming into higher rates -- higher increases for our members was going to impact retention. We also knew that decreasing our acquisition spend was going to be impactful to refer a friend. So oftentimes refer a friend is a channel that really benefits from some of those several other touch points. So we expect it to be here. It's a detour on our path. We're still absolutely focused on it. And that's what our goals are. So we have detoured from where we've been historically, but that was somewhat expected.

Brandon Vazquez. We were at lunch talking a little bit about, in the 2023 shareholder letter, there was some data on the number of pets per month prescribed per hospital. And there was kind of quartiles on them. Your top accounts were doing 14. I think going on your entire user base, you're just over 1 pet per month per hospital. Maybe can you talk to us a little bit about like what is happening at those accounts that they're so high in your top quartile? And are those reproducible as you go to some of your other accounts and try to get them up into that upper range as well?

Jason?

Yes. So I'm proud to talk about this because Canada has written a book on how to get this done. As Marty shared in the open, we have a number of hospitals that we could use as -- they have set the bar for the rest of the organization. So the answer to the question, really, the difference between what we rank internally as an A hospital versus the others is simply, it's the culture. It is the culture throughout the practice, it's the adopted workflow, it's the conviction that, that practice has. I think the difference between this, a, is if you ask any practice, how often you spoke of heartworm prevention or flea and tick control or the prevention of disease, and ask them to give you, okay, how many times, how many patients or clients did you speak to this morning about that, they'll look at you funny. It's like, well, I don't know because I just do it. And you ask that same question, well, how many did you speak to about the prevention of financial burden and preparing for the future? And the lightbulb kind of goes off, because it's not consistent across a lot of our practices. And the challenge, and Margi had said, ask us how hard it is. I've been doing this a long time, and it is no easier today than it was 15 years ago. Why is that? Once we have a hospital in stride, and we turn our back on that hospital to go focus on the next, thanks to staff attrition or what have you, we lose that momentum, and we have to go back and rinse and repeat. So I think for us, it's building the right habits, ensuring that Trupanion is a big part of the workflow. And again, that conviction is there from the CSR at the front, all the way to the veterinarian in the back.

Maybe I'll add to that. Utilization begets utilization, meaning that when people are reminded and they see something works once, twice, five times, they will start to remember. But I said at the beginning of this, with 3.69% insured and only about 1 in 100 coming in with Trupanion, we need to make sure that people consistently utilize and build that muscle, build that muscle memory. And then there's a tipping point. When enough people are coming in on enough of a frequent basis, the muscle is just there. Now you're not thinking about lifting that weight, it's just happening and the muscle is built. So we're starting to reach in many, many places that point in hospitals where they have enough Trupanion members. That is not just the territory partner and the general managers, et cetera, are going in and their account executives reminding them and reminding them and reminding them, it's they're thinking, "Oh yes, 2 weeks ago, I had a really great experience with this. And they paid me directly." Is lightning going to strike twice, and then it strikes twice and then 5 times. And let's just have it. People will leave and people come and people will go. Whoever learned at the first clinic will take it to their second clinic or their third clinic. And eventually, things will flip over again and cycle through and you'll have another person from another hospital that used it at this hospital and they'll move on. So in areas where we have more insured, it multiplies, which is really cool.

Wilma Burdis at Raymond James. Two questions. One should be pretty quick. Just wanted to clarify the 15% target for year-end. Is that exiting the year? Is it for the full quarter? Maybe just help put a little bit finer point on it.

Yes, I can take that one. So if we're talking about Q4 of this year, it's for Q4. So in Q4, we expect to achieve the 15%.

Okay. So for the full quarter, 15%.

Correct.

Okay. And then second question, discussing modes, there does not appear to be any competitor in the market for the higher premium Trupanion product. And we saw some exits there as well, I think, in that market. Maybe just talk a little bit about that and why that product is difficult to recreate. I know you've talked some about that throughout, but -- and do you see any competitors coming in the market? And would that be a good or bad thing?

We haven't. I mean, I think the closest to our core product is Chewy, the top-tier Chewy product, which, obviously, we've created in partnership with them. Otherwise, there's nothing that is remotely close in terms of the breadth of coverage, the value proposition, the consistent value proposition that we're offering. In terms of the field, Jason, do you see high levels of competition coming through that's of high quality? Or is it fairly consistent?

Yes. I mean I think double down on what we said earlier that, again, our #1 competitor is basically in difference, Visa and Mastercard. So I've yet to kind of swim in those waters where we're really butting heads with the competition. In Canada, we don't really have the same number of players as the U.S. market has currently, and some of those players have been around a while. And some of those players definitely are not at the same level of us when it comes to coverage. Ultimately, insurers have 2 options. You either price appropriately or you adjust your coverage. And these particular players I have in mind are those that have a track record of reducing coverage, and that's unfortunate because most members do not read their coverage or understand their coverage. And unfortunately, they learn the hard way that they can lose coverage. And so that's what we see a lot of times.

I think the -- just to answer the part of the question related to why haven't they come into the market. When you think about the breadth of coverage that we offer today and you think about how do you price for that, people think it's easy to price for the cost of care, but the cost of care is very different depending on where you live, depending on how you behave as a pet parent, the age of your pet, the breed of your pet. But not only that. When you think about how do you then go into every regulator, do you then have to get the right approvals, do you justify the cost. You can't be in this business doing what we're doing unless you understand the problem that you're solving. And a lot of people don't have the time, effort, or energy to put in to create the type of product that we created. We have the first-mover advantage. We were the first to come in with unlimited, we were the first to do 90%, we were the first to cover the things most likely to go wrong with your pet. All of those things have given us so much data that allows us to get our pricing right. And I think a lot of people come in and they don't realize the value of 71% on every dollar, and they'll come in at 51% and they think it's the same thing. This is not a commoditized market. So the quality of coverage is very different across the marketplace, but they just can't -- the pricing is hard for that top-tier product. The only ever product that has come close to matching Trupanion, it wasn't as good, but it was close to matching Trupanion, has just dropped coverage on 100,000 members. That's how hard it is. That was the biggest player in the industry, the oldest in the industry. And people have seen that. It's not easy to replicate, and it's something that we continue to refine as other people are playing catch up.

One thing I'll just add, there was a wise man that once said, who might be sitting in the back of the room, there's 2 things in life you don't want to buy cheap. One is insurance and the other is sushi.

I had a question about aggregators. I mean, these websites that tend to direct traffic to different insurance companies. Now that the market has consolidated essentially 3 players or 3 groups, how is their business model adopted? I mean, have you seen any change? Do you see the JV brand sort of fighting one against each other or they are rationalizing there? And also, have you heard of them maybe trying to go a bit more directly to the vets?

Yes, we have. That's an interesting one. It's the hot potato. From our perspective, we want to partner with people who are going to legitimately have actual reviews. And years ago, we made the sense, if we're going to partner with any aggregator site, and I was in the U.K. when aggregators came into the market, and they absolutely commoditized the marketplace. So everybody assumed every coverage was equal, and the only thing differentiating them was the price. We're not at that point as a category today at 4%. And so for us, we want to work with partners who are prepared to be very transparent with their promotions with the content, to have legitimate reviews from members who have been through a claiming experience and can then say this is either good or bad. And I don't know how many of them exist today that would check those boxes, to be completely blunt. The team we've been talking a lot about, how do we partner with people to help really reinforce the brand to make sure Trupanion is there, because everyone is looking for Trupanion when they go to an affiliate site, an aggregator. And we don't legitimize them today because we're not there. There's a question, should that be the strategy? And we've been having internal discussions. Steve, would you add some color to how you're thinking about this and what you think it could look like in a few years' time?

I mean, I think Margi is right. It's not a level playing field. Like it's a pay-to-play and it's not something I really think that we believe in. If you look at those sites and you see the ones that they're giving 5 stars to, I mean, it doesn't always make sense. Now I think over time, I'm hoping that, that changes. I'm hoping that they do decide to take an approach where these are going to be based on true customer reviews of experiences that people who have claimed have had. And I think if it gets to that, I think it's something that we definitely need to look at, because I don't think anybody can hold a candle to the experience that our members would have. But until that point, I think it's something that we're going to monitor and see how it progresses.

The JV front, I mean, I'm not going to speak for other brands other than to say they're all still on the aggregators. So that's for them to decide.

Aggregator sites, particularly in the U.K. and in Europe actually. The actual lifetime value of a pet or any policy that's on an aggregator site is very short. And it's a massive problem to the point where the regulators in the U.K. have now started to look at an overall fair pricing model, because everybody is just chasing the lowest premium to try and get business onboard and buying policies. No less prevalent with pet. But the data ownership, particularly with GDPR in Europe and the likes, the aggregator owns that data. So as soon as they get a quotation and they buy a policy from Trupanion or whoever, the next year, the aggregator is going back trying to get them to -- because they only make money by selling a new policy. So aggregators are a dangerous place to play, particularly with pet insurance. It's not right for the customer, because they will end up with preexisting condition problems and they might not understand what that means. And furthermore, we don't get the long-term value of the pet.

I guess I can keep going. I have to head out in a minute, guys. So last question for me. But I think one thing that stands out to me when I looked at the trend of the margin over time is that there's only been 1 data point that was over 15%. So you guys are targeting that for next year. I think that what was happening is that the margin was expanding for a long period of time. You got hit with the inflation. But maybe just help me think through if that's a good long-term number, and what's changed over the last, I don't know, 5 years or so?

Yes. I mean, so if we look at that chart, that's why I called it out, because those of you that have been following us for a long time will know that we only got there once. We're very excited about getting there, and we can back to that. What isn't shown on here is -- and this comes back to the point that both Fawwad and I have made in terms of disciplined capital allocation and how we're thinking about the business. During the period you see on the screen, we had a lot of investment from Aflac. And we had a lot of money that we were spending to do things across the business. It meant that, honestly, we took our eye off the ball with certain things. We weren't as disciplined. And so it's very deliberate that we're both saying what we're saying, because we do not want to do that again. We had good ideas. We weren't necessarily tracking all those good ideas. And as a result of that, we took our eye off the margin a little bit. Now that's not -- the bulk, obviously, is the inflation, but as it starts to turn down, if I look back, my opinion at the time, retrospectively, is we should have, of course, corrected at that point. We still would have suffered from the margin compression that we saw, but it wouldn't perhaps have been a severe, because we weren't being as disciplined with our expense profile and how we're managing expenses across the board.

Thank you very much. Okay. I'm Jonathan Kim from The Public Asset Management in South Korea. Nice to meet you, and thank you for having me. I have three remaining questions. Number one is, is there any signal that customers cancel or postpone to renew their policies because of macro headwind during the third quarter?

Maybe can you repeat the question? I didn't quite catch the end.

Yes. Is there any signal that customers cancel or postpone to renew their policies because of macro headwinds during the third quarter?

Oh, I see. No, we haven't seen anything that would necessarily reflect that. Honestly, what we tend to see in times like these is that this is when pet owners need us the most. So that's when they're staying with us longer, because they recognize that there is some uncertainty and they will need us in the future.

Second one is about your competitors. I think your policy looks pricey than other competitors, but actually, that's not true. If so, there are many newcomers from other insurance companies after many accidents or illness of their cats or dogs, unfortunately. Can you provide some details of some kind of winning rate or something?

Track the win rate in the macro environment. What I would say is as we see volume coming through vets, what we're focused on is the leads that we generate. So for a long time, we felt, because of the team mentioning we have the highest number of people in the field across North America. So those people every day are really driving the lion's share of the lead volume in the category. So if you think about a win rate, you could assume that if we get an exam day offer, which is really our best quality lead, if you will, people who have had an introduction to a concept of high-quality insurance from the veterinary team, and then we are communicating directly to that pet parent to help them understand why Trupanion. That's our highest win rate. And I'm not going to give away competitive secrets, but it's a very high conversion rate. Beyond that, though, a lot of people will go and they'll shop around online. We see the traffic online searching for pet insurance is largely dictated by how much money the category as a whole is spending. So if we are online, bidding on pet insurance as a term, for example, you'll see the search terms, because we're just more prevalent, that we come up in different spaces. Same thing with Trupanion brand, same thing with our competitors. So if there's not a lot of money floating around, you're not going to see an awful lot of search traffic, because our people are the ones driving the overall lift. But in terms of market share, we're about 25%. I'd expect that to continue moving forward. So you could assume perhaps that we have 25% of the total opportunities in terms of lead volume. When it comes to actually people who are in market to buy pet insurance, I would say that we are absolutely getting the lion's share because of that traffic. Would anyone add anything to that? John?

No. I mean, overall, I think that's probably right. And I mean, I think if you're thinking about a win rate, I mean, I just go to conversion rate, and I think from the phone, even with everything being a high-priced product, or that's maybe the perception sometimes, the conversion rates climbed, and now, I mean, when we're looking at puppy and kitten conversion rate, it's even higher than what's on that chart there. And I think that's because of the value that we're able to portray over the phone and educate the people that are calling us, because they are shopping around. But when we stack up against them, there is actually no comparison. So I mean, I think when we get those opportunities, we capitalize at an extremely high rate.

Okay. The last one is this. I knew the new rate in California from July will affect. Do you think this affects significantly third or fourth quarter earnings? Or how many pets are there in California, how many portions?

We're not going to tell you that. That's a secret. Though we do have quite a high penetration rate. Michael, do you want to talk a little bit about California rate and the impact there? And then maybe, John, talk about how we're applying that from a growth perspective in our thoughts.

Well, there's a kazillion pets in California. That's the correct number. But the way the rate rolls out, all the new pets will get the new rate right away, but the renewal pets get it as they renew. So by fourth quarter, that will be less than half the pets will have got the renewal. And some of those pets will have just gotten the renewal. Like those ones in December, we should barely be paying. So that cumulative increase in rate or in premium isn't as much as the overall rate increase in Q4. And we also had a rate prior to this last one that was material. So I don't have the numbers off the rate, but you can quote me on the kazillion.

And I think from a growth perspective, I think what Aaron shared earlier was something that we've applied, right? And we're understanding where we are priced appropriately and not. And now with that rate flowing through, we feel comfortable on kind of pushing the pedal to the metal and starting to accelerate there, which we're really excited to do. But growth is more than just new pets. It's also retention. And I can say, from all of the rate conversations that we've been having, [ Sabre ] just continue to go up, and we're making really good progress on rate change over 20%, which I think is really significant, understanding the balance and the rate that's going on there, but it's also going on in other places, too.

Who hasn't been a question? People questions? We've got some people, people in the room that can answer questions about learning and development, about talent, hiring, retention. We've got machine learning questions. We haven't had many of those. We thought we'd get lots of that, but you guys know we've been doing this for a long time. So perhaps it's not new news.

Can you guys speak to the denial rate over time on claims and how that's changed over, say, 5 years?

Yes, I can. It's a pretty short answer. It's very consistent. It's been operating right at the same level for the past several years. If anything, may be trending down if you look at like a 10-year run rate, but really quite steady over the last several years.

Question from one of the online participants, from Greg, who would like us to discuss plans to expand the vet channel footprint in terms of growth from a clinic and/or territory partners. Are we looking to add headcount there?

Yes, it's a good question. Our current footprint has been pretty well defined for a number of years. We've got a specific ratio of hospitals to headcount that has worked for us since Darryl started the TP model long ago. So when I think about opportunities, I think the opportunities lie in how can we -- and this is really maybe even a better territory partner question, but how can we increase our presence inside of these hospitals. We talked about the difference between the hospital with the ideal culture and one that might not have it. You can't get to that next level unless we're consistently present in that hospital. We have to have that visibility to build the right habits. You've heard muscle memory stated a few times. It takes us showing up and making a difference to be able to achieve that. And so I think the opportunity would lie -- would be Territory Partners creating and executing a strategy that delivers upon that -- it provides that frequency. Not every hospital is created equal. Some hospitals, they need us in there. It could be once a week, a couple of times a week even. Those are usually the hospitals that want to grow and build that foundation of insured pets. Some hospitals, they're not bought in. So we need to go and do a better job and really invest our time, because time is our currency in the field, and we need to invest where we're going to get the greatest ROI. And that's how we expand, by increasing same-store sales inside of our hospitals. I mean, I think currently, we have maybe 3 or 4 open territories today, and those are not new territories. Those are territories that have been vacant for some time. And I think in the middle session, there was a question about, during the last 12, 18 months or so, have we felt attrition in the TP channel, and the answer is -- again, to echo Margi, the answer is no. Because if you actually look at where we are today and compare it to our tier 3 partner attrition, say, 10, 15 years ago, number is much higher. Our tenure continues to grow and grow and grow across TP Nation. In fact, we've been celebrating people with 20 years of experience as territory partners of late. So it's a proud moment for us.

And I think if I can add to that, the TPs, we were talking about this earlier, but the TPs that we're bringing on today and TPAs, they work tirelessly, they work very hard. They have a very different experience to TPs that we brought on 20 years ago. Those TPs were trailblazing. They were working in a market where actually nobody understood anything about pet insurance, and they helped to build up the education, and now they're able to benefit from that. Someone coming in now as a territory partner is riding on a little bit of a crossover wave, as we see more acceptance and awareness, there's a lot more information about it, and so it's a lot quicker for them to start to see those returns. Because these are people. Remember, they only get paid when they enroll a pet. So it's definitely a model that works, and it's one that works even better today if you do have to bring something new in. Just quickly as well, just touching on that question from Greg, when we think about same-store sales, how do we look at increasing it? It's still our metric that we measure. Same-store sales is not just based on what that hospital is doing directly themselves, it's based on all of the things around it that end up associating a pet to that hospital. So as we bring our pack levels down, when we're spending this money, our same-store sales number is naturally going to go down, because we're not adding as many gross pets. So when those gross adds go up, as our pack goes up, the same-store sales will go up per hospital. So our goal is to continue to increase it. I think somewhere between 2 and 2.5 will be a sweet spot across North America. We are some way away from that, but that's something that we expect to climb from. And we know from Australia, I see Steve smiling right over there, when you focus and you have absolute discipline, we can get it above 3. So I think that's something that we aspire to. The idea for us now over the next 18 months is to be very focused, to lean into the North American opportunity we have, to make sure that we are looking at the vet channel and how do we complement everything we're doing. So we're far more structured with our processes that will help to drive that same-store sales number up.

I have one comment and one question. So on the slide over here from London, I was reading all the shareholder letters from Darryl, and then 2023, of course, Margi added. Again, it's sort of like a short novel from 2014 to '23. And one thing that stands out that how consistent the messaging is, and it's basically reality has played out pretty much as Darryl had laid it out from the start, except for the last 2 years with inflation, but apart from that, it's pretty amazing to see the progression. So whoever has not gone through it, it's fun to read it like a short novel, and I would recommend that. The question is just maybe something if you could give more color on what happened with Aflac in Japan and why that didn't work out?

Yes. Absolutely. Simon?

Yes. So we put a lot of due diligence in Japan, looked at the marketplace, 11,000 hospitals, probably quite a lot of very small hospitals, a single vet, probably an unqualified technician also substituting as a receptionist, giving a basic level of care with no real appetite on behalf of the clinician to refer or the clients to demand that referral. Pet insurance has been pretty established in Japan for quite a long while. Inside the Nordic territory, as we looked at Sweden at 67% of dogs and cats insured. Norway is slightly less than that. Denmark, probably 1 point or 2 less than that still. Finland down at a really low 34% penetration. But the Nordic territory has now been working with pet insurance probably the best part of 100 years. I think dog insurance in Sweden sort of hit its centennial year this year, 2024. Probably followed by the U.K., and then probably followed by Japan with sort of 13%, 14%, 15% penetration quite consistently over the last probably 15 to 20 years. And that hasn't changed. So it's flatlined. What has happened is that the quality of the cover in a cultural desire to keep the price pretty consistent and not put the price up, the quality of the cover has been eroded over time. You look at the marketplace, you've got 2 key market leaders with about 1 million insured customers each and a lot of much smaller players. But those 2 market leaders dominate the single distribution channel in Japan at the moment, which is the pet shop channel. That's predicated on breeders selling to auction houses, who do all the routine checks, cares, vaccinations, health checks. Pet shops buy from the auction houses, people buy from the pet shop. So a very different model to probably the one that we're used to in terms of acquiring pets in North America, in Europe. And then the 2 main pet insurers pay incredibly high commissions to the pet shops. So products have devalued in terms of quality of their cover with prices that are unnaturally high because of the levels of commission, meant it's quite a difficult market. We saw a huge opportunity in the veterinary space because nobody is talking to the vets. We did a lot of work in terms of engaging vets and there's an opportunity there, but I think the opportunity comes at quite a high cost. And when we are looking at where we wanted to invest, I think maybe the work and effort we needed to put in to bring that veterinary distribution channel around now set against the cost of doing that compared to putting money into, for example, Europe. I think it made sense to pause Japan and pivot on to Europe, which we've done and where we're focused.

We talk a lot about dogs. I think the value proposition for cats is the same, but there's much lower penetration for cats. Is cats a growing product class relative to dogs? Or is dogs growing more quickly? And what does Trupanion need to do to convince cat owners about the proposition of a comprehensive insurance for their animals?

It is growing at alarming proportions compared to puppies. So lots and lots of kittens. And when we talk about the species mix, that's where we're seeing that lower cost is. It is lower cost to insure a cat. We have a lot of data. We do insure a lot of cats. And when you look at kind of the lopsidedness, I expect you'll start to see that level off. The curious thing about cats, I don't know if you have a cat, Josh? Okay. But you are familiar with the feline? They tend to be very -- they don't tell you when they're ill. Well, a dog will come and put their chin on your leg and they'll look at you and they look sorry. The cat will go off and hide, and they don't communicate in the same way. And so naturally, people hear of cats have 9 lives and the assumption of a pet parent is, "Oh, my cat is going to be okay". They just fell off a branch will be whatever. That's not true. Our highest claims -- I think this is still accurate, but tell me if I'm wrong, I think our highest ever claim was paid for a cat.

It's not true. But there are some very high level...

There was a cat that got impaled. That's true.

Yes. It was our highest claim for a while.

Yes, hundreds of thousands of dollars were spent on this cat. And the cat can have the same treatment as a dog, but people don't necessarily think they need it. So it was the same back when we were in the U.K. 80/20, you had more, 80% of them were dogs. Cat owners just need to be educated. We are seeing a shift though and a lifestyle change, especially from the millennial market. The Gen-Zs that are saying in apartments, they want to have a pet, they want to have comfort. They're getting cats and they're leaning into the cost of care. So I suspect we'll see cats continue to rise a little bit. They are still a way smaller book of percentage of our business, but it's definitely a lion's share of not only our growth, but you can see that data in the NAPHIA report as well that cat ownership and cat penetration rate is increasing.

And no one mentioned Landspath, but it's on the slide. Is Landspath still happening?

Landspath is still happening. It has quite a decent owner of it at the moment, Mr. Rawlings at the back. He's our food owner, and he is responsible for bringing that to market. There isn't a huge amount to update on at this point, because he needs to get a wiggle on with what he's doing apparently. But we will be updating as and when there is more to share with everybody. It's still something that we firmly believe in, and I think absolutely fits in with our mission and value proposition, but thank you for asking, and we will update when there is more to share.

In today's world, we haven't talked enough about AI. So maybe I'll pivot us back to AI. I think you guys are seeing using a lot of this for claims processing. Outside of that, can you use AI and all this data that you guys have to mine for improving retention rates, improving conversion rates? Is there any possibility of you guys using data for that?

Yes, absolutely. Like I mean the world -- the sky is the limit, right? I mean, you heard Dr. Steve talk about our partnership with the CDC and like the public health warning. Sorry, I'm not going to get it...

Early warning detection system.

Yes. I mean we're investigating large language models, how we can break down the barriers for everyone up here to access our data in a more natural kind of way. And then how that impacts our member experience. But what you won't see us do is rush something that diminishes our members' trust in what our product is. So...

And to be clear, you can use -- because I know sometimes in health care you can't really move data around, it's their data, but you guys can share data within your departments? Is that BAU?

Yes. Yes, absolutely.

Okay. And then maybe one last one for me on a commercial perspective. It seems like a lot of the benefits of Trupanion, whether it's that visits do better, or acceptance rate of procedures is better than the rest of the noninsured. Is there a day where we could see the SVPs or the corporates of the world do a top-down mandate pushing this? I think you guys were talking a little bit about this earlier and having some teams, and so I apologize if I missed it. But can you go from the top-down instead of the bottom-up here and have these accounts training their own vets on their own?

Well, there are two components of that. I'll start this off and then hand it over to the team. So VCA did top-down. Every single VCA hospital, every single BluePearl hospital has got Trupanion. It's got access to our software. So of those 10,500 that you saw there, they are a big mass contingent there. A lot of groups have done that. But to use MJ's analogy again, that's the gym. People aren't going to go to the gym unless you have the conversation, the training, the coaching. We need to be also mindful of the fact that we don't want anyone in the hospital trying to sell insurance. So there's not what we're asking of them. It's really about helping them understand the benefits of high-quality medical insurance and what that does and what that means. And that's where Steve mentioned earlier, the certification program. It's more of a kind of tips and tricks on how to use our software and the thought process as they go through when they're in the day to day. And it just adds value to them as individuals and it's an accreditation. It's something that they feel good about themselves, and that's something that's very important to the hospital team. And that's kind of really where you see the top-down and the bottom-up would then come together to actually enact some sort of traction. But we do have a lot of hospital groups to do it. It's just really how do you build that habit. It's the same point that Jason was making before. Would you add, either of you, to that?

I think I would just maybe punctuate what Margi just said. Our Territory Partners, it's harder for them to be successful without the group partnerships. And the group partnerships cannot be successful without our territory partners. And what I mean by that is without the partnership in place, often there are barriers at the hospital level that we have to break through. That said, we have non-partners who have hospitals in their network that work with us. So it's not cut and dry or where we're completely locked out of these hospitals. But meanwhile, only a handful of groups, and I think it was Dr. Steve that had said earlier, not all groups were created equal. Some are far more engaged and kind of set the expectations downstream. But without the territory partners kind of driving it home and forming the relationships at the hospital level, it would still likely fall short. Anything you would add?

No. I mean with a lot of these mandates that we see with the SVPs of the world or any of these consolidators, when it's coming from the top-down, it's not very effective unless the bottom accepts it. I mean, it's just reality. So we've just found we have to -- no matter how much the top is on board with it, if we're not getting the boots on the ground level on board, then it never really takes off.

And it is much more important than force, too. If we have advocates, if we have people that utilize this on a day-to-day basis and have their own pet saved by it, it's that story and that communication that can happen in the veterinary office, at the receptionist desks, and with the techs in the back telling that story, that's what does it. That's the authority of the white coat, not you must do this. So it's a great question. But unfortunately, it takes more than that.

We want to inspire people to want to talk about us versus feeling like they have to. It's a much different -- there's, again, conviction there. The pet owner feels it, they get it versus when someone is just kind of going through the motions because they're told to.

We have a couple of questions submitted from the audience that are related. So I'm going to ask them both, which are: First, can you speak to what you're seeing from an affordability perspective from members and prospective members for adequate policy premiums? And can you talk about using the deductible as a lever to help make the policies more affordable. And then secondly, is there any evidence that you see that pet ownership is becoming a luxury purchase due to affordability issues?

Do you want to talk a little bit about deductible and what you and the team are hearing?

Yes. Good question. We do get a lot of people that call in, and it is an option that we have, obviously, to lower our premium. So we will do that at times, certainly. So the other thing I want to mention that's more related, Brandon, to your question on AI. So I'm just going to jump back to that while I have an opportunity. A lot of times when you think of AI, we think of claims data and setting something on there. In the contact center, we have millions of interactions every year, direct voice of the customer interactions. So just take a minute to break about some software that we implemented last year. That's really speech analytics with some AI on top of it to help us digest these millions of interactions. So I think, Brandon, your question was, like how do we use that to improve retention and conversion rate? That's exactly what we're looking to do with that. So being able to mine those millions of different interactions not only helps the contact center, but we help drive that information kind of upstream. So if you think about improving web experience, what people are looking for in these different channels, it's a great way to do it.

Yes. I'll speak to affordability just for a second. What bothers me about the affordability dilemma is that people look at the premium and say that's not affordable, but that premium is based on claims. And what we're doing is looking at the life of the pet and chopping that claim up into bite-sized pieces called premium, which makes it affordable. If you say, "Oh, I can't afford that", then you're not going to be able to afford the claims for your pet later. So that person doesn't understand the long-term cost of the pet. That's the issue, not the statement of affordability. That's my view.

So I'm going to jump in with it. It's not about affordability, it's about budgetability. It always has been and it will continue to be. We need to command our share of the wallet. And by doing that, we need people to understand the value that we bring to them, right? Hopefully, you heard, if you were here at the beginning, the calls into us, and we had the pet parent that said, "I do my own nails. I color my own hair, I go to CVS. I'm happy to pay for my insurance policy. You've saved my pet's life. You've saved my family." We have people that buy a Grande Mocha Frappuccino Latte with froth 3 times a week at $4.15, 3 times a week. Do the math, multiply it out, it's a policy. I'm not saying don't go to Starbucks. I'm saying budget for this. You need to budget for this. You do not need to budget for these other things. You can do it and you can give them a share of your wallet, but you don't know when an accident is going to happen, if it's going to happen, what is going to happen with it. That's not something you want to get a lottery ticket for. So we need to educate people about the budgetability aspect of this. And then yes, it is affordable.

I think the other thing that I would add to that is, despite the changes in the market, again, we're still underpenetrated. So we are over-indexing on either side of that spectrum, which is a different way of saying what you just said. So the high net worth individuals will protect their assets. They will get insurance. They appreciate the value of insurance. They don't want to take a risk. The people that are just like the lady that we heard on the phone, who wanted to make sure that everybody heard her message, and she'll probably be thrilled that, that happened. She can't be without her pet. She has no other option. This is her only choice. And she is, as we heard, like hundreds of thousands of others who are happy to make that decision. And we're seeing that the market is starting to move to the mid-market, which is where you're seeing a slightly different change in terms of how we're thinking about messaging. Emily had mentioned earlier that we're testing different messages, and we need to do that because our consumers will evolve, they will become more educated, and we've got to meet them where they are. I do just want to touch on the other part of that question. Emily, I know this is something that you've been looking at with the team and the data. How is Add a Pet been trending since the higher rates have been going through?

Yes. We've actually seen Add a Pet continue to grow at a pretty steady rate, even with a higher level of rate flowing through. So I think that speaks to what everybody has been saying is that our members see the value. And especially if they happen to have an unlucky pet, they know that we're going to be there for them. So they sign up their second pet.

Okay. I'm going to grab one more that was submitted. Can you speak to the ability of your reaction time for another potential MLR spike, i.e., the speed at which you can respond and work with regulators to get adequate rates approved? How much have you improved, and how much room is there still left to go?

I've been in the gym, I've been working my reaction time. No, it's getting late in the afternoon. So sorry, I'm getting a little cheeky, as Margi likes to tell me. We have broadened our view of data. We are looking more frequently. We're looking at more data points to avoid what we just went through. And it's hard to put a timing on it, because once you have the recognition, then you have to look at what you were thinking prior, and then you have to respond to this new thing. I think this likely could go up or down, right? I mean, it's not just up. So you have to be sensitive about either direction. And it does take a while. I mean, there's a period of time in which rates will not correct themselves. So yes, if we recognize it quicker, that's where we save the time. The rest of the process will take about the same length of time. So maybe we chopped off a couple of months.

Well, I think the other thing as well is the communication across the business has become so much more, I think, collective. So if Jacquie is seeing something, she's sharing directly with the team, or anyone in the field is sharing something. We're hearing things from vet groups. We're hearing from our members. That coordination and communication has stepped up significantly, which allows us to move quickly. I think on that point, though, just to kind of really press on the point, when we shared in the July call that we had seen a slight dip down in claims frequency and we were wondering what was going to happen, we said at the time, we think we need to watch this trend. If we had reacted that quickly, we would have given ourselves a whole world of hurt in Q1 of next year, because we would have been taking our prices down. So there is a need to see trend for a good period of time to be able to lean into it and say this is what we believe to be true. And this is what regulators will ultimately buy into. These regulators are looking at data trends. They need to see the information to be able to say, yes, this is where that forecast is out to. And we've got to be diligent about having sufficient data points before we can push that. I will say, though, one of the pieces is having the data file put together to then submit to a regulator. The other is having conversations with the regulator. The team -- I mean, I'll give them all a shout out, they have done such a good job of building connections directly with regulators across North America. That is going to help us react quicker regardless, because when you can pick up the phone and say to somebody, we need you to see this. This is what's going to happen in your state, in your province if you're not having this consideration today. And we couldn't do that 18 months ago, 2 years ago. It wasn't as effective. So that's kudos to the team for making that effort and a priority, and I'm very pleased to see that progress, because that will absolutely help us in future.

With regards to cost of care and what you were just talking about, pet owners, I feel -- I love the concept and how you described budgeting. I think that makes total sense. But what they're budgeting for is an increasing cost of care in vet med, and you don't have control over that. You have to base your pricing based on somebody else's industry. With all the data that you have, are there any things that you're doing to advocate and help with cost of care overall, because it is going to price pets out of many homes, insurance or not.

Yes. Education. Education about the cost of care consistently, not just in veterinary practices, but with Joe Public, with anyone who believe their pets are their family. We need to do this all across the board. So yes, we do continuing education. We call it CE. So we give veterinarians credit towards their licenses, so they can keep them up and active, and we educate about cost of care. We educate about burnout ethics, exhaustion, compassion fatigue, suicide, how to negotiate your salary, all of these things. But the biggest thing that we educate about is how to communicate with other humans, right, which is sometimes hard for people like me day in and day out, seeing 20, 30 people, one after another, all with their individual things that are going on and with a limited time to educate them. But that's really what this is about. It's about education and getting people to understand the value you bring versus the value that they perceive you bring, and how you can synergistically come together to take care of that pet. So it's all about education. We do that through 170-something people in the field. We do that through programs like colleague consult or vet portal certification, where we give these credits to veterinaries or veterinary professionals as well. We make it a little bit easier for them to do their thing and communicate with people. We also have programs like Mighty Vet, where we educate the community or our partnerships that we've done before, EarsToVets with We Rate Dogs, where we educate millions of people out there about what's going on and how they can listen and see and understand. And if you understand, there's perfect alignment and everything works great. When people don't understand the perspectives of what's going on in the veterinary ecosystem versus what's going on in the pet parent ecosystem, then there's friction, misunderstanding and misalignment. So this is what we do all day every day.

I think the other thing I would add to that is, as harsh as it sounds, and I know Fawwad made the comment earlier that we would love to enroll every pet that we ever see or every pet that we come across, and that's true of our team, we would. The reality is that the people that don't have insurance are going to be hurt before the people have insurance. And hopefully, that doesn't happen because there's enough of a catalyst for vets to recognize. Actually, everybody should get insurance. This is going to help make sure that you can protect that pet for their lives. So that's a long way off the scenario you painted. We are in a much better position because of it. Because people have chosen Trupanion, we'll be able to take care of the pet. And hopefully, others will follow suit. Let me ask a question. What's happening in our learning development world, Dewald?

Yes. So when we wrote our 60-month plan, we knew, by the end of 2025, our company and our organization is going to be very different. And one of the things that we need to ensure, as you know, we are powered by amazing people that work for us. And we really want to make sure that they make Trupanion a destination for their careers and building their careers. So we develop our leaders. We've got 245 team members with just internal mobility, where we have to reskill and upskill our members. As our business evolves, their roles evolve, the places they need to work evolve in our organization. We need to help our friends internationally beyond time zones, beyond languages. As you can see, we've reduced actually the total training hours, which a real big part of this is part of Vision, like the ability for us to get our team members into production faster. We've really seen a big uptake in the new learning management system we've implemented, which, if we speak about AI, has given me the ability to see how long these guys spend in the training we offer, but it also helps us to see where there's going to be gaps? Like where our people don't engage with our content? How we can help them? How we can predict where we need to do some things for operational efficiency? Where we have to mitigate risk that's going to happen for them? And also to just acknowledge like the way people learn, like we want our people to help our members out there to be in the field, to make sure that they can be out there help us save pets and save lives. So it's important for us to give them the performance support when they need it, at a time when they need it, and how they can use it.

As you guys continue to scale and potentially scale on fixed costs, with the philosophy -- I guess, the financial philosophy, the economic philosophy, would it be to pass back price in terms of increasing the value proposition, to hold the AOI margin at 15? Or as you scale in fixed cost lever, would it be to -- that 15 would potentially go higher?

Well, I think we've got to get to 15 first. The long-term plan, we talked about in our 60-month plan, we hope to be at 72%. I think we should revisit that theory as does it actually make a difference to do that? I think all of us again, we want to be able to help pets as much as possible, but does it offset a different conversion rate, different retention rate? The reality is we have -- he is always saying, we have choices. When we have choices, we can make decisions smartly and intelligently. And I think that's a position that we're looking to be in. I can't stress enough, we're not going to deploy every single dollar if we cannot get it within the internal rates of return that we are targeting. So what does that then mean if we can get these fixed expenses and variable expenses within our model P&L or even lower and become more efficient, which with AI and the way that Jordon and his team are helping to flow that through the business, there is a pathway to do that. It then comes down to a decision making point on do we increase our value proposition. I believe it's in the best interest for animal health to do that, but it's something that we haven't yet. Until we hit that point, we haven't really dug in specifically. What would you add?

I think you said it perfect. Just maybe at the point on fixed expense, because you specifically raised that. Fixed expense fits within our model P&L, it's 5% of revenue. When you look over the last couple of years, fixed expense was actually lower than model P&L. I mean, it was 4.3% in 2022. It increased to 4.7% last year. And then through the first half of this year, it's ticked above 5%, and we've talked about it in the context of the compliance investment that we've had to make. There's also the transition from the development division to the deployment division. So there's more operating expense, less CapEx and so that's hitting the P&L. I think we've certainly talked about the scalability of the existing model. I continue to think that it's scalable. So we have to first get to that point and ultimately our destination, but I don't necessarily see a point in the future where the model no longer scales at some revenue threshold. Obviously, we evaluate it all the time. So we feel good about being disciplined about the model. This is one of those things where change can be good and change can be corrosive to consistency. And this is one of those things where I would index more to keep it consistent unless there's evidence that it no longer serves us. Right now, I think it's doing a good job of serving us.

One more question? While we're waiting for a question, I just want to say a huge thank you. I think Laura briefly introduced Gil. Many of you have probably spoken to Gil on Zoom calls or on the phone, but Gil joined us back in December last year, and he's been a wonderful addition to the team and part of Laura's team. So Gil and Laura, Anna and Morgan at the back there, we have a team of folks from our facility team as well who put this event on. I think, every year -- someone said earlier, every year it gets a little bit better, which is exciting to hear. We're always looking to improve. The folks that are doing the AV for us, they have done a like rapid, they should come work for Formula 1, because they're so quick, but I mean, an amazing job for everybody. So we're very grateful for them all today. And if you wouldn't mind just joining me and give them a round of applause in a second. Any final questions?

Can I just ask 2 maybe more boring modeling questions. I hate to end this on these. But when you guys talk about the 15% operating margin, there's clearly seasonality to your business. And so to get there on a full year basis, does that mean you start below and you end the year above 15%? Or how do we -- does it flatten out as you scale, so we'll start with that.

Yes. The short answer is yes. So in order to hit 15% for the full year, because second half, because of the seasonality I talked about earlier that generally happens, yes, it's fair to say that achieve 15%. You have to be above that, for instance, in Q4.

And I already forgot the second modeling question, so we don't even have to go there.

I have a boring modeling question that I'll chip in. So as Pets Best winds down, how do you feel about keeping fixed expenses around the 5% threshold as, to your point, it is low margin, but it has helped absorb your fixed costs, and that will be going away?

Yes, it's a good question. We're still committed to the model P&L, so the 5% that I talked about. Yes, the way that I sort of think about that is there's 2 dimensions to it. So ultimately, because we put expense as a percent of revenue, holding expenses flat and growing our top line ultimately gets the model back into equilibrium. So I think that's sort of one element. The other thing is that we don't just want to rely on revenue, because that's a little bit -- maybe a little bit lazier. There's a lot that happens beneath the surface. So for instance, I've had the chance to lead the technology organization on an interim basis over the last 6 months, and John did a lot of work before me. There's a lot of efficiency we've driven within technology. Technology is one of our largest components of fixed expense. There's a very, I would say, complicated environment, complex environment that's been built up within the technology landscape. So as we decrement technology, as we sunset, as we rationalize license count, as we get better terms and conditions from suppliers, and we want to get advantages of getting scale as a company, it puts you in a better position to be able to negotiate more favorable deals. There's been a ton of work. We don't disclose the percentages, but it's a meaningful percentage where we've divested and then reinvested. When you look technology as an investment in total, this is a digital company, so it's an important area of our focus. It's largely flat year-over-year when you take the all-in CapEx and OpEx together. But ultimately, we expect to get back into equilibrium, and then we have the opportunity to grow expenses in line with revenue. To Margi's point, we're always going to look for leverage. We're always going to look, as any company would, we look for some version of revenue increases at a faster rate than expense. But first, we have to get there, and then we can have that conversation. But it's something we're paying attention to literally every day.

Well, if there are no more questions, then I'll invite everyone who's joining us here into Seattle to some refreshments in the back. But first, I'm going to hand it over to Margi for any closing thoughts.

Yes. Thank you, Laura. Thank you all so much for taking the time to be here today. It means an awful lot to me, and I know it means a huge amount to the team to be able to speak to you and understand your questions and hear the concerns. You are a huge part of our ecosystem, and we want to help inform you of the things that are happening in the business. I hope you have appreciated today. We've definitely appreciated the questions and the attention, and love the conversations we're able to have with you as well during the breaks, and that shouldn't stop now because we do have some drinks and refreshments, as Laura said. Hopefully, also, I've heard from a few of you very different to last year. We walked in today with a different spring in our step. The company has proven its resilience. We've talked about it for a long time, but being able to come through the margin compression that we came through does not happen by accident. It happens because of execution. We don't rest on our laurels. We don't stop here. We will continue to do the things that we have been planning to do and expect that this wonderful team, who I believe to be world-class, will help us execute all the way through it. So thank you so much for your support. Thank you for your questions. And please have safe travels home, and enjoy the rest of the evening.