Trupanion reports Q3 2024 results

Trupanion held its Q3 2024 earnings call on October 30, 2024. Key highlights include:

• Strong rate increases and expense discipline position the company to achieve a 15% subscription adjusted operating margin for Q4 2024.
• Trupanion’s subscription business generated $219 million in revenue for the quarter, a 20% year-over-year increase. The total monthly average revenue per pet reached $74.27, reflecting a 13% growth compared to the previous year.
• Within the core Trupanion brand, ARPU grew 14% year-over-year, outpacing overall growth. Total subscription pets increased 6% to over 1,032,000 as of September 30, including 48,000 European pets underwritten by third parties. Average monthly retention for the trailing 12 months was 98.29%, down from 98.55% in the prior year, with trailing 3-month retention slightly lower than Q2 but consistent with Q1.
• The subscription business incurred $155.5 million in veterinary invoice costs, achieving a 71% value proposition, down from 75.9% in the prior year.
• Approximately 50% of the book received price increases of 20% or more, with retention trending up year-over-year despite consecutive double-digit adjustments.
• Retention for members with increases below 20% remained strong, even as more members experienced price hikes in the high teens.
• Claims migration nearly complete, resulting in:
  • Improved service levels.
  • Record levels of claims automation.
  • Increased invoices paid directly to hospitals.
• Invoice processing costs reached a new low as a percentage of subscription revenue.
• $16.8 million spent in Q3 to enroll 65,800 new subscription pets, with an average pet acquisition cost of $243 and an estimated internal rate of return of 36%.
• Recent initiatives included Trupanion’s Powered by suite of products with Chewy and Aflac, medium and low ARPU products (Furkin and PHI Direct), and European offerings, accounting for 15% of new pet additions and 10% of pet acquisition spending.
• In September, the first Trupanion-branded products launched in Germany and Switzerland, targeting 29 million pet owners.
• Trupanion is nearing $3 billion in paid veterinary invoices in its subscription segment, achieved progressively faster: 20 years for the first $1 billion, under three years for the second, and under two years for the third.
• When asked about Trupanion’s approach to ramping pet acquisition spending and whether specific channels or geographies are being prioritized, CEO Margaret Tooth explained that while the company is generating strong lead volumes from existing channels like the vet ecosystem and its large team of Territory Partners, the focus will shift toward digital efforts to educate potential customers about pet insurance and Trupanion’s value. There are no significant changes in channel strategy, but spending will incrementally increase across lead generation, conversions, and first-year growth to expand the pet count. “Territory Partners, we have a very big group of territory partners. I think it’s a record size that we have today so not looking to expand that group of individuals. But we will be looking at deploying a lot more from a digital perspective and looking to help drive education in terms of why Trupanion and why insurance and helping to inform people as they make that conscious decision.”
• When asked about the impact of NAIC factor changes on capital relief for pet insurance and their influence on Trupanion’s requirements, CFO Fawwad Qureshi explained that the company’s excess capital relative to requirements rose from $64 million at the beginning of the year to nearly $140 million. This increase was primarily driven by NAIC factor changes and a slower growth rate at Pets Best. More than half of the increase resulted from reduced requirements due to infrequent updates in Lines 4 and 8 of the NAIC guidelines, with the remainder attributed to retained profits. These changes significantly reduced the required capital, offering substantial relief.
• When asked for an update on Trupanion’s material weaknesses identified earlier in the year and associated remediation costs, CFO Fawwad Qureshi stated that Trupanion identified two material weaknesses during the 2023 audit, which were control-related rather than financial. The company has prioritized remediation, completing the scoping and design phases and is now operating the controls, which must function successfully over time. Fixed expenses have risen due to investments in enhancing control systems, including advisory support from PwC. Trupanion expects EY’s audit opinion by February with its 10-K filing and views this effort as a long-term investment in a scalable control infrastructure to support future growth. “The only other thing I’d say is longer term, and I’ve spoken about it before, I think it’s important to emphasize that we look at this not just as an investment in the remediation of these issues, but actually an investment in building an infrastructure of controls that will position the company to be able to grow what we hope is the next $1 billion of revenue.”