Trupanion, Inc.

Greetings and welcome to Trupanion Inc's third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Laura Badenbridge of Investor Relations.

Good afternoon. and welcome to True Panion's third quarter 2021 financial results conference call. Participating on today's call are Daryl Rawlings, Chief Executive Officer, and Drew Wolf, Chief Financial Officer. Margie Tooze and Tricia Pluss, our co-presidents, will be joining Daryl and Drew for the Q&A portion of today's call. Before we begin, I would like to remind everyone that during today's conference call, we will make certain forward-looking statements regarding the future operations, opportunities, and financial performance of Trupanion within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed. A detailed discussion of these and other risks and uncertainties are included in our earnings release, which can be found on our investor relations website, as well as the company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission. Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation, fixed expenses, variable expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA, and free cash flow. When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating income or margin before new pet acquisition. Unless otherwise noted, margins and expenses will be presented on a non-GAAP basis, which excludes stock-based compensation expense and depreciation expense. These non-GAAP measures are an addition to, and not a substitute for, measures of financial performance prepared in accordance with the U.S. GAAP. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or on Trupanion's Investor Relations website under the quarterly earnings tab. Lastly, I would like to remind everyone that today's call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site. With that, I will hand the call over to Daryl.

Thanks, Laura, and good afternoon. I'm excited to share with you our key financial measures for the quarter. Total revenue increased 40% over the prior year period. Adjusted operating income increased 44% year over year. And in total, the team was able to deploy 42% more capital year over year at an estimated internal rate of return of 36%. As a reminder, adjusted operating income represents the cash generated from our existing pets in a given period. Typically, we will invest the majority of these dollars growing our portfolio of new pets. Growing adjusted operating income and deploying compounding sums at high internal rates of return are the drivers of intrinsic value in our business. Because adjusted operating income is the primary input of our discounted cash flow model, we view it as a proxy for value creation. In a large, underpenetrated market, we aim to grow intrinsic value per share 25% per year. Year-to-date, growth in adjusted operating income of 39% for the first nine months of our 60-month plan means we are currently tracking well ahead. In the quarter, performance benefited from expanding margins and sustained high levels of retention. Compared to the prior year period, average monthly retention increased to 98.72% on a trailing 12-month basis. The average pet stays with Trupanion for 78 months, up from 76 months in the prior year period. In times of accelerated growth, I believe this performance is exceptional and very hard to do. Well done, team. The impact of these sustained high levels of retention is reflected in our progress towards Trutopia, our defined state of self-sustaining growth. In Trutopia, members adding pets or referring friends offsets pets churning off. In the quarter, we narrowed the gap to Trutopia to a mere 0.28%. Trutopia is also a leading indicator of net pet growth, which increased 41% over the prior year period. Over the long term, we believe companies most likely to be successful are those who can invest in innovation and expand their addressable market. Achieving operating scale, compounding adjusted operating income, and our team's growing ability to put greater sums of capital to work in a disciplined manner position us to do so. We highlighted the ways we are growing and investing in our business in our 60-month plan, which can be found in this year's annual shareholder letter. I'll focus my remarks on a few areas. In the quarter, we launched our low and medium ARPU products, Firkin and Pet Health Insurance Direct, both in Canada. We will operate both brands within our same capital allocation parameters, and over time, we'll aim to grow our addressable market while offering greater transparency to the industry. Our ability to operate at scale means that we are also able to support the launch of new markets. By the end of 2025, we aim to grow our addressable market by 40%. We intend on doing this by adding 10,000 international hospitals. This will increase our overall market from 25,000 in North America to 35,000 globally. While doing so, we also expect to expand our active hospital base. Nine months into our 60-month plan, active hospitals totaled over 15,000. For more information on the growth in our active hospitals over the years, please see our prior shareholder letters. As we grow and scale new products, distribution channels, and international markets, our mix of business should continue to evolve. Our metrics will reflect this progression. What won't change are the drivers of the value creation for our business, our adjusted operating income, the amount of capital we can deploy, and the return on our invested capital. Before I hand it over to Trish, I want to take a moment to welcome Drew formally to the call and congratulate him on his promotion to CFO. Drew joined us in May and has quickly shown himself to be a strong leader and a great all-around team member. Drew, it's a pleasure to have you on board. I continue to be humbled by the talent we are attracting to the team. To me, it speaks to our culture and our mission-driven organization. With that, I'll hand it over to Trish.