Trupanion, Inc.

And welcome to Trupanion Inc. 4th Quarter 2021 Earnings Conference 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 Bainbridge, Investor Relations.

Good afternoon, and welcome to TruePanion's fourth quarter and 2021 financial results conference call. Participating on today's call are Daryl Rawlings, Chief Executive Officer, and Drew Wolf, Chief Financial Officer. Similar to prior earnings calls, Margie Tooth and Tricia Pluss will be available 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 reports on forms 10-K and 8-K filed 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. 2021 wraps up the first 12 months of our 60-month plan. By all counts, it was a strong year for Trupanion. Total revenue increased 39% to $699 million. We ended the year with over 1.1 million total enrolled pets. Within our subscription business across multiple brands, we had over 704,000 pets at year-end, on average staying with us 79 months. Lifetime value of a pet was $717, up 10% year-over-year. Our gap to Trutopia... which measures the difference between members adding pets or referring friends and pets turning off was 0.29, a 17 basis point improvement over 2020. I am extremely proud of this performance, but what I'm most focused on is the growth in our adjusted operating income. Adjusted operating income represents the funds generated from our existing pets in a given period and is the single most important metric to understanding and evaluating our performance. It also serves as a proxy for value creation. In 2021, adjusted operating income grew 37% over the prior year. This performance is exceptional and well ahead of our 25% target we laid out in our 60-month plan. Our outperformance was a result of us doing three things really well, accelerating pet growth, sustaining high levels of retention, and maintaining scale within our subscription business. In short, the team fired on all cylinders. Within our large and under-penetrated market, we want to deploy as much of our adjusted operating income within our targeted internal rates of return as possible. As we grow and scale, we're seeing more opportunities and the team is doing a great job putting our capital to work against them. In 2021, we were able to deploy 56% more capital year over year at an estimated internal rate of return of 36%. We do this while operating at scale. In fact, Q4 marks the fourth quarter in the last eight where we were within 100 basis points of our 15% adjusted operating margin target for our subscription business. I know we'll not hit 15% every quarter as we did in Q4, but I am encouraged by the narrowing of the range around our target. To me, in light of all the talk around inflation, it shows very strong execution. Well done, team. Hitting scale... or the size in which we operate efficiently while maintaining our margin targets, is hard and takes discipline. Doing so has taken us over 20 years. As we move forward, and we do so with a commitment to remaining the industry's low-cost operator and to reinvesting any future cost efficiencies back into the value proposition we offer to pet owners, I outline our plans to do so further in our 60-month plan. Our 60-month plan can be found in our most recent shareholder letter on our IR website. One great benefit of being the low cost operator and building the Trupanion brand into what it is today is that we attract the interest of potential new strategic partners and distribution channels. We're humbled and excited when we can find partners who are leaders in their field, have long term alignment, and recognize the value of our brand, scale, and expertise. State Farm, Aflac, and our most recent partnership with Chewy are perfect examples. Later this quarter, Our Aflac Powered by Trupanion employee benefits product will be made available to select Aflac brokers to begin selling this new insurance offering to work sites across North America. We are excited to grow this channel through our strategic alliance with Aflac, a partnership which increases our reach and is a key component of our 60-month plan. In short, 2021 was an exceptionally strong year overall. We came out of the gates flying, but saw growth slow in the fourth quarter. In Q4, we enrolled approximately 4,000 fewer pets than in Q3. We believe this was driven by the introduction of the Delta and Omicron variants, providing some industry challenges. So far this quarter, we're seeing activity rebound to Q3 levels. Results under Margie and Trisha's leadership have been humbling to say the least. Years such as 2021 are not the standard by which we measure our success. I'll reiterate, our goal remains to grow adjusted operating income by 25% every year for the remaining 48 months of our 60-month plan. We believe this is the right target for our large under-penetrated market. As we work towards our 60-month plan, we want to ensure we remain organized in a way that is most effective. Ultimately, we're a growth company, and we continue to align the organization to provide clarity of the direction around this mandate. As part of this, Tricia recently assumed the role of chief operating officer, and Margie has remained president, responsible for leading the execution of our 60-month plan. While much of the day-to-day responsibilities remain the same, I expect these changes to drive greater clarity, transparency, and accountability within our organization.