Trupanion, Inc.

Greetings and welcome to the Trupanion fourth quarter and full year 2022 earnings call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Laura Bainbridge, Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Trupanion's fourth quarter and full year 2022 financial results conference call. Participating on today's call are Daryl Rawlings, Chief Executive Officer, Margie Tooth, President, and Drew Wolf, Chief Financial Officer. 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, variable expenses, fixed 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 and development expenses. 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 conference call is also available via webcast on True Panion'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. Revenue for the year grew 29% year-over-year to $905 million, marking another year of strong growth. We ended the year with over 1.5 million total enrolled pets. The consistency of these results demonstrate the benefits of our monthly recurring business model in a large under-penetrated market. With inflation in veterinary medicine continuing to outpace that of a pet owner's disposable income, the need for our products will continue to grow. Total adjusted operating income grew 14% year-over-year to $89 million. As a percent of revenue, our subscription-adjusted operating margin was down 100 basis points year over year as the cost of veterinary care grew faster than we initially predicted. Long-term, expansion in our adjusted operating income will make it easier for us to deploy greater sums of capital at high rates of return. In 2022, we deployed $80 million of these funds, acquiring pets at an estimated internal rate of return of 30%. We also invested approximately $16 million on two acquisitions, that gained us access to continental Europe. In doing so, we nearly doubled the number of veterinary hospitals in our addressable market. Further, we added two new distribution channels in North America and continued to work on our new low and medium coverage brands, including significant investments in our infrastructure to support these growth initiatives. In 2022, our balance sheet and access to working capital provided us the funds to do so. Margie will provide additional commentary on the progress against our 60-month plan momentarily. Although these are very early days, we are pleased to have these initiatives in market with the majority of upfront spend behind us. As we've said before, we expect it will take years to build momentum. This is a characteristic we understand well with monthly recurring revenue. Our low margin other business segment grew revenue by 51% year over year. and adjusted operating income was approximately 10 million. As a reminder, we are required to hold cash in the form of capital reserves to support this growth. In aggregate, these capital reserve requirements totaled approximately 60 million, which is more than we have earned in our adjusted operating income for this business segment over the same time period. In effect, our other business segment has been limiting our ability to deploy capital at higher rates of return. With this in mind, we've been working towards a long-term agreement with our large partner and our other business to more effectively utilize our capital for our subscription business. Through our new agreement, existing policyholders will now stay with Trupanion for a minimum three-year period. We expect the majority of new business to be issued by a different underwriter as early as Q2. Any new pets that we underwrite moving forward will be at a more reasonable margin. Looking ahead, we will be prioritizing our capital deployment for our entire business in areas that deliver us the highest returns. In 2023, our focus will be on continuing to leverage our veterinary leads in North America and further strengthening our balance sheet as main drivers of value creation. With that, I'll hand the call over to Margie.