Trupanion, Inc. Aktie

Thank you. Hello and welcome to the Trupanion Second Quarter 2026 Earnings Conference Call. All participants will be on the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you can press star, then one on your telephone keypad. To try your question, please press star, then two. Please note, this event is being recorded.

But now I turn the conference over to Gilman here. Please go ahead. Good afternoon and welcome to DuPennyon's second quarter 2026 Financial Results Conference Call. on today's call are Moggy Toof, Chief Executive Officer and President, and Farouad Qureshi, Chief Financial Officer. Before we begin, please be advised that remarks today will contain forward-looking statements. All statements are then statements of historical facts or forward-looking statements. These include, but are not limited statements regarding our future operations, key operating metrics, opportunities and financial performance, pricing, and veterinary industry inflation. 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 today's earnings release, as well as the company's most recent reports, including forms 10-K, 10-Q, 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, cost of paying veterinary invoices, 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 a non-GAAP operating income or margin before for new pet acquisition and development expenses. Unless otherwise noted, all margins and expenses will be presented on a non-GAAP basis and excluding stock-based compensation expense and depreciation expense. These non-GAAP measures are in addition to another 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. Lastly, I would like to remind everyone that today's conference call is also available via webcast on 2Pennines' investor relations website. A replay will also be available on the site.

I will now hand over the call to Margie.

Good afternoon everyone and thank you for joining us. We delivered another strong quarter. Subscription adjusted operating income grew 24% year over year and we remain on track to generate $180 million of total adjusted operating income this year. One of the advantages of our compounding AOI is that it creates additional capacity to invest in our business. This provides the flexibility to thoughtfully deploy capital across the opportunities we believe will create the greatest long-term value, whether that's adding new pets, enhancing our products and member experience, investing in new capabilities and technology, or strengthening the underlying systems that support our business. In the quarter, returns on our pet acquisition investment contributed to an acceleration in gross pet ads, up 9% year over year. Together with Sable Retention, we added approximately 18,800 net subscription pets in the quarter, growth of 39% over the prior year period. This This programme reflects a number of initiatives being rolled out across the business to improve the Trupanion experience, from the moment someone first learns about the company through to enrolment and retention.

As pet parents progress through the enrolment experience, we continue to refine and optimise that journey, making it easier to understand our value proposition to enrol with confidence. Those investments contributed to improve web conversion in the quarter, while phone conversion remained consistently strong, operating near record levels. In addition, we're pleased with the early results from the enhancements we've made to our core Trupanion product. Expanded deductible and co-insurers options are improving accessibility by providing more affordable monthly choices, and we're well on track to expand this rollout across North America as planned. More importantly, through disciplined execution, we're improving the long-term economics of new enrollments with pricing that's better aligned to the value of our coverage. The results of this discipline show up in a 25% increase in the lifetime value of an enrolled pet during the quarter, meaning every dollar we invest in pet acquisition today has the potential to create significantly more long-term value than it did just a year ago. These stronger unit economics reinforce our confidence to invest across core acquisition channels.

In our large and under-penetrated market, a substantial opportunity exists to reach more pet parents, in spite of a downturn in new visits to veterinarians reported across the industry. Even with the recent pullback, there are still millions of uninsured puppies and kittens entering hospitals each year, and the addressable market remains vast. We believe our differentiated model built on decades of veterinary relationships, proprietary data and deep insurance expertise position us very well to continue strengthening our core offering while thoughtfully expanding our portfolio to serve more pet parents. Consistent with that strategy we remain on track to launch our new digital offering in the first half of our current strategic plan. We believe this will further extend access to medical insurance for cats and dogs, reach new customer segments, and help grow the overall market. As we scale, technology will remain a key enabler of growth, helping us to better serve our member base, making every interaction simpler, faster, and more personal. Our investments in AI and automation are designed to increase operating leverage through the removal of friction, improve operational efficiencies, and free up our teams to focus on the moments that matter, the human touch.

Today, the benefits of this approach are evidenced with our increasing operational scale and solid retention. Over time, we expect these capabilities to support long-term growth while preserving the experience our members and partners have come to expect from Trupanion. Overall, we're encouraged by the progress we made during the quarter and remain confident in the opportunity ahead. We will continue investing with a disciplined focus on growing adjusted operating income and creating durable shareholder value. Our confidence in our long-term outlook remains high, which is reflected in today's announcement of a share repayment. purchase programme. I will hand the call over to Fawad to provide additional details related to this and to add more colour to our quarterly results.

Thanks, Margie, and good afternoon, everyone. Today I will share additional details around our second quarter performance as well as provide our outlook for the third quarter and full year 2026. Total revenue for the quarter was $392.9 million, up 11% year-over-year. Within our subscription business, revenue was 276.7 million, up 14% year over year. The total monthly average revenue per pet for the quarter was $87.44, up 9% over the prior year period. SOTO subscription pets increased 5% year-over-year to 1,125,000 pets as of June 30th. This includes approximately 66,000 pets in Europe.

The average monthly retention for the trailing 12 months was 98.37% up versus the second quarter last year, which was 98.29%. The subscription business cost of paying veterinary invoices was $194.3 million, resulting in a value proposition of 70.2% versus 71.1% in the prior year period. The quarter included favorable prior period development of $1.2 million, or approximately 40 basis points of subscription revenue. As a percentage of subscription revenue, variable expenses were 9%, down from 9.1% in the second quarter of last year. fixed expenses as a percentage of revenue were 5.8%, down from 6% in the prior year period. Combined, we saw fixed and variable spending at 14.8% of subscription revenue in Q2 and improvement from 15.1% in the prior year period. Our subscription business delivered adjusted operating income of $41.4 million, an increase of 24% from last year, and contributed 96% of our total AOI for the quarter. Subscription adjusted operating margin was 15%, up from 13.8% in the prior year.

Now I'll turn to our other business segment. Other business revenue was $116.2 million for the quarter, an increase of 4% year-over-year. Adjusted operating income for this segment was $1.9 million, or 1.6% of revenue. We also wanted to share that we have agreed with PetsBest to conclude our relationship following the third quarter of 2028. In total, adjusted operating income was $43.3 million in Q2, up 24% from Q2 last year, and ahead of our expectations. We deployed 21.6 million of this AOI to acquire approximately 68,100 new subscription pets. Excluding the pets that are underwritten through an MGA structure, this translated into an average pet acquisition cost of $299 per pet in the quarter, up from $276 in the prior year period.

We invested $1.8 million in the quarter in development costs. Stock-based compensation expense was $9.9 million. As a result, net income for the quarter was $6.8 million, or $0.16 per basic and diluted share, compared to net income of $9.4 million, or $0.22 per basic and diluted share, in the prior year period. As a reminder, last year's net income included a one-time gain of $7.8 million on the exchange of preferred stock related to our pet food initiative. The results of this quarter mark our fifth consecutive quarter of positive net income. In terms of cash flow, operating cash flow was $21 million in the quarter compared to $15 million in the prior year period. capital expenditures totaled $1.8 million, down from $3 million in Q2 of last year. As a result, free cash flow was $19.2 million, up from $12 million last year. the last four quarters, free cash flow reached 82.2 million.

Turning to the balance sheet, we ended the quarter with 398.5 million in cash and short-term investments and a total debt balance of 106.9 million, a reduction of 7.6 million versus Q2 last year. Subsequent to quarter end, we received approval from the New York Department of Financial Services to dividend 44 million of capital from our largest insurance entity, APIC, to our operating company. This approval brings the total amount of excess capital we have unlocked from our insurance entities to approximately 130 million over the past three years, reflecting the strength of our financial services. financial position and our ability to invest in growth opportunities. In conjunction with the dividend, we are pleased to announce the authorization of a $100 million share repurchase program, with repurchases expected to occur opportunistically. We view the new share repurchase program as an additional lever to create long-term shareholder value, complementing our continued investment in organic growth and the disciplined capital allocation approach that has guided our strategy. I'll turn to our outlook. For the full year of 2026, we now expect total revenue in the range of $1.584 billion to $1.601 billion. We are narrowing the range for subscription revenue, which is now expected to be between $1.124 billion and $1.133 billion.

The midpoint of the range is increasing slightly and continues to represent approximately 14% year-over-year growth. We're also narrowing the range on total adjusted operating income to be between 176 million and 184 million, or 19% year-over-year growth at the midpoint. For the third quarter of 2026, total revenue is expected to be in the range of $399 million to $405 million. Subscription revenue is expected to be between $284 million and $287 million, representing approximately 13% year-over-year growth at the midpoint. Total adjusted operating income is expected to be in the range of $44 million to $47 million. This represents approximately 11% growth year over year at the midpoint. As a reminder, our revenue projections are subject to conversion rate movements predominantly between the US and Canadian currencies.

For our third quarter and full year guidance, we used a 71% conversion rate in our projections.

Let me now pass it back to Margie. Thank you, Fawad. As we reach the midpoint of the year, we're encouraged by our execution and the strength of the business we continue to build. In the first half of twenty twenty six, we generated more than eighty three million dollars of adjusted operating income, up twenty seven percent year over year, demonstrating the earnings power of our business. We delivered adjusted operating margins and a long-term target while continuing to invest with discipline. We generated strong free cash flow, providing additional flexibility to invest where we see the most attractive returns. And we accelerated net pack growth, strengthened the economics of new enrollments, enhanced the experience of our members and veterinarians, and expanded our product portfolio. These results position us well for the second half of the year.

We remain focused on disciplined execution, investing in our highest return opportunities, and building on the momentum we've established to create lasting shareholder value. With that, let's open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press the star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, you may press the star then 2 to remove yourself from the list. At this time, we will pause momentarily to assemble the roster. And today's first question comes from William Larkin with Raymond James.

Hey, good evening. Could you talk a little bit about what you're seeing in terms of continued pet inflation, how you're thinking about that as you continue to see increases?.

Yes, thanks for the question Wilma. We're seeing veterinary inflation is still higher than we historically would have expected going back three, four years ago. So, still sort of at the double digit level. It has come down and we expect that that will normalize over time. But those assumptions are flowing through our pricing, which is why we're still seeing higher than average pricing coming through the book. good business and they can reflect the impact we see from veterans where wellness is down and revenue is going up as they push their prices to maintain revenue strength.

Thank you. And then can you talk a little bit about what you used your credit facility for this quarter?.

Yes, I would say thanks for the question Wilma. Yes, overall the credit facility we have in the debt refinance area with PNC is two 100 million, which is the term loan, and then there's a 20 million revolver. So we'll disclose in the 10Q so you know more specifics about it, but we've drawn most of the revolver And yes, we can provide details in the in the 10 Q. I would say from a debt perspective, overall our debt continues to come down as part of our agreement. We make regular principal payments And so you can see the year over year decrease in debt, and even from the beginning of the year. Another thing that's worth noting is just from an interest perspective, we're again generating more interest income than paying interest expense. So we feel good about the overall financing, where we are from a debt equity ratio standpoint continues to be strong and very happy with the relationship with PNC.

Okay, thank you.

Thank you. And the next question comes from Josh Shanker with Bank of America.

Yes, thank you for taking my question. Good afternoon, everybody. So sharing purchase authorization. Obviously it has no. exploration on it. But when making the announcement, investors would like to know that it's planned to be used. Can you give a little detail on the thoughts behind it and whether investors should be confident that it'll be exercised?.

Yes, Josh, I'll say a couple of things about it. I think it goes back to what we previously emphasized, that there's really two components when we think about our financial strength. Certainly the strength of the balance sheet being one of them and the ability to monetize our surplus. First and foremost, we're very pleased to get the extraordinary dividend that we announced, the $44 million. That's our third extraordinary dividend. So when you look at the $26 million we received in May of last year, approximately $15 million in Q1, and then the most recent one, that's about $85 million that we've taken out. In total, through ordinary extraordinary dividends and efficiency, we've taken $100 million. So it's a meaningful amount that we've successfully and responsibly taken out of the insurance entity.

When you take the $44 million, which is not included in our financials, and add that to add that to our available cash. It gets you to just under 100 million of available operating cash. So again, we feel very good about our ability to not just fund share buyback, but really take the record margins that we have growing AOI and be able to deploy that along with the surplus from the balance sheet, whether it's in in pet counts in pack, which we spend more in the first half of this year than any first half in our history. continue to be the majority of our focus, but also in Landsat, International. And then I spoke last quarter about some of the technology and AI investments we've made. So we look to accelerate those. And then finally, financial investments. First came the debt, principal repayments on debt that we did last year. And then now we're adding share buyback.

So I would say given the record AOI given our free cash flow, given the strength of the balance sheet. We feel very good about our ability to invest meaningfully across that. Now we're still going to look at it from an IRR perspective to make sure that we're maximizing the return, but we feel good about our ability to make investments.

are created to the business. And that's an IR question. Can you say with confidence, or do you know whether a dollar put to use in a share repurchase is higher or lower than a dollar used in PAC at this point in time? Yes.

Yes, I can't give you a point of view because obviously it's dependent on the share price. We have run that analysis as you'd expect, and we're confident in our ability to deploy capital in the right places. First, just to have the means to do it and have the capacity, and we feel confident based on the work over the last couple of years that we now have those choices, and we have we are going to look at the difference in return between investing in PAC, investing in other internal investments. Lance Path, for instance,.

as well as making financial investments. And is there any detail you can give investors about in terms of the gross ads in the quarter? How much was flagship, Trupanion subscription pets and how much were through your partners who are selling a different product, similar but not necessarily the flagship product?.

Yes, the strength of the gross balance came through the core products that was up 10%, around 10% year over year. So we saw some nice movement across the board, but that was particularly exciting to see from a core point of view. It is where the majority of our focus is, both an acquisition and retention perspective and the efforts of the team over the last I would say three to four quarters the number of tests that we've been pulling together have culminated and come together you know sometimes tests work sometimes they don't I would say we've had a really really good execution quarter in q2 we've seen some solid performance not only with the changes made through the website which I mentioned my earlier opening remarks have improved webconversion nicely, the good stuff up there. We've also seen really lovely improvement with the new expanded current insurance and deductible. which is the first iteration on that product really for 20 years. So seeing that come to the market, I think it's it's filling a gap that we weren't previously able to fill, and it's giving people flexibility with the affordability point of the at the entry point of our product. So so we're pleased to see that momentum The second half of the year is off to a solid start and importantly for us, we have the financial flexibility to continue to invest and test and learn and we expect the sort of opportunity in front of us that we'll be looking to execute into.

Thank you for all the answers. Thank you. Thank you. And the next question comes from Brendan Basquiat. This is William Blair.

Hey guys, thanks for taking the question. Margie, you started to hit on this, but can you spend a little bit more time talking about the changes to the enrollment services that you guys are making? That seems like it's having a pretty tangible impact in terms of the net new ads. Trying to understand maybe what the timeline is to roll that out to the broader, I guess, in all of North America, since it's already seemingly having some benefits. You know, like, I want to understand the cadence of how we should expect total net new pets and how impactful those can be over the coming quarters.

Yes, sure. So, as I mentioned, there have been a number of tactics that we started doing some things over the course of Q4, Q1, where we were really building towards not only the launch of the expanded co-insurance and deductible, but also some tests. Some of them are brand, some of them are up a funnel, and I think they're coming together to tell a better story to pet parents who are coming to the market for the first time. And that's showing up through more engagement, greater engagement within the website, and just helping to pull people through the funnel to convert. the timeline for the rollout of current insurance and deductible is throughout the rest of this year. So the teams and and thank you to the teams. Anyone that's listening to this, they they've done absolutely fantastic job working together across the board. to roll this out in a very short space of time. We had an accelerated timeline through this year and we're really pleased that we're well on track for that. say the product changes are being embraced by the market as we'd expect because it's giving people the ability to moderate and play with their premium, play with their monthly costs so they can find something that suits them which was not as much flexibility embedded beforehand. And we're pleased with what they're doing.

I think we're around 50% of the way through that journey right now. now. Early signs are that it's looking really good and we're continuing to not only deploy that but also other tactics that we believe will be accretive to conversion rate as well online. So lots still to do, a good nice quarter behind us and momentum in front of us.

Great. Maybe a follow-up to that and a slightly different question I'll throw on both of you guys at once. We're talking about changing deductibles a little bit. That might help with the premium price that the user pays. Maybe, Fala, can you talk to us a little bit about how should we think about the P&L impact of these, either from margins or from an ARPU level? And then a slightly different question, Margie. In the past, we've talked a little bit about new products coming, maybe totally new insurance products or maybe things like food. Any meaningful updates to give us on that front at this point? Thank you. Margie Lee, ARQ, Thank you.

Yes, a couple of things. I think one, we're very pleased with the coinsurance and deductible offerings and also our ability to bring them to market. as quickly as we have. So those are in market and beginning to contribute. I think it's still early, given that some of the states have not yet launched, but we're making progress and adding every month. I think it'll be more clear over time. The initial reaction we're getting is positive. I'm sure, Martin, you will give some context on feedback that we've had. So I would say it's early days, but we're pleased with overall performance so far.

Yes, I just said to add to that, I would say that the volume increase we've seen kind of deductible changes, RP changes. It's all it's secretive, so you know we feel really good about the fact that we've been able to unlock I think a bit of a a consumer segment than we weren't able to reach beforehand. So we're definitely encouraged, and I think there's a lot more to do there, and a lot of testing and learning, because as we mentioned, we're only 50% of the way through, and that's a recent stat. So encouraging signs. Just in terms of new products, We have shared before that we expect this to launch around the midpoint of our or by the midpoint of our strategic plan, our current strategic plan, which is the midway through next year. So we're nicely on track for that. Teams are working together again to put together a very different approach to pet insurance, something that Trupanion, a gap that Trupanion doesn't currently really target. And I think it's an exciting way for us to open the category.

It's something that I think in spirit of being veterinary partners to the entire animal health industry, we need to find ways to unlock the financial support that pet parents are looking for. And I think this is another avenue that Trupanion has competitive strength in. So excited to bring that to market. In terms of food, making really good progress. I would say we're nearing completion in some of our manufacturing development that we're doing there. Just in terms of building out the factory, we shared that last quarter that will continue through the rest of this quarter, and then we'll we'll start doing some more robust testing. We don't anticipate any meaningful revenue contribution in this strategic plan, but this is definitely a long play for us to not only kind of gradually increase our investment in a space but to do so in a manner I think will set us up very well for the long term with the future of animal health being such a huge market and a huge category that we can be part of.

Very good. And we've reached the end of our Q&A session. I would like to turn the call back over to Margie Tooth for any closing remarks.

Yes, thank you. Today we're demonstrating the earnings power of our model. Our business generated more adjusted operating income and cash. We're funding our own growth and we're thoughtfully investing in opportunities that we believe will create real long term value. As veterinary medicine continues to advance, we believe Trupanion is uniquely positioned to help more pet-friendly families access the care they need while creating enduring value for our shelters. Thank you very much for joining us today.

Thank you. The conference is now concluded. Thank you for attending today's presentation. We now disconnect your lines.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good day, and welcome to the Trupanion First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gil Melchior, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to Trupanion's First Quarter 2026 Financial Results Conference Call. Participating on today's call are Margi Tooth, Chief Executive Officer and President; and Fawwad Qureshi, Chief Financial Officer.

Before we begin, please be advised that remarks today will contain forward-looking statements. All statements other than statements of historical facts are forward-looking statements. These include, but are not limited to, statements regarding our future operations, key operating metrics, opportunities and financial performance, pricing and veterinary industry inflation. 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 today's earnings release as well as the company's most recent reports, including Forms 10-K, 10-Q 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, cost of paying veterinary invoices, 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, all margins and expenses will be presented on a non-GAAP basis and excluding stock-based compensation expense and depreciation expense. These non-GAAP measures are in 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.

Lastly, I would like to remind everyone that today's conference call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site.

I will now hand over the call to Margi.

Good afternoon, everyone, and thank you for joining us today. In the first quarter, we generated over $40 million of adjusted operating income, up 29% year-over-year and remain on track to deliver $180 million for the full year. In my shareholder letter published earlier this week, I highlighted the importance of adjusted operating income, which provides the flexibility to invest in growth and serve as a proxy for our core earnings power. As we enter a highly compelling period in the pet insurance industry, that flexibility presented by strong performance against this metric is increasingly important.

The human animal bond continues to strengthen, which means pet care, once considered discretionary, is now viewed by many as a necessity. Alongside this trend, the cost of veterinary support has increased significantly, limiting access to care for a growing number of uninsured pets. These dynamics create a meaningful and expanding opportunity for Trupanion. To fully capture what's ahead, we intend to embolden our messaging, broaden our existing products, introduce a brand-new product and continue to invest to grow the business.

To do this, we'll leverage our adjusted operating income, which, as I noted in my shareholder letter, has compounded annually at 35% in the last two years and 45% over the last 10. Sustained growth of this nature requires discipline across pricing, retention and new member acquisition. Simply put, for it to expand meaningfully, we must be priced accurately, maintain or improve retention and add new members at our target value proposition, ultimately expanding our pet count and the number of pets we protect. Our track record demonstrates the ability to do this for more than two decades.

Today, we provide coverage for nearly 1 million pets under the Trupanion brand. And last year, more than 0.25 million pet parents chose us because they wanted high-quality coverage for their pet. Yet there are many more that didn't, and we need to be sharper in how we communicate what makes us different and why it matters.

Beyond that, we also recognize the opportunity of expanding the options available for our existing product to offer greater choice as well as innovating pet insurance once again with a modern digital-first lens with plans to bring a new solution to market later this year. The new products will carry the mark of Trupanion to enable us to better leverage our brand reputation, direct payment, pet acquisition investments and to create room for upsell or cross-sell where appropriate to reach a broader customer segment.

As these initiatives come to life, we must also plan to operate with improving efficiency and cohesion. With that in mind, we're reorganizing our approach to growth to unify under a single leader and to create a consistent, bold and clear pet parent experience in support of this mandate from lead generation through to conversion and retention. That said, our overall expectations for the year remain unchanged with adjusted operating income continuing to propel growth and investment in the business as we benefit from the scale achieved across our operations, retention and the accuracy of our pricing.

With that, I'll briefly turn to some notable developments and results in the quarter. At the beginning of this call, I mentioned our increase in total AOI to over $40 million. Our subscription business generated the majority of this, contributing $38 million, which directly translates to a record lifetime value per pet, up 29% year-over-year, giving us ongoing confidence to compound the business by investing at continuously higher levels.

The pet acquisition investment in the quarter, which was 53% of our total AOI, fuels a growth plan expected to deliver returns across multiple time horizons with benefits accruing beyond the current quarter, all while continuing to generate strong free cash flow.

We added approximately 64,700 pets into our ecosystem in Q1. We recognize there's still work to do in order to fully capitalize on the opportunity in front of us, yet we're encouraged by the mix of pets onboarded, continue to demonstrate strong and durable per pet economics.

At the end of the quarter, we began the early rollout of the first of our strategic initiatives under our new strategic plan, adding flexibility to our core Trupanion product for pet parents wanting Trupanion at a lower entry point. Initially available in Canada, we've expanded to a handful of U.S. states and intend to expand broadly throughout the year. Early results are encouraging with improved web conversion rates relative to prior periods, an indication that offering greater choice is resonating with pet parents.

Worth noting, when presented with a broader set of options, pet parents are consistently selecting coverage levels that are somewhat in line with our core offering, suggesting increased flexibility of expanding access without materially shifting selection toward lower coverage. As we move through the year, we remain focused on executing against these priorities with discipline while continuing to build on our strong foundation.

With that, I'll turn it over to Fawwad to walk through our Q1 financial results in more detail.

Thanks, Margi, and good afternoon, everyone. Today, I will share additional details around our first quarter performance as well as provide our outlook for the second quarter and full year 2026. Total revenue for the quarter was $384 million, up 12% year-over-year. Within our subscription business, revenue was $269.5 million, up 16% year-over-year and exceeding the high end of our expectations.

Total monthly average revenue per pet for the quarter was $85.79, up 11% over the prior year period. Total subscription pets increased 5% year-over-year to 1,106,000 pets as of March 31. This includes approximately 64,000 pets in Europe. Average monthly retention for the trailing 12 months was 98.35%, up versus the first quarter last year, which was 98.28%. The subscription business cost of paying veterinary invoices was $190.9 million, resulting in a value proposition of 70.8% versus 71.8% in the prior year period. This improvement came in light of an adverse development from prior periods of $3.1 million or approximately 120 basis points of subscription revenue, showcasing the strong performance in the quarter.

As a percentage of subscription revenue, variable expenses were 9.1%, in line with the first quarter of last year. Fixed expenses as a percentage of revenue were 5.8%, down from 6.2% in the prior year period. Combined, we saw fixed and variable spending at 14.9% of revenue in Q1, an improvement from 15.3% in the prior year period. Our subscription business delivered adjusted operating income of $38.4 million, an increase of 28% from last year and contributed 96% of our total AOI for the quarter. Subscription adjusted operating margin was 14.2%, the highest Q1 margin in our history and up from 12.9% in the prior year and represents approximately 130 basis points of margin expansion.

Now I'll turn to our other business segment, which is comprised of revenue from other products and services that have a lower margin profile than our subscription business. Our other business revenue was $114.6 million for the quarter, an increase of 5% year-over-year. We expect growth for this segment to continue to decelerate as we are no longer enrolling new pets in the majority of U.S. states for our largest partner in the segment.

Adjusted operating income for this segment was $1.8 million or 1.6% of revenue. In total, adjusted operating income was $40.2 million in Q1, up 29% from Q1 last year and in line with our expectations. We deployed $21.2 million of this AOI to acquire approximately 64,700 new subscription pets. Excluding the pets that are underwritten through an MGA structure, this translated into an average pet acquisition cost of $315 per pet in the quarter, up from $267 in the prior year period. We invested $1.7 million in the quarter in development costs. Stock-based compensation expense was $8.8 million.

As a result, net income for the quarter improved to $4.9 million or $0.11 per basic and diluted share as compared to a net loss of $1.5 million or $0.03 per basic and diluted share in the prior year period. This marks our fourth consecutive quarter of positive net income.

In terms of cash flow, operating cash flow was $14.6 million in the quarter compared to $16 million in the prior year period. Capital expenditures totaled $0.8 million, down from $1.9 million in Q1 of last year. As a result, free cash flow was $13.7 million, approximately in line with last year.

This quarter, we continue to execute on the investments that Margi outlined in the shareholder letter and that I talked about last quarter. In addition to opportunities to accelerate growth in our core business in North America and international, these include Landspath, our food initiative, investments in technology to strengthen our competitive advantage in areas like claims automation and improve member experience and financial investments such as paying down debt.

Turning to the balance sheet. We ended the quarter with $383.7 million in cash and short-term investments and a total debt balance of $109.3 million, a reduction of $19.5 million versus Q1 of last year.

Now I'll turn to our outlook. For the full year of 2026, we now expect total revenue in the range of $1.556 billion to $1.581 billion. We are narrowing the range for subscription revenue, which is now expected to be between $1.119 billion and $1.135 billion, continuing to expect approximately 14% year-over-year growth at the midpoint. We also continue to expect total adjusted operating income to be in the range of $173 million to $187 million or 19% year-over-year growth at the midpoint.

For the second quarter of 2026, total revenue is expected to be in the range of $386 million to $392 million. Subscription revenue is expected to be between $274 million to $277 million, representing approximately 14% year-over-year growth at the midpoint. Total adjusted operating income is expected to be in the range of $40 million to $43 million. This represents approximately 19% growth year-over-year at the midpoint.

As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U.S. and Canadian currencies. For our second quarter and full year guidance, we used a 73% conversion rate in our projections.

Let me now pass it back to Margi.

Thanks, Fawwad. We enter our new strategic plan from a position of strength with a clear strategy and disciplined focus on the highest return priorities to drive durable growth and long-term shareholder value. Speaking of which, this weekend, we'll host our annual Q&A following the Berkshire Hathaway Shareholder Meeting in Omaha. Each year, this presents us with a rather unique opportunity to hold an open forum with a community of long-term like-minded investors. We hope to see many of you there.

With that, we'll open it up for questions.

[Operator Instructions] The first question comes from Wilma Burdis with Raymond James.

Looking forward to seeing you guys in Omaha. In the shareholder letter, we noticed that the number of hospitals with Trupanion software increased 30% in '25 year-over-year. And I think you noted in there that the -- I'm going to call it productivity has come down a little bit, so seeing less new pets per those new hospitals. Can you talk about why that pet count growth hasn't kept pace? And is that a good leading indicator?

Yes, it's a great question. So as I mentioned in the shareholder letter, typically, when we think about gross pet adds, we know that the higher that number goes, usually, you get an increase in same-store sales and actually hospital numbers go up. What we've seen over the last year is the change in same-store sales has come down. So that means consistency of introducing the concept of insurance come down.

However, the footprint has widened, and that's led to more software. So this is as a direct result of the teams, the territory partners really leaning into the solution we provide for people in a sense to leverage our software as a hospital team to help pet parents deal with the invoice when it comes through. So it's the start of what typically becomes an active hospital than a same-store sale. We would expect to see that number, the same-store sales down when pet count is lower.

We expect to see it build over time. And it's the constant juggling the territory partners have to do with going wide and going deep. And I think they've done a fantastic job to see that growth in our software usage because what that does is it really underpins the core value proposition that we have.

So it means that we're helping more members by paying them directly, which we can see in the scale and efficiency across the business. And I'd expect to see that number of active hospitals grow over time as we continue with that pet count.

And a bit of a follow-up on that. I mean maybe you could talk about -- is there a time frame for some of that to flow through? But I'd also just really like to hear a little bit more about the new product and maybe you could explain the coinsurance and the deductible changes that you outlined in the shareholder letter. And just talk a little bit more about price point and just maybe give us some additional details on how that's going to work.

Yes, sure. I will try and remember that. So starting with the time frame. I mean the hospital channel is always a very, very strong channel for us. We'd expect it to -- you get active hospitals go up, then same-store sales will come down, then the team has to go back in and manage that. It's a constant of the territory partners, and that's really where we have that deep moat. It will build over time. And like I said, it tends to correlate with our overall gross add numbers. So we'll kind of update you as we go with that one.

In terms of -- I think you asked about the new product, what we can say more about. I mean I really stick to the details of the shareholder letter, but at the highest level. The intention behind the two big initiatives we have for North America this year to recap, one is expanding on our core products. This is the first time in 25 years that we will be expanding the coverage levels to offer broader price points, and we do that through the flexibility with increasing deductible as well as adjusting into different levels of coinsurance, which really does expand those price points quite significantly.

We started to roll this out very late in Q1, and the early signs have been encouraging. And as I mentioned in my opening remarks, we've actually seen very little change in terms of the overall options selected by pet parents when they get to see and play around with a different co-pay and different deductible levels. So it gives people more of an understanding of what's involved in the value proposition, which is great, and that's what our intention was, but also gives more optionality.

And then I think the third part of your question was around the brand-new product, which, as I shared, is really designed to appeal to the new audiences that have been coming into the category. So as pricing has risen from a cost of care perspective, we've seen a new generation of pet parents, the millennials and Gen Zs who are looking to come into the space. They want to protect their pets. It is treated as part of the family, but sometimes that entry-level price point for any product out there can be too high. They're looking for quality. They're looking for transparency. They're looking for Vet Direct Pay, but they want a different solution to one that many offer, including Trupanion today.

And so we're leaning into the brand equity we have built over the 25 years, the trust in the vet clinics, the territory partners that enable that high retention rate to create something that is leveraging our data and leveraging the route to the business, but creating something very unique. It will be -- I'm not going to give too much away, but it's going to be a digital-first product in the sense that everything will happen online. We're going to make it -- the products that people want it to be for them in the right space, meaning we're not going to direct them to a specific communication channel. It will be where they want to communicate, how they want to communicate. And it will be built in a manner that will allow them to have a lot more optionality than we have today, even with the new price point. So we are very excited about it. We've got the teams working on it, and we'll update you over the next few months as we go.

The next question comes from Josh Shanker with Bank of America.

In the shareholder letter, you talked about going forward that the IRR disclosure no longer is meaningful because there's so many products. And so it means something different depending on the mix of products. So two questions. How should we think about the internal rate of return on various products you've taken that away. And it probably was a garbage number anyways it didn't help us.

But two, maybe it's worthwhile thinking about what the IRR is on the Trupanion flagship product as a way of understanding what incremental dollars of marketing are doing?

Yes. No, thanks, George. Thanks for the question. I'm glad you brought this up. So there are a couple of reasons for us making this change. First and foremost, as you mentioned, and as I said in the shareholder letter, the blended IRR metric is no longer relevant as it was at the beginning of when we first started sharing it given the size and maturity of the core business today. And that's because we have multiple products in multiple geographies that all create very different ARPUs, very different returns with the same intention to get to the same guardrails, but it takes time to do that.

So we're moving away from it to improve the clarity and focus on metrics that we believe more accurately represent the economics and the value of the business today. And the most important one of those being AOI, adjusted operating income.

So as I outlined in the shareholder letter, IRR, for example, it assumes that newly enrolled pets that we get today behave the same way as the existing book of business. And when you have over 1 million pets on the book, that becomes increasingly more complex. But it becomes, therefore, less accurate as the business scales and the market penetrates more heavily. Similarly, as I mentioned, you've got the products and the geographies, which create further confusion.

And just to give you a little bit more context around that, when we first started sharing IRR metrics, our adjusted operating income at the time was $5 million. And it was a total the team had to spend to deploy. Today, it's over $155 million, which naturally becomes far more dynamic and complex and is, therefore, significantly less suited to a single blended metric. And it's also competitively sensitive.

To take the second part of your question, when we think about the core Trupanion product, from our perspective, we don't want to share the level of insight into what we're spending, where we're spending because of the competitive sensitivity. But we are still adhering to those internally to those guardrails, we have not changed how we operate.

And the AOI that we're generating will demonstrate that we are enrolling pets that continue to have that higher margin, the right margin, we've priced appropriately, we're retaining them, and we remain committed to leveraging that internally, like I said. I will just say that with our IRR performance this quarter, it did improve sequentially, and we feel like this is the right step to give clarity to our audience.

And so I guess dovetailing from that, when you start a new business, there's obviously you have to spend to make it work and you do have a number of new businesses. What tools should give us confidence about Landspath and [indiscernible] and Furkin and PHI Direct. I mean, early on, it was very hard for you to figure out whether or not those businesses could leave Canada even because they were still incubating. I think some are still there. We know that Trupanion, the core product works. What sort of signs can we look at that the newer, younger products are worth putting money behind them to get them to grow?

Yes, it's a great question. I think we are going to continue to provide the visibility as we have done today on AOI. And as we deploy more of that, and obviously, we'll be sharing how much we're deploying, we would expect to see that AOI grow commensurate with the investment we're making. I would say the transparency we've had, to your point, with early doors, PHI, Furkin, any of the new products and channels we've introduced -- we -- it's not necessary for us to share the details on every single test we're doing, every single product.

What we're trying to do is orientate people to the metric that we believe best captures all of those products and their performance over time because we want to get to a place where we are continuously investing in that adjusted operating income with high levels of return, which you'll see as that compounds. We've shown for the last couple of years that the rate of compounding has increased with AOI. Our goal is to continue to do that.

And as I mentioned in the shareholder letter, we expect to generate well in excess of $500 million. And the reason we made that comment in the letter is to demonstrate there's a lot of fuel for us to continue to grow this business. And we will do that with varying products, the Landspath being one of them. We won't disclose how much we're putting into one versus the other, but we will continue to compound the AOI. That's our goal. That's our intention.

Fawwad, would you add anything to that?

Yes. I think the other thing I would add is something we've been talking about and I mentioned it last time, is just the versatility of AOI. So it's a pool of capital that, to Margi's point, gives us optionality to invest in a variety of things. And when we think about how we will get to mid-teens growth in sub AOI over the next 3 years, I think we've proven there's multiple ways to drive AOI. We clearly think pricing not a necessity, but it's become, I think, something that we've honed and become proficient about over the last couple of years.

Retention, retention continues to be resilient. It was up nine points in 2025 from a full year basis. It was up quarter-on-quarter. It was also up year-over-year, about seven points. And then, of course, adding members. We added over 0.25 million gross adds last year. We added, as Margi mentioned, 64,700 gross adds this quarter.

And then operational efficiencies. I think one of the things that we're very excited about is just the ability to leverage technology and the company was well ahead of the curve when it came to leveraging innovative technologies in those days, it was machine learning, now it's AI. Our automation rate in the quarter jumped to 62%. So that's up from 56% last year.

And that's great for everyone. It's a better experience for members. It costs us less in terms of processing the claims and the actual processing costs. So you're seeing that in the loss ratio at 70.8% to start the year there, I think is a strong position for us to be in, particularly given the first half, second half seasonality that we've seen. So yes, I think when you look at AOI, that's the thing that I would pay attention to in terms of are we being judicious in deploying it.

The next question comes from David Westenberg with Piper Sandler.

This is Sky on for David. Just on the macro side, as it relates to pet adoption trends, how are you thinking about the growth in puppies and kittens? Are you seeing a shift in portfolio to cats? If so, how are you targeting cats? And does this have an impact on the timing of payouts?

Yes. Thank you, Sky. We have definitely seen a shift in overall, I would say, lead volume coming from the vet channel. We've heard across the industry, we're seeing sort of the downturn in terms of vet visits, wellness visits. And from a lead volume perspective for us, we still see a healthy lead volume. It was flattish in Q1. It's actually shown an uptick in Q2, which is great.

I think, yes, we are seeing more cats. We noticed that two years ago when we started to see more kittens coming into the category. Overall, though, in terms of the opportunity, it remains at least 1 million pets, 1.2 million pets approximately that are entered into practice management systems every month. We have a lot of markets still to capitalize on. So in terms of the opportunity there, we're not talking to all of those puppies and kittens at this point.

Adoption trends do appear to be slowing, which is part of the pressure being put into the vet industry. But from our perspective, that just -- that still gives us a long, long runway ahead of us. So our channels tend to be breeder vet shelter, as well as our members referring their friends and adding pets. We're still seeing a healthy portion of that population doing that. It still remains one of our second biggest channels.

So we'll continue to work with the veterinary industry to help them. We've helped show that through our cost, as you can see that people are still taking their pets into the vet when they have Trupanion. It is a solution to the barrier that the veterinarians are seeing preventing people coming into the hospital. And we know that there's a long runway ahead of us. But overall, we added 64,700 pets in the quarter, as Fawwad just mentioned, and as I mentioned earlier, and I think the margin of those pets is where it needs to be.

From a cat point of view, we love all pets. We're not trying to target one over the other. And we have a lot of cat activity going on. We also have a lot of dog activity going on, and the goal is to continue to build on that number over time.

This concludes our question-and-answer session. I would like to turn the conference back over to Margi Tooth for any closing remarks.

Thank you. I'd just like to say a big thanks to everyone for the questions today and your participation. Hopefully, we've come across to show that we're excited about the long-term opportunity ahead, which remains as significant as it has ever been with demand continuing to grow. We are absolutely committed to executing with discipline against this opportunity, which means leveraging our strong adjusted operating income to invest where we see the highest returns and to help more pets to access the care they need, as I just mentioned.

With that, we appreciate your time today and look forward to updating you on our progress in the next quarter. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.

Ladies and gentlemen, the program is about to begin. At this time, it is my pleasure to turn the program over to your host, Michael Ryskin. You may begin.

Great. Thanks, everyone, for joining us for our next session. My name is Mike Ryskin. I'm the U.S. life science tools and diagnostics analyst also covering animal health. But for this next session, I'm also honored to be joined by Josh Shanker, our U.S. insurance equity analyst, who's hot off a plane, and I'm surprised he's not still out of breath, but he's that eager to be joining us. And we're also excited to be joined by Trupanion. We're joined by Margi Tooth, President and CEO; and Fawwad Qureshi, Chief Financial Officer. Thanks, everyone, for taking the time and being here with us. I'm going to pass it over to Josh since it's his coverage and he'll lead the fireside chat. But as always, Boomer, chat or e-mail any of us if you want to introduce any other questions. Josh?

Yes. Fawwad, Margi, thank you for being here today. We really appreciate it. I guess like, look, we just had the year-end conference call. And obviously, you laid out some guidance. Can you tell people how they should be thinking about 2026 and what you think the major points to relay to investors are?

Yes, I can take that one. As you said, we just announced our 2025 results, super happy about the way the year shaped up, looking forward to momentum in 2026. When we think about guidance similar to what we talked about in 2025, pricing is still contribute more as a percent of revenue growth in 2026, but less so than it did in 2025. So we're seeing that gradual shift of contribution to revenue going from pricing to headcount. Headcount will contribute more as a percentage in 2026 than it did in 2025, but it will still be a pricing-led year.

When we look at loss ratio, pretty similar experience that we saw in Q4 is what we're carrying forward in our guidance. Haven't really seen a significant abatement in inflation as we get into the start of the year, but of course, it's something you take a lot of attention to [indiscernible]. Really happy to be able to deliver on the expense leverage. I committed that we will achieve leverage in the second half on fixed expense and we [indiscernible] revenue. We'll continue that momentum going into 2026.

You guys see the top line. You see the total percentage. Within that, underneath that, there's a number of things happening, one of which is we continue to invest in technology. We feel technology is a differentiator for the company. We talked a lot in the past about [indiscernible] automation [indiscernible]. It's really leading into that, and we're paying for that through efficiencies in the overall expense portfolio. And then because of that, we expect to see continued margin expansion from an adjusted operating margin standpoint [indiscernible].

Great. And so when we think about go-to strategy, one thing that we've noticed in the recent past is you've upped the customer acquisition cost spend or policy acquisition cost spend. You can see on a per pet basis, we can see in aggregate numbers. How is the go-to-market strategy changing or evolving as we enter 2026 through vets, through breeders, through direct outreach. What are we spending those dollars on, and how is that allocation changing over time?

Yes. So when we think about pet acquisition, in terms of our distribution channel, the vet channel is still, I'll maybe say, still sort of the hotline of every conversation that we have once a pet gets to the vet, and we want to reinforce that with the vet routine as well as with breeders and shelters as well. So we're thinking about all stages of early pet ownership and adoption. Our additional spend has really allowed us, much like Fawwad mentioned for technology, kind of building the framework and the lay of the land and foundation to be able to build up from it. When we were pulling back our pet spend over the last 2 years prior, we've started to really build that foundation again. So we're thinking about making sure the brand is present in hospitals, making sure that breeders understand who Trupanion is and what value that brings to their letters. The same thing with pet parents. We're trying to find them earlier in the funnel, so where they shop, where they consume, where they're browsing, where they're looking for education information, using the data that we have as Trupanion to sort of put that into the eyes and minds of pet parents. It's a multitude of ways that we're pulling together the strategy for acquisition, some of which will deliver quickly and a lot of it, we expect, will just really help to broaden that funnel right at the top so you bring a lot more people through that then get to know Trupanion, which means there are different stages of velocity of how quickly they can move the funnel better.

Can you go a little deeper in finding pet parents? I mean, there's one thing about the idea of vet saying to the customer, hey, look, have you thought about health coverage for your pet? And it sounds like that you have more of a pull of finding customers. How does that differ from what's been going on in the past?

It's complementary today. I'd say that we're looking at finding ways that it's helpful. It eases the conversation when a small dog walks in the door and they're already saying they're insured from a vet perspective. That makes their lives so much easier. We've heard that for years. For us, it's about trying to make sure you're making that conversation quicker and more efficient. Also, the more time that someone sees a brand, we know this from old, that they become more familiar with it. That's more credibility. When it's introduced, they're more willing to listen to what the brand has to say. This is really kind of us building our brand in not only animal health, but actually kind of broadening into the market.

I would say just in terms of tactics, I don't want to reel too much, obviously, but we're doing a lot of new things, sort of different things, and kind of thinking about the vet journey, but where do people go before they get to the vet? That's predominantly when they're getting a pet for the first time. So they're researching a breeder or shelter. They're looking at things they want to buy for a puppy or kitten. We're really trying to compare those things together to help them when the conversation comes off at that level.

I think of Trupanion as the industry leader in pet health care insurance. There's obviously been a lot of capital formation and M&A and putting together businesses. The category continues to grow. I'm not sure that Trupanion is currently growing as quickly as the category as it's been retooling pricing. Historically, you've outgrown the market, which I think is only 4% penetration right now. I expect that's going to continue to grow. So a, can you frame like what you think the growth for the category is? And b, where Trupanion will be in 1 year, 3 years, 5 years relative to the category's growth?

Yes. There's a lot in that question. Keep me on track here in case I don't answer everything. So when we think about overall growth rate, there's a category right over around 4%, 4.5%. The industry figures haven't been released for 2025, but I'd expect that we've seen somewhat continuous growth, if not sort of slightly ahead of where we've been trading for the last 5 years. That's a category. So we know that with vet costs, that people are leaning into more solutions. They're looking for better solutions than probably they have. Insurance is one of those solutions. There are some others that are coming out in the market. From our perspective, what we've been very clear about for the last couple of years is doubling down [indiscernible] price right. We should [indiscernible] they are.

We're talking about a compounding increase now of sort of somewhat close to 50%, if not higher than that. It's [indiscernible] over the course of the last few years. So for us, it was important to maintain their retention rate before we went into growth aggressively. That's not to say we haven't been [indiscernible], but it was more around when we're enrolling a pet, we want to make sure that price comes in place. It's been very deliberate for us to focus member first and then additive. I would say, in general, because of that, I anticipate that certain players in the market have been growing faster than Trupanion because their priorities are different. Moving forward, though, there's absolutely greenfield for everybody. We're not in a situation where the category is a take market, if you will.

It's very much building the awareness, building the education. We talked about helping the funnel to build for everybody. From our point of view, we're not going to just grow at all costs. It's been very deliberately focused on highlighting value, looking at the margin we get per pet. We've seen from the numbers Fawwad was talking about in Q4, our margin was at level for the full year, which is the first time in our history we've done that. We now have the confidence to be more aggressive. I would say sort of 3 to 5 years out, as we leave that demand and that sort of early adopter moving into sort of majority market, early majority, we fully expect to be aggressive.

That's based on deploying the AOI that we've been generating as a business and getting to a growth curve that we've been talking about. So yes, we want to grow with the market. That's absolutely our long-term aspiration for sure. We won't do it at all costs. We believe that when you're playing that long-term game, looking at the reputation of our brand, we're looking at how members can trust us and know that we've moved up coverage, that we're doing what we said, that they keep the product. That's more important to us for the long-term play. And we're excited to enter the position to really maximize that in the coming years.

I mean I'm just going to make a comment here that you can dovetail on a little bit that the product you sell is the most coverage that you can get for dollar.

That's right.

There should be a -- clearly, there's a market for that. I mean, a, should that type of product grow faster than the market, grow at the same pace, not even Trupanion, but the desire to have as much coverage as Trupanion is going to provide, should that be outgrowing the market or growing with the market?

Look, I think it depends. You've got pockets of people that will want the most comprehensive, and then you've got folks who are going to want something, whether that's access to emergency coverage versus kind of lifetime coverage and the wellness and everything in between. I think there is a space, but it absolutely is the ultimate product. We've always seen ourselves as a leader, and I think our numbers prove that from the lifetime value retention perspective. I think where the market is today, though, I mentioned just a second ago, that we're going into a different phase of market in pet leadership, which is really exciting for the entire category. That's when you're going to start to see it in the broader offering. And people are -- consumers are going to demand something a little bit different as they should, and they want more choice.

I think our role, having our data, having our experience, having the systems that Fawwad talked about in terms of our AI adoption with our technology, is really helping us to build on how do we then create the next-generation product? What does that look like? What features do pet parents want? So they have an optionality between what is the best, most comprehensive coverage, and also potentially an early entry product as well that will help them come into the Trupanion family. But yes, I mean, I think it's recommended by more vets than any other product for a reason. We have a highest retention rate for a reason. We're proud of that. There's a much [indiscernible] for us to continue to grow.

You may have seen -- it's really a more home and auto story about some governors in the United States who are asking for a cap on insurance prices. And really, I don't know if that's the right idea, but they're trying to capture on people's wallets are hurting. And affordability is going to be a big issue in the 2026 election cycle. To what extent is your messaging being successful around even though we are a more expensive product, we actually help you manage your expenses better? Or are we still in the phase where sticker shock is the dominant feature about how people think about things, and that's going to be weighing on growth for the next 12 months?

Well, thank you for asking the question that way, Josh, because it's -- Trupanion is not the most expensive product. Trupanion is actually the least expensive product over the line. And the point you make is exactly what we are breaking down in terms of our communication and our efforts around conversion and education that I talked about before, that pet parents don't appreciate what every other provider in the market does. They don't appreciate that the age of enrollment is a unique benefit to Trupanion. And we lock in that age at that age because we believe in providing care for the life of the pet. Now, that being said, your point is still absolutely the right one. And as I mentioned, we're looking at how do we evolve our products then to make sure that we're doing everything we can for our existing product?

And then looking at what do we do for the pet parents that, to your point, don't have that money? They still want some comfort. We believe our brand has created sufficient equity in the market today where we can actually go and create something that will not be as comprehensive and might have some different product features and limits, but it will still have direct pay. It will still have the Trupanion brand promise and security that vets know. And we believe that that's kind of the next step for us as a category. I'm sure we'll see more market entrants come in because there is that need. You've got that beautiful alignment of the markets growing. There is more awareness. Vets are recognizing the power of an initial client base. Consumers need something to help them protect.

Like I said before, we have sufficient data and that brand development in the market that will help us to build on that and create something specific for those members who can't afford their dollars today.

You've had a multiyear soft launch, I call it, of lower-value health care products in terms of a discount product like PHI Direct and a mid-tier product like Furkin. I think about Trupanion as being a business built around doing what's best for pets' health. To what extent does Trupanion have the skill sets to sell a product that is designed around maximizing health care for pet needs?

Yes. I think PHI and Furkin, they were launched in Canada, and they are still in Canada. They're still running as businesses acquiring pets. I would say the 2 of those products launched at a time just before we saw margin compression come through as a business. So our intention with those products was to invest aggressively, bringing them over to the U.S. market, and have a free product sitting as swim lanes. As we look back over the last sort of 3 years, 4 years, when we saw that margin compression come through, the first thing we did was, as I mentioned, we put a double down focus on members, and we started to pull back where our acquisition investment was going. We were deploying it into areas with the highest lifetime value.

PHI and Furkin, just by the very nature of the type of product they are, was not the highest lifetime value, so we stopped really investing in them. We've learned a lot from them. I think if I look back to when we launched them and we started talking about 2021, the whole premise for us was we didn't want to use the Trupanion brand at that point in time. We wanted to create very different products that would compete with other products out there in the market and would clearly define the difference between a high-value product and mid-value product and a low-value product. Between the 3 of them, I would say it's been a very useful learning curve. We've got a lot of data from different types of pet parents who will buy those 3 products.

But now where we are, as I mentioned, our brand equity has changed significantly over the last few years. We've added a lot more hospitals to our active hospital base, installed a lot more software. And we're at a point now where we think that the brand actually will help advance those products in the market because of the trust that Trupanion has created. So they've been effective. They've been very helpful, and they're still part of our ecosystem in the back room today.

We'll take the best parts of those. We'll build them into the Trupanion concept and then start to kind of bring a slightly different product to market. So now we have the means to do that. We've seen a nice level set with our margin. We anticipate that that pricing will continue to go through over the next few years. It gives us means to deploy not only into core but into other products too. And the benefit of having that one brand or them associated under that umbrella is the dollar will go down much further supporting them, whereas before it was incrementally a dollar for PHI and Furkin and [indiscernible] for Trupanion, and they weren't all benefiting from the same spend.

if we go -- yes, go ahead, Fawwad, please.

I'm also going to add a quick point that may be helpful. So you think about pricing as a contributor to revenue growth, one of the things that we talked about at the end of 2024 is that was a dollar when we expected the year-over-year our [indiscernible]. And for the most part, as you look at 2025 shape of year, it largely played out with price increases where we are now. So we felt like we were at least past the peak. It took a lot of work on us to go from significantly compressed margins on some of the [ 6% ] that we gained in 2023 for those of you who may not be aware of our target market is 15%. Effectively, we're very happy to get 14.8% for the full year in 2025. So we feel like we're in a good space.

So there's a couple of things happening at the same time. One, we have the margin recovery. Two, we have the strength of our balance sheet, positive free cash flow. So we have a financial capacity to invest. Those are the 2 conditions that we talked about over the course of last year. We can start accelerating our investment. When we've got margin [indiscernible], when we're at a point where we're not going to reach full market share like a negative margin share, not market share. We need to be able to have the financial resiliency to make the investments that we want to make in [indiscernible] way.

So I feel good about where we're positioned in terms of unleashing those dollars. We see the old guy not much more interested, but I would say we're pretty enthusiastic about what's up in the first few years.

If we go back to the post-COVID inflation period, you have a birthday renewal type pricing model and you asked the regulators for price increases in response to what you're seeing. And so as inflation is happening, your margins deteriorate because it is happening in arrears. And you get to a stability in terms of where your current pricing is matching the inflationary trend. With your 2026 guidance, we see that pricing is coming down, you're responding to loss cost trend moderating to some extent. But it's going to take you a year for all those prices to reset the proper level of inflation. Does that mean half of your book is going to be at a price that is ahead of the loss cost trend until we reach the renewal date and it forces your margins to expand from here?

I think there's obviously good chance that can happen. I mean, we knew going into this, the team has been really eager to get as quickly as we need to. At this point, though, as Fawwad mentioned, we haven't seen costs fading and certainly lower than our expectations, which gives us confidence moving through the year that, first and foremost, we're in a position to be able to afford that cost of goods, which was critical for us. And as soon as we see something change, we will pivot. We'll switch. Some we can go quicker than others because, as you mentioned, we've got to be able to [indiscernible] through. Our goal is still to get the same value proposition. We'll be in a different position to where we were in '22, as you say. We saw that margin compression. I think for us, it's really a case of just watching it, monitoring and ensuring that we can offer the value prop that we know will drive our own attention rate up.

So pricing is moderating. I kind of believe that if I were a customer of Trupanion, I'm not a pet owner, so I can't be a customer of Trupanion. But if I were and I got 2 back-to-back 20% price increases and I stayed a customer, I think you can imagine I'm never going to leave, that I got huge price increases and I still love the product and whatnot. And so I look at the cohort of customers you have, and I assume that they're more loyal than they've ever been, would be my takeaway. But retention is still lower than it was a half decade ago. Do you expect to return to peak level retentions because you have a different population that's been through a number of rate increases and stuck around. Should we see -- I mean, retention is improving. It's clear, but it's improving modestly, not step function improving.

Yes. I think we do have a loyal base, and I think that's something that we hold it with such high value because we are not in a position to try and take margin where we don't need margin [indiscernible] the value proposition. I think our members have realized that. Then there are pet parents who understand what they're buying, they understand the value that we can help in their lifetime, so -- in their pet's lifetime. I think from our point of view, yes, I absolutely think our retention rates can continue to improve. And I think over a period of years, we'll get that back to the levels we've historically seen. Now, it'll be different depending on cohorts because you've got if you have a new product entry, that's going to behave differently. We know PHI and Furkin behaved differently.

But I think overall, when we had to put that rate through, as I said, we really pivoted to focus on member dedication, experience and understand how do we refine our software approach? How do we use tools like AI to help us answer that? So that's really kind of building up the member experience further. We'll continue to look at ways that we can surprise and delight our members because we're not -- we don't want to just be associated with price. But we've been so encouraged by the numbers the team's been able to develop together with our members. I think we've been doing an outstanding job of it.

And to still have the retention rates we have, to your point, after not 2 years but 3 years of compounding increases, speaks volumes to the product and the quality that we have. It also speaks volumes to the relationships we have within the veterinary space because at the end of the day, when you're using a product, you're speaking to your vet, and your vet is reassuring you that this is the right product for you. And when you hear that as a pet parent, it's worth it. So I think we all honor that commitment to our members. I mean, over time, I believe that that will continue to grow and get back to those high levels here.

Fawwad, please correct me if I'm wrong, but I think if I remember properly, you guys generated about $41 million of free cash flow this year, op cash flow less CapEx. I think that was the number, but maybe I'm wrong.

Yes, it was a little higher. It was about $75 million.

$75 million. I'm sorry. It was -- all right. So that's -- so it's interesting. That's even actually my point. If we go back in time about 5 years ago, I think that the ethos of the company was to maybe be cash flow neutral in some ways that every incremental dollar we're generating should be put into acquiring pet parents because the category is growing so quickly that we have a much better use of that capital than anything we could do. And then, of course, we hit the inflationary period and cash flow went negative. You had the capital suck from the other division, the -- and Pets Best. And so is there a different ethos in the company about the purpose of cash flow compared to what you thought it was half a decade ago?

Yes. That's a couple of things. One, half a decade ago, the company was much smaller. So this company has grown give or take 20% a year. So we're talking about a [ billion-dollar ] business. And so one of the things that Margi and I talk about is we want to have the capacity to be able to make investments through marketing. So we want to approach every cycle, every annual planning cycle from a constrained perspective.

Yes, I think having free cash flow obviously gives us choices. It gives us the ability to make decisions, to be aggressive, to see opportunity. We took a goal right when I started free cash flow as a percent of revenue to be at least 2.5% of business. This year, we were closer to 5%. I think about 5%. Yes, as long as we continue to generate strong margins out of business that will create free cash flow, about 2/3 of that free cash flow is generated by AOI. So it's not being created through expense reduction or margin expansion in businesses in general. So yes, we feel super healthy free cash flow, stronger balance sheet, lower cost of capital, [indiscernible] debt. We feel really, really well positioned to be able to make investments whenever [indiscernible].

The other thing I talked about, I think it's an important thing for investors to consider, is there's a lot of opportunities within the company. PAC will always be -- more likely to always be the biggest source of our investment dollars. When you think about having [indiscernible] as a pool of capital, that can be deployed in PAC. We're deploying that out in Landspath. They're starting to [indiscernible]. Right now, we're in more of a capital-intensive period, so that's consuming some cash.

Obviously, from a technology perspective, I spoke about that earlier. It gives us the wherewithal to make investments there that accelerate local things that members see, whether it's [indiscernible], UX, the overall member experience. And then there's financial investments we can make. We paid down about $17.5 million in [indiscernible] in 2025. I would say AOI as a pool of capital, it can be deployed in a variety of places, the majority of which, obviously, we'll expect that to be in PAC or more importantly, selling pet insurance. It gives us more optionality. And so that free cash flow is the financial engine that's going to power all of those investments.

Yes. I would just add, Josh, when I think back to what I said quite a bit at the beginning, thinking about how we've shifted, how we've changed. We're such a big organization. For us, this big organization, we still remain rooted in making sure that we can help pet parents and support the veterinary industry. We're also looking at high internal rates of return. What we're never trying to do is just deploying what the AOI and maybe we'll get X now, maybe they'll come through in 10 years. That's not our goal. Our goal is to continue to be disciplined.

It is such a lovely position to be in, to know that we've got the means to deploy in things like technology that we can only help our members or help our teams more efficient and effective. And it's very much more that kind of long-term thinking. We want to do things that maybe we could have done a few years ago, but we didn't. So I think kind of chasing that kind of market growth is helpful in the short term for us as far as setting ourselves up because we're in a position -- the market is underpenetrated.

We're in a great position. We will continue to deploy higher and higher levels of adjusted operating income to grow the business into pet count at high internal rates of return. So we think about that. Then we think about the other things, the opportunities we have that come our way. And we think about the fact that we're more and more in control of our own destiny. That sets us up with that extra level of confidence. I think it'll really just help us set the stage for the next few years of business.

Tow more questions. One, I think that we have a formula about what the ROI of a dollar of PAC is. We -- whether it works out that way, but we kind of know what it is. I don't think we know what a dollar of ROI spent on Landspath is. Can you sort of frame how we should think about the value of those 2 propositions?

We're in the early days of it, so I don't want to commit to a particular market profile. I think what I would say is, when we look at the opportunity, I think there's a couple of things that differentiate us. This is a product that will be distributed through the vet channels, so we will continue to build that relationship. We offer vets, additional source of feed that they can provide to their customers. The long-term unique economics of this business, we believe, because we have proprietary IP, suggests that the market profile of the pet food business can be superior to the pet insurance business. It's going to take time for that business to achieve scale. So again, nothing in the near term. But yes,, long term, we're very excited about it. We think it could ultimately end up being as big as the pet insurance business, maybe bigger, with more favorable economics.

Okay. And then one more maybe a housekeeping question. The 13Fs were filed. Large holder Tarmac eliminated its position, and Felix Holding, I'm not so familiar with our before position. Is this connected? And should we learn anything from the changing holder base at the company?

Yes. It's the same. It's one of our directors was moving from Tarmac into Felix Holding is a related entity. So moving from one holding onto another holding, so it's a transfer. They've also increased their position, which is continued support, showing that kind of confidence in the business, which is great. That happened earlier this week. It's the same holder, just transferring to a different fund.

Okay. And in terms of, I guess, post-quarter, is there any takeaways that you're receiving from investors that you think would be useful to share what you understand the sentiment around the stock and what's changing and what isn't?

Yes. I would say, from my perspective, reiterating the opening remarks that Fawwad made around the confidence going into this year, we absolutely intend to be aggressive from a pet count point of view. That has, I hope, been well understood and hope also that people understand that we now have the means to do that aggressively in a marketplace that will both leverage our existing product, but also what we have coming up too to kind of replicate it for that additional kind of growing market space. One thing that I don't know that we really talked to a huge amount on our previous call, but in the call-ups, we've had a lot of conversations around AI and how we're using that.

And when we think about those technology investments for us as a business, we've been able to massively accelerate our efficiency within our -- within certain areas of our operations, our member experience because the teams are using those tools. It's just helped us really kind of accelerate that pattern to the benefit of our members. I think when we consider articulating our value proposition, doing things different, smarter, quicker, more personalized, all of those things are coming together that means that we're able to get to better leverage actually. All in all, super excited about the year ahead in an incredibly strong financial position and incredibly apt market for us. So we're looking forward to the next few calls to continue with our trajectory. Josh, we can't hear you.

Josh, you are muted.

I am muted. I was trying to fix the [indiscernible] a little bit.

You made it the whole time without that.

Yes. I just wanted to maybe give Mike the opportunity to -- with -- for some closing remarks, how this all fits into this animal health theme maybe and maybe some concluding remarks.

Yes. Thanks, Josh. Thanks, everyone, for joining. That was, I thought, a really great session. It certainly overlaps with a lot of the conversations we have with investors on our side, and I know there's a lot of overlap between investors in terms of pet trends, pet parent behavior, spending behavior in the current macro, sort of how insurance fits into that and helping manage the cost of pet ownership. So I think it's all part of one ecosystem and really appreciate you taking the time and joining us.

Thank you.

Thank you all, and have a wonderful day. Appreciate it.

Thank you.

Good day, and welcome to the Trupanion Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gil Melchior, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to Trupanion's Fourth Quarter and Full Year 2025 Financial Results Conference Call. Participating on today's call are Margi Tooth, Chief Executive Officer and President; and Fawwad Qureshi, Chief Financial Officer. For ease of reference, we've included a slide presentation to accompany today's discussion, which will be made available on our Investor Relations website under our Quarterly Earnings tab.

Before we begin, please be advised that remarks today will contain forward-looking statements. All statements other than statements of historical facts are forward-looking statements. These include, but are not limited to, statements regarding our future operations, key operating metrics, opportunities and financial performance, pricing and veterinary industry inflation. 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 today's earnings release as well as the company's most recent reports, including Forms 10-K, 10-Q 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, cost of paying veterinary invoices, 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, all margins and expenses will be presented on a non-GAAP basis and excluding stock-based compensation expense and depreciation expense. These non-GAAP measures are in 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.

Lastly, I would like to remind everyone that today's conference call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site. I will now hand over the call to Margi.

Thanks, Gil, and thank you, everyone, for joining us this afternoon. 2025 was a record year for the company, and I was especially pleased with the fourth quarter, which marked a strong close to the year and a solid launch pad for our next strategic plan. Over the past 60 months, we added over $900 million in revenue and generated $518 million in adjusted operating income. We ended the year with nearly 1 million pets protected under the Trupanion brand and have now paid over $3.5 billion in veterinary invoices on behalf of our members over our history, a testament to our mission and the need we serve in today's market.

I'd like to take a moment to thank our entire team for their efforts. The strength of our mission and our commitment to each other reinforce our confidence as we move on to our next strategic plan.

Turning to our 2025 highlights. We ended the year with nearly $1 billion in subscription revenue and delivered approximately 15% annual subscription adjusted operating margin, reflecting the strength and consistency of our model. Our performance translated into $152 million of adjusted operating income, which funded $83 million of pet acquisition and investments in development spend during the course of the year to support long-term growth. The increase of 33% year-on-year in adjusted operating income reflects meaningful progress in aligning pricing with the value we deliver. These actions directly translated into a substantial improvement in per pet margins and lifetime value while continuing to honor our commitment to our member value proposition, which we believe remains sustainably the highest in the industry for the life of the pet.

Our ongoing commitment to our pricing promise and to a strong member experience has been reflected in steadily improving retention. Retention is a key driver of long-term growth in adjusted operating income, and that commitment paid off in 2025 with trailing 12-month retention improving in every single quarter. We saw a similar strengthening in new pet acquisition with gross pet adds also accelerating throughout 2025 and ending Q4 up 8% year-on-year. Strong retention and stepped-up acquisition together drove subscription net pet growth of 50% in Q4 and 10% for the full year.

As operating margins improved, we intentionally leaned further into new pet acquisition, reflecting our confidence that today's higher per pet margin and lifetime value profile support a more aggressive posture. This resulted in a blended Q4 2025 IRR of 23%, while our full year blended IRR was 30%.

From our strong financial footing, we expect another year of consistent revenue growth with margins on our annual operating target. Combined, this translates into meaningful growth in AOI that we can reinvest with consistency and intention while continuing to generate substantial free cash flow. We expect to continue investing in our market reach by educating pet parents, redefining our message and rolling out targeted product enhancements, all aimed at strengthening Trupanion's position in the animal health ecosystem. Our veterinary channel, which remains our heartland for distribution, continues to play a critical role in educating pet parents about the value of medical insurance. This is most notably supported by our long-standing territory partner model with nearly 200 TPs in the field every day whose close partnerships with veterinary teams help bring the Trupanion value proposition to life.

More broadly, awareness of pet medical insurance continues to rise as pet parents increasingly seek coverage earlier, reflecting a clear understanding of the true cost of care and a stronger desire to be financially prepared. This growing demand reinforces our focus on reaching pet parents earlier in the decision-making journey and often even before they first visit the veterinarian. Doing so will require sustained investment in brand awareness and education with returns that build over time. Though still early, we're encouraged by the role brand spend can play in helping facilitate the movement of pet parents through the sales funnel, and we will continue to test and refine our approach to drive maturing leads, conversion and retention over time. Against this backdrop, Trupanion's model directly addresses a growing need for reliable, sustainable coverage for unexpected veterinary care. Our commitment to our mission remains unchanged, helping ensure pets receive the care they need and the veterinarians can practice the medicine they're trained to deliver.

With that, I'll turn it over to Fawwad.

Thanks, Margi, and good afternoon, everyone. Today, I will share additional details around our fourth quarter performance as well as provide our outlook for the first quarter and full year 2026. Total revenue for the quarter was $376.9 million, up 12% year-over-year. Within our subscription business, revenue was $261.4 million, up 15% year-over-year. Total subscription pets increased 5% year-over-year to over 1,096,000 pets as of December 31. This includes approximately 63,000 pets in Europe. Average monthly retention for the trailing 12 months was 98.34%, up versus the fourth quarter last year, which was 98.25%. The subscription business cost of paying veterinary invoices was $180.8 million, resulting in a value proposition of 69.1%. This compared to 70% in the prior year period. This improvement more than offset adverse development from prior periods of $0.9 million or approximately 30 basis points of revenue. As a percentage of subscription revenue, variable expenses were 8.7%, down from 9.2% a year ago.

Fixed expenses as a percentage of revenue were 5.6%, up from 5.5% in the prior year period. Combined, we saw fixed and variable spending at 14.4% of revenue in Q4, an improvement from 14.6% in the prior year period. We have continued to drive efficiencies in fixed and variable spending consistent with our expectations.

Our subscription business delivered adjusted operating income of $43.1 million, an increase of 23% from last year and contributed 96% of our total AOI for the quarter. Subscription adjusted operating margin was 16.5%, up from 15.3% in the prior year and represents approximately 120 basis points of margin expansion. Similar to last quarter, this marks a new company record for both subscription AOI and subscription AOM.

Now I'll turn to our other business segment, which is comprised of revenue from other products and services that have a lower margin profile than our subscription business. Our other business revenue was $115.4 million for the quarter, an increase of 5% year-over-year. We expect growth for this segment to continue to decelerate as we are no longer enrolling new pets in the majority of U.S. states for our largest partner in this segment. Adjusted operating income for this segment was $1.9 million or 1.6% of revenue. In total, adjusted operating income was $45 million in Q4, ahead of our expectations and up 26% from Q4 last year.

We deployed $21.6 million of this AOI to acquire approximately 65,200 new subscription pets. Excluding the pets that are underwritten through an MGA structure, this translated into an average pet acquisition cost of $320 per pet in the quarter, up from $261 in the prior year period. We invested $1.8 million in the quarter in development costs. Noncash expenses in the quarter included $9.4 million in stock-based compensation as well as a $1.1 million goodwill impairment charge related to our European businesses. As a result, net income for the quarter improved to $5.6 million or $0.13 per basic and diluted share as compared to a net income of $1.7 million or $0.04 per basic and diluted share in the prior year period.

In terms of cash flow, operating cash flow was $29.3 million in the quarter compared to $23.7 million in the prior year period. Capital expenditures totaled $3.9 million, up from $1.9 million in Q4 of last year. As a result, free cash flow was $25.3 million, up from $21.8 million last year. For the full year of 2025, we continue to strengthen our balance sheet as free cash flow increased to $75.4 million, 5.2% of total revenue and an increase of 95% year-over-year.

We ended the year with $370.7 million in cash and short-term investments and a total debt balance of $111.8 million, a reduction of $17.1 million versus last year.

Our financial position continues to strengthen. Last quarter, we announced a new debt facility with PNC Bank. We are happy to share that in February and subsequent to year-end, our largest insurance entity, APIC, paid an extraordinary dividend of $15 million to our operating company. This follows the $26 million extraordinary dividend we announced in May last year and is a continued illustration of the strong capitalization of APIC and our ability to fund our growth.

Now I'll turn to our outlook. For the full year of 2026, we expect total revenue in the range of $1.55 billion to $1.582 billion. We expect subscription revenue to be between $1.117 billion and $1.137 billion, representing approximately 14% year-over-year growth at the midpoint. We expect total adjusted operating income to be in the range of $173 million to $187 million or 19% year-over-year growth at the midpoint. This assumes veterinary inflation in line with current trends.

For the first quarter of 2026, total revenue is expected to be in the range of $376 million to $382 million. Subscription revenue is expected to be between $265 million to $268 million, representing approximately 14% year-over-year growth at the midpoint. Total adjusted operating income is expected to be in the range of $38 million to $41 million. This represents approximately 27% growth year-over-year at the midpoint.

As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U.S. and Canadian currencies. For our first quarter and full year guidance, we used a 73% conversion rate in our projections. Before handing it over to Margi, I want to take a moment to talk about AOI and underscore its importance to our business model. Historically, the majority of AOI was reinvested in PAC, and we anticipate this will continue. When we think about where to place the next marginal investment dollar in addition to PAC, we have a range of choices, including new strategic initiatives such as Landspath, our food initiative, opportunities to accelerate growth such as international, investments in technology to strengthen our competitive advantage in areas like claims automation and improve member experience and financial investments such as paying down debt. We look at AOI as a measure of profitability. It provides a versatile base of reinvestable dollars that we can align to drive the greatest overall return for the company. Let me now pass it back to Margi.

Thanks, Fawwad. Before we open the call up for questions, I want to briefly reflect on the foundation we're carrying into our next strategic plan. Since 2021, the business generated over $500 million in adjusted operating income and grew at a compound annual growth rate of 22%. As we enter our next 36-month plan, we're doing so with strong momentum. We intend to invest aggressively against our opportunity to strengthen pet acquisition and retention strategies to place the Trupanion brand in more households than ever before. We expect to deploy capital with discipline, balancing growth, cash flow and the strength of our balance sheet as we work to build on our adjusted operating income over time. You can expect to learn more about our plan in my forthcoming shareholder letter.

From an outcomes perspective, the objective of our plan is very clear: to deliver sustainable growth in adjusted operating income and intrinsic value creation that continues to compound over time. We enter this next phase with confidence in a business model that has proven resilient time and again. To realize our full potential, we will continue to raise the bar and thoughtfully scale both our business and our team to match the opportunity ahead.

Stepping back, in an underpenetrated market where just 4% of pet parents have insurance, Trupanion has grown to support over 1 million pets and generate over $1 billion in revenue. The strength of our financial foundation is what allows us to invest more confidently, funding our growth in pets to drive high internal rates of return, creating a profitable, well-capitalized and increasingly cash-generative business. In an underpenetrated global market, we are well positioned for the opportunities ahead.

And with that, we're happy to answer your questions.

[Operator Instructions] The first question today comes from John Barnidge with Piper Sandler.

My first question would be focused -- you talked about brand spend. Can you talk about some successes that you've had in reaching pet parents in different ways and how maybe that will be accelerated going forward?

Yes. Thanks, John. So for us, brand spend is really about how do we put the Trupanion brand in front of all pet parents as we're kind of really in a position now to step up given our current run rate. So it's really in areas where we are seeing existing pet parents in the veterinary profession and also outside of that.

So when we've concentrated our brand spend in the vet space, what we're seeing is people moving through the funnel to conversion quicker over time, and we're seeing some encouraging results from that process. We're also expanding in areas where pet parents go prior to getting to the vet when they're looking for pets, when they're starting to research what pets are right for them. So doing sort of more general direct-to-consumer information, education gathering, which is then also helping to bring them into our funnel from a general awareness perspective.

As the category continues to expand because more pet parents are facing a challenge of the cost of veterinary care today, we want to be in a position to go to them where they are, and we're starting to see that move through the funnel. And in some areas that awareness of Trupanion and some it's just bringing them further and further down, which is reflected in the numbers that you see in terms of pet count in the quarter with our gross pet adds up 8% and net pet for the quarter up 50%.

Appreciate that. And then, Fawwad, was there any favorable reserve development in that really impressive loss ratio or vet service cost ratio you reported?

Yes. We had a little bit of adverse development when you look at just Q4 stand-alone, so about 30 basis points. And if you dollarize it, it's about $900,000. So yes, very happy about loss ratio. Obviously, it's been a journey to get to the full year number of 70.5% and then within the quarter, lower because we have the first half, second half seasonality. So not for that, it would have been even a little bit lower.

The next question comes from Brandon Vazquez with William Blair.

This is Russell on for Brandon. Maybe I'll start by asking you to kind of level set us on your '26 guidance. What is the high end, the low end kind of bake in, in terms of things like gross adds, commercial strategy? And what exactly are the puts and takes? And maybe any color you can kind of give on price versus volume that you're contemplating into the guide?

Yes, there's a couple of things underpinning the guidance. So as you mentioned, pricing. So as we exited the year, pricing was still the more dominant contributor to overall revenue growth. We expect that will continue as we go into 2026. But with the gross adds increasing, and we saw them come up nicely in the quarter at 8.4%, followed by 3.6% the quarter before, we're starting to see that shift.

When you look at full year '26, we still expect pricing to play the larger role. But if you compare pricing '26 versus '25, we expect it to be lower. Similarly, if you compare pet count contribution to revenue '26 to '25, we expect it to be higher.

From a loss ratio perspective, obviously, that's the biggest driver from a financial performance standpoint. We're carrying forward the assumptions from what we exited the year, so largely in line. We haven't seen a significant abatement of inflation. Obviously, it's something we look at pretty carefully. And then from a spend perspective, very happy to see the leverage. We had committed to fixed expense coming down in the second half, and we saw that happen coming from 6.2% down to 5.6% year-end, both Q3 and Q4. So just diligent expense management, overall variable, again, happy in the quarter. It came down from 14.6% to 14.4%. So we're seeing those efficiencies and the productivity investments we've made. So we expect those to continue. And then that will lead to margin expansion. Those are primarily the largest drivers of guidance.

That's very helpful. And then maybe on leads, previously, you've mentioned a focus on the conversion towards breeder specifically and maybe some other exploratory methods. Can you talk a little bit about what you're seeing in terms of conversion and where you're seeing the most success? And have you seen any change in demographic or economic quality of inbound -- lead inbounds given macro pressures?

Yes. So in terms of the channels we operate in, we -- primarily the vet channel continues to be our heartland. So that's always a channel that we kind of lead off of when we think about our acquisition strategy. Breeder, shelter, members referring their friends, they all combine to support the overall funnel when you have more exposure to the brand that helps pull somebody through a little bit more.

I would say that across the board, we're seeing encouraging results. Some move quicker than others and the team leans into that, the more that we're able to invest or we can learn, which is great because we're in a position now where we can be really bullish. I think in terms of the demographic, we're absolutely starting to speak to different pet parents. We think in the market right now, given where the macro conditions, given where vet costs are, we have an opportunity not only with the existing Trupanion product that we have today, we're also looking at optimizing that broadly for the new pet parents coming through that we're starting to talk to. And that also will show up in the new product that we plan to launch over the course of the next 36 months, which will echo the Trupanion brand, but give us that extra reach within the market that we're seeing with our lead volume today.

The next question comes from Josh Shanker with Bank of America.

I was just curious, look, retention is improving. Maybe on the margin, I might hope it would be improving a little quicker. Usually, at year-end, you're going to give disclosure in the annual letter by cohort. Can you talk about -- you might say that all 3 are improving, where the improvement really is coming and where it's lagging, I guess?

Yes. Thank you for the question, Josh. The retention across the board is looking really healthy. We were pleased to see every single quarter in the year that, that improved and increased across the cohorts. To specifically hit on that question, the middle bucket, which I refer to as the middle bucket is those receiving rate increases of under 20%. A lot more of our members have moved into that cohort over the course of the last year. We know that that's a stronger cohort that has been improving. The over 20% bucket, which still has a good portion of our members in has been improving consistently for the last couple of years because there has been so much activity in that space.

So the team has done a very good job of understanding the pain points, the confusion or challenges that members have, and they are able to articulate the value proposition, which is a cost-plus model and the reasons for those increases. So that's been great. The area that we still have opportunity is the area we've always had opportunity, which is in our first year. And as we grow quicker and you can see those pet adds coming through, we will have plenty of opportunity once again to lean into the different tactics that the teams have got lined up to be able to drive that number higher as well.

And you said that you have lots of uses for cash flow other than PAC. And you mentioned Landspath. We don't really have a great granularity in that. Can you talk about Landspath a little bit and why we should be confident that that's a good use of your funds?

Yes, I can take that question. I think it's exactly the point. AOI is a pool of capital, and now we have -- I think company has always had different places to put it. Now we have more channels. I think Landspath is still in the early stages. A lot of it is building the infrastructure to be able to test and then ultimately deliver the product. So the returns there, we haven't disclosed specifics on our expectations for that. But longer term, we think that will be a very meaningful contributor to margin. The unit economics of that business are quite favorable. So that's a potential use of cash.

I think the others that I talked about, technology has been hugely important to us. So when we think about claims automation going north of 60%, we expect that to rise over the course of the 3 years that drives efficiency straight to the bottom line. It's a big part of why we're seeing the margin expansion we are. So continued investments in technology have pretty good ROIs for us. And then there's financial investments as well. So we have the opportunity to pay off some of our debt using the proceeds from the first extraordinary dividend that we got in the middle of last year. So that can be an effective use of cash. It lowers our cost of capital, the overall debt structure, lowered our cost of capital.

So -- and we look at AOI as a pool of money that we generate organically from the business. And then we look across that portfolio and try to find the best mix of channels and where we want to make those investments. And -- yes, I mean, we'll continue to do that. I think it's a good position for us to be in, especially coming off a record year for margin, but also a record year for total dollars.

And if I can just add as well from a Landspath perspective, specifically thinking about how does it blend in with what we're doing. The whole premise of Landspath is that this is a portion control food that we believe will help improve the health and well-being of a pet. So when we dovetail that with the insurance component of what we offer, we believe that we can help pet parents not only have a bundle of pet care with their food on a monthly subscription basis and their insurance, but also if we see benefits coming through from having fed that food to your pet, then we will be able to pass that saving back to a pet parent, which in turn increases our lifetime value of that member but also retention, referral friend and that flywheel.

The other component about Landspath is it is sold through the veterinarian, and that's very different from other foods out there, which allows the veterinarian to benefit from that additional income that we know that they've lost through revenue. And we know that there is a lot of discussion in the industry right now about revenue. This is a time where we think we can add even more support to an industry that needs it.

The next question comes from Jon Block with Stifel.

Jordan Bernstein here on for Jon. Some of our checks would indicate the need for a lower-priced insurance plan out there for pet owners, even hearing this morning from some industry peers, a tighter pet owner budget out there to that end, are there any updates you can provide on the go-to-market strategy for a lower-priced plan? I think the latest thought would be one Trupanion branded lower-priced offering. Or is the company thinking of a two-pronged approach with the [ PHI Direct ] and offerings kind of remodeled?

Yes. Thanks for the question, Jordan. There's a couple of things here. I think as we look at where we are today as a product as a brand, first and foremost, we're really pleased with the results coming out of the quarter that shows that the efforts we've been making from a brand perspective holistically are really starting to move the needle, both in terms of overall gross adds, which were up 8% in the quarter and the net pet growth, which is up 50%. So that brand spend is starting to really resonate both at lead, convert and keep level, which we've seen in those numbers.

And we're seeing that, as I mentioned, we're pulling through a new consumer as well. And what we're looking to do is both broaden the existing Trupanion offering, which will change the price point for some people, still honoring our value proposition over the life of the pet, but just helping to broaden it as well as looking at this newer product offering. It won't be released over the next few quarters, but it's absolutely part of our 36-month plan. And our expectation is that we will be able to leverage the brand, as you mentioned, through direct payment, through the value proposition, through the trust that we've created in the veterinary industry to offer a product that we believe there's a really big gap in the market for. And we'll share more details when we're ready about that. We're excited about it. We're making good progress in our thinking around that. And yes, there's an opportunity to be had, and we will absolutely be aggressive when that time comes.

Great. Just one quick question and I hear you on all the great acceleration on gross adds on the year-over-year growth, especially the exit in 4Q. But just on the internal rate of return, the guardrail there was set at 30%. It's been breached to the downside for the second straight quarter, 28% 3Q and now 23% 4Q. I believe the metric has been down for 7 straight quarters sequentially. When should investors expect to return to the greater than 30% and some of that spend beginning to pay off on that line item?

Yes. So a couple of things. I guess, we're pleased. We believe that, that investment is absolutely starting to pay off. And kind of a couple of things. We're assuming a margin for the IRR is at 12.5%. We've just entered the -- exited the year at 15%. So there's already a difference in the margin there. And it's a blended metric, too. So the core Trupanion product is higher from an IRR point of view. But if we take a step back, the reason we're investing so much more is we feel really good about the position we're in. We've increased our lifetime value of a pet 35% year-over-year. So we're able to lean into pet acquisition far more aggressively than historically because not only do we have the adjusted operating income there, we're seeing that retention start to improve, which drives that tenure, which increases that lifetime value. So the newer cohort of pets have a higher margin per pet. So it gives us that confidence.

We will continue to be confident because we have this really strong financial background behind us now, which we can push forward with in a market that absolutely is crying out for solutions of how to help pet parents budget the unexpected. Over time, we're still committed to very high lifetime returns, and we're really pleased with where we ended the quarter, and we're happy with that momentum.

[Operator Instructions] The next question comes from Wilma Burdis with Raymond James.

Looking at the '26 guide, it looks like the subscription revenue was in line with my model, but the other revenue seems like you're -- the runoff might be accelerating a little bit there. I just want to see if that's the case. And then also the adjusted operating income looks pretty strong. So maybe you can kind of walk us through all of those different impacts going into '26.

Yes, thanks for the question. Yes, on the other business, it's been trending pretty consistently down. So I think as we've mentioned in the past from a pet count perspective, that decline started quite a while ago, really at the back half of 2023, and it's been pretty steady. And obviously, we expect revenue ultimately to turn negative from a year-over-year standpoint. It's still up because of pricing. So not a significant change. The margin profile for that business is loss sensitive. So it doesn't affect us significantly. We don't expect that there will be a significant change in the trend line. But obviously, we expect that business to ultimately go away.

And then in terms of the AOI, yes, it really comes down to a couple of things. I think pricing will still lead the way as we look at 2026, gross adds starting to accelerate. We saw that in the second half of the year. We think there's upside from expense management and just overall productivity and efficiency. That's really a combination of those things. What could go against us, obviously, would be inflation. So it's something that we pay close attention to. But right now, we feel good about AOI growing faster than revenue.

And then I think that leads into my next question, actually. I know you normally see veterinarians raising their prices early in the year in January. Just curious if you're seeing anything there that changes your mind on the 15% type inflation you've been expecting every year.

Yes, from our perspective, there's nothing that we've seen year-to-date that would anticipate us changing our current assumptions, and we do watch it, obviously, like Hawk. And I think we've seen slight softening, and I would say it's softening off a high level. We do know the industry is under a lot of pressure right now. So we're going to continue to monitor it, and we will adjust when we see a need to.

This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.

Yes. Thank you. I'd just like to say that before we sign off, I want to recognize the team for the really strong execution and results we delivered this year. Pricing is aligned. We've achieved our target margin with strong free cash flow generation. Retention is improving and gross pet adds are accelerating. We are in great financial position with so much opportunity ahead, and we really look forward to updating everyone in the coming months on our progress. Thank you for your time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Trupanion Third Quarter 2025 Earnings Conference Call. Today's call, which is being recorded, is scheduled to last about an hour, including remarks. I would now like to turn the call over to Gil Melchior, Director of Investor Relations. Thank you, and over to you.

Good afternoon, and welcome to Trupanion's Third Quarter 2025 Financial Results Conference Call. Participating on today's call are Margi Tooth, Chief Executive Officer and President; and Fawwad Qureshi, Chief Financial Officer. For ease of reference, we've included a slide presentation to accompany today's discussion, which will be made available on our Investor Relations website under our Quarterly Earnings tab.

Before we begin, please be advised that remarks today will contain forward-looking statements. All statements other than statements of historical facts are forward-looking statements. These include, but are not limited to, statements regarding our future operations, key operating metrics, opportunities and financial performance, pricing and veterinary industry inflation.

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 today's earnings release as well as the company's most recent reports, including Form 10-K, 10-Q 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, cost of paying veterinary invoices, 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, all margin and expenses will be presented on a non-GAAP basis and excluding stock-based compensation expense and depreciation expense. These non-GAAP measures are in 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. Lastly, I would like to remind everyone that today's conference call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site. I will now hand over the call to Margi.

Thank you, Gil, and good afternoon, everyone. Our third quarter financial performance was strong, underscored by continued momentum across key business metrics. I'll start with the headlines, then hand over to Fawwad for a full walk-through of our financial performance, ahead of discussing how we're expanding Trupanion's reach through new partnerships and brand initiatives that strengthen our connection to veterinarians and pet parents alike.

Turning to our highlights. In our subscription segment, we accelerated net pet adds for the third consecutive quarter and increased them by 45% year-over-year. We delivered record subscription adjusted operating income of $39 million, an increase of 27% year-over-year. Subscription adjusted operating margin was 15.5%, also our highest ever.

These results reflect consistent, disciplined execution over the past 24 months to deliver on our value proposition and our cost-plus solution. Adjusted operating income is the fuel to grow the business and pet growth in the quarter was a result of continued investment in our retention performance and increasing contribution from our gross pet adds.

Specifically related to retention, we're pleased to report continued progress. As rate flow stabilizes for the majority of our members, our efforts to make adjustments more predictable and to reinforce the importance of coverage, especially in uncertain economic times are paying off. Targeted communications, enhanced member support and education around coverage value are resonating, contributing to improved member loyalty and a steady climb in trailing 12-month retention.

Retention is more than a performance indicator. It's a foundational element of long-term value creation. High retention strengthens lifetime value, which in turn increases our allowable PAC. As our margin continues to hold strong, this translates into high levels of adjusted operating income dollars to reinvest in growth.

With that in mind, following the third consecutive quarter of double-digit investment increases, we returned to growth in gross pet additions, which were up 4% year-over-year. Combined with our retention gains, this translated into the highest net pet growth in 7 quarters, adding over 16,000 net new pets in our subscription segment. These are durable gains, and we expect these positive trends to continue into 2026.

As we enter the final stretch of the year with record margins, record free cash flow generation and a strengthened balance sheet, we have the capacity to invest even more deeply. We're deploying this capital aggressively yet deliberately to ensure the Trupanion brand is seen and heard in a broader way than before. The driving force behind our why remains.

Pet parents are struggling to understand how to budget for the unexpected care of their pet and the veterinary industry is under immense strain as they work through the challenges of access to care. Trupanion must be visible and well understood as a standout solution capable of bridging that growing gap, and we're now well poised to advance that message. I'll now turn it over to Fawwad to walk through the financials in more detail.

Thanks, Margi, and good afternoon, everyone. Today, I will share additional details around our third quarter performance as well as provide our outlook for the fourth quarter and full year 2025. Total revenue for the quarter was $366.9 million, up 12% year-over-year. Within our subscription business, revenue was $252.7 million, up 15% year-over-year.

Total subscription pets increased 5% year-over-year to over 1,082,000 pets as of September 30. This includes approximately 60,000 pets in Europe, a majority of which are currently underwritten through an MGA structure. Average monthly retention for the trailing 12 months was 98.33%, up versus the third quarter last year, which was 98.29%.

The subscription business cost of paying veterinary invoices was $177.1 million, resulting in a value proposition of 70.1%. This compared to 71.0% in the prior year period. This improvement more than offset adverse development from prior periods of $0.3 million or approximately 10 basis points of revenue.

As a percentage of subscription revenue, variable expenses were 8.9%, down from 9.4% a year ago. Fixed expenses as a percentage of revenue were 5.6%, in line with the prior year period. Combined, we saw fixed and variable spending at 14.5% of revenue in Q3, an improvement from 15.0% in the prior year period. We have continued to drive efficiencies in both fixed and variable spending, consistent with our expectations.

The improvements in variable spending have given us the opportunity to reinvest, particularly in technology investments that sit within our fixed expenses. Our subscription business delivered adjusted operating income of $39.1 million, an increase of 27% from last year and contributed 96% of our total AOI for the quarter. Subscription adjusted operating margin was 15.5%, up from 14% in the prior year and represents approximately 150 basis points of margin expansion. This marks a new company record for both subscription AOI and subscription AOM.

Now I'll turn to our other business segment, which is comprised of revenue from other products and services that have a lower margin profile than our subscription business. Our other business revenue was $114.2 million for the quarter, an increase of 5% year-over-year. We expect growth for this segment to continue to decelerate as we are no longer enrolling new pets in the majority of U.S. states for our largest partner in this segment.

Adjusted operating income for this segment was $1.8 million or 1.5% of revenue. In total, adjusted operating income was $40.9 million in Q3, up 25% from Q3 last year. We deployed $20.4 million of this AOI to acquire approximately 68,100 new subscription pets. Excluding the pets that are underwritten through an MGA structure, this translated into an average pet acquisition cost of $290 per pet in the quarter, up from $243 in the prior year period.

We invested $1.2 million in the quarter in development costs. Stock-based compensation expense was $9.3 million. As a result, net income from the quarter improved to $5.9 million or $0.14 per basic and $0.13 per diluted share as compared to a net income of $1.4 million or $0.03 per basic and diluted share in the prior year period.

In terms of cash flow, operating cash flow was $29.2 million in the quarter compared to $15.3 million in the prior year period. Capital expenditures totaled $5.3 million, up from $1.9 million in Q3 of last year. As a result, free cash flow was $23.9 million, up from $13.4 million last year. Over the last 4 quarters, free cash flow reached $71.9 million. We ended the quarter with $348.5 million in cash and short-term investments.

We spoke at our recent Investor Day about the work over the last 2 years to strengthen our balance sheet and build the financial foundation to power our future growth. Strong free cash flow generation, monetizing our capital surplus, including receiving the first extraordinary dividend in the company's history and driving additional efficiencies have allowed us to invest in growth as well as make a $15 million early principal payment towards our debt in the second quarter.

We are excited today to announce the next step in further strengthening our financial position and lowering our cost of capital. Subsequent to quarter end, we refinanced our outstanding term loan through a new $120 million credit facility with PNC Bank, one of the largest diversified financial services institutions in the United States. This new 3-year facility provides us greater financial flexibility, further reduces interest expense and gives us greater assurance as we navigate the coming years. I would like to take this opportunity to thank everyone on our team involved in developing this partnership and for helping us achieve this result.

Now I'll turn to our outlook. For the full year of 2025, we are updating our guidance to account for Q3 performance. We now expect total revenue in the range of $1.433 billion to $1.439 billion. We are narrowing the range for subscription revenue, which is now expected to be between $986 million and $989 million, representing approximately 15% year-over-year growth at the midpoint.

We now expect total adjusted operating income to be in the range of $148 million to $151 million. We're raising the low end of our outlook while maintaining the high end, resulting in a new midpoint that represents 31% year-over-year growth. For the fourth quarter of 2025, total revenue is expected to be in the range of $371 million to $377 million. Subscription revenue is expected to be in the range of $258 million to $261 million, representing approximately 14% year-over-year growth at the midpoint.

Total adjusted operating income is expected to be in the range of $41 million to $44 million. This represents approximately 19% growth year-over-year at the midpoint. As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U.S. and Canadian currencies. For our fourth quarter and full year guidance, we used a 72% conversion rate in our projections. Let me now pass it back to Margi.

Thank you, Fawwad. The results this quarter are strong. They reflect solid execution and a growing recognition for a solution to enable greater access to veterinary care. By the end of this year, we will have grown adjusted operating income at a 5-year compounded annual growth rate of 21%, generating over $0.5 billion of adjusted operating income to fund high-return pet acquisition. We have and will continue to remain disciplined, focusing on enrolling pets price to our margin profile and educating members through improved retention activity.

This focus is most clearly evident with our AOI per pet growing at a cumulative 37% over the past 5 years. With our pricing now tracking alongside the rate of veterinary inflation, our position is strong, which in turn affords us the opportunity to continue to invest in ways to educate pet parents directly and to tell our story and share our solution more boldly than before.

Trupanion is uniquely positioned to address the challenges of access to care by covering the veterinary invoices directly and instantly, which allows veterinarians to focus on medicine and empowers pet parents to seek timely and appropriate treatment when it matters most. Partnering with the animal health sector will always be at the heart of our strategy.

That foundation, which we've been cultivating for 25 years, now provides the opportunity to expand the presence of the Trupanion brand to raise awareness and connect with pet parents earlier in their journey before they ever set foot in a veterinary hospital. We plan to accomplish this through intentional development of partnerships and complementary channels. Earlier in the quarter, we announced our first-of-its-kind collaboration with the Seattle Reign FC, a mission-based and deeply aligned partner now possible with our greater investment flexibility.

This partnership exemplifies a new chapter in our brand development, broadening our reach and engaging with pet parents with a shared connection of pets and community. And most recently, earlier today, we were very pleased to announce our new partnership with BMO Insurance, part of the BMO Financial Group, one of Canada's largest banks.

It's a great example of how we're extending our leadership in Canada by broadening access to our solution through trusted complementary partners. With rightsized margins, strong retention and greater investment flexibility, we're excited to further nurture and strengthen our veterinary focus while adding more creative ways to broaden our reach and engage pet parents through authentic partnerships that align with our mission and ambition. With that, we'll open it up for questions.

[Operator Instructions] We have the first question from the line of Brandon Vazquez from William Blair.

Congrats on a nice quarter here. I think, first, I kind of wanted to start with a high-level picture. Look, it feels like after a couple of years of trying to stabilize the business and return some of the operating margins, things like that, this might be the first quarter where there's a little bit of an inflection, right?

You have some of the gross adds, things like that returning back to year-over-year growth. Talk to us a little bit just high level again, like as we go into next year, what does this business look like in terms of commercial strategy when you go maybe from defense to offense, what are some of the things that we should expect from you guys that might start to accelerate growth even further?

Yes. Thank you, Brandon. We're very pleased with the quarter and the performance. Third consecutive quarter, as you mentioned, of net pet growth and for us, seeing that 16,000 pets coming in at 45% year-over-year growth is something that we're very proud of. And in combination of the strategy, which, first and foremost, through the last 9 months has been focusing on level setting our margins, getting our investment in retention to really help our members understand what that value proposition looks like.

And then finally, reaccelerating pet growth, and we're at the tail end of that strategy for this year and pleased to have seen that growth pet adds come up to the 4% year-over-year. It is very much momentum we expect. We're being a lot more aggressive with our investments. We're in an incredibly strong financial position. We have record levels of margin and free cash flow while honoring our value proposition for our members. So we expect the same.

We've got the momentum starting to come. We expect to continue to be aggressive. We're in a very strong position to do so. And as you said quite rightly, we're moving into offense position, which is where this company has always operated in a heavily underpenetrated market. We'll continue with our strategy of helping pet parents to budget for the unexpected cost of care, which is a greater need today than it ever has been. We are perfectly positioned to leverage both what we have today in market and also taking those learnings from the last 5 years in our strategic plan to aggressively go forward and support more pet parents in the future.

Okay. Great. And maybe follow for you as my follow-up. As we start to just clean up our models for 2026, I appreciate we'll probably get a hard number on a guide for '26 on the next quarter call. Maybe some of the key -- like walk us through some of the key puts and takes that we should be keeping in mind. And I think one that we talk about often that will help us kind of fine-tune our models here is what level of growth should we be expecting from price versus volume in the sense of ARPU versus gross adds? Any commentary you want to give us on '26 for the Street models to be aligned would be great.

Yes. I think I can say a few things. As you mentioned, when we get to year-end, we'll obviously give the full year guidance. We're still very much focused on Q4. I think some of the things we're thinking about thematically going into next year, we do expect investment to increase, as Margi said.

Really happy about the just overall financial position we're in the $20.4 million we spent in PAC. This quarter was the highest we've ever spent. And so it gives us some good momentum as we exit this year and start thinking about next year. I think in terms of contribution to revenue, as you mentioned, this year has really been more pricing driven. And over time, we would like to have pets continue to contribute at a higher and higher level.

So I think from a contribution standpoint, we'd like to see pet count contribute more and pricing contribute less. And then from a margin standpoint, we're very pleased with the progress on margin. As Margi mentioned, it's been a journey over the last 2 years. And our overall margin expectations, our goals that we set, I think, are largely going to be the same given the first and second half seasonality as we go into next year. Those are kind of the broad strokes of what we're thinking about at this point.

We have the next question from the line of Katie Sakys from Autonomous Research.

I guess my first question is on some of the growth dynamics that you guys saw this quarter. My math might be a little off here. It took me a while to get the slides up. But I was sort of hoping you could break down the growth dynamics you saw amongst the European subscription pet cohort versus those in the U.S./North America and whether or not the growth rates that you saw this quarter are the levels of growth you think you can deliver upon going into the new year?

Yes. Thank you for the question, Katie. So specifically, when we think about our focus, I would say that the last -- we've really kind of upped the increase in that acquisition investment in the last 3 months -- 3 quarters, sorry, we've been focusing heavily on the core Trupanion subscription business. So the majority of our investment has been going into that business.

Now we've rightsized those margins and focusing on retention. The other products on the -- and specifically, as you called out, the European have very limited investment right now. We're really kind of looking at building those businesses and helping to get them stabilized before we invest heavily. I expect over the next several years, naturally, we anticipate there's a lot of opportunity in the European market where that investment will increase.

The wonderful thing now about our margins being where they are is that we have that free cash flow and then the opportunity to invest the adjusted operating income dollars that we didn't have previously. So excited to be able to take those numbers up and invest and expect those lines of businesses to contribute more meaningfully in the future.

Awesome. And then maybe shifting to the new opportunity with BMO Insurance in Canada. Can you clarify which Trupanion products will be offered via that partnership? And how much realistically you think that can contribute to the pet base next year?

Yes. We're really excited about this partnership to announce it today, fresh off the press. So it's exciting for us because it really is representative of our position within the Canadian market. We are the market leader by some way, and it's where we were established and founded and partnering with a brand as established and as significant as BMO for us is really exciting.

The core Trupanion product will be offered through that channel. So it's the same product that we have across most of our business and the majority of our growth. And for us, as you mentioned, it takes a long time for products and partners to come to fruition. It's a lot of hard work.

We align with brands that we believe share the ethos of Trupanion. BMO is definitely one of those. We wouldn't expect it to contribute meaningfully in the short to midterm. These things do take time to build. What we're particularly excited about, though, is having a brand like BMO standing proud next to them and really helping to bring our brand into more households across Canada.

We have the next question from the line of Wilma Burdis from Raymond James.

How are you guys thinking about pricing going into 2026? Are we still on track for the 15% inflation? I know you guys have been talking about that most this year into January. Inflation seems to be accelerating a bit in the broader market. So just curious to hear what you're seeing there.

Yes. Thanks for the question. I can certainly comment on inflation that we saw in the quarter. It was approximately in line with what we saw in Q2. So there was a little bit of reduction in the U.S., a little bit of inflation in Canada. But on balance, it was pretty much flat. And as we talked about in the Q2 call, we saw it coming down about 1 point. From that point, it's relatively stable. I think it's too early at this point to try and predict what next year will look like.

Yes. I mean I would add just in terms of pressures within Animal Health, Wilma as well. Obviously, we're a cost-plus model. So the cost of goods in the marketplace are really what's going to dictate that. I think as we go into next year, we certainly wouldn't anticipate pricing getting back to levels that we saw 4, 5 years ago. It's still a heightened inflation. And to Fawwad's point, we will monitor that very closely and make sure that we're in a position to continue to offer the same value proposition that we've always been targeting.

And then could you give a little color on what you're seeing with your customers? The sales appear to be very high. But on the one hand, we're hearing about some pockets of pressure on consumers. And on the other hand, we also understand that the protection can be very attractive when the costs are rising. So how do you think the current environment impacts your sales going forward?

Yes. I mean we're really pleased with the quarter that we've just posted. I think that's a consolidated strategy over a number of quarters to really get to the point where we can start pushing into new markets and to reach new pet parents, and that's reflected in the gross adds this quarter.

You're right, there is an increasing pressure on consumers and naturally an insurance product is one that if you get it right, you have to sell it. People have to understand the need behind it. I think we have historically proven that we do a good job of that through our routes to market through the vet channel, through breeders, through shelters at a grassroots level. So pet parents understand how much it's going to cost to make sure they can take care of their pet.

It's our job to ensure that we continue to articulate that value proposition. I think the teams are doing a good job. The more investment we put into the funnel, the more opportunity we have to test and learn and we're excited to keep doing that. There is absolutely a need for Trupanion today, and we can see that with the number of leads and the number of pets we've enrolled and maintained. And we think our role is much bigger still to play in the future. So happy that we're in a position to do that.

We have the next question from the line of John Barnidge from Piper.

Can you talk about the interest rate savings and any onetime items in advance of ending the old credit facility and whether we should be waiting for 1Q '26 to see all the savings?

Yes. Thanks for the question. Yes, obviously, we're very pleased with the PNC deal that we announced today. It not only puts us in a better position from a cost of capital standpoint, but just the opportunity to work with the bank, PNC being one of the largest financial institutions, opens up a variety of services they're going to be working with us on as, for instance, treasury management. So there's benefits outside of just the interest rate.

The interest rate by itself, our current debt is SOFR plus 5.15%. The new debt will be SOFR plus 2.75%. So it's about a 240 basis point benefit in terms of interest savings. So our expectation is that at the end of this, we'll have approximately $115 million of debt. So it would be interest savings against that somewhere in the range of $8 million to $9 million.

And then -- can you talk about the potential additions you're thinking through with the important fourth quarter for when open enrollment occurs for the group channel?

Yes. Thanks, John. So specifically speaking to Aflac, we don't anticipate seeing anything meaningful in the quarter as a contribution from Aflac. It's still a very nascent channel for us. It's one that we have a lot of learnings from. Aflac continues as always, to be a great partner for us.

I would say we're learning that the product that we have in market is perhaps not quite what we need. And so we're looking at refining that over time. We still have a lot of expectation and believe in this channel, but I wouldn't anticipate a lot for this quarter coming up for Q1.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to hand over the conference to Margi Tooth for closing comments.

Thank you, and thanks, everyone, for your questions and participation today in our call. We're incredibly proud of the financial discipline that's brought us to where we are this quarter and even more excited about what it enables.

We'll have continued investment in high-quality growth in our new partners and our existing partners and in the broader veterinary ecosystem. We will stay disciplined in our investment while continuing to build our brand and expand awareness to help even more pet parents get the care they deserve. And thank you very much for your time this afternoon.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.