Trupanion (TRUP) Q4 2025 Earnings Call Transcript

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Date

Feb. 12, 2026 at 4:30 p.m. ET

Call participants

• Chief Executive Officer and President — Margaret Tooth
• Chief Financial Officer — Fawwad Qureshi
• Director of Investor Relations — Gil Melchior

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Takeaways

• Total revenue -- $376,900,000, up 12% year over year.
• Subscription revenue -- $261,400,000, reflecting a 15% increase from the prior year.
• Total subscription pets -- 1,096,000 as of period end, including about 63,000 in Europe, up 5% year over year.
• Average monthly retention (TTM) -- 98.34%, compared to 98.25% in the prior year quarter.
• Subscription cost of paying veterinary invoices -- $180,800,000, driving a value proposition of 69.1% versus 70% last year.
• Variable expenses (subscription revenue %) -- 8.7%, down from 9.2% last year.
• Fixed expenses (subscription revenue %) -- 5.6%, slightly up from 5.5% in the prior year period.
• Combined fixed and variable expenses -- 14.4% of revenue, improved from 14.6% a year ago.
• Subscription adjusted operating income -- $43,100,000, up 23% year over year, contributing 96% of total AOI.
• Subscription adjusted operating margin -- 16.5%, a record, up from 15.3% last year.
• Other business revenue -- $115,400,000, up 5% year over year.
• Other business adjusted operating income -- $1,900,000 (1.6% margin).
• Total adjusted operating income -- $45,000,000, a 20% year-over-year increase.
• Gross pet adds -- Accelerated, with Q4 up 8% year over year; 65,200 new subscription pets acquired in the quarter.
• Subscription net pet growth -- 50% in Q4 and 10% for the full year.
• Average pet acquisition cost -- $320 per pet (excluding MGA pets), up from $261 last year.
• Development costs invested -- $1,800,000 for the quarter.
• Non-cash expenses -- $9,400,000 in stock-based compensation and $1,100,000 goodwill impairment for European operations.
• Net income -- $5,600,000 ($0.13 per share), versus $1,700,000 ($0.04 per share) last year.
• Operating cash flow -- $29,300,000, up from $23,700,000 last year.
• Free cash flow -- $25,300,000, an increase from $21,800,000 in Q4 last year.
• Full-year free cash flow -- $75,400,000 (5.2% of total revenue), up 95% year over year.
• Cash and short-term investments -- $370,700,000 as of period end.
• Total debt -- $111,800,000, reduced by $17,100,000 year over year.
• Blended Q4 internal rate of return (IRR) -- 23%; full-year blended IRR was 30%.
• Q4 pet lifetime value -- Increased 35% year over year, as mentioned in the call.
• Dividend from APIC -- $15,000,000 extraordinary dividend paid after year-end, following a $26,000,000 dividend in May.
• 2026 revenue guidance -- $1,550,000,000 to $1,582,000,000 total; $1,117,000,000 to $1,137,000,000 subscription revenue (14% growth at midpoint).
• 2026 adjusted operating income guidance -- $173,000,000 to $187,000,000 (19% growth at midpoint).
• 2026 Q1 revenue guidance -- $376,000,000 to $382,000,000; subscription revenue $265,000,000 to $268,000,000 (14% growth at midpoint).
• 2026 Q1 adjusted operating income guidance -- $38,000,000 to $41,000,000 (27% growth at midpoint).
• Conversion rate assumption -- 73% for U.S. to Canadian dollar projections in guidance.
• Trailed twelve-month retention improvement -- Increased every single quarter, according to management statements.
• Territory partner model -- Nearly 200 TPs active daily, supporting veterinary channel distribution.
• Landspath initiative -- Designated as an early-stage food business with expectations of meaningful future margin contribution.
• Claims automation -- Now exceeding 60% automation rate, with plans for further increase over the next three years.
• Planned lower-priced product -- Management said, “it is absolutely part of a 36-month plan,” with launch details to come.
• Other business segment growth outlook -- Expected deceleration as enrollments for the largest partner have ceased in most U.S. states.
• Veterinary inflation -- Current trends used for guidance modeling; management sees no material change to their assumptions to date.

Summary

Trupanion (NASDAQ:TRUP) reported its highest-ever subscription adjusted operating margin and delivered 20% total AOI growth, with ongoing expense efficiency and an all-time high in Q4 subscription AOI. Management confirmed that lifetime value per pet increased 35%, fueling higher acquisition investment and supporting an increase in new pet growth and gross adds momentum. The company announced an upcoming lower-priced offering within a 36‑month timeframe, in parallel with continued expansion of its Landspath food venture as a strategic growth lever. Additional capital flexibility was created by a post-year-end $15,000,000 extraordinary dividend upstreamed from APIC, reinforcing the balance sheet alongside a $17,100,000 reduction in total debt. Prudent management of expenses and continued improvement in claims automation contributed to increased net income, robust cash flows, and a record free cash flow result for the year.

• Management stated that AOI is increasingly diversified in its uses, with explicit mentions of debt repayment, technology investment, and the Landspath initiative, indicating a disciplined approach to allocation.
• The veterinary channel remains the company's primary driver for acquisition, with nearly 200 Territory Partners active every day to promote penetration and member retention.
• Retention performance improved in every cohort and every quarter, with the middle cohort (members with under 20% rate increases) showing particular strength, while first-year retention is addressed as an area of opportunity.
• The other business segment’s growth is expected to slow, with continued declines in pet count projected to eventually result in declining revenue year over year, though overall margin impact remains minimal due to the product mix.
• Veterinary inflation, called out as the most significant external variable, currently remains elevated, and management continues “we do watch it, obviously, like hawks,” with no immediate change to 2026 guidance assumptions.

Industry glossary

• AOI (Adjusted Operating Income): A non-GAAP measure used by Trupanion, defined as operating income before new pet acquisition, development expenses, stock-based compensation, and depreciation expense.
• TP (Territory Partner): Independent representatives focused on veterinary channel engagement and member acquisition.
• IRR (Internal Rate of Return): The blended rate measuring return on new pet acquisition investments in a fiscal period.
• APIC: American Pet Insurance Company, Trupanion’s primary insurance carrier affiliate.
• Landspath: Trupanion’s emerging portion-controlled pet food initiative targeting health outcomes and member engagement.
• MGA (Managing General Agent): An intermediary business structure underwriting some pet policies distinct from direct ownership.
• Value proposition (insurance): The percentage of member premiums paid back in veterinary invoice reimbursements by Trupanion’s subscription business.

Full Conference Call Transcript

Operator: Good day, and welcome to the Trupanion, Inc. Fourth Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. 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.

Gil Melchior: And welcome to Trupanion, Inc.'s fourth quarter and full year 2025 Financial Results Conference Call. Participating on today's call are Margaret Tooth, Chief Executive Officer and President, and Fawwad Qureshi, Chief Financial Officer. For ease of reference, we have 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-Ks, 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 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 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, Inc.'s Investor Relations website. A replay will also be available on the site. I will now hand over the call to Margaret Tooth.

Margaret Tooth: Thanks, Gil, and thank you everyone for joining us this afternoon. 2025 was a record year for the company. Over the past 60 months, we added over $900,000,000 in revenue, and generated $518,000,000 in adjusted operating income. We ended the year with nearly 1,000,000 pets protected under the Trupanion brand, and have now paid over $3,500,000,000 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 would 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 $1,000,000,000 in subscription revenue and delivered approximately 15% annual subscription adjusted operating margin, reflecting the strength and consistency of our model. Our performance translated into $152,000,000 of operating income, which funded $83,000,000 of pet acquisition and investments and 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 twelve-month retention improving in every single quarter. We saw a similar strengthening in new pet acquisition, with gross pet ads also accelerating throughout 2025 and ending Q4 up 8% year on year.

Stronger 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 a 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, Inc.'s position in the animal health ecosystem. Our veterinary channel, which remains our hotline for distribution, continues to play a critical role in educating pet parents about the value of medical insurance. This is most notably supported by a 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 clearer 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 are encouraged by the role brand spend can play in helping facilitate the movement of 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, Inc.'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 so veterinarians can practice the medicine they are trained to deliver. With that, I will turn it over to Fawwad. Thanks, Margaret, 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.

Fawwad Qureshi: Total revenue for the quarter was $376,900,000, up 12% year over year. Within our subscription business, revenue was $261,400,000, 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 twelve months was 98.34%, up versus the fourth quarter last year, which was 98.25%. The subscription business cost of paying veterinary invoices was $180,800,000, 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 $900,000, 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 expectation. Our subscription business delivered adjusted operating income of $43,100,000, 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 will 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 $115,400,000 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 in the majority of U.S. states for our largest partner in this segment. Adjusted operating income for this segment was $1,900,000, or 1.6% of revenue.

In total, adjusted operating income was $45,000,000 in Q4, ahead of our expectations and up 20% from Q4 of last year. We deployed $21,600,000 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 $1,800,000 in the quarter in development costs. Non-cash expenses in the quarter included $9,400,000 in stock-based compensation, as well as a $1,100,000 goodwill impairment charge related to our European businesses.

As a result, net income for the quarter improved to $5,600,000, or $0.13 per basic and diluted share, as compared to a net income of $1,700,000, or $0.04 per basic and diluted share in the prior year period. In terms of cash flow, operating cash flow was $29,300,000 in the quarter compared to $23,700,000 in the prior year period. Capital expenditures totaled $3,900,000, up from $1,900,000 in Q4 of last year. As a result, free cash flow was $25,300,000, up from $21,800,000 last year. For the full year of 2025, we continued to strengthen our balance as free cash flow increased to $75,400,000, 5.2% of total revenue and an increase of 95% year over year.

We ended the year with $370,700,000 in cash and short-term investments and a total debt balance of $111,800,000, a reduction of $17,100,000 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 $15,000,000 to our operating company. This follows the $26,000,000 extraordinary dividend we announced in May and is a continued illustration of the strong capitalization of APIC and our ability to fund our growth. Now I will turn to our outlook.

For the full year of 2026, we expect total revenue in the range of $1,550,000,000 to $1,582,000,000. We expect subscription revenue to be between $1,117,000,000 and $1,137,000,000, representing approximately 14% year over year growth at the midpoint. We expect total adjusted operating income to be in the range of $173,000,000 to $187,000,000, 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 $376,000,000 to $382,000,000. Subscription revenue is expected to be between $265,000,000 to $268,000,000, representing approximately 14% year over year growth at the midpoint.

Total adjusted operating income is expected to be in the range of $38,000,000 to $41,000,000. This represents approximately 27% growth year over year at the midpoint. As a reminder, our revenue projections are subject to conversion 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 Margaret, 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 Margaret.

Margaret Tooth: Thanks, Fawwad. Before we open the call up for questions, I want to briefly reflect on the foundation we are carrying into our next strategic plan. Since 2021, the business generated over $500,000,000 in adjusted operating income, and grew at a compound annual growth rate of 22%. As we enter our next 36-month plan, we are doing so with strong momentum. We intend to invest aggressively against the 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 1,000,000 pets and generate over $1,000,000,000 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 are happy to answer your questions. We will now open for questions. To ask a question, you may press star and one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then two.

We ask that you limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from John Barnidge with Piper Sandler. Please go ahead.

John Barnidge: Thank you, and good afternoon. Appreciate the opportunity. My first question would be focused, you talked about brand spend. Can you talk about some successes that you have had in reaching pet parents in different ways and how maybe that will be accelerated going forward? Thank you.

Margaret Tooth: Yeah. Thanks, John. So for us, spend is really about how do we put the Trupanion brand in front of all pet parents. We are kind of really in a position now to step up given our current run rate. So it is really in areas where we are seeing existing pet parents in the veterinary profession and also outside of that. So we have concentrated our brand spend in the vet space. What we are seeing is people moving through the funnel to conversion quicker over time, and we are seeing some encouraging results from that process.

We are also expanding in areas where pet parents go prior to getting to the vet, so when they are looking for pets, when they are starting to research what pets are right for them. So doing some more general direct-to-consumer information gathering, which is then also helping to bring them into our funnel from a general awareness perspective.

As a category continues to expand because more pet parents are facing, you know, a challenge with the cost of veterinary care today, we want to be in position to go to them where they are, and we are starting to see that move through the funnel and some areas that the awareness of Trupanion and bringing them further and further down, which is reflected in the numbers you see in terms of pet count in the quarter with our gross pet ads up 8% and net pet growth for the quarter of 50%. Appreciate that. And then for a while, was there any favorable reserve development in that really impressive loss ratio or that service cost ratio you reported?

Thank you.

Fawwad Qureshi: Yeah. We had a little bit of adverse development when you look at just Q4 standalone. So about 30 basis points and if you dollarize it, it is about $900,000. So, yeah, very happy about loss ratio. Obviously, it has 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 yeah, if not for that, it would have been a little bit lower.

Operator: The next question comes from Brandon Vazquez with William Blair. Please go ahead.

Russell (for Brandon Vazquez): Hey, everyone. This is Russell on for Brandon. Thanks for taking the questions. Maybe I will start by asking you to kind of level set us on your 2026 guidance. What does the high end, the low end kind of bake in terms of things like gross ads, 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 are contemplating into the guide?

Fawwad Qureshi: Yeah. There are 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. Expect that will continue as we go into 2026, but the gross adds increasing and we saw them come up nicely in the quarter, we are starting to see that shift. When you look at full year 2026, we still expect pricing to play the role of the larger role. But if you compare pricing 2026 versus 2025, we expect it to be lower. Similarly, if you compare pet count contribution to revenue, 2026 to 2025, we expect it to be higher.

From a loss ratio perspective, obviously, that is the biggest driver from a financial performance standpoint. Carrying forward the assumptions from what we exited the year, so largely in line. We have not seen a significant abatement of inflation. Obviously, it is something we look at pretty carefully. And then from a spend perspective, very happy to see the leverage we had committed to, expense coming down in 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 are seeing those efficiencies and the productivity investments we have made.

So we expect those to continue, and then that will lead to margin expansion. Those are primarily the largest drivers of guidance. That is very helpful. Thank you. And then maybe on leads, previously, excuse me. You have mentioned the focus on the conversion towards breeders specifically and maybe some other exploratory methods. Can you talk a little bit about what you are seeing in terms of conversion and where you are seeing the most success and have you seen any change in demographic or economic quality of inbound leads given macro pressures?

Margaret Tooth: Yeah. So in terms of the channels we operate in, we primarily, the vet channel continues to be our hotline. So that is always the channel that we kind of lead off of when we think about our acquisition strategy. Breeder and 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 are seeing encouraging results. Some move quicker than others, and the team leans into that.

The more that we are able to invest, the more we can learn, which is great because we are in a position now where we can be really bullish. I think in terms of the demographic, we are absolutely starting to speak to different pet parents. We think in the market right now, given where the macro conditions are, given where vet costs are, we have an opportunity not only with the existing Trupanion product that we have today. We are also looking at optimizing that broadly for new pet parents coming through that we are 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 are seeing with our lead volume today. The next question comes from Josh Shanker with Bank of America. Please go ahead.

Josh Shanker: Yeah. Thank you very much. Good afternoon, everybody. I was just curious, you know, look, retention is improving. Maybe on the margin, might hope it would be improving a little quicker. Usually, at year end, you are going to give disclosure in the annual letter by cohort. Can you talk about, you might say that all three are improving, where the improvement really is coming and where it is lagging, I guess?

Margaret Tooth: Yeah. Thank you for the question, Josh. Retention across the board is looking really healthy. You know, we were pleased to see every single quarter in the year that improved and increased across the cohorts. So specifically to hit on that question, the middle bucket, referred 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 is a stronger cohort. That has been improving.

The over 20% bucket, though, 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 rationale for those increases. So that has been great. The area that we still have opportunity is the area we have always had opportunity, which is in our first year.

And as we grow quicker, and you can see those pet ads coming through, we will have plenty of opportunities 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.

Josh Shanker: Thank you. And you said that you have lots of uses for cash flow other than PAC, and you mentioned Landspath. We do not really have a granularity in it. Can you talk about Landspath a little bit on why we should be confident that is a good use of your funds?

Fawwad Qureshi: Yeah. I can take that question. I think it is exactly the point. AOI is a pool of capital, and now we have, I think the 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, you know, building the infrastructure to be able to test and then ultimately deliver the product. So the returns there, we have not disclosed specifics on our expectations for that. But longer term, we think that will be a very meaningful contributor to margin. Unit economics of that business are quite favorable. So that is 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 three years. That drives efficiency straight to the bottom line. It is a big part of why we are seeing the margin expansion we are. So continued investments in technology have pretty good ROIs for us. And then there are 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 we look at AOI as a pool of money that we generate organically from the business. Then we look across that portfolio and try to find the best mix of channels and where we want to make those investments, and we will continue to do that. I think it is a good position for us to be in, especially coming off a record year for margin, but also a record year for total dollars.

Margaret Tooth: If I can just add as well from a Landspath perspective, specifically thinking about how does it blend in with what we are 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, 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, refer-a-friend, in that flywheel. The other component about Landspath is it is sold through the veterinarian.

And that is very different from other foods out there, which allows the veterinarian to benefit from that additional income that we know that they have 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 Jonathan Block with Stifel. Please go ahead.

Jordan Bernstein (for Jonathan Block): Great. Jordan Bernstein here on for Jonathan. You know, some of our checks would indicate the need for a lower-priced insurance plan out there for pet owners, you know, even hearing this morning from some industry peers, the tighter pet owner budget out there. To that end, are there any details 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 and Furkin offerings kind of remodeled? Yeah. Thanks for the question, Jordan. There are a couple of things here.

Margaret Tooth: I think as we look at where we are today as a product, as a brand, first and foremost, we are really pleased with the results coming out of the quarter that show that the efforts we have been making from a brand perspective holistically are really starting to move the needle, both in terms of overall gross ads, which were up 8% in the quarter, and the net pet growth, which is up to 50%. So that brand spend is starting to really resonate both at leads, convert, and keep level, which we have seen in those numbers. And we are seeing that, as I mentioned, we are pulling through a new consumer as well.

And what we are 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 will not be released over the next few quarters, but it is absolutely part of a 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, the trust that we have created in the veterinary industry, to offer a product we believe there is a really big gap in the market for.

And we will share more details when ready about that. We are excited about it. We are making good progress in our thinking around that, and, yeah, there is an opportunity to be had, and we will absolutely be aggressive when that time comes.

Jordan Bernstein (for Jonathan Block): Great. Thanks for all that color. You know, just one quick question. 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 has been breached to the downside for the second straight quarter. 28% in 3Q, now 23% in 4Q. I believe the metric has been down for seven straight quarters sequentially. When should investors expect to return to greater than 30% and some of that spend beginning to pay off on that line item?

Margaret Tooth: Yeah. So a couple things. I guess that we are pleased. We believe that investment is absolutely starting to pay off. And kind of a couple of things, we are assuming a margin for the IRR is at 12.5%. We have just exited the year at 15%. So there is already a difference in the margin there, and it is a blended metric too. So the quarterly planning product is higher from an IRR point of view. If we take a step back, you know, the reason we are investing so much more is we feel really good about the position we are in. We have increased our lifetime value of a pet 35% year over year.

So we are able to lean into pet acquisition far more aggressively because not only do we have the adjusted operating income there, we are 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. And in a market that absolutely is crying out for solutions of how to help pet parents budget and expect it. Over time, we are still committed to very, you know, high lifetime returns.

And we are really pleased where we ended the quarter, and we are happy with that momentum. As a reminder, if you would like to ask a question, please press star. The next question comes from Wilma Jackson Burdis with Raymond James. Please go ahead.

Wilma Jackson Burdis: Hey. Good evening. Looking at the 2026 guide, it looks like the subscription revenue was in line with my model, but the other revenue seemed like the runoff might be accelerating a little bit there. Just want to see if that is 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 to 2026. Thanks.

Fawwad Qureshi: Yeah. Hi, Wilma. Thanks for the question. Yeah. On the other business, you know, it has been trending pretty consistently down. And I think we mentioned in the past from a pet count perspective, that decline started quite a while ago, really in the back half of 2023. And it has been pretty steady, and obviously, we expect revenue ultimately to turn negative from a year-over-year standpoint. It is still up because of pricing. So not a significant change. The margin profile for that business is loss sensitive, so it does not affect us significantly. Do not expect that to 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, yeah, it really comes down to a couple of things. I think pricing will still lead the way as we look at 2026. Gross ads starting to accelerate. We saw that in the second half of the year. We think there is an upside from expense management and just overall productivity and efficiency. That is really the combination of those things. What could go against us, obviously, would be inflation. So it is something that we pay close attention to. But right now, we feel good about AOI growing faster than revenue.

Wilma Jackson Burdis: Thank you. 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 are seeing anything there that, you know, changes your mind on the 15% type inflation you have been expecting every year? Thanks.

Fawwad Qureshi: Yeah. Hi, Wilma. From our perspective, there is nothing that we have seen year to date that would anticipate us changing our current assumptions, and we do watch it, obviously, like hawks. And I think we have seen slight softening, and I would say it is softening off a high level. We do know the industry is under a lot of pressure right now, so we are going to continue to monitor it, and we will adjust when we see a need to.

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

Margaret Tooth: Yeah. Thank you. I would just like to say that, before we sign off, I want to recognize the team for the really strong execution and results we have delivered this year. Pricing is aligned. We have achieved our target margin with strong free cash flow generation. Retention is improving, and growth in ads 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.

Gil Melchior: The conference has now concluded.

Operator: Thank you for attending today's presentation. You may now disconnect.

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