Trupanion (TRUP) Q3 2026 Earnings Call Transcript

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DATE

Thursday, Nov. 5, 2026

CALL PARTICIPANTS

• Investor Relations - Gil Melchior
• Chief Executive Officer and President - Margaret Rosemary Maria Tooth
• Chief Financial Officer - Fawwad Qureshi

TAKEAWAYS

• Total Revenue -- $405.6 million, up 11% year over year driven by strength in the subscription business.
• Subscription Revenue -- $287.9 million, an increase of 14% year over year.
• Adjusted Operating Income (AOI) -- $47 million, an all-time high representing 15% year-over-year growth.
• Net Income -- $9.3 million, or $0.21 per diluted share, reflecting the company's sixth consecutive quarter of positive net income.
• Free Cash Flow -- $28.5 million, an all-time high and the 10th consecutive quarter of positive free cash flow.
• Average Monthly Retention -- 98.38%, representing the seventh consecutive quarter of year-over-year improvement.
• Net New Subscription Pets -- 20,500 pets, an increase of over 28% compared to the prior year period.
• Average Pet Acquisition Cost (PAC) -- $279 per pet, down from $290 in the prior year period due to improved web conversion rates.
• Monthly Average Revenue Per Pet -- $88.95, representing an 8% increase year over year driven by historical pricing adjustments.
• Claims Automation Rate -- Over 65%, up from under 15% in 2020 due to long-term technology and AI investments.
• Share Repurchases -- Approximately $25 million for 830,000 shares during the quarter under a $100 million authorization.
• Full-Year Revenue Guidance -- $1.59 billion to $1.597 billion, with subscription revenue projected at $1.131 billion to $1.133 billion.
• Fourth Quarter AOI Guidance -- $48 million to $51 million, representing approximately 10% growth year over year at the midpoint.
• Total Enrolled Pets -- 1,626,901, representing a 2% decrease year over year as the company transitions certain noncore business.
• Subscription Value Proposition -- 69.7%, compared to 70.1% in the prior year period.
• Operating Cash Flow -- $30.7 million, up from $29.2 million in the prior year period.
• Capital Expenditures -- $2.2 million, a decrease from $5.3 million in the prior year period.
• Subscription Variable Expenses -- 8.7% of revenue, down from 8.9% year over year reflecting scaling member support costs.
• Total Debt Balance -- $104.5 million, representing a reduction of $10.1 million versus the prior year period.
• Cash and Short-Term Investments -- $396.8 million as of Sept. 30, 2026.

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RISKS

• Tooth stated, "We are expecting to see continuous double-digit inflation in 2027. We have seen nothing to expect that to be easing," regarding the ongoing impact of rising veterinary medical costs.
• Qureshi noted that the transition of the Pets Best book of business to a new underwriting partner is underway, representing a step toward the ultimate runoff of that business after the third quarter of 2028.

SUMMARY

Trupanion, Inc. (NASDAQ:TRUP) reported record adjusted operating income and free cash flow for the third quarter of 2026. Management reported that the subscription business drove the majority of top-line growth, supported by a seventh consecutive quarter of improved retention and a 28% increase in net new pet enrollments. The company continues to invest in technology and automation, which has resulted in over 65% of claims being processed automatically. Strategic initiatives, including a new digital product scheduled for a mid-2027 launch and limited trials for the Landspath pet food line, remain primary focal points for long-term expansion. Additionally, the company initiated share repurchases following a $100 million authorization and reduced its outstanding debt through disciplined capital allocation.

• CEO Tooth stated, "Our long standing investments in technology, automation, and AI continue to pay off across the business."
• The company announced a new brand partnership with Simon Cowell to increase category awareness and highlight product features such as direct veterinary payments.
• Management confirmed that coinsurance and deductible expansions are now implemented across Canada and approximately 90% of the U.S. market.
• CFO Qureshi noted that the company repaid $15 million of outstanding borrowings subsequent to the quarter end to effectively zero out its revolving credit facility.
• The Landspath pet food initiative has begun limited trials with a full market launch expected to follow a measured investment pace through 2027.
• Management indicated that pricing increases contributed less to revenue growth this quarter than in previous periods, showing a more balanced mix between volume and price.

INDUSTRY GLOSSARY

• AOI (Adjusted Operating Income): A non-GAAP measure of operating income before new pet acquisition and development expenses.
• PAC (Pet Acquisition Cost): The average cost to acquire a new subscription pet, including marketing and sales expenses.
• Value Proposition: The percentage of subscription revenue that the company pays out in the form of veterinary invoices.
• Landspath: Trupanion's proprietary portion-control pet food initiative sold through veterinary channels.
• Agentic Search: A type of search technology driven by AI agents that can provide more detailed and value-based results than traditional keyword search.
• Other Business: A segment that includes policies written for third parties and other non-subscription revenue streams.

Full Conference Call Transcript

Operator: Good day. And welcome to Trupanion Third Quarter 2026 Earnings Conference Call. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star and then 2. Please note this event is being recorded. I would now like to turn the conference over to Gil Melchior, Investor Relations. Please go ahead.

Gil Melchior: Good afternoon, and welcome to Trupanion's Third Quarter 2026 Financial Results Conference Call. Participating on today's call are Margie 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 cost, 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 US 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. Let me now turn the call over to Margie.

Margaret Rosemary Maria Tooth: Thank you, Jamie. Good afternoon, and thank you for joining Trupanion's Third Quarter 2026 Earnings Conference Call. I am pleased to report that our third quarter results were strong led by adjusted operating income in excess of $47 million an all time high. Our compounding AOI along with free cash flow also another all time high in Q3, is enabling more investment across our business to build long term value. These investments are generating momentum and delivering real results through growth represented in gross new pets added, retention, enhancing the member experience, products, brand, leading ultimately to higher lifetime value and contribution per pet.

Both of which reached their highest level in the history of our company during the third quarter. Our free cash flow, along with our efforts to unlock surplus capital, enabled us to repurchase approximately $25 million of our shares during the quarter, which Fawwad will discuss momentarily. During the third quarter, our investment in acquiring new pets and member experience again resulted in year over year and sequential growth. We added over 20.5 thousand net new pets, an increase in excess of 20-8 percent over Q3 of last year. And our acquisition spend per pet declined modestly. Driven largely by improved conversion. Our long standing investments in technology, automation, and AI continue to pay off across the business.

And it starts with conversion. We have continued to refine our online enrollment journey, making it easier for pet parents to understand our product and its unique differences and to enroll with confidence. Those improvements, coupled with the continued rollout of expanded deductible and coinsurance options, now implemented entirely across Canada and roughly 90% of the US, contributed to a strengthened web conversion rate in the third quarter. Retention improved for the seventh consecutive quarter, also supported by the aforementioned product updates. These increased variability options on our leading products are beginning to unlock access to more consumers. While helping to deepen pet parents' understanding of the lifetime coverage that we offer.

Once the pet parent becomes a member, our patented software lets us pay veterinarians directly at checkout. No other provider in North America can do this. In Q3, we added the most veterinary clinics using our software in a quarter in nearly 5 years. Behind the scenes, claims automation has climbed from under 15 percent in 2020. To over 60-5 percent today. Our proprietary software, along with claims automation, enables us to approve a claim and pay a veterinarian in a matter of seconds, and it provides us with lower processing costs to drive operating leverage, and enhanced experience for our members.

Combined with our long standing veterinary relationships built over the course of many years, this technology gives Trupanion a durable moat that is hard to replicate. Importantly, our investments in technology automation, and AI are not meant to replace the human touch. But rather protect it. When routing claims are processed automatically and tools like Scout, our AI virtual agent, answer everyday questions, our teams have more time for the moments that matter most. The pet parent facing a difficult diagnosis, the complex claim that needs careful judgment, or the veterinary team that needs a quick answer at checkout. Good pet insurance is ultimately about trust. And trust is built by people.

Technology lets us deliver an experience that is simpler, faster, and more personal so that when a member reaches out to us, they reach someone who can focus entirely on supporting them not navigating friction. Turning to the new digital offering, our next generation product designed to grow the market, Since our last call, the work has progressed well, and we remain on track to launch by the mid point of our strategic plan next summer. Our coinsurance and deductible rollout has been instructive. it is confirmed meaningful demand from pet parents who want Trupanions protection at a more accessible starting point. And that learning is directly shaping how we approach branding, and pricing in the new product.

We look forward to sharing more in the coming quarters. Our pet food initiative, Landspath, made good progress in the quarter as well. I am pleased to report that we have begun limited trials, which is an important milestone for us as we move closer to launch in 2027. As a reminder, Landspath is a long term opportunity into which we will continue to invest at a measured pace. We believe a portion control food sold directly through veterinarians can improve pet health deepen member loyalty, and return revenue to our veterinary partners over time. While Landspath broadens the way we can support pet health and strengthen our veterinary relationships, raising awareness of pet insurance is our most immediate focus.

And driving general category understanding remains central to unlocking a large and under market. There are more than 180 million pets across The United States and Canada. Yet only a little over 7 million pet parents have insurance. We estimate that more than 1 million new pets are added to veterinary practice management systems every month. Each represents the pet parent making decisions about their pet's care. And an opportunity for us to be part of that conversation. In October, we announced a new partnership with television personality and music executive Simon Cowell. Simon has built a career and a reputation on recognizing quality. And he brought that same discerning eye to pet insurance.

He came to us with hard questions. Did his own homework, and chose Trupanion for his own 4 dogs. Now he is helping pet parents understand what great pet insurance looks like. No payout limits, coverage that keeps pace with modern veterinary medicine, and a veterinarian is paid directly at checkout. When Simon speaks, people listen. And we are proud to have him in our corner. His latest collaboration builds on our partnerships with the Seattle Reign FC and a number of leading animal welfare organizations across North America.

It is a continuation of the brand investment we have discussed over the past year, reaching pet parents earlier in their journey, often before they ever visit a veterinarian or even have a pet. Stepping back, we are very pleased with our results. Our third continued its trend of reaching higher highs. We enrolled over 20.5 thousand net new pets, increased retention for the seventh consecutive quarter, and made great progress on our key strategic initiatives. And I am proud to say that we accomplished these results while honoring our promise to members, through product enhancements to support a lifetime of care and providing new pet parents with greater choice and flexibility in how they protect their pets.

Before I hand over to Fawwad, I want to thank our entire team. The progress we have shared today from expanding choice in our core product to advancing our new digital offering and bringing our brand to more pet parents than ever is a result of their hard work and dedication. Time and again, they have shown their commitment to our members and veterinary partners. And the care they bring to every pet. The momentum we have today is something this team has created. And I could not be more proud. With fewer than 5% of pets in North America insured, the opportunity ahead of us remains far larger than anything we have achieved so far.

And with that, I will turn it over to Fawad to walk through our third quarter results in more detail.

Fawwad Qureshi: Thanks, Margie, 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 of 2026. However, before I do, I would like to echo Margie's comments about the strength of our results in the third quarter. The investments that we have been making to drive growth and profitability, paired with our disciplined approach to capital allocation, are delivering real results. Total revenue for the quarter was $405.6 million up 11% year over year. Within our subscription business, revenue was $287.9 million, up 14% year over year.

Total monthly average revenue per pet for the quarter was $88.95, up 8% over the year ago quarter. Total subscription pets increased 6% year over year to 1.145 million pets as of September 30. This includes approximately 60-6 thousand pets in Europe. Average monthly retention for the trailing 12 months was 98.38%, an increase of 5 basis points from Q3 of last year and our seventh consecutive quarter of year over year improvement. The subscription business cost of paying veterinary invoices was $200.6 million, resulting a value proposition of 69.7% versus 70.1% in the prior year period. The quarter included adverse prior period development of $600 thousand or approximately 20 basis points of subscription revenue.

As a percentage of subscription revenue, variable expenses were 8.7% down from 8.9% in the year ago quarter due to scaling member support cost improvements. Fixed expenses as a percentage of revenue were 5.8% versus 5.6% in the prior year period. Primarily due to higher employee and technology related expenses. Combined, we saw fixed and variable spending at 14.6% of subscription revenue in Q3 largely in line with 14.5% in Q3 of last year. Our subscription business delivered all time high adjusted operating income of $45.4 million an increase of 16% from last year, and contributed 97% of our total AOI for the quarter. Subscription adjusted operating margin was 15.8% up from 15.5% year over year.

Now I will turn to our other business segment. Other business revenue was $117.7 million for the quarter, an increase of 3% year over year. Adjusted operating income for this segment was $1.6 million or 1.4% of revenue. In total, adjusted operating income was $47 million in Q3, up 15% from last year. We deployed $23.3 million of this AOI to acquire approximately 77.5 thousand new subscription pets. Excluding the pets that are underwritten through an MGA structure, this translated into an average pet acquisition cost of $279 per pet in the quarter down from $290 in the prior year period. As Margie mentioned, the decline in per-pet acquisition spend was largely driven by higher conversion.

We invested $2.4 million in the quarter in development costs. Stock based compensation expense was $7.9 million. As a result, net income for the quarter was $9.3 million or $0.21 per basic and diluted share compared to net income of $5.9 million or $0.14 per basic and $0.13 per diluted share in the prior year period. These results mark our sixth consecutive quarter of positive net income. In terms of cash flow, operating cash flow was $30.7 million in the quarter compared to $29.2 million in the prior year period. Capital expenditures totaled $2.2 million down from $5.3 million in Q3 of last year.

As a result, our free cash flow was $28.5 million an all time high up from $23.9 million last year and our tenth consecutive quarter of positive free cash flow. Over the last 4 quarters, free cash flow reached $86.7 million Turning to the balance sheet. We ended the quarter with $396.8 million cash and short term investments and a total debt balance of $104.5 million, a reduction of $10.1 million versus Q3 last year. Subsequent to quarter end, we repaid $15 million of outstanding borrowings, leaving us with $18.5 million available under our credit facility. Last quarter, we announced the authorization of a $100 million share repurchase program. With any repurchases expected to occur opportunistically.

As a reminder, this authorization has no expiration date. I am pleased to report that in Q3, we repurchased approximately 830 thousand shares at a cost of approximately $25 million. 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. Now I will turn to our outlook, For the full year of 2026, we now expect total revenue in the range of $1.59 billion to $1.597 billion We are narrowing the range for subscription revenue, which is, now expected to be between $1.131 billion and $1.133 billion.

The midpoint of the range is increasing and represents 14% year over year growth. We now expect total adjusted operating income to be between $179 million and $182 million or 19% year over year growth at the midpoint. For the fourth quarter of 2026, total revenue is expected to be in the range of $407 million to $414 million Subscription revenue is expected to be between $297 million and $299 million representing approximately 14% year over year growth at the midpoint. Fourth quarter total adjusted operating income is expected to be in the range of $48 million to $51 million This represents approximately 10% growth year over year at the midpoint.

As a reminder, last quarter, we announced that we have reached an agreement to end our relationship with Pets Best following the third quarter of 2028. That transition is now underway with the existing book of business beginning to move to a new underwriting partner in the fourth quarter of 2026. A meaningful step towards the ultimate runoff of the business. And lastly, our revenue projections are subject to conversion rate movements predominantly between the US and Canadian currencies. For our fourth quarter and full year guidance, we used a 72% conversion rate in our projections. Before I pass it back to Margie for her closing remarks, I would like to reiterate the strength of our financial performance.

The investments that we have been making are yielding results. They are driving improvements in efficiencies, lowering costs, and supporting growth. We will continue to execute with discipline, investing to move the business forward, and to deliver for our members and shareholders. I will now pass it back to Margie.

Margaret Rosemary Maria Tooth: Thank you, Fawwad. As we enter the final stretch of the year, we are encouraged that we have delivered 9 months of disciplined execution and have generated over $130 million of adjusted operating income year to date. Up 22% over the prior year period. We have added nearly 50 thousand net subscription pets so far this year, Lifetime value and margin per pet continue to grow, and our expanded coinsurance and deductible options are now available to 90% of pet parents across North America. At the same time, we are investing for the long term. In our brand and marketing, in our technology, and in our new digital offering. As well as Landspath.

All while also returning capital to shareholders through share repurchases. We are carrying real momentum into the fourth quarter, and we will continue to invest with discipline in the opportunities that compound adjusted operating income drive free cash flow, and create lasting and durable shareholder value. Ahead of questions, I would like to confirm that our next Investor Day will take place on March 1st in New York. The team and I look forward to sharing more on our progress and plans for the future. We will post further details on our investor relations website shortly, and we hope to see many of you there. With that, let's open it up for questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then 2. Our first question comes from Joshua Shanker with Bank of America. Please go ahead.

Josh Shanker: Yes. Thank you for taking my question. So I am going to ask a few questions. Sometimes, the call in short, so I hope you will indulge me a little bit. Number 1, let's talk about improved conversion. What does that mean actually in terms of operations What are the things that you are doing that are working to make that happen? I am so. I love seeing beating on pets, but also spending less packed to do it. that is very, very efficient. So how's that working?

Margaret Rosemary Maria Tooth: Yeah. Hi, Josh. Thanks for the question. So really pleased with the conversion. Really pleased with the pet count for the quarter. As you mentioned, it is the highest ever that we have achieved as a business and also spending the most we have ever been able to spend at a more efficient rate. So a 4 percent efficiency year over year, which is fantastic. From our perspective, conversion is coming from. In a number of different ways. The first and perhaps the most meaningful movement from conversion was the introduction of our coinsurance and deductible expansions.

We anticipated this would have a benefit to conversion, and it is doing what we hope it would do in the sense of it is providing people greater understanding, the ability to play around with options on screen and understand more what their budget can fit into. In addition to that, something that we did not anticipate having quite as much attraction as it has been to date has been the improvements the teams has been busy working on over the last few quarters.

We have talked about this previously with the investment in technology, the improvements in user experience, really helping to lean into value proposition, commentary, AI, chatbots, and we have seen a lift across the board in terms of that journey. So this is sustainable. it is what is really exciting for us because this is not a 1-off campaign. This is something that we are building on. And what is particularly encouraging is we have not even announced yet the changes on a public level and a campaign to promote the coinsurance and deductible expansion. So we are absolutely maximizing the lead generation we have been delivering.

The improvement in conversion gives us confidence moving forward as we start to expand the aperture and do more of that brand build and lead generation that there is a lot more incremental still to come.

Josh Shanker: And I do see in numbers getting through them, there a breakdown of gross new pets from the underwritten versus the MGA pets for the quarter?

Margaret Rosemary Maria Tooth: No. That. that is not there. The majority is coming from Core, however, and in the quarter.

Josh Shanker: Okay. And then, 1 basis point improvement in retention Obviously, that continues to improve. Is there any indication on first year retention being better versus fewer customers getting a 20 percent rate increase. Can we talk about, like, what the drivers are and if those trends should continue that we can model that improvement going forward.

Margaret Rosemary Maria Tooth: Yeah. Brady faces attention. The team is seventh consecutive quarter we have seen an improvement in retention and the core book of business is performing very, very strongly. If you take cohort by cohort over and under 20 percent, both had a lovely improvement in the quarter. First year, we would expect to be a little bit less so because we are adding pets at a high clip, so that is a natural headwind to retention in first year. However, what is interesting to us is the introduction of the coinsurance and deductible appears early signs that we are having some benefits and wins there with that.

In first year retention, and we have seen some really nice momentum as some of the tactics the teams have been working on for the last year are really starting to roll through. The more pets we get into that cohort, the more effective that will be, and I think we have got a lot to be proud of to be able to put as much rate as we needed to put through and see that retention continuing to move at a nice clip. So very encouraged, and we expect to continue to put a lot of effort and attention to this area. We can see that come through in AOI.

Josh Shanker: And 1 last 1, for $25 million is a nice even number. It looks like a plan number. As long as the stock is cheap, why have a plan in the quarter? Why not just buy the stock at a cheap price? Because you got so much cash right now. You could do it. How do you come to 25 as the right number in a quarter if that continues?

Fawwad Qureshi: Yeah. Thanks for the question. And, of course, an approximate number, but yeah, I mean, we felt very good about the shape of the quarter and the thing that we talked about really at the start of the year is that we wanted to have as much financial flexibility as possible and the free cash flow, the AOI, gives us that investable pool of capital that we can deploy across the business. I think, Margie, pointed out that we have got the most in pet acquisition than we have ever invested in any quarter and at the same time, made investments in technology and AI and also made financial investments.

You saw in the release that subsequent to the quarter end, we also paid down $15 million of debt. Addition to the $25 million of share repurchase. So feel really good about the allocation. I mean, we are a growth company. And so when you think about how much we are investing internal both in pet acquisition as well as in our key initiatives, Landspath as a for instance, and still being able to make finance investments we feel pretty good about that mix going into next year. Thank you.

Operator: And the next question comes from Wilma Burdis with Raymond James. Please go ahead.

Wilma Burdis: Hey. Good evening. Subscription revenue grew mid-teens year to date. Do you think this is a good run rate, or is this something that could accelerate as PAC is deployed? I guess on the other hand, you are benefiting from rate increases, so maybe just talk about the longer term. Thanks.

Fawwad Qureshi: Yeah. Thanks, Wilma. So we are very happy about the just the revenue, the sources of revenue. So, we have talked about up until this point. Pricing has been the more. Has been the bigger contributor to overall revenue growth. That was still the case this quarter, but as Margi pointed out, we also saw gross adds tick up nicely. there is a 13.8 percent gross add year over year increase. that is the highest increase since 2023. Retention, as we noted, is up 7 quarters in a row and 1 basis point sequentially, basis points year over year. Then pricing continues to contribute.

The pricing increases, while still the larger contributor to revenue, were the lowest pricing increase we have seen going back to 2023. So we are seeing more of a balance in terms of what is driving our revenue, and that is where we ultimately wanna be.In past times, gross ads was, of course, the biggest driver, and today, it is starting to get closer to pricing, but we feel pretty good about all 3 of these elements contributing and that is it gives us a lot of flexibility in terms of how we drive revenue growth. Very happy about the quarter and not just the revenue growth, but AOI growing faster than revenue.

We have committed externally that we want to have mid teens AOI growth for the 3 years and 3 quarters in, we are off to a good start. Okay. Thank you.

Wilma Burdis: And then do not know if you could discuss some plans to utilize the $18.5 million facility from PNC. What are some of the options to use that to lever for growth? Thanks.

Fawwad Qureshi: Yeah. 1 of the things we are we are very happy about is just our overall financial health and specifically, as part of that, our cash position. So we have got the capacity to be able to make investments in PAC, investments in technology, investments in growth initiatives, still the financial investments that we made this quarter So I feel very good about our overall balance sheet. The big unlock has been we have taken capital out of our insurance entity in a responsible way. I have spoken about a year ago about opportunities to monetize the surplus capital, and I primarily through extraordinary dividends and ordinary dividends.

We have been consistently able to unlock that and redeploy that into growing the business. So. And we feel good about overall cash position, financial health, and the revolver is there for us to use in use it for a variety of purposes, working capital, for instance, but subsequent to the quarter, the $15 million that we paid towards the revolver to effectively zero it out. there is a million and a half letter of credit against the revolver. it is not technically considered debt, but it is a draw against that, which is why it is 18.5 in instead of 20.

But we feel that, you know, once we start the year, we will start the year in good cash position and we have options. there is no pressing need to draw down on that. We have the capacity to be able to invest in the business. Okay. Thank you.

Operator: And the next question comes from Joshua Shanker with Bank of America. Please go ahead.

Josh Shanker: I heard a rumor I might be able to sneak in, so I will ask you some more questions. Alright. So let's talk about the food business. When will there be food available for the first pets? Can you talk about how that launches and what sort of pull points you will go along the way that will tell you that it is growing at the pace and it is been a worthwhile investment.

Margaret Rosemary Maria Tooth: Yeah. So thanks for the question again, Josh. From a food point of view, Landspath, we, as I mentioned, in the opening remarks, we have been really pleased with the progress here. it is been something that is been moving along over the last few years, and this year, we have made significant progress. And we are at the point of testing. So that testing is important to us for obvious reasons to ensure that everything is working as expected both from a food point of view and logistically. All going well. We anticipate being on track to actually start putting this out to market. it is somewhere in the middle of next year.

Again, the reason we are testing is ensure that is an appropriate timeline. And then over the course of the next 18 months, so towards the end of our strategic plan, we will have very limited revenue. it is really about testing the process and making sure it works with workflow. It fits within our April member experience. We will be. Gradually, we will keep you updated with how that progress goes, but expect to see very limited contribution to revenue, and the purpose for us to make sure that we can fit it within the ecosystem. It adds value to the vets as much as it does to our members.

And we have a lot of gating factors in the way in terms of same store sales, very similar to the core Trupanion business. How does the vet use it within their systems? How do we help to add revenue And as a reminder with Landspath, it is really about reinforcing that moat. And being able to ensure that vet is able to get the benefit for the revenue of the food sales there. This is only sold through the vet perspective. So, lots still to come.

We are excited about it. it is being run as a sort of individual p and l, and it allows us to be able to have another avenue for us to invest in over time in addition to the new digital product which, again, we expect to come out over the next course of the next 6 to 9 months as well as the core business, which is obviously got some good momentum going.

Josh Shanker: You know, you have 1.2 million, 1.3 million. I mean, 1.2 million subscription pets out there. subscription pence out there. If you had a 1% take up that is 10 thousand to 12 thousand pets eating the food. Is that a success? Like, you know, like. And rather it does not have to happen tomorrow. What does a successful launch look like?

Margaret Rosemary Maria Tooth: A successful launch for us is essentially making sure the logistics work. So it is coming through the vet channel, being able to embed it into their workflow, having them introduce the concept of nutrition, and have that sort of delivered from end to end and have consistent subscription revenue coming through. Now, naturally, there is a member component to this, but the. Where we are where we start is with the vet, where we always start. So making sure that we have something that is meaningful for them and something they can articulate to their members and their clients in the process. So we will we will provide a lot more information. We will give updates.

We just announced that the New York venue will be doing our Investor Day this time on the East Coast. We hope that we can have you there and answer any questions on Landspath and other initiatives that we have got rolling out. Thank you.

Operator: Thank you. And the next question comes from Wilma Burdis with Raymond James. Please go ahead.

Wilma Burdis: Just wanted to ask a little bit about how you are thinking about pricing and pet cost inflation into 2027. Realized earlier you said that there is been more of a balance there between growth and the margin looks pretty strong, but at the same time, the inflationary environment is still pretty high. So maybe just give us a little bit of color on how you are thinking. Of that into 2027. Thanks.

Margaret Rosemary Maria Tooth: Yeah. Thanks, Wilma. We saw cost for the quarter come in pretty much in line with expectations, slightly higher in Q3, and we saw some benefit from the efficiencies the teams have delivered operationally that is helped to maintain the value proposition. You know, going forward, we expect to see what we have now considered consistently elevated cost of double-digit inflation coming through over the course of the next several quarters, and that is how the team has priced appropriately.

I think if you look over the course of 2026, so far, year to date, we have done an exceptional job of achieving that value proposition virtually on the money every single quarter. that is very hard to do with a book of 1.1 million members, and I think it is testament to the way the teams are continuously reiterating their pricing, going in at a granular level. We are watching it very closely. We understand there is significant pressure on animal health at the moment in terms of that revenue per hospital. We are looking to make sure that we are there to honor that value proposition to the members and be there for the vet.

So we are expecting to see continuous double-digit inflation in 2027. We have seen nothing to expect that to be easing. Our pricing assumes that. And what that means, however, is that because we are priced, we are now so accurate with our targeting, with our pricing, we anticipate that average member increase to continue to ease off in 2027 because we have caught up for the most part. So I think as long as it is consistent and steady, we will be watching in Q1, which is typically where we see those rates come through. We anticipate that being a potential tailwind to retention as that rate starts to stabilize even more.

Wilma Burdis: I mean, retention seems to be tracking favorably even though, you know, clearly, you have had quite a lot of rate increases coming through? Do you think that your customers sort of just they kind of get the punchline on the fact that the costs are going up and they are seeing value in the product? Or do you think it is squeezing any budgets? Or, you know, how are you kind of seeing that with your customer base?

Margaret Rosemary Maria Tooth: Yeah. I mean, we take the affordability element very seriously. it is something that we have been focused on with our members, and the honoring of our value proposition is really, I believe, what is upheld that. The lifetime per pet and contribution per pet are at record levels, but that is not because we are trying to go beyond the value proposition. I think people understand the value. They understand when they use the product that we are there. We pay the vet directly at the time of invoice, which I think is 1 of the biggest reasons we are seeing that step up in active hospitals because people are recognizing they cannot afford to be out of pocket.

And Trupanion takes that pain away. So that is why I think we are being there time and again. We are consistently articulating why we are having to move prices. We are a cost plus model. And we know that puts pressure on our members, and we are doing everything we can to help them understand why that is, and clearly, they are reacting well to that. We do not take that for granted, and we certainly do not take it lightly, and we will continue to refine our efforts there to ensure that we can uphold that retention improvement we have seen. Thank you.

Wilma Burdis: Just maybe 1 final 1. Can you just talk a little bit about the penetration in the pet insurance market? It seems like it maybe I am reading this wrong, but it seems like it might have actually accelerated a little bit recently. Maybe just talk about where we stand, what you see in the coming years. And the pattern of that.

Margaret Rosemary Maria Tooth: Yeah. Thank you, Wilma. I mean, We have seen over the course of the last 5 years an increase in penetration rate. And as always in this space, when you see the cost pressure from a pet parent perspective, there is more opportunity for insurance to come in and be a solution. I think the pet parents are looking for solutions, and the evidence for us is when you look at the conversion rate in our lead volume already starting to pick up as we have expanded coinsurance and deductible. As we look to introduce our new products next year where we are appealing to a different market segment, so very different to the core Trupanion product.

We believe there is ample room for growth, and there is a. there is never been a greater need for insurance in the space. So I think we expect We expect to see it expand over time. it is been growing gradually. Last was predominantly growing from a revenue perspective in ARPU, which we have talked about. I think pet count will start to come through in a stronger level. Certainly, we have seen that this quarter with 28% growth in net pets, which for the core Trupanion business is over double that. So, you know, we have got some really good momentum as a category.

The most important thing is driving that message at the higher level of the funnel, which I have talked about over the last few quarters now. We need people to know the solution exists before they go to the vet and have a condition to treat. And that is what we are really leaning into doing, making sure that our brand spend is not just for the specific product. it is category based. it is educational, and some of the investment in pet acquisition point of view are leaning into that, which I think is a real tailwind but not just for Trupanion, but the whole category. Okay. Thank you. Looking forward to the rest of your day. Thanks, Wilma.

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

Brandon Vazquez: Yeah. Thanks for taking the question. Margi, can you talk a little bit about I think the retention looks good. Ads continue to improve sequentially. Maybe just talk a little bit about the quality of leads. And in part, it is maybe a 2 part question that I will put together here that, like, there is a lot of talk about moving from normal, like, search engines into AI. You guys maybe have mentioned it a little bit in the script and we have talked about it in the past, but, like, how the quality of the leads coming in, and is there you guys kind of identified pathways yet to use AI LLMs in a.

As a way to supplement those leads and maybe even help close leads in the go-forward?

Margaret Rosemary Maria Tooth: Yeah. Thanks, Brandon. So lead volume has actually been very solid for us. Over the quarter, and we recognize that is against the backdrop of declining vet visits. From a wellness point of view. So we feel very good about that. I think Again, it just speaks to the fact that we have got more hospitals than ever before recommending insurance, recommending Trupanion more hospitals using our software. There seems to be more of an appreciation of what we can deliver, and the fact that the territory partners have been able to maintain that lead volume in the vet level has been incredibly encouraging. The big mover in the quarter was conversion improvements.

So even without expanding our lead volume and investing more heavily from a lead perspective, we have seen conversion improvements, which ultimately helping to drive some the efficiency you see from a pet acquisition perspective. And we will continue to do both. We have the means to invest in lead convert and keep, and we have means to invest in broader brand spend that we think is going to be a long-term solution to help drive category awareness. So by and large, we feel very good about that. I think in terms of supplementing lead volume through AI, Trupanion has historically not had to lean into some of the more traditional channels of growth such as Google search or social.

Now that is not to say they do not play a role for us. They do. They have historically been conversion channels. And that will shift over time as the market becomes more penetrated. AI has been really interesting for us because it really leans in the areas that Trupanion is different in a positive way. So if you think about an agentic search and an agent, they show up in a way that an agent would show up to a person in the sense they articulate the value of a proposition. They go through the details. They talk about pricing, transparency, service levels. All of these things are where Trupanion excels.

And all of these things are very hard to discern from a Google search, for example. So I think what we are seeing so far is a positive outcome for Trupanion. We rank very well from an agentic search perspective. The teams have been investing leaning into this space, and we will continue to test more as we go through the course of the next several quarters and years. I anticipate that we will see even more benefit from a conversion point of view because of the testing they have been doing. And I think, by and large, this is potentially a very new and encouraging channel for us.

And I think as we expand our product offerings to include a different type of product for a different type of audience, it sets us up really well for the future. Thanks.

Brandon Vazquez: And follow-up, maybe 1 for you. Can you talk to us a little bit? I know historically, you guys do not give a hard number for this, but as we are kind of shoring up our models for 2027, talk to us a little bit about the growth that we should be baking in between volume and mix, or maybe that is volume price maybe is not the right term, but, like, price and subscription growth. Thanks.

Fawwad Qureshi: Yeah. Obviously, from a 2027 perspective, we will provide guidance on the next call. I would just point to the results in the quarter. As I mentioned earlier, you are starting to see a little bit more balance between pricing and headcount, so the gross adds coming up nicely. Really starting to trend in Q1. So that is contributing at a little bit higher level. Price is contributing at a little lower level. it is still not quite back to the historical levels that were there, you know, some years ago where that count was significantly higher as a contributor to revenue.

So we are happy with the balance, and I think the gross adds coming up pricing still coming up, but at a lower level. The lowest since 2023, is a good trend for us, and we are gonna look to continue to invest as we invested this quarter in acquisition. Ultimately, we wanna get those gross adds and some retention continues to be resilient. And at the same time, where appropriate, take price. Okay.

Margaret Rosemary Maria Tooth: Well, thank you for joining us. Before we close, I just wanted to highlight our strong results including the highest quarterly AOI in the history of the company. With record levels of pet acquisition investment again, a highly efficient per pet economics. When lifetime value is at record highs and we have a strong financial position, we move forward today with confidence to invest in our business and the category at large as a leader. While continuing to deliver value to not only our members, but also our shareholders. Thank you for joining us today. We appreciate the time.

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

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