Trupanion Q3 2026 Earnings Call Transcript

Trupanion (NASDAQ:TRUP) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.

View the webcast at https://events.q4inc.com/attendee/665182753

Summary

Trupanion reported strong Q3 2026 results with adjusted operating income exceeding $47 million, marking an all-time high.

The company added over 20,500 net new pets, a 28% increase from the previous year, and improved retention for the seventh consecutive quarter.

Strategic initiatives included the introduction of coinsurance and deductible options, expansion of veterinary clinic partnerships, and advancements in their Landspath pet food initiative.

Total revenue for the quarter was $405.6 million, up 11% year over year, with subscription revenue contributing $287.9 million of this total.

Management highlighted the success of technology investments in enhancing the member experience and improving operational efficiency, with claims automation reaching over 65%.

Guidance for full-year 2026 includes total revenue between $1.59 billion and $1.597 billion, and adjusted operating income between $179 million and $182 million.

Trupanion repurchased approximately $25 million of shares during the quarter and reduced its total debt balance by $10.1 million year over year.

Full Transcript

OPERATOR

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 Jamie Dewis, Investor Relations. Please go ahead.

Jamie Dewis (Investor Relations)

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 Fawad 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, 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 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’d 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 Tooth (President and CEO)

Thank you, Jamie. Good afternoon, and thank you for joining Trupanion’s third quarter 2026 earnings conference call. I’m 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 our member experience, products and 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 Fawad 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 20,500 net new pets, an increase in excess of 28% 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’ve 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 U.S., 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 market-leading product are beginning to unlock access to more consumers while helping to deepen pet parent understanding of the lifetime coverage that we offer once a 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 five years. Behind the scenes, claims automation has climbed from under 15% in 2020 to over 65% 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 that drive operating leverage and enhance 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 routine 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, a 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 midpoint of our strategic plan next summer. Our coinsurance and deductible rollout has been instructive. It’s confirmed meaningful demand from pet parents who want Trupanion’s protection at a more accessible starting point, and that learning is directly shaping how we approach flexibility, 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’m pleased to report that we’ve 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’ll 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 underpenetrated 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 a 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 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 four dogs. Now he’s helping pet parents understand what great pet insurance looks like: no payout limits, coverage that keeps pace with modern veterinary medicine, and a veterinarian paid directly at checkout. When Simon speaks, people listen, and we’re proud to have him in our corner.

His latest collaboration builds on our partnerships with the Seattle Reign and a number of leading animal welfare organizations across North America. It is the continuation of the brand investment we’ve 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’re very pleased with our results. Our third quarter continued its trend of reaching higher highs. We enrolled over 20,500 net new pets, increased retention for the seventh consecutive quarter, and made great progress on our key strategic initiatives. And I’m 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 Fawad, I want to thank our entire team. The progress we’ve 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’ve 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 couldn’t be more proud.

With fewer than 5% of pets in North America insured, the opportunity ahead of us remains far larger than anything we’ve achieved so far. And with that, I’ll turn it over to Fawad to walk through our third quarter results in more detail.

Fawwad Qureshi (Chief Financial Officer)

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 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 1,145,000 pets as of September 30th. This includes approximately 66,000 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 in a value proposition of 69.7% versus 70.1% in the prior-year period. The quarter included adverse prior-period development of 0.6 million, 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’ll 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 77,500 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. In our 10th consecutive quarter of positive free cash flow, over the last four quarters free cash flow reached 86.7 million. Turning to the balance sheet, we ended the quarter with 396.8 million in 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 830,000 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’ll 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 U.S. 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’d like to reiterate the strength of our financial performance. The investments that we’ve been making are yielding results. They are driving improvements in efficiencies, lowering costs, and supporting growth. We’ll continue to execute with discipline, investing to move the business forward and to deliver for our members and shareholders. I’ll now pass it back to Margie.

Margaret Tooth (President and CEO)

Thank you, Fawad. As we enter the final stretch of the year, we’re encouraged that we’ve delivered nine 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’ve added nearly 50,000 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 approximately 90% of pet parents across North America.

At the same time, we’re 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’re carrying real momentum into the fourth quarter, and we’ll 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’d 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’ll 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 one on your touchtone 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. Our first question comes from Josh Schenker with Bank of America. Please go ahead.

Josh Schenker (Analyst at Bank of America)

Yeah, thank you for taking my question. So I’m going to ask a few questions sometime in the call, in short, so I hope you’ll indulge me a little bit. Number one, 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 love seeing beating on pets but also spending less PAC to do it. That’s very, very efficient. So how’s that working?

Margaret Tooth (President and CEO)

Yeah, hi Josh, thanks for the question. So, really pleased with the conversion. Really pleased with the pet count performance in the quarter. As you mentioned, it’s the highest we’ve achieved as a business and also spending the most we’ve ever been able to spend at a more efficient rate. So it’s a 4% efficiency year over year, which is fantastic from our perspective. Conversion is coming in a number of different ways. The first, and perhaps the most meaningful movement for conversion, was the introduction of our coinsurance and deductible expansions. We anticipated this would have a benefit to conversion, and it’s doing what we hoped it would do in the sense of it’s providing people greater understanding and 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 didn’t anticipate having quite as much traction as it has done to date has been the improvements the team has been busy working on over the last few quarters. We’ve talked about this previously with the investments in technology, the improvements in user experience really helping to lean into value proposition commentary, AI chatbots, and we’ve seen a lift across the board in terms of that journey. So this is sustainable.

What’s really exciting for us is this isn’t a one-off campaign. This is something that we’re building on. And what’s particularly encouraging is we haven’t even announced yet the changes on a public level in a campaign to promote the coinsurance and deductible expansion. So we are absolutely maximizing the lead generation we’ve 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 Schenker (Analyst at Bank of America)

And I didn’t see in the numbers, scanning through them. Is there a breakdown of gross new pets from the underwritten versus the MGA pets for the quarter?

Fawwad Qureshi (Chief Financial Officer)

No, that’s not there. The majority is coming from core, however, in the quarter.

Josh Schenker (Analyst at Bank of America)

Okay. And then one 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% rate increase? We talked about what the drivers are and if those trends should continue that we can model that improvement going forward.

Margaret Tooth (President and CEO)

Yeah, really pleased with retention. The team is. This is the seventh consecutive quarter we’ve seen an improvement in retention, and the core book of business is performing very, very strongly. If cohort by cohort, over and under 20% both had a lovely improvement in the quarter. First year we would expect to be a little bit less, because we’re adding pets at higher clips. So that’s a natural headwind to retention in first year. However, I would say what’s interesting to us is the introduction of the coinsurance and deductible appears, early signs, that we’re having some benefits and wins there with that in first-year retention.

And we’ve 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’ve got a lot to be proud of to be able to put as much rate as we’ve 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.

So we can see that come through in AOI.

Fawwad Qureshi (Chief Financial Officer)

Yeah, thanks for the question. Of course it’s 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 want to have as much financial flexibility as possible and the free cash flow, the AOI that gives us that investable pool of capital that we can deploy across the business. Margie pointed out that we invested the most in pet acquisition than we’ve 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 in addition to the 25 million of share repurchase. So we feel really good about the allocation. I mean, we’re a growth company. And so when you think about how much we’re investing internal both in pet acquisition as well as in our key initiatives, Landspath, as a for instance, and still being able to make financial investments. We feel pretty good about that mix going into next year.

OPERATOR

And the next question comes from Wilmer Brutus with Raymond James. Please go ahead.

Wilmer Brutus (Analyst at Raymond James)

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 (Chief Financial Officer)

Yeah, thanks. We’re very happy about the not just the revenue, but the sources of revenue. So we’ve talked about. Up until this point, pricing has been the bigger contributor to overall revenue growth. That was still the case this quarter. But as Margie pointed out, we also saw gross adds tick up nicely. The 13.8% gross add year over year increase, that’s the highest increase since 2023. Retention, as we noted, is up seven quarters in a row and 1 basis point sequentially, 5 basis points year over year.

And then pricing continues to contribute. The pricing increases, while still the larger contributor to revenue, were also the lowest pricing increase we’ve seen going back to 2023. So we’re seeing more of a balance in terms of what’s driving our revenue. And that’s where we ultimately want to be. In past times, gross adds was of course the biggest driver and today it’s starting to get closer to pricing. But we feel pretty good about all three of these elements contributing and that 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. And we’ve committed externally that we want to have mid teens AOI growth over the three years. And now through three quarters, we’re off to a good start.

Wilmer Brutus (Analyst at Raymond James)

Okay, thank you. And then I don’t 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 (Chief Financial Officer)

Yeah. One of the things we’re very happy about is just our overall financial health and specifically as part of that, our cash position. So we’ve got the capacity to be able to make investments in PAC, investments in technology, investments in growth initiatives, and 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’ve taken capital out of our insurance entity in a responsible way.

I’d spoken about a year ago about opportunities to monetize the surplus capital and think primarily through extraordinary dividends and ordinary dividends. We’ve been consistently able to unlock that and redeploy that into growing the business. So we feel good about overall cash position, financial health. The revolver is there for us to use. We can use it for a variety of purposes. Working capital, as an 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 dollar letter of credit against the revolver. It’s not technically considered debt, but it is a draw against that, which is why it’s 18.5 instead of 20. But we feel that, you know, once we start the year, we’ll start the year in a good cash position and, you know, we have options. So there’s no pressing need to draw down on that. We have the capacity to be able to invest in the business.

OPERATOR

Okay, thank you. And the next question comes from Josh Schenker with Bank of America. Please go ahead.

Josh Schenker (Analyst at Bank of America)

I heard a rumor I might be able to sneak in, so I’ll ask you some more questions. All right, 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, you know, pull points go along the way that will tell you that it’s growing at the pace and it’s been a worthwhile investment.

Margaret Tooth (President and CEO)

Yeah. So thanks for the question again, Josh. From a food point of view, Landspath, we, as I mentioned in the opening remarks, we’ve been really pleased with the progress here. It’s been something that’s been moving along over the last few years, and this year we’ve 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 somewhere in the middle of next year. Again, the reason we’re testing is to ensure that that’s 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, very limited revenue. It’s really about testing the process in the hospital, making sure it works with workflow. It fits within our overall member experience. So we will be gradually. We’ll keep you updated with how that progress goes, but expect to see very limited contribution to revenue. And the purpose for us is 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? As a reminder, with Landspath, it’s really about reinforcing that moat and being able to ensure that that vet is able to get the benefit for the revenue of the food sales there. So it’s only sold through the vet perspective.

So lots still to come. We’re 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 course of the next six to nine months as well as the core business which has obviously got some good momentum going.

Josh Schenker (Analyst at Bank of America)

You know, you have 1.2, 1.3, I mean 1.1 to 1.2 subscription pets out there. If you had a 1% take up, that’s, you know, 10,000, 12,000 pets eating the food. Is that a success and it doesn’t have to happen tomorrow. But what does a successful launch look like?

Margaret Tooth (President and CEO)

A successful launch for us is essentially making sure the logistics work. So it’s coming through the vet channel. Being able to bed it into their workflow, having them introduce the concept of nutrition and have that sort of deliver from end to end and have consistent subscription revenue coming through. Now naturally there is a member component to this, but where we start is with the vet, where we always start. So making sure that we have something that’s meaningful for them and something they can articulate to their members and their clients in the process. So we’ll provide a lot more information, we’ll 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’ve got rolling out.

Josh Schenker (Analyst at Bank of America)

Thank you.

Margaret Tooth (President and CEO)

Thank you.

OPERATOR

And the next question comes from Wilmer Brutus with Raymond James. Please go ahead.

Wilmer Brutus (Analyst at Raymond James)

Hey. Hey, good evening. Just wanted to ask a little bit about how you’re thinking about pricing and cost inflation into 2027. Realized earlier you said that there’s been more of a balance there between growth and, you know, the margin looks pretty strong but at the same time the inflationary environment still pretty high. So maybe just give us a little bit of color on how you’re thinking of that into 27. Thanks.

Margaret Tooth (President and CEO)

Yeah, thanks Wilmer. We saw costs 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’s helped to maintain a value proposition. Going forward we expect to see what we have now considered consistently elevated costs of double-digit inflation coming through over the course of the next several quarters, and that’s how the team is priced appropriately.

I think if you look over the course of 2026 so far, year to date, we’ve done an exceptional job of achieving that value proposition virtually on the money every single quarter. That’s very hard to do with a book of 1.1 million members. And I think it’s 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. So we’re looking to make sure that we’re there to honor that value proposition to the members and be there for the vet. So we are expecting to see continued double-digit inflation in 2027. We’ve seen nothing to expect that to be easing. Our pricing assumes that. And what that means, however, is that because we’ve priced and 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’ve caught up for the most part.

So I think as long as it’s consistent and steady, we’ll be watching in Q1, which is typically those rates come through. We anticipate there being a potential tailwind to retention as that rate starts to stabilize even more.

Wilmer Brutus (Analyst at Raymond James)

I mean, retention seems to be tracking favorably even though, you know, clearly you’ve 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’re seeing value in the product? Or do you think it’s, you know, squeezing any budgets or, you know, how are you kind of seeing that with your, with your customer base? Thanks.

Margaret Tooth (President and CEO)

Yeah. I mean, we take the affordability element very seriously. It’s something that we’ve been focused on with our members. And the honoring of our value proposition is really, I believe, what’s upheld, that the lifetime per pet and contribution per pet are at record levels. But that’s not because we are trying to go beyond the value proposition. I think people understand the value. They understand when they use a product that we’re there. We pay the vet directly at the time of invoice, which I think is one of the biggest reasons we’re 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’s why I think we’re being there time and again. We are consistently articulating why we are having to move prices. We’re a cost plus model and we know that puts pressure on our members and we’re doing everything we can to help them understand why that is.

And clearly they’re reacting well to that. We don’t take that for granted and we certainly don’t take it lightly. And we will continue to refine our efforts there to ensure that we can, we can uphold that retention improvement we’ve seen.

Uma (Analyst)

Thank you. Just maybe one final one. Can you just talk a little bit about the penetration in the pet insurance market? It seems like it, maybe I’m 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 time.

Margaret Tooth (President and CEO)

Yeah. Thank you, Uma. We’ve definitely seen over the course of the last five years an increase in penetration rate. And as always in this space, when you see that 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’ve 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 Trupanion product, we believe there is ample room for growth and there’s never been a greater need for insurance in the space.

So I think we’ll set to see it expand over time. It’s been growing gradually. Last year was predominantly growing from a revenue perspective in ARPU, which we’ve talked about. I think pet count will start to come through in a stronger level. Certainly we’ve seen that this quarter with 28% growth in net pets, which for the quarter planning business is over double that. So we’ve 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’ve talked about over the last few quarters. Now we need people to understand the solution exists before they go to the vet and have a condition to treat. And that’s what we’re really leaning into doing, making sure that our brand spend is not just for the specific product, it’s category based, it’s educational. And some of the investments we’re making from a pet acquisition point of view are leaning into that which I think is a real tailwind for not just for Trupanion but the whole category.

Uma (Analyst)

Okay, thank you. Looking forward to the investor day. Thanks Wilma.

OPERATOR

And the next question comes from Brandon Vasquez with William Blair. Please go ahead.

Brandon Vasquez (Analyst at William Blair)

Yeah, thanks for taking the question. Margie. Can you talk a little bit about, I think retention looks good. Ads continue to improve sequentially. Maybe just talk a little bit about the quality of leads and in part it’s maybe a two part question that I’ll put together here that like there’s a lot of talk about moving from normal like search engines into AI. I know you guys maybe have mentioned it a little bit in the script and we’ve talked about it in the past but like how the quality of the leads coming in and is there.

Have you guys kind of identified pathways yet to use AI LLMs as a way to supplement those leads and maybe even help close leads in the go forward?

Margaret Tooth (President and CEO)

Yeah, thanks Brandon. So we’ve seen lead volume has actually been very solid for us over the quarter and we recognize that’s against the backdrop of declining vet visits from a wellness point of view. So we feel, we feel very good about that. I think again it speaks to the fact that we’ve got more hospitals than ever before recommending insurance and 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 from 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’ve seen conversion improvements which has ultimately helped, helping to drive some of that 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’s not to say they don’t play a role for us. They absolutely do. They’ve 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 into the areas that Trupanion is different in a positive way.

So if you think about agentic search and agents, they, they show up in the 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’re 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 will continue to test more as we go through the course of the next several quarters and years. I anticipate that we’ll see even more benefit from a conversion point of view because of the testing they’ve 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 offering to include a different type of product for a different type of audience, it sets us up really well for the future.

Brandon Vasquez (Analyst at William Blair)

Thanks. And Fawwad, maybe one for you. Can you talk to us a little bit? I know historically you guys don’t give a hard number for this, but as we’re kind of shoring up our models for 2027, maybe talk to us a little bit about the, the growth that we should be baking in between volume and mix. Or maybe that’s volume and price maybe isn’t the right term, but like price and, and subscription growth. Thanks.

Fawwad Qureshi (Chief Financial Officer)

Yeah, Obviously from a 2027 perspective, we’ll provide the guidance on the next call. You know, I would just point to the results in the quarter. As I mentioned earlier, you’re starting to see a little bit more balance between pricing and headcount. So the gross ads coming up nicely, really starting to trend in Q1. So that’s contributing at a little bit higher level. Pricing is contributing at a little lower level. It’s still not quite back to the historical levels that were there, you know, some years ago where Fed count was significantly higher as a contributor to revenue.

So we’re happy with the balance and I think the gross ads coming up, pricing still coming up, but at a lower level, the lowest since 2023 is a good trend for us and we’re going to look to continue to invest as we invested this quarter in pet acquisition. Ultimately we want to get those gross adds and net retention, continue to be resilient and at the same time, where appropriate, take price.

Margaret Tooth (President and CEO)

Okay, 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.

So 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.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.