Good day, ladies and gentlemen, and welcome to the Trupanion, Inc. third quarter 2022 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question- and- answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star and zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Laura Bainbridge, Investor Relations. Please go ahead. Good afternoon and welcome to Trupanion's third quarter 2022 financial results conference call. Participating on today's call are Margi Tooth, President, Drew Wolff, Chief Financial Officer, and joining us remotely from Europe, Darryl Rawlings, Chief Executive Officer. Similar to prior earnings calls, Tricia Plouf, Chief Operating Officer, will be available for the Q&A portion of today's call. Before we begin, I would like to remind everyone that during today's conference call, we will make certain forward-looking statements regarding the future operations, opportunities, and financial performance of Trupanion within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed. A detailed discussion of these and other risks and uncertainties are included in our earnings release, which can be found on our investor relations website, as well as the company's most recent reports on Form 10-K and Form 8-K filed with the Securities and Exchange Commission. Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation, variable expenses, fixed expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA, and free cash flow. When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating income or margin before new pet acquisition and development expenses. Unless otherwise noted, margins and expenses will be presented on a non-GAAP basis, which excludes stock-based compensation expense and depreciation expense. These non-GAAP measures are in addition to, and not a substitute for, measures of financial performance prepared in accordance with the U.S. GAAP. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or on Trupanion's investor relations website under the quarterly earnings tab. Lastly, I would like to remind everyone that today's call is also available via webcast on Trupanion's investor relations website. A replay will also be available on the site. With that, I will hand the call over to Darryl. Thanks, Laura, and good afternoon. Total revenue in the quarter grew 29% to approximately $234 million. Adjusted operating income was $22 million, up 6% year-over-year. We invested $20 million of this acquiring pets at a 37% estimated internal rate of return. We continue to invest in areas where we believe we can achieve high internal rates of return. In today's environment, I'm especially pleased with the discipline the team has shown in managing to our internal rate of return guardrails. In the quarter, this translated to strong growth within our core subscription business. We added over 70,000 new subscription pets, driven primarily from the veterinary channel. We achieved this record growth while also sustaining our high levels of retention. As you've heard me say before, in times of uncertainty, the need for Trupanion grows. Our monthly recurring business model drives consistency in results. In fact, our total revenue growth has exceeded 20% every year for the last 10+ years. I'm proud of this growth, but I am most focused on growing adjusted operating income. Adjusted operating income represents the funds we have to grow our business, and I believe it is a proxy for our value creation. The more adjusted operating income we have, the more we're able to reinvest at our high internal rates of return and increase the intrinsic value of our company. In Q3, subscription adjusted operating margin was 12.8% below my expectations and driven by price. This is the one key metric I was disappointed in for the quarter. If the team is focused and continues taking action on price, not only for the accelerated rate of inflation we're seeing today, but also for that which we expect will come, I am confident that we'll get back to our target adjusted operating margin of 15% by the end of 2023. Margi, as the leader of our 60-month plan, is monitoring these efforts, making sure we have clear ownership, focus and resources to quickly and effectively get ahead of the changes we are seeing in veterinary medicine. Now let's get back to the fundamentals. We are in a large under-penetrated market. Today, 97% of pet owners do not have pet medical insurance and are therefore choosing to self-insure. With the rising cost of care and the growing human pet bond, the need for Trupanion is greater than ever. In our monthly subscription business, growth in pet count and ARPU drives higher lifetime value. Higher lifetime value drives higher allowable pet acquisition costs and greater sums of capital we can deploy efficiently. The team has a strong track record of doing so. In the last five years, we've grown our adjusted operating income over 300% and deployed this capital consistently within our target internal rate of return of 30%-40%. With that, I'll turn it over to Margi. Thank you, Darryl. I'll start by reviewing our quarterly growth metrics and how today's environment presents a unique opportunity for Trupanion. I'll then discuss the actions we're taking to ensure we're well-positioned for where the industry is headed. It was a particularly strong growth quarter. We added over 70,000 new pets in our subscription business, a new quarterly record. Growth was primarily driven by the veterinary channel, reflecting ongoing demand for veterinary care. In the quarter, veterinary leads were at an all-time high. Our pet acquisition spend continues to reflect all efforts to generate leads, convert pet owners to members, and welcome members during their first year with us. I'll echo Darryl's sentiment that we were very encouraged by the efficiency of all elements of the spend during the quarter. This effective capital deployment ultimately helped drive our estimated internal rate of return to well within our 30%-40% target range. Year-to-date, we have deployed approximately $60 million to add over 190,000 new subscription pets. At our current ARPU of around $64 and assuming an average life of 78 months, this new cohort of pets will generate almost $1 billion in forward revenue, and this is before inflation. Encouragingly, we continue to see the veterinary industry adjust their pricing models. They absolutely cannot afford not to, and yet, at the same time, people's disposable income is stagnating. The cost to self-insure is getting more expensive. It is an increasingly poor solution. As more enrolled pets enter the community, this higher percentage of insured clients can give veterinarians the confidence to continue to raise prices. This, in turn, helps solve the challenges they face, such as staffing. This is positive news for the industry in general, and for us specifically, to see these prices come through. It makes the conversation around budgeting for unexpected veterinary expenses more relevant than ever. However, it also requires meticulous execution, exceptional analysis, and constant review from within Trupanion to stay true to our value proposition and the pricing promise we commit to our members. In the third quarter, we fell short of our 71% value proposition by 2.5%. Absent the impact of mix changes, cost of invoices was up approximately 10% over the prior year period, outpacing our average rate increase of 7% for the same period. As Darryl alluded, we are taking actions to get ahead of the changes we're seeing in veterinary medicine. Absent the impact of changes in mix, we now have pricing increases of 11% flowing through into early 2023, with another 7% planned going into next year. We will continue to closely monitor the rate of inflation and are poised to roll forward additional pricing adjustments as needed in the coming months. As a reminder, rate changes are immediate for new enrollments but are applied for existing pets once every 12 months, so the impact of these changes will flow through in 2023, with the full benefit showing up in late 2023 when we anticipate being back on track to hit our margin target. At the same time, our member experience teams have been focused on ensuring that our commitment to members regarding our value proposition is well understood and maintained. Our pricing promise is our pledge to pet owners that we price for the life of the pet, never punish unlucky pets, and price accurately to our value proposition across our millions of categories. If in aggregate, we overshoot our 15% subscription margin target, we will make it right. This is our pricing promise. In the coming years, the need for Trupanion and to budget and care for the unexpected will only grow. This need is universal, and so too are our aspirations. International expansion is an important building block of our 60-month plan, and I'm very proud of the progress the team has made on this front year-to-date. We've started to see some acceleration in Australia, have team members in place in Japan, and just recently announced two strategic acquisitions to officially mark our entrance into continental Europe to take our new geographies to the cusp of revenue generation. There are over 40,000 veterinary hospitals spanning continental Europe, and our acquisition of Smart Paws and our pending acquisition of PetExpert gives us immediate access to over 12,000 of these, increasing our addressable market. PetExpert provides high-value pet insurance to approximately 25,000 pet owners in the Czech Republic and Slovakia and works closely with veterinarians to provide high-quality partner support to hospitals. This same synergy is also evident in Smart Paws, our recently completed acquisition. While smaller in scale than PetExpert, Smart Paws brings with it a team and infrastructure to further enable rapid expansion and parallel to our North American foundation, deep relationships across the European veterinary community. We're excited that these acquisitions and their pet passionate teams provide a platform for us to bring Trupanion and our world-leading member experience to these new and under-penetrated markets. Together, we have taken several steps forward in achieving our global mission to help the pets we all love receive the best veterinary care. The opportunity is significant, and we're well-poised to build on it. With that, I'll hand over to Drew to walk through our financial results in more detail. Drew? Thanks, Margi, and good afternoon, everyone. Today, I'll share additional details around our Q3 performance, as well as provide an update on how we're tracking against our annual goals. Total revenue for the quarter was $233.8 million, up 29% year-over-year, and continued to be driven by strong pet additions and sustained high levels of retention in our subscription business, along with growth in our other business. Within our subscription business segment, revenue was $152.4 million, up 20% over last year. As with the last quarter, the ongoing strength of the U.S. dollar had meaningful impact on our results. On a constant currency basis, subscription revenue would have been $153.7 million or up 21% year-over-year. Total enrolled subscription pets increased 19% year-over-year to over 808,000 pets. Average monthly retention, which is calculated on a trailing 12-month basis, was 98.71%, equating to an average life of 78 months. Monthly average revenue per pet was $63.80, up 1.1% year-over-year on a constant currency basis. ARPU growth continues to be impacted by mix of business. For context, we continue to see accelerated growth in new pet enrollments in lower income areas that, combined with business and product mix, mask the price increases rolling through our book of business. After adjusting for this mix impact, the average pricing change across our book goes from 1.1% to the 7% that Margi referenced earlier. This is behind the cost of veterinary invoices, which increased approximately 10% over the same time period. As a result, our loss ratio in the quarter expanded 70 basis points from the prior quarter to 73.5%. As a percentage of subscription revenue, variable expenses were 9.7%, down from 9.9% in the prior year period. Fixed expenses at 4% of revenue were also down from 4.3% sequentially and 4.8% year- over- year, reflecting additional cost actions in the quarter to drive operating leverage and partially offset the increase in our loss ratio. After the cost of paying veterinary invoices, variable expenses, and fixed expenses, we calculate our adjusted operating income. In dollars, our subscription business delivered adjusted operating income of $19.5 million, an increase of 5% over the prior year period. On a constant currency basis, subscription adjusted operating income would have been $19.7 million, up 6% year-over-year. As a percent of subscription revenue, our adjusted operating margin was 12.8%. Now I'll turn briefly to our other business segment, which is comprised of revenue from other products and services that generally have a B2B component and a different margin profile than our subscription business. Total revenue for the other business segment was $81.4 million. Compared to the prior year quarter, this is an increase of 49% year-over-year, reflecting an increase in the number of pets enrolled. Adjusted operating income for the segment was approximately $2.5 million. As a result, our total adjusted operating income was $22 million. During the quarter, we invested 15% more year-over-year or $20.1 million to acquire over 70,000 new subscription pets. This resulted in a pet acquisition cost of $268, an estimated 37% internal rate of return for a single average pet. We also invested $2.4 million or 1% of revenue in the quarter on development expense. This reflects a ramp-up of our international activity as well as ongoing support for new distribution channels, which we expect will run through year-end. This resulted in an adjusted EBITDA loss of $900,000 compared to an adjusted EBITDA gain of $2.2 million in the prior year quarter. Total stock-based compensation expense was $8.3 million, in line with our expectations. Net loss for the quarter was $12.9 million or a loss of $0.32 per basic and diluted share, compared to a net loss of $6.8 million or a loss of $0.17 per basic and diluted share in the prior year period. Turning to our balance sheet, we ended the quarter with approximately $238 million in cash and investments. We held approximately $54 million in debt with $90 million available under our long-term credit facility. As Margie mentioned, we recently completed one acquisition and announced another, both in continental Europe. In the fourth quarter, we will add about 25,000 new pet policies to our subscription business as a result of these acquisitions. We do not expect any material impact to our financials in the fourth quarter. In terms of cash flow, operating cash flow was -$2.3 million in the quarter compared to $6.2 million in the prior year period. Capital expenditures totaled $4.1 million in the quarter, and as a result, free cash flow was -$6.4 million. I'll now briefly discuss how we're tracking for the remainder of the year. We continue to expect consistent growth in revenue and are reintroducing an estimate range for the year to provide more clarity on our business given the current macro conditions. For 2022, we expect total revenue in the range of $900 million-$902 million. At the midpoint, this will result in a growth rate of 29% over the prior year. Subscription revenue is expected to be in the range of $595 million-$596 million. At the midpoint, this would result in a growth rate of 20% over the prior year. Total adjusted operating income or the dollars we have to invest in growth is expected to be in the range of $87 million-$89 million. At the midpoint, this is up 12% over last year. Please keep in mind that our projections are subject to foreign exchange rate fluctuations. For our full year guidance, we used a 73% Canadian to U.S. conversion rate in our projections, which was the approximate rate at the end of September. Looking into 2023, we have line of sight to our target 15% adjusted operating margin by year-end, primarily reflecting our pricing actions. We expect to provide formal 2023 guidance on our year-end call in February. Thank you for your time. With that, we'll open it up for questions. Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw, please press the one and the three. Our first question will be from the line of Shweta Khajuria with Evercore ISI. You may go ahead. Okay. Thank you for taking my questions. How should we think about ARPU growth, going forward? You gave great context in terms of pricing changes, but I'm not sure if I fully understood, how it impacts the overall business. Could you please help us with that? The second question is on your acquisitions, the most recent one you announced today is expected to close in the fourth quarter. How should we think about your goals for synergies coming into 2023 and then expansion going forward? Thank you. Hi, Shweta. This is Tricia. I'll kick it off with the first question, and then I think Margi will touch on the second question. When it comes to ARPU growth, as I'm sure you noticed in the script, so I'm talking at a macro level about absent changes in mix, what we have that is flowing through into next year, 11% with an additional seven plans to be filed, either already filed or to be filed in the next 30 days so that we're positioned well, if current inflationary rates continue into next year. Now obviously, when it comes to how this then translates over the course of the year as well as on the financial statements, it does take time to roll on. We won't see kind of the full impact coming until the back half of the year. You know, we'll definitely start, absent you know, dramatic changes in the types of enrollments we get now. We do expect on the financials, even when you account for the mix shift that, you know, we're kind of at a lower rate right now, and that will start to move up, and it'll move up over the course of the year. Drew, do you have anything to add about, you know, more on how to expect this to roll through on the financials? Yeah. Given all this mix impact and assuming, you know, constant currency, which is really important because there's significant FX headwinds that we're going into the year with, we're looking at an average for the full year 2023 at a 5% for ARPU. As Tricia mentioned, that builds throughout the year and is back half loaded. But that gets us back to an average, you know, price increase that we saw in 2019 and 2020 and half of 2021, so. Oh. I'm sorry. It's 5% for 2023. Drew, thanks. Thanks, Trish and Drew. Just a quick follow-up on that, before you address the next question. How should we think about the exit rate of ARPU growth for 2023? Is it fair to say, well, you tell us. Yeah. I mean, I would say, obviously, we're still mapping out next year, and we'll give a lot more visibility on the February call. With, you know, projecting out current rates of inflation and the rates we have flowing through to average 5% for the full year, it's above 5% in the back half of the year. And we can give you more visibility, you know, as we go in, into next year. That's how to think about it. We'll be exiting at a higher rate than that. Okay. Thanks, Trish. Hi, Shweta. I'll pick up the second one. It's Margi. Just in terms of the acquisition that you mentioned. Today, we announced the acquisition of PetExpert, so this will close, as you said, in Q4. In terms of synergies, PetExpert really is a key part of our 60-month plan. It's gonna increase our addressable market in general. They're very vet-centric, very much like Trupanion. Their foundation is through partnerships with the veterinary community, making sure they can solve the issues of being out-of-pocket and reimbursement. They have the ability to kind of continue what we've been doing in North America for quicker, faster payment. For us, it's really about how do we get to those markets with people that are aligned to our core, which is vet, and being able to work with people who are like-minded with products that will be very similar to Trupanion and really kind of help us build that market in time. It is very under-penetrated in Continental Europe, so they're definitely gonna help us get our foot in the door very quickly in 2023. Okay. Thank you, Margi. Okay. Our next question is from Corey Grady with Jefferies. Please go ahead. Hey, thanks for taking my question. I wanna ask first about retention. You break out retention in three buckets in your shareholder letters, but can you talk about maybe other factors that impact retention and, you know, if there were any other factors besides price behind the step back this quarter? Thanks. Yeah, I'll kind of take it at a high level. In terms of our retention, it's strong. It's near an all-time high. You know, I think we have a good pathway towards our 60-month plan, which is our 9%-10% achievement. You're right. We do break it out into three buckets. Typically, the impact to that, aside from pets passing away, we also have the financial implications very occasionally. Typically, it comes down to understanding the value proposition. You know, we don't lose many pets. You know, we look at our overall retention rate. We're not talking about a high volume here. The issues are always very, very minor. That's why we're kind of at that point now with the team executing. They're looking at those tiny incremental things they can do to adjust the way that people think about their product. You know, I think in terms of other issues, we're not seeing anything different. I think the main thing for us is making sure that we explain why Trupanion, we explain the value proposition, and we help them understand the cost-plus model that we have. You know, I would say that the way that we've been managing it for the last several quarters has been very strong, and we've seen continuous improvement through that. You know, the biggest thing that if there is any headwind for us is typically when you see that faster rate of growth. To reiterate what you heard earlier, with 70,000 new adds in the quarter, we do often see, you know, how do we make sure we're focusing on that fast growth and offsetting that first-year retention. 'Cause that's the weakest point of the journey, if there is a weak point, and that comes back to the point of the value proposition and reiterating that to people. There isn't anything further that I would add. Darryl, would you add anything? No. You pointed out, you know, we've been coming off quarters of about 60,000 new pets, and we just added 70,000, a new record, and that is 10,000 incremental pets have an impact on retention. Retention overall is strong. Got it. Thanks. I also wanted to ask about the pet acquisition costs. You demonstrated some flexibility on PAC this quarter, and you still put up very strong gross adds. Can you talk about where the flexibility on acquisition spend is coming from? How should we think about gross adds going forward, you know, with PAC down in the quarter? Yeah, sure. I can start this off and then hand over to Drew for the second part of the question. In terms of overall PAC efficiency, you know, as we went through the quarter, I'm very impressed and proud of the team for the way they were able to flex their muscles and pull on the levers that we built over the years. Going through the quarter, they understood that our margin was down, so we adjusted our PAC spend to suit that, and in doing so, we added 10,000 more pets for the same amount of money from Q2. Really efficient spend. In terms of the flexibility, you know, we're always looking at making sure that we're refined in what we can do, and I think they've proven time and again that quarter-over-quarter, we can live within those guardrails that we've set ourselves, which is a high bar, and it's good execution that led us to those results in Q3. Drew, would you add? Well, just on the question about forward PAC, I would emphasize that it's an output of our lifetime value and so we flex in order to. You know, we solve for what we can afford to spend in order to drive growth. It, it's an output, and it's. We're not subject to the whims of the market. I would also emphasize that it includes everything. It's fully loaded. It has a lot. There's all the marketing and sales and marketing people, IT people are in that. It's not as we typically think of a marginal advertising PAC, which is important. I will just add one other thing to that. When we think about our PAC moving forward, through the rest of the year, so into this quarter, we do have our Territory Partner Conference coming up. To Drew's point, when we think about all the people that we include within our PAC costs, the Territory Partner Conference is our sales conference, so it's an important factor of our calendar. We haven't been able to have it for three years, for obvious reasons. Bringing our TPs together for the first time in three years as a sales group will be a really important long-term move for us. It's not gonna have immediate gain in November or December, but what we do see is there is benefit for the subsequent 12 months after the conference. While we're excited to have them in Seattle, it does hit our PAC in one quarter. You know, to Drew's point, that kind of all gets fully loaded in there. Very helpful. Thank you. Our next question is from the line of John Barnidge with Piper Sandler. Please go ahead. Thank you very much for the opportunity. My question is on the acquisitions in Europe. Can you maybe talk about how Smart Paws and PetExpert will look different versus what is already in the market? How do you think it'll look different than the U.S. and Canadian Chewy companion current offering? Yeah, sure. Smart Paws and PetExpert, just to touch on what I mentioned earlier, they're both key acquisitions to help us in our 60-month plan. We talk about increasing our addressable market, and both of those will allow us to do that across continental Europe. In terms of the offering, it's still early stages. As we mentioned, the PetExpert deal should close this quarter. The key for us is making sure we have brand consistency and as close as possible product consistency across the world globally. We recognize there will likely be localizations to those products depending on what the markets dictate to a certain degree. We feel very confident that our product is a global leader. Our retention rates are global leaders. In doing so, having that centricity means there are certain parts of our product that are hard to replicate, but they really do what they say. They solve the same problem no matter which country you're in, and so we'll maintain that as close as possible we can. At this stage, in terms of the specific differences between the North American product, which is the same in Canada and the U.S., we wouldn't be able to kind of share specifics as to what that looks like, but you can expect them to be very similar. Thank you for the answer. My follow-up: As I look at ARPU, how should we be thinking about the size on the per dollar amount, FX as headwinds, and then how should we be thinking about that for, within that vein of the 5% growth? Well, we're currently using a conversion rate of 73%. If you even just, you know, look at what it was last year, it'll. Looking out, that could be 2%-3% headwinds next year. Obviously, it all depends, you know, and things move, but that's currently the rate we're using and the assumption we're using. That would be on- Thanks, Drew. The 5% is a constant currency basis, and then reported might be different than that based on FX. Thank you very much. Our next question is from the line of Josh Shanker with Bank of America. Please go ahead. Yeah. Thank you very much for taking my question. So I just wanna understand the 11% and 7%. 11% is the rate that's in the pricing of enrolled pets as of September 30, and 7% is rate approvals that have yet to impact the pricing? Yeah. Good question. Let me map it out, because I know it can be a little difficult. We had going through the third quarter 7% rate. During the third quarter and into October, we did additional filings, which now bring what we were rolling through, which was, you know, kind of 7% up to the 11% that I mentioned. That 11% is fully approved. We're not waiting for anything. The effective dates are set. Now a portion of. That's kind of the run rate that we should expect. Some of the approvals have just been within recent weeks, so those will start ramping up, and that's kind of our run rate going into Q4 and then Q1 of next year. The 11% is known and ready to notify customers and start moving through the book. We desire to and have plans to do an additional 7%. 3% of that 7% we've already filed. We're waiting on approval. 2% of that we believe is imminent. And then the remaining 4% that we plan to have, as we wanna be aggressive in this going into next year, we'll be filing over the next 30 days. 11% is fully baked, known. And then of the 7%, we filed for 3% of it and expect that to be approved very quickly. The remaining 4% will be filed in the next 30 days, all to really go into next year more aggressive, as we look to keeping up, continuing to keep up and bridge that gap on inflation. Does that help? How much price is embedded in the $152 million of subscription revenue that you wrote in the quarter? How much price? Well, that included roughly 7% rate increases. After changes in mix and FX, it was, you know, right around 1% increase. Okay. Seven percent price, but ARPU is 1%. That's fine. Then, my other question, on the 56,000 pets, I think you said that they're going to become subscription pets because of the acquisition, and I might have gotten that number wrong. Is the character of that book similar to the subscription business in general? That when we call them subscription pets, they should be expected to have the same kind of return profile as the current Trupanion subscription book? Yeah, this is Darryl. That is correct. The business in Europe is gonna have different ARPUs in different countries, obviously, different, reflecting the different costs of veterinary care. All of them will over time be targeting the 15% adjusted operating margin. They should all be targeting the same as well as the same internal rate of return guardrail. That will take a little bit of time over the next year or two for that to show up in our GAAP financials in the same way. That is because right now these companies are operating as MGAs, so they're only gonna see a percentage of the revenue hit our P&L until it becomes our own underwriter. Okay. Thank you very much. Just for one correction, I think you said 56,000. It's actually 25,000. I'm sorry. That's what will join our book. Yep. I was writing too fast. No problem. Thank you very much. Our next question is from Elliot Wilbur with Raymond James. Please go ahead. Thanks. Good afternoon. Just two quick clarification questions. First for Tricia, thinking about the 11% and the 7%. Simplistically, would I just add those or multiply those together to get sort of a compounded inflation rate, say, exiting 2023? I mean, in general, we're essentially how this is going to roll through the book in terms of ARPU is when something is approved, so we know the 11% is approved, it's those increases hit members on their annual anniversary date. 1/12 roughly rolls through the book at any given time. You know, with the 11%, and then as the 7% comes on board, it will start to build, and it really does build sequentially, as we look through. We're, you know, looking at The vet trends in general, anticipating double-digit inflation to continue. We're making sure, you know, we're being aggressive in anticipation of that and pricing through it, and then the pricing will roll through the book. Now obviously, how things actually play out on the claims, the cost remains to be seen. We wanna be very proactive in anticipation that current trends will continue and have been pushing these rates in anticipation of that. To your question, it'll build. On kind of a, what is our book getting on average when it's all rolling through? That is the 11%+ the 7%. That's the 18 by the end of next year that absent any changes in mix, pets on our current book would be getting next year, on average. Obviously, as you can see in our current financials, when new pet mix comes in, which is enrolling currently at a slightly lower amount, that brings the average down as well as any changes in FX as well. You can kind of use that same relativity that we talked about to map out how that looks when it hits the financials. I don't know if anyone else has anything to add to that. Okay. That was helpful. I wanna ask a follow-up question with respect to the acquisition, Smart Paws and PetExpert as well. It wasn't clear to me exactly when those would start appearing in your financial statements, and is that different from when you would add them to new pet adds and PAC figures? And then with respect to these businesses, can you just give us a sense of where they stand with respect to your current financial guardrails and IRR targets and, you know, basically how long you generally expect it to be before these businesses can, you know, hit those rates? Yes. I, as Darryl said, these are MGAs, so they're not the full stack. So you don't have, you know, the full gross written premium hit in revenue. You just have the commission. Smart Paws is small. PetExpert is bigger. Smart Paws is closed, PetExpert will close this quarter. They will, you know, be in our books starting this year. We'll only have one month of revenue, so it won't be material that way. They're going into subscription because we're targeting similar, you know, similar margins to our existing Trupanion business. Going into next year when we give an update on 2023 in January, we're looking to grow these businesses. You know, relative to Trupanion, they're not big, but we're looking to grow. They'll be in our guidance when we talk in February. I can add to that too. Just in terms of the synergies, as we touched on earlier with these two companies, we've chosen to partner with them and bring them into our Trupanion family because of their ability to grow in the way they think about their business. They think lean, they think low-cost operator. You know, they have the same drivers and tenets that we value very much as a business. In terms of how quickly we can get to those financial guardrails, they're set up really well. Initially, you know, we're working with two teams who understand how to run a business as we do. We're looking forward to seeing that impact in 2023. Okay. If I can ask one additional follow-up question for yourself, Margi. Can you just maybe provide a little bit more granularity in terms of what drove the strength in new pet adds in the period? I guess, with the contraction in vet clinic visits, you know, there's been some expectation, of course, that it would be more difficult to add new pets, and you guys seem to be proving that theory wrong. Is it just function of better leads, better conversion, more hospitals being called on or you know, existing client base being called on more frequently? Just maybe some of the key dynamics that enable you to continue to overperform on that metric. Thanks. Yeah. Of course, you've actually kind of touched on many of the reasons why actually. When we think about the overall growth pet adds through the quarter, it was led by the veterinary channel, kind of predominantly really happy to see that continuing to get stronger at its record level. Record levels of leads. To answer that question regarding leads and conversion, both were up. We've talked a lot about conversion, how we're focusing there. The team executed really strongly with some tactics they've been planning for several months, and we're starting to see them come through. Have that coupled with lead volume, you see both of those things are gonna start to drive just some strong return in the vet channel. Our other channels continue to perform strongly. You know, one of the things we've made very clear in our distribution strategy for our 60-month plan is that we have multiple channels. We have multiple opportunities to continue to grow in an under-penetrated market and happy to see them continue to go up. We're growing faster in areas where the vet costs, you know, we see there is a need for our product. We solve the problem of budgeting for the unexpected, and that helps us. Yes, vet visits are down, but that doesn't mean that's not reflected in our number because at the end of the day, vets are seeing the value in our product. They're having good conversations. Our territory partners have been back now in the field consistently for six months and more through this quarter. That continued conversation, coupled with the fact that we've had record rates of software installation, so the kind of thing that really sets us apart in the industry has gone up as well. There are a number of really positive factors that set us up well for the future. I think the biggest thing for us is really to remember that We are priced to support the needs of the vet and the needs of the pet owner. We're seeing that value proposition, the relationship, and that cool channel for us, that vet channel is performing very well. It's positive, really positive story for us as a quarter for Trupanion. You know, I'll just add a little on top of it. You know, this company has been around for over 20 years. We've been through multiple recessions. We've been through high impact times of change. The veterinarian message becomes stronger and more compelling at times when people have concerns, and particularly when they're financial concerns. You know, all the headlines are talking about inflation. People are hearing the word recession, and that increases the likelihood that veterinarians want to communicate to new pet owners about the need for high-quality medical insurance, and why that message is gonna resonate stronger to people. You know, if you go back a couple of years ago, a lot of times when some people think that it's easier for us to grow, it's the opposite. You know, when our message is compelling to veterinarians to help people budget for their pet and we're seeing that across the board with vet leads. One thing that I think I just wanna point out is, you know, our new pets grew from about 60,000 new pets to about 70,000. Of that 10,000 incremental in the quarter, about two-thirds of that came from the veterinary channel, and they were mainly driven in areas of lower income. This product is not designed for rich people. Rich people can self-insure for the people that have a tighter budget. They need a solution and our solution resonates, and veterinarians can drive that message. That comes across in our lower PAC dollar spend and the efficiencies we're having. You know, there'll be puts and takes if we move into recession over the year. The inflation of ARPU going up will help us on growing our revenue, make that a little bit easier. Messaging will be stronger at the vet hospitals, but we'll have some other areas that'll be a little bit more challenging. You know, we expect another strong year of growth. Our next question is from the line of Ryan Tunis with Autonomous Research. Please go ahead. Hey, thanks. Good evening. Just another follow-up, I guess, on the rate discussion. The 18 points of rate, the 7% and 11% to the end of 2023, is that on top of the 7% we're observing now? Should we think about the cumulative of 2022 and 2023 as 25, or is 18 kind of the number to think of over the two-year period? Yeah. No, we're looking at 18, at least currently as what, when you add it together, rolls through. We really took the 7% and increased it to 11% as some of the 7% rolls off because it related to things that had already been in place. We re-upped the 7%, but then added to that to 11%, and then we'll add again to get that up to 18%. That's the top end. Obviously, you know, we're looking at this on a weekly basis. We're leveraging data from many different sources, our TPs that are in the field, the data that we already have, relationships with many of the groups, as well as the veterinary CPIs. If we see things change and we need more, we are absolutely poised to do that as well, and to make sure we're being aggressive. We can. This is the visibility we have right now that we're acting on and feel good about it going into next year. Understood. Can you maybe give us a little bit of a breakdown from a loss trend perspective, frequency, severity, you know, what you saw year-over-year, what you maybe learned this quarter relative to, you know, first half of the year or the second? Yeah. At a high level, and I'll speak more about, you know, when we look at things, absent dramatic changes in mix. I mean, going into the year, as we've talked about before, particularly in the first quarter, as we were coming out of COVID, we definitely saw more changes in frequency with people, you know, going back, checking, catching up on things. Saw you know small more normal-ish, call it 2% year-over-year changes in severity, but nothing overly dramatic. We started to see movement in severity in the second quarter, increasing, and then we've seen more movement in severity year-over-year going into the third quarter. Now, the increase that we talked about of cost of claims going up about 10%, absent of mix changes, it still has some frequency. It's about half frequency, half severity that we're seeing. When we see both of those moving, many times historically, we've seen severity go up, but frequency doesn't tend to go up as much. When we're seeing both of those moving, we definitely wanna be more aggressive. We've seen severity kind of tick up every quarter so far this year, kind of as we've seen overall inflation move in general. Got it. I, yeah, so I guess my follow-up then would just be if the plan is kind of for, you know, 18% rate over these two years and we're running at 10% loss trend and that's accelerating. Why wouldn't the plan be to take a little bit more rate? The one other thing I had was, I guess just on, like, deductibles, you know, what impact does inflation have? Could that potentially be a reason why you're picking up more frequency, just more attachment? Thanks. There's a variety of reasons that we're seeing more frequency. One is, you know, I think we weren't surprised to see it coming out of COVID, like I mentioned. Also, as more and more hospitals use our software, we tend to see a little bit of a step-up in frequency because it's just much more easy to submit those, and that's a good thing. That's more of a small one-time step up. That tends to be the frequency. Now, we have had rates flowing through, so we have a current gap of 3%, and we're looking at that combined with continued inflation into next year, and that's where we're getting to the 18%. Obviously, if we see trends change, we'll react to that very quickly. Thanks. Our next question is from Maria Ripps with Canaccord. Please go ahead. Great. Thanks so much for taking my questions. Just following up on retention. As you started sort of passing along this higher magnitude rate increases onto your member base, are you seeing any signs of elevated churn among those subs that got sort of price increases so far? And I guess, how are consumers responding to these higher prices, especially given the macro backdrop? Yeah. Hi, Maria, it's Margi. Just at a high level, I would say our retention rate has held really strong, so we're not seeing any signs of elevated retention across those buckets. In the event that, you know, when you look at it at a granular level, we've got our three buckets. The first year of retention, those with under 20% rate increase and those with an over 20% rate increase is where you tend to see some of the differences. The first-year bucket has been one that has slightly changed, and that's because of our rate of increase of pet growth. As we talk about that relationship between you add more pets, you're gonna obviously see more people in that first year. In general, we haven't seen anything that causes any concern. I think as we think future state, as we think about this aggressive pricing strategy that Trish has been outlining, we really are making sure that we've got our teams aligned to be able to be ready to support anything that we're seeing. If we see increased calls, if we have different conversations based on what's happening in the macro environment, we want to be ready to be able to really reiterate and explain our value proposition and really staying true to that, which is why we alluded to the pricing promise earlier as well. Just making sure people understand what's involved, what goes into budgeting for their pet, and helping them to really kind of get their arms around that. So far, so good. Got it. Margi, you talked about sort of key drivers for strong additions in the quarter. Did any of your new initiatives contribute to this strong growth additions in Q3? When we think about the 70,000 pets, 70,000 is around 10,000 pets more than we have been on our run rate. When we think about that and kinda how it's broken up, about a third of them came from new initiatives, so not significant volume. It's nice to have that additive. But the bulk of that growth came through the vet channel. It came through that core channel. It came through the fact that we've got our territory partners out in the field really reinforcing the moat that we have there and the strength of connection with vets at a time when they really need to make sure their clients can afford this care. That's really kind of where that sort of halo effect came from our overall pet growth. While they're contributing, they're not the kind of the driver of that growth there, for sure. Got it. That's very helpful. Thank you so much. Our next question is from Jon Block with Stifel. Please go ahead. Tom, I'm for Jon. Thanks for the questions. If I can start with retention. You know, it was down a little bit quarter-over-quarter, and kind of piggybacking off the last question, but, you know, with pricing growth accelerating substantially in the coming quarters, I mean, do you have confidence retention will, you know, either maintain at its current levels or do you think it'll climb back to, you know, kind of the 98.74%-ish range? I'd just love your thoughts, you know, on how we should think about, you know, price going up so much and kind of the impact on churn. Sure. Well, to start with, I hope anybody on the call recognizes anytime that you're talking about 98 point something, we've got high retention. The fact that we're talking about 98.7% is very high. We believe that our retention rate compared to the category is significantly higher. If the retention rate goes back to, let's say, 98.6%, which would still be leading the category, that would have a little bit of downside on our total net pet growth. The offset on having 18% rate increases and what that'll do to drive our revenue growth is well offset. We've been through this type of cycle before in small regional areas or everywhere else, and it's most important that we price accurately, and we'll take the revenue growth benefits from the ARPU, and we might get a small subtraction on retention, but net over, it will help our revenue growth. It'll also, more importantly, help our adjusted operating income and our lifetime value. Got it. You know, we'll be pleased. Yeah. Okay. Moving forward, maybe model sequential very small downticks in the retention. Is that fair? Yeah, I mean, it depends on if Margi continues to and the team continue to have accelerated growth. Remember, our lowest retention is in that first-year retention. If we keep having accelerated growth, that brings down our blended retention more than anything else. If there's more people in the 20%+ bucket, that will have a smaller impact. But like I say, it will be more than offset by increased revenue growth. Got it. That's helpful. My second question is just on gross adds, really strong in the quarter. Maybe first, quickly, did the Smart Paws acquisition contribute to that number at all? No, it didn't. Got it. Okay. The strength, you know, it sounded like it came from the vet channel. Margie, you just mentioned this a bit, but can you provide some more color just around leads and conversion, sort of outside the vet channel with those new initiatives? I guess, is that one-third contribution that you talked about in the 10,000 incremental pets, is that typical, you know, relative to history? I guess my last one, what is kind of your level of confidence in these gross add levels persisting moving forward? You know, can we expect to grow sequentially off these 70,000 levels? Thank you. Yeah, sure. I'm gonna try and make sure I hit that from the top, so please forgive me if I forget some of those things. In terms of the strength, yes, it did come through majority of growth through the vet channel. But I will say all of our channels were up in terms of lead and conversion, which is great, and really plays into our broadened distribution strategy. Always helpful to have growth across the mix of channels we have there. In terms of the 1/3 contribution, it's not typical. We, you know, really took a step up in Q3 through that vet channel, and that was, like I said, primarily driven through the vets. The combination of all the things happening in the world, the vets kind of being back, they're at full strength. They're still under massive pressure, but they're at full strength. Our territory partners being back out there, really reiterating, seeing the depth of our software penetration really starting to expand. There are all these things that combine that are helping to make the conversation about the need to budget for the unexpected care is really helpful. When we think about the growth, you know, we expect year-over-year and quarter-over-quarter to have sustained revenue growth. You know, I feel confident moving into the quarter based on the way the team has performed and continues to perform and the analysis they're doing that we feel confident in being able to maintain that sustained revenue growth with the combination of the ARPU and the pet growth mix. Perfect. Thanks, Margi. Thank you. Our next question will be our last question today, and it'll be from Greg Gibas with Northland Securities. Please go ahead, sir. Hey, thanks for taking the questions. Thanks for the insights too, on the claim activity being higher than normal. Are you seeing that begin to stabilize in Q4, or is that kind of expected to persist a while? Yeah. Hi, Greg, it's Tricia. You know, we're one month into Q4, I would say, with October behind us. In general, we're seeing. You know, October is typically a bigger month for us in any given year, given there's no holidays and it's, you know, a month with 31 days. We're seeing October kind of in similar run rates to what we've seen in Q3. We're not seeing dramatic step-ups. We're not seeing dramatic step downs. It's kind of continuing in terms of what I mentioned, the frequency and severity on a similar pace, which, you know, we use to help guide us when we project it out into next year, those numbers that I mentioned that we would need and really been prompted us with the plans that we put in place as well, taking October into account. Okay. Got it. If I could follow up on PetExpert, you know, maybe what rough percentage share of the market do they have? What is kind of the total penetration rate in the Czech Republic and Slovakia? Then, you know, what pace would we maybe see them or you guys kind of expand into new European markets going forward? We're hoping to close the deal this quarter, so super excited about the team. Market penetrations in the country are about 5%, which is pretty consistent with a lot of continental Europe, so well behind the U.K. and Sweden, so a lot of opportunity for growth. Obviously, in countries where the cost of veterinary care is lower, then the ARPU is lower and lifetime value will be lower. You have to apply a lower pet acquisition cost to get you the same internal rates of return. They've been able to prove to do that, and we think that we can help them grow aggressively, you know, for the next 4-5 years to come, and super excited about it. Great. Thank you. That does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.