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

Good afternoon, and welcome to Trupanion's Third Quarter 2025 Financial Results Conference Call. Participating on today's call are Margi Tooth, Chief Executive Officer and President; and Fawwad Qureshi, Chief Financial Officer. For ease of reference, we've included a slide presentation to accompany today's discussion, which will be made available on our Investor Relations website under our Quarterly Earnings tab. Before we begin, please be advised that remarks today will contain forward-looking statements. All statements other than statements of historical facts are forward-looking statements. These include, but are not limited to, statements regarding our future operations, key operating metrics, opportunities and financial performance, pricing and veterinary industry inflation. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed. A detailed discussion of these and other risks and uncertainties are included in today's earnings release as well as the company's most recent reports, including Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission. Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including, without limitation, cost of paying veterinary invoices, variable expenses, fixed expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA and free cash flow. When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating income or margin before new pet acquisition and development expenses. Unless otherwise noted, all margin and expenses will be presented on a non-GAAP basis and excluding stock-based compensation expense and depreciation expense. These non-GAAP measures are in addition to and not a substitute for measures of financial performance prepared in accordance with the U.S. GAAP. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release. Lastly, I would like to remind everyone that today's conference call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site. I will now hand over the call to Margi.

Thank you, Gil, and good afternoon, everyone. Our third quarter financial performance was strong, underscored by continued momentum across key business metrics. I'll start with the headlines, then hand over to Fawwad for a full walk-through of our financial performance, ahead of discussing how we're expanding Trupanion's reach through new partnerships and brand initiatives that strengthen our connection to veterinarians and pet parents alike. Turning to our highlights. In our subscription segment, we accelerated net pet adds for the third consecutive quarter and increased them by 45% year-over-year. We delivered record subscription adjusted operating income of $39 million, an increase of 27% year-over-year. Subscription adjusted operating margin was 15.5%, also our highest ever. These results reflect consistent, disciplined execution over the past 24 months to deliver on our value proposition and our cost-plus solution. Adjusted operating income is the fuel to grow the business and pet growth in the quarter was a result of continued investment in our retention performance and increasing contribution from our gross pet adds. Specifically related to retention, we're pleased to report continued progress. As rate flow stabilizes for the majority of our members, our efforts to make adjustments more predictable and to reinforce the importance of coverage, especially in uncertain economic times are paying off. Targeted communications, enhanced member support and education around coverage value are resonating, contributing to improved member loyalty and a steady climb in trailing 12-month retention. Retention is more than a performance indicator. It's a foundational element of long-term value creation. High retention strengthens lifetime value, which in turn increases our allowable PAC. As our margin continues to hold strong, this translates into high levels of adjusted operating income dollars to reinvest in growth. With that in mind, following the third consecutive quarter of double-digit investment increases, we returned to growth in gross pet additions, which were up 4% year-over-year. Combined with our retention gains, this translated into the highest net pet growth in 7 quarters, adding over 16,000 net new pets in our subscription segment. These are durable gains, and we expect these positive trends to continue into 2026. As we enter the final stretch of the year with record margins, record free cash flow generation and a strengthened balance sheet, we have the capacity to invest even more deeply. We're deploying this capital aggressively yet deliberately to ensure the Trupanion brand is seen and heard in a broader way than before. The driving force behind our why remains. Pet parents are struggling to understand how to budget for the unexpected care of their pet and the veterinary industry is under immense strain as they work through the challenges of access to care. Trupanion must be visible and well understood as a standout solution capable of bridging that growing gap, and we're now well poised to advance that message. I'll now turn it over to Fawwad to walk through the financials in more detail.

Thanks, Margi, and good afternoon, everyone. Today, I will share additional details around our third quarter performance as well as provide our outlook for the fourth quarter and full year 2025. Total revenue for the quarter was $366.9 million, up 12% year-over-year. Within our subscription business, revenue was $252.7 million, up 15% year-over-year. Total subscription pets increased 5% year-over-year to over 1,082,000 pets as of September 30. This includes approximately 60,000 pets in Europe, a majority of which are currently underwritten through an MGA structure. Average monthly retention for the trailing 12 months was 98.33%, up versus the third quarter last year, which was 98.29%. The subscription business cost of paying veterinary invoices was $177.1 million, resulting in a value proposition of 70.1%. This compared to 71.0% in the prior year period. This improvement more than offset adverse development from prior periods of $0.3 million or approximately 10 basis points of revenue. As a percentage of subscription revenue, variable expenses were 8.9%, down from 9.4% a year ago. Fixed expenses as a percentage of revenue were 5.6%, in line with the prior year period. Combined, we saw fixed and variable spending at 14.5% of revenue in Q3, an improvement from 15.0% in the prior year period. We have continued to drive efficiencies in both fixed and variable spending, consistent with our expectations. The improvements in variable spending have given us the opportunity to reinvest, particularly in technology investments that sit within our fixed expenses. Our subscription business delivered adjusted operating income of $39.1 million, an increase of 27% from last year and contributed 96% of our total AOI for the quarter. Subscription adjusted operating margin was 15.5%, up from 14% in the prior year and represents approximately 150 basis points of margin expansion. This marks a new company record for…

Thank you, Fawwad. The results this quarter are strong. They reflect solid execution and a growing recognition for a solution to enable greater access to veterinary care. By the end of this year, we will have grown adjusted operating income at a 5-year compounded annual growth rate of 21%, generating over $0.5 billion of adjusted operating income to fund high-return pet acquisition. We have and will continue to remain disciplined, focusing on enrolling pets price to our margin profile and educating members through improved retention activity. This focus is most clearly evident with our AOI per pet growing at a cumulative 37% over the past 5 years. With our pricing now tracking alongside the rate of veterinary inflation, our position is strong, which in turn affords us the opportunity to continue to invest in ways to educate pet parents directly and to tell our story and share our solution more boldly than before. Trupanion is uniquely positioned to address the challenges of access to care by covering the veterinary invoices directly and instantly, which allows veterinarians to focus on medicine and empowers pet parents to seek timely and appropriate treatment when it matters most. Partnering with the animal health sector will always be at the heart of our strategy. That foundation, which we've been cultivating for 25 years, now provides the opportunity to expand the presence of the Trupanion brand to raise awareness and connect with pet parents earlier in their journey before they ever set foot in a veterinary hospital. We plan to accomplish this through intentional development of partnerships and complementary channels. Earlier in the quarter, we announced our first-of-its-kind collaboration with the Seattle Reign FC, a mission-based and deeply aligned partner now possible with our greater investment flexibility. This partnership exemplifies a new chapter in our brand development, broadening our reach and engaging with pet parents with a shared connection of pets and community. And most recently, earlier today, we were very pleased to announce our new partnership with BMO Insurance, part of the BMO Financial Group, one of Canada's largest banks. It's a great example of how we're extending our leadership in Canada by broadening access to our solution through trusted complementary partners. With rightsized margins, strong retention and greater investment flexibility, we're excited to further nurture and strengthen our veterinary focus while adding more creative ways to broaden our reach and engage pet parents through authentic partnerships that align with our mission and ambition. With that, we'll open it up for questions.

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

Congrats on a nice quarter here. I think, first, I kind of wanted to start with a high-level picture. Look, it feels like after a couple of years of trying to stabilize the business and return some of the operating margins, things like that, this might be the first quarter where there's a little bit of an inflection, right? You have some of the gross adds, things like that returning back to year-over-year growth. Talk to us a little bit just high level again, like as we go into next year, what does this business look like in terms of commercial strategy when you go maybe from defense to offense, what are some of the things that we should expect from you guys that might start to accelerate growth even further?

Yes. Thank you, Brandon. We're very pleased with the quarter and the performance. Third consecutive quarter, as you mentioned, of net pet growth and for us, seeing that 16,000 pets coming in at 45% year-over-year growth is something that we're very proud of. And in combination of the strategy, which, first and foremost, through the last 9 months has been focusing on level setting our margins, getting our investment in retention to really help our members understand what that value proposition looks like. And then finally, reaccelerating pet growth, and we're at the tail end of that strategy for this year and pleased to have seen that growth pet adds come up to the 4% year-over-year. It is very much momentum we expect. We're being a lot more aggressive with our investments. We're in an incredibly strong financial position. We have record levels of margin and free cash flow while honoring our value proposition for our members. So we expect the same. We've got the momentum starting to come. We expect to continue to be aggressive. We're in a very strong position to do so. And as you said quite rightly, we're moving into offense position, which is where this company has always operated in a heavily underpenetrated market. We'll continue with our strategy of helping pet parents to budget for the unexpected cost of care, which is a greater need today than it ever has been. We are perfectly positioned to leverage both what we have today in market and also taking those learnings from the last 5 years in our strategic plan to aggressively go forward and support more pet parents in the future.

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

Yes. I think I can say a few things. As you mentioned, when we get to year-end, we'll obviously give the full year guidance. We're still very much focused on Q4. I think some of the things we're thinking about thematically going into next year, we do expect investment to increase, as Margi said. Really happy about the just overall financial position we're in the $20.4 million we spent in PAC. This quarter was the highest we've ever spent. And so it gives us some good momentum as we exit this year and start thinking about next year. I think in terms of contribution to revenue, as you mentioned, this year has really been more pricing driven. And over time, we would like to have pets continue to contribute at a higher and higher level. So I think from a contribution standpoint, we'd like to see pet count contribute more and pricing contribute less. And then from a margin standpoint, we're very pleased with the progress on margin. As Margi mentioned, it's been a journey over the last 2 years. And our overall margin expectations, our goals that we set, I think, are largely going to be the same given the first and second half seasonality as we go into next year. Those are kind of the broad strokes of what we're thinking about at this point.

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

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

Yes. Thank you for the question, Katie. So specifically, when we think about our focus, I would say that the last -- we've really kind of upped the increase in that acquisition investment in the last 3 months -- 3 quarters, sorry, we've been focusing heavily on the core Trupanion subscription business. So the majority of our investment has been going into that business. Now we've rightsized those margins and focusing on retention. The other products on the -- and specifically, as you called out, the European have very limited investment right now. We're really kind of looking at building those businesses and helping to get them stabilized before we invest heavily. I expect over the next several years, naturally, we anticipate there's a lot of opportunity in the European market where that investment will increase. The wonderful thing now about our margins being where they are is that we have that free cash flow and then the opportunity to invest the adjusted operating income dollars that we didn't have previously. So excited to be able to take those numbers up and invest and expect those lines of businesses to contribute more meaningfully in the future.

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

Yes. We're really excited about this partnership to announce it today, fresh off the press. So it's exciting for us because it really is representative of our position within the Canadian market. We are the market leader by some way, and it's where we were established and founded and partnering with a brand as established and as significant as BMO for us is really exciting. The core Trupanion product will be offered through that channel. So it's the same product that we have across most of our business and the majority of our growth. And for us, as you mentioned, it takes a long time for products and partners to come to fruition. It's a lot of hard work. We align with brands that we believe share the ethos of Trupanion. BMO is definitely one of those. We wouldn't expect it to contribute meaningfully in the short to midterm. These things do take time to build. What we're particularly excited about, though, is having a brand like BMO standing proud next to them and really helping to bring our brand into more households across Canada.

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

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

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

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

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

Yes. I mean we're really pleased with the quarter that we've just posted. I think that's a consolidated strategy over a number of quarters to really get to the point where we can start pushing into new markets and to reach new pet parents, and that's reflected in the gross adds this quarter. You're right, there is an increasing pressure on consumers and naturally an insurance product is one that if you get it right, you have to sell it. People have to understand the need behind it. I think we have historically proven that we do a good job of that through our routes to market through the vet channel, through breeders, through shelters at a grassroots level. So pet parents understand how much it's going to cost to make sure they can take care of their pet. It's our job to ensure that we continue to articulate that value proposition. I think the teams are doing a good job. The more investment we put into the funnel, the more opportunity we have to test and learn and we're excited to keep doing that. There is absolutely a need for Trupanion today, and we can see that with the number of leads and the number of pets we've enrolled and maintained. And we think our role is much bigger still to play in the future. So happy that we're in a position to do that.

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

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

Yes. Thanks for the question. Yes, obviously, we're very pleased with the PNC deal that we announced today. It not only puts us in a better position from a cost of capital standpoint, but just the opportunity to work with the bank, PNC being one of the largest financial institutions, opens up a variety of services they're going to be working with us on as, for instance, treasury management. So there's benefits outside of just the interest rate. The interest rate by itself, our current debt is SOFR plus 5.15%. The new debt will be SOFR plus 2.75%. So it's about a 240 basis point benefit in terms of interest savings. So our expectation is that at the end of this, we'll have approximately $115 million of debt. So it would be interest savings against that somewhere in the range of $8 million to $9 million.

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

Yes. Thanks, John. So specifically speaking to Aflac, we don't anticipate seeing anything meaningful in the quarter as a contribution from Aflac. It's still a very nascent channel for us. It's one that we have a lot of learnings from. Aflac continues as always, to be a great partner for us. I would say we're learning that the product that we have in market is perhaps not quite what we need. And so we're looking at refining that over time. We still have a lot of expectation and believe in this channel, but I wouldn't anticipate a lot for this quarter coming up for Q1.

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

Thank you, and thanks, everyone, for your questions and participation today in our call. We're incredibly proud of the financial discipline that's brought us to where we are this quarter and even more excited about what it enables. We'll have continued investment in high-quality growth in our new partners and our existing partners and in the broader veterinary ecosystem. We will stay disciplined in our investment while continuing to build our brand and expand awareness to help even more pet parents get the care they deserve. And thank you very much for your time this afternoon.

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