TRUPANION, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations – InsuranceNewsNet

Insight

We provide medical insurance for cats and dogs throughout the United States,
Canada, Puerto Rico, and Australia. Our data-driven, vertically-integrated
approach enables us to provide pet owners with products that offer what we
believe is the highest value medical insurance, priced specifically for each
pet's unique characteristics and coverage level. Our growing and loyal
membership base provides us with highly predictable and recurring revenue. We
operate our subscription business segment similar to other subscription-based
businesses, with a focus on achieving a target margin prior to our new pet
acquisition expense and acquiring as many pets as possible at our targeted
average estimated internal rate of return.

We operate in two business segments: subscription business and other business.
We generate revenue in our subscription business segment primarily by
subscription fees from our direct-to-consumer products. Fees are paid at the
beginning of each subscription period, which automatically renews on a monthly
basis. We generate revenue in our other business segment primarily by writing
policies on behalf of third parties. We do not undertake the marketing efforts
for these policies and have a business-to-business relationship with these third
parties. Our other business segment also includes revenue from other products
and software solutions that have a different margin profile from our
subscription business.

We generate leads for our subscription business segment from a diverse set of
member acquisition channels, which we then convert into members through our
contact center, website and other direct-to-consumer activities. These channels
include leads from third-parties such as veterinarians and referrals from
existing members. Veterinary hospitals represent our largest referral source. We
engage our "Territory Partners" to have face-to-face visits with veterinarians
and their staff. Territory Partners are dedicated to cultivating direct
veterinary relationships and building awareness of the benefits of high quality
medical insurance to veterinarians and their clients. Veterinarians then educate
pet owners, who visit our website or call our contact center to learn more
about, and potentially enroll in, Trupanion. We also receive a significant
number of new leads from existing members adding pets and referring their
friends and family members. Our direct-to-consumer acquisition channels serve as
important resources for pet owner education and drive new member leads and
conversion. We monitor average pet acquisition cost to evaluate the efficiency
in acquiring new members and measure effectiveness based on our targeted return
on investment.

Our response to the COVID-19 pandemic

We have not experienced a material adverse impact on our business due to
COVID-19, but we continue to monitor conditions closely and adapt our operations
to meet federal, state and local guidance. Our focus remains on promoting
employee health and safety, serving our members and ensuring business
continuity. Our Seattle headquarters is now open for those who want to work in
that office, in compliance with applicable regulations and guidance.

The impacts of COVID-19 and related economic conditions on our results are
very uncertain and in many ways beyond our control. scope, duration
and the magnitude of the direct and indirect effects of COVID-19 are changing
quickly and in ways that are difficult, if possible, to anticipate. For
for more details, see the section entitled “Risk Factors”.

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Main operating parameters

The following table shows the total number of registered pets and the main operating parameters for
our subscription business for each of the past eight quarters.

                                                                                                        Three Months Ended
                             Mar. 31, 2022         Dec. 31, 2021         Sept. 30, 2021         Jun. 30, 2021         Mar. 31, 2021         Dec. 31, 2020         Sept. 30, 2020         Jun. 30, 2020
Total Business:
Total pets enrolled (at
period end)                    1,267,253             1,176,778              1,104,376             1,024,226               943,854               862,928                804,251               744,727
Subscription Business:
Total subscription pets
enrolled (at period end)         736,691               704,333                676,463               643,395               609,835               577,957                552,909               529,400
Monthly average revenue per
pet                         $      64.21          $      63.89          $       63.60          $      63.69          $      62.97          $      62.03
         $       60.87          $      59.40
Lifetime value of a pet,
including fixed expenses    $        730          $        717          $         697          $        681          $        684          $        653          $         615          $        597
Average pet acquisition
cost (PAC)                  $        301          $        306          $         280          $        284          $        279          $        272          $         261          $        199
Average monthly retention          98.75  %              98.74  %          
    98.72  %              98.72  %              98.73  %              98.71  %               98.69  %              98.66  %




Total pets enrolled. Total pets enrolled reflects the number of subscription
pets or pets enrolled in one of the insurance products offered in our other
business segment at the end of each period presented. We monitor total pets
enrolled because it provides an indication of the growth of our consolidated
business.

Total subscription pets enrolled. Total subscription pets enrolled reflects the
number of pets in active memberships at the end of each period presented. We
monitor total subscription pets enrolled because it provides an indication of
the growth of our subscription business.

Monthly average revenue per pet. Monthly average revenue per pet is calculated
as amounts billed in a given period for subscriptions divided by the total
number of subscription pet months in the period. Total subscription pet months
in a period represents the sum of all subscription pets enrolled for each month
during the period. We monitor monthly average revenue per pet because it is an
indicator of the per pet unit economics of our subscription business.

Lifetime value of a pet, including fixed expenses. Lifetime value of a pet,
including fixed expenses, is calculated based on subscription revenue less cost
of revenue from our subscription business segment for the 12 months prior to the
period end date excluding stock-based compensation expense related to cost of
revenue from our subscription business segment, sign-up fee revenue and the
change in deferred revenue between periods. This amount is also reduced by the
fixed expenses related to our subscription business, which are the pro-rata
portion of general and administrative and technology and development expenses,
less stock-based compensation, based on revenues. This amount, on a per pet
basis, is multiplied by the implied average subscriber life in months. Implied
average subscriber life in months is calculated as the quotient obtained by
dividing one by one minus the average monthly retention rate. We monitor
lifetime value of a pet, including fixed expenses, to estimate the value we
might expect from new pets over their implied average subscriber life in months,
if they behave like the average pet in that respective period. When evaluating
the amount of pet acquisition expenses we may want to incur to attract new pet
enrollments, we refer to the lifetime value of a pet, including fixed expenses,
as well as our estimated internal rate of return calculation for an average pet,
which also includes an estimated surplus capital charge, to inform the amount of
acquisition spend in relation to the estimated payback period.

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Average pet acquisition cost. Average pet acquisition cost (PAC) is calculated
as net acquisition cost divided by the total number of new subscription pets
enrolled in that period. Net acquisition cost, a non-GAAP financial measure, is
calculated in a reporting period as new pet acquisition expense, excluding
stock-based compensation expense and other business segment expense, offset by
sign-up fee revenue. We exclude stock-based compensation expense because the
amount varies from period to period based on number of awards issued and
market-based valuation inputs. We offset sign-up fee revenue because it is a
one-time charge to new members collected at the time of enrollment used to
partially offset initial setup costs, which are included in new pet acquisition
expenses. We exclude other business segment pet acquisition expense because that
does not relate to subscription enrollments. We monitor average pet acquisition
cost to evaluate the efficiency in acquiring new members and measure
effectiveness based on our targeted return on investment.

Average monthly retention. Average monthly retention is measured as the monthly
retention rate of enrolled subscription pets for each applicable period averaged
over the 12 months prior to the period end date. As such, our average monthly
retention rate as of March 31, 2022 is an average of each month's retention from
April 1, 2021 through March 31, 2022. We calculate monthly retention as the
number of pets that remain after subtracting all pets that cancel during a
month, including pets that enroll and cancel within that month, divided by the
total pets enrolled at the beginning of that month. We monitor average monthly
retention because it provides a measure of member satisfaction and allows us to
calculate the implied average subscriber life in months.


Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. GAAP, we believe
the following non-GAAP financial measures are useful in evaluating our operating
performance. We use the following non-GAAP financial information to evaluate our
ongoing operations and for internal planning and forecasting purposes. We
believe that these non-GAAP financial measures, when taken collectively, may be
helpful to investors because it provides consistency and comparability with past
financial performance. However, non-GAAP financial information is presented for
supplemental informational purposes only, has limitations as an analytical tool,
and should not be considered in isolation, or as a substitute for, the directly
comparable financial measures prepared in accordance with GAAP.

We calculate these non-GAAP financial measures by excluding certain non-cash or
non-recurring expenses. We exclude business combination transaction cost as it
is non-recurring and not indicative of our operating performance. We exclude
stock-based compensation as it is non-cash in nature. Although stock-based
compensation expenses are expected to remain recurring expenses for the
foreseeable future, we believe excluding them allows investors to make
meaningful comparisons between our recurring core business operating results and
those of other companies. We define non-GAAP development expenses as operating
expenses incurred to develop new products and offerings that are pre-revenue. We
define non-GAAP fixed expenses as the total of Technology and Development
expense and General and Administrative expense, less stock-based compensation
expense, business combination transaction cost, and development expenses related
to exploring and developing new products and offerings that are in the
pre-revenue stage.


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The following table presents the reconciliation of our non-GAAP financial
measures from corresponding GAAP measures for the periods presented (in
thousands):

                                                                                                                       Three Months Ended
                                        Mar. 31, 2022          Dec. 31, 2021          Sept. 30, 2021          Jun. 30, 2021          Mar. 31, 2021          Dec. 31, 2020          Sept. 30, 2020         Jun. 30, 2020
Veterinary invoice expense             $     144,926          $     132,852          $      125,058          $     118,282          $     109,870          $      98,169          $      91,266          $      82,049
Less:
Stock-based compensation
expense1                                      (1,173)                  (798)                   (769)                  (672)                (2,299)                  (358)                  (337)                  (245)
Other business cost of paying
veterinary invoices                          (44,336)               (38,009)                (34,432)               (31,029)               (26,144)               (22,254)               (19,394)               

(16,019)

Subscription cost of paying
veterinary invoices (non-GAAP)         $      99,417          $      94,045          $       89,857          $      86,581          $      81,427          $      75,557          $      71,535          $      65,785
% of subscription revenue                       71.1  %                70.1  %                 70.7  %                71.9  %                71.9  %                71.0  %                72.0  %                71.2  %

Other cost of revenue                  $      31,179          $      30,992          $       28,443          $      25,433          $      23,715          $      20,925          $      18,265          $      16,004
Less:
Stock-based compensation
expense1                                        (631)                  (581)                   (542)                  (552)                  (935)                  (168)                  (111)                   (99)
Other business variable expenses             (16,506)               (17,208)                (15,315)               (12,940)               (11,904)               (11,079)                (9,039)                

(7,440)

Subscription variable expenses
(non-GAAP)                             $      14,042          $      13,203          $       12,586          $      11,941          $      10,876          $       9,678          $       9,115          $       8,465
% of subscription revenue                       10.0  %                 9.8  %                  9.9  %                 9.9  %                 9.6  %                 9.1  %                 9.2  %                 9.2  %

Technology and development
expense                                $       5,229          $       4,665          $        4,391          $       4,079          $       3,731          $       3,108          $       2,426          $       2,293
General and administrative
expense                                        9,366                  8,996                   8,246                  7,435                  7,216                  6,502                  5,412                  5,073
Less:
Stock-based compensation
expense1                                      (3,226)                (3,293)                 (3,020)                (3,122)                (2,483)                (1,275)                (1,241)                

(1,208)

Business combination transaction
costs                                              -                      -                       -                      -                    (82)                  (522)                     -                      -
Development expenses                          (1,258)                  (858)                   (919)                (1,121)                  (821)                  (339)                     -                      -
Fixed expenses (non-GAAP)              $      10,111          $       9,510          $        8,698          $       7,271          $       7,561          $       7,474          $       6,597          $       6,158
% of total revenue                               4.9  %                 4.9  %                  4.8  %                 4.3  %                 4.9  %                 5.2  %                 5.1  %                 5.2  %

New pet acquisition expense            $      21,627          $      19,845          $       19,708          $      19,390          $      19,704          $      14,809          $      13,344          $       9,242
Less:
Stock-based compensation
expense1                                      (2,328)                (2,136)                 (2,112)                (2,181)                (2,731)                  (801)                  (741)                  

(675)

Other business pet acquisition
expense                                         (109)                   (76)                   (134)                  (118)                  (171)                  (201)                  (265)                  (191)
Subscription acquisition cost
(non-GAAP)                             $      19,190          $      17,633          $       17,462          $      17,091          $      16,802          $      13,807          $      12,338          $       8,376
% of subscription revenue                       13.7  %                13.1  %                 13.7  %                14.2  %                14.8  %                13.0  %                12.4  %                 9.1  %

1Trupanion employees can elect to take restricted stock instead of cash payment for their bonuses. We account for these expenses as stock-based compensation under GAAP, but we do not include them in any
non-GAAP adjustments. Stock-based compensation associated with bonuses was approximately $0.2 million for the three months ended March 31, 2022.

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When determining our PAC, we calculate net acquisition cost for a more
comparable metric across periods. Net acquisition cost, a non-GAAP financial
measure, is calculated in a reporting period as GAAP new pet acquisition
expense, excluding stock-based compensation expense and other business segment
expense, offset by sign-up fee revenue. We exclude stock-based compensation
expense because the amount varies from period to period based on the number of
awards issued and market-based valuation inputs. We offset sign-up fee revenue
because it is a one-time charge to new members collected at the time of
enrollment used to partially offset initial setup costs, which are included in
new pet acquisition expenses. We exclude other business segment pet acquisition
expense because it does not relate to subscription enrollments.

The following table reconciles the GAAP new pet acquisition expense to the non-GAAP net amount
acquisition cost (in thousands) for each of the last eight quarters:

                                                                                                   Three Months Ended
                                                                         Sept. 30,                                                                                  Sept. 30,          Jun. 30,
                          Mar. 31, 2022           Dec. 31, 2021             2021             Jun. 30, 2021           Mar. 31, 2021           Dec. 31, 2020             2020              2020
New pet acquisition
expense                 $       21,627          $       19,845          $  19,708          $       19,390          $       19,704          $       14,809          $  13,344          $  9,242
Net of sign-up fee
revenue                         (1,202)                 (1,162)            (1,268)                 (1,260)                 (1,264)                   (919)              (827)             (781)
Excluding:
Stock-based
compensation expense            (2,328)                 (2,136)            (2,112)                 (2,181)                 (2,731)                   (801)              (741)             (675)
Other business pet
acquisition expense               (109)                    (76)              (134)                   (118)                   (171)                   (201)              (265)             (191)

Net acquisition cost $17,988 $16,471 $16,194 $15,831 $15,538 $12,888 $11,511 $7,595

Components of operating results

General

We operate in two business segments: subscription business and other business.
Our subscription business segment primarily relates to subscription fees from
our direct to consumer products. Our other business segment includes revenue
from other product offerings that generally have a business-to-business
relationship and different margin profiles than our subscription segment,
including revenue from writing policies on behalf of third parties and revenue
from other products and software solutions.

Revenue

We generate revenue in our subscription business segment primarily from
subscription fees for our pet medical insurance. Fees are paid at the beginning
of each subscription period, which automatically renews on a monthly basis. In
most cases, our members authorize us to directly charge their credit card, debit
card or bank account through automatic funds transfer. Subscription revenue is
recognized on a pro rata basis over the monthly enrollment term. Membership may
be canceled at any time without penalty, and we issue a refund for the unused
portion of the canceled membership.

We generate revenue in our other business segment primarily from writing
policies on behalf of third parties where we do not undertake the direct
consumer marketing. This segment also includes revenue from other products and
software solutions that have a different margin profile from our subscription
business.


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Revenue cost

The cost of products for each of our segments includes the following:

Veterinary bill fee

Veterinary invoice expense includes our costs to review veterinary invoices,
administer the payments, and provide member services, and other operating
expenses directly or indirectly related to this process. We also accrue for
veterinary invoices that have been incurred but not yet received. This also
includes amounts paid by unaffiliated general agents, and an estimate of amounts
incurred and not yet paid for our other business segment.

Other revenue cost

Other cost of revenue for the subscription business segment includes direct and
indirect member service expenses, Territory Partner renewal fees, credit card
transaction fees and premium tax expenses. Other cost of revenue for the other
business segment includes the commissions we pay to unaffiliated general agents,
costs to administer the programs in the other business segment and premium taxes
on the sales in this segment.

Operating Expenses

Our operating expenses are classified into four categories: technology and
development, general and administrative, new pet acquisition expense, and
depreciation and amortization. For each category, excluding depreciation and
amortization, the largest component is personnel costs, which include salaries,
employee benefit costs, bonuses and stock-based compensation expense.

Technology and development

Technology and development expenses primarily consist of personnel costs and
related expenses for our technology staff, which includes information technology
development and infrastructure support, including third-party services. It also
includes expenses associated with development of new products and offerings.

general and administrative

General and administrative expenses consist primarily of personnel costs and
related expenses for our finance, actuarial, human resources, regulatory, legal
and general management functions, as well as facilities and professional
services.

Cost of acquiring a new pet

New pet acquisition expenses primarily consist of costs, including employee
compensation, to educate veterinarians and consumers about the benefits of
Trupanion, to generate leads and to convert leads into enrolled pets, as well as
print, online and promotional advertising costs. New pet acquisition expense was
previously termed "sales and marketing" on the consolidated statement of
operations. This update represents a change in name only. It does not denote a
change in method of accounting.

Depreciation and amortization

Depreciation allowances include the depreciation of assets,
hardware and software developed for internal use, as well as the amortization of
fixed life intangible assets.

Gain (loss) from investment in joint venture

Gain (loss) from investment in joint venture consists of the share of income and
losses from our equity method investment in a joint venture, as well as income
and expenses associated with administrative services provided to the joint
venture.

Stock-based compensation

Stock-based compensation is included in the cost and expense line items above.
Stock-based compensation will vary depending on corporate performance, pursuant
to our pre-approved equity incentive plan. For example, when we have delivered
strong performance, stock-based compensation may increase as a result of
incentive-based awards under our equity incentive plan.


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Factors affecting our performance

Average monthly retention. Our performance depends on our ability to continue to
retain our existing and newly enrolled pets and is impacted by our ability to
provide a best-in-class value and member experience. Our ability to retain
enrolled pets depends on a number of factors, including the actual and perceived
value of our services and the quality of our member experience, the ease and
transparency of the process for reviewing and paying veterinary invoices for our
members, and the competitive environment. In addition, other initiatives across
our business may temporarily impact retention and make it difficult for us to
improve or maintain this metric. For example, if the number of new pets enrolled
increases at a faster rate than our historical experience, our average monthly
retention rate could be adversely impacted, as our retention rate is generally
lower during the first year of member enrollment.

Investment in pet acquisition. We have made and plan to continue to make
significant investments to grow our member base. Our net acquisition cost and
the number of new members we enroll depends on a number of factors, including
the amount we elect to invest in pet acquisition activities in any particular
period in the aggregate and by channel, the frequency of existing members adding
a pet or referring their friends or family, the effectiveness of our sales
execution and marketing initiatives, changes in costs of media, the mix of our
pet acquisition expenditures and the competitive environment. Our average pet
acquisition cost has in the past significantly varied, and in the future may
significantly vary, from period to period based upon specific marketing
initiatives and estimated rates of return on pet acquisition spend. We also
regularly test new member acquisition channels and marketing initiatives, which
may be more expensive than our traditional marketing channels and may increase
our average acquisition costs. We continually assess our pet acquisition
activities by monitoring the estimated return on PAC spend both on a detailed
level by acquisition channel and in the aggregate.

Timing of initiatives. Over time we plan to implement new initiatives to improve
our member experience, make modifications to our subscription plan, introduce
new coverage plans, pursue pet food or other adjacent opportunities, improve our
technology, increase the number of veterinary hospitals using our direct pay
software, and find other ways to maintain a strong value proposition for our
members. These initiatives will sometimes be accompanied by price adjustments,
in order to compensate for an increase in benefits received by our members. The
implementation of such initiatives may not always coincide with the timing of
price adjustments, resulting in fluctuations in revenue and profitability in our
subscription business segment.

Geographic mix of sales. The relative mix of our business between the United
States and Canada impacts the monthly average revenue per pet we receive. Prices
for our plan in Canada are generally higher than in the United States (in local
currencies), which is consistent with the relative cost of veterinary care in
each country. As our mix of business between the United States and Canada
changes, our metrics, such as our monthly average revenue per pet, and our
exposure to foreign exchange fluctuations will be impacted. Any expansion into
other international markets could have similar effects.

Other business segment. Our other business segment primarily includes other
product offerings that generally have a business-to-business relationship. These
products have been in the past, and may be in the future, materially different
from our subscription segment. Our relationships in our other business segment
are generally subject to termination provisions and are non-exclusive.
Accordingly, we cannot control the volume of business, even if a contract is not
terminated. Loss of an entire program via contract termination could result in
the associated policies and revenue being lost over a period of 12 to 18 months,
which could have a material impact on our results of operations. We may enter
into additional relationships in the future to the extent we believe they will
be profitable to us, which could also impact our operating results.


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Operating results

The following tables present our results of operations for the periods
presented both in absolute dollars and as a percentage of total revenues for
these periods. The comparison of financial results from one period to another is not
necessarily indicative of future results.

                                                    Three Months Ended March 31,
                                                                            2022           2021
                                                                             (in thousands)
Revenue:
Subscription business                                                    $ 139,839      $ 113,292
Other business                                                              66,160         41,393
Total revenue                                                              205,999        154,685
Cost of revenue:
Subscription business(1)                                                   115,263         95,537
Other business                                                              60,842         38,048
Total cost of revenue                                                      176,105        133,585
Operating expenses:
Technology and development(1)                                                5,229          3,731
General and administrative(1)                                                9,366          7,216
New pet acquisition expense(1)                                              

21,627 19,704

 Depreciation and amortization                                               2,717          3,093
Total operating expenses                                                    38,939         33,744
Loss from investment in joint venture                                          (69)           (85)
Operating loss                                                              (9,114)       (12,729)
Interest expense                                                                79             (2)
Other income, net                                                             (314)           (62)
Loss before income taxes                                                    (8,879)       (12,665)
Income tax benefit                                                             (24)          (217)
Net loss                                                                 $  (8,855)     $ (12,448)

(1) Includes stock-based compensation expense as follows:


                                                       Three Months Ended March 31,
                                                                                2022         2021
                                                                                (in thousands)
   Cost of revenue                                                            $ 1,836      $ 3,234
   Technology and development                                                     908          664
   General and administrative                                                   2,423        1,819
   New pet acquisition expense                                                  2,382        2,731
   Total stock-based compensation expense                                     $ 7,549      $ 8,448


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                                                                           Three Months Ended March 31,
                                                                                               2022                 2021
                                                                                          (as a percentage of revenue)
Revenue                                                                                           100  %               100  %
Cost of revenue                                                                                    85                   86
Operating expenses:
Technology and development                                                                          3                    2
General and administrative                                                                          5                    5
New pet acquisition expense                                                                        10                   13
Depreciation and amortization                                                                       1                    2
Total operating expenses                                                                           19                   22
Gain (loss) from investment in joint venture                                                        -                    -
Operating loss                                                                                     (4)                  (8)
Interest expense                                                                                    -                    -
Other income, net                                                                                   -                    -
Loss before income taxes                                                                           (4)                  (8)
Income tax benefit                                                                                  -                    -
Net loss                                                                                           (4) %                (8) %



Stock-based compensation expense:                                           

Three months completed March, 31st,

                                                                                                      2022                 2021
                                                                                          (as a percentage of revenue)
Cost of revenue                                                                                            1  %                 2  %
Technology and development                                                                                 -                    -
General and administrative                                                                                 1                    1
New pet acquisition expense                                                                                1                    2
Total stock-based compensation expense                                                                     4  %                 5  %

                                                                            Three Months Ended March 31,
                                                                                                      2022                 2021
                                                                                              (as a percentage of
                                                                                              subscription revenue)
Subscription business revenue                                                                            100  %               100  %
Subscription business cost of revenue                                                                     82                   84



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Comparison of the three months ended March 31, 2022 and 2021

Revenue

                                                                            Three Months Ended March 31,
                                                                                  2022                    2021     % Change
                                                                                  (in thousands, except percentages, pet and per pet data)
Revenue:
Subscription business                                                                      $  139,839            $ 113,292              23  %
Other business                                                                                 66,160               41,393              60
Total revenue                                                                              $  205,999            $ 154,685              33

Percentage of Revenue by Segment:
Subscription business                                                                              68  %                73  %
Other business                                                                                     32                   27
Total revenue                                                                                     100  %               100  %

Total pets enrolled (at period end)                                                         1,267,253              943,854              34
Total subscription pets enrolled (at period end)                                              736,691              609,835              21
Monthly average revenue per pet                                                            $    64.21            $   62.97               2
Average monthly retention                                                                       98.75  %             98.73  %



Three months ended March 31, 2022 compared to three months ended March 31, 2021.
Total revenue increased by $51.3 million, or 33%, to $206.0 million for the
three months ended March 31, 2022. Revenue from our subscription business
segment increased by $26.5 million, or 23%, to $139.8 million. This increase was
primarily due to a 21% increase in total subscription pets enrolled as of
March 31, 2022 compared to a year ago, and a 2% year over year increase in
average revenue per pet. Increases in pricing resulted from updates based on
pricing more accurately to our value proposition. Revenue from our other
business segment increased by $24.8 million, or 60%, to $66.2 million for the
three months ended March 31, 2022, primarily due to a 59% increase in enrolled
pets in this segment.
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Cost of Revenue

                                                                            Three Months Ended March 31,
                                                                                  2022                    2021    % Change
                                                                                 (in thousands, except percentages, pet and per pet data)
Cost of Revenue:
Subscription business:
Veterinary invoice expense                                                                 $  100,590            $ 83,726              20  %
Other cost of revenue                                                                          14,673              11,811              24
Total cost of revenue                                                                         115,263              95,537              21
Other business:
Veterinary invoice expense                                                                     44,336              26,144              70
Other cost of revenue                                                                          16,506              11,904              39
Total cost of revenue                                                                      $   60,842            $ 38,048              60

Percentage of Revenue by Segment:
Subscription business:
Veterinary invoice expense                                                                         72  %               74  %
Other cost of revenue                                                                              10                  10
Total cost of revenue                                                                              82                  84
Other business:
Veterinary invoice expense                                                                         67                  63
Other cost of revenue                                                                              25                  29
Total cost of revenue                                                                              92  %               92  %

Total pets enrolled (at period end)                                                         1,267,253             943,854              34
Total subscription pets enrolled (at period end)                                              736,691             609,835              21
Monthly average revenue per pet                                                            $    64.21            $  62.97               2



Three months ended March 31, 2022 compared to three months ended March 31, 2021.
Cost of revenue for our subscription business segment was $115.3 million for the
three months ended March 31, 2022, compared to $95.5 million for the same period
in the prior year. The increase of 21% in subscription cost of revenue was
primarily the result of a 21% increase in subscription pets enrolled. Cost of
revenue for our other business segment increased by $22.8 million, or 60%, to
$60.8 million for the three months ended March 31, 2022, primarily due to the
increase in enrolled pets in this segment.


                                       25
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Technology and development expenses

                                                                                   Three Months Ended
                                                                                        March 31,
                                                                                      2022                2021    % Change
                                                                                              (in thousands, except percentages)
Technology and development                                                                    $ 5,229            $ 3,731              40  %
Percentage of total revenue                                                                         3  %               2  %



Three months ended March 31, 2022 compared to three months ended March 31, 2021.
Technology and development expenses increased by $1.5 million, or 40%, to $5.2
million for the three months ended March 31, 2022. The increase was primarily
due to increased headcount and related compensation expense. Additionally,
development expense associated with developing new products and offerings was
$1.2 million, or 0.6% of our total revenue, for the three months ended March 31,
2022. It increased by $0.4 million year over year, as a result of expenditures
and investment in several pre-revenue initiatives. Excluding stock-based
compensation, technology and development expenses in total remained consistent
at approximately 2% as a percentage of revenue year over year.


General and administrative expenses

                                                                                   Three Months Ended
                                                                                        March 31,
                                                                                      2022                2021    % Change
                                                                                              (in thousands, except percentages)
General and administrative                                                                    $ 9,366            $ 7,216              30  %
Percentage of total revenue                                                                         5  %               5  %



Three months ended March 31, 2022 compared to three months ended March 31, 2021.
General and administrative expenses increased by $2.2 million, or 30%, to $9.4
million for the three months ended March 31, 2022. The increase in expense was
primarily due to a $1.1 million increase in compensation expense related
primarily to increased headcount, a $0.5 million increase in stock-based
compensation, a $0.4 million increase in legal, tax and other professional
service fees, and a $0.2 million increase in facilities-related expenses.
General and administrative expenses remained consistent at approximately 5% of
total revenue.


New Pet Acquisition Expense


                                                                       Three Months Ended March 31,
                                                                              2022                   2021    % Change
                                                                            (in thousands, except percentages, pet and per pet data)
New pet acquisition expense                                                             $ 21,627            $ 19,704              10  %
Percentage of total revenue                                                                   10  %               13  %
Subscription Business:
Total subscription pets enrolled (at period end)                                         736,691             609,835              21
Average pet acquisition cost (PAC)                                                      $    301            $    279               8




Three months ended March 31, 2022 compared to three months ended March 31, 2021.
New pet acquisition expense increased by $1.9 million, or 10%, to $21.6 million
for the three months ended March 31, 2022, contributing to a 21% increase in
total subscription pets enrolled year over year. The $1.9 million increase was
primarily attributable to a $2.0 million increase in expenses to generate leads
and increase conversion rates.


                                       26
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Depreciation and amortization

                                                                         Three Months Ended
                                                                              March 31,
                                                                            2022                2021    % Change
                                                                                     (in thousands, except percentages)
Depreciation and amortization                                                       $ 2,717            $ 3,093            (12)%
Percentage of total revenue                                                               1  %               2  %



Three months ended March 31, 2022 compared to three months ended March 31, 2021.
Depreciation and amortization expense decreased by $0.4 million, or 12%, to $2.7
million for the three months ended March 31, 2022. Depreciation and amortization
expense as a percentage of total revenue decreased from 2% to 1% year over year,
primarily due to the growth of our business and total revenue.

Stock-based compensation

Three months ended March 31, 2022 compared to three months ended March 31, 2021.
Stock-based compensation is included in the cost and expense line items in the
consolidated statements of operations, discussed above. The amount of
stock-based compensation recognized largely reflects the timing and vesting of
performance grants, calculated according to our equity incentive plan.
Stock-based compensation expense in total was $7.5 million during the period, a
decrease from $8.4 million in the prior year period, largely due to a one-time
2020 performance grant, shared with the entire team and fully vested in the
first quarter of 2021.
                                       27
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Cash and capital resources

The following table summarizes our cash flows for the periods indicated (in
thousands):


                                                                      Three Months Ended March 31,
                                                                         2022                  2021
Net cash used in operating activities                             $        (3,590)         $  (1,735)
Net cash used in investing activities                                     (14,251)            (4,602)
Net cash provided by (used in) financing activities                        52,765               (643)

Effect of exchange rates on cash, cash equivalents and
restricted cash, net

                                                          139                230

Net change in cash, cash equivalents and restricted cash $35,063 ($6,750)


Our primary requirements for liquidity are paying veterinary invoices, funding
operations and regulatory capital requirements, investing in new member
acquisition, investing in enhancements to our member experience, and servicing
debt. We have certain contractual obligations in the normal course of business,
including obligations and commitments relating to our credit facility,
non-cancellable vendor purchase agreements, as well as future payments of
veterinary invoice claims. Refer to Note 7, Reserve for Veterinary Invoices, and
Note 8, Debt, included in Item 1 of Part I of this 10-Q, for further details on
anticipated cash outflows.

Our primary sources of liquidity are cash provided by operations and available
borrowings from our credit facility. In March 2022, we entered into a credit
agreement that provided us with up to $150.0 million of credit. We believe these
sources are sufficient to fund our operations and regulatory capital
requirements for the next 12 months. As we continue to grow and consider
strategic opportunities, however, we may explore additional financing to fund
our operations and growth or to meet regulatory capital requirements. Financing
could include equity, equity-linked, or debt financing. Additional financing may
not be available to us on acceptable terms, or at all.

As of March 31, 2022, we had $259.0 million in cash, cash equivalents and
short-term investments and $90.0 million available under our Credit Facility.
Most of the assets in our insurance subsidiaries are subject to certain capital
and dividend rules and regulations prescribed by jurisdictions in which they are
authorized to operate. As of March 31, 2022, total assets and liabilities held
outside of our insurance entities were $254.3 million and $87.4 million,
respectively, including $8.3 million of cash and cash equivalents that were
segregated from other operating funds and held in trust for the payment of
veterinary invoices on behalf of our insurance subsidiaries. For further
information, refer to "-Regulation".

In April 2021, our board of directors approved a share repurchase program,
pursuant to which the Company may, between May 2021 and May 2026, repurchase
outstanding shares of our common stock. While our board of directors has
approved the program, any repurchase will be subject to quarterly assessments
based on parameters we set. We cannot predict the timing or extent of any
repurchases of shares of common stock, as such repurchases will depend on a
number of factors, some of which are beyond our control. These include uses of
capital in a given quarter, available cash, our stock price relative to our
estimated intrinsic value, and general market conditions. We have not
repurchased any shares under this program.

Operating cash flow

We derive operating cash flows primarily from the sale of our subscription
plans, which is used to pay veterinary invoices and other cost of revenue.
Additionally, cash is used to support the growth of our business by reinvesting
to acquire new pet enrollments and to fund projects that improve our members'
experience. Net cash used in operating activities was $3.6 million for the three
months ended March 31, 2022, compared to $1.7 million net cash used in operating
activities for the three months ended March 31, 2021. The change was primarily
driven by increased pet acquisition spend during the current period to drive new
pet enrollments and future growth, faster payment of veterinary invoices as a
result of increased utilization of claims automation, as well as timing
differences between collections from members and payments of veterinary invoices
and payments to vendors. Changes in accounts receivable and deferred revenue
were primarily related to annual policies with monthly payment terms within our
other business segment.

Investing Cash Flows

Net cash used in investing activities was $14.3 million for the three months
ended March 31, 2022, primarily related to net purchase of investments to
increase our statutory capital, as well as purchases of property, equipment and
intangible assets, primarily related to development of internal use software
focused on new product initiatives and member experience improvements.
                                       28
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Cash flow financing

Net cash provided by financing activities was $52.8 million for the three months
ended March 31, 2022, compared to $0.6 million net cash used in financing
activities during the same period in the prior year, primarily due to net
proceeds from the initial term loan under the new Credit Facility which closed
in March 2022.


Long-Term Debt

On March 25, 2022we entered a $150.0 million credit contract. Refer to
Note 8, Debt, included in Item 1 of Part I of this 10-Q, for further details.

Regulation

As of March 31, 2022, our insurance entities collectively held $136.5 million in
short-term investments and $211.1 million in other current assets, including
$20.7 million held in cash and cash equivalents to be used for operating
expenses of our insurance subsidiaries. Most of the assets in our insurance
entities are subject to certain capital and dividend rules and regulations
prescribed by jurisdictions in which they are authorized to operate. We expect
our required capital held within our insurance entities to grow as our business
grows.

American Pet Insurance Company (APIC)

The majority of our investments are held by our insurance entities to satisfy
risk-based capital requirements of the National Association of Insurance
Commissioners (NAIC). The NAIC requirements provide a method for analyzing the
minimum amount of risk-based capital (statutory capital and surplus plus other
adjustments) appropriate for an insurance company to support its overall
business operations, taking into account the risk characteristics of the
company's assets, liabilities and certain other items. An insurance company
found to have insufficient statutory capital based on its risk-based capital
ratio may be subject to varying levels of additional regulatory oversight
depending on the level of capital inadequacy. APIC must hold certain capital
amounts in order to comply with the statutory regulations and, therefore, we
cannot use these amounts for general operating purposes without regulatory
approval. As our business grows, the amount of capital we are required to
maintain to satisfy our risk-based capital requirements may increase
significantly. As of December 31, 2021, APIC was required to maintain at least
$116.0 million of risk-based capital to avoid this additional regulatory
oversight. As of that date, APIC maintained $124.2 million of risk-based
capital.

ZPIC Insurance Company (ZPIC) and QPIC Insurance Company (QPIC)

In 2021, we established two new wholly-owned insurance subsidiaries, ZPIC and
QPIC, domiciled in Missouri and Nebraska, respectively. We have funded required
statutory capital to these new subsidiaries. As of March 31, 2022, neither ZPIC
nor QPIC has begun underwriting any insurance policies.

Wyndham Insurance Company (SAC) Limited (WICL) Separate AX Account

WICL Segregated Account AX was established by WICL, with Trupanion, Inc. as the
shareholder, to enter into a reinsurance agreement with Omega General Insurance
Company. All of the assets and liabilities of WICL Segregated Account AX are
legally segregated from other assets and liabilities within WICL, and all shares
of the segregated account are owned by Trupanion, Inc. In March 2022, our parent
entity received a dividend of $6.9 million from WICL Segregated Account AX as
allowed under our agreements with WICL. As required by the Office of the
Superintendent of Financial Institutions regulations related to our reinsurance
agreement with Omega General Insurance Company, we are required to maintain a
Canadian Trust account with the greater of CAD $2.0 million or 120% of unearned
Canadian premium plus 20% of outstanding Canadian claims, including all incurred
but not reported claims. As of December 31, 2021, the account held CAD $7.7
million.

Though we are not directly regulated by the Bermuda Monetary Authority (BMA),
WICL's regulation and compliance impacts us as it could have an adverse impact
on the ability of WICL Segregated Account AX to pay dividends. WICL is regulated
by the BMA under the Insurance Act of 1978 (Insurance Act) and the Segregated
Accounts Company Act of 2000. The Insurance Act imposes on Bermuda insurance
companies, solvency and liquidity standards, certain restrictions on the
declaration and payment of dividends and distributions, certain restrictions on
the reduction of statutory capital, and auditing and reporting requirements, and
grants the BMA powers to supervise and, in certain circumstances, to investigate
and intervene in the affairs of insurance companies. Under the Insurance Act,
WICL, as a class 3 insurer, is required to maintain available statutory capital
and surplus at a level equal to or in excess of a prescribed minimum established
by reference to net written premiums and loss reserves.
                                       29
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Under the Bermuda Companies Act 1981, as amended, a Bermuda company may not
declare or pay a dividend or make a distribution out of contributed surplus if
there are reasonable grounds for believing that: (a) the company is, or would
after the payment be, unable to pay its liabilities as they become due; or (b)
the realizable value of the company's assets would thereby be less than its
liabilities. The Segregated Accounts Company Act of 2000 further requires that
dividends out of a segregated account can only be paid to the extent that the
cell remains solvent and the value of its assets remain greater than the
aggregate of its liabilities and its issued share capital and share premium
accounts.


Contractual Obligations

We enter into long-term contractual obligations and commitments in the normal
course of business, primarily debt obligations and non-cancellable vendor
service agreements. Specifically, on March 25, 2022, we entered into a $150.0
million credit agreement. Refer to Note 8, Debt, included in Item 1 of Part I of
this 10-Q, for further details and future principal payment schedule.


Critical accounting estimates

Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the consolidated financial statements, as well as the reported
revenue and expenses during the reporting periods.

Critical accounting estimates are those that we consider the most important to
the portrayal of our financial condition and results of operations because they
require our most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. Generally, we base our estimates on historical experience and on
various other factors that we believe to be reasonable under the circumstances.
Actual results may differ from these estimates.

No material changes have been made to our critical accounting estimates
compared to those described in our annual report on Form 10-K for the fiscal year
year ended December 31, 2021.

                                       30

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About Meredith Campagna

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