So it’s about getting us ready for the long term growth. But I think the ultimate priority for us moving forward is making sure that margin is where we need it to be and expect it to be as we continue through the rest of the year. Hopefully, that answers your question.
Operator: The next question comes from John Barnridge with Piper Sandler.
John Barnridge: Please go ahead. Good afternoon. Thank you for the opportunity. My first question, can you talk about the opportunity for the food initiatives that you’ll be involved in? Daryl, what do you view as a Tam? There is Japan. You’re going to retain 100% control, and will those expenses flow through the other business? Thank you.
Darryl Rawlings: Well, we first talked about our food initiative in our 60 month plan. It’s still very early days. We believe it is a very large tam. You know, if we get to 25% market penetration on insurance, 100% of pets are eating food, and we think we’re in a unique position to understand the health outcomes. That’s what we’re focused on. But we don’t have any promises on how, when it’s going to hit the P&L or where it will be flowing through. So it’s early days.
John Barnridge: Okay, in my follow up question, can you talk about the growth in capital in excess of the minimums? During the quarter, it looked like it went to $103.4 from $64.1. With growth slowing, should this continue to build as the year progresses?
Darryl Rawlings: Thank you. Yes, thanks for the question. So the way we look at it, the excess capital or the overcapitalization with the insurance entities, it’s driven by two things, as I think you know. One is as the business continues to grow from a subscription perspective, we contribute to that pool of capital. And then the other is the dynamic of pets best rolling off. So, pets best, and it’s been talked about in the past, the capital intensity of that business is higher. And so as that business, as that growth rate begins to diminish, and then ultimately it goes into secular decline, it frees up capital. So a good portion of the $24 million increase in capital, again above the minimum requirement, was due to that dynamic.
We look at it as a positive for a couple of reasons, I think. One, it gives us the capital to add more policies. So we now have the financial wherewithal to grow the subscription business, where we see opportunities that meet our guardrails. The second is, obviously, it contributes to the RBC requirement. Those requirements are things that we pay close attention to. We’ve had very productive conversations with New York DF’s. And then the third is a dynamic that I think we’ve all seen over the last year. And that’s just that interest rates continue to remain elevated, at least where they were from a historical perspective. So now that is a. That is now generating cash. And as you saw in Q4, we took an ordinary dividend that was interest accrued on that cash.
So there’s utility in us having. That. We’ve continued to discuss with New York DF’s. I think they’re open to the idea of us continuing to take ordinary dividends. So certainly I would expect that to grow in proportion to the growth rate of our business. But the capital intensity of it, because of the pet’s best roll off, will diminish.
Operator: Thank you. The next question comes from Katie Sacchi with Autonomous research. Please go ahead.
Katie Sacchi: Hi. Good evening and thank you. Margi and Darlene both. Congratulations on your respective new roles. I want to clarify some things on the invoice ratio, first, across both subscription and other pet. I think about a year ago, we were talking about somewhere in the field of one point of adverse development on that invoice ratio. And I just wanted to check in with you guys to see, you know, if there’s any similar degree of, you know, revision included in this quarter’s invoice ratio. And, you know, more broadly, if you give us some color as to, you know, how you’re feeling about the past year’s loss picks, holding in, that would be much appreciated.
Darryl Rawlings: Sure. I just want to make sure that we got the question right so we can answer it. I think you’re talking about loss ratio and the trend. I think one of the things I would refer back to what we said on subscription, I think one of the things we didn’t talk about is loss ratio was elevated in Q1 related to the other business related to pets best. And that’s due to the same phenomenon that we’ve been seeing within our subscription business, where rates are now being pushed through and that’s now manifesting a higher loss ratio. From pets best perspective, the nature of our agreement is that it’s less sensitive. So from a trupanion perspective, we’re less concerned about that. So I would say that that increase in loss ratio that they’re seeing is effectively the same thing that we saw, and we’re putting pricing through as a result in response to that.
Margi Tooth: And Katie, just in terms of our reserves and our IBNR, we did release a little reserve in the quarter, just related to the much older claims that we’ve been holding back reserves for. The beauty of having the vet direct pay model, where we pay those invoices directly, is that we see a lot less development in those over time and we’re able to release that reserve. Which I think could be where your question was aiming.
Darryl Rawlings: Yes. And if it’s helpful, I can give you a little bit more context specific on the reserve. So if you look at reserve as a percent of revenue across the total book, it was down. It was down sequentially from 21.4 to 20.3. But if you look at it year-over-year, a year ago it was 18.8. So there were some elevated claims that were paid from elevated claims in Q4 that were paid in Q1. So we felt comfortable bringing the reserve down. But you indexed that 18.8 versus 20.3 with a 5.6% increase in pet count. So we feel relatively good that reserve and revisions to reserve are unchanged.
Katie Sacchi: Okay. Yes, thank you. That’s a helpful clarification. And then we’ll be turning to growth metrics. I think the deceleration in other pet enrolled is to be expected in the context of the pet business agreement changes. But I was just wondering, are there any positive growth trends in that segment that are being masked, the pets best shift.
Darryl Rawlings: I think the only thing that would refer to there is probably ARPU. I mean, back to my earlier comments that, you know, they’re seeing increased ARPU and the ability to pass on price to consumers. So I would say very similar to what we’re seeing. If you’re asking about the overall adjusted operating margin change and why it went down, there’s two reasons for that. One is we’re now under the new agreement and that new agreement has different revenue tiers. And so as the business is declining, we’re no longer kicking in those revenue tiers. And the other, as I mentioned earlier, was higher fixed expenses related in part to remediation. And some of the technology costs, if you look at those in conjunction, that’s the driver.
So to the 1.6% that we saw in Q1, I would expect, if you were thinking about it going forward, that that is the new normal for, in terms of profitability of that business, somewhere between 1.5 and 1.7 is what we’re thinking is forecast for balance of year. If that’s helpful.
Operator: The next question comes from Wilma Burdis with Raymond James. Please go ahead.
Wilma Burdis: Hey, good evening and congratulations to Margi and also to Daryl. A couple quick questions for you guys. First, could you talk about the trajectory of adjusted operating income throughout 2024? Trupanion appears on track for $43 million in the first half of the year, which implies about $70 million of adjusted operating income in the second half of the year. To hit the guidance of $100 to $120 for ’24. Can you just talk about the pieces to get there to that higher level in the second half of the year? Thank you.
Fawwad Qureshi: Sure. The primary driver is pricing and pricing flowing through the book. So if you compare and just look at adjusted operating margin, it’s up about in the range of 200 to 450. And that is entirely driven by margin expansion through pricing. I would expect sequential improvement, I think to my earlier comment, the Q1 to Q2, largely flat from a margin perspective. And then acceleration in back half of the year.
Wilma Burdis: Okay, thank you. And then second question. Can you talk about the ARPU, the higher ARPU in the other business, should we expect a similar growth rate in pricing going forward?
Fawwad Qureshi: If you look at contribution to revenue. So the 15.2% year-over-year increase in the other business, almost all of it was ARPU. I think 1413.9% was ARPU related. So we’re getting a very small amount through pet months because these are annual contracts. Total enrollments are down. But we’ll see that trail off. So I would say that’s largely driven by our poom.
Operator: This concludes our question-and-answer session and the Trupanion first quarter 2024 earnings call. It is now concluded , you may now disconnect.
