Josh Shanker: Yes. Thank you very much for taking my question. This quarter average pet acquisition cost was $212 per pet, down from $268 a year ago, you added 71,000 pets gross before contemplating those from the European Commission based pets. Maybe you don’t have to spend as much to get the pets or would you have a substantially higher pet count at quarter end, if right now you weren’t trying to get the margins back to state? But what have we learned about how much we have to spend per pet in order to bring the pets that you want into Trupanion? And after you get through this period of difficulty in achieving the 71%, 72% MLR goal, do you think that your spend per pet will be lower than it’s been in the past?
Margi Tooth: Hi Josh. So if we kick off just in terms of the 71%, I just want to stress the message that you heard earlier that the 20% reduction in pack and essentially keeping our pet count consistent year-over-year is an exceptionally challenging thing to do. And the team made it look quite effortless in the quarter. So I’m very proud of the ability to pull that lever back. For us, the reason we broke out the internal rates of return by different cohorts is really to help give you that visibility into understanding what we will be trying to spend per cohort. So we’re not going to deviate from our 30% to 40% internal rates of return and we’ll continue to focus on that. And that may mean that that pack spend, as our margin increases, our lifetime value increases, we’re able to spend more money to acquire a pet.
At the moment, our margin necessitates that we spend less, being a lower lifetime value that will pick up over time as our margin continues to expand, as will our pack spend. It will be different by segments when you think by cohort. So when you think about that core Trupanion subscription business, that pack will grow and it’s actually higher than we’ve got different parts of the North American market that we can acquire pets at very different levels, because of their lifetime value. And our expectation is that higher pet count will come as we start to see that margin expansion, as we lean into our internal rates of return and we use the levers that we’ve dialed back over the last few months and start to push them back on again. But we will continue to be disciplined.
I think that’s the key thing here, ensuring that we are living within that guardrail at 30% to 40% and admonishing the business accordingly. Once we see that margin expansion and we’re seeing that margin expansion now quite solidly, this has been a very deliberate execution and a large sequential improvement for us quarter-over-quarter. It gives a little bit more leeway to push into more areas that are now priced appropriately and excited to see the teams have the opportunity to do that again with every quarter that comes.
Josh Shanker: Do you think that the pets being added today have a lifetime MLR of around 71% or is that going to be elevated because they start from a higher position?
Margi Tooth: Pets enrolling today?
Josh Shanker: Yes.
Margi Tooth: Pets enrolling today. The pets that we’re enrolling for the most part are absolutely they’re priced appropriately. So we are being very specific with how we’re enrolling pets. So as the rates get approved, as we focus on where we’re growing, you’ll see that loss ratio be consistent with our target value proposition, which is at 71%.
Josh Shanker: And then, I guess, in pets enrolled the last few years. Look, we understand the inflation came, it changed the numbers. If I was a person who bought average customer who bought the product in 2021 is my average pet going to have a 71% MLR? Do you think that – those cohorts are slightly higher than that because of the inflationary spike?
Margi Tooth: It depends when you enrolled in 2021, if we think about every 12 months we’re adjusting people’s rates. Historically that has been adjusting either up or down. Lately, it’s been adjusting up. You will be – across one of the reasons we’ve broken out the different segments is to demonstrate there is a dramatic difference between individual pets, whether that’s location, age or breed. And our target is to get our book by and large at 71%. So our goal is to be pricing people with a value proposition as opposed to it being taking rate where we can. So our cohorts are slightly different just depending on the renewal rate in the year. But overall, our target is getting closer and closer to 71%. So if you see that value proposition come down from where it was at 77%, you’ve heard it’s come down 110 basis points. That’s moving it closer to that 71% overall. Does that answers your question.
Darryl Rawlings: Josh, with our pricing promise, some people don’t understand this. What we’re charging for new members is the exact same rate that we charge for our renewing existing members, but some of them may be 11 months behind or something else. So we offer the same value proposition, but if rates are $65 for a golden doodle today, that’s what the new person is getting. And when that person is renewing, they’d get the exact same rate.
Josh Shanker: Thank you for answering all my questions.
Operator: Our next question comes from Jon Block from Stifel. Please go ahead.
Jon Block: Thanks, guys. Good evening. Maybe just the first question. It looks like the credit facility draw was $25 million, specific to the quarter, only $15 million left. Maybe if you could just talk to the decision to draw the $25 million, if you were decently free cash flow positive in the quarter. And I thought I heard Wei say cash in excess of capital requirements was roughly $60 million. So maybe if you could just talk through those dynamics, and again, I think $25 million specific to the quarter was one of the bigger amounts that you’ve drawn in the facility to date.
Wei Li: Hey, Jon. So, as a reminder, our credit facility we entered into back in March 2022, about 18 months ago. At the inception, we drew $50 million initial term loan with $75 million term loan. And we call it Delayed Draw Term Loan and $15 million revolver available. So that $75 million Delayed Draw Term Loans has an expiration date of 18 months. So by the end of September this year, according to the term, you either use it or you either lose it. So that’s the reason like we ended up drawing at the end of the quarter, which is in line with our plan. I hope that answers your question.
Jon Block: No, that was helpful. I appreciate that. I guess still if you’re $60 million in excess, why even draw that $25 million if Darryl, you’re saying you feel comfortable with the 2.5% of revenue free cash flow positive going forward, but maybe the answer there is safety net and you wanted to access it. Is that fair? And then I can ask my second question.
Darryl Rawlings: Yes. I mean it makes us – when we’re cash flow positive, our $11 million operating cash and $7 million free cash flow, it certainly makes us a lot easier. But we had a date coming up and we need to make a decision. Did we want that extra buffer or not? It seemed prudent at this time and gives us a lot more flexibility.
Jon Block: Okay. Very helpful. So second one is going to be a little bit longer, so just maybe to move to the gross add. They were flat year-over-year, Margi, I think you pointed out, but I just want to make sure I have some of the numbers correct. So year ago, 71,000-ish gross adds were essentially all like call it core Trupanion. This year a similar number, but I believe 57,000 core Trupanion. So the core Tru, which is sort of the higher end or the white glove that was down, whatever that is, 15%, 20%. And then the fact that you’re bringing on other pets, PHI or Furkin likely helps suppress that impressive pack of 212. Maybe if you can just talk through that and confirm it and then Part B, no relation, but Part B of a question would be can you talk to the sources of cash, your free cash flow positive, but reserves have been $18 million source of cash to date.
