Operator: Our next question comes from Corey Grady with Jefferies. Please proceed with your question.
Corey Grady: Yes. Thanks for taking my question. I might have missed this in the prepared remarks, but did you provide any color on sub-count contribution from the PetExpert acquisition in Q4? And then what are you expecting in terms of contribution in 2023 from the European acquisitions?
Drew Wolff: Yes. We €“ the two acquisitions, we brought in 29,000 pets that came with those two acquisitions. As we mentioned in the prepared remarks, once again, they are marketing companies. It’s not the fully underwritten model that we have on our other business. And so the revenue stream from them currently is just the marketing commission. Now, our intent is to move to a full underwriting model, and that’s why they are in our subscription business, they are direct-to-consumer businesses. And we will eventually have them on a fully underwritten basis. But €“ so their revenue contribution is relatively modest. We had one month of PetExpert, which is by far the largest of the two, and that was 200,000. And so they are growing, and we intend to bring a Trupanion like product to them this year. But that’s for 2023, you can kind of back into what the contribution would be if you grow off that base.
Margi Tooth: Yes. If I can add some context in terms of the overall impact, so we would expect to see around 10% to 20% of our new pets coming from all of our new initiatives. So, that would both increase of international and our new distribution channels as we look through 2023. And as we are referring to Drew’s earlier comments, when you think about our pet count in the coming year, what we expect to see as a 20% increase in our pet count overall in terms of gross adds, but at the same PAC spend. So, that kind of really tells you that we are being very disciplined with our approach. We believe that having our international expansion allows us a great opportunity for success, and we are excited to be able to hold all of our general managers across all of the different countries we are involved in to the same guardrail. So, we will be looking to deploy that capital agnostic of where they are at the location, but at the same levels of the higher rates of return.
Corey Grady: That’s really helpful. Thank you. And I wanted to follow-up on John’s question on the term loan. Just on capital reserves, can you talk about plans to fund the higher capital reserves? And do you feel like you have enough cash on hand or you need to tap the term loan further?
Darryl Rawlings: Let me handle this at first and then I will hand it off to Drew. The changes that we have recently announced, is going to lower our need for capital reserves, not increase them. The €“ in our other business area where it’s been growing at a healthy clip, it has required us to hold about $60 million of reserve capital. And in aggregate, we have earned about $20 million of adjusted operating income, so obviously, not a super efficient use of funds. As that area slows down, our total capital requirements will lower and give us an opportunity to reinvest that same capital at places with higher rates of return. Drew, anything you want to add there?
Drew Wolff: No. I mean our €“ there is a big growth penalty in insurance reserve calcs that which penalized our entire book. And so that’s helpful in terms of more efficient use there. And our capital needs are totally linked with how fast we grow. As we have outlined, we are being disciplined in allocating capital to our highest return areas. And should we get margin expansion as we go through the year, then we will look at deploying more capital, but right now, going into the year, that’s our posture.
Corey Grady: Thank you.
Operator: Our next question comes from Ryan Tunis with Autonomous Research. Please proceed with your question.
Ryan Tunis: Yes. Thanks. Good evening. First question, I guess for Drew. You gave first quarter adjusted operating earnings guidance. What are you contemplating in that the subscription invoice ratio?
Drew Wolff: I think in loss ratio, I think you will see a step back up, but then building back towards a step down and a subscription adjusted operating margin. But €“ so starting lower in the year and then building up to 15% in the back half of the year. So, embedded in our full year guidance is a 13% to 14% subscription operating margin. But €“ with that, it’s very consistent year-over-year growth in subscription revenue and subscription AOI. And there is a lot more of the year to go. As we go through it, if we see margin expansion coming through, then we will deploy more capital for more growth.
Margi Tooth: And I think if I can add to that as well, when we think about the overall cost of goods, we expect to see that coming up about 10% to 12%. So, at the moment, as a reminder, the amount of rate we have flowing through is between 15% to 18% in ARPU. So, the earning that get us back to kind of where we should be from a catch-up from last year put us nicely in line or slightly ahead of that curve in terms of the cost.
Ryan Tunis: Got it. I guess following up on that, I guess I was a little bit surprised that ARPU didn’t increase a little bit more. How should we interpret it? It looks like ARPU was sort of flat on the adjusted basis. How should we interpret that given the rate you put into the book?
Drew Wolff: Yes. We have been talking about this dynamic all year, and it’s a healthy mix. We have €“ so from that, the headline like-for-like rates that Margi was talking about, it mix, drives it down to the lower rates. We also have significant FX year-over-year headwinds that we typically don’t talk about unless they are over 1%. Well, in the first part of the year, they are 2%. But what we see for the full year €˜23 for an ARPU growth rate is on average for the whole year, 3% to 3.5%. That’s once again, consistent with our outlook back in October, nothing has really changed other than we have updated our mix assumptions. Now bear in mind, mix also plays through to claims because we are a cost-plus model. If we have lower ARPU, we are also going to have lower claims. So, those two go together, and that’s why we are focused on €“ at the end of the day, it’s about margin. And so full year 13% to 14% margins on average is what’s embedded in our guidance.
Ryan Tunis: Got it. And then just lastly, Drew, that was helpful. You mentioned the 2019 experience. I think you said 20% of the book at 20% rate, but you gave us like a 70-month retention number that was low-70s. How should we think about that in terms of reconciling it to kind of that monthly retention number that you give?
Darryl Rawlings: Yes, so, that €“ it’s Darryl, I will answer it. It’s in my shareholder letter. So, you are looking at about a 98.6% monthly retention rate equals about 70 months. And that’s referencing back to 2019 where we saw about 20% of our new pets at that rate. So, it’s just a placement time for people to go back and take a look at it. We have been there before. We have been through it, and we would expect some similar.
Ryan Tunis: Thanks so much.
Operator: Our next question comes from Jon Block with Stifel. Please proceed with your question.
