UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 001-36537
TRUPANION, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
83-0480694
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
907 NW Ballard Way
Seattle, Washington 98107
(855) 727 - 9079
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, $0.00001 par value per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
x
(Do not check if smaller reporting company)
Smaller reporting company
o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public market for the registrant’s common stock. The registrant’s common stock began trading on the New York Stock Exchange on July 18, 2014. The aggregate market value of common stock held by non-affiliates of the registrant computed by reference to the price of the registrant’s common stock as of July 18, 2014 (based on the last reported sale price on the New York Stock Exchange as of such date) was $56,969,288.
As of February 18, 2015, there were approximately 27,797,215 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the definitive proxy statement to be filed by the registrant in connection with the 2015 Annual Meeting of Stockholders (Proxy Statement). The Proxy Statement will be filed by the registrant with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2014.




TRUPANION, INC.
Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 2014
TABLE OF CONTENTS

 
 
Page
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
 
Item 15.
 
 
 





Note About Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and section 27A of the Securities Act of 1933, as amended (Securities Act). All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “target,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan” and “expect,” and similar expressions that convey uncertainty of future events or outcomes, are intended to identify forward-looking statements.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II. Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law.

Unless otherwise stated or the context otherwise indicates, references to “Trupanion,” “we,” “us,” “our” and similar references refer to Trupanion, Inc. and its subsidiaries taken as a whole.

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PART I
Item 1. Business
Our Mission
Our mission is to help the pets we all love receive the best veterinary care.
Our Company and Approach
We are a direct-to-consumer monthly subscription service providing a medical insurance plan for cats and dogs throughout the United States, Canada and Puerto Rico. Our data-driven, vertically-integrated approach enables us to provide pet owners with what we believe is the highest value medical plan for their pets, priced specifically for each pet’s unique characteristics. Our growing and loyal member base provides us with highly predictable and recurring revenue. We operate our business with a focus on maximizing the lifetime value of each pet while sustaining a favorable ratio of lifetime value relative to acquisition cost.
Our target market is large and underpenetrated. We have pioneered a unique solution that sits at the center of the pet medical ecosystem, meeting the needs of pets, pet owners and veterinarians, and we believe we are uniquely positioned to disrupt the pet medical insurance market and drive increased market penetration. Our aggregate enrolled pets, including pets in our other business segment, was 232,426 as of December 31, 2014. Of this amount, the total number of pets enrolled in our subscription medical plan has increased every quarter for the last ten years. More recently, the total pets enrolled in our subscription medical plan grew from 31,207 on January 1, 2010 to 218,684 on December 31, 2014, which represents a compound annual growth rate of 48% .
Total Subscription Pets Enrolled
(in thousands)
 
Pet owners are often surprised by the cost of veterinary care and can be financially unprepared if their beloved pets become injured or ill. The costs of medical treatments for pets have become more onerous over time due to the availability and usage of increasingly advanced veterinary care. Although traditional pet insurance products have been offered for years, many of these products are poorly designed and confusing to pet owners and their veterinarians. These products provide limited value to both pet owners and veterinarians and they have low adoption rates. Consequently, pet owners without medical coverage or with traditional insurance products may be forced to accept sub-standard care for their pets due to financial constraints.
To address these challenges, we offer a simple, fair and comprehensive medical plan that pays 90% of actual veterinary costs for accident and illness claims, has no payout limitations, has few exclusions and can be used to cover the costs incurred at any veterinary practice, emergency care center or specialty hospital in the United States, Canada and Puerto Rico. This differentiated approach aligns the interests of pet owners and veterinarians, which allows them to focus on providing the best care for pets rather than minimizing the cost of treatment. Some of our key differentiators include:
Superior Value Proposition. Our vertically integrated infrastructure eliminates significant frictional costs that constrain many of our competitors, which allows us to provide superior value to our members.
Proprietary Database and Technology Platform. Our custom-built technology platform and proprietary database contains 15 years of pet health records and gives us unique insights into how to both manage our business and accurately price subscriptions to our medical plan.

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Strong Relationship with Veterinary Community. We have invested significant time and energy communicating our value proposition to thousands of veterinarians. We engage a national referral network of independent contractors who are paid fees based on activity in their regions, which we refer to as our Territory Partners. Our Territory Partners communicate the benefits of our medical plan to veterinarians through in-person visits.
We believe that these differentiators serve as competitive advantages, making our business model difficult to replicate.
We generate revenue primarily from subscription fees for our medical plan. Our medical plan automatically renews on a monthly basis, and members pay the subscription fee at the beginning of each subscription period. Since 2010, at least 88% of our subscription business revenue every quarter has come from existing members who had active subscriptions at the beginning of the quarter. Due to our focus on providing a superior value proposition and member experience, our members are very loyal, as evidenced by our 98.68% average monthly retention rate in 2014. For more information regarding average monthly retention, including an explanation of how we calculate this metric, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics.”
We enrolled our first pet in Canada in 2000 and our first pet in the United States in 2008. Our revenue for the year ended December 31, 2014 was $115.9 million , representing a compound annual growth rate of 57% from our revenue of $19.1 million for the year ended December 31, 2010. We have made and expect to continue to make substantial investments in member acquisition and in expanding our operations to support our expected growth. For the year ended December 31, 2014, we had a net loss of $21.2 million and our accumulated deficit was $57.2 million at December 31, 2014.
Our Solution
Our medical plan aligns the interests of pet owners and veterinarians, which allows them to focus on providing the best care for their pets rather than cost of treatment.

Benefits to Pet Owners
Predictability of costs and peace of mind. Our members can be confident that their pets will be covered in the event of injury or illness. When they make a claim that is covered by our plan, we pay 90% of the veterinary costs actually charged by the member’s veterinarian. While a significant number of our members choose a plan with no deductible, our members have the option to choose a deductible up to $1,000 and can change their deductible at any time. Our members may obtain treatment from any licensed veterinarian that they select within the United States, Canada or Puerto Rico. Our coverage has no payout limits, is not subject to a lifetime maximum payout and is not limited by the amount that a veterinarian charges or the treatment that a veterinarian recommends. Our coverage is designed to be comprehensive and to cover the treatment costs of any accident or illness. Generally, the only costs not covered by our plan are those relating to conditions existing prior to the pet’s enrollment, routine or preventative care, including examination fees and taxes. Our goal is to enable pets to receive the best medical care while helping pet owners manage the financial burdens stemming from injuries or illnesses.
Awareness of cost of care. We believe veterinarians typically have consultative relationships with pet owners and play a major role in influencing the decisions they make to care for their pets. We actively market the value of our medical plan to veterinarians, enabling them to educate pet owners effectively about the costs of veterinary care and the benefits of our medical plan. Leads generated from veterinary referrals drive membership engagement across multiple touch points ranging from our member-friendly contact center to our easy-to-use website.
Superior value proposition. We offer a comprehensive medical plan with no limitations for chronic, congenital or hereditary conditions, no payout limits and no mandates to veterinarians on the cost of treatment. We focus on providing high value to our members, rather than minimizing the monthly subscription price.
Exceptional member experience. We are highly focused on providing an exceptional member experience. We offer a simple and easy to understand medical plan. We have designed our claims process to be fair, efficient and transparent. Our goal is to help eliminate the high levels of frustration associated with traditional pet insurance products.
Benefits to Veterinarians
Freedom to be the most effective advocate for pets. Our medical plan does not limit how much can be paid for an injury or illness. This provides veterinarians with the freedom to practice veterinary medicine at the highest level and be the most effective advocate for the health of the pets.

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More loyal client base. Our members visit veterinarians more frequently, which can generate significantly more annual revenue for veterinarians compared to clients without pet medical coverage. Furthermore, pet owners with medical coverage typically spend significantly more on their seriously injured or ill pet before opting to stop treatment. The result is a client base that is more engaged, spends more money on care and has healthier cats and dogs.
Reduces potential conflicts with cost-sensitive pet owners. We enable veterinarians to recommend optimal treatment without having their decisions dictated by the cost of treatment and the financial burden on the pet owner. As a result, veterinarians are able to establish stronger ties with their clients.
Our Strategy
Our strategy is focused on attracting and retaining members by providing a best-in-class value and member experience. We are focused on building a successful long-term business by pursuing the following growth strategies:
Increase the number of referring veterinary practices. We intend to increase the number of veterinary practices that are actively introducing our medical plan to their clients by continuing to expand our national independent referral network of Territory Partners and increasing direct marketing to veterinarians.
Increase the number of referrals from active veterinary practices. We intend to continue increasing the number and quality of interactions that we have with veterinarians to accelerate the rate at which active veterinary practices refer us leads.
Increase the number of third-party referrals from members. We are focused on using innovative technologies to further enhance our member experience. Generally, we believe a superior member experience will foster member referrals. For example, we recently introduced a new software technology, Trupanion Express, which is designed to facilitate the direct payment of claims to veterinary practices. We believe this, if widely adopted, will transform the claims process and could increase referrals from pet owners and veterinarians acting as ambassadors for our brand.
Improve online lead generation and conversion. We are investing in our online marketing capabilities, and intend to continue to do so in order to fully capture the online opportunity. Our online marketing initiatives play an integral role in acquiring new leads. Our website is critical to converting leads from all of our member acquisition channels, with over 82% of our new members in the year ended December 31, 2014 visiting our website prior to or during the enrollment process.
Explore other member acquisition channels. We regularly evaluate new member acquisition channels. We intend to aggressively pursue those channels that we believe will generate an attractive ratio of lifetime value relative to acquisition cost.
Expand internationally. While we are currently focused on capturing the large opportunity in the U.S. and Canadian markets, we may to explore international expansion in the future.
Pursue other revenue opportunities. We may opportunistically engage in other revenue opportunities. For example, American Pet Insurance Company, which we acquired in 2007, has written policies for an unaffiliated general agent since the end of 2012. As the industry grows and other providers consider entering the pet insurance market, we are uniquely positioned to partner with them.
Sales and Marketing
Marketing to Veterinarians
Veterinary practices represent our largest referral source. Forming long-term relationships with veterinarians is critical to our continued success, as we believe veterinary recommendations are highly persuasive to our existing and prospective members and key to increasing overall awareness of our medical plan. To reach veterinarians effectively, we utilize a national independent referral network of Territory Partners. Territory Partners serve as a critical resource for us, as the market for veterinary services is highly fragmented and includes many sole-owner veterinary practices and small veterinary practices that are difficult to reach. Our Territory Partners are independent contractors who exclusively market our medical plan and are paid fees based on activity in their regions. We believe this compensation structure aligns our interests and provides a platform that we can leverage over time to increase the contribution margin of membership generated through this channel.
Sales and Marketing to Pet Owners
We generate leads through a diverse set of third-party referrals and online member acquisition channels, which we then convert into members through our website and contact center.
Referrals from third-parties. We actively promote the value of our medical plan with veterinarians, veterinary affiliates (including purchasing groups and other veterinary membership organizations), corporate employee benefit providers, shelters and breeders to introduce our medical plan to their clients.

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Online. We believe most of our members spend some time researching pet medical coverage online as part of their decision-making process. Online advertising represents a large source of new member enrollments. A significant portion of the members we acquire from online leads come through our paid search marketing, email marketing, social media marketing and search engine optimization initiatives.
Referrals from existing members . For the year ended December 31, 2014, 21% of our new member enrollments were generated from existing members adding a pet and referring their friends and family.
We constantly evaluate our marketing initiatives based on their respective returns on investment, which we generally measure by comparing total sales and marketing investment for an initiative against the applicable contribution margin generated.
Member Support and Claims Operations
We utilize our award-winning, in-house contact center to maximize the effectiveness of our sales, claims handling and overall member retention rate. Our contact center employees play an essential role in communicating our brand and values to our members. When a member calls, our system automatically routes them to one of our professionals who is best equipped to handle the call, rather than sending them to an automated menu of options. Operationally, we provide 24-hour support, seven days a week, and offer support in English, Spanish and French. Members can select their preferred contact method of phone, email or web co-browsing. We meticulously measure our contact center interactions and capture meaningful member insights that can be leveraged across our business.
One of the most significant opportunities we have to interact with our members is through our claims administration process. We view each interaction with our members as an opportunity to create an ambassador for our brand. Our claims processing team has significant first-hand experience in veterinary practices. We have carefully engineered our claims process to be transparent, fair and fast, which is critical for membership experience and retention rates, and we are continually evaluating new ways to further improve our claims administration process.
Our Platform and Technology
We are a data and technology-driven company that has devoted significant resources to developing scalable infrastructures that leverage state-of-the-art technology frameworks. We have a team of product and engineering professionals dedicated to enhancing our technology platform and developing new solutions for pet owners and veterinarians.
Our team has developed proprietary, in-house software that forms the backbone of our unique technology platform:
Analytics and pricing engine. Our dynamic analytics platform draws on our extensive library of proprietary data to effectively and accurately price subscriptions to our medical plan. We leverage a broad range of information, including species, breed, age, gender and pet location. As of December 31, 2014, we used approximately 1.2 million permutations, which are regularly refined to price each pet based on its unique characteristics. As data collection is a key part of our research and development process, we are constantly looking for new and relevant data to collect and shape for this purpose.
Trupanion Express. Our software solution for veterinarians provides them with the ability to process claims electronically, often in less than five minutes. Trupanion Express integrates with veterinarians practice management software, giving us access to more data, reducing our claims handling expense and giving us the ability to deliver a significantly better experience to our members compared to the traditional reimbursement model.
Pet Organizer. Our proprietary claims processing software is at the heart of our technology platform. Custom-built to facilitate our claims administration and billing, Pet Organizer enables us to collect an ever-increasing amount of unique pet data. Pet Organizer allows our claims administration team to process a voluminous number of claims in a flexible way, which we do not believe is possible using off-the-shelf claims software.

Customer relationship management system. Using customer relationship management technology that has been modified to support the unique processes of our sales and claims professionals, our customer relationship management system provides a robust, dynamic means of creating, tracking and storing all of the data we use to better understand and manage our interactions with members, Territory Partners and veterinarians.
Contact center. Our phone system uses a multi-channel solution that intelligently routes member interactions to the best-matched skilled professional. This technology includes a workforce management solution that forecasts call volumes and schedules our professionals to meet goals, providing us with robust data capture and reporting capabilities.

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Trupanion.com. Our responsive, content management system-based website provides a simple interface between Trupanion and consumer and business audiences, providing a simple interface that removes the need for labor intensive, complex steps during the enrollment process. It employs dynamic business logic to help new members complete their enrollment forms in real time. Built using digital asset management and customer relationship management system technologies, the site provides a custom-built user experience for each user based on who the user is and how the user arrived at the site. The responsive nature of the website also helps to deliver an optimal experience, regardless of where the content is accessed.
We developed our website and related infrastructure with the goal of maximizing the availability of our platform to members, veterinarians and key member acquisition channels. Our website and related infrastructure are hosted on a network located at our headquarters in Seattle, Washington and in a redundant third-party facility in Santa Clara, California.
Competition
The market for medical coverage for pets is highly competitive. We compete with consumers that self-fund veterinary costs with cash or credit, as well as traditional pet insurance providers and new entrants to our market. The vast majority of pet owners in the United States and Canada do not currently have medical coverage for their pets. We are primarily focused on expanding the overall size of the market by improving the value proposition for consumers. We view our primary competitive challenge as educating pet owners on why our medical plan is a better alternative to self-funding.
Additionally, there are traditional insurance companies that provide pet insurance products, either as a stand-alone product or along with a broad range of other insurance products. The largest of these traditional providers is Veterinary Pet Insurance Company, a division of Nationwide Insurance. In addition, new entrants backed by large insurance companies with substantial financial resources have attempted to enter the market in the past and may do so again in the future. Further, traditional providers may consolidate, resulting in the emergence of new providers that are vertically integrated or able to create other operational efficiencies, which could lead to increased competition. We believe that we have competitive strengths that position us favorably related to competitors, including a compelling value proposition due in part to our vertically integrated approach that reduces frictional costs, a unique member acquisition strategy and network of territory partners, a proprietary database containing 15 years of historical data that provides actionable data insights, powerful technology infrastructure and an experienced management team.
Intellectual Property
We rely on federal, state, common law and international rights, as well as contractual restrictions, to protect our intellectual property. We control access to our proprietary technology, software and documentation by entering into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with third parties, such as service providers, vendors, individuals and entities that may be exploring a business relationship with us.
In addition to these contractual arrangements, we also rely on a combination of intellectual property rights, including trade secrets, patents, copyrights, trademarks and domain names, as well as contractual protections, to establish and protect our intellectual property. As of December 31, 2014, we had two pending patent applications in the United States, one pending international patent filed under the Patent Cooperation Treaty, one pending patent application in Europe and no issued patents. We also had six registered trademarks in the United States, including “Trupanion,” and two additional trademark applications. We had one registered trademark in Canada, and have and two additional trademark applications. Many of our unregistered trademarks, however, contain words or terms having a common usage and, as a result, may not be protectable under applicable law. We also currently hold the “Trupanion.com” Internet domain name and numerous other related domain names.
Employees
As of December 31, 2014, we had 413 employees. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Regulation
Each U.S. state, the District of Columbia and U.S. territories and possessions, as well as all of the Canadian provinces, have insurance laws that apply to companies licensed to transact insurance business in the jurisdiction. The primary regulator of an insurance company, however, is located in its state of domicile. Our underwriting subsidiary American Pet Insurance Company (APIC) is domiciled in New York State and its primary regulator is therefore the New York Department of Financial Services (NY DFS). APIC is currently licensed to do business in all 50 states, Puerto Rico and the District of Columbia in the United States. As such, APIC is subject to comprehensive regulation and supervision under U.S. state and federal laws.

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State insurance regulators have broad authority with respect to all aspects of the insurance industry, including the following:
licensing of APIC to transact its line of business and approval and issuance of its certificate of authority;
establishing minimum levels of capital and reserves required by APIC to operate as an ongoing insurance company;
assessing the officers and directors of APIC to ensure a minimum level of competency and trustworthiness;
licensing of individual producers and agents and business entities marketing and selling insurance products and of claims adjusters settling claims;
admittance of assets to statutory surplus and regulating the type of investments in which APIC can invest;
regulating premium rate levels for the insurance products APIC offers;
approving policy forms APIC issues;
regulating unfair trade and claims practices; and
establishing reserve requirements and solvency standards.
Regulators also have broad authority to conduct on-site market conduct examinations of our management and operations, marketing and sales, underwriting, customer service, claims handling and licensing. Market conduct examinations can involve direct, on-site contact with a company to identify potential regulatory violations, discuss and correct an identified problem or obtain a better understanding of how the company is operating in the marketplace.
Adverse state insurance regulatory actions could include limiting APIC’s ability to write new policies, limiting APIC’s ability to effect rate increases or to cancel, reduce or non-renew insurance coverage with respect to existing policies, disallowing premium increases or policy coverage amendments APIC seeks, reviewing the adequacy and appropriateness of our insurance products before they can be made available to our members and restricting marketing and sales by our referral sources, contact centers and producers.
State insurance laws and regulations in the United States require APIC to file financial statements with state insurance regulators everywhere it is licensed and its operations and accounts are subject to examination at any time. APIC’s statutorily required financial statements are available to the public. APIC prepares statutory financial statements in accordance with accounting practices and procedures prescribed or permitted by these regulators. The National Association of Insurance Commissioners (NAIC) has approved a series of uniform statutory accounting principles (SAP) that have been adopted, in some cases with minor modifications, by all state insurance regulators. As a basis of accounting, SAP was developed to monitor and regulate the solvency of insurance companies. In developing SAP, insurance regulators were primarily concerned with assuring an insurer’s ability to pay all its current and future obligations to policyholders. As a result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary state. The values for assets, liabilities and equity reflected in financial statements prepared in accordance with U.S. generally accepted accounting principles are usually different from those reflected in financial statements prepared under SAP.
In Canada, our plan is written by an unaffiliated Canadian-licensed insurer, Omega General Insurance Company (Omega). Under the terms of our agreements with Omega, our subsidiary Trupanion Brokers Ontario acts as a general agent through a fronting and reinsurance agreement with Omega pursuant to which APIC retains any financial risk associated with our Canadian business. This agreement was restructured as of January 1, 2015 to include our newly formed segregated portfolio cell business, Wyndham Segregated Account, located in Bermuda. These restructured agreements may be terminated by either party with one year’s written notice until they terminate pursuant to their terms on December 31, 2017, at which time they will automatically renew for successive one-year periods and remain terminable by either party with one year’s written notice. Omega’s Canadian insurance operations are supervised and regulated by the Canadian federal, provincial and territorial governments. Omega is a fully licensed insurer in all of the Canadian provinces and territories in which we do business.
Insurance Holding Company Regulation
APIC is subject to laws governing insurance holding companies in New York, its state of domicile. These laws impact us in a number of ways, including the following:
We must file periodic information reports with the NY DFS, including information concerning our capital structure, ownership, financial condition and general business operations.
New York regulates certain transactions between APIC and our other affiliated entities, including the fee levels payable by APIC to affiliates that provide services to APIC.

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New York law restricts the ability of any one person to acquire certain levels of our voting securities without prior regulatory approval. State insurance holding company regulations generally provide that no person, corporation or other entity may acquire control of an insurance company, or a controlling interest in any parent company of an insurance company, without the prior approval of such insurance company’s domiciliary state insurance regulator. Any person acquiring, directly or indirectly, 10% or more of the voting securities of an insurance company is presumed to have acquired “control” of the company. To obtain approval of any change in control, the proposed acquirer must file with the applicable insurance regulator an application disclosing, among other information, its background, financial condition, the financial condition of its affiliates, the source and amount of funds by which it will effect the acquisition, the criteria used in determining the nature and amount of consideration to be paid for the acquisition, proposed changes in the management and operations of the insurance company and other related matters. In considering an application to acquire control of an insurer, the insurance commissioner generally will consider such factors as the experience, competence and financial strength of the applicant, the integrity of the applicant’s board of directors and executive officers, the acquirer’s plans for the management and operation of the insurer and any anti-competitive results that may arise from the acquisition.
New York law restricts the ability of APIC to pay dividends to its holding company parent. These restrictions are based in part on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval, and dividends in larger amounts, or extraordinary dividends, are subject to approval by the NY DFS. An extraordinary dividend or distribution is defined as a dividend or distribution that, in the aggregate in any 12-month period exceeds the lesser of (i) 10% of surplus as of the preceding December 31 or (ii) the insurer’s adjusted net investment income for such 12-month period, not including realized capital gains.
Financial Regulation of Insurers
Risk-Based Capital Requirements
The NAIC has adopted risk-based capital requirements for life, health and property and casualty insurance companies . The requirements provide a method for analyzing the minimum amount of adjusted 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 . Generally, the NY DFS will compare, on an annual basis as of December 31 or more often as deemed necessary, an insurer’s total adjusted capital and surplus against what is referred to as an “Authorized Control Level” of risk-based capital that is calculated based on a formula designed to estimate an insurer’s capital adequacy. There generally are five outcomes possible from this comparison, depending on the insurer’s level of risk-based capital as compared to the applicable Authorized Control Level.
No Action Level : Insurer’s total adjusted capital is equal to or greater than 200% of the Authorized Control Level.
Company Action Level : Insurer’s total adjusted capital is less than 200% but greater than 150% of the Authorized Control Level. When at this level, an insurer must prepare and submit a financial plan to the NY DFS for review and approval. Generally, a risk-based capital plan would identify the conditions that contributed to the Company Action Level and include the insurer’s proposed plans for increasing its risk-based capital in order to satisfy the No Action Level. The failure to provide the NY DFS with a risk-based capital plan on a timely basis or the inability of the NY DFS and the insurer to mutually agree on an appropriate risk-based capital plan could trigger a Regulatory Action Level outcome, subject to the insurer’s right to a hearing on the issue.
Regulatory Action Level : Insurer’s total adjusted capital is less than 150% but greater than 100% of the Authorized Control Level. When at this level, an insurer generally must provide a risk-based capital plan to the NY DFS and be subject to examination or analysis by the NY DFS to the extent it deems necessary, including such corrective actions as the NY DFS may require.
Authorized Control Level : Insurer’s total adjusted capital is less than 100% but greater than 70% of the Authorized Control Level. At this level, the NY DFS generally could take remedial actions that it determines necessary to protect the insurer’s assets, including placing the insurer under regulatory control.
Mandatory Control Level : Insurer’s total adjusted capital is less than 70% of the Authorized Control Level. At this level, the NY DFS generally is required to take steps to place the insurer under regulatory control, even if the insurer is still solvent.
As of December 31, 2014, APIC maintained risk-based capital of $23.7 million , which exceeded the required $22.6 million of risk-based capital needed to satisfy the No Action Level. The NY DFS may increase the required levels of risk-based capital in the future, and we anticipate that we will need to maintain greater amounts of risk-based capital if our pet enrollment continues to grow.
State insurance regulators use the risk-based capital requirements as an early warning tool to identify possibly inadequately capitalized insurers . An insurance company found to have insufficient statutory capital and surplus based on its risk-based capital ratio may be subject to varying levels of additional regulatory oversight depending on the level of capital inadequacy.

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Risk-based capital requirements reduce the amount of risk a company can take. Risk-based capital requirements generally obligate a company with a higher amount of risk to hold a higher amount of capital relative to the premiums written. Risk-based capital provides a cushion to a company against insolvency if it fails to adequately price its insurance products and the sum of losses and expenses is greater than the premium. Risk-based capital is intended to be a minimum regulatory capital standard and not necessarily the full amount of capital that an insurer would ideally want to hold to meet its financial obligations. The risk-based capital formulas are designed to require insurers that are growing premiums quickly to hold more capital; as a result, growth of our business may increase significantly the amount we are required to retain as risk-based capital.
NAIC Insurance Regulatory Information Systems Ratios
The NAIC has developed a set of financial relationships or tests known as the Insurance Regulatory Information System, or IRIS, to assist state regulators in monitoring the financial condition of U.S. insurance companies and identifying companies requiring special attention or action. IRIS consists of a statistical phase and an analytical phase whereby financial examiners review insurers’ annual statements and financial ratios. The statistical phase consists of 12 key financial ratios based on year-end data that are generated from the NAIC database annually; each ratio has a “usual range” of results. For IRIS ratio purposes, APIC submits data annually to state insurance regulators who then analyze our data using prescribed financial data ratios. A ratio falling outside the prescribed “usual range” is not considered a failing result. Rather, unusual values are viewed as part of the regulatory early monitoring system. In many cases, it is not unusual for financially sound companies to have one or more ratios that fall outside the usual range. As of December 31, 2014, APIC had three such ratios outside the usual range, relating to net premiums written to surplus, change in net premiums written and investment yield.
Regulators may investigate or monitor an insurance company if its IRIS ratios fall outside the prescribed usual range . The inquiries made by state insurance regulators into an insurance company’s IRIS ratios can take various forms . In some instances, regulators may require the insurance company to provide a written explanation as to the causes of the particular ratios being outside the usual range, management’s actions to produce results that will be within the usual range in future years and what, if any, actions the insurance company’s domiciliary state insurance regulators have taken . Regulators are not required to take action if an IRIS ratio is outside the usual range, but, depending on the nature and scope of the particular insurance company’s exception, regulators may request additional information to monitor going forward and, as a consequence, may take additional regulatory action.
Insurance Guaranty Associations, Residual Markets, Wind Pools and State-specific Reinsurance Mechanisms
Most jurisdictions in which we operate have laws or regulations that require insurance companies doing business in the state to participate in various types of guaranty associations or other similar arrangements designed to protect policyholders from losses under insurance policies issued by insurance companies that become impaired or insolvent. Typically, these associations levy assessments, up to prescribed limits, on member insurers on the basis of the member insurer’s proportionate share of the business in the relevant jurisdiction in the lines of business in which the impaired or insolvent insurer is engaged. Some jurisdictions permit member insurers to recover assessments that they paid through full or partial premium tax offsets, usually over a period of years.
Some states in which APIC operates have residual markets, wind pools or state reinsurance mechanisms. The general intent behind these is to provide coverage to individuals and businesses that cannot find coverage in the private marketplace. The intent of state-specific reinsurance mechanisms generally is to stabilize the cost of, and ensure access to, reinsurance for admitted insurers writing business in the state. Historically, APIC has had minimal financial exposure to guaranty associations, residual markets, wind pools and state-specific reinsurance mechanisms; however there is no guarantee that these items will continue to be of low financial impact to APIC.
Licensing of Producers and Other Entities
Insurance agencies, producers, third-party administrators, claims adjusters, service providers and administrators are subject to licensing requirements and regulation by insurance regulators in various jurisdictions in which they conduct business. If any of our subsidiaries, referral sources, contact centers or service providers engage in these functions, they will be subject to licensing requirements and regulation by insurance regulators in various jurisdictions. If a subsidiary, referral source, contact center or service provider does not comply with licensing requirements and regulation by any insurance regulator, such insurance regulator could penalize such entity, including restricting certain activity of such entity.

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Federal Initiatives
The U.S. federal government generally does not directly regulate the insurance business. From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been, or are at present being, considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. The NAIC has undertaken a Solvency Modernization Initiative focused on updating the U.S. insurance solvency regulation framework, including capital requirements, governance and risk management, group supervision, accounting and financial reporting and reinsurance. The NAIC Amendments are a result of these efforts. Additional requirements are also expected. For example, the NAIC has adopted the Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act, which when adopted by the states will require insurers to perform an ORSA and, upon request of a state, file an ORSA Summary Report with the state. The ORSA Summary Report will be required in 2015 for medium and large insurers, subject to the various dates of adoption by states, and, if required, will describe our process for assessing our own solvency.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a Federal Insurance Office within the U.S. Department of the Treasury. The Federal Insurance Office initially is charged with monitoring all aspects of the insurance industry (other than health insurance, certain long-term care insurance and crop insurance), gathering data and conducting a study on methods to modernize and improve the insurance regulatory system in the United States. It is not possible to predict whether, in what form or in what jurisdictions any of these proposals might be adopted, or the effect federal involvement in insurance will have, if any, on us.
Privacy and Data Collection Regulation
There are numerous federal, state and foreign laws regarding privacy and the protection of member data. The regulatory environment in this area for online businesses is very unsettled in the United States and internationally and new legislation is frequently being proposed and enacted.
In the area of information security and data protection, many states have passed laws requiring notification to users when there is a security breach for personal data, such as the Massachusetts Data Breach Notification Law, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. In addition, our operations subject us to certain payment card association operating rules, certification requirements and rules, including the Payment Card Industry Data Security Standard, a security standard for companies that collect, store or transmit certain data regarding credit and debit cards, credit and debit card holders and credit and debit card transactions.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use our technology or data to develop products that may compete with our offerings. Policing unauthorized use of our technology or data is difficult. The laws of other countries in which we market our medical plan may offer little or no effective protection of our proprietary technology. Our competitors could also independently develop technologies equivalent to ours, and our intellectual property rights may not be broad enough for us to prevent competitors from selling products incorporating those technologies.
Companies in our industry and in other industries may own a large number of patents, copyrights and trademarks and may frequently request license agreements, threaten litigation or file suit against us based on allegations of infringement or other violations of intellectual property rights. From time to time, we face, and we expect to face in the future, allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including our competitors. As we face increasing competition and as our business grows, we will likely face more claims of infringement.
Information About Segments and Geographic Revenue
Information about segments and geographic revenue is set forth in Note 13 of the Notes to Condensed Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. In addition, financial information regarding our operations, assets and liabilities, including our total net revenue and net loss for the years ended December 31, 2014, 2013 and 2012 and our total assets as of December 31, 2014 and 2013, is included in our Condensed Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.
Corporate Information
We were founded in Canada in 2000 as Vetinsurance Ltd. In 2006, we effected a business reorganization whereby Vetinsurance Ltd. became a consolidated subsidiary of Vetinsurance International, Inc., a Delaware corporation. In 2007, we began doing business as Trupanion. In 2013, we formally changed our name from Vetinsurance International, Inc. to Trupanion, Inc. Our principal executive offices are located at 907 NW Ballard Way, Seattle, Washington 98107, and our telephone number is

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(855) 727-9079. Our website address is www.trupanion.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this Annual Report on Form 10-K.
Available Information
We are required to file annual, quarterly and other reports, proxy statements and other information with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (Exchange Act). We also make available, free of charge on the investor relations portion of our website at investors.trupanion.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. You can inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the SEC’s Public Reference Room located at 100 F Street, NE, Washington D.C 20549 on official business days during the hours of 10 a.m. to 3 p.m. Eastern time. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Rooms. The SEC also maintains an Internet website at www.sec.gov/ where you can obtain our SEC filings. You can also obtain paper copies of these reports, without charge, by contacting Investor Relations at InvestorRelations@Trupanion.com .


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Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this report, including our consolidated financial statements and related notes, as well as in our other filings with the SEC, in evaluating our business and before investing in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that are not expressly stated, that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, operating results, financial condition and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
We have incurred significant net losses since our inception and may not be able to achieve or maintain profitability in the future.
We have incurred significant net losses since our inception. We had a net loss of $21.2 million for the year ended December 31, 2014. Additionally, as of December 31, 2014, our accumulated deficit was $57.2 million . We have funded our operations through equity financings and borrowings under a revolving line of credit and term loans. We may not be able to achieve or maintain profitability in the near future or at all. Our recent growth, including our growth in revenue and membership, may not be sustainable or may decrease, and we may not generate sufficient revenue to achieve or maintain profitability. Additionally, our expense levels are based, in significant part, on our estimates of future revenue and many of these expenses are fixed in the short term. As a result, we may be unable to adjust our spending in a timely manner if our revenue falls short of our expectations. Accordingly, any significant shortfall of revenue in relation to our estimates could have an immediate negative effect on our financial results.
We expect to continue to make significant expenditures to maintain and expand our business, including expenditures relating to the acquisition of new members, retention of our existing members and development and implementation of our technology platforms. We also expect to incur increased operating expenses as we hire additional personnel and invest in our infrastructure to support anticipated future growth and the reporting and compliance obligations to which we are subject as a public company. These increased expenditures will make it more difficult for us to achieve and maintain future profitability. Our ability to achieve and maintain profitability depends on a number of factors, including our ability to attract and service members on a profitable basis. If we are unable to achieve or maintain profitability, we may not be able to execute our business plan, our prospects may be harmed and our stock price could be materially and adversely affected.
We have made and plan to continue to make significant investments to grow our member base. Our average pet acquisition cost and the number of new pets we enroll depends on a number of factors, including the effectiveness of our sales execution and marketing initiatives, changes in costs of media, the mix of our sales and marketing 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. For example, veterinary trade show costs have traditionally increased our acquisition costs in the first quarter of each year. We also periodically test new member acquisition channels and marketing initiatives, each of which impacts our average acquisition costs. We plan to expand the number of Territory Partners we use to reach veterinarians and other referral sources and to engage in other marketing activities, including direct to consumer advertising, which are likely to increase our acquisition costs.
We base our decisions regarding our member acquisition expenditures primarily on the lifetime value of the pets that we project to acquire. Our estimates and assumptions may not accurately reflect our future results, we may overspend on member acquisition and we may not be able to recover our member acquisition costs or generate profits from these investments.
We invest significantly in member acquisition. We spent $11.6 million on sales and marketing to acquire new members for the year ended December 31, 2014. We expect to continue to spend significant amounts to acquire additional members. We utilize Territory Partners, who are paid fees based on activity in their regions, to communicate the benefits of our medical plan to veterinarians through in-person visits. Veterinarians then educate pet owners, who visit our website or call our contact center to learn more about, and potentially enroll in, our medical plan. We also invest in other third-party referrals and direct to consumer member acquisition channels, though we have limited experience with some of them.
We base our decisions regarding our member acquisition expenditures primarily on the lifetime value of the pets that we project to acquire. This analysis depends substantially on estimates and assumptions based on our historical experience with pets enrolled in earlier periods, including our key financial and operating metrics described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics.”

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If our estimates and assumptions regarding the lifetime value of the pets that we project to acquire and our related decisions regarding investments in member acquisition prove incorrect, or if the expected lifetime value of the pets that we project to acquire differs significantly from that of pets acquired in prior periods, we may be unable to recover our member acquisition costs or generate profits from our investment in acquiring new members. Moreover, if our member acquisition costs increase or we invest in member acquisition channels that do not ultimately result in any or an adequate number of new member enrollments, the return on our investment may be lower than we anticipate irrespective of the lifetime value of the pets that we project to acquire as a result of the new members. If we cannot generate profits from this investment, we may need to alter our growth strategy, and our growth rate and operating results may be adversely affected.
If we are unable to maintain high member retention rates, our growth prospects and revenue will be adversely affected.
We have historically experienced high average monthly retention rates. For example, our average monthly retention rate was 98.68% in 2014. If our efforts to satisfy our existing members are not successful, we may not be able to maintain our retention rates. Members we obtain through aggressive promotions or other channels that involve relatively less meaningful contact between us and the member may be more likely to terminate their medical plan subscription. In the past we have experienced reduced retention rates during periods of rapid member growth, as our retention rate has been generally lower during the first year of member enrollment. Members may choose to terminate their medical plan subscription for a variety of reasons, including increased subscription fees, perceived or actual lack of value, delays or other unsatisfactory experiences in claims administration, unsatisfactory member service, an economic downturn, loss of a pet, a more attractive offer from a competitor, changes in our medical plan or other reasons, including reasons that are outside of our control. When a member terminates his or her medical plan subscription, we no longer receive the related revenue and may not be able to recover the member acquisition cost or other expenses, including claims expenses, related to that member. Our cost of acquiring a new member is substantially greater than the cost involved in maintaining our relationship with an existing member. If we are not able to successfully retain existing members and limit medical plan subscription terminations, our revenue and operating margins will be adversely impacted and our business, operating results and financial condition would be harmed.
The prices of our medical plan subscriptions are based on assumptions and estimates and may be subject to regulatory approvals. If our actual experience differs from the assumptions and estimates used in pricing our medical plan subscriptions or if we are unable to obtain any necessary regulatory pricing approvals we need at all or in a timely manner, our revenue and financial condition could be adversely affected.
The pricing of our medical plan subscriptions reflect expected claim payment patterns derived from assumptions that we make regarding a number of factors, including a pet’s species, breed, age, gender and location. Factors related to pet location include the current and assumed changes in the cost and availability of veterinary technology and treatments and local veterinary practice preferences. The prices of our medical plan subscriptions also include assumptions and estimates regarding our own operating costs and expenses. We monitor and manage our pricing and overall sales mix to achieve target returns. Profitability from new members emerges over a period of years depending on the nature and length of time a pet is enrolled in our medical plan, and is subject to variability as actual results may differ from pricing assumptions. If the subscription fees we collect are insufficient to cover actual claim costs, operating costs and expenses within anticipated pricing allowances, or if our member retention rates are not high enough to ensure recovery of member acquisition costs, then our gross profit could be adversely affected and our revenue may be insufficient to achieve profitability. Conversely, if our pricing assumptions differed from actual results such that we overpriced risks, our competitiveness and growth prospects could be adversely affected. Further, even if our pricing assumptions are accurate, we may not be able to obtain the necessary regulatory approvals for any pricing changes that we may determine are appropriate based on our pricing assumptions, which could prevent us from obtaining sufficient revenue from medical plan subscriptions to cover claims expenses, pet acquisition costs and other expenses in any such jurisdiction unless and until such regulatory approvals are obtained in appropriate amounts.
The anticipated benefits of our analytics platform may not be fully realized.
Our analytics platform draws upon our proprietary pet data to price our medical plan subscriptions. The assumptions we make about breeds and other factors in pricing medical plan subscriptions may prove to be inaccurate, and, accordingly, these pricing analytics may not accurately reflect the claims expense that we will ultimately incur. Further, if any of our competitors developed similar data systems, adopted similar underwriting criteria and pricing models or received our data, our competitive advantage could decline or be lost.

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Our actual claims expenses may exceed our current reserve established for claims and may adversely affect our operating results and financial condition.
As of December 31, 2014, our claims reserve was $5.1 million . Our recorded claims reserve is based on our best estimates of claims, both reported and incurred but not reported, after considering known facts and interpretations of circumstances. We consider internal factors, including data from our proprietary data analytics platform, experience with similar cases, actual claims paid, historical trends involving claim payment patterns, pending levels of unpaid claims, claims management programs and contractual terms. We may also consider external factors, including changes in the law, court decisions, changes to regulatory requirements and economic conditions. Because reserves are estimates of the unpaid portion of claims that have occurred, including claims incurred but not reported, the establishment of appropriate reserves is an inherently uncertain and complex process that involves significant subjective judgment. Further, we do not transfer or cede our risk as an insurer and, therefore, we maintain more risk than we would if we purchased reinsurance. The ultimate cost of claims may vary materially from recorded reserves, and such variance may result in adjustments to the claims reserve, which could have a material effect on our operating results.
We rely significantly on Territory Partners, veterinarians and other third parties to recommend our medical plan.
We rely significantly on Territory Partners and other third parties to cultivate direct veterinary relationships and build awareness of the benefits that our medical plan offers veterinarians and their clients. In turn, we rely on veterinarians to introduce and refer our medical plan to their clients. We also rely significantly on other third parties, such as existing members, online and offline businesses, animal shelters, breeders and veterinary affiliates, including veterinarian purchasing groups, to help generate leads for our medical plan subscriptions. Veterinary practices represent our largest member acquisition channel, accounting for approximately 74% of our enrollments in in the year ended December 31, 2014, excluding existing members adding pets and referring their friends and family members. Many factors influence the success of our relationships with these referral sources, including:
the continued positive market presence, reputation and growth of our company and of the referral sources;
the effectiveness of referral sources;
the decision of any such referral source to support one of our competitors;
the interest of the referral sources’ customers or clients in the medical plan we offer;
the relationship and level of trust between Territory Partners and veterinarians, and between us and the referral source;
the percentage of the referral sources’ customers or clients that submit applications or use trial certificates to enroll in a medical plan through our website or contact center;
our ability to implement or maintain any marketing programs, including trial certificates, in any jurisdiction; and
our ability to work with the referral source to implement any changes in our marketing initiatives, including website changes, infrastructure and technology and other programs and initiatives necessary to generate positive consumer experiences.
In order for us to implement our business strategy and grow our revenue, we must effectively maintain and increase our relationships with Territory Partners, veterinarians and other referral sources, and continue to scale and improve our processes, programs and procedures that support them. Those processes, programs and procedures could become increasingly complex and difficult to manage. We expend significant time and resources attracting qualified Territory Partners and providing them with complete and current information about our business. Their relationship with us may be terminated at any time, and, if terminated, we may not recoup the costs associated with educating them about our medical plan or be able to maintain any relationships they have developed with veterinarians within their territories. Further, if we experience an increase in the rate at which Territory Partner relationships are terminated, we may not develop or maintain relationships with veterinarians as quickly as we have in the past. If the financial cost to maintain our relationships with Territory Partners outweighs the benefits provided by Territory Partners, or if they feel unsupported or undervalued by us and terminate their relationship with us, our growth and financial performance could be adversely affected.
The success of our relationships with veterinary practices depends on the overall value our medical plan can provide to veterinarians. If the scope of our medical plan coverage is perceived to be inadequate or our claims settlement process is unsatisfactory to the veterinarian’s clients because, for example, claims are denied or we fail to timely settle and pay claims, veterinarians may be unwilling to recommend our medical plan to their clients and they may encourage their existing clients who have subscribed to our medical plan to stop subscribing to our medical plan or to purchase a competing product. If veterinarians determine our medical plan is unreliable, cumbersome or otherwise does not provide sufficient value, they may terminate their relationship with us or begin recommending a competing product, which could negatively impact our ability to increase our member base and grow our business.

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If we fail to establish or are unable to maintain successful relationships with Territory Partners, veterinarians and other referral sources, or experience an increase in the rate at which any of these relationships are terminated, it could negatively impact our ability to increase and retain our member base and our financial results. If we are unable to maintain our existing member acquisition channels and continue to add new member acquisition channels, if the cost of our existing sources increases or does not scale as we anticipate, or if we are unable to continue to use any existing channels or programs in any jurisdiction, including our trial certificate program, our member levels and sales and marketing expenses may be adversely affected.
Territory Partners are independent contractors and, as such, may pose additional risks to our business.
Territory Partners are “independent contractors” for all purposes and, accordingly, we are not in a position to directly provide the same direction, motivation and oversight over Territory Partners as we otherwise could if Territory Partners were our own employees. Territory Partners may decide not to participate in our marketing initiatives or training opportunities, accept our introduction of new solutions or comply with our policies and procedures applicable to the Territory Partners, any of which may adversely affect our ability to develop relationships with veterinarians and grow our membership. Our sole recourse against Territory Partners who fail to perform is to terminate their contract, which could also trigger contractually obligated termination payments or result in disputes, including threatened or actual legal proceedings.
We believe that Territory Partners are not employees under existing interpretations of the applicable laws of the jurisdictions in which we operate. We do not pay or withhold any employment tax with respect to or on behalf of Territory Partners or extend any benefits to them that we generally extend to our employees, and we otherwise treat Territory Partners as independent contractors. Applicable authorities or the Territory Partners have in the past questioned and may in the future challenge this classification. Further, the applicable laws or regulations, including tax laws or interpretations, may change. If it were determined that we had misclassified any of our Territory Partners, we may be subjected to penalties or be required to pay withholding taxes for, extend employee benefits to, provide compensation for unpaid overtime to, or otherwise incur substantially greater expenses with respect to, Territory Partners. Any of the foregoing circumstances could have a material adverse impact on our operating results and financial condition.
Our member base has grown rapidly in recent periods, and we may not be able to maintain the same rate of membership growth.
Our ability to grow our business and to generate revenue depends significantly on attracting new members. For the year ended December 31, 2014, we generated 90.6% , of our revenue from medical plan subscriptions. In order to continue to increase our membership, we must continue to offer a medical plan that provides superior value to our members. Our ability to continue to grow our membership will also depend in part on the effectiveness of our sales and marketing programs. Our member base may not continue to grow or may decline as a result of increased competition or the maturation of our business.
We may not maintain our current rate of revenue growth.
Our revenue has increased quickly and substantially in recent periods. We believe that our continued revenue growth will depend on, among other factors, our ability to:
improve our market penetration through efficient and effective sales and marketing programs to attract new members;
maintain high retention rates;
increase the lifetime value per pet;
maintain positive relationships with veterinarians and other referral sources, and convince them to recommend our medical plan;
maintain positive relationships with and increase the number and efficiency of Territory Partners;
continue to offer a superior value medical plan with competitive features and rates;
accurately price our medical plan subscriptions in relation to actual membership claims costs and operating expenses;
provide our members with superior member service, including a timely and efficient claims experience and by recruiting, integrating and retaining skilled and experienced claims personnel who can appropriately and efficiently adjudicate member claims;
generate new and maintain existing relationships and programs in our other business segment; recruit, integrate and retain skilled and experienced sales department professionals who can demonstrate our value proposition to new and existing members;
react to changes in technology and challenges in the industry, including from existing and new competitors;

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increase awareness of and positive associations with our brand; and
successfully respond to any regulatory matters and defend any litigation.
You should not rely on our historical rate of revenue growth as an indication of our future performance.
Our use of capital may be constrained by risk-based capital regulations.
Our subsidiary, American Pet Insurance Company, is subject to risk-based capital regulations that require us to maintain certain levels of surplus to support our overall business operations in consideration of our size and risk profile. We have in the past and may in the future fail to maintain the amount of risk-based capital required to avoid additional regulatory oversight, which was $22.6 million as of December 31, 2014. To comply with these regulations, we may be required to maintain capital that we would otherwise invest in our growth and operations, which may require us to modify our operating plan or marketing initiatives, delay the implementation of new solutions or development of new technologies, decrease the rate at which we hire additional personnel and enter into relationships with Territory Partners, incur additional indebtedness or pursue equity or debt financings or otherwise modify our business operations, any of which could have a material adverse effect on our operating results and financial condition.
Unexpected increases in the severity or frequency of claims may negatively impact our operating results.
Unexpected changes in the severity or frequency of claims may negatively impact our operating results. Changes in claims severity are driven primarily by inflation in the cost of veterinary care and the increasing availability and usage of expensive technologically advanced medical treatments. Increases in claims severity also could arise from unexpected events that are inherently difficult to predict, such as a pandemic that spreads through the pet population, tainted pet food or supplies or an unusually high number of serious injuries or illnesses. Our loss management initiatives may not successfully or timely identify or mitigate any such future increases in claim severity. In addition, we may experience volatility in claim frequency from time to time, and short-term trends may not continue over the longer term. The frequency of claims may be affected by the level of care and attentiveness an owner provides to the pet, the pet’s breed and age and other factors outside of our control, as well as fluctuations in member retention rates and by new member initiatives that encourage more frequent claims and other new member acquisition activities. A significant increase in claim severity or frequency could increase our cost of revenue and have a material adverse effect on our financial condition.
Changes in the Canadian currency exchange rate may adversely affect our revenue and operating results.
We offer our medical plan in Canada, which exposes us to the risk of changes in the Canadian currency exchange rates. As of December 31, 2014, approximately 25% of our total revenue was generated in Canada. Fluctuations in the relative strength of the Canadian economy and the Canadian dollar has in the past and could in the future adversely affect our revenue and operating results.
Our success depends on our ability to adjust claims quickly and accurately.
We must accurately evaluate and quickly pay claims that are made under our medical plan in a manner that gives our members high satisfaction. Many factors can affect our ability to pay claims accurately, quickly and in a manner that gives our members high satisfaction, including the training, experience and skill of our claims representatives, our ability to reduce claims for non-covered conditions, our ability to recognize and respond to fraudulent or inflated claims, the claims department’s culture and the effectiveness of its management, and our ability to develop or select and implement appropriate procedures, technologies and systems to support our claims functions. Our failure to pay claims fairly, accurately and in a timely manner, or to deploy claims resources appropriately, could result in unanticipated costs to us, lead to material litigation, undermine customer goodwill and our reputation, and impair our brand image and, as a result, materially and adversely affect our competitiveness, financial results, prospects and liquidity.
We are and will continue to be faced with many competitive challenges, any of which could adversely affect our prospects, operating results and financial condition.
The market for medical insurance for pets is highly competitive. We compete with pet owners that self-fund with cash or credit, as well as traditional pet insurance providers and relatively new entrants into our market. The vast majority of pet owners in the United States and Canada do not currently have medical coverage for their pets. We are focused primarily on expanding the overall size of the market, and we view our primary competitive challenge as educating pet owners on why our medical plan is a better alternative to self-funding.
Additionally, there are traditional insurance companies that provide pet insurance products, either as a stand-alone product or along with a broad range of other insurance products. The largest of these traditional pet insurance providers is Veterinary Pet Insurance Company, a division of Nationwide Insurance. In addition, new entrants backed by large insurance companies have attempted to enter the pet insurance market in the past and may do so again in the future. Further, traditional pet insurance providers may consolidate, resulting in the emergence of new providers that are vertically integrated or able to create other operational efficiencies, which could lead to increased competition.

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Some of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, technical, marketing and other resources than we do. Some of our competitors may be able to undertake more extensive marketing initiatives for their brands and services, devote more resources to website and systems development and make more attractive offers to potential employees, referral sources and third-party service providers.
To compete effectively, we will need to continue to invest significant resources in sales and marketing, in improving the service at our contact center and claims department, in the online experience and functionalities of our website and in other technologies and infrastructure. Failure to compete effectively against our current or future competitors could result in loss of current or potential members, medical plan subscription terminations or a reduction in member retention rates, which could adversely affect our pricing, lower our revenue and prevent us from achieving or maintaining profitability. We may not be able to compete effectively for members in the future against existing or new competitors, and the failure to do so could result in loss of existing or potential members, increased sales and marketing expenses or diminished brand strength, any of which could harm our business.
If we are not successful in cost-effectively converting visitors to our website and contact center into members, our business and operating results would be harmed.
Our growth depends in large part upon growth in our member base. We seek to convert consumers who visit our website and call our contact center into members. The rate at which consumers visiting our website and contact center seeking to enroll in our medical plan are converted into members is a significant factor in the growth of our member base. A number of factors have influenced, and could in the future influence, the conversion rates for any given period, some of which are outside of our control. These factors include:
the competitiveness of the medical plan we offer, including its perceived value, coverage, simplicity and fairness;
changes in consumer shopping behaviors due to circumstances outside of our control, such as economic conditions and consumers’ ability or willingness to pay for a pet medical plan;
the quality of and changes to the consumer experience on our website or with our contact center or claims department;
regulatory requirements, including those that make the experience on our website cumbersome or difficult to navigate or that hinder our call center’s ability to speak with potential members quickly and in a way that is conducive to converting leads or to enroll new members;
system failures or interruptions in the operation of our abilities to write policies or operate our website or contact center; and
changes in the mix of consumers who are referred to us through various member acquisition channels, such as veterinary referrals, existing members adding a pet and referring their friends and family members and other third-party referrals and online member acquisition channels.
Our ability to convert consumers into members can be impacted by a change in the mix of referrals received through our member acquisition channels. In addition, changes to our website or contact center, or other programs or initiatives we undertake, may adversely impact our ability to convert consumers into members at our current rate, or at all. These changes may have the unintended consequence of adversely impacting our conversion rates. A decline in the percentage of members who enroll in our medical plan on our website or telephonically through our contact center also could result in increased member acquisition costs. To the extent the rate at which we convert consumers into members suffers, the growth rate of our member base may decline, which would harm our business, operating results and financial condition.
We have made and plan to continue to make substantial investments in features and functionality for our website and training and staffing for our contact center that are designed to drive traffic, increase member engagement and improve new and existing member service. These activities do not directly generate revenue, however, and we may never realize any benefit from these investments. If the expenses that we incur in connection with these activities do not result in sufficient growth in members to offset the cost, our business, operating results and financial condition will be adversely affected.
If we are unable to maintain and enhance our brand recognition and reputation, our business and operating results will be harmed.
We believe that maintaining and enhancing our brand recognition and reputation is critical to our relationships with existing members, Territory Partners, veterinarians and other referral sources, and to our ability to attract new members, new Territory Partners, additional supportive veterinarians and other referral sources. We also believe that the importance of our brand recognition and reputation will continue to increase as competition in our market continues to develop and mature. Our success in this area will depend on a wide range of factors, some of which are out of our control, including the following:
the efficacy and viability of our sales and marketing programs;
the perceived value of our medical plan;

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quality of service provided by our contact center and claims professionals, including the fairness, ease and timeliness of our claims administration process;
actions of our competitors, Territory Partners, veterinarians and other referral sources;
positive or negative publicity, including regulatory pronouncements and material on the Internet or social media;
regulatory and other government-related developments; and
litigation-related developments.
The promotion of our brand may require us to make substantial investments, and we anticipate that, as our market becomes increasingly competitive, these branding initiatives may become increasingly difficult and expensive. Our brand promotion activities may not be successful or yield increased revenue, and to the extent that these activities result in increased revenue, the increased revenue may not offset the expenses we incur and our operating results could be harmed. If we do not successfully maintain and enhance our brand, our business may not grow and our relationships with veterinarians and other referral sources could be terminated, which would harm our business, operating results and financial condition.
Our business depends on our ability to maintain and scale the infrastructure necessary to operate our technology platform.
Our business depends on our ability to maintain and scale the infrastructure necessary to operate our technology platform, which includes our analytics and pricing engine, claims management systems, customer relationship management system, contact center phone system and website. We use these technology frameworks to price our medical plan subscriptions, enroll members, engage with current members and administer claims under our medical plan. Additionally, our members review and purchase subscriptions to our medical plan and submit claims through our website and contact center. Our reputation and ability to acquire, retain and serve our members depends on the reliable performance of our technology platform and the underlying network systems and infrastructure, and on providing best-in-class member service through our contact center and website. As our member base continues to grow, the amount of information collected and stored on the systems and infrastructure supporting our technology platform will continue to grow, and we will need an increasing amount of network capacity, computing power and information technology personnel to develop and maintain our technology platform and service our contact center and claims department.
We have made, and expect to continue to make, substantial investments in equipment and related network infrastructure to handle the operational demands on our technology platform, including increasing data collection, software development, traffic on our website and the volume of calls at our contact center. The operation of the systems and infrastructure supporting our technology platform is expensive and complex and could experience operational failures. In the event that our data collection, member base or amount of traffic on these systems grows more quickly than anticipated, we may be required to incur significant additional costs to increase the capacity in our systems. Any system failure that causes an interruption in or decreases the responsiveness of our services could impair our revenue-generating capabilities, harm our business and operating results and damage our reputation. In addition, any loss or mishandling of data could result in breach of confidence, competitive disadvantage or loss of members, and subject us to potential liability. Any failure of the systems and infrastructure that we rely on could negatively impact our enrollments as well as our relationship with members. If we do not maintain or expand the systems and infrastructure underlying our technology platform successfully, or if we experience operational failures, our reputation could be harmed and we could lose current and potential members, which could harm our operating results and financial condition.
We have made, and expect to continue to make, significant investments in new solutions and enhancements to our technology platform. These new solutions and enhancements may not be successful, and we may not recognize the expected benefits.
We have a team of product and engineering professionals dedicated in part to enhancing our technology platform and developing new solutions. We have made, and expect to continue to make, significant investments in these new solutions and enhancements. For example, we are currently making significant investments to develop and implement Trupanion Express, which is designed to facilitate the direct payment of claims to veterinary practices. Similarly, we recently redesigned our website, which required a significant amount of time and expense. These development and implementation activities may not be successful, and we may incur delays or cost overruns or elect to curtail our currently planned expenditures related to them. Further, if or when these new solutions or enhancements are introduced, they may not be well received by veterinarians or by new or existing members, particularly if they are costly, cumbersome or unreliable and, even if they are well-received, they may be or become obsolete due to technological reasons or to the availability of alternative solutions in the marketplace. If new solutions and enhancements are not successful on a long-term basis, we may not recognize benefits from these investments, and our business and financial condition could be adversely affected.

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If we fail to effectively manage our growth, our business, operating results and financial condition may suffer.
We have recently experienced, and expect to continue to experience, significant growth, which has placed, and may continue to place, significant demands on our management and our operational and financial systems and infrastructure. We expect that our growth strategy will require us to commit substantial financial, operational and technical resources. It may also result in increased costs, including unexpected increases in our underlying costs (such as member acquisition costs or the frequency or severity of claims costs) generated by our new business, which could prevent us from becoming profitable and could impair our ability to compete effectively for pet medical plan business. Additionally, we have in the past, and may in the future, experience increases in medical plan subscription terminations as our membership grows, which negatively affects our retention rate. If we do not effectively manage growth at any time, our financial condition could be harmed and the quality of our services could suffer.
In order to successfully expand our business, we need to hire, integrate and retain highly skilled and motivated employees. We also need to continue to improve our existing systems for operational and financial management, including our reporting systems, procedures and controls. These improvements could require significant capital expenditures and place increasing demands on our management. We may not be successful in managing or expanding our operations or in maintaining adequate financial and operating systems and controls. If we do not successfully implement improvements in these areas, our business, operating results and financial condition will be harmed.
Our operating results may vary, which could cause the trading price of our stock to fluctuate or decline, make period-to-period comparisons less meaningful, and make our future results difficult to predict.
We may experience fluctuations in our revenue, expenses and operating results in future periods. Our operating results may fluctuate in the future as a result of a number of factors, many of which are beyond our control. These fluctuations may lead analysts to change their long-term models for valuing our common stock, cause us to face short-term liquidity issues, impact our ability to retain or attract key personnel or cause other unanticipated issues, all of which could result in declines in our stock price. Moreover, these fluctuations may make comparing our operating results on a period-to-period basis less meaningful and make our future results difficult to predict. You should not rely on our past results as an indication of our future performance. In addition, if revenue levels do not meet our expectations, our operating results and ability to execute on our business plan are likely to be harmed. In addition to the other factors listed in this “Risk Factors” section, factors that could affect our operating results include the following:
our ability to retain our current members and grow our member base;
the level of operating expense we elect to incur related to sales and marketing and technology and development initiatives that are discretionary in nature;
the effectiveness of our sales and marketing programs;
our ability to improve veterinarians’ and other third-parties’ willingness to recommend our medical plan;
the timing, volume and severity of our claims and the adequacy of our claims reserve;
our ability to accurately price our medical plans;
regulatory limitations or other constraints on our ability to or our willingness to implement pricing changes;
the level of demand for and the price of our medical plan subscriptions or those of our competitors;
fluctuations in applicable foreign currency exchange rates;
the perceived value of our medical plan to veterinarians and pet owners;
spending decisions by our members and prospective members;
our costs and expenses, including pet acquisition costs and claims expenses;
our ability to expand the scope and efficiency of our Territory Partner network;
our ability to effectively manage our growth;
the effects of increased competition in our business;
our ability to keep pace with changes in technology and our competitors;
the impact of any security incidents or service interruptions;
costs associated with defending any regulatory action or litigation or with enforcing our intellectual property, contractual or other rights;
the impact of economic conditions on our revenue and expenses; and
changes in government regulation affecting our business.

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Seasonal or periodic variations in the behavior of our members also may cause fluctuations in our financial results. Enrollment in our medical plan tends to be discretionary in nature and may be sporadic, reflecting overall economic conditions, budgeting constraints, pet-buying patterns and a variety of other factors, many of which are outside our control. For example, we expect to experience some effects of seasonal trends in member behavior in the fourth quarter and in the beginning of the first quarter of each year in connection with the traditional holiday season. While we believe seasonal trends have affected and will continue to affect our quarterly results, our growth may have overshadowed these effects to date. We believe that our business will continue to be subject to seasonality in the future, which may result in fluctuations in our financial results.
Due to these and other factors, our financial results for any quarterly or annual period may not meet our expectations or the expectations of investors or analysts that follow our stock and may not be meaningful indications of our future performance.
Our vertical integration may result in higher costs.
We manage all aspects of our business, including writing our medical plan, implementing our own national independent referral network, pricing our medical plan subscriptions with our in-house actuarial team, administering claims made with respect to our medical plan, operating our own contact center and owning our own brand. While we believe this vertically integrated approach reduces frictional costs and enhances member experiences, third-party providers may, now or in the future, be able to replicate this model, partially or entirely, on a more efficient and effective basis. If our in-house services are or become less efficient or less effective than the same services provided by a third party, we may not realize the related cost savings and may be unable to provide a superior membership experience, which may have an adverse effect on our operating results.
Our forecasts of market growth may prove to be inaccurate, and even if the market for medical coverage for cats and dogs in North America achieves the forecasted growth, our business may not grow at similar rates, if at all.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates, which may not prove to be accurate. Although we believe that the North American market for pet medical coverage will grow over time if consumers are offered a high-value product, the market for medical coverage for cats and dogs in North America has been historically growing slowly or stagnant and may not be capable of growing further. Even if this market experiences significant growth, we may not grow our business at similar rates, or at all For example, the market for medical coverage for cats and dogs in North America has been highly competitive and may become even more competitive in the future. Our growth is subject to many factors, including our success in implementing our business strategy and maintaining our position in a highly competitive market, which are subject to many risks and uncertainties.
We depend on key personnel to operate our business and, if we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully grow our business could be harmed.
Our success depends to a significant extent on the continued services of our current management team, including Darryl Rawlings, our founder and Chief Executive Officer. The loss of Mr. Rawlings or several other key executives or employees within a short time frame could have a material adverse effect on our business. We employ all of our executive officers and key employees on an at-will basis, and their employment can be terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance payment rights. In order to retain valuable employees, in addition to salary and cash incentives, we have provided stock options and restricted stock that vest over time and may in the future grant equity awards tied to company performance. The value to employees of stock options and restricted stock that vest over time will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to maintain their retention benefit or counteract offers from other companies. Additionally, if we were to lose a large percentage of our current employees in a relatively short time period, or our employees were to engage in a work stoppage or unionize, we may be unable to hire and train new employees quickly enough to prevent disruptions in our operations, which may result in the loss of members, Territory Partners or referral sources.
Our success also depends on our ability to attract, retain and motivate additional skilled management personnel. We plan to continue to expand our work force, which we believe will enhance our business and operating results. We believe that there is significant competition for qualified personnel with the skills and knowledge that we require. Many of the other companies with which we compete for qualified personnel have greater financial and other resources than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than those we have to offer. If we are unable to attract and retain the necessary qualified personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our business objectives and our ability to pursue our business strategy. New hires require significant training and, in most cases, take significant time before they achieve full productivity. New employees may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. If our recruiting, training and retention efforts are not successful or do not generate a corresponding increase in revenue, our business will be harmed.

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If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork and focus that contribute crucially to our business.
Our culture is fundamental to our success and defines who we are and how we operate our business. We were founded on a deep appreciation of the special relationship between pet owners, their beloved pets and their trusted veterinarians. We have invested substantial time, energy and resources in developing a culture that fosters teamwork, innovation, creativity and a focus on providing value for our members as well as for Territory Partners and veterinarians. As we continue to develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain personnel, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
Our business and financial condition is subject to risks related to our writing of policies for an unaffiliated general agent.
In November 2012, we began writing pet insurance policies for an unaffiliated general agent. These policies provide different coverage and are subject to materially different terms and conditions than the Trupanion medical plan. Further, the unaffiliated general agent administers these policies and markets them to consumers. For the year ended December 31, 2014, premiums from these policies accounted for 8.6% of our total revenue. This relationship can be terminated by either party and, if terminated, would result in a reduction in our revenue to the extent we cannot enter into another relationship and generate equivalent revenues with a different general agent. In addition, the general agent controls a trust account it maintains on our behalf. If the general agent makes operating decisions that adversely affect its business or brand, our business or brand could also be adversely affected.
We have limited experience in writing policies for unaffiliated general agents. This business is not expected to grow at the same rate as our core business and may decline. Further, this business has lower margins than our core business. As a result of this line of business, we are subject to additional regulatory requirements and scrutiny, which increase our costs and may have an adverse effect on our operations. Further, administration of this business and any similar business in the future may divert our time and attention away from our core business, which could adversely affect our operating results in the aggregate.
In Canada, our medical plan is written by Omega General Insurance Company (Omega). If Omega were to terminate its underwriting arrangement with us, our business could be adversely affected.
In Canada, our medical plan is written by Omega, and we assume all premiums written by Omega and the related claims through an agency agreement and a fronting and administration agreement. These agreements will remain in effect until December 31, 2017 but may be terminated by either party with one year’s prior written notice. If Omega were to terminate our agreement or be unable to write insurance for regulatory or other reasons, we may have to terminate subscriptions with our existing members, or suspend member enrollment and renewals, in Canada until we entered into a relationship with another third party to write our medical plan, which may take a significant amount of time and require significant expense. We may not be able to enter into a new relationship, and any new relationship would likely be on less favorable terms. Any delay in entry into a new relationship or suspension of member enrollment and renewals could have a material adverse effect on our operating results and financial condition.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
We are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our annual report for the fiscal year ending December 31, 2015, provide a management report on the internal control over financial reporting, which must be attested to by our independent registered public accounting firm to the extent we decide not to avail ourselves of the exemption provided to an emerging growth company, as defined by The Jumpstart Our Business Startups Act of 2012 (JOBS Act).
We may not detect errors on a timely basis and our financial statements may be materially misstated. We have had in the past, and may have in the future, material weaknesses and significant deficiencies in our internal control over financial reporting. If we or our independent registered public accounting firm identify future material weaknesses in our internal control over financial reporting, are unable to comply with the requirements of Section 404 in a timely manner, are unable to assert that our internal control over financial reporting is effective or our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. We could also become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

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If our security measures are breached and unauthorized access is obtained to our data, including our members’ data, we may lose our competitive advantage, our systems may be perceived as not being secure and we may incur third-party liability.
Our data repository contains proprietary information that we believe gives us a competitive advantage, including claims data and other data with respect to members, Territory Partners, veterinarians and other third parties. Security breaches could expose us to a risk of loss of our data and/or disclosure of this data, either publicly or to a third party who could use the information to gain a competitive advantage. In the event of a loss of our systems or data, we could experience increased costs or delays, which in turn may harm our financial condition, damage our brand and result in the loss of members. Such a disclosure also could lead to litigation and possible liability.
In the course of operating our business, we store and transmit our members’ confidential information, including credit card and bank account numbers, pet medical records and other private information. Security breaches could expose us to a risk of loss of this information, litigation and possible liability. Our payment services may be susceptible to credit card and other payment fraud schemes, including unauthorized use of credit cards, debit cards or bank account information, identity theft or merchant fraud.
If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to our data, including data of our members, our reputation may be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs, the public perception of the effectiveness of our security measures could be harmed and we could lose members, which would adversely affect our business.
Any legal liability, regulatory penalties or negative publicity for the information on our website or that we otherwise distribute or provide, directly or through Territory Partners or other referral sources, could harm our business, operating results and financial condition.
We provide information on our website, through our contact center and in other ways regarding pet health, the pet insurance industry in general and our medical plan, including information relating to subscription fees, coverage, benefits, exclusions, limitations, availability and medical plan comparisons. A significant amount of both automated and manual effort is required to maintain the medical plan information on our website. Separately, from time to time, we use the information provided on our website and otherwise collected by us to publish reports designed to educate consumers. For example, we produce a significant amount of marketing materials regarding our medical plan. If the information we provide on our website, through our contact centers or otherwise is not accurate or is construed as misleading, or if we improperly assist individuals in purchasing subscriptions to our medical plan, our members, competitors or others could attempt to hold us liable for damages, our relationships with veterinarians and other referral sources could be terminated and regulators could attempt to subject us to penalties, revoke our licenses to transact business in one or more jurisdictions or compromise the status of our licenses to transact our business in other jurisdictions, which could result in our loss of revenue. In the ordinary course of operating our business, we may receive complaints that the information we provided was not accurate or was misleading. These types of claims could be time-consuming and expensive to defend, could divert our management’s attention and other resources and could cause a loss of confidence in our business. As a result, whether or not we are able to successfully resolve these claims, they could harm our business, operating results and financial condition.
We are subject to a number of risks related to accepting automatic fund transfers and credit card and debit card payments.
We accept payments of subscription fees from our members through automatic fund transfers and credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase in the number of members who utilize credit and debit cards to pay their subscription fees or related credit and debit card fees would reduce our margins and could require us to increase the subscription fees for our medical plan, which could cause us to lose members and revenue, or suffer an increase in our operating expenses, either of which could adversely affect our operating results.
If we, or any of our processing vendors or banks have problems with our billing software, or if the billing software malfunctions, it could have an adverse effect on our member satisfaction and could cause one or more of the major credit card companies or banks to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our members’ credit cards on a timely basis or at all, or a bank withdraws the incorrect amount or fails to timely transfer the correct amount to us, we could lose revenue and harm our member experience, which could adversely affect our business and operating results.

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We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, including the Payment Card Industry Data Security Standard (PCI DSS), a security standard applicable to companies that collect, store or transmit certain data regarding credit and debit cards, holders and transactions. In the past we may not have been, we currently are not and in the future we may not be, fully or materially compliant with PCI DSS. Our failure to comply fully or materially with the PCI DSS now or at any point in the future may violate payment card association operating rules, federal and state laws and regulations, and the terms of our contracts with payment processors and merchant banks. Such failure to comply fully or materially also may subject us to fines, penalties, damages and civil liability, and may result in the loss of our ability to accept credit and debit card payments. In addition, there is no guarantee that PCI DSS compliance, if we are able to become compliant, will prevent illegal or improper use of our payment systems or the theft, loss or misuse of data pertaining to credit and debit cards, credit and debit card holders and credit and debit card transactions.
If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher credit card-related costs, each of which could adversely affect our business, operating results and financial condition.
If we are unable to maintain our chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or our fees for many or all categories of credit and debit card transactions, credit card companies and debit card issuers may increase our fees or terminate their relationship with us. Any increases in our credit card and debit card fees could adversely affect our operating results, particularly if we elect not to raise our subscription fees. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.
Failure to adequately protect our intellectual property could substantially harm our business and operating results.
We rely on a combination of intellectual property rights, including trade secrets, copyrights, trademarks and domain names, as well as contractual restrictions, to establish and protect our intellectual property. As of December 31, 2014, we had two pending patent applications in the United States, one pending international patent filed under the Patent Cooperation Treaty, one pending patent application in Europe and no issued patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our digital content, pricing analytics, technology, software, branding and functionality, or obtain and use information that we consider proprietary. Moreover, policing our proprietary rights is difficult and may not always be effective. If we continue to expand internationally, we may need to enforce our rights under the laws of countries that do not protect proprietary rights to as great an extent as do the laws of the United States, which may be expensive and divert management’s attention away from other operations.
Our digital content is not protected by any registered copyrights or other registered intellectual property. Rather, our digital content is protected by statutory and common law rights, user agreements that limit access to and use of our data and by technological measures. Compliance with use restrictions is difficult to monitor, and our proprietary rights in our digital content databases may be more difficult to enforce than other forms of intellectual property rights.
As of December 31, 2014, we had six registered trademarks in the United States, including “Trupanion,” and two additional trademark applications. We had one registered trademark in Canada, and two additional trademark applications. Many of our unregistered trademarks, however, contain words or terms having a common usage and, as a result, may not be protectable under applicable law. Trademark protection may also not be available, or sought by us, in every country in which our medical plan may become available. Competitors may adopt names similar to ours, or purchase our trademarks and confusingly similar terms as keywords in Internet search engine advertising programs, thereby impeding our ability to build brand identity and possibly confusing members. Moreover, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate marks similar to our trademarks. We may take action, including initiating litigation, to protect our intellectual property rights and the integrity of our brand, and these efforts may prove costly, ineffective and increase the likelihood of counterclaims against us.
We currently hold the “Trupanion.com” Internet domain name and numerous other related domain names. Domain names generally are regulated by Internet regulatory bodies. If we lose the ability to use a domain name in the United States, Canada or any other country, we may be forced to acquire domain names at significant cost or, in the alternative, be forced to incur significant additional expenses to market our medical plan, including the development of a new brand and the creation of new promotional materials, which could substantially harm our business and operating results. The regulation of domain names in the United States, Canada and in other foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain the domain names that utilize the “Trupanion” name in all of the countries in which we currently intend to conduct business.

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We control access to our proprietary technology, software and documentation by entering into confidentiality and invention assignment agreements with our employees and contractors, confidentiality agreements with third parties, such as service providers, vendors, individuals and entities that may be exploring a business relationship with us, and terms of use with third parties, such as veterinary hospitals desiring to use our technology, software and documentation. These agreements may not prevent disclosure of intellectual property, trade secrets and/or other confidential information, and may not provide an adequate remedy in the event of misappropriation of trade secrets or any unauthorized disclosure of trade secrets and other confidential information. In addition, others may independently discover trade secrets and confidential information and, in such cases, we may not be able to assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our intellectual property rights and related confidentiality and nondisclosure provisions, and failure to obtain or maintain trade secret protection, or our competitors being able to obtain our trade secrets or to independently develop technology similar to ours or competing technologies, could adversely affect our competitive business position.
Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies in the United States and abroad may be necessary in the future to enforce our intellectual property rights, to protect our domain names and to determine the validity and scope of the proprietary rights of others. Our efforts to enforce or protect our proprietary rights may be ineffective, could result in substantial costs and diversion of resources and could substantially harm our operating results.
Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.
Third parties have in the past and may in the future claim that our services infringe or otherwise violate their intellectual property rights. We may be subject to legal proceedings and claims, including claims of alleged infringement by us of the intellectual property rights of third parties. Any dispute or litigation regarding intellectual property could be expensive and time consuming, regardless of the merits of any claim, and could divert our management and key personnel from our operations.
If we were to discover or be notified that our services potentially infringe or otherwise violate the intellectual property rights of others, we may need to obtain licenses from these parties in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, and any such license may substantially restrict our use of the intellectual property. Moreover, if we are sued for infringement and lose the lawsuit, we could be required to pay substantial damages or be enjoined from offering the infringing services. Any of the foregoing could cause us to incur significant costs and prevent us from selling or properly administering subscriptions to our medical plan or performing under our other contractual relationships.
We rely on third parties to provide intellectual property and technology necessary for the operation of our business.
We utilize intellectual property and technology owned by third parties in developing and operating our technology platform and operating our business. From time to time, we may be required to renegotiate with these third parties or negotiate with other third parties to include or continue using their intellectual property or technology in our existing technology platform or business operations or in modifications or enhancements to our technology platform or business operations. We may not be able to obtain the necessary rights from these third parties on commercially reasonable terms, or at all, and the third-party intellectual property and technology we use or desire to use may not be appropriately supported, maintained or enhanced by the third parties. If we are unable to obtain the rights necessary to use or continue to use third-party intellectual property and technology in our operations, or if those third parties are unable to support, maintain and enhance their intellectual property and technology, we could experience increased costs or delays, which in turn may harm our financial condition, damage our brand and result in the loss of members.
Our technology platform and our data are also hosted by a third-party service provider. The terms under which such third-party service provider provides us services may change and we may be required to renegotiate with that third party. If we are unable to renegotiate satisfactory terms, we may not be able to transition to an alternative service provider without interrupting the availability of our technology platform and any interruption could materially and adversely affect our business. Additionally, if our third-party service provider experiences any disruptions, outages or catastrophes, or if it ceases to conduct business for any reason, we could experience an interruption in our business, which may in turn, damage our brand, result in a loss of members and harm our financial condition.
The outcome of litigation or regulatory proceedings could subject us to significant monetary damages, restrict our ability to conduct our business, harm our reputation and otherwise negatively impact our business.
From time to time, we have been, and in the future may become, subject to litigation, claims and regulatory proceedings and inquiries, including market conduct exams and other investigations by state insurance regulatory agencies. For example, we are currently addressing an inquiry from the Washington State Office of Insurance Commissioner regarding various allegations including that one of our subsidiaries and its employees were not properly licensed under Washington law.

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We cannot predict the outcome of these or any future actions or proceedings, and the cost of defending such actions or proceedings could be material. Further, defending such actions or proceedings could divert our management and key personnel from our business operations. If we are found liable in any action or proceeding, we may have to pay substantial damages or fines, or change the way we conduct our business, either of which may have a material adverse effect on our business, operating results, financial condition and prospects. There may also be negative publicity associated with litigation or regulatory proceedings that could harm our reputation or decrease acceptance of our services. These claims may be costly to defend and may result in assessment of damages, adverse tax consequences and harm to our reputation.
We do not believe the nature of any pending regulatory or legal proceeding will have a material adverse effect on our business, operating results and financial condition. Our assessment, however, may be incorrect, and is subject to change at any time based on the discovery of facts or circumstances that are not presently known to us. Therefore, it is possible that pending or future litigation may have a material adverse effect on our business, reputation, operating results and financial condition.
Changes in the economy may negatively impact our business, operating results and financial condition.
Our business may be affected by changes in the economic environment. Pet medical plans are a discretionary purchase, and members may reduce or eliminate their discretionary spending during an economic downturn, resulting in an increase in medical plan subscription terminations and a reduction in the number of new member enrollments. We may experience a material increase in medical plan subscription terminations or a material reduction in our member retention rate in the future, especially in the event of a prolonged recessionary period or a downturn in economic conditions. Conversely, consumers may have more income to pay for pet healthcare out-of-pocket and less desire to purchase a pet medical plan during a period of economic growth. In addition, media prices may increase during a period of economic growth, which could increase our sales and marketing expenses. As a result, our business, operating results and financial condition may be significantly affected by changes in the economic environment.
Covenants in the credit agreement governing our revolving line of credit may restrict our operations, and if we do not effectively manage our business to comply with these covenants, our financial condition could be adversely affected.
The credit agreement governing our revolving line of credit contains various restrictive covenants, including restrictions on our ability to dispose of our assets, change the name, location, office or executive management of our business, merge with or acquire other entities, incur other indebtedness, incur encumbrances, pay dividends or make distributions to holders of our capital stock, make investments, engage in transactions with our affiliates, make payments on subordinated debt, store equipment and inventory with a third party, become an investment company, permit withdrawals from APIC (with certain exceptions), conduct operations in certain of our Canadian subsidiaries and amend our certificate of incorporation in a manner adverse to the lenders. Our credit agreement also contains financial covenants, including those that require APIC to maintain certain capital and surplus, require us to maintain certain minimum cash balances and require us to achieve specified monthly revenue, claims ratios and EBITDA levels (each as defined in the credit agreement). Our ability to meet these restrictive covenants can be affected by events beyond our control, and we have been in the past, and may be in the future, unable to do so. In addition, our failure to maintain effective internal controls to measure compliance with our financial covenants could affect our ability to take corrective actions on a timely basis and could result in our being in breach of these covenants. Our credit agreement provides that our breach or failure to satisfy certain covenants constitutes an event of default. Upon the occurrence of an event of default, our lenders could elect to declare all amounts outstanding under our credit agreement to be immediately due and payable. If we are unable to repay those amounts, our financial condition could be adversely affected.
Our indebtedness could adversely affect our business and limit our ability to expand our business or respond to changes, and we may be unable to generate sufficient cash flow to satisfy our debt service obligations.
As of December 31, 2014, we had outstanding indebtedness of $14.9 million , which was secured by substantially all of our assets. We may incur additional indebtedness in the future, including any additional borrowings available under our revolving line of credit. Any substantial indebtedness and the fact that a substantial portion of our cash flow from operating activities could be needed to make payments on this indebtedness could have adverse consequences, including the following:
reducing the availability of our cash flow for our operations, capital expenditures, future business opportunities and other purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, which could place us at a competitive disadvantage compared to our competitors that may have less debt;
limiting our ability to borrow additional funds; and
increasing our vulnerability to general adverse economic and industry conditions.

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Our ability to borrow any funds needed to operate and expand our business will depend in part on our ability to generate cash. Our ability to generate cash is subject to the performance of our business, as well as general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may also need to borrow additional funds to support risk-based capital requirements related to APIC’s growth. If our business does not generate sufficient cash flow from operating activities or if future borrowings are not available to us, under our revolving credit facility or otherwise, in amounts sufficient to enable us to fund our liquidity needs, our operating results, financial condition and ability to expand our business and meet our risk-based capital requirements may be adversely affected. Moreover, our inability to make scheduled payments on our debt obligations in the future would require us to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity investment.
Our revenue may be negatively affected if we are required to pay income tax, premium tax, transaction tax or other taxes in jurisdictions where we are currently not collecting and reporting tax.
We currently pay income tax, premium tax, transaction tax and other taxes in certain jurisdictions in which we do business. A successful assertion by one or more jurisdiction(s) that we should be paying income, premium, transaction or other taxes on our income or in connection with enrollment in our medical plan or intercompany services, or the enactment of new laws requiring the payment of income, premium, transfer or other taxes in connection with enrollment in our medical plan or intercompany services, could result in substantial tax liabilities. Our voluntary disclosure of tax obligations and any future assertions by any jurisdiction that we should be paying taxes may create increased administrative burdens or costs, require payment of substantial fines and penalties, discourage consumers from enrolling in our medical plan, reduce our operational efficiencies, decrease our ability to compete or otherwise substantially harm our business and operating results.
If consumer acceptance of the Internet as an acceptable marketplace for a pet medical plan does not continue to increase, our growth prospects will be harmed.
Our success depends in part on widespread consumer acceptance of the Internet as a marketplace for the purchase of a pet medical plan. Internet use may not continue to develop at historical rates, and consumers may not continue to use the Internet to research, select and purchase a pet medical plan. In addition, the Internet may not be accepted as a viable resource for a number of reasons, including lack of security of information or privacy protection, possible disruptions, computer viruses or other damage to Internet servers or to users’ computers, and excessive governmental regulation.
Our success will depend, in large part, on third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services.
We depend in part on Internet search engines to attract potential new members to visit our website. If Internet search engines’ methodologies are modified or our search result page rankings decline for other reasons, our new member growth could decline, and our business and operating results could be harmed.
We derive a significant amount of traffic to our website from consumers who search for pet medical insurance through Internet search engines, such as Google, Bing and Yahoo!. A critical factor in attracting consumers searching for pet medical insurance on the Internet to our website is whether we are prominently displayed in response to an Internet search relating to pet insurance. Algorithmic search result listings are determined and displayed in accordance with a set of formulas or algorithms developed by the particular Internet search engine, which may change from time to time. If we are listed less prominently in, or removed altogether from, search result listings for any reason, the traffic to our websites would decline and we may not be able to replace this traffic, which in turn would harm our business, operating results and financial condition. If we decide to attempt to replace this traffic, we may be required to increase our sales and marketing expenditures, including by utilizing paid search advertising, which would also increase our pet acquisition costs and harm our business, operating results and financial condition.
We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results.
We may decide to acquire businesses, products and technologies. Our ability to successfully make and integrate acquisitions is unproven. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. Further, even if we successfully acquire additional businesses or technologies, we may not be able to migrate the policyholders to our medical plan, integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business or technology. In addition, we may unknowingly inherit liabilities from future acquisitions that arise after the acquisition and are not adequately covered by indemnities. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. If an acquired business or technology fails to meet our expectations, our business, operating results and financial condition may suffer.

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Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2014, we had U.S. federal net operating loss carryforwards of approximately $44.4 million that will begin to expire in 2027. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change” generally occurs if there is a cumulative change in our ownership by “5-percent stockholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We may have experienced an ownership change in the past and we may experience an ownership change in the future, some of which may be outside our control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards, or other pre-change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to limitations.
We are exploring opportunities to expand our operations globally, and we may therefore become subject to a number of risks associated with international expansion and operations.
As part of our growth plan, we are exploring opportunities to expand our operations globally. We have no history of marketing, selling, administrating and supporting our medical plan to consumers outside of the United States, Canada and Puerto Rico. International sales and operations are subject to a number of risks, including the following:
regulatory rules and practices, foreign exchange controls, tariffs, tax laws and treaties that are different than those we operate under in the United States, Canada and Puerto Rico and that carry a greater risk of unexpected changes;
the costs and resources required to modify our technology and sell our medical plan in non-English speaking countries;
the costs and resources required to modify our medical plan appropriately to suit the needs and expectations of residents and veterinarians in such foreign countries;
our data analytics platform may have limited applicability in foreign countries, which may impact our ability to develop adequate underwriting criteria and accurately price subscriptions to our medical plan in such countries;
increased expenses incurred in establishing and maintaining office space and equipment for our international operations;
technological incompatibility;
fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;
difficulties in attracting and retaining personnel with experience in international operations;
difficulties in modifying our business model in a manner suitable for any particular foreign country, including any modifications to our Territory Partner model to the extent we determine that our existing model is not suitable for use in foreign countries;
our lack of experience in marketing to consumers and veterinarians, and encouraging online marketing, in foreign countries;
our relative lack of industry connections in many foreign countries;
difficulties in managing operations due to language barriers, distance and time zone differences, staffing, cultural differences and business infrastructure constraints, including difficulty in obtaining foreign and domestic visas;
application of foreign laws and regulations to us, including more stringent or materially different insurance, employment, consumer and data protection laws;
the uncertainty of protection for intellectual property rights in some countries;
greater risk of a failure of foreign employees to comply with applicable U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act and any trade regulations ensuring fair trade practices; and
general economic and political conditions in these foreign markets.
These factors and other factors could harm our ability to gain future international revenue and, consequently, materially impact our business and operating results. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources, detracting from management attention and financial resources otherwise available to our existing business. Our failure to successfully manage our international operations and the associated risks effectively could limit the future growth of our business and could have an adverse effect on our operating results and financial condition.

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A downgrade in the financial strength rating of our insurance company may have an adverse effect on our competitive position, the marketability of our medical plan, and our liquidity, access to and cost of borrowing, operating results and financial condition.
Although we do not believe that the financial strength rating of APIC is material for customers or to understand our business beyond what is already publicly available, financial strength ratings can be important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. On an ongoing basis, rating agencies review the financial performance and condition of APIC and could downgrade or change the outlook on its ratings due to, for example, a change in its statutory capital, a change in the rating agency’s determination of the amount of risk-based capital required to maintain a particular rating or a reduced confidence in management or its business strategy, as well as a number of other considerations that may or may not be under our control. The insurance financial strength rating of APIC is subject to quarterly review, and APIC may not retain the current rating. A downgrade in this or any future ratings could have a material effect on our sales, our competitiveness, the marketability of our medical plan, our liquidity, access to and cost of borrowing, operating results and financial condition.
Our business is subject to the risks of earthquakes, floods, fires and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism.
Our systems and operations are vulnerable to damage or interruption from earthquakes, human error, intentional bad acts, hurricanes, floods, fires, power losses, telecommunications failures, hardware and system failures, terrorist attacks, acts of war, break-ins or similar events. For example, our corporate headquarters and facilities are located in Seattle, Washington near known earthquake fault zones and are vulnerable to significant damage from earthquakes. In addition, acts of terrorism could cause disruptions in our business or the economy as a whole. Our servers and systems may also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential member data. We currently have limited disaster recovery capability, and our business interruption insurance may be insufficient to compensate us for losses that may occur. Such disruptions could negatively impact our ability to run our business, which could have an adverse effect on our operating results and financial condition.
Risks Related to Compliance with Laws and Regulations
We may not, maintain the amount of risk-based capital required to avoid additional regulatory oversight, which may adversely affect our ability to operate our business.
Memberships in our U.S. medical plan are written by APIC. APIC is an insurance company domiciled in the state of New York and licensed by the New York Department of Financial Services. Regulators in the states in which we do business impose risk-based capital requirements on APIC that generally are approved by the National Association of Insurance Commissioners to ensure APIC maintains reasonably appropriate levels of surplus to support our operations and to protect our members against adverse developments in APIC’s financial circumstances, taking into account the risk characteristics of our assets, liabilities and certain other items. Generally, the NY DFS will compare, on an annual basis as of December 31 or more often as deemed necessary, an insurer’s total adjusted capital and surplus against what is referred to as an “Authorized Control Level” of risk-based capital that is calculated based on a formula designed to estimate an insurer’s capital adequacy. There generally are five outcomes possible from this comparison, depending on the insurer’s level of risk-based capital as compared to the applicable Authorized Control Level.
No Action Level : Insurer’s total adjusted capital is equal to or greater than 200% of the Authorized Control Level.
Company Action Level : Insurer’s total adjusted capital is less than 200% but greater than 150% of the Authorized Control Level. When at this level, an insurer must prepare and submit a financial plan to the NY DFS for review and approval. Generally, a risk-based capital plan would identify the conditions that contributed to the Company Action Level and include the insurer’s proposed plans for increasing its risk-based capital in order to satisfy the No Action Level. The failure to provide the NY DFS with a risk-based capital plan on a timely basis or the inability of the NY DFS and the insurer to mutually agree on an appropriate risk-based capital plan could trigger a Regulatory Action Level outcome, subject to the insurer’s right to a hearing on the issue.
Regulatory Action Level : Insurer’s total adjusted capital is less than 150% but greater than 100% of the Authorized Control Level. When at this level, an insurer generally must provide a risk-based capital plan to the NY DFS and be subject to examination or analysis by the NY DFS to the extent it deems necessary, including such corrective actions as the NY DFS may require.
Authorized Control Level : Insurer’s total adjusted capital is less than 100% but greater than 70% of the Authorized Control Level. At this level, the NY DFS generally could take remedial actions that it determines necessary to protect the insurer’s assets, including placing the insurer under regulatory control.

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Mandatory Control Level : Insurer’s total adjusted capital is less than 70% of the Authorized Control Level. At this level, the NY DFS generally is required to take steps to place the insurer under regulatory control, even if the insurer is still solvent.
As of December 31, 2014, APIC was required to maintain at least $22.6 million of risk-based capital to satisfy the No Action Level (the highest of the above levels). As of December 31, 2014, APIC maintained $23.7 million of risk-based capital. The NY DFS may increase the required levels of risk-based capital in the future, and we anticipate that we will need to maintain greater amounts of risk-based capital if our pet enrollment continues to grow.
Additionally, if our risk-based capital falls below the Company Action Level, we may be in breach of various contractual relationships, including, for example, with the unaffiliated general agent for which we write pet insurance policies, which may give such parties the ability to cancel their contracts with us and/or sue us for damages related to our risk-based capital levels, which could have a material adverse effect on our financial condition.
We may require additional capital to meet our risk-based capital requirements, pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances. If capital is not available to us at any time, our business, operating results and financial condition may be harmed.
We may require additional capital to meet our risk-based capital requirements, operate or expand our business or respond to unforeseen circumstances. Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of holders of our common stock. Further, volatility in the credit or equity markets may have an adverse effect on our ability to obtain debt or equity financing or the cost of such financing. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If a combination of these factors were to occur, our internal sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing on favorable terms. If funds are unavailable to us on reasonable terms when we need them, we may be unable to meet our risk-based capital requirements, train and support our employees, support Territory Partners, maintain the competitiveness of our technology, pursue business opportunities, service our existing debt, pay claims or acquire new members, any of which could have an adverse effect on our business, operating results and financial condition.
If we fail to comply with the numerous laws and regulations that are applicable to the sale of a pet medical plan, our business and operating results could be harmed.
The sale of a pet medical plan, which is considered a type of property and casualty insurance in most jurisdictions, is heavily regulated by each state in the United States, in the District of Columbia, in Puerto Rico and by Canadian federal, provincial and territorial governments. In the United States, state insurance regulators are charged with protecting policyholders and have broad regulatory, supervisory and administrative powers over our business practices. Because we do business in all 50 states, the District of Columbia, all Canadian provinces and territories and Puerto Rico, compliance with insurance-related laws, rules and regulations is difficult and imposes significant costs on our business. Each jurisdiction’s insurance department typically has the power, among other things, to:
grant and revoke licenses to transact insurance business;
conduct inquiries into the insurance-related activities and conduct of agents and agencies and others in the sales, marketing and promotional channels;
require and regulate disclosure in connection with the sale and solicitation of insurance policies;
authorize how, by which personnel and under what circumstances insurance premiums can be quoted and published and an insurance policy sold;
approve which entities can be paid commissions from carriers and the circumstances under which they may be paid;
regulate the content of insurance-related advertisements, including web pages, and other marketing practices;
approve policy forms, require specific benefits and benefit levels and regulate premium rates;
impose fines and other penalties; and
impose continuing education requirements.

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While the U.S. federal government does not directly regulate the insurance industry, federal legislation and administrative policies can also affect us. Congress and various federal agencies periodically discuss proposals that would provide for federal oversight of insurance companies. We cannot predict whether any such laws will be enacted or the effect that such laws would have on our business. We also do business in all ten provinces and three territories of Canada. The provincial and territorial insurance regulators have the power to regulate the market conduct of insurers and insurance intermediaries, and the licensing and supervision of insurance agents, brokers, and adjusters, along with enforcement rights, including the right to assess administrative monetary penalties in certain provinces.
Insurance companies are also regulated at the federal level in Canada, and the Insurance Companies Act prohibits a foreign entity from insuring risks in Canada unless it is authorized by an Order made by the Superintendent of Financial Institutions (Canada) permitting it to do so.
Due to the complexity, periodic modification and differing interpretations of insurance laws and regulations, we have not always been, and we may not always be, in compliance with them. New insurance laws, regulations and guidelines also may not be compatible with the manner in which we market and sell subscriptions to our medical plan in all of our jurisdictions and member acquisition channels, including over the Internet. Failure to comply with insurance laws, regulations and guidelines or other laws and regulations applicable to our business could result in significant liability, additional department of insurance licensing requirements, the revocation of licenses in a particular jurisdiction or our inability to sell subscriptions to our medical plan, which could significantly increase our operating expenses, result in the loss of our revenue and otherwise harm our business, operating results and financial condition.
Moreover, an adverse regulatory action in one jurisdiction could result in penalties and adversely affect our license status or reputation in other jurisdictions, including due to the current requirement that adverse regulatory actions in one jurisdiction be reported to other jurisdictions. Even if the allegations in any regulatory or other action against us ultimately are determined to be unfounded, we could incur significant time and expense defending against the allegations, and any related negative publicity could harm consumer and third-party confidence in us, which could significantly damage our brand.
In addition, we have received, and may in the future receive, inquiries from regulators regarding our marketing and business practices. These inquires may include investigations regarding a number of our business practices, including the manner in which we market and sell subscriptions to our medical plan and the manner in which we write policies for any unaffiliated general agent. Any modification of our marketing or business practices in response to regulatory inquiries could harm our business, operating results or financial condition.
A regulatory environment that limits rate increases may adversely affect our operating results and financial condition.
Many states, including New York, have adopted laws or are considering proposed legislation that, among other things, limit the ability of insurance companies to effect rate increases or to cancel, reduce or not renew insurance coverage with respect to existing policies, and many state regulators have the power to reduce, or to disallow increases in premium rates. Most states, including New York, require licensure and regulatory approval prior to marketing new insurance products. Our practice has been to regularly reevaluate the price of our medical plan subscriptions, with any pricing changes implemented at least annually, subject to the review and approval of the state regulators, who may reduce or disallow our pricing changes. Such review has often in the past resulted, and may in the future result, in delayed implementation of pricing changes and prevent us from making changes we believe are necessary to achieve our targeted claims payout ratio, which could adversely affect our operating results and financial condition. In addition, we may be prevented by regulators from limiting significant pricing changes, requiring us to raise rates more quickly than we otherwise may desire. This could damage our reputation with our members and reduce our retention rates, which could significantly damage our brand, result in the loss of expected revenue and otherwise harm our business, operating results and financial condition.
In addition to regulating rates, certain states have enacted laws that require a property-casualty insurer, which includes a pet insurance company, conducting business in that state to participate in assigned risk plans, reinsurance facilities, joint underwriting associations (JUAs), Fair Access to Insurance Requirements (FAIR) plans and wind pools. In these markets, if the state reinsurance facilities, wind pools, FAIR plans or JUAs recognize a financial deficit, they may in turn have the ability to assess participating insurers, adversely affecting our operating results and financial condition if we are a part of such state reinsurance facilities, wind pools, FAIR plans or JUAs. Additionally, certain states require insurers to participate in guaranty funds for impaired or insolvent insurance companies. These funds periodically assess losses against all insurance companies doing business in the state. Our operating results and financial condition could be adversely affected by any of these factors.

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Regulations that require individuals or entities that sell pet insurance to be licensed may be interpreted to apply to our business, which could require us to modify our business practices.
Insurance regulators generally require that each individual who transacts pet insurance business on our behalf must maintain a valid license in one or more jurisdictions. If regulators determined that any of our contact center employees, Territory Partners, veterinarians or other referral sources were selling subscriptions to our medical plan on our behalf and needed to be licensed in a particular jurisdiction, and if such persons were not in fact licensed, we could become subject to conviction for an offense or the imposition of an administrative penalty and liable for significant penalties and would likely be required to modify our business practices and sales and marketing programs, or license the affected individuals, which may be impractical or costly and time-consuming to implement. Any modification of our business or marketing practices in response to regulatory licensing requirements could harm our business, operating results or financial condition.
Most Canadian provincial and territorial insurance legislation requires entities that solicit the sale of pet insurance to be validly licensed in the applicable jurisdiction. If any such regulator were to determine that any entity soliciting the sale of a medical plan on our behalf did not hold the required license, we may have to modify our business practices or marketing efforts, or license the affected entities, which may be costly and time-consuming to implement.
We are subject to numerous laws and regulations, and compliance with one law or regulation may result in non-compliance with another.
We are subject to numerous laws and regulations that are administered and enforced by a number of different governmental authorities, each of which exercises a degree of interpretive latitude, including, in the United States, state insurance regulators, state securities administrators, state attorneys general and federal agencies including the SEC and the U.S. Department of Justice. Consequently, we are subject to the risk that compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal environment may, even absent any particular regulator’s or enforcement authority’s interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take from a legal risk management perspective, thus necessitating changes to our practices that may, in some cases, increase our costs and limit our ability to grow or to improve the profitability of our business. Further, in some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency rather than a range of constituencies. For example, state insurance laws and regulations generally are intended to protect or benefit purchasers or users of insurance products, not holders of securities, which generally is the jurisdiction of the SEC. In many respects, these laws and regulations limit our ability to grow or to improve the profitability of our business.
Regulation of the sale of medical insurance for cats and dogs is subject to change, and future regulations could harm our business and operating results.
The laws and regulations governing the offer, sale and purchase of medical insurance for cats and dogs are subject to change, and future changes may be adverse to our business. For example, if a jurisdiction were to increase our risk-based capital requirements or alter the requirements for obtaining or maintaining an agent’s license in connection with the enrollment of a member in our medical plan, it could have a material adverse effect on our operations. Some states in the United States have adopted, and others are expected to adopt, new laws and regulations related to the insurance industry. It is difficult to predict how these or any other new laws and regulations will impact our business, but, in some cases, changes in insurance laws, regulations and guidelines may be incompatible with various aspects of our business and require that we make significant modifications to our existing technology or practices, which may be costly and time-consuming to implement and could also harm our business, operating results and financial condition.

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Failure to comply with federal, state and provincial laws and regulations relating to privacy and security of personal information, and civil liabilities relating to breaches of privacy and security of personal information, could create liabilities for us, damage our reputation and harm our business.
A variety of U.S. and Canadian federal, state and provincial laws and regulations govern the collection, use, retention, sharing and security of personal information. We collect and utilize demographic, credit and other private information from and about our members when they visit our website, call our contact center and apply for enrollment in our medical plan. Further, we use tracking technologies, including “cookies,” to help us manage and track our members’ interactions and deliver relevant advice and advertising. Claims or allegations that we have violated applicable laws or regulations related to privacy and data security could in the future result in negative publicity and a loss of confidence in us by our members and our participating service providers, and may subject us to fines by credit card companies and the loss of our ability to accept credit and debit card payments. In addition, we have posted privacy policies and practices concerning the collection, use and disclosure of member data on our website. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In addition, our use and retention of personal information could lead to civil liability exposure in the event of any disclosure of such information due to hacking, viruses, inadvertent action or other use or disclosure. Several companies have been subject to civil actions, including class actions, relating to this exposure.
We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols for personal information imposed by law, regulation, self-regulatory bodies, industry standards and contractual obligations. Such laws, standards and regulations, however, are evolving and subject to potentially differing interpretations, and federal, state and provincial legislative and regulatory bodies may expand current or enact new laws or regulations regarding privacy matters. We are unable to predict what additional legislation, standards or regulation in the area of privacy and security of personal information could be enacted or its effect on our operations and business.
Government regulation of the Internet and email could adversely affect our business.
The laws governing general commerce on the Internet remain unsettled and it may take years to fully determine whether and how existing laws such as those governing insurance, intellectual property, privacy and taxation apply to the Internet. In addition, the growth and development of the market for electronic commerce and Internet-related pet medical plan advertisements and transactions may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business and selling subscriptions to a pet medical plan over the Internet. Any new laws or regulations or new interpretations of existing laws or regulations relating to the Internet could harm our business and we could be forced to incur substantial costs in order to comply with them, which would harm our business, operating results and financial condition.
Additionally, we use email to market our services to potential members and as a means of communicating with our existing members. The laws and regulations governing the use of email for commercial purposes continue to evolve and the growth and development of the market for commerce over the Internet may lead to the adoption of additional legislation. On July 1, 2014, legislation became effective in Canada that, among other things, prohibits the sending of commercial electronic messages without the express or implied consent of the recipient, subject to certain exceptions. Failure to abide by this new legislation could lead to significant administrative monetary penalties and, as of July 1, 2017, civil liability exposure, including through class actions. We have incurred, and will continue to incur, expenses to comply with electronic messaging laws. If new laws or regulations are adopted, or existing laws and regulations are interpreted, to impose additional restrictions on our ability to send email to our members or potential members, we may not be able to communicate with them in a cost-effective manner. In addition to legal restrictions on the use of email for commercial purposes, Internet service providers, email service providers and others attempt to block the transmission of unsolicited email, commonly known as “spam.” Many Internet and email service providers have relationships with organizations whose purpose it is to detect and notify the Internet and email service providers of entities that the organization believes is sending unsolicited email. If an Internet or email service provider identifies email from us as “spam” as a result of reports from these organizations or otherwise, we could be placed on a restricted list that will block our emails to members or potential members. If we are restricted or unable to communicate by email with our members and potential members as a result of legislation, blockage or otherwise, our business, operating results and financial condition would be harmed.
Applicable insurance laws regarding the change in control of our company may impede potential acquisitions that our stockholders might consider to be desirable.
We are subject to statutes and regulations of the state of New York that generally require that any person or entity desiring to acquire direct or indirect control of APIC obtain prior regulatory approval. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change in control of our company, including through transactions, and in particular unsolicited transactions, that some of our stockholders might consider to be desirable. Similar laws or regulations may also apply in other states in which we may operate.

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We will continue to incur significantly increased costs and devote substantial management time as a result of operating as a public company.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we are subject to the reporting requirements of the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the JOBS Act, as well as rules and regulations subsequently implemented by the SEC and the stock exchange on which our common stock is listed, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Compliance with these requirements has and will continue to increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, from time to time, our management and other personnel need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we have and will continue to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as defined by the JOBS Act. Our management and other personnel also have limited experience operating a public company, which may result in operational inefficiencies or errors. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We generally will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (iv) five years from the date of our IPO.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
Risks Related to Ownership of Our Common Stock
Our actual operating results may differ significantly from our guidance.
From time to time we have released, and may continue to release, guidance in our quarterly earnings conference call, quarterly earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which includes forward-looking statements, has been and will be based on projections prepared by our management. These projections are not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections. Accordingly, no such person expresses any opinion or any other form of assurance with respect to the projections.

34



Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such third parties.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this Annual Report on Form 10-K could result in the actual operating results being different from our guidance, and the differences may be adverse and material.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the securities or industry analysts who publish research about us or our business downgrade our stock or publish inaccurate or unfavorable evaluations of our company or our stock, the price of our stock could decline. If one or more of these analysts cease coverage of our company, our stock may lose visibility in the market, which in turn could cause our stock price to decline.
The market price of our common stock has been and is likely to continue to be volatile, and you may be unable to sell your shares at or above the price at which you purchased them.
The market price of our common stock has been and is likely to continue to fluctuate widely. Factors affecting the market price of our common stock include:
variations in our operating results, earnings per share, cash flows from operating activities, and key financial and operational metrics, and how those results compare to analyst expectations;
forward-looking guidance that we provide to the public and industry and financial analysts related to future revenue and profitability, and any change in that guidance or our failure to achieve the results reflected in that guidance;
the net increases in the number of members, either independently or as compared with published expectations of industry, financial or other analysts that cover our company;
changes in the estimates of our operating results or changes in recommendations by securities analysts that elect to follow our common stock;
announcements of changes to our medical plan, strategic alliances or significant agreements by us or by our competitors;
announcements by us or by our competitors of mergers or other strategic acquisitions, or rumors of such transactions involving us or our competitors;
recruitment or departure of key personnel;
the economy as a whole and market conditions in our industry;
trading activity by a limited number of stockholders who together beneficially own a majority of our outstanding common stock;
the number of shares of our stock trading on a regular basis; and
any other factors discussed in these risk factors.
In addition, if the market for stock in our industry or the stock market in general experiences uneven investor confidence, the market price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The market price of our common stock might also decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly affect us. Some companies that have experienced volatility in the trading price of their stock have been the subject of securities class action litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of our management’s attention and resources.

35



We have broad discretion in the use of the net proceeds from our IPO and may not use them effectively.
We received net proceeds of approximately $72.8 million from our IPO in July 2014. We have broad discretion in the application of these net proceeds. Because of the number and variability of factors that will determine our use of the net proceeds from our IPO, their ultimate use may vary substantially from their intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from our IPO in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government that may not generate a high yield to our stockholders.
We do not intend to pay dividends on our common stock for the foreseeable future and, therefore, any returns will be limited to the value of our stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our common stock is limited by the terms of our credit agreement, and APIC’s ability to pay dividends is limited by New York state insurance laws. Any return to stockholders will therefore be limited to the increase, if any, of our stock price.
Our directors and principal stockholders own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
As of December 31, 2014, our directors, five percent or greater stockholders and their respective affiliates beneficially held in the aggregate approximately 61% of our outstanding voting stock. Therefore, these stockholders have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you or other stockholders may feel are in your or their best interest as one of our stockholders.
Provisions in our restated certificate of incorporation, restated bylaws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the market price of our common stock.
Our restated certificate of incorporation and restated bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions, among other things:
establish a classified board of directors so that not all members of our board are elected at one time;
permit only the board of directors to establish the number of directors and fill vacancies on the board;
provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders;
require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws;
authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan (also known as a “poison pill”);
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
prohibit cumulative voting; and
establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock.

36



Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our principal executive offices are located at 907 NW Ballard Way, Seattle, Washington. The lease for our principal office is for 37,500 square feet and expires in 2016, with two remaining one-year options to extend the lease. We also occupy 12,000 square feet of office space in Seattle, Washington pursuant to a lease that expires in September 2015 and 1,600 s quare feet of office space in Vancouver, British Columbia pursuant to a lease that expires in March 2017 .
Item 3. Legal Proceedings
Our subsidiary, APIC, a New York corporation, received an inquiry from the California Department of Insurance (CDOI) in 2011 alleging APIC’s trial insurance policies issued in California are in violation of California law. We have disputed this assertion. In July 2014, the CDOI filed a notice of non-compliance regarding this issue. As of December 31, 2014, we had accrued liabilities of $0.4 million for this matter. On February 12, 2015, APIC and CDOI entered into a Stipulation and Waiver whereby APIC voluntarily agreed to remove its trial certificate program in favor of a new program that has been pre-approved by the CDOI. APIC also agreed to pay a fine and reimburse CDOI expenses in an aggregate amount of $0.4 million . Pursuant to the stipulation, APIC did not admit any wrongdoing.
We received an inquiry from the Washington State Office of the Insurance Commissioner (OIC) in December 2012 concerning whether one of our subsidiaries was properly licensed, and whether certain of its employees were properly licensed, under Washington law. We responded to this letter in January of 2013 confirming that our subsidiaries are licensed and that our employees are not required to be licensed under Washington law. In October 2013, OIC sent further correspondence informing APIC that the results of a market conduct examination regarding its use of unlicensed non-appointed producers were being referred to OIC’s enforcement committee and that such committee would notify APIC in the event action is taken in regard to possible violations. The Company received additional correspondence from the OIC in July 2014 informing it that the OIC is scheduling a regulatory examination to further assess the Company’s compliance. A regulatory examination took place during the third and fourth quarters of 2014. As of December 31, 2014, we had accrued liabilities of $0.2 million for this matter as a precautionary measure. Adverse outcomes beyond recorded amounts are reasonably possible. At this stage in the matter, however, we are unable to estimate a possible loss or range of possible loss beyond amounts accrued.
We cannot predict the ultimate outcome of the above-mentioned proceedings and claims, and we are unable to estimate any potential liability we may incur.
In addition to the matters described above, from time to time we may be subject to various legal proceedings and claims in the ordinary course of business activities, including claims of alleged infringement of trademarks, copyrights and other intellectual property rights; employment claims; and general contract or other claims. We may, from time to time, also be subject to various other legal or government claims, disputes or investigations.
Item 4. Mine Safety Disclosures
None.

37



PART II
Item 5. Market for Registrant s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market for our Common Stock
Our common stock began trading on the New York Stock Exchange (NYSE) under the symbol "TRUP" on July 18, 2014. Prior to that time, there was no public market for our common stock. The following table sets forth the high and low intra-day sales prices per share for our common stock on the NYSE.
 
Fiscal Year 2014
 
High
 
Low
Third Quarter (From July 17, 2014)
$
11.95

 
$
7.70

Fourth Quarter
8.60
 
5.21
Dividend Policy
We have never declared or paid cash dividends on our capital stock. Under our credit agreement, we are restricted from paying any dividends or making any distributions on account of our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws and restrictions in our outstanding credit agreement, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors considers relevant.
Holders of Record
As of February 18, 2015, there were 92 stockholders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, whose shares are held of record by banks, brokers, and other financial institutions.
Securities Authorized for Issuance under Equity Compensation Plans
The information called for by this item is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders to be held in 2015. See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management.”
Stock Performance Graph
The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our other filings under the Exchange Act or the Securities Act, except to the extent we specifically incorporate it by reference into such filing.
This chart compares the cumulative total return on our common stock with that of the S&P Small Cap 600 Index and the NASDAQ-100 Technology Sector Index. The chart assumes $100 was invested at the close of market on July 18, 2014, in our common stock and the S&P Small Cap 600 Index, and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

38



Company/Index
Base Period 7/18/14
7/31/2014

8/31/2014

9/30/2014

10/31/2014

11/30/2014

12/31/2014

Trupanion Inc.
$
100

$
87.70

$
78.49

$
74.57

$
58.46

$
53.26

$
60.82

S&P Small Cap 600
100

97.10

101.18

95.62

102.31

101.90

104.65

NASDAQ-100 Technology Sector Index
100

98.20

102.32

101.85

104.00

110.09

108.79

Sales of Unregistered Securities
From January 1, 2014 and through July 17, 2014, we granted to our directors, officers, employees and consultants options to purchase 376,100 shares of common stock under our 2007 Equity Compensation Plan with per share exercise prices ranging from $9.07 to $12.27 , and issued 116,291  shares of common stock upon exercise of such options. These transactions were exempt from the registration requirements of the Securities Act in reliance upon Rule 701 promulgated under the Securities Act or Section 4(a)(2) of the Securities Act.
In April 2014, we issued 86,956 shares of Series A convertible preferred stock upon the net exercise of a warrant and withheld 13,044 shares to cover the exercise price of $1.50 per share. The purchaser represented to us that it was an accredited investor. This transaction was exempt from the registration requirements of the Securities Act in reliance upon Regulation D promulgated under the Securities Act. In July 2014, we issued warrants to purchase an aggregate of 510,000 shares of our common stock at an exercise price of $10.00 per share to purchasers that represented to us that they were accredited investors. This transaction was exempt from the registration requirements of the Securities Act in reliance upon Regulation D promulgated under the Securities Act.
Use of Proceeds
On July 17, 2014 , our registration statement on Form S-1 (File No. 333-196814) was declared effective by the SEC for our IPO pursuant to which we sold an aggregate of 8,193,750 shares of our common stock at a price to the public of $10.00 per share resulting in net proceeds to us of $72.8 million , after deducting underwriting discounts and commissions and offering expenses. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on July 18, 2014. Pending the uses described, we have invested the net proceeds in short-term, investment-grade interest-bearing securities such as money market funds.
Issuer Purchases of Equity Securities
Not applicable.

39



Item 6. Selected Consolidated Financial Data
The following selected consolidated financial and other data should be read with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of operations data for the years ended December 31, 2014, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014 and 2013 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of operations data for the years ended December 31, 2011 and 2010 and the consolidated balance sheet data as of December 31, 2012 and 2011 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in any future period.
 
 
YEARS ENDED
DECEMBER 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(in thousands, except share and per share data)
Consolidated Statements of Operations Data:
 

 

 

 

 

Revenue:
 

 

 

 

 

Subscription business
 
$
105,052

 
$
76,818

 
$
55,352

 
$
37,045

 
$
19,099

Other business
 
10,858

 
7,011

 
178

 

 

Total revenue
 
115,910

 
83,829

 
55,530

 
37,045

 
19,099

Cost of revenue:
 

 

 

 

 

Subscription business (1)
 
86,402

 
61,905

 
44,185

 
29,002

 
15,326

Other business
 
9,634

 
6,280

 
134

 

 

Total cost of revenue
 
96,036

 
68,185

 
44,319

 
29,002

 
15,326

Gross profit:
 

 

 

 

 

Subscription business
 
18,650

 
14,913

 
11,167

 
8,043

 
3,773

Other business
 
1,224

 
731

 
44

 

 

Total gross profit
 
19,874

 
15,644

 
11,211

 
8,043

 
3,773

Operating expenses:
 

 

 

 

 

Sales and marketing (1)
 
11,608

 
9,091

 
7,149

 
5,206

 
4,264

Technology and development (1)
 
9,899

 
4,888

 
3,406

 
1,499

 
1,098

General and administrative (1)
 
14,312

 
8,652

 
6,195

 
4,289

 
3,636

Total operating expenses
 
35,819

 
22,631

 
16,750

 
10,994

 
8,998

Operating loss
 
(15,945
)
 
(6,987
)
 
(5,539
)
 
(2,951
)
 
(5,225
)
Interest expense
 
6,726

 
609

 
535

 
690

 
577

Other (income) expense, net
 
(1,487
)
 
671

 
252

 
186

 
146

Loss before income taxes
 
(21,184
)
 
(8,267
)
 
(6,326
)
 
(3,827
)
 
(5,948
)
Income tax expense (benefit)
 
(7
)
 
(92
)
 
84

 
92

 
50

Net loss
 
$
(21,177
)
 
$
(8,175
)
 
$
(6,410
)
 
$
(3,919
)
 
$
(5,998
)
Net loss attributable to common stockholders
 
$
(21,177
)
 
$
(8,175
)
 
$
(8,147
)
 
$
(3,919
)
 
 
Net loss per share attributable to common stockholders—basic and diluted (2)
 
$
(1.64
)
 
$
(6.23
)
 
$
(9.76
)
 
$
(5.34
)
 
 
Weighted average number of shares outstanding used to compute net loss per share attributable to common stockholders—basic and diluted (2)
 
12,934,477

 
1,312,019

 
834,648

 
734,411

 
 

40



 
 
YEARS ENDED
DECEMBER 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
Other Financial and Operational Data (3) :
 
 
 
 
 
 
 
 
 
 
Total subscription pets enrolled
 
218,684

 
169,570

 
125,387

 
88,707

 
56,738

Monthly adjusted revenue per pet (4)
 
$
44.27

 
$
42.57

 
$
41.99

 
$
41.00

 
$
36.61

Lifetime value of a pet (5)
 
$
590

 
$
612

 
$
557

 
$
500

 
$
385

Average pet acquisition cost (6)
 
$
119

 
$
103

 
$
100

 
$
84

 
$
98

Average monthly retention
 
98.68
%
 
98.65
%
 
98.51
%
 
98.24
%
 
98.16
%
Adjusted EBITDA
 
$
(10,347
)
 
$
(4,351
)
 
$
(3,904
)
 
$
(1,862
)
 
$
(4,613
)
 
 
AS OF
DECEMBER 31,
 
 
2014
 
2013
 
2012
 
2011
 
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
53,098

 
$
14,939

 
$
4,234

 
$
8,087

Short-term investments
 
22,371

 
16,088

 
10,809

 
9,370

Working capital
 
62,111

 
13,710

 
7,746

 
12,689

Total assets
 
98,306

 
51,653

 
27,666

 
24,863

Warrant liabilities
 

 
4,900

 
551

 
333

Current and long-term debt
 
14,900

 
26,099

 
9,900

 
9,900

Total liabilities
 
39,031

 
52,928

 
23,015

 
17,743

Convertible preferred stock
 

 
31,724

 
31,724

 
25,792

Stockholders’ equity (deficit)
 
59,275

 
(32,999
)
 
(27,073
)
 
(18,672
)

(1)
Includes stock-based compensation expense as follows:
 
 
YEARS ENDED
DECEMBER 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
Cost of revenue
 
$
315

 
$
230

 
$
109

 
$
65

 
$
23

Sales and marketing
 
553

 
677

 
428

 
288

 
249

Technology and development
 
461

 
351

 
268

 
165

 
15

General and administrative
 
2,755

 
680

 
629

 
464

 
311

Total stock-based compensation expense
 
$
4,084

 
$
1,938

 
$
1,434

 
$
982

 
$
598


(2)
See note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders.
(3)
For more information about how we calculate total subscription pets enrolled, monthly adjusted revenue per pet, lifetime value of a pet, average pet acquisition cost and average monthly retention, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics.”
(4)
Monthly adjusted revenue per pet is calculated in part based on adjusted revenue, a non-GAAP financial measure, that we define as revenue from our subscription business segment excluding sign-up fee revenue and the change in deferred revenue between periods. For more information about adjusted revenue and a reconciliation of revenue to adjusted revenue, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
(5)
Lifetime value of a pet is calculated in part based on contribution margin, a non-GAAP financial measure, that we define as gross profit 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. For more information about contribution margin and a

41



reconciliation of gross profit to contribution margin, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
(6)
Average pet acquisition cost is calculated in part based on acquisition cost, a non-GAAP financial measure, that we define as sales and marketing expenses, excluding stock-based compensation expense, net of sign-up fee revenue. For more information about acquisition cost and a reconciliation of sales and marketing expenses to acquisition cost, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

42



Item 7. Management s Discussion and Analysis of Financial Conditions and Results of Operations

Overview
We are a direct-to-consumer monthly subscription service providing a medical plan for cats and dogs throughout the United States, Canada and Puerto Rico. Our data-driven, vertically-integrated approach enables us to provide pet owners with what we believe is the highest value medical plan available for their pets, priced specifically for each pet’s unique characteristics. Our growing and loyal member base provides us with highly predictable and recurring revenue. We operate our business with a focus on maximizing the lifetime value of each pet while sustaining a favorable ratio of lifetime value relative to acquisition cost.
We operate in two business segments: subscription business and other business. We generate revenue in our subscription business segment primarily from subscription fees for our medical plan, which we actively market to consumers. Our medical plan automatically renews on a monthly basis, and members pay the subscription fee at the beginning of each subscription period, in most cases by authorizing 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. We generate revenue in our other business segment primarily from writing policies for other businesses, including policies we write for an unaffiliated general agent and from writing policies under a federal government program. These policies provide different coverage and are subject to materially different terms and conditions than our primary medical plan.
We generate leads for our subscription business through both third-party referrals and online member acquisition channels, which we then convert into members through our website and contact center. Veterinary practices represent our largest referral source. While these referrals accounted for a majority of our enrollments during 2014, we do not pay commissions to or otherwise compensate veterinarians for their referrals. We engage a national referral network of independent contractors who are paid fees based on activity in their regions, which we refer to as our Territory Partners. Our Territory Partners are dedicated to cultivating direct veterinary relationships and building awareness of the benefits that our medical plan offers 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, our medical plan. Our online member acquisition channels serve as important resources for pet owner education and drive new member leads and conversion. We also receive a significant number of new leads from existing members adding pets and referring their friends and family members. We constantly evaluate the effectiveness of our member acquisition channels and marketing initiatives based upon their return on investment, which we measure by comparing the ratio of the lifetime value of a pet generated through each specific channel or initiative to the related acquisition cost.
Our revenue increased from $83.8 million for the year ended December 31, 2013 to $115.9 million for the year ended December 31, 2014, representing 38% year-over-year growth. We have made and expect to continue to make substantial investments in member acquisition and in expanding our operations. For the year ended December 31, 2014, 2013, and 2012, we had a net loss of $21.2 million , $8.2 million , and $6.4 million , respectively. As of December 31, 2014, our accumulated deficit was $57.2 million .
Key Financial and Operating Metrics
We believe that one of the key operating drivers for any online subscription business is the amount of sales and marketing expenses incurred to drive new member acquisition, which typically is evaluated in relation to the lifetime value of the member’s pet. In order to assess this metric, we regularly review a number of financial and operating metrics, including per pet unit economics, to evaluate our subscription business, determine the allocation of resources and make decisions regarding business strategy.

43



The following tables set forth our key financial and operating metrics for our subscription business for the periods ended December 31, 2014, 2013 and 2012:
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Total subscription pets enrolled (at period end)
 
218,684

 
169,570

 
125,387

Monthly adjusted revenue per pet
 
$
44.27

 
$
42.57

 
$
41.99

Lifetime value of a pet (LVP)
 
$
590

 
$
612

 
$
557

Average pet acquisition cost (PAC)
 
$
119

 
$
103

 
$
100

Average monthly retention
 
98.68
%
 
98.65
%
 
98.51
%
Adjusted EBITDA (in thousands)
 
$
(10,347
)
 
$
(4,351
)
 
$
(3,904
)
Total subscription pets enrolled. Total subscription pets enrolled reflects the number of pets subscribed to our plan at the end of each period presented. We monitor total subscription pets enrolled because it provides an indication of the growth of our business.
Monthly adjusted revenue per pet. Monthly adjusted revenue per pet is calculated as adjusted revenue divided by the total number of subscription pet months in the period. Adjusted revenue, a non-GAAP financial measure, is calculated as subscription business revenue, excluding sign-up fee revenue and the change in deferred revenue. We exclude sign-up fee revenue since it is collected at the time a new pet is enrolled and is used to partially offset initial setup costs, which are included in sales and marketing expenses. We exclude changes in deferred revenue in order to present monthly adjusted revenue per pet in a consistent manner across periods. Total subscription pet months in a period represents the sum of all pets enrolled for each month during the period. We monitor monthly adjusted revenue per pet because it is an indicator of the per unit economics of our business.

Lifetime value of a pet.  Lifetime value of a pet (LVP) is calculated in a reporting period as the average monthly contribution margin per pet over the 12 months prior to the period end date, multiplied by the implied average subscriber life in months. The average monthly contribution margin per pet is calculated by dividing gross profit for our subscription business for the period, excluding sign-up fee revenue, the change in deferred revenue and stock based compensation expense recorded in cost of revenue by the number of subscription pet months in the 12-month period. 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 LVP to assess how much lifetime contribution margin we might expect from new pets over their implied average subscriber life in months and to evaluate the amount of sales and marketing expenses we may want to incur to attract new pet enrollments.
Average pet acquisition cost. Pet acquisition cost (PAC) is calculated as acquisition cost divided by the total number of new pets enrolled in that period. Acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as sales and marketing expenses, excluding stock-based compensation, offset by sign-up fee revenue. We offset sales and marketing expenses with sign-up fee revenue since it is a one-time charge to new members used to partially offset initial setup costs, which are included in sales and marketing expenses. We monitor average pet acquisition cost to evaluate the efficiency of our sales and marketing programs in acquiring new members and measure effectiveness using the ratio of our lifetime value of a pet to average pet acquisition cost.
Average monthly retention. Average monthly retention is measured as the monthly retention rate of enrolled 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 December 31, 2014 is an average of each month’s retention from January 1, 2014 through December 31, 2014. 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 subscription 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 and manage our business.
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we define as net loss excluding stock-based compensation expense, depreciation and amortization expense, interest income, interest expense, change in fair value of warrant liabilities and income tax expense (benefit). For more information about adjusted EBITDA and a reconciliation of net loss to adjusted EBITDA, see Non-GAAP Financial Measures below.

44



Non-GAAP Financial Measures
We believe that using adjusted revenue, contribution margin and acquisition cost to calculate and present certain of our other key metrics is helpful to our investors. These measures, which are non-GAAP financial measures, are not prepared in accordance with U.S. GAAP. We define adjusted revenue as revenue from our subscription business segment excluding sign-up fee revenue and the change in deferred revenue between periods. We define contribution margin as gross profit 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. We define acquisition cost as sales and marketing expenses, excluding stock-based compensation expense, net of sign-up fee revenue.
Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry as other companies in our industry may calculate or use non-GAAP financial measures differently. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact on our reported financial results. Further, stock-based compensation expense and other items used in the calculation of adjusted EBITDA have been and will continue to be for the foreseeable future significant recurring expenses in our business. The presentation and utilization of non-GAAP financial measures is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We urge our investors to review the reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures in our consolidated financial statements that is included below, and not to rely on any single financial or operating measure to evaluate our business.
Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company’s non-cash expenses, we believe that providing non-GAAP financial measures such as contribution margin, acquisition cost and adjusted EBITDA that exclude stock-based compensation expense and, in the case of adjusted EBITDA, the change in fair value of warrant liabilities allows for more meaningful comparisons between our operating results from period to period. We exclude sign-up fee revenue from the calculation of both adjusted revenue and contribution margin because we collect it from new members at the time of enrollment and consider it to be an offset to a portion of our sales and marketing expenses. For this reason, we also net sign-up fees with sales and marketing expenses in our calculation of acquisition cost. We exclude changes in deferred revenue from the calculation of both adjusted revenue and contribution margin in order to eliminate fluctuations caused by the timing of pet enrollment during the last month of any particular period in which such measures are being presented or utilized. We exclude the change in fair value of warrant liabilities from our calculation of adjusted EBITDA in order to eliminate fluctuations caused by changes in our stock price. We believe this allows us to calculate and present adjusted revenue, contribution margin and acquisition cost and the related financial measures we derive from them, as well as adjusted EBITDA, in a consistent manner across periods. Our non-GAAP financial measures and the related financial measures we derive from them are important tools for financial and operational decision-making and for evaluating our own operating results over different periods of time.

The following table reflects the reconciliation of adjusted revenue to revenue:
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
Revenue
 
$
115,910

 
$
83,829

 
$
55,530

Excluding:
 
 
 
 
 
 
Other business revenue
 
(10,858
)
 
(7,011
)
 
(178
)
Change in deferred revenue
 
977

 
1,107

 
767

Sign-up fee revenue
 
(1,572
)
 
(1,418
)
 
(1,189
)
Adjusted revenue
 
$
104,457

 
$
76,507

 
$
54,930




45



The following table reflects the reconciliation of contribution margin to gross profit:
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
Gross profit
 
$
19,874

 
$
15,644

 
$
11,211

Excluding:
 
 
 
 
 
 
Stock-based compensation expense
 
315

 
230

 
109

Other business segment gross profit
 
(1,224
)
 
(731
)
 
(44
)
Sign-up fee revenue
 
(1,572
)
 
(1,418
)
 
(1,189
)
Change in deferred revenue
 
977

 
1,107

 
767

Contribution margin
 
$
18,370

 
$
14,832

 
$
10,854


The following table reflects the reconciliation of acquisition cost to sales and marketing expenses:
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
Sales and marketing expenses
 
$
11,608

 
$
9,091

 
$
7,149

Excluding:
 
 
 
 
 
 
Stock-based compensation expense
 
(553
)
 
(677
)
 
(428
)
Net of:
 
 
 
 
 
 
Sign-up fee revenue
 
(1,572
)
 
(1,418
)
 
(1,189
)
Acquisition cost
 
$
9,483

 
$
6,996

 
$
5,532


The following table reflects the reconciliation of adjusted EBITDA to net loss:
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
 
 
(in thousands)
Net loss
 
$
(21,177
)
 
$
(8,175
)
 
$
(6,410
)
Excluding:
 

 

 

Stock-based compensation expense
 
4,084

 
1,938

 
1,434

Depreciation and amortization expense
 
1,674

 
892

 
349

Interest income
 
(73
)
 
(102
)
 
(107
)
Interest expense
 
6,726

 
645

 
546

Change in fair value of warrant liabilities
 
(1,574
)
 
543

 
200

Income tax (benefit) expense
 
(7
)
 
(92
)
 
84

Adjusted EBITDA
 
$
(10,347
)
 
$
(4,351
)
 
$
(3,904
)


46



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 maintain the retention rate of enrolled pets may be affected by a number of factors, including the actual and perceived value of our services and the quality of our member experience, our claims payment process and competitive environment. In addition, 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 acquisition cost and the number of new members we enroll depends on a number of factors, including the amount we elect to invest in sales and marketing activities in any particular period in the aggregate and by channel, effectiveness of our sales execution and marketing initiatives, changes in costs of media, the mix of our sales and marketing 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 the actual or expected relationship to LVP. For example, veterinary trade show costs have traditionally increased our average pet acquisition costs in the first quarter of each year and the timing of our Territory Partner conference can also increase our average pet acquisition cost in a given period. We also may periodically test new member acquisition channels and marketing initiatives, such as television advertising, each of which impacts our average pet acquisition cost. We plan to expand the number of Territory Partners and their associates, which is likely to increase our average pet acquisition cost. We continually assess our sales and marketing activities by monitoring the ratio of LVP to PAC.
Geographic mix of sales. The relative mix of our business between the United States and Canada impacts the monthly adjusted revenue per pet we receive. Prices for our plan in Canada are generally higher than in the United States, which is consistent with the relative cost of veterinary care in each country. As our revenue has grown faster in the United States compared to Canada, this geographic shift in the mix of business has reduced the growth in our monthly adjusted revenue per pet. In addition, as our mix of revenue changes between the United States and Canada, our exposure to foreign exchange fluctuations will be impacted.
Investments to grow our business. We plan to continue to invest to grow our business. Any investments in the development of new technology and continued improvements to our member experience, and the costs associated with being a public company, will increase our operating expenses in the near term.
Timing of initiatives. Over time we plan to implement new initiatives to improve our member experience, make modifications to our medical plan and find other ways to maintain a strong value proposition for our members. These initiatives will sometimes be accompanied by price increases, in order to compensate for value delivered. The implementation of such initiatives may not always coincide with the timing of price increases resulting in fluctuations in revenue and gross profit in our subscription business segment.

Other business segment. Our other business segment includes revenue and expenses related to our writing of policies for an unaffiliated general agent. This relationship can be canceled by the unaffiliated general agent with 360 days’ notice and we are unlikely to be able to replace it with a similar contract quickly, if at all. A cancellation of this contract would result in the policies and revenue being run off over a period of 12 months and could have a material impact on our results of operations. Our other business segment also includes revenue and expenses related to policies written under a federal government program. We may enter into additional relationships to the extent we believe they will be profitable to us, which could also impact our operating results.

Basis of Presentation
General
We operate in two business segments: subscription business and other business. Our subscription business segment includes revenue and expenses related to monthly subscriptions for our medical plan. Our other business segment includes revenue and expenses related to our other operations, including the writing of policies for an unaffiliated general agent and policies written under a federal government program. We report our financial information in accordance with U.S. GAAP.
Revenue
We generate revenue in our subscription business segment primarily from subscription fees for our medical plan. Our medical plan automatically renews on a monthly basis, and members pay the subscription fee at the beginning of each subscription period, in most cases by authorizing us to directly charge their credit card, debit card or bank account through automatic funds

47



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 for an unaffiliated general agent that offers pet insurance and from writing policies under a federal government program. Revenue from our other business segment is recognized on a pro rata basis over the enrollment term for each policy.
Cost of Revenue
Cost of revenue in each of our segments is comprised of claims expenses and other cost of revenue.
Claims expenses
Claims expenses include claims incurred, the cost of personnel administering the claims and providing member service relating to the claims and other operating expenses directly or indirectly related to claims administration. Claims incurred are the claims approved for payment plus an accrual for claims incurred that have not yet been submitted or approved for payment. This accrual is based on our historical experience and developments in claims frequency and severity and the cost of veterinary care, and also includes the cost of administering such claims.
Other cost of revenue
Other cost of revenue for our subscription business segment includes direct and indirect member service expenses, renewal fees to our independent referral network, credit card transaction fees and premium tax expenses. Other cost of revenue for our other business segment includes the commission we pay to the unaffiliated general agent.
For both our subscription business and our other business segments, we generally expect our cost of revenue to remain relatively constant as a percentage of revenue, although there may be some periodic variability due to a number of factors including the rate of claims occurrences during such periods. Claims expenses as a percentage of our subscription business revenue may increase over time as part of our strategy to return more value to our members to further enhance our member experience, retention rates and lifetime value of a pet. We currently expect that, in the long-term, such increases generally will be offset by economies of scale in our other cost of revenue.
Gross Profit
Gross profit is total revenue less cost of revenue. We expect gross profit as a percentage of revenue in our subscription segment to remain relatively consistent in the long-term, although there has been and may be in the future some periodic variability due to a number of factors, including the rate of claims occurrences during such periods and in the timing and significance of our pricing adjustments. The timing of our implementation of various initiatives to improve the experience of our members also may affect gross profit in the short-term. Further, as the mix of subscription business and other business changes and as our other business segment changes, this may impact our total gross profit as a percentage of revenue.
Operating Expenses
Our operating expenses are classified into three categories: sales and marketing, technology and development, and general and administrative. For each category, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses and stock-based compensation.
Sales and Marketing
Sales and marketing expenses primarily consist of referral fees paid with respect to newly enrolled pets, print, online and promotional advertising costs, and employee compensation and related costs. Sales and marketing expenses are driven primarily by investments to acquire new members and retain our existing members. We plan to continue to invest in existing and new member acquisition channels and marketing initiatives to grow our business. We expect sales and marketing expenses to increase in absolute dollars, although it may fluctuate as a percentage of revenue. We generally target a ratio of lifetime value of a pet to average pet acquisition cost of 5:1.
Technology and Development
Technology and development expenses primarily consist of personnel costs and related expenses for our operations staff, which includes information technology development and infrastructure support, third-party services and depreciation of hardware and amortization of capitalized software and intangible assets. We expect technology and development expenses to increase in absolute dollars and as a percentage of total revenue in the near term as we

48



continue to devote significant resources to enhance our member experience and, thereafter, decrease as a percentage of revenue.
General and Administrative
General and administrative expenses consist primarily of personnel costs and related expenses for our finance, actuarial, human resources, general management functions, as well as facilities and professional services. We have recently incurred additional expenses as a result of expanding our management team and becoming a public company, and expect to continue to incur additional expenses associated with being a public company, including higher legal, corporate insurance and accounting expenses. We expect general and administrative expenses to increase in absolute dollars and decrease as a percentage of revenue over time.


49



Results of Operations
The following tables set forth our results of operations for the periods presented both in absolute dollars and as a percentage of our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
 
YEARS ENDED
 
DECEMBER 31,
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
 
 
Revenue:
 
 
 
 
 
Subscription business
$
105,052


$
76,818


$
55,352

Other business
10,858


7,011


178

Total revenue
115,910


83,829


55,530

Cost of revenue:
 
 
 
 
 
Subscription business (1)
86,402

 
61,905

 
44,185

Other business
9,634

 
6,280

 
134

Total cost of revenue
96,036

 
68,185

 
44,319

Gross profit:
 
 
 
 
 
Subscription business
18,650

 
14,913

 
11,167

Other business
1,224

 
731

 
44

Total gross profit
19,874


15,644

 
11,211

Operating expenses:
 
 
 
 
 
Sales and marketing (1)
11,608

 
9,091

 
7,149

Technology and development (1)
9,899

 
4,888

 
3,406

General and administrative (1)
14,312

 
8,652

 
6,195

Total operating expenses
35,819

 
22,631

 
16,750

Operating loss
(15,945
)

(6,987
)
 
(5,539
)
Interest expense
6,726

 
609

 
535

Other (income) expense, net
(1,487
)
 
671

 
252

Loss before income taxes
(21,184
)

(8,267
)

(6,326
)
Income tax (benefit) expense
(7
)
 
(92
)
 
84

Net loss
$
(21,177
)
 
$
(8,175
)

$
(6,410
)
(1)
Includes stock-based compensation expense as follows:
 
YEARS ENDED
 
DECEMBER 31,
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
(in thousands)
Cost of revenue
$
315

 
$
230

 
$
109

Sales and marketing
553

 
677

 
428

Technology and development
461

 
351

 
268

General and administrative
2,755

 
680

 
629

Total stock-based compensation expense
$
4,084

 
$
1,938

 
$
1,434



50



 
YEARS ENDED
 
DECEMBER 31,
 
2014
 
2013
 
2012
 
 
 
 
 
 
Revenue
100
 %
 
100
 %
 
100
 %
Cost of revenue
83

 
81

 
80

Gross profit
17

 
19

 
20

Operating expenses:
 
 
 
 
 
Sales and marketing
10

 
11

 
13

Technology and development
9

 
6

 
6

General and administrative
12

 
10

 
11

Total operating expenses
31

 
27

 
30

Operating loss
(14
)
 
(8
)
 
(10
)
Interest expense
5

 
1

 
1

Other (income) expense, net
(1
)
 
1

 
1

Loss before income taxes
(18
)
 
(10
)
 
(12
)
Income tax (benefit) expense

 

 

Net loss
(18
)%
 
(10
)%
 
(12
)%


 
YEARS ENDED
 
DECEMBER 31,
 
2014
 
2013
 
2012
 
 
 
 
 
 
Subscription business revenue
100
%
 
100
%
 
100
%
Subscription business cost of revenue
82

 
81

 
80

Subscription business gross profit
18
%
 
19
%
 
20
%


51



Comparison of the years ended December 31, 2014, 2013 and 2012
Revenue
 
YEARS ENDED
DECEMBER 31,
 
2014 TO 2013 % CHANGE
 
2013 TO 2012 % CHANGE
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages, pet and per pet data)
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Subscription business
$
105,052

 
$
76,818

 
$
55,352

 
37%
 
39%
Other business
10,858

 
7,011

 
178

 
55
 
NM
Total revenue
$
115,910

 
$
83,829

 
$
55,530

 
38
 
51
Percentage of Revenue by Segment:
 
 
 
 
 
 

 

Subscription business
91
%
 
92
%
 
100
%
 

 

Other business
9

 
8

 

 

 

Total revenue
100
%
 
100
%
 
100
%
 

 

Subscription Business:
 
 
 
 
 
 

 

Total subscription pets enrolled
218,684

 
169,570

 
125,387

 
29
 
35
Monthly adjusted revenue per pet
$
44.27

 
$
42.57

 
$
41.99

 
4
 
1
Average monthly retention
98.68
%
 
98.65
%
 
98.51
%
 
 
 
 

Year ended December 31, 2014 compared to year ended December 31, 2013. Total revenue increased by $32.1 million to $115.9 million for the year ended December 31, 2014, or 38% . Revenue from our subscription business segment increased by $28.2 million to $105.1 million for the year ended December 31, 2014, or 37% . This increase in subscription business revenue primarily was due to a 29% increase in total subscription pets enrolled as of December 31, 2014 compared to December 31, 2013. Adjusted revenue per pet increased from $42.57 to $44.27 , or 4% , for the same period, due to pricing increases. The impact of the increase in revenue was partially offset by an approximate $2.1 million impact of foreign exchange rates on our Canadian revenue. Revenue from our other business segment increased $3.8 million to $10.9 million for the year ended December 31, 2014, as a result of the remaining policies written for the unaffiliated general agent being transferred to us from its previous insurance company, whereas only a portion of such policies had been transferred from its previous insurance company during the year ended December 31, 2013. Included in the increase in our other business revenue is $0.9 million related to medical plans under a federal government program that started in March 2014.
Year ended December 31, 2013 compared to year ended December 31, 2012. Total revenue increased by $28.3 million to $83.8 million for the year ended December 31, 2013, or 51% . Revenue for our subscription business segment increased by $21.5 million to $76.8 million for the year ended December 31, 2013, or 39% . This increase in subscription business revenue was primarily due to a 35% increase in total subscription pets enrolled as of December 31, 2013 compared to December 31, 2012 and a slight increase in monthly adjusted revenue per pet during this period due primarily to increases in our pricing. The impact of these price increases was partially offset by a higher percentage of newly enrolled pets in the United States as compared to Canada, which have a lower monthly adjusted revenue per pet, and an approximate $0.8 million impact of foreign exchange rates on our Canadian revenue. Revenue from our other business segment increased $6.8 million to $7.0 million for the year ended December 31, 2013. We began generating revenue in our other business segment in November 2012 by writing policies for an unaffiliated general agent.













52




Cost of Revenue
 
YEARS ENDED
DECEMBER 31,
 
2014 TO 2013 % CHANGE
 
2013 TO 2012 % CHANGE
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
 
 
 
 
Cost of Revenue:
 
 
 
 
 
 
 
 
 
Subscription business:
 
 
 
 
 
 
 
 
 
Claims expenses
$
75,397

 
$
53,787

 
$
37,773

 
40%
 
42%
Other cost of revenue
11,005

 
8,118

 
6,412

 
36
 
27
Total cost of revenue
86,402

 
61,905

 
44,185

 

 

              Gross profit
18,650

 
14,913

 
11,167

 
25
 
34%
Other business:
 
 
 
 
 
 

 

Claims expenses
4,516

 
2,850

 
83

 
58
 
NM
Other cost of revenue
5,118

 
3,430

 
51

 
49
 
NM
Total cost of revenue
9,634

 
6,280

 
134

 

 

              Gross profit
1,224

 
731

 
44

 

 

Percentage of Revenue by Segment:
 
 
 
 
 
 
 
 

Subscription business:
 
 
 
 
 
 
 
 
 
Claims expenses
72
%
 
70
%
 
68
%
 
 
 
 
Other cost of revenue
10

 
11

 
12

 
 
 
 
Total cost of revenue
82

 
81

 
80

 
 
 
 
              Gross profit
18

 
19

 
20

 
 
 
 
Other business:
 
 
 
 
 
 
 
 
 
Claims expenses
42

 
41

 
47

 
 
 
 
Other cost of revenue
47

 
49

 
29

 
 
 
 
Total cost of revenue
89

 
90

 
76

 
 
 
 
              Gross profit
11

 
10

 
24

 
 
 
 
Year ended December 31, 2014 compared to year ended December 31, 2013. Cost of revenue for our subscription business segment was $86.4 million , or 82% of revenue, for the year ended December 31, 2014, compared to $61.9 million , or 81% of revenue, for the year ended December 31, 2013. This $24.5 million increase in subscription cost of revenue primarily was the result of an increase in claims expenses, which were 72% of revenue for the year ended December 31, 2014, compared to 70% of revenue for the year ended December 31, 2013. We have in the past and expect in the future to experience changes in the claims ratio from quarter to quarter. During 2014, the claims expense ratio was higher than our historical average due to a higher frequency of claims than previous periods, which primarily was driven by the implementation of several key initiatives designed to improve our member experience. We expect that the claims expense ratio and the cost of revenue as a percent of revenue will continue to be elevated during 2015 as price increases are generally implemented on our members’ annual anniversary dates. In addition, compensation expense and related costs increased by $1.7 million due to a 43% increase in employee headcount to service our growth and improve our member experience.

Cost of revenue for our other business segment increased $3.4 million to $9.6 million for the year ended December 31, 2014. This increase is primarily a result of having the full business for the unaffiliated general agent for the entire twelve months of 2014, whereas the policies were in the process of being transferred from the previous insurance company over the first ten months of 2013, as well as the addition of a government program that began in 2014.

53



Year ended December 31, 2013 compared to year ended December 31, 2012. Cost of revenue for our subscription business segment increased $17.7 million to $61.9 million for the year ended December 31, 2013, or 40% . This increase was primarily a result of the $16.0 million increase in claims expenses resulting from the 35% increase in enrolled pets, offset by a $0.5 million benefit from fluctuating foreign exchange rates on our Canadian dollar-denominated payments to Canadian members. Other cost of revenue decreased as a percentage of revenue due to economies of scale resulting from the timing of a headcount increase in 2012, which we made in anticipation of continued growth in 2013.
Cost of revenue for our other business segment increased $6.1 million to $6.3 million for the year ended December 31, 2013 due to increased business with the unaffiliated general agent.
Sales and Marketing Expenses
 
YEARS ENDED
DECEMBER 31,
 
2014 TO 2013 % CHANGE
 
2013 TO 2012 % CHANGE
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages and per pet data)
 
 
 
 
Sales and marketing
$
11,608

 
$
9,091

 
$
7,149

 
28%
 
27%
Percentage of total revenue
10
%
 
11
%
 
13
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription Business:
 
 
 
 
 
 
 
 
 
Average pet acquisition cost (PAC)
$
119

 
$
103

 
$
100

 
16
 
3
Year ended December 31, 2014 compared to year ended December 31, 2013. Sales and marketing expenses increased $2.5 million to $11.6 million for the year ended December 31, 2014, or 28% . The increase in sales and marketing expenses was primarily due to an increase of $0.7 million in expenditures related to new and expanded online marketing initiatives, a $0.7 million increase in print advertising and brand development and a $0.6 million increase related to developing our territory partner network. Additionally, compensation related costs increased $0.3 million due to increased headcount. Finally, commissions to our territory partners increased $0.2 million based on increased enrollments.
Year ended December 31, 2013 compared to year ended December 31, 2014. Sales and marketing expenses increased $1.9 million to $9.1 million for the year ended December 31, 2013, or 27% . The increase in sales and marketing expenses was primarily due to a $1.4 million increase in salaries and related employee expenses resulting from an 8% increase in sales and marketing headcount from December 31, 2012 to December 31, 2013 and an increase of $0.5 million in expenditures related to new and expanded sales and marketing initiatives. The decrease as a percentage of revenue in part reflects the impact of recurring revenue from existing members.
Technology and Development Expenses
 
 
YEARS ENDED
DECEMBER 31,
 
2014 TO 2013 % CHANGE
 
2013 TO 2012 % CHANGE
 
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
 
 
 
 
Technology and development
 
$
9,899

 
$
4,888

 
$
3,406

 
103%
 
44%
Percentage of total revenue
 
9
%
 
6
%
 
6
%
 
 
 
 

Year ended December 31, 2014 compared to year ended December 31, 2013. Technology and development expenses increased $5.0 million to $9.9 million for the year ended December 31, 2014, or 103% . The increase was primarily due to a $4.2 million increase in compensation expense and related cost, resulting from increased headcount as we made investments in new technology and infrastructure, and a $0.5 million increase in system hosting to support our infrastructure growth. In addition, $0.2 million of the total increase was due to software licenses and fees as a result of our company growth. Total expenses, net of capitalization, in technology related to claims processing improvements were $4.7 million in 2014 and $1.4 million in 2013.

Year ended December 31, 2013 compared to year ended December 31, 2012. Technology and development expenses increased $1.5 million to $4.9 million for the year ended December 31, 2013, or 44% . The increase was primarily due to a $1.5 million increase in compensation expense and related costs as a result of increased headcount as we made investments in technology infrastructure and new technology related to claims processing improvements. Total expenses, net of capitalization, in technology related to claims processing improvements were $1.4 million in 2013 and $1.0 million in 2012.

54



General and Administrative Expenses
 
 
YEARS ENDED
DECEMBER 31,
 
2014 TO 2013 % CHANGE
 
2013 TO 2012 % CHANGE
 
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
 
 
 
 
General and administrative
 
$
14,312

 
$
8,652

 
$
6,195

 
65%
 
40%
Percentage of total revenue
 
12
%
 
10
%
 
11
%
 
 
 
 
Year ended December 31, 2014 compared to year ended December 31, 2013. General and administrative expenses increased $5.7 million to $14.3 million for the year ended December 31, 2014, or 65% . The increase in general and administrative expenses was primarily due to the recognition of stock-based compensation expense that was contingent upon our IPO of $1.4 million . Salaries and related expenses increased $1.8 million due to increased headcount to support our growth, transition to being a public company and a severance agreement with a former employee. Additionally, regulatory expenses increased $0.5 million due to contingent regulatory matters and we incurred $0.8 million related to public company readiness activities.
Year ended December 31, 2013 compared to year ended December 31, 2012. General and administrative expenses increased $2.5 million to $8.7 million for the year ended December 31, 2013, or 40% . We moved our U.S. operations to a new facility during the third quarter of 2012, resulting in a $0.5 million increase in facilities and related expenses during 2013. Additionally, employee compensation and related expenses increased $0.4 million as we increased headcount primarily in our actuarial, legal and accounting departments and incurred other expenses in preparation for an IPO. We also incurred $0.4 million related to public company readiness activities.
Other (Income) Expense, Net
 
 
YEARS ENDED
DECEMBER 31,
 
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(in thousands)
Interest expense
 
$
6,726

 
$
609

 
$
535

Other (income) expense, net
 
(1,487
)
 
671

 
252

Total other expense, net
 
$
5,239

 
$
1,280

 
$
787

Year ended December 31, 2014 compared to year ended December 31, 2013. Other expense, net for the year ended December 31, 2014 increased $4.0 million to $5.2 million . The increase was primarily due to the expensing of unamortized debt discounts associated with the repayment of debt, partially offset by income from the revaluation of warrants classified as liabilities in our consolidated balance sheet during 2014.
Year ended December 31, 2013 compared to year ended December 31, 2012. Other expenses, net increased $0.5 million to $1.3 million for the year ended December 31, 2013. This increase was primarily due to the revaluation of warrants classified as liabilities in our consolidated balance sheet.

55




Quarterly Results of Operation s
The following tables set forth selected unaudited quarterly statements of operations data for the last eight fiscal quarters. The unaudited interim financial statements for each of these quarters have been prepared on the same basis as the audited financial statements included elsewhere in this prospectus and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present a fair statement of our results of operations and financial position for these periods. This data should be read in conjunction with the audited consolidated financial statements and accompanying notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.
 
THREE MONTHS ENDED
 
DEC. 31, 2014
 
SEPT. 30, 2014
 
JUN. 30, 2014
 
MAR. 31, 2014
 
DEC. 31, 2013
 
SEPT. 30, 2013
 
JUN. 30, 2013
 
MAR. 31, 2013
 
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription business
$
29,087

 
$
27,517

 
$
25,359

 
$
23,089

 
$
21,426

 
$
20,007

 
$
18,368

 
$
17,017

Other business
2,781

 
2,795

 
2,731

 
2,551

 
2,585

 
2,127

 
1,474

 
825

Total revenue
31,868


30,312


28,090


25,640


24,011


22,134


19,842


17,842

Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription business (1)
23,876

 
23,404

 
20,518

 
18,602

 
17,617

 
16,117

 
14,698

 
13,473

Other business
2,468

 
2,463

 
2,422

 
2,282

 
2,306

 
1,898

 
1,315

 
761

Total cost of revenue
26,344


25,867


22,940


20,884


19,923


18,015


16,013


14,234

Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription business
5,211


4,113


4,841


4,487


3,809


3,890


3,670


3,544

Other business
313


332


309


269


279


229


159


64

Total gross profit
5,524


4,445


5,150


4,756


4,088


4,119


3,829


3,608

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing (1)
3,218

 
2,934

 
2,810

 
2,646

 
2,238

 
2,013

 
2,268

 
2,572

Technology and development (1)
2,614

 
2,532

 
2,553

 
2,200

 
1,697

 
1,156

 
1,152

 
883

General and administrative (1)
3,850

 
4,385

 
3,292

 
2,786

 
2,670

 
2,033

 
2,022

 
1,927

Total operating expenses
9,682


9,851


8,655


7,632


6,605


5,202


5,442


5,382

Operating loss
(4,158
)

(5,406
)

(3,505
)

(2,876
)

(2,517
)

(1,083
)

(1,613
)

(1,774
)
Interest expense
103

 
5,155

 
726

 
736

 
203

 
148

 
138

 
120

Other (income) expense, net
58

 
(2,066
)
 
(759
)
 
1,286

 
489

 
(7
)
 
78

 
111

Loss before income taxes
(4,319
)

(8,495
)

(3,472
)

(4,898
)

(3,209
)

(1,224
)

(1,829
)

(2,005
)
Income tax (benefit) expense
(43
)
 
14

 
7

 
15

 
(6
)
 
(2
)
 
(5
)
 
(79
)
Net loss
$
(4,276
)

$
(8,509
)

$
(3,479
)

$
(4,913
)

$
(3,203
)

$
(1,222
)

$
(1,824
)

$
(1,926
)


56



 
PERIOD ENDED
 
DEC. 31, 2014
 
SEPT. 30, 2014
 
JUN. 30, 2014
 
MAR. 31, 2014
 
DEC. 31, 2013
 
SEPT. 30, 2013
 
JUN. 30, 2013
 
MAR. 31, 2013
Other Financial and Operational Data (2) :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total subscription pets enrolled
218,684

 
207,843

 
194,617

 
181,634

 
169,570

 
160,065

 
147,868

 
136,027

Monthly adjusted revenue per pet (3)
$
44.88

 
$
44.98

 
$
43.90

 
$
43.12

 
$
43.07

 
$
42.59

 
$
42.21

 
$
42.30

Lifetime value of a pet (4)
$
590

 
$
584

 
$
605

 
$
610

 
$
611

 
$
617

 
$
641

 
$
604

Average pet acquisition cost (5)
$
141

 
$
113

 
$
113

 
$
111

 
$
105

 
$
80

 
$
99

 
$
132

Average monthly retention
98.68
%
 
98.67
%
 
98.65
%
 
98.65
%
 
98.65
%
 
98.64
%
 
98.62
%
 
98.56
%
Adjusted EBITDA (6)
$
(2,903
)
 
$
(2,908
)
 
$
(2,459
)
 
$
(2,079
)
 
$
(1,780
)
 
$
(378
)
 
$
(985
)
 
$
(1,208
)
(1) Includes stock-based compensation as follows, which may differ slightly from annual amounts due to rounding:
 
THREE MONTHS ENDED
 
DEC. 31, 2014
 
SEPT. 30, 2014
 
JUN. 30, 2014
 
MAR. 31, 2014
 
DEC. 31, 2013
 
SEPT. 30, 2013
 
JUN. 30, 2013
 
MAR. 31, 2013
 
(in thousands)
Cost of revenue
$
91

 
$
78

 
$
64

 
$
81

 
$
85

 
$
57

 
$
48

 
$
40

Sales and marketing
147

 
115

 
144

 
149

 
185

 
147

 
202

 
143

Technology and development
155

 
110

 
98

 
98

 
103

 
83

 
94

 
71

General and administrative
497

 
1,698

 
320

 
239

 
201

 
191

 
141

 
147


(2)  
For more information about how we calculate total subscription pets enrolled, monthly adjusted revenue per pet, lifetime value of a pet, average pet acquisition cost and average monthly retention, see “—Key Financial and Operating Metrics.”
(3)  
Monthly adjusted revenue per pet is calculated in part based on adjusted revenue, a non-GAAP financial measure, that we define as revenue from our subscription business segment excluding sign-up fee revenue and the change in deferred revenue between periods. For more information about adjusted revenue, see “—Non-GAAP Financial Measures.”
(4)  
Lifetime value of a pet is calculated in part based on contribution margin, a non-GAAP financial measure, that we define as gross profit 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. For more information about contribution margin, see “—Non-GAAP Financial Measures.”
(5)  
Average pet acquisition cost is calculated in part based on acquisition cost, a non-GAAP financial measure, that we define as sales and marketing expenses, excluding stock-based compensation expense, net of sign-up fee revenue. For more information about acquisition cost, see “—Non-GAAP Financial Measures.”
(6)  
Adjusted EBITDA is a non-GAAP financial measure that we define as net loss excluding stock-based compensation expense, depreciation and amortization expense, interest income, interest expense, change in fair value of warrant liabilities and income tax expense (benefit). For more information about adjusted EBITDA, see “—Non-GAAP Financial Measures.”


57



 
THREE MONTHS ENDED
 
DEC. 31, 2014
 
SEPT. 30, 2014
 
JUN. 30, 2014
 
MAR. 31, 2014
 
DEC. 31, 2013
 
SEPT. 30, 2013
 
JUN. 30, 2013
 
MAR. 31, 2013
 
(as a percentage of revenue)
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
 
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of revenue
83

 
85

 
82

 
81

 
83

 
81

 
81

 
80

Gross profit
17

 
15

 
18

 
19

 
17

 
19

 
19

 
20

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
10

 
10

 
10

 
10

 
9

 
9

 
11

 
14

Technology and development
8

 
8

 
9

 
9

 
7

 
5

 
6

 
5

General and administrative
12

 
14

 
12

 
11

 
11

 
9

 
10

 
11

Total operating expenses
30

 
32

 
31

 
30

 
27

 
23

 
27

 
30

Operating loss
(13
)
 
(18
)
 
(12
)
 
(11
)
 
(10
)
 
(4
)
 
(8
)
 
(10
)
Interest expense

 
17

 
3

 
3

 
1

 
1

 
1

 
1

Other (income) expense, net

 
(7
)
 
(3
)
 
5

 
2

 

 

 
1

Loss before income taxes
(13
)
 
(28
)
 
(12
)
 
(19
)
 
(13
)
 
(5
)
 
(9
)
 
(12
)
Income tax (benefit) expense

 

 

 

 

 

 

 

Net loss
(13
)%
 
(28
)%
 
(12
)%
 
(19
)%
 
(13
)%
 
(5
)%
 
(9
)%
 
(12
)%


 
THREE MONTHS ENDED
 
DEC. 31, 2014
 
SEPT. 30, 2014
 
JUN. 30, 2014
 
MAR. 31, 2014
 
DEC. 31, 2013
 
SEPT. 30, 2013
 
JUN. 30, 2013
 
MAR. 31, 2013
 
(as a percentage of subscription revenue)
Subscription business revenue
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
Subscription business cost of revenue
82

 
85

 
81

 
81

 
82

 
81

 
80

 
79

Subscription business gross profit
18
%
 
15
%
 
19
%
 
19
%
 
18
%
 
19
%
 
20
%
 
21
%

The following table reflects the reconciliation of adjusted revenue to revenue:
 
THREE MONTHS ENDED
 
DEC. 31, 2014
 
SEPT. 30, 2014
 
JUN. 30, 2014
 
MAR. 31, 2014
 
DEC. 31, 2013
 
SEPT. 30, 2013
 
JUN. 30, 2013
 
MAR. 31, 2013
 
(in thousands)
Revenue
$
31,868

 
$
30,312

 
$
28,090

 
$
25,640

 
$
24,011

 
$
22,134

 
$
19,842

 
$
17,842

Excluding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Other business revenue
(2,781
)
 
(2,795
)
 
(2,731
)
 
(2,551
)
 
(2,585
)
 
(2,127
)
 
(1,474
)
 
(825
)
    Change in deferred revenue
247

 
385

 
84

 
262

 
452

 
314

 
218

 
124

    Sign-up fee revenue
(363
)
 
(425
)
 
(407
)
 
(377
)
 
(345
)
 
(386
)
 
(356
)
 
(332
)
Adjusted revenue
$
28,971

 
$
27,477

 
$
25,036

 
$
22,974

 
$
21,533

 
$
19,935

 
$
18,230

 
$
16,809



58



The following table reflects the reconciliation of contribution margin to gross profit:
 
TWELVE MONTHS ENDED
 
DEC. 31, 2014
 
SEPT. 30, 2014
 
JUN. 30, 2014
 
MAR. 31, 2014
 
DEC. 31, 2013
 
SEPT. 30, 2013
 
JUN. 30, 2013
 
MAR. 31, 2013
 
(in thousands)
Gross Profit
$
19,874

 
$
18,439

 
$
18,113

 
$
16,792

 
$
15,644

 
$
14,788

 
$
14,263

 
$
12,841

Excluding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
315

 
309

 
287

 
270

 
230

 
171

 
143

 
123

Other business segment gross profit
(1,224
)
 
(1,189
)
 
(1,086
)
 
(935
)
 
(731
)
 
(496
)
 
(267
)
 
(108
)
Change in deferred revenue
977

 
1,183

 
1,111

 
1,246

 
1,107

 
874

 
761

 
725

Sign-up fee revenue
(1,572
)
 
(1,554
)
 
(1,514
)
 
(1,464
)
 
(1,418
)
 
(1,356
)
 
(1,285
)
 
(1,229
)
Contribution margin
$
18,370

 
$
17,188

 
$
16,911

 
$
15,909

 
$
14,832

 
$
13,981

 
$
13,615

 
$
12,352


The following table reflects the reconciliation of acquisition cost to sales and marketing expenses:

THREE MONTHS ENDED

DEC. 31, 2014

SEPT. 30, 2014

JUN. 30, 2014

MAR. 31, 2014

DEC. 31, 2013

SEPT. 30, 2013

JUN. 30, 2013

MAR. 31, 2013
 
(in thousands)
Sales and marketing expenses
$
3,218

 
$
2,934

 
$
2,810

 
$
2,646

 
$
2,238

 
$
2,013

 
$
2,268

 
$
2,572

Excluding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Stock-based compensation expense
(147
)
 
(115
)
 
(144
)
 
(149
)
 
(185
)
 
(147
)
 
(202
)
 
(143
)
Net of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Sign-up fee revenue
(363
)
 
(425
)
 
(407
)
 
(377
)
 
(345
)
 
(386
)
 
(356
)
 
(332
)
Acquisition cost
$
2,708

 
$
2,394

 
$
2,259

 
$
2,120

 
$
1,708

 
$
1,480

 
$
1,710

 
$
2,097


The following table reflects the reconciliation of adjusted EBITDA to net loss:
 
THREE MONTHS ENDED
 
DEC. 31, 2014
 
SEPT. 30, 2014
 
JUN. 30, 2014
 
MAR. 31, 2014
 
DEC. 31, 2013
 
SEPT. 30, 2013
 
JUN. 30, 2013
 
MAR. 31, 2013
 
(in thousands)
Net loss
$
(4,276
)
 
$
(8,509
)
 
$
(3,479
)
 
$
(4,913
)
 
$
(3,203
)
 
$
(1,222
)
 
$
(1,824
)
 
$
(1,926
)
Excluding:

 

 

 

 

 

 

 

    Stock-based compensation expense
890

 
2,001

 
626

 
567

 
574

 
478

 
485

 
401

    Depreciation and amortization expense
441

 
505

 
419

 
309

 
229

 
243

 
214

 
206

    Interest (income)
(18
)
 
(20
)
 
(18
)
 
(18
)
 
(13
)
 
(32
)
 
(27
)
 
(30
)
    Interest expense
103

 
5,155

 
726

 
742

 
225

 
154

 
144

 
122

    Change in fair value of warrant liabilities

 
(2,054
)
 
(740
)
 
1,219

 
414

 
3

 
28

 
98

    Income tax (benefit) expense
(43
)
 
14

 
7

 
15

 
(6
)
 
(2
)
 
(5
)
 
(79
)
Adjusted EBITDA
$
(2,903
)
 
$
(2,908
)
 
$
(2,459
)
 
$
(2,079
)
 
$
(1,780
)
 
$
(378
)
 
$
(985
)
 
$
(1,208
)

59




Liquidity and Capital Resources
Since inception, we have financed our operations and met capital requirements primarily through the sale of equity securities and from borrowings. Our principal uses of cash are paying claims, funding operations and capital requirements, investing in new member acquisition and enhancements to our member experience and servicing debt. In July 2014, we closed our IPO, pursuant to which we sold 8,193,750 shares of common stock at an offering price of $10.00 per share. We received net proceeds of approximately $72.8 million .
Sources of Funds
As of December 31, 2014, we had cash and cash equivalents of $53.1 million and short-term investments of $22.4 million . We believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations and statutory capital requirements for at least the next 12 months. From time to time, we may explore additional financing, which could include equity, equity-linked and debt financing. However, there can be no assurance that any additional financing will be available to us on acceptable terms, or at all.

Long-Term Debt
Square 1 Bank Loan and Security Agreement
In April 2007, we entered into a loan and security agreement with Square 1 Bank (Square 1), which we amended and restated in August 2012 and most recently amended in December 2014. We refer to this amended and restated loan and security agreement as our Square 1 credit facility. The Square 1 credit facility provides for a revolving line of credit, under which we may take advances up to $20.0 million . The maximum amount for borrowing under the Square 1 credit facility, inclusive of any amounts outstanding under the revolving line of credit and the term loan, is the lesser of $20.0 million or the total amount of cash and securities held by our subsidiary, American Pet Insurance Company, less up to $0.5 million for obligations we may have outstanding from Square 1 for other ancillary services.
Interest on the revolving line of credit accrues at a variable annual rate equal to the greater of 5.0% or 1.5% plus the prime rate . The revolving line of credit matures in July 2016, at which time it will need to be renewed or all amounts outstanding under it, including accrued interest, will become immediately due and payable.
The Square 1 credit facility requires us to maintain certain financial covenants, including having APIC maintain statutory capital and surplus at all times of not less than the greater of $0.5 million or 110% of the highest amount of statutory capital and surplus required in any state in which APIC is licensed, maintaining a minimum cash balance of $0.5 million in our accounts at Square 1 (including for such purposes, APIC’s cash and depository products at Square 1), achieving certain monthly revenue and remaining within certain maximum EBITDA loss levels. EBITDA is defined for such purposes as earnings, plus an amount equal to the sum of (i) tax, plus (ii) depreciation and amortization, plus (iii) interest and non-cash expenses, plus (iv) any non-cash stock compensation expense, less (a) any increase in capitalized expenditures from the prior period, plus (b) any increase in capitalized software from the prior period, plus (c) any increase in deferred acquisition costs from the prior period.
The Square 1 credit facility also requires us to maintain certain non-financial covenants, including those that restrict our ability to dispose of our assets, change the name, location, office or executive management of our business, merge with or acquire other entities, incur other indebtedness, incur encumbrances, pay dividends or make distributions to holders of our capital stock, make investments, engage in transactions with our affiliates, permit withdrawals from APIC (with certain exceptions) and conduct operations in certain of our Canadian subsidiaries. As of December 31, 2014, we were in compliance with each of the financial and non-financial covenants.

Our obligations under the Square 1 credit facility are secured by substantially all of our assets and a pledge of certain of our subsidiaries’ stock. As of December 31, 2014, our aggregate borrowings outstanding and under the Square 1 credit facility were $14.9 million .
Regulation
As of December 31, 2014, APIC held $22.4 million in investments and $7.8 million in other current assets. Most of the assets in this entity are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and cannot be transferred outside of that subsidiary without prior approval from regulatory authorities. As of December 31, 2014, total assets and liabilities held outside of APIC totaled $67.2 million and $23.7 million, respectively.

60




The majority of our investments are held by our insurance entities to satisfy risk-based capital requirements of the National Association of Insurance Commissioners. The 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. Our insurance entity 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, 2014, APIC was required to maintain at least $22.6 million of risk-based capital to avoid this additional regulatory oversight. As of that date, APIC maintained $23.7 million of risk-based capital. The NY DFS may increase the required levels of risk-based capital in the future, and we anticipate that we will need to maintain greater amounts of risk-based capital if our pet enrollment continues to grow.
To comply with these regulations, we may be required to maintain capital that we would otherwise invest in our growth and operations, which may require us to modify our operating plan or marketing initiatives, delay the implementation of new solutions or development of new technologies, decrease the rate at which we hire additional personnel and enter into relationships with Territory Partners, incur additional indebtedness or pursue equity or debt financings or otherwise modify our business operations.
New York laws also restrict the ability of APIC to pay dividends to our parent holding company. The dividend restrictions are based in part on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval. In general, dividends or distributions that, in the aggregate in any 12-month period exceed the lesser of (i) 10% of surplus as of the preceding December 31 or (ii) the insurer’s adjusted net investment income for such 12-month period ended the preceding December 31, not including realized capital gains, are subject to approval by regulatory authorities. As of December 31, 2014, less than $0.1 million was able to be paid in the form of a dividend from APIC to our parent holding company without prior approval from regulatory authorities. Furthermore, effective January 1, 2015, due to our newly formed segregated account in Bermuda as part of our restructured relationship with Omega General Insurance Company, we are also subject to certain Canadian and Bermudian laws, as applicable at any given time. Additionally, effective January 1, 2015, in order to meet regulatory requirements in both Canada and Bermuda, we are required to fund a Canadian Trust account with the greater of C$2.0 million or 115% of unearned Canadian premium plus 15% of outstanding Canadian claims, including all incurred by not reported claims as well as required capital of C$1.3 million.
Investments
As of December 31, 2014, we had $23.3 million of short-term and long-term investments. These investments are held to satisfy statutory requirements. The majority of our investments are highly rated U.S. treasury securities, certificates of deposit, and U.S. government funds. In addition we have one investment in a municipal bond which is insured by a third-party insurance company with a rating of "A2" with Moody’s. The unused proceeds from our IPO are currently held primarily in money market funds.

Historical Cash Flow Trends
The following table shows a summary of our cash flows for the periods indicated:
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
 
2012
Net cash used in operating activities
$
(10,801
)
 
$
(1,023
)
 
$
(1,543
)
Net cash used in investing activities
(11,926
)
 
(5,997
)
 
(4,544
)
Net cash provided by financing activities
60,863

 
17,551

 
2,274

Effect of exchange rates on cash
23

 
174

 
(40
)
Net change in cash and cash equivalents
$
38,159

 
$
10,705

 
$
(3,853
)
Operating Cash Flows
We derive operating cash flows from cash collected from the sale of subscriptions to our medical plan, which is used to pay claims and other cost of revenue. Additionally, cash is used to support the growth of our business. As a result, we have historically experienced negative cash flows from operating activities as we have expanded our business and we currently

61



anticipate this will continue for the foreseeable future. We anticipate that we will continue to make material capital expenditures on company initiatives, including investments to support new technology to enhance our member experience.
Net cash used in operating activities for the year ended December 31, 2014 consisted of our net loss of $21.2 million reduced by non-cash expenses, including stock-based compensation of $4.1 million and the amortization of the debt discount of $5.0 million as well as changes in our operating assets and liabilities of $1.1 million , which were primarily driven by an increase in claims paid, increased spend on marketing and technology initiatives, as well as an increase in prepaid assets due to advance payment insurance. These increases in cash used in operating activities were partially offset by increased revenue due to enrollment growth and higher adjusted revenue per pet.
Net cash used in operating activities for 2013 consisted of our net loss of $8.2 million and changes in our operating assets and liabilities of $3.6 million , which were primarily driven by increased receivables related to writing policies for an unaffiliated managing general agent, which began in November 2012 and increased until November 2013 as the unaffiliated managing general agent transitioned its business from the company that previously wrote its policies. This was partially offset by non-cash expense items including stock-based compensation of $1.9 million , depreciation and amortization of $0.9 million and expense relating to the remeasurement of warrant liabilities to fair value of $0.5 million .
Net cash used in operating activities for 2012 consisted of our net loss of $6.4 million and changes in our operating assets and liabilities of $2.8 million , which were partially offset by non-cash expense items including stock-based compensation of $1.4 million .
Investing Cash Flows
Net cash used in investing activities for each of the periods presented was primarily related to the net purchase of investments to increase our statutory capital. We expect to continue increasing our statutory capital as we expand our operations. In addition, we made investments in software to be used internally for our technology initiatives and purchased other fixed assets related to our operations.
Financing Cash Flows
Historically, we have funded our operations through the issuance of common and preferred stock and the incurrence of indebtedness. In July 2014, we completed our IPO, pursuant to which we sold 8,193,750 shares of common stock at an offering price of $10.00 per share
For the year ended December 31, 2014, net cash provided by financing activities included the net proceeds from our IPO of $72.8 million , debt financing of $17.0 million and the release of restricted cash of $3.0 million . Net cash used in financing activities consisted primarily of debt repayments of $32.0 million .
For 2013, net cash provided by financing activities consisted of the incurrence of an aggregate of $20.0 million of borrowings under our revolving line of credit and term loans. Of this amount, $3.0 million was designated as restricted cash at December 31, 2013. In addition, we received $0.6 million in proceeds from the exercise of stock options.
For 2012, net cash provided by financing activities consisted of the issuance of $6.9 million of Series C convertible preferred stock and $0.5 million in proceeds from the exercise of stock options, offset by $2.3 million for the repurchase of common stock and $2.7 million for the redemption of Series A and Series B convertible preferred stock.
Contractual Obligations
We enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations and non-cancellable operating leases. Our contractual cash obligations as of December 31, 2014 are set forth below.
    
 
 
TOTAL
 
LESS THAN
1 YEAR
 
1-3 YEARS
 
3-5 YEARS
 
MORE THAN
5 YEARS
Long-term debt obligations, including interest
 
$
16,018

 
$
745

 
$
15,273

 
$

 
$

Operating lease obligations
 
1,219

 
766

 
453

 

 

Other obligations
 
521

 
101

 
252

 
102

 
66

 

Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on

62



various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Critical accounting policies and 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. Our critical accounting policies and estimates include those related to:
stock-based compensation and warrant liabilities;
income taxes; and
claims reserve.
Stock-Based Compensation and Warrant Liabilities
Compensation expense related to stock-based transactions, including employee and non-employee stock option awards, is measured and recognized in the financial statements based on fair value. The fair value of each option award is estimated on the grant date using the Black-Scholes-Merton option-pricing model. The stock-based compensation expense, net of forfeitures, is recognized on a straight-line basis over the requisite service periods of the awards, which are generally four years. All of our stock-based awards have been for instruments tied to our common stock.
All warrants were classified as liabilities as of December 31, 2013 and until July 2014, as they were for redeemable shares and contained terms that allowed for the modification of the exercise price or the number of shares issuable upon exercise. Warrants to purchase shares of common stock and convertible preferred stock were recorded as a discount on the related debt and as a liability at fair value on the date of issuance. The fair value of the award was estimated on the grant date using the Black-Scholes-Merton option-pricing model. The discount on debt was accreted to interest expense using the effective interest method over the term of the related loan until payoff in July 2014, at which point the remaining discount on debt was amortized. The warrant liability was revalued each period and recorded at fair value as of the period end date with any gain or loss in value recorded in other expense, net in our consolidated statement of operations until the warrants were redeemed or the modification terms were settled in July 2014.
Key assumptions . Our Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying stock, the expected volatility of the price of our stock, the expected term of the option or warrant, risk-free interest rates and the expected dividend yield of our stock. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based expense could be materially different in the future. These assumptions are estimated as follows:
Fair value of our stock —Because our stock was not publicly traded prior to our IPO, we estimated the fair value of our stock, as discussed in “—Pre-IPO Stock valuations.” Upon the completion of our IPO, our common stock was valued by reference to the publicly traded price of our common stock.
Expected volatility —As we do not have a significant trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average historic price volatility for identified peers based on daily price observations over a period equivalent to the expected term of the stock option grants and warrant issuances. We did not rely on implied volatilities of traded options or warrants in our industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available.
Expected term —The expected term represents the period that our stock-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the stock-based awards granted, we have based our expected term for awards issued to employees on the simplified method, which represents the average period from vesting to the expiration of the stock option. The expected term for warrants is equal to the contract term.
Risk-free interest rate —The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.
Expected dividend yield —We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
In addition to the assumptions used in the Black-Scholes-Merton option-pricing model, the amount of stock option expense we recognize in our consolidated statements of operations includes an estimate of stock option forfeitures. Estimated forfeitures did not have a material impact on our assumptions in 2014, 2013 or 2012.
Pre-IPO Stock valuations . Prior to our IPO, the fair value of the stock underlying our stock options and warrants was determined by our board of directors, which intended all instruments granted to be exercisable at a price per share not less than

63



the per share fair value of our stock underlying those instruments on the date of award. The valuations of our stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . The assumptions we used in the valuation model are based on future expectations combined with management’s judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our stock, including the following factors:
contemporaneous valuations performed by independent third-party specialists;
the rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;
lack of marketability on our common stock;
actual operating and financial performance;
current business conditions and projections;
the prices of preferred stock sold to third-party investors in arms-length transactions;
prices of common stock sold between third parties in arms-length transactions;
ongoing enhancements to our service;
trends and developments in our industry;
the market performance of comparable publicly traded companies;
likelihood of achieving a liquidity event, such as an IPO; and
U.S. and global economic and capital market conditions.
Income Taxes
We use the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when such assets and liabilities are recovered or settled. We determine deferred tax assets including net operating losses (NOLs) and liabilities, based on temporary differences between the book and tax bases of assets and liabilities. We believe that it is currently more likely than not that our deferred tax assets will not be realized, and as such, a full valuation allowance is required. In addition, utilization of NOLs and credits to offset future income subject to taxes may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986, and similar state provisions. We have not performed a significant analysis to determine whether a qualifying change in ownership that would limit the utilization of our NOLs has taken place.
Claims Reserve
Our claims reserve represents estimated claims and claim settlement costs with respect to covered claims that have occurred as of the balance sheet date. The liabilities for claims and claim adjustment expenses are recorded at the estimated ultimate payment amounts. Estimated ultimate payment amounts are based upon a number of factors, including claims information received from members and estimates of incurred but not reported claims. Historical claims data as well as expected developments in the industry, internal claims adjustment expense forecasts, and the economy as a whole are considered by our team of pet medical insurance actuaries when developing our claims reserve.
In establishing estimates for these factors, we must make various assumptions regarding frequency and severity of claims, length of time to achieve ultimate settlement of claims, estimated deductible applicable to incurred claims, and changes in the cost of veterinary care. Due to the inherent uncertainty associated with these estimates, and the cost of incurred but unreported claims, our actual liabilities may be different from our original estimates. On a monthly basis, we review our reserve for claims and claims settlement costs to determine whether further adjustments are required. Any resulting adjustments are included in the current period’s results.
As of December 31, 2014 and 2013, our reserve for claims incurred but not yet reported was $5.1 million and $5.6 million , respectively. We believe the amount of our claims reserve as of December 31, 2014 is adequate and we do not believe that there are any reasonably likely changes in the facts or circumstances underlying key assumptions that would result in the reserve for claims being insufficient in an amount that would have a material impact on our reported results, financial position or liquidity. The ultimate liability, however, may be in excess of or less than the amount we have reserved. In 2012, we experienced actual claims in excess of our estimate for our prior year reserves of less than $0.1 million . During 2014 and 2013, we experienced actual claims that were below our estimate for prior year reserves by $0.5 million and $0.1 million , respectively. Historically, approximately 95% of claims have been settled within three months of the claim date.

64



Item 7A. Quantitative and Qualitative Disclosures About Market Risks
We are exposed to various market risks, including the risks inherent in our insurance business and changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices.

Interest Rate Risk
The principal market risk we face is interest rate risk. We had cash and cash equivalents of $53.1 million and $23.3 million in investments as of December 31, 2014, which consisted of both highly-liquid investments with an original maturity of twelve months or less and a long-term low-risk investment that is secured. We believe that we do not have significant exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of most of our investments coupled with the security behind our long-term investment. Historically, our investment income has not been a material part of our operations.
As of December 31, 2014, our aggregate outstanding indebtedness was $14.9 million , which was borrowed pursuant to our revolving line of credit with Square 1 Bank. This loan bears interest at the rate of the greater of 5.0% or 1.5% plus the prime rate and matures in July 2016. Interest on any revolver borrowings incurred pursuant to the credit facility described above would accrue at a rate based on a formula tied to certain market rates at the time of incurrence. However, we do not expect that any change in prevailing interest rates will have a material impact on our results of operations or cash flows. For more information regarding this credit agreement, see “—Liquidity and Capital Resources—Long-Term Debt.”
Foreign Currency Exchange Risk
We generate a significant portion of our revenue in Canada. In 2014, our Canadian operations accounted for 25% of our revenue. Our revenue and expenses are generally denominated in the currencies in which our operations are located, which are the United States and Canada. As our operations in Canada or the United States grow on an absolute basis and/or relative to one another, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates.
Upon consolidation, as exchange rates vary, revenues and other operating results may differ materially from expectations. For example, as a result of fluctuations in foreign exchange rates during 2014, Canadian revenues were impacted $2.1 million when compared to the prior year. Our analysis of operating results transacted in Canadian currency indicated that a hypothetical 10% change in the Canadian currency exchange rate could have increased or decreased our total revenues by approximately $2.9 million for the year ended December 31, 2014. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future.


65



Item 8. Financial Statements and Supplementary Data

Trupanion Inc.
Index to Consolidated Financial Statements
 
Page


















66



Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Trupanion, Inc.

We have audited the accompanying consolidated balance sheets of Trupanion, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Trupanion, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Seattle, Washington
February 24, 2015























67



Trupanion, Inc.
Consolidated Balance Sheets
(in thousands, except for share data)
 
YEARS ENDED
DECEMBER 31,
 
2014
 
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
53,098

 
$
14,939

Short-term investments
22,371

 
16,088

Accounts and other receivables
7,887

 
7,771

Prepaid expenses and other assets
1,299

 
935

Total current assets
84,655

 
39,733

Restricted cash

 
3,000

Investments in fixed maturities, at fair value
942

 
832

Property and equipment, net
7,862

 
3,124

Deferred offering costs

 
54

Intangible assets, net
4,847

 
4,910

Total assets
$
98,306

 
$
51,653

Liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,962

 
$
1,263

Accrued liabilities
4,607

 
3,660

Claims reserve
5,107

 
5,612

Deferred revenue
9,345

 
8,468

Short-term debt

 
900

Warrant liabilities

 
4,900

Other payables
1,399

 
1,138

Deferred tax liabilities
124

 
82

Total current liabilities
22,544

 
26,023

Long-term debt
14,900

 
25,199

Deferred tax liabilities
1,495

 
1,540

Other liabilities
92

 
166

Total liabilities
39,031

 
52,928

Redeemable convertible preferred stock: $0.00001 par value per share, 0 and 15,648,723 authorized at December 31, 2014 and December 31, 2013, respectively, and 0 and 14,857,989 issued and outstanding at December 31, 2014 and December 31, 2013, respectively.

 
31,724

Stockholders’ equity (deficit):

 

Common stock, $0.00001 par value per share, 200,000,000 and 26,000,000 shares authorized at December 31, 2014 and December 31, 2013, respectively, 28,451,920 and 27,830,941 issued and outstanding at December 31, 2014; 2,857,620 and 2,236,641 shares issued and outstanding at December 31, 2013.

 

Preferred stock: $0.00001 par value per share, 10,000,000 and 0 authorized at December 31, 2014 and December 31, 2013, respectively, and 0 issued and outstanding at December 31, 2014 and December 31, 2013.

 

Special voting shares, $0.00001 par value per share, 0 and 2,500,030 shares authorized at December 31, 2014 and December 31, 2013, respectively, and 0 and 2,247,130 issued and outstanding at December 31, 2014 and December 31, 2013, respectively.

 

Additional paid-in capital
119,045

 
5,769

Accumulated other comprehensive income (loss)
11

 
(164
)
Accumulated deficit
(57,180
)
 
(36,003
)
Treasury stock, at cost: 620,979 shares at December 31, 2014 and December 31, 2013.
(2,601
)
 
(2,601
)
Total stockholders’ equity (deficit)
59,275

 
(32,999
)
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)
$
98,306

 
$
51,653



68



Trupanion, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share data)
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Revenue
$
115,910

 
$
83,829

 
$
55,530

Cost of revenue:
 
 

 

Claims expenses
79,913

 
56,637

 
37,856

Other cost of revenue
16,123

 
11,548

 
6,463

Gross profit
19,874

 
15,644

 
11,211

Operating expenses:
 
 
 
 
 
Sales and marketing
11,608

 
9,091

 
7,149

Technology and development
9,899

 
4,888

 
3,406

General and administrative
14,312

 
8,652

 
6,195

Total operating expenses
35,819

 
22,631

 
16,750

Operating loss
(15,945
)
 
(6,987
)
 
(5,539
)
Interest expense
6,726

 
609

 
535

Other (income) expense, net
(1,487
)
 
671

 
252

Loss before income taxes
(21,184
)

(8,267
)

(6,326
)
Income tax (benefit) expense
(7
)
 
(92
)
 
84

Net loss
$
(21,177
)

$
(8,175
)

$
(6,410
)
Premium on preferred stock redemption

 

 
1,737

Net loss attributable to common stockholders
(21,177
)
 
(8,175
)
 
(8,147
)
Net loss per share attributable to common stockholders:
 
 
 
 
 
Basic and diluted
$
(1.64
)
 
$
(6.23
)
 
$
(9.76
)
Weighted average shares used to compute net loss per share attributable to common stockholders:
 
 
 
 
 
Basic and diluted
12,934,477
 
1,312,019
 
834,648


69



Trupanion, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)

 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Net loss
$
(21,177
)
 
$
(8,175
)
 
$
(6,410
)
Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments
65

 
85

 
(8
)
Change in unrealized losses on available-for-sale securities
110

 
(107
)
 
(61
)
Other comprehensive income (loss), net of taxes
175

 
(22
)
 
(69
)
Comprehensive loss
$
(21,002
)
 
$
(8,197
)
 
$
(6,479
)


70




Trupanion, Inc.
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders  Equity (Deficit)
(in thousands, except share amounts)
 
Redeemable Convertible Preferred Stock
Common Stock
Special Voting Shares
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
Total Stockholders' Equity (Deficit)
 
Shares
Amount
Shares
Amount
Shares
Amount
Balance at December 31, 2011
13,731,559

25,792

755,071


2,500,030


2,819

(21,418
)
(73
)

(18,672
)
Issuance of preferred stock, net of issuance costs
1,783,767

6,922










Issuance of common stock for investment


60,240




250




250

Special voting shares exchanged for common stock


252,900


(252,900
)






Redemption of preferred stock
(657,337
)
(990
)




(1,737
)



(1,737
)
Purchase of treasury stock


(560,739
)






(2,327
)
(2,327
)
Exercise of stock options


502,874




458




458

Stock-based compensation expense






1,434




1,434

Other comprehensive loss








(69
)

(69
)
Net loss







(6,410
)


(6,410
)
Balance at December 31, 2012
14,857,989

31,724

1,010,346


2,247,130


3,224

(27,828
)
(142
)
(2,327
)
(27,073
)
Issuance of restricted stock


732,708









Issuance of common stock


5,846









Purchase of treasury stock


(60,240
)






(274
)
(274
)
Exercise of stock options


547,981




607




607

Stock-based compensation expense






1,938




1,938

Other comprehensive loss








(22
)

(22
)
Net loss







(8,175
)


(8,175
)
Balance at December 31, 2013
14,857,989

31,724

2,236,641


2,247,130


5,769

(36,003
)
(164
)
(2,601
)
(32,999
)
Conversion of special voting shares to common stock


2,247,130


(2,247,130
)






Conversion of preferred stock to common stock
(14,944,945
)
(32,724
)
14,944,945




32,724




32,724

Exercise of warrants
86,956

1,000

25,170




270




270

Proceeds from IPO, net of issuance costs


8,193,750




72,722




72,722

Reclassification of warrant liabilities






3,180




3,180

Issuance of common stock upon exercise of stock options and vesting of restricted stock units


183,305




181




181

Stock-based compensation expense






4,199




4,199

Other comprehensive income








175


175

Net loss







(21,177
)


(21,177
)
Balance at December 31, 2014

$

27,830,941

$


$

$
119,045

$
(57,180
)
$
11

$
(2,601
)
$
59,275



71



Trupanion, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Operating activities

 

 
 
Net loss
$
(21,177
)
 
$
(8,175
)
 
$
(6,410
)
Adjustments to reconcile net loss to cash used in operating activities:


 

 
 
Depreciation and amortization
1,674

 
892

 
349

Amortization of debt discount and prepaid loan fees
5,033

 
36

 
11

Warrant (income) expense
(1,574
)
 
543

 
200

Stock-based compensation expense
4,084

 
1,938

 
1,434

Other
57

 
112

 
58

Changes in operating assets and liabilities:


 

 

Accounts receivable
(126
)
 
(5,478
)
 
(1,889
)
Prepaid expenses and other current assets
(369
)
 
(22
)
 
(432
)
Accounts payable
449

 
242

 
291

Accrued liabilities
551

 
1,258

 
853

Claims reserve
(505
)
 
3,031

 
947

Deferred revenue
877

 
4,529

 
2,574

Other payables
225

 
71

 
471

Net cash used in operating activities
(10,801
)
 
(1,023
)
 
(1,543
)
Investing activities


 

 
 
Purchases of investment securities
(34,894
)
 
(26,064
)
 
(10,379
)
Maturities of investment securities
28,601

 
20,770

 
8,909

Purchases of property and equipment
(5,633
)
 
(1,473
)
 
(2,055
)
Equity method investment

 

 
(249
)
Other

 
770

 
(770
)
Net cash used in investing activities
(11,926
)
 
(5,997
)
 
(4,544
)
Financing activities


 

 
 
Restricted cash
3,000

 
(3,000
)
 

Settlement of forward contract

 

 
(52
)
Issuance of preferred stock

 

 
6,922

Purchase of treasury stock

 

 
(2,327
)
Proceeds from exercise of stock options
211

 
607

 
458

Redemption of preferred stock

 

 
(2,727
)
Proceeds from line of credit and debt financing
17,000

 
15,000

 

Repayment of debt financing
(32,000
)
 
5,000

 

Other financing costs
(103
)
 
(56
)
 

Net proceeds from IPO
72,755

 

 

Net cash provided by financing activities
60,863

 
17,551

 
2,274

Effect of foreign exchange rates on cash, net
23

 
174

 
(40
)
Net change in cash and cash equivalents
38,159

 
10,705

 
(3,853
)
Cash and cash equivalents at beginning of period
14,939

 
4,234

 
8,087

Cash and cash equivalents at end of period
$
53,098

 
$
14,939

 
$
4,234

Supplemental disclosures


 

 
 
Income taxes paid
(9
)
 

 

Interest paid
(1,494
)
 
(642
)
 
(570
)
Noncash investing and financing activities:

 

 
 
Warrants issued in conjunction with debt issuance
1,124

 
3,806

 
18

Exchange of stock for equity method investment

 
448

 
(250
)
Increase in payables for property and equipment
911

 
134

 

Cashless exercise of preferred stock warrants
1,270

 

 

Common stock warrant reclassification to equity
3,180

 

 





72



Trupanion, Inc.
Notes to Consolidated Financial Statements

1. Nature of Operations and Summary of Significant Accounting Policies
Description of Business
Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the Company) is a direct-to-consumer monthly subscription service provider of a medical plan for cats and dogs throughout the United States, Canada and Puerto Rico.
Reclassifications
Certain prior year amounts have been reclassified within the Company’s consolidated financial statements from their original presentation to conform with the current period presentation.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies and the reported amounts of revenue and expenses. Significant items subject to such estimates and assumptions include the valuation of deferred tax assets, stock-based compensation, warrant liabilities, claims reserve, useful lives of software developed for internal use and income tax uncertainties. Actual results could differ from the estimates used in preparing the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At times, cash on deposit may be in excess of the applicable federal deposit insurance corporation limits.

Restricted Cash
The Company considers any cash account that is restricted as to withdrawal or use under the terms of certain financing agreements as restricted cash. Cash will be considered restricted for so long as any obligations are outstanding. Restricted cash pledged as collateral for the term loan totaled $3.0 million as of December 31, 2013. During 2014, this outstanding term loan was repaid in full, which also resulted in a release of the Company’s restricted cash.
Accounts and Other Receivable
Receivables are comprised of trade receivables and other miscellaneous receivables. As of December 31, 2014 and 2013, receivables included $6.8 million and $7.4 million , respectively, for one-year policies written by an unaffiliated general agent.
No single customer made up more than 5% of accounts receivable as of December 31, 2014 or 2013.

73



Deferred Acquisition Costs
The Company incurs certain costs related to the successful acquisition of new and renewal customer contracts, which are capitalized. These costs include premium taxes, commissions, and referral fees that directly relate to the successful acquisition of new or renewal customer contracts. Deferred acquisition costs are included in prepaid expenses and other assets on the consolidated balance sheet and are amortized over the related policy term to the applicable financial statement line item, including sales and marketing expenses and other cost of revenue. Total deferred acquisition costs for the years ended December 31, 2014, 2013 and 2012 are summarized below (in thousands):
 
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Deferred acquisition costs capitalized
 
$
7,995

 
$
5,919

 
$
2,334

Deferred acquisition costs amortized:
 

 

 

Sales and marketing
 
858

 
663

 
755

Other cost of revenue
 
7,052

 
5,082

 
1,522

Total amortization
 
7,910

 
5,745

 
2,277

Balance at December 31,
 
$
469

 
$
384

 
$
210

Investments
The Company recognizes the following classifications of investments:
Short-term-investments —Investments with an initial maturity of less than one year are reported at amortized cost, which approximates fair value.
Available-for-Sale —Investments in fixed maturities not classified as short-term-investments are reported at fair value, and the temporary declines or increases from amortized cost are included as a component of other comprehensive income.
Available-for-sale securities are classified based upon the availability to be used in current operations.
Premiums and discounts on fixed maturity securities are amortized or accreted over the life of the security. Such amortization expense and accretion is included in interest income. Interest income is recognized in other income when earned.
A decline in the fair value of any available-for-sale or held-to-maturity security below amortized cost that is deemed to be other than temporary results in an impairment to reduce the amortized cost to fair value or recovery value. To determine whether an impairment is other than temporary, the Company considers its intent to sell the security, intent and ability to hold the security, as well as all available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable forecasts, when developing estimates of cash flows expected to be collected. Realized capital gains and losses are determined on a specific identification basis and recorded as a part of other expense, net in the statement of operations.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from three to five years. Leasehold improvements are depreciated over the remaining term of the related lease.
Costs related to software developed for internal use are primarily related to the Company’s website, internal support systems, and proprietary billing and claims systems. Costs are capitalized during the application development stage of the project and amortized on a straight-line basis over the estimated useful lives of the related assets, estimated between three and five years, once the software is placed into service.
Intangible Assets
Indefinite-lived intangible assets, which are not amortized, are assessed for impairment at least annually and more frequently if circumstances indicate a possible impairment. The Company first performs a qualitative analysis to assess whether it is more likely than not the asset is impaired and, if necessary, a quantitative analysis is performed to measure impairment.
Assets with finite lives are amortized over their estimated remaining useful life.

74



Asset Impairment
Long-lived assets, such as property and equipment and definite lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.
Claims Reserve
Claims reserve includes unpaid claims and claims adjustment expenses, which includes an estimate, based on past experience, for claims incurred but not reported. Such liabilities are necessarily based on assumptions and estimates, and while management believes the amount is adequate, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in the period in which they become known.
Warrants
The Company issued warrants to purchase common or convertible preferred stock to third parties as a part of certain business and financing transactions. The Company values warrants using the Black-Scholes-Merton option-pricing model. Certain warrants were considered liability awards and were remeasured each reporting period until exercised, settled or reclassified to stockholders’ equity. See Note 12 for additional information.

Revenue Recognition
The Company generates revenue primarily from subscription fees for its medical insurance plan and other policies the Company writes, which is earned pro rata over the terms of the customer contracts.
No single customer accounted for more than 5% of the Company’s revenue in 2014, 2013 or 2012.
Claims Expense
Claims expenses include claims incurred, the cost of personnel administering the claims and providing customer service related to claims, and other operating expenses directly or indirectly related to claims administration.
Other Cost of Revenue
Other cost of revenue includes direct and indirect customer service expenses, credit card transaction fees, premium tax expenses and expenses related to an unaffiliated general agent.
Sales and Marketing
Sales and marketing expenses consist of referral fees paid with respect to newly enrolled pets, print, online and promotional advertising costs and employee compensation and related costs.
General and Administrative
General and administrative expenses consist primarily of personnel costs and related expenses for the Company’s finance, actuarial, human resources, business development and general management functions, as well as facilities and professional services.
Technology and Development
Technology and development expenses consist primarily of personnel costs and related expenses for the Company’s operations staff, which includes information technology development and infrastructure support, third-party services and depreciation of hardware and amortization of capitalized software and intangible assets.

75



Other (Income) Expense, Net
Other (income) expense, net was comprised of the following (in thousands):
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Interest income
 
$
(73
)
 
$
(86
)
 
$
(75
)
Foreign exchange gain
 
41

 
76

 
3

Loss on disposal of fixed assets
 
111

 
44

 
26

Warrant remeasurement
 
(1,574
)
 
543

 
200

Other
 
8

 
94

 
98

Other (income) expense, net
 
$
(1,487
)
 
$
671

 
$
252

Fronting Agreement
For the Company’s Canadian business, all plans are written by Omega General Insurance Company (Omega) and the risk is assumed by the Company through a fronting and reinsurance agreement. Omega retains an annual fee for fronting the Company’s insurance business in Canada, and all risks are retained within the Company. Premiums are recognized and earned pro rata over the terms of the related customer contracts. Premiums recognized from the agreement in 2014, 2013 and 2012 were $ 29.1 million , $ 24.7 million and $ 20.7 million , respectively and deferred revenue relating to this arrangement at December 31, 2014 and 2013 was $ 0.9 million and $ 0.7 million , respectively. Reinsurance revenue was 25% , 29% and 37% of total revenue in 2014, 2013 and 2012, respectively. Cash designated for the purpose of paying claims related to this reinsurance agreement was $1.7 million and $1.6 million at December 31, 2014 and 2013, respectively.
The Company has not transferred any risk to third-party reinsurers.
Other Policies
In November 2012, the Company began writing one-year pet insurance policies for an unaffiliated general agent. Revenue during 2014, 2013 and 2012 totaled $10.0 million , $7.0 million and $0.2 million , respectively, and deferred revenue relating to this arrangement at December 31, 2014 and 2013 was $5.1 million and $5.2 million , respectively.
Advertising
Advertising costs are expensed as incurred. Advertising costs amounted to $3.2 million , $0.7 million and $0.3 million , in 2014, 2013 and 2012, respectively.
Stock-Based Compensation
The Company measures compensation expense for stock-based transactions to employees at fair value on the date of grant and recognizes such cost, on a straight-line basis over the requisite service period (generally four years). Stock options are valued using the Black-Scholes-Merton option-pricing model. The fair value of restricted stock units (RSUs) and restricted stock awards is based on the fair value of the Company’s stock on the date of the grant.
The Company measures compensation cost for stock-based compensation to non-employees at fair value and remeasures the award each period until the award vests.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are provided for when it is considered more likely than not that deferred tax assets will not be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than a 50% likelihood of being realized. Penalties and interest are classified as a component of income taxes.

76



Foreign Currency
The Company’s consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with non-U.S. dollar functional currencies are translated to U.S. dollars at the exchange rates in effect on the balance sheet date. Revenue and expenses for each subsidiary are translated to U.S. dollars using a weighted-average rate for the relevant reporting period. Translation adjustments resulting from this process are included in accumulated other comprehensive loss. Gains and losses that arise from exchange rate fluctuations for monetary asset and liability balances that are not denominated in an entity’s functional currency are included within other income.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. The Company manages its risk by investing cash equivalents and investment securities in money market instruments and securities of the U.S. government, U.S. government agencies and high-credit-quality issuers of debt securities.
Credit risk with respect to accounts receivable is dispersed due to the large number of customers. In addition, the Company’s credit risk is mitigated by the relatively short collection period.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Insurance contracts are excluded from the scope of this new guidance. The guidance is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption prohibited, and must be applied retrospectively or modified retrospectively. We are currently evaluating the impact this ASU will have on our consolidated financial statements.

2. Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period. Excluded from the weighted-average number of shares outstanding are shares that have been issued and are subject to future vesting and unvested restricted stock. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock method. Potentially dilutive common stock equivalents are comprised of convertible preferred stock, warrants for the purchase of convertible preferred stock and common stock, exchangeable shares, unvested restricted stock and stock options. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.
The following potential dilutive equity securities are not included in the diluted net loss per common share calculation because they would have had an antidilutive effect:
 
AS OF DECEMBER 31,
 
2014
 
2013
 
2012
Stock options
5,112,556

 
4,663,445

 
4,226,883

Restricted stock awards and units
592,625

 
722,226

 

Warrants
869,999

 
884,111

 
124,857

Series A convertible preferred stock

 
7,466,283

 
7,466,283

Series B convertible preferred stock

 
3,546,384

 
3,546,384

Series C convertible preferred stock

 
3,845,322

 
3,845,322

Exchangeable shares

 
2,247,130

 
2,247,130


Convertible preferred stock is presented on an as converted basis to reflect the applicable conversion ratio at December 31, 2013 and 2012.


77



3. Property and Equipment, Net
Property and equipment, along with their useful lives, were as follows for the years ended December 31, 2014 and 2013 (in thousands):
 
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
Office and telephone equipment (5 years)
$
123

 
$
128

PC and networking hardware (4 years)
1,125

 
827

Software (3–5 years)
8,532

 
3,222

Furniture and fixtures (5 years)
711

 
497

Vehicles (5 years)
54

 

Leasehold improvement (over life of lease)
571

 
212

Property and equipment
11,116

 
4,886

Accumulated depreciation
(3,254
)
 
(1,762
)
Property and equipment, net
$
7,862

 
$
3,124

Depreciation and amortization expense for property and equipment was $1.6 million , $0.9 million and $0.3 million for 2014, 2013 and 2012, respectively.
The Company capitalized interest of $0.2 million , $0.1 million and $0.03 million in 2014, 2013 and 2012, respectively, related to software developed for internal use.

4. Intangible Assets
The Company acquired an insurance company in 2007, which originally included licenses in 23 states. These licenses were valued at $4.8 million . The Company is currently licensed in all 50 states, the District of Columbia and Puerto Rico. Most licenses are renewed annually upon payment of various fees assessed by the issuing state. Renewal costs are expensed as incurred. This is considered an indefinite-lived intangible asset given the planned renewal of the certificates of authority and applicable licenses for the foreseeable future. No impairments have been recorded on this asset as of December 31, 2014.
The Company has another intangible asset, which is being amortized over the expected useful life of the asset. The amortization expense for 2014, 2013 and 2012 was $0.1 million , $0.04 million and $0 , respectively, and the value of the intangible asset at December 31, 2014 and 2013 was $0.1 million and $0.1 million , respectively. Future amortization expense for this asset is expected to be as follows (in thousands):
 
 
 
Year ending December 31:
 
2015
$
63

2016
11

Total future amortization:
$
74



78



5. Investment Securities
The amortized cost, gross unrealized holding losses, and fair value of available-for-sale and short-term investments by major security type and class of security were as follows as of December 31, 2014 and 2013 (in thousands):

 
AMORTIZED
COST
 
GROSS
UNREALIZED
HOLDING
LOSSES
 
FAIR
VALUE
As of December 31, 2014
 
 
 
 
 
       Available-for-sale:
 
 
 
 
 
Municipal bond
$
1,000

 
$
(58
)
 
$
942

 
$
1,000

 
$
(58
)
 
$
942

Short-term investments:
 
 
 
 
 
              U.S. Treasury securities
$
5,677

 
$

 
$
5,677

              Certificates of deposit
800

 

 
800

              U.S. government funds
15,894

 

 
15,894

 
$
22,371


$


$
22,371

 
 
 
 
 
 
 
AMORTIZED
COST
 
GROSS
UNREALIZED
HOLDING
LOSSES
 
FAIR
VALUE
As of December 31, 2013
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
Municipal bond
$
1,000

 
$
(168
)
 
$
832

 
$
1,000


$
(168
)

$
832

Short-term investments:
 
 
 
 
 
U.S. Treasury securities
$
5,778

 
$

 
$
5,778

Certificates of deposit
2,700

 

 
$
2,700

U.S. government funds
7,610

 

 
$
7,610

 
$
16,088


$


$
16,088



Maturities of securities classified as available-for-sale were as follows (in thousands):
 
DECEMBER 31, 2014
 
AMORTIZED
COST
 
FAIR
VALUE
Available-for-sale:

 

Due under one year
$

 
$

Due after one year through five years

 

Due after five years through ten years
1,000

 
942

Due after ten years

 

 
$
1,000

 
$
942

The Company had one investment with an unrealized loss of $0.1 million and a fair value of $0.9 million at December 31, 2014. This investment has been in an unrealized loss position for more than 12 months. The Company assessed the bond for credit impairment and determined that there is no intent to sell this bond and it is likely that it will hold the investment for a period of time sufficient to allow for recovery. Further, future payments on this bond are insured by a financial guarantee insurer. Therefore, the Company believes that the unrealized loss on this bond constitutes a temporary impairment.

79



6. Fair Value
The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.
When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 inputs: Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
AS OF DECEMBER 31, 2014
 
FAIR VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Assets
 
 
 
 
 
 
 
Municipal bond
942

 

 
942

 

Money market funds
$
44,575

 
$
44,575

 
$

 
$

Total
$
45,517

 
$
44,575

 
$
942

 
$

 
 
 
 
 
 
 
 
 
AS OF DECEMBER 31, 2013
 
FAIR VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Assets
 
 
 
 
 
 
 
Restricted cash
$
3,000

 
$
3,000

 
$

 
$

Municipal bond
832

 

 
832

 

Total
$
3,832

 
$
3,000

 
$
832

 
$

Liabilities

 
 
 
 
 
 
Warrant liabilities
$
4,900

 
$

 
$

 
$
4,900

Total
$
4,900

 
$

 
$

 
$
4,900


A rollforward of activity in liabilities valued using Level 3 inputs is as follows (in thousands):
 
WARRANT LIABILITIES
 
2014
 
2013
Balance at January 1,
$
4,900

 
$
551

Issued warrant liability awards
1,124

 
3,806

Settlement of warrant liability upon exercise
(1,270
)
 

Change in fair value upon remeasurement
(1,574
)
 
543

Reclassification to stockholders’ equity
(3,180
)
 

Balance at December 31,
$

 
$
4,900

 
Changes in fair value upon remeasurement are recorded in other (income) expense, net on the consolidated statement of operations.
The Company estimates fair value for its long-term debt based upon rates currently available to the Company for debt with similar terms and remaining maturities. This is a Level 3 measurement. Based upon the terms of the debt, the carrying amount of long term debt approximated fair value at December 31, 2014 and 2013.

80



The Company’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers between levels for the twelve months ended December 31, 2014.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Investment securities: Debt securities classified as available-for-sale are measured using quoted market prices when quoted market prices are available. If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data obtained from third-party data providers. Short-term investments are carried at amortized cost and the fair value is disclosed in Note 3. Fair value is determined in the same manner as available-for-sale securities and is considered a Level 2 measurement.
Warrant liabilities: These liabilities are valued using the Black-Scholes-Merton option-pricing model using certain unobservable inputs that are estimated by the Company. These inputs include a measure of volatility using an average of peer companies’ publicly traded stock volatility, expected dividend payments based on management’s assertion that no dividends will be paid in the near term, the remaining contractual term and a discount rate using an average equivalent bond yield calculation. The range of inputs used is as follows:
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
Expected volatility
34%-46%
 
35%–43%
Expected dividends
—%
 
—%
Risk-free rate
0.03%-2.02%
 
0.1%–2.10%
Term
0.1-6.0 years
 
0.3–6.3 years

An increase or decrease in any of these unobservable inputs would result in a change in the fair value measurement, which may be significant. The liabilities were revalued each period-end until exercised, expired or modified to exclude recurring fair value measurement. Gains and losses on revaluation of the liabilities were recorded in other (income) expense, net in the Company’s consolidated financial statements.
7. Equity Method Investments
In May 2013, the Company and an equity method investee came to an agreement to exchange the Company’s investment for shares of the Company’s common stock held by the investee. In addition, the Company obtained an exclusivity agreement which was recorded as an intangible asset. Per the terms of the contract, any intellectual property developed as a part of this relationship is the property of the Company. A loss of $0.1 million was recognized on this transaction in 2013.

8. Commitments and Contingencies
The Company has operating leases, related to equipment and office facilities, which expire over the next three years with various renewal options. Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease. Rental expense for operating leases was $0.8 million , $0.8 million and $0.6 million during 2014, 2013 and 2012, respectively.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2014, are as follows (in thousands):
 
Year ending December 31:
 
2015
$
766

2016
447

2017
6

Total minimum lease payments
$
1,219

 
 

81



The Company has entered into agreements with independent contractors to provide services for a period of time. Future commitments related to these contracts are as follows (in thousands):
 
Year ending December 31:
 
2015
$
101

2016
151

2017
101

2018
51

2019
51

2020-2021
66

Total minimum commitment
$
521

 
 
During 2013, the Company determined that it owes goods and services tax (GST) and harmonized sales tax (HST) in Canada for certain intercompany fees charged to its Canadian entities from 2007 through 2013. The Company began a voluntary self-disclosure with the Canada Revenue Agency for these unpaid taxes in 2014 under the Canada Revenue Agency Voluntary Disclosures Program, which was accepted in 2014. The Company has accrued $0.9 million of GST/HST tax for the 2007 through 2013 tax years, including interest, related to prior period GST/HST unpaid taxes.
The Company is involved from time to time in claims, regulatory examinations and litigation, including the following:
The Company’s subsidiary, APIC, a New York corporation, received an inquiry from the California Department of Insurance (CDOI) in 2011 alleging APIC’s trial insurance policies issued in California are in violation of California law. The Company has disputed this assertion. In July 2014, the CDOI filed a notice of non-compliance regarding this issue. As of December 31, 2014, the Company had accrued liabilities of $0.4 million for this matter. On February 12, 2015, APIC and CDOI entered into a Stipulation and Waiver whereby APIC voluntarily agreed to remove its trial certificate program in favor of a new program that has been pre-approved by the CDOI. APIC also agreed to pay a fine and reimburse CDOI expenses in an aggregate amount of $0.4 million . Pursuant to the stipulation, APIC did not admit any wrongdoing and continues to believe that its program was permissible under California law; however, the Company determined that it was in its best interest to resolve the dispute amicably.
The Company received an inquiry from the Washington State Office of the Insurance Commissioner (OIC) in December 2012 concerning whether a subsidiary of the Company was properly licensed, and whether certain of its employees were properly licensed, under Washington law. The Company responded to this letter in January of 2013 confirming that our subsidiaries are licensed and that our employees are not required to be licensed under Washington law. In October 2013, OIC sent further correspondence informing APIC that the results of a market conduct examination regarding its use of unlicensed non-appointed producers were being referred to OIC’s enforcement committee and that such committee would notify APIC in the event action is taken in regard to possible violations. The Company received additional correspondence from the OIC in July 2014 informing it that the OIC is scheduling a regulatory examination to further assess the Company’s compliance. A regulatory examination took place during the third and fourth quarters of 2014. As of December 31, 2014, the Company had accrued liabilities of $0.2 million for this matter. Adverse outcomes beyond recorded amounts are reasonably possible. At this stage in the matter, however, the Company is unable to estimate a possible loss or range of possible loss beyond amounts accrued.
The outcomes of the Company’s legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. The Company makes a provision for a liability relating to legal matters when it is both probable that a liability beyond previously accrued amounts has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter.


82



9. Claims Reserve
Activity in the claims reserve is summarized as follows (in thousands):
 
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Claims reserve at beginning of year
 
$
5,612

 
$
2,582

 
$
1,637

Claims incurred during the year related to:
 
 
 
 
 
 
Current year
 
80,438

 
56,702

 
37,779

Prior years
 
(525
)
 
(65
)
 
77

Total claims incurred
 
79,913

 
56,637

 
37,856

Claims paid during year related to:
 
 
 
 
 
 
Current year
 
75,094

 
50,907

 
35,250

Prior years
 
5,088

 
2,516

 
1,584

Total claims paid
 
80,182

 
53,423

 
36,834

Non-cash claims expense
 
236

 
184

 
77

Claims reserve at end of year
 
$
5,107

 
$
5,612

 
$
2,582

The decrease in incurred claims for prior years in the year ended December 31, 2014 and December 31, 2013 is primarily due to less claims than expected for 2013 and 2012 claims, respectively. For the year ended December 31, 2012, the increase in incurred claims for prior years is primarily due to unanticipated claims development in those years from prior year claims and the corresponding change in the estimates of ultimate liabilities for incurred claims.

10. Debt

The Company’s outstanding debt at December 31, 2014 was as follows:

BALANCE
 
INTEREST RATE
 
MATURITY
 
(in thousands)
 
 
Line of credit
$14,900
 
5%
 
July 23, 2016

The Company has a revolving line of credit with Square 1 Bank, which is secured by any and all interest the Company has in assets that are not otherwise restricted. The revolving line of credit bore a variable interest rate as of December 31, 2014 and 2013, equal to the greater of 5.0% or 1.5% plus the prime rate . Interest expense is due monthly on the outstanding principal amount with all amounts outstanding under the revolving line of credit due upon maturity in July 2016. The credit agreement requires the Company to comply with various financial and non-financial covenants. As of December 31, 2014, the Company was in compliance with these covenants. This facility also has a compensating balance requirement of $0.5 million .

Borrowings on the revolving line of credit were limited to the lesser of $20.0 million and $15.0 million in 2014 and 2013, respectively, and the total amount of cash and securities held by American Pet Insurance Company (APIC), less up to $0.5 million for obligations the Company may have outstanding for other ancillary services.

On March 28, 2013, the Company obtained a term loan from the same bank of $3.0 million in aggregate principal. The interest rate on the term loan was the greater of 5.5% or 2.0% plus the prime rate . All amounts outstanding under the term loan, including principal and accrued interest, were payable in 30 equal monthly installments beginning on April 28, 2014. During July 2014, this outstanding term loan was repaid in full, which also resulted in a release of the Company’s restricted cash.


83



On December 23, 2013, the Company obtained a term loan in an aggregate principal amount of $12.0 million . This note was entered into at a discount of $3.8 million related to the issuance of warrants being deducted from the principal amount. On July 2, 2014, the Company entered into an amended and restated credit agreement in relation to this existing $12.0 million term loan for a secured subordinated term loan totaling $29.0 million , which reflected an increase of $17.0 million from the prior agreement. The amended principal amount was entered into at an additional discount of $1.1 million as a result of the issuance of warrants. The term loan bore a fixed interest rate of 11.0% per year and was due on the earlier of three years from the issue date or certain triggering events, including a qualifying IPO, which would result in a 1.5% prepayment premium on the $17.0 million increase related to the amendment. The $29.0 million term loan was repaid in full on July 23, 2014, including $0.9 million in accrued interest and a prepayment fee of $0.3 million . The unamortized discount on debt totaling $4.4 million was included in interest expense in the consolidated statement of operations.
Interest expense during 2014, 2013 and 2012 related to all loans was $6.7 million , $0.6 million and $0.5 million , respectively. Total maturities of debt in 2015 and 2016 are $0 and $14.9 million , respectively.

11. Stock-Based Compensation

In June 2014, the Company’s Board of Directors adopted the 2014 Equity Incentive Plan (2014 Plan), which succeeded the 2007 Equity Compensation Plan upon the Company’s IPO. The 2014 Plan authorizes the award of stock options or restricted stock to directors, officers, employees, and non-employees. All awards have 10-year contractual terms. At December 31, 2014, there were 2,252,752 additional shares available for the Company to grant under the 2014 Plan.
Stock Options
The grant date fair value of stock option awards are estimated on the date of grant using the Black-Scholes-Merton option-pricing model. Valuation assumptions for the years ended December 31, 2014, 2013 and 2012 are presented in the following table:
 
 
 
YEARS ENDED
DECEMBER 31,
 
 
2014
 
2013
 
2012
Valuation assumptions:
 
 
 
 
 
 
Expected term (in years)
 
6.25
 
6.25
 
6.25
Expected volatility
 
54.3%–59.3%
 
54.9%–57.4%
 
60%
Risk-free interest rate
 
1.8%–2.0%
 
1.0%–2.0%
 
0.9%-1.3%
Expected dividend yield
 
—%
 
—%
 
—%
Expected term: The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. As the Company does not have sufficient historical experience for determining the expected term of stock-based awards granted, the expected term for awards issued to employees is based on the simplified method, which represents the average period from vesting to the expiration of the stock option.
Expected volatility: As the Company does not have significant trading history for common stock, the expected stock price volatility for common stock is estimated by taking the average historical price volatility for identified peers based on daily price observations over a period equivalent to the expected term of the stock option grants. The Company does not rely on implied volatilities of traded options in identified peers’ common stock because the volume of activity is relatively low. The Company intends to continue to consistently apply this process using these or similar public companies until a sufficient amount of historical information regarding the volatility of the Company’s common stock price becomes available.
Risk-free interest rate: The risk-free interest rate for the expected term of the stock option is based on the U.S. Treasury yield curve at the date of grant.
Expected dividend yield: The Company does not expect to pay any dividends in the foreseeable future.

84



Stock option activity for the years ended December 31, 2014, 2013 and 2012 was as follows:
 
NUMBER
OF
OPTIONS
 
WEIGHTED-
AVERAGE
EXERCISE
PRICE
 
AGGREGATE
INTRINSIC
VALUE
(in thousands)
December 31, 2011
4,506,708

 
$
1.06

 
$

Granted
352,146

 
4.05

 

Exercised
(502,874
)
 
0.91

 
1,579

Forfeited
(129,097
)
 
1.28

 

December 31, 2012
4,226,883

 
1.32

 

Granted
1,294,150

 
4.40

 

Exercised
(547,981
)
 
1.11

 
2,285

Forfeited
(309,607
)
 
2.48

 

December 31, 2013
4,663,445

 
2.12

 
30,406

Granted
754,200

 
9.64

 

Exercised
(176,595
)
 
1.20

 
1,428

Forfeited
(128,494
)
 
5.40

 

December 31, 2014
5,112,556

 
3.19

 
21,116

 
 
 
 
 
 
Vested and exercisable at December 31, 2014
3,578,138

 
$
1.77

 
$
18,541

As of December 31, 2014, stock options outstanding had a weighted average remaining contractual life of 6.8 years and vested and exercisable options had a weighted average remaining contractual life of 5.5 years .

The weighted-average grant date fair value of stock options granted and the fair value of options vested were as follows for the years ending December 31, 2014, 2013, and 2012:
 
 
WEIGHTED-AVERAGE GRANT DATE FAIR VALUE
 
FAIR VALUE
OF OPTIONS
VESTED
 
 
(per share)
 
(in thousands)
Year:
 
 
 
 
2012
 
$
2.26

 
$
1,296

2013
 
$
2.97

 
$
1,675

2014
 
$
5.33

 
$
2,203



85



Restricted Stock Awards
The below table summarizes the Company’s restricted stock award activity for the years ending December 31, 2014 and 2013:
 
 
NUMBER OF 
SHARES
 
WEIGHTED-AVERAGE
GRANT DATE FAIR
VALUE PER
RESTRICTED STOCK
Nonvested stock award balance at December 31, 2012
 

 
$

Restricted stock awards granted
 
732,708

 
4.77

Awards upon which restrictions lapsed
 
(10,482
)
 
4.77

Restricted stock awards forfeited
 

 

Nonvested stock award balance at December 31, 2013
 
722,226

 
4.77

Restricted stock awards granted
 
6,126

 
5.79

Awards upon which restrictions lapsed
 
(143,967
)
 
4.81

Restricted stock awards forfeited
 

 

Nonvested stock award balance at December 31, 2014
 
584,385

 
4.77

During the third quarter of 2014, 116,877 shares of restricted stock, which were subject to a performance condition relating to the Company’s IPO, vested and resulted in $1.6 million of expense included in general and administrative expense in the consolidated statement of operations. The fair value of these vested shares was approximately $1.2 million . The remaining 584,385 shares of unvested restricted stock related to this agreement are expected to vest over the remaining service term of approximately five years.
Stock-based compensation expense includes stock options, restricted stock units and restricted stock awards granted to employees and non-employees, and is reported in the Company’s consolidated statement of operations in claims expenses, other cost of revenue, sales and marketing, technology and development, and general and administrative expenses depending on the function performed by the employee or non-employee. The Company measures stock-based compensation expense on a straight-line basis, except for the restricted stock with a performance condition which is measured on a graded vesting schedule. Stock-based compensation expense recognized in each category of the consolidated statement of operations for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands):
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
 
2012
Claims expenses
$
236

 
$
184

 
$
77

Other cost of revenue
79

 
46

 
32

Sales and marketing
553

 
677

 
428

Technology and development
461

 
351

 
268

General and administrative
2,755

 
680

 
629

Total stock-based compensation
$
4,084

 
$
1,938

 
$
1,434

As of December 31, 2014, the Company had unrecognized stock-based compensation expense of $7.2 million , which is expected to vest over a weighted-average period of approximately 1.94 years . As of December 31, 2014, the Company had 1,534,418 unvested stock options and 592,625 restricted stock awards that are expected to vest. No net tax benefits related to the stock-based compensation costs have been recognized since the Company’s inception.
12. Stockholders Equity
On July 23, 2014 the Company completed an IPO pursuant to which 8,193,750 shares of common stock were sold to the public at a price of $10.00 per share. The Company received net proceeds of approximately $72.8 million from the IPO. Upon the closing of the IPO, all shares of outstanding convertible preferred stock and exchangeable shares automatically converted into 14,944,945 and 2,247,130 shares of common stock, respectively. If this transaction had taken place on January 1, 2014, the Company’s weighted-average shares outstanding for the twelve months ended December 31, 2014 would have been 27,067,167 .

86



As of December 31, 2014, the Company had 200,000,000 shares of common stock authorized and 27,830,941 shares of common stock outstanding. Holders of common stock are entitled to one vote on each matter properly submitted to the stockholders of the Company except those related to matters concerning possible outstanding preferred stock. At December 31, 2014, the Company had 10,000,000 shares of undesignated shares of preferred stock authorized for future issuance and did not have any outstanding shares of preferred stock. The holders of common stock are also entitled to receive dividends as and when declared by the board of directors of the Company, whenever funds are legally available. These rights are subordinate to the dividend rights of holders of all classes of stock outstanding at the time. The Company is unable to pay dividends to stockholders as of December 31, 2014 due to restrictions in its credit agreements.
Warrants
Immediately prior to the Company’s IPO, there were warrants to purchase 1,164,085 shares of common stock outstanding, of which warrants to purchase 415,646 of shares of common stock were issued on July 2, 2014 in connection with an amended and restated credit agreement that contained terms modifying the exercise price and number of underlying shares upon completion of an IPO, resulting in historical liability classification in the consolidated balance sheet. Upon the closing of the IPO, the number of shares underlying these warrants was adjusted to 869,999 shares, and the exercise price of each warrant was adjusted to $10.00 per share. These warrants were also revalued resulting in a gain of $2.0 million , which was recorded in other (income) expense, net in the statement of operations. Immediately following the IPO, these warrants were no longer subject to contractual modification provisions and were reclassified from a liability classification to an equity classification on the consolidated balance sheet.

Upon issuance of each warrant, the fair value of the warrant was determined using the Black-Scholes-Merton option-pricing model and recorded as a deferred financing cost and amortized over the term of the related financing agreement. Common stock warrants had provisions modifying both the strike price and the number of shares issuable upon exercise of the warrants upon certain events, which resulted in liability classification in the consolidated balance sheet. At the end of each reporting period prior to the IPO, the Company adjusted the fair value of the warrants (see Note 6). There was significant judgment used in determining the unobservable inputs used in valuing these instruments. A change in the inputs used, particularly related to the fair value of the underlying shares, could have resulted in a significantly higher or lower fair value estimate.





13. Segments
The Company has two segments: subscription business and other business. The subscription business segment includes monthly subscriptions related to the Company’s medical plan, while the other business segment includes all other business, including policies written for third parties and policies written under a federal government program. The chief operating decision maker uses two measures to evaluate segment performance: revenue and gross profit. Corporate operating expenses, interest and other expenses, and income taxes are not allocated to the segments, nor included in the measure of segment profit or loss. The Company does not analyze discrete segment balance sheet information related to assets. In the first quarter of 2015, employer paid contracts will be included in the other business segment based upon changes to management financial reporting as of January 1, 2015.

Revenue and gross profit of the Company’s segments were as follows (in thousands):
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Subscription business
$
105,052

 
$
76,818

 
$
55,352

Other business
10,858

 
7,011

 
178

 
115,910

 
83,829

 
55,530

Claims expenses:
 
 
 
 
 
Subscription business
75,397

 
53,787

 
37,773

Other business
4,516

 
2,850

 
83

 
79,913

 
56,637

 
37,856

Other cost of revenue:
 
 
 
 
 
Subscription business
11,005

 
8,118

 
6,412

Other business
5,118

 
3,430

 
51

 
16,123

 
11,548

 
6,463

Gross profit:
 
 
 
 
 
Subscription business
18,650

 
14,913

 
11,167

Other business
1,224

 
731

 
44

 
19,874

 
15,644

 
11,211

Sales and marketing
11,608

 
9,091

 
7,149

Technology and development
9,899

 
4,888

 
3,406

General and administrative
14,312

 
8,652

 
6,195

Operating loss
$
(15,945
)
 
$
(6,987
)
 
$
(5,539
)

The following table presents the Company’s revenue by geographic region of the member (in thousands):
 
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
 
2012
United States
$
86,494

 
$
58,847

 
$
34,611

Canada
29,416

 
24,982

 
20,919

Total revenue
$
115,910

 
$
83,829

 
$
55,530

Substantially all of the Company’s assets were located in the United States as of December 31, 2014 and 2013.


88



14. Dividend Restrictions and Statutory Surplus
The Company’s business operations are conducted through subsidiaries, one of which is an insurance company domiciled in New York. In addition to general state law restrictions on payments of dividends and other distributions to stockholders applicable to all corporations, insurance companies are subject to further regulations that, among other things, may require such companies to maintain certain levels of equity and restrict the amount of dividends and other distributions that may be paid to their parent corporations.
Under regulatory requirements at December 31, 2014, the amount of dividends that may be paid by the Company’s insurance subsidiary to the Company without prior approval by regulatory authorities was approximately $0.04 million . During 2014, 2013 and 2012, the Company’s insurance subsidiary did not pay any dividends to the Company.                                
The statutory net income for 2014, 2013 and 2012 and statutory capital and surplus at December 31, 2014, 2013 and 2012, for the Company’s insurance subsidiary was as follows (in thousands):
 
 
 
AS OF DECEMBER 31,
 
 
2014
 
2013
 
2012
Statutory net income
 
$
990

 
$
1,126

 
$
1,266

Statutory capital and surplus
 
23,661

 
16,875

 
11,794

As of December 31, 2014, the Company’s insurance subsidiary maintained $23.7 million of statutory capital and surplus which was above the required amount of $22.6 million of statutory capital and surplus to avoid additional regulatory oversight. As of December 31, 2014 and 2013, the Company had $6.5 million and $6.5 million , respectively, on deposit with various states in which it writes policies.

15. Related Parties
In March 2012, the Company issued a mortgage loan to an employee in the amount of $0.8 million . In November 2013, the loan was repaid in full.
The Company is party to an arrangement with the father of the Company’s Chief Executive Officer, who serves as an independent contractor, to develop veterinary relationships and build referrals. The terms of the independent contractor agreement are consistent with the terms of other similar independent contractors that do business with the Company. Total amounts paid to the related party in 2014, 2013 and 2012 were $0.3 million , $0.3 million and $0.3 million , respectively. As of December 31, 2014 and 2013, the Company owed the independent contractor $0.03 million and $0.03 million , respectively, in earned contractor fees.

16. Income Taxes
Income (loss) before income taxes was as follows for the years ended December 31, 2014, 2013 and 2012 (in thousands):
 
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
United States
 
$
(21,371
)
 
$
(8,256
)
 
$
(6,522
)
Foreign
 
187

 
(11
)
 
196

 
 
$
(21,184
)
 
$
(8,267
)
 
$
(6,326
)






89





The components of income tax expense (benefit) were as follows (in thousands):
 
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Current:
 
 
 
 
 
 
U.S. federal & state
 
$
26

 
$
30

 
$
24

Foreign
 
(30
)
 
(122
)
 
60

 
 
(4
)
 
(92
)
 
84

Deferred:
 
 
 
 
 
 
U.S. federal & state
 

 

 

Foreign
 
(3
)
 

 

 
 
(3
)
 

 

Income tax (benefit) expense
 
$
(7
)
 
$
(92
)
 
$
84


A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the financial statements is presented below:
 
 
 
YEARS ENDED DECEMBER 31,    
 
 
2014
 
2013
 
2012
Federal income taxes at statutory rate
 
34.0
 %
 
34.0
 %
 
34.0
 %
Equity compensation
 
(0.9
)
 
(8.6
)
 
(8.5
)
Change in valuation allowance
 
(32.5
)
 
(25.1
)
 
(26.5
)
Other, net
 
(0.5
)
 
0.8

 
0.1

Effective income tax rate
 
0.1
 %
 
1.1
 %
 
(0.9
)%
The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
 
 
 
YEARS ENDED DECEMBER 31,         
 
 
2014
 
2013
Deferred tax assets:
 
 
 
 
Current:
 
 
 
 
Loss reserves
 
$
1,013

 
$
1,033

Other
 
801

 
575

Noncurrent:
 
 
 
 
Net operating loss carryforwards
 
14,346

 
8,322

Depreciation and amortization
 
356

 
322

Equity compensation
 
713

 
229

Other
 
228

 
118

Total deferred tax assets
 
17,457

 
10,599

Deferred tax liabilities:
 
 
 
 
Current:
 
 
 
 
Deferred costs
 
(140
)
 
(114
)
Noncurrent:
 
 
 
 
Intangible assets
 
(1,623
)
 
(1,622
)
Total deferred tax liabilities
 
(1,763
)
 
(1,736
)
Total deferred taxes
 
15,694

 
8,863

Less deferred tax asset valuation allowance
 
(17,313
)
 
(10,485
)
Net deferred taxes
 
$
(1,619
)
 
$
(1,622
)

90



At December 31, 2014, the Company had federal net operating loss carryforwards of $44.4 million . Use of the carryforwards is limited based on the future income of the Company. The federal net operating loss carryforwards will begin to expire in 2027. Approximately $2.2 million of the net operating loss carryforwards relate to tax deductible stock-based compensation in excess of amounts recognized for financial statement purposes. To the extent that net operating loss carryforwards, if realized, relate to excess stock-based compensation, the resulting tax benefits will be recorded to stockholders’ equity (deficit), rather than to results of operations. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net operating loss carryforwards and credit carryforwards may be limited if the Company experiences an ownership change.
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against its deferred tax assets at December 31, 2014 and 2013, because the Company’s management has determined that it is more likely than not that these assets will not be fully realized.
The Company is open to examination by the U.S. federal tax jurisdiction for the years ended December 31, 2011 through 2014. The Company is also open to examination for 2006 and forward with respect to net operating loss carryforwards generated and carried forward from those years in the United States. The Company is open to examination by the Canada Revenue Agency for the years ended December 31, 2007 through 2014.
The Company accounts for uncertain tax positions based on a two-step process of evaluating recognition and measurement criteria. The first step assesses whether the tax position is more likely than not to be sustained upon examination by the taxing authority, including resolution of any appeals or litigation, on the basis of the technical merits of the position. If the tax position meets the more-likely-than-not criteria, the portion of the tax benefit greater than 50% likely to be realized upon settlement with the relevant tax authority is recognized in the financial statements. Net unrecognized tax benefits, interest, and penalties not expected to be settled within one year are included in other long-term liabilities on the consolidated balance sheets. No significant changes in uncertain tax positions are expected in the next twelve months.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
 
   
 
YEARS ENDED
DECEMBER 31,
 
 
2014
 
2013
 
2012
Balance, beginning of year
 
$
390

 
$
526

 
$
348

Decreases to tax positions related to prior periods
 
(346
)
 
(162
)
 

Increases to tax positions related to the current year
 
21

 
26

 
178

Balance, end of year
 
$
65

 
$
390

 
$
526


17. Retirement Plan
The Company has a 401(k) plan for its U.S. employees. The plan allows employees to contribute a percentage of their pretax earnings annually, subject to limitations imposed by the Internal Revenue Service. The plan also allows the Company to make a matching contribution, subject to certain limitations. To date, the Company has made no contributions to the 401(k) plan.

18. Quarterly Financial Information (Unaudited)

The following table contains selected unaudited financial data for each quarter of 2014 and 2013. The unaudited information should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this report. The Company believes that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.


91



 
THREE MONTHS ENDED
 
DEC. 31, 2014
 
SEPT. 30, 2014
 
JUN. 30, 2014
 
MAR. 31, 2014
 
DEC. 31, 2013
 
SEPT. 30, 2013
 
JUN. 30, 2013
 
MAR. 31, 2013
 
(in thousands, except share amounts)
Total revenues
$
31,868

 
$
30,312

 
$
28,090

 
$
25,640

 
$
24,011

 
$
22,134

 
$
19,842

 
$
17,842

Gross profit
5,524

 
4,445

 
5,150

 
4,756

 
4,088

 
4,119

 
3,829

 
3,608

Net loss
(4,276
)
 
(8,509
)
 
(3,479
)
 
(4,913
)
 
(3,203
)
 
(1,222
)
 
(1,824
)
 
(1,926
)
Net loss per share attributable to common stockholders:
Basic and diluted
(0.16
)

(0.41
)

(2.25
)

(3.22
)

(2.23
)

(0.87
)

(1.32
)

(1.76
)
Weighted average shares used to compute net loss per share attributable to common stockholders:
Basic and diluted
27,231,651

 
20,857,126

 
1,543,134

 
1,524,028

 
1,433,811

 
1,411,866

 
1,379,803

 
1,094,989


19. Subsequent Events
Effective January 1, 2015, the Company capitalized a new segregated cell entity in Bermuda as part of Wyndham Insurance Company (SAC) Limited, and entered into a revised fronting and reinsurance arrangement with Omega to include its newly formed segregated cell. These revised agreements may be terminated by either party with one year’s written notice until they terminate pursuant to their terms on December 31, 2017, at which time they will automatically renew for successive one-year periods and remain terminable by either party with one year’s written notice.


92



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Annual Report on Form 10-K that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Item 9B. Other Information
None.


93



PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 11. Executive Compensation
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 14. Principal Accountant Fees and Services
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report.

94



PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
We have filed the financial statements listed in the Index to Financial Statements as a part of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
Schedule I Condensed Financial Information of Registrant
No other financial statement schedules have been provided because the information called for is not required or is shown either in the financial statements or notes thereto.
(a)(3) Exhibits
The list of exhibits included in the Exhibit Index to this Annual Report on Form 10-K is incorporated herein by reference.









95



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
TRUPANION, INC.
 
 
 
By:
 
/s/ Darryl Rawlings
 
 
Darryl Rawlings
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears below hereby constitutes and appoints Darryl Rawlings, Michael Banks and Asher Bearman, and each of them, as his or her true and lawful attorneys-in-fact, proxies and agents, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, proxies and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, proxies and agents, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


96



 
 
 
 
 
 
 
 
Date: February 24, 2015
 
/s/ Darryl Rawlings
 
 
Darryl Rawlings
Chief Executive Officer and President
(Principal Executive Officer)
 
 
Date: February 24, 2015
 
/s/ Michael Banks
 
 
Michael Banks
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
Date: February 24, 2015
 
/s/ Murray Low
 
 
Murray Low
Chairman of the Board of Directors
 
 
 
Date: February 24, 2015
 
/s/ Peter R. Beaumont
 
 
Peter R. Beaumont
Director
 
 
 
Date: February 24, 2015
 
/s/ Michael Doak
 
 
Michael Doak
Director
 
 
 
Date: February 24, 2015
 
/s/ Robin Ferracone
 
 
Robin Ferracone
Director
 
 
 
Date: February 24, 2015
 
/s/ Dan Levitan
 
 
Dan Levitan
Director
 
 
 
Date: February 24, 2015
 
/s/ H. Hays Lindsley
 
 
H. Hays Lindsley
Director
 
 
 
Date: February 24, 2015
 
/s/ Glenn Novotny
 
 
Glenn Novotny
Director
 
 
 
Date: February 24, 2015
 
/s/ Howard Rubin
 
 
Howard Rubin
Director

97




EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Where an exhibit is incorporated by reference, the number in parentheses indicates the document to which cross-reference is made. See the end of this exhibit index for a listing of cross-reference documents.
Exhibit
 
 
 
Incorporated by Reference
 
Filed/Furnished
Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Exhibit Filing Date
 
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1
 
Restated Certificate of Incorporation of the Registrant.
 
10-Q
 
001-36537
 
3.1
 
8/28/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2
 
Restated Bylaws of the Registrant.
 
10-Q
 
001-36537
 
3.2
 
8/28/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1
 
Form of Common Stock Certificate.
 
S-1
 
333-196814
 
4.1
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.2
 
Form of Warrant to Purchase Common Stock.
 
S-1
 
333-196814
 
4.2
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.3
 
Form of Warrant to Purchase Common Stock.
 
S-1
 
333-196814
 
4.3
 
7/7/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.4
 
Third Amended and Restated Registration Rights Agreement, dated October 25, 2011, by and among the Registrant and certain of its stockholders, as amended.
 
S-1
 
333-196814
 
4.4
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1+
 
Form of Indemnity Agreement.
 
S-1
 
333-196814
 
10.1
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2+
 
2007 Equity Compensation Plan and forms of stock option agreements and exercise notices, restricted stock notice agreement and restricted stock agreement thereunder.
 
S-1
 
333-196814
 
10.2
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3+
 
2014 Equity Incentive Plan and forms of stock option award agreement, restricted stock agreement and restricted stock unit award agreement thereunder.
 
S-1
 
333-196814
 
10.3
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4+
 
2014 Employee Stock Purchase Plan.
 
S-1
 
333-196814
 
10.4
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5+
 
Amended and Restated Employment Agreement, dated April 20, 2007, by and between the Registrant and Darryl Rawlings.
 
S-1
 
333-196814
 
10.6
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.6+
 
Employment Agreement, dated June 13, 2012, by and between the Registrant and Michael Banks.
 
S-1
 
333-196814
 
10.7
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.7+
 
Consulting Agreement, dated May 5, 2014, by and between the Registrant and Howard Rubin.
 
S-1
 
333-196814
 
10.8
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.8+
 
Independent Contractor Agreement, effective as of March 7, 2014, by and between the Registrant and Peter R. Beaumont.
 
S-1
 
333-196814
 
10.9
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.9
 
Amended and Restated Loan and Security Agreement, dated August 24, 2012, by and among the Registrant, Trupanion Managers USA, Inc. and Square 1 Bank, as amended.
 
S-1
 
333-196814
 
10.10
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

98



10.10
 
Seventh Amendment to Amended and Restated Loan and Security Agreement, dated December 19, 2014, by and among the Registrant, Trupanion Managers USA, Inc. and Square 1 Bank.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.11
 
Lease Agreement, dated June 14, 2012, by and between American Pet Insurance Company and the Housing Authority of the City of Seattle, as amended.
 
S-1
 
333-196814
 
10.13
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.12
 
Lease, dated August 29, 2011, by and between C.D. Stimson Company and American Pet Insurance Company.
 
S-1
 
333-196814
 
10.14
 
6/16/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.13†
 
Agency Agreement between Omega General Insurance Company and Trupanion Brokers Ontario, Inc., effective January 1, 2015.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.14†
 
Fronting and Administration Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 2015.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.15†
 
Quota Share Reinsurance Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 2015.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
21.1
 
Subsidiaries of the Registrant.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
23.1
 
Consent of independent registered public accounting firm.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
24.1
 
Power of Attorney (reference is made to the signature page hereto)
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
 
Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
32.1*
 
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
32.2*
 
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
 
 
 
 
 
 
X

99




+
Indicates a management contract or compensatory plan or arrangement.
Registrant has omitted portions of the referenced exhibit pursuant to a request for confidential treatment under Rule 24b-2 promulgated under the Exchange Act. The omitted portions of this exhibit have been filed separately with the SEC.
*
This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.


100



Schedule I - Condensed Financial Information of Registrant
Trupanion, Inc.
Condensed Balance Sheets
( Parent Company Only)
(In thousands, except for share and per share data)
 
 
AS OF DECEMBER 31,
 
 
2014
 
2013
Assets
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
45,042

 
$
9,039

Prepaid expenses and other assets
 
399

 
118

Total current assets
 
45,441

 
9,157

Restricted cash
 

 
3,000

Property and equipment, net
 
450

 
97

Intangible assets, net
 
4,847

 
4,910

Investments in and advances to subsidiaries
 
25,219

 
14,411

Total assets
 
$
75,957

 
$
31,575

Liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
7

 
23

Accrued liabilities
 
152

 
206

Short-term debt
 

 
900

Warrant liabilities
 

 
4,900

Deferred tax liabilities
 
124

 
82

Total current liabilities
 
283

 
6,111

Long-term debt
 
14,900

 
25,199

Deferred tax liabilities
 
1,499

 
1,540

Total liabilities
 
16,682

 
32,850

Redeemable convertible preferred stock: $0.00001 par value per share, 0 and 15,648,723 authorized at December 31, 2014 and December 31, 2013, respectively, and 0 and 14,857,989 issued and outstanding at December 31, 2014 and December 31, 2013, respectively.
 

 
31,724

Stockholders’ equity (deficit):
 
 
 
 
Common stock, $0.00001 par value per share, 200,000,000 and 26,000,000 shares authorized at December 31, 2014 and December 31, 2013, respectively, 28,451,920 and 27,830,941 issued and outstanding at December 31, 2014; 2,857,620 and 2,236,641 shares issued and outstanding at December 31, 2013.
 

 

Preferred stock: $0.00001 par value per share, 10,000,000 and 0 authorized at December 31, 2014 and December 31, 2013, respectively, and 0 issued and outstanding at December 31, 2014 and December 31, 2013.
 

 

Special voting shares, $0.00001 par value per share, 0 and 2,500,030 shares authorized at December 31, 2014 and December 31, 2013, respectively, and 0 and 2,247,130 issued and outstanding at December 31, 2014 and December 31, 2013, respectively.
 

 

Additional paid-in capital
 
119,045

 
5,769

Accumulated other comprehensive income (loss)
 
11

 
(164
)
Accumulated deficit
 
(57,180
)
 
(36,003
)
Treasury stock, at cost: 620,979 shares at December 31, 2014 and December 31, 2013.
 
(2,601
)
 
(2,601
)
Total stockholders’ equity (deficit)
 
59,275

 
(32,999
)
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)
 
$
75,957

 
$
31,575







101



Trupanion, Inc.
Condensed Statements of Comprehensive Loss
(Parent Company Only)
(In thousands)

 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Expenses:
 
 
Claims expenses
 
$
240

 
$
187

 
$
77

Other costs of revenue
 
79

 
46

 
31

Sales and marketing
 
553

 
677

 
428

Technology and development
 
528

 
391

 
268

General and administrative
 
4,108

 
1,131

 
887

Total expenses
 
5,508

 
2,432

 
1,691

Operating loss
 
(5,508
)
 
(2,432
)
 
(1,691
)
Interest expense
 
6,726

 
609

 
535

Other (income) loss
 
(1,575
)
 
630

 
208

Loss before equity in undistributed earnings of subsidiaries
 
(10,659
)
 
(3,671
)
 
(2,434
)
Equity in undistributed earnings of subsidiaries
 
(10,518
)
 
(4,504
)
 
(3,976
)
Net loss
 
$
(21,177
)
 
$
(8,175
)
 
$
(6,410
)
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
Other comprehensive income (loss) of subsidiaries
 
175

 
(22
)
 
(69
)
Other comprehensive income (loss)
 
175

 
(22
)
 
(69
)
Comprehensive loss
 
$
(21,002
)
 
$
(8,197
)
 
$
(6,479
)
































102




Trupanion, Inc.
Condensed Statements of Cash Flows
(Parent Company Only)
(In thousands)

 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Operating activities
 
 
Net loss
 
$
(21,177
)
 
$
(8,175
)
 
$
(6,410
)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
 
 
 
 
 
 
Loss attributable to equity method investments
 
10,518

 
4,504

 
3,976

Depreciation and amortization
 
67

 
37

 

Amortization of debt discount and prepaid loan fees
 
5,033

 
36

 
11

Stock-based compensation expense
 
4,084

 
1,938

 
1,434

Loss on disposal of equipment
 

 
52

 

Warrant expense
 
(1,574
)
 
543

 
200

Changes in operating assets and liabilities:
 
 
 
 
 
 
Prepaid expenses and other assets
 
(339
)
 
(64
)
 
(11
)
Accounts payable
 
889

 
1,840

 
538

Accrued liabilities
 
(84
)
 
206

 

Net cash (used in) provided by operating activities
 
(2,583
)
 
917

 
(262
)
Investing activities
 
 
 
 
 
 
Purchases of property and equipment
 
(243
)
 
(65
)
 
(33
)
Advances to subsidiaries
 
(22,209
)
 
(9,455
)
 
(6,910
)
Equity method investment
 

 

 
(249
)
Net cash used in investing activities
 
(22,452
)
 
(9,520
)
 
(7,192
)
Financing activities
 
 
 
 
 
 
Restricted cash
 
3,000

 
(3,000
)
 

Other financing costs
 
(103
)
 

 

Issuance of preferred stock
 

 

 
6,922

Net Proceeds from IPO
 
72,755

 

 

Issuance (settlement) of forward contract
 

 

 
(52
)
Purchase of treasury stock
 

 

 
(2,327
)
Deferred financing costs
 

 
(56
)
 

Redemption of preferred stock
 

 

 
(2,727
)
Proceeds from exercise of stock options
 
211

 
607

 
458

Proceeds from line of credit and debt financing
 
17,000

 
15,000

 

Repayment of debt financing
 
(32,000
)
 
5,000

 

Net cash provided by financing activities
 
60,863

 
17,551

 
2,274

Effect of foreign exchange rates on cash, net
 
175

 
(22
)
 
(69
)
Net increase (decrease) in cash and cash equivalents
 
36,003

 
8,926

 
(5,249
)
Cash and cash equivalents at beginning of year
 
9,039

 
113

 
5,362

Cash and cash equivalents at end of year
 
$
45,042

 
$
9,039

 
$
113

Supplemental disclosures
 
 
 
 
 
 
Noncash investing and financing activities:
 
 
 
 
 
 
Income taxes paid
 
(9
)
 

 

Interest paid
 
(1,494
)
 
(642
)
 
(570
)
Warrants issued in conjunction with debt issuance
 
1,124

 
3,806

 
18

Exchange of stock and intangible asset for equity method investment
 

 
448

 
(250
)
Cashless exercise of preferred stock warrants
 
1,270

 

 

Common stock warrant reclassification to equity
 
3,180

 

 



103



1. Organization and Presentation
The accompanying condensed financial statements present the financial position, results of operations and cash flows for Trupanion, Inc. These condensed unconsolidated financial statements should be read in conjunction with the consolidated financial statements of Trupanion, Inc. and its subsidiaries and the notes thereto (the Consolidated Financial Statements). Investments in subsidiaries are accounted for using the equity method of accounting.
Additional information about Trupanion, Inc.’s accounting policies pertaining to intangible assets, commitments and contingencies, debt financing, stock-based compensation, and stockholders’ equity are set forth in Notes 4, 8, 10, 11 and 12, respectively, to the Consolidated Financial Statements


104

Exhibit 10.10
SEVENTH AMENDMENT
TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This Seventh Amendment to Amended and Restated Loan and Security Agreement is made and entered into as of December 19, 2014 (the “ Amendment ”) by and among SQUARE 1 BANK (“ Bank ”) and TRUPANION, Inc. and TRUPANION MANAGERS USA, Inc. (each a “ Borrower ”, and collectively “ Borrowers ”).
RECITALS
Borrowers and Bank are parties to that certain Amended and Restated Loan and Security Agreement dated as of August 24, 2012 (as amended from time to time, the “ Agreement ”). The parties desire to amend the Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1)
Bank and Borrower hereby agree that Borrower shall no longer be required to maintain the Cash Security Account (as such term is defined immediately prior to the date of this Amendment), and Bank hereby releases its security interest in any Cash balances previously maintained in such account.

2)
Section 2.1(c) of the Agreement is hereby deleted in its entirety.

3)
Section 2.1(d) of the Agreement is hereby deleted in its entirety.
 
4)
Section 2.3(a)(ii) of the Agreement is hereby deleted in its entirety.
 
5)
Section 4.4 of the Agreement is hereby deleted in its entirety.

6)
Section 6.7(d) of the Agreement is hereby amended and restated, as follows:

(d)      Maximum EBITDA Loss/Minimum EBITDA. Measured monthly and calculated on a trailing three-months basis, Borrowers’ consolidated EBITDA loss shall not exceed the amounts set forth in the table immediately below for the corresponding reporting periods.
Reporting Period Ending
Maximum EBITDA Loss
September 30, 2014
($6,275,000)
October 31, 2014
($6,090,000)
November 30, 2014
($5,400,000)
December 31, 2014
($5,139,000)

EBITDA levels for subsequent reporting periods will be set by Bank based upon the board approved, fully-funded operating plan to be provided by Borrowers pursuant to Section 6.2(viii).
7)
Section 6.12 of the Agreement is hereby deleted in its entirety.

8)
Section 8.2(a) of the Agreement is hereby amended and restated, as follows:

(a)     If a Borrower fails to perform any obligation under Sections 6.2, 6.4, 6.5, 6.6, 6.7, or 6.10 or violates any of the covenants contained in Article 7 of this Agreement;

9)
The following defined terms set forth in Exhibit A to the Agreement are hereby amended and restated, as follows:

“Credit Extension” means each Advance or any other extension of credit by Bank to or for the benefit of a Borrower hereunder.

“Revolving Line” means a Credit Extension of up to $20,000,000 (inclusive of any amounts outstanding under the Ancillary Services Sublimit).

“Revolving Maturity Date” means July 23, 2016; provided, however, that the Revolving Maturity Date will be automatically renewed for an additional 12 month period, unless Bank provides Borrower written notice that it will not extend the Revolving Maturity Date at least 11 months prior to the then current Revolving Maturity Date.





10)
The defined terms “Availability End Date”, “Cash Security Account” and

11)
“Term Loan Maturity Date” and their associated definitions set forth in Exhibit A to the Agreement are hereby deleted in their entirety.
 
12)
Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Each Borrower ratifies and reaffirms the continuing effectiveness of all agreements entered into in connection with the Agreement.

13)
Each Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment.

14)
This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

15)
As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following:
a)
this Amendment, duly executed by each Borrower;
b)
an officer’s certificate of each Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Amendment;
c)
an Affirmation of Guarantee and Security, duly executed by Trupanion Brokers Ontario, Inc.;
d)
an Affirmation of Guarantee and Security, duly executed by Trupanion Canadian Shareholders, Ltd.;
e)
Second Amended and Restated Intellectual Property Security Agreements, duly executed by each Borrower;
f)
payment of a $25,000 facility fee, which may be debited from any of Borrowers’ accounts;
g)
payment of all Bank Expenses, including Bank’s expenses for the documentation of this amendment and any related documents, and any UCC, good standing or intellectual property search or filing fees, which may be debited from any of Borrowers’ accounts; and
h)
such other documents and completion of such other matters, as Bank may reasonably deem necessary or appropriate.


[Remainder of page intentionally left blank]




IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written.

TRUPANION, Inc.

By: /s/ Darryl Rawlings                         
Name: Darryl Rawlings                         
Title: President and CEO                         


TRUPANION Managers USA, Inc.

By: /s/ Darryl Rawlings                         
Name: Darryl Rawlings                         
Title: President and CEO                         


SQUARE 1 BANK

By: /s/ Michael Fulton                         
Name: Michael Fulton                         
Title: AVP                         




[Signature page to Seventh Amendment
to Amended and Restated Loan and Security Agreement]





Exhibit 10.13

*
Confidential Treatment has been requested for the marked portions of this exhibit pursuant to Rule 24B-2 of the Securities Exchange Act of 1934, as amended.

Agency Agreement

Between

Omega General Insurance Company
34 King Street East, Suite 1200
Toronto, Ontario M5C 2X8

hereinafter called “ The Company

And

Trupanion Brokers Ontario, Inc.
PO Box 34538, 1268 Marine Drive
North Vancouver, British Columbia V7P 1T2

hereinafter called “ The Broker


ARTICLE I
Appointment

Whereas The Company and Wyndham Insurance Company (SAC) Limited, in respect of its Segregated Account AX (“ Wyndham ”) have entered into a separate Fronting and Administration Agreement (“ FAA ”) effective January 1, 2015, The Company hereby appoints the Broker, subject to all the terms and conditions herein, all of the insurance laws and other laws applicable to insurance companies and insurance brokers of each province and territory of Canada (“ Provincial Insurance Laws ”) and to any limitations, underwriting rules and procedural instructions issued by The Company. It is understood and agreed that this appointment is solely for the purpose of selling policies of insurance as contemplated under the FAA and other related insurance as may be mutually agreed by the parties to this agreement. The Broker shall not hold itself out as having the power to bind or obligate The Company in any manner whatsoever except for the purpose set out herein.

The Broker has read and fully understands the contents, terms, conditions and covenants of the FAA and agrees to be bound by FAA as it relates to the Broker and the business of the Broker.


ARTICLE II
Accounts

1. The Broker agrees to submit to The Company monthly statements in the required format, reporting all policies in numerical order; a record of all premiums due; and such other reports as The Company may reasonably request pertaining to its business in force or expired. The Broker shall forward statements due to The Company no later than 15 calendar days following the end of each month in which the business is recorded at its offices. If no sale is made during the month, a “ Nil ” report must be submitted. Commissions and other remuneration shall be determined by agreement and may be subject to change from time to time. The initial commission is set out in the attached Exhibit 1.

2. All monies received or collected by the Broker on behalf of The Company, less The Broker’s commissions, and any other amounts agreed to herein shall be the property of The Company, and shall be held by The Broker in trust for The Company. The Broker shall not use the funds or apply them for other purposes, except as contained in this agreement, unless otherwise approved by The Company in writing.








ARTICLE III
Records

1. All records of The Broker pertaining to the business of The Company shall be open to inspection by The Company at any reasonable time and at The Company’s expense, for the purpose of determining any fact related to money due The Company, or the status of business placed with The Company by The Broker. Except for forms, manuals, advertising and other materials that may be supplied to The Broker by The Company, at its option and in the ordinary course of business, or as otherwise provided in this agreement or the agreements referenced in this agreement, in all cases as amended from time to time, The Broker shall bear all the cost and expense of operating its business.

2. Ownership, use and control of all customer lists and records shall remain the property of The Broker and shall not be used by The Company without the express written permission of The Broker, except (a) to the extent required by law, or (b) in the event of any failure on the part of Wyndham to meet its obligations to The Company. If customer lists and/or records of The Broker are used by The Company pursuant to Section 2(a) or (b), such use will only be for the purposes of operating the Business (as defined in the FAA) and not to compete with the Broker and/or its affiliates.


ARTICLE IV
Sub Agents

The Broker shall have the sole responsibility of appointing or removing other agencies, brokers and producers with respect to the Business, as defined in the FAA. The Company reserves the right to require that any such appointments be cancelled with or without cause, provided that such requests are reasonable and in good faith in carrying out The Company’s obligations pursuant to this agreement and the FAA, on 30 days notice and The Company shall be relieved of all liability hereunder. Any sub agents or affiliated agents will be expected to conform their agreement to the terms and conditions of this Agreement.


ARTICLE V
Termination

1. It is expressly understood and agreed that The Company and The Broker have mutually agreed to the premiums and coverages assigned to the Business (as defined in the FAA) and that neither party has the authority to change unilaterally the premium or coverage terms.

2. This Appointment may be terminated by in accordance with the termination provisions of the FAA. Upon termination by either party, each party shall return to the other party all documents and supplies in their possession and pertaining to the Business (as defined in the FAA) that are the property of the other party, if any, along with any monies due to the other party, if any.


ARTICLE VI
Administration

1. The Broker, after deducting The Broker’s agreed commission as compensation, will remit all remaining premiums to The Company by the 30th day of the month following the month in which the transactions are recorded at its offices.

2. The Company located at 34 King Street East, Suite 1200, Toronto, Ontario M5C 2X8 will receive all premiums from The Broker, and will validate and process all entries of premium as required herein.

 
ARTICLE VII
Service of Suit

The Broker may not accept service of legal process issued against The Company in respect of any of the business hereunder.











ARTICLE VIII
Indemnity

1. It is expressly understood and agreed that in order to comply with the Provincial Insurance Laws, The Broker, and any sub agents or brokers representing the Business (as defined in the FAA) , when required by law or regulation, shall be in possession of a valid Insurance License appointment in each Province or Territory of Canada where it solicits business as the case may be. Also, the Broker shall indemnify and hold The Company harmless against liability to policy or certificate holders caused solely by acts or omissions of negligence or fraud by The Broker in processing authorized business for The Company.
 
2. The Company shall hold The Broker harmless from any civil liability resulting from The Company’s acts or omissions in services performed under this Agreement. Such indemnification shall include reasonable legal fees incurred in connection with the investigation or defense against any claim. Upon receiving notice of any claim that could be covered by this section, The Broker shall notify The Company promptly.
 

ARTICLE IX
Arbitration

1. In the event that any dispute arises between the parties signatory to this agreement, whether such dispute arises during or after the term of this agreement, and as a precedent to any right of action hereunder a meeting will be held between representatives of each of the parties with decision making authority to settle the dispute. At the meeting the parties will attempt in good faith to negotiate an informal resolution of the dispute. If the dispute is not resolved through negotiation within 10 Business Days the parties hereby agree to submit their dispute to Arbitration. Upon the written request of either party to the dispute the parties shall select an arbitrator from among persons with not less than 10 years experience in the insurance or reinsurance business, as persons engaged in the industry itself or as lawyers or other professional advisors, or as otherwise agreed by the parties. If the parties are unable to agree on an arbitrator within 30 days after receipt of written notice from the other party requesting it to do so then either party may proceed pursuant to the Arbitration Act, 1991 (Ontario) to have an arbitrator appointed.

2. The arbitrator shall interpret this agreement as an honourable engagement and not as a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law, and they shall make their award with a view to effecting the general purpose of this agreement in a reasonable manner rather than in accordance with a literal interpretation of the language. Each party shall submit its case to the arbitrator within 30 days of the appointment of the arbitrator.

3. The arbitrator, so far as is permissible under the law and practice of the place of arbitration, shall have power to fix all procedural rules for the holding of the arbitration including discretionary power to make orders as to any matters which it may consider proper in the circumstances of the case with regard to pleadings, discovery, inspection of the documents, examination of witnesses and any other matter whatsoever relating to the conduct of the arbitration and may receive and act upon such evidence whether oral or written strictly admissible or not as it shall in its discretion think fit.

4. The decision in writing of the arbitrator shall be final and binding on both parties. Judgement may be entered upon the final decision of the arbitrator in any court in Canada having jurisdiction. The arbitrator shall determine who pays the expense of the arbitration. The arbitration will take place in Toronto, Ontario, Canada, or such other venue in Ontario, Canada as determined by the arbitrator.

[signature page follows]





Signed and accepted by the parties to this Agency Agreement.


SIGNED this 30th day of December , 20 14 ;
OMEGA GENERAL INSURANCE COMPANY

/s/ Philip H. Cook     
By: Philip H. Cook, CEO

SIGNED this 30th day of December , 20 14 ;
TRUPANION BROKERS ONTARIO, INC.

/s/ Darryl Rawlings     
By:














































EXHIBIT 1 - Commissions



Regular Commission: [*]% to be deducted by The Broker from the gross premium charged to the policyholders, before sending the balance to The Company in accordance with Article VI of this Agreement.

* Confidential Treatment Requested.




Exhibit 10.14


*
Confidential Treatment has been requested for the marked portions of this exhibit pursuant to Rule 24B-2 of the Securities Exchange Act of 1934, as amended.


THIS FRONTING AND ADMINISTRATION AGREEMENT is made effective January 1, 2015

Between:


WYNDHAM INSURANCE COMPANY (SAC) LIMITED (“WYNDHAM”),
in respect of its Segregated Account AX, a Bermuda regulated Insurance Company

and

OMEGA GENERAL INSURANCE COMPANY (“Omega”)
a Canadian regulated Insurance Company


WHEREAS:
 
(A) WYNDHAM is a Bermuda domiciled and regulated insurer operating under the Segregated Accounts Companies Act 2000 that has created a distinct Segregated Account on behalf of Trupanion, Inc., a Delaware corporation and its affiliates (“ Trupanion ”), in order to reinsure Canadian pet health insurance business sourced, underwritten and managed by a wholly-owned subsidiary of Trupanion (the “ Program ”) for eligible policyholders but Wyndham is not currently a licensed insurance company in Canada;

(B) Omega, an insurance company duly licensed to carry out business in each province and territory of Canada, has agreed to act as a participating fronting company for the Program and has entered into a Quota Share Reinsurance Agreement in the form attached hereto as Exhibit “A” (the “ Reinsurance Agreement ”) with WYNDHAM;

(C) A Broker as defined herein has been appointed by Omega to act as the broker of record for the Program and has entered into an Agency Agreement with Omega in the form attached hereto as Exhibit “B” (the “ Agency Agreement ”); and,

(D) The parties wish to confirm the basis on which the Program will be underwritten, administered and managed.
 

Now it is hereby agreed as follows:
 

1


Section 1 - Definitions
 
In this Agreement and in the exhibits and schedules attached hereto, the following terms and expressions will have the following meanings:
 
Agreement means this Agreement as amended from time to time.

Broker means a brokerage company or a managing general agent approved by WYNDHAM and Omega that has entered into an Agency Agreement with Omega in the form attached as Exhibit ”B” and that has agreed to comply with the terms hereof as it applies to the Broker.
 
Business means the business of writing insurance policies as part of the Program for Omega in its capacity as fronting insurer for WYNDHAM.

Business Day means a day (other than a Saturday, Sunday or statutory holiday) on which banks are open for the transaction of general banking business in Toronto.
 
Confidential Information means all information obtained by a party as a result of negotiating and entering into this Agreement; and all financial or other information received by a party pursuant to this Agreement in respect of the Program.

Claim means, in relation to the Business, the notification by the insured of an actual or potential claim.
 
Regulatory Action means any order of a court of competent jurisdiction; or any order made, decision given or final view expressed by a competent national, governmental or regulatory authority or agency; or any enactment of a legislative body that prohibits or restricts to a material extent the carrying on of the Business or the arrangements contemplated by this Agreement; or in consequence of which any of the parties would incur fines or a liability in damages were this Agreement to be performed in accordance with its terms.
 
Superintendent means the Superintendent of Financial Institutions Canada.
 
Taxation means all forms of taxation and statutory, governmental, federal, provincial, local or municipal governmental impositions, duties, contribution and levies and all penalties, charges, costs and interest relating thereto.

Section 2 – Recitals and General Matters

References to Recitals, Clauses, Schedules and parties are, except where otherwise provided, to Recitals, Clauses, Schedules or parties to this Agreement.

The Schedules form part of this Agreement and have the same force and effect as if set out in the body of this Agreement.
 

2


The sections and headings hereto are inserted for convenience only and shall not affect the construction of this Agreement.
 
References to WYNDHAM, Omega, or the Broker or any of them mean and include their respective successors in title and permitted assigns.
 
Where the context so admits, references to the singular shall be deemed to include the plural and vice versa.

Section 3 - Appointment of Omega to write Fronting Insurance:
 
WYNDHAM hereby appoints Omega to underwrite and/or bind and/or issue policies in the name of Omega with respect to the Business pursuant to the Program in accordance with the terms of this Agreement provided that all Underwriting Guidelines and/or decisions are acknowledged to remain under the control of WYNDHAM; and to administer the Business as provided herein.


Section 4 - Appointment of Broker of Record:
 
Omega and the Broker shall enter into an Agency Agreement in the form attached hereto as “Exhibit B” with respect to the Program. The Broker shall act as broker of record with respect to the Program and shall be paid commissions with respect to the Business as agreed to pursuant to the Agency Agreement. The Broker shall receive each premium payment as the agent of Omega and shall hold all premiums in a trust account.


Section 5 - Underwriting:
 
Omega shall issue policies using forms and rates approved by WYNDHAM as provided in the Underwriting Guidelines provided in “Exhibit C” (“Underwriting Guidelines”) attached hereto.

Omega shall at all times follow the Underwriting Guidelines and decisions of WYNDHAM with respect to the Program.


Section 6 - Claims:
 
Omega shall manage and perform the administration of the Business and the negotiation and settlement of Claims hereunder, and in doing so, shall act on behalf of WYNDHAM. Omega shall at all times follow the claims handling procedures of WYNDHAM as provided in “Exhibit D” attached hereto. Omega shall immediately notify WYNDHAM of all claims and provide for a full right of consultation regarding the handling of them.


3


WYNDHAM shall ensure that, at all times, sufficient funds are provided to Omega to enable all obligations under or in relation to the Business to be met as and when they fall due pursuant to the terms of the Reinsurance Agreement.
 
In the event of the termination of this Agreement, WYNDHAM shall have the right to assume responsibility for the handling of all claims with respect to the Program. Omega agrees to follow all decisions made by WYNDHAM with respect to all claims made under the Program under such circumstances.
 
Any and all funds provided by WYNDHAM pursuant to the Reinsurance Agreement shall, until physically disbursed to or on behalf of the relevant insured, be held by Omega in trust for WYNDHAM.

 
Section 7 - Accounts and Information:

Omega and the Broker agree to provide accounting and other information to WYNDHAM in the form and in the manner that may be reasonably required by WYNDHAM from time to time.
 
Omega and the Broker shall keep, in such forms as may be agreed from time to time with WYNDHAM, books, records, underwriting statistics and accounts of all transactions under this Agreement.

WYNDHAM may, subject to any confidentiality obligations, at any reasonable time and on reasonable notice appoint its officers, employees, agents, and/or auditors to inspect, examine and verify at the offices of Omega and the Broker (and to take copies of such books and records) all such accounts, records, books, vouchers, correspondence and papers relating to any of the functions performed by the relevant party under this Agreement insofar as they relate to the Program and the affairs of WYNDHAM, including the application of any money belonging to WYNDHAM paid or received by the relevant party pursuant to this Agreement; and Omega shall whenever reasonably required at any time during normal business hours give such officers, employees, servants or agents of WYNDHAM access to its and/or Broker’s offices for such purposes.

WYNDHAM undertakes to agree to supply, to the extent permissible under any applicable law or regulatory requirements, such information as Omega or the Broker shall reasonably request from time to time in order to facilitate the management of the Business.
 

Section 8 - Relationship between the Parties:
 
Nothing in this Agreement shall create or constitute a partnership between the parties hereto or any of them nor, save as expressly provided herein, constitute any one the agent of another and no party shall do or suffer anything to be done whereby it shall or may be represented that it is the partner or agent of any other party hereto (save as aforesaid) unless such party is appointed partner or agent of another party subject to the written consent of every other party to this Agreement.
 


4


Section 9 - Term:

Unless earlier terminated in accordance with the provisions of Sections 10 or 11 hereof, the initial term of this Agreement shall be for a period of thirty-six (36) months, commencing on January 1 st , 2015 (the “Effective Date”) and ending on December 31 st , 2017 (the “Initial Term”).
 
During the Initial Term either WYNDHAM or Omega may terminate this Agreement by providing one (1) years prior written notice to the other parties, to take effect at a calendar month end.

At the completion of the Initial Term, this Agreement shall be automatically renewed for a minimum of one (1) year terms provided that any party may terminate this Agreement at any time after the end of the Initial Term by providing one (1) years prior written notice to the other parties, to take effect at a calendar month end.


Section 10 - Termination:
 
For the purposes of this Clause 10, a Trigger Event shall be deemed to have occurred with respect to Omega or WYNDHAM if:
 
(a) It ceases to be duly authorized, or licensed as an insurance company (or has any suspension, restriction or other limitation imposed in respect of its authority, licence, approval or permission), in the jurisdiction in which it is incorporated or has its principal place of business (home jurisdiction);

(b) It goes into liquidation whether compulsorily or voluntarily (other than a voluntary and solvent liquidation for the purpose of reconstruction or amalgamation pursuant to a scheme previously agreed between the parties);

(c) It enters into any composition with its creditors generally or suffers any similar action in consequence of default by it in its obligations in respect of any indebtedness for borrowed moneys; or an administration order shall be made in respect of such party;

(d) It stops or threatens to stop payment or ceases or threatens to cease to carry on its business (otherwise than in connection with or in pursuance of a winding-up for the purpose of a reconstruction or amalgamation pursuant to a scheme previously agreed between the parties) or is deemed to be unable to pay its debts; or,
 
(e) It has an administrative receiver or other receiver or other similar official appointed over all (or substantially all) of its undertaking and assets.
 
Notwithstanding Section 9, in the event that a Trigger Event occurs in relation to either Omega or WYNDHAM, the other party may suspend entirely with immediate effect the operation of the Program.
 
If this Section 10 applies, Omega will not (and will not have any authority to), and will ensure that the Broker does not and/or have any authority to:

5



(a) Accept new policies with respect to the Business;

(b) Provide quotations or enter into (or continue) any negotiations relating to the possible acceptance of new policies with respect to the Business; and/or,
 
(c) Agree to any amendments to the terms of or otherwise agree to any endorsements to any policy with respect to the Business that would, or be reasonably likely to, increase materially the gross exposure of Omega and WYNDHAM under the policy in question.

Each party shall notify the other parties upon becoming aware of a Trigger Event in relation to Omega or WYNDHAM at any time.

Suspension and/or termination of the authority granted pursuant to this Agreement in whatever manner shall in no way affect or limit any accrued rights any party to this Agreement may have against the other pursuant to this Agreement or any rights expressly stated to survive termination of this Agreement.
Notwithstanding anything in this Agreement to the contrary if one party is in default of this Agreement and if such default is capable of being cured the non defaulting party shall give written notice of the default in reasonable detail to the defaulting party who shall be given a reasonable amount of time to cure such default prior to the non defaulting party terminating this Agreement for such default.

Section 11 – Early Termination and Transfer of Business:
 
In the event that Trupanion and/or any ’now existing and/or newly formed subsidiary or affiliate of Trupanion becomes a licensed insurance company in Canada (a “Canadian Licensing Event”), WYNDHAM may terminate this Agreement upon three (3) months written notice to Omega, to take effect at a calendar month end.

In the event of a Canadian Licensing Event’, Omega shall have the right to require a transfer of the run-off of the Business from Omega to the Trupanion licensed Canadian insurance company(ies) pursuant to a Transfer and Assumption Agreement, subject to any applicable regulatory approval. A transfer of the Business shall be conditional upon Omega reaching agreement with all required parties as respect to the amount of reserves to be transferred, which agreement will be negotiated in good faith between the parties on commercially reasonable terms and not unreasonably delayed.
 

Section 12 – Confidentiality:

Each party hereto shall protect and safeguard the confidentiality of all Confidential Information with at least the same degree of care as the Recipient would protect its own Confidential Information, but in no event with less than a commercially reasonable degree of care, shall not use the disclosing party’s Confidential Information, or permit it to be accessed or used, for any purpose other than in connection with the transactions related to operating the Program within Canada that are contemplated by this

6


Agreement, or otherwise in any manner to the disclosing party’s detriment and shall not divulge to any other party or any third party any Confidential Information nor make any public or press announcement regarding this Agreement or matters connected therewith.

Notwithstanding the provisions of this Section 12, any party may disclose Confidential Information in compliance with the succeeding paragraph:

(a) In respect of any party to any other party with the prior written consent of the first party (such consent not to be unreasonably withheld or delayed);

(b) If and to the extent required by law or for the purpose of any judicial proceedings;
 
(c) If and to the extent required by any securities exchange or regulatory or governmental body or tax authority to which that party is subject, wherever situated; and,

(d) To its professional advisers, auditors and bankers who are subject to confidentiality duties or obligations disclosing party that are no less restrictive than the terms and conditions of this Agreement.
 
Any disclosure of Confidential Information pursuant to subsection (b) or (c) pursuant to the preceding paragraph will be subject to this paragraph. Prior to making any such disclosure, the disclosing party shall use best efforts to provide the disclosing party with (i) prompt written notice of such requirement to the party owning such Confidential Information to enable such party to seek a protective order or other remedy, and (ii) reasonable assistance in opposing such disclosure or seeking a protective order or other limitations on disclosure; provided , however , that no advance notice under (i) will be required with respect to any disclosures that a party reasonably determines are being made in the ordinary course of business and that do not either involve (A) Confidential Information of a sensitive or significant nature, or (B) situations where the disclosure of the disclosed information could adversely affect the business of the party originally disclosing such Confidential Information pursuant to this Agreement.
If, after providing such notice and assistance as required herein, the disclosing party remains subject to a valid order issued by a court or governmental agency of competent jurisdiction to disclose any Confidential Information (a “ Legal Order ”), the Recipient shall disclose, and, if applicable, shall require its representatives or other persons to whom such Legal Order is directed to disclose, no more than that portion of the Confidential Information that, on the reasonable advice of the disclosing party’s legal counsel, such Legal Order specifically requires and shall use commercially reasonable efforts to obtain assurances from the applicable court or governmental agency, as applicable, that such Confidential Information will be afforded confidential treatment.
Notwithstanding this Section 12, each party shall be entitled to provide extracts of this Agreement to such banks, reinsurers, brokers and insurance regulators as it reasonably deems necessary for the purpose of carrying out the Business.

Each party shall comply with all applicable federal and provincial privacy laws.


7


The provisions of this Section 12 shall remain in full force and effect notwithstanding the termination of this Agreement and each party shall remain bound by the provisions of this Section 12 for a period of five years following the termination of this Agreement.


Section 13 – Undertakings:
 
WYNDHAM and Omega shall, and Omega will cause Broker to, use all reasonable care and skill in the performance of their respective obligations under this Agreement and shall comply with all applicable laws relating thereto in all material respects.
 
Each party agrees, warrants and undertakes to the others that it has and will have all necessary consents, powers and authorities to enter into this Agreement in accordance with its terms.
 
Omega represents and warrants to WYNDHAM and the Broker that it is duly authorized and licensed to write the Business in Canada and Omega undertakes to take all reasonable steps to maintain such authorizations and licenses during the duration of this Agreement.

Omega undertakes to notify WYNDHAM and the Broker in writing as soon as reasonably practicable of any changes as to the authorizations and licenses which it has, or expects to obtain, from time to time.


Section 14 - Regulatory Matters:

The parties shall co-operate with each other to ensure that all information necessary or desirable for making any regulatory notification or filing in respect of this Agreement, or any agreement, arrangement or concerted practice of which it forms part (or responding to any requests for further information following any such notification or filing), is supplied timely to the party (including any third party) dealing with such notification or filing and that any such notification or filing is properly, accurately and promptly made.

The parties will each ensure that any other registrations, filings and/or submissions required under the laws or regulations of any jurisdiction in respect of the Agreement or the Business are made.


Section 15 - Waiver of Obligations:

Waiver by any party of any default by any other party in the performance of any obligation of such other party hereunder shall not affect such party’s rights in respect of any other default nor any subsequent default of the same or of a different kind nor shall any delay or omission of any party to exercise any right arising from any default affect or prejudice that party’s rights as to the same or any future default. Waiver by one party of any default by any other party shall not constitute a waiver of such default on the part of or on behalf of any other party.


8



Section 16 - Amendments and Representations:

Any amendment to any term of this Agreement shall be in writing and signed by the authorized representatives of the parties hereto.

This Agreement together with the Reinsurance Agreement and the Agency Agreement, including the exhibits and schedules hereto and thereto, set out the entire agreement and understanding between the parties in relation to the Business. It is agreed that no party has entered into this Agreement in reliance upon, or been induced to enter into this Agreement by, any representation, warranty or undertaking of any other party hereto (whether express or implied and whether pursuant to statute or otherwise) that is not set out in this Agreement,the Reinsurance Agreement or the Agency Agreement and to the extent that it may have done so, it hereby waives all rights, remedies and claims it may have in respect thereto.

A party may claim in contract for breach of warranty under this Agreement,the Reinsurance Agreement or the Agency Agreement but shall otherwise have no claim or remedy in respect of misrepresentation (whether negligent or otherwise, and whether made prior to, and/or in, this Agreement) or untrue statement made by any other party, provided that this Section 14 shall not exclude any liability for, or remedy in respect of any fraud including, without limitation, fraudulent misrepresentation by any party.


Section 17 – Assignment:

No party shall sell, transfer or encumber all or any of its rights or obligations under this Agreement without the prior written consent of all the other parties.


Section 18 - Notices and Communications:

Notices under this Agreement shall be sent to a party at its address and for the attention of the individual set out in Section 19 provided that a party may change its notice details on giving written notice to the other parties of the change. That notice shall only be effective on the date falling five clear Business Days after the notification has been received or such later date as may be specified in the notice.

All notices or other communications required for the purposes of this Agreement shall be in English and shall be given or sent by hand, facsimile, registered mail or courier to the parties and shall be deemed to be received: (i) if given by hand, at the time of delivery; or (ii) if sent by facsimile; at the time when the sender receives from the recipient facsimile machine or from the addressee of the notice confirmation of receipt of the whole of the facsimile; or (iii) if sent by registered mail, 24 hours after confirmation of delivery; or (iv) if sent by courier, 24 hours after the date of delivery by the courier company.



9


Section 19 – Addresses:

Notices under this Agreement shall be sent to the following addresses or facsimile numbers for the attention of the person indicated:


a) if to WYNDHAM:    Swan Building, 2nd Floor
26 Victoria Street HM 12
BERMUDA
Attention William Wood COO


With a copy sent to:    907 NW Ballard Way
Seattle, WA 98107
USA
Attention: Regulatory and Legal Compliance

b) if to Omega:     34 King Street East, Suite 1200
Toronto, Ontario, M5C 2X8
CANADA
(Attention: President or CEO)


Different persons may be authorized to give or receive instructions for different purposes, and such persons may include officers of corporations other than the parties hereto, authorized in that regard by the board of the relevant party.

A certified copy of a resolution of the board of Omega or WYNDHAM or the Broker may be received and accepted by either party as conclusive evidence of the authority of any person to act and may be considered in full force and effect until receipt of written notice to the contrary.


Section 20 - Governing Law:

This Agreement and the relationship between the parties shall be governed by and interpreted in accordance with the law of the Province of Ontario, Canada.


Section 21 – Enforceability:

If any provision of this Agreement or any part thereof:
 
(a) Purports to exclude, restrict or limit any liability and such exclusion, restriction or limitation is prohibited, rendered void or unenforceable by any legislation to which it is subject;


10


(b) Is itself prohibited, rendered void or unenforceable by any legislation to which it is subject, then the exclusion, restriction or limitation or the provision or part thereof in question shall be so prohibited or rendered void or unenforceable to the extent to which it is thus prohibited or rendered void or unenforceable and the validity or enforceability of any other part of this Agreement shall not thereby be affected.


Section 22 – Arbitration:

(a) In the event that any dispute arises between the parties signatory to this agreement, whether such dispute arises during or after the term of this agreement, and as a precedent to any right of action hereunder a meeting will be held between representatives of each of the parties with decision making authority to settle the dispute. At the meeting the parties will attempt in good faith to negotiate an informal resolution of the dispute. If the dispute is not resolved through negotiation within 10 Business Days the parties hereby agree to submit their dispute to Arbitration. Upon the written request of either party to the dispute the parties shall select an arbitrator from among persons with not less than 10 years experience in the insurance or reinsurance business, as persons engaged in the industry itself or as lawyers or other professional advisors, or as otherwise agreed by the parties. If the parties are unable to agree on an arbitrator within 30 days after receipt of written notice from the other party requesting it to do so then either party may proceed pursuant to the Arbitration Act, 1991 (Ontario) to have an arbitrator appointed.

(b) The arbitrator shall interpret this agreement as an honourable engagement and not as a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law, and they shall make their award with a view to effecting the general purpose of this agreement in a reasonable manner rather than in accordance with a literal interpretation of the language. Each party shall submit its case to the arbitrator within 30 days of the appointment of the arbitrator.

(c) The arbitrator, so far as is permissible under the law and practice of the place of arbitration, shall have power to fix all procedural rules for the holding of the arbitration including discretionary power to make orders as to any matters which it may consider proper in the circumstances of the case with regard to pleadings, discovery, inspection of the documents, examination of witnesses and any other matter whatsoever relating to the conduct of the arbitration and may receive and act upon such evidence whether oral or written strictly admissible or not as it shall in its discretion think fit.

(d) The decision in writing of the arbitrator shall be final and binding on both parties. Judgment may be entered upon the final decision of the arbitrator in any court in Canada having jurisdiction. The arbitrator shall determine who pays the expense of the arbitration. The arbitration will take place in Toronto, Ontario, Canada, or such other venue in Ontario, Canada as determined by the arbitrator.



11


Section 23 – Counterparts:

This Agreement may be executed in any number of counterparts and by the parties to it on separate counterparts and by facsimile transmission, each of which is an original but all of which together constitute one and the same instrument.
 

12


IN WITNESS WHEREOF this FRONTING AND ADMINISTRATION AGREEMENT has been signed by and on behalf of the parties.
  

SIGNED this 30th day of December , 20 14 ;
OMEGA GENERAL INSURANCE COMPANY

/s/ Philip H. Cook    
By: Philip H. Cook, CEO

SIGNED this 30th day of December , 20 14 ;
WYNDHAM INSURANCE COMPANY (SAC) LIMITED, in
respect of its Segregated Account AX

/s/ Andrew McComb    
By:

IN HAMILTON, BERMUDA



13


Exhibit A

Reinsurance Agreement

14







AGREEMENT NUMBER: 2015003
QUOTA SHARE REINSURANCE AGREEMENT
made between
OMEGA GENERAL INSURANCE COMPANY
A company organized and existing under the laws of Canada
(hereinafter referred to as the “Reinsured”)
and
WYNDHAM INSURANCE COMPANY (SAC) LIMITED,
in respect of its Segregated Account AX,
a company organized and existing under the laws of Bermuda
(hereinafter referred to as the “Reinsurer”)

WHEREAS: The parties to this Agreement having entered into a separate Fronting and Administration Agreement (herein referred to as the “ FAA ”) effective January 1, 2015 wherein the Reinsured is willing to cede, and the Reinsurer is willing to accept, certain risks underwritten by the Reinsured as contemplated under the FAA;
and
WHEREAS: The Reinsured has also entered into an Agency Agreement with the Broker as defined in the FAA;
and
WHEREAS: For and in consideration of the Premium specified in this Agreement being paid by the Reinsured to the Reinsurer and subject always to the terms and conditions of this Agreement, the Reinsurer agrees to indemnify the Reinsured as follows:
ARTICLE 1 INTEREST CLAUSE
This Agreement is to indemnify the Reinsured in respect of liability, which may accrue to them under any and all policies and/or contracts of insurance in respect of the business produced by the Broker and underwritten pursuant to the FAA, and in accordance with underwriting and claims handling guidelines set out therein. At no time shall the Reinsured accept or underwrite business not provided for in the FAA for this reinsurance.

15






ARTICLE 2 PERIOD CLAUSE
This Agreement is in respect of losses as herein defined pertaining to risks attaching during the period specified in the FAA.
ARTICLE 3 EXCLUSIONS
This Agreement follows the underlying coverage issued to the policyholders of the Reinsured in accordance with the FAA. For further clarity, this Agreement does not contain any exclusions or limitations not present in the underlying policies.
ARTICLE 4 REINSURING CLAUSE
A.
The Reinsurer hereby agrees to pay the Reinsured, in cash, an amount equal to 100% of any losses paid by the Reinsured on the subject portfolio, upon presentation of supporting documentation by the Reinsured. The calculation of losses shall include all reasonable costs and adjustment expenses paid by the Reinsured arising from the handling of claims, other than the overhead (including, without limitation, salaries of employees and office expenses) of the Reinsured.
B.
The Reinsurer will have the option of authorising the Reinsured to deduct amounts due under the above Article 4A from premium funds due to the Reinsurer, but in any event, the Reinsurer agrees to fund the paid losses either by “offset” or direct payment as soon as supporting documentation is received.
C.
The Reinsured undertakes to provide up-dated paid loss information on a monthly basis, no later than 30 days after the end of each month.
ARTICLE 5 FUNDING AND COLLATERAL
A.
The Reinsurer will provide the Reinsured with cash funding equal to the 100% of any outstanding losses incurred by the Reinsured on the subject portfolio, including 100% of any incurred but not reported (“ IBNR ”) losses, as they appear in the books and records of the Reinsured.
B.
The Reinsurer will have the option of authorising the Reinsured to deduct amounts due in the above Article 5A from premium funds due to the Reinsurer, but in any event, the Reinsurer agrees to fund the outstanding losses either by “offset” or direct payment as soon as supporting documentation is received.
C.
The Reinsured undertakes to provide up-dated outstanding loss information on a quarterly basis, no later than 45 days after the end of each calendar quarter.
D.
In addition to the cash funding required under Article 5A, the Reinsurer will provide the Reinsured with a Reinsurance Security Agreement (the “ RSA ”) in compliance with Canadian

16






regulations concerning unregistered reinsurance no later than March 31, 2015 and in substantially the form attached as Exhibit A, subject to any required changes of the custodian. The amount of funds under the RSA will be maintained at the greater of (a) $[*] and (b) [*]% of unearned premium plus [*]% of outstanding losses including IBNR losses, as they appear in the books and records of the Reinsured. All investment income generated by the funds in the RSA will accrue to the benefit of the Reinsurer.
E.
The funds under the RSA will be placed in a trust account at a Canadian bank or trust company acceptable to the Reinsured (the “ Reinsurance Trust Account ”). The Reinsurance Trust Account will not be less than the Minimum Value in the RSA and shall be adjusted quarterly as required by the RSA.
F.
In addition to the RSA funding required under Article 5D, the Reinsurer will maintain an additional capital amount of $[*]. Such capital shall be held in cash or securities within the Reinsurance Segregated Account as described in Addendum #1.
ARTICLE 6 TERRITORIAL LIMITATIONS
This Agreement is in respect of Business in Canada.
ARTICLE 7 PREMIUM CLAUSE AND UNLIMITED RECOURSE
The Reinsured hereby agrees to pay the Reinsurer a premium equal to 100% of the gross premium on the subject portfolio as charged to the policyholder. This premium shall be paid to the Reinsurer on a quarterly basis, forty-five (45) days following the end of each calendar quarter, or fifteen (15) days following the month in which the premium is received by the Reinsured, whichever is later. The Reinsurer also acknowledges that the Reinsured has agreed that the producing Broker may remit the subject premium directly to the Reinsurer and that such premiums are deemed to have been received by the Reinsurer when due. Failure on the part of the producing Broker to remit the premiums to the Reinsurer when due will not affect the Reinsured’s right to recover amounts due to it under this Agreement.
ARTICLE 8 CEDING COMMISSION
The Reinsurer will allow the Reinsured a “ Ceding Commission ” equal to the sum of:
A.
[*]% of the commission charged by the producing Broker, plus;
B.
[*]% of gross premium on the subject Business, representing reimbursement for premium taxes, plus;
*Confidential Treatment Requested.


17






C.
$[*] for the calendar year ended December 31, 2015, representing the Reinsured’s “ Fronting Fee ”.
The Fronting Fee component of the Ceding Commission is intended to represent approximately [*]% of gross premium on the estimated volume of subject Business. The Fronting Fee component of the Ceding Commission will be renegotiated annually, no later than 90 days prior to the calendar year end, or any time during the year when projected gross premiums on the subject Business vary by [*]% from the estimated volume of subject Business.
ARTICLE 9 CURRENCY CLAUSE
For the purpose of this Agreement all currencies are expressed in Canadian dollars. Any losses involving other than Canadian currency shall be converted into Canadian currency at the rates of exchange used in the Reinsured’s books, or where there is a specific remittance for a loss settlement, at the rates of exchange used in making such remittance.
ARTICLE 10 UNDERWRITING POLICY CLAUSE
It is a condition precedent to the Reinsurer’s liability hereunder that the Reinsured shall not introduce at any time after the Reinsured enters into this Agreement any change in the FAA without the prior written approval of the Reinsurer.
ARTICLE 11 INSPECTION OF RECORDS CLAUSE
For as long as either party retains any liability hereunder the Reinsured shall, upon request by the Reinsurer, make available at the Reinsured’s head office for inspection at any reasonable time by such representatives as may be authorised by the Reinsurer for that purpose, all information relating to business reinsured hereunder (including actuarial reviews and evaluations) in the Reinsured’s possession or under its control and the said representatives may arrange for copies to be made of any of the records containing such information as they may require.
ARTICLE 12 AMENDMENTS AND ALTERATIONS CLAUSE
Any amendments and/or alterations to this Agreement that are agreed either by correspondence or endorsements, shall be automatically binding on the parties and unless otherwise agreed by the parties hereto shall be formally documented by an exchange of correspondence signed by the parties or by the issue of a contract addendum, which shall be considered to form an integral part hereof.

*Confidential Treatment Requested.


18







ARTICLE 13 ERRORS OR OMISSIONS CLAUSE
Any inadvertent errors or omissions on the part of either the Reinsured or the Reinsurer shall not relieve the other party from any liability that would have attached hereunder, provided that such errors or omissions shall be rectified as soon as possible after discovery. Nevertheless, nothing contained in this Article shall be held to override any of the terms and conditions of this Agreement and no liability shall be imposed on the other party greater than would have attached hereunder had such errors or omissions not occurred.
ARTICLE 14 CLAIMS NOTIFICATION AND SETTLEMENTS CLAUSE
The Reinsured undertakes to advise the Reinsurer as soon as possible in the event of a loss being likely to arise hereunder together with an estimate of the Reinsurer’s liability and thereafter keep the Reinsurer fully informed of any developments regarding such event. In addition, the Reinsured shall provide to the Reinsurer with quarterly information on all claims made under the subject agreement, even if the aggregate total of such claims does not exceed the Reinsured’s retention.
All losses under the program will be adjusted on behalf of the Reinsured by claim handlers selected by mutual agreement between the Reinsured and the Reinsurer.
All loss settlements made by the Reinsured shall be binding upon the Reinsurer, provided such settlements are within the terms and conditions of the original policies and/or contracts and within the terms and conditions of this Agreement, and amounts falling to the share of the Reinsurer shall be payable by them upon reasonable evidence being given by the Reinsured.
ARTICLE 15 INSOLVENCY CLAUSE
Where an Insolvency Event (as defined below) occurs in relation to the Reinsured, the following terms shall apply (and, in the event of any inconsistency between these terms and any other terms of this Agreement, these terms shall prevail):
A.
(i)    The Reinsurer shall be liable to pay the Reinsured even though the Reinsured may be unable actually to pay, or discharge its liability to, its policyholder; but
(ii)    nothing in this clause shall operate to accelerate the date for payment by the Reinsurer of any sum that may be payable to the Reinsured but for it being the subject of any Insolvency Event.
B.
The amount of any sum the Reinsurer is liable to pay the Reinsured under this Agreement shall be the amount the Reinsurer would be liable to pay to the Reinsured if the liability of the Reinsured to its policyholders had been determined without reference to any term in any

19






composition or scheme of arrangement or any similar such arrangement, entered into between the Reinsured and all or any portion of its policyholders.
C.
The Reinsurer shall continue to be entitled (but not obliged) to set-off, against any sum it may be liable to pay the Reinsured, any sum for which the Reinsured is liable to pay the Reinsurer.
An “Insolvency Event” means:
(a)
where a winding up petition is presented in respect of the Reinsured or a provisional liquidator is appointed over it or if the Reinsured goes into administration, administrative receivership or receivership or if the Reinsured has a scheme of arrangement or voluntary arrangement proposed in relation to all or any part of its affairs; or,
(b)
where the Reinsured becomes subject to any other similar insolvency process and/or is unable to pay its debts as and when they fall due within the meaning relevant Canadian law or statute.
The following situations will not be considered an “Insolvency Event”:
i.
where the Reinsured goes into voluntary liquidation or run-off; or,
ii.
where the Reinsured becomes subject to any regulatory intervention.
ARTICLE 16 REGULATORY INTERVENTION
In the event that the Reinsured becomes subject to any regulatory intervention that the Reinsurer considers will have a significant negative impact on the policyholders, the Reinsurer shall be entitled (but not obliged) to assume direct control of any losses under the program by giving notice to the policyholder, the Reinsured or its representative. The Reinsurer will then assume total responsibility for such losses as though they had issued the underlying policy.
ARTICLE 17 TERMINATION CLAUSE
Either party shall have the right to terminate this Agreement immediately by giving the other party written notice:
A.    If the performance of the whole or any part of this Agreement in any material respect is prohibited or rendered impossible as a consequence of any applicable law or regulation, including, without limitation, any material prevention directly or indirectly in the remittance of any or all or any part of the balance of payments due to or from either party, it being understood and agreed that the parties will in good faith use best efforts to renegotiate the terms of his Agreement to avoid or mitigate any such material prohibition or impossibility prior to termination of the Agreement pursuant to this section, if possible.
B.    If the other party has become insolvent or unable to pay its debts or has lost the whole or any part of its paid up capital.

20






C.    If the other party shall have failed to comply with any of the terms and conditions of this Agreement in any material respect and failed to cure such failure following reasonable advance notice, as provided below.
After the date of any such termination the liability of the Reinsurer hereunder shall cease outright other than in respect of losses that occurred prior thereto.
All notices of termination served in accordance with any of the provisions of this Article shall be addressed to the party concerned at its head office or at any other address previously designated by that party. That notice shall only be effective on the date falling five clear Business Days after the notification has been received or such later date as may be specified in the notice.

All notices or other communications required for the purposes of this Agreement shall be in English and shall be given or sent by hand, facsimile, registered mail or courier to the parties and shall be deemed to be received: (i) if given by hand, at the time of delivery; or (ii) if sent by facsimile; at the time when the sender receives from the recipient facsimile machine or from the addressee of the notice confirmation of receipt of the whole of the facsimile; or (iii) if sent by registered mail, 24 hours after confirmation of delivery; or (iv) if sent by courier, 24 hours after the date of delivery by the courier company.
Notwithstanding anything in this Agreement to the contrary if one party is in default of this Agreement and if such default is capable of being cured the non defaulting party shall give written notice of the default in reasonable detail to the non defaulting party who shall be given 60 days or such additional time as the non defaulting party may consider reasonable to cure such default prior to the non defaulting party terminating this Agreement for such default.
ARTICLE 18 ARBITRATION CLAUSE

1. In the event that any dispute arises between the parties signatory to this agreement, whether such dispute arises during or after the term of this Agreement, and as a precedent to any right of action hereunder a meeting will be held between representatives of each of the parties with decision making authority to settle the dispute. At the meeting the parties will attempt in good faith to negotiate an informal resolution of the dispute. If the dispute is not resolved through negotiation within 10 Business Days the parties hereby agree to submit their dispute to Arbitration. Upon the written request of either party to the dispute the parties shall select an arbitrator from among persons with not less than 10 years experience in the insurance or reinsurance business, as persons engaged in the industry itself or as lawyers or other professional advisors, or as otherwise agreed by the parties. If the parties are unable to agree on an arbitrator within 30 days after receipt of written notice from the other party requesting it to do so then either party may proceed pursuant to the Arbitration Act, 1991 (Ontario) to have an arbitrator appointed.

2. The arbitrator shall interpret this agreement as an honourable engagement and not as a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law, and they shall make their award with a view to effecting the general purpose of this

21






agreement in a reasonable manner rather than in accordance with a literal interpretation of the language. Each party shall submit its case to the arbitrator within 30 days of the appointment of the arbitrator.

3. The arbitrator, so far as is permissible under the law and practice of the place of arbitration, shall have power to fix all procedural rules for the holding of the arbitration including discretionary power to make orders as to any matters which it may consider proper in the circumstances of the case with regard to pleadings, discovery, inspection of the documents, examination of witnesses and any other matter whatsoever relating to the conduct of the arbitration and may receive and act upon such evidence whether oral or written strictly admissible or not as it shall in its discretion think fit.

4. The decision in writing of the arbitrator shall be final and binding on both parties. Judgement may be entered upon the final decision of the arbitrator in any court in Canada having jurisdiction. The arbitrator shall determine who pays the expense of the arbitration. The arbitration will take place in Toronto, Ontario, Canada, or such other venue in Ontario, Canada as determined by the arbitrator.
ARTICLE 19 JURISDICTION CLAUSE
This Agreement shall be governed by the laws of Ontario, Canada.
ARTICLE 20 INTERMEDIARY CLAUSE
The parties to this Agreement recognize and accept that there is no intermediary involved in the placement or handling of this Agreement and that the relationship is direct between the Reinsured and the Reinsurer.
ARTICLE 21 WARRANTIES AND/OR SPECIAL CONDITIONS CLAUSE    
The parties to this Agreement hereby warrant and confirm that they are licensed in good standing in their respective regulatory jurisdictions and that they are authorized to carry on the business of insurance or reinsurance for the line of business contemplated by this Agreement. The parties also warrant and confirm that they have the necessary authority to enter in to and execute this Agreement, and that both have accepted the terms and conditions of the FAA.
ARTICLE 22 COUNTERPARTS

This Agreement may be executed in any number of counterparts and by the parties to it on separate counterparts and by facsimile transmission, each of which is an original but all of which together constitute one and the same instrument .

22






ARTICLE 23 USAGE CLAUSE

In this Agreement, capitalized terms used but not defined herein have the meanings given to them in the FAA.

[ signature page follows ]

23







IN WITNESS WHEREOF this Quota Share Reinsurance Agreement has been signed by and on behalf of the parties.

SIGNED this 30th day of December , 20 14 ;

For the Reinsured, OMEGA GENERAL INSURANCE COMPANY

    
By: Philip H. Cook, CEO

SIGNED this 30th day of December , 20 14 ;
For the Reinsurer, WYNDHAM INSURANCE COMPANY (SAC) LIMITED, in respect of its Segregated Account AX

    
By:

IN HAMILTON, BERMUDA


24






AGREEMENT NUMBER: 2014003
ADDENDUM #1
QUOTA SHARE REINSURANCE AGREEMENT
made between
OMEGA GENERAL INSURANCE COMPANY
(hereinafter referred to as the “Reinsured”)
and
WYNDHAM INSURANCE COMPANY (SAC) LTD,
in respect of its Segregated Account AX (hereinafter referred to as the “Reinsurer”)

A.
Pursuant to the provisions of the Segregated Accounts Companies Act, 2000 as it applies to the Reinsurer through registration thereunder, this Agreement is hereby designated a Governing Instrument (as such terms is defined in the Act) and a Contract of Insurance and shall be so treated for the purpose of the Insurance Act 1978 (and the regulations promulgated thereunder from time to time) notwithstanding any statutory provision or any law to the contrary.

B.
The Reinsurer will establish and maintain a Segregated Account with respect to this Agreement (the “ Subject Segregated Account ”) and such Segregated Account will be designated by the Reinsurer as “ Segregated Account AX ”.

C.
All rights and interests in assets and property standing to the credit of the Subject Segregated Account shall be determined in accordance with this Agreement and the terms of the Act. The Reinsured acknowledges that the Reinsurer may issue one or more shares or securities to be related to the Subject Segregated Account. Notwithstanding any provision of this Agreement to the contrary, the Reinsurer may use (and deplete if be a consequence) the assets of the Subject Segregated Account to pay (or reimburse) itself or third parties (a) the expenses, fees and taxes with respect to any such said issue or repurchase of such said shares or securities or dividends and distributions for such shares or securities and (b) all and any claims against and expenses, fees and taxes of the Reinsurer incurred in connection with or under (including without limitation entering into making or establishing as the case may be) this Agreement, any purchase or investment by the Reinsurer contemplated by this Agreement, any subscription and shareholders agreement concerning the said shares or securities or the Subject Segregated Account. The Reinsurer may terminate the Subject Segregated Account at any time after it ceases to have any obligations to the Reinsured hereunder.

D.
The Reinsurer agrees to credit to the Subject Segregated Account all premium, retro-premium and other receipts arising from this Agreement. In addition, any reinsurance recoveries arising from retrocessional reinsurance agreements ceding all or any portion of the risks assumed hereunder shall be credited to the Subject Segregated Account.


25






E.
Except for renewals to this Agreement, the Reinsurer may not issue any other contracts of insurance with respect to the Subject Segregated Account; provided that, however, the Reinsurer may enter into retrocessional agreements to cede all or any portion of the risks assumed hereunder.

F.
The Reinsured acknowledges and recognizes the applicability, validity and enforceability of the Act and the terms contained therein and in particular that the Reinsurer’s liability and obligations under this Agreement are limited to the assets (available, realizable and reasonably accessible by the Reinsurer) of the Subject Segregated Account. In the event the assets of the Subject Segregated Account are insufficient to satisfy any claims under the Agreement, the Reinsured agrees that it has no claim and undertakes that it shall make no claim against the Reinsurer and/or any assets of the Reinsurer, the Reinsurer or any other person in the Reinsurer’s general account or against any assets in any other Segregated Account other than the assets of the Subject Segregated Account.

G.
The Reinsurer (or their designated representative) will provide the Reinsured with annual audited financial statements reflecting the financial condition of the Reinsurer and the Segregated Account AX, together with immediate notice of any reduction in the capital of the Segregated Account AX, below the minimum amount provided for under this Agreement and Addendums.

H.
This Agreement shall be governed and construed under the laws of the Province of Ontario, without reference to principles of choice of law, provided however that all rights and obligations of the parties that derive from or are in any way related to the fact that this Agreement is issued from a Segregated Account of the Reinsurer shall be governed by the substantive laws of Bermuda.

SIGNED this 30th day of December , 20 14 ;
For the Reinsured, OMEGA GENERAL INSURANCE COMPANY

/s/ Philip H. Cook    
By: Philip H. Cook, CEO

SIGNED this 30th day of DEC , 20 14 ;
In Hamilton, Bermuda;
For the Reinsurer, WYNDHAM INSURANCE COMPANY (SAC) LTD, in respect of its Segregated Account AX

/s/ Andrew McComb    
By: Andrew McComb, President


26






Exhibit A

Form of Reinsurance Security Agreement


27






Wyndham Insurance Company (SAC) Ltd,
in respect of its Segregated Account AX
as Pledgor
and
OMEGA GENERAL INSURANCE COMPANY
as Secured Party
and
RBC INVESTOR SERVICES TRUST
as Custodian

REINSURANCE SECURITY AGREEMENT
January 1, 2015



28






TABLE OF CONTENTS
 
 
 
 
 
Section 1
Defined Terms and Interpretation.
2

Section 2
The Securities Account.
6

Section 3
Grant of Security.
8

Section 4
Secured Obligations.
9

Section 5
Attachment.
9

Section 6
Duties of the Secured Party.
10

Section 7
Rights of the Pledgor.
10

Section 8
Expenses.
11

Section 9
Enforcement.
11

Section 10
Remedies.
12

Section 11
Exercise of Remedies.
13

Section 12
Appointment of Attorney.
14

Section 13
Dealing with the Collateral.
14

Section 14
Standards of Sale.
15

Section 15
Dealings by Third Parties.
15

Section 16
Representations, Warranties and Covenants.
16

Section 17
Collateral Matters.
18

Section 18
Appointment and Duties of the Custodian.
19

Section 19
Directed Powers.
22

Section 20
Contractual Settlement.
23

Section 21
Services to be Performed without Direction.
23

Section 22
Express Provisions.
25

Section 23
Security Interest, Set-Off and Deduction.
26

Section 24
Waiver by Custodian.
27

Section 25
Charges of the Custodian.
28

Section 26
Indemnification of Custodian.
28

Section 27
Limitation of Custodian Liability.
28

Section 28
Removal and Resignation of the Custodian.
32

Section 29
No Conflict.
32

Section 30
Communications and Directions.
33

Section 31
Confidentiality.
37

Section 32
General.
38










REINSURANCE SECURITY AGREEMENT
Reinsurance Security Agreement dated as of January 1, 2015 made between:
WYNDHAM INSURANCE COMPANY (SAC) LIMITED , in respect of its Segregated Account AX , an insurance company existing under the laws of Bermuda. and having its principal office located at Swan Building, 2 nd Floor, 26 Victoria Street, Bermuda, HM12 (the “ Pledgor ”);
-and-
OMEGA GENERAL INSURANCE COMPANY , an insurance company incorporated under the laws of Canada and having its head office located at Suite 1200, 34 King Street East, Toronto, Ontario, M5C 2X8, Canada (the “ Secured Party ”);
-and-
RBC INVESTOR SERVICES TRUST , a trust company incorporated under the laws of Canada and having its head office located at 155 Wellington Street West, 7 th Floor, Toronto, Ontario, M5V 3L3, Canada (the “ Custodian ”).
RECITALS:
(i)
The Secured Party is authorized to carry on an insurance business in Canada under the Insurance Companies Act (Canada) (the “ ICA ”).
(ii)
The Pledgor and the Secured Party have entered into one or more Reinsurance Agreements pursuant to which the Pledgor has agreed to reinsure certain risks for the benefit of the Secured Party. The Pledgor is not authorized under the ICA to reinsure risks in Canada.
(iii)
The Secured Party will only receive credit for capital purposes under the ICA for reinsurance ceded under the Reinsurance Agreement if security is maintained in Canada in respect of the reinsurance liabilities of the Pledgor in accordance with the Superintendent’s guidance on reinsurance arrangements.
(iv)
The Pledgor has agreed to provide security to the Secured Party for its obligations pursuant to the Reinsurance Agreement and has agreed to enter into this Agreement and to perform the obligations of the Pledgor described hereunder.

1


(v)
The Pledgor and the Secured Party desire to retain the Custodian to act as custodian of the Collateral in accordance with the terms of this Agreement and to provide safekeeping and custodial services in respect of the Collateral.
(vi)
The Custodian has agreed to act as custodian of the Collateral and to provide safekeeping and custodial services in respect of the Collateral, all on the terms and conditions of this Agreement.
In consideration of the foregoing and the mutual agreements herein set forth and other good and valuable consideration, the receipt and adequacy of which are acknowledged, the parties agree as follows:
Section 1
Defined Terms and Interpretation.
(1)
As used in this Agreement, the following terms have the following meanings:
Affiliate ” shall have the meaning set out in the Canada Business Corporations Act, as amended from time to time, and any successor legislation thereto as in effect from time to time.
Agent ” means any agent, service provider, advisor or other entity appointed by the Custodian to assist in providing services under this Agreement, and may include Affiliates and subsidiaries of the Custodian.
Agreement ” means this Reinsurance Security Agreement, as supplemented or amended from time to time.
Applicable Law ” means in relation to any person, any existing or future laws, regulations, policies or orders made and promulgated under statutory authority by any governmental or regulatory body, commission or agency having jurisdiction over such person whether or not having the force of law, including, without limitation, laws in relation to taxation, all as the same may be amended from time to time.
Blocking Service ” has the meaning specified in Section 2(4).
Business Day ” means a day, other than a Saturday or a Sunday, on which banks are open for general business in Toronto, Ontario.
CDS ” means CDS Clearing and Depository Services Inc. and its successors and assigns. “Collateral” has the meaning specified in Section 3.

2


Contractual Settlement Date ” means:
(i)
with respect to the purchase or sale of any security, the date the parties have contracted to settle the trade;
(ii)
with respect to the purchase or sale of any short term money market investments, the date specified by the Pledgor at the time at which it gave instructions to the Custodian;
(iii)
with respect to the maturity of a security, the maturity date; and
(iv)
with respect to interest and dividend payments, the due date established by the payor.
Corporate Action ” means any conversion privileges, subscription rights, warrants or other rights or options available to the holder in connection with any securities which form part of the Collateral, including those relating to the reorganization, recapitalization, takeover, consolidation, amalgamation, merger, liquidation, filing for or declaration of bankruptcy or plans of arrangement of any corporation or association.
Custodial Obligations ” has the meaning specified in Section 23(5).
Custodian ” means RBC Investor Services Trust, a trust company continued under the laws of Canada, and any successor Custodian appointed pursuant hereto, and their respective successors and assigns.
Custodian Security Interest ” has the meaning specified in Section 23(5).
Depository ” means any authorized domestic depository or clearing or settlement agency or system, including a transnational book-based system, and shall include CDS, and “ Depositories ” means all of them.
Direction ” means any directions, notices, requests, instructions and any other communication of the Pledgor, the Secured Party or any Investment Manager (including, for greater certainty, Entitlement Orders) given to the Custodian in accordance with the terms of this Agreement and “ Direct ” means to give a Direction.
Entitlement Order ” means a notice communicated to the Custodian directing the transfer or redemption of a financial asset to which the Secured Party has a security entitlement and includes an “entitlement order” as defined in the STA.
Event of Default ” has the meaning specified in Section 9.

3


Expenses ” has the meaning specified in Section 4(b).
Fee Schedule ” means the schedule of fees payable hereunder as agreed to by the parties, as amended from time to time.
Investment Manager ” means any person or entity designated by the Pledgor as an investment manager pursuant to Section 7.
Lien ” means (i) any mortgage, charge, pledge, hypothecation, security interest, assignment by way of security, encumbrance, lien (statutory or otherwise), hire purchase agreement, conditional sale agreement, deposit arrangement, title retention agreement or arrangement, or any other assignment, arrangement or condition that in substance secures payment or performance of an obligation, (ii) any trust arrangement, (iii) any arrangement which creates a right of set-off out of the ordinary course of business, or (iv) any agreement to grant any such rights or interests.
Market Value ” means the market value of the Collateral, as determined by the Custodian in accordance with the terms of this Agreement.
Minimum Market Value ” means an amount equal to at least [*]% of the unearned premium plus [*]% of outstanding losses of the Secured Party in respect of policies that are the subject of Reinsurance Agreements with the Pledgor, with such liabilities being determined by the appointed actuary of the Secured Party in accordance with generally accepted actuarial principles with such changes as may be determined by the Superintendent and any additional directions that may be made by the Superintendent.
Overdraft ” has the meaning specified in Section 23(1).
Permitted Investments ” means any of the investments listed in Schedule "D" hereto, as amended from time to time, provided that they are held and settled through CDS or are represented by physical certificates delivered to, and registered or endorsed in the name of, the Custodian or its nominee.
Person ” means any natural person, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, company, limited liability company, institution, public benefit corporation, investment or other fund, government (whether federal, provincial, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof) or other entity of any nature.
*Confidential Treatment Requested.


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PPSA ” means the Personal Property Security Act (Ontario) and the Minister's order and regulations thereunder.
Reinsurance Agreement ” means the reinsurance agreement between the Secured Party and the Pledgor listed on Schedule “A”, as amended from time to time.
Secured Obligations ” has the meaning specified in Section 4(a).
Securities Account ” means each account opened or maintained by the Pledgor with the Custodian for purposes of this Agreement or which the parties may agree is to be a Securities Account for purposes of this Agreement, as more particularly designated in Section 2(1) hereof.
Security Interest ” has the meaning specified in Section 4.
Set-Off Rights ” has the meaning specified in Section 23(6).
STA ” means the Securities Transfer Act, 2006 (Ontario).
Standard of Care ” has the meaning specified in Section 27(1)
Superintendent ” means the Superintendent of Financial Institutions, appointed pursuant to the Office of the Superintendent of Financial Institutions Act.
Voting Materials ” means all proxies, proxy solicitation materials and other communications received by the Custodian relating to any securities which form part of the Collateral and that call for voting.
(2)
Terms defined in the PPSA or the STA and used but not otherwise defined in this Agreement have the same meanings as in the PPSA or STA, as the case may be. For greater certainty, the terms “ investment property ”, “ money ” and “ proceeds ” have the meanings given to them in the PPSA; and the terms “ certificated security ”, “ control ”, “ deliver ”, “ entitlement holder ”, “ entitlement order ” “ financial asset ”, “ security ”, “ securities account ”, “ securities intermediary ”, “ security entitlement ” and “ uncertificated security ” have the meanings given to them in the STA.
(3)
In this Agreement the words “ including ”, “ includes ” and “ include ” mean “ including (or includes or include) without limitation ”. The expressions “ Section ” and other subdivision followed by a number mean and refer to the specified Section or other subdivision of this Agreement.

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(4)
Any reference in this Agreement to gender includes all genders. Words importing the singular number only include the plural and vice versa.
(5)
The division of this Agreement into Sections and other subdivisions and the insertion of headings are for convenient reference only and do not affect its interpretation.
(6)
Any reference in this Agreement to this Agreement, any other agreement or any instrument, means this Agreement, such other agreement, or such instrument, in each case, as the same may have been or may from time to time be amended, modified, extended, renewed, restated, replaced or supplemented and includes all schedules attached thereto. Except as otherwise provided in this Agreement, any reference in this Agreement to a statute refers to such statute and all rules and regulations made under it as the same may have been or may from time to time be amended or re-enacted.
Section 2
The Securities Account.
(1)
The Custodian shall open and maintain the Securities Account as an account of, and in the name of, the Pledgor, or shall designate an existing account as a Securities Account for purposes of this Agreement. The parties hereby agree that the account described in Schedule “B” is and shall be a “Securities Account” for purposes of this Agreement and a securities account for the purposes of the STA.
(2)
The Securities Account shall be opened and maintained at the offices of the Custodian in Toronto, Ontario. The Custodian will not change the location of any Securities Account without the prior written consent of the Pledgor and the Secured Party.
(3)
Concurrent with the execution and delivery of this Agreement, the Pledgor shall, from time to time, deliver Permitted Investments to the Securities Account having an aggregate Market Value as of such date no less than the Minimum Market Value.
(4)
The Pledgor shall ensure that all property delivered by it to the Securities Account, or in which it Directs that amounts in the Securities Account be invested, consists of Permitted Investments. While it is the Pledgor’s obligation to ensure that all property delivered by it to the Securities Account consists of Permitted Investments and the Secured Party has access to statements of the Securities Account to permit it to confirm that the assets in the Securities Account are Permitted Investments, as a supplemental control, the Custodian may, at its sole discretion, block the settlement of property that is non-CDS eligible into the Securities Account (the “ Blocking Service ”). On each occasion that the Custodian provides the Blocking Service, it shall promptly notify the Secured Party and the Pledgor of any property that has not settled into the Securities Account due to the Blocking Service. The Pledgor

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and the Secured Party shall not Direct the Custodian to use any part of the Collateral in a securities lending program.
(5)
The Custodian shall determine the Market Value of the Collateral at such times as required for purposes of this Agreement, including, without limitation, no less frequently than monthly for the purposes of the monthly declaration required to be filed by the Custodian pursuant to Section 18(1)(j). In determining such Market Values, the Custodian shall use nationally recognized pricing services for property for which such prices are available, and for property for which such prices are not available, the Market Value shall be based on an estimate or estimates provided jointly by the Secured Party and the Pledgor. The Custodian shall not be liable for any loss, damage or expense, arising as a result of an error in such data sources or estimates provided by the Pledgor or the Secured Party or for any delay or failure of either party providing such estimates.
(6)
No later than 30 calendar days after the end of each calendar quarter, the Secured Party shall prepare and provide to the Pledgor, for the sole purpose of adjusting the Minimum Market Value, a specific statement of the Minimum Market Value as of the end of such calendar quarter.
(7)
The Pledgor shall ensure that the Market Value of the Collateral (as determined by the Custodian for the purposes and as shown in the monthly declaration required to be filed by the Custodian pursuant to Section 18(1)(j)) shall at all times be at least equal to the Minimum Market Value, as determined by the Secured Party in accordance with Section 2(6). If the Market Value of the Collateral shall at any time fall below the Minimum Market Value, the Pledgor shall promptly deposit in the Securities Account additional Collateral with a Market Value sufficient to bring the Market Value of the Collateral up to at least the Minimum Market Value.
(8)
The Pledgor may not withdraw or replace, and the Custodian shall not permit the withdrawal or replacement of, any of the Collateral without the joint written Direction of the Pledgor and the Secured Party. Upon any disbursement or withdrawal made in accordance with this Section 2(8), the Collateral disbursed or withdrawn shall cease to be subject to the Security Interest and shall cease to be Collateral. The Security Interest shall not otherwise terminate except by means of a discharge in writing executed by the Secured Party in accordance with Section 32. The Custodian shall be entitled to set off against any Collateral withdrawn by the Pledgor pursuant to this Section 2(8) any amounts due and payable to it by the Pledgor pursuant to this Agreement.
(9)
No withdrawal or disbursement of Collateral pursuant to Section 2(8) shall prejudice the right of the Secured Party to subsequently require, or the obligation of the Pledgor to make,

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delivery of new or further Collateral in accordance with the terms of the Reinsurance Agreement and this Agreement.
(10)
Notwithstanding anything in this Agreement to the contrary, the Secured Party shall have the unconditional right to give an Entitlement Order with respect to any Collateral in the Securities Account at any time, and the Custodian agrees that it will promptly comply with any Entitlement Orders originated by the Secured Party, without the further consent of the Pledgor. As between the Secured Party and the Pledgor, the Secured Party agrees that it shall not give an Entitlement Order unless an Event of Default has occurred and is continuing; provided, however, that the Custodian shall not be required to enquire as to the occurrence or existence of any Event of Default prior to acting upon any Entitlement Order given by the Secured Party. Upon receipt of any such Entitlement Order, the Custodian shall promptly take any and all steps necessary to transfer such Collateral to the Secured Party or as it may Direct. Upon receipt of any Entitlement Order from the Secured Party, the Custodian shall promptly cease to comply with Entitlement Orders of the Pledgor with respect to Collateral in the Securities Account and the Custodian shall promptly cease to comply with Directions of the Pledgor or the Investment Manager with respect to the Collateral (including without limitation Directions pursuant to Section 7(1) and Section 7(2). In complying with any such Entitlement Order, the Custodian shall be entitled to a reasonable period of time to implement the Entitlement Order and shall not be required to cease processing a pending transaction not involving the withdrawal of property from the Securities Account pursuant to a Direction that was received by the Custodian prior to receiving the Entitlement Order. Other than an Entitlement Order, no other statement or document need be presented by the Secured Party to withdraw any of the Collateral from the Securities Account, except that the Secured Party shall acknowledge to the Custodian receipt of such withdrawn Collateral.

Section 3     Grant of Security.
The Pledgor grants to the Secured Party a security interest in, and assigns, mortgages, charges, hypothecates and pledges to the Secured Party, the following (collectively, the “ Collateral ”):
(a)
all securities and other property from time to time delivered or contributed by or on behalf of the Pledgor to the Custodian pursuant to or in accordance with the Reinsurance Agreement or this Agreement, or to be held pursuant to this Agreement, including, without limitation, all security entitlements with respect thereto;

8


(b)
the Securities Account and all of the credit balances, security entitlements, securities, cash, and other financial assets and other property (or their value) from time to time held in the Securities Account;
(c)
all substitutions and replacements of, increases and additions to the property described in Section 3(a) and Section 3(b) including any consolidation, subdivision, reclassification or stock dividend; and
(d)
all proceeds in any form derived directly or indirectly from any dealing with all or any part of the property described in Section 3(a), Section 3(b) and Section 3(c) including the proceeds of such proceeds.
Section 4     Secured Obligations.
The security interest, assignment, mortgage, charge, hypothecation and pledge granted by the Pledgor to the Secured Party under this Agreement (collectively, the “ Security Interest ”) secures the payment and performance of:
(a)
(i) all of the Pledgor’s present and future obligations to the Secured Party to pay the Pledgor’s share of any loss or liability or both sustained by the Secured Party for which the Pledgor is liable under the Reinsurance Agreement and (ii) all of the Pledgor’s other present and future debts, liabilities and obligations to the Secured Party, direct or indirect, absolute or contingent, whether alone or with others, pursuant to or in connection with the Reinsurance Agreement or this Agreement (including, where required by the Reinsurance Agreement, any loss or liability on account of claims incurred but not reported) (collectively, and together with the Expenses, the “ Secured Obligations ”); and
(b)
all reasonable legal fees, court costs, receiver's or agent's remuneration and other expenses of taking possession of, realizing, collecting, selling, transferring, delivering or obtaining payment for the Collateral upon the Security Interest becoming enforceable, and of taking, defending or participating in any action or proceeding in connection with any of the foregoing matters (collectively, the “ Expenses ”).
Section 5
Attachment.
(1)
The Pledgor acknowledges that (i) value has been given, (ii) it has rights in the Collateral or the power to transfer rights in the Collateral to the Secured Party (other than after- acquired Collateral), (iii) it has not agreed to postpone the time of attachment of the Security Interest, and (iv) it has received a copy of this Agreement.

9


(2)
At the request of the Secured Party, the Pledgor will take all action that the Secured Party deems advisable to cause the Secured Party to have “control”, for the purposes of the STA, over any securities or other investment property delivered by the Pledgor pursuant to this Agreement or that is now or at any time becomes Collateral, including (i) causing the Collateral to be transferred to or registered in the name of the Custodian or its nominee, (ii) endorsing any certificated securities to the Custodian or its nominee by an effective endorsement, (iii) directing CDS that the Collateral is to be credited to an account in the name of the Custodian or its nominee, (iv) delivering the Collateral to the Custodian, and (v) delivering to the Custodian any and all consents or other documents or agreements which may be necessary to effect the transfer of any Collateral to the Custodian.
Section 6
Duties of the Secured Party.
(1)
The Secured Party has no obligation to exercise any option or right in connection with any Collateral. The Secured Party has no obligation to protect or preserve any Collateral from depreciating in value or becoming worthless and is released from all responsibility for any loss of value whether such Collateral is in the possession of, is a security entitlement of, or is subject to the control of, the Secured Party, the Custodian, the Pledgor or any other Person. The Custodian shall comply with its Standard of Care in the physical keeping of any Collateral.
(2)
The Secured Party may, after the Security Interest is enforceable, sell, transfer, use or otherwise deal with any Collateral on such conditions and in such manner as the Secured Party in its sole discretion may determine.
Section 7
Rights of the Pledgor.
(1)
Unless and until the Secured Party has delivered an Entitlement Order pursuant to Section 2(10), the Pledgor shall be entitled, subject to Section 2(4) and Section 2(7), to Direct the Custodian as to the manner of investment of the Collateral. The Custodian may establish reasonable requirements relative to the time or times by which Direction must be given and shall advise the Pledgor of those requirements. The Pledgor may, by Direction to the Custodian and the Secured Party, designate an Investment Manager to manage the investment of some or all of the Collateral as identified by the Pledgor, and to provide Directions to the Custodian with regard to the investment of the Collateral. The Custodian may assume that the designation of an Investment Manager continues in force until it receives a written Direction from the Pledgor to the contrary. Whenever an Entitlement Order has been given pursuant to Section 2(9), all rights of the Pledgor, or any Investment Manager, to Direct the Custodian as to the manner of investment of the Collateral shall terminate and all such rights shall become vested solely and absolutely in the Secured Party.

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(2)
Unless and until the Secured Party has delivered an Entitlement Order pursuant to Section 2(10), the Pledgor shall be entitled to Direct the Custodian with respect to the exercise of the voting rights attached to the securities and other financial assets that are part of the Collateral. The Custodian may establish reasonable requirements relative to the time or times by which any such Directions must be given and shall advise the Pledgor of those requirements. Whenever an Entitlement Order has been given by the Secured Party pursuant to Section 2(10), all rights of the Pledgor to vote or to Direct the voting (including under any proxy given by the Custodian or the Secured Party (or a nominee) or otherwise) shall cease and all such rights become vested solely and absolutely in the Secured Party.
(3)
All dividends, interests, distributions and other amounts related to the Collateral shall be collected by the Custodian, credited to the Securities Account and shall constitute Collateral, unless and until released in accordance with Section 2(8). Any dividend, interest, cash or other amounts received by the Pledgor contrary to this Section 7(3) will be held by the Pledgor as trustee for the Secured Party and shall be immediately paid over to the Custodian, or after the giving of an Entitlement Order, to or to the order of the Secured Party.
Section 8
Expenses.
The Pledgor is liable for and will pay on demand by the Custodian or Secured Party, as the case may be, any and all Expenses of the Custodian or the Secured Party.
Section 9
Enforcement.
The Security Interest shall become and be enforceable against the Pledgor upon the occurrence of any one or more of the following events (each, an “ Event of Default ”):
(a)
the Pledgor is no longer authorized in its home jurisdiction to carry on the business of reinsurance;
(b)
the Pledgor fails to make any payment when due under the Reinsurance Agreement (whether on a scheduled payment date or upon default or termination), and such failure is not remedied on or before the close of business in Toronto, Ontario on the third Business Day after notice thereof has been given by the Secured Party to the Pledgor;
(c)
the Pledgor defaults, in any material respect, in any of its other duties and obligations under the Reinsurance Agreement and the Pledgor has not remedied such default within any applicable cure period provided for in the Reinsurance Agreement;

11


(d)
any representation or warranty made by the Pledgor in this Agreement is breached or is incorrect in any material respect and the Pledgor fails to remedy such breach and cause such representation or warranty to become correct in all material respects within three Business Days of receipt of notice from the Secured Party requiring it to do so;
(e)
the Pledgor fails, in any material respect, to perform any of its undertakings, covenants or agreements in this Agreement and such failure is not remedied on or before the third Business Day following the day in which notice of such failure has been given by the Secured Party to the Pledgor;
(f)
the Pledgor becomes insolvent or unable to pay its debts as they fall due or fails or admits in writing its inability to pay its debts as they fall due;
(g)
the Pledgor institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (i) results in a judgment of insolvency or liquidation, or (ii) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof;
(h)
one or more supervisory or regulatory authorities takes control of all or substantially all of the assets of the Pledgor, with the intention that such authority or authorities act as administrator, liquidator or provisional liquidator, receiver or interim receiver, trustee, custodian or other similar officer; or
(i)
a liquidator or receiver of the Pledgor or of any part of the insurance business of the Pledgor is appointed under the provisions of any statute or pursuant to any agreement between the Pledgor and a third party.
Section 10     Remedies.
Whenever the Security Interest is enforceable, the Secured Party may realize upon the Collateral and enforce the rights of the Secured Party by:
(a)
realizing upon or otherwise disposing of or contracting to dispose of the Collateral by sale, transfer or delivery;

12


(b)
exercising and enforcing all rights and remedies of a holder of the Collateral as if the Secured Party were the absolute owner thereof (including, if necessary, causing the Collateral to be registered in the name of the Secured Party or its nominee if not already done);
(c)
collecting any proceeds arising in respect of the Collateral;
(d)
whether or not an Entitlement Order has been given, directing the Custodian to transfer all Collateral held by the Custodian in the Securities Account, or any of them, to another account maintained with, by or on behalf of the Secured Party or otherwise as the Secured Party may Direct, and the Custodian shall comply with any such Direction;
(e)
applying any proceeds arising in respect of the Collateral in accordance with Section 32(12); and
(f)
exercising any other remedy or proceeding authorized or permitted under the PPSA or otherwise by Applicable Law or equity.
Section 11
Exercise of Remedies.
The remedies under Section 10 may be exercised from time to time separately or in combination and are in addition to, and not in substitution for, any other rights of the Secured Party however arising or created. The Secured Party is not bound to exercise any right or remedy, and the exercise of rights and remedies is without prejudice to the rights of the Secured Party in respect of the Secured Obligations including the right to claim for any deficiency.

13


Section 12     Appointment of Attorney.
The Pledgor hereby irrevocably constitutes and appoints the Secured Party (and any officer of the Secured Party), at any time that the Security Interest is enforceable, the true and lawful attorney of the Pledgor. As the attorney of the Pledgor, the Secured Party has the power to exercise for and in the name of the Pledgor with full power of substitution, at any time that the Security Interest is enforceable, any of the Pledgor's right (including the right of disposal), title and interest in and to the Collateral including the execution, endorsement, delivery and transfer of the Collateral to the Secured Party, its nominees or transferees, and the Secured Party and its nominees or transferees are hereby empowered to exercise all rights and powers and to perform all acts of ownership with respect to the Collateral to the same extent as the Pledgor might do. This power of attorney is irrevocable, is coupled with an interest, has been given for valuable consideration (the receipt and adequacy of which is acknowledged) and survives, and does not terminate upon, the bankruptcy, dissolution, winding up or insolvency of the Pledgor. This power of attorney extends to and is binding upon the Pledgor’s successors and assigns. The Pledgor authorizes the Secured Party to delegate in writing to another Person any power and authority of the Secured Party under this power of attorney as may be necessary or desirable in the opinion of the Secured Party, and to revoke or suspend such delegation.
Section 13
Dealing with the Collateral.
(1)
The Secured Party is not obliged to exhaust its recourse against the Pledgor or any other Person or against any other security it may hold in respect of the Secured Obligations before realizing upon or otherwise dealing with the Collateral in such manner as the Secured Party may consider desirable.
(2)
The Secured Party may grant extensions or other indulgences, take and give up securities, accept compositions, grant releases and discharges and otherwise deal with the Pledgor and with other Persons, sureties or securities as it may see fit without prejudice to the Secured Obligations, the liability of the Pledgor or the rights of the Secured Party in respect of the Collateral.
(3)
Except as otherwise provided by Applicable Law or this Agreement, the Secured Party is not (i) liable or accountable for any failure to collect, realize or obtain payment in respect of the Collateral, (ii) bound to institute proceedings for the purpose of collecting, enforcing, realizing or obtaining payment of the Collateral or for the purpose of preserving any rights of any Persons in respect of the Collateral, (iii) responsible for any loss occasioned by any sale or other dealing with the Collateral or by the retention of or failure to sell or otherwise deal with the Collateral, or (iv) bound to protect the Collateral from depreciating in value or becoming worthless.

14


Section 14     Standards of Sale.
Without prejudice to the ability of the Secured Party to dispose of the Collateral in any commercially reasonable manner, the Pledgor acknowledges that:
(a)
the Collateral may be disposed of in whole or in part;
(b)
the Collateral may be disposed of by public auction, public tender or private contract, with or without advertising and without any other formality;
(c)
any assignee of such Collateral may be the Secured Party or a customer of the Secured Party;
(d)
any sale conducted by the Secured Party will be at such time and place, on such notice and in accordance with such procedures as the Secured Party, in its sole discretion, may deem advantageous;
(e)
the Collateral may be disposed of in any manner and on any terms necessary to avoid violation of Applicable Law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that the prospective bidders and purchasers have certain qualifications, and restrict the prospective bidders and purchasers to Persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of the Collateral) or in order to obtain any required approval of the disposition (or of the resulting purchase) by any governmental or regulatory authority or official;
(f)
a disposition of the Collateral may be on such terms and conditions as to credit or otherwise as the Secured Party, in its sole discretion, may deem advantageous; and
(g)
the Secured Party may establish an upset or reserve bid or price in respect of the Collateral.
Section 15
Dealings by Third Parties.
(1)
No Person dealing with the Secured Party or an agent or receiver appointed at the instance of the Secured Party is required to determine (i) whether the Security Interest has become enforceable, (ii) whether the powers which such Person is purporting to exercise have become exercisable, (iii) whether any money remains due to the Secured Party or the Custodian by the Pledgor, (iv) the necessity or expediency of the stipulations and conditions subject to which any sale or lease is made, (v) the propriety or regularity of any sale or other

15


dealing by the Secured Party with the Collateral, or (vi) how any money paid to Secured Party has been applied.
(2)
Any bona fide purchaser of all or any part of the Collateral from the Secured Party or any receiver or agent will hold the Collateral absolutely, free from any claim or right of whatever kind, including any equity of redemption, of the Pledgor, which it specifically waives (to the fullest extent permitted by law) as against any such purchaser together with all rights of redemption, stay or appraisal which the Pledgor has or may have under any rule of law or statute now existing or hereafter adopted.
Section 16
Representations, Warranties and Covenants.
(1)
The Pledgor represents and warrants (which representations and warranties will be deemed to be repeated as of each date on which the Pledgor delivers Collateral) and undertakes to the Secured Party and the Custodian that:
(a)
the Pledgor is a captive insurance company duly incorporated and validly existing under the laws of its jurisdiction of incorporation and is not in liquidation, is authorized in its home jurisdiction to carry on the business of reinsurance and has the corporate power and authority to enter into this Agreement and to exercise its rights and perform its obligations hereunder and has taken all corporate and other action required to authorise its execution and performance of this Agreement;
(b)
the Pledgor owns, or will at the time of it being credited to the Securities Account own, the Collateral free and clear of all Liens (other than the Security Interest and the Custodian Security Interest) and other adverse claims and the Pledgor is entitled to grant the Security Interest created pursuant to this Agreement;
(c)
this Agreement does not conflict in any material respect with any contractual or other obligation binding upon the Pledgor or with the constitutional documents of the Pledgor;
(d)
the Security Interest created pursuant to this Agreement constitutes and will constitute a first priority security interest over the Collateral, not subject to any prior or pari passu security interest (except as provided in Section 23(5));
(e)
this Agreement has been duly executed and delivered by the Pledgor and constitutes the legal, valid and binding obligations of the Pledgor, enforceable in accordance with its terms;

16


(f)
other than with the prior written consent of the Secured Party, the Pledgor shall not dispose of the Collateral, shall not create any Liens, other than the Security Interest created by this Agreement (except as provided in Section 23(5)), in respect of the Collateral (irrespective of whether ranking behind the Security Interest created hereby), shall not permit the existence of any such Lien, and shall not grant control over any of the Collateral to any Person other than the Secured Party;
(g)
to the Pledgor’s knowledge, no transfer restrictions apply to any of the Collateral, except as have been complied with;
(h)
to the Pledgor’s knowledge, the obligations that are Collateral constitute, where applicable, the legal, valid and binding obligation of the issuer of such Collateral, enforceable in accordance with its terms, subject only to any limitation under Applicable Laws relating to (i) bankruptcy, insolvency, fraudulent conveyance, arrangement, reorganization or creditors’ rights generally, and (ii) the discretion that a court may exercise in the granting of equitable remedies;
(i)
the Pledgor does not know of any claim to or interest in any Collateral, including any adverse claims. If any Person asserts any Lien, encumbrance or adverse claim against any of the Collateral, the Pledgor will promptly notify the Secured Party;
(j)
the Pledgor has not consented to, will not consent to, and has no knowledge of any control by any Person with respect to any Collateral, other than the Secured Party or the Custodian;
(k)
the Pledgor will notify the Secured Party immediately upon becoming aware of any change in an “issuer’s jurisdiction” within the meaning of the STA and the equivalent legislation in any other jurisdiction in respect of any Collateral that are uncertificated securities;
(l)
the Pledgor will not change its name in any manner or its jurisdiction of incorporation without providing at least 30 days’ prior written notice to the Secured Party and the Custodian;
(m)
the Pledgor will not change the jurisdiction of its head office without providing at least 30 days’ prior written notice to the Secured Party;
(n)
the Pledgor will grant to the Secured Party such further security interests, assignments, mortgages, charges, hypothecations and pledges in such of the Collateral that is not effectively subject to a valid and perfected first ranking security interest pursuant to this Agreement, and in each relevant jurisdiction as reasonably

17


determined by the Secured Party. The Pledgor will perform all acts, execute and deliver all agreements, documents and instruments and take such other steps as are reasonably requested by the Secured Party at any time to register, file, signify, publish, perfect, maintain, protect, and enforce the Security Interest including: (i) executing, recording and filing of financing or other statements, and paying all taxes, fees and other charges payable, (ii) placing notations on its books of account to disclose the Security Interest, (iii) delivering acknowledgements, confirmations and subordinations that may be necessary to ensure that the Security Interest constitutes a valid and perfected first ranking security interest, (iv) executing and delivering any certificates, endorsements, instructions, agreements, documents and instruments, required to register, file, signify, publish, perfect, maintain, protect and enforce the Security Interest. The documents contemplated by this paragraph must be in form and substance reasonably satisfactory to the Secured Party.
(2)
The Custodian represents and warrants that it does not use any subcustodian in respect of securities that it holds through a securities account at CDS or that it holds in physical form, and it covenants that it will not do so in the future.
Section 17     Collateral Matters.
(1)
The Custodian acknowledges and agrees that:
(a)
it has not entered into, and will not enter into, any agreement, other than this Agreement, in which it agrees to comply with any Entitlement Order or other instruction or direction in respect of the Collateral or any portion thereof and it will not accept or act upon an Entitlement Order, instruction or direction in respect of the Collateral or the Securities Account, except as provided in this Agreement;
(b)
all property (whether a credit balance, a security, an instrument or other property) credited to or held in the Securities Account is to be treated as a financial asset under the STA and the equivalent legislation in other jurisdictions;
(c)
the Securities Account is a “securities account” for purposes of the STA and the equivalent legislation in other jurisdictions;
(d)
all account statements for the Securities Account shall show as a credit balance to the Securities Account any cash representing proceeds derived from property held in the Securities Account or cash delivered to the Securities Account as original Collateral, notwithstanding that the Custodian may (and is hereby permitted) to hold such cash in one or more deposit accounts maintained with a deposit-taking institution;

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(e)
it is acting as securities intermediary, for purposes of the STA and the equivalent legislation in other jurisdictions, in respect of the Collateral and any security entitlements credited to the Securities Account; and
(f)
the securities intermediary’s jurisdiction of the Custodian for purposes of the STA, and the equivalent legislation in other jurisdictions, is the Province of Ontario, Canada.
(2)
Each of the Pledgor and the Secured Party acknowledges and agrees that:
(a)
the Custodian shall have no obligation to register any financing statement or other personal property security filings in respect of any of the Collateral, or to perfect or maintain the perfection of any Lien, other than its obligation to open and maintain the Securities Account in accordance with the terms of this Agreement; and
(b)
the Custodian shall not be responsible for determining the amount of Collateral required to be delivered by the Pledgor at any time pursuant to this Agreement or to determine whether the Collateral held in the Securities Account are Permitted Investments.
(3)
Each of the Pledgor and the Custodian acknowledges and agrees that to the extent that any other agreement between the Pledgor and the Custodian contains a provision that is inconsistent with the designation of the securities intermediary’s jurisdiction of the Custodian for the purposes of the STA set out in Section 17(1)(c) hereof such agreement is hereby deemed to be amended to remove such inconsistency.
Section 18
Appointment and Duties of the Custodian.
(1)
The Custodian agrees to act as Custodian and, in that connection, agrees to open and maintain the Securities Account in accordance with the terms of this Agreement. In particular, the Custodian agrees as follows:
(a)
Except as otherwise provided herein, all securities and all other property delivered to the Custodian pursuant to this Agreement or the Reinsurance Agreement for credit to the Securities Account, or otherwise as Collateral, shall promptly be credited to, and shall be held in, the Securities Account. The Custodian shall hold the Collateral in accordance with the terms and conditions of this Agreement. The Custodian shall hold the Collateral as client property separate and apart from its general property. All Collateral shall at all times and in all circumstances be clearly recorded in the books and records of the Custodian as being separate and apart from the assets of the Custodian and in a manner which reflects the Pledgor as the beneficial owner of

19


the securities and other property in the Securities Account. The Custodian shall make notations in its records that the Securities Account is subject to a security interest in favour of the Secured Party.
(b)
The Custodian shall promptly credit and deposit to the Securities Account all cash or other amounts received as dividends, interest, distributions or other payment related to the Collateral, including all cash or other amounts received pursuant to Section 7(3).
(c)
The Custodian shall, with respect to Corporate Actions, use reasonable efforts to promptly forward to the Pledgor, or, on Direction from the Pledgor, to the Investment Manager, a Corporate Action notice that contains a summary of information which has actually been received by the Custodian from third party sources believed by the Custodian to be reliable, and request Directions with respect to such Corporate Action where required. The Custodian shall, with respect to Voting Materials, use reasonable efforts to promptly forward, or arrange to have promptly forwarded, to the Pledgor (or to the Investment Manager which the Pledgor has designated as having responsibility for the relevant security) all Voting Materials which the Custodian receives in respect of securities forming part of the Collateral. The Custodian shall be under no duty to investigate, participate in or take affirmative action concerning any Corporate Actions or Voting Materials, except in accordance with a Direction given in accordance with this Agreement, and upon such indemnity and provision for fees and expenses as the Custodian may require. For greater certainty, other than as described in this paragraph and in (1)(e) below, the Custodian shall not be obligated to forward or summarize any other shareholder communications, including shareholder mailings, notices or reports, and the Custodian shall have no responsibility or liability for ensuring the accuracy or adequacy of such third party information contained in any such Voting Materials or Corporate Action notice.
(d)
The Custodian shall register the Collateral in the Custodian’s own name, in the name of a Depository or in the name of a nominee, or in bearer form, if the security is not capable of being registered or registration of it would not be in the best interests of the Pledgor and the Secured Party.
(e)
The Custodian shall account for all Collateral in the Securities Account and shall provide monthly statements of account. Additional statements as required to satisfy the requirements of the Superintendent and any other regulatory or administrative agencies will also be provided as requested by the Secured Party, the Pledgor, the Superintendent or such other regulatory or administrative agency, all at the expense

20


of the Pledgor. Upon the expiration of ninety (90) days from the date of mailing of any statement, the Custodian shall be fully released and discharged from any liability or accountability to any party with respect to the acts or transactions disclosed in such statement, except for those certain acts and transactions which the Pledgor or the Secured Party has identified by giving written notice to the Custodian.
(f)
The Custodian shall respond to any direct inquiries of the Pledgor, the Secured Party, the Bermuda Monetary Authority (BMA) as the Pledgor’s regulator or any of their representatives, concerning the Securities Account or the Collateral, and shall upon reasonable prior notice provide to the Pledgor, the Secured Party and/or the Pledgor’s applicable regulator detailed inventories of all securities and other property held in the Securities Account, and the Custodian shall, upon reasonable prior notice and subject to commercially reasonable requirements, permit the Pledgor, the Secured Party, the Pledgor’s regulator, or any of their representatives, to examine and audit all securities and other property held in the Securities Account. The Custodian shall promptly provide notice to the Secured Party and the Pledgor concerning audits of the Pledgor’s regulator. The parties acknowledge that copies of statements and confirmations relating to the Securities Account are available through the Custodian’s client access web portal, and the Pledgor hereby consents to the Custodian granting access to the Secured Party to information regarding the Securities Account by such web portal and such consent to access may not be withdrawn without the consent of the Secured Party. The Pledgor and the Secured Party hereby consent to the Custodian granting access to the Pledgor’s regulator to information regarding the Securities Account by the Custodian’s client access web portal if such access were to be requested.
(g)
The Custodian shall keep records of the administration of the Securities Account. The Pledgor, the Pledgor’s regulator, the Secured Party and/or any other persons to whom the Custodian is legally obligated to provide access, may examine such records upon reasonable prior notice during business hours through any person or persons duly authorized in writing by the Pledgor, the Pledgor’s regulator the Secured Party and/or such other person, as the case may be.
(h)
The Custodian shall notify the Pledgor and the Secured Party of any claim of which the Custodian has actual notice against the Collateral or any part thereof exerted by any Person, or of any loss, destruction of or damage to the Collateral or any part thereof.
(i)
The Custodian shall, on the receipt from the Secured Party of an Entitlement Order, or notice from the Secured Party that such surrender or transfer is required in

21


connection with a realization effected in accordance with Section 10, surrender possession of all or part of the Collateral or transfer all or part of the Collateral from the Securities Account to the Secured Party, another Person or to an account designated by the Secured Party, all as Directed by the Secured Party.
(j)
The Custodian will, on or before the fifteenth day of each month, or, if the fifteenth day is not a business day of the Custodian, on or before the first business day of the Custodian following the fifteenth day, provide to the Superintendent, in a form acceptable to the Superintendent, a declaration with respect to the Collateral, in such form as the Superintendent may require, together with paper and electronic copies of information required by the Superintendent with respect to the Collateral. The Secured Party hereby appoints the Custodian as its agent for the purpose of filing such declaration and authorizes the Custodian to file each such declaration on its behalf. The Secured Party acknowledges that such declaration may as an administrative matter be filed by the Custodian as part of a larger filing made in respect of other similar arrangements with other clients.
(k)
Notwithstanding Section 17.1(c) of the PPSA, the equivalent legislation in any other jurisdictions or any other provision of Applicable Law, the Custodian shall not lend, re-pledge or re-hypothecate the Collateral or any portion thereof.
(l)
The Collateral shall not be used as part of the Custodian’s or any other Person’s securities lending program.
Section 19
Directed Powers.
(1)
The Custodian shall exercise the following powers and authority in the administration of the Securities Account only upon Direction of the Pledgor or its Investment Manager and, to the extent required by Section 2, the consent of the Secured Party and, after receipt of an Entitlement Order from the Secured Party or a notice pursuant to Section 10(d) from the Secured Party, only upon the Direction of the Secured Party:
(a)
settle the purchase and sale of Collateral; and
(b)
complete and process such Voting Materials and process Corporate Actions as the Custodian may be Directed, provided that the Custodian has received Directions within the time frames specified by the Custodian in any such Voting Materials or Corporate Action notice applicable thereto. Where Directions have not been provided within such time frames, the Custodian will take no action except only in the case of Corporate Actions and where a default option exists, such default option as outlined in the notice will apply. In the event that Directions are provided after such

22


time frames, the Custodian shall use reasonable efforts to process such Corporate Actions or Voting Materials but the Custodian shall have no liability for failure to process such Voting Materials or Corporate Actions.
(2)
Save and except for carrying out Directions as provided herein, the Custodian shall have no responsibility for any trading in securities forming part of the Collateral, the investment management of the Collateral or for any investment decisions.
Section 20     Contractual Settlement.
The Custodian shall, in jurisdictions where settlement practices permit, credit the Securities Account with Collateral, in connection with the receipt of interest or dividends or the sale or redemption of any security held hereunder, and debit such Securities Account, in connection with the purchase of any security, on the Contractual Settlement Date with respect thereto, whether or not such monies have been received, or payment made, by the Contractual Settlement Date. However, if after a reasonable time (as determined by the Custodian) following the Contractual Settlement Date any such payment or receipt shall fail to take place for any reason other than the failure of the Custodian to make payment against delivery or delivery against payments, all related credits and debits shall be reversed and adjusted to reflect the failure of the transaction to take place.
Section 21     Services to be Performed without Direction.
(1)
The Custodian may, without Direction:
(a)
hold securities forming part of the Collateral through a Depository on the terms of business of the operators of such Depository, and may effect settlement in accordance with the customary or established trading and processing practices and procedures in the jurisdiction or market in which any transaction in respect of the Collateral occurs. The Custodian shall be fully protected and absolved from any liability howsoever arising from effecting transactions in the foregoing manner except to the extent that such liability arises out of the Custodian’s breach of its Standard of Care (as defined herein) in carrying out Directions in relation to such transactions.
(b)
The Custodian may commingle Collateral held through a Depository with property of other clients of the Custodian (but not with property held for the Custodian’s own account).
(c)
Where the Collateral is so held through a Depository, the Pledgor and the Secured Party confirm that they will not assert any claim in respect of such Collateral which would be contrary to the rules and procedures of such Depository, and will not

23


knowingly act in any way which could result in the Custodian being in breach of any rule or procedure of such Depository.
(d)
enter into and settle foreign exchange transactions, on behalf of the Pledgor, for purposes of facilitating settlement of trades of Collateral or otherwise, and any such transactions may be entered into with such counterparties (including but not limited to the Custodian acting as principal) as the Custodian may choose in its sole discretion, including Affiliates of the Custodian, unless the Pledgor otherwise Directs;
(e)
to the extent it may do so in the ordinary course of its business, (i) collect income payable to and distributions due to the Securities Account and sign on behalf of the Pledgor or the Secured Party any declarations, affidavits, certificates of ownership and other documents required to collect income and principal payments, including but not limited to, tax reclamations, rebates and other withheld amounts, and (ii) collect proceeds from securities or other property which may mature, provided that whenever a security or other property offers the Custodian the option of receiving dividends in shares or cash, the Custodian is authorized to select the cash option unless the Custodian receives a Direction to the contrary. The Custodian shall not be responsible for the failure to receive payment of (or late payment of) distributions with respect to securities or other property held in the Securities Account.
(f)
present for redemptions or exchange any securities or other property which may be recalled, redeemed, withdrawn or retired provided that timely receipt of written notice of the same is received by the Custodian from the issuer.
(g)
retain uninvested cash balances from time to time on hand in the Securities Account and may, in its sole discretion, hold such cash balances on deposit with a bank or another deposit taking institution, including the Custodian or its Affiliates, in such interest bearing account as the Custodian may, in its sole discretion, determine.
For greater certainty, the parties agree that all free credit balances standing to the credit of any Account, including un-invested cash balances and all interests earned, shall constitute “financial assets” for the purposes of the STA and shall be subject to the Security Interest; and
(h)
do all such acts, take all such proceedings and exercise all such rights and privileges, although not specifically mentioned in this Agreement, as the Custodian may deem necessary to carry out its rights and obligations under this Agreement.

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(2)
The Custodian may appoint Agents and nominees (which may be Affiliates of or otherwise connected to the Custodian) to perform any of the services to be performed by the Custodian as required under the Agreement.
(3)
The Custodian shall act in accordance with its Standard of Care in the selection and monitoring of Agents and nominees.
(4)
The Custodian shall be fully protected and absolved from liability howsoever arising from any acts or omissions of any agent appointed by the Custodian or appointed by the Secured Party or Pledgor; provided, however, that the Custodian will be liable for any gross negligence, recklessness and/or wilful/ intentional acts by its agents. For greater certainty, Depositories are not agents of the Custodian.
(5)
For greater certainty, any rights, powers, authorities, benefits, and limitations on liability or responsibility whatsoever granted to the Custodian under this Agreement or conferred upon the Custodian otherwise at law shall be deemed to have been granted to, or conferred upon, any and all Agents and nominees duly appointed by the Custodian, and in furtherance thereof, any references to “the Custodian” herein shall be construed as references to such Agents or nominees, as the context requires.
(6)
Settlements of transactions may be effected in accordance with trading and processing practices customary in the jurisdiction or market where the transaction occurs. The Pledgor acknowledges that this may, in certain circumstances, require the delivery of cash or securities (or other property) without the concurrent receipt of securities (or other property) or cash and, in such circumstances, the Pledgor shall have sole responsibility for non receipt of payment (or late payment) by the counterparty.
Section 22     Express Provisions.
Notwithstanding any of the foregoing provisions, the Custodian, in the administration of the Securities Account, is to be bound solely by the express provisions of this Agreement, and such further written and signed Directions as the appropriate party or parties may, under the conditions herein provided, deliver to the Custodian. The Custodian shall have no duties or obligations under any other agreement, notwithstanding that such other agreement may be referred to in this Agreement. The Custodian shall be under no obligation to enforce the Pledgor's or the Secured Party’s obligations under this Agreement, except as otherwise expressly provided or Directed pursuant hereto in accordance with the terms hereof.

25


Section 23
Security Interest, Set-Off and Deduction.
(1)
If a Direction from the Pledgor, or the settlement of a transaction would create a debt owing, overdraft or short position in the Securities Account (an “ Overdraft ”), then the Custodian is authorized to, but shall not be obliged to, act on such Direction or complete such transaction.
(2)
Interest on any Overdraft shall be calculated on the daily balance of the amount owing (before and after demand, default and judgment) at an annual rate established and declared by the Custodian from time to time, subject to such minimum charges as declared from time to time, with interest on overdue interest at the same rate. Interest is payable monthly and shall form part of the Overdraft.
(3)
The Pledgor agrees to pay to the Custodian promptly upon notice, the amount of any Overdraft together with any interest that has accrued in accordance with Section 23(2).
(4)
Notwithstanding any other provision of this Agreement, the Custodian, in its reasonable discretion, shall be entitled to decline to act upon any Direction of the Pledgor unless and until all the amounts due and owing to the Custodian under this Agreement have been paid in full. The Custodian shall give the parties notice of its decision not to act on any such Direction as soon as practicable thereafter.
(5)
The Pledgor hereby assigns, conveys, mortgages, pledges, hypothecates, and charges in favour of, and grants a security interest to the Custodian in all of the Pledgor’s right, title and interest in and to all Collateral now owned or hereafter acquired by the Pledgor and held by the Custodian pursuant to this Agreement and all proceeds thereof (the “ Custodian Security Interest ”), as continuing collateral security for the due payment of the obligations from time to time of the Pledgor, whether present or future, absolute or contingent, liquidated or non-liquidated, of whatsoever nature or kind in any currency, in respect of fees and expenses arising pursuant to this Agreement that are unpaid and owing to the Custodian, and any Overdrafts (collectively, the “ Custodial Obligations ”).
The Pledgor and the Custodian agree that it is their intention that the Custodian Security Interest hereby created shall attach immediately to any Collateral in which the Pledgor has an interest on the date hereof, and, with respect to after-acquired Collateral, forthwith at the time the Pledgor acquires an interest therein, all in accordance with the terms hereof.
The Pledgor acknowledges and agrees that the Custodian Security Interest in the Collateral shall have priority over any other security interest therein granted by the Pledgor to the extent of the Custodial Obligations, and the Custodian shall be under no obligation to waive,

26


subordinate or discharge the Custodian Security Interest except upon the indefeasible payment and satisfaction in full of such unpaid Custodial Obligations.
(6)
If and to the extent that at any time any unpaid Custodial Obligations owing to the Custodian hereunder are outstanding and unpaid, in addition to any right or remedy that the Custodian may otherwise have hereunder or under any Applicable Law, the Custodian is hereby authorized, in its discretion (upon reasonable notice to the Pledgor and the Secured Party and in accordance with Applicable Law), both before and after demand or judgment, and whether or not default has occurred hereunder:
(a)
to sell, as agent for the Pledgor, such portion of the Collateral (which, for the purposes of this Section 23 shall include any account with any third party with whom cash has been deposited by the Custodian on behalf of the Pledgor) as may be required to satisfy any such unpaid Custodial Obligations, on such commercially reasonable terms as it thinks fit in its discretion, and
(b)
set off against and deduct from the proceeds of any such sale owing to the Pledgor such amounts of such unpaid Custodial Obligations as the Custodian thinks fit in its discretion, and account for any surplus to the Pledgor, or as provided in this Agreement,
it being agreed and understood by the Pledgor that the exercise of the Custodian’s rights under this Section 23(6) shall not be construed as the exercise of a right of realization in respect of Custodian Security Interest but a separate right of set-off (hereinafter referred to as “ Set-Off Rights ”).
(7)
Notwithstanding any other term of this Agreement, the Custodian hereby subordinates in favour of the Secured Party all security interests, liens, encumbrances, hypothecs and claims and hereby waives any rights of set-off it may have, now or in the future, against the Collateral, including any free credit or cash balance in the Account (other than in respect of the Custodian Security Interest and the Set-Off Rights).
Section 24
Waiver by Custodian.
Subject to Section 2(8) and Section 23, the Custodian acknowledges and agrees that it has not acquired any right, title or interest in the Collateral on its own behalf other than such rights as it may have as a securities intermediary and the right and obligation to hold and administer the Collateral in accordance with the terms of this Agreement.

27


Section 25     Charges of the Custodian.
The Pledgor agrees to pay all reasonable costs, fees or expenses charged by the Custodian for acting as the Custodian pursuant to this Agreement, including fees incurred by the Custodian for legal services deemed reasonably necessary by the Custodian as a result of the Custodian’s so acting. Following the giving of an Entitlement Order, the Secured Party shall be required to pay the fees and expenses arising from this Agreement.
Section 26
Indemnification of Custodian.
(1)
Prior to the issuing of an Entitlement Order by the Secured Party, the Pledgor shall indemnify and hold the Custodian, its directors, officers, employees, representatives and agents harmless from and against any and all taxes, charges, costs, expenses, damages, claims, demands and liabilities to which they, or any of them, may become subject, including legal and accounting costs, for or in respect of anything done or omitted to be done in connection with this Agreement or in respect of the Collateral, except for the negligence, wilful misconduct or lack of good faith of the Custodian, such indemnification to survive the resignation or removal of the Custodian and the termination of this Agreement.
(2)
Following the issuing of an Entitlement Order by the Secured Party, the Secured Party shall indemnify and hold the Custodian, its directors, officers, employees, representatives and agents harmless from and against any and all taxes, charges, costs, expenses, damages, claims, demands and liabilities to which they, or any of them, may become subject, including legal and accounting costs, for or in respect of anything done or omitted to be done in connection with this Agreement or in respect of the Collateral following the issuance of the Entitlement Order, except for the negligence, wilful misconduct or lack of good faith of the Custodian, such indemnification to survive the resignation or removal of the Custodian and the termination of this Agreement.
(3)
Whenever an action by the Custodian is authorized by Direction pursuant to the provisions of this Agreement and such action is taken in accordance with such Direction, the party or parties authorizing such action by way of Direction hereby agree to indemnify the Custodian against all losses, damages, costs and expenses, including reasonable legal fees, resulting from any action so taken by the Custodian, except for any such losses, damages, costs or expenses resulting from its own negligence, wilful misconduct or lack of good faith.
Section 27
Limitation of Custodian Liability.
(1)
The Custodian, in carrying out its duties in respect of the safekeeping of, and dealing with, the Collateral, shall exercise the degree of care, diligence and skill that a prudent Canadian trust company would exercise in comparable circumstances (the “ Standard of Care ”).

28


Except to the extent that the Custodian has not complied with the Standard of Care, the Custodian shall not be liable for any act or omission in the course of, or connected to, rendering services hereunder. Without limitation, the Custodian shall not be liable for any losses to, or diminution of, the Collateral, except to the extent that such loss or diminution is directly caused by the Custodian’s breach of the Standard of Care. In no event shall the Custodian be liable for any consequential or special damages, including but not limited to loss of reputation, goodwill or business.
(2)
Notwithstanding the foregoing or any other provision of this Agreement, the Custodian’s liability arising from the Blocking Service shall in no event exceed the aggregate amount of fees received by the Custodian with respect to the specific Securities Account in the preceding six (6) months.
(3)
The Custodian shall not be responsible for:
(a)
any property until it has been received by the Custodian;
(b)
the title, validity or genuineness of any property or evidence of title to any Collateral or any defect in ownership or title;
(c)
any act or omission required or demanded by any governmental, taxing, regulatory or other competent authority in any country in which all or part of the Collateral is held or which has jurisdiction over the Custodian the Pledgor or the Secured Party;
(d)
any loss resulting from official action (including nationalisation and expropriation), currency restrictions or devaluations, acts or threat of war or terrorism, insurrection, revolution or civil disturbance, acts of God, strikes or work stoppages, inability of any Depository or other settlement system to settle transactions, interruptions in postal, telephone, telex and/or other communication systems or in power supply, the failure of any third party appointed by the Pledgor to fulfil its obligations hereunder, or any other event or factor beyond the reasonable control of the Custodian;
(e)
any failure to act on Directions, if the Custodian reasonably believed that to do so might result in breach of Applicable Law or the terms of this Agreement; or
(f)
any Collateral which it does not hold or which is not directly controlled by the Custodian or its appointed Agents.
(4)
The Custodian's duties and responsibilities in connection with this Agreement will be limited to those expressly set forth in this Agreement. The Custodian is not a principal, participant, party or beneficiary in any transaction underlying this Agreement and will have no duty to

29


inquire beyond the terms and provisions hereof. Save and except for carrying out Directions as provided herein, the Custodian shall have no responsibility for trading in securities which form part of the Collateral, or for any investment management or investment decision. The Custodian shall not be held responsible for the sufficiency of the Collateral or for any market decline in the value of the Collateral and shall have no obligation to notify either the Pledgor or the Secured Party of any such decline. The Custodian will not be liable for any error in judgement, any act or omission, any mistake of law or fact, or for anything it may do or refrain from doing in connection herewith, except for its own negligence, wilful misconduct or lack of good faith.
(5)
Should any dispute arise in respect of any Person’s entitlement to or rights in the Collateral under this Agreement, or any Person’s right to give an Entitlement Order or other Direction with respect thereto, and notice of such dispute has been given to the Custodian, or should the Custodian in good faith be uncertain as to whether a particular action it would otherwise be required to take under this Agreement would result in a breach of Applicable Law, this Agreement, or the rights of another Person, it will be entitled to withhold delivery of all or any part of the Collateral until the dispute is resolved, any conflicting demands are withdrawn or any such uncertainty is resolved, and will have the right, but not the obligation, to institute a petition for interpleader in any court of competent jurisdiction to determine the rights of the respective parties to the dispute. Should a petition for interpleader be instituted, or should the Custodian be threatened with litigation or become involved in litigation or arbitration in any manner whatsoever in connection with this Agreement or the Collateral, the Pledgor hereby agrees to reimburse the Custodian for its lawyers' fees and any and all other expenses, losses, costs and damages incurred by the Custodian in connection with such threatened or actual litigation or arbitration. Notwithstanding any other term of this Agreement, the Custodian shall have no responsibility or liability to the Pledgor for complying with an Entitlement Order concerning the Securities Account issued by the Secured Party, and shall have no responsibility to investigate the appropriateness of any such Entitlement Order, even if the Pledgor notifies the Custodian that the Secured Party is not legally entitled to originate any such Entitlement Order, unless the Custodian has been served with an injunction, restraining order or other legal process issued by a court of competent jurisdiction (“ Court Order ”) enjoining it from complying and has had a reasonable opportunity to act on such Court Order.
(6)
The Custodian may employ and retain and consult with legal counsel or professional advisors concerning any questions relating to its duties or responsibilities hereunder and the Pledgor shall reimburse the Custodian for all reasonable costs and expenses associated therewith, however in the event of Custodian’s decision to retain legal counsel or professional advisors, the Custodian agrees to advise the Pledgor of it’s intent to do so prior to engagement. The Custodian shall be entitled to rely on and may act upon advice of such legal counsel or

30


professional advisers and shall not be liable for any loss or damage resulting from so relying or acting if the advice was within the area of professional competence of the person from whom it was received and the Custodian acted in good faith in relying thereon.
(7)
The Pledgor shall notify the Custodian in writing of any taxes payable in respect of the Collateral. The Custodian shall use reasonable efforts, based upon the information available to it, to assist the Pledgor with respect to any taxes. If the Custodian is responsible under any Applicable Law for any taxes in respect of the Securities Account, the Pledgor shall inform the Custodian in writing of such taxes, shall Direct the Custodian with respect to the payment of such taxes and shall provide the Custodian with the necessary funds and all information required to fund, pay or meet such taxes. The Custodian shall have no responsibility or liability for and shall be indemnified and held harmless by the Pledgor for any assistance provided to the Pledgor and for any taxes now or hereafter imposed on the Securities Account or the Pledgor or the Custodian in respect of the Securities Account by any taxing authorities, domestic, foreign or international.
(8)
Each of the Pledgor and the Secured Party shall provide the Custodian with an incumbency certificate substantially in the form set out in Schedule “C” setting out the names and sample signatures of persons authorized to give Directions to the Custodian hereunder. The Custodian shall be entitled to rely on such certificate until a revised certificate is provided to it hereunder. Unless otherwise expressly provided, each Direction shall continue in full force and effect until superseded or cancelled by another written instruction. Any Directions shall, as against the Pledgor and the Secured Party, if applicable, and in favour of the Custodian, be conclusively deemed to be Directions for the purposes of this Agreement notwithstanding any error in the transmission thereof or that such written instruction may not be genuine, if believed by the Custodian acting in good faith, to be genuine. Provided however that the Custodian, subject to Section 27(9), may in its discretion decline to act upon any Direction: (a) that is insufficient or incomplete; or (b) that is not received by the Custodian in sufficient time to give effect to such written instructions; or (c) where the Custodian has reasonable grounds for concluding that the same has not been accurately transmitted or is not genuine. If the Custodian declines to give effect to any Directions for any reason set out in the preceding sentence, it shall notify the person giving such instruction forthwith after it so declines.
(9)
Except as otherwise expressly provided in this Agreement, any statement, certificate, notice, request, consent, approval, or other instrument to be delivered or furnished by the Pledgor or the Secured Party shall be sufficiently executed if executed in the name of the Pledgor or the Secured Party by persons named in the incumbency certificate delivered pursuant to Section 27(8). The Custodian shall be protected in acting upon any written statement or

31


other instrument made by such officers or agents of the Pledgor or the Secured Party with respect to the authority conferred on it.
Section 28
Removal and Resignation of the Custodian.
(1)
The Custodian may at any time resign from, and terminate its capacity hereunder by delivery of written notice of resignation, effective not less than ninety (90) days after receipt by both the Secured Party and the Pledgor. The Custodian may be removed by the Pledgor by (i) delivery to the Custodian and the Secured Party of a written notice of removal, effective not less than ninety (90) days after receipt by the Custodian and the Secured Party of the notice, and (ii) receipt of the Secured Party’s consent to such action, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, no such resignation by the Custodian or removal by the Pledgor shall be effective until a successor to the Custodian shall have been duly appointed by the Pledgor and approved by the Secured Party and all Collateral in the Securities Account have been duly transferred to such successor. The Pledgor, upon receipt of notice of resignation or removal of the Custodian, shall undertake to obtain the agreement of a qualified, successor depository, agreeable to the Secured Party, to act as a successor Custodian in accordance with all agreements of the Custodian herein. The Secured Party agrees not to withhold unreasonably approval of such Custodian.
(2)
Any successor Custodian appointed hereunder shall execute an instrument accepting such appointment hereunder and shall deliver the same to the Pledgor and the Secured Party and to the then acting Custodian. Thereupon such successor Custodian shall, without any further act, assume the obligations and duties of the Custodian under this Agreement with like effect as if originally named herein; but the predecessor Custodian shall nevertheless, when requested in writing by the successor Custodian, execute an instrument or instruments assigning such of its rights and powers, and shall duly assign, transfer and deliver to the Custodian all property and money held by such predecessor hereunder. The predecessor Custodian shall continue to be indemnified by reason of such entity being or having been a Custodian in accordance with the terms hereof.
Section 29     No Conflict.
(1)
The Custodian represents and warrants to the Secured Party and the Pledgor that, at the time of the execution and delivery of this Agreement, no material conflict of interest exists with respect to the Custodian’s role hereunder. The Custodian shall resign by giving notice in accordance with Section 28 if a material conflict of interest arises with respect to its role as custodian hereunder that is not eliminated within ninety (90) days after the Custodian becomes aware of such conflict of interest. Immediately after the Custodian becomes aware

32


that it has a material conflict of interest, it shall provide the Secured Party and the Pledgor with written notice of the nature of that conflict.
(2)
(The Pledgor and the Secured Party agree that the Custodian, and any of its divisions, branches or Affiliates, may take any one or more of the following actions without creating a conflict of interest; and without being liable to account therefor or being in breach of this Agreement:
(a)
purchase, hold, sell, invest in or otherwise deal with securities or other property of the same class and nature as may be part of the Collateral, whether on its own account or for the account of another (in a fiduciary capacity or otherwise);
(b)
act as a market maker in any securities that form part of the Collateral;
(c)
provide brokerage services to other clients;
(d)
act as financial adviser to the issuer of such securities;
(e)
act in the same transaction as agent for more than one client;
(f)
act as a deposit taking institution holding the cash balances in the Securities Account;
(g)
have a material interest in any issue of securities that form part of the Collateral;
(h)
subject to Section 31(1), use in other capacities knowledge gained in its capacity as Custodian hereunder; and
(i)
earn profits from any of the activities listed herein.
Section 30    Communications and Directions.
(1)
All communications hereunder (including, for greater certainty, Directions) must be given by one of the following methods of communication:
personal or courier delivery;
prepaid ordinary mail;
authenticated telex;
facsimile;
S.W.I.F.T.;
one of the Custodian's secured client access channels, including Investor Services Online;

33


directly between electromechanical or electronic terminals (including, subject to Section 30(5), the internet or unsecured lines of communication); or
telephone (subject to Section 30(3)).
(2)     Communications should be addressed, as applicable, as follows:
(i)
to the Pledgor at:
Wyndham Insurance Company (SAC) Limited
Swan Building 2 nd Floor
26 Victoria Street,
Hamilton HM 12
Bermuda
Attention: William Wood
in respect of Segregated
Account AX
Email: William.Wood@ctplc.com
With a carbon copy to:
American Pet Insurance Company.
907 NW Ballard
Seattle, Washington, 98107-4607
U.S.A.
Attention: Regulatory and Legal
Email:
tim.graff@trupanion.com
asher.bearman@trupanion.com
(ii)
to the Secured Party at:
Omega General Insurance Company
34 King Street East, Suite 1200
Toronto, Ontario M5C 2X8
Attention:
President or CEO
Facsimile:
416-361-6113

34


(iii)
to the Custodian at:
RBC Investor Services Trust
155 Wellington Street West, 7 th Floor
P.O. Box 7500, Station A
Toronto, Ontario
M5W 1P9
Attention:
Senior Manager, Client Service Insurance
Facsimile:
416-955-2600
Any party may change its address and facsimile number for communications by notifying the other parties in accordance with the notice provisions above. Any communication delivered personally shall be deemed to have been given and received on the day it is so delivered (or if that day is not a Business Day, on the next succeeding Business Day). Subject to disruptions in the postal service, any communication sent by prepaid ordinary mail shall be deemed to have been given and received on the fifth (5th) Business Day following the date of mailing. Any communication given by authenticated telex, facsimile, S.W.I.F.T., one of the Custodian’s secured client access channels or directly between electromechanical or electronic terminals (including, subject to Section 30(5) and Section 30(6), the internet or unsecured lines of communication) shall be deemed to have been given and received on the Business Day it is transmitted provided that it was received before 3:00 p.m. (Toronto time), and, if received after 3:00 p.m. (Toronto time), it shall be deemed to have been given and received on the Business Day following the day of transmission provided in each case that confirmation of transmission is available from the party giving the communication.
(3)
With respect to telephone Directions, the party giving such Directions shall endeavour to forward written Directions confirming such telephone Directions on the same day that such telephone Directions are given to the Custodian. The fact that such confirming written Directions are not received or that contrary Directions are received by the Custodian shall in no way affect the validity of any transactions effected by the Custodian on the basis of the telephone Directions.
The parties acknowledge and agree that some or all telephone communications between the parties, including, without limitation, Directions, may be recorded by the Custodian. In the event of any disagreement as to the content of any communication given by telephone, the Custodian’s recording will be conclusive and determinative of the contents of such communication.
(4)
Without limiting the foregoing, in the case of Directions sent through one of the Custodian’s secured access channels, including Investor Services Online, or sent directly between electromechanical or electronic terminals (including, subject to Section 30(5) and Section

35


30(6), the internet or unsecured lines of communication), the parties acknowledge that it may not be possible for such Directions to be executed, however the Custodian shall nevertheless be protected in relying on such Directions as if they were written Directions from the Pledgor or the Investment Manager, as the case may be, executed by an authorized signatory of the Pledgor or the Investment Manager, as the case may be. The Custodian shall be entitled, without further inquiry or investigation, to assume that such Directions have been duly and properly issued by the Pledgor or the Investment Manager, as the case may be, and that the sender(s) is/are duly authorized to act, and to provide Directions, on behalf of the Pledgor or the Investment Manager, as the case may be.
(5)
The parties acknowledge and agree that the Custodian, in providing the services hereunder, may forward reports and information to the parties or an Investment Manager, and may receive and act upon communications and instructions (including without limitation, Directions) received from the parties or an Investment Manager, through use of the internet or any other electronic means of communication which is not secure.
The parties acknowledge and agree that the internet is not a secure or confidential means of communication, and that accordingly, there are certain risks inherent in its use. The parties therefore agree that the Custodian shall bear no responsibility or liability whatsoever for any errors and omissions, or direct, indirect or consequential losses or damages that are directly attributable to the use of the internet as a means of communication, including any losses or damages arising from viruses or worms, or the interception, tampering or breach of confidentiality of data or information transmitted which is not encrypted and authenticated in accordance with the Custodian’s encryption standards.
The parties also agree that the Custodian may rely and act upon any email instructions or Directions received via the internet from the Parties, without the Custodian having to take any further actions of any kind to verify or otherwise ascertain the validity of such instructions or Directions, and any such instructions or Directions shall be binding on the party on whose behalf the e-mail instructions or Directions shall have been given and that such Party shall not make any claim or take any action or proceedings against the Custodian for any losses or damages whatsoever suffered by reason of the Custodian accepting and acting upon such instructions or Directions.
(6)
Nothing in this Agreement shall create an obligation for the Custodian to constantly monitor its electronic communication equipment, provided that reasonable monitoring is performed within business hours of the Custodian where communications are sent and the Custodian will not be held liable for an omission to act from not receiving electronically transmitted communications (including, without limitation, Directions). The party giving an electronic communication is responsible to ensure that it has been transmitted and received by the

36


correct recipient. In the event of any disagreement as to whether electronic communications (including, without limitation, Directions) have been received by the Custodian, the sender will have the onus of proving that such electronic communications have been so received by the correct recipient.
(7)
The Custodian shall:
(a)
be fully protected in acting upon any Direction believed by it to be genuine and presented by the proper person(s); and
(b)
be under no duty to make any investigation or inquiry as to any statement contained in any such Direction but may accept such statement as conclusive evidence of the truth and accuracy of such statement.
Section 31     Confidentiality.
(1)
Each party shall hold in confidence all information relating to the Collateral and this Agreement (“ Confidential Information ”) and may only release such information to others where required by Applicable Law, where such information was within such party’s possession on a non-confidential basis prior to it being provided to such party, such information is or becomes generally available to the public or as otherwise agreed between the parties. The parties hereby consent to the delivery and availability of a copy of this Agreement, and any amendment thereto, to the Superintendent.
(2)
Without limitation of Section 31(1) above, the parties agree that the Custodian may share Confidential Information, on a need-to-know basis, with its Agents, service providers, Affiliates, related companies, subsidiaries, parent companies and their respective parent companies, Affiliates, related companies and subsidiaries, for the purposes of marketing, administration, client services, to prevent fraud, to verify the identity of the parties and to prevent money laundering. The Custodian will also provide the information relative to the Pledgor and the Secured Party’s information, including Confidential Information, to any federal or provincial legal or regulatory body if required by law to do so.
The parties also agree and acknowledge that it may from time to time be necessary for the Custodian to disclose Confidential Information to third parties where the Custodian is compelled to do so by Applicable Law or such disclosure is necessary to protect a legitimate business interest of the Custodian, to the extent permitted by and consistent with applicable privacy legislation and the common law governing a bank’s duty of confidentiality.
(3)
The Pledgor acknowledges that the Custodian may from time-to-time be required to transfer, store and process Confidential Information outside of Canada. The parties further

37


acknowledge and agree that the contractual or other measures that the Custodian may use to protect such information are subject to the legal requirements of the jurisdiction where such information may be transferred, stored or processed, and that the Custodian may be required by law to disclose Confidential Information to the lawful authorities operating within that jurisdiction. The parties further agree and acknowledge that the Custodian shall in no way be liable or responsible in any way for any damages, costs or expenses whatsoever that the parties may face as a result of the Custodian being legally obligated to disclose any such Confidential Information.
Section 32
General.
(1)
The Agreement shall not be terminated except by a written release or discharge signed by the Secured Party. Upon termination of the Agreement and at the request and expense of the Pledgor, the Secured Party will execute and deliver to the Pledgor such financing statements and other documents or instruments as the Pledgor may reasonably require and the Custodian will redeliver to the Pledgor, or as the Pledgor may otherwise Direct the Custodian, any Collateral in its possession.
(2)
This Agreement does not operate by way of merger of any of the Secured Obligations and no judgment recovered by the Secured Party will operate by way of merger of, or in any way affect, the Security Interest, which is in addition to, and not in substitution for, any other security now or hereafter held by the Secured Party in respect of the Secured Obligations. The representations, warranties and covenants of the Pledgor and the representations and warranties of the Custodian in this Agreement survive the execution and delivery of this Agreement. Notwithstanding any investigation made by or on behalf of the Custodian, the Pledgor or the Secured Party, such covenants, representations and warranties continue in full force and effect.
(3)
The Pledgor will do all acts and things and execute and deliver, or cause to be executed and delivered, all agreements, documents and instruments that the Secured Party may require and take all further actions as the Secured Party may require for (i) protecting the Collateral, (ii) perfecting, preserving and protecting the Security Interest, and (iii) exercising all powers, authorities and discretions conferred upon the Secured Party and the Custodian. After the Security Interest becomes enforceable, the Pledgor will do all acts and things and execute and deliver all documents and instruments that the Secured Party may require for facilitating the sale or other disposition of the Collateral in connection with its realization.
(4)
This Agreement is in addition to, without prejudice to and supplemental to all other security now held or which may hereafter be held by the Secured Party.

38


(5)
If and to the extent that any provision of the Reinsurance Agreement is inconsistent with or conflicts with any provision of this Agreement governing the Pledgor and the Secured Party, the relevant provision of this Agreement shall prevail and govern to the extent of such inconsistency or conflict, and the Reinsurance Agreement shall be deemed to have been amended to the extent necessary to resolve any such inconsistency or conflict. Without limiting the generality of the foregoing, if and to the extent that the Reinsurance Agreement contains a provision that:
(a)
makes reference to an arrangement whereby the Pledgor’s obligations under such Reinsurance Agreement are to be secured, including, without limitation, by means of assets held in trust, cash deposit, letter of credit or other form of security (a “Security Arrangement”);
(b)
prescribes or identifies specific categories of assets or investments that are or may be permissible in connection with the Security Arrangement; or
(c)
sets out any rights of the Pledgor or the Secured Party with respect to withdrawals from or draws against the Security Arrangement or enforcement of the security represented thereby,
and such provision conflicts with any provision of this Agreement, such former provision shall be deemed to be amended to conform to the provisions of this Agreement, and if such amendment would not be possible without extensive and substantive changes to such Reinsurance Agreement, the relevant provision of this Agreement shall supersede and prevail over the provision of the Reinsurance Agreement to the extent necessary to give effect to the meaning and intent of this Agreement.
(6)
This Agreement is binding on the Pledgor, its successors and assigns, and enures to the benefit of the Secured Party, the Custodian, and their respective successors and assigns. This Agreement may not be assigned without the consent of the parties hereto.
(7)
The Pledgor acknowledges and agrees that in the event it amalgamates or merges with any other Person, it is the intention of the parties that the Security Interest (i) extends to: (A) all of the Collateral that any of the amalgamating corporations then own, (B) all of the Collateral that the amalgamated corporation thereafter acquires, (C) all of the Collateral in which any of the amalgamating corporations then has any interest and (D) all of the Collateral in which the amalgamated corporation thereafter acquires any interest; and (ii) secures the payment and performance of the Secured Obligations of each of the amalgamating corporations and the amalgamated corporation to the Secured Party in any currency, however or wherever incurred, and whether incurred alone or jointly with another or others and whether as principal, guarantor or surety and whether incurred prior to, at the time of or subsequent to

39


the amalgamation. The Security Interest attaches to the additional Collateral at the time of amalgamation and to any Collateral thereafter owned or acquired by the amalgamated corporation when such becomes owned or is acquired. Upon any such amalgamation, the defined term “ Pledgor ” means, collectively, each of the amalgamating corporations and the amalgamated corporation, the defined term “ Collateral ” means all of the property and undertaking and interests described in (i) above, and the defined term “ Secured Obligations ” means the obligations described in (ii) above.
(8)
If any court of competent jurisdiction from which no appeal exists or is taken, determines any provision of this Agreement to be illegal, invalid or unenforceable, that provision will be severed from this Agreement and the remaining provisions will remain in full force and effect.
(9)
This Agreement may only be amended, supplemented or otherwise modified by written agreement executed by the Secured Party, the Custodian and the Pledgor.
(10)
No consent or waiver by the Secured Party in respect of this Agreement is binding unless made in writing and signed by an authorized officer of the Secured Party. Any consent or waiver given by the Secured Party under this Agreement is effective only in the specific instance and for the specific purpose for which given. No waiver of any of the provisions of this Agreement constitutes a waiver of any other provision.
(11)
A failure or delay on the part of the Secured Party in exercising a right under this Agreement does not operate as a waiver of, or impair, any other right of the Secured Party however arising. A single or partial exercise of a right on the part of the Secured Party does not preclude any other or further exercise of that right or the exercise of any other right by the Secured Party.
(12)
All monies collected by the Secured Party upon the enforcement of its rights and remedies under this Agreement, including any sale or other disposition of the Collateral, will be applied on account of the Secured Obligations at such times, in such manner and in such order as the Reinsurance Agreement may require or as the Secured Party may determine.
(13)
This Agreement will be governed by, interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
(14)
This Agreement may be executed and delivered in any number of counterparts, each of which when executed and delivered is an original but all of which taken together constitute one and the same instrument.

40


(15)
Any action or proceeding against the Custodian arising out of or relating to this Agreement may only be brought in a court of competent jurisdiction in the Province of Ontario.
(16)
The Pledgor hereby irrevocably consents to the service of any and all process in any such action or proceeding by the delivery of copies of such process to the Pledgor at the address set out in relation to the Pledgor in Section 30(2). Nothing in this Section 32(16) limits the right of the Secured Party to serve process in any other manner permitted by law.
[remainder of this page deliberately left blank – signature page follows]


41


IN WITNESS WHEREOF this Agreement has been executed and delivered as of the date first above written.
WYNDHAM INSURANCE COMPANY (SAC) LIMITED, in respect of its Segregated Account AX

By:
Its:

By:
Its:
OMEGA GENERAL INSURANCE COMPANY

By:
Its:

By:
Its:
RBC INVESTOR SERVICES TRUST, as Custodian

By:
Its:

By:
Its:


42






SCHEDULE “A”
TO THE REINSURANCE SECURITY AGREEMENT
DATED AS OF THE 1 st DAY OF JANUARY, 2015
REINSURANCE AGREEMENT
Quota Share Reinsurance Agreement (Agreement number: 2014003) Made between Omega General Insurance Company and Wyndham Insurance Company (SAC) Limited, in respect of its Segregated Account AX, dated the __ day of ____, 20___.









SCHEDULE “B”
TO THE REINSURANCE SECURITY AGREEMENT
DATED AS OF THE 1 st DAY OF JANUARY, 2015
SECURITIES ACCOUNT









SCHEDULE “C”
TO THE REINSURANCE SECURITY AGREEMENT
DATED AS OF THE 1 st DAY OF JANUARY, 2015
CERTIFICATE OF AUTHORIZED SIGNATORIES (“C.O.A.S.”)
See attached









CERTIFICATE OF AUTHORIZED SIGNATORIES (including Category Guide)
CLIENT NAME:
 
ACCOUNT NUMBER(S)
 
(the “Account(s)”):
 
The Undersigned hereby authorizes the following person(s) (herein called " Authorized Person(s) ") to direct RBC Investor Services Trust ("RBCIS") with respect to certain categories Column E) of activities requiring authorization for said Account (see Category Guide for a list of categories of activities requiring authorization or Direction).
 
 
 
D . IS PERSON IN (A)
AN EMPLOYEE OF
UNDERSIGNED?
 
 
A.   NAME
B.  TITLE
C.  SPECIMEN SIGNATURE
YES
NO
IF " NO ", NAME OF COMPANY /
ORGANIZATION and RELATIONSHIP TO
UNDERSIGNED
E.   CATEGORY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All authorizations and Directions provided to RBCIS must be signed by the appropriate number of Authorized Persons indicated in the Category Guide. COAS is not valid if the Category Guide is not completed and attached. The Undersigned hereby confirms that RBCIS is fully protected in acting upon any instrument, certificate, direction or other writing (whether in written form or given by electronic transmission) presented to it and signed by the appropriate number of Authorized Persons (whether or not such Authorized Person is an employee of the Undersigned). The Undersigned also hereby assumes responsibility to review this Certificate from time to time as required and to provide RBCIS with a new Certificate if changes are made. Unless RBCIS receives a new Certificate, the Undersigned acknowledges and agrees that RBCIS may rely conclusively on the last Certificate filed with them.
For greater certainty and notwithstanding the foregoing, in the case of authorizations or Directions sent through one of RBCIS' secured access channels, including Investor Services Online, or sent directly between electromechanical or electronic terminals (including the internet or unsecured lines of communication), the Undersigned acknowledges that it may not be possible for such Directions to be executed, however RBCIS shall nevertheless be protected in relying on such Directions as if they were written Directions from the Undersigned, executed by an authorized signatory of the Undersigned. RBCIS shall be entitled, without further inquiry or investigation, to assume that such Directions have been duly and properly issued by the Undersigned, and that the sender(s) is/are duly authorized to act, and to provide Directions, on behalf of the Undersigned. Furthermore, specifically in the case of Investor Services Online, the Undersigned acknowledges that any use of Investor Services Online is also governed by the Investor Services Online Access Agreement (the "Access Agreement") as applicable to the Undersigned (and the relevant Fund or Funds of the Undersigned as defined in the Access Agreement), including the granting of authorization for access to Investor Services Online and the ability to provide Directions and perform other transactions therein. Accordingly, any Directions provided through Investor Services Online in accordance with the Access Agreement, shall be considered valid Directions provided under the Agreement and this COAS and RBCIS shall be fully protected for relying and acting thereon.
This Certificate replaces and supersedes any previously filed Certificate and becomes effective on the date RBC receives it. This Certificate shall remain in full force and effect until the Undersigned provides RBCIS with a new Certificate to replace it.
Signed in the City of    on this    day of    , 20 .
CERTIFIED ON BEHALF OF
    
NAME OF THE COMPANY/ORGANIZATION/PLAN SPONSOR (the "Undersigned")
I hereby declare that I am duly authorized to provide this Certificate on behalf of the Undersigned.
 
 
 
 
 
 
DATE RECEIVED BY RBCIS
 
AUTHORIZED SIGNATORY
 
PRINT NAME
 
TITLE
 
AUTHORIZED SIGNATORY
 
PRINT NAME
 
TITLE
 


COAS Insurance – July 2012     RSA Omega General Insurance






CATEGORY GUIDE
CLIENT NAME:
 
ACCOUNT NUMBER(S)
 
(the “Account(s)”):
 
 
 
 
 
In Column E of the Certificate, enter the Category(ies) in which each Authorized Person is entitled to sign.
CATEGORY GUIDE
CATEGORY FUNCTION
NO. OF REQUIRED SIGNATORIES
1.
To sign legal documentation to bind the Company/Organization/Plan Sponsor (Note: Category "1" designation may be given Only  
to direct employees of the Company/Organization/Plan Sponsor).
 
2.
To direct RBCIS to settle security transactions including free asset movements and make disposition of account assets for settlement purposes and to advise RBC of corporate action decisions relating to investments, including direction for proxy voting.
 
3.
To direct RBCIS to pay fees, charges and expenses from the asset (including, but not limited to, out-of pocket expenses, payments to consultants, lawyers, investment managers, RBCIS as trustee, RBCIS as custodian, RBCIS in any other capacity acting for the account, to any other custodian).
 
4.
To provide notification to RBC of the appointment of Investment Managers and other agents; to provide notification of the termination of an Investment Manager and direction as to any changes in the management of account assets.
 
5.
To provide directions to RBCIS to with respect to account opening, account maintenance, or account termination.
 
6.
To direct RBCIS to carry out non-financial transactions including such matters as changes to statement frequencies and reporting periods, and changes to access rights or account maintenance in one of RBCIS's secured access channels used by the Client.
 
7.
To direct RBCIS to transfer cash in and out of the account and to enter into and settle foreign exchange transactions.
 
8.
To direct RBCIS in respect of any other activity or matter. Enter the details regarding such other activity or matter:
 


COAS Insurance – July 2012     RSA Omega General Insurance






SCHEDULE "D" - PERMITTED INVESTMENTS
PERMITTED INVESTMENTS
I.
Cash (CDN$) or (U.S.$)
II.
Bonds, Debentures and Other Evidences of Indebtedness in Canadian (CDN$) or American (U.S.$) currency, in each case held and settled through CDS:
a)
Government:
(i)
Canada and Guaranteed
(ii)
Canadian Provincial and Guaranteed
(iii)
Canadian Municipal, Public Authority, School and Parochial.
b)
Corporate:    Canadian and rated “BBB” or above by at least one major credit rating agency.











Exhibit B

Agency Agreement










Agency Agreement

Between

Omega General Insurance Company
34 King Street East, Suite 1200
Toronto, Ontario M5C 2X8

hereinafter called “ The Company

And

Trupanion Brokers Ontario, Inc.
PO Box 34538, 1268 Marine Drive
North Vancouver, British Columbia V7P 1T2

hereinafter called “ The Broker


ARTICLE I
Appointment

Whereas The Company and Wyndham Insurance Company (SAC) Limited , in respect of its Segregated Account AX (“ Wyndham ”) have entered into a separate Fronting and Administration Agreement (“ FAA ”) effective January 1, 2015, The Company hereby appoints the Broker, subject to all the terms and conditions herein, all of the insurance laws and other laws applicable to insurance companies and insurance brokers of each province and territory of Canada (“ Provincial Insurance Laws ”) and to any limitations, underwriting rules and procedural instructions issued by The Company. It is understood and agreed that this appointment is solely for the purpose of selling policies of insurance as contemplated under the FAA and other related insurance as may be mutually agreed by the parties to this agreement. The Broker shall not hold itself out as having the power to bind or obligate The Company in any manner whatsoever except for the purpose set out herein.

The Broker has read and fully understands the contents, terms, conditions and covenants of the FAA and agrees to be bound by FAA as it relates to the Broker and the business of the Broker.


ARTICLE II
Accounts

1. The Broker agrees to submit to The Company monthly statements in the required format, reporting all policies in numerical order; a record of all premiums due; and such other reports as The Company may reasonably request pertaining to its business in force or expired. The Broker shall forward statements due to The Company no later than 15 calendar days following the end of each month in which the business is recorded at its offices. If no sale is made during the month, a “ Nil ” report must be submitted. Commissions and other remuneration shall be determined by agreement and may be subject to change from time to time. The initial commission is set out in the attached Exhibit 1.

1







2. All monies received or collected by the Broker on behalf of The Company, less The Broker’s commissions, and any other amounts agreed to herein shall be the property of The Company, and shall be held by The Broker in trust for The Company. The Broker shall not use the funds or apply them for other purposes, except as contained in this agreement, unless otherwise approved by The Company in writing.


ARTICLE III
Records

1. All records of The Broker pertaining to the business of The Company shall be open to inspection by The Company at any reasonable time and at The Company’s expense, for the purpose of determining any fact related to money due The Company, or the status of business placed with The Company by The Broker. Except for forms, manuals, advertising and other materials that may be supplied to The Broker by The Company, at its option and in the ordinary course of business, or as otherwise provided in this agreement or the agreements referenced in this agreement, in all cases as amended from time to time, The Broker shall bear all the cost and expense of operating its business.

2. Ownership, use and control of all customer lists and records shall remain the property of The Broker and shall not be used by The Company without the express written permission of The Broker, except (a) to the extent required by law, or (b) in the event of any failure on the part of Wyndham to meet its obligations to The Company. If customer lists and/or records of The Broker are used by The Company pursuant to Section 2(a) or (b), such use will only be for the purposes of operating the Business (as defined in the FAA) and not to compete with the Broker and/or its affiliates.


ARTICLE IV
Sub Agents

The Broker shall have the sole responsibility of appointing or removing other agencies, brokers and producers with respect to the Business, as defined in the FAA. The Company reserves the right to require that any such appointments be cancelled with or without cause, provided that such requests are reasonable and in good faith in carrying out The Company’s obligations pursuant to this agreement and the FAA, on 30 days notice and The Company shall be relieved of all liability hereunder. Any sub agents or affiliated agents will be expected to conform their agreement to the terms and conditions of this Agreement.


ARTICLE V
Termination

1. It is expressly understood and agreed that The Company and The Broker have mutually agreed to the premiums and coverages assigned to the Business (as defined in the FAA) and that neither party has the authority to change unilaterally the premium or coverage terms.

2. This Appointment may be terminated by in accordance with the termination provisions of the FAA. Upon termination by either party, each party shall return to the other party all documents and supplies in their possession and pertaining to the Business (as defined in the FAA) that are the property of the other party, if any, along with any monies due to the other party, if any.


2







ARTICLE VI
Administration

1. The Broker, after deducting The Broker’s agreed commission as compensation, will remit all remaining premiums to The Company by the 30th day of the month following the month in which the transactions are recorded at its offices.

2. The Company located at 34 King Street East, Suite 1200, Toronto, Ontario M5C 2X8 will receive all premiums from The Broker, and will validate and process all entries of premium as required herein.

 
ARTICLE VII
Service of Suit

The Broker may not accept service of legal process issued against The Company in respect of any of the business hereunder.


ARTICLE VIII
Indemnity

1. It is expressly understood and agreed that in order to comply with the Provincial Insurance Laws, The Broker, and any sub agents or brokers representing the Business (as defined in the FAA) , when required by law or regulation, shall be in possession of a valid Insurance License appointment in each Province or Territory of Canada where it solicits business as the case may be. Also, the Broker shall indemnify and hold The Company harmless against liability to policy or certificate holders caused solely by acts or omissions of negligence or fraud by The Broker in processing authorized business for The Company.
 
2. The Company shall hold The Broker harmless from any civil liability resulting from The Company’s acts or omissions in services performed under this Agreement. Such indemnification shall include reasonable legal fees incurred in connection with the investigation or defense against any claim. Upon receiving notice of any claim that could be covered by this section, The Broker shall notify The Company promptly.
 

ARTICLE IX
Arbitration

1. In the event that any dispute arises between the parties signatory to this agreement, whether such dispute arises during or after the term of this agreement, and as a precedent to any right of action hereunder a meeting will be held between representatives of each of the parties with decision making authority to settle the dispute. At the meeting the parties will attempt in good faith to negotiate an informal resolution of the dispute. If the dispute is not resolved through negotiation within 10 Business Days the parties hereby agree to submit their dispute to Arbitration. Upon the written request of either party to the dispute the parties shall select an arbitrator from among persons with not less than 10 years experience in the insurance or reinsurance business, as persons engaged in the industry itself or as lawyers or other professional advisors, or as otherwise agreed by the parties. If the parties are unable to agree on an arbitrator within 30 days after receipt of written notice from the other party requesting it to do so then either party may proceed pursuant to the Arbitration Act, 1991 (Ontario) to have an arbitrator appointed.

3







2. The arbitrator shall interpret this agreement as an honourable engagement and not as a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law, and they shall make their award with a view to effecting the general purpose of this agreement in a reasonable manner rather than in accordance with a literal interpretation of the language. Each party shall submit its case to the arbitrator within 30 days of the appointment of the arbitrator.

3. The arbitrator, so far as is permissible under the law and practice of the place of arbitration, shall have power to fix all procedural rules for the holding of the arbitration including discretionary power to make orders as to any matters which it may consider proper in the circumstances of the case with regard to pleadings, discovery, inspection of the documents, examination of witnesses and any other matter whatsoever relating to the conduct of the arbitration and may receive and act upon such evidence whether oral or written strictly admissible or not as it shall in its discretion think fit.

4. The decision in writing of the arbitrator shall be final and binding on both parties. Judgement may be entered upon the final decision of the arbitrator in any court in Canada having jurisdiction. The arbitrator shall determine who pays the expense of the arbitration. The arbitration will take place in Toronto, Ontario, Canada, or such other venue in Ontario, Canada as determined by the arbitrator.

[signature page follows]

4






Signed and accepted by the parties to this Agency Agreement.




SIGNED this 30th day of December , 20 14 ;
OMEGA GENERAL INSURANCE COMPANY

    
By: Philip H. Cook, CEO

SIGNED this 30th day of December , 20 14 ;
TRUPANION BROKERS ONTARIO, INC.

    
By:









EXHIBIT 1 – Commissions



Regular Commission: [*]% to be deducted by The Broker from the gross premium charged to the policyholders, before sending the balance to The Company in accordance with Article VI of this Agreement.


*Confidential Treatment Requested.









Exhibit C

Underwriting Guidelines



Underwriting Guidelines as per most current version on record with Trupanion.








Exhibit D

Claims Handling Procedures


Claims Handling Procedures as per most current version on record with Trupanion.





Exhibit 10.15


*
Confidential Treatment has been requested for the marked portions of this exhibit pursuant to Rule 24B-2 of the Securities Exchange Act of 1934, as amended.
AGREEMENT NUMBER: 2015003
QUOTA SHARE REINSURANCE AGREEMENT
made between
OMEGA GENERAL INSURANCE COMPANY
A company organized and existing under the laws of Canada
(hereinafter referred to as the “Reinsured”)
and
WYNDHAM INSURANCE COMPANY (SAC) LIMITED,
in respect of its Segregated Account AX,
a company organized and existing under the laws of Bermuda
(hereinafter referred to as the “Reinsurer”)

WHEREAS: The parties to this Agreement having entered into a separate Fronting and Administration Agreement (herein referred to as the “ FAA ”) effective January 1, 2015 wherein the Reinsured is willing to cede, and the Reinsurer is willing to accept, certain risks underwritten by the Reinsured as contemplated under the FAA;
and
WHEREAS: The Reinsured has also entered into an Agency Agreement with the Broker as defined in the FAA;
and
WHEREAS: For and in consideration of the Premium specified in this Agreement being paid by the Reinsured to the Reinsurer and subject always to the terms and conditions of this Agreement, the Reinsurer agrees to indemnify the Reinsured as follows:
ARTICLE 1 INTEREST CLAUSE
This Agreement is to indemnify the Reinsured in respect of liability, which may accrue to them under any and all policies and/or contracts of insurance in respect of the business produced by the Broker and underwritten pursuant to the FAA, and in accordance with underwriting and claims

1


handling guidelines set out therein. At no time shall the Reinsured accept or underwrite business not provided for in the FAA for this reinsurance.
ARTICLE 2 PERIOD CLAUSE
This Agreement is in respect of losses as herein defined pertaining to risks attaching during the period specified in the FAA.
ARTICLE 3 EXCLUSIONS
This Agreement follows the underlying coverage issued to the policyholders of the Reinsured in accordance with the FAA. For further clarity, this Agreement does not contain any exclusions or limitations not present in the underlying policies.
ARTICLE 4 REINSURING CLAUSE
A.
The Reinsurer hereby agrees to pay the Reinsured, in cash, an amount equal to 100% of any losses paid by the Reinsured on the subject portfolio, upon presentation of supporting documentation by the Reinsured. The calculation of losses shall include all reasonable costs and adjustment expenses paid by the Reinsured arising from the handling of claims, other than the overhead (including, without limitation, salaries of employees and office expenses) of the Reinsured.
B.
The Reinsurer will have the option of authorising the Reinsured to deduct amounts due under the above Article 4A from premium funds due to the Reinsurer, but in any event, the Reinsurer agrees to fund the paid losses either by “offset” or direct payment as soon as supporting documentation is received.
C.
The Reinsured undertakes to provide up-dated paid loss information on a monthly basis, no later than 30 days after the end of each month.
ARTICLE 5 FUNDING AND COLLATERAL
A.
The Reinsurer will provide the Reinsured with cash funding equal to the 100% of any outstanding losses incurred by the Reinsured on the subject portfolio, including 100% of any incurred but not reported (“ IBNR ”) losses, as they appear in the books and records of the Reinsured.
B.
The Reinsurer will have the option of authorising the Reinsured to deduct amounts due in the above Article 5A from premium funds due to the Reinsurer, but in any event, the Reinsurer agrees to fund the outstanding losses either by “offset” or direct payment as soon as supporting documentation is received.

2


C.
The Reinsured undertakes to provide up-dated outstanding loss information on a quarterly basis, no later than 45 days after the end of each calendar quarter.
D.
In addition to the cash funding required under Article 5A, the Reinsurer will provide the Reinsured with a Reinsurance Security Agreement (the “ RSA ”) in compliance with Canadian regulations concerning unregistered reinsurance no later than March 31, 2015 and in substantially the form attached as Exhibit A, subject to any required changes of the custodian. The amount of funds under the RSA will be maintained at the greater of (a) $[*] and (b) [*]% of unearned premium plus [*]% of outstanding losses including IBNR losses, as they appear in the books and records of the Reinsured. All investment income generated by the funds in the RSA will accrue to the benefit of the Reinsurer.
E.
The funds under the RSA will be placed in a trust account at a Canadian bank or trust company acceptable to the Reinsured (the “ Reinsurance Trust Account ”). The Reinsurance Trust Account will not be less than the Minimum Value in the RSA and shall be adjusted quarterly as required by the RSA.
F.
In addition to the RSA funding required under Article 5D, the Reinsurer will maintain an additional capital amount of $[*]. Such capital shall be held in cash or securities within the Reinsurance Segregated Account as described in Addendum #1.
ARTICLE 6 TERRITORIAL LIMITATIONS
This Agreement is in respect of Business in Canada.
ARTICLE 7 PREMIUM CLAUSE AND UNLIMITED RECOURSE
The Reinsured hereby agrees to pay the Reinsurer a premium equal to 100% of the gross premium on the subject portfolio as charged to the policyholder. This premium shall be paid to the Reinsurer on a quarterly basis, forty-five (45) days following the end of each calendar quarter, or fifteen (15) days following the month in which the premium is received by the Reinsured, whichever is later. The Reinsurer also acknowledges that the Reinsured has agreed that the producing Broker may remit the subject premium directly to the Reinsurer and that such premiums are deemed to have been received by the Reinsurer when due. Failure on the part of the producing Broker to remit the premiums to the Reinsurer when due will not affect the Reinsured’s right to recover amounts due to it under this Agreement.

*Confidential Treatment Requested.


3



ARTICLE 8 CEDING COMMISSION
The Reinsurer will allow the Reinsured a “ Ceding Commission ” equal to the sum of:
A.
[*]% of the commission charged by the producing Broker, plus;
B.
[*]% of gross premium on the subject Business, representing reimbursement for premium taxes, plus;
C.
$[*] for the calendar year ended December 31, 2015, representing the Reinsured’s “ Fronting Fee ”.
The Fronting Fee component of the Ceding Commission is intended to represent approximately [*]% of gross premium on the estimated volume of subject Business. The Fronting Fee component of the Ceding Commission will be renegotiated annually, no later than 90 days prior to the calendar year end, or any time during the year when projected gross premiums on the subject Business vary by [*]% from the estimated volume of subject Business.
ARTICLE 9 CURRENCY CLAUSE
For the purpose of this Agreement all currencies are expressed in Canadian dollars. Any losses involving other than Canadian currency shall be converted into Canadian currency at the rates of exchange used in the Reinsured’s books, or where there is a specific remittance for a loss settlement, at the rates of exchange used in making such remittance.
ARTICLE 10 UNDERWRITING POLICY CLAUSE
It is a condition precedent to the Reinsurer’s liability hereunder that the Reinsured shall not introduce at any time after the Reinsured enters into this Agreement any change in the FAA without the prior written approval of the Reinsurer.
ARTICLE 11 INSPECTION OF RECORDS CLAUSE
For as long as either party retains any liability hereunder the Reinsured shall, upon request by the Reinsurer, make available at the Reinsured’s head office for inspection at any reasonable time by such representatives as may be authorised by the Reinsurer for that purpose, all information relating to business reinsured hereunder (including actuarial reviews and evaluations) in the Reinsured’s possession or under its control and the said representatives may arrange for copies to be made of any of the records containing such information as they may require

*Confidential Treatment Requested.

4


ARTICLE 12 AMENDMENTS AND ALTERATIONS CLAUSE
Any amendments and/or alterations to this Agreement that are agreed either by correspondence or endorsements, shall be automatically binding on the parties and unless otherwise agreed by the parties hereto shall be formally documented by an exchange of correspondence signed by the parties or by the issue of a contract addendum, which shall be considered to form an integral part hereof.
ARTICLE 13 ERRORS OR OMISSIONS CLAUSE
Any inadvertent errors or omissions on the part of either the Reinsured or the Reinsurer shall not relieve the other party from any liability that would have attached hereunder, provided that such errors or omissions shall be rectified as soon as possible after discovery. Nevertheless, nothing contained in this Article shall be held to override any of the terms and conditions of this Agreement and no liability shall be imposed on the other party greater than would have attached hereunder had such errors or omissions not occurred.
ARTICLE 14 CLAIMS NOTIFICATION AND SETTLEMENTS CLAUSE
The Reinsured undertakes to advise the Reinsurer as soon as possible in the event of a loss being likely to arise hereunder together with an estimate of the Reinsurer’s liability and thereafter keep the Reinsurer fully informed of any developments regarding such event. In addition, the Reinsured shall provide to the Reinsurer with quarterly information on all claims made under the subject agreement, even if the aggregate total of such claims does not exceed the Reinsured’s retention.
All losses under the program will be adjusted on behalf of the Reinsured by claim handlers selected by mutual agreement between the Reinsured and the Reinsurer.
All loss settlements made by the Reinsured shall be binding upon the Reinsurer, provided such settlements are within the terms and conditions of the original policies and/or contracts and within the terms and conditions of this Agreement, and amounts falling to the share of the Reinsurer shall be payable by them upon reasonable evidence being given by the Reinsured.
ARTICLE 15 INSOLVENCY CLAUSE
Where an Insolvency Event (as defined below) occurs in relation to the Reinsured, the following terms shall apply (and, in the event of any inconsistency between these terms and any other terms of this Agreement, these terms shall prevail):
A.
(i)    The Reinsurer shall be liable to pay the Reinsured even though the Reinsured may be unable actually to pay, or discharge its liability to, its policyholder; but
(ii)    nothing in this clause shall operate to accelerate the date for payment by the Reinsurer of any sum that may be payable to the Reinsured but for it being the subject of any Insolvency Event.

5


B.
The amount of any sum the Reinsurer is liable to pay the Reinsured under this Agreement shall be the amount the Reinsurer would be liable to pay to the Reinsured if the liability of the Reinsured to its policyholders had been determined without reference to any term in any composition or scheme of arrangement or any similar such arrangement, entered into between the Reinsured and all or any portion of its policyholders.
C.
The Reinsurer shall continue to be entitled (but not obliged) to set-off, against any sum it may be liable to pay the Reinsured, any sum for which the Reinsured is liable to pay the Reinsurer.
An “Insolvency Event” means:
(a)
where a winding up petition is presented in respect of the Reinsured or a provisional liquidator is appointed over it or if the Reinsured goes into administration, administrative receivership or receivership or if the Reinsured has a scheme of arrangement or voluntary arrangement proposed in relation to all or any part of its affairs; or,
(b)
where the Reinsured becomes subject to any other similar insolvency process and/or is unable to pay its debts as and when they fall due within the meaning relevant Canadian law or statute.
The following situations will not be considered an “Insolvency Event”:
i.
where the Reinsured goes into voluntary liquidation or run-off; or,
ii.
where the Reinsured becomes subject to any regulatory intervention.
ARTICLE 16 REGULATORY INTERVENTION
In the event that the Reinsured becomes subject to any regulatory intervention that the Reinsurer considers will have a significant negative impact on the policyholders, the Reinsurer shall be entitled (but not obliged) to assume direct control of any losses under the program by giving notice to the policyholder, the Reinsured or its representative. The Reinsurer will then assume total responsibility for such losses as though they had issued the underlying policy.
ARTICLE 17 TERMINATION CLAUSE
Either party shall have the right to terminate this Agreement immediately by giving the other party written notice:
A.
If the performance of the whole or any part of this Agreement in any material respect is prohibited or rendered impossible as a consequence of any applicable law or regulation, including, without limitation, any material prevention directly or indirectly in the remittance of any or all or any part of the balance of payments due to or from either party, it being understood and agreed that the parties will in good faith use best efforts to renegotiate the terms of his Agreement to avoid or mitigate any such material prohibition or impossibility prior to termination of the Agreement pursuant to this section, if possible.

6


B.
If the other party has become insolvent or unable to pay its debts or has lost the whole or any part of its paid up capital.
C.
If the other party shall have failed to comply with any of the terms and conditions of this Agreement in any material respect and failed to cure such failure following reasonable advance notice, as provided below.
After the date of any such termination the liability of the Reinsurer hereunder shall cease outright other than in respect of losses that occurred prior thereto.
All notices of termination served in accordance with any of the provisions of this Article shall be addressed to the party concerned at its head office or at any other address previously designated by that party. That notice shall only be effective on the date falling five clear Business Days after the notification has been received or such later date as may be specified in the notice.

All notices or other communications required for the purposes of this Agreement shall be in English and shall be given or sent by hand, facsimile, registered mail or courier to the parties and shall be deemed to be received: (i) if given by hand, at the time of delivery; or (ii) if sent by facsimile; at the time when the sender receives from the recipient facsimile machine or from the addressee of the notice confirmation of receipt of the whole of the facsimile; or (iii) if sent by registered mail, 24 hours after confirmation of delivery; or (iv) if sent by courier, 24 hours after the date of delivery by the courier company.
Notwithstanding anything in this Agreement to the contrary if one party is in default of this Agreement and if such default is capable of being cured the non defaulting party shall give written notice of the default in reasonable detail to the non defaulting party who shall be given 60 days or such additional time as the non defaulting party may consider reasonable to cure such default prior to the non defaulting party terminating this Agreement for such default.
ARTICLE 18 ARBITRATION CLAUSE

1. In the event that any dispute arises between the parties signatory to this agreement, whether such dispute arises during or after the term of this Agreement, and as a precedent to any right of action hereunder a meeting will be held between representatives of each of the parties with decision making authority to settle the dispute. At the meeting the parties will attempt in good faith to negotiate an informal resolution of the dispute. If the dispute is not resolved through negotiation within 10 Business Days the parties hereby agree to submit their dispute to Arbitration. Upon the written request of either party to the dispute the parties shall select an arbitrator from among persons with not less than 10 years experience in the insurance or reinsurance business, as persons engaged in the industry itself or as lawyers or other professional advisors, or as otherwise agreed by the parties. If the parties are unable to agree on an arbitrator within 30 days after receipt of written notice from the other party requesting it to do so then either party may proceed pursuant to the Arbitration Act, 1991 (Ontario) to have an arbitrator appointed.


7


2. The arbitrator shall interpret this agreement as an honourable engagement and not as a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law, and they shall make their award with a view to effecting the general purpose of this agreement in a reasonable manner rather than in accordance with a literal interpretation of the language. Each party shall submit its case to the arbitrator within 30 days of the appointment of the arbitrator.

3. The arbitrator, so far as is permissible under the law and practice of the place of arbitration, shall have power to fix all procedural rules for the holding of the arbitration including discretionary power to make orders as to any matters which it may consider proper in the circumstances of the case with regard to pleadings, discovery, inspection of the documents, examination of witnesses and any other matter whatsoever relating to the conduct of the arbitration and may receive and act upon such evidence whether oral or written strictly admissible or not as it shall in its discretion think fit.

4. The decision in writing of the arbitrator shall be final and binding on both parties. Judgement may be entered upon the final decision of the arbitrator in any court in Canada having jurisdiction. The arbitrator shall determine who pays the expense of the arbitration. The arbitration will take place in Toronto, Ontario, Canada, or such other venue in Ontario, Canada as determined by the arbitrator.
ARTICLE 19 JURISDICTION CLAUSE
This Agreement shall be governed by the laws of Ontario, Canada.
ARTICLE 20 INTERMEDIARY CLAUSE
The parties to this Agreement recognize and accept that there is no intermediary involved in the placement or handling of this Agreement and that the relationship is direct between the Reinsured and the Reinsurer.
ARTICLE 21 WARRANTIES AND/OR SPECIAL CONDITIONS CLAUSE    
The parties to this Agreement hereby warrant and confirm that they are licensed in good standing in their respective regulatory jurisdictions and that they are authorized to carry on the business of insurance or reinsurance for the line of business contemplated by this Agreement. The parties also warrant and confirm that they have the necessary authority to enter in to and execute this Agreement, and that both have accepted the terms and conditions of the FAA.
ARTICLE 22 COUNTERPARTS

This Agreement may be executed in any number of counterparts and by the parties to it on separate counterparts and by facsimile transmission, each of which is an original but all of which together constitute one and the same instrument .

8



ARTICLE 23 USAGE CLAUSE

In this Agreement, capitalized terms used but not defined herein have the meanings given to them in the FAA.

[ signature page follows ]

9



IN WITNESS WHEREOF this Quota Share Reinsurance Agreement has been signed by and on behalf of the parties.

SIGNED this 30th day of December , 20 14 ;

For the Reinsured, OMEGA GENERAL INSURANCE COMPANY

/s/ Philip H. Cook    
By: Philip H. Cook, CEO

SIGNED this 30th day of December , 20 14 ;
For the Reinsurer, WYNDHAM INSURANCE COMPANY (SAC) LIMITED, in respect of its Segregated Account AX

/s/ Andrew McComb    
By:

IN HAMILTON, BERMUDA





AGREEMENT NUMBER: 2014003
ADDENDUM #1
QUOTA SHARE REINSURANCE AGREEMENT
made between
OMEGA GENERAL INSURANCE COMPANY
(hereinafter referred to as the “Reinsured”)
and
WYNDHAM INSURANCE COMPANY (SAC) LTD,
in respect of its Segregated Account AX (hereinafter referred to as the “Reinsurer”)

A.
Pursuant to the provisions of the Segregated Accounts Companies Act, 2000 as it applies to the Reinsurer through registration thereunder, this Agreement is hereby designated a Governing Instrument (as such terms is defined in the Act) and a Contract of Insurance and shall be so treated for the purpose of the Insurance Act 1978 (and the regulations promulgated thereunder from time to time) notwithstanding any statutory provision or any law to the contrary.

B.
The Reinsurer will establish and maintain a Segregated Account with respect to this Agreement (the “ Subject Segregated Account ”) and such Segregated Account will be designated by the Reinsurer as “ Segregated Account AX ”.

C.
All rights and interests in assets and property standing to the credit of the Subject Segregated Account shall be determined in accordance with this Agreement and the terms of the Act. The Reinsured acknowledges that the Reinsurer may issue one or more shares or securities to be related to the Subject Segregated Account. Notwithstanding any provision of this Agreement to the contrary, the Reinsurer may use (and deplete if be a consequence) the assets of the Subject Segregated Account to pay (or reimburse) itself or third parties (a) the expenses, fees and taxes with respect to any such said issue or repurchase of such said shares or securities or dividends and distributions for such shares or securities and (b) all and any claims against and expenses, fees and taxes of the Reinsurer incurred in connection with or under (including without limitation entering into making or establishing as the case may be) this Agreement, any purchase or investment by the Reinsurer contemplated by this Agreement, any subscription and shareholders agreement concerning the said shares or securities or the Subject Segregated Account. The Reinsurer may terminate the Subject Segregated Account at any time after it ceases to have any obligations to the Reinsured hereunder.

D.
The Reinsurer agrees to credit to the Subject Segregated Account all premium, retro-premium and other receipts arising from this Agreement. In addition, any reinsurance recoveries arising from retrocessional reinsurance agreements ceding all or any portion of the risks assumed hereunder shall be credited to the Subject Segregated Account.





E.
Except for renewals to this Agreement, the Reinsurer may not issue any other contracts of insurance with respect to the Subject Segregated Account; provided that, however, the Reinsurer may enter into retrocessional agreements to cede all or any portion of the risks assumed hereunder.

F.
The Reinsured acknowledges and recognizes the applicability, validity and enforceability of the Act and the terms contained therein and in particular that the Reinsurer’s liability and obligations under this Agreement are limited to the assets (available, realizable and reasonably accessible by the Reinsurer) of the Subject Segregated Account. In the event the assets of the Subject Segregated Account are insufficient to satisfy any claims under the Agreement, the Reinsured agrees that it has no claim and undertakes that it shall make no claim against the Reinsurer and/or any assets of the Reinsurer, the Reinsurer or any other person in the Reinsurer’s general account or against any assets in any other Segregated Account other than the assets of the Subject Segregated Account.

G.
The Reinsurer (or their designated representative) will provide the Reinsured with annual audited financial statements reflecting the financial condition of the Reinsurer and the Segregated Account AX, together with immediate notice of any reduction in the capital of the Segregated Account AX, below the minimum amount provided for under this Agreement and Addendums.

H.
This Agreement shall be governed and construed under the laws of the Province of Ontario, without reference to principles of choice of law, provided however that all rights and obligations of the parties that derive from or are in any way related to the fact that this Agreement is issued from a Segregated Account of the Reinsurer shall be governed by the substantive laws of Bermuda.

SIGNED this 30th day of December , 20 14 ;
For the Reinsured, OMEGA GENERAL INSURANCE COMPANY

/s/ Philip H. Cook    
By: Philip H. Cook, CEO

SIGNED this 30th day of DEC , 20 14 ;
In Hamilton, Bermuda;
For the Reinsurer, WYNDHAM INSURANCE COMPANY (SAC) LTD, in respect of its Segregated Account AX

/s/ Andrew McComb    
By: Andrew McComb, President





Exhibit A

Form of Reinsurance Security Agreement






Wyndham Insurance Company (SAC) Ltd,
in respect of its Segregated Account AX
as Pledgor
and
OMEGA GENERAL INSURANCE COMPANY
as Secured Party
and
RBC INVESTOR SERVICES TRUST
as Custodian

REINSURANCE SECURITY AGREEMENT
January 1, 2015








TABLE OF CONTENTS
 
 
 
 
 
Section 1
Defined Terms and Interpretation.
2

Section 2
The Securities Account.
6

Section 3
Grant of Security.
8

Section 4
Secured Obligations.
9

Section 5
Attachment.
9

Section 6
Duties of the Secured Party.
10

Section 7
Rights of the Pledgor.
10

Section 8
Expenses.
11

Section 9
Enforcement.
11

Section 10
Remedies.
12

Section 11
Exercise of Remedies.
13

Section 12
Appointment of Attorney.
14

Section 13
Dealing with the Collateral.
14

Section 14
Standards of Sale.
15

Section 15
Dealings by Third Parties.
15

Section 16
Representations, Warranties and Covenants.
16

Section 17
Collateral Matters.
18

Section 18
Appointment and Duties of the Custodian.
19

Section 19
Directed Powers.
22

Section 20
Contractual Settlement.
23

Section 21
Services to be Performed without Direction.
23

Section 22
Express Provisions.
25

Section 23
Security Interest, Set-Off and Deduction.
26

Section 24
Waiver by Custodian.
27

Section 25
Charges of the Custodian.
28

Section 26
Indemnification of Custodian.
28

Section 27
Limitation of Custodian Liability.
28

Section 28
Removal and Resignation of the Custodian.
32

Section 29
No Conflict.
32

Section 30
Communications and Directions.
33

Section 31
Confidentiality.
37

Section 32
General.
38







REINSURANCE SECURITY AGREEMENT
Reinsurance Security Agreement dated as of January 1, 2015 made between:
WYNDHAM INSURANCE COMPANY (SAC) LIMITED , in respect of its Segregated Account AX , an insurance company existing under the laws of Bermuda. and having its principal office located at Swan Building, 2 nd Floor, 26 Victoria Street, Bermuda, HM12 (the “ Pledgor ”);
-and-
OMEGA GENERAL INSURANCE COMPANY , an insurance company incorporated under the laws of Canada and having its head office located at Suite 1200, 34 King Street East, Toronto, Ontario, M5C 2X8, Canada (the “ Secured Party ”);
-and-
RBC INVESTOR SERVICES TRUST , a trust company incorporated under the laws of Canada and having its head office located at 155 Wellington Street West, 7 th Floor, Toronto, Ontario, M5V 3L3, Canada (the “ Custodian ”).
RECITALS:
(i)
The Secured Party is authorized to carry on an insurance business in Canada under the Insurance Companies Act (Canada) (the “ ICA ”).
(ii)
The Pledgor and the Secured Party have entered into one or more Reinsurance Agreements pursuant to which the Pledgor has agreed to reinsure certain risks for the benefit of the Secured Party. The Pledgor is not authorized under the ICA to reinsure risks in Canada.
(iii)
The Secured Party will only receive credit for capital purposes under the ICA for reinsurance ceded under the Reinsurance Agreement if security is maintained in Canada in respect of the reinsurance liabilities of the Pledgor in accordance with the Superintendent’s guidance on reinsurance arrangements.
(iv)
The Pledgor has agreed to provide security to the Secured Party for its obligations pursuant to the Reinsurance Agreement and has agreed to enter into this Agreement and to perform the obligations of the Pledgor described hereunder.

1


(v)
The Pledgor and the Secured Party desire to retain the Custodian to act as custodian of the Collateral in accordance with the terms of this Agreement and to provide safekeeping and custodial services in respect of the Collateral.
(vi)
The Custodian has agreed to act as custodian of the Collateral and to provide safekeeping and custodial services in respect of the Collateral, all on the terms and conditions of this Agreement.
In consideration of the foregoing and the mutual agreements herein set forth and other good and valuable consideration, the receipt and adequacy of which are acknowledged, the parties agree as follows:
Section 1
Defined Terms and Interpretation.
(1)
As used in this Agreement, the following terms have the following meanings:
Affiliate ” shall have the meaning set out in the Canada Business Corporations Act, as amended from time to time, and any successor legislation thereto as in effect from time to time.
Agent ” means any agent, service provider, advisor or other entity appointed by the Custodian to assist in providing services under this Agreement, and may include Affiliates and subsidiaries of the Custodian.
Agreement ” means this Reinsurance Security Agreement, as supplemented or amended from time to time.
Applicable Law ” means in relation to any person, any existing or future laws, regulations, policies or orders made and promulgated under statutory authority by any governmental or regulatory body, commission or agency having jurisdiction over such person whether or not having the force of law, including, without limitation, laws in relation to taxation, all as the same may be amended from time to time.
Blocking Service ” has the meaning specified in Section 2(4).
Business Day ” means a day, other than a Saturday or a Sunday, on which banks are open for general business in Toronto, Ontario.
CDS ” means CDS Clearing and Depository Services Inc. and its successors and assigns. “Collateral” has the meaning specified in Section 3.

2


Contractual Settlement Date ” means:
(i)
with respect to the purchase or sale of any security, the date the parties have contracted to settle the trade;
(ii)
with respect to the purchase or sale of any short term money market investments, the date specified by the Pledgor at the time at which it gave instructions to the Custodian;
(iii)
with respect to the maturity of a security, the maturity date; and
(iv)
with respect to interest and dividend payments, the due date established by the payor.
Corporate Action ” means any conversion privileges, subscription rights, warrants or other rights or options available to the holder in connection with any securities which form part of the Collateral, including those relating to the reorganization, recapitalization, takeover, consolidation, amalgamation, merger, liquidation, filing for or declaration of bankruptcy or plans of arrangement of any corporation or association.
Custodial Obligations ” has the meaning specified in Section 23(5).
Custodian ” means RBC Investor Services Trust, a trust company continued under the laws of Canada, and any successor Custodian appointed pursuant hereto, and their respective successors and assigns.
Custodian Security Interest ” has the meaning specified in Section 23(5).
Depository ” means any authorized domestic depository or clearing or settlement agency or system, including a transnational book-based system, and shall include CDS, and “ Depositories ” means all of them.
Direction ” means any directions, notices, requests, instructions and any other communication of the Pledgor, the Secured Party or any Investment Manager (including, for greater certainty, Entitlement Orders) given to the Custodian in accordance with the terms of this Agreement and “ Direct ” means to give a Direction.
Entitlement Order ” means a notice communicated to the Custodian directing the transfer or redemption of a financial asset to which the Secured Party has a security entitlement and includes an “entitlement order” as defined in the STA.
Event of Default ” has the meaning specified in Section 9.

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Expenses ” has the meaning specified in Section 4(b).
Fee Schedule ” means the schedule of fees payable hereunder as agreed to by the parties, as amended from time to time.
Investment Manager ” means any person or entity designated by the Pledgor as an investment manager pursuant to Section 7.
Lien ” means (i) any mortgage, charge, pledge, hypothecation, security interest, assignment by way of security, encumbrance, lien (statutory or otherwise), hire purchase agreement, conditional sale agreement, deposit arrangement, title retention agreement or arrangement, or any other assignment, arrangement or condition that in substance secures payment or performance of an obligation, (ii) any trust arrangement, (iii) any arrangement which creates a right of set-off out of the ordinary course of business, or (iv) any agreement to grant any such rights or interests.
Market Value ” means the market value of the Collateral, as determined by the Custodian in accordance with the terms of this Agreement.
Minimum Market Value ” means an amount equal to at least [*]% of the unearned premium plus [*]% of outstanding losses of the Secured Party in respect of policies that are the subject of Reinsurance Agreements with the Pledgor, with such liabilities being determined by the appointed actuary of the Secured Party in accordance with generally accepted actuarial principles with such changes as may be determined by the Superintendent and any additional directions that may be made by the Superintendent.
Overdraft ” has the meaning specified in Section 23(1).
Permitted Investments ” means any of the investments listed in Schedule "D" hereto, as amended from time to time, provided that they are held and settled through CDS or are represented by physical certificates delivered to, and registered or endorsed in the name of, the Custodian or its nominee.
Person ” means any natural person, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, company, limited liability company, institution, public benefit corporation, investment or other fund, government (whether federal, provincial, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof) or other entity of any nature.
*Confidential Treatment Requested.


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PPSA ” means the Personal Property Security Act (Ontario) and the Minister's order and regulations thereunder.
Reinsurance Agreement ” means the reinsurance agreement between the Secured Party and the Pledgor listed on Schedule “A”, as amended from time to time.
Secured Obligations ” has the meaning specified in Section 4(a).
Securities Account ” means each account opened or maintained by the Pledgor with the Custodian for purposes of this Agreement or which the parties may agree is to be a Securities Account for purposes of this Agreement, as more particularly designated in Section 2(1) hereof.
Security Interest ” has the meaning specified in Section 4.
Set-Off Rights ” has the meaning specified in Section 23(6).
STA ” means the Securities Transfer Act, 2006 (Ontario).
Standard of Care ” has the meaning specified in Section 27(1)
Superintendent ” means the Superintendent of Financial Institutions, appointed pursuant to the Office of the Superintendent of Financial Institutions Act.
Voting Materials ” means all proxies, proxy solicitation materials and other communications received by the Custodian relating to any securities which form part of the Collateral and that call for voting.
(2)
Terms defined in the PPSA or the STA and used but not otherwise defined in this Agreement have the same meanings as in the PPSA or STA, as the case may be. For greater certainty, the terms “ investment property ”, “ money ” and “ proceeds ” have the meanings given to them in the PPSA; and the terms “ certificated security ”, “ control ”, “ deliver ”, “ entitlement holder ”, “ entitlement order ” “ financial asset ”, “ security ”, “ securities account ”, “ securities intermediary ”, “ security entitlement ” and “ uncertificated security ” have the meanings given to them in the STA.
(3)
In this Agreement the words “ including ”, “ includes ” and “ include ” mean “ including (or includes or include) without limitation ”. The expressions “ Section ” and other subdivision followed by a number mean and refer to the specified Section or other subdivision of this Agreement.

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(4)
Any reference in this Agreement to gender includes all genders. Words importing the singular number only include the plural and vice versa.
(5)
The division of this Agreement into Sections and other subdivisions and the insertion of headings are for convenient reference only and do not affect its interpretation.
(6)
Any reference in this Agreement to this Agreement, any other agreement or any instrument, means this Agreement, such other agreement, or such instrument, in each case, as the same may have been or may from time to time be amended, modified, extended, renewed, restated, replaced or supplemented and includes all schedules attached thereto. Except as otherwise provided in this Agreement, any reference in this Agreement to a statute refers to such statute and all rules and regulations made under it as the same may have been or may from time to time be amended or re-enacted.
Section 2
The Securities Account.
(1)
The Custodian shall open and maintain the Securities Account as an account of, and in the name of, the Pledgor, or shall designate an existing account as a Securities Account for purposes of this Agreement. The parties hereby agree that the account described in Schedule “B” is and shall be a “Securities Account” for purposes of this Agreement and a securities account for the purposes of the STA.
(2)
The Securities Account shall be opened and maintained at the offices of the Custodian in Toronto, Ontario. The Custodian will not change the location of any Securities Account without the prior written consent of the Pledgor and the Secured Party.
(3)
Concurrent with the execution and delivery of this Agreement, the Pledgor shall, from time to time, deliver Permitted Investments to the Securities Account having an aggregate Market Value as of such date no less than the Minimum Market Value.
(4)
The Pledgor shall ensure that all property delivered by it to the Securities Account, or in which it Directs that amounts in the Securities Account be invested, consists of Permitted Investments. While it is the Pledgor’s obligation to ensure that all property delivered by it to the Securities Account consists of Permitted Investments and the Secured Party has access to statements of the Securities Account to permit it to confirm that the assets in the Securities Account are Permitted Investments, as a supplemental control, the Custodian may, at its sole discretion, block the settlement of property that is non-CDS eligible into the Securities Account (the “ Blocking Service ”). On each occasion that the Custodian provides the Blocking Service, it shall promptly notify the Secured Party and the Pledgor of any property that has not settled into the Securities Account due to the Blocking Service. The Pledgor

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and the Secured Party shall not Direct the Custodian to use any part of the Collateral in a securities lending program.
(5)
The Custodian shall determine the Market Value of the Collateral at such times as required for purposes of this Agreement, including, without limitation, no less frequently than monthly for the purposes of the monthly declaration required to be filed by the Custodian pursuant to Section 18(1)(j). In determining such Market Values, the Custodian shall use nationally recognized pricing services for property for which such prices are available, and for property for which such prices are not available, the Market Value shall be based on an estimate or estimates provided jointly by the Secured Party and the Pledgor. The Custodian shall not be liable for any loss, damage or expense, arising as a result of an error in such data sources or estimates provided by the Pledgor or the Secured Party or for any delay or failure of either party providing such estimates.
(6)
No later than 30 calendar days after the end of each calendar quarter, the Secured Party shall prepare and provide to the Pledgor, for the sole purpose of adjusting the Minimum Market Value, a specific statement of the Minimum Market Value as of the end of such calendar quarter.
(7)
The Pledgor shall ensure that the Market Value of the Collateral (as determined by the Custodian for the purposes and as shown in the monthly declaration required to be filed by the Custodian pursuant to Section 18(1)(j)) shall at all times be at least equal to the Minimum Market Value, as determined by the Secured Party in accordance with Section 2(6). If the Market Value of the Collateral shall at any time fall below the Minimum Market Value, the Pledgor shall promptly deposit in the Securities Account additional Collateral with a Market Value sufficient to bring the Market Value of the Collateral up to at least the Minimum Market Value.
(8)
The Pledgor may not withdraw or replace, and the Custodian shall not permit the withdrawal or replacement of, any of the Collateral without the joint written Direction of the Pledgor and the Secured Party. Upon any disbursement or withdrawal made in accordance with this Section 2(8), the Collateral disbursed or withdrawn shall cease to be subject to the Security Interest and shall cease to be Collateral. The Security Interest shall not otherwise terminate except by means of a discharge in writing executed by the Secured Party in accordance with Section 32. The Custodian shall be entitled to set off against any Collateral withdrawn by the Pledgor pursuant to this Section 2(8) any amounts due and payable to it by the Pledgor pursuant to this Agreement.

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(9)
No withdrawal or disbursement of Collateral pursuant to Section 2(8) shall prejudice the right of the Secured Party to subsequently require, or the obligation of the Pledgor to make, delivery of new or further Collateral in accordance with the terms of the Reinsurance Agreement and this Agreement.
(10)
Notwithstanding anything in this Agreement to the contrary, the Secured Party shall have the unconditional right to give an Entitlement Order with respect to any Collateral in the Securities Account at any time, and the Custodian agrees that it will promptly comply with any Entitlement Orders originated by the Secured Party, without the further consent of the Pledgor. As between the Secured Party and the Pledgor, the Secured Party agrees that it shall not give an Entitlement Order unless an Event of Default has occurred and is continuing; provided, however, that the Custodian shall not be required to enquire as to the occurrence or existence of any Event of Default prior to acting upon any Entitlement Order given by the Secured Party. Upon receipt of any such Entitlement Order, the Custodian shall promptly take any and all steps necessary to transfer such Collateral to the Secured Party or as it may Direct. Upon receipt of any Entitlement Order from the Secured Party, the Custodian shall promptly cease to comply with Entitlement Orders of the Pledgor with respect to Collateral in the Securities Account and the Custodian shall promptly cease to comply with Directions of the Pledgor or the Investment Manager with respect to the Collateral (including without limitation Directions pursuant to Section 7(1) and Section 7(2). In complying with any such Entitlement Order, the Custodian shall be entitled to a reasonable period of time to implement the Entitlement Order and shall not be required to cease processing a pending transaction not involving the withdrawal of property from the Securities Account pursuant to a Direction that was received by the Custodian prior to receiving the Entitlement Order. Other than an Entitlement Order, no other statement or document need be presented by the Secured Party to withdraw any of the Collateral from the Securities Account, except that the Secured Party shall acknowledge to the Custodian receipt of such withdrawn Collateral.
Section 3     Grant of Security.
The Pledgor grants to the Secured Party a security interest in, and assigns, mortgages, charges, hypothecates and pledges to the Secured Party, the following (collectively, the “ Collateral ”):
(a)
all securities and other property from time to time delivered or contributed by or on behalf of the Pledgor to the Custodian pursuant to or in accordance with the Reinsurance Agreement or this Agreement, or to be held pursuant to this Agreement, including, without limitation, all security entitlements with respect thereto;

8


(b)
the Securities Account and all of the credit balances, security entitlements, securities, cash, and other financial assets and other property (or their value) from time to time held in the Securities Account;
(c)
all substitutions and replacements of, increases and additions to the property described in Section 3(a) and Section 3(b) including any consolidation, subdivision, reclassification or stock dividend; and
(d)
all proceeds in any form derived directly or indirectly from any dealing with all or any part of the property described in Section 3(a), Section 3(b) and Section 3(c) including the proceeds of such proceeds.
Section 4     Secured Obligations.
The security interest, assignment, mortgage, charge, hypothecation and pledge granted by the Pledgor to the Secured Party under this Agreement (collectively, the “ Security Interest ”) secures the payment and performance of:
(a)
(i) all of the Pledgor’s present and future obligations to the Secured Party to pay the Pledgor’s share of any loss or liability or both sustained by the Secured Party for which the Pledgor is liable under the Reinsurance Agreement and (ii) all of the Pledgor’s other present and future debts, liabilities and obligations to the Secured Party, direct or indirect, absolute or contingent, whether alone or with others, pursuant to or in connection with the Reinsurance Agreement or this Agreement (including, where required by the Reinsurance Agreement, any loss or liability on account of claims incurred but not reported) (collectively, and together with the Expenses, the “ Secured Obligations ”); and
(b)
all reasonable legal fees, court costs, receiver's or agent's remuneration and other expenses of taking possession of, realizing, collecting, selling, transferring, delivering or obtaining payment for the Collateral upon the Security Interest becoming enforceable, and of taking, defending or participating in any action or proceeding in connection with any of the foregoing matters (collectively, the “ Expenses ”).
Section 5
Attachment.
(1)
The Pledgor acknowledges that (i) value has been given, (ii) it has rights in the Collateral or the power to transfer rights in the Collateral to the Secured Party (other than after- acquired Collateral), (iii) it has not agreed to postpone the time of attachment of the Security Interest, and (iv) it has received a copy of this Agreement.

9


(2)
At the request of the Secured Party, the Pledgor will take all action that the Secured Party deems advisable to cause the Secured Party to have “control”, for the purposes of the STA, over any securities or other investment property delivered by the Pledgor pursuant to this Agreement or that is now or at any time becomes Collateral, including (i) causing the Collateral to be transferred to or registered in the name of the Custodian or its nominee, (ii) endorsing any certificated securities to the Custodian or its nominee by an effective endorsement, (iii) directing CDS that the Collateral is to be credited to an account in the name of the Custodian or its nominee, (iv) delivering the Collateral to the Custodian, and (v) delivering to the Custodian any and all consents or other documents or agreements which may be necessary to effect the transfer of any Collateral to the Custodian.
Section 6
Duties of the Secured Party.
(1)
The Secured Party has no obligation to exercise any option or right in connection with any Collateral. The Secured Party has no obligation to protect or preserve any Collateral from depreciating in value or becoming worthless and is released from all responsibility for any loss of value whether such Collateral is in the possession of, is a security entitlement of, or is subject to the control of, the Secured Party, the Custodian, the Pledgor or any other Person. The Custodian shall comply with its Standard of Care in the physical keeping of any Collateral.
(2)
The Secured Party may, after the Security Interest is enforceable, sell, transfer, use or otherwise deal with any Collateral on such conditions and in such manner as the Secured Party in its sole discretion may determine.
Section 7
Rights of the Pledgor.
(1)
Unless and until the Secured Party has delivered an Entitlement Order pursuant to Section 2(10), the Pledgor shall be entitled, subject to Section 2(4) and Section 2(7), to Direct the Custodian as to the manner of investment of the Collateral. The Custodian may establish reasonable requirements relative to the time or times by which Direction must be given and shall advise the Pledgor of those requirements. The Pledgor may, by Direction to the Custodian and the Secured Party, designate an Investment Manager to manage the investment of some or all of the Collateral as identified by the Pledgor, and to provide Directions to the Custodian with regard to the investment of the Collateral. The Custodian may assume that the designation of an Investment Manager continues in force until it receives a written Direction from the Pledgor to the contrary. Whenever an Entitlement Order has been given pursuant to Section 2(9), all rights of the Pledgor, or any Investment Manager, to Direct the Custodian as to the manner of investment of the Collateral shall terminate and all such rights shall become vested solely and absolutely in the Secured Party.

10


(2)
Unless and until the Secured Party has delivered an Entitlement Order pursuant to Section 2(10), the Pledgor shall be entitled to Direct the Custodian with respect to the exercise of the voting rights attached to the securities and other financial assets that are part of the Collateral. The Custodian may establish reasonable requirements relative to the time or times by which any such Directions must be given and shall advise the Pledgor of those requirements. Whenever an Entitlement Order has been given by the Secured Party pursuant to Section 2(10), all rights of the Pledgor to vote or to Direct the voting (including under any proxy given by the Custodian or the Secured Party (or a nominee) or otherwise) shall cease and all such rights become vested solely and absolutely in the Secured Party.
(3)
All dividends, interests, distributions and other amounts related to the Collateral shall be collected by the Custodian, credited to the Securities Account and shall constitute Collateral, unless and until released in accordance with Section 2(8). Any dividend, interest, cash or other amounts received by the Pledgor contrary to this Section 7(3) will be held by the Pledgor as trustee for the Secured Party and shall be immediately paid over to the Custodian, or after the giving of an Entitlement Order, to or to the order of the Secured Party.
Section 8
Expenses.
The Pledgor is liable for and will pay on demand by the Custodian or Secured Party, as the case may be, any and all Expenses of the Custodian or the Secured Party.
Section 9
Enforcement.
The Security Interest shall become and be enforceable against the Pledgor upon the occurrence of any one or more of the following events (each, an “ Event of Default ”):
(a)
the Pledgor is no longer authorized in its home jurisdiction to carry on the business of reinsurance;
(b)
the Pledgor fails to make any payment when due under the Reinsurance Agreement (whether on a scheduled payment date or upon default or termination), and such failure is not remedied on or before the close of business in Toronto, Ontario on the third Business Day after notice thereof has been given by the Secured Party to the Pledgor;
(c)
the Pledgor defaults, in any material respect, in any of its other duties and obligations under the Reinsurance Agreement and the Pledgor has not remedied such default within any applicable cure period provided for in the Reinsurance Agreement;

11


(d)
any representation or warranty made by the Pledgor in this Agreement is breached or is incorrect in any material respect and the Pledgor fails to remedy such breach and cause such representation or warranty to become correct in all material respects within three Business Days of receipt of notice from the Secured Party requiring it to do so;
(e)
the Pledgor fails, in any material respect, to perform any of its undertakings, covenants or agreements in this Agreement and such failure is not remedied on or before the third Business Day following the day in which notice of such failure has been given by the Secured Party to the Pledgor;
(f)
the Pledgor becomes insolvent or unable to pay its debts as they fall due or fails or admits in writing its inability to pay its debts as they fall due;
(g)
the Pledgor institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (i) results in a judgment of insolvency or liquidation, or (ii) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof;
(h)
one or more supervisory or regulatory authorities takes control of all or substantially all of the assets of the Pledgor, with the intention that such authority or authorities act as administrator, liquidator or provisional liquidator, receiver or interim receiver, trustee, custodian or other similar officer; or
(i)
a liquidator or receiver of the Pledgor or of any part of the insurance business of the Pledgor is appointed under the provisions of any statute or pursuant to any agreement between the Pledgor and a third party.
Section 10     Remedies.
Whenever the Security Interest is enforceable, the Secured Party may realize upon the Collateral and enforce the rights of the Secured Party by:
(a)
realizing upon or otherwise disposing of or contracting to dispose of the Collateral by sale, transfer or delivery;
(b)
exercising and enforcing all rights and remedies of a holder of the Collateral as if the Secured Party were the absolute owner thereof (including, if necessary, causing

12


the Collateral to be registered in the name of the Secured Party or its nominee if not already done);
(c)
collecting any proceeds arising in respect of the Collateral;
(d)
whether or not an Entitlement Order has been given, directing the Custodian to transfer all Collateral held by the Custodian in the Securities Account, or any of them, to another account maintained with, by or on behalf of the Secured Party or otherwise as the Secured Party may Direct, and the Custodian shall comply with any such Direction;
(e)
applying any proceeds arising in respect of the Collateral in accordance with Section 32(12); and
(f)
exercising any other remedy or proceeding authorized or permitted under the PPSA or otherwise by Applicable Law or equity.
Section 11
Exercise of Remedies.
The remedies under Section 10 may be exercised from time to time separately or in combination and are in addition to, and not in substitution for, any other rights of the Secured Party however arising or created. The Secured Party is not bound to exercise any right or remedy, and the exercise of rights and remedies is without prejudice to the rights of the Secured Party in respect of the Secured Obligations including the right to claim for any deficiency.

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Section 12     Appointment of Attorney.
The Pledgor hereby irrevocably constitutes and appoints the Secured Party (and any officer of the Secured Party), at any time that the Security Interest is enforceable, the true and lawful attorney of the Pledgor. As the attorney of the Pledgor, the Secured Party has the power to exercise for and in the name of the Pledgor with full power of substitution, at any time that the Security Interest is enforceable, any of the Pledgor's right (including the right of disposal), title and interest in and to the Collateral including the execution, endorsement, delivery and transfer of the Collateral to the Secured Party, its nominees or transferees, and the Secured Party and its nominees or transferees are hereby empowered to exercise all rights and powers and to perform all acts of ownership with respect to the Collateral to the same extent as the Pledgor might do. This power of attorney is irrevocable, is coupled with an interest, has been given for valuable consideration (the receipt and adequacy of which is acknowledged) and survives, and does not terminate upon, the bankruptcy, dissolution, winding up or insolvency of the Pledgor. This power of attorney extends to and is binding upon the Pledgor’s successors and assigns. The Pledgor authorizes the Secured Party to delegate in writing to another Person any power and authority of the Secured Party under this power of attorney as may be necessary or desirable in the opinion of the Secured Party, and to revoke or suspend such delegation.
Section 13
Dealing with the Collateral.
(1)
The Secured Party is not obliged to exhaust its recourse against the Pledgor or any other Person or against any other security it may hold in respect of the Secured Obligations before realizing upon or otherwise dealing with the Collateral in such manner as the Secured Party may consider desirable.
(2)
The Secured Party may grant extensions or other indulgences, take and give up securities, accept compositions, grant releases and discharges and otherwise deal with the Pledgor and with other Persons, sureties or securities as it may see fit without prejudice to the Secured Obligations, the liability of the Pledgor or the rights of the Secured Party in respect of the Collateral.
(3)
Except as otherwise provided by Applicable Law or this Agreement, the Secured Party is not (i) liable or accountable for any failure to collect, realize or obtain payment in respect of the Collateral, (ii) bound to institute proceedings for the purpose of collecting, enforcing, realizing or obtaining payment of the Collateral or for the purpose of preserving any rights of any Persons in respect of the Collateral, (iii) responsible for any loss occasioned by any sale or other dealing with the Collateral or by the retention of or failure to sell or otherwise

14


deal with the Collateral, or (iv) bound to protect the Collateral from depreciating in value or becoming worthless.
Section 14
Standards of Sale.
Without prejudice to the ability of the Secured Party to dispose of the Collateral in any commercially reasonable manner, the Pledgor acknowledges that:
(a)
the Collateral may be disposed of in whole or in part;
(b)
the Collateral may be disposed of by public auction, public tender or private contract, with or without advertising and without any other formality;
(c)
any assignee of such Collateral may be the Secured Party or a customer of the Secured Party;
(d)
any sale conducted by the Secured Party will be at such time and place, on such notice and in accordance with such procedures as the Secured Party, in its sole discretion, may deem advantageous;
(e)
the Collateral may be disposed of in any manner and on any terms necessary to avoid violation of Applicable Law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that the prospective bidders and purchasers have certain qualifications, and restrict the prospective bidders and purchasers to Persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of the Collateral) or in order to obtain any required approval of the disposition (or of the resulting purchase) by any governmental or regulatory authority or official;
(f)
a disposition of the Collateral may be on such terms and conditions as to credit or otherwise as the Secured Party, in its sole discretion, may deem advantageous; and
(g)
the Secured Party may establish an upset or reserve bid or price in respect of the Collateral.

Section 15     Dealings by Third Parties.
(1)
No Person dealing with the Secured Party or an agent or receiver appointed at the instance of the Secured Party is required to determine (i) whether the Security Interest has become

15


enforceable, (ii) whether the powers which such Person is purporting to exercise have become exercisable, (iii) whether any money remains due to the Secured Party or the Custodian by the Pledgor, (iv) the necessity or expediency of the stipulations and conditions subject to which any sale or lease is made, (v) the propriety or regularity of any sale or other dealing by the Secured Party with the Collateral, or (vi) how any money paid to Secured Party has been applied.
(2)
Any bona fide purchaser of all or any part of the Collateral from the Secured Party or any receiver or agent will hold the Collateral absolutely, free from any claim or right of whatever kind, including any equity of redemption, of the Pledgor, which it specifically waives (to the fullest extent permitted by law) as against any such purchaser together with all rights of redemption, stay or appraisal which the Pledgor has or may have under any rule of law or statute now existing or hereafter adopted.
Section 16
Representations, Warranties and Covenants.
(1)
The Pledgor represents and warrants (which representations and warranties will be deemed to be repeated as of each date on which the Pledgor delivers Collateral) and undertakes to the Secured Party and the Custodian that:
(a)
the Pledgor is a captive insurance company duly incorporated and validly existing under the laws of its jurisdiction of incorporation and is not in liquidation, is authorized in its home jurisdiction to carry on the business of reinsurance and has the corporate power and authority to enter into this Agreement and to exercise its rights and perform its obligations hereunder and has taken all corporate and other action required to authorise its execution and performance of this Agreement;
(b)
the Pledgor owns, or will at the time of it being credited to the Securities Account own, the Collateral free and clear of all Liens (other than the Security Interest and the Custodian Security Interest) and other adverse claims and the Pledgor is entitled to grant the Security Interest created pursuant to this Agreement;
(c)
this Agreement does not conflict in any material respect with any contractual or other obligation binding upon the Pledgor or with the constitutional documents of the Pledgor;
(d)
the Security Interest created pursuant to this Agreement constitutes and will constitute a first priority security interest over the Collateral, not subject to any prior or pari passu security interest (except as provided in Section 23(5));

16


(e)
this Agreement has been duly executed and delivered by the Pledgor and constitutes the legal, valid and binding obligations of the Pledgor, enforceable in accordance with its terms;
(f)
other than with the prior written consent of the Secured Party, the Pledgor shall not dispose of the Collateral, shall not create any Liens, other than the Security Interest created by this Agreement (except as provided in Section 23(5)), in respect of the Collateral (irrespective of whether ranking behind the Security Interest created hereby), shall not permit the existence of any such Lien, and shall not grant control over any of the Collateral to any Person other than the Secured Party;
(g)
to the Pledgor’s knowledge, no transfer restrictions apply to any of the Collateral, except as have been complied with;
(h)
to the Pledgor’s knowledge, the obligations that are Collateral constitute, where applicable, the legal, valid and binding obligation of the issuer of such Collateral, enforceable in accordance with its terms, subject only to any limitation under Applicable Laws relating to (i) bankruptcy, insolvency, fraudulent conveyance, arrangement, reorganization or creditors’ rights generally, and (ii) the discretion that a court may exercise in the granting of equitable remedies;
(i)
the Pledgor does not know of any claim to or interest in any Collateral, including any adverse claims. If any Person asserts any Lien, encumbrance or adverse claim against any of the Collateral, the Pledgor will promptly notify the Secured Party;
(j)
the Pledgor has not consented to, will not consent to, and has no knowledge of any control by any Person with respect to any Collateral, other than the Secured Party or the Custodian;
(k)
the Pledgor will notify the Secured Party immediately upon becoming aware of any change in an “issuer’s jurisdiction” within the meaning of the STA and the equivalent legislation in any other jurisdiction in respect of any Collateral that are uncertificated securities;
(l)
the Pledgor will not change its name in any manner or its jurisdiction of incorporation without providing at least 30 days’ prior written notice to the Secured Party and the Custodian;
(m)
the Pledgor will not change the jurisdiction of its head office without providing at least 30 days’ prior written notice to the Secured Party;

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(n)
the Pledgor will grant to the Secured Party such further security interests, assignments, mortgages, charges, hypothecations and pledges in such of the Collateral that is not effectively subject to a valid and perfected first ranking security interest pursuant to this Agreement, and in each relevant jurisdiction as reasonably determined by the Secured Party. The Pledgor will perform all acts, execute and deliver all agreements, documents and instruments and take such other steps as are reasonably requested by the Secured Party at any time to register, file, signify, publish, perfect, maintain, protect, and enforce the Security Interest including: (i) executing, recording and filing of financing or other statements, and paying all taxes, fees and other charges payable, (ii) placing notations on its books of account to disclose the Security Interest, (iii) delivering acknowledgements, confirmations and subordinations that may be necessary to ensure that the Security Interest constitutes a valid and perfected first ranking security interest, (iv) executing and delivering any certificates, endorsements, instructions, agreements, documents and instruments, required to register, file, signify, publish, perfect, maintain, protect and enforce the Security Interest. The documents contemplated by this paragraph must be in form and substance reasonably satisfactory to the Secured Party.
(2)
The Custodian represents and warrants that it does not use any subcustodian in respect of securities that it holds through a securities account at CDS or that it holds in physical form, and it covenants that it will not do so in the future.
Section 17     Collateral Matters.
(1)
The Custodian acknowledges and agrees that:
(a)
it has not entered into, and will not enter into, any agreement, other than this Agreement, in which it agrees to comply with any Entitlement Order or other instruction or direction in respect of the Collateral or any portion thereof and it will not accept or act upon an Entitlement Order, instruction or direction in respect of the Collateral or the Securities Account, except as provided in this Agreement;
(b)
all property (whether a credit balance, a security, an instrument or other property) credited to or held in the Securities Account is to be treated as a financial asset under the STA and the equivalent legislation in other jurisdictions;
(c)
the Securities Account is a “securities account” for purposes of the STA and the equivalent legislation in other jurisdictions;
(d)
all account statements for the Securities Account shall show as a credit balance to the Securities Account any cash representing proceeds derived from property held

18


in the Securities Account or cash delivered to the Securities Account as original Collateral, notwithstanding that the Custodian may (and is hereby permitted) to hold such cash in one or more deposit accounts maintained with a deposit-taking institution;
(e)
it is acting as securities intermediary, for purposes of the STA and the equivalent legislation in other jurisdictions, in respect of the Collateral and any security entitlements credited to the Securities Account; and
(f)
the securities intermediary’s jurisdiction of the Custodian for purposes of the STA, and the equivalent legislation in other jurisdictions, is the Province of Ontario, Canada.
(2)
Each of the Pledgor and the Secured Party acknowledges and agrees that:
(a)
the Custodian shall have no obligation to register any financing statement or other personal property security filings in respect of any of the Collateral, or to perfect or maintain the perfection of any Lien, other than its obligation to open and maintain the Securities Account in accordance with the terms of this Agreement; and
(b)
the Custodian shall not be responsible for determining the amount of Collateral required to be delivered by the Pledgor at any time pursuant to this Agreement or to determine whether the Collateral held in the Securities Account are Permitted Investments.
(3)
Each of the Pledgor and the Custodian acknowledges and agrees that to the extent that any other agreement between the Pledgor and the Custodian contains a provision that is inconsistent with the designation of the securities intermediary’s jurisdiction of the Custodian for the purposes of the STA set out in Section 17(1)(c) hereof such agreement is hereby deemed to be amended to remove such inconsistency.
Section 18
Appointment and Duties of the Custodian.
(1)
The Custodian agrees to act as Custodian and, in that connection, agrees to open and maintain the Securities Account in accordance with the terms of this Agreement. In particular, the Custodian agrees as follows:
(a)
Except as otherwise provided herein, all securities and all other property delivered to the Custodian pursuant to this Agreement or the Reinsurance Agreement for credit to the Securities Account, or otherwise as Collateral, shall promptly be credited to, and shall be held in, the Securities Account. The Custodian shall hold the Collateral

19


in accordance with the terms and conditions of this Agreement. The Custodian shall hold the Collateral as client property separate and apart from its general property. All Collateral shall at all times and in all circumstances be clearly recorded in the books and records of the Custodian as being separate and apart from the assets of the Custodian and in a manner which reflects the Pledgor as the beneficial owner of the securities and other property in the Securities Account. The Custodian shall make notations in its records that the Securities Account is subject to a security interest in favour of the Secured Party.
(b)
The Custodian shall promptly credit and deposit to the Securities Account all cash or other amounts received as dividends, interest, distributions or other payment related to the Collateral, including all cash or other amounts received pursuant to Section 7(3).
(c)
The Custodian shall, with respect to Corporate Actions, use reasonable efforts to promptly forward to the Pledgor, or, on Direction from the Pledgor, to the Investment Manager, a Corporate Action notice that contains a summary of information which has actually been received by the Custodian from third party sources believed by the Custodian to be reliable, and request Directions with respect to such Corporate Action where required. The Custodian shall, with respect to Voting Materials, use reasonable efforts to promptly forward, or arrange to have promptly forwarded, to the Pledgor (or to the Investment Manager which the Pledgor has designated as having responsibility for the relevant security) all Voting Materials which the Custodian receives in respect of securities forming part of the Collateral. The Custodian shall be under no duty to investigate, participate in or take affirmative action concerning any Corporate Actions or Voting Materials, except in accordance with a Direction given in accordance with this Agreement, and upon such indemnity and provision for fees and expenses as the Custodian may require. For greater certainty, other than as described in this paragraph and in (1)(e) below, the Custodian shall not be obligated to forward or summarize any other shareholder communications, including shareholder mailings, notices or reports, and the Custodian shall have no responsibility or liability for ensuring the accuracy or adequacy of such third party information contained in any such Voting Materials or Corporate Action notice.
(d)
The Custodian shall register the Collateral in the Custodian’s own name, in the name of a Depository or in the name of a nominee, or in bearer form, if the security is not capable of being registered or registration of it would not be in the best interests of the Pledgor and the Secured Party.

20


(e)
The Custodian shall account for all Collateral in the Securities Account and shall provide monthly statements of account. Additional statements as required to satisfy the requirements of the Superintendent and any other regulatory or administrative agencies will also be provided as requested by the Secured Party, the Pledgor, the Superintendent or such other regulatory or administrative agency, all at the expense of the Pledgor. Upon the expiration of ninety (90) days from the date of mailing of any statement, the Custodian shall be fully released and discharged from any liability or accountability to any party with respect to the acts or transactions disclosed in such statement, except for those certain acts and transactions which the Pledgor or the Secured Party has identified by giving written notice to the Custodian.
(f)
The Custodian shall respond to any direct inquiries of the Pledgor, the Secured Party, the Bermuda Monetary Authority (BMA) as the Pledgor’s regulator or any of their representatives, concerning the Securities Account or the Collateral, and shall upon reasonable prior notice provide to the Pledgor, the Secured Party and/or the Pledgor’s applicable regulator detailed inventories of all securities and other property held in the Securities Account, and the Custodian shall, upon reasonable prior notice and subject to commercially reasonable requirements, permit the Pledgor, the Secured Party, the Pledgor’s regulator, or any of their representatives, to examine and audit all securities and other property held in the Securities Account. The Custodian shall promptly provide notice to the Secured Party and the Pledgor concerning audits of the Pledgor’s regulator. The parties acknowledge that copies of statements and confirmations relating to the Securities Account are available through the Custodian’s client access web portal, and the Pledgor hereby consents to the Custodian granting access to the Secured Party to information regarding the Securities Account by such web portal and such consent to access may not be withdrawn without the consent of the Secured Party. The Pledgor and the Secured Party hereby consent to the Custodian granting access to the Pledgor’s regulator to information regarding the Securities Account by the Custodian’s client access web portal if such access were to be requested.
(g)
The Custodian shall keep records of the administration of the Securities Account. The Pledgor, the Pledgor’s regulator, the Secured Party and/or any other persons to whom the Custodian is legally obligated to provide access, may examine such records upon reasonable prior notice during business hours through any person or persons duly authorized in writing by the Pledgor, the Pledgor’s regulator the Secured Party and/or such other person, as the case may be.
(h)
The Custodian shall notify the Pledgor and the Secured Party of any claim of which the Custodian has actual notice against the Collateral or any part thereof exerted by

21


any Person, or of any loss, destruction of or damage to the Collateral or any part thereof.
(i)
The Custodian shall, on the receipt from the Secured Party of an Entitlement Order, or notice from the Secured Party that such surrender or transfer is required in connection with a realization effected in accordance with Section 10, surrender possession of all or part of the Collateral or transfer all or part of the Collateral from the Securities Account to the Secured Party, another Person or to an account designated by the Secured Party, all as Directed by the Secured Party.
(j)
The Custodian will, on or before the fifteenth day of each month, or, if the fifteenth day is not a business day of the Custodian, on or before the first business day of the Custodian following the fifteenth day, provide to the Superintendent, in a form acceptable to the Superintendent, a declaration with respect to the Collateral, in such form as the Superintendent may require, together with paper and electronic copies of information required by the Superintendent with respect to the Collateral. The Secured Party hereby appoints the Custodian as its agent for the purpose of filing such declaration and authorizes the Custodian to file each such declaration on its behalf. The Secured Party acknowledges that such declaration may as an administrative matter be filed by the Custodian as part of a larger filing made in respect of other similar arrangements with other clients.
(k)
Notwithstanding Section 17.1(c) of the PPSA, the equivalent legislation in any other jurisdictions or any other provision of Applicable Law, the Custodian shall not lend, re-pledge or re-hypothecate the Collateral or any portion thereof.
(l)
The Collateral shall not be used as part of the Custodian’s or any other Person’s securities lending program.
Section 19
Directed Powers.
(1)
The Custodian shall exercise the following powers and authority in the administration of the Securities Account only upon Direction of the Pledgor or its Investment Manager and, to the extent required by Section 2, the consent of the Secured Party and, after receipt of an Entitlement Order from the Secured Party or a notice pursuant to Section 10(d) from the Secured Party, only upon the Direction of the Secured Party:
(a)
settle the purchase and sale of Collateral; and
(b)
complete and process such Voting Materials and process Corporate Actions as the Custodian may be Directed, provided that the Custodian has received Directions

22


within the time frames specified by the Custodian in any such Voting Materials or Corporate Action notice applicable thereto. Where Directions have not been provided within such time frames, the Custodian will take no action except only in the case of Corporate Actions and where a default option exists, such default option as outlined in the notice will apply. In the event that Directions are provided after such time frames, the Custodian shall use reasonable efforts to process such Corporate Actions or Voting Materials but the Custodian shall have no liability for failure to process such Voting Materials or Corporate Actions.
(2)
Save and except for carrying out Directions as provided herein, the Custodian shall have no responsibility for any trading in securities forming part of the Collateral, the investment management of the Collateral or for any investment decisions.
Section 20     Contractual Settlement.
The Custodian shall, in jurisdictions where settlement practices permit, credit the Securities Account with Collateral, in connection with the receipt of interest or dividends or the sale or redemption of any security held hereunder, and debit such Securities Account, in connection with the purchase of any security, on the Contractual Settlement Date with respect thereto, whether or not such monies have been received, or payment made, by the Contractual Settlement Date. However, if after a reasonable time (as determined by the Custodian) following the Contractual Settlement Date any such payment or receipt shall fail to take place for any reason other than the failure of the Custodian to make payment against delivery or delivery against payments, all related credits and debits shall be reversed and adjusted to reflect the failure of the transaction to take place.
Section 21     Services to be Performed without Direction.
(1)
The Custodian may, without Direction:
(a)
hold securities forming part of the Collateral through a Depository on the terms of business of the operators of such Depository, and may effect settlement in accordance with the customary or established trading and processing practices and procedures in the jurisdiction or market in which any transaction in respect of the Collateral occurs. The Custodian shall be fully protected and absolved from any liability howsoever arising from effecting transactions in the foregoing manner except to the extent that such liability arises out of the Custodian’s breach of its Standard of Care (as defined herein) in carrying out Directions in relation to such transactions.
(b)
The Custodian may commingle Collateral held through a Depository with property of other clients of the Custodian (but not with property held for the Custodian’s own account).

23


(c)
Where the Collateral is so held through a Depository, the Pledgor and the Secured Party confirm that they will not assert any claim in respect of such Collateral which would be contrary to the rules and procedures of such Depository, and will not knowingly act in any way which could result in the Custodian being in breach of any rule or procedure of such Depository.
(d)
enter into and settle foreign exchange transactions, on behalf of the Pledgor, for purposes of facilitating settlement of trades of Collateral or otherwise, and any such transactions may be entered into with such counterparties (including but not limited to the Custodian acting as principal) as the Custodian may choose in its sole discretion, including Affiliates of the Custodian, unless the Pledgor otherwise Directs;
(e)
to the extent it may do so in the ordinary course of its business, (i) collect income payable to and distributions due to the Securities Account and sign on behalf of the Pledgor or the Secured Party any declarations, affidavits, certificates of ownership and other documents required to collect income and principal payments, including but not limited to, tax reclamations, rebates and other withheld amounts, and (ii) collect proceeds from securities or other property which may mature, provided that whenever a security or other property offers the Custodian the option of receiving dividends in shares or cash, the Custodian is authorized to select the cash option unless the Custodian receives a Direction to the contrary. The Custodian shall not be responsible for the failure to receive payment of (or late payment of) distributions with respect to securities or other property held in the Securities Account.
(f)
present for redemptions or exchange any securities or other property which may be recalled, redeemed, withdrawn or retired provided that timely receipt of written notice of the same is received by the Custodian from the issuer.
(g)
retain uninvested cash balances from time to time on hand in the Securities Account and may, in its sole discretion, hold such cash balances on deposit with a bank or another deposit taking institution, including the Custodian or its Affiliates, in such interest bearing account as the Custodian may, in its sole discretion, determine.
For greater certainty, the parties agree that all free credit balances standing to the credit of any Account, including un-invested cash balances and all interests earned, shall constitute “financial assets” for the purposes of the STA and shall be subject to the Security Interest; and

24


(h)
do all such acts, take all such proceedings and exercise all such rights and privileges, although not specifically mentioned in this Agreement, as the Custodian may deem necessary to carry out its rights and obligations under this Agreement.
(2)
The Custodian may appoint Agents and nominees (which may be Affiliates of or otherwise connected to the Custodian) to perform any of the services to be performed by the Custodian as required under the Agreement.
(3)
The Custodian shall act in accordance with its Standard of Care in the selection and monitoring of Agents and nominees.
(4)
The Custodian shall be fully protected and absolved from liability howsoever arising from any acts or omissions of any agent appointed by the Custodian or appointed by the Secured Party or Pledgor; provided, however, that the Custodian will be liable for any gross negligence, recklessness and/or wilful/ intentional acts by its agents. For greater certainty, Depositories are not agents of the Custodian.
(5)
For greater certainty, any rights, powers, authorities, benefits, and limitations on liability or responsibility whatsoever granted to the Custodian under this Agreement or conferred upon the Custodian otherwise at law shall be deemed to have been granted to, or conferred upon, any and all Agents and nominees duly appointed by the Custodian, and in furtherance thereof, any references to “the Custodian” herein shall be construed as references to such Agents or nominees, as the context requires.
(6)
Settlements of transactions may be effected in accordance with trading and processing practices customary in the jurisdiction or market where the transaction occurs. The Pledgor acknowledges that this may, in certain circumstances, require the delivery of cash or securities (or other property) without the concurrent receipt of securities (or other property) or cash and, in such circumstances, the Pledgor shall have sole responsibility for non receipt of payment (or late payment) by the counterparty.
Section 22
Express Provisions.
Notwithstanding any of the foregoing provisions, the Custodian, in the administration of the Securities Account, is to be bound solely by the express provisions of this Agreement, and such further written and signed Directions as the appropriate party or parties may, under the conditions herein provided, deliver to the Custodian. The Custodian shall have no duties or obligations under any other agreement, notwithstanding that such other agreement may be referred to in this Agreement. The Custodian shall be under no obligation to enforce the Pledgor's or the Secured Party’s obligations under this Agreement, except as otherwise expressly provided or Directed pursuant hereto in accordance with the terms hereof.

25


Section 23
Security Interest, Set-Off and Deduction.
(1)
If a Direction from the Pledgor, or the settlement of a transaction would create a debt owing, overdraft or short position in the Securities Account (an “ Overdraft ”), then the Custodian is authorized to, but shall not be obliged to, act on such Direction or complete such transaction.
(2)
Interest on any Overdraft shall be calculated on the daily balance of the amount owing (before and after demand, default and judgment) at an annual rate established and declared by the Custodian from time to time, subject to such minimum charges as declared from time to time, with interest on overdue interest at the same rate. Interest is payable monthly and shall form part of the Overdraft.
(3)
The Pledgor agrees to pay to the Custodian promptly upon notice, the amount of any Overdraft together with any interest that has accrued in accordance with Section 23(2).
(4)
Notwithstanding any other provision of this Agreement, the Custodian, in its reasonable discretion, shall be entitled to decline to act upon any Direction of the Pledgor unless and until all the amounts due and owing to the Custodian under this Agreement have been paid in full. The Custodian shall give the parties notice of its decision not to act on any such Direction as soon as practicable thereafter.
(5)
The Pledgor hereby assigns, conveys, mortgages, pledges, hypothecates, and charges in favour of, and grants a security interest to the Custodian in all of the Pledgor’s right, title and interest in and to all Collateral now owned or hereafter acquired by the Pledgor and held by the Custodian pursuant to this Agreement and all proceeds thereof (the “ Custodian Security Interest ”), as continuing collateral security for the due payment of the obligations from time to time of the Pledgor, whether present or future, absolute or contingent, liquidated or non-liquidated, of whatsoever nature or kind in any currency, in respect of fees and expenses arising pursuant to this Agreement that are unpaid and owing to the Custodian, and any Overdrafts (collectively, the “ Custodial Obligations ”).
The Pledgor and the Custodian agree that it is their intention that the Custodian Security Interest hereby created shall attach immediately to any Collateral in which the Pledgor has an interest on the date hereof, and, with respect to after-acquired Collateral, forthwith at the time the Pledgor acquires an interest therein, all in accordance with the terms hereof.
The Pledgor acknowledges and agrees that the Custodian Security Interest in the Collateral shall have priority over any other security interest therein granted by the Pledgor to the extent of the Custodial Obligations, and the Custodian shall be under no obligation to waive,

26


subordinate or discharge the Custodian Security Interest except upon the indefeasible payment and satisfaction in full of such unpaid Custodial Obligations.
(6)
If and to the extent that at any time any unpaid Custodial Obligations owing to the Custodian hereunder are outstanding and unpaid, in addition to any right or remedy that the Custodian may otherwise have hereunder or under any Applicable Law, the Custodian is hereby authorized, in its discretion (upon reasonable notice to the Pledgor and the Secured Party and in accordance with Applicable Law), both before and after demand or judgment, and whether or not default has occurred hereunder:
(a)
to sell, as agent for the Pledgor, such portion of the Collateral (which, for the purposes of this Section 23 shall include any account with any third party with whom cash has been deposited by the Custodian on behalf of the Pledgor) as may be required to satisfy any such unpaid Custodial Obligations, on such commercially reasonable terms as it thinks fit in its discretion, and
(b)
set off against and deduct from the proceeds of any such sale owing to the Pledgor such amounts of such unpaid Custodial Obligations as the Custodian thinks fit in its discretion, and account for any surplus to the Pledgor, or as provided in this Agreement,
it being agreed and understood by the Pledgor that the exercise of the Custodian’s rights under this Section 23(6) shall not be construed as the exercise of a right of realization in respect of Custodian Security Interest but a separate right of set-off (hereinafter referred to as “ Set-Off Rights ”).
(7)
Notwithstanding any other term of this Agreement, the Custodian hereby subordinates in favour of the Secured Party all security interests, liens, encumbrances, hypothecs and claims and hereby waives any rights of set-off it may have, now or in the future, against the Collateral, including any free credit or cash balance in the Account (other than in respect of the Custodian Security Interest and the Set-Off Rights).
Section 24
Waiver by Custodian.
Subject to Section 2(8) and Section 23, the Custodian acknowledges and agrees that it has not acquired any right, title or interest in the Collateral on its own behalf other than such rights as it may have as a securities intermediary and the right and obligation to hold and administer the Collateral in accordance with the terms of this Agreement.

27


Section 25     Charges of the Custodian.
The Pledgor agrees to pay all reasonable costs, fees or expenses charged by the Custodian for acting as the Custodian pursuant to this Agreement, including fees incurred by the Custodian for legal services deemed reasonably necessary by the Custodian as a result of the Custodian’s so acting. Following the giving of an Entitlement Order, the Secured Party shall be required to pay the fees and expenses arising from this Agreement.
Section 26
Indemnification of Custodian.
(1)
Prior to the issuing of an Entitlement Order by the Secured Party, the Pledgor shall indemnify and hold the Custodian, its directors, officers, employees, representatives and agents harmless from and against any and all taxes, charges, costs, expenses, damages, claims, demands and liabilities to which they, or any of them, may become subject, including legal and accounting costs, for or in respect of anything done or omitted to be done in connection with this Agreement or in respect of the Collateral, except for the negligence, wilful misconduct or lack of good faith of the Custodian, such indemnification to survive the resignation or removal of the Custodian and the termination of this Agreement.
(2)
Following the issuing of an Entitlement Order by the Secured Party, the Secured Party shall indemnify and hold the Custodian, its directors, officers, employees, representatives and agents harmless from and against any and all taxes, charges, costs, expenses, damages, claims, demands and liabilities to which they, or any of them, may become subject, including legal and accounting costs, for or in respect of anything done or omitted to be done in connection with this Agreement or in respect of the Collateral following the issuance of the Entitlement Order, except for the negligence, wilful misconduct or lack of good faith of the Custodian, such indemnification to survive the resignation or removal of the Custodian and the termination of this Agreement.
(3)
Whenever an action by the Custodian is authorized by Direction pursuant to the provisions of this Agreement and such action is taken in accordance with such Direction, the party or parties authorizing such action by way of Direction hereby agree to indemnify the Custodian against all losses, damages, costs and expenses, including reasonable legal fees, resulting from any action so taken by the Custodian, except for any such losses, damages, costs or expenses resulting from its own negligence, wilful misconduct or lack of good faith.
Section 27
Limitation of Custodian Liability.
(1)
The Custodian, in carrying out its duties in respect of the safekeeping of, and dealing with, the Collateral, shall exercise the degree of care, diligence and skill that a prudent Canadian trust company would exercise in comparable circumstances (the “ Standard of Care ”).

28


Except to the extent that the Custodian has not complied with the Standard of Care, the Custodian shall not be liable for any act or omission in the course of, or connected to, rendering services hereunder. Without limitation, the Custodian shall not be liable for any losses to, or diminution of, the Collateral, except to the extent that such loss or diminution is directly caused by the Custodian’s breach of the Standard of Care. In no event shall the Custodian be liable for any consequential or special damages, including but not limited to loss of reputation, goodwill or business.
(2)
Notwithstanding the foregoing or any other provision of this Agreement, the Custodian’s liability arising from the Blocking Service shall in no event exceed the aggregate amount of fees received by the Custodian with respect to the specific Securities Account in the preceding six (6) months.
(3)
The Custodian shall not be responsible for:
(a)
any property until it has been received by the Custodian;
(b)
the title, validity or genuineness of any property or evidence of title to any Collateral or any defect in ownership or title;
(c)
any act or omission required or demanded by any governmental, taxing, regulatory or other competent authority in any country in which all or part of the Collateral is held or which has jurisdiction over the Custodian the Pledgor or the Secured Party;
(d)
any loss resulting from official action (including nationalisation and expropriation), currency restrictions or devaluations, acts or threat of war or terrorism, insurrection, revolution or civil disturbance, acts of God, strikes or work stoppages, inability of any Depository or other settlement system to settle transactions, interruptions in postal, telephone, telex and/or other communication systems or in power supply, the failure of any third party appointed by the Pledgor to fulfil its obligations hereunder, or any other event or factor beyond the reasonable control of the Custodian;
(e)
any failure to act on Directions, if the Custodian reasonably believed that to do so might result in breach of Applicable Law or the terms of this Agreement; or
(f)
any Collateral which it does not hold or which is not directly controlled by the Custodian or its appointed Agents.
(4)
The Custodian's duties and responsibilities in connection with this Agreement will be limited to those expressly set forth in this Agreement. The Custodian is not a principal, participant, party or beneficiary in any transaction underlying this Agreement and will have no duty to

29


inquire beyond the terms and provisions hereof. Save and except for carrying out Directions as provided herein, the Custodian shall have no responsibility for trading in securities which form part of the Collateral, or for any investment management or investment decision. The Custodian shall not be held responsible for the sufficiency of the Collateral or for any market decline in the value of the Collateral and shall have no obligation to notify either the Pledgor or the Secured Party of any such decline. The Custodian will not be liable for any error in judgement, any act or omission, any mistake of law or fact, or for anything it may do or refrain from doing in connection herewith, except for its own negligence, wilful misconduct or lack of good faith.
(5)
Should any dispute arise in respect of any Person’s entitlement to or rights in the Collateral under this Agreement, or any Person’s right to give an Entitlement Order or other Direction with respect thereto, and notice of such dispute has been given to the Custodian, or should the Custodian in good faith be uncertain as to whether a particular action it would otherwise be required to take under this Agreement would result in a breach of Applicable Law, this Agreement, or the rights of another Person, it will be entitled to withhold delivery of all or any part of the Collateral until the dispute is resolved, any conflicting demands are withdrawn or any such uncertainty is resolved, and will have the right, but not the obligation, to institute a petition for interpleader in any court of competent jurisdiction to determine the rights of the respective parties to the dispute. Should a petition for interpleader be instituted, or should the Custodian be threatened with litigation or become involved in litigation or arbitration in any manner whatsoever in connection with this Agreement or the Collateral, the Pledgor hereby agrees to reimburse the Custodian for its lawyers' fees and any and all other expenses, losses, costs and damages incurred by the Custodian in connection with such threatened or actual litigation or arbitration. Notwithstanding any other term of this Agreement, the Custodian shall have no responsibility or liability to the Pledgor for complying with an Entitlement Order concerning the Securities Account issued by the Secured Party, and shall have no responsibility to investigate the appropriateness of any such Entitlement Order, even if the Pledgor notifies the Custodian that the Secured Party is not legally entitled to originate any such Entitlement Order, unless the Custodian has been served with an injunction, restraining order or other legal process issued by a court of competent jurisdiction (“ Court Order ”) enjoining it from complying and has had a reasonable opportunity to act on such Court Order.
(6)
The Custodian may employ and retain and consult with legal counsel or professional advisors concerning any questions relating to its duties or responsibilities hereunder and the Pledgor shall reimburse the Custodian for all reasonable costs and expenses associated therewith, however in the event of Custodian’s decision to retain legal counsel or professional advisors, the Custodian agrees to advise the Pledgor of it’s intent to do so prior to engagement. The Custodian shall be entitled to rely on and may act upon advice of such legal counsel or

30


professional advisers and shall not be liable for any loss or damage resulting from so relying or acting if the advice was within the area of professional competence of the person from whom it was received and the Custodian acted in good faith in relying thereon.
(7)
The Pledgor shall notify the Custodian in writing of any taxes payable in respect of the Collateral. The Custodian shall use reasonable efforts, based upon the information available to it, to assist the Pledgor with respect to any taxes. If the Custodian is responsible under any Applicable Law for any taxes in respect of the Securities Account, the Pledgor shall inform the Custodian in writing of such taxes, shall Direct the Custodian with respect to the payment of such taxes and shall provide the Custodian with the necessary funds and all information required to fund, pay or meet such taxes. The Custodian shall have no responsibility or liability for and shall be indemnified and held harmless by the Pledgor for any assistance provided to the Pledgor and for any taxes now or hereafter imposed on the Securities Account or the Pledgor or the Custodian in respect of the Securities Account by any taxing authorities, domestic, foreign or international.
(8)
Each of the Pledgor and the Secured Party shall provide the Custodian with an incumbency certificate substantially in the form set out in Schedule “C” setting out the names and sample signatures of persons authorized to give Directions to the Custodian hereunder. The Custodian shall be entitled to rely on such certificate until a revised certificate is provided to it hereunder. Unless otherwise expressly provided, each Direction shall continue in full force and effect until superseded or cancelled by another written instruction. Any Directions shall, as against the Pledgor and the Secured Party, if applicable, and in favour of the Custodian, be conclusively deemed to be Directions for the purposes of this Agreement notwithstanding any error in the transmission thereof or that such written instruction may not be genuine, if believed by the Custodian acting in good faith, to be genuine. Provided however that the Custodian, subject to Section 27(9), may in its discretion decline to act upon any Direction: (a) that is insufficient or incomplete; or (b) that is not received by the Custodian in sufficient time to give effect to such written instructions; or (c) where the Custodian has reasonable grounds for concluding that the same has not been accurately transmitted or is not genuine. If the Custodian declines to give effect to any Directions for any reason set out in the preceding sentence, it shall notify the person giving such instruction forthwith after it so declines.
(9)
Except as otherwise expressly provided in this Agreement, any statement, certificate, notice, request, consent, approval, or other instrument to be delivered or furnished by the Pledgor or the Secured Party shall be sufficiently executed if executed in the name of the Pledgor or the Secured Party by persons named in the incumbency certificate delivered pursuant to Section 27(8). The Custodian shall be protected in acting upon any written statement or

31


other instrument made by such officers or agents of the Pledgor or the Secured Party with respect to the authority conferred on it.
Section 28
Removal and Resignation of the Custodian.
(1)
The Custodian may at any time resign from, and terminate its capacity hereunder by delivery of written notice of resignation, effective not less than ninety (90) days after receipt by both the Secured Party and the Pledgor. The Custodian may be removed by the Pledgor by (i) delivery to the Custodian and the Secured Party of a written notice of removal, effective not less than ninety (90) days after receipt by the Custodian and the Secured Party of the notice, and (ii) receipt of the Secured Party’s consent to such action, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, no such resignation by the Custodian or removal by the Pledgor shall be effective until a successor to the Custodian shall have been duly appointed by the Pledgor and approved by the Secured Party and all Collateral in the Securities Account have been duly transferred to such successor. The Pledgor, upon receipt of notice of resignation or removal of the Custodian, shall undertake to obtain the agreement of a qualified, successor depository, agreeable to the Secured Party, to act as a successor Custodian in accordance with all agreements of the Custodian herein. The Secured Party agrees not to withhold unreasonably approval of such Custodian.
(2)
Any successor Custodian appointed hereunder shall execute an instrument accepting such appointment hereunder and shall deliver the same to the Pledgor and the Secured Party and to the then acting Custodian. Thereupon such successor Custodian shall, without any further act, assume the obligations and duties of the Custodian under this Agreement with like effect as if originally named herein; but the predecessor Custodian shall nevertheless, when requested in writing by the successor Custodian, execute an instrument or instruments assigning such of its rights and powers, and shall duly assign, transfer and deliver to the Custodian all property and money held by such predecessor hereunder. The predecessor Custodian shall continue to be indemnified by reason of such entity being or having been a Custodian in accordance with the terms hereof.
Section 29     No Conflict.
(1)
The Custodian represents and warrants to the Secured Party and the Pledgor that, at the time of the execution and delivery of this Agreement, no material conflict of interest exists with respect to the Custodian’s role hereunder. The Custodian shall resign by giving notice in accordance with Section 28 if a material conflict of interest arises with respect to its role as custodian hereunder that is not eliminated within ninety (90) days after the Custodian becomes aware of such conflict of interest. Immediately after the Custodian becomes aware

32


that it has a material conflict of interest, it shall provide the Secured Party and the Pledgor with written notice of the nature of that conflict.
(2)
(The Pledgor and the Secured Party agree that the Custodian, and any of its divisions, branches or Affiliates, may take any one or more of the following actions without creating a conflict of interest; and without being liable to account therefor or being in breach of this Agreement:
(a)
purchase, hold, sell, invest in or otherwise deal with securities or other property of the same class and nature as may be part of the Collateral, whether on its own account or for the account of another (in a fiduciary capacity or otherwise);
(b)
act as a market maker in any securities that form part of the Collateral;
(c)
provide brokerage services to other clients;
(d)
act as financial adviser to the issuer of such securities;
(e)
act in the same transaction as agent for more than one client;
(f)
act as a deposit taking institution holding the cash balances in the Securities Account;
(g)
have a material interest in any issue of securities that form part of the Collateral;
(h)
subject to Section 31(1), use in other capacities knowledge gained in its capacity as Custodian hereunder; and
(i)
earn profits from any of the activities listed herein.
Section 30     Communications and Directions.
(1)
All communications hereunder (including, for greater certainty, Directions) must be given by one of the following methods of communication:
personal or courier delivery;
prepaid ordinary mail;
authenticated telex;
facsimile;
S.W.I.F.T.;
one of the Custodian's secured client access channels, including Investor Services Online;

33


directly between electromechanical or electronic terminals (including, subject to Section 30(5), the internet or unsecured lines of communication); or
telephone (subject to Section 30(3)).
(2)
Communications should be addressed, as applicable, as follows:
(i)
to the Pledgor at:
Wyndham Insurance Company (SAC) Limited
Swan Building 2 nd Floor
26 Victoria Street,
Hamilton HM 12
Bermuda
Attention: William Wood

in respect of Segregated

Account AX
Email: William.Wood@ctplc.com
With a carbon copy to:
American Pet Insurance Company.
907 NW Ballard
Seattle, Washington, 98107-4607
U.S.A.
Attention: Regulatory and Legal
Email:
tim.graff@trupanion.com
asher.bearman@trupanion.com
(ii)
to the Secured Party at:
Omega General Insurance Company
34 King Street East, Suite 1200
Toronto, Ontario M5C 2X8
Attention:
President or CEO
Facsimile:
416-361-6113

34


(iii)
to the Custodian at:
RBC Investor Services Trust
155 Wellington Street West, 7 th Floor
P.O. Box 7500, Station A
Toronto, Ontario
M5W 1P9
Attention:
Senior Manager, Client Service Insurance
Facsimile:
416-955-2600
Any party may change its address and facsimile number for communications by notifying the other parties in accordance with the notice provisions above. Any communication delivered personally shall be deemed to have been given and received on the day it is so delivered (or if that day is not a Business Day, on the next succeeding Business Day). Subject to disruptions in the postal service, any communication sent by prepaid ordinary mail shall be deemed to have been given and received on the fifth (5th) Business Day following the date of mailing. Any communication given by authenticated telex, facsimile, S.W.I.F.T., one of the Custodian’s secured client access channels or directly between electromechanical or electronic terminals (including, subject to Section 30(5) and Section 30(6), the internet or unsecured lines of communication) shall be deemed to have been given and received on the Business Day it is transmitted provided that it was received before 3:00 p.m. (Toronto time), and, if received after 3:00 p.m. (Toronto time), it shall be deemed to have been given and received on the Business Day following the day of transmission provided in each case that confirmation of transmission is available from the party giving the communication.
(3)
With respect to telephone Directions, the party giving such Directions shall endeavour to forward written Directions confirming such telephone Directions on the same day that such telephone Directions are given to the Custodian. The fact that such confirming written Directions are not received or that contrary Directions are received by the Custodian shall in no way affect the validity of any transactions effected by the Custodian on the basis of the telephone Directions.
The parties acknowledge and agree that some or all telephone communications between the parties, including, without limitation, Directions, may be recorded by the Custodian. In the event of any disagreement as to the content of any communication given by telephone, the Custodian’s recording will be conclusive and determinative of the contents of such communication.
(4)
Without limiting the foregoing, in the case of Directions sent through one of the Custodian’s secured access channels, including Investor Services Online, or sent directly between electromechanical or electronic terminals (including, subject to Section 30(5) and Section

35


30(6), the internet or unsecured lines of communication), the parties acknowledge that it may not be possible for such Directions to be executed, however the Custodian shall nevertheless be protected in relying on such Directions as if they were written Directions from the Pledgor or the Investment Manager, as the case may be, executed by an authorized signatory of the Pledgor or the Investment Manager, as the case may be. The Custodian shall be entitled, without further inquiry or investigation, to assume that such Directions have been duly and properly issued by the Pledgor or the Investment Manager, as the case may be, and that the sender(s) is/are duly authorized to act, and to provide Directions, on behalf of the Pledgor or the Investment Manager, as the case may be.
(5)
The parties acknowledge and agree that the Custodian, in providing the services hereunder, may forward reports and information to the parties or an Investment Manager, and may receive and act upon communications and instructions (including without limitation, Directions) received from the parties or an Investment Manager, through use of the internet or any other electronic means of communication which is not secure.
The parties acknowledge and agree that the internet is not a secure or confidential means of communication, and that accordingly, there are certain risks inherent in its use. The parties therefore agree that the Custodian shall bear no responsibility or liability whatsoever for any errors and omissions, or direct, indirect or consequential losses or damages that are directly attributable to the use of the internet as a means of communication, including any losses or damages arising from viruses or worms, or the interception, tampering or breach of confidentiality of data or information transmitted which is not encrypted and authenticated in accordance with the Custodian’s encryption standards.
The parties also agree that the Custodian may rely and act upon any email instructions or Directions received via the internet from the Parties, without the Custodian having to take any further actions of any kind to verify or otherwise ascertain the validity of such instructions or Directions, and any such instructions or Directions shall be binding on the party on whose behalf the e-mail instructions or Directions shall have been given and that such Party shall not make any claim or take any action or proceedings against the Custodian for any losses or damages whatsoever suffered by reason of the Custodian accepting and acting upon such instructions or Directions.
(6)
Nothing in this Agreement shall create an obligation for the Custodian to constantly monitor its electronic communication equipment, provided that reasonable monitoring is performed within business hours of the Custodian where communications are sent and the Custodian will not be held liable for an omission to act from not receiving electronically transmitted communications (including, without limitation, Directions). The party giving an electronic communication is responsible to ensure that it has been transmitted and received by the

36


correct recipient. In the event of any disagreement as to whether electronic communications (including, without limitation, Directions) have been received by the Custodian, the sender will have the onus of proving that such electronic communications have been so received by the correct recipient.
(7)
The Custodian shall:
(a)
be fully protected in acting upon any Direction believed by it to be genuine and presented by the proper person(s); and
(b)
be under no duty to make any investigation or inquiry as to any statement contained in any such Direction but may accept such statement as conclusive evidence of the truth and accuracy of such statement.
Section 31     Confidentiality.
(1)
Each party shall hold in confidence all information relating to the Collateral and this Agreement (“ Confidential Information ”) and may only release such information to others where required by Applicable Law, where such information was within such party’s possession on a non-confidential basis prior to it being provided to such party, such information is or becomes generally available to the public or as otherwise agreed between the parties. The parties hereby consent to the delivery and availability of a copy of this Agreement, and any amendment thereto, to the Superintendent.
(2)
Without limitation of Section 31(1) above, the parties agree that the Custodian may share Confidential Information, on a need-to-know basis, with its Agents, service providers, Affiliates, related companies, subsidiaries, parent companies and their respective parent companies, Affiliates, related companies and subsidiaries, for the purposes of marketing, administration, client services, to prevent fraud, to verify the identity of the parties and to prevent money laundering. The Custodian will also provide the information relative to the Pledgor and the Secured Party’s information, including Confidential Information, to any federal or provincial legal or regulatory body if required by law to do so.
The parties also agree and acknowledge that it may from time to time be necessary for the Custodian to disclose Confidential Information to third parties where the Custodian is compelled to do so by Applicable Law or such disclosure is necessary to protect a legitimate business interest of the Custodian, to the extent permitted by and consistent with applicable privacy legislation and the common law governing a bank’s duty of confidentiality.
(3)
The Pledgor acknowledges that the Custodian may from time-to-time be required to transfer, store and process Confidential Information outside of Canada. The parties further

37


acknowledge and agree that the contractual or other measures that the Custodian may use to protect such information are subject to the legal requirements of the jurisdiction where such information may be transferred, stored or processed, and that the Custodian may be required by law to disclose Confidential Information to the lawful authorities operating within that jurisdiction. The parties further agree and acknowledge that the Custodian shall in no way be liable or responsible in any way for any damages, costs or expenses whatsoever that the parties may face as a result of the Custodian being legally obligated to disclose any such Confidential Information.
Section 32
General.
(1)
The Agreement shall not be terminated except by a written release or discharge signed by the Secured Party. Upon termination of the Agreement and at the request and expense of the Pledgor, the Secured Party will execute and deliver to the Pledgor such financing statements and other documents or instruments as the Pledgor may reasonably require and the Custodian will redeliver to the Pledgor, or as the Pledgor may otherwise Direct the Custodian, any Collateral in its possession.
(2)
This Agreement does not operate by way of merger of any of the Secured Obligations and no judgment recovered by the Secured Party will operate by way of merger of, or in any way affect, the Security Interest, which is in addition to, and not in substitution for, any other security now or hereafter held by the Secured Party in respect of the Secured Obligations. The representations, warranties and covenants of the Pledgor and the representations and warranties of the Custodian in this Agreement survive the execution and delivery of this Agreement. Notwithstanding any investigation made by or on behalf of the Custodian, the Pledgor or the Secured Party, such covenants, representations and warranties continue in full force and effect.
(3)
The Pledgor will do all acts and things and execute and deliver, or cause to be executed and delivered, all agreements, documents and instruments that the Secured Party may require and take all further actions as the Secured Party may require for (i) protecting the Collateral, (ii) perfecting, preserving and protecting the Security Interest, and (iii) exercising all powers, authorities and discretions conferred upon the Secured Party and the Custodian. After the Security Interest becomes enforceable, the Pledgor will do all acts and things and execute and deliver all documents and instruments that the Secured Party may require for facilitating the sale or other disposition of the Collateral in connection with its realization.
(4)
This Agreement is in addition to, without prejudice to and supplemental to all other security now held or which may hereafter be held by the Secured Party.

38


(5)
If and to the extent that any provision of the Reinsurance Agreement is inconsistent with or conflicts with any provision of this Agreement governing the Pledgor and the Secured Party, the relevant provision of this Agreement shall prevail and govern to the extent of such inconsistency or conflict, and the Reinsurance Agreement shall be deemed to have been amended to the extent necessary to resolve any such inconsistency or conflict. Without limiting the generality of the foregoing, if and to the extent that the Reinsurance Agreement contains a provision that:
(a)
makes reference to an arrangement whereby the Pledgor’s obligations under such Reinsurance Agreement are to be secured, including, without limitation, by means of assets held in trust, cash deposit, letter of credit or other form of security (a “Security Arrangement”);
(b)
prescribes or identifies specific categories of assets or investments that are or may be permissible in connection with the Security Arrangement; or
(c)
sets out any rights of the Pledgor or the Secured Party with respect to withdrawals from or draws against the Security Arrangement or enforcement of the security represented thereby,
and such provision conflicts with any provision of this Agreement, such former provision shall be deemed to be amended to conform to the provisions of this Agreement, and if such amendment would not be possible without extensive and substantive changes to such Reinsurance Agreement, the relevant provision of this Agreement shall supersede and prevail over the provision of the Reinsurance Agreement to the extent necessary to give effect to the meaning and intent of this Agreement.
(6)
This Agreement is binding on the Pledgor, its successors and assigns, and enures to the benefit of the Secured Party, the Custodian, and their respective successors and assigns. This Agreement may not be assigned without the consent of the parties hereto.
(7)
The Pledgor acknowledges and agrees that in the event it amalgamates or merges with any other Person, it is the intention of the parties that the Security Interest (i) extends to: (A) all of the Collateral that any of the amalgamating corporations then own, (B) all of the Collateral that the amalgamated corporation thereafter acquires, (C) all of the Collateral in which any of the amalgamating corporations then has any interest and (D) all of the Collateral in which the amalgamated corporation thereafter acquires any interest; and (ii) secures the payment and performance of the Secured Obligations of each of the amalgamating corporations and the amalgamated corporation to the Secured Party in any currency, however or wherever incurred, and whether incurred alone or jointly with another or others and whether as principal, guarantor or surety and whether incurred prior to, at the time of or subsequent to

39


the amalgamation. The Security Interest attaches to the additional Collateral at the time of amalgamation and to any Collateral thereafter owned or acquired by the amalgamated corporation when such becomes owned or is acquired. Upon any such amalgamation, the defined term “ Pledgor ” means, collectively, each of the amalgamating corporations and the amalgamated corporation, the defined term “ Collateral ” means all of the property and undertaking and interests described in (i) above, and the defined term “ Secured Obligations ” means the obligations described in (ii) above.
(8)
If any court of competent jurisdiction from which no appeal exists or is taken, determines any provision of this Agreement to be illegal, invalid or unenforceable, that provision will be severed from this Agreement and the remaining provisions will remain in full force and effect.
(9)
This Agreement may only be amended, supplemented or otherwise modified by written agreement executed by the Secured Party, the Custodian and the Pledgor.
(10)
No consent or waiver by the Secured Party in respect of this Agreement is binding unless made in writing and signed by an authorized officer of the Secured Party. Any consent or waiver given by the Secured Party under this Agreement is effective only in the specific instance and for the specific purpose for which given. No waiver of any of the provisions of this Agreement constitutes a waiver of any other provision.
(11)
A failure or delay on the part of the Secured Party in exercising a right under this Agreement does not operate as a waiver of, or impair, any other right of the Secured Party however arising. A single or partial exercise of a right on the part of the Secured Party does not preclude any other or further exercise of that right or the exercise of any other right by the Secured Party.
(12)
All monies collected by the Secured Party upon the enforcement of its rights and remedies under this Agreement, including any sale or other disposition of the Collateral, will be applied on account of the Secured Obligations at such times, in such manner and in such order as the Reinsurance Agreement may require or as the Secured Party may determine.
(13)
This Agreement will be governed by, interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
(14)
This Agreement may be executed and delivered in any number of counterparts, each of which when executed and delivered is an original but all of which taken together constitute one and the same instrument.

40


(15)
Any action or proceeding against the Custodian arising out of or relating to this Agreement may only be brought in a court of competent jurisdiction in the Province of Ontario.
(16)
The Pledgor hereby irrevocably consents to the service of any and all process in any such action or proceeding by the delivery of copies of such process to the Pledgor at the address set out in relation to the Pledgor in Section 30(2). Nothing in this Section 32(16) limits the right of the Secured Party to serve process in any other manner permitted by law.
[remainder of this page deliberately left blank – signature page follows]


41


IN WITNESS WHEREOF this Agreement has been executed and delivered as of the date first above written.
WYNDHAM INSURANCE COMPANY (SAC) LIMITED, in respect of its Segregated Account AX

By:
Its:

By:
Its:
OMEGA GENERAL INSURANCE COMPANY

By:
Its:

By:
Its:
RBC INVESTOR SERVICES TRUST, as Custodian

By:
Its:

By:
Its:






SCHEDULE “A”
TO THE REINSURANCE SECURITY AGREEMENT
DATED AS OF THE 1 st DAY OF JANUARY, 2015
REINSURANCE AGREEMENT
Quota Share Reinsurance Agreement (Agreement number: 2014003) Made between Omega General Insurance Company and Wyndham Insurance Company (SAC) Limited, in respect of its Segregated Account AX, dated the __ day of ____, 20___.






SCHEDULE “B”
TO THE REINSURANCE SECURITY AGREEMENT
DATED AS OF THE 1 st DAY OF JANUARY, 2015
SECURITIES ACCOUNT






SCHEDULE “C”
TO THE REINSURANCE SECURITY AGREEMENT
DATED AS OF THE 1 st DAY OF JANUARY, 2015
CERTIFICATE OF AUTHORIZED SIGNATORIES (“C.O.A.S.”)
See attached






CERTIFICATE OF AUTHORIZED SIGNATORIES (including Category Guide)
CLIENT NAME:
 
ACCOUNT NUMBER(S)
 
(the “Account(s)”):
 
The Undersigned hereby authorizes the following person(s) (herein called " Authorized Person(s) ") to direct RBC Investor Services Trust ("RBCIS") with respect to certain categories Column E) of activities requiring authorization for said Account (see Category Guide for a list of categories of activities requiring authorization or Direction).
 
 
 
D . IS PERSON IN (A)
AN EMPLOYEE OF
UNDERSIGNED?
 
 
A.   NAME
B.  TITLE
C.  SPECIMEN SIGNATURE
YES
NO
IF " NO ", NAME OF COMPANY /
ORGANIZATION and RELATIONSHIP TO
UNDERSIGNED
E.   CATEGORY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All authorizations and Directions provided to RBCIS must be signed by the appropriate number of Authorized Persons indicated in the Category Guide. COAS is not valid if the Category Guide is not completed and attached. The Undersigned hereby confirms that RBCIS is fully protected in acting upon any instrument, certificate, direction or other writing (whether in written form or given by electronic transmission) presented to it and signed by the appropriate number of Authorized Persons (whether or not such Authorized Person is an employee of the Undersigned). The Undersigned also hereby assumes responsibility to review this Certificate from time to time as required and to provide RBCIS with a new Certificate if changes are made. Unless RBCIS receives a new Certificate, the Undersigned acknowledges and agrees that RBCIS may rely conclusively on the last Certificate filed with them.
For greater certainty and notwithstanding the foregoing, in the case of authorizations or Directions sent through one of RBCIS' secured access channels, including Investor Services Online, or sent directly between electromechanical or electronic terminals (including the internet or unsecured lines of communication), the Undersigned acknowledges that it may not be possible for such Directions to be executed, however RBCIS shall nevertheless be protected in relying on such Directions as if they were written Directions from the Undersigned, executed by an authorized signatory of the Undersigned. RBCIS shall be entitled, without further inquiry or investigation, to assume that such Directions have been duly and properly issued by the Undersigned, and that the sender(s) is/are duly authorized to act, and to provide Directions, on behalf of the Undersigned. Furthermore, specifically in the case of Investor Services Online, the Undersigned acknowledges that any use of Investor Services Online is also governed by the Investor Services Online Access Agreement (the "Access Agreement") as applicable to the Undersigned (and the relevant Fund or Funds of the Undersigned as defined in the Access Agreement), including the granting of authorization for access to Investor Services Online and the ability to provide Directions and perform other transactions therein. Accordingly, any Directions provided through Investor Services Online in accordance with the Access Agreement, shall be considered valid Directions provided under the Agreement and this COAS and RBCIS shall be fully protected for relying and acting thereon.
This Certificate replaces and supersedes any previously filed Certificate and becomes effective on the date RBC receives it. This Certificate shall remain in full force and effect until the Undersigned provides RBCIS with a new Certificate to replace it.
Signed in the City of    on this    day of    , 20 .
CERTIFIED ON BEHALF OF
    
NAME OF THE COMPANY/ORGANIZATION/PLAN SPONSOR (the "Undersigned")
I hereby declare that I am duly authorized to provide this Certificate on behalf of the Undersigned.
 
 
 
 
 
 
DATE RECEIVED BY RBCIS
 
AUTHORIZED SIGNATORY
 
PRINT NAME
 
TITLE
 
AUTHORIZED SIGNATORY
 
PRINT NAME
 
TITLE
 


COAS Insurance – July 2012     RSA Omega General Insurance



CATEGORY GUIDE
CLIENT NAME:
 
ACCOUNT NUMBER(S)
 
(the “Account(s)”):
 
 
 
 
 
In Column E of the Certificate, enter the Category(ies) in which each Authorized Person is entitled to sign.
CATEGORY GUIDE
CATEGORY FUNCTION
NO. OF REQUIRED SIGNATORIES
1.
To sign legal documentation to bind the Company/Organization/Plan Sponsor (Note: Category "1" designation may be given Only  
to direct employees of the Company/Organization/Plan Sponsor).
 
2.
To direct RBCIS to settle security transactions including free asset movements and make disposition of account assets for settlement purposes and to advise RBC of corporate action decisions relating to investments, including direction for proxy voting.
 
3.
To direct RBCIS to pay fees, charges and expenses from the asset (including, but not limited to, out-of pocket expenses, payments to consultants, lawyers, investment managers, RBCIS as trustee, RBCIS as custodian, RBCIS in any other capacity acting for the account, to any other custodian).
 
4.
To provide notification to RBC of the appointment of Investment Managers and other agents; to provide notification of the termination of an Investment Manager and direction as to any changes in the management of account assets.
 
5.
To provide directions to RBCIS to with respect to account opening, account maintenance, or account termination.
 
6.
To direct RBCIS to carry out non-financial transactions including such matters as changes to statement frequencies and reporting periods, and changes to access rights or account maintenance in one of RBCIS's secured access channels used by the Client.
 
7.
To direct RBCIS to transfer cash in and out of the account and to enter into and settle foreign exchange transactions.
 
8.
To direct RBCIS in respect of any other activity or matter. Enter the details regarding such other activity or matter:
 


COAS Insurance – July 2012     RSA Omega General Insurance



SCHEDULE "D" - PERMITTED INVESTMENTS
PERMITTED INVESTMENTS
I.
Cash (CDN$) or (U.S.$)
II.
Bonds, Debentures and Other Evidences of Indebtedness in Canadian (CDN$) or American (U.S.$) currency, in each case held and settled through CDS:
a)
Government:
(i)
Canada and Guaranteed
(ii)
Canadian Provincial and Guaranteed
(iii)
Canadian Municipal, Public Authority, School and Parochial.
b)
Corporate:    Canadian and rated “BBB” or above by at least one major credit rating agency.





Exhibit 21.1
List of Subsidiaries of Trupanion, Inc.
Subsidiary
 
Incorporation
American Pet Insurance Company
 
United States, New York
Trupanion Managers USA, Inc.
 
United States, Arizona
Trupanion Brokers Ontario, Inc.
 
Canada, Ontario






Exhibit 23.1

Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-197514) pertaining to the 2014 Equity Incentive Plan, 2014 Employee Stock Purchase Plan, and 2007 Equity Compensation Plan of Trupanion, Inc. of our report dated February 24, 2015, with respect to the consolidated financial statements and schedule of Trupanion, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2014.
/s/ Ernst & Young LLP
Seattle, Washington
February 24, 2015





Exhibit 31.1
Certification of Principal Executive Officer
Pursuant To Exchange Act Rule 13a-14(a)/15d-14a
As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act Of 2002

I, Darryl Rawlings, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Trupanion, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 24, 2015


/s/ Darryl Rawlings

Darryl Rawlings
Chief Executive Officer and President
(Principal Executive Officer)








Exhibit 31.2
Certification of Principal Financial Officer
Pursuant To Exchange Act Rule 13a-14(a)/15d-14a
As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act Of 2002

I, Michael Banks, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Trupanion, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 24, 2015


/s/ Michael Banks

Michael Banks
Chief Financial Officer
(Principal Financial Officer)





Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Darryl Rawlings, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1.
the Annual Report of Trupanion, Inc. on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Trupanion, Inc.

Date: February 24, 2015




/s/ Darryl Rawlings

Darryl Rawlings
Chief Executive Officer and President
(Principal Executive Officer)





Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Michael Banks, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1.
the Annual Report of Trupanion, Inc. on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Trupanion, Inc.

Date: February 24, 2015




/s/ Michael Banks

Michael Banks
Chief Financial Officer
(Principal Financial Officer)