Operator:

Good day, everyone, and welcome to the Verisk Second Quarter 2024 Earnings Results Conference Call. This call is being recorded. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Lee Shavel:

Thanks, Stacey. Good morning, and thank you for participating in this morning's call. As we mark the halfway point in 2024, I can confidently say that we are on track to deliver against the strategic, operational and financial goals that we articulated at Investor Day and in our 2024 full year guidance. Elizabeth will provide the detailed financials, but at a high level, Verisk delivered solid organic constant currency revenue growth led most importantly by strong subscription growth of 8.3% that was broad-based across most of our businesses. This was partly offset in the quarter by modest declines in our transactional business, related to historically high volumes in auto shopping and elevated weather-related activity in the prior year quarter, which made for tough comparisons to normalized activity this quarter. We also experienced a drag on our transactional growth from the conversion of transaction-based contracts to subscriptions, which enhances the consistency of our growth going forward. To put this quarter in perspective and minimize the transaction to subscription conversion impact on a two-year compound annual growth rate basis, our total organic constant currency revenue growth has been 8%, at the high-end of our Investor Day revenue growth targets. We are driving subscription growth through strong renewals and improved price realization as our customers recognize the innovation and value-added upgrades we have incorporated into existing solutions. This is something that we've heard repeatedly in our renewal discussions with our largest clients. Our focus on cost discipline and operating efficiency resulted in healthy organic constant currency adjusted EBITDA growth and strong margin expansion, translating into 15% adjusted EPS growth. We delivered these results while continuing to invest in innovation and technologies that can help our clients improve speed, efficiency and accuracy through deeper insights, improved data and increased automation. Our strategy is unchanged as we focus on building long-term value for the insurance ecosystem while delivering consistent and predictable growth with high returns on capital for shareholders. The industry backdrop in which we are currently operating is one marked by continued strong premium growth as rate increases continue to earn in. In fact, in the first quarter of 2024, industry-wide direct premium growth increased 10%, and Swiss Re's forecast is for 8% growth for the full year. Profitability across the sector has improved, and industry-wide combined ratios have come down, though there is variability by line and geography. Carriers continue to be cautious in an uncertain environment and focused on driving profitability. Specific to the homeowners line of insurance, 2023 was the worst year on record for catastrophic losses with $15.2 billion in losses, and direct combined ratios in 17 states were above the breakeven threshold of 100. This has driven carriers to restrict underwriting in certain markets and in some cases, exit challenging states and lines of business. We are working with our clients and innovating new solutions that target these problem areas, including introducing new roof analytics that leverage aerial imagery and engaging with the respective departments of insurance in Western states to share the updates we have made to our wildfire solutions. In the near term, these market conditions may present some headwinds for our predominantly subscription property business, but in the longer term, we continue to believe it highlights the need for the most accurate information to best price the risk. Technological and regulatory change also continue to challenge the industry structurally. And we continue to partner with clients to help them address the rapid pace of technological change as well as increased regulatory scrutiny on data privacy, fairness, generative AI and climate risk. As another example of our work to support understanding of broad industry challenges, we recently co-authored a paper along with research organization RAND Corporation analyzing the impact of social inflation in insurance casualty claims payments with a focus on better understanding the trends, impact and potential structural factors in growing jury verdicts and trial awards. At the center of our growth strategy is our effort to engage with our clients on a more strategic level. As an example of what I've been hearing recently from clients, I've had conversations with both client CEOs and CIOs about the importance to them of integrating data sets across their enterprise for efficiency and consistency. We are the natural trusted technology partner to help with this data asset convergence as we are best positioned, given our deep data and domain expertise, our position in the industry and our proven track record of aggregating and integrating industry data at scale. These C-suite level and strategic conversations are opening up broader and enterprise-wide opportunities and applications of our data and analytics with the industry and new avenues for growth for Verisk. For example, in casualty, an area of focus for carriers due to the rising claim severity, our Liability Navigator is an analytic solution that objectively assesses bodily injury claims to help carriers improve settlement consistency across claim teams. By integrating our proprietary medical provider fraud data and our Discovery Navigator medical record review technology, we transformed previously unstructured and disparate medical data into actionable insights at the point of decision, thus improving efficiency and accuracy in bodily injury claims outcomes. Also key to our growth strategy is building upon our 50-plus year history in insurance and our competitive advantages and positioning to serve as a network for the insurance industry. To that end, in our specialty business solutions, we are delivering solid double-digit growth as we build out an interconnected ecosystem built upon the white space platform for participants in the London market, including brokers, underwriters and managing general agents. We are continuing to win new clients, adding 15 new clients in the quarter, and placement volumes are growing rapidly as the scale of the platform builds. This network effect is also active across our claims platforms as we continue to add new partners to our claims solutions ecosystem. The ClaimSearch partnership enables insurance technology providers to integrate with the ClaimSearch platform, allowing insurers to select the technology that best fits their individual business needs. Earlier this year, we announced two new collaborations with FRISS and Globlue Technologies, who are integrating with our ClaimSearch platform. This integration will facilitate advanced fraud analysis and detection, including more complex scoring and triaging to improve decision-making. Additionally, it should minimize the manual fraud detection process, saving valuable time and reducing operational costs for our clients. Finally, we continue to focus on innovation as a key pillar of our growth strategy. To that end, earlier this month, we officially launched ISO Experience Index, a new benchmarking tool which is part of our Core Lines Reimagine initiative. The ISO Experience Index is designed to modernize how actuaries in the insurance industry analyze risk patterns by addressing the increasing volatility and scale of loss patterns in the industry and offering a responsive and up-to-date indicator of observed underwriting experience. Experience Index empowers our clients to be more responsive to changing conditions across various geographic markets by offering quarterly releases with more frequent updates compared to traditional loss cost reviews. This enables our customers to make more informed decisions in real time. Experience Index is available for the homeowners line and will be expanded over time to other lines of insurance. Our customers are realizing the value we are delivering through Core Lines Reimagine, and we are benefiting from this investment through better price realization and improved client dialogues. In a recent conversation with the CEO of a national carrier, he expressed appreciation for our quarterly Emerging Issues updates. These reports are just one example of listening to our customers' requests to not only provide data but also deliver more valuable and actionable insights. And with that, let me turn it over to Elizabeth for the detailed financial review.

Lee Shavel:

Thanks, Elizabeth. In summary, our execution priorities are unchanged as we remain focused on delivering consistent and predictable growth while allocating capital to our highest return on investment opportunities. Our focus on heightened strategic engagement with clients, both large and small, has strengthened relationships and has fostered new product and business opportunities for the industry where we can invest at scale to drive value for our clients, employees and shareholders. We continue to appreciate the support and interest in Verisk. [Operator Instructions] With that, I'll ask the operator to open the line for questions.

Manav Patnaik:

Thank you. Good morning. Lee, I just wanted to follow up. You talked about the 8% growth on a two-year stack that's above kind of what it used to be. I was just wondering the components of that outperformance. I know you talked about pricing before. I was wondering this transition from transaction to subscription if there was a way to quantify how much that might have helped and just the sustainability of this for the next several years.

Operator:

The next question comes from the line of Surinder Thind from Jefferies. Please go ahead.

Lee Shavel:

Thank you, Surinder. So I think the thing that I would emphasize is that when you look at the second quarter of 2023 and you see the 12.4% growth, this is in the investor presentation on - in - that we had provided on the website. What we're experiencing was a very high level of shopping activity in auto as a function of rising rates within that business. You can look at the commentary of that. It was kind of truly exceptional - an exceptional level of shopping activity that was driving that transaction element. In addition, as you will see in the description around claims business, we were experiencing still a high level of weather-related claims activity that was also driving that business. And so that's really what is contributing to what we're - we are experiencing a relatively tough comparison enhanced by some of the transaction to subscription migrations that are more pronounced in this quarter. As we think about that element on an ongoing basis, I think we generally expect that our transactional growth rates are ones that are generally at our broader growth rates to slightly higher because in many cases, they represent some of our higher-growth businesses that tend to have more of a transactional aspect at the early stage. So with that, I'll ask Elizabeth to add some perspective.

Operator:

The next question comes from the line of Toni Kaplan, Morgan Stanley. Please go ahead.

Elizabeth Mann:

Yes. Thanks for the question, Toni. You're right that we have previously talked about this in the context of our Claims Essential bundle, where there was a targeted effort for a certain customer segment. I would say as you hear us talk now more broadly across the business, we are seeing it in a number of different businesses where customers are on a pilot and choose to lock that in for a longer-term subscription or they have a subscription with overage tiers. And as their business grows, they lock into a higher subscription so that they have more visibility into their own price point. So those are trends that we will continue to see across the business. Over time, you've still seen that subscription-transactional mix of our revenues be fairly steady at 80-20-ish. And probably as some of our transactional customers convert into subscription, at the same time, we will have new and introductory products or new markets that we're entering where it's more common to enter it in a transactional basis. So we will continue to top up, I think, that transactional revenue base as well.

Ashish Sabadra:

Thanks for taking my question. Last quarter, there was also a reference to a double-digit growth within life insurance solutions and benefited the transactional revenue growth. I was wondering if you could highlight what is going on with the life insurance solution, both on the subscription but also transactional side? Thanks.

Operator:

The next question comes from the line of Andrew Steinerman from JPMorgan. Please go ahead.

Elizabeth Mann:

Yes. Thanks, Andrew. Our auto insurance related - the shopping-related revenue did continue to grow in this quarter. But the year-over-year comp, it means that it's growing off a much higher level. So there's deceleration there. From a market share standpoint, we believe we're generally steady in the market.

Operator:

The next question comes from the line of Gregory Peters from Raymond James. Please go ahead.

Lee Shavel:

Great. Thank you very much for the question. And I appreciate we have a broad range of clients. Naturally, our largest clients receive a lot of focus because their sophistication, their specific needs. But to your point, we want to make certain that we are delivering value for the entire insurance ecosystem. One thing that I would say kind of specific to the small and the midsized clients is that proportionately, they receive a greater value from the scale that we are able to deliver to them, both from an operational standpoint and from the value of data that we provide to them because often they have a lower share of access to overall loss costs or general information. I think they benefit more from the scale competitiveness that we provide them in a variety of claim solutions. And we have not seen any evidence of higher levels of attrition or disintermediation of that range of clients within our business. And that is something that we've watched and we've asked the question around. I think one - or two points that I would make supplementally is that a lot of our clients, while they are interested in new ideas, the risk of taking on a new, small, private technology vendor is something that they think about very carefully because they have to know that some - a firm that they can rely on over the long term. This is clearly an advantage for us because of our stability, our reliability. And to that end, we have also been working, as we've talked about, kind of most significantly in the claims area of finding ways to deliver some of those new technology providers by integrating them into our systems and platforms so that our clients can receive the benefit of that, but also in - with greater confidence that we have vetted and are supporting and integrating those products into our overall systems. So I really appreciate the perspective. It's not something that we have observed in terms of the behavior of our clients. Obviously, I think a much bigger impact is occasionally, our clients decide to leave a line of business or leave a state. That will have more influence, and we haven't seen any pattern of clients in the smaller, the midsized that have been leaving to another technology provider.

Alex Kramm:

Yes. Hello, everyone. Apologies in advance to harp on the whole subs versus transaction one more time, but clearly, it matters to people and also for the quarter in particular. So maybe you can just help us talk about the impact of the transition in this specific quarter. I know, Lee, you gave the two-year stack. And if you're not willing to be so specific for this year, I look at what you said 8% over two years, I think the average of the reported numbers were 8.7. So is it fair that maybe that added 70 bps this quarter and maybe the core growth was more in mid-7s? Any help would be helpful since people are clearly asking.

Operator:

The next question comes from the line of Jeff Meuler from Baird. Please go ahead.

Elizabeth Mann:

Yes. Jeff thanks for the question. To map it in underwriting solutions, that first descriptor, you've got the underwriting data analytics solutions. That is where the auto insurance shopping activity sits. So that's an element.

Kelsey Zhu:

Hi. Good morning. Thanks for taking my question. So there's been a lot of discussion around where we are in the cycle for the insurance industry and whether we'll see pricing kind of peaking in 2025. Since 20% to 25% of Verisk revenue comes from contracts that have premium growth as a direct input in price increases but also with a two-year lag, does this basically insulates there into 2027 if 2025 was kind of the pricing peak for insurance companies. Or how should we think about the cyclical dynamics here?

Operator:

The next question comes from the line of Jeff Silber from BMO Capital Markets. Please go ahead.

Elizabeth Mann:

Yes. Thanks for the question, Jeff. A couple of things. We have historically talked about some of the seasonality in our margin. Any quarter's margin can vary based on revenue mix as well as just the timing of spending. And we've signaled - we’ve commented that we intend to invest in the business. So that our margin guidance gives you and our EBITDA guidance gives you a good feeling of where we expect to end up on an EBITDA basis. If you look at the EPS rate, in addition, there's the tax rate where we've had certain benefits in the first half of the year that we don't expect to continue in the second half of the year.

Heather Balsky:

Hi. Good morning. I just wanted to piggyback on Kelsey's question earlier on pricing and just ask, your net written premiums as we go into next year, I guess, the 2023 net written premiums were quite strong. It sounds like you're seeing very good value realization in terms of pricing from what you're doing in Core Lines. As we think about your 3% to 4% pricing target that you said at your Investor Day, do you think you're positioned to be at the higher end of that or even above based on what you're seeing? And how should we think about pricing in the near term? Thank you.

Saurabh Khemka:

Absolutely. Thanks, Lee. Yes, if you look on the Core Lines Reimagine side, our engagement with our customers has really demonstrated the value of our content, and the upcoming innovations that we have is delivering additional value for them. So for example, the feedback has been very encouraging across the spectrum of our customers, large and small. They are seeing additional value in the new insights like the Experience Index, the executive insights as well as the new technology innovations that we have on delivery of our content, which is creating efficiencies for them. And so what we are hearing from our customers is these new insights is helping them be better in terms of reacting to market conditions, and these new efficiency tools are helping them to be more efficient in their operations. So it's been very good. I would also say that we've been flexible in terms of how we deliver our content. So some of our smaller customers like the packaged insights and the turnkey solutions. And our larger customers prefer some of the access to underlying components to our analytics so that they can create more differentiation. And so by being flexible, we're benefiting all our customers.

Operator:

The next question comes from the line of Russell Quelch from Redburn Atlantic. Please go ahead.

Elizabeth Mann:

Yes. Thanks for the question, Russell. So yes, as we look at our target leverage range and where we are relative to the two to three times, we go back to our capital allocation philosophy. We are willing to deploy to support the business. We do remain active in M&A markets and looking at what is available. We tend to focus on businesses that are unique in their markets that serve our insurance end market, but for which Verisk has a unique reason to be the right owner of that business. And so those can be data opportunities that we can add to our existing services. They can be customer opportunities or geographic or market expansion.

George Tong:

Hi. Thanks. Good morning. Going back to transactional revenue performance, the 3% decline you saw in quarter, were there any unusual headwinds you would call out that may not persist? Just trying to understand the overall trend since if you look at the quarterly cadence, the swing from plus three in 1Q to down three in 2Q was quite significant and want to understand if that trajectory should be carried forward into future quarters or if the 2Q decline is a reasonable rate to persist into 3Q, which also represents a tough comp if you look at the year-ago period.

Operator:

[Operator Instructions] The next question comes from the line of Alex Kramm from UBS Financial. Please go ahead.

Lee Shavel:

Alex, thanks for the follow-up. I'm going to actually ask Saurabh talk about that - addressing your question.

Lee Shavel:

And I think regardless of whether it's priced separately or it's part of the broader element, this is an example of where we expect to capture value from that greater - the greater currency, I mean, kind of recency of that data. I want to take that, Alex, just given the question and kind of broaden it. We recently did a Voice of the Customer exercise and isolated 3 primary asks that we have had from our clients. The first of which the Experience Index addresses is that they wanted more - they wanted to see greater investment in data, both broadening the data set that we have and the currency of the data sets that we have. So this is an opportunity to improve the currency and the actionability of that data set. Now the other thing that's important is that the client is also asking for more data, which means that there's an implicit desire on their part to give us more data so that we can expand and develop it. So that in and of itself creates more value for us. And we've seen a variety of initiatives and appetite from the clients in the excess and surplus area, which for insurance industry analysts will recognize has been a growing area of the - of industry underwriting. The second theme that we heard was more insights. And we talked about the emerging issues, providing greater insights from the data on what trends are that are taking place. And so that has been a key enhancement. And then the final theme that we heard from clients is connecting the ecosystem. They want us to be that that central provider building network aspect so as to improve the efficiency that the overall system and their ease of operating within that. So all of these elements I share because their reflection is not entirely of us saying, this is what the industry needs, but what we are hearing from clients that they expect from us given our role, given our centrality and the data sets that we have.

Operator:

Good day, everyone, and welcome to the Verisk First Quarter 2024 Earnings Results Conference Call. This call is being recorded. [Operator Instructions]

Stacey Brodbar:

Thank you, operator, and good day, everyone. We appreciate you joining us today for a discussion of our first quarter 2024 financial results. On the call today are Lee Shavel, Verisk President and Chief Executive Officer; and Elizabeth Mann, Chief Financial Officer.

Elizabeth Mann:

Thanks, Lee, and good day to everyone on the call.

Operator:

[Operator Instructions] Your first question comes from the line of Andrew Steinerman with JPMorgan.

Lee Shavel:

Thank you, Andrew. I've assessed the strength of our client as being very solid. And I would say in contrast to, I think, where we were 2 or 3 years ago, you are clearly seeing -- across the industry, and if you follow the quarterly releases of the property and casualty insurers, you are seeing very strong premium growth, which is a reflection of that hard market and the improving profitability as reflected in stronger combined ratios for the business.

Jeffrey Meuler:

Yes. So Lee, that all sounds like the industry is going to start to lean in more on marketing, and it seems like we've seen some signs that marketing spend is positively inflecting following a challenging period.

Lee Shavel:

Yes. Thank you, Jeff. I think that's an accurate observation. I think we are beginning to see some early signs that marketing is picking up. Within the industry, there is a lag impact. And so we will continue to look forward to hopefully seeing some of that translate into our business. That is a small business, so it may not be discernible overall within our business. But we do think that's a positive trend.

Operator:

Your next question comes from the line of Ashish Sabadra with RBC Capital Markets.

Lee Shavel:

Yes. And if I -- thanks, Elizabeth, for kicking off the first part of the question. We talked with Jeff's question on some of the headwinds we're facing on marketing, but I would also say, in terms of new product adoption in our life insurance offering, we are seeing very strong uptake in that category with the applicability of the low no-code solutions to the life business within our specialty business solutions area where we have seen very strong adoption on some -- from some major industry players onto the white space platform, which is a new product that we are growing.

Operator:

Your next question comes from the line of Andrew Nicholas with William Blair.

Lee Shavel:

Sure.

Toni Kaplan:

During the prepared remarks, you mentioned you're discontinuing the auto telematic offering. I was wondering, clearly, it's not generating much revenue for you, but was -- what was -- what prompted deciding to discontinue it? Was the data not valuable? Was it costly to maintain? Just any color there.

Operator:

Your next question comes from the line of Faiza Alwy with Deutsche Bank.

Lee Shavel:

Yes. And Faiza, maybe to add a little additional color, and we use this as an opportunity to say we talked about the environment. We've talked about the benefit of engaging as partners with our leading clients, which I think has helped us on that front, probably most primarily at a senior level to help our clients understand the value that we are providing to them across the enterprise.

Jeffrey Silber:

I know you talked in the past about three, I guess, buckets of investment. You talked about the Core Lines Reimagine, investing in your sales force and investing in AI. Can we just get a refresh in terms of how much you're thinking of spending in those areas and where we are in that process?

Operator:

Your next question comes from the line of Gregory Peters with Raymond James.

Manav Patnaik:

I guess, I'll just ask on capital allocation. It sounds like you guys are starting on the ASR, so that seems to be the priority. But maybe what is the small- to medium-sized kind of M&A pipeline looks like, some of the stuff that you've been doing over the last couple of years?

Operator:

Your next question comes from the line of Surinder Thind with Jefferies.

Elizabeth Mann:

Thanks -- yes. Thanks, Surinder. I can't break it out numerically. I would say that there are -- we've talked about the various projects that we are investing in now. Those are finite projects, which we will finish, and we've talked about the time lines for each.

Operator:

Your next question comes from the line of Russell Quelch with Redburn.

Alex Kramm:

Just maybe quickly on the international side. I think 23% growth year-over-year. I know that's not organic, but still pretty impressive. Can you just maybe give us an update where you're seeing the most growth in those businesses?

Lee Shavel:

Thank you, Alex. It's a great question. So I think the first question relates to the overall growth. And I think when we look at the businesses on an organic basis, I think we are generally viewed, as we've spoken before, and we continue to believe that they have and will continue to drive double-digit growth within the -- within our business. And so I think that's kind of the baseline. We continue to see opportunity on that front.

Heather Balsky:

I was really curious about the catastrophe bond piece of your business. There's been some really strong data out there, and it seems like there's some outlook for continuation of that. What's driving that? And can you also remind us just how you benefit from strength in that market?

Operator:

[Operator Instructions] Your next question comes from the line of George Tong with Goldman Sachs.

Operator:

Your next question comes from the line of Gregory Peters with Raymond James.

Operator:

Ladies and gentlemen, there are no further questions at this time. Thank you for your participation. This concludes today's call. You may now disconnect.

Operator:

Good day, everyone, and welcome to the Verisk Fourth Quarter and Full Year 2023 Earnings Results Conference Call. This call is being recorded. Currently, all participants are in listen-only mode. After today's prepared remarks, we will conduct a question-and-answer session, where we will limit participants to one question so that we can allow everyone to ask a question. We will have further instructions for you at that time. For opening remarks and introduction, I would now like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Lee Shavel:

Thank you, Stacey. Good morning, everyone, and thank you for participating in this morning's call. I am pleased to be here today to recap what was an exceptional year for Verisk, marked by strategic, organizational and cultural change matched with outstanding financial performance and value creation for clients and shareholders alike. Elizabeth will provide the financial detail but in summary, we delivered 8.7% organic constant currency revenue growth in 2023, the strongest performance on record since our initial public offering back in 2009. And we exceeded the expectations we set at Investor Day in March. We combine this with double-digit organic constant currency adjusted EBITDA growth and 150 basis points of margin expansion on an Insurance-only basis, achieving the low end of the initial margin improvement goal of 300 basis points one year earlier than our original target of 2024. And we have plans in place to build on that in 2024 and beyond. Despite the separation of our non-Insurance business, we still grew free cash flow 6% to over $800 million and above our 2022 level on an unadjusted basis. Over the past two years, we demonstrated capital discipline by returning over $4 billion in proceeds from recent dispositions, to shareholders through share repurchases reducing our share base by about 10%. This also served to substantially improve our capital efficiency, and boost our returns on invested capital. And while our strong 2023 revenue growth was exceptional, the long-term opportunity of addressing our clients' most pressing needs, gives me confidence in our strategy to drive consistent and predictable growth in 2024 and beyond. The insurance industry backdrop in which we are operating, is relatively comparable to 2023. Insurance carriers continue to deal, with cyclical challenges on profitability resulting from higher losses and the lagging effects of inflation, by restricting new business in profit-challenged markets. The most recent AM Best data shows losses for the first nine months of 2023 were $32.2 billion, a further deterioration from the $24.5 billion in net losses recorded through the first six months of the year and tracking way ahead of the pace of losses in 2022. This caused AM Best to downgrade their outlook for the homeowners line from stable to negative, while also maintaining their negative outlook on personal auto. To some extent, profitability challenges in the industry were the result of higher catastrophe-related losses. Our own PCS data, points out that 2023 was the highest year on record for frequency of catastrophe activity, with 74 events. While 2023, did not have a major tropical hurricane make US landfall, wind and severe convective storms were dominant and the major source of events in the year. That said, the fourth quarter of 2023 was a relatively quiet period with only seven events, and was lower than the fourth quarter of 2022, which experienced 13 events. On the more positive end, carriers are having success raising rates and driving premium growth and are taking the very early steps in certain lines to unwind restrictions on writing new business, as they achieve rate adequacy. In fact, net written premium growth increased 10.8% for the first nine months of 2023. More structurally, the insurance industry continues to be challenged by the rapid pace of technological change including, digitalization and cloud migration. This is being compounded by the fact, that the industry also faces technological debt and aging legacy systems. In addition, the industry continues to experience growing regulatory focus on issues of data privacy, fairness and climate risk. Our business model and strategy are designed to address our customers' most pressing needs, both from a cyclical and structural perspective. We invest on behalf of the industry, applying our industry knowledge and technical expertise at scale, to deliver value to our clients at a lower cost of investment and ownership than any one participant can achieve individually. As we work with our clients on a more integrated basis, the opportunities to develop new solutions expands. We are focused on the three key priorities, we articulated back at Investor Day namely, delivering consistent and predictable top line growth, driving operating efficiency and profitability and ensuring disciplined capital allocation. Let me spend a few minutes on how we plan to go after each in 2024 and beyond. Our first priority is delivering consistent and predictable growth, through strategic dialogue with clients in innovation. Throughout 2023, we made substantial progress on our initiative to elevate the strategic dialogue with our clients, and to become their strategic data analytic and technology partner. During the year, I met with over three dozen client CEOs and senior leaders representing over half of the US property and casualty insurance industry direct written premium to discuss how we could better support their objectives. Three primary themes came up repeatedly. How can you accelerate and expand the delivery of data and analytics to our organization? How can Verisk augment the capabilities of our colleagues to improve their ability to manage the amount of information they receive? And finally, how can Verisk help better connect the ecosystems we operate in to improve our efficiency. On the acceleration point, we are intensively addressing this opportunity across our businesses, but perhaps most significantly in our Core Lines Reimagine project to reengineer how we deliver our core data sets and analytics to meet the rapidly evolving ingestion demands of our clients. Prospectively, we see the application of low no-code and micro services technology that we have successfully deployed in the life insurance industry, having material significance to the property and casualty segment and have been working with clients on testing applications. On augmentation, we have already been applying generative AI technology through our Discovery Navigator solution to dramatically accelerate the summarization of large and complex medical files in our casualty business. Prospectively, we have been developing and working with clients to refine several augmented underwriting applications. On connectivity, we have been investing in our Xactware platform to support the integration of more ecosystem and partners. Last week, I attended our Elevate Conference in Salt Lake City, which had record attendance from our insurance contractor, adjuster clients, and over 30 ecosystem partners. Both clients and partners expressed enthusiasm for our delivery of improved connectivity and efficiency, demonstrating the network potential of this business. Finally, on connectivity, we were thrilled at last week's announcement of Marsh's expansion of its digital trading initiative on the Verisk Whitespace platform. This builds on a successful pilot in 2023, which traded over $400 million in premium and is a gratifying endorsement by a world-leading insurance broker that should draw more participation onto a data-first platform that will drive greater efficiency for the market. With expansion across its UK specialty and international placement business, Marsh anticipates that over 90% of all client premium in that segment will flow through the platform by the end of 2024. Our strategic conversations are also helping to drive more informed innovation. In our conversations with clients, we repeatedly hear about the increasing regulatory focus and reporting requirements on fairness and unfair discrimination. To address this need during the fourth quarter, we launched FairCheck, a solution designed to address issues of fairness and discrimination in the underwriting process. FairCheck helps insurers test their personal lines' models and variables to respond to regulatory change and to evaluate and mitigate the potential for unfairly discriminatory outcomes. This solution is an extension of the work we did internally to assess Verisk's own personal auto rating model, to determine whether there were unfair pricing outcomes regarding race. We recently signed a national property and casualty carrier to be our first customer. Internally during 2023, we worked with an outside consultant to sharpen our go-to-market strategy and are implementing the first steps of this changed approach in 2024. This includes an investment behind sales effectiveness, incorporating a change to the composition of incentives to be more in line with industry best practices. In addition, we have identified pricing and packaging opportunities within property estimating solutions and extreme event solutions. And we will be bringing them to market throughout this year. Our second priority from Investor Day is driving operating efficiency and profitability. We remain committed to driving operating efficiency and margin expansion over time. We are leaning into our global talent optimization initiative, tapping into the talent-rich and low-cost markets like Krakow Poland and Hyderabad India. We have recently expanded our real estate footprint in both markets to support our growth. Additionally, we should continue to achieve savings as we modernize and optimize our technology infrastructure across all our legacy systems, including our internal financial and human capital ERP upgrade, which is underway and which should start delivering early efficiency benefits in 2025 with the full impact to be achieved in two to three years. As we look out, we see opportunity in improving our operational efficiency by careful reviews of our workflow and processes. We will continue to deploy our Lean Six Sigma program to drive additional savings and continue to focus on our organizational structure and efficiency. And finally, our third priority is disciplined capital allocation. Disciplined capital allocation underscores all our decision-making at Verisk. We invest our strong free cash flow into value-creating opportunities that support growth with attractive returns. Excess capital is returned to shareholders through dividends and share repurchases. In 2023, our return on invested capital was approximately 26% with incremental returns on capital at approximately 19%, as continue to invest our capital at high internal rates of return. We are excited about the many opportunities we have to invest across our business in emerging technologies, including generative AI, low no-code applications and international expansion. We also are investing behind upgrades and re-platforming of our core solutions, some of which have been underinvested and need modernization to support future innovation. The most notable example is our Core Lines Reimagine project. As we highlighted before, we are about one-third of the way through this project from an investment perspective and we are engaging our clients as we plan for customer-facing modules launching in 2024. While there is still much work to be done, we are already driving returns through strong contract renewals with our largest customers, as they recognize the value of the program. We are also investing in modernizing our property estimating solutions platform to advance our strategic goal of creating a more open ecosystem that is resilient, redundant and available for all stakeholders. We are simplifying partner integration and developing new services to enable deeper workflow integration, richer solutions and better client services. This initiative should increase our agility and create a more dynamic work environment for both our clients and our development teams. We are also excited about the opportunities to continue to create incremental value in our insurance related acquisitions. For example, in claims, we are driving growth and synergies in our three recent acquisitions in Germany, where we have a leading market position in the bodily injury space and are adding services and technology offerings in the auto and property spaces through the acquisitions of ACTINEO, Krug and Rocket respectively. These acquisitions enable us to deliver solutions and add value to our German customers across the entire claims life cycle. Before we close, I want to address the recent leadership announcements naming three new business leaders to the Verisk Senior Operating Committee. Rob Newbold was named President, Extreme Events taking over the reins from Bill Churney who retired at the end of the year. And Doug Caccese and Saurabh Khemka, who are recently named Co-Presidents of Underwriting Solutions replacing Neil Spector who has moved into a strategic advisory role. All three leaders are evidence of our deeply talented management bench and focused leadership development and succession planning process. I want to thank both Bill and Neil for their many contributions to Verisk and to me personally as I stepped into the role of CEO. And while we will miss them, they have left their business in the very capable hands of talented, experienced and energized leaders. 2023 was a demonstration of Verisk's evolving culture. We delivered strong financial success, while absorbing organizational and leadership change. And I am excited about having the fresh perspective and energy of these three leaders as we move into 2024. With that, I'll hand it over to Elizabeth to review our financial results.

Lee Shavel:

Thanks, Elizabeth. In summary, we're excited about the opportunity that lies ahead. Our motivating purpose is to partner with our clients in building resilience for individuals, communities and businesses globally. The combination of our focused business model, deep customer relationships and strategy to deliver value for clients through improved decision-making and operational efficiency is a formula that will also deliver value to our shareholders through growth and returns. We continue to appreciate the support and interest in Verisk, given the large number of analysts we have covering us, we ask that you limit yourself to one question. With that, I'll ask the operator, to open the line for questions.

Faiza Alwy:

Yes. Hi. Good morning. Thank you. So I wanted to talk about the revenue guide. Liz, you mentioned a few puts and takes and we've been talking all of last year about some of the one-time impacts that you noted are normalizing. So maybe you give us a bit more perspective specifically how you're thinking about transaction growth and what some of the puts and takes there are? Thank you.

Operator:

Your next question comes from the line of Heather Balsky from Bank of America. Please go ahead.

Lee Shavel:

Yes. So, thanks. This is Lee. So first let me distinguish I think from a pricing standpoint first, as we indicated in our comments and as Elizabeth just described, the overall premium growth market has continued to be strong as insurers have been able to secure some rate approvals. We think there's more progress in that regard. So I want to differentiate that pricing environment, which has been constructive. And from our perspective that is a partial benefit. It represents approximately 20% to 25% of our revenue base is tied to prior two-year premium growth. And so that provides some level of support. But I think the more meaningful element of our pricing is our ability to deliver value to our clients. We're doing that probably most significantly in the investment that we're making in our Core Lines Reimagine project, where early renewals from clients that have seen what we are doing, what we are creating, how we are improving, their experience, their efficiency has demonstrated that value. And we have been able to realize stronger pricing momentum than we had originally anticipated which we feel good about as we continue to deliver more functionality through that platform. And I would say, further I think we through the go-to-market review that we have done, we have identified some areas to identify how we can capture more value that we are delivering to our clients from pricing structures that align to identifying and identifying that value that we're creating for our clients.

Andrew Steinerman:

Hi. First, I just want to say how much I appreciate Slide 7, the revenue mix, very helpful. My question is about Verisk auto underwriting revenues, which I think is all non-subs. Just please verify that. How did this ad market do in the fourth quarter? And what's the assumption for 2024 within a guide?

Doug Caccese:

Sure. Thanks, Elizabeth and thanks, Andrew for the question. Just I'll echo what you had said Elizabeth. As we look at our internal data and also external shopping data we see a slight slowdown in Q4 from the shopping activity. And when you look at it month-over-month you see a slight slowdown from October, November, December. So we are seeing that slowdown happen. We expect that slowdown to continue. But in 2024, we expect still elevated levels of shopping activity. The pivot on this is also that we'll focus on our non-rate action campaigns which actually allow us to go and help carriers bring in premium immediately that's leaking out of the book while they're waiting for rate to earn in so it helps in that way.

Ashish Sabadra:

Thanks for taking my question. I just wanted to focus on the subscription growth. There were three headwinds that were called out. I was just wondering how should we think about the Marketing Solutions some of the attrition and contracted activity and insurance deck as we go through 2024? Thanks.

Operator:

Your next question comes from the line of Manav Patnaik from Barclays. Please go ahead.

Lee Shavel:

Sure. Thank you, Brendan. And I'm going to repeat the question because you came through a little choppy there. So I think the question was how do we feel about a new product pipeline areas of investment? And so I would say, we're really excited about a number of the new products and developments that we are -- that we have been working on. In particular, I think, certainly a lot of the focus has been around generative AI and its application. And we've been exploring its application across a variety of our businesses. I'm going to isolate for a second on our claims business where we have deployed some generative AI, applications and are also looking at developing other applications. I'm going to ask my colleague Maroun Mourad to talk a little bit about what we're doing in that area as an example of what we have been looking to do more broadly.

Lee Shavel:

And I'd add to that, Brendan. I want to give you a taste of what we're doing on that front. But as many of you know, we've been really thrilled about the success that we've had with our fast businesses application of low and no-code technology to the Life Insurance business. We believe and have begun to engage with clients on how that can be potentially applied to the P&C area. So I think that's a broad opportunity. And then we also as a more insurance-focused entity have been able to try to integrate more of our data sets in our extreme events business and our specialty business solutions area, tying together some of the functions in the excess and specialty market and the reinsurance markets as well as tying together some of our claims data and our underwriting data. And so as we have now fully migrated to the cloud, our ability to facilitate those types of integrations are particularly attractive. So a lot of the great stuff that we have underway that should support future growth for the company.

Jeff Meuler:

Yeah. Thank you. I know a lot of factors contribute to the consistent growth. But I just would love your perspective on the procyclicality of bookings or innovation sell-through, especially when it's discrete upsell. And I guess, what I'm wondering is as the -- as you start to see the move towards premium adequacy, would you expect to see bookings pick up with that? And maybe can call out a few areas, I'd imagine marketing is one, but any other areas where there may be pent-up demand as the environment gets healthier from a profitability perspective? Thank you.

Operator:

Your next question comes from the line of Toni Kaplan from Morgan Stanley. Please go ahead.

Elizabeth Mann:

Yes. Thanks for the question. We are continually focused on efficiency here at Verisk and looking at the next levers that we can pull. We do think in the long-term that being efficient in our core business will enable us to fund some of the investments we've been talking about, all while delivering operating leverage in the business. So, beyond 2024 is a long way out, and we'll come back and give impact on that in future years as we get closer. But that's the general concept of delivering efficiency in order to fund some investments and still have an expansion.

Jeff Silber:

Thanks so much. I want to continue on the margin discussion, and I'm sorry, if I'm misspeaking here. But I'm looking at your Investor Day slide last March, where you were guiding for 54% to 50% -- 56%, excuse me, adjusted EBITDA margins in 2024, and then another 25 to 75 basis points increase in 2025. Today you're talking about 54% to 55% in 2024. I'm just wondering what's changed since then? And should we still expect the margin expansion in 2025 that you had guided to last year? Thanks.

Operator:

Your next question comes from the line of Andrew Jeffrey from Truist Securities. Please go ahead.

Lee Shavel:

Yeah. Thank you, Andrew. I'm going to answer your question in a way that I think gives you some insight in terms of where we see value creation opportunity. I think first off, all of our businesses are clearly generating strong organic growth delivering value to the industry. They're at different scale levels. And so I'll reiterate that, for instance, in our forms rules and loss cost area where we focused our core lines reimagine area that's a broad area where we are creating value. And I'm going to ask Saurabh Khemka who leads that effort in that business to talk a bit about how we're creating value there. It's probably our most scaled opportunity where we can find incremental value and capture that value. Underneath the businesses as a whole and this will hearken back to Investor Day, we see opportunities to build network value. We've talked about it within the themes ecosystem where we're adding partners, which creates value for all of our market participants but particularly our insurance clients. And I'll also note that with our specialty business solutions, while 3% of our total 2023 revenue contribution represents connectivity and a network impact particularly with the Marsh announcement that allows us to build value in that network expansion. And I think that holds true in a variety of areas, property estimating solutions in forms rules and loss costs. But let me give Saurabh an opportunity to talk a little bit about where we are adding value to our clients in a variety of ways with the core lines reimagine project.

Lee Shavel:

And I'll cap it off by saying another dimension of incremental growth is the ability to move some of our traditional products into more of a SaaS type of environment. And there in our extreme events business, the migration to more of a SaaS model, we believe opens up opportunity to deliver more value to that segment of our clients as well. But thanks for the question.

Surinder Thind:

Thank you. In terms of just the go-to-market strategy the investment in the sales force at this point, can you provide a little bit more color in terms of are there like changes in compensation structure or headcount thing that you're looking for? How should we think about that part of the equation?

Operator:

Your next question comes from the line of Andrew Nicholas from William Blair. Please go ahead.

Elizabeth Mann:

Yes. This is Elizabeth. Yes, I can comment on that. They continue to be on the path and on the trajectory to achieve that goal. They've achieved strong results in 2023. And the largest change in our growth mix in 2023 versus kind of the algorithm laid out at Investor Day, has been the overperformance of the core businesses.

Q – Russell Quelch:

Yes. Appreciate, you having me on. I also appreciate the strategy you've been making in improving and growing the business. But I want to look at the free cash flow yield. It's still at the low end of the peer group. And Elizabeth did mention in her remarks, I think a focus on growing free cash flow. So maybe you could expand on this a little bit, and how much we should expect free cash flow to grow in 2024 and beyond.

Lee Shavel:

Yes. And Russell the one thing I would add is I think that if you start with free cash flow given accounting differences over time should even out. And so it should approximate our overall EBITDA growth rate assuming that the CapEx is growing commensurate with that. I do think in 2024, we're seeing slightly higher CapEx growth, because of what we see as a number of opportunities within the business. Part of that relates to the generative AI opportunity. And so we may have periods of higher level of CapEx investment that may bring the overall free cash flow growth down. But over the long-term we see that very -- should be very commensurate with our overall adjusted EBITDA growth.

Seth Weber :

Hi. Thanks. Good morning. Lee, I've heard a couple of times you talked about pricing opportunities. I think you called out extreme events and property estimating. I'm just trying to maybe get some more details on that. Do you think that will impact 2024? Or is that a longer-term kind of play here? And is this just sort of the first couple of areas where you're finding these new opportunities and we should expect more of that kind of going forward? Or any way you can help frame this pricing opportunity? Thank you.

Operator:

Your next question comes from the line of Greg Peters from Raymond James. Please go ahead.

Elizabeth Mann :

Yes. Thanks for the question, Sid. As we highlight there, our capital management philosophy really focuses on our returns on invested capital. We will look to invest in the business. Our CapEx range that we've given you for the year shows the organic investment in the business. On the M&A side, we are active in the market. And we will continue to evaluate opportunities and what we see out there for strong businesses which bring something additive to the Verisk business. And those two things should be generating returns well above our cost of capital. And we assess that and continue to track it. As we highlighted in the script, our incremental returns on invested capital this year were approximately 19%. To the extent, we don't find opportunities there, we will continue to return capital to shareholders, as you've seen us do pretty consistently in the past.

Operator:

Your final question today comes from George Tong from Goldman Sachs. Please go ahead.

Elizabeth Mann:

Yes. Thanks for the question, George. You're right. The transaction revenue is -- well, first of all it's coming off a full year of very strong transactional growth, double digit I think for the prior four quarters. So we are sort of lapping that period. The biggest driver in that elevated strength a big piece of it was the auto shopping activity that we've talked about before and the weather trends actually being another element of that transactional growth. That was actually offset by some headwinds in our anti-fraud business, as they converted transactional customers to subscription customers. So looking forward, I think we expect those trends to normalize. Again, we're not assuming elevated weather activity. The auto shopping trends will begin to normalize.

Operator:

Good day, everyone, and welcome to the Verisk Third Quarter 2023 Earnings Results Conference Call. This call is being recorded. Currently, all participants are in listen-only mode. After today's prepared remarks, we will conduct a question-and-answer session, where we will limit participants to one question so that we can allow everyone to ask a question. We will have further instructions for you at that time. For opening remarks and introductions, I would like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Lee Shavel:

Good morning, and thank you for participating in our third quarter earnings call. I am pleased to be here today to update you on the progress our team at Verisk is making on driving strategy and translating it into strong growth and value creation for our clients and shareholders alike. Elizabeth will provide the financial detail. But in summary, we delivered another strong quarter of results marked by solid organic revenue growth across most of our businesses, healthy margin expansion, and double-digit profit growth. We have confidence in our ability to deliver on both our 2023 guidance and the longer-term objectives we communicated back in March at Investor Day. The industry environment within which we are operating is marked by some deep challenges. Insurance carriers are dealing with the cross currents of inflation and higher losses, which are both negatively impacting industry profitability. In fact, A.M. Best data for the first six months of 2023 points to a $24.5 billion net underwriting loss for the U.S. Property and Casualty Insurance industry, running well ahead of the pace of the full-year 2022, which experienced net underwriting losses of $26.9 billion. A.M. Best notes that personal lines specifically homeowners is the primary driver of these declines. In reaction to this backdrop, carriers are exiting markets in key catastrophe prone states, dropping certain lines of unprofitable business and laying off portions of their workforce. Carriers are also raising rates to attempt to cover rising inflation and losses, driving net written premium growth up 9.7% for the first six months of 2023. In response to this environment, Verisk is partnering closely with our clients to address their most pressing concerns, including high value solutions that can deliver high return on investment for our clients. And we are including our clients earlier in the innovation process to ensure we are delivering the right solutions with simple implementations, improving the success rate and pace of uptake of new solutions. One of the key tenets of our strategy is to elevate the strategic dialogue with our clients and to become their trusted data and analytic and technology partner. During the third quarter, we engaged with clients on several occasions and at a variety of venues including the Verisk Insurance Conference in London. This year, we've combined several Verisk events to make it easier for clients to explore the many ways we can add value and increase the efficiency of their operations. In London, for example, we combined events focused on underwriting, claims, specialty insurance and extreme event modeling into a singular client-centric experience featuring Verisk solutions. I delivered one of two keynote presentations and the entire Verisk Senior Operating Committee was in attendance demonstrating our commitment to our customers at all levels. A solutions gallery featured Verisk solutions as well as the solutions of our ecosystem partners, and we held 35 concurrent educational sessions. We wrapped up with a CEO dinner with attendees that represented carriers, brokers, and managing general agents had a group discussion around common challenges faced by the entire insurance value chain. Enterprise-wide risk management is top of mind for many in London, as our clients are managing extremely large and complex portfolios of risk spanning multiple classes of business and insurance markets all over the world. To address this pressing need, we recently introduced Enterprise Exposure Manager. This solution is a joint development effort between specialty business solutions and extreme events to bring to the market a cloud-native and scalable solution that enables insurers and reinsurers to make more informed business decisions by offering a comprehensive view of risks that exist across large property portfolios. As we engage with our customers at these events and in the many one-on-one meetings we have hosted throughout the year, there were a few consistent themes that we hear in these conversations. First is Digital Transformation, which represents a massive opportunity for the global insurance market. Our clients aspire to modernize their platforms, improve systems integrations, lower expenses, and improve operational efficiency, and we are partnering with them on this journey. Verisk is introducing solutions that drive operational efficiency for some of their most people and paper intensive processes. For example, within our casualty business, we recently launched Discovery Navigator and are seeing solid early success. Discovery Navigator combines artificial intelligence and machine learning, Verisk's contributory data and years of clinical and legal expertise to immediately identify and extract key medical data points from unstructured records, which are part of bodily injury claims. Depending on the complexity of the case, the number of medical pages involved in a bodily injury claim can range from hundreds to thousands. Verisk has automated the organization, review, and summary, of these complex unstructured documents, allowing insurers to adjust, negotiate, and settle more claims in less time. Discovery Navigator easily integrates into our customers workflows through API or online options and delivers up to a 90% time savings and 95% accuracy for an average 10x ROI for clients. Additionally, Discovery Navigator is a widely versatile tool that is driving innovation and can be used in combination with other Verisk solutions like Liability Navigator, delivering workflow automation, decision support and overall efficiency for clients. The need for deeper data insights is also something we hear regularly from customers. Inflation trends during the past year have underscored the need for accurate, up-to-date and granular data insights to inform underwriting, risk management, reinsurance and claims decisions. No company is better positioned to meet this need than Verisk with our comprehensive and proprietary data assets. For example, our Verisk property estimating solutions are designed to meet these challenges head on with a comprehensive set of tools based on timely proprietary data, enabling our customers to write the most accurate estimates possible on their first attempt. This reduces the risk of over and underpayments while improving cycle times. Key to this process is XactXpert, our recently introduced rules engine that assists estimators in avoiding unwarranted costs in their estimates. We also enable our customer's quality assurance teams that evaluate the data from the entire process, ensuring that the claim payment will be correct the first time. Finally, generative AI remains a frequent topic with clients both its transformative potential and the risk that it brings. We believe gen AI can deliver efficiency within Verisk and in client-facing solutions starting first in our underwriting and life businesses where we are actively exploring new product development as well as enhancements to existing solutions. We are increasing our investment and leaning into generative AI as our clients recognize that by partnering with Verisk, they can invest in this -- we can invest in this advanced technology on behalf of the industry more efficiently than any one customer can do on their own. We also intend to do so while maintaining our focus on fairness and value-centric governance. On the theme of investment, I want to provide a progress report and update on our core lines reimagine project. We are about one-third of the way complete in what is likely a five-year journey to modernize our forms, rules, and loss costs and related solutions. We've made progress modernizing our internal processes like our ratemaking operation to enable and efficiently scale innovations in current and new solutions. We are expanding our industry-leading contributory database by adding new data contributors and by increasing the quality of our collected data. And we are working on enhancing the recency of our data in our analytics. On the customer-facing side, we are in-market with new proprietary analytics and workflow tools. For example, we have launched executive and client insight reports designed for the senior leadership of our clients across two of the largest lines of insurance, namely homeowners and business owners with plans to expand into other large lines over time. Just this month, we also launched our Legislative Monitoring application in the new platform for select clients. This new cloud-native application transforms what was previously a document based paper trail for tracking thousands of insurance related, legal, regulatory and legislative developments into a data driven, modern, digital monitoring and efficiency tool with an improved customer interface. Legislative Monitoring is the first of a series of new features that will be launched over the next several years on the platform. Overall, customer feedback on the reimagine project has been quite positive, including on the custom analytics and Legislative Monitoring application I mentioned before, and there is excitement for future advances within core lines. This excitement is driving more constructive, value driven conversations with our clients as we partner with them along their digital transformation journey. We are making these investments to deliver increased value for our clients through enhanced underwriting accuracy and efficiency. With that, I'll hand it over to Elizabeth to review our financial results.

Lee Shavel:

Thanks, Elizabeth. In summary, we are excited about our business momentum and the opportunity ahead. Our motivating purpose is to partner with our clients in building resilience for individuals, communities, and businesses globally. The combination of our focused business model, deep customer relationships, and strategy to deliver value for clients through improved decision making and operational efficiency is a formula that will also deliver value to our shareholders through growth and returns. We continue to appreciate the support and interest in Verisk, given the large number of analysts we have covering us, we ask that you limit yourself to one question. With that, I'll ask the operator to open the line for questions.

George Tong:

Hi, thanks. Can you talk a little bit about what you're seeing with insurance marketing budgets, especially in the current rate and inflation environment and if you're seeing any sort of a pullback from insurance carriers?

Stacey Brodbar:

Next question, please.

Manav Patnaik:

Thank you. I guess I'll just ask the question around the guidance that was maintained. I mean, this quarter came in, I think above at least our expectations and probably yours. Correct me if I'm wrong there, but if the subscription growth stays steady like it usually does, are you implying that the transaction piece could see some material declines? Just would love any help with just trying to bridge that.

Operator:

Line of Alex Kramm with UBS. Your line is now open.

Lee Shavel:

Thank you, Alex. I'm happy to address that. I think we have seen a clear benefit in a variety of areas. So one and first is that engaging at that strategic dialogue and I probably have had over a dozen client CEO meetings and one thing that we focus on in that is understanding their broader enterprise challenges within this environment. And there's also a focus on what is Verisk doing for us and where are their areas that we are helping others that we can help them. And specifically, in a number of those conversations, we've identified products -- existing products that we have that can be particularly helpful in this environment. And I would say are what we have done to help carriers analyze their existing rate adequacy and where there may be opportunities to improve their rates in their auto book or in other parts of their business. And that's opened up some channels that before where our bottoms up approach may have run into an obstacle within the organization. But when given the opportunity to describe the strategic benefit, the financial benefit, we're getting more top down support. And I've seen that take place in a number of clients. So I think that's one. The second is in understanding areas, emerging areas where they are facing either challenges or interest in new technologies, an opportunity to guide what we are doing in some of our projects like core lines, reimagine, what we're doing in generative AI, to tailor them to what we know has strategic resonance for those clients has been helpful. And so I think as we have been investing in a number of generative AI applications that has been specifically helped by getting insight and buy in from those levels. I had one dinner with the CEO said, look, Lee, we could spend tens of millions of dollars on generative AI, and I'm not sure what we'll be able to generate out of it. But if you can develop a pilot and we can benefit from that. We would be happy to test that pilot as soon as you have it ready. And I think that's a great example of where we're able to substantiate that strategic dialogue and translate it into targeted product development at a faster rate than we would have before. I think those are certainly benefits that we'll hope to begin to deliver additional growth for us in 2024 supporting our core business.

Greg Peters:

Great. Good morning, everyone. I will focus my question on Slide 6 of your investor deck where you breakout subscription and non-subscription growth. And I guess I'm going to come at the non-subscription piece where you callout auto underwriting, property estimating, and life insurance. And clearly, you're doing really well this year. But we're also dealing with some really unusual profitability challenges inside auto and property. Would you expect that the non-subscription organic growth rate would inversely correlate with sort of the underwriting cycle for your carrier partners, or am I missing something?

Operator:

Your next question comes from Andrew Jeffrey with Truist Securities. Your line is now open, Andrew.

Lee Shavel:

Yes. Hey, Andrew, this is Lee. I know you directed that to Elizabeth, but we have Neil Spector who runs our underwriting business for us, and I think he's been closest to that. So let me give him an opportunity to give you a read from what we're seeing in those markets.

Lee Shavel:

And I would add to that, Andrew, and I think that gives a great kind of current sense of where things are. Neil and I were in Washington, D.C. last week meeting with a number of the trade associations just to understand how we can be helpful to the industry from a data perspective. And one thing that was very clear is that the Florida and California are both very engaged with the industry to understand what steps could be taken to improve the health of those markets. I think they understand the risk and the challenges. They obviously face some political pressure, but we've been encouraged by their openness to discussing how they can improve the market dynamic for the carriers within each of those markets. And that's an intense level of dialogue that could ameliorate some of kind of the early pressures that we saw.

Jeff Meuler:

Yes. Thanks. I'd imagine we're at the time of year where you're starting to send invoices on 2024 pricing. So can you just talk through how you're thinking about it relative to the historical context, just given the cross currents of still elevated inflation, but maybe it's coming down the P&C insurance, industry profitability challenges and then just not sure how things like core lines play into that pricing realization versus discrete upsell. Thank you.

Lee Shavel:

I think those are the two core elements. One, the impact of premium growth, which as we indicated, remains strong, as well as the value that we are creating, particularly in core lines where we've increased the number of data sets, we've increased the ability of our clients to utilize that data. And so we certainly look to capture the value that we're creating for our clients there and all of those factor into our pricing considerations.

Lee Shavel:

Russell, are you there?

Lee Shavel:

Moving to the next question.

Toni Kaplan:

Thank you. Lee, I was hoping you could talk about the M&A pipeline. Any areas of particular interest, maybe technology, just given you highlighted the digital transformation theme earlier. Just wanted to ask about sort of how -- what would be interesting and how you're seeing levels of assets right now. Thanks.

Operator:

Your next question comes from the line of Andrew Steinerman with J.P. Morgan. Your line is now open.

Elizabeth Mann:

Yes. Thanks for the question, Andrew. That comment about the high end was specific and confined to revenues and did not apply to the other line items. And I'm not here to comment on the fourth quarter in specific, other than the points I made about the year-over-year comps.

Jeff Silber:

Thanks so much. I'm going to ask a question about 2024, but not a numbers question. I'm just curious, compared to a year ago, what areas of your business are you feeling more confident about it as we head into the next year? And conversely, what areas might be a bit more concerning for you than they were a year ago? Thanks.

Operator:

Your next question comes from the line of Andrew Nicholas with William Blair. Your line is now open.

Elizabeth Mann:

Yes. Thanks for the question, Andrew. The biggest component of the transaction revenue that has some seasonality to it, there's two that come to mind. One is the weather, the weather-related seasonality in property estimating solutions that on a long-term historical basis tends to occasionally get a boost in the third quarter as a function of Atlantic hurricanes last year in 2022 that happened to hit in October and fell in the fourth quarter. The other element that you saw last quarter, the securitization market can sometimes that hits in the second quarter primarily. That's a relatively small part in our business. The other elements of transactional revenue don't necessarily have a seasonal pattern to them, the life insurance services, the auto, underwriting product is more a function of their own markets.

Heather Balsky:

Hey, thank you for taking my question. I was hoping you could update us on your expense program where you are today. Are there any other areas that you're identifying in terms of opportunity as we move forward? Thanks.

Lee Shavel:

Yes. And Heather, I would say, look, we're very focused on the margin objectives that we set at Investor Day and I think we had a very good start and what we have delivered and have been realizing the benefits of that. But it's a continuous process for us and we're always going to look for where we can achieve greater efficiencies throughout the business. Elizabeth mentioned several, but as we have been able to make the business a more integrated business focused on insurance, I think we've identified some areas where we can improve both effectiveness and efficiency in the organization and we'll expect to be pursuing those in 2024 to continue that momentum.

Seth Weber:

Thanks. Good morning, and thanks for taking my question. I was interested in your comment in the prepared remarks about incremental business on the life side. I'm wondering if you could just unpack that a little bit and talk about customer appetite for more cross-selling and taking more solutions here in this environment. Thank you.

Neil Spector:

Yes. Thanks, Lee. So our solution in life is a low-code, no-code software platform that helps a life insurer from the policy administration distribution claims from a full lifecycle. And what we've seen is even in the current environment, there is a huge need in the life industry to modernize technology. They're behind P&C as far as modernization of systems. And as Lee pointed out, because our system is a low-code, no-code, we have the opportunity to potentially lower the operating costs of deployed lines of business on our platform pretty substantially versus legacy solutions. So there's a strong incentive for life insurers to move on to these more flexible and lower cost operating environments. We've also seen a huge need from our customers in support of their transformation and that has driven some of our service or transactional revenue for our existing customers because of their desire to have us support their implementation efforts.

Surinder Thind:

Thank you. Lee, could you please discuss maybe the performance in the international business, maybe what's driving growth there and how that kind of differs from the U.S. and maybe even some product plans or how you expect to kind of further offering out there.

Maroun Mourad:

Thank you, Lee. Thank you, Surinder for the question. As I may have mentioned in previous calls, we had made a decision within the international claims business to reorganize the units splitting the UK and Europe about a year ago to drive more focus and growth. And that approach and the execution of the strategy has paid dividend. I'll talk about the UK first, which is growing with speed and focus under the leadership of Chris Sawford and his team innovating on existing property, bodily injury and auto, or motor as we call it across upon solutions. And more recently, there's been a focus on the anti-fraud space within the UK. On the European side, under the leadership of Samer Abou-Jaoudé and his team, we had entered the bodily injury market through Germany a couple of years ago through the acquisition of ACTINEO as a matter of fact, I was just in Cologne where we hosted a market event attended by over 70 customers who showed greater support for the bodily injury solutions and product offering, as well as an appetite to engage more frequently with Verisk to on the motor side, where we have a few months back made the Krug acquisition on the motor side and that integration is proceeding well and delivering on plan. And last but not least, we have our Mavera acquisition in Scandinavia based out of Sweden that delivers technology solutions for the bodily injury space. And finally, from an operating model perspective, we are leveraging our position in multiple territories with single finance, human resources, marketing, legal, as well as technology platforms.

Operator:

Your next question comes from the line of Ashish Sabadra with RBC. Your line is now open.

Lee Shavel:

Yes. Well, thank you, Ashish. So let me give you a couple of responses to that. So first, I have to say, generative AI is something that is certainly relatively new and so there is a developing aspect to this technology and its application. And so there will be dimensions of this that we're still in the process of piloting and testing. But let me refer you back to the comments that I made around Discovery Navigator and what we are doing in the casualty space where we are already utilizing AI, including some generative AI elements in that solution. And so generative AI is a component kind of similar to traditional AI or machine learning that is a tool to help our clients gather data, consolidate and interpret and then utilize data. So as it relates to Discovery Navigator, there are some generative AI elements that are included in that, that we are in the process of monitoring by demonstrating the substantial ROIs by improving the speed with which they can gather that data from a workers' comp claim through all of those medical records. So that's in flight we have other dimensions of that in certain businesses. The second example I would give is in utilizing generative AI from a coding perspective to improve efficiency is something that we have been exploring and testing and we think there are internal efficiencies for us in adapting some of that technology. And then, finally, what is on the horizon that I referenced in speaking to our client engagement and their enthusiasm for us to developing a product is something that would be a co-pilot in an underwriting context that utilizes our data sets, our experience in supporting from an actuarial standpoint from a rating standpoint, the underwriting process that is specifically targeted to a line of business. And that is something that is on more of the front end that we are testing and developing. In the first instance, that's something that we are monetizing with Discovery Navigator in the second instance, that's something that we hope to begin to deploy so that we can achieve efficiency in our overall coding. And in the third instance that's going to be something that hopefully we develop a product. There's been a strong appetite and interest from our clients. And so if we can deliver something that would be something we would hope to begin to monetize in the 2024/2025 timeframe based upon what our product development is. So a range of that, but it's a component of and an additional tool to a lot of the data and analytics work that we do.

Russell Quelch:

Yes. Thanks for circling back around and sorry for the technology issues. I was wondering if you would provide us with the growth rate for the extreme events solutions revenues in Q3 and year-to-date. And you made some brief comments in your prepared remarks, Elizabeth, but can you expand on what trends you saw there in Q3 and maybe what you're seeing so far in Q4, and wondering what you've assumed for your -- in your full-year guidance for Q4 in this business area?

Operator:

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Have a good day.

Operator:

Good day, everyone. And welcome to the Verisk Second Quarter 2023 Earnings Results Conference Call. This call is being recorded, and currently, all participants are in a listen-only mode. After today’s prepared remarks, we will conduct a question-and-answer session where we will limit participants to one question so that we can allow everyone time to ask a question. We will have further instructions for you at that time. For opening remarks and introductions, I would like to turn the call over to Verisk’s Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Lee Shavel:

Thanks, Stacey. Good morning and thank you for participating in today’s call. I am excited to be with you today to provide an update on how our strategy, focus and results-oriented culture is translating into strong financial performance for Verisk. I will leave the details of the financial results to Elizabeth. But in summary, Verisk delivered continued business momentum in the second quarter, underscored by strong organic revenue growth and solid margin expansion, translating into double-digit profit growth. We are driving these results by focusing on our client’s most pressing needs as they deal with an environment marked by elevated underwriting losses, including those from catastrophes and high levels of inflation, leading to pressure on profitability. We have elevated the conversation and directed our sales focus to the solutions in our portfolio best suited to solve those challenges. Our byproduct of the tough operating environment is a hardening of the insurance market as carriers are taking rate actions to help drive improved profitability, leading to stronger net written premium growth. Rate takes time to work through, so we expect this environment to persist into 2024. The cross currents of elevated underwriting losses and increasing pricing in the insurance industry has become a hot topic across the press with headlines about trouble spots like Florida and California. Specific to Florida, since our last update, there has been little change as we have not seen any additional liquidations, though uncertainty remains. We continue to watch the market carefully, particularly as we head into the Atlantic hurricane season. We are also keeping a keen eye out for new financial stability ratings for the Florida market, which we expect in the next few weeks and could identify further deterioration in the market. Recent legislative reforms in the property market are expected to have a positive impact, but it may take some time for that to materialize. In California, current regulation restricts insurers from using catastrophe models and ratemaking, but the Department of Insurance is exploring a change to that policy. To that end, Verisk recently testified in front of the California State Assembly, joint hearing, insurance and emergency management as the expert on catastrophe models and how their use can help insurers assess risk from low frequency, high severity events like wildfires, ultimately benefiting the residents and businesses in the state. This is a great example of our enhanced industry engagement as we leverage our expertise to benefit all the players in the insurance ecosystem, including carriers and regulators and build resilience for consumers and businesses. As I discussed at Investor Day and on prior calls, a key pillar in our strategy is elevating and strengthening the strategic dialogue with our clients. To that end, I had the opportunity in the second quarter to visit with many of our clients in the U.S. to understand their focus and explore how we can better support their objectives. These conversations generated several initiatives for expanded dialogue with C-suite support to accelerate opportunities on technology and data initiatives, particularly regarding inflationary impacts. During a visit to Europe, I encountered similar opportunities with our clients there, as well as exceptional energy and focus at Verisk offices in London, Malaga, Cracow and Cologne. The message that we hear is very similar across industry participants, large and small, U.S. and international. We welcome Verisk’s expertise in partnership to drive more automation, lower our investment cost and improve efficiency. Given our mission-critical data, deep customer relationships and engagement and scale, no one is better positioned to meet this need than Verisk. A key extension of our conversations with our clients is our innovation agenda. We are listening to our customers and designing solutions to meet their most pressing needs. For example, we recently launched a new solution for carriers, contractors and adjusters within our property estimating solutions called XactXpert. XactXpert is a no-code, low-code cloud-based rules engine designed to streamline the insurance restoration and claims estimation process. XactXpert targets the key challenges our clients face, including inaccurate and incomplete information and claims estimates, high compliance needs, pressure to reduce cycle times, revisions, loss adjustment expenses and a need for more digital and simplified processes for a changing workforce demographic. Further, it empowers carriers, contractors and adjusters to customize organizational estimating behaviors, delivering quick, accurate claims estimation by reducing manual input errors and driving consistency, accuracy and efficiency throughout the claims estimating process. We are seeing strong interest from our customers for this newly launched solution. In our anti-fraud solutions, we recently launched Image Forensics, an AI tool designed to detect fraud in digital images submitted as part of the claims settlement process. Image used in claims processing has grown exponentially with more and more images being submitted directly by the claimant. In fact, just since mid-2020, photo estimates for auto claim settlement have doubled and while virtual claims processing is driving industry efficiency and customer satisfaction, it has also exposed insurers to an increasing source of fraud from activities like reusing prior loss images using Internet images or digital or document manipulation. We are leveraging the depth and breadth of our customer’s relationships in building a contributory image database, combining it with images sourced from Verisk’s property estimating solutions databases to provide images in match reports and indications if an image was used in a prior loss. Image Forensics is also a great example of how our innovation engine is now actively associating data sets that were previously siloed into powerful new tools for our customers as this tool combines data from anti-fraud with data from property estimating solutions. I know that generative AI has been top of mind for many. At Verisk, we have been using artificial intelligence, machine learning, computer vision and natural language processing in many of our solutions for some time. For example, our Mozart Forms Composer uses machine learning and natural language processing to help insurers organize, track, edit and analyze insurance policy forms with greater consistency, efficiency and speed. This tool employs advanced technology to digitize a historically document-driven process and addresses a major pain point for our clients, managing the complex and growing problem of analyzing policy language across multiple lines and states, while enhancing their ability to customize policy language more quickly. With regard to generative AI, we are currently testing private versions of generative AI and are making an index of possible use cases focused on both customer-facing solutions and internal efficiency opportunities. We are working in partnership with our customers and state regulators to ensure that we are approaching this innovative technology with a focus on ethical use in fairness. Finally, I would like to formally welcome Samantha Vaughan to Verisk as our Chief Privacy Officer. Data governance and stewardship have always been a key focus for Verisk and Vaughan will lead the oversight and enhancement of our policies to protect the data entrusted to Verisk and will help ensure the integrity of Verisk’s data practices, regulation and compliance. In addition to the focus and dedicated privacy leadership, our new privacy officer expands on the thought leadership Verisk is providing across the insurance industry. As technology and data capabilities expand, the privacy risks expand as well. Concerns about AI, data risk management and security, all have a key nexus in privacy and we are glad to be joining the best-in-class companies that articulate a values-based approach to the privacy office. With that, I will hand it over to Elizabeth to review our financial results.

Lee Shavel:

Thanks, Elizabeth. In summary, we are excited about the opportunity ahead and our ability to focus all our attention, talent and resources on the global insurance industry. Verisk is best positioned to capitalize on the opportunity because of our scale and expertise. Our motivating purpose is to work together with our clients in building resilience for individuals, communities and businesses globally. The combination of our focused business model, deep customer relationships and strategy to deliver value for clients through improved decision-making and operational efficiency is a formula that we are confident will also deliver value to our shareholders through growth and returns. We continue to appreciate the support and interest in Verisk. Given the large number of analysts we have covering us, we ask that you limit yourself to one question. And with that, I will ask the Operator to open the line for questions.

Heather Balsky:

Hi. Good morning. Thanks for taking my question. I wanted to ask about the outlook for the back half on sales. I know that both this quarter and last quarter, you ring fenced some items that, you articulated were potentially one-time. But it seems like guidance implies at the high end 7.5% revenue growth versus you did 10% organic sales in the first half. Is it those items tapering off, do you have a different outlook for the environment? Could it really helpful to reconcile how you did in the first half and your expectation for the back half?

Lee Shavel:

And Heather, if I can put a wrapper around the detail that Elizabeth provided, you asked the question initially in terms of a sales dynamic in the second half. And as Elizabeth was describing, these really aren’t sales-related elements, they are more environmental factors that contributed to a strong first half that we think are likely to moderate in the second half where we can’t have confidence that they will continue to reoccur. So there’s nothing that we see that this is predominantly sales driven. It is more environmental.

Operator:

And we will take our next question from George Tong with Goldman Sachs. Your line is open.

Lee Shavel:

Yeah. So, George, thanks for the question. I mean, I will start off by saying that I think implicit if you go through all of those details that Elizabeth has gone through, it’s difficult to predict what that is going to happen. I think the sense is, there is probably some reversion to mean in the ILS market. We had a strong second quarter. It’s not -- typically, you see that from quarter-to-quarter, but it’s difficult to predict. The shopping activity is one where we are seeing some early trends, but that’s going to depend upon macroeconomic factors. So I don’t think that, given the nature of that and its particular strength on the transactional side, we are in a position to estimate or predict when that’s likely to moderate or simply taking a more conservative point of view around the impact in the second half.

Operator:

We will take our next question from Andrew Steinerman with JP Morgan. Your line is open.

Elizabeth Mann:

Yeah. Thanks, Andrew. It is helping this year’s revenue growth and we are looking back to 2021 on our 2023 contract. I think we have previously called out that was a 9.6% net written premium growth across the industry. And as I called out, the factors of strength in our subscription growth that and the strength in our forms, rules and loss cost business has probably been the largest contributor to our subscription growth.

Andrew Steinerman:

Perfect. Thanks, Lee. Thanks, Elizabeth.

Toni Kaplan:

Thanks so much. I am going to ask a question that’s sort of a compilation of the prior three. When you think about the sort of abnormal items or one-time items that have been benefiting. I think most of those seem to impact the non-subscription business. A couple of them seem to apply to subscription. But I guess when you think about the non -- the traditional like subscription business, is it the pricing or is it the low attrition, like, what’s happening the biggest impact and maybe if you think about the net written premium growth in 2022 versus 2021, how should we be thinking about that with regard to pricing in 2024? Thanks.

Toni Kaplan:

Thank you.

Manav Patnaik:

Thank you. I just had a question on the margins. I know you reiterated the number. I was just hoping you could give us an update on how much of the long-term kind of cost actions have been taken, as you did last quarter. And I was just curious, the talk on gen AI and then I think you had CapEx going up as well. Is that -- I mean, if you have to spend more on that, does that change your perhaps range of margin outcomes thinking a couple of years out?

Lee Shavel:

Yeah. And I would just add, I think, on a lot of those investment opportunities, they are more CapEx driven than OpEx driven at this point. And we have given you our targets that we are very focused on achieving, while at the same time, continuing to maintain the necessary investment, both in OpEx and CapEx to make certain that we are delivering on our top priority, which is organic growth in the business.

Greg Peters:

Good morning, Lee, Elizabeth and Stacey. I am going to focus my question on the transactional revenue component. And I am curious if there is a reporting lag and some of your transactional revenue. For example, you called out the benefit from auto in the second quarter yet. We are seeing some of the large auto insurance companies really cut back in their marketing expenses in their second quarter results. And would it be appropriate for us to match property transactional revenue with either PCS events and/or hurricane activity, because you called that out in one of your answers? Thank you.

Greg Peters:

Understand. It’s intrigued [ph] question. Thanks for the time.

Operator:

And we will take our next question from Andrew Jeffrey with Truist. Your line is open.

Lee Shavel:

Yeah. Thank you very much for the question, Andrew. And it has been something that I have emphasized across the enterprise. And we have really been pleasantly surprised at the receptivity that we have had at that level where I don’t think we had really prosecuted that dialogue as effectively or in a coordinated fashion as we probably should have. And this -- in the past two weeks, I have had conversations at the CEO level with three executives of our -- of large clients or partners of ours, actually four over the past three weeks. And in one instance, it was very clear, the CEO was focused on the impact of climate change on their business model over the long-term and they asked us to come in and give a broader perspective on what we see in terms of the impact of the longer term model and how we see that potentially impacting their underwriting decisions within geographies. So tying together some of our underwriting benchmark and analysis with our longer term weather trends. That’s an opportunity for us to tie together some of our data sets and analytics. In another conversation, there was a focus around some of the regulatory challenges on rate approval. So it was an opportunity for us to deliver some of our expertise around non-rate actions to enable the carriers to realize some lift on the rate side. And in the third instance, there was a recognition that the client was facing some technology and process challenges as they were trying to move their organization forward where we could lend some technical support in building and helping them build technology that meets their client needs more effectively. And in each of those, I think, it opened up opportunities for us to tie our data sets together to deliver an integrated product. And the other dynamic is that, I think, when you have that support at the C-suite rather than us pushing product up within the organization, you have a mandate that motivates and energizes that client if we can demonstrate real value. And I think we are really just at the early stages of that as we find opportunities to address these broader needs that then can be expanded to new industry solutions across the -- across all of our client sets. So at this stage, I think, what you are seeing in our performance is some beneficial environment, the focus within certain of our businesses, energy released by some of our organizational changes, but I think we are still at a very early stage in expanding and opening a more strategic relationship and partnership with our clients.

Operator:

And we will take our next question from Jeff Silber with BMO Capital Markets. Your line is open.

Elizabeth Mann:

Thanks for the question, Jeff. Yeah. We haven’t quantified kind of the components of each of these. I would say two things. As I have listed out factors on contributing to subscription and transactional growth. Those have been in order of magnitude to help you size them up. And the other point, we have a rough rule of thumb of calling out kind of one-time events that are -- that contribute more than 1% to revenue growth, none of these single factors hit that threshold.

Jeff Silber:

Okay.

Jeff Silber:

Okay. Great. That’s helpful. Thanks so much.

Andrew Nicholas:

Hi. Good morning. Thanks for taking my question. Just wanted to circle back on marketing solutions. I think you called out in the prepared remarks or in the slide deck that you continue to see some pressure there and new customer acquisition spend is low amongst the carriers. Any signs of moderation there, it does seem like, in general, they continue to pull back. I think the expectation previously was that was going to improve in the second half. Just wondering what kind of the latest temperature check is there and what’s kind of baked into guidance in terms of a recovery?

Andrew Nicholas:

Understood. Thanks, Lee.

Alex Kramm:

Yes. Hey. Good morning, everyone. I maybe scrutinizing the guidance change a little bit too much, but just a quick question about the margin. When I look at the change in guidance on before in revenue and on EBITDA, it seems like the incremental margins you are implying here are at the midpoint in the low 40s and even at the high end only 50%. So, again, this may be just like some of the, like, a number thing, but I am just wondering why the incremental margins on the outperformance would be lower than your overall margins? Is it performance-based payments, is it incremental investing or is it just the mix of business?

Alex Kramm:

Fair enough. Thank you.

Russell Quelch:

Hi. [Technical Difficulty]

Operator:

Sir, yes, we have a very garbled connection. If you could try reconnecting and rejoining the queue, please?

Operator:

It is. Thank you.

Elizabeth Mann:

Thanks for the question, Russell. Yeah. We don’t give that level of disclosure at the moment on our businesses. The Investor Day was to give a long-term -- a sense of our long-term overall portfolio and was more disclosure than we have ever given in the past. So we will take your feedback on that and consider it.

Elizabeth Mann:

So thanks for the question. In terms of CapEx as a percent of revenue, again, we have talked about it, that’s not a metric that we target. What we target is strong returns on invested capital for our capital deployment. But if you are benchmarking against our peers, there’s two things that you have to keep in mind in terms of CapEx as a percent of revenue. One is our very high margins, which would make the CapEx as a percent of revenue skewed and maybe we should look at CapEx as a percent of EBITDA or free cash flow. The second point is that our R&D is very low, just given the way that we classify items. And so you should look at CapEx plus R&D, and on that basis, you would get to a more normalized level. As to kind of where we would take it, I think at Investor Day, I pointed to a similar range of sort of high single digits area and we continue to assess what the opportunity is and what’s the best way to create value for shareholders.

Elizabeth Mann:

Thanks, Russell.

Ashish Sabadra:

Thanks for taking my question. I wanted to drill down further on the new product innovation. Lee, you mentioned several new products that were launched in the quarter that are gaining traction with customers. I was wondering how do you track those KPIs internally and is there anything that you can share externally on how we can track the success that you are having with this new Verisk initiative and the new product innovation over the near-term, but also over the next three years to five years? Thanks.

Ashish Sabadra:

Okay. That’s great color. Thank you.

Stephanie Moore:

Hi. Good morning. Thank you. I was wondering if you could talk a little bit about your strategy within Europe for your international business, maybe you could touch on how organic growth is trending, also your thoughts on any kind of acquisitions or that could help you kind of further gain critical mass going forward? Thank you.

Stephanie Moore:

Great. I appreciate all the color.

Faiza Alwy:

Yes. Hi. Thank you and good morning. So I wanted to talk about the sales growth acceleration. You cited basically environmental factors that have accelerated your growth. But you have also talked about innovation, better dialogue and partnership with your customers. So it seems like the financial impact of that represents more upside over time, but curious how you think about the return on the innovation and some of the cultural things that you are doing. Is that something that you think accelerates that growth by allowing for pricing, improving retention, cross-selling, et cetera.? Has your thinking evolved just over the last few months since you gave your long-term outlook?

Faiza Alwy:

Great. Thanks, Lee. Appreciate it.

Operator:

Good day, everyone, and welcome to the Verisk First Quarter 2023 Earnings Results Conference Call. This call is being recorded. [Operator Instructions]. For opening remarks and introductions, I would now like to turn the call over to Verisk Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Lee Shavel :

Thanks, Stacey. Good morning, and thank you for participating in today's call. At our Investor Day in mid-March, we detailed the benefits of being an insurance-focused business and our comprehensive strategy to drive consistent, predictable growth at Verisk. Our first quarter results demonstrate the sharpened focus and results-oriented operating plan at Verisk. We are operating on a more integrated basis across the company and have been more engaged with our clients, as I'll describe in greater detail. I will leave it to Elizabeth to walk through the details of the financials. But in summary, we delivered very strong organic revenue growth combined with solid margin expansion yielding double-digit profit growth. The growth was broad-based with most businesses contributing to the result, and we have strong business momentum. We delivered this performance despite a macroeconomic environment marked by high inflation, interest rate volatility and market anxiety. Specific to the insurance industry, our customers are coming off a year marked by elevated underwriting losses and pressure on profitability. In fact, the U.S. property casualty insurers experienced a $27 billion net underwriting loss in 2022, the largest loss since 2011, according to industry data collected by Verisk and the American Property Casualty Insurance Association. Moreover, profitability was under pressure as reflected in deteriorating combined ratios at 103% in 2022 versus almost 100% in 2021. One consequence of this tough loss in profitability environment in 2022 has been a hardening insurance market where rate increases are driving faster net written premium growth in the first quarter reports of many major insurers. Verisk is partnering with the industry to help them reduce costs, better select and price risk, root out fraud and overall operate more efficiently, given the macro environment. One problem area has been the state of Florida. As we have discussed in prior calls, the insurance crisis in Florida is being driven by a litigious environment, further complicated by extreme event vulnerability. The combined impact is pushing insurers into insolvency. The state legislature has passed reforms to address the crisis, and there are currently efforts be negotiated to bring increased oversight to the state's insurance market. That said, the risk for more liquidations remains. And we continue to monitor both the primary and reinsurance markets closely while leaning in with our customers to help them adapt to new legislation, to better select and price risk in the state and to identify the systemic bad actors in the market. A second area of challenge has been auto underwriting as insurers pulled back on writing new policies as they awaited regulatory approval for rate increases. Rate actions have started to roll through. And in the first quarter, we saw a rebound in policyholder shopping activity in response to higher rates, driving strong transactional revenue growth for Verisk this quarter. That said, we have yet to see behavior change on the part of the underwriters as they are still cautious about spending on marketing and underwriting new policies. We continue to expect that improvement in the back half of the year. One key pillar in our strategy that we discussed at Investor Day is being a more client-centric organization and the importance of strengthening the strategic dialogue with our clients and intensifying our industry engagement. To that end, I've been leading the organization with direct client engagement through full relationship reviews at several of our largest clients where we've been able to identify how we can best serve them and integrate new solutions to meet their specific objectives. I've also hosted our first CEO roundtable, where we brought together the leaders of our clients to discuss the issues that are foremost in their minds and where we can leverage our centrality and expertise to help address these issues. This has been followed by a client Chief Information Officer roundtable, where we brought our technology leadership headed by our CIO, Nick Daffan; and Chief Data Officer, Eric Schneider, to discuss technology and analytics trends that are on the minds of insurance industry CIOs. In particular, generative AI was a hot topic. And we discussed how we can help the industry develop safe, ethical and effective use cases and guide policy. Our clients are recognizing the early benefits of change and focus at Verisk and have provided great feedback. A recent quote from an important client stated, I can't remember a meeting with this degree of transparent dialogue where I felt like Verisk was listening. Our recent NPS scores also reflect this change in perception. Verisk conducts customer relationship surveys twice a year. And our recent NPS scores in the first quarter of 2023 were 47, up 4 points versus this time last year. Further, so far this year, we have hosted 3 in-person client events. At all our events, clients can engage with our solutions and hear directly from those clients who use the products in the market and learn how effective they are in helping solve industry challenges. More specifically, in February, our claims business hosted 2 events, including Elevate, our signature event for claims and restoration professionals, which provided educational and networking sessions for over 600 industry professionals. We also hosted almost 300 industry participants at IFM, an industry-wide event targeting the latest issues and advances in fraud management. In the U.S. alone, insurance fraud is estimated to cost the industry $300 billion annually, impacting industry profitability, and Verisk is uniquely positioned to help the industry. We host this event in partnership with the National Insurance Crime Bureau. Both events included expert panel discussions featuring our clients and partners, leading academics and thought leaders in the industry covering top-of-mind issues. In April, we hosted the inaugural Verisk Insurance Conference and hosted almost 600 clients for a 4-day multitrack conference designed to deliver a combination of product and thought leadership-focused content to key extreme events, life and underwriting decision-makers in insurance and reinsurance. This comprehensive event, which combined 3 previously separate events, enabled us to educate our clients and prospects about Verisk's end-to-end capabilities while continuing to provide them with valuable content applicable to their specific role in organization. It raised the awareness of the breadth and depth of solutions we offer to solve the industry's biggest challenges and really highlighted the benefits of the integrated Verisk approach. We saw a great response to this event with almost half of the extreme events professionals attending underwriting sessions and 40% of the underwriting attendees joining an extreme event session. A recent notable competitive contract win in our Extreme Events business is a great example of the benefits of being more focused and more integrated across Verisk. We recently signed a large multiyear contract expansion with a global insurer for extreme events platform, Touchstone. This client, who is already a subscriber to our property underwriting data solutions, will partner with Verisk in a workflow that will directly integrate those data solutions into the Touchstone platform. This partnership not only allows the client to obtain an enhanced view of their catastrophe loss potential based on various data with minimal operational friction, but it also gives Verisk the opportunity to market the feasibility of the same solution to a broader range of market participants. What struck me at both our claims and underwriting events after dozens of client conversations was the genuine enthusiasm our clients have for our ability to help them address industry issues with our scale and centrality. A commonly expressed sentiment is Verisk has a unique perspective, and we know you can help us. This is a tremendous privilege for us, and we are more mindful of our responsibility to create value for our clients and stakeholders. We are particularly excited about the opportunity it represents to find new channels for growth. On the technological transformation front, we recently achieved a major milestone as we have successfully sunset our mainframe. The scope and complexity of this project was massive. And our technology teams worked tirelessly to shut down a 40 year old mainframe in just 5 years. I want to thank my colleagues for their hard work and dedication to modernizing our legacy technology footprint. This move allowed us to modernize our operations and provide a better experience for our customers. Equally importantly, it enables Verisk to allocate more of our technology resources towards innovation to drive future growth. Finally, I wanted to share that we recently published our 2022 corporate social responsibility report. This year's report offers a view of our ESG journey and our work to help build global resilience for individuals, communities and businesses. We continue to pursue sustainability and growth through the lens of a responsible ESG framework. On the environmental front, this year, we established a Climate Advisory Council to glean strategic guidance on climate change and receive climate-related feedback on our forthcoming solutions. Moreover, Verisk's sustainability team is currently working with an independent consultant to help the company complete a report, meeting the expectations set forth by the task force on climate-related financial disclosures. As part of the exercise, we are conducting analysis assessing the impact of climate change, both on Verisk's direct operations and across key elements of its value chain and developing a realistic pathway to support science-based targets and a commitment to net zero targets. The team is also engaging with internal stakeholders regarding Verisk's current risk assessment activities and framework for identifying climate-related opportunities. We expect to publish the report in late 2023. Regarding governance, over the last 12 months, Verisk took steps to enhance our governance at the Board level, including making changes to provide for the annual election of directors and separating the role of Chair and CEO. We also took steps to refresh our Board, welcoming 4 new independent directors, who bring fresh perspectives and valuable skill and experience sets. As of the 2023 Annual Meeting of Shareholders, 4 directors, namely Annell Bay, Chris Foskett, Constantine Iordanou and David Wright will be retiring from the Board. I would like to express my gratitude to each of these directors for their leadership and guidance, which have been invaluable to Verisk's journey and transformation. These changes will bring our Board to a total of 10 members, 90% of whom are independent and 60% are gender or racially diverse. With that, I'll hand it over to Elizabeth to review our financial results.

Lee Shavel :

In summary, we're excited about the opportunity ahead and our ability to focus all our attention, talent and resources on the global insurance industry. Verisk is best positioned to capitalize on the opportunity because of our scale, centrality and expertise. Our motivating purpose is to work together with our clients in building resilience for individuals, communities and businesses globally. The combination of our focused business model, unique market position and strategy to deliver value for clients through improved decision-making and operational efficiency is the formula that will also deliver value to our shareholders through predictable growth and returns. We continue to appreciate the support and interest in Verisk. [Operator Instructions] With that, I'll ask the operator to open the line for questions.

Faiza Alwy :

I wanted to ask about -- I understand that the transactional revenues you cited, there may be certain onetime items. But on the subscription revenues, you cited increased growth in premium pricing. And it sounds like that should continue. So maybe talk about some of the offsets. I know you mentioned Florida, but if you can further dimensionalize that for us, that would be really helpful.

Lee Shavel:

And Faiza, if I would add, I think the other dimension that you were looking for is what might not be sustained given that strong growth in the first quarter. And so there are a couple of things that I would point to. One is that we -- in subscription growth, we have some property estimating solution subscriptions that come on associated with the storms in the fourth quarter. And sometimes those persist. It's hard to predict how long that those will persist. So that's a factor. In addition, as we indicated, the Florida situation and potential further insolvencies would impact that. And then as Elizabeth described, part of the conversion of the -- in the anti-fraud to our claims essentials package, it generates some growth in 2022 and in the early part of 2023. I think we will lap some of that exceptional growth, and that will probably serve as a bit of an offset in the later part of 2023.

Andrew Steinerman:

I would just like a little more detail about those certain transactional revenues that were elevated in the first quarter, like which product lines? And what are you assuming for the balance of the year for those same transactional pieces?

Andrew Steinerman:

Right. And Elizabeth, I also said, how are you assuming these transactional pieces are guided for, for the balance of the year?

Operator:

Our next question comes from the line of Greg Peters from Raymond James.

Lee Shavel:

Thanks for the question, Greg. So certainly, we view the Net Promoter Score as one gauge of our client satisfaction and enthusiasm for what we do. I wouldn't say that we are targeting our client outreach primarily to drive an increase in NPS. We're hopeful that, that will be a consequence, but our primary purpose is to elevate our dialogue [indiscernible] with our clients, which, as I indicated, I think there's a very strong appetite for because they recognize that with the data sets that we have and our centrality, we have the ability to solve problems for the industry. And the only way that we can identify those as industry issues is by moving and strengthening that dialogue at the top. And I think it does put us in a position where we are beyond addressing their tactical needs in underwriting claims, extreme events modeling, we have the ability to solve bigger problems by tying some of those data sets together. We talked about the integration of our property data into the Touchstone platform, which is an example of how, as part of that higher-level dialogue, we were able to find solutions. So we are looking for ways to integrate more data sets and bring new data sets in to satisfy and delight our clients. And I certainly hope that we'll be able to see an increase in our NPS overtime. But where the rubber will meet the road is going to be in sustained revenue growth and the development of new products that we can then monetize across the industry.

Ashish Sabadra :

I just wanted to drill down further, Lee, on your comments around some of the macro challenges, insurance-specific challenges, but also better client interaction and some of the things that you mentioned in response to the prior question around new data sets. So my question here was how is that helping build the sales pipeline? Have you seen any elongation in the sales pipeline? Can you talk about the bookings and the traction you're seeing? And how should we think about the contribution from these upsell, cross-sell into the existing customer base accelerate as we go through the year?

Ashish Sabadra :

That's great, and congrats on such a strong momentum in the business.

Toni Kaplan :

Lee, thanks for your comments on generative AI. I was hoping you could talk a little bit more about it in terms of your broader strategy and how you view the opportunities and risks. And then, Elizabeth, thanks for sharing the pieces on the subscription and transactional nonrecurring items, but I'm not sure I caught the quantification of how much the quarter benefited from the onetime items.

Elizabeth Mann:

Toni, to your question on the onetime items, we haven't quantified them. They're not of a magnitude that we would call out in specific. We just wanted to mention as a tailwind.

Operator:

Our next question comes from the line of Heather Balsky from Bank of America.

Lee Shavel:

Thank you, Heather. It's a great opportunity for me to bring Neil Spector, President of our underwriting businesses, into the conversation and through his engagement with clients, particularly on the underwriting side, has probably the best insight on what's happening within Florida. Neil?

Operator:

Our next question comes from the line of Manav Patnaik from Barclays.

Lee Shavel:

Yes. Thank you, Manav. So -- and I appreciate you asked the context in kind of a sequential way. So first, as I indicated, the accomplishment of moving off of that mainframe was a really substantial challenge, particularly for an organization that has been -- has developed over decades, and that technology had been in place for a long time. And so the immediate benefit, as we've talked about in the past, is that we are clearly realizing an economic benefit in terms of our ability to manage data and process data in the cloud. And we have -- there were costs necessary for us to achieve that outcome. But most of those costs have been -- had hit us. We're now experiencing the benefit of that from an economic perspective. But I'll remind everyone that, of course, that this also involves a geographic change in our balance sheet, meaning that what previously would have been depreciation of those hardware and software assets is now moving to an operating expense in terms of cloud expense. So may not be apparent from an EBITDA perspective, but there is real economic benefit from that. Now we will also continue to expect to see our cloud expenses grow as we integrate new data sets as we develop new solutions. So that will be part of our expense base that grows with the revenue opportunities that we see. But the strategic benefit for us that I believe we're really at the early stages of realizing is that through associating data sets that are now in a cloud format, our ability to tie those data sets together, to develop workflow software that is able to integrate that, to deliver that in a micro services context or an EPA context to our clients and integrate into those features expands the scope by which we can create value from those data sets. And to tie it to my earlier comments, as we better understand our clients' needs, it gives us an ability to potentially customize the way that we integrate and deliver those data sets to our clients to meet their specific value objectives. And that's, I think, what we're very excited about. We also -- from a technology standpoint, one other modernization step that we are taking on is an upgrade of our ERP system. That will deliver also efficiencies for us on the accounting, on the HR side. That also improves our ability to understand and accelerate the amount of internal information that we have. So having completed the cloud migration, we're now embarking under Elizabeth's leadership the -- our ERP transformation.

Alex Kramm :

Just wanted to come back to the guidance, which was obviously unchanged. Just trying to understand, since you're new to this first year of giving guidance, what your philosophy really is here going forward? So I know it's the first quarter in, but how should we be thinking about you updating the guidance throughout the year if you're running significantly ahead or below? And then as we think about this year, I know there was a lot said already on this call. But as you talk about the none changed guidance, was it really hey it's too early in the year? Was it anything as maybe a little bit more uncertain, some of the transactional side you mentioned? Or was the first quarter really just in line with what you were expecting all along?

Alex Kramm :

Okay. Fair enough.

Operator:

Our next question comes from the line of Andrew Nicholas from William Blair.

Elizabeth Mann:

Yes. Thanks. So that -- in that product, we had -- it is for insurers, but it is also used by third-party administrators and by self-insured. Previously, those customers, the TPAs and the self-insured had been on a more of a transactional business model. They would use the data when something would occur. We have developed a subscription product that is specifically targeted to that customer base and have been moving them to that subscription product. We started that in the middle of last year. As they move from a transactional to a subscription model, you're seeing that shift in that business where transaction revenue may even be declining, but it is being replaced by subscription revenue, which is higher quality and more sustainable.

Jeff Silber :

You called out your life insurance business a couple of times. I know it's relatively small, but we've been reading about some of the pressure that the life insurance industry is in because of the returns on commercial real estate, maybe some mismatches of assets and liabilities. Are you seeing that with any of your clients either in the life insurance industry or more broadly overall?

Operator:

Our next question comes from the line of Andrew Jeffrey from Truist Securities.

Lee Shavel:

Yes. Thank you, Andrew. And I think this is a good opportunity for me to bring in Maroun Mourad, the President of our Claims business. And given kind of the claims dimension of that, he can speak specifically to crew and also how it fits into our broader German strategy given our prior acquisition of ACTINEO.

Operator:

Our next question comes from the line of Jeff Meuler from Baird.

Lee Shavel:

So Jeff, I think you won the award for the most complex [indiscernible] question, which we do appreciate because it is a complicated topic. Let me start off, and then I'm going to ask Neil to jump in and provide more context. So the dynamic of what we're seeing is that right now, in general, is that we are seeing higher rates, and consumers are responding to that. So some of the strength that we're seeing in auto is they are beginning to shop more frequently because of the initial impact of rates. We expect that, that will continue. Some insurers through nonrate actions that they're entitled to have been able to increase prices. So we're getting to see the consumer respond to that, and that's driving volume. Now from the insurers' perspective, however, there still are these concerns about inflation and underwriting in certain geographies that is -- put them in a position where they are not willing to market as aggressively. And so that's why we have not seen the level of marketing activity on the insurer side. So those are the dynamics that we are seeing right now. It's -- we do expect to see more rate increases. That will probably encourage more competition and demand for new products, but the insurers will have to evaluate where they want to write business and what they want to do to attract more. So that's kind of a rough approximation, and I'll let Neil fine-tune that a bit.

Lee Shavel:

Yes. And specific to this embedded in our comments was part of the transactional strength were some nonrate action programs that were insurers looking to address some of their higher risks within that. As these rate increases begin to flow through, that should diminish, but then it potentially drives other growth within the business. So again, a complex situation, but hopefully, that gives you a little bit more insight.

Operator:

Our next question comes from the line of [Harold] from Jefferies.

Lee Shavel:

So Harold, I was -- we lost you there for a little bit. I think that you were just asking the general question around price increases in the context of the environment. Do I have that correct?

Elizabeth Mann:

Yes, happy to comment on it. I mean, first, I want to remind you, we don’t have a single pricing approach. It’s a targeted approach across all of our businesses, and we’ve been pricing items to value. I think I quoted before the net written premium growth in the industry was 9.6% in 2021. That’s the year that drives the growth for many of our customers. About 20% of our revenue is tied to that premium growth in the year prior. So that has been an element.

Operator:

Our final question comes from the line of George Tong from Goldman.

Elizabeth Mann:

Yes. Good question, George. Thanks for that. Some of it ties back to the discussion we were just having on the industry and the impact of the rate increases that we're starting to see. So the strong auto insurance shopping behavior that we saw in this quarter was a function of some of the rate increases that have started to push through. To some extent, that is a recovery that we had expected to come later in the year. And so it may just be a pull forward of that recovery. We're waiting to see kind of the interplay of the dynamics that Lee and Neil were talking about in there. The second driver of the auto business, the nonrate actions and our -- enabling our customers to do that, that may taper off as they start to get rate increases, and that may turn into some of that shopping activity. So that's the interplay of those elements we see going forward.

Operator:

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.

Operator:

Good morning, everyone, and welcome to the Verisk Fourth Quarter 2022 Earning Results Conference Call. This call is being recorded. [Operator Instructions] For opening remarks and introductions, I would now turn -- like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, you may go ahead.

Lee Shavel :

Good morning, everyone, and thank you, Stacey, and thanks to you all for participating today. We've really been looking forward to this call because it's our first opportunity to reintroduce Verisk in our new insurance-focused configuration, to discuss the momentum in the fourth quarter and given all the structural changes, give you a forward view of our expected performance in 2023. We accomplished an extraordinary amount in 2022, so let me provide a brief summary. First, there's been a lot of structural change. In March, we sold 3E, our environmental health and safety business, for net cash proceeds of $575 million. In April, we sold Verisk Financial Services for net cash proceeds of approximately $500 million. And most recently in February, we sold Wood Mackenzie for approximately $3.1 billion. We've begun the process of returning a substantial majority of the after-tax proceeds of those transactions to shareholders through share repurchases as promised. Despite a challenging economic, geopolitical and financing environment, we were able to complete these transactions at attractive valuations through the strong underlying businesses, capable management teams and a well-organized sale process. Let's turn to governance change. Structural change wasn't the only transition at Verisk. We also made a number of governance changes that shareholders suggested. We are transitioning to a declassified Board with annual elections. We added four new directors with fresh perspectives and experiences

Lee Shavel :

Thanks, Elizabeth. In summary, we are excited to focus all our attention, talent and resources on the global insurance industry where we can deliver substantial value to our clients through improved decision-making and operational efficiency. We will be engaged more intensively as a strategic technology partner to our clients and the broader insurance industry to identify and develop ways for Verisk to support their objectives. With our scale, relationships and expertise, we are well positioned to help make those connections in this period of accelerated change for the industry and by extension, to the people and communities they serve. Our motivating purpose is to work together with our clients in building resilience for individuals, communities and businesses globally. Combined with our focused business model and unique market position, this is a formula that will deliver value to our shareholders through growth and returns. We continue to appreciate the support and interest in Verisk. Given the large number of analysts we have covering us, we ask that you limit yourself to one question. With that, I'll ask the operator to open the line for questions.

Toni Kaplan :

Congrats on the results today and particularly, I think your progress on the margin front. You talked about hitting 53% to 54% margin in '23. And as you mentioned, that will essentially be at the low end of the '24 target range. Does this change your strategy around investment, meaning does this allow you to go more aggressively after growth opportunities, just given that your margin is in a really solid place?

Elizabeth Mann :

Thanks, Toni. I don't think it changes our overall strategy. We are committed to the targets delivering in '24. We're happy to be in the low end of that range already ahead of schedule. But we'll maintain that level of focus on margin while still maintaining investment in the business as we have been balancing so far.

Operator:

Our next question comes from George Tong with Goldman Sachs.

Elizabeth Mann :

Yes. Thanks. We remain committed to that range. Right now, I'm here talking about 2023, I think there's been some headwinds in '22 that we've talked about previously as well as some benefits to the business. So on balance, we're committed to the range.

Heather Balsky :

I'll continue the streak of margin questions on the Q&A. And just ask, if you could help us just bridge a little bit more what gets you to 53 to 54, what's coming from the savings? What's sort of the impact from the stranded costs and some of the other chunkier lines that kind of get you from '22 to '23?

Operator:

Our next question comes from Ashish Sabadra with RBC Capital Markets.

Lee Shavel :

It’s like a four-part question. So let's choose -- I would consider that multiple choice. So…

Operator:

Our next question comes from Stephanie Moore with Jefferies.

Lee Shavel :

Yes. Thank you for the question. Let me try to address the components of that. So I think I outlined in my comments the general strategy where we are looking to make investments in data or technology that solve industry problems that we can monetize across that industry. And that strategy really holds across the business. Internationally where we've had a very solid success of finding businesses that have established products in international context, and I'll use our acquisition of Sequel as an example, we have taken that business. We have found ways to support that with addition of other components such as a rate-making component or a binding component in that business that add value to the total offering for our business, thereby integrating components for the market participants in that ecosystem. We will continue to look for opportunities to leverage those types of additions as well as data sets and functionality that we have within the U.S. business. We recently made an acquisition in Sweden, and you may be familiar with both our acquisitions of ACTINEO in Germany and Opta where we're deploying similar strategies. And generally, across our international businesses, we have been able to deliver growth faster than our overall rate and generally in the double-digit range because of the penetration opportunities we have within those marketplaces. So hopefully that ties together with our general strategy and how it applies internationally and the contributions to growth from each of those elements.

Jeff Meuler :

I want to ask about the pickup in claims underlying growth normalized for the discrete storm revenue. I mean, it's a pretty big step-up. So I'm just trying to understand were there any other like onetime benefits in the quarter? Is this mostly about COVID recovery because the factors you cited were things like recovery in international travel, workers' comp or what I'm really looking for, was there like a pickup in like cross-selling and upselling trends in the business, and the stepped-up growth rate could be sustainable?

Maroun Mourad :

Thank you. Thank you, Lee. Thank you, Jeff, for the question. We've been experiencing overall healthy growth across the different claims businesses that we've got. So in addition to the comments made by Elizabeth and Lee around property estimating solutions as well as the casualty workers' comp business, we continue to see the customer engagement that is resulting in very healthy growth activity across our antifraud suite of solutions. Thank you.

Alexander Hess :

This is Alex Hess on for Andrew Steinerman. I want to ask maybe a bit about retention rate and the pressures you saw from Florida? And then as a sort of second part to that question, any sort of operational or balance sheet efficiency statistics you can provide for the standalone insurance Verisk? So to that Florida question, maybe what are -- what was your retention rate in '23 and then -- in '22 and what was it sort of ex Florida?

Neil Spector :

Thanks, Lee. No, I think you summarized it well. I would just say that while there are potential for liquidations down there, there's also new formations of companies that come into the market because there's need for coverage, which gives us opportunities. So just -- it isn't a one-way flow of businesses exiting, there's businesses entering as well, which helps offset some of that.

Elizabeth Mann :

Yes. Thanks for that, Alex. We haven't -- I don't have any specific stats pulled out on that right now. But I think in general, the insurance business is the most cash flow generative and sort of the most capital efficient of our former businesses. It generates strong free cash flow, negative working capital characteristics and high kind of yields on EBITDA.

Operator:

Our next question comes from Greg Peters with Raymond James.

Lee Shavel :

Yes. Great. Thank you very much. And you really touched on something that we -- I think we have a good system. We undertake a survey and an NPS scoring twice a year. In 2022, that is in the mid-40s, which is consistent with where we've been before the pandemic and through the pandemic. And I think we saw an increase in that during the pandemic as a function of kind of a general lift from working from home, from our clients, some of the features that we offered through client experience that were well received but still a very solid number. So we undertake that, but we also have customer experience unit that is always looking to gauge the feedback that we receive from our clients on product experience. So at that level, we're trying to provide a number of means for them to communicate anonymously their level of satisfaction. I would also say anecdotally, we have intensified our efforts to engage at a senior level, particularly at C-suite with how we are providing value and solving problems for them. The feedback of knowing of -- their feedback to our renewed focus on just the insurance industry has been very positive. The outreach from some clients, where we haven't had a strong relationship, has been very positive, and we've actually seen a higher level of engagement from them as a result. So we're looking at that across at different layers. And so far, I think the response has been positive, and we'll continue to build on that.

Andrew Jeffrey :

I appreciate all the sort of succinct summation of the changes you made in your business. And the guidance, I agree, that's really helpful. We also appreciate all the callouts of the business drivers. Now that you're a pure-play, can you -- are there some areas where you think Verisk has particular ability to focus and accelerate growth? I'm thinking about life or extreme event modeling as we think more about climate change. I just wonder if there's more of a laser focus on areas we think Verisk has the ability to really leverage assets and potentially accelerate top line.

Operator:

Our next question comes from Jeff Silber with BMO Capital Markets.

Lee Shavel :

Yes. So one, I'm going to address the second part first. And then just also ask Elizabeth or Stacey to kind of refresh me on the overall exposure element. But I think we're confident because we are already seeing in a number of regulatory areas that those rate increases are being approved. There was a -- previously a bit of a delay, I think, because of elections that probably created some delay from a regulatory standpoint. We're now seeing those begin to emerge. I think a recognition that the inflationary costs that the auto insurers have borne is something that is legitimate needs to be factored into overall pricing. There are some areas that I think we're concerned about, particularly in California and approvals on that front. But I think we're getting a sense of momentum in those rate increases. And from an overall exposure standpoint...

Jeff Silber :

And that's what it was or that's what it is now?

Lee Shavel :

It has been at that level consistently. It hasn't changed materially.

Manav Patnaik :

And first, thank you so much for the guidance details and providing that. I just had a question around the pricing environment. If you could just talk about what pricing -- how pricing fared, I guess, this year and then looking out into '23, if you should expect any incremental improvement versus that?

Operator:

Our next question comes from Andrew Nicholas with William Blair.

Elizabeth Mann :

Yes. Good question. Yes, as you flagged kind of one of the swing factors between the top and bottom end would be the recovery of some of the more sensitive -- macro sensitive parts of our business like auto. In general, with the 80% subscription revenue, there's a lot of stability in the overall. One or two other environment-related factors that I would point out that could contribute to the difference in that, the top and bottom end of that range as you say, the amount of storm-related revenue is inherently unpredictable, obviously. We have included some assumptions for that in the budget but a sort of moderate assumption in there. And then there's one or two other sort of macro-related factors like the level of cat loss activity and other things that could contribute to that range.

Alexander Kramm :

Quick clean-up question, and sorry if I missed it, I dropped earlier. But I don't think you guided on interest expense, and you gave us a couple of pieces here in terms of paying off some of the debt already in February. So can you just be a little bit more specific on what we should be expecting there? Because I think some people are struggling getting from your EBITDA guide to EPS.

Operator:

Our final question comes from Faiza Alwy with Deutsche Bank.

Elizabeth Mann :

Yes. Thanks, Faiza, for the question. Really, we're here today to talk about the quarter and the 2023 view. So sort of longer-term discussions, we'll talk about at Investor Day.

Operator:

There are no further questions at this time, which concludes today's conference. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good day, everyone, and welcome to the Verisk Third Quarter 2022 Earnings Results Conference Call. This call is being recorded. Currently, all participants are in a listen-only mode. After today’s prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Verisk’s Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Lee Shavel:

Thanks, Stacey, and good day, everyone. Before I jump into the earnings results, I want to officially welcome Elizabeth Mann to Verisk. Elizabeth brings operational and corporate finance experience from her three years at S&P Global capital markets and strategic sophistication from her 12 years of investment banking experience at Goldman Sachs, and finally, an impressive academic foundation and enthusiasm for mathematics that fits perfectly into our analytical culture. She is coming up the curve quickly and has already established herself as a valued part of the team. I’m pleased to share that we delivered on our stated intention to become a global insurance-focused data analytics and technology company. As we announced on Monday, we have signed a definitive agreement to sell Wood Mackenzie to Veritas Capital for $3.1 billion in cash consideration, payable at closing, plus future additional contingent consideration of up to $200 million. Our ability to achieve this result in the midst of a deteriorating deal environment speaks to the quality of the asset and the momentum of the business. Wood Mackenzie is the globally recognized leader in natural resources intelligence, with in-depth proprietary data sets and subject matter experts that cover the full energy and natural resource value chain. Since we acquired Wood Mackenzie in 2015, the business has increased revenue and EBITDA; integrated acquisitions; developed new areas of growth in the energy transition, chemicals and metals and mining; and most recently, upgraded their client platform, Lens. This has transformed Wood Mackenzie from an advisory services business focused on transactional research and consulting to a data analytics business bolstered by long-term subscription contracts, a leading brand and market position. We have been honored to work with and support our friends and colleagues at Wood Mackenzie and we wish them well and look forward to their continued growth and success under the proven leadership of Mark Brinin and Joe Levesque, and their respected future owners, Veritas Capital. The future for Wood Mackenzie is very bright, and we look forward to having an ongoing productive relationship with them. This transaction, which is expected to close in the first quarter of 2023, will best position Wood Mackenzie to fully capitalize on secular industry tailwinds, including the energy transition and deliver on the growth opportunity that lies ahead. The closing of this transaction is subject to customary closing conditions, including regulatory approvals. Going forward, the Wood Mackenzie business will be reported as discontinued operations beginning with Verisk’s fourth quarter earnings report and 10-K filing. We plan to use the approximate $3.1 billion in proceeds, primarily for share repurchases and debt paydown. After accounting for share repurchase and debt paydown, we expect this transaction to be modestly dilutive to Verisk’s earnings in the range of 4% to 6%. That said, over the longer term, we believe the deal will bring Verisk the added benefit of increased focus on our core insurance business, more consistent growth in line with our long-term targets and improved return on capital, which should drive shareholder value. Now let me turn my attention to our third quarter earnings results. Verisk delivered solid third quarter results as we partner with our customers to help them navigate through environmental challenges in the marketplace, including inflation and elevated losses in certain lines of insurance. Adjusted for the impact of the suspension of commercial operations in Russia, Verisk delivered mid-single-digit organic constant currency revenue growth and margin expansion, resulting in organic constant currency adjusted EBITDA growth of 7%. This performance reflects our focus on cost discipline, operational efficiency and the early benefits of initial steps taken in previously announced margin improvement initiative. Elizabeth will provide more detail in her financial review. On our EBITDA margin expansion objective, we continue to be confident in our ability to achieve our stated target to deliver 300 to 500 basis points of margin expansion by 2024, an insurance-only baseline of 50% to 51% normalized adjusted EBITDA margins. We have taken actions to enhance operating efficiency, improve productivity and streamline processes. During the quarter, we eliminated certain roles across the organization, sunset legacy products and reduced office square footage. Additionally, we entered into an agreement to sublease our data center to a third-party as we move more of our computing infrastructure to the cloud, delivering long-term savings for Verisk. We have also advanced on our future of data collection project, where we are improving the efficiency and productivity of our field force, which not only saves money, but enhances our solutions. We expect that over the next two years, about half of our identified cost savings will come from headcount actions, about 25% from reductions in spending from IT infrastructure and about 25% from third-party spending, including real estate. To-date, we have made decisions and taken actions to address more than half of the cost savings we are targeting. Turning to our customers. Our Insurance customers continue to be generally healthy while they’re dealing with the cross-currents of inflation and increasing loss ratios, which are negatively impacting profitability across the industry. This is having a disproportionate impact in personal lines, insurtech companies and certain geographic markets. While insurers are increasing rates to help cover inflation in repair costs, it takes time to get rates approved by the regulators and then implement it across the entire book of business. To-date, premium growth has not yet caught up to loss costs. Specifically, in personal auto, we continue to see pressure on underwriting activity across the industry as insurance providers are holding back on writing new business. In fact, combined ratios across the industry continue to trend lower, and as a result, insurers are cutting back on marketing spend as a way to protect profitability. The net result is lower transactional revenues for Verisk across both our personal lines and auto underwriting solutions as well as certain of our marketing solutions. We believe this is a cyclical issue and will abate over time. As we noted last quarter, Florida is a trouble spot for the insurance industry, and the losses from Hurricane Ian add complication. We are experiencing an increasing level of insolvencies across the market, with four companies liquidating just this quarter, while other carriers are electing to exit the market entirely. This has had a negative impact on both our subscription and transactional revenues. To address these issues and drive future growth, our sales teams are engaged with the new entrants into the market as well as expanding our relationship with a state-backed insurer to help price and select risk. We are also working with our existing customers to help them understand the impact of inflation across their book of business and to help them price the risks accordingly as policies come up for renewal. Apart from the near-term challenges, we continue to believe that the opportunity for Verisk to address the long-term strategic and operating needs of the insurance industry remains substantial. In my many conversations with insurance CEOs, they have consistently encouraged us to develop a more strategic dialogue and how we can help the industry address technology, regulatory and operating issues, leveraging our unique and legacy position as an effective utility for the industry. To that objective, we have been coordinating a series of CEO and CIO roundtables to develop solutions that can improve industry operating efficiency and capital efficiency as well as productivity. While these initiatives will take time to develop and implement, they represent a substantial incremental opportunity for Verisk. We are very excited about the opportunity to engage with the industry at the strategic level and broaden our technology partnership with them. In recognition of our commitment to innovate on behalf of clients, Verisk was recognized by Celent as a Luminary for developing innovative solutions that help property, casualty and life insurers detect claims fraud. Our solutions were recognized by highly advanced functionality and ability to integrate with third-party data, driving faster outcomes and a more accurate claims experience. Similarly, we are committed to creating value for our employees, which includes providing an exceptional workplace. And we were awarded the Great Place to Work designation this year in the U.S., UK, India, Spain and New York. We were also recognized as a Great Place to Work for Women in the UK. In today’s rapidly evolving workplace, we are focused on talent attraction, development and retention by supporting our teammates’ passion and having a purpose-driven culture that allows unlimited success. Finally, as a demonstration of our commitment to ESG priorities, Verisk has been ranked third out of 100 Best ESG Companies in 2022 by Investor’s Business Daily. The list recognized companies with superior environmental, social and governance ratings, in addition to fundamental and technical stock performance. We are honored to receive this recognition for our commitment to sustainability and the ability of our strong and growing business to meet customer and investor expectations. As we move forward, I am more confident than ever that with our proprietary data sets, talented and dedicated people, deep industry knowledge and technical expertise, Verisk is best positioned to create value for our customers by helping them evolve in a new digital environment, integrate rapidly growing data sets and achieve new levels of efficiency. This, in turn, will create value for our employees and shareholders. I will now turn the call over to Mark for some more color on the Insurance business performance.

Elizabeth Mann:

Thanks, Mark, and good morning to all of you here on the call. I’m so happy to be here at Verisk and speaking to you today. I have admired the company and its phenomenal insurance business for over a decade as I worked in the information services sector. And now is a particularly exciting time to join as we have an opportunity to redefine our strategy as a global insurance-focused data analytics and technology company. We can now focus our capital and all of our industry knowledge to support the needs of our customers, as Lee and Mark have already highlighted. As I’ve joined Verisk over the last six weeks, and I’ve been getting to know the people and digging into the business, I’ve been focused on a few priorities. The first is a focus on cost discipline and execution against the margin targets we’ve committed. Second, Lee has established a framework for capital allocation and ROIC metrics, which I intend to continue. The resulting transparency and accountability on our deployment of capital will support our ability to invest with confidence to drive top line growth and strong returns. Third, I will prioritize investor engagement, gathering feedback and providing transparency into the business. So I look forward to getting out on the road and meeting all of you. Let me now turn to our third quarter results. Before I begin, I want to remind everyone that all consolidated and GAAP numbers are negatively impacted by the recent dispositions of 3E and Verisk Financial Services. This effect will continue through the first quarter of 2023 when we will anniversary those transactions. As noted, due to its materiality, Wood Mackenzie will be accounted for as discontinued operations beginning in the fourth quarter of 2022. For the third quarter of 2022, on a consolidated and GAAP basis, revenue was $745 million, a modest decline from the prior year, reflecting the impact of recent dispositions and foreign currency exchange rate headwinds, which are most pronounced in our Energy segment, offset in part by acquisitions. Net income attributable to Verisk decreased 6% to $189 million while diluted GAAP earnings per share attributable to Verisk decreased 3% to $1.20. The decline was primarily due to the dispositions within the former Energy and Specialized Markets and Verisk Financial Services segments, including the loss incurred as part of the true-up of the closing adjustments. Moving to our organic constant currency results, adjusted for non-operating items, as defined in the non-GAAP financial measures section of our press release. We are pleased with our operating results, led by continued growth in our subscription revenues. In the third quarter, OCC revenues grew 4.8%, driven by continued strength in our Insurance segment and continued sequential improvement in our Energy segment. Our subscription revenues increased 5.6% while our transactional revenues increased a more modest 1.2%. Adjusting for $3.3 million in prior year revenue associated with our Energy business in Russia, OCC revenue would have grown 5.3% and subscription revenues would have grown 6.2%. Consolidated OCC adjusted EBITDA growth was 6% in the third quarter. Normalizing for the prior year revenue associated with our Energy in Russia and the incremental expenses associated with exiting that business, OCC adjusted EBITDA growth was 7%. Total adjusted EBITDA margin, which includes both organic and inorganic results, was 51.5%, up 160 basis points from the year prior, reflecting strong cost and operational discipline as well as the benefit from recent dispositions. This level of margin includes approximately 60 basis points of headwind from recent acquisitions; 50 basis points of headwind from our ongoing technological transformation, including cloud expenses, which we absorbed into our cost structure; and 40 basis points from higher year-over-year T&E expenses. Despite the environment and cyclical headwinds to margin, this quarter’s margin expansion is further demonstration of our commitment to efficiency. On that note, let’s turn to our segment results on an OCC basis. For Insurance. In the third quarter, Insurance segment revenues increased 5.3%. We saw healthy growth in our industry standard insurance programs, claims analytics, extreme events, life insurance and specialty business solutions. Subscription revenues increased 6.1%, reflecting tougher comparisons versus last year’s 7.9% growth as well as the impact of some of the environmental factors Lee and Mark spoke about earlier. Transactional revenues increased 1.8% in the quarter, reflecting a lower level of storm activity in the quarter as well as continued softness from personal auto, underwriting and marketing. This was offset in part by strong recovery growth in international travel insurance solutions. Within workers’ compensation, we have seen a return to modest growth, though the business is not yet back to pre-pandemic levels. Adjusted EBITDA grew 6.9% in the third quarter while margins declined 70 basis points to 55.2%. These margins reflect a heavier burden from the corporate costs that were previously allocated to businesses that have been disposed as well as the impact of recently acquired businesses, higher cloud expenses and the partial normalization of travel expenses back into the business. This level of margin also includes continued investment in our high-growth areas like life insurance and specialty business solutions and the impact of recently acquired businesses. Energy and Specialized Markets. Revenue increased 2.5% in the third quarter. Normalizing for the impact of our exit from Russia, Energy revenue growth was 5.2%. Our subscription revenues increased 3.5% or 6.8%, normalizing for the Russian exit, led by double-digit growth in energy transition, chemicals and metals and mining research, coupled with modest growth in our core research subscriptions. Additionally, we continue to experience strong adoption and contract expansion from our Lens renewals. Transactional revenues decreased 1.8% as growth was constrained by consulting resources. Adjusted EBITDA decreased 0.2% in the third quarter, and margins contracted 210 basis points to 34.4%. These adjusted EBITDA and adjusted EBITDA margin figures include $0.2 million in incremental expense related to the suspension of operations in Russia. Normalizing for that impact, adjusted EBITDA growth would have been 7.8%. On taxes. Our reported effective tax rate was 22.7% compared to 20.9% in the prior year quarter. This higher year-over-year tax rate was the result of lower level of stock option activity versus the prior year. Looking ahead to the remainder of 2022, we expect the tax rate in the fourth quarter to be approximately 24% to 26%, reflecting the impact of discontinued operations as well as a lower than originally expected level of stock option activity. On adjusted net income and diluted adjusted EPS. Adjusted net income decreased 1.9% to $230 million, and diluted adjusted EPS increased 1.4% to $1.46 for the third quarter of 2022. These changes reflect organic growth in the business, contributions from acquisitions and a lower average share count, offset in part by the impact of divestitures and the higher interest expense and tax rate. For free cash flow, net cash provided by operating activities was $280 million for the quarter, down 1.8% from the prior year period due to the loss of operating cash flows related to the dispositions. Normalizing for the impact of the 3E and Verisk Financial Services dispositions, free cash flow would have been up 7.5%. Capital expenditures were $66 million for the quarter, up 7% versus last year, reflecting increases in capitalized software development, offset in part by savings on third-party hardware and software as we move to the cloud. We now expect capital expenditures for the full year to be within the range of $270 million to $280 million. This range supports our plans to increase our software investment into core underwriting, where we believe there is a significant opportunity for platform enhancement. In addition, we now expect fixed asset depreciation and amortization to be within the range of $195 million to $205 million, and intangible amortization should be approximately $145 million for the full year 2022. Both depreciation and amortization elements are subject to foreign currency variability, the timing of purchases, the completion of projects and future M&A activity. On capital returns. During the third quarter, we returned $349 million in capital to shareholders through share repurchases and dividends, as our strong cash flow allows us to consistently return capital to shareholders while also investing in the business. Additionally, in October of 2022, we entered into a new $100 million accelerated share repurchase agreement to be completed in the fourth quarter, as is our normal practice. Looking ahead, we plan to optimize the use of proceeds from the sale of Wood Mackenzie while also maintaining our leverage range. We will achieve this through a combination of debt paydown and share repurchases and may act opportunistically from a timing standpoint. Before I turn the call back over to Lee, I just want to remind everyone that we will be hosting an Investor Day in March, where we will provide more transparency and clarity on our strategic and financial profile and growth drivers as a global insurance-focused data analytics and technology company. And now I will turn the call back over to Lee for some closing comments.

Operator:

[Operator Instructions] And with that we will take our first question from Ashish Sabadra from RBC Capital Markets. Please go ahead.

Lee Shavel:

Thank you, Ashish. First, let me say on the question on tax leakage. The $3.1 billion in proceeds, I think, if your question is directed towards that, we are not expecting any significant tax leakage. There may be some upside for us on that modestly. But we think that we will be able to deploy the full amount of that in share repurchases and debt paydowns. As it relates to the future tax rate, we have provided some guidance for the fourth quarter. But we – it’s obviously a complex issue that we are working through in terms of the longer-term impact. It depends upon the composition of the business overall, and we would intend to provide more clarity for that as we look ahead. I think it’s fair to assume, of course, kind of as implicated in the fourth quarter, that our effective tax rate will be higher. But we’ll try to provide more specific guidance as we sort that out and in the time frame that we typically do with our fourth quarter earnings results.

Operator:

Your next question will come from Jeff Meuler with Baird. Go ahead.

Lee Shavel:

Sure. Thank you, Jeff. I’m going to take a first crack at it and then hand it over to Mark for his perspective. But the one way that we’re looking at this is we’re looking at the totality of the insurance industry spend in aggregate. And that’s a very substantial number in kind of the [indiscernible] and Jeff, I think you may be rattling a paper there. But we’re looking at that aggregate amount. And I think as we’ve talked to investors previously, when we look at the amount of revenue that Verisk generates from the insurance industry relative to their operating costs, it is a 40 to 45 basis point amount. And we think that there’s a broader opportunity for us to address their marketing spend in finding efficiencies, in finding solutions to drive productivity gains, to find efficiencies on technology spend, which are substantially larger opportunities for us relative to the scale of what we’re doing. So that will give you a sense of why we think that’s a substantial opportunity. And we’ve been engaged in addressing a lot of those with current initiatives that we look to expand on. And I know Mark can certainly speak to some of the things that we’ve been doing on that front.

Lee Shavel:

Yes. And Jeff, I think you see there are three dimensions there that we’re talking about. One is a functional orientation. And so that’s Mark speaking to the marketing opportunity. We see similar opportunities on the technology side. And then operationally, there is the business line opportunity or dimension that we’re looking at with travel and other areas. And then, of course, there is the international, where we feel as though the opportunity to bring some of that expertise. All of those are – create, I think, a broad envelope for us to look to expand on what we’re doing.

Operator:

Our next question will come from Alex Kramm with UBS Financial. Please go ahead.

Lee Shavel:

Yes. Alex, thanks for the question. We’re not at the point where we have broken through both the combination of the adjustments that we’re making in the overhead costs or the overhead allocation. So I think that is something that we’ll look to provide more input on as we move ahead, probably with the fourth quarter earnings, where we’ll have that discontinued operations. Our focus has been on getting the transaction done. As you can imagine, that has been, I think, a pretty solid accomplishment in a difficult market. It will take time for us to sort through the accounting consequences now that we understand that, and there are a lot of transitional elements that we need to take into account. So it’s not a simple metrics to us.

Operator:

And our next question will come from Toni Kaplan with Morgan Stanley. Please go ahead.

Mark Anquillare:

Yes. Thank you, Toni. I appreciate. This is Mark. Let me first remind everybody, we do have some connectivity of pricing to premium volumes. The utility of our products are seen and demonstrated through the premiums they write. So to the extent that it’s a harder market or meaning price is going up and there’s more premium, we will see that on a little bit of a lag effect. To your more direct and short-term, I think what we’re trying to do is really balance the opportunity to hopefully maybe take a little bit more price, only because, like everybody, we’re incurring some more costs around labor and other inflationary type of spend. But at the same time, we’re in it for the long-term. And what we’re trying to do is make sure that we are able to sell new products, new solutions to customers and not cause any short-term angst degree with regard to pricing today.

Operator:

Our next question will come from Manav Patnaik from Barclays. Please go ahead.

Lee Shavel:

Thank you, Manav. So these are – there are a variety of factors, some of which are difficult to kind of fully separate. I’m going to ask Mark to kind of give his perspective on both impact and sustainability of these effects that you’re asking about.

Lee Shavel:

Yes. And I would add one other dimension, Manav, which is I think that what we’ve seen is kind of fairly solid subscription growth. I think that what you saw in 2022 was some weakness on the transactional revenue growth. And I think it will probably manifest itself, some of these trends in – some sustaining of that weaker growth into 2023 if these dynamics have the impact that we described. But again, also subject to variability on storm levels, but hopefully, that’s helpful.

Operator:

The next question will come from Andrew Steinerman with JPMorgan.

Lee Shavel:

Thank you, Andrew. So we certainly understand that. What I will first say and reiterate that our confidence in that long-term target remains in place given what we see as the opportunities in front of us. I think when you look at what we’ve even achieved in 2021 at a more challenging environment, where we had two quarters of organic revenue growth above 7% clearly demonstrates the ability of the insurance – of our insurance business to achieve that. We’ve had some weakness related to pandemic effects, such as lower driving activity, impact on workers’ comp. And I think, to Mark’s comments, we are seeing some weakness as a result of the economic environment, but we’re also seeing recovery in some of the pandemic-related effects. And I think that biases us towards stronger performance ahead from a growth perspective as we come out of some of these stronger elements. Some of the macroeconomics may persist, but I think we’re seeing kind of more momentum towards that target ahead. That would be the way, I think, about it, both from a longer-term perspective, which we are still confident that we can deliver on that. We have to work our way through, I think, the conflicting impacts of some recovery from pandemic impacts and then some of the more sustained macroeconomic, which, I think, are of a lower magnitude than what we experienced through the pandemic.

Operator:

The next question will come from Greg Peters with Raymond James. Please go ahead.

Lee Shavel:

Greg, thanks for the question. And particularly – I would particularly value your perspective and knowledge around the insurance industry. And so you probably better understand better than most the challenges that the insurance industry is facing. And so let me kind of break that apart. I think the opportunity to invest in these new opportunities have generated both growth and very strong returns for the internal investments that we have made in a variety of areas. And I would probably cite our LightSpeed product, where we’ve been able to accelerate delivery of quote to – a bindable quote to the point of sale, has generated a very strong economic growth for us and a very good return on capital. So we’re looking for similar elements to that. We’ve been talking about our investment in the core lines, reimagined initiative to migrate a lot of our data and services into that new technology platform, which delivers substantially greater value for our clients on that front, opening up, I think new opportunities for growth and certainly a high return that we can generate on that. So those – and the third point that I would make is that on the margin efficiency target, that has been focused on looking at – not at cutting investment within the business, but looking for areas of opportunity from an operational efficiency perspective within the business that, I think, it’s been a very healthy exercise for us that we’ve demonstrated progress against, but it hasn’t come at the cost of us pursuing these overall opportunities. So I think if you – the fundamental concern is, look, we’re hearing that there are a lot of opportunities to invest. How does that – does that conflict with the margin objective? I don’t believe so. I think that we can continue to make these investments. We can deliver on the operational efficiencies within the business to drive that margin improvement and continue to generate very solid growth and strong returns on capital.

Lee Shavel:

Thanks, Greg.

George Tong:

Hi, thanks. Good morning. With respect to the Wood Mackenzie sale proceeds, how are you thinking about splitting the $3.1 billion between debt paydown and share repurchases? Do you have a target leverage multiple in mind for the stand-alone insurance company?

Elizabeth Mann:

Yes, hey George, thanks for asking. Like we said, we’re going to balance it between debt paydown and share repurchases. We don’t – we haven’t established a precise number for debt paydown, other than to state there’s no change to our target leverage range of 2x to 3x in order to maintain our investment-grade rating. Within that, we’ll look to optimize, over time, kind of the best balance of interest savings versus share repurchases. And either way, the majority of it, the significant majority will be on share repurchase. But either way, sort of farther to where we end up within that fairly small range, we’ll still be within the accretion dilution range that we quoted.

Operator:

Our next question will come from Andrew Jeffrey with Truist Securities.

Mark Anquillare:

So Andrew, great question. I appreciate that. I think when we attack new markets, we typically go at it with a theory that we could build some great models. And then as data information starts to flow, we can improve those models. So pet as an example. What we do with travel is not that travel, you would think like, boy, I missed my flight. It’s going to being short. This is the type of travel that focuses on somebody who has a pre-existing medical condition. And to the extent that they’re traveling, how do they get the right medical. So that is a modeled outcome and that has kind of the data we have around it. We can apply those type of models to pets, dogs, cats, more traditional pets, in a way that we can understand how health of the pet and existing conditions cause and will affect payouts. So I hope that’s just an example of ways we can kind of adjust our models. I think the digital engagement and the way we’ve gone at those things are very best-in-class and very digitally engaged. So I think we’re well-positioned there. We do not hold the same data advantage that we do in some of the United States’ admitted lines. But that doesn’t cause us to shy away from and actually provides us with an opportunity to find a way to gather some information. I hope that’s responsive.

Operator:

And our next question will come from Jeff Silber with BMO Capital Markets. Please go ahead.

Mark Anquillare:

Yes. So one of the things I think we tried to do is to share that, even though you would think of subscriptions as being this wonderfully flat ride from quarter-to-quarter, even inside of our subscription businesses, when we bring on new customers, where we have some anniversary of dates, there is a little bit of an up and down inside that. So to the extent that you look at this year’s subscription to last year’s, I think that’s a good rule of thumb. If you look at it quarter-by-quarter, there’s some up and downs. I would not read anything into subscription level growth in the quarter. Everything is very solid, and everything is running as we would expect. So I will kind of reinforce Lee’s earlier comments about the subscription growth being strong and more optimistic.

Operator:

And our next question will come from Faiza Alwy with Deutsche Bank. Please go ahead.

Elizabeth Mann:

Yes. Thanks, Faiza. Thanks for the question. Let me comment a bit on the Insurance-only margin for Q3. While it was a slight year-over-year decline, I think we reminded you that, that was offsetting some of the headwinds in the baseline that included the reallocation of corporate expenses from the divestitures. It included the impact of recent acquisitions, which are themselves lower-margin businesses, and it offsets our investment in cloud and the return of T&E expenses. Offsetting those, there is the natural kind of operating leverage in the business and business growth. So those things kind of offset each other. The one other thing I might call out in the quarter there is it’s also offsetting a slight decrease in the pension credit, which happened at the corporate level. And so the Insurance business had its allocation of that component. And that is expected to continue in the fourth quarter. More generally, as we look ahead to the fourth quarter for Insurance, these headwinds will continue. The impact may not be exactly linear quarter-to-quarter, so that could move around.

Faiza Alwy:

Great. Very helpful. Thank you, both.

Stephanie Moore:

Hey, good morning. I was hoping to get a bit more color on just the international business, maybe some update on how it performed during the quarter and kind of your expectations going forward. Thank you.

Mark Anquillare:

Well, I think you had it right. I think we are seeing growth there, which is in excess of our U.S. business. What I also like to highlight, although not organic at this point, the acquisition of Opta, which is a business intelligence solution up in Canada, is a wonderful business, very much aligned with what we do. And the synergies that we anticipated are greater than we anticipated. So I think we’re making great progress there, and it’s a really nice addition to the Verisk family.

Operator:

Our next question will come from Andrew Nicholas with William Blair.

Mark Anquillare:

Yes, good question. I mean, I think you’ve read it. You’ve seen it. I mean the insurance industry is, like many, under a little bit of pressure. Inflationary costs and inflation in general is causing pain to their bottom line. The cat, along with some other cats, I mean, another big year, probably $100 billion of losses. So that creates stress and pressure on them to look at costs, look at ways. They can be more focused on underwriting and underwriting discipline. So I would tell you that we have this wonderful business that continues to have a wonderful spot inside of their key decisions. And we have not seen anybody trying to move away, but there is definitely pressure there. There is definitely people scrutinizing every purchase and scrutinizing when and how they buy. So we are seeing some of that. And we’ve highlighted some of the areas where it’s been most – fall more on the transactional side.

Andrew Nicholas:

Makes sense. Thanks for the color.

Heather Balsky:

Thanks for taking my question. I’d love to get an update from you guys on your cloud transformation and how it’s progressing. And then just any color you can give on the implementation costs and then when you kind of expect to see some savings, and what type of savings? And then just with regards to your margin expansion goals, does that incorporate the cost of implementation rolling off and those savings flowing through? Or is that incremental to that target?

Heather Balsky:

Thank you very much.

Operator:

Good day, everyone, and welcome to the Verisk Second Quarter 2022 Earnings Results Conference Call. This call is being recorded. Currently, all participants are in a listen-only mode. After today's prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] For opening remarks and introductions, I'd like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Lee Shavel:

Thanks, Stacey, and good day, everyone. I'm pleased to share that Verisk delivered solid second quarter results. As you review the financial results, please be aware that due to the dispositions of 3E and Verisk Financial Services, certain year-over-year comparisons will be distorted by the impacts of these transactions. For example, the decrease in our free cash flow year-over-year was primarily the result of a significant tax on the realized gain from the sale of 3E. Dave will provide more details in his financial review. Second quarter organic constant currency revenue grew approximately 5% and organic constant currency adjusted EBITDA grew approximately 4%. Adjusted for the impact of the suspension of commercial operations in Russia, organic constant currency revenue grew approximately 6% and organic constant currency adjusted EBITDA grew approximately 6%. Adjusted EBITDA margins expanded 140 basis points to 51% through cost discipline, operational efficiencies, the benefit of decisions affecting recent portfolio actions and some very early steps taken in our previously announced margin improvement initiative. This level of margin also includes headwinds from cloud transition and a partial normalization of travel and entertainment expenses as we continue to hold more in-person conferences and visits as we engage with our customers. While overall organic constant currency revenue growth, excluding Russian revenues was below our long-term targets, we saw solid performance in our subscription revenues offset by weakness in our transactional revenues due to the continued impact of the work from home environment on certain businesses as we'll describe. We did see sequential improvements in the second quarter, reflecting some normalization in certain businesses including international travel. Subscription revenue organic constant currency growth excluding Russian revenues of approximately 7%, representing 81% of total revenue was solid and improved sequentially in both insurance and energy. Insurance OCC subscription revenues were above our 7% long-term target, demonstrating the mission critical nature of our solutions. Energy subscription growth improved sequentially as positive pricing momentum from our Lens investment and strong annual contract value growth begins to convert into revenue growth. We also had strong growth in our energy transition, chemicals and metals and mining research. Transactional organic constant currency revenue growth of approximately 2%, representing 19% of total revenue, improved slightly in the quarter with sequential improvement in insurance due to the solid underwriting growth offset by weaker performance and claims due to ongoing declines in workers' compensation claims volumes across the industry of at least 25%. And new regulations that went into effect in early 2022 that are slowing claims settlement. In addition, we are also experiencing some softness in personal lines auto related to the market dislocation as Mark will describe in his section. We have seen normalization progress across our businesses and expect this to continue. However, several of these impacts are having longer cycle recovery times than we originally expected. Energy transactional revenue declined modestly on an organic constant currency basis, due primarily to resource constraints in our consulting business as a result of strong demand from our professionals, particularly in [technical difficulty] region as well as tough compares versus last year's rebound level growth rates. You can find more details about our subscription and transactional growth rates by segment in our quarterly earnings deck, which can be found in the Investors section of our website. Since taking over the CEO role at the end of May, I've been meeting with the leadership teams of many of our key customers and stakeholders. In these valuable conversations where I'm learning how we can improve, I hear repeatedly that Verisk is a critical partner with a unique seat to analyze performance and technology across the industries we serve and most importantly, implement technology change for the benefit of all of our clients. As one of our clients put it not only do we need to Verisk help on this issue, the industry needs your help. Our value proposition is clear. Verisk strategically invests in data and technology at scale to deliver economic value to our customers through operational efficiencies and better decision making. In both the insurance and energy industries, we benefit from the growing demand for data analytics from our customers, along with their increased ability to ingest and use our rapidly growing datasets. We deliver greater value per dollar invested than our clients would be able to individually and we are in an advantaged position as few companies enjoy closer ties to and a greater understanding of their clients businesses than Verisk. This is a responsibility that we do not take lightly, as it is this unique proposition that will power our growth and drive long-term value creation for shareholders, customers and employees. As we focus and define the strategic orientation over 2022, we expect to lay out our plans in greater detail at an Investor Day in the first quarter of 2023, following the reporting of our fourth quarter 2022 results. During the second quarter, we made a series of new leadership announcements as we build out the team that will lead Verisk forward. Of importance to many of you on this call, we recently announced that Elizabeth Mann will be joining Verisk as our Chief Financial Officer. Elizabeth joins us from S&P Global, where she was the Chief Financial Officer of Ratings and Mobility divisions. And before that she was Senior Vice President of Capital Management, which included oversight of the Treasury department Elizabeth will bring very relevant experience and a fresh perspective that I know will improve our organization financially and operationally. She will be joining us on September 15, and we look forward to introducing her to you and she will welcome your perspectives as she comes up the curve on Verisk. In addition, we recently announced that Maroun Mourad has been named President of Claims Solutions. Maroun has been a key leader in our Underwriting and Rating business since 2015, serving as President of ISO, Commercial Lines, President, Global Underwriting and most recently President, Life & Growth markets. Maroun brings deep industry expertise from as many leadership roles at Gen Re, AIG, Arch and Zurich across underwriting, operations and general management. He also brings a great entrepreneurial spirit and a true customer-centric approach to the business and is the right leader to help drive our vision of revolutionizing claims for the industry to automation, technology and advanced analytics. Maroun takes the reigns from Rich Della Rocca who has retired after 27 years with Verisk. We thank Rich for all of his many contributions to Verisk and wish him very well in his retirement. We also announced that Tim Rayner has been named President of Verisk Specialty Business Solutions. Our U.K.-based business centered around our Sequel suite of insurance software. The Specialty Business Solutions team is a linchpin in our strategy to create an automated in interconnected ecosystem for the insurance industry in the U.K., EU and beyond. And Tim is the right leader to drive that strategy. Tim joined Verisk in 2018, after a long and successful career in the insurance industry holding various leadership roles at Miller Insurance Services. Now, let me provide an update on both our progress towards being an insurance focus data analytic solutions provider and our commitment to furthering margin expansion. We're making steady progress on our evaluation of the separation of the energy business. The preparation of the internal separation analysis and standalone financials are ongoing and we have hired a team of outside advisors who are engaged in the next phase of our process of developing alternatives available to us. Our timing expectations remain unchanged and as we have stated previously, our decisions will continue to be guided by shareholder feedback, value considerations and market conditions. As many of you know, we have also undertaken a broad shareholder survey for the benefit of your perspectives, not only on the energy separation, but how we can improve in meeting investor expectations generally. On our EBITDA margin expansion objective, we continue to be very confident in our ability to achieve our stated target to deliver 300 to 500 basis points of margin expansion by 2024 often insurance only baseline of 50% to 51% normalized adjusted EBITDA margins. We have taken some early steps, including the restructuring of our marketing function, office space consolidation and a greater emphasis on our global talent optimization hiring. Additionally, we have embarked on a span of control analysis to guide further operational efficiencies. We continue to experience the impact of the stranded corporate allocations from the businesses we have sold in our reported segment margins. It is important to remember that 2022 is likely to remain quite noisy due to the impact of portfolio changes and implementation costs. As such, we continue to expect to the margin expansion to be increasingly visible over 2023 as we move past the timing impacts of the portfolio changes in implementations and work toward previously stated 2024 target. Now I will turn the call over to Mark for some more color on the insurance business performance.

David Grover:

Thanks, Mark. Before I begin, I want to remind everyone that all consolidating GAAP results are negatively impacted by the recent dispositions of 3E and Verisk Financial Services. That will continue through the first quarter of 2023 when we will earn anniversary those transactions. For the second quarter of 2022, on a consolidated basis, revenues were $746 million, a modest decline from the prior year, reflecting the impact of recent dispositions and headwinds from FX rate changes, which were most pronounced in our Energy segment offset and part by acquisitions. Net income attributable to Verisk increased 28% to $198 million while diluted GAAP EPS attributable to Verisk increased 32% to $1.24. The increase was primarily due to a lower tax provision this year versus the prior-year period, which included a non-cash revaluation charge related to an increase in U.K. tax rates that became [effective] last year. Moving to our OCC results, adjusted for non-operating items as defined in the non-GAAP financial measures section of our press release, we are pleased with our operating results led by continued and consistent growth in our subscription revenues. In the second quarter, OCC revenues grew 5.3% driven by continued strength in our insurance segment. Our subscription revenues increased 6.2% while our transactional revenues increased a more modest 1.7%. Adjusting for $3.5 million in prior year revenues associated with our energy business in Russia, OCC revenues would have grown 5.9% and subscription revenues would have grown 6.9%. Consolidated OCC adjusted EBITDA growth was 4.4% in the second quarter, normalizing for the prior year revenue associated with our energy business in Russia and the incremental expenses associated with exiting that business. OCC adjusted EBITDA growth was 5.7%. Total adjusted EBITDA margin, which includes both organic and inorganic results was 51.0%, up 140 basis points from the prior year, reflecting strong cost and operational discipline as well as the benefits from recent dispositions. This level of margin includes approximately 80 basis points of headwind from recent acquisitions, 60 basis points of headwind from our ongoing technological transformation, including cloud expenses, which we absorbed into our cost structure and 60 basis points from higher year-over-year G&A expenses. Finally, this margin also reflects about 60 basis points of headwind from the timing shifts related to executive compensation, which we told you about last quarter, and will have no impact on full-year results. On that note, let's turn to our segment results on an OCC basis. In the second quarter, Insurance segment revenues increased 6.4%. We saw healthy growth in our industry standard insurance programs, claims analytics, extreme events, life insurance and international specialty business solutions, subscription revenues increased 7.3% while transactional revenues were up 2.7%. We continue to experience strong recovery growth in certain of our transactional businesses, including international travel insurance solution, but continues to be pressured by weakness in workers compensation, as well as softness in personal auto underwriting as the dealing with some dislocation as Mark described earlier. Adjusted EBITDA grew 6.1% in the second quarter, while margins declined 180 basis points to 54.7%. These margins reflect heavier burden from the corporate costs that were previously allocated to businesses that have been disposed the impact of recently acquired businesses, higher cloud expenses and the partial normalization of travel back into the business. This level of margin also includes continued investment in our high growth areas like life insurance and marketing solutions. Energy and specialized market revenues increased 0.8% in the second quarter, normalizing for the impact of suspended operations in Russia, energy revenue growth was 3.6%. The end market continues to be volatile and impacted by geopolitical developments, but we are seeing sequential improvements in our subscription revenue growth rates as our customers are trying to witness some of the data and analytics. Our subscription revenues increased 1.7% and was affected by our decision to suspend all commercial operations in Russia. Normalizing for Russia, subscription revenue growth was 5.2% led by double-digit growth in energy transitions, chemicals and metals and mining research coupled with modest growth in our core research subscriptions. Additionally, we continue to experience strong adoption [technical difficulty] expansion from our Lens renewals. Transactional revenues decreased 2.8% as growth was constrained by consulting resources as we are seeing an elevated level of employee attrition due to a competitive market for expertise in energy and technology. We are working to offset this trend and have demonstrated success in attracting talent to our energy business as well. Adjusted EBITDA decreased 6.4% in the second quarter and margins contracted 90 basis points to 34.6%. Adjusted EBITDA and adjusted EBITDA margin includes $1.1 million in incremental expense related to the suspension of operations in Russia. Normalizing for the Russian impact, adjusted EBITDA growth would have been 3.6%. In addition to the incremental Russian expense, this margin also reflects the partial normalization of travel expense back into the business and higher cloud expenses. It also reflects continued investment in Lens as we further build our capability to garner maximum value from the platform including Lens power, energy transitions, chemicals and metals and mining. Looking to the remainder of 2022, loss of Russian revenues and adjusted EBITDA will negatively impact each quarter by approximately $4 million per quarter. Verisk Financial Services results are included in our reported numbers, but not in the OCC figures. We sold Verisk Financial Services to TransUnion on April 8. Our reported effective tax rate was 18.3% compared to 35.6% in the prior year quarter. The prior year's tax rate was elevated due to a non-cash revaluation charge with a U.K. tax law change, we also benefited in the quarter from higher level stock option exercise activity as compared to last year. Looking ahead to the remainder of 2022, we expect the tax rate to be between 20% and 23% in the third and fourth quarters of 2022, though, there could likely be some quarterly variability related to employee stock option exercise activity. Adjusted net income increased 28% to $244 million and diluted adjusted EPS increased 31% to $1.53 for the second quarter of 2022. These increases reflect organic growth in the business, contributions from acquisitions, a lower effective tax rate and a lower average share count. Net cash provided by operating activities was $130 million for the quarter, down 44% from the prior year period due to a tax payment of $122 million primarily related to the gain on sale of 3E as well as the loss of operating cash flows related to the dispositions. Adjusting for these unique items, operating cash flow would have increased by a double-digit rate year-over-year. Capital expenditures were $69 million for the quarter, up 11% versus last year, reflecting increases in capitalized software development, offset in part by savings on third-party hardware and software as we move to the cloud. We continue to expect our capital expenditures to be within the range of $280 million to $310 million. This range supports our plans to increase our software investment through the acceleration of our pace of development in Lens and extending software development into core underwriting that we believe there is similar opportunity for platform enhancement. Related to CapEx, we now expect fixed asset depreciation and amortization to be within the range of $210 million to $230 million and intangible amortization to be approximately $170 million. Both depreciation and amortization elements are subject to FX variability, the timing of purchases, and completion of projects and future M&A activity. During the second quarter, we returned $374 million in capital to shareholders through share repurchases and dividends as our strong cash flow allows us to invest behind our highest growth and highest return initiatives while also consistently returning capital to shareholders. Additionally, in June, we entered into a new $300 million accelerated share repurchase agreement to be completed in the third quarter. And now, I'll turn the call back over to Lee for some closing comments.

Operator:

Thank you. [Operator Instructions] Our first question is from Heather Balsky with Bank of America. Your line is open.

Lee Shavel:

Thank you, Heather. I'll start off and then ask offer Mark an opportunity to provide additional color as the Chief Operating Officer. He has been leading that initiative and really driving it's today. At a high level, as I indicated in the call, we are very confident that we will be in a position to deliver on the expected range of margin improvement of 300 to 500 basis points of that 50% to 51% baseline for an insurance only business described the elements that we are considering. We've taken a look at all alternatives that have been identified to us internally and externally. And are working against those directly, some of those have already been underway. I'll let Mark kind of describe, but some of the things that we have been doing. In terms of phasing, we are [technical difficulty] at this point to give specific direction potentially as we kind of look towards the Investor Day, and we have a clear picture of 2023 and specifically the macroeconomic environment that we're looking at. We might be in a position to provide some greater clarity around that. But this at this point, there are too many moving pieces for us to estimate. But as I indicated, we'll expect to see clear progress across 2023. And with that, just offer Mark an opportunity to add any color.

Lee Shavel:

And Heather, the only thing I would add is that of course, as I think all companies are these days are aware of the impact of inflation across the business, and particularly the competitive environment from a compensation standpoint. And so we have factored that in at this point, we believe that we can absorb those costs make some steps and improving our retention and still deliver on that. So to your macroeconomic comment, we do recognize that there have been some pressures that may influence the results in 2023 and 2024, but reiterate our confidence in the original target that we set out.

Operator:

The next question is from Ashish Sabadra with RBC Capital Markets. Your line is open.

Lee Shavel:

Thank you, John. Mark, do you want to take that.

Lee Shavel:

And so, John, at a high level, as Mark describing, there are a lot of individual effects on the transactional businesses, some of which are shorter term timing related, there may be some systemic or secular elements on the workers comp. But generally, I think across those transactional businesses, we did see sequential improvement from the first quarter, the second quarter and I think the kind of the stronger trend will be kind of a continued normalization. So certainly, there are a lot of factors and individual elements, but we feel as though we should see kind of continued normalization on those growth rates.

Operator:

The next question is from Alex Kramm with UBS. Your line is open.

Lee Shavel:

Yes. Thank you for the question, Alex. So in terms of overall timing that remains the same. We are on track to have a decision on energy by the end of the third quarter in conjunction with our third quarter earnings release with execution of that alternative to actually follow given the various kind of timing of executing on that. And with that, timing, I would describe this as being exactly where we anticipated completing the kind of separation of the accounting work and analysis. As I indicated, we have advisors that are engaged in this project, they along with our team are actively evaluating all of the alternatives. And so everything from a private sale to a separately capitalized spin out as well as retention are still alternatives that we are weighing. We're being guided by what we think is in the best interest of our shareholders from a value perspective and factoring risk in timing. I've seen the markets are different almost by definition from where we were when we originally announced this. And so the financing market as a function of changes in interest rates is more challenging than it was previously. And naturally, obviously equity markets are also down. Those are all factors that we will consider as we think about the value of the business and the value to our shareholders.

Lee Shavel:

Thank you.

Toni Kaplan:

Thanks so much. Wanted to ask also about energy, ex-Russia grew about 3.6% organically in the quarter, very slight deceleration sequentially. I maybe would have thought that just given how strong energy prices have been year-to-date and I would think it's a really conducive environment for selling more information just given all the uncertainty, you also of the Lens platform that you launched in the last couple of years. So just what's holding back growth in this segment. Why isn't this growing 5% or more just what's holding it back. Thanks.

Toni Kaplan:

Thank you so much.

Manav Patnaik:

Thank you. Good morning. I was hoping you could perhaps talk about in a life insurance business there, maybe just a sense of how big it is today. And just what the - how we should think about the strategic vision for building up life insurance?

Mark Anquillare:

Yes, I look forward to and thank you for the question. I think we talked about life and marketing. Life has been a wonderful story. What we've seen is, inside of those insurers that are really looking to upgrade probably decades, old technology. Our fast solution has been winning the day and that is a combination of trying true traditional life insurers and there's been a lot of the secondary market or a lot of M&A, where private equities getting involved and buying books of business. Because we're able to implement quickly and then a very low cost in this no-code low-code environment we have been the kind of gender and strategic partner of choice. The beauty of these contracts at the beginning is a little bit implementation, but everyone is going to be moving on to the platform and what you see is not only do they put their business on, they start adding lines and they start extending across legal entities. So we have a combination of new logos, but also more business coming onto the platform. And as you think about the way we - for that obviously, the subscription revenue associated with those like - are going to continue to grow nicely. What we are doing is kind of uniquely positioning solution with not only a combination of great modular software, but analytics, so you can better understand - underwrite business which parallels a lot of the things we did in P&C. So we've kind of taken a little bit about P&C playbook, we've augmented with some great technology and I think we're starting to really make a difference in the life insurance space so, very happy with the progress there. I don't know, we've given the size of that business, but it is certainly growing quite quickly with the high double-digits

Mark Anquillare:

And just to tie it altogether, we referenced [indiscernible] that's an example of us kind of bring it in industry dataset and industry organization to fight fraud things that we do well in the P&C side. So kind of a good example of these comments.

Operator:

The next question is from Jeff Silber with BMO Capital Markets. Your line is open.

Lee Shavel:

So Jeff, I'll start and then I'll ask is Stacey to describe it. Essentially, we have the allocated corporate costs that exist, but we still are - we still bear or simply be allocated on a variety of basis, but generally kind of proportionate to the scale of the business. And so that impact, we have to allocate those cost somewhere and they are being allocated to the insurance in the energy business. Stacey, you feel [ph] you're embellishing.

Jeff Silber:

Yes, I'll say, I'll definitely follow-up. Thanks so much. Appreciate it.

Faiza Alwy:

Yes, hi. Thank you. And so, I was hoping to get a little bit more color on the international business, and you mentioned some management changes in the U.K. Just wanted to get clear in terms of - how you see that business trending. How it trended in the quarter and how you see a trending going forward?

Mark Anquillare:

Yes, that's great. And I think we highlighted that what you would probably recognize Sequel suite of insurance software has been the bigger element and the big grower over U.K. and beyond. We also have an underwriting business that kind of [technical difficulty] as it relates to understanding risks, understanding exposures. But we go beyond there and talk about insurance as it relates to travel and even pet insurance. Those have both come back and it started to grow nicely. That has been nice grower, once again, we're thinking of our international businesses contributing to and actually helping us accelerate our overall organic growth. Other two things that I'll quickly highlight is we kind of continue to extend selectively often it does a lot of the things that we do here in United States, as it relates to property underwriting, they do it in Canada. So, that is a new acquisition that has been a good contributor and kind of new to the Verisk family as well as ACTINEO, which takes us into Germany again inside the claims space, primarily around auto. So our approach broadly, it's been more around software and a little bit on the claims side around services augmented with solutions and things that we do in the U.S., trying to export them with a local footprint and all of that has been successful with - our international growth.

Faiza Alwy:

Great, thank you.

Andrew Jeffrey:

Hi, good morning. Appreciate taking the question and all the color on the business. Mark, I wanted to ask you about another relatively new area for you, which is marketing. And I wonder if you could sort of give us a sense of what the long-term roadmap to that business looks like. And also I'm wondering if there are any cyclical considerations, discretionary spend considerations you mentioned some pressures that underwriters are facing today. Is that a business you think grows through the cycle, how do we think about that?

Andrew Jeffrey:

Yes, it does. Thanks a lot.

Jeff Meuler:

Yes, thanks. And part of related question, but related to the personal auto underwriting, I guess, it seems like the insurers are - rate actions now. So if you can run this forward because I would think there is also some countercyclical demand in terms of consumer rate shopping to save money for going into a recession. So just -- are there any historical parallels in terms of like what's the lag between those rate actions? And when you see the increased churn that has the positive impact on your business and then just to be clear on the last answer since you said there is probably some cyclicality. Are you seeing delayed uptake because of the cyclical headwinds of LightSpeed in the marketing capabilities, because it sounds like the markets talking a lot about a need for more sophisticated segmentation? Thank you.

Lee Shavel:

And Jeff, I would just add kind of a broader overlay which is as Mark is describing, we are seeing some of that near-term pressure on in the business, but longer term, we believe the fundamental driver is the demand for that marketing technology, that demand for kind of delivering that data in that underwriting decision increasingly at the point of sale is what we continue to drive the growth in that business as the industry moves to deliver on that digital experience that Mark described.

Operator:

The next question is from Andrew Nicholas with William Blair. Your line is open.

David Grover:

Yes. Andrew, thank you for the question and the opportunity to address that. I want to be very clear. We believe that the transaction revenue over time, it's something that is -- at least at the 7% and actually historically has contributed a higher level of growth and reflects in a lot of ways the applications of new data and new technology that is expressed at the initial stage in transaction related activity that generates revenue for us. So I think what we are experiencing right now are the impacts a bit of the overhang of the pandemic, more people working from home, as Mark described workers comp impact on auto in the macroeconomic environment. But we maintain complete confidence that the transactional driven businesses over time and on a normalized basis will be additive to our overall growth rate and can certainly exceed our 7% long-term target

Andrew Nicholas:

Thank you.

Andrew Steinerman:

Hi, I just wanted to ask if directionally you expect your energy and specialized markets business to accelerate in the second half of the year. Lee, you did point out like you see on Slide 6 that non-subs business and energy and specialized was down because of consulting constraints. Do you expect those constraints to resolve themselves? Or is that going to be with us near-term and then you mentioned solid growth in ACV. I would think the solid growth in ACV would translate into stronger growth in -- for energy and specialized.

Andrew Steinerman:

Thank you.

Hans Hoffman:

Hi, this is Hans Hoffman filling in for Hamzah. Thanks for taking my question. Could you just walk us through how you're thinking about further M&A and where the focus is there and then sort of what the pipeline looks like.

Hans Hoffman:

Thanks.

George Tong:

Hi, thanks. Good morning. You committed to expand margins 300 to 500 bps off 50% to 51% baseline for an insurance only business. I wanted to confirm that you can achieve those margin targets regardless of the outcome of your energy strategic review. And since you've taken a close look at costs and the insurance business as part of the strategic process, how likely are you able to also take out medium term organic revenue growth for insurance beyond the historical 7% range.

George Tong:

Sure. The second part is since you've already taken a look at the insurance business from a cost perspective. Have you also taking it aligns to the business from a growth perspective and insurance, how likely are you able to take up the medium-term organic revenue growth for insurance beyond 7%.

George Tong:

Got it. Thank you.

Operator:

Good day, everyone, and welcome to the Verisk First Quarter 2022 Earnings Results Conference Call. This call is being recorded. Currently, all participants are in a listen-only mode. After today’s prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Scott Stephenson:

Thanks, Stacey. Good day, everyone. And thank you for joining us for our first quarter 2022 earnings conference call. The past 21 years at Verisk had been an incredible and rewarding journey. It's been my absolute privilege to serve as Chairman and CEO during such a transformative time for our company. I'm incredibly proud of the growth that we delivered and the value that we created for customers, employees and shareholders. And we always deliver this value by acting with the highest level of integrity. Our company's success has always been a team effort. To that end I'm delighted we have such a deep bench of talent, including our incoming CEO. Lee Shavel and incoming President, Mark Anquillare, who I know will drive continued growth for our company and Verisk towards becoming a global insurance focused data analytics solution provider. I look forward to seeing the work that all Verisk teammates will do to drive innovation and growth or long-term success. As this is my final earnings call, I also wanted to take a moment to thank all the shareholders and analysts that have covered Verisk for your effort and your support over the years. And with that, I'll turn the call over to Lee.

Mark Anquillare:

Thanks, Lee. Before I begin, I also want to take a moment to thank Scott for all that he has contributed to Verisk. The legacy that you're leaving is rooted in the way our teams innovate, and always deliver for our customers. I wish you the very best in your retirement. It has been a pleasure to partner with you for all these years. And I'm excited to build on the strong foundation of success as we move to the next chapter of Verisk story. I'm pleased to share that the insurance segment delivered another solid quarter. Across insurance we're seeing strong results from both commercial and personal lines and seeing contributions to growth from our newly acquired businesses like Marketing and Life Insurance Solutions. Within our core, underwriting and Claims Solutions, growth is being driven by strong renewal cycles with existing customers, as well as from the addition of new customers and expanded use cases for Claim Solutions. Within marketing, we're seeing strong growth driven by continued adoption from T&C carriers using our solutions to optimize lead acquisition programs, build more intelligent marketing, segmentation and monitor portfolios for right timed outreach, and for improved customer retention. We're excited about the opportunity head as we combine Jornaya with our newly acquired in future business to further enhance these capabilities by synergizing products and offerings. Our Life Insurance Solutions continue to help our life and annuity customers along with their digital transformation. All the while delivering very strong growth for Verisk with the addition of new customers as well as expansion of relationships with existing customers. Life insurance recognize the benefits of a module and flexible software solutions and are standardizing on fast platform. Within stream events, we are seeing strong growth in our core Touchdown platform with the signing of new customers as well as extension of multiyear deals with existing customers. In addition, the catastrophe bond market continued to be strong, with Verisk participating in more than half of the deals placed in the quarter. Our sustainability business also had a very strong quarter as demand for ESG and resilience global risk indices in both the corporate and financial sector whose strong double digits. In the quarter we launched sovereign ESG ratings targeting the right financial sector, and early interest is encouraging as our focus on the risk is an unmet need in the marketplace. During the quarter, we experienced recovery in many of our transactional businesses that were negatively impacted by the pandemic, including travel, international auto and claims. This was offset in part by continued weakness in our workers compensation business, as carriers are adjusting to new regulation within the industry as well as tougher compares on the storm-related revenue versus last year's ice storms in Texas. In our many discussions with our customers, we continually hear the same message, the insurance industry is healthy and focused on to become more digital, more efficient and more automated. While insurers are experiencing increasing costs related to inflation, rates are hardening reflecting these inflationary factors. This should lead to faster premium growth. In addition, rising interest rates are helping the investment portfolios of our customers driving better profitability. All that said, cost efficiency continues to be a big focus of our customers has they work to be quicker, more automated and drive savings. The growth of our data sets has been a strategic focus as we work to further advance our mission to help our customers better slug risk. To that end, we've been expanding the data encouraging of our commercial property database, and now have over 15.4 million properties up from 12.2 just a year ago, goes to become a combination of onsite surveys, virtual technologies, third-party data sources, and our ability to accurately model key characteristics using the data we have to expand and update our databases more frequently. Separately, we've added 10 new data contributors into our core statistical databases for ratemaking in the first quarter. On [indiscernible] this quarter has been wonderful. We successfully hosted hybrid customer events, with many in person sessions. In February, we held our signature Elevate Conference, and in March, we held our Insurance Fraud Management Conference, both of which successful. Across the two events we had almost 600 attendees in person and another 900 plus through virtual sessions. It was great to be in person with customers again. During the quarter we acquired Opta, Canada's leading provider of property intelligence and innovative technology solutions, the acquisition further expands their footprint in the Canadian market, it supports optic and reshaping risk management with valuable business intelligence. As the only organization in Canada that regular gathers and validates data through ongoing research often is widely considered the industry standard for valuations, property risk intelligence and loss control services. This transaction offers Verisk immediate expansion into Canada with the leading provider of underwriting data and analytics to carriers and provides opportunity for product harmonization across the Opta and Verisk portfolio. We're excited to welcome the Opta team to the Verisk family. Finally, I want to take a minute to add to the comments that we made around operational efficiency. Within the insurance segment, we have engaged in a detailed study across all our costs throughout our business units. We have identified areas of expenses to be eliminated without impacting future growth opportunities. Such opportunities exist in real estate, technology infrastructure, increased use of our low-cost talent locations for open positions, improved sourcing and procurement, product optimization, and we work diligently to realize these cost savings in a timely and efficient manner. Now, let me turn the call over to interim CFO, David Grover, for the financial review.

Lee Shavel:

Thanks, Dave. In summary, our businesses are strong, and we are making important progress executing on our strategic and operational initiatives, including the separation of the energy business and our improvement in margins. As we evaluate options for the energy business, we will continue to focus on pursuing the most value creating path for our shareholders and all the various stakeholders. We are confident that the transformation of our portfolio and active cost management, we can return to growth in line with our long-term objectives, and deliver OCC adjusted EBITDA growth ahead of revenue growth in 2022 and beyond. We continue to appreciate the support and interest in Verisk given the large number of analysts we have covering us, we ask that you limit yourself to one question. And with that, I'll ask the operator to open the line for questions.

Alex Kramm:

Yes. Hey, good morning, everyone. So thanks for some of the clarification on the base for the margin upside. I think there's been some confusion. Maybe just and I think you raised to that a little bit. So maybe I didn't catch us fully. But can you just talk -- remind us of the cadence to get to that 300 to 500 basis point improvement? I think you made a comment about 2023 that you may see some benefits. And then maybe related to that, on 2024. We talked about 300 to 500. Is that really something you see realized in 2024 for the full year or is it something that you would achieve by the end of the year and it's really a 2025 event? So maybe a little bit more of a cadence will be helpful. Thank you.

Operator:

Your next question comes from the line of Toni Kaplan from Morgan Stanley. Your line is open, Please ask your question.

Lee Shavel:

Sure, Greg. Thank you. And let me start off, I will ask Mark to supplement my comments. But we have looked comprehensively at all of the suggestions that we have received from shareholders. We have examined those. We have drilled into them. And we've had conversations with the business. And there is naturally supporting this a substantial amount of opportunity that we are going to be pursuing over the next several years. And I think it's important to understand that that 300 to 500 basis points reflects not just the quantum of the cost savings, but also the opportunities for other investment within the business that we think drives stronger growth rates, good returns on those types of investments from an internal and from an external perspective. And so I think to answer your question, we do see opportunities from a cost savings standpoint that go beyond that. But we are also making certain that we are utilizing, as I've described before, the opportunity for investments and near-term in projects that may have a lower margin, but represent good growth, good return and operating leverage over time. So hopefully that gives you a sense of both the scope, the quantum that we are looking at and how it relates to our overall management of the business for growth and return objectives. Mark is there anything that you would want to add to that?

Operator:

Your next question comes from the line of Ashish Sabadra from RBC Capital Markets. Your line is open. Please ask your question.

Lee Shavel:

So Ashish thank you for the question. I'm going to start off by making a high-level comment with regard to our subscription revenue versus non-subscription revenue and insurance and then turn it over to Mark to give some compositional color around that. But to your question, in Dave's comments, we highlighted that for insurance in the first quarter, we achieved 7.2%, organic constant currency revenue growth in our subscription revenue. And the weaker part of the business is, was in our non-subscription revenue. And that was a function of within our Medicare set aside some caution with regard to regulatory changes, hangover from the pandemic, pressured some of that transactional revenue. In addition, we continue to see lower auto purchasing activity. And then, finally, we had a tougher compare due to the Texas ice storms in the prior year period. So I think not stepping away from the fact that the 6% was below that overall target, in the most important component of the largest component, the subscription revenue growth, we think was very solid, and we have some near term transactional revenue. That was really the primary driver of that lower growth rate. But Mark, press within the businesses, you can give some context around the strength on the subscription side and any of the other transactional elements.

Lee Shavel:

And Ashish, thanks for that mark. And Ashish, I want to also come back and address your question on the longer term growth trajectory. And certainly, within our existing businesses, we see a constructive environment and good demand. But one area that I'll be focused on and this comes out, I think some of my past experience, as well as conversations with customers, is that the insurance industry as a whole continues to look for opportunities to improve their efficiency to take substantial costs out of their operations, to improve the digital experience with their customers. And I think our ability from where we sit to act as their technology partner in more of a utility role, where we can find solutions for the industry is a tremendous opportunity for us to think more broadly about what we can do, because if we are creating value for the industry, we're creating value for our clients. And I think that will naturally drive value for our shareholders.

Andrew Steinerman:

Hi. I just wanted to talk about that margin expansion. So you saying the base now is 50 to 51? Going up 300 to 500 basis points that's 53 to 56 by '24. Does that include energy or does that kind of 53% to 56% margin assume energy is not part of the business. And then if you can make a comment on if the tax rate for the various business meaning x energy will be much different than the businesses today.