Verisk Analytics, Inc. (NASDAQ:VRSK) Q1 2024 Earnings Call Transcript

Verisk Analytics, Inc. (NASDAQ:VRSK) Q1 2024 Earnings Call Transcript May 1, 2024

Verisk Analytics, Inc. beats earnings expectations. Reported EPS is $1.63, expectations were $1.52. VRSK isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to the Verisk First 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 Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

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. The earnings release referenced on this call as well as our traditional quarterly earnings presentation and the associated 10-Q can be found in the Investors section of our website, verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC. A replay of this call will be available for 30 days on our website and by dial-in. As set forth in more detail in today’s earnings release, I will remind everyone, today’s call may include forward-looking statements about Verisk’s future performance, including those related to our financial guidance.

Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance is contained in our recent SEC filings. A reconciliation of reported and historic non-GAAP financial measures discussed on this call is provided in our 8-K and today’s earnings presentation posted on the Investors section of our website, verisk.com. However, we are not able to provide a reconciliation of projected adjusted EBITDA and adjusted EBITDA margin to the most directly comparable expected GAAP result because of the unreasonable effort and high unpredictability of estimating certain items that are excluded from projected non-GAAP adjusted EBITDA and adjusted EBITDA margin including, for example, tax consequences, acquisition-related costs, gain/loss from dispositions and other nonrecurring expenses, the effect of which may be significant.

And now, I’d like to turn the call over to Lee Shavel.

Lee Shavel: Thanks, Stacey. Good morning, and thank you for participating in this morning’s call. 2024 is off to a solid start at Verisk as we are building upon the strong performance we delivered in 2023. Elizabeth will provide the detailed financials, but I am pleased to share that we delivered 6.9% organic constant currency revenue growth with strong underlying subscription growth of 7.8% that was broad-based across most of our businesses. Our focus on cost discipline and operating efficiency produced strong double-digit organic constant currency adjusted EBITDA growth and healthy margin expansion, translating into 26% adjusted EPS growth. This quarter’s performance was in line with our 2024 guidance. We are driving predictable and consistent growth by harnessing the power of our more integrated insurance-focused company and executing against our strategy to partner with the insurance ecosystem to help all participants address their most pressing challenges.

Our execution priorities are unchanged from those that we communicated to you a year ago at Investor Day. We are building on the progress that we made in 2023 as we continue to focus on three key things: one, delivering consistent and predictable revenue growth; two, driving operating efficiency and profitability; and three, allocating our strong free cash flow with discipline and a focus on return on investment. I’ve spoken on this call many times about our efforts to engage with our clients on a more strategic level. To that end, in April, we hosted the Verisk Insurance Conference, or VIC as it is affectionately known in the industry, which attracted a record number of attendees from across the global insurance ecosystem, including representatives from the carriers, reinsurers, regulators and our channel partners.

VIC is our flagship event where we strategically engage with all our ecosystem clients and partners through joint discussions and presentations as an integrated One Verisk. This year’s event featured over 70 different educational sessions and panel discussions on some of the industry’s top-of-mind issues, including fairness, generative AI, fraud, climate risk, rate adequacy and social inflation. One of the best attended sessions was a panel discussion about Florida property insurance and featured representatives from key market players, including the carriers, regulators, legislators and Verisk. The discussion focused on lessons learned from the insurance crisis in this important and high-risk market and what other states can learn from this experience.

The event also featured a solutions gallery that showcased many of our offerings, covering risk, natural perils, commercial property, home and auto as well as several of our key technology ecosystem partners. The event has generated strong collaboration ideas with our clients and partners as well as leads for our sales teams. It also builds upon the goal that we set last year to elevate the strategic dialogue with our clients and continue our path to serve as a data and technology partner to the global insurance ecosystem. During the Verisk Insurance Conference, our Extreme Events division unveiled its latest innovation, Next Generation Models or NGM, for insurers, brokers and reinsurers. Verisk is the first firm to release its full suite of over 100 models across all perils and geographies to a next-generation financial modeling framework.

And these models are all now accessible via our Touchstone platform. As the rising cost of catastrophes and an increase in losses from frequency-driven perils such as severe convective storms has challenged the industry, Next Generation Models provide a better quantification of uncertainty and enhanced capabilities to assess insured losses across the insurance industry more accurately. With next-generation models, our clients can make better financial assessments of loss potential and more accurately represent the risk to their policyholders, their businesses and their partners. NGM also offers new advantages to support complex insurance policy structures and deal with new terms and conditions that previously went unmodeled. Clients can effectively manage risk, both at the portfolio and individual levels using the NGM suite of models.

NGM represents the next step in our journey towards a fully SaaS native platform, underscoring our commitment to continuous investment in advanced data and technologies and capabilities on behalf of the industry. Next, I’d like to provide you with an update on our Core Lines Reimagine program. As previously mentioned, we are on a journey to digitize and enhance our essential suite of industry standard solutions to make our forms, rules and loss cost content easier to access, use and customize and provide much needed updates and insights. We have made good progress in modernizing our internal systems and processes for digital-first content creation, enabling us to deliver new client-facing modules. We recently introduced Filing Intelligence, which is accessible on our new platform.

This tool simplifies our filings delivery process by consolidating all necessary documents, forms, rules and loss costs into one accessible interface, eliminating the need for manual review and piecing together multiple documents. Filing Intelligence digitally connects all documents related to each filing, streamlining the process for users and ensuring seamless access to essential information. On the actuarial front, we recently added Actuarial Hub to the new platform. Within the hub, clients can access new insights such as the ISO Experience Index, the loss cost activity dashboard and a new series of actuarial prospective articles. These resources offer deeper insights into our filings and data, empowering our clients to make quicker, well-informed decisions.

Looking ahead, we plan to launch additional customer-facing modules that will provide even more value to our clients by introducing new proprietary analytics, workflow tools and insights to further streamline processes and enhance underwriting accuracy for our clients. Overall, we’re excited about the progress of the Reimagine program. This initiative is already driving returns for Verisk as we are receiving positive client feedback and experiencing better price realization in contract renewals. Lastly, today is an important day as May 1 is officially Verisk Generative AI day. Our technology teams from across our global offices and business units are gathered at our Jersey City headquarters to collaborate and share best practices and learnings on their work with GenAI for both customer-facing initiatives and internal efficiencies.

More specifically, all of our divisions have active GenAI pilots running with many other areas in active development. And within our claims business, we have three solutions in production and available today for clients. Generative AI continues to be top of mind for our clients and is a topic of much discussion in my conversations with industry executives. One very promising application that I’m seeing is the use of generative AI to gather and predigest massive amounts of information to organize and distill it for the insurance professional, improving and focusing their expertise, not replacing it. This is a natural fit and opportunity for the work we do in curating and managing the needs of the global insurance industry to facilitate more effective and efficient workflows.

As we have done with other forms of advanced technology, GenAI is an area where we can invest for the benefit of the industry at a lower cost of investment in ownership than any single client can do on their own. With that, I will turn it over to Elizabeth to cover the detailed financial review.

Elizabeth Mann: Thanks, Lee, and good day to everyone on the call. I am pleased to share that Verisk delivered a solid first quarter of 2024. On a consolidated and GAAP basis, first quarter revenue was $704 million, up 8% versus the prior year, reflecting solid growth in underwriting and more modest growth in claims. Income from continuing operations was $219 million, up 12.9% versus the prior year, while diluted GAAP earnings per share from continuing operations were $1.52, up 19.7% versus the prior year. This level of EPS growth reflects strong revenue and profit growth, combined with a lower effective tax rate and a lower average share count due to the large accelerated share repurchase program in 2023. Moving to our organic constant currency results for the first quarter.

Adjusted for nonoperating items, as defined in the non-GAAP financial measures section of our press release, our operating results demonstrated solid growth for most of our businesses. OCC revenues grew 6.9% with growth of 7.8% in underwriting and 4.7% in claims. This was an acceleration from the fourth quarter in both subsegments and was in line with our expectations and 2024 financial guidance. Our subscription revenues, which comprised 80% of our total revenue in the quarter, grew 7.8% on an OCC basis during the first quarter. We experienced broad-based growth across most of our subscription-based solutions, with strong renewals and expanded relationships with existing customers and solid sales of new solutions. The largest contributor to subscription growth was forms, rules and loss costs.

We are benefiting from a stronger renewal cycle and improved price realization as we continue to modernize our platform and deliver more value and insights to our clients through our Core Lines Reimagine program that Lee spoke about earlier. In anti-fraud, we experienced underlying strength in the business with growth augmented by the continued benefit from the conversion to subscription from previously transactional customers that we mentioned throughout 2023. Most of our clients have successfully completed this transition. Therefore, the benefit will continue to taper throughout 2024. And within underwriting data solutions, we are seeing a positive client response to our enhanced commercial lines property solutions, which have benefited from our expanded coverage as our database of commercial property records has grown by over 200% since 2020 and now has over 15.9 million records.

Our transactional revenues, representing 20% of total revenue in the first quarter, increased 3.1% on an OCC basis, reflecting a tough comparison versus the prior year which benefited from the strong auto shopping activity and nonreaction activity. During the quarter, we saw continued growth across our auto suite of solutions, though growth rates have moderated as we expected. Regarding auto, due to recent changes in our data source, we have decided to discontinue our existing telematics offering. The impact of this is immaterial in 2024 with less than $1 million of revenue impact. We do not expect this to have any impact on the remainder of our auto solutions. Our transactional revenue growth also benefited from double-digit growth within life insurance solutions as we saw strong customer demand for incremental services.

And within our extreme events business, we saw better-than-expected transactional growth driven by securitization. This was offset in part by lower weather-related transaction volumes in property estimating solutions and the impact of the conversion to subscription within our anti-fraud business. Moving now to our adjusted EBITDA results. OCC adjusted EBITDA growth was 10.6% in the quarter, while total adjusted EBIT margin, which includes both organic and inorganic results, was 54%, up 180 basis points from the reported results in the prior year. As we’ve said in the past, the margin rate in any given quarter can be influenced by revenue mix and timing of spending, so we think it’s useful to look at our margin on a trailing 12-month basis which, as of March 31, 2024, was 53.9%, up 120 basis points over last year’s level.

This level of margin expansion reflects the positive impact of sales leverage and cost discipline. We also experienced a modest margin benefit from nonoperating items, including foreign currency changes, but this was largely offset by margin impact from recent acquisitions. Our current margin rate also reflects continued organic investment for future growth, including our Reimagine program, the replatforming of key solutions in extreme events and property estimating solutions, our new financial and human capital systems as well as exploration of advanced technologies like GenAI. We remain confident in our ability to meet our margin expansion targets, while strategically investing in future growth opportunities. Continuing down the income statement.

Net interest expense was $29 million for the first quarter compared to $26 million in the prior year. The current level of net interest expense reflects interest income on lower cash balances than one year previously. Our reported effective tax rate was 20.3% compared to 27.1% in the prior year quarter. The year-over-year decrease in the tax rate is primarily due to tax charges incurred in structuring the sale of our energy business last year as well as certain discrete items that we do not expect to repeat in the remaining quarters of the year. We continue to believe that our tax rate for the full year 2024 will be in the 23% to 25% range, so there could be some quarterly variability related to employee stock option exercise activity. Adjusted net income increased 19% to $234 million, and diluted adjusted EPS increased 26% to $1.63 for the quarter.

The increase is primarily driven by solid revenue growth, strong margin expansion, a lower effective tax rate and a lower average share count. Our lower average share count reflects the impact of the large accelerated share repurchase program we completed in 2023 using the proceeds from the divestitures. This was partially offset by higher depreciation and amortization and higher net interest expense. From a cash flow perspective, on a reported basis, net cash from operating activities increased 1.9% to $372 million, while free cash flow increased 4.2% to $317 million. Both cash flow metrics reflect the impact of our indemnification obligation related to our former financial services business, which we accrued for in 2023. It is also important to note that the prior year cash flow figures still include the results of our previously divested energy business.

So these growth figures understate the cash flow growth of our insurance-only business. We are committed to returning capital to shareholders. During the first quarter, we initiated a $200 million accelerated share repurchase program, which was completed in April. Our $0.39 per share dividend was up 15% from the prior year. We continue to have $1.4 billion in capacity remaining under our repurchase authorization. We are pleased with our results for the first quarter and reiterate our outlook for 2024. More specifically, we continue to expect consolidated revenue for 2024 to be in the range of $2.84 billion to $2.9 billion. We expect adjusted EBITDA to be in the range of $1.54 billion to $1.6 billion and adjusted EBITDA margin in the 54% to 55% range.

We expect our tax rate to be in the range of 23% to 25% and adjusted earnings in the range of $6.30 to $6.60 per share. A complete listing of all guidance measures can be found in the earnings slide deck, which has been posted to the Investors section of our website, verisk.com. And now, I will turn the call back over to Lee for some closing comments.

Lee Shavel: Thanks, Elizabeth. In summary, our execution priorities remain consistent with those communicated at Investor Day, continued focus on revenue growth, operating efficiency and disciplined cash flow allocation. Following a strong 2023, we are pleased to see 2024 off to a strong start with implied growth of 7% in consolidated revenue and 9.5% in adjusted EBITDA, at the midpoint of our 2024 financial guidance. Our focus on heightened strategic engagement with clients has strengthened relationships and 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. 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.

See also 11 Oversold MidCap Stocks To Buy Now and 15 Most Affordable Grocery Stores In the US.

Q&A Session

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

Andrew Steinerman: How would you assess the health of your clients, meaning the P&C insurance industry now versus 3 or really kind of 6 months ago and how might that impact Verisk this year?

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. And so I think the combination of that growth, the improved profitability, some reserve strengthening now beginning to offset some of the heightened cat losses that they’ve experienced has generally put them in a position where they are feeling positive about the outlook, the — their ability to achieve better pricing and price adequacy from their standpoint on rate.

There clearly are risks that they continue to face in terms of heightened catastrophic losses or cyber exposure or exposure to increasing casualty losses. But generally, their financial position is stronger and that has, one, both a benefit for us because we do participate to some extent in their overall premium growth, but also, I think, importantly, is that, that financial strength is making them more constructive and engaged in where they can be making investments to improve their business, whether it’s on the underwriting side or it’s on the efficiency and processing front.

Operator: Your next question comes from the line of Jeff Meuler with Baird.

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. But you continue to call out headwinds in your marketing solution revenue. So maybe talk through that and if it’s just a lag effect and a pipe is building.

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. I would also note that within that business, it is not entirely insurance for us that we’re providing insights to some other legacy industries. And so that may cause a differentiated output. But I think your general observation is true.

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

Ashish Sabadra: I wanted to focus on the solid sales of new solution. The question there was, Lee, thanks for providing some good details on the GenAI, but I was wondering if you could provide an example of new solutions that are gaining traction. And then at the Investor Day, the new initiative was expected to generate 150 to 200 basis points of incremental revenue growth going into 2025. And I was just wondering if you could comment on how that’s tracking.

Lee Shavel: Thank you, Ashish. Let me take the first question since you’re kind of referencing Investor Day, and I’ll let Elizabeth add to this if she feels necessary. But what we outlined at Investor Day was incorporated into our guidance in terms of where we felt we could achieve incremental revenue growth. Naturally, we saw the performance in 2023, which was a representative of the — of achieving those higher growth rates. We’re really pleased in the first quarter to be able to similarly deliver strong growth on top of that. And so we have kind of a compounding effect. And I think that reflects in large part, the achievement of some of that revenue growth upside. So I would look to the fact that we are meeting and exceeding the guidance that we set at Investor Day.

Elizabeth Mann: Yes, I agree with Lee there. And I think in terms of examples of new products gaining traction, you’ve heard us talk about them on some of the recent calls, the Discovery Navigator product in claims, which is one that does — now uses GenAI as well. We’ve talked about image forensics in the antifraud space and — as well as a variety of innovations that we talked about in this call on our core products, including Core Lines Reimagine and the Next Generation Models in extreme events.

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. And so in — as well as internationally, as we have been bringing our products into that market, we’re seeing the uptake and very strong double-digit growth across those businesses internationally.

And then finally, I would say, I think in terms of new product growth, we should never overlook the benefit or the uptake and receptivity that we are seeing to our existing product investments as with Core Lines Reimagine and other areas that we have been investing in similar to LightSpeed where we have improved those products, we have increased the value to the customer, we’re integrating generative AI into a number of those products. And in a way, that is new product adoption in terms of being able to realize incremental value in our revenues for those products. And I think that is reflected in our overall revenue growth as well here.

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

Thomas Roesch: This is Tom Roesch on for Andrew. I wanted to ask about the pricing environment. It sounds like insurers are starting off the year on good footing. So I was wondering just kind of how the pricing environment, how you think about it this year relative to last year? And then also as it relates to those contracts that are tied to prior year net premium, just kind of how you think about those, too, this year.

Lee Shavel: Sure.