Verisk Analytics, Inc. (NASDAQ:VRSK) Q3 2023 Earnings Call Transcript

Verisk Analytics, Inc. (NASDAQ:VRSK) Q3 2023 Earnings Call Transcript November 1, 2023

Verisk Analytics, Inc. beats earnings expectations. Reported EPS is $1.52, expectations were $1.46.

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.

Stacey Brodbar: Thank you, Sheryl, and good day, everyone. We appreciate you joining us today for a discussion of our third quarter 2023 financial results. On the call today are Lee Shavel, Verisk’s 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.

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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. Finally, I’d also like to remind everyone that the financial results for recent dispositions are included in our consolidated and GAAP results but are excluded from all organic constant currency growth figures. 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 results because of the unreasonably high effort and 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, gains and loss from dispositions and other non-recurring expenses, the effect of which may be significant.

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

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.

Elizabeth Mann: Thanks, Lee, and good day to everyone on the call. I am pleased to share that Verisk delivered strong third quarter financial results. On a consolidated and GAAP basis, revenue was $678 million, up 11% versus the prior year, and income from continuing operations was $187 million, up 13% versus the prior year, reflecting strong growth across both underwriting and claims. Diluted GAAP earnings per share from continuing operations were $1.29, up 23% versus the prior year. This quarter’s reported results included a $19 million litigation reserve expense associated with an indemnification for an ongoing inquiry related to our former Financial Services segment, which was sold in April 2022. 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, our operating results demonstrated strong and broad-based growth from most of our businesses, aided by some in-period transactional benefits.

In the third quarter, OCC revenues grew 9.4%, with growth of 8.3% in underwriting and 12.2% in claims. Our subscription revenues, which comprised 80% of our total revenue in the quarter, grew 9.3% on an OCC basis, with growth in almost all our subscription-based solutions. More specifically on the drivers of growth in subscription revenues during the quarter, we experienced the continued benefit on certain of our revenues from the stronger net premium growth in 2021, which is currently reflected in some of our contract pricing as well as a lower level of attrition and consolidation across the industry. Within property estimating solutions, our efforts to expand the ecosystem and drive new innovations like XactXpert are paying dividends through higher levels of customer retention for our contractor customers.

In anti-fraud, we saw underlying strength in the business with growth augmented by the continued benefit from the conversion to subscription from previously transactional customers through our claims essentials bundle. And finally, within extreme events solutions, we are benefiting from strong renewals and new customer wins. Our transactional revenues representing 20% of total revenue in the third quarter grew 10.2% on an OCC basis. The largest contributor to growth was again from our auto solutions, driven by better than expected shopping activity by consumers and the continued benefit from the large non-rate action deal with a national insurer that we previously communicated. Our trends track consistently with the recent J.D. Power data, which pointed to a 12% increase in shopping activity for auto insurance in the third quarter as customers continue to respond to rate increases.

That said we will begin to anniversary the elevated shopping activity in the fourth quarter, so we are expecting that growth to moderate. In addition to gains in auto, our transactional revenue growth also benefited from double-digit growth from life insurance solutions as we are seeing strong customer demand for incremental services. And within our property estimating solutions business, we saw strong transactional growth generated by our expanded set of distribution partners within our ecosystem and from elevated weather events, although not to the level of a large scale catastrophe. In fact, according to Verisk’s PCS data, the third quarter of 2023 had 73 days out of 92 that included a PCS event in the U.S. And 2023 is on track to become a new high for catastrophe frequency likely to bypass 2021, which was the highest year on record to-date.

Moving now to our adjusted EBITDA results. OCC adjusted EBITDA growth was 11.8% in the third quarter, while total adjusted EBITDA margin, which includes both organic and inorganic results was 54%, up 70 basis points from the reported results in the prior year. This margin rate reflects core operating leverage from the strong revenue growth and cost discipline across the organization. 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 best to look at our margins on a trailing 12-month basis, which in the third quarter were 53.3%, up 150 basis points over last year’s level. Continuing down the income statement, net interest expense was $29 million for the third quarter, compared to $34 million in the prior year.

The current level of net interest expense reflects lower year-over-year debt balances as we paid down our revolving credit facility as well as higher interest on cash balances. Our reported effective tax rate was 25% compared to 24.2% in the prior year quarter. The year-over-year change in the tax rate is related to the $19 million litigation reserve expense that we mentioned earlier, partially offset by higher stock compensation benefits in this quarter versus the prior year’s period. Going forward, we expect the tax rate for the full-year 2023 to be near the high end of the originally guided range of 23% to 25%. Adjusted net income increased 17% to $221 million, and diluted adjusted EPS increased 27% to $1.52 for the third quarter 2023. These changes reflect organic growth in the business, contributions from acquisitions, and a lower average share count.

The share count reflects the impact of our $2.5 billion accelerated share repurchase plan that we entered into in March, as well as an additional $50 million worth of share repurchase that we completed in the third quarter. Regarding the share count, you can see that while our weighted average diluted shares outstanding declined 7.7% year-over-year, it was essentially flat sequentially. From a cash flow perspective, on a reported basis, net cash from operating activities decreased 11% to $250 million, while free cash declined 9% to $196 million. The decline in both cash flow metrics is a function of the fact that prior year cash flow metrics include the results from previously divested businesses as well as a favorable cash tax impact in the prior year from the sale of our environmental, health and safety business.

Adjusted for these items, both cash flow metrics increased year-over-year during the third quarter. We are very pleased with robust year-to-date performance. Our guidance for 2023 remains unchanged. We now expect revenue to be towards the high end of our range of $2.63 billion to $2.66 billion. Adjusted EBITDA is still expected to be between $1.39 billion to $1.43 billion. Adjusted EBITDA margin in the 53% to 54% range and adjusted EPS in the range of $5.50 to $5.70. 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. We do want to remind you that the fourth quarter of 2022 included $6 million in revenue associated with Hurricane Ian as well as a tax benefit associated with the divestiture of Wood Mackenzie.

And now, I will turn the call back over to Lee for some closing comments.

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.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of George Tong with Goldman Sachs. Your line is now open. Please go ahead.

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?

Lee Shavel: Yes. Thank you, George. I appreciate the question. So the short answer is yes. I think the dynamic that we’re observing is that because of the loss environment and the frustrations that the insurers or the carriers generally have had in getting rate increases to compensate them for the increased risk and the increased replacement costs driven by replacement. Right now they are focused on achieving profitability off of their existing books and that has resulted in a lower level of advertising by the carriers as they are kind of working with their existing book. We have seen, as Elizabeth described, a lot of shopping activity, but that is consumer driven and is a response to the higher rates that almost everyone is experiencing right now. The consequences of that for us is that in our Verisk marketing solutions business, we have seen declines within that business because of lower overall advertising spend by the carriers as a function of this environment.

Stacey Brodbar: Next question, please.

Operator: Line of Manav Patnaik from Barclays Capital. Your line is now open.

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.

Elizabeth Mann: Yes. Thanks very much, Manav. On the guidance, we’re very proud of our results year-to-date. We’ve given full-year guidance in order to bring additional transparency and for folks to see how the business is going. We did update that mid-year after seeing significant shifts in the environment. But our full-year guidance does imply revenue growth of approximately 8% to 9% on a reported basis that’s above our long-term targets. As we look at the fourth quarter, no specific comments on the fourth quarter other than what I highlighted, which is to remind that the growth comparisons do get tougher in the fourth quarter due to the storm revenue and the tax benefit there.

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

Alex Kramm: Yes. Hey, good morning, everyone. Just Lee, you keep on talking about the strategic dialogue you have with customers at a high level. It sounds like some of this stuff is resonating. I guess I’m curious, are you actually measuring success in any way yet or is this too early? I mean, should we be looking for larger, I don’t know, outsourcing deals or maybe again specifically like any revenues that you’re tracking that you can already talk about?

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.

Operator: Your next question comes from the line of Greg Peters with Raymond James. Your line is now open, Greg.

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?

Elizabeth Mann: Well, let me thanks — thanks for the question, Greg. Let me take a crack at that. I think it’s a little bit hard to draw that conclusion. The transactional revenue is a combination of a couple of different areas. We’ve highlighted the main ones that contributed to the growth. The auto underwriting, the shopping activity has driven that, the property estimating solutions has a transactional component related to weather activity and then life on the incremental services. So I’m not sure I would point it directly to an inverse correlation to the underwriting environment.

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

Andrew Jeffrey: Thank you. Good morning. Appreciate you taking the question. Elizabeth, could you give us an update on the state of two markets? One, Florida, just an update on liquidations, and how that’s impacting your outlook for the fourth quarter. And also California, I know there’s been I think Lee referred to in your prepared remarks, some disruption in, especially homeowners, underwriting in California and some challenges that carriers are facing raising rates. Just wondering if there are any updates in either of those areas as it pertains to the guidance and maybe the longer-term outlook too.

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.