Verisk Analytics, Inc.

Good day, everyone, and welcome to the various first quarter 2021 earnings results conference call. This call is being recorded. At this time, 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 and one follow-up. 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 Bauder. Ms. Bauder, please go ahead.

Thank you, Myra, and good day, everyone. We appreciate you joining us today for a discussion of our first quarter 2021 financial results. Today's call will be led by Scott Stevenson, their chairman, president, and chief executive officer, who will provide an overview of our business. Lee Schabel, chief financial officer and group president, will follow with the financial review. Mark Anquillari, Chief Operating Officer and Group President, will join the team for the Q&A session. The earnings release referenced on this call, as well as the associated 10Q, can be found in the investor section of our website, Veris.com. The earnings release has also been attached to an 8K that we have furnished to the SEC. A replay of this call will be available for 30 days on our website and by dialing. Finally, as set forth in more detail in today's earnings release, I will remind everyone that today's call may include forward-looking statements about their future performance, including, but not limited to, the potential impacts of the COVID-19 pandemic. 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. And now I will turn the call over to Scott.

Thanks, Stacey. Hello, everyone, and thank you for joining us for our first quarter 2021 earnings conference call. 2021 is a special year here at Verisk as it marks our 50th anniversary as a company. For 50 years, our mission and purpose has been the same. We work nonstop in partnership with our customers, using data and insights to make a difference by helping protect people, economies, society, and our planet. On this journey, we have used our unique data and combined it with advanced technologies in new ways to unlock meaningful insights about risk, becoming a global leader in cutting-edge analytics. And while we are very proud of our accomplishments over the last 50 years, It inspires us to look ahead to all the difference we can make over the next 50 years. I'm pleased to share that this year is off to a solid start, marked by continued growth in our subscription businesses. We delivered solid growth in insurance, a modest sequential improvement in our energy segment, yet we had a challenging quarter within financial services. While certain of our businesses continue to be impacted by the pandemic, those revenue streams show resilience as the underlying causal factors improve. and we have confidence in this relationship. We will provide more detail in his financial review. For 2021, we remain focused on building long-term shareholder value, delivering for our customers through innovation and service, while also protecting the health and well-being of our teammates around the globe. Currently, most of our offices are operating in a phase one format and are available for those employees who have volunteered to work from the office. We do have certain offices that have advanced to phase two and even phase three, as conditions in their local markets allow, and employees are energized to be back in the office. Our Global Protection Services team closely monitors directives from local governments and public health officials around the world, as well as incorporates learnings from our local market experiences to make real-time decisions to maintain the safety of our people. To that end, our teams are closely monitoring the current situation in India in the face of a severe second wave of COVID and we are providing relief and assistance to our India colleagues, including vaccination coverage, virtual medical services, emergency relief funds, and other essential programs. To date, we have experienced minimal or no disruption to our business or the services we provide. Over the duration of the pandemic, our teams have proven they can transition efficiently into different work modes with minimal interruption in service to our customers. So while there remains some uncertainty around return to office timing, across our many different markets, I have complete confidence that our 9,000-plus teammates at Ferris will continue to navigate through these times effectively and deliver the highest value to our customers. Throughout the pandemic, I've maintained a high level of engagement with our customers' CEOs across all three of our segments. Despite the virtual setting, the frequency of these meetings has increased, and the level of engagement and mutual respect has deepened. In these conversations, we are discussing our customers' highest strategic priorities. In all circumstances, we are receiving feedback that Verisk is a trusted and differentiated partner and that our solutions and innovations play a large and increasing role in our customers' journeys to becoming more digitally engaged, more automated, and more efficient. These types of constructive meetings are happening across all levels of our organizations. most recently within our underwriting and claims councils, which include representatives from our top 25 customers in the insurance vertical. With regard to digital engagement, we continue to see very strong adoption of our virtual claims processing platform, claims experience, as insurers continue to find additional use cases for remote claims handling outside the pandemic. Our virtual claims tools enable our customers to conduct business at a time when in-person processes were not possible. but it also has the added benefit of settling claims with greater speed. In fact, virtual claims are paid on average 30% faster than the traditional process. We've recently added new features to enhance the solution, including remote measurement, object recognition, and an automated damage assessment tool. We also are having success converting customers from transactional usage to long-term contracts with committed volumes as they build comfort with the tool and realize the value that remote claims processing can bring to their organization. One of the strongest signals of the deep and expanding relationships with their customers, in our view, is the fact that they entrust us with their data. I'm pleased to share that in the most recent year, 29 insurers have decided to newly contribute data to our ISO statistical database. This is the highest number of new participants in a single year over the last 10 years. and represents a range of different customers from insurtech startups to multi-state carriers. On the sales front, we're having great success selling in virtual mode and remain committed to advancing our techniques with ongoing training across the many new virtual selling tools we employ. Our pipelines of new opportunities are some of the strongest in our history, and they continue to build. Our customers are more engaged with Verisk as a partner, as evidenced by increased numbers of meetings, better attendance at our virtual conferences, and contract renewals and signings of new deals that are longer in duration. On the innovation front, we continue to make advances with our solutions to drive digital engagement, automate processes, and create a seamless interconnected ecosystem, what we at Verisk refer to as Platforms Analytic Environments. While this is a journey we've been on for some time, the pandemic has catalyzed our customers to move forward with greater urgency and speed. These platforms' analytic environments offer our customers deep integration into their workflows and allow a massive amount of information to be rendered so that decisions can be made quickly and accurately. Often, these environments are more software-intensive. as we are utilizing this software to gather more data, automate more processes, and become even more deeply embedded with our customers. These platforms are also driving healthy and profitable growth for Verist across our verticals. Let me give you a few recent examples. Within life insurance, we are driving strong growth and profitability as we bundle the industry-leading module software offerings at FAST. With the data analytics we have developed across Verist, create a full suite of life insurance solutions in one singular platform. We're having great success extending and accelerating the adoption of fast solutions across our broad customer base and have a strong pipeline of future deals. In addition, we recently launched new analytics, including EHR Triage Engine and Life Risk Navigator. Electronic Health Record Triage Engine uses advanced data analytics and natural language processing to distill thousands of pages of electronic medical records into a short summary, and provides an automated underwriting score, both of which reduce underwriting costs and speed up the process, and that leads to an improved buying experience for the end consumer. Likert's Navigator is a cloud-based modeling platform that offers in-depth portfolio analytics to enhance risk selection and quantify changes in mortality rates, and drive overall better decision-making. Further, in March, we enhanced our capabilities in life insurance through the acquisition of 4C Solutions, a software advisory firm with expertise in group life insurance. The addition of 4C enables us to extend our expertise into the group life market and help address the needs for group life insurers and institutional annuity providers. While each solution is strong on its own, we believe we deliver even more value for our customers as these solutions are integrated into one holistic interconnected ecosystem. We are also delivering very strong growth at SQL as we help our customers in the specialty markets digitize and modernize. SQL solutions create a truly integrated ecosystem across carriers, brokers, and managing general agents throughout the specialty market and we are bringing in new customers and expanding our suite of products across existing customers. We are also beginning to see traction in our global expansion of SQL with new clients signed in the US and Asia Pacific. To further enhance the value and capability of the SQL ecosystem, we recently acquired a majority stake in Whitespace Software. The powerful combination of Whitespace's digital placing platform with SQL's pricing, distribution, and policy administration applications enables a seamless, real-time, quote-to-buying solution with straight-through submissions for our existing and prospective customers. In our energy business, we continue to make advances on the development of new modules and sales of new subscriptions for our LENS platform. Despite the softness in the energy end market, customers are recognizing the value and uniqueness of the platform, and this is reflected in new customer subscriptions and constructive pricing for customers that adopt Lens. Additionally, we have lots of interest in future releases for Lens and already have a group of development partners in place to support Lens Power, backed by the proprietary data assets of McKinsey and Genscape. Lens Power enables customers to maximize investment opportunities in clean energy and be on the forefront of the energy transition and further advances our market leading position in the energy transition. We are well positioned to capitalize on the growing trend of countries and companies around the world, increasing investment toward renewables and green energy, and our solutions will help inform these critical decisions at the highest levels. LensPower is part of a broader suite of solutions that we have within our energy segment to help our customers navigate the changing ESG landscape. We are seeing a positive market response to our energy customer solutions for improved management of supply chain risk and ESG priorities like emissions benchmarking and supplier diversity programs. Not only are we helping our customers with their ESG initiatives, we have also moved forward on our own ESG agendas. In early April, we released our annual CSR report, which you can find in the corporate social responsibility section of our website. This year's report is notable for three reasons. First, the environmental section features our climate disclosure report, which speaks to the four pillars of TCFP, governance, risk and opportunities, risk management, and metrics and targets. Our board and senior management team are very engaged on these subjects, including climate change and climate transition, both on the risks we face but equally important on the opportunities they present for our business. We've been helping customers understand, measure, and manage risk associated with climate and weather for decades, windstorms, wildfire, and flood risk, among others, and are building on a base of knowledge, data, predictive models, analytic expertise, industry-leading standards, and investments that are already in play and serving our insurance and energy customers daily. Second, we used the CSR report as the vehicle to deliver our first-ever disclosure in accordance with SASB's recommendations for professional and commercial services companies. The disclosure includes baseline metrics around workforce composition, diversity, engagement, and turnover. We intend to update those metrics in our CSR report each year. And finally, the CSR report calls out Verisk's approach to cybersecurity, a comprehensive document that describes our commitment and investments to strengthen data security and privacy. That commitment doesn't just exist on paper, but is reinforced through the mandatory training we conduct annually for all of our employees. We're very proud of the progress we made throughout 2020. Our board and senior management team are very much engaged And our entire organization is committed to continue to move forward our ESG agenda over the coming years. I'm confident we have the right strategy and team in place to meet our long-term growth objectives. Our deep domain expertise and relationships with our customers help inform our innovation agenda. And we are treating the year 2021 as one that provides a unique set of signals on the resilience of the different parts of our company. which we are pulling into our always active capital process to ensure that our capital is deployed into the highest return opportunities. Now I'll turn the call over to Lee to cover our financial results. Thank you, Scott. First, I would like to bring to everyone's attention that we have posted a quarterly earnings presentation that is available on our website. Additionally, you may notice that we have a slightly new presentation of our financial statements. As Scott mentioned earlier, during the quarter, we closed on a majority investment in Whitespace Software. As a result, we now report net income and earnings per share attributable to Verisk. Moving to the financial results for the first quarter, on a consolidated and gap basis, revenue grew 5.3% to $726 million. Net income attributable to Veris decreased 1.8% to $169 million, while diluted GAAP earnings per share attributable to Veris declined 1% to $1.03, reflecting a $19 million gain on dispositions in the prior year that did not reoccur. 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 very pleased with our operating results, considering the continued impact from COVID-19. In the first quarter, organic constant currency revenue grew 3.4%, led by continued strength in our insurance segment and modest sequential improvement in our energy segment. This quarter's performance fundamentally reflected a year-over-year comparison to a largely pre-pandemic quarter, although we began to see progress in our COVID-sensitive revenues, which improved sequentially. Our non-COVID sensitive revenues, as we defined at the start of the pandemic, grew approximately 4.9% on an organic constant currency basis, down from 6.5% rate in the fourth quarter, reflecting a lower level of catastrophe bond securitization activity at AIR and a higher level of impact from consolidation in the insurance and energy segments. We did continue to experience as we have since the onset of the pandemic, a negative impact from COVID-19 on certain of our products and services, largely transactional in nature, which represent the balance or approximately 15% of our revenues. However, we saw an improvement as certain of these products and services returned to growth on a year-over-year basis. COVID-sensitive revenues declined approximately 5.9% on an organic constant currency basis during the first quarter compared to the 12.5% decline in the fourth quarter, primarily as a result of improved consulting activity in our energy sector, but also reflecting a return to growth of several products and services, particularly in the U.S. Despite the impact on revenue in the first quarter, we are pleased to report that we delivered solid EBITDA growth and expanded margins as a result of effective expense management and lower travel expenses. Organic constant currency adjusted EBITDA growth was 5.2% in the first quarter up from 4.9% growth in the fourth quarter. Total adjusted EBITDA margin for the quarter, which includes both organic and inorganic revenue, and adjusted EBITDA was 47.6% in the quarter, representing leverage across our insurance and energy verticals offset in part by weakness in financial services. This margin level includes roughly 150 basis points of benefit from lower travel expenses, but also reflects a return to a more normal pace of headcount growth and an increase in the pace of investment in our technological transformation, including our cloud transition costs. On that note, let's turn to our segment results on an organic constant currency basis. In the first quarter, insurance segment revenues increased 6%, reflecting healthy growth in our industry standard insurance programs, catastrophe modeling solutions, repair cost estimating solutions, and insurance software solutions. We experienced a modest benefit from storm-related revenues as a result of the ice storms in Texas and the southeast. However, this was more than offset by a lower level of securitization revenues in our catastrophe modeling business as issuance was lower year over year. In addition, we experienced declines in certain transactional revenues that were negatively impacted by COVID-19 as we had very minimal COVID impact in the first quarter of 2020. Adjusted EBITDA grew 8.3% in the first quarter, while margins expanded 196 basis points demonstrating strong margin expansion despite certain revenue declines, investment in our breakout areas, and increased costs associated with our cloud transition. Energy and specialized markets revenue decreased 0.6% in the first quarter due to declines in consulting and implementation projects and some modest headwinds related to consolidation in the end market. Growth in core research and environmental health and safety service revenues was offset by declines in transactional and consulting revenues. We attribute our performance to the diversification of our revenue streams into higher growth breakout areas like the energy transition and chemicals, the broad range of end markets that we serve, and the strength of our relationships in the industry. Adjusted EBITDA grew 6.6% in the first quarter, while margins expanded 237 basis points, reflecting continued cost discipline and the benefit of lower travel expenses. As a key partner to our energy customers, we are deeply engaged with them and part of their most strategic and important decisions. We have a track record of managing through volatile times effectively and believe we are well positioned with our energy transition solutions as well as our lens platform to continue to outperform the end market and help our customers navigate this broad energy transition. Financial services revenue declined 12.8% in the quarter, reflecting the continued impact of contract transitions that we undertook in 2020 and which will continue for the next two quarters as well as lower levels of project spending from our bank customers stemming from the COVID-19 pandemic, and fewer bankruptcies as a result of government support and forbearance programs. Adjusted EBITDA declined 74%, reflecting the negative impact of lower sales and a larger impact of corporate expense allocations on the segment's smaller base. We continue to make progress on our journey to transition Ferris Financial Services to a more sustainable subscription-based business, We are achieving the goals we have set for the business and have taken actions that we believe benefit the business in the long run, but are likely to continue to negatively impact our growth over the next few quarters. To that end, given the continued impacts from COVID-19 and the contract transitions, we expect to see a similar level of revenue and profit performance in the second quarter of 2021. However, as the impact of the contract transitions abate and our COVID-sensitive revenues improve, we anticipate a stronger back half of the year performance. Our reported effective tax rate was 22.5% compared to 20.8% in the prior year quarter, mostly owing to lower stock option exercises in the current period. As we have discussed, there will likely continue to be some quarterly variability related to the impact of employee stock option exercises, which depends in part on the various stock price and employee personal decisions. As a result of a tax law change in the UK, we now believe that our full year tax rate for 2021 will be between 23% and 25%, up from the 20% to 22% we had previously provided. This UK legislation was passed in March and will increase the UK corporate tax rate to 25% from 19% previously. This UK tax rate increase is likely to create variability in our quarterly rates as we expect we will be subject to a one-time non-cash revaluation charge in the third quarter related to a deferred tax liability when the bill is expected to become law. Our best estimate at this time is that our quarterly rate in the third quarter will be in the range of 33% to 35%, but we expect this to be primarily one-time in nature and do not anticipate a material long-term impact from this increase. Adjusted net income was $203 million and diluted adjusted EPS was $1.23 for the first quarter 2021, up 4.6% and 5.1% from the prior year, respectively. These increases reflect solid top-line growth, cross-discipline in the business, a reduction in travel expenses as a result of COVID-19, and a lower average share count. This was offset in part by a higher effective tax rate. Net cash provided by operating activities was $449 million for the quarter, up 24% from the prior year period, primarily due to increased customer collections and a reduction in travel payments as a result of COVID-19. Capital expenditures were $59 million for the quarter, up 12%. we continue to believe that CapEx will be in the range of 250 to 280 million, reflecting our continued investment in our innovation agenda, our technological transformation, as well as the carryover of certain expenditures that were delayed in 2020 as a result of the pandemic. Related to capital expenditure, we expect fixed asset depreciation and amortization will be within the range of 200 to 215 million, However, we now forecast intangible amortization to be approximately $180 million, reflecting the impact of recent acquisitions and changes in foreign currency rates. Both depreciation and amortization elements are subject to foreign exchange variability, the timing of purchases, and the completion of projects and future M&A activity. During the first quarter, we returned $147 million in capital to shareholders through share repurchases and dividends. In addition, in May, we repaid our 5.8% senior notes in the amount of $450 million through a combination of cash from operations and proceeds from our credit facility. Our strategy to deliver long-term sustainable growth remains unchanged, and we believe the stability and predictability of our subscription revenues will persist. As we approach the anniversary, the onset of the pandemic, we plan to continue to provide updates on our non-COVID and COVID-sensitive revenues to offer transparency on the recovery of our business. We remain confident the COVID impacts do not represent a structural change in our fundamental growth drivers and believe that as the underlying causal factors abate with the rollout of vaccinations and the opening of global economies, we will show strong resilience and recovery. We also have confidence in our ability to manage the cost structure effectively to protect profitability, though we would remind you that cost comparisons will be more challenging beginning in the second quarter. Taking this all together, we believe that as the COVID impacts abate, we can return to our long-term growth model of 7% organic constant currency revenue growth with core operating leverage allowing EBITDA to grow faster than revenue, although it's difficult to predict that timing. We hope this provides some useful context for you, and we look forward to addressing your questions. We continue to appreciate all 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 one follow-up. With that, I'll ask the operator to open the line for questions.