Verisk Analytics, Inc.

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 Broadbar. Ms. Broadbar, please go ahead. Thank you, Abby, and good day, everyone. We appreciate you joining us today for a discussion of our second quarter 2023 financial results. On the call today are Lee Schabel, 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 10Q, can be found in the investor section of our website, VAERS.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 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 various 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 filing. Finally, I'd 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 and today's earnings presentation posted on the investor section of our website, VAERS.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 unreasonable effort and high unpredictability of estimating certain items that are excluded from projected non-GAAP adjusted EBITDA and adjusted EBITDA margins, including, for example, tax consequences, acquisition-related costs, gains and losses 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 Schaeffel.

Thanks, Stacey. Good morning, and thank you for participating in today's call. I'm 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 clients' 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. A 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 in rate-making, 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, Krakow, and Cologne. The message that we hear is very similar across industry participants, large and small, US and international. We welcome Verisk's expertise and 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 ExactExpert. ExactExpert is a no-code, low-code, cloud-based rules engine designed to streamline the insurance restoration and claims estimation process. ExactExpert 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 claim settlement process. Image use and 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 customers' 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 and fairness. Finally, I would like to formally welcome Samantha Vaughn to Verisk as our Chief Privacy Officer. Data governance and stewardship has always been a key focus for Verisk, and Vaughn 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'll hand it over to Elizabeth to review our financial results.

Thanks, Lee, and good morning to everyone on the call. I'm pleased to share that Veris delivered strong second quarter financial results. On a consolidated and GAAP basis, revenue was $675 million, up 10% versus the prior year. And income from continuing operations was $204 million, up 18% versus the prior year. reflecting strong growth across both underwriting and claims. Diluted GAAP earnings per share from continuing operations were $1.35, up 9% versus the prior year. 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 second quarter, OCC revenues grew 9.8%, with growth of 9.3% in underwriting and 11.2% in claims. This quarter's result was boosted by certain transactional revenues that we do not expect to repeat in the back half of the year. Our subscription revenues, which comprised 79% of our total revenue in the quarter, grew 9.1% on an OCC basis. We saw contributions across nearly all of our subscription offerings. 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 written premium growth in 2021, which is currently reflected in some of our contract pricing. In anti-fraud, we are driving accelerated growth from the successful conversion to subscription from previously transactional customers through our claims essential bundle. And in property estimating solutions, we continue to benefit from strong contractor subscription growth as contractors are realizing the value of being part of the Verisk network, particularly with the active weather patterns we are undergoing. In fact, according to Verisk's Property Claim Services . In 70-plus years of history, this was the most active first half of the year on record from a weather event perspective, dominated by hail, wind, and thunderstorms. Finally, liquidations and consolidation across the industry was lower than historic average during the quarter, but we continue to anticipate some normalization in the second half of the year. Our transactional revenues, representing 21% of total revenue in the second quarter, grew 12.4% on an OCC basis. The largest contributor to growth for the second consecutive quarter was from our auto solutions, driven by increased rate shopping by consumers and the continuation of a large non-rate action deal with a national insurer that we told you about last quarter. Our trends are reflective of those noted by recent J.D. Power data, which pointed to a 13% increase in shopping activity for auto insurance in the second quarter as consumers react to rate increases. However, J.D. Power also noted that carrier switching increased a much more modest 4%, which may suggest a potential slowing of the market going forward. 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 extreme events business, we saw very strong transactional growth related to securitization as the second quarter marked a record for new issuance in the catastrophe bond market. I will remind you that the catastrophe bond market is seasonal. and we do not expect this level of activity to continue in the second half of 2023. These transactional results also included some one-time benefits, including overage charges on specific large underwriting contracts that renewed in the quarter. Moving now to our adjusted EBITDA results, OCC adjusted EBITDA growth was 12.6% in the second quarter, reflecting core operating leverage on the strong revenue growth and the impact of certain cost reduction actions we have taken in connection with our margin expansion objectives. Total adjusted EBITDA margin, which includes both organic and inorganic results, was 54.1%, up 160 basis points from the reported results in the prior year. On a pro forma basis for all divestitures, the second quarter margin expanded 140 basis points, from margins of 52.7% in Q2-22. The margin rate in any given quarter can be influenced by the revenue mix, leading to a seasonal pattern in our margins. As such, we think it's helpful to look at our margins on a trailing 12-month basis, which in the second quarter were 53.1% on a trailing 12-month basis. up 140 basis points over the prior period. The year-over-year change in the second quarter margin reflects the impact of certain one-time expenses in the prior year quarter, as well as strong cost and operational discipline and the impact of our cost reduction program. This was offset in part by higher levels of performance-based compensation, including commissions, related to our stronger year-to-date performance, as well as a decrease in our pension credit negative margin impact from recent acquisitions, and higher T&E expenses. Reflecting on our ongoing cost reduction plan, we continue to have confidence in our ability to deliver on the margin targets that we articulated in our 2023 guidance and at Investor Day in mid-March. Continuing down the income statement, net interest expense was $31.6 million for the second quarter, compared to $31.9 million in the prior year. With the divestitures now behind us, the proceeds from the sales directed to our $2.5 billion accelerated share repurchase plan, and the long-term capital structure now in place, we now expect this current level of net interest expense to be at a similar quarterly run rate for the remainder of the year. On taxes, our reported effective tax rate was 23.8% compared to 19.2% in the prior year quarter. The year-over-year change in the tax rate is related to lower stock compensation benefits in this quarter versus the prior year's period. Going forward, we still expect the tax rate for the remainder of the year to be in the originally guided range of 23 to 25%. Adjusted net income increased 8.5% to $219.8 million, And diluted adjusted EPS increased 18.9% to $1.51 for the second quarter 2023. These changes reflect organic growth in the business, contributions from acquisitions, and a lower average share count, all set in part by a higher tax rate. With regard to the share count, we received the vast majority of the shares from the $2.5 billion accelerated share repurchase plan when we entered into the plan back in March. And while we did not make any repurchases in the second quarter, we do have the ability to repurchase some additional shares outside of the ASR, and we may do so in the future. From a cash flow perspective, net cash from operating activities increased 48% to $193 million due to strong operations and a decrease in cash taxes paid. The decrease in taxes paid is primarily related to the non-recurring gain on the 3E disposition in the prior year quarter, though there was also a one-time cash tax payment of $17 million paid in the second quarter of 2023 related to the energy divestiture. I will remind you that the prior year cash flow metrics include the results from previously divested businesses. Turning to guidance, Given our strong first half performance, as well as the contribution from recent acquisitions, we are increasing our financial outlook for 2023. We have posted a summary of all guidance measures in the earnings deck on the Investors section of our website, Verisk.com. Specifically for 2023, We now expect consolidated revenue to be in the range of 2.63 to 2.66 billion dollars and adjusted EBITDA to be in the range of 1.39 to 1.43 billion. We continue to expect adjusted EBITDA margins to be in the range of 53 to 54 percent. Walking further down the P&L, we still expect fixed asset DNA to be between 175 and 195 million, and intangible amortization to be approximately 70 million. Both depreciation and amortization elements are subject to currency variability, the timing of purchases, the completion of projects, and future M&A activity. Regarding capital expenditures, we now expect CapEx to be between 220 and 240 million dollars. reflecting increases associated with recent acquisitions, as well as our continued focus on investing organically behind our highest return on investment opportunities. These include a modernization of our forms rules and loss costs, a migration of our extreme events platform to a cloud-native architecture, and further investments across our growth businesses. We are also investing in an upgrade of our financial and human capital systems that will enable future efficiencies once implemented. As previously communicated, we expect the tax rate to be in the range of 23 to 25%, bringing adjusted earnings per share to a range of 550 to 570. And now I will turn the call back over to Lee for some closing comments.