Verisk Analytics, Inc.

further instructions for you at that time. For opening remarks and introductions, I would now like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Thank you, operator, and good day, everyone. We appreciate you joining us today for a discussion of our fourth quarter and full year 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 10K, can be found in the investor section of our website, Vaersk.com. The earnings release has also been attached to an AK 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. 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 8K and today's earnings presentation posted on the investor 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 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, 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 Shavel.

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

Thanks, Lee, and good day to everyone on the call. I am pleased to share that VERIS delivered a solid fourth quarter, capping off an outstanding 2023. On a consolidated and gap basis, fourth quarter revenue was $677 million, up 7.4% versus the prior year, reflecting solid growth in underwriting and more modest growth in claims. Income from continuing operations was $182 million, down 15.5% versus the prior year, while diluted GAAP earnings per share from continuing operations were 125, down 8.8% versus the prior year. The year-over-year declines in both measures were primarily due to a $19 million litigation reserve expense related to our former financial services segment that was previously sold. alongside a one-time tax benefit of $30 million, or 19 cents per share, in the fourth quarter of 2022. Additionally, elevated depreciation and amortization expenses in the fourth quarter of 2023, resulting from the completion and implementation of certain large internally developed software projects during the year, also contributed to the decrease. These factors were partially offset by strong revenue growth, lower net interest expense, and the benefit from our accelerated share repurchase program. 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 solid growth from most of our businesses. In the fourth quarter, OCC revenues grew 6%, with growth of 7.3% in underwriting and 2.8% in claims. Normalizing for the $5.6 million in storm-related revenue in the fourth quarter of 2022, total OCC revenue growth would have been 6.9%, and claims OCC revenue growth would have been 6.0%. As expected, and as we highlighted in prior quarters, some of the environmental trends which supported elevated growth earlier in the year began to normalize in the fourth quarter. Additionally, we did begin to overlap tougher comparisons in many of our businesses. That said, 2023 was a record year for Verisk, with total OCC revenue growth of 8.7%, driven by strong growth of 8.5% in underwriting and 9.3% in claims. Growth for the full year was broad-based, with almost all businesses delivering better than expected results. Throughout 2023, our increased focus on the insurance business and our energized organization capitalized on three key industry and environmental trends to amplify our growth. These trends included the pricing environment resulting from the hard insurance market, the high transaction activity driven by elevated shopping activity for auto insurance, and the active U.S. weather patterns that Lee highlighted. Our subscription revenues, which comprise 80% of our total revenue in the quarter, grew 7.3% on an OCC basis during the fourth quarter, with growth in almost all our subscription-based solutions. The drivers of growth we experienced in the quarter were consistent with trends we saw throughout 2023. More specifically 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. 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 essential bundle. That said, We have started to anniversary the benefit we experienced from these conversions and are expecting the benefit from this transition to continue to moderate in 2024. These strengths were offset in part by continued weakness within various marketing solutions and a more normalized level of attrition across the business, including some reduction in the level of contractor activity due to the weather and some pressure within our insure tech customer segment. Our transactional revenues, representing 20% of total revenue in the fourth quarter, increased a modest 0.8% on an OCC basis, reflecting a tough comparison versus the prior year, which included revenues associated with Hurricane Ian. Adjusting for the storm impact, transactional revenue growth would have been 4.1%. During the quarter, we continued to see strong results from our auto solutions driven by healthy consumer shopping activity and the final quarter of benefit from the large non-rate action deal we signed for 2023. We have begun to overlap the positive inflection in shopping behavior from last year and are expecting growth to moderate in 2024. Our transactional revenue growth also benefited from double-digit growth within life insurance solutions. as we are seeing strong customer demand for incremental services. And within our extreme events business, we saw better than expected transactional growth driven by securitizations. Moving now to our adjusted EBITDA results, OCC adjusted EBITDA growth was 6.5% in the fourth quarter, while total adjusted EBITDA margin, which includes both organic and inorganic results, was 53.4%. up 70 basis points from the reported results in the prior year. The fourth quarter margin rate reflects the positive impact of sales leverage, cost discipline, and foreign currency changes. This was offset in part by margin pressure from higher incentive compensation, acquisitions, and organic investments for future growth. 2023 was a year of tremendous growth and efficiency for Verisk, as evidenced by total OCC adjusted EBITDA growth of 11.5%, while total adjusted EBITDA margin was 53.5%, up 150 basis points from the prior year. This margin rate reflects core operating leverage from the strong revenue growth and cost discipline across the organization. As Lee discussed earlier, delivering operational efficiency and profitability remains a key priority for us as we move forward into 2024 and beyond. We have confidence we can continue to make further progress while also balancing investments to support future growth. Continuing down the income statement, net interest expense was $28 million for the fourth quarter compared to $41 million in the prior year. The current level of net interest expense reflects lower year-over-year debt balances as well as higher interest on cash balances. Depreciation and amortization of fixed assets was $68 million for the quarter, an increase of 57%. The increase was primarily driven by an additional $23 million of expense related to the timing of certain large internally developed software projects that were completed and placed into service during the year. On taxes, Our reported effective tax rate was 24.9%. Compared to 9.9% in the prior year quarter. The year over year increase in the tax rate. Is related to the 1 time tax benefit of 30M in the 4th quarter of 2022. And the 19M dollar litigation reserve taken in the 4th quarter 2023 that we mentioned earlier. Adjusted net income decreased 9.3% to $204 million, and diluted adjusted EPS decreased 2.1% to $140 for the fourth quarter. These changes reflect the negative impact from the one-time tax benefit in the prior year quarter and higher depreciation and amortization expenses, partially offset by solid revenue and EBITDA growth, lower net interest expense, and a lower average share count. The share count reflects the impact of the additional $250 million of share repurchases executed in the fourth quarter, as well as the final settlement of our $2.5 billion accelerated share repurchase plan that we entered into in March. From a cash flow perspective, on a reported basis, net cash from operating activities increased 1.4% to $252 million. while free cash flow increased 15.8% to $196 million. It is 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 full cash flow growth potential of our insurance-only business. On dividends and repurchases, during 2023, we returned $3 billion of capital to shareholders. through dividends and repurchases. We are pleased to share that our Board has approved a $0.05 or 15% increase in our quarterly cash dividend to $0.39 per share. In addition, our Board has also authorized an additional $1 billion in share repurchases, bringing our total authorization to $1.6 billion. On guidance, we are pleased to deliver our expectations for 2024 with growth and margins in line with our investor day target, and they build upon the exceptional performance we delivered in 2023. More specifically, we 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. This margin reflects strong cost discipline while also funding incremental investment opportunities that we expect to drive future growth. These opportunities include investing in our sales force to drive greater sales effectiveness, expanding internationally through our recent acquisitions, and building our capabilities with new advanced technologies, including generative AI. Walking further down the P&L, we expect depreciation and amortization of fixed assets in the range of 210 to 240 million, and amortization of intangibles of approximately 75 million. Both items are subject to the timing of completion of projects and foreign currency changes. We expect our tax rate to be in the range of 23 to 25%. This all culminates in adjusted earnings in the range of $630 to $660 per share. We also expect capital expenditures to be between $240 million and $260 million as we continue to invest organically to drive future growth. A complete list of all guidance measures can be found in the earnings slide deck, which has been posted to the investor section of our website, Veris.com. And now I will turn the call back over to Lee for some closing comments.

Thanks, Elizabeth. In summary, we're excited about the opportunity that lies ahead. Our motivating purpose is to partner with our clients in building resilience for individuals, communities, and businesses globally. The combination of our focused business model, deep customer relationships, and strategy to deliver value for clients to improve 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.

Thank you. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Faiza Alway from Deutsche Bank. Please go ahead.

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

Thank you.

takes, but zooming back on the full year, we really think there were three drivers of strength in 2023. The first was the pricing environment in the hard insurance market. The second was the transactional rebound and particularly the activity in the auto shopping space. And the third was the elevated weather activity, which as you heard, 2023 was a record-breaking year for cat events, even though there wasn't a single large hurricane driving it. When we think about making assumptions for a future year, we think in general that first, that hard insurance market does persist into 2024. But for the other factors for transactional activity, we would expect that to normalize somewhat. And for the weather, we can never forecast mother nature, so we assume a more normalized level of weather activity.

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

It's for Heather. Thanks for taking our questions. Just wanted to comment a little bit more on the pricing environment for 2023. You said it was quite elevated. Can you comment on how that is going into 2024?

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

Your next question comes from the line of Andrew Steinerman from JP Morgan. Please go ahead.

Hi. First, I just want to say how much I appreciate slide seven, the revenue mix, very helpful. My question is about various auto underwriting revenues, which I think is all non-subs. Just please verify that. How did this ad market do in the fourth quarter, and what's the assumption for 24 within the guide?

Thanks, Andrew, and thanks for the feedback on the slide. We always listen to you guys. On the auto underwriting revenues, it is largely transactional, but not 100%. There is some subscription revenues in there. And, you know, the shopping activity was in Q4. It tapered down from Q3, but it is still elevated relative to historical levels. I think for third-party data that is AD Power, data encapsulates that. I think we are assuming that it will continue tapering down to more historic levels. Even at where it is, we're now lapping the benefit of the strong environment. But maybe for more on that environment, I'll turn it over to Doug Kachase.

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

Your next question comes from the line of Ashish Sabradura from RBC. Please go ahead.

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

Yeah, on the marketing side, as we've called out in the year, carriers in being challenged in still trying to achieve profitable growth have not yet turned on their marketing spend. We are starting to see that tide turn, and some of them are returning to profitability. The marketing engines haven't been turned on quite yet, but you're starting to see green shoots in that environment. I would say we're assuming that it will it will start to return to more normalized levels in the second half of this year.

Your next question comes from the line of Menav Patniak from Barclays. Please go ahead.

I just want to ask on the new product pipeline, any benefits from that this year and what's planned for this year? And then also, you talked about some incremental investments as well with AI, Gen AI, so anything related to that?

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

Thank you, Lee, and thank you, Manav, for the question. Just building on our... 2023 momentum, let me just highlight our strong levels of client engagement and ecosystem partner-driven innovations and co-creation that led to the productization of a couple of solutions. In the casualty, bodily injury space, we have deployed traditional AI methods as well as generative AI technologies in the data extraction and medical file summary space in conjunction with the the deep domain expertise of our legal as well as medical staff in order to continue delivering value to our customers in that space. And also in the property estimation space, we have also deployed GenAI and other AI methods in order to continue delivering automation in the estimation process. We've talked in the past about ExactExpert as a solution to continue driving productivity speed, as well as accuracy, which is very important for our customers to connect adjusters, contractors, as well as insurers.

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

Your next question comes from the line of Jeff Mueller from Baird. Please go ahead.

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

Sure, Jeff. It's a complex question, and so I think we're trying to get our handle on it. I'm going to kind of isolate on as we see premium adequacy improve in the pro-cyclicality dimension of the business. I should probably start by saying, or I... by saying, as I think many of our investors and analysts understand, we don't have a high degree of economic sensitivity. And so, you know, there is muted sensitivity to cyclical effects. We tend to be more influenced, as you've observed, by weather events or activities in the ILS market. And so those tend to have a more pronounced element to it. I do think that there is some procyclicality elements that as the business, as the insurance industry is doing well and we've seen premium growth, that does encourage more investment in technology and renovation that accelerates our ability to deploy some of the technologies that we have invested in. And that is a positive tailwind in that scenario. However, I want to isolate that to insurance cyclicality so that as their profitability grows, and that may be separate and unconnected to just broader economic cyclicality, which is relatively muted.

So hopefully that, you know, I think addresses kind of the core of your question, Jeff.

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

Hey, good morning. This is Greg Parrish on for Tony. Thanks for taking our question. I wanted to talk about margin. You talked about what sounded like expansion of some of the ongoing efficiency initiatives that you have. Is the benefit from those within the ongoing 25 to 75 basis points of your framework and balanced by investment, or do you skew a little bit higher over the next two to three years as you work through those initiatives? How do we think about that? Thanks.

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

Your next question comes from the line of Jeff Silber from VMO Capital Markets. Please go ahead.

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

Yeah, thanks for the question, Jeff. Yes, you're right. Our range now as a one-year guidance and a one-point range is a tightening from what we had said at Investor Day, which, you know, at that time it was two years out and a two-point range. And I'll remind you that that Investor Day range, the 54 to 6, itself was a tightening of what had been our three-year margin target which was a three-point range of 53 to 56. So, you know, our trajectory over the past three years has been to increase margins by 150 basis points in 2022, another 150 basis points in 2023, and then currently the midpoint of this guide would represent another 100 basis points on top of that. So we are balancing that margin expansion and the trajectory of margin expansion with investments in growth The differential between the current midpoint of our guide and the midpoint at Investor Day is entirely encompassed by the three incremental investments that I highlighted that were not yet in the cards at the time of Investor Day. Those are the investments in our sales force that Lee discussed, the international expansion with our M&A that has taken place since Investor Day, and then the investments in generative AI to drive new products. We think we're delivering on all of our client-facing investments, those three ones being the ones that are particularly new since Investor Day. We're doing that while still delivering 100 basis points of margin expansion, and so we think that balance is an attractive package. If you compound this and this margin expansion on top of what we already delivered in 2023, you come out ahead of those targets that we had in March.

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

Hi. Good morning. Appreciate you taking the question. I'll echo Andrew's comments on slide seven. Super helpful. And my question goes specifically to that graphic. Lee and Elizabeth, when you look at the different solutions here, maybe you could call out a couple about which you're the most excited and perhaps where you think you have the ability to drive faster growth, whether that's on the claim side or the underwriting side. It sounds like you have some pricing initiatives. Obviously, life and rest of the world is pretty exciting if somewhat small, but are there a couple areas where you think if we look at this chart, say, three to five years from now, where the contributions of certain solutions have significantly changed.

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

Sure. Thanks, Lee.

And good morning.

So overall, we feel really good about where we are with the reimagining program and the progress the team has made. And as the program naturally moves towards client deliverables in 2024, our customers will see additional value from benefits of our modernization of our internal systems, which will allow them to have faster access to our analytics, new analytics and insights like our executive industry insights that will be brought into five lines of business. We'll provide benchmarking analytics to our customers, new innovation around our forms management platform, which will make it easier for our customers to manage and track changes to our core programs, and finally, continued migration of our content services to the new platform. We are really encouraged by the client feedback around these innovations, and our customers are excited to see these come to fruition.

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

Your next question comes from the line of Surrender Themed from Jefferies. Please go ahead.

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

Yeah, thank you, Sarinder. So there are a number of elements, and I really have to compliment the organization for its receptivity to outside perspectives on what we could be doing better. We looked at it across all of our businesses, and certainly compensation structure was an area of focus, and there I think there were two things. One, we looked at where market levels were both from a level and from a composition standpoint so that our sales team felt as though they were being fairly treated, creating a good opportunity, and aligning our interests with the customer. And we believe that that will improve our retention and make certain that they are focused on the opportunities that generate the most value for us. We also spent time looking at pricing relative to value and where we feel as though we're delivering demonstrable value to our clients, and how we can be more responsive to structuring our pricing in a way that aligns with our clients' perception of value and what their needs are. So I would just identify those as two of the primary functions. I would add, somewhat outside of this, we've also been working to make certain that our sales effort is well tied into our senior level strategic dialogue so that as we have driven a stronger level of dialogue, we are communicating effectively internally to capitalize on opportunities for sales on existing products that our clients may not be aware of or we find higher support because of the value proposition at a senior level within the organization. And so that's an area where we expect that we'll be able to do a better job as well.

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

Hi, good morning. Thanks for taking my question. I wanted to ask about the higher growth businesses a different way. I think back in the investor day, you talked about those potentially representing 20% of your business in 2025. Is there a way to kind of comment on that trajectory and how those faster growth businesses performed in 2023 specifically?

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

Your next question comes from the line of Russell Quilt from Redburn Atlantic. Please go ahead.

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

Yeah, thanks for the question, Russell. We'll have to look with you at that stat on free cash flow yield because we've We think the insurance business has very strong free cash flow. Again, looking at it maybe as a percent of revenue may understate the strength of it. So, we think it's been growing. I mean, a demonstration of the growth has been the Q4 number, which has grown over the prior year, even though the prior year numbers still include the energy business. So we are excited about the free cash flow generation in the business. We don't give guidance on it, but conceptually it should continue to grow roughly in line with our bottom line. And I think the purest demonstration we can give of that confidence has been the commitment on the dividend increase.

Yeah. And Russell, the one thing I would add is I think that if you start with free cash flow given accounting differences over time should even out, and so it should approximate our overall EBITDA growth rate, assuming that CapEx is growing commensurate with that. I do think in 2020 and 2024, We're seeing slightly higher CapEx growth because of what we see as a number of opportunities within the business. Part of that relates to the generative AI opportunity. And so we may have periods of higher level of CapEx investment that may bring the overall free cash flow growth down. But over the long term, we see that should be very commensurate with our overall adjusted EBITDA growth.

Your next question comes from the line of Seth Weber from Wells Fargo Securities. Please go ahead.

Hi, thanks. Good morning. Lee, I've heard a couple of times you talked about pricing opportunities. I think you called out extreme events and property estimating. I'm just trying to maybe get some more details on that. Do you think that will impact 2024 or is that a longer term opportunity? know kind of play here and is this just sort of the first couple areas where you're finding these new opportunities and we should expect more of that kind of going going forward or if any way you can help frame this pricing opportunity thank you yeah i know seth it's uh thanks for the question it's

difficult to kind of isolate it because it occurs across our business. I would say that certainly those pricing improvements that I've referred to in terms of new contract renewals are factored into our 2024 guidance from an overall revenue growth perspective. So in that regard, we're beginning to see some of that influence that our near-term expectations But I do believe that it is a source of growth for us longer term. And it's not really very different than what we describe as our general operating model, which is that we believe that we can create much broader value for the industry by investing in this data and technology. And capturing that, particularly as we add value to our existing clients, is largely value-driven pricing. And so that supports that longer-term 6% to 8% growth target that we are working to achieve on a predictable and consistent basis.

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

Hey, good morning. This is Sidon for Greg. I wanted to focus on slide 18 of your investor deck and where you talk about your capital management philosophy and just moving forward, curious how we should view repurchases following in your capital management framework versus acquisitions or internal investments, et cetera.

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

And Greg, one thing that I would add, and I want to thank all of our investors who participated in the year-end investor survey that was conducted. We thought it was important to get feedback after the first three quarters and following investor day. And specific to your point and Elizabeth's comments, Greg, one very clear priority from the investors that we surveyed was a preference for internal investment, kind of recognizing our ability to leverage that and generate very high returns. And so we appreciate that input. We share the view that that's very additive to our business and will clearly be a priority for us.

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

Hi, thanks. Good morning. I wanted to dive a little bit deeper into some of the transaction revenue trends you're seeing. Adjusting for storm comps, transaction revenue growth was 4% on an organic constant currency basis in 4Q. Directionally in 2024, how do you expect transaction revenue growth to trend from that 4% normalized for storm comps? Considering trends like auto rate shop and behavior and the conversion of transaction revenue to subscription revenue, what are some of the puts and takes that gets you higher or lower than 4% transaction revenue growth this year?

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

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