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

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

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

Operator: Good day, everybody, and welcome to the Verisk Third Quarter 2023 Earnings Outcomes Convention Name. This name is being recorded. Presently, all individuals are in listen-only mode. After at this time’s ready remarks, we are going to conduct a question-and-answer session, the place we are going to restrict individuals to at least one query in order that we will permit everybody to ask a query. We could have additional directions for you at the moment. For opening remarks and introductions, I wish to flip the decision over to Verisk’s Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go forward.

Stacey Brodbar: Thanks, Sheryl, and good day, everybody. We recognize you becoming a member of us at this time for a dialogue of our third quarter 2023 monetary outcomes. On the decision at this time are Lee Shavel, Verisk’s President and Chief Govt Officer; and Elizabeth Mann, Chief Monetary Officer. The earnings launch referenced on this name, in addition to our conventional quarterly earnings presentation and the related 10-Q may be discovered within the Traders part of our web site, verisk.com. The earnings launch has additionally been connected to an 8-Okay that now we have furnished to the SEC. A replay of this name shall be obtainable for 30 days on our web site and by dial-in. As set forth in additional element in at this time’s earnings launch, I’ll remind everybody at this time’s name might embody forward-looking statements about Verisk’s future efficiency, together with these associated to our monetary steerage.

A girl analyzing a big dataset on a pc display screen, emphasizing the significance of analytics within the know-how sector.

Precise efficiency may differ materially from what is recommended by our feedback at this time. Details about the components that would have an effect on future efficiency is contained in our latest SEC filings. Lastly, I’d additionally prefer to remind everybody that the monetary outcomes for latest tendencies are included in our consolidated and GAAP outcomes however are excluded from all natural fixed foreign money development figures. A reconciliation of reported and historic non-GAAP monetary measures mentioned on this name is supplied in our 8-Okay and at this time’s earnings presentation posted on the Traders part of our web site, verisk.com. Nevertheless, we’re not capable of present a reconciliation of projected adjusted EBITDA and adjusted EBITDA margin to probably the most instantly comparable anticipated GAAP outcomes due to the unreasonably excessive effort and unpredictability of estimating sure objects which might be excluded from projected non-GAAP adjusted EBITDA and adjusted EBITDA margin, together with, for instance, tax penalties, acquisition-related prices, good points and loss from tendencies and different non-recurring bills, the impact of which can be vital.

And now, I’d like to show the decision over to Lee Shavel.

Lee Shavel: Good morning, and thanks for taking part in our third quarter earnings name. I’m happy to be right here at this time to replace you on the progress our crew at Verisk is making on driving technique and translating it into sturdy development and worth creation for our shoppers and shareholders alike. Elizabeth will present the monetary element. However in abstract, we delivered one other sturdy quarter of outcomes marked by strong natural income development throughout most of our companies, wholesome margin growth, and double-digit revenue development. We have now confidence in our capacity to ship on each our 2023 steerage and the longer-term aims we communicated again in March at Investor Day. The {industry} surroundings inside which we’re working is marked by some deep challenges.

Insurance coverage carriers are coping with the cross currents of inflation and better losses, that are each negatively impacting {industry} profitability. Actually, A.M. Finest knowledge for the primary six months of 2023 factors to a $24.5 billion internet underwriting loss for the U.S. Property and Casualty Insurance coverage {industry}, operating properly forward of the tempo of the full-year 2022, which skilled internet underwriting losses of $26.9 billion. A.M. Finest notes that non-public strains particularly householders is the first driver of those declines. In response to this backdrop, carriers are exiting markets in key disaster susceptible states, dropping sure strains of unprofitable enterprise and shedding parts of their workforce. Carriers are additionally elevating charges to aim to cowl rising inflation and losses, driving internet written premium development up 9.7% for the primary six months of 2023.

In response to this surroundings, Verisk is partnering carefully with our shoppers to deal with their most urgent considerations, together with excessive worth options that may ship excessive return on funding for our shoppers. And we’re together with our shoppers earlier within the innovation course of to make sure we’re delivering the best options with easy implementations, bettering the success fee and tempo of uptake of latest options. One of many key tenets of our technique is to raise the strategic dialogue with our shoppers and to develop into their trusted knowledge and analytic and know-how accomplice. Through the third quarter, we engaged with shoppers on a number of events and at a wide range of venues together with the Verisk Insurance coverage Convention in London. This 12 months, we’ve mixed a number of Verisk occasions to make it simpler for shoppers to discover the various methods we will add worth and improve the effectivity of their operations.

In London, for instance, we mixed occasions targeted on underwriting, claims, specialty insurance coverage and excessive occasion modeling right into a singular client-centric expertise that includes Verisk options. I delivered one among two keynote shows and the whole Verisk Senior Working Committee was in attendance demonstrating our dedication to our prospects in any respect ranges. A options gallery featured Verisk options in addition to the options of our ecosystem companions, and we held 35 concurrent instructional periods. We wrapped up with a CEO dinner with attendees that represented carriers, brokers, and managing normal brokers had a bunch dialogue round widespread challenges confronted by the whole insurance coverage worth chain. Enterprise-wide threat administration is prime of thoughts for a lot of in London, as our shoppers are managing extraordinarily giant and sophisticated portfolios of threat spanning a number of lessons of enterprise and insurance coverage markets all around the world.

To handle this urgent want, we lately launched Enterprise Publicity Supervisor. This resolution is a joint growth effort between specialty enterprise options and excessive occasions to deliver to the market a cloud-native and scalable resolution that permits insurers and reinsurers to make extra knowledgeable enterprise selections by providing a complete view of dangers that exist throughout giant property portfolios. As we interact with our prospects at these occasions and within the many one-on-one conferences now we have hosted all year long, there have been just a few constant themes that we hear in these conversations. First is Digital Transformation, which represents a large alternative for the worldwide insurance coverage market. Our shoppers aspire to modernize their platforms, enhance programs integrations, decrease bills, and enhance operational effectivity, and we’re partnering with them on this journey.

Verisk is introducing options that drive operational effectivity for a few of their most individuals and paper intensive processes. For instance, inside our casualty enterprise, we lately launched Discovery Navigator and are seeing strong early success. Discovery Navigator combines synthetic intelligence and machine studying, Verisk’s contributory knowledge and years of medical and authorized experience to instantly establish and extract key medical knowledge factors from unstructured data, that are a part of bodily damage claims. Relying on the complexity of the case, the variety of medical pages concerned in a bodily damage declare can vary from tons of to 1000’s. Verisk has automated the group, assessment, and abstract, of those complicated unstructured paperwork, permitting insurers to regulate, negotiate, and settle extra claims in much less time.

Discovery Navigator simply integrates into our prospects workflows by way of API or on-line choices and delivers as much as a 90% time financial savings and 95% accuracy for a median 10x ROI for shoppers. Moreover, Discovery Navigator is a broadly versatile device that’s driving innovation and can be utilized together with different Verisk options like Legal responsibility Navigator, delivering workflow automation, choice help and general effectivity for shoppers. The necessity for deeper knowledge insights can be one thing we hear often from prospects. Inflation developments throughout the previous 12 months have underscored the necessity for correct, up-to-date and granular knowledge insights to tell underwriting, threat administration, reinsurance and claims selections. No firm is best positioned to fulfill this want than Verisk with our complete and proprietary knowledge property.

For instance, our Verisk property estimating options are designed to fulfill these challenges head on with a complete set of instruments based mostly on well timed proprietary knowledge, enabling our prospects to write down probably the most correct estimates doable on their first try. This reduces the chance of over and underpayments whereas bettering cycle instances. Key to this course of is XactXpert, our lately launched guidelines engine that assists estimators in avoiding unwarranted prices of their estimates. We additionally allow our buyer’s high quality assurance groups that consider the info from the whole course of, making certain that the declare fee shall be right the primary time. Lastly, generative AI stays a frequent matter with shoppers each its transformative potential and the chance that it brings.

We consider gen AI can ship effectivity inside Verisk and in client-facing options beginning first in our underwriting and life companies the place we’re actively exploring new product growth in addition to enhancements to present options. We’re rising our funding and leaning into generative AI as our shoppers acknowledge that by partnering with Verisk, they will make investments on this — we will make investments on this superior know-how on behalf of the {industry} extra effectively than anyone buyer can do on their very own. We additionally intend to take action whereas sustaining our give attention to equity and value-centric governance. On the theme of funding, I need to present a progress report and replace on our core strains reimagine mission. We’re about one-third of the best way full in what is probably going a five-year journey to modernize our types, guidelines, and loss prices and associated options.

We’ve made progress modernizing our inner processes like our ratemaking operation to allow and effectively scale improvements in present and new options. We’re increasing our industry-leading contributory database by including new knowledge contributors and by rising the standard of our collected knowledge. And we’re engaged on enhancing the recency of our knowledge in our analytics. On the customer-facing aspect, we’re in-market with new proprietary analytics and workflow instruments. For instance, now we have launched government and consumer perception studies designed for the senior management of our shoppers throughout two of the biggest strains of insurance coverage, particularly householders and enterprise house owners with plans to increase into different giant strains over time. Simply this month, we additionally launched our Legislative Monitoring utility within the new platform for choose shoppers.

This new cloud-native utility transforms what was beforehand a doc based mostly paper path for monitoring 1000’s of insurance coverage associated, authorized, regulatory and legislative developments into a knowledge pushed, fashionable, digital monitoring and effectivity device with an improved buyer interface. Legislative Monitoring is the primary of a sequence of latest options that shall be launched over the following a number of years on the platform. General, buyer suggestions on the reimagine mission has been fairly constructive, together with on the customized analytics and Legislative Monitoring utility I discussed earlier than, and there’s pleasure for future advances inside core strains. This pleasure is driving extra constructive, worth pushed conversations with our shoppers as we accomplice with them alongside their digital transformation journey.

We’re making these investments to ship elevated worth for our shoppers by way of enhanced underwriting accuracy and effectivity. With that, I’ll hand it over to Elizabeth to assessment our monetary outcomes.

Elizabeth Mann: Thanks, Lee, and good day to everybody on the decision. I’m happy to share that Verisk delivered sturdy third quarter monetary outcomes. On a consolidated and GAAP foundation, income was $678 million, up 11% versus the prior 12 months, and revenue from persevering with operations was $187 million, up 13% versus the prior 12 months, reflecting sturdy development throughout each underwriting and claims. Diluted GAAP earnings per share from persevering with operations had been $1.29, up 23% versus the prior 12 months. This quarter’s reported outcomes included a $19 million litigation reserve expense related to an indemnification for an ongoing inquiry associated to our former Monetary Companies phase, which was bought in April 2022. Transferring to our natural fixed foreign money outcomes adjusted for non-operating objects as outlined within the non-GAAP monetary measures part of our press launch, our working outcomes demonstrated sturdy and broad-based development from most of our companies, aided by some in-period transactional advantages.

Within the third quarter, OCC revenues grew 9.4%, with development of 8.3% in underwriting and 12.2% in claims. Our subscription revenues, which comprised 80% of our whole income within the quarter, grew 9.3% on an OCC foundation, with development in virtually all our subscription-based options. Extra particularly on the drivers of development in subscription revenues throughout the quarter, we skilled the continued profit on sure of our revenues from the stronger internet premium development in 2021, which is at the moment mirrored in a few of our contract pricing in addition to a decrease stage of attrition and consolidation throughout the {industry}. Inside property estimating options, our efforts to increase the ecosystem and drive new improvements like XactXpert are paying dividends by way of increased ranges of buyer retention for our contractor prospects.

In anti-fraud, we noticed underlying power within the enterprise with development augmented by the continued profit from the conversion to subscription from beforehand transactional prospects by way of our claims necessities bundle. And at last, inside excessive occasions options, we’re benefiting from sturdy renewals and new buyer wins. Our transactional revenues representing 20% of whole income within the third quarter grew 10.2% on an OCC foundation. The most important contributor to development was once more from our auto options, pushed by higher than anticipated procuring exercise by customers and the continued profit from the massive non-rate motion take care of a nationwide insurer that we beforehand communicated. Our developments observe constantly with the latest J.D. Energy knowledge, which pointed to a 12% improve in procuring exercise for auto insurance coverage within the third quarter as prospects proceed to answer fee will increase.

That stated we are going to start to anniversary the elevated procuring exercise within the fourth quarter, so we expect that development to average. Along with good points in auto, our transactional income development additionally benefited from double-digit development from life insurance coverage options as we’re seeing sturdy buyer demand for incremental providers. And inside our property estimating options enterprise, we noticed sturdy transactional development generated by our expanded set of distribution companions inside our ecosystem and from elevated climate occasions, though to not the extent of a big scale disaster. Actually, in accordance with Verisk’s PCS knowledge, the third quarter of 2023 had 73 days out of 92 that included a PCS occasion within the U.S. And 2023 is on observe to develop into a brand new excessive for disaster frequency more likely to bypass 2021, which was the best 12 months on document to-date.

Transferring now to our adjusted EBITDA outcomes. OCC adjusted EBITDA development was 11.8% within the third quarter, whereas whole adjusted EBITDA margin, which incorporates each natural and inorganic outcomes was 54%, up 70 foundation factors from the reported leads to the prior 12 months. This margin fee displays core working leverage from the sturdy income development and price self-discipline throughout the group. As we’ve stated previously, the margin fee in any given quarter may be influenced by income combine and timing of spending. So we predict it’s greatest to have a look at our margins on a trailing 12-month foundation, which within the third quarter had been 53.3%, up 150 foundation factors over final 12 months’s stage. Persevering with down the revenue assertion, internet curiosity expense was $29 million for the third quarter, in comparison with $34 million within the prior 12 months.

The present stage of internet curiosity expense displays decrease year-over-year debt balances as we paid down our revolving credit score facility in addition to increased curiosity on money balances. Our reported efficient tax fee was 25% in comparison with 24.2% within the prior 12 months quarter. The year-over-year change within the tax fee is expounded to the $19 million litigation reserve expense that we talked about earlier, partially offset by increased inventory compensation advantages on this quarter versus the prior 12 months’s interval. Going ahead, we anticipate the tax fee for the full-year 2023 to be close to the excessive finish of the initially guided vary of 23% to 25%. Adjusted internet revenue elevated 17% to $221 million, and diluted adjusted EPS elevated 27% to $1.52 for the third quarter 2023. These modifications replicate natural development within the enterprise, contributions from acquisitions, and a decrease common share rely.

The share rely displays the affect of our $2.5 billion accelerated share repurchase plan that we entered into in March, in addition to an extra $50 million value of share repurchase that we accomplished within the third quarter. Concerning the share rely, you may see that whereas our weighted common diluted shares excellent declined 7.7% year-over-year, it was basically flat sequentially. From a money stream perspective, on a reported foundation, internet money from working actions decreased 11% to $250 million, whereas free money declined 9% to $196 million. The decline in each money stream metrics is a operate of the truth that prior 12 months money stream metrics embody the outcomes from beforehand divested companies in addition to a positive money tax affect within the prior 12 months from the sale of our environmental, well being and security enterprise.

Adjusted for this stuff, each money stream metrics elevated year-over-year throughout the third quarter. We’re more than happy with strong year-to-date efficiency. Our steerage for 2023 stays unchanged. We now anticipate income to be in the direction of the excessive finish of our vary of $2.63 billion to $2.66 billion. Adjusted EBITDA continues to be anticipated to be between $1.39 billion to $1.43 billion. Adjusted EBITDA margin within the 53% to 54% vary and adjusted EPS within the vary of $5.50 to $5.70. An entire itemizing of all steerage measures may be discovered within the earnings slide deck, which has been posted to the Traders part of our web site, verisk.com. We do need to remind you that the fourth quarter of 2022 included $6 million in income related to Hurricane Ian in addition to a tax profit related to the divestiture of Wooden Mackenzie.

And now, I’ll flip the decision again over to Lee for some closing feedback.

Lee Shavel: Thanks, Elizabeth. In abstract, we’re enthusiastic about our enterprise momentum and the chance forward. Our motivating goal is to accomplice with our shoppers in constructing resilience for people, communities, and companies globally. The mix of our targeted enterprise mannequin, deep buyer relationships, and technique to ship worth for shoppers by way of improved choice making and operational effectivity is a method that may also ship worth to our shareholders by way of development and returns. We proceed to understand the help and curiosity in Verisk, given the massive variety of analysts now we have masking us, we ask that you simply restrict your self to at least one query. With that, I’ll ask the operator to open the road for questions.

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Q&A Session

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

George Tong: Hello, thanks. Are you able to discuss a bit bit about what you’re seeing with insurance coverage advertising and marketing budgets, particularly within the present fee and inflation surroundings and in case you’re seeing any form of a pullback from insurance coverage carriers?

Lee Shavel: Sure. Thanks, George. I recognize the query. So the brief reply is sure. I believe the dynamic that we’re observing is that due to the loss surroundings and the frustrations that the insurers or the carriers usually have had in getting fee will increase to compensate them for the elevated threat and the elevated alternative prices pushed by alternative. Proper now they’re targeted on reaching profitability off of their present books and that has resulted in a decrease stage of promoting by the carriers as they’re type of working with their present ebook. We have now seen, as Elizabeth described, quite a lot of procuring exercise, however that’s shopper pushed and is a response to the upper charges that just about everyone seems to be experiencing proper now. The implications of that for us is that in our Verisk advertising and marketing options enterprise, now we have seen declines inside that enterprise due to decrease general promoting spend by the carriers as a operate of this surroundings.

Stacey Brodbar: Subsequent query, please.

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

Manav Patnaik: Thanks. I assume I’ll simply ask the query across the steerage that was maintained. I imply, this quarter got here in, I believe above at the very least our expectations and doubtless yours. Appropriate me if I’m incorrect there, but when the subscription development stays regular prefer it often does, are you implying that the transaction piece may see some materials declines? Simply would love any assist with simply attempting to bridge that.

Elizabeth Mann: Sure. Thanks very a lot, Manav. On the steerage, we’re very happy with our outcomes year-to-date. We’ve given full-year steerage in an effort to deliver extra transparency and for people to see how the enterprise goes. We did replace that mid-year after seeing vital shifts within the surroundings. However our full-year steerage does suggest income development of roughly 8% to 9% on a reported foundation that’s above our long-term targets. As we have a look at the fourth quarter, no particular feedback on the fourth quarter aside from what I highlighted, which is to remind that the expansion comparisons do get more durable within the fourth quarter as a result of storm income and the tax profit there.

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

Alex Kramm: Sure. Hey, good morning, everybody. Simply Lee, you retain on speaking concerning the strategic dialogue you’ve got with prospects at a excessive stage. It seems like some of these things is resonating. I assume I’m curious, are you really measuring success in any manner but or is that this too early? I imply, ought to we be in search of bigger, I don’t know, outsourcing offers or perhaps once more particularly like all revenues that you simply’re monitoring you could already discuss?

Lee Shavel: Thanks, Alex. I’m comfortable to deal with that. I believe now we have seen a transparent profit in a wide range of areas. So one and first is that participating at that strategic dialogue and I most likely have had over a dozen consumer CEO conferences and one factor that we give attention to in that’s understanding their broader enterprise challenges inside this surroundings. And there’s additionally a give attention to what’s Verisk doing for us and the place are their areas that we’re serving to others that we may also help them. And particularly, in quite a few these conversations, we’ve recognized merchandise — present merchandise that now we have that may be significantly useful on this surroundings. And I’d say are what now we have achieved to assist carriers analyze their present fee adequacy and the place there could also be alternatives to enhance their charges of their auto ebook or in different elements of their enterprise.

And that’s opened up some channels that earlier than the place our bottoms up strategy might have run into an impediment throughout the group. However when given the chance to explain the strategic profit, the monetary profit, we’re getting extra prime down help. And I’ve seen that happen in quite a few shoppers. So I believe that’s one. The second is in understanding areas, rising areas the place they’re going through both challenges or curiosity in new applied sciences, a possibility to information what we’re doing in a few of our initiatives like core strains, reimagine, what we’re doing in generative AI, to tailor them to what we all know has strategic resonance for these shoppers has been useful. And so I believe as now we have been investing in quite a few generative AI functions that has been particularly helped by getting perception and purchase in from these ranges.

I had one dinner with the CEO stated, look, Lee, we may spend tens of thousands and thousands of {dollars} on generative AI, and I’m unsure what we’ll be capable of generate out of it. However in case you can develop a pilot and we will profit from that. We’d be comfortable to check that pilot as quickly as you’ve got it prepared. And I believe that’s a terrific instance of the place we’re capable of substantiate that strategic dialogue and translate it into focused product growth at a sooner fee than we might have earlier than. I believe these are actually advantages that we’ll hope to start to ship extra development for us in 2024 supporting our core enterprise.

Operator: Your subsequent query comes from the road of Greg Peters with Raymond James. Your line is now open, Greg.

Greg Peters: Nice. Good morning, everybody. I’ll focus my query on Slide 6 of your investor deck the place you breakout subscription and non-subscription development. And I assume I’m going to come back on the non-subscription piece the place you callout auto underwriting, property estimating, and life insurance coverage. And clearly, you’re doing rather well this 12 months. However we’re additionally coping with some actually uncommon profitability challenges inside auto and property. Would you anticipate that the non-subscription natural development fee would inversely correlate with form of the underwriting cycle to your service companions, or am I lacking one thing?

Elizabeth Mann: Nicely, let me thanks — thanks for the query, Greg. Let me take a crack at that. I believe it’s a bit bit onerous to attract that conclusion. The transactional income is a mix of a few completely different areas. We’ve highlighted the principle ones that contributed to the expansion. The auto underwriting, the procuring exercise has pushed that, the property estimating options has a transactional element associated to climate exercise after which life on the incremental providers. So I’m unsure I’d level it on to an inverse correlation to the underwriting surroundings.

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

Andrew Jeffrey: Thanks. Good morning. Respect you taking the query. Elizabeth, may you give us an replace on the state of two markets? One, Florida, simply an replace on liquidations, and the way that’s impacting your outlook for the fourth quarter. And in addition California, I do know there’s been I believe Lee referred to in your ready remarks, some disruption in, particularly householders, underwriting in California and a few challenges that carriers are going through elevating charges. Simply questioning if there are any updates in both of these areas because it pertains to the steerage and perhaps the longer-term outlook too.

Lee Shavel: Sure. Hey, Andrew, that is Lee. I do know you directed that to Elizabeth, however now we have Neil Spector who runs our underwriting enterprise for us, and I believe he’s been closest to that. So let me give him a possibility to offer you a learn from what we’re seeing in these markets.