Verisk Analytics, Inc. (NASDAQ:VRSK) Q4 2023 Earnings Call Transcript
Verisk Analytics, Inc. (NASDAQ:VRSK) Q4 2023 Earnings Call Transcript February 21, 2024
Verisk Analytics, Inc. misses on earnings expectations. Reported EPS is $1.4 EPS, expectations were $1.42. Verisk Analytics, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to the Verisk Fourth Quarter and Full Year 2023 Earnings Results Conference Call. This call is being recorded. Currently, all participants are in listen-only mode. After today's prepared remarks, we will conduct a question-and-answer session, where we will limit participants to one question so that we can allow everyone to ask a question. We will have further instructions for you at that time. For opening remarks and introduction, I would now like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.
Stacey Brodbar: Thank you, 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 10-K can be found in the Investors section of our website, verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC. A replay of this call will be available for 30 days on our website and by dial-in. As set forth in more detail in today's earnings release, I will remind everyone today's call may include forward-looking statements about Verisk's future performance, including those related to our financial guidance.
Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance is contained in our recent SEC filings. Finally, I'd also like to remind everyone that the financial results for recent dispositions are included in our consolidated and GAAP results but are excluded from all organic constant currency growth figures. A reconciliation of reported and historic non-GAAP financial measures discussed on this call is provided in our 8-K and today's earnings presentation posted on the Investors section of our website, verisk.com. However, we are not able to provide a reconciliation of projected adjusted EBITDA and adjusted EBITDA margin to the most directly comparable expected GAAP results because of the unreasonably 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.
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 combine 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 AM Best 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 AM Best to downgrade their outlook for the homeowners 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 in 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 Reimagine project to reengineer 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 micro services 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 Xactware 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 Whitespace 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 Verisk's 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 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 re-platforming of our core solutions, some of which have been underinvested and need modernization to support future innovation. The most notable example is our Core Lines 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 life cycle. 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 Churney who retired at the end of the year.
And Doug Caccese and Saurabh Khemka, who are 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 as 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.
Elizabeth Mann : Thanks Lee, and good day to everyone on the call. I am pleased to share that Verisk delivered a solid fourth quarter capping off an outstanding 2023. On a consolidated and GAAP 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 $1.25, down 8.8% versus the prior year. The year-over-year decline 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 $0.19 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 for 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 recorded 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 US 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 Verisk 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 Insurtech 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 nonrate 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 one-time tax benefit of $30 million in the fourth quarter of 2022 and a $19 million litigation reserve taken in the fourth quarter 2023 that we mentioned earlier.
Adjusted net income decreased 9.3% to $204 million and diluted adjusted EPS decreased 2.1% to $1.40 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 the 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 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 million 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 $6.30 to $6.60 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 Investors section of our website, verisk.com. And now, I will turn the call back over to Lee, for some closing comments.
Lee Shavel: 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 through improved decision-making and operational efficiency is a formula that will also deliver value to our shareholders through growth and returns. We continue to appreciate the support and interest in Verisk, given the large number of analysts we have covering us, we ask that you limit yourself to one question. With that, I'll ask the operator, to open the line for questions.
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