Verisk Analytics Inc (VRSK) — Q4 2017 Earnings Call Transcript

Thank you, Heidi, and good morning, everyone. We appreciate you joining us today for the discussion of our fourth quarter 2017 financial results. With me on this call this morning are Scott Stephenson, Chairman, President, and Chief Executive Officer; and Mark Anquillare, Chief Operating Officer. Following comments by Scott, Mark, and myself highlighting some key points about our financial performance, we will open up the call for your questions. Unless stated otherwise, all results we discuss today will reflect continuing operations. All discussions of EBITDA reflect adjusted EBITDA, for which you can find a reconciliation in our press release. The earnings release referenced on this call, as well as 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. Finally, as set forth in more detail in today's earnings release, I will remind everyone that today's call may include forward-looking statements about Verisk's future performance. 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. Now I will turn the call over to Scott Stephenson.

Thank you and good morning. It's a real pleasure to welcome Lee to his first earnings call as Verisk's new CFO. Lee's experience and insight from his time as NASDAQ CFO are already contributing to developments at Verisk. One of the first jobs he and I agreed on was for him to do a listening tour of some of our major institutional shareholders to hear your candid feedback about your likes and dislikes concerning owning Verisk. This has been the healthy exercise we expected, and we believe your feedback will be expressed in our evolving policies and communication practices in the coming quarters. Lee has already been able to complete an annual budget cycle with us, and so he has quickly become grounded in the rudiments of our business. As we described in our recent Investor Day, Verisk advances by achieving strong levels of organic revenue growth, and the primary driver of high-quality organic revenue is the sale of multiyear subscriptions. A multiyear subscription is the best demonstration that our solutions have moved from nice-to-have to must-have. Over the last 90 days, there have been several encouraging developments. To name three: First, Argus acquired a large multiyear subscription agreement along with the associated data rights with the only major credit card issuer in the English-speaking world that was not a customer. Second, WoodMac saw good progress in the number and value of subscription agreements signed. And third, in the insurance vertical, against a backdrop of many contract signings, we had 3 companies choose to focus exclusively on our catastrophe models and saw 2 other companies make an exclusive commitment to our Geomni program of imagery capture and analysis. But perhaps most important of all, we have the chance to see the value of our industry-standard solutions tested in the context of the merger of 2 carriers and are very pleased with the degree to which our value and subscription price points stood the test as we finalized that new agreement. Subscriptions, of course, can cut both ways. When they are lost, it takes even more sales success to compensate and grow. In 2017, we had such conditions at work at Argus, where 2 government and 1 legacy subscription agreement rolled off with a reduction of about $11 million in annual revenue. As we assess our business into 2018, we observe the following across our several thousand customers: we see no material risk at this time of a lost customer relationship in the insurance and financial services verticals. And in energy, two accounts that produced subscription revenue in '17 will be combined into one as a result of a merger with relatively immaterial impacts. The substantial majority of our customer relationships are showing year-over-year increases in revenue related primarily to the adoption of more of our product suite. We are aware of only two accounts, one in financial services and one in energy, where we expect year-over-year revenues to be down materially in 2018. In the financial services example, this is due to the phenomenon we have previously described, where first-year revenue spikes due to implementation, followed thereafter by a steady but lower level of high-quality subscription revenue. In the case of energy, the customer no longer exists due to merger. Our industry-standard solutions will show growth in 2018, but at a slightly lower rate than in '17. Because of general softness in the insurance environment and to preserve our cross-sell opportunities, we deliberately moderated growth for '18 to a modest degree. However, we see hardening in the market, and we expect that in '19, we will be at or above the growth rate of '17. WoodMac growth continues to move to the positive. In '18, the growth will primarily relate to cross-selling and expansion of exciting product sets, including subsurface analytics, renewable energy sources, and chemicals. We are still minimizing price increases in '18 in support of cross-selling opportunities, but expect '19 and beyond to make more use of pricing in our overall growth mix. One of the best leading indicators of our organic revenue growth is the number and quality of meetings we had with senior decision-makers at our customers, in which we explore new opportunities for value creation. In that context, it is encouraging that in the last 90 days, we, on 3 occasions, had company CEOs ask to bring themselves and their senior teams to our offices to observe Verisk's InsureTech and jointly develop new or bespoke solutions. Another leading indicator that has meaning for me is our success in winning business with the newer entrants into the markets we serve. For example, the world is alive with interest in the InsureTech space. Of the 8 leading InsureTech firms founded in '16 and '17 that operate as risk-bearing or risk-managing entities, 6 of them are currently customers of Verisk. I take that as evidence of the freshness of our value proposition. We're busy at work integrating the companies we acquired in 2017. The work of integration has 3 different flavors at this moment: First, we acquired seven regional image capture companies with the intent to merge them into one integrated national entity. Success in this endeavor is really entirely a function of integration since this is core to the value proposition. I'm pleased with our progress here. At the end of last year, with all the extreme weather events, the flexibility and integration of our operations were tested. And I was pleased to see that the quality and responsiveness of our image capture, driven by the integration of our platform, permitted us to image Puerto Rico following Hurricane Maria with such speed and precision that we unlocked business with mortgage lenders who were not previously customers. At the other end of the spectrum, PowerAdvocate and Sequel are relatively mature organizations, where, in addition to financial and HR integration, the primary work is to link their platforms to those elsewhere in Verisk. Specifically, PowerAdvocate to WoodMac oil and gas analytics and Sequel to AIR's Touchstone modeling platform. Teams are well underway on this work. In fact, we've recently signed a major contract with one of the world's largest national oil companies, which involves deliverables on the part of both PowerAdvocate and WoodMac. Both teams report this sale would not have happened had the 2 companies not come together. The third category is a series of smaller product organizations, most of them in insurance, where the immediate work is to harness the Verisk distribution channel to increase sales. We are well underway with this work. At our recent Investor Day, I described the 5 qualities that make our company a moated business, which can produce strong organic revenue growth on a sustained basis: one, vertical market expertise; two, unique datasets, ideally contributed by our customers; three, deep integration with customer workflows; four, global reach leading to an expanding customer account; and five, synergies arising from the sharing of methods and capabilities across our enterprise. I see progress on all fronts. And over the last 90 days, I'm particularly struck by our growing effectiveness in overseas markets, particularly the U.K. As a result, our organic revenue growth in the quarter was 7.6%, consistent with our longer-term goals. Our rate of organic EBITDA growth in the quarter was about 5%, lower than revenue growth and a function, particularly, of the significant investment we made in Geomni as we continue to ramp up that operation. In 2018, I expect that relationship to be reversed, meaning enterprise organic EBITDA growth greater than organic revenue growth. I'd like to comment on the corporate tax reform that was enacted at the end of 2017. Lee will take you through the specific implications for Verisk as regards our tax rate and the after-tax cash flow and accounting implications. From a strategic perspective, we are treating this as an opportunity to reinvest in our people. And so we have taken the decision to double our training budgets in most categories and to materially increase our contributions to long-term wealth for our people in the form of greater 401(k) matching and expanded employee stock purchase programs. We have built all of these investments into our 2018 budget and still expect a strong bottom line this year. After the additional free cash, we intend to be disciplined with our investor's money, looking for the highest-return investment opportunities and looking favorably on opportunities to return capital to shareholders. With that, I'll hand it over to Mark for some comments on the insurance business.

Thank you, Scott. In our insurance business, we had another strong quarter, with all insurance-facing businesses, industry standard programs, catastrophe modeling, repair cost estimating, plans analytics, and remote imagery contributing to the growth. Let me highlight a few areas that drove top-line growth and update you on several initiatives to aggregate new sources of data to better position us for growth in the future. Our claims businesses, repair cost estimating and claims analytics experienced a nice uptick in growth in the second half of 2017. We have been successful in expanding our insurance fraud prevention business, claims analytics, by broadening our use cases, aggregating additional information, licensing our antifraud analytic tools and extending beyond our traditional insurance customers to entities such as self-insured companies and third-party administrators. In most cases, these opportunities take the form of multiyear contracts, but in some instances, they start as a paid proof of concept. We're optimistic about these extensions of our business. We've also experienced a surge in opportunities in our workers' compensation solutions business, bringing on several major new accounts during 2017. Over the past couple of years, we've invested to provide increased automation and enhanced insights to our customers. This investment has proven successful as we implement new customers and attract a growing sales pipeline. During the fourth quarter, Geomni, our business that harnesses remote sensing and machine learning technologies to provide information about residential and commercial structures, deployed one of its regional hubs to proactively capture aerial imagery in response to the Southern California fires. Imagery collected helps document the areas affected, provides operational efficiencies, and accelerates the damage estimation and restoration process for homes and commercial buildings, helping insurers protect people and property. As Scott mentioned in his earlier comments, we have made significant progress at Geomni, signing new customers, advancing the analytics, and building geographic coverage. We were thrilled to sign an exclusive agreement with Honda to join the Verisk Data Exchange in the quarter. Honda will provide Verisk with driving data from consenting owners of Honda's connected cars. Honda customers can access the Verisk Driving Score, a simple metric that rates driving behavior. Insurers can use the data from the Verisk Data Exchange with their usage-based insurance programs, typically designed to reward safe drivers or use Verisk driver behavior scores that are filed and approved for use today in 43 states. With the addition of Honda, the total market share of automakers participating in the Verisk Data Exchange increased to 27% of vehicles sold in the United States. The exchange now has close to 3 million cars, with 30 billion miles of driving data, and it's growing at more than 150,000 vehicles each month. This telematics information is a key component of our broader mission to aggregate remote sensing information and find insights to help our customers. This remote sensing data includes information from mobile devices and connected homes and buildings. For example, with connected homes, our research using IoT data has shown opportunities for improved underwriting results for our customers writing homeowners' insurance. International expansion is an important part of our long-term growth plan. AIR continues to lead our international expansion efforts as PICC Reinsurance Company Limited, a leading Chinese reinsurance company, has collaborated with AIR to better assess and manage its growing portfolio of catastrophe risk reinsurance business. Another positive on the international front was our introduction of a new inland flood model for Japan, along with enhancements to our Japan typhoon model. The integration of our new international acquisitions has progressed smoothly. The newly acquired businesses have gained immediate benefit by leveraging Verisk's technology infrastructure and cloud capabilities. Specific to Sequel, we work with clients to enable seamless data transfer from Sequel's business intelligence tools to AIR's Touchstone Solutions. In the longer term, our goal is to integrate Sequel's front-end exposure management and visualization platform with ISO's underwriting information and portfolio assessment and modeling features of AIR. This modular approach will allow product cross-sell with Sequel customers as well as existing Verisk customers. Our integration efforts at Sequel are also working in 2 directions, as evidenced by an opportunity for our claims analytics business to leverage some existing Sequel software to serve our U.S. claims analytics customers. All in all, both qualitatively and quantitatively, we are pleased with the performance of the insurance business. With that, let me turn the call over to Lee to cover our financial results.

Thanks, Mark. It's an honor to be here and to serve this great company and its shareholders while collaborating with Scott and his management team. Over the past two months, I've had the chance to meet or speak with 18 of our top 25 active investors, encompassing 50% of the active voting interest of our shareholders. We discussed various topics and I received many insightful perspectives, but two consistent themes emerged: a wish for better understanding of our capital management practices and an improvement in transparency and communication regarding our financial and operational performance. I am confident we will make progress in both areas in 2018. To facilitate this, we will introduce a quarterly earnings presentation in the first quarter of 2018, providing a consistent framework for reviewing our performance across different business lines, and we are exploring further enhancements based on the feedback I've received. Now, regarding our financial results for the quarter, I want to emphasize two key metrics we discussed on Investor Day: organic revenue growth and organic EBITDA growth. Verisk showed solid growth performance and momentum in the fourth quarter. Our organic revenue growth of 7.6%, and 7.4% on a constant-currency basis, aligns with our long-term guidance and is an increase from the comparable third quarter 2017 growth of 6.5% or 7% on a constant-currency basis. Average quarterly organic growth on a constant-currency basis in the second half of 2017 was 7.2%, compared to 3.3% in the first half, validating our expectation for an acceleration in the latter half of the year. I want to highlight that total acquired revenue in the quarter from deals that have not transitioned to organic was $26 million, with revenue from the three August acquisitions—G2, Sequel, and LCI—contributing $16 million in the quarter, and combined margins around 36%, as anticipated. For the entire year, Verisk achieved organic revenue growth of 4.5% and 5.3% on a constant-currency basis, which is below our target due to industry challenges at WoodMac and contract expirations at Argus affecting revenues from 2016, particularly in the first half. On a side note regarding revenue accounting, the company will adopt the new revenue recognition standard, ASC 606, in the first quarter of 2018, and we expect the impact to be minimal on our financial results. Breaking down organic revenue growth: as shown in Table 2 of the press release, Decision Analytics, especially in insurance, was the main contributor to this growth at 12.9%, driven by strong progress in repair cost estimating and claims analytics solutions, with solid growth in underwriting solutions as well. The positive financial effects of severe weather in the third quarter continued into the fourth quarter, adding about $8 million in revenue from repair cost estimating and imagery-based solutions. Even excluding this revenue, organic insurance revenue growth was 8.2%. Decision Analytics for energy showed improvement, reaching a 5.2% organic growth in the fourth quarter, up from 0.2% in the third quarter. Considering the currency impact for energy, mainly WoodMac, the energy revenue growth was 4.7% on a constant-currency basis, increasing for each of the prior three quarters. We're pleased to see positive trends in our subscription business, supported by strong consulting revenue numbers, which often act as a leading market indicator. In Decision Analytics financial services, we recorded a growth of 0.4% in the fourth quarter, reversing the declining trend from the previous three quarters due to contract expirations. This organic growth was driven by robust performance in analytical data warehousing products, share of wallet model algorithms, and media effectiveness solutions. We are consistently winning significant new business with clients, as Scott highlighted, in areas such as media effectiveness, analytical solutions, competitive benchmarking, decisioning algorithms, and regulatory solutions. G2 and LCI are integrating well, with joint product roadshows that clients have received positively. Fintellix has also contributed by introducing new products in the insurance sector. We believe financial services made clear progress in the fourth quarter and are optimistic about its contribution to organic growth in 2018. Risk Assessment reported a 5.3% year-over-year growth for the period, up from 4.9% in the third quarter, having increased steadily across each of the four quarters in 2017. Organic growth was supported by the effective annual growth in 2017 invoices, alongside new solutions in industry-standard insurance programs and increased subscription revenue from underwriting solutions. Organic EBITDA growth was 4.9% for the quarter on a year-over-year basis versus organic revenue growth of 7.6%, reflecting a 9.7% growth in organic cost of revenue and SG&A due to continued investment in various internal opportunities, particularly Geomni. For the year, EBITDA growth was 4% over 2016 against organic revenue growth of 4.5%, due to a 5.2% full-year rise in the cost of revenue and SG&A, which also indicates ongoing internal investment in several growth opportunities and organic revenue growth falling short of targets at Argus and WoodMac relative to expense growth. Excluding expenses related to internal investment initiatives, organic EBITDA grew at a faster pace than organic revenue growth in 2017. The adjusted EBITDA margin from continuing operations was 49% for 2017, a slight decrease from 50% in 2016, mainly due to the impact of acquisitions. On an organic basis, the EBITDA margin remained roughly unchanged. Depreciation and amortization were $64 million in the quarter, up 28% from the same quarter last year, and totaled $237 million for 2017, a 12% increase from 2016, reflecting the impacts of acquisitions and higher capital expenditures in both periods. We anticipate fixed asset depreciation and amortization of about $150 million to $160 million, along with about $130 million in amortization of intangible assets in 2018. Interest expense was $32 million in the quarter, a 13% rise from the prior year, and totaled $119 million for 2017, a 1% decrease from 2016. Total debt stood at $3 billion as of December 31, 2017. Our leverage at the end of the fourth quarter was 2.7x, and we aim to bring it back to our reference level of 2.5x over time. Our cash and cash equivalents were approximately $142 million at the close of 2017. The reported effective tax rate for the quarter was a negative 14.1% and a positive 19.7% for the full year of 2017. These effective rates include an $89 million benefit from the reevaluation of our net deferred tax liabilities due to newly enacted tax legislation. We estimate our effective tax rate for 2018 to be between 21% and 23%. Diluted adjusted EPS from continuing operations was $1.34 for the fourth quarter, increasing from $0.80 in the prior year quarter, and $3.74 for 2017, up from $3.11 in 2016. The increase in both cases primarily reflects the impact of the 2017 tax reform. Excluding the tax reform benefit of $0.53 per share in the fourth quarter, diluted adjusted EPS was $0.81 for the quarter, a 1% increase from the prior year, and $3.21 for 2017, up 3% from 2016. The average diluted share count was 168.3 million shares for the quarter, with a diluted share count of 168.7 million shares at the end of 2017. Regarding cash flow: Net cash provided by operating activities from continuing operations was $744 million for 2017, a 34% increase from $556 million in 2016. Capital expenditures from continuing operations totaled $184 million in 2017, up 26% from $146 million in 2016, primarily due to increased investment in Geomni. We expect capital expenditures to range between $220 million and $230 million in 2018, including ongoing investments in our aerial imagery solutions at Geomni, which are set to peak in 2018. Consequently, we foresee CapEx as a percentage of revenues steadily declining. Free cash flow was $560 million for 2017, marking a 9.8% increase after excluding $100 million of taxes paid related to the sale of the healthcare business in 2016. We repurchased 3.4 million shares in 2017, returning $270 million to shareholders at a weighted average price of $80.39. As of December 31, 2017, we had $366 million remaining under our share repurchase authorization and intend to continue buybacks in 2018. To summarize, 2017's results reflected growth challenges in the early part of the year at Wood Mackenzie due to a cyclical decline in the energy sector, FX headwinds, and certain contract expirations at Argus. Both businesses showed revenue progress in the second half, with strong performance in our insurance business partly attributed to revenue from significant severe weather in the third quarter. We returned to our targeted organic revenue growth in the second half of 2017. We remain hopeful for our long-term organic growth targets, especially if growth continues to improve at both WoodMac and Argus as seen in the latter half of the year. We are satisfied with our plan for 2018 and are enthusiastic about investing for long-term profitable growth. We are confident in our financial strength and capital structure to support these long-term investments. We truly appreciate all the support and interest in Verisk. I'll now turn it over to the operator to open the line for questions.

Can I ask about your comments regarding industry standard programs? Could you elaborate on your cautious approach to pricing? In the past, you mentioned that your pricing capabilities are somewhat separate from the insurance industry's environment. What factors contributed to that cautious stance, and how significant do you think this will be for your program’s impact?

Thank you, Tim. Let me start with the end. It's not a particularly significant effect, but of course, folks will be watching our year-over-year progression as we go through 2018. We have visibility into this, so we just wanted to note it. It's not a very material effect. We're talking about basis points. The reason that we did it was that we've just, in the round, accounted for where our insurance customers were as they exited '17, the state of their own businesses. The most important thing in the growth of our insurance business by far, and I hope that's evident to everybody, is the cross-selling of our total suite of solutions. Essentially, we made a decision about where we're going to take our gains in 2018. At the margin, we're leaning a little bit more towards the other parts of the suite facing our insurance customers. So we just wanted to note it for you. It's not a big effect at all. We wanted to call it out just because it's a line item that we report, but it's not highly material.

Okay. And just to be clear, that's driven by the industry standard, not the broader insurance category that includes Decision Analytics and so forth?

That's correct. I was only talking about our industry standard line item within the overall insurance suite. We feel very good about the overall insurance business.

Regarding the organic EBITDA margins expected to grow in 2018, I have a couple of related questions. Is this projection made prior to considering the reinvestment of some tax savings? If so, could you provide an estimate of the size of that reinvestment? Additionally, could you share any insights about how acquisitions might influence the 2018 margins? There are several variables involved, specifically regarding acquired and deferred revenue challenges and the impact of prior acquisitions becoming relevant again, particularly concerning transaction costs from 2017. So, my first question is whether the outlook for organic margins takes the reinvestment into account. Also, can you help clarify those two aspects?

Right, thanks, Jeff. I'll start, then I'll bump it over to Lee. With respect to the statement about the projection of organic EBITDA exceeding that of organic revenue, that is before any tax effects whatsoever. So that is net of all the investing that we're doing in the business in total. And hopefully, that's responsive to your question. With respect to some of the detail underneath, Lee, do you want to add anything to all that?

Yes. Jeff, part of the question relates to the tax benefits reinvestment. We expect our organic EBITDA growth to reflect the core business while we invest in growth initiatives, which we believe will lead to margin expansion over time as these investments mature. However, as I mentioned earlier, when excluding those investments, we saw an increase in organic EBITDA margin in 2017. Our current focus is on two key areas: the performance of the core business and how the investments are doing. Regarding acquisitions, we've shared the impact of acquisitions in the fourth quarter, but it's tough to predict their overall effect on margins in the long run. Our priority is the organic EBITDA margin, which is what we're actively managing. While acquisitions may initially dilute EBITDA margins, we're aiming for year-over-year improvements as those businesses integrate into our core operations. I hope this provides clarity on the organic EBITDA margin topic.

That's helpful. Regarding the outlook for Argus or financial services, there was a moment during Investor Day when a question was raised about whether 2018 would be a year of significant growth. I recall you, Scott, mentioning that you expected this, and there seemed to be agreement on that. Today, there was also a comment regarding a growth effect related to one-time revenue in 2017, stemming from a major new client coming on board. Given all that, do you still expect 2018 for Argus to be a year of substantial organic growth?

Yes, it is.

The first question is about organic revenue growth in 2018. Scott, you discussed various factors, and mentioned that you expect 2019 to be larger than 2017 in the insurance sector. I want to confirm if I understood that correctly. Additionally, Lee, you reviewed how the second half aligns with the long-term organic growth range you shared. Given all these components, how should we view 2018?

Right. So again, this was Tim's question as well. My comment about moderating price increases related only to one part of what we do in insurance, and that's industry-standard insurance programs. I called it out only because it's a line item that we report separately. So you get to see it. It's a relatively immaterial impact. So hopefully, everybody is clear on that. With respect to the sum of everything that we do in insurance, which is both that as well as all the things that we do in DA insurance, we see '18 as a very positive year. And so the only thing you should add to that, with respect to my '19 comment, is there will be even a little more wind in our sails in '19 with respect to the industry standard insurance programs because of the hardening that is taking place in the premium environment in insurance. So we see '18 as a good extension of what you saw in the latter half of '17. In '19, there's one macro factor that will actually be positive as we go forward from '18.

So Manav, just to address some of the comments that I was making, first, the targets that we have set out of 7% to 8% organic revenue growth and the EBITDA expansion beyond that. I think, if you look at the fourth quarter, I think the summary that we offered is that we've achieved those targets even though we continue to have progress to be made at both WoodMac and at Argus. And so that is something that we feel positive about our ability to continue to deliver on those expectations in 2018. And clearly, there is continued upside for us factoring in all of the elements that we discussed.

Got it. And then my second question is just more on these organic investments you are making and sort of the time of phasing in which we should expect some of the results. So obviously, Geomni sounds like you've already seen some of the fruition with the extreme weather activity. But when do we see telematics, connected home, all these other things you talk about, start giving you that return you're expecting?

Let me start by saying that both Geomni and telematics are crucial aspects of our business, representing new types of data that can be utilized for improved decision-making. It's important to note that both data types have applications within the insurance sector, as well as beyond it. As we look at how we will generate revenue from our investments, I believe these applications will initially manifest in the insurance vertical but will also expand into other markets over time. Regarding your question, we are already witnessing the positive outcomes from our Geomni investments, which is very promising. We are optimistic about the developments in IoT; however, the revenue generated from IoT is expected to grow gradually. One contributing factor is the connected car trend, where we are currently leaders. However, the adoption of connected cars compared to the total vehicle population in the U.S. is a long-term trend that will take time for all automakers to transition their fleets to fully connected models. While the impact of IoT in homes may evolve at a different pace, the value derived from data signals from cars is generally higher than those from household appliances. We are currently seeing growth in IoT, but it is likely to be a longer-term process. Mark, do you have anything to add?

I think it's well said. I mean, the vision is that the rating paradigm will shift as to how automobiles, and more importantly, people are underwritten, and the premiums determined. We hope to have all that information for every vehicle and every person. At the same time, today, it's a little bit about claims, and so it's a little bit about bespoke modeling to help insurers kind of perfect their own internal behavioral scores.

My first question is just broadly on pricing. I know you mentioned the insurance piece, and it's not significant. But you also mentioned minimizing price increases on cross-selling in WoodMac with some potential in 2019 on pricing. So just broadly speaking, do you guys view pricing as an underappreciated lever for the business as we look long term? Or is it just you have very high market share and pricing is not a huge lever here because of cross-sell?

Yes. Let me state this in two ways. Pricing is a part of the progression of our revenue every year, including in 2018. I noted the relative degree to which we're making use of the price mechanism in 2018 in one part of what we do in insurance and in energy. But even in that part of insurance and in energy, our pricing is up year-over-year. So please be sure to note that. And then all I would add to that is, in 2019, I believe that there will be, relative to 2018, yet more opportunity where price is concerned for the reasons that I stated: the insurance environment generally hardening on the one hand, and Wood Mackenzie's customers continuing to cycle to ever more strength as the commodity cycle has improved. So '18, there is a price effect. It's relatively in line with what was there in '17. I noted the differences. And in '19, I believe the price effect will be even stronger than it was in '18.

Very helpful. I have a follow-up question, perhaps for Lee regarding tax reform. Could you remind us of the effective tax rate, which is between 21% and 23%? Also, what is the cash tax savings impact for 2018 due to tax reform? Additionally, considering that you are currently experiencing a significant capital expenditure cycle that will ease by 2020 or 2022, do you plan to accelerate capital expenditures because of the tax reform regulations? Please provide us with more details regarding tax reform.

Sure. Thank you, Hamzah. So the answer to your question on the tax rate: We would anticipate that the drop in our U.S. tax rate resulting from tax reform will generate approximately an incremental $90 million of additional cash flow in 2018. And with regard to whether that has any impact on our CapEx timing, I think the answer is no; we view each of those projects as pursuing their natural life and our expectations of investing in them from a business standpoint. So no anticipated change on that front.

You had indicated your overall insurance growth in 2018 should run at a similar pace as the second half of 2017 organically. Given some of the strength in the second half of '17 came from weather-related catastrophe modeling, is the expectation that you'll see incremental strengthening from other areas within insurance?

Yes, that's right. And Mark, I don't know if you want to expand on that.

I think we feel pretty good across all of our businesses. Clearly, we did benefit from the severe weather. It's tough to predict severe weather in the future, so I note your point. But I think we feel like both contract signings, which were strong at the end of 2017, and most of our businesses are deeply engaged with customers, and that ultimately pays benefit.

You'll remember that Mark started his comments commenting on the claims side of our business. So for example, there's a lot that is in that, that actually is not related to severe weather impacts. And so as we look at the portfolio of solutions across everything we do in insurance, yes, we do see broad performance on to the rate of organic revenue growth and insurance that you've seen in the second half of '17.

Yes, you're asking two distinct questions. First, the integrations are going well. As I mentioned, there are three categories of integration. The integration related to image capture required us to develop a national capability from a set of regional businesses, which we have largely accomplished. I noted some successes in the fourth quarter of 2017 when we put that capability to the test while keeping up with rapid changes in the market. This shows that the integration has been successful. Currently, the margin progression at Geomni depends on business growth. While it is not completely a fixed-cost business, it is predominantly so, meaning that as we expand, the margins will naturally improve. The second question relates to the future margin progression of our acquired businesses. For the more established companies like Sequel and PowerAdvocate, which we previously discussed, their margin profiles are already solid. Although they don't match the overall margins of Verisk yet, we expect them to move closer as they grow. There are also a few smaller acquisitions that focus more on products, and we do not strictly hold their margins to the same standard as the rest of Verisk. However, we anticipate positive incremental growth in their EBITDAs.

So a question for you on underwriters and automation. There are a number of tech start-ups looking to accelerate automation in underwriting. They have some catchy names, like Pie Insurance and Lemonade. How does Verisk interact with these start-ups? Do they collaborate, compete, wait, and see?

I'm happy to start there. I think, first of all, you should understand with a lot of these start-ups, from an InsureTech perspective, there are two types, right. There's some that are risk-bearing entities. I will tell you, in many cases, as Scott highlighted, they are customers. There are a couple of instances where the amount they spend on us was actually more than they wrote in premiums. So those are good relationships, and they're very dependent upon us as they want to become very analytic. I think your other question is really around the InsureTech world that is kind of very blossoming now. We talk frequently; most of the ones that have started to get a little bit of lift or actually have a customer or two are usually at our door. I think we are very well in tune with that environment and that world. The other thing I'd like to highlight is that I think a lot of our customers, and I think we believe ourselves to be kind of, in many cases, the ultimate InsureTech. We do a lot of this. We spend a lot of time on R&D. We have a lot of cutting-edge analytic methods, some in search of application, some with ideas around application, and we share that with customers. I think that thought leadership is something that is well-respected.

So for my second question, congratulations on the Honda win. You have 27% share. I guess, my question is, when do you hit the tipping point for more accelerated adoption?

I would like to underscore that most insurers are increasingly seeing us as a valuable source of information. The industry is set to evolve, and while currently, only a small percentage of cars are connected, the way we gather data about vehicles and driving behavior will rely on both connected cars—an area that will become significantly important in the next 5 to 10 years—and various devices. Smartphones, for example, provide a wealth of relevant information, which users can opt into sharing. Insurers are currently leveraging this data to refine their models for underwriting. I believe that in the future, every pricing decision will rely on some form of database, hopefully ours, to analyze driving behavior from the past six months, leading to adjustments in rates, pricing, and premiums. This is how I envision the future landscape of insurance pricing, and we believe we are strategically positioned to capitalize on it.

I want to come back to the margin outlook because, quite frankly, I'm still a little bit confused with all the moving pieces. So, Lee, I guess, when you put it all together, the organic expansion, but also kind of the impact of investments and the acquisitions, I mean, where roughly should we be shaking out for the margins? I mean, it sounds like margins should be down overall a little bit. Is it really just a Decision Analytics story? Or is the Risk Assessment also margin decline? Any incremental comment you can give about the magnitude would be helpful.

Sure. Thanks, Alex. So the way I would summarize it, Alex, and building off of Scott's comments, is that we expect, in 2018, that, on an organic basis, our EBITDA margins should expand. That is a combination of kind of the total organic business, meaning the core business and the growth initiatives at Geomni and the chemicals and the subsurface at WoodMac and the others that we've described. The function of continuing to target the 7% to 8% organic revenue growth and the EBITDA expansion beyond that, we believe, will enable us to achieve that EBITDA growth in excess of overall revenue growth. As it relates to the acquisition impact, obviously, that's a variable that is more difficult to anticipate, and the overall net effect will end up being a balancing of what we can achieve from an organic standpoint in terms of margin expansion, offset to some extent by the impact of the acquisitions that are coming on. We are trying to give more focus around that organic EBITDA margin so that you can see meaningfully the progression that we're making in the core business. Over time, what I would emphasize is that all of the acquisitions that we look at have great operating leverage. We expect that they will contribute to overall EBITDA growth in those businesses in excess of their organic revenue growth. Hopefully, that answers it. I know that probably what you're looking for is what is the net impact on the acquisitions to the whole, but that becomes that net impact between the two. The important thing that we feel we want folks to focus on is that organic EBITDA margin, which we feel confident will expand in 2018.

Right. And maybe just to add to that, I write upfront and then Lee also emphasized that we have benefited from the listening tour that Lee has engaged with our investors. One message that was very clear was that our investors, in general, would like to hear us talk with increased emphasis about organic results, organic revenue growth and organic EBITDA progression. You'll hear that more as a part of our presentation. But we're very excited about the acquisitions also, which are contributing in 2018 to the overall top and bottom line of the company. We’re enthusiastic about their contributions this year and the contributions they'll make in the future. But you're hearing an emphasis on organic because that's what our investors have told us they like us to have.

Let me add one thing just to allay any concerns. It's not because we don't want to be focused on the financial returns or the acquisitions. In my conversations with a lot of investors, the focus there has to be, 'Are we generating good returns on capital for that component of the business?' Clearly, it has a financial impact overall, but I want to ensure that we build on the disclosure that we provided at Investor Day around the performance of those entities from a capital standpoint in addition to the financial performance. That will be something that you'll see in 2018, where we'll be working to enhance disclosure around those components. So just wanted to add that point.

I mean, I think the issue, as you probably heard in your tour, is you have a business that's so heavily subscription-based, people believe you should have extreme visibility relative to a lot of other companies. The reality of it is, it's been extremely difficult to predict your quarter-to-quarter financial performance. This kind of inability to really be helpful on the forward-looking numbers, I think, it's a big reason why. But I'm sure you've heard that, and I'm sure you're thinking about ways to improve it. So I appreciate the color.

I know it's late. I've got one quick question. What should we be modeling for interest expense in 2018?

Yes. So Jeff, we've specifically not provided guidance around that. I don't think it's going to move materially. But as we're thinking about debt levels and our target aside, I just didn't want to set a specific expectation. I think you can look at the balances and at the rate historically; I don't think it will vary significantly.

I’m curious about the PowerAdvocate acquisition. Is that reflected on the balance sheet at the end of the year, or has it not been included yet?

No, it is on the balance sheet. We funded that substantially with debt.

You've talked about a lot of newer, I would say, growth drivers relative to Verisk's historical businesses. I haven't heard a mention of cyber. I wonder how you think about cyber risk? And whether there are some organic opportunities to grow in cyber or whether M&A is something you're looking at?

Yes, thank you for the question. I'll begin, and Mark can chime in if he'd like. Cyber is definitely a part of our current operations. For those familiar with the property and casualty insurance industry, it's interesting to note that despite the extensive discussions around cyber risk, the cyber insurance line is not currently that substantial. It generates considerably more conversation than premium income at this stage. We anticipate that the cyber line will continue to expand, and we already offer modeling for it, with customers utilizing those models. We are actively involved in this area. Two key questions arise for us, and Mark is welcome to add his thoughts. The first question is how quickly the cyber line will grow as an insurance product. The second is regarding other potential avenues through which we can assist operating companies in managing cyber exposures, beyond just managing insurance policies. Mark, would you like to add anything?

We have been kind of the industry standard as it relates to the coverage language in those policies. I think we've got a lot of customers we've highlighted at the Investor Day, where I think the more promising future growth is going to be inside of the models. As people try to grow, and for the most part, underwrite some of that cyber, some of the models, which we historically called cat models, are now being used for, what I'll refer to as, more of the liability side. Cyber is very prominent there. We've made some great progress in working inside of the folks in the London market as well as inside of the United States insurers. That will be a growth driver for us. I would tell you that it's probably more marginal in '18, but it will and should kick up in the future years.

Okay. Well, I think we're at the end of the questions. Thank you all very much for joining us. We've enjoyed the conversation and look forward to being with you again to report on the next quarter. Lee will be following up with many of you. Let's continue to have a dialogue, and thank you very much for your time today.

Thank you very much.