Verisk Analytics Inc (VRSK) — Q4 2023 Earnings Call Transcript

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 unreasonable effort and high unpredictability of estimating certain items that are excluded from projected non-GAAP adjusted EBITDA and adjusted EBITDA margin, including, for example, tax consequences, acquisition-related costs, gains and losses from dispositions and other non-recurring expenses, the effect of which may be significant. And now, I'd like to turn the call over to Lee Shavel.

Thank you, Stacey. Good morning, everyone, and thank you for participating in this morning's call. I am pleased to be here today to recap what was an exceptional year for Verisk, marked by strategic, organizational and cultural change matched with outstanding financial performance and value creation for clients and shareholders alike. Elizabeth will provide the financial detail but in summary, we delivered 8.7% organic constant currency revenue growth in 2023, the strongest performance on record since our initial public offering back in 2009. And we exceeded the expectations we set at Investor Day in March. We 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 well 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 expand. 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 microservices technology that we have successfully deployed in the life insurance industry having material significance to the property and casualty segment and have been working with clients on testing applications. On augmentation, we have already been applying generative AI technology through our Discovery Navigator solution to dramatically accelerate the summarization of large and complex medical files in our casualty business. Prospectively, we have been developing and working with clients to refine several augmented underwriting applications. On connectivity, we have been investing in our 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 and 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 we continue to invest our capital at high internal rates of return. We are excited about the many opportunities we have to invest across our business in emerging technologies, including generative AI, low no-code applications, and international expansion. We also are investing behind upgrades and 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 lifecycle. Before we close, I want to address the recent leadership announcements naming three new business leaders to the Verisk Senior Operating Committee. Rob Newbold was named President, Extreme Events taking over the reins from Bill Churney who retired at the end of the year. 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.

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 was 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 non-rate action deal we signed for 2023. We have begun to overlap the positive inflection in shopping behavior from last year and are expecting growth to moderate in 2024. Our transactional revenue growth also benefited from double-digit growth within life insurance solutions, as we are seeing strong customer demand for incremental services. And within our extreme events business, we saw better-than-expected transactional growth driven by securitizations. Moving now to our adjusted EBITDA results. OCC adjusted EBITDA growth was 6.5% in the fourth quarter, while total adjusted EBITDA margin which includes both organic and inorganic results was 53.4%, up 70 basis points from the reported results in the prior year. The fourth quarter margin rate reflects the positive impact of sales leverage, cost discipline, and foreign currency changes. This was offset in part by margin pressure from higher incentive compensation, acquisitions, and organic investments for future growth. 2023 was a year of tremendous growth and efficiency for Verisk as evidenced by total OCC adjusted EBITDA growth of 11.5%, while total adjusted EBITDA margin was 53.5%, up 150 basis points from the prior year. This margin rate reflects core operating leverage from the strong revenue growth and cost discipline across the organization. As Lee discussed earlier, delivering operational efficiency and profitability remains a key priority for us as we move forward into 2024 and beyond. We have confidence we can continue to make further progress, while also balancing investments to support future growth. Continuing down the income statement, net interest expense was $28 million for the fourth quarter compared to $41 million in the prior year. The current level of net interest expense reflects lower year-over-year debt balances as well as higher interest on cash balances. Depreciation and amortization of fixed assets was $68 million for the quarter, an increase of 57%. The increase was primarily driven by an additional $23 million of expense related to the timing of certain large internally developed software projects that were completed and placed into service during the year. On taxes our reported effective tax rate was 24.9% compared to 9.9% in the prior year quarter. The year-over-year increase in the tax rate is related to the 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.

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.

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

Looking at the year as a whole, we believe there were three main factors contributing to our strong performance in 2023. Firstly, the pricing environment in the hard insurance market was favorable. Secondly, there was a rebound in transactional activity, especially in the auto shopping sector. Lastly, we experienced significant weather events, with 2023 marking a record year for catastrophe occurrences, largely influenced by a major hurricane. As we consider expectations for the coming year, we anticipate that the hard insurance market will continue into 2024. However, we expect the transactional activity to normalize somewhat, and regarding weather patterns, we cannot predict nature, so we assume a return to more typical weather conditions.

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

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

Hi. First, I just want to say how much I appreciate Slide 7, the revenue mix, very helpful. My question is about Verisk auto underwriting revenues, which I think is all non-subscriber. Just please verify that. How did this ad market do in the fourth quarter? And what's the assumption for 2024 within a guide?

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

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

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

Yes. In marketing, as we've pointed out throughout the year, carriers are facing challenges and have not yet increased their marketing expenditures in order to achieve profitable growth. However, we are beginning to notice a shift as some of them are becoming profitable again. While the marketing efforts haven't fully resumed, we are seeing some positive signs in that area. We anticipate a return to more typical levels of marketing spending in the second half of this year.

Hi, this is Brendan for Manav. I would like to inquire about the new product pipeline and if there are any benefits from it this year. What is planned for this year? Additionally, you mentioned some incremental investments related to AI. Could you share more about that?

Thank you, Brendan. I'm going to repeat the question because there was some disruption. The question was about our sentiment towards the new product pipeline and areas of investment. I want to emphasize that we are very enthusiastic about several new products and developments we have been working on. Specifically, a significant amount of our focus has been on generative AI and its various applications, which we are investigating across different aspects of our business. I want to highlight our claims business where we have implemented some generative AI solutions and are also looking into creating additional applications. I will now have my colleague Maroun Mourad share more details on what we are doing in that area as an example of our broader efforts.

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

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

Thank you. I understand that many factors contribute to our consistent growth. However, I would appreciate your thoughts on the relationship between bookings and innovation sell-through, particularly regarding discrete upsell opportunities. I'm curious if, as we move towards premium adequacy, you anticipate an increase in bookings as a result. Are there specific areas, like marketing, where you see potential pent-up demand as the market improves from a profitability standpoint? Thank you.

It's a complicated question, and we're working to understand it better. I want to focus on how we see improvements in premium adequacy and the procyclicality aspect of our business. I should start by noting that, as many investors and analysts realize, we aren't highly sensitive to economic fluctuations. This results in a muted reaction to cyclical effects. Instead, we are more affected by weather events or activities in the insurance-linked securities market, which tend to have a greater impact on us. I believe there are some procyclical aspects to consider; as the insurance industry performs well and we see premium growth, this encourages more investment in technology and renovations. This accelerates our ability to implement the technologies we've invested in, creating a positive momentum in that situation. However, I want to differentiate that from broader economic cyclicality, which is relatively muted. I hope this addresses the main points of your question.

This is Greg Parrish on for Toni. Thanks for taking our question. Why don't you just talk about margin? You talked about what sounded like expansion of some of the ongoing efficiency initiatives that you have. Is the benefit from those within the ongoing 25 to 75 basis points in your framework and balanced by investment? Or do you skew a little bit higher over the next two to three years as you work through those initiatives? How do we think about that? Thanks.

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

Thank you. I would like to continue the discussion on margins. Looking at your Investor Day slide from last March, you projected adjusted EBITDA margins of 54% to 56% for 2024, with an additional increase of 25 to 75 basis points in 2025. Currently, you are indicating a range of 54% to 55% for 2024. Can you explain what has changed since then? Should we still anticipate the margin expansion in 2025 that was previously indicated? Thank you.

Thanks for the question, Jeff. You are correct that our current one-year guidance range of 54% to 55% is a tightening from the 54% to 56% range we provided during Investor Day. At that time, we were referring to a two-year outlook, and the previous range was part of a longer three-year target of 53% to 56%. Over the past three years, we have aimed to increase margins by 150 basis points in both 2022 and 2023, with the current midpoint of our guidance representing an additional 100 basis points. We are managing margin expansion while also investing in growth, which is reflected in the difference between our current midpoint and what we presented at Investor Day. The new investments include enhancements to our sales force, international expansion through M&A activities since Investor Day, and efforts in generative AI to develop new products. We believe that we are successfully executing these client-facing investments while also achieving 100 basis points of margin expansion. This balance offers an appealing overall package. If you account for this margin expansion alongside what we accomplished in 2023, we will exceed our earlier targets set in March.

Hi. Good morning. Thank you for taking my question. I want to echo Andrew's comments on slide 7; it's very helpful. My question is specifically about that graphic. Lee and Elizabeth, could you highlight a couple of solutions that you’re particularly excited about and where you see the potential for faster growth, whether on the claims side or underwriting side? It seems like you have some pricing initiatives in place. The life sector and the broader market looks promising, even if it's somewhat small. Are there specific areas where you believe the contribution of certain solutions will significantly change when we look at this chart three to five years from now?

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

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

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

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

Thank you, Surinder. There are several aspects to consider, and I want to commend the organization for being open to outside perspectives on potential improvements. We have reviewed this across all our businesses, with compensation structure being a key focus. We analyzed market levels regarding both the amount and composition to ensure our sales team feels fairly treated, which creates better opportunities and aligns our interests with those of our customers. We believe this will enhance retention and keep our team focused on the most valuable opportunities. Additionally, we examined pricing in relation to value and how we can structure our pricing to better match our clients' perception of value and their needs. These are two primary areas we are addressing. Moreover, we are also ensuring our sales efforts are closely connected to our senior-level strategic discussions. By fostering stronger internal dialogue, we can better capitalize on sales opportunities related to existing products that clients may not yet recognize or that gain more support at the senior level due to our value proposition. We expect to improve in this area as well.

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

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

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

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

Yes. Russell, one thing I would add is that starting with free cash flow, accounting differences over time should balance out. Therefore, it should be close to our overall EBITDA growth rate, provided that CapEx is increasing in line with that. In 2024, we anticipate slightly higher CapEx growth due to several opportunities within the business, including those related to generative AI. As a result, we may experience periods of elevated CapEx investment, which could reduce overall free cash flow growth. However, in the long run, we expect it to align closely with our adjusted EBITDA growth.

Hi. Thanks. Good morning. Lee, I've heard a couple of times you talked about pricing opportunities. I think you called out extreme events and property estimating. I'm just trying to maybe get some more details on that. Do you think that will impact 2024? Or is that a longer-term kind of play here? And is this just sort of the first couple of areas where you're finding these new opportunities and we should expect more of that kind of going forward? Or any way you can help frame this pricing opportunity? Thank you.

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

Hi. Good morning. This is Sid on for Greg. I wanted to focus on Slide 18 of your investor deck and when you talk about your capital management philosophy. And just moving forward curious, how we should view repurchases following in your capital management framework versus acquisitions or internal investments, et cetera?

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

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

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

Thank you for the question, George. You're correct that our transaction revenue is coming off a full year of strong growth, consistently in the double digits over the previous four quarters. We are now comparing to that period. A significant factor contributing to this elevated growth was the activity related to auto shopping, along with some favorable weather conditions. However, we experienced some challenges in our anti-fraud business due to the conversion of transactional customers to subscription customers. Moving forward, we expect these trends to stabilize. We are not anticipating elevated weather conditions, and we believe the auto shopping trends will start to normalize.