Verisk Analytics Inc (VRSK) — Q4 2024 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 2024 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. 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 nonrecurring expenses, the effect of which may be significant. And now I'd like to turn the call over to Lee Shavel.

Good morning, everyone, and thank you for participating in our call today. I am pleased to share that Verisk delivered strong fourth quarter results, underscored by 11% subscription growth and solid margin expansion, translating into double-digit profit growth. Organic constant currency revenue growth of 8.6% was a sequential improvement from the third quarter driven by underlying sales momentum along with certain benefits from elevated storm-related transactional activity from hurricanes Helene and Milton. Despite the storm benefits, transactional revenues were down slightly in the quarter due to the ongoing conversion of transactional revenues into committed subscription contracts that we have spoken to you about recently. This fourth quarter capped off a solid annual performance that compounded on top of strong growth in 2023 and was in line with our guidance and the longer-term expectations we set at Investor Day in 2023. For 2024, Verisk delivered OCC revenue growth of 7.1% and OCC adjusted EBITDA growth of 9.9% and 120 basis points of margin expansion, resulting in 16% EPS growth. Elizabeth will provide the financial details in her review, but these results further demonstrate our predictable growth trajectory and our results-oriented culture. We built strong momentum throughout the year and delivered these results by focusing on three key initiatives: one, enhancing our go-to-market approach; two, elevating and intensifying our strategic dialogue with clients; and three, investing in innovation at scale on behalf of the industry. Let me spend a few minutes on each and discuss how we plan to further advance on them in 2025 to deliver another year of strong growth, profitability, and invention. First, in 2023, our businesses worked with an outside consultant to incorporate sales enhancement strategies tailored for each business. As a result, in 2024, we aligned sales territories and account teams for improved client coverage, and implemented new sales force compensation plans that better match with business needs and industry best practices. Additionally, we introduced product integration in certain businesses for a simpler sales process. Finally, we introduced pricing optimization strategies and tools to drive a more value-based conversation with clients. Specifically, in our Extreme Events business, where we recently introduced our global suite of Next Generation Models, we benefited from this new client-centric approach as we are capturing strong value-based price realization and extending duration in contract renewals. After a year of record new sales across all of Verisk, our sales teams are energized as we enter 2025, as they have identified further areas to improve, including cross-business unit sales collaboration opportunities. Our second initiative has focused on enhancing and deepening engagement across the broader industry-wide and C-suite level. This approach has given Verisk deeper insights into our clients' enterprise needs, broadened and strengthened our relationships, and opened new opportunities with carriers, intermediaries, reinsurers, regulators, and other ecosystem participants. These stronger connections have allowed us to discuss with clients the value we bring to the ecosystem and have resulted in stronger renewals and improved sales outcomes. This impact has been especially significant within our largest clients where we have achieved accelerating growth. In 2025, we are expanding this approach with more clients, reinforcing our trusted partnerships. For example, our broadened approach to industry engagement has created new opportunities for our anti-fraud business to serve the state insurance departments and the National Insurance Crime Bureau. By leveraging our core ClaimSearch platform and advanced analytic tools, we help automate and triage the increasing number of criminal referrals and leads these agencies receive every day. Our work is helping state fraud bureaus operate more efficiently and effectively, ultimately saving the system money while improving benefits to the consumer. We have identified further opportunities to scale this initiative into additional states over time. Our third initiative is investing in innovation at scale on behalf of the industry. Our strong free cash flow generation allows us to invest both in improving the value of our existing solutions and inventing new solutions to address industry needs. Our Core Lines Reimagine project is a prime example of the greater value we are driving for our clients. Throughout 2024, we introduced new features onto the digital platform, like the Actuarial Hub, which provides tools and risk insights to help insurers leverage ISO loss cost data quickly and confidently to address the evolving pricing needs of the market. Additionally, our Future of Forms tool is helping underwriters quickly analyze and react to form changes that are impacting filings, driving efficiency and faster speed to market. And just in the fourth quarter, we introduced Future of Forms and Filing Intelligence for the Businessowners line. We also introduced a new ISO Forms Library experience with the replatforming of our Forms Library from our legacy ISOnet. The new Forms Library experience includes an improved search function, a more intuitive user experience, and the ability to bulk download forms from the library. In total, we introduced 13 modules across Core Lines Reimagine in 2024, and we are slated to introduce an even greater number of modules throughout 2025. In our Extreme Events business, our sustained investment behind cutting-edge science and advanced technologies has delivered models that have proven to be accurate and loss predictive through the recent hurricanes and wildfires. In June of 2024, we released an update to our California wildfire model that included the impacts of downslope Santa Ana winds that contributed to the devastating Eaton and Palisades wildfires. We've estimated a loss range of $28 billion to $35 billion for these two events, and clients who are already using the model had access to simulated scenarios that were predictive of the losses that tragically occurred. We are continuing our typical pace of investment to keep our models at the highest levels of predictive science and have plans for an update to our U.S. severe convective storm model to be released later this year. We are also taking the learnings from our elevated strategic conversations with clients and investing behind initiatives that they are most focused on. To that end, this year, we are increasing investment towards new inventions that integrate data sets from across Underwriting, Claims, and Extreme Events. At Investor Day, we discussed with you how we are moving from a siloed organization to one that is more integrated, and this invention focus moves us one step closer on that journey. And we are hearing from clients that they too want help flowing information better within their own organizations and across the ecosystem. Verisk is in a unique position to invent solutions with great competitive differentiation that can help bridge these long-standing industry practices. Verisk Augmented Underwriting is one such example. This innovative solution combines our rich property data sets from Underwriting with our software capabilities in Specialty Business Solutions and our catastrophe modeling expertise to provide a seamless end-to-end solution that enables our clients to evaluate large-scale property inquiries to ensure optimal pricing and coverage. Augmented Underwriting offers clients an automated way to evaluate large numbers of property files that they previously could not address with manual processes, enabling better risk selection and, ultimately, portfolio optimization. Additionally, we continue to grow our claims ecosystem to drive more connectivity and interoperability within the industry. Within property estimating solutions, we have added 21 new partners to our ecosystem in the last year, and we now connect over 100 industry participants, which offers our clients more choice from the platform as well as a seamless workflow tool that streamlines operations for improved outcomes. We are also extending that ecosystem approach within our anti-fraud business, with solid growth from three partners in 2024 and plans to add up to 20 new partners in 2025. This will enable the industry to more effectively fight fraud, waste, and abuse, and ultimately benefit consumers and policyholders. During the fourth quarter, we sold a small nonstrategic asset called Atmospheric and Environmental Research, or AER, which was part of our Underwriting subsegment. AER's solution set had little strategic or customer overlap with our other businesses, and this sale is further evidence of our active portfolio management. Before I close, I want to take a moment to address the devastating wildfires in Southern California, which have had a profound impact on individuals, businesses, communities, and our insurance industry clients. Across Verisk, we are actively supporting our clients during this challenging time. Within our property estimating solutions business, we are equipping claims adjusters and restoration contractors with tools to streamline the claims estimation and rebuilding process. Specifically, we are offering the AI-enabled ClaimXperience solution, including its personal property and additional living expense modules, to help clients collaborate more effectively and deliver faster and more accurate assistance to policyholders. These capabilities not only enhance the efficiency of the claims process but also provide critical support for policyholders as they navigate their recovery. We also have representatives from our survey teams from Underwriting and Extreme Events on the ground to help understand in real time the disruption and impact of the wildfires to ultimately incorporate into our models. Even before this year's fires, Verisk was the first organization to submit a wildfire model as part of the California Department of Insurance initiative to stabilize the insurance market. Models provide insights into natural disaster risks and we believe can support increased insurance availability across the state, which will benefit all stakeholders. Notwithstanding the significant losses the industry is bearing related to the L.A. fires, the overall trends of strong premium growth and improving profitability in 2024 are a positive for the industry's interest and capability to adopt and integrate improved data, analytics, and technology into their businesses.

Thanks, Lee, and good day to everyone on the call. On a consolidated and GAAP basis, fourth quarter revenue was $736 million, up 8.6% versus the prior year, reflecting solid levels of growth across both Underwriting and Claims. Income from continuing operations was $204 million, up 12% versus the prior year, while diluted GAAP earnings per share from continuing operations were $1.44, up 15% versus the prior year. The increase in diluted GAAP EPS was driven by strong operating performance, a litigation reserve expense in the prior year period, and lower share count. Moving to our organic constant currency results adjusted for nonoperating items, as defined in the non-GAAP financial measures section of our press release. Our operating results demonstrated growth across both Underwriting and Claims. In the fourth quarter, OCC revenues grew 8.6%, with growth of 7% in Underwriting and 12.7% in Claims. This represents sequential improvement in our revenue growth rates across both subsegments and caps off another year of results in line with our longer-term targets that we laid out at our 2023 Investor Day. For the full year 2024, we delivered OCC revenue growth of 7.1%, compounding on the strong 8.7% OCC revenue growth from 2023. Our subscription revenues, which comprised 82% of our total revenue in the quarter, grew 11% on an OCC basis during the fourth quarter. The drivers of growth in the quarter were consistent with trends we have seen throughout 2024, including strength across our largest subscription-based businesses as well as the continued conversion to subscription from previously transactional contracts. We continue to see positive outcomes in forms, rules, and loss costs as our investment in Core Lines Reimagine is delivering additional value for our clients, leading to strong renewals. In Extreme Event Solutions, as Lee mentioned earlier, our enhanced go-to-market strategy is helping drive new customer wins as well as strong renewals with extended terms. Within property estimating solutions, we are seeing strong sales of our advanced analytics, including XactXpert, and our weather applications, which focus on hail and wind. And finally, our pricing and bundling strategy is driving solid growth in our anti-fraud business. Our transactional revenue declined 1.1% on an OCC basis during the fourth quarter. This decrease reflects the continued conversion to subscription from previously transactional revenues, including the impact of the one discrete contract we have spoken to you about previously. We also experienced a more normalized level of attrition, particularly within the insurtech customer segment of our auto business. The decline was partially offset by the elevated levels of transactional volume in our property estimating solutions business related to hurricanes Helene and Milton. Moving now to our adjusted EBITDA results. OCC adjusted EBITDA growth was 13.5% in the quarter, while total adjusted EBITDA margin, which includes both organic and inorganic results, was 54.1%, up 70 basis points from the reported results in the prior year. This quarter's margin expansion highlights the effects of strong revenue growth and ongoing cost discipline, including the benefits of our Global Talent Optimization initiatives. We did experience a modest headwind in this quarter's margin from foreign exchange translation, offsetting the benefit that we experienced in the third quarter. For the full year 2024, adjusted EBITDA margins were 54.7%, up 120 basis points year-over-year and in the upper half of our guided range. This margin reflects core operating leverage on our solid revenue growth and continued cost discipline while also absorbing the impact of our self-funded investments back into our business to fund future growth. I also would note that while it caused quarterly variability, foreign currency translation had minimal impact on full year results. Continuing down the income statement, net interest expense was $35 million, compared to $28 million in the same period last year. This increase is primarily due to higher interest expenses from the issuance of senior notes in the second quarter at a higher interest rate, leading to an increased run rate expense going forward. We do have a $500 million maturity coming due in June 2025, and given that our leverage is slightly below the low end of our targeted range of 2 to 3x adjusted EBITDA, we will likely refinance during the year. Our reported effective tax rate was 26%, compared to 24.9% in the prior year quarter, reflecting the timing of certain discrete tax items as well as the tax impact from the disposition of AER in the quarter. On a full year basis, our tax rate was 22.6%, as compared to 25.2% in the prior year, reflecting the benefit from certain one-time discrete items in the current year as well as impact from our energy divestiture in the prior year. Adjusted net income increased 11.6% to $228 million, and diluted adjusted EPS increased 15% to $1.61 for the quarter. The increase is primarily driven by solid revenue growth, strong margin expansion, and a lower average share count. This was partially offset by the higher interest expense and a higher tax rate. For the full year, adjusted EPS of $6.64 was up 16.3%, reflecting strong operational growth, a lower tax rate, and lower share count, offset in part by higher interest expense. From a cash flow perspective, on a reported basis, net cash from operating activities increased 1% to $255 million, while free cash flow increased 2% to $200 million, reflecting the timing of higher interest payments versus last year and certain one-time items in the prior year. On a full year basis, free cash flow increased 11% to $920 million, a record for Verisk, demonstrating the strong cash flow generation characteristics of our subscription-based business model. We are committed to returning capital to shareholders, and during the quarter, we returned $355 million through repurchases and dividends. 2024 marks the third year in a row that we have returned over $1 billion in capital to shareholders through dividends and repurchases. And I am pleased to share that our Board has approved a 15% increase to our dividend and an additional $1 billion in share repurchase authorization, demonstrating our confidence in our economic model and our commitment to return capital to shareholders. As Lee discussed, we are entering 2025 energized and with strong momentum. To that end, we are pleased to deliver our outlook for 2025, which builds upon the strong performance we delivered in 2024. Our guidance reflects the divestiture of AER, which contributed $17 million in revenue in 2024 and was included within our Underwriting subsegment. Our guidance also assumes current foreign currency exchange rates, current interest rates, and current tax rates. More specifically, we expect consolidated revenue for 2025 to be in the range of $3.03 billion to $3.08 billion. This translates to OCC revenue growth of 6% to 8%. We expect adjusted EBITDA to be in the range of $1.67 billion to $1.72 billion and adjusted EBITDA margin in the range of 55% to 55.8%, up from 54.7% in 2024. Further down the P&L, we expect depreciation and amortization of fixed assets to be in the range of $250 million to $270 million, subject to the timing and completion of projects. We expect amortization of intangibles to be approximately $65 million. We expect interest expense to be between $145 million to $165 million, as compared to $125 million in 2024, reflecting higher debt balances and higher interest rates. And we expect our tax rate to return to a normalized level in the 23% to 25% range, higher than the 22.6% recorded in 2024 which included some one-time tax benefits. This culminates in adjusted earnings per share in the range of $6.80 to $7.10. We expect capital expenditures to be between $245 million and $265 million as we continue to prioritize organic investment in our business. A complete listing 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.

In summary, our strategic priorities are unchanged as we remain focused on delivering consistent and predictable growth while allocating capital to our highest return on investment opportunities and returning excess capital to shareholders. We have a unique opportunity to invest in data and technology at scale on behalf of the insurance industry and create value for our clients through invention at a lower cost of investment and ownership than an individual insurance company can on their own. We're excited by this opportunity and the team, culture, and organization we have in place to pursue it in 2025. 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. And with that, I'll ask the operator to open the line for questions.

I wanted to ask a question on price realization. You mentioned it as one of the drivers for driving that really strong subscription growth rate of 11% this quarter. How much pushback are you getting from customers? I know in the past, there was the sensitivity around raising prices because you get the data from the insurers and didn't want to sort of rock the boat on that. So are you taking more price than usual? And how are you expecting '25 to look in terms of the pace of the elevated pricing?

Thanks, Toni. This is Lee. I appreciate the question, as it has played a significant role in the momentum we've seen in 2024 and what we anticipate for 2025. I want to emphasize that we've been increasingly successful at implementing value-driven price increases due to two main factors. First, we've focused on delivering more value and ensuring our sales efforts are aligned with this value proposition. Specifically, we've made investments in the Core Lines Reimagine, and our clients have reported considerable improvements in the value of the products they're receiving. We've also received feedback from indirect channels confirming that these changes have significantly enhanced their productivity, which has enabled us to renew contracts at higher prices as our clients recognize the greater value they are getting. Additionally, our Extreme Events business has shown strength; evaluations conducted by an external consultant indicated that there is a stronger perception of the value of our underlying models and other EES products. With this sales information, we have been able to effectively communicate and implement pricing more assertively. In our Claims business, our efforts to broaden the ecosystem have also contributed to increased value for our clients. Overall, the impact of value-driven pricing has been a key factor in our subscription growth, and we believe this represents a structural and philosophical shift in our pricing strategy that will continue to yield positive results into 2025 and beyond.

This is Brendan speaking on behalf of Manav. I wanted to inquire about the benefits we've seen from the conversions to subscription. Specifically, how should we view this for 2025 and consider the long-term potential?

Brendan, thanks for the question. Let me break it into two parts. We discussed a specific contract conversion, which we quantified in the third quarter, and it has a similar impact in the fourth quarter. This will continue until the middle of the second quarter. The last significant effect will be in the first quarter of next year. More generally, we've mentioned our success with converting transactional revenue into license and subscription packages. This has had an impact in our anti-fraud business and in other areas as well. Specifically in anti-fraud, we focused on a particular customer group consisting of third-party adjusters and self-insured clients. This specific impact will also carry on into the first half of next year. Overall, as customers recognize the value, as Lee mentioned, and move to longer-term contracts, we could see a continued positive trend for subscriptions.

Transaction revenue in the quarter benefited from elevated storm activity. Can you talk about how much of a benefit you saw from storms in the quarter and how much of a benefit you expect in 2025?

Yes, George, thank you for your question. Regarding the transactional aspect and the effects of the storms, we have previously established a threshold to determine the exact storm impact when it results in at least a 1 percentage point effect on revenue growth. As mentioned in my prepared remarks, we did not reach that threshold. However, I can say that the revenue impact in this fourth quarter was roughly equivalent to what we experienced with Hurricane Ian in the fourth quarter of 2022. Importantly, the rest of our business has grown to a level that no longer meets that impact threshold. Looking ahead to 2025, the storms Helene and Milton occurred quite early, specifically late in the third quarter and very early in the fourth quarter. Therefore, we do not anticipate those storms to significantly affect the results for 2025. As a general practice, we do not provide forecasts, but we plan for a normalized level of storm activity.

Can you maybe provide some thoughts around just the state of insurance in the sense of what's going on in California and kind of the shift towards the state being the insurer of choice? How does that impact the business from a revenue perspective versus also the insurance companies being or active in the state versus not being active in the state?

Thank you for the question, Surinder. It's certainly timely. The most immediate impact is the losses the industry is experiencing from the L.A. wildfires, which are reflected in the financial results being reported. This situation underscores the need for increased pricing in that market. A challenge has been that California previously did not permit forward-looking models for pricing, but that has since changed. As I noted earlier, we were proud to be the first to submit our wildfire model for pricing. We are moving towards an acknowledgment that the risk environment is evolving, which should lead to stable pricing and improved rate adequacy. However, carriers must assess whether they are receiving adequate pricing to cover their risks. We believe this will unfold throughout 2025. There is a strong incentive to continue serving the California market due to its scale, as long as there is a good rationale for appropriate risk-based pricing. These risks in California also highlight the growing importance of catastrophic risk modeling and enhanced analytics to identify areas of higher risk in U.S. real estate markets and globally. We continue to see strong demand for the expertise we provide to our clients.

So 20% to 25% of your revenues come from contracts that have a direct input of premium growth with a 2-year lag. And 2023 was a pretty strong year for premium growth, but we're also in the third year of elevated premium growth in 2025. So just curious to think about how should we think about pricing contribution to growth in 2025 compared to, I think, historical levels were more closer to 3% to 4%. And if you could quantify pricing contribution to overall growth in 2024, that would be really helpful.

Kelsey, thanks for that. Yes. So yes, we've previously said that 20% to 25% of our revenue comes from contracts with that input from premium growth. And we continue to experience that. I will say, more importantly for us, we've been using that as an input, but the ultimate outcome of our pricing conversations come from our clients' perception of the value that we're providing. And so I think Lee talked at the beginning about some of the trends and the value that we've been able to deliver to clients. So all of those things are true. Yes, we see the strong pricing input and we do see that continuing off of the 2023 numbers. But the more important conversation for us longer term with our clients is the value.

So I wanted to follow up on transaction revenues. So you've had some difficult comps. I'm curious how we should think about that as we look ahead to 2025? And I know, Elizabeth, you mentioned the storm impact and quantified that amount for us, but curious if all of that was in transaction versus subscription because I know you talked about converting some of those contracts to subscription revenue.

Thank you for the question. Regarding the storm, it is mainly transactional, with a small component possibly related to subscription from contractors, but it should primarily be viewed as transactional. Looking ahead to 2025, you are correct that there will be challenging comparisons in transactional revenue. We discussed the contract conversion from one discrete conversion that will extend through the first quarter, along with the impact of anti-fraud conversions. Additionally, for 2025, the auto activity faces a tough comparison, especially in Q1. However, transactional activity remained quite strong in the first quarter. We have also noted some weakness in the insurtech segment within the auto sector, which may persist throughout the year. When considering transactional revenue, keep in mind the sale of AER, which was mainly a transactional business. While that will affect nominal figures, it will not be as significant from an OCC perspective, which is our usual measure. Additionally, the first quarter typically has fewer drivers for transactional growth due to lower weather activity affecting property estimating solutions, and the ILS market is usually less active during this period. I hope this provides some clarity as you think about 2025.

Elizabeth, just a few really counting punch questions about the guide. One, is there any share buyback in the guide? Two, the interest expense looks materially stepped-up to me. Like, are you making an assumption about the planned refi in that interest assumption? And then three, the D&A also looks stepped up to me relative to last year, relative to '24. What's driving the D&A step-up in '25?

Yes, Andrew, thank you for those questions. I'll address them in order. We did highlight some of the challenges because there are headwinds present. Regarding the share buyback, we do anticipate share buyback activity in 2025. As for the interest expense, we haven’t typically emphasized it, but we felt it was important for you to grasp the underlying dynamics. If you review our fourth quarter interest run rate, as I mentioned earlier, it was $35 million, so if you annualize that fourth quarter, it already reflects the impact of our 2024 refinancing, approaching the level in the guidance without factoring in any further refinancing. These are some of the challenges we are encountering in a rising rate environment. Finally, concerning the depreciation and amortization, it is a result of the investments made in our projects and the capital expenditures we have undertaken. As we bring projects into service and as they contribute to revenue growth, that leads to the increase in depreciation and amortization we are seeing.

Staying on the guidance for a moment, particularly regarding revenue. There's a range, and the 6% to 8% is in line with past forecasts. Could you clarify the low and high ends? Is the variation mainly due to transactional volatility, as you mentioned earlier, or are there other factors influencing this? Additionally, how much of the subscription growth is already accounted for?

Yes. Thanks for the question, Alex. You're right, transactional volumes is one component of the swing factors. On the other side, on the low end, we always monitor attrition and potential attrition on the customer side, including potentially if there's customers that temporarily pull back in California, that could potentially have a short-term attrition impact. On the high end, we've talked a lot about some of the new products that we've been investing in, and we're excited about those rolling out in 2025. If there's a greater or faster traction than we've assumed, then you could see upside there. Any of the products we've talked about, from XactXpert in the property estimating solutions side. We've talked about Discovery and Liability Navigator, the Whitespace product in Specialty Business Solutions, the Augmented Underwriting. So there's some opportunity there on the high end. And then finally, maybe just to be a bit more specific, we talked about transactional as a swing factor, but just to enumerate those. We talked on the auto side about the comps there. Weather and ILS can be a driver of variability on the transactional side. And then I'd also mention on the life businesses, our services support for our customers there can be a transactional variability.

And Alex, thanks for the question. I think there are always these broader factors that can influence our business despite us having, I think, very good predictability as we've demonstrated and tight variance around expectations. But we've talked about the weather events, which can influence things on the margin for us. The other thing that we're watching right now is, of course, there is a lot of activity on the government and the regulatory front. As we are sorting out the new administration's elements, we don't see anything immediately that we would identify, but of course, there's a lot that is in flux on that. And then, of course, more broadly, the economic environment and interest rates and FX are factors that will influence us over the course of the year. But despite those vagaries of those broader exposures, I still think beneath that we have a business that has strong momentum, well positioned to take advantage of the opportunity over the next several years. But thanks for the question to feel out some of the elements of variability here.

I just wanted to focus on the M&A. I wanted to see if there is more opportunities for portfolio rationalization, but also how is the pipeline for M&A and thoughts on M&A?

Thank you, Ashish. The opportunity pipeline remains largely the same. We continue to explore possibilities, and values are still high. An additional point I want to highlight is that as we expand our ecosystem across various sectors, we are gaining insights into how new businesses contribute value to the industry. This understanding may create opportunities for us to integrate those businesses into our broader operations. As we adopt a more cohesive approach to our business, we are discovering chances to enhance the value propositions we offer to clients. Overall, the environment has not changed; there are still many interesting companies that add value to the industry. Our understanding of how we can potentially improve that value and deliver it to clients is also growing.

Lee, you had mentioned that you rolled out 13 modules across Core Lines Reimagine in 2024 and how that's driving better price realization. You had also said that you're introducing a greater number of modules in 2025. Do you think that, that can drive an uptick in price realizations in 2025 versus 2024?

So David, thanks for the question. I think the short answer is we believe that each incremental module that we're adding is adding value to our clients, and so becomes an opportunity for us to capture some of that value that we're delivering. But I'm going to hand it over to my colleague, Saurabh Khemka, to describe some of the modules that I think our clients will be excited about in '25 that we're rolling out.

Yes. Thanks, Lee. As you mentioned, we are delivering these modules across two dimensions. One is providing enhanced insights to our customers from our proprietary databases. So things like our Executive Insights where we're going to be adding another module, the commercial auto module, and our ISO Experience Index, which we're going to be rolling out across all commercial lines in 2025, are things we know that customers are going to be excited about and will provide more value to that. And the second dimension is the digital delivery of our content, which increases the productivity of our customers as they look at these analytics from us. And there, our Future of Forms initiative as well as our ratings reimagine initiatives will have new modules coming out.

David, I'll just jump in to address your question about price realization. For many of our large customers, they are on multiyear contracts. Therefore, the pricing benefit from the new modules we are introducing will be more of a gradual and sustained opportunity, rather than a one-time increase.

I get that there's been a little bit of help, especially in the back half, from the transaction to subscription conversions. But subscription organic constant currency growth accelerated every quarter of 2024. You're talking about record bookings, the innovation and revenue initiatives, good momentum. That feels like a really good launching off point for '25 exiting at 11% OCC. I know you discussed some headwinds, but it doesn't totally add up to me. So just anything else you can say that would kind of like offset an exit rate of 11%? And is there any shift in on when pricing or value is kind of realized for you from like the beginning of the calendar year to midyear that's been happening or anything like that?

Yes, thank you for the question, Jeff. We are excited about the strength in subscriptions across our businesses. For the fourth quarter, we experienced a couple of technical assists. Last quarter, we mentioned that contract conversion contributed about 60 basis points to subscriptions, along with the ongoing conversion within our portfolio. Additionally, the fourth quarter had a slightly easier comparison to the previous year. These were some of the influencing factors. Overall, we are enthusiastic about the pricing realization, the value our clients recognize, and the positive outcomes we've experienced.

I wanted to touch on the extended duration of contract renewals, which I think, Lee and Elizabeth, you both mentioned today. Can you maybe describe a little bit more about what is enabling that? If there's any way to maybe quantify the change in average length. And what benefits that creates, whether it be in terms of deal economics or predictability or how you manage those relationships?

Yes, thanks for the question, Andrew. The impact is likely gradual. The extension of contract length hasn't significantly changed our business. Our largest customers are seeking more certainty in future pricing, and some of our businesses have succeeded in securing longer-term contracts. However, this is an evolution in our business rather than a drastic change.

Yes. And I would add to that, David. I think that it demonstrates at one level, to move to that longer contract, there certainly is an economic incentive on the part of the client from our standpoint to greater predictability. Obviously, there is growth embedded in those contracts. But I think it's also a reflection of a greater degree of confidence and a stronger strategic relationship that if that weren't in place or that weren't developing, then I think you would see more of our clients wanting to kind of keep those contracts at the shorter end, maintain optionality and flexibility around it. So I view it more broadly as a barometer of our ability to become even more deeply embedded and a comfort that we're adding value, that we're a partner to them, and it gives us other areas to focus on in making those clients more efficient and more effective.

I'm curious if you could talk about how your marketing business performed in the fourth quarter and what's your expectation for that business in 2025? Because we've seen some pretty good advertising and marketing spending from the insurance industry.

Yes, Jason, thanks for the question. On the marketing business, the insurance customer segment has seen strong growth, and we see tailwinds on that going into next year. The rest of the customer base still has been more muted based on the advertising and marketing segment overall. And so we're watching that business as it develops into next year.

I wanted to talk about CapEx. I noted that CapEx came in quite far below the prior guidance range in '24. I think it was about 10% below the midrange of what you're guiding for. I'm trying to square that with your comments that you've been investing more in the business. Wondering if you maybe delayed some capitalization of some projects in 2025, especially given you're guiding CapEx up 15% year-on-year to '25. Also more broadly, are there any comments you want to provide on free cash flow growth expectations in 2025?

Yes, thank you for the question, Russell. Regarding the 2024 numbers, there were no major decisions or significant delays in projects. We will always be mindful of our expenses, so if we don’t utilize the budget we will approach it with caution. However, there are some timing factors that have pushed certain initiatives into 2025. Additionally, we are making considerable investments in our operating expenses. These elements contribute to what we believe is a healthy level of organic investment in the business. While we do not forecast free cash flow growth, we were pleased to see double-digit growth in free cash flow for the full year this year. A testament to our confidence in free cash flow growth for the upcoming year is the dividend increase we have announced.

Actually, a couple of quick numbers questions. I know it's difficult to quantify some of the, I guess, extreme events. But the California wildfires did happen earlier in the quarter. Is it possible to give us some estimate of what the impact of that might be on your business? And secondly, Lee, I think you had alluded to some of the stuff going on in Washington. Can you talk about your exposure either directly or indirectly to federal government-related revenues?

Thank you, Jeff. Regarding the California wildfires, as we mentioned, they definitely have an impact on the industry and are being closely monitored. However, it's challenging to determine their specific numerical impact on us. To clarify, while hurricanes can affect our property estimating solutions business by providing support for repairs, our support in wildfire situations is less impactful as they are more geographically concentrated. Therefore, they typically do not have the same financial effect on our business. I'll pass it over to Lee.

Great. Jeff, that's a reasonable question to ask. Our revenues from the federal government account for less than 1% of our total revenues. Like many others, we have been closely observing the changes from Washington. Currently, we do not think we have any direct exposure to tariffs or the trade executive orders. As you may understand, our collaboration with state and federal agencies aims to enhance the industry by providing efficiency, automation, and risk management, which we believe serves the interests of both the industry and policyholders. Additionally, since insurance is primarily regulated at the state level, the federal government's role in the overall insurance regulatory framework is quite limited.