Verisk Analytics Q1 2024 Earnings Call Transcript

Thank you, Andrew, good morning. I'd assess the strength of our client as being very solid, and I would say, in contrast to, I think, where we were two or three years ago, you are clearly seeing across the industry, and if you follow the quarterly releases of property and casualty insurers, you are seeing very strong premium growth, which is a reflection of that hard market, and the improving profitability as reflected in stronger combined ratios for the business. And so, I think the combination of that growth, the improved profitability, some reserve strengthening now beginning to offset some of the heightened cap losses that they've experienced has generally put them in a position where they are feeling positive about the outlook, their ability to achieve better pricing and price adequacy from their standpoint on rate. There clearly are risks that they continue to face in terms of heightened catastrophic losses or cyber-exposure or exposure to increasing casualty losses. But generally, their financial position is stronger, and that has one both a benefit for us because we do participate to some extent in their overall premium growth. But also, I think importantly is that that financial strength is making them more constructive and engaged in where they can be making investments to improve their business, whether it's on the underwriting side or it's on the efficiency and processing front.

Yeah, thank you, Jeff. I think that's an accurate observation. I think we are beginning to see some early signs that marketing is picking up within the industry. There is a lag impact, and so we will continue to look forward to hopefully seeing some of that translate into our business. That is a small business, so it may not be discernible overall within our business, but we do think that's a positive trend. I would also note that within that business, it is not entirely insurance for us that we're providing insights to some other legacy industries. And so, that may cause a differentiated output. But I think your general observation is true.

Thank you, Ashish. Let me take the -- let me take the first question since kind of referencing Investor Day, and I'll let Elizabeth add to this if you feel is necessary, but what we outlined at Investor Day was incorporated into our guidance in terms of where we felt we could achieve incremental revenue growth. Naturally, we saw the performance in 2023, which was representative of achieving those higher growth rates. We're really pleased in the first quarter to be able to similarly deliver strong growth on top of that. And so, we have kind of a compounding effect, and I think that reflects in large part the achievement of some of that revenue growth upside. So, I would look to the fact that we are meeting and exceeding the guidance that we set at Investor Day.

Yeah, I agree with Lee there. And I think in terms of examples of new products gaining traction, you know, you've heard us talk about them on some of the recent calls, the Discovery Navigator product and claims, which is one that does now use Gen AI as well. We've talked about image forensics in the anti-fraud space and as well as a variety of innovations that we talked about in this call on our core products, including Core Lines Reimagined and the next generation models in extreme events.

Yeah, and if I -- thanks, Elizabeth, for kicking up that. The first part of the question we talked with Jeff's question on some of the headwinds we're facing on marketing. But I would also say in terms of new product adoption in our life insurance offering, we are seeing very strong uptake in that category with the applicability of the low no code solutions to the life business within our specialty business solutions area, where we have seen very strong adoption from some major industry players onto the whitespace platform, which is a new product that we are growing. And so, in as well as internationally, as we have been bringing our products into that market, we're seeing the uptake and very strong double-digit growth across those businesses internationally.

And then finally, I would say, I think in terms of new product growth, we should never overlook the benefit or the uptake and receptivity that we are seeing to our existing product investments. As with Core Lines Reimagine, and other areas that we have been investing in, similar to LightSpeed, where we have improved those products, we have increased the value to the customer, we're integrating generative AI into a number of those products, and in a way that is new product adoption in terms of being able to realize incremental value in our revenues for those products. And I think that is reflected in our overall revenue growth as well here.

Thanks. Ross, for the question. Yeah, you know, it's good context. You heard Lee talk about the industry and the relative strength in the industry, as well as the hard market that we are in. So, as he highlighted for our contracts that have a tie to net written premium growth, we're seeing generally positive tailwinds in line, I would say, in line overall with last year. I think what's most important for us from a pricing standpoint is the increased engagement that we are having with our clients. And you're seeing the benefit of the investments that we're putting in our products, and those are driving for us strong renewals, strong outcomes on the pricing conversations.

And Tom, I'd say that on that, we see a receptive environment because I think the industry is doing well. We're seeing recognition of the value of the products, but I would also mention that I think with some of our efforts to improve our go to market strategy, we're seeing a more effective sales organization that is contributing to good outcomes on the pricing side as well. So, I think we feel very positive about some of the changes that we put in place in 2024 as a function of a close examination of what we could be doing better there.

Certainly. Thank you, Toni, and the short answer is, in first, was a small financial impact for us. The simple answer is that the entities that were providing that data to us decided to discontinue collecting that data. And so, there was really not sufficient analytical value in that without the data that was being provided. And, you know, I think it's, it's fair to assume that it's a function of some of the -- some of the media attention to collect connected car data. So that really was the simple reason. It had been an area where we felt it was worth investing. We do believe in looking at broad datasets that are useful in evaluating driver risk. But I would emphasize that while we have discontinued that operation and was immaterial from a financial standpoint, we do continue to serve auto insurers in a significant way with a wide variety of products, including our LightSpeed auto, our coverage verifier, damage assessment from a claims perspective. So, this is a very, very substantial business for us, and the discontinuation of the Verisk data exchange will not have any impact in our legacy auto businesses.

Yes, Faiza, thanks for the question. In terms of quarterly variations, you know, there can always be minor puts and takes as things move from quarter to quarter, but nothing that we see at this point that would -- that would indicate, you know, significant quarterly changes. The drivers of strength for us this quarter have been, you know, really broad based across the business, forms, rules and loss costs has been the largest driver as the largest business, and we talked about some of the trends benefiting it there. We've had strong strength in the, in the anti-fraud business. I would call that both absolute strength as well as benefiting from the conversion from transaction to subscription, and the extreme events business actually had strong subscription growth as well, given the demonstrated value there.

And Faiza, maybe to add a little additional color, we use this as an opportunity to say we've talked about the environment, we've talked about the benefit of engaging as partners with our leading clients, which I think has helped us on that front. Probably most primarily at a senior level to help our clients understand the value that we are providing to them across the enterprise. But something to your question of kind of sustainability and growth, we clearly want to grow the subscription revenues at a higher rate where possible, and coming out of a lot of intense engagement at a senior level in 2023, we have had three clients in different areas -- one's an international insurer, one's a large U.S. insurer, one is outside of the insurer, but in a variety of areas that have come to us with ideas of products that we might jointly develop or distribute with them. And I think it's a reflection of how we can potentially develop new incremental revenue sources. This was certainly part of our plan originally, but we've been delighted to see that that engagement has enabled real commercial opportunities that we are in the process of exploring and structuring at this stage. That is certainly a primary path for us to find ways to continue to sustain and grow that subscription growth.

Yeah, thanks for the question, Jeff. We don't, you know, we don't break out sort of specific areas of investment by element. I think on the last quarter call I mentioned those as some of the top areas for investment this year. And I think our investment in those areas is pretty much in line with our expectation of the year and embedded in the margin that you're seeing and the guidance for the full year.

Yeah. Happy to cover that, Greg. Thanks. You are right that we do see headwinds on the transactional revenue side, largely because the comps from last year have been so strong. You saw double digit transactional growth for about a one-year period last year. I think some of the main areas of tough comps have been and will be on the auto, auto transactional shopping activity, which was a real area of strength last year in addition to the non-rate action activity. And we -- that really picked up in the first quarter of last year. So, we're starting the anniversary it now. The shopping activity did actually continue strong in the first quarter, but starting next quarter we really anniversary strong growth there.

The other area where it could be tough comps has been on the weather activity. We called out through 2023 the elevated weather patterns that we were seeing, and so that could be a headwind this year. Securitization activity was very strong last year in extreme events. So that's one that we are also waiting to see. So, between those different areas, that's something we're looking at. I think this quarter is a demonstration of the power of the business model, and the bulk of our revenue coming in that subscription revenue, which continues to show very healthy signs of strength, shows the strength that we can deliver, even compounding those tough comps.

Thank you, Manav. I think I heard that, I think the focus is on capital allocation and how does the outlook for small and medium size M&A opportunities. I would describe them as they are out there, that I think that valuations remain high for those entities. Our focus is always on how can we add value with our distribution, our data, our relationships? That has been a good equation for us. And valuations kind of continue to make that challenging for us to generate attractive returns. But we are very engaged in that market, and always looking for products that have achieved traction with the industry, where we think we can accelerate the adoption and deliver value both to our clients and to our shareholders.

Thanks. Yeah, thanks. Surinder. I can't break it out numerically. I would say that there are -- we've talked about the various projects that we are investing in now. Those are finite projects which we will finish, and we've talked about the timelines for each. There are some elements of those projects that is fixing or reinvesting in technology that has maybe been overdue. And so, I would talk about our internal ERP systems as an area of that. Some of the places where we are doing tech replatforming, would be those areas. And so that level of investment may be elevated, and we may not need to continue going forward. I would say we will always be investing in our products to maintain sort of their cutting-edge status. So, after we finish Core Lines Reimagine, we will continue to invest and evolve in new projects that we may not know exactly what they are today.

And I think what I would add to that, Surinder, is, I think that the short answer is that the ability for us to integrate generative AI technology as an expansion of a new form of artificial intelligence within existing products is something that our businesses are effectively absorbing into their current financial models, and thinking about where they are deploying capital within their own businesses.

There have been and there may be in the future areas where we have decided that, or we have determined that there is a really interesting application in a new product side that we want to invest heavily in, or we want to accelerate, and that will be an opportunity for us to provide a focused amount of capital or investment. At this stage, I think there were a couple opportunities that we evaluated and we determined kind of just maintaining our natural, organic level of investment is the right path at this point. That may change in the future. But I think Elizabeth's comments I would just reinforce by saying right now we're finding a way to integrate this investment into the businesses, and also recognizing that we are making a heightened investment on an ERP upgrade that we think will drive operating efficiencies and informational advantages for us over time.

And that will be one that, as we kind of finish that level of investment, may free up space if there are good opportunities for us to invest. Otherwise, we'll return that capital as we always do with our discipline.

Yeah. Thank you, Russell. So, first, on the next generation models, I think that this is a major upgrade in terms of the sophistication of the models, allowing our clients to better estimate and quantify the uncertainty of their losses across the industry. And given you think about the next generation models, it is taking a variety of the environmental, physical, weather risk related, and then translating into our what are the real costs associated with damage, restructuring and the rest. And so, we can take this and apply it to all of our perils and all of our geographies. So, it is a major enhancement to our portfolio of products, and it has also increased the sophistication of the ability to support complex insurance policy structures and deal with the new terms and conditions that weren't previously effectively captured in the model. It also is an important step for us to the SAS model, getting the next generation financial model in place was critical in what we heard from our clients as what they wanted to be addressed first, and now we can improve the functionality and the efficiency of that.

So, we do think that this is a substantial opportunity for us to deliver more value to our risk modeling clients. And certainly, our expectations are reflected within our guidance in that regard. But it does, I think, open us up to continue to expand what we do for clients on that front. With regard to your question on is the pricing upside, that is reflected within our guidance. We're pleased with the progress that we're making in the reaction from our clients to the investments that we've made in a variety of our products, and that's reflected in the guidance that we have put forward.

Yeah, thank you, Alex. That's a great question. So, I think the first question relates to the overall growth. And I think when we look at the businesses on an organic basis, I think we are -- generally view that, as we spoken before, and we continue to believe that they have and will continue to drive double digit growth within our business. And so, I think that's kind of the baseline. We continue to see opportunity on that front.

Your question on the coordination, I think is an important one. And I would say that each of those businesses are serving distinct insurance industry constituencies, and the opportunity, I think, has been less to tie all of those products together from a single client perspective, but to partner more effectively with the U.S. team and the international team to make certain that we are integrating our expertise, our data, some of the investments that we've made in the U.S. to enhance and strengthen those product sets. And so, I think we're seeing a heightened level of partnership in that regard, but not so much time together, for instance, the claims and the underwriting businesses as well.

You know, another dimension which I referenced earlier is that I think that we are seeing an opportunity to partner with institutions within Europe that see that value and through their existing distribution networks have an ability for us to deliver some of that value in partnership with other players within that market. And so that, I think becomes an enhancement opportunity for those products, as well as some of even our U.S. based products and technology that can be applied there.

Yeah, thanks, Heather. Yes, it is, it is a strong market. I think it's what's driving it is both the need, the increased catastrophe risk and the need for diversifying the set of investors in that space of risk, and for new investors, it's their own desire to diversify and find uncorrelated areas of investment. So, that's been driving strength in that cat bond market. How we benefit from it is our extreme event business is one of the primary providers of models and assessment of that risk, so that the investors and the issuers of those cap bonds can agree to transact on the pricing by assessing the risk.

And Heather, what we are seeing that is driving that is both demand from investors for non-core related returns and interest, particularly in this hard market from an insurance standpoint, what are perceived to be more attractive returns. We're also seeing that in terms of more capital being attracted into excess and surplus lines and reinsurance generally. And it speaks to, I think, the ongoing development and the increasing sophistication of the portfolio -- active portfolio management of the insurance industry. That is an opportunity for us, given our modeling capabilities, given the loss costs and the rate modeling activities that we have. And that has been something that we have been engaged in thinking about at an enterprise level in terms of how we can support the development of that market.

One example would be, there was a category of insurers that are ILS managers, Insurance Linked Securities managers, and those have been modeling clients of ours and also represent opportunities for us to build broader relationships in how our suite of products can serve their needs as they manage external sources of capital.

Yeah, thanks, George. We don't forecast subscription growth for you. We do -- we obviously give our medium-term target range for total revenue growth at 6% to 8% organic, constant currency and subscription has historically been 80% of that. So, that's kind of what we can say numerically. In terms of drivers for acceleration and deceleration, I think all of the things that we've been talking about are investment in our products, our customer engagement, and our industry expertise drive strength in the subscription revenue, both from a renewal, from a new customer base and from a pricing perspective. You know, headwinds can come with that. We've talked about this before with, you know, potential attrition or industry consolidation or [Indecipherable].

Thanks, Greg, and thanks for coming back for a second. We appreciate it. So, I think that we are seeing, I would first challenge that we are seeing kind of continued pressures on the industry, both in terms of ongoing inflation as well as increased risk that they are experiencing that seemingly is continuing to support premium growth as well as natural expansion in coverage for the industry. So, at this point, based upon the financial reports and our engagement with clients, we have not seen early signs of that market. In fact, a lot of the reading that I have seen has been to a sustained hard market. But we do have to anticipate at some point that there may be some pressure from a margin standpoint. And in that context, our products and services remain critical in achieving a higher level of operational efficiency within the business in order to maintain or improve that combined ratio, as well as the efficiency of making good underwriting decisions. And I would use this as an opportunity to say I think one of the most promising dimensions of generative AI is in gathering and pre-digesting a lot of the information flow that the insurance industry relies upon to evaluate policy submissions, evaluating adequacy, going into the risk, not replacing the human, but enabling them to focus their expertise on the underwriting decision, the risk and the return decision. We think that that is a secular trend as technology improves, as datasets expand, that will continue to provide ample opportunity for us to deliver value to the industry. It's nice to have some premium growth because I think it puts people in a constructive frame of mind. But these issues and challenges that the industry face are going to exist regardless of whether it's a hard market or a soft market, and I think that's our fundamental opportunity.