Q1 2022 Verisk Analytics Inc Earnings Call
Good day, everyone and welcome to the very first quarter 2022 earnings results Conference call.
This call is being recorded currently all participants are in a listen only mode.
I'll start today's prepared remarks, we will conduct a question and answer session, where we will limit participants to one question. So that we can allow everyone to ask a question.
They love the little have forget instructions for you at that time for opening remarks, and introductions I would like to turn the call over to various head of Investor Relations Ms. Stacy broad bar Mis Mis broad bar. Please go ahead.
Thank you Justin and good day everyone.
Appreciate you joining us today for a discussion of our first quarter 2022.
On the call today are Scott Stephenson, Chairman, President and Chief Executive Officer, Reshape, our incoming CEO , Mark ancillary Chief operating officer, and incoming President and David <unk>, Our controller and Chief Accounting Officer.
The earnings release referenced on this call as well as our traditional quarterly earnings presentation and the associated 10-Q can be found in the investors section of our website <unk> Dot com.
Earnings release has also been attached to an 8-K that we furnished to the SEC.
Replay of this call will be available for 30 days on our website and by dialing.
Finally, as set forth in more detail in today's earnings release, I will remind everyone that today's call may include forward looking statements about their future performance.
Actual performance could differ materially from what is suggested by our comments today information about the factors that could affect future performance is contained in our recent SEC filings.
I would also like to note that the financial results for our recent disposition of three financial services are included in our consolidated GAAP results.
Excluded from all organic constant currency growth figure a reconciliation is provided in our 8-K and now I'd like to turn the call over to Scott. Thanks, Stacy Good day, everyone and thank you for joining us for our first quarter 2022 earnings conference call. The past 21 years at various Kevin an incredible and rewarding journey. It is.
Ben My absolute privilege to serve as chairman and CEO during such a transformative time for our company I'm incredibly proud of the growth that we delivered and the value that we created for customers employees and shareholders and we always deliver this value by acting with the highest level of integrity.
Our company's success has always been a team effort.
To that end I'm delighted we have such a deep bench of talent, including our incoming CEO Lee shameful and incoming president Mark and Lorie, who I know will drive continued growth for our company and the various towards becoming a global insurance focused data analytics solution provider I look forward to seeing the work that all.
Various teammates will do to drive innovation and growth for long term success.
This is my final earnings call I also wanted to take a moment to thank all the shareholders and analysts that will cover Paris for your effort and your support over the years.
And with that I'll turn the call over to Lee.
Thanks, Scott and good day, everyone on behalf of the entire Arris team Scott Let me. Thank you for your dedication and service to virus. We wish you all the very best in your well deserved retirement. It has been a privilege to work with you and learn from you over the past five years and I am fortunate to have your ongoing support and counsel I'm.
I am pleased to share that various delivered solid first quarter results first quarter organic constant currency revenue grew five 3% and organic constant currency. Adjusted EBITDA grew four 1% adjusted for the impact of the suspension of our commercial operations in Russia, and higher discrete professional fees organic constant currency.
Fee revenue grew five 7% and organic constant currency adjusted EBITDA grew six 9%, we delivered solid growth across the insurance segment with the fastest growth reported in marketing solutions International specialty business solutions life insurance extreme event solutions and claims analytics. We also had some.
Contributions from our industry standard solutions and underwriting within energy, we continue to see improving results across both subscription and consulting with the strongest growth in the energy transition chemicals and metals and mining we did experience softness in certain of our transactional businesses, including workers' compensation, which is <unk>.
<unk> continued weakness as carriers are adjusting to new regulation within the industry.
In addition, our property estimating solutions had weaker transactional growth related to a slower storm season versus last year's ice storms in Texas. Finally, the auto underwriting business continues to deal with a lower level of shopping activity.
Our results also included headwinds from the suspension of commercial operations in Russia increased cloud costs higher discrete professional fees in the quarter and the partial normalization of travel and entertainment in the post pandemic environment. We will provide more details on the financial review section of the call.
In preparation for officially stepping into the role as CEO over the last 75 days, we have visited our offices in London, Boston, Lehigh, Utah and of course Jersey City to meet with the employees and leadership teams of all our business units. Many of these individuals are longtime colleagues and I'm excited to build on these relationships going forward in <unk>.
I've had the opportunity to meet with more than a dozen of our most significant customers some of whom I've interacted with throughout my tenure here.
Long known the valued role we play as a technology partner to our customers and I'm more energized than ever about the extraordinary opportunity we have to expand the breadth and the depth of those relationships our value proposition is very clear.
<unk> strategically invest in data and technology at scale in order to deliver economic value to our customers through operational efficiencies and better decision, making across the industries we serve.
In insurance, our customers look to us to help them better select risk and facilitate the automation of legacy processes to improve efficiencies in underwriting and claims. They also turned to virus for support with the digitization of their customer experience and to enable the use of new datasets and platforms for expanded product lines. The.
<unk> of our Touchstone platform, an extreme event solutions, the lightspeed product suite in underwriting and the development of our life business are tangible examples of what we have delivered to clients and an energy understanding the complex impacts of the energy transition and the geopolitical events continuing to unfold in Ukraine on the global energy economy.
<unk> remain a primary customer focus there is strong demand for improved data delivery and analytics and we continue to deliver on that demand for our customers through our lens platform. In fact, the first quarter was our fourth consecutive quarter of mid to high single digit ACB growth helped by new multiyear contracts with material upsell.
For customers that are adopting lens as they recognize the value of this new platform delivers.
In both insurance and energy, we benefit from the growing demand for data analytics from our customers along with their increased ability to ingest and utilized our rapidly growing datasets and technologies to make better decisions and drive operational efficiency, we create lift from these growth engines through the industry scale at which we can deliver greater.
Value per dollar invested and our clients would be able to individually.
Growth and returns on invested capital have been and will continue to be the primary driver of value creation for our shareholders over the long term and my highest priority as CEO will be to continue to deliver on both we are well positioned in industries with massive opportunities that will require investment and focus in areas, where we can maximize value for.
Our customers.
It also requires delivering value for our employees on whom we rely for their talent commitment and effort. We operate in a highly competitive market for talent and must be sure that virus remains a very attractive destination for the best and brightest.
Moving from our long term value creation strategy to our near term focus on the activities. We described to drive enhanced shareholder value I wanted to provide an update on both our progress towards being an insurance focused data analytics solutions provider and our commitment to achieving margin expansion, we are making steady progress on the separation of the energy business.
We are actively engaged in a detailed planning and modeling exercise of the financial legal tax and operational costs associated with separating the business. This analysis will inform valuation and the transaction structure that we intend to pursue subject to market conditions and shareholder value considerations are timing.
Spectation remain unchanged.
On our EBITDA improvement objective as Mark will describe in greater detail, though still early we have identified several areas of organic cost efficiencies at the operating and corporate level to drive margin expansion. These opportunities include the consolidation of certain real estate locations as leases come due or to the extent sublease opera.
These are available the increased usage of our global talent optimization locations for new hires and more efficient technology investment, including the closure of our on premise data centers. We will also reduce corporate overhead. After we complete the transition services agreements associated with the sale of three <unk> and various financial service.
<unk>.
As we previously announced in mid March the company continues moving towards the goal of being a global insurance focused data analytics solutions provider, we expect to deliver 300 to 500 basis points of EBITDA margin expansion in the consolidated remaining insurance focused business by 'twenty 'twenty four against a base.
This line of 50% to 51% normalized adjusted EBITDA margins North of 55% adjusted EBITDA margin that our insurance segment delivered in 2021, Indeed, 55% does not represent a normalized run rate for the insurance business as it does not account for a number of offsets including first corpora.
Overhead costs allocated to other businesses of approximately 200 basis points second the impact of three strategic insurance related acquisitions made over the last two quarters, approximately 80 basis points and finally, the normalization for incremental cloud transition and post pandemic travel and entertainment.
<unk> for a combined approximately 170 basis points in.
In addition investments in new financial and human capital systems will provide greater efficiency opportunities when fully implemented but will pressure margins in the near term as well inflationary and competitive compensation pressures, but these effects are all embedded in the 300 to 500 basis point target.
We should note the 2022 is likely to be quite noisy due to the impact of portfolio changes in implementation costs as well as the impact of other environmental issues at <unk>.
Such we expect the margin expansion to be most visible beginning in 2023 as we move past the timing impacts of the portfolio changes in implementation.
Based on our work to date, we are very confident in our ability to achieve our stated target for EBITDA expansion by 2024 as we originally disclosed.
Before turning it over to Mark let me provide a quick update on the CFO search we continue to make progress and are prioritizing public company Cfos with operational efficiency experience in the meantime, David Ruberg, <unk> controller, and Chief Accounting Officer has been acting as interim Chief financial Officer and is well suited for this job.
I'll now turn it over to Mark for some more color on the insurance business.
Thanks, Lee before I begin I also want to take a moment to thank Scott for all that he has contributed to various <unk>. The legacy that you were leaving is rooted in the way our teams innovate always deliver for our customers I wish you. The very best in your retirement, it's been a pleasure to partner with you for all these years and I'm excited too.
To build on the strong foundation of success as he moves next chapters of their story.
I'm pleased to share the insurance segment delivered another solid quarter across insurance, we're seeing strong results from both commercial and personal lines and seen contributions to growth from our newly acquired businesses like marketing and life insurance solutions with our within our core underwriting and claim solutions.
Growth is being driven by strong renewal cycles with existing customers as well as from the addition of new customers and expanded use cases for our claim solutions.
Within marketing, we're seeing strong growth driven by continued adoption from P&C carriers, using our solutions to optimize lead acquisition programs build more intelligent marketing segmentation and monitor portfolios for re timed outreach and for improved customer retention.
We're excited about the opportunity ahead, as we combine <unk> with our newly acquired and Futura business to further enhance these capabilities by synergize in products and offerings.
Our life insurance solutions continue to help our life and annuity customers along with their digital transformation all the while delivering very strong growth for <unk> with the addition of new customers as well as expansion of relationships with existing customers.
Life insurance recognize the benefits of our modular and flexible software solutions inner standardizing on SaaS platform.
Within extreme events, we're seeing strong growth in our core touchstone platform with the signing of new customers as well as expansion of multi year deals with existing customers.
In addition, the catastrophe bond market continued to be strong with <unk> participating in more than half of the deals placed in the quarter.
Our sustainability business also had a very strong quarter as demand for our ESG and resilience global risk indices in both corporate and financial sector grew strong double digits.
Quarter, we launched sovereign ESG ratings targeting the financial sector and early interest is encouraging as our focus on the risk is an unmet need in the marketplace.
During the quarter, we experienced recovery in many of our transactional businesses that were negatively impacted by the pandemic, including travel International Oiling claims.
This was offset in part by continued weakness in our workers compensation business as carriers are adjusting to new regulation within the industry as well as tougher compares on the storm related revenue versus last year's ice storms in Texas.
And there are many discussions with their customers we continually hear the same message.
Insurance industry is healthy and focused on become more digital more efficient and more automated while insurance are experiencing increasing costs related to inflation.
Rates are hardening, reflecting these inflationary factors.
This should lead to faster premium growth. In addition, rising interest rates are helping the investment portfolios of our customers driving better profitability.
All that said cost efficiency continues to be a big focus of our customers as they work to be quicker.
More automated and drive savings.
The growing of our datasets has been a strategic focus as we work to further advance our mission to help our customers better select risk to that end, we've been expanding the data and currency of our commercial property database and our hope over $15 4 million properties.
From 12 point to just a year ago.
Growth to become a combination of on site surveys virtual technologies third party data sources, and our ability to accurately model key characteristics using the data we have to expand and update our databases more frequently.
Separately, we've added 10, new data contributors into our core statistical databases for ratemaking in the first quarter.
On the client Gretchen front this quarter has.
Wonderful, we successfully hosted hybrid customer events with many in person sessions in February we held our signature elevate conference and in March we held our insurance fraud management conference both of which are successful across the two events. We had almost 600 pennies in person and another 900 plus through virtual session.
It was great to be in person with customers again.
During the quarter, we acquired after Canada's leading provider of property intelligence and innovative technology solutions. The acquisition further expands <unk> footprint in the Canadian market. It supports after reshaping risk management with valuable business intelligence.
As the only organization in Canada that regular gathers validate status through ongoing research. After is widely considered the industry standard for down lengthens property risk intelligence and loss control services.
This transaction offers immediate expansion into Canada, with a leading provider of underwriting data and analytics to carriers and provides opportunity for product harmonization across an offset in Paris portfolio.
We're excited to welcome the off the team for the various family.
Finally, I want to take a minute to add to the comments that Lee made around operational efficiency.
Within the insurance segment, we are engaged in a detailed study across all our cost throughout our business units. We have identified areas of expenses to be eliminated without impacting future growth opportunities such opportunities exist in real estate technology infrastructure increased use of our lower cost.
Locations for open positions improved sourcing and procurement.
<unk> optimization, and we will work diligently to realize these cost savings in a timely and efficient manner.
Now, let me turn the call over to interim CFO , David Grover for the financial review.
Thanks Mark.
For the first quarter of 2022 on a consolidated and GAAP basis revenues grew six 8% to $776 million.
Net income attributable to <unk> increased 200% to $506 million, while diluted GAAP earnings per share attributable to <unk> increased 204% to $3 13.
Our GAAP results include the impact of a $380 million after tax gain on the sale of our environmental health and safety business.
Moving to our organic constant currency results adjusted for nonoperating items as defined in the non-GAAP financial measures section of our press release, we are pleased with our operating results led by continued and consistent growth in our subscription revenues.
In the first quarter organic constant currency revenues grew five 3% driven by continued strength in our insurance segment and sequential improvement within our energy segment, our subscription revenues increased six 2%, while transactional revenues increased a more modest one 3%.
Adjusting for $3 million in prior year revenues associated with our energy business in Russia organic constant currency revenues would have grown five 7%.
Consolidated OCC adjusted EBIT was four 1% in the first quarter.
Adjusting for expenses related to the suspension of commercial operations in Russia, as well as discrete higher professional fees.
Consolidated OCC adjusted EBITDA growth was six 9% total adjusted EBITDA margin, which includes both organic and inorganic revenues.
And adjusted EBITDA was 46, 3%. This level of margin includes the impact of the suspension of Russian operations, approximately 70 basis points of headwind from strategic recent acquisitions, a higher level of professional fees and the return of certain COVID-19 related costs back into the business.
It also includes approximately 90 basis points of headwind from our ongoing technological transformation, including our cloud transition cost, which we absorbed into our cost structure.
Finally, this margin also reflected a beneficial.
Timing difference related to executive compensation, which will reverse over the remainder of 2022.
On that note, let's turn to our segment results on an organic constant currency basis.
In the first quarter insurance segment revenues increased six 1%, we saw healthy growth in our industry standard insurance programs claims analytics solutions extreme event solutions life insurance solutions and international specialty business solutions subscription revenues increased seven 2% while <unk>.
Transactional revenues were up one 3%.
Certain of our transactional businesses experienced recovery in the quarter, including International travel insurance solutions and international Auto claim solutions, but this was offset by a slower storm season versus last year's Texas ice storms and continued softness in workers' compensation.
Adjusted EBITDA grew five 5% in the first quarter, while margins declined 240 basis points to 51, 5%.
These margins reflect a heavier burden from our corporate costs that were previously allocated to the businesses that have been disposed the impact of recently acquired businesses.
Higher cloud expenses and the return of travel expense back into the business. This level of margin also includes continued investment in our high growth areas like life insurance and marketing solutions.
Energy and specialized markets revenues grew one 9% in the first quarter normalizing for the impact of suspended operations in Russia.
Energy revenue growth was four 3% a solid acceleration from the fourth quarter.
The end market continues to continues to be volatile, but has benefited from higher commodity prices. Our customers were in a much stronger financial position than they were just two years ago, our subscription revenues increased four 8% when adjusted for.
The Russian impact as we are capitalizing on the increased appetite for advanced analytics during the quarter, we delivered double digit growth in energy transition and chemicals research coupled with modest growth in our core research subscriptions, we continued to benefit from strong adoption of our lens platform through upsell of existing.
Customers and the adoption of new logos. It says customers are seeing the value of our integrated cloud based data analytic environment.
This is evidenced by material increases in contract size for multiyear contracts that include land.
We also had another successful renewal cycle in the first quarter of 2022.
Resulting in our fourth consecutive quarter of mid to high single digit ACB growth.
<unk> revenues increased one 5%, but growth was constrained by resources as we actively are managing to take on only the highest value consulting work.
Adjusted EBITDA decreased four 9% in the first quarter and margins contracted to 130 basis points to 33, 1%. This margin includes one $4 million in incremental expense related to the suspension of operations in Russia.
Normalizing for the Russian impact adjusted EBITDA growth would have been five 3%. In addition to the Russia expense. This margin level reflects higher cloud expenses and the return of travel expenses back into the business. It also reflected continued investment in blends as we further build out capabilities to garner.
<unk> value.
For the platform, including months power energy transition chemicals, and metals and mining.
Looking to the remainder of 2022, the loss of Russian revenues and the adjusted EBITDA will impact each quarter by approximately $4 million per quarter.
Financial services were included in our reported numbers, but not within our organic constant currency figures. We closed the sale of BFS to Transunion on April eight.
Our reported effective tax rate was 17 two.
<unk> percent compared to 22, 5% in the prior year quarter, the quarterly tax rate benefited by over 500 basis points from certain nonrecurring adjustments related to the sale of <unk> looks.
Looking ahead to the remainder of 2022.
We still expect the tax rate to be between 2022% in each of the next three quarters, though there will likely be some quarterly variability related to the strength of employee stock option exercises.
Adjusted net income increased 7% to $217 million and diluted adjusted EPS increased 9% to $1 34 for the first quarter of 2008.
22, these increases reflected organic growth in the business contributions from acquisitions, a lower effective tax rate and a lower average share count net.
Net cash provided by operating activities was $400 million in the quarter down 11% from the prior year period, reflecting timing differences for certain of our collections and the impact of the <unk> disposition, which closed in the middle of March.
Capital expenditures were $60 million for the quarter up one 4% versus last year, reflecting increases in capitalized software development offset in part by savings on third party hardware and software as we move to the cloud.
We continue to expect our capital expenditures to be approximately $280 million to $310 million. This versus this supports our plans to increase our software investments through the acceleration of our pace of development.
And extending software development into core underwriting, where we believe there is a similar opportunity for platform enhancement.
Related to Capex, we now expect fixed asset depreciation and amortization should be within the range of $210 million to $230 million and intangible amortization to be approximately $170 million, both depreciation and amortization elements are subject to FX variability the timing of purchases.
The completion of projects and future M&A activity.
During the first quarter, we returned $621 million in capital to shareholders through share repurchases and dividends as our strong cash flow allows us to invest behind our highest growth and highest return initiatives. While also returning capital to shareholders consistently.
We continue to expect to deploy after tax proceeds from the sale of our <unk> and various financial businesses for share repurchases. In addition to our normal pace of quarterly repurchases, which are generally executed through an ASR program.
And now I'll turn the call back over to Lee for some closing comments.
Thanks, Dave in summary, our businesses are strong and we are making important progress executing on our strategic and operational initiatives, including the separation of the energy business and our improvement in margins as we evaluate options for the energy business. We will continue to focus on pursuing the most value creating path for our shareholders and all the various stakeholders.
We are confident that the transformation of our portfolio and active cost management, we can return to growth in line with our long term objectives and deliver OCC adjusted EBITA growth ahead of revenue growth in 2022 and beyond.
We continue to appreciate the support and interest in <unk> 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.
At this time I would like to advice everyone wanted to ask a question Press Star then the number one thing our telephone keypad.
And at Star one on your telephone keypad.
We advise you to four we limit questions to one per participants.
Your first question comes from the line of Alex Kramm from UBS. Your line is open. Please ask your question.
Yeah, Hey, good morning, everyone.
So thanks for some of the clarification on the on the base for what the margin upside I think there's been some confusion maybe.
Maybe just and I think you raised through that a little bit so maybe I didn't catch this fully but can you just.
<unk>.
Kind of the cadence to get to that 300 to 500 basis point improvement I think you made some comments about 2023 that you may see some benefits and then maybe related to that on 2024. When you talk about 300 to 500 is that really something you'll see realized in 2024 for the full year or is this something that you would achieve.
By the end of the year and it's really a 2025 event, so maybe a little bit more of the cadence will be helpful. Thank you yep. Thank you Alex So yes, I think you have the.
It took the took the comments accurately in terms of the base rate and as we indicated 2022 is going to be noisy. There are a lot of effects. What we are working towards and I think we remain confident in is that going into 2023, we will have achieved.
Run rate expenses that demonstrate progress in 2023 on a full year basis and as we then look to 2024, our expectation is that 2024 on a full year basis will represent eight achievement of that 300 to 500 basis points.
Improvements and so I think.
Your question, Alex went too or is that something that youre anticipating exiting 2024 with no I think that we believe that achieving that our objective for 2024 as a whole is is what we're targeting and we remain confident with.
Your next question comes from the line of Pawnee Kaplan from Morgan Stanley . Your line is open. Please ask your question.
As Greg Paris, one for Tony Thanks for taking our question and all the best to Scott.
I just wanted to stick with the margin of 300 to 500 basis points of expansion you talked today about doing a deep dive and a review of the cost structure to come up with that number I mean does this incorporate all the opportunities you found I think you know some of them like closing down the data center is probably what happened anyway, and I mean, the backdrop of why I'm asking the shareholder thinks.
Potentially a lot more out there so I don't know if theres a way you can frame the delta here. Thanks.
Yes sure Greg Thank you.
Let me, let me start off I will ask Marc to supplement my comments, but we have looked comprehensively at all of the suggestions that we have received from shareholders. We have examined those we have drilled into them. When we've had conversations with the business and there there is naturally supporting.
This a substantial amount of opportunity that we are going to be pursuing over the next several years and I think it's important to understand that that 300 to 500 basis points reflects not just the quantum of the cost savings, but also the opportunities for other investments.
And within the business that we think drives stronger growth rates. Good returns on those types of investments from an internal and from an external perspective, and so I think the answer to your question, we do see opportunities from a from a cost savings standpoint that go beyond that but we are also.
Making certain that we are utilizing as I've described before of the opportunity for investments near term in projects that may have a lower margin, but represent good growth good return and operating leverage over over time. So hopefully that gives you a sense of both the scope the quantum that we are looking at and how it relates.
<unk> to our overall management of the business for growth and return objectives.
Mark is there is there anything that you would want to add to that.
No I think it was well said I just will highlight that we have gone across every.
Every account every division and we've got very deep into this and I think the theme here is a combination of how quick more effective how can you be more efficient and that's across a lot of different categories as well as you know what products they need to be rethought, but.
I will emphasize we want to make sure is that we continue to invest in the future. Because we are looking to grow and continue to grow as we have and organic growth is key to all of this so it's a delicate bouncing X, but I think we've been.
Making very good progress hearing and we're confident.
Your next question comes from the line of Ashwin <unk> from RBC capital markets. Your line is open. Please ask your question.
Thanks for taking my question I, just wanted to focus on the insurance OCC growth of 6%. So the industrial background is pretty robust you talked about strength in several businesses. Obviously there are some one time headwinds as well.
But I was just wondering like the organic growth of six continues to.
Steve behind or underperformed the longer term expectation, despite a pretty strong demand environment. So how should we think about this crude going forward as well as some of these one off items come off can we get back to 7% plus growth in.
In 'twenty two and then just maybe mid to long term as you streamline the business and as you highlighted focusing on more.
Efficient growth.
Can we see an improvement to that growth profile or the victim.
So ashish. Thank you for the question I'm going to start off by making a high level comment.
With regard to our subscription revenue versus non subscription revenue and insurance and then turn it over to Mark to give some some compositional color around that but to your to your question.
And Dave's comments, we highlighted that for insurance in the first quarter, we achieved seven 2% organic constant currency revenue growth in our subscription revenue and the weaker part of the business is was in our non subscription revenue and that was a function of within <unk>.
Our our Medicare set aside some caution with regard to regulatory changes some hangover from the pandemic pressured some of that transactional revenue. In addition, we continued to see lower auto purchasing activity and then finally, we had a tougher compare due to the Texas ice storms in the prior year.
So I think no I don't not stepping away from the fact that the 6% was below that overall target in the most important component of the largest component. The subscription revenue growth. We think was very solid and we have some near term transactional revenue that was really the primary driver of that lower lower growth.
Right.
But mark pressed within the businesses you can give some context around the around the strength on the subscription side in any of the other transactional elements. Yeah. Please I go back to we were just under 7% in 'twenty one from insurance perspective, as we look forward I think the seven point to us.
Good indication of the strength of the business.
Occupied a little color on the ups and downs as some of the non subs type of revenue.
One <unk>.
Storms last year, Texas storms provided a little bit of a headwind in 'twenty, one obviously working against that comp in 'twenty two.
Two.
There still seems to be a quietness.
Leased in volumes as a result of the pandemic and we see that in two places one just people are shopping for auto insurance car insurance quite as frequently as they once did.
I think they're probably content with at least the rates. They have now as inflation hits and rates start to rise people will again begin to shop.
And the world of workers comp claims is just generally down.
You can get your homes, it's just not as many workers comp claims we've seen probably drop off you don't need to around 20%.
And there's been some regulatory changes that have paused some of the activity with insurers, how they're going to approach. Those claims. So those are the specifics with regard to non subs or subscriptions.
But you know what I'd like to emphasize is the subscription side of things, whether it's from our underwriting a core line services.
The claims analytics business, which is the fraud fighting business exceptions.
And again with the extreme events very strong. So I was pleased with the first quarter and as is the norm we typically have.
The growth that we have strength as the year progresses with insurance. So thank you.
And Ashish thanks for that market Ashish I wanted to also come back and address your question on the on the longer term growth trajectory is certainly within our existing businesses, we see a constructive environment and good demand, but one area that I'll be focused on and this comes out I think some of my past experience as well as conversation.
With.
With customers is that the insurance industry as a whole continues to look for opportunities to improve their efficiency to take substantial costs out of their operations to improve the digital the digital experience with their customers and I think our ability for.
Where we sit to act as their technology partner in a buy in more of a utility role where we can find solutions for the industry.
Is a tremendous opportunity for us to think more broadly about what we can do because we are creating value for the industry, we're creating value for our clients and I think that will naturally drive value for our shareholders.
Your next question comes from the lineup Androstane Herman from JP Morgan. Your line is open. Please ask your question Hi, I just wanted to talk about that margin expansion. So you're saying the base now is 50 to 51 going up 300.
500 basis points to 53% to 56 by 24 does that include.
Energy or does that kind of 53% to 56% margin assume energy is not part of the business and then if you can make a comment on if the tax rate for the various business, meaning ex energy will be much different than the businesses today.
Yeah. Thank you Andrew and so let me first confirmed that that 300 to 500 basis points off of the 50% to 51% assumes that we have separated energy and so what we're trying to do is provide and reference as we did in the original the original statement.
What the consolidated insurance focused business looks like from a margin standpoint. So it explicitly assumes that we have separated energy within that within that context.
And with regard to tax rate I think we are still sorting through that as we as we look at the complexity of the legal entities that we utilized on a global basis and we have tried to utilize some of the some of the legal efficiencies within there.
Those tax jurisdictions I don't think at this point, we're anticipating a dramatic change in the tax but I just want to maintain the fact that we are as part of our exercise.
Trying to get a more precise read on what the tax implications are.
Your next question comes from the line up Greg Peters from Raymond James Your line is open. Please ask your question.
Good morning.
So I'm going to focus on slide 16 of your Investor presentation, which is the capital expenditure supplies.
And I noted the comments regarding guidance around Capex. So I'm just trying to understand the pieces here and what you're showing us on slide 16 and specifically.
How much of the Capex expense.
This history relates to non insurance related.
Businesses and.
When you set this target of getting to mid single digit level over time.
I'm trying to foot that with the guidance that you have in Capex for this year because it certainly doesn't seem too to match. So any additional perspective on capex would be helpful. Thank you.
Yes. Thank you Greg I. Appreciate the question I know this has been a focus for investors. So the way I would describe it and on page 16.
Important to understand for 2021 that that does include BFS three E and wood Mackenzie and I would note that if we were looking at this on a on a segment basis the.
Various financial services, and wood Mackenzie, particularly as a function of the the lens investment that we have made as well as product enhancements that we were making at adverse financial services. We're operating at a higher capex as a percentage of revenue relative to our average and so.
If we are looking at an insurance focused unfocused entity, while there will continue to be investment opportunities, probably most notably with what we were describing as our core lines re imagine that we.
We believe we will we will deliver similar types of benefits to the lens platform that we did it with mckinsey that those those areas of investment will continue to be important but overall across the insurance that would have been and we expect would be below the average rate that we have been operating at over the past three to five years.
<unk>.
Your next question come comes from the line of GAAP Mueller from Baird. Your line is open. Please ask your question.
I guess I, just want to revisit the structural growth structure revenue growth dancer.
And let me have presented this way you've invested a lot in several new areas non U S marketing life.
There's been more capex youre talking about the underwriting software platform and tech opportunities.
In general not sure to what extent as you do the deep dive on the business theres incremental pricing or go to market opportunities that sounds like a lot of growth drivers to be.
I guess are those back filling for maturing growth drivers are they incremental I don't know if you're just not wanting to commit to a new target or if you want to show us for growth first but if you could just help me understand if theres offsets to what sounds like a lot of growth drivers. Thank you.
Yeah. Thanks, Jeff look I appreciate the perspective, and I think that we would we would agree there are a lot of growth opportunities within the business. As we are are sorting out the separation of the two businesses part of that exercise is looking at the overall the overall insurance.
Business and evaluating where there are where there are is growth where there are opportunities to invest where there are obvious opportunities to invest.
At this point given that I think it's early stage in making that assessment, we're not prepared to change the guidance that we that we have I think we've demonstrated on the subscription revenue that we have been able to achieve within insurance that 7% growth there are transactional.
<unk> transactional revenues that we still are expecting to show recovery.
As we proceed through the separation my objective would be to give a more thoughtful and fulsome description of how we think about growth going forward as we are thinking about this as an insurance focused entity.
Take the point there are a lot of growth opportunities, we're going to be making a making investments but at this stage. We haven't reached the point, where we're ready to make a change in that long term guidance, we believe 7% organic constant currency or higher group for the insurance business is a very solid respectable target.
With operating leverage that should drive EBITDA ahead of that we've made our point in terms of our EBITDA I expect expectations and hopefully we'll continue to refine that as we think about where we want to focus where we want to invest and what we think the growth opportunities are.
Your next your next question comes from the lineup had their Bosky from Bank of America. Your line is open. Please ask your question Hi.
Hi, Thank you for taking my question.
And two things on the margin outlook a lot of additional color. The first is in terms of the three to 500 basis point I guess, what gets you to the low end versus the high end of the ranges I'd love to better understand that and second part is are there.
I guess, the one time costs or how should we think about one time costs as you execute on this plan. Thank you.
Yes. Thank you thank you Heather.
I appreciate the question on the low end versus the versus the high end I think there are two primary dimensions that will influence that one is simply that the quantum of opportunity that we identify and we want to identify as much opportunity as we can that doesn't impact.
The overall growth level of the of the business and so that's.
We are certainly pushing them to achieve.
As much of that margin improvement as we've laid out as possible the.
On the other side of that is what is the level of investment that we think is necessary to support expand.
The overall growth and achieve good returns on that but that is the tension point as I've described before to many of you to many of the investors margin is a dynamic of element that you have to understand in terms of what is what margin expansion is being generated on a pre <unk>.
<unk> basis, and then what do you consume in order to support and expand growth and returns on beyond that and so, particularly as we are going through an environment with higher inflationary costs with high competition for our talent we are evaluating.
Those impacts, which I would describe as environmental that we have to take into account that may influence, where we where we end up in terms of that in terms of that range, but the primary business tension will be the quantum of cost savings that are not growth impacting as well as our.
Our deliberate decision on what we're going to where we're going to invest and what the opex impact of that will be on our overall margins, but with our primary objective is as I mentioned in my comments that growth and returns are the fundamental foundation for our valuation at about for value creation for shareholders.
Your next question comes from the line of Manav Patnaik from Barclays. Your line is open. Please ask your question.
Thank you good morning.
I just wanted to focus on all the recent tuck in acquisitions that you've made it looks like you spent over $600 million. So on acquiring a bunch of these assets I was just hoping you could help us identify some of the key areas and perhaps what the total M&A contribution should be you should be you gave us some.
Help on kind of the margin impact just from a revenue perspective, what does that add.
Manav. Thank you for the question and since as you observe those those have been predominantly if not exclusively in the insurance sector I'm going to ask Mark to talk about the nature of those tuck in acquisitions, what we expect to achieve from our business from a business standpoint, and then.
Stacy will either now or in our follow up calls provide to provide context around the acquisition impact Mark can I turn it over to you to talk I'll talk through some of the recent insurance acquisitions.
Sure. So let me two themes that I think you'll you'll spot is one we continue to focus on trying to quote globally grow. So we'd have this wonderful franchise in the United States and we've tried to take and extend that into other areas. So a opt it provides us with an underwriting base and foundation in Cana.
Duke.
Many of the same things that ferrous does in the United States around the ability to understand the value of a property how much should be ensure the property characteristics. So very nice synergies very much aligned with what we do and it takes us into Canada, we have a strong claims presence from a repair cost.
Estimating perspective, but limited.
Underwriting so I hope that.
Very strategic in that regard.
The other international element to this is we bought a business called <unk>, which represents a.
Claims business around auto.
Germany, so as we try to extend that expand we've had some wonderful growth in some.
Great synergies in the U K market and this takes us into Germany, but also provides us an opportunity and a solution set that along with an earlier acquisition called Validus that helps us also potentially get into Spain. It back into the U K in this in this product area. So.
Again international expansion the focus.
Other theme is really around marketing and we've experienced a lot of customers are very interested in trying to understand it penetrate.
The customers that they are trying to segment the customers. They are trying to identify and bring on board we have some wonderful tools.
To help them quote that business and identify and select that risk. So think about some shopping for homeowners insurance auto insurance.
What Jordan higher and in few toward give us give us visibility as to who's literally out there shopping for insurance it is.
Idea lead idea that kind of shares this industry standard at the SM out there I've been on these websites and to the extent that now I have information about that person.
We are taking a lot of our underwriting where we've been focused on the asset meaning the house on the car and trying to extend it into the people and the person and the individual gaming insurance and we feel that personal at the side of underwriting and marketing is a very large market opportunity and where <unk>.
Actually they already so hopefully that provides a little bit of a strategic context.
Okay. Thank you. Thank you Mark and one thing I Wanna add before you Stacie will address the contribution elements Manav is I think one thing that we have been pleased with is the shift that we have made from.
More of our portfolio orientation from an acquisition standpoint to a focus on business unit driven acquisitions is that we have been able to identify where we can have an impact on the business. We are focused on an improved and more intensive integration process and so with acquisitions like like fast.
Jeremiah.
And.
Sequel for instance, we have been able to demonstrate improved performance against our expectations and really help accelerate a lot of good technologies that the insurance industry values.
But we can really.
Help accelerate their adoption by the industry.
And Manav just.
Well you are aware, we break out the contribution from acquisition related revenue versus disposition in.
But no tables or the non-GAAP reconciliations in our press release during the quarter it was about $20 million.
On an annualized basis I think the best way to think about the recent tuck in acquisitions, you're referring to are roughly $100 million in incremental annualized revenue, but you'll just have to stay within the timing for when we close those acquisition.
Next question.
Your next question comes from the lineup GAAP Silber from BMO capital markets. Your line is open. Please ask your question.
Thanks, so much I'm apologizing for going back to a margin question and I just wanted to focus on the insurance segment. I know you said this year is going to be noisy I completely understand it but if we look at the first quarter. Your insurance segment margins went down by about 240 basis points. I know there were number of items in there is that the kind of run rate we should use for.
For the rest of the year in terms of a year over year decline that we should be expected in this segment.
Yes, so Jeff.
Thanks for that a couple of things one I think that we know what's important to understand on that decline is that the primary contributor to that is the reallocation of expenses to the to the insurance and the energy sector and so and if we achieve that separate.
And with energy that will be a further allocation. That's what gets you to that 15% to 51% level now there we're going to be effects within that quarter that influenced that for instance, we had the discrete professional costs and we mentioned in that quarter. There was a benefit from some compensation elements that will reverse.
But I think that that that primary impact of the reallocation of the expenses is a good starting point for understanding kind of what our normal run rate expenses will be over the over the course of the year.
Yeah.
Your next question comes from the lineup George Tong from Goldman Sachs. Your line is open. Please ask your question.
Hi, Thanks, good morning going.
Going back to your margin expansion target can you elaborate on your strategy for balancing cost take out with growth investments so as not to starve the business of growth capital.
And related to that what are your what are your targets for the amount of growth investments spend over this time horizon through 2024, and which areas will future growth investments focused on.
Yes, Thank you George.
I appreciate the question and I'll start by saying that.
First from a.
From a process standpoint, obviously, we are in the business is operating on a real time basis, we are making investments and so.
On those we are maintaining what we believe was the right investment approach going into 2022, and so within our within our budget and so those are the types of investments that you want to have that you want to maintain we will.
Look as we go into 2023, where the the tradeoffs are from a growth standpoint relative to the expense savings and this is actually kind of a typical.
Year end discussion that Scott and Mark and I would have to evaluate what is the level of investment.
<unk>, we believe is advisable in the business too.
<unk> to expand the growth opportunity what is the margin impact what are the returns for all of those and we look at those options across all of the businesses and then determine what we think is the best and the most supportive and so as we near.
Near term focused on achieving the cost savings identifying implementing those over the course of 2022 and then as we proceed and think about where we want to focus our investment on an ongoing basis within that business. We will look at those those tradeoffs there is.
Is not a monolithic across the business perspective on this is what we're going to invest in growth because almost by necessity it needs to be a project by project and business by business determination that we evaluate through our budget and our long range long range planning.
So that's probably the best answer that I can give you, but we're always trying to prioritize growth and returns while achieving our margin expansion objectives that we've outlined.
Your next question comes from the lineup Andrew Jeffrey from two Lewis. Your line is open. Please ask your question.
Hi, Good morning, I appreciate you squeezing me in here.
Wanted to ask a question about the cloud investment in our cloud transition.
Lee It seems like there will be some longer term expenses associated with that that you contemplate in your sort of steady state.
<unk> margins I assume there are some go to market product development NPI benefits, though too can you just talk about the.
The specific ROI that you expect.
From your cloud transition efforts.
Sure. Thank you Andrew so the the.
The first point that I want to make is that as we detailed in our last call from an economic standpoint, we are achieving a benefit from our plant our transition to cloud, meaning that our investments in that cloud migration have generated opex.
Savings and Capex savings across the portfolio that we have that we have made and it's important to understand that you have to look at both dimensions of that to see the economic value, but it does entail naturally and effective transition of what were formally capex.
<unk> into Opex expenses in terms of our <unk>, our cloud based or cloud based expenses and so first firstly that that investment is generating an economic value and is generating a a high double digit plus return on.
The capital that we invested.
Within that and I say that on the basis of having looked at the projects of where we've made those investments and then what we've achieved from an opex and a capex savings standpoint. So we do believe that it is contributing both economic value and and returns.
Broader question as I as I understand it is to understand the benefits from a business standpoint, and we do believe that the migration of that data of those datasets into the cloud of the applications into the cloud facilitate more.
Coordination and integration of the analytics that are able to draw from that consolidated dataset and in a way the lens experience that we've had is a is a demonstration of that.
First and probably most immediately in terms of the ease with which our customers can access data utilize data integrated into their processes improve their efficiency, because we arent sourcing from from multiple systems or from legacy systems and much of what we want to accomplish in our port <unk>.
Re imagine moves in that direction as well process efficiency first but we're also improving the environment, where we can associate datasets more up more effectively but that is I think is more of a a second stage achievement. We're focused first on the economic value that we can achieve the process improvements for our clients and their.
Ultimately the improved analytical opportunity there certainly may be overlap, but generally that's the process and to date I would say on that on that data benefit that is still largely an unrealized in certain areas I think we've achieved it but in terms of the broader off.
<unk> I think there is still much more much more for us to do and it ties into I think this broader infrastructure or utility opportunity that we see for the industry as a whole as that as that data becomes consolidated in a more consistent architecture. It facilitates broader industry process improvements.
Your next question comes from the line of <unk> from Deutsche Bank. Your line is open. Please ask your question.
Yes, hi, Thank you and good morning.
Lee I wanted to ask a few follow ups.
Maybe a follow up to George's question.
Are you able to do you need to talk about.
The specific cost soothing, so maybe how much of your cost savings are related to real estate, how much is related to costs.
So how much is related to sort of employees in other locations.
And maybe if you could talk about the operating leverage that you expect in the business and lastly, you know you've made a few acquisitions that have impacted margins and I'm curious as you think about your longer term growth rate do you need to make more acquisitions and whether the potential margin impact of those future acquisition.
It's included in your long term margin targets. Thank you.
Yeah. So thanks, that's a lot of questions too to throw at me, but we'll try to we'll try not to knock them down one by one so at this point the dollar detail as we are developing this as we are anticipating what we can achieve over the course of 2022, we we arent at the stage, where we are ready.
To provide a one dollar breakdown on the on the expense with regard to your question on operating leverage operating leverage is really the key element that I'd focus on and I am we do embrace the fact.
That.
This opportunity to rethink our cost base fundamentally improves our operating leverage we've always been focused on businesses that have solid operating leverage and that as we drive strong organic growth into the into the business that that magnifies, the EBITDA growth and that naturally produces margin expand.
Can you offset by our level of investment.
The last question or element of the question related to the impact of M&A.
And there our focus is on generating growth in returns I think embedded in your question is do we rely on acquisitions too.
Maintaining our growth rate I think the short answer is no. We are we do look for businesses that we can create value from that are higher growth and represent opportunities for us to accelerate and to generate and to generate returns, but we believe that our our internal.
<unk> to grow and as demonstrated in a variety of areas, including with our with our lightspeed products.
And.
In within our within our claims business with a number of the products that we've added there within our extreme event solutions businesses. Those have all been strongly performing growth businesses for us.
Looking looking ahead, we obviously can't anticipate the acquisitions that may become available to us our acquisitions are typically four smaller higher growth businesses that do have lower margins and if we do see acquisitions that we think are value creating.
We will pursue those and they may have a negative margin impact in fact, they're probably likely to have a negative margin impact that would be outside of our overall, our overall objectives here, but they're fundamentally.
Focus on value creation through our ability to accelerate and drive both growth and growth in returns. So our analysis is based on the business as it is right now that we can achieve that against that insurance focused consolidated consolidated business, but we aren't making any assumptions.
<unk> of what our future acquisitions are those have to be opportunistic and based upon our discipline.
Your next question comes from the line of Pam's that misery from Jefferies. Your line is open. Please ask your question.
Hi, This is Hans Hoffman filling in for Hamzah.
Can you just walk us through your pricing model and how much is price running today, maybe any changes relative to history on how your price I know you guys have talked about value based pricing in the past.
Yeah, Let me, let me ask Mark to provide a high level view of we obviously have hundreds of products with different pricing dimension. So again, it's not a monolithic business, but mark perhaps you can offer some some perspectives on how we think about that value our value based pricing model.
Super.
So first of all.
Naturally the way, we kind of align our value add to our customers' needs is typically tied to some.
Element have how big they are which is usually in the form of premiums. So it doesn't necessarily tie year after year to premium, but we try to sync it up to how they are using basically our core products or our claims analytics products to.
To the extent you think about some of these solutions on the repair cost estimating side. Some of it's tied to the number of claims. So I think what we've typically tried to do is set up a process by which we kind of size. The overall relationship based upon premium or claims are and then inside.
Inside of that we are trying to create a holistic solution. So we are trying to bundle solutions together. So we provide a holistic solution set to them.
And.
I think the opportunity there is that one they have the ability to bundle the products they get kind of a value price and we try to conclude some increase or inflation in years, two and three you should these are three year contracts and they kind of come renewal year for sometimes there.
Five year contracts, but I hope that gives you a little bit of color.
5% of the revenue is subscription base typically it's these three year contracts.
And I think the relationship is strong so we're always able to add new solutions or maybe they want to add a different subsidiary to the mix and that gives us continued upsell and opportunities inside what is a very existing at very big existing customer base.
Yeah.
Your next question comes from the line of Kevin Mcveigh from Credit Suisse. Your line is open. Please ask your question.
Great. Thanks, So much page I wanted to go back to the Capex slide on 16.
Lee is there any way to disaggregate kind of how much sits within energy versus insurance.
And you know to the extent something happens.
The energy business should we expect that to go down and then you know as you.
For the transition in the cloud journey does he does he internally developed software start to scale down as well or is that going to be structural parts that I know the capex over time kind of.
Declines, but how should we think about kind of cloud versus internally developed software.
Yeah. Thank you Kevin So the first comment is.
As we are kind of looking at this separation.
I would I would just kind of leave it at right now.
The investment on the energy side relative to revenue would be above that average driven by that level of lens investment in 2021 and 2022.
So we would expect that there would be an improvement on that but we want to look at that separation before we evaluate changing that guidance, which we still adhere to the second part of your question is.
One yes, we are seeing that Capex savings as you can see on that slide but that internally developed software will continue to be an important component of the way that we invest to deliver value to our clients. It is creating platforms for the data it is cream.
Aiding them software automation solutions for our clients and that will continue to be an important component for the way that we either improve efficiency or make better decisions with within our business as a whole our business is becoming more.
Or software intensive and we think that's a good thing because of the value that we can that we can create for them for them.
One from a process standpoint, but also recognize that in a lot of the software businesses that we that we have and have acquired.
Our essentially networks of participants in the insurance ecosystem, our sequel business, our specialty business solutions.
Probably the best example of that and that creates opportunities for us to utilize that data to create analytics and to provide new functionality that supports the ecosystem and so that's why it's so important in a way with that with that software we are able to recreate in other markets of the network.
Fact that we have enjoyed.
Historically within our within our domestic business and I would also note when you look at our acquisitions fast sequel, <unk>. They are more software intensive.
And our associated with that higher growth rate, so that will be an ongoing and important component for us.
So with that I think that is R.
Our final question. Thank you for your for your time today. Thanks again to Scott for all of all of his contributions and we look forward to the ongoing dialogue with with all of you as we proceed have a good day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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