Verisk Analytics, Inc. (VRSK) Q1 2021 Earnings Call Transcript

Good day, everyone. And welcome to the Verisk First Quarter 2021 Earnings Results Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. After today’s prepared remarks, we will conduct a question-and-answer session, where we will limit participants to one question and one follow-up. We will have further instructions for you at that time. For opening remarks and introductions, I would like to turn the call over to Verisk’s Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead.

Thank you, Mayra, and good morning, everyone. We appreciate you joining us today for a discussion of our first quarter 2021 financial results. Today’s call will be led by Scott Stephenson, Verisk’s Chairman, President and Chief Executive Officer, who will provide an overview of our business. Lee Shavel, Chief Financial Officer and Group President, will follow with the financial review. Mark Anquillare, Chief Operating Officer and Group President, will join the team for the Q&A session. The earnings release referenced on this call, as well as the associated 10-Q, can be found in the Investors section of our website, verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC. A replay of this call will be available for 30 days on our website and by dial-in. Finally, as set forth in more detail in today’s earnings release, I will remind everyone that today’s call may include forward-looking statements about Verisk’s future performance, including, but not limited to, the potential impact of the COVID-19 pandemic. 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. And now, I’ll turn the call over to Scott.

Thanks, Stacey. Hello, everyone. And thank you for joining us for our first quarter 2021 earnings conference call. 2021 is a special year here at Verisk as it marks our 50th anniversary as a company. For 50 years, our mission and purpose has been the same. We work non-stop in partnership with our customers using data and insights to make a difference by helping protect people, economies, society and our planet. On this journey, we used our unique data and combined it with advanced technologies in new ways to unlock meaningful insights about risk, becoming a global leader in cutting-edge analytics. And while we are very proud of our accomplishments over the last 50 years, it inspires us to look ahead to all the difference we can make over the next 50 years. I’m pleased to share that this year is off to a solid start marked by continued growth in our subscription businesses. We’ve delivered solid growth in Insurance, a modest sequential improvement in our Energy segment. Yet we had a challenging quarter within Financial Services. While certain of our businesses continue to be impacted by the pandemic, those revenue streams show resilience as the underlying causal factors improve and we have confidence in this relationship. We will provide more detail on this financial review. For 2021, we remain focused on building long-term shareholder value, delivering for our customers through innovation and service, while also protecting the health and well-being of our teammates around the globe. Currently, most of our offices are operating in a Phase 1 format and are available for those employees who have volunteered to work from the office. We do have certain offices that have advanced to Phase 2 and even Phase 3 as conditions in their local markets allow and employees are energized to be back in the office. Our Global Protection Services team closely monitors directives from local governments and public health officials around the world, as well as incorporates learnings from our local market experiences to make real-time decisions to maintain the safety of our people. To that end, our teams are closely monitoring the current situation in India in the face of the severe second wave of COVID and we are providing relief and assistance to our India colleagues including vaccination coverage, virtual medical services, emergency relief funds and other essential programs. To date, we have experienced minimal or no disruption to our business or the services we provide. Over the duration of the pandemic, our teams have proven they can transition efficiently into different work modes with minimal interruption in service to our customers. So while there remains some uncertainty around return to office timing across our many different markets, I have complete confidence that our 9,000 plus teammates at Verisk will continue to navigate through these times effectively and deliver the highest value to our customers. Throughout the pandemic, I’ve maintained a high level of engagement with our customers, CEOs across all three of our segments. Despite the virtual setting, the frequency of these meetings has increased, and the level of engagement and mutual respect has deepened. In these conversations, we are discussing our customers’ highest strategic priorities. In all circumstances, we are receiving feedback that Verisk is a trusted and differentiated partner, and that our solutions and innovations played a large and increasing role in our customers' journeys to becoming more digitally engaged, more automated and more efficient. These types of constructive meetings are happening across all levels of our organization, most recently within our underwriting and claims councils, which include representatives from our top 25 customers in the Insurance vertical. With regard to digital engagement, we continue to see very strong adoption of our virtual claims processing platform, Claims Experience, as insurers continue to find additional use cases for remote claims handling outside the pandemic. Our virtual claims tools enable our customers to conduct business at a time when in-person processes were not possible. But it also has the added benefit of settling claims with greater speed. In fact, virtual claims are paid on average 30% faster than the traditional process. We’ve recently added new features to enhance the solution including remote measurement, object recognition and an automated damage assessment tool. We also are having success converting customers from transactional usage to long-term contracts with committed volumes, as they build comfort with the tool and realize the value that remote claims processing can bring to their organization. One of the strongest signals of the deep and expanding relationships with our customers, in our view, is the fact that they entrust us with their data. I’m pleased to share that in the most recent year 29 insurers have decided to newly contribute data to our ISO Statistical Database. This is the highest number of new participants in a single year over the last 10 years and represents a range of different customers from insurtech startups to multi-state carriers. On the sales front, we’re having great success selling in virtual mode and remain committed to advancing our techniques with ongoing training across the many new virtual selling tools we employ. Our pipelines of new opportunities are some of the strongest in our history and they continue to build. Our customers are more engaged with Verisk as a partner, as evidenced by increased numbers of meetings, better attendance at our virtual conferences, and contract renewals and signings of new deals that are longer in duration. On the innovation front, we continue to make advances with our solutions to drive digital engagement, automate processes and create a seamless interconnected ecosystem, what we have variously referred to as platforms and analytic environments. While this is a journey we’ve been on for some time, the pandemic has catalyzed our customers to move forward with greater urgency and speed. These platforms and analytic environments offer our customers deep integration into their workflows and allow a massive amount of information to be rendered so that decisions can be made quickly and accurately. Often these environments are more software intensive, as we are utilizing this software to gather more data, automate more processes and become even more deeply embedded with our customers. These platforms are also driving healthy and profitable growth for Verisk across our verticals. Let me give you a few recent examples. Within Life Insurance, we’re driving strong growth and profitability as we bundled the industry-leading module software offerings at FAST with the data analytics we have developed across Verisk to create a full suite of Life Insurance Solutions in one singular platform. We’re having great success extending and accelerating the adoption of FAST Solutions across our broad customer base and have a strong pipeline of future deals. In addition, we recently launched new analytics including EHR Triage Engine and Life Risk Navigator. Electronic Health Record Triage Engine uses advanced data analytics and natural language processing to distill thousands of pages of electronic medical records into a short summary and provides an automated underwriting score, both of which reduce underwriting costs and speed up the process and that leads to an improved buying experience for the end consumer. Life Risk Navigator is a cloud-based modeling platform that offers in-depth portfolio analytics to enhance risk selection, quantify changes in mortality rates and drive overall better decision making. Further in March, we enhanced our capabilities in Life Insurance through the acquisition of 4C Solutions, a software advisory firm with expertise in Group Life Insurance. The addition of 4C enables us to extend our expertise into the Group Life market and help address the needs for Group Life insurers and institutional annuity providers. While each solution is strong on its own, we believe we deliver even more value for our customers as these solutions are integrated into one holistic interconnected ecosystem. We are also delivering very strong growth at Sequel as we help our customers in the specialty markets digitize and modernize. Sequel Solutions create a truly integrated ecosystem across carriers, brokers and managing general agents throughout the specialty market, and we’re bringing in new customers and expanding our suite of products across existing customers. We are also beginning to see traction in our global expansion of Sequel with new clients signed in the U.S. and Asia-Pacific. To further enhance the value and capability of the Sequel ecosystem, we recently acquired a majority stake in Whitespace Software. The powerful combination of Whitespace’s digital placing platform with Sequel’s pricing distribution and policy administration applications enables a seamless real-time quote-to-bind solution with straight-through submissions for our existing and prospective customers. In our Energy business, we continue to make advances on the development of new modules and sales of new subscriptions for our Lens platform. Despite the softness in the energy end market, customers are recognizing the value and uniqueness of the platform, and this is reflected in new customer subscriptions and constructive pricing for customers that adopt Lens. Additionally, we have lots of interest in future releases for Lens and already have a group of development partners in place to support Lens Power, backed by the proprietary data assets of Wood Mackenzie and Genscape. Lens Power enables customers to maximize investment opportunities in clean energy and be on the forefront of the energy transition and further advances our market-leading position in the energy transition. We are well positioned to capitalize on the growing trend of countries and companies around the world increasing investment in renewables and green energy, and our solutions will help inform these critical decisions at the highest levels. Lens Power is part of a broader suite of solutions that we have within our Energy segment to help our customers navigate the changing ESG landscape. We are seeing a positive market response to our Energy Customer Solutions to improve management of supply chain risk and ESG priorities like emissions benchmarking and supplier diversity programs. Not only are we helping our customers with their ESG initiatives, we have also moved forward on our own ESG agenda. In early April, we released our Annual CSR report, which you can find in the Corporate Social Responsibility section of our website. This year’s report is notable for three reasons. First, the environmental section features our Climate Disclosure report, which speaks to the four pillars of TCFD: governance, risk and opportunities, risk management, and metrics and targets. Our Board and senior management team are very engaged on these subjects, including climate change and climate transition, both on the risks we face, but equally important on the opportunities they present for our business. We’ve been helping customers understand, measure and manage risk associated with climate and weather for decades: wind storms, wildfire and flood risk among others, and are building on a base of knowledge, data, predictive models, analytic expertise, industry-leading standards and investments that are already in play, and serving our insurance and energy customers globally. Second, we used the CSR report as the vehicle to deliver our first-ever disclosure in accordance with SASB’s recommendations for professional and commercial services companies. The disclosure includes baseline metrics around workforce composition, diversity, engagement and turnover. We intend to update those metrics in our CSR report each year. And finally, the CSR report calls out Verisk's approach to cybersecurity, a comprehensive document that describes our commitment and investments to strengthen data security and privacy. That commitment doesn’t just exist on paper, but is reinforced through the mandatory training we conduct annually for all of our employees. We’re very proud of the progress we made throughout 2020. Our Board and senior management team are very much engaged and our entire organization is committed to continue to move forward our ESG agenda over the coming years. I’m confident we have the right strategy and team in place to meet our long-term growth objectives. Our deep domain expertise and relationships with our customers help inform our innovation agenda. And we are treating the year 2021 as one that provides a unique set of signals on the resilience of the different parts of our company which we are pulling into our always-active capital process to ensure that our capital is deployed into the highest return opportunities. Now, I’ll turn the call over to Lee to cover our financial results.

Thank you, Scott. First, I would like to bring to everyone’s attention that we have posted a quarterly earnings presentation that is available on our website. Additionally, you may notice that we have a slightly new presentation of our financial statements. As Scott mentioned earlier during the quarter, we closed on a majority investment in Whitespace Software. As a result, we now report net income and earnings per share attributable to Verisk. Moving to the financial results for the first quarter. On a consolidated and GAAP basis, revenue grew 5.3% to $726 million, net income attributable to Verisk decreased 1.8% to $169 million, while diluted GAAP earnings per share attributable to Verisk declined 1% to $1.03, reflecting a $19 million gain on dispositions in the prior year that did not recur. Moving to our organic constant currency results, adjusted for non-operating items as defined in the non-GAAP Financial Measures section of our press release. We were very pleased with our operating results considering the continued impact from COVID-19. In the first quarter, organic constant currency revenue grew 3.4% led by continued strength in our Insurance segment and modest sequential improvement in our Energy segment. This quarter's performance fundamentally reflected a year-over-year comparison to a largely pre-pandemic quarter, although we began to see progress in our COVID-sensitive revenues, which improved sequentially. Our non-COVID-sensitive revenues, as we defined at the start of the pandemic, grew approximately 4.9% on an organic constant currency basis, down from a 6.5% rate in the fourth quarter, reflecting a lower level of catastrophe bond securitization activity at AIR and a higher level of impact from consolidation in the Insurance and Energy segments. We did continue to experience, as we have since the onset of the pandemic, a negative impact from COVID-19 on certain of our products and services, largely transactional in nature, which represent the balance of approximately 15% of our revenues. However, we saw an improvement as certain of these products and services returned to growth on a year-over-year basis. COVID-sensitive revenues declined approximately 5.9% on an organic constant currency basis during the first quarter, compared to the 12.5% decline in the fourth quarter, primarily as a result of improved consulting activity in our Energy sector, but also reflecting a return to growth of several products and services, particularly in the U.S. Despite the impact on revenue in the first quarter, we are pleased to report that we delivered solid EBITDA growth and expanded margins as a result of effective expense management and lower travel expenses. Organic constant currency adjusted EBITDA growth was 5.2% in the first quarter, up from 4.9% growth in the fourth quarter. Total adjusted EBITDA margin for the quarter, which includes both organic and inorganic revenue and adjusted EBITDA, was 47.6% in the quarter, representing leverage across our Insurance and Energy verticals offset in part by weakness in Financial Services. This margin level includes roughly 150 basis points of benefit from lower travel expenses, but also reflects a return to a more normal pace of headcount growth and an increase in the pace of investment in our technological transformation, including our cloud transition costs. On that note, let’s turn to our segment results on an organic constant currency basis. In the first quarter, Insurance segment revenues increased 6%, reflecting healthy growth in our industry standard insurance programs, catastrophe modeling solutions, repair cost estimating solutions and insurance software solutions. We experienced a modest benefit from storm-related revenues as a result of the ice storms in Texas and the Southeast. However, this was more than offset by lower levels of securitization revenues in our catastrophe modeling business as issuance was lower year-over-year. In addition, we experienced declines in certain transactional revenues that were negatively impacted by COVID-19, as we had very minimal COVID impact in the first quarter of 2020. Adjusted EBITDA grew 8.3% in the first quarter, while margins expanded 196 basis points, demonstrating strong margin expansion, despite certain revenue declines, investment in our breakout areas and increased costs associated with our cloud transition. Energy and Specialized Markets revenue decreased 0.6% in the first quarter, due to declines in consulting and implementation projects and some modest headwinds related to consolidation in the end market. Growth in core research and environmental health and safety service revenues was offset by declines in transactional and consulting revenues. We attribute our performance to the diversification of our revenue streams into higher growth breakout areas like the energy transition and chemicals, the broad range of end markets that we serve and the strength of our relationships in the industry. Adjusted EBITDA grew 6.6% in the first quarter, while margins expanded 237 basis points, reflecting continued cost discipline and the benefit of lower travel expenses. As a key partner to our Energy customers, we are deeply engaged with them and part of their most strategic and important decisions. We have a track record of managing through volatile times effectively and believe we are well-positioned with our energy transition solutions, as well as our Lens platform to continue to outperform the end market and help our customers navigate this broad energy transition. Financial Services revenue declined 12.8% in the quarter, reflecting the continued impact of contract transitions that we undertook in 2020 and which will continue for the next two quarters, as well as lower levels of project spending from our bank customers, stemming from the COVID-19 pandemic and fewer bankruptcies as a result of government support and forbearance programs. Adjusted EBITDA declined 74%, reflecting the negative impact of lower sales and a larger impact of corporate expense allocations on the segment’s smaller base. We continue to make progress on our journey to transition Verisk Financial Services to a more sustainable subscription-based business. We are achieving the goals we have set for the business and have taken actions that we believe benefit the business in the long run, but are likely to continue to negatively impact our growth over the next few quarters. To that end, given the continued impacts from COVID-19 and the contract transitions, we expect to see a similar level of revenue and profit performance in the second quarter of 2021. However, as the impact of the contract transitions abate and our COVID-sensitive revenues improve, we anticipate a stronger back half of the year performance. Our reported effective tax rate was 22.5%, compared to 20.8% in the prior year quarter, mostly owing to lower stock option exercises in the current period. As we have discussed, there will likely continue to be some quarterly variability related to the impact of employee stock option exercises, which depends in part on the Verisk stock price and employee personal decisions. As a result of a tax law change in the U.K., we now believe that our full year tax rate for 2021 will be between 23% and 25%, up from the 20% to 22% we had previously provided. This U.K. legislation was passed in March and will increase the U.K. corporate tax rate to 25% from 19% previously. This U.K. tax rate increase is likely to create variability in our quarterly rates, as we expect we will be subject to a one-time non-cash revaluation charge in the third quarter related to a deferred tax liability when the bill was expected to become law. Our best estimate at this time is that our quarterly rate in the third quarter will be in the range of 33% to 35%. But we expect this to be primarily one-time in nature and do not anticipate a material long-term impact from this increase. Adjusted net income was $203 million and diluted adjusted EPS was $1.23 for the first quarter 2021, up 4.6% and 5.1% from the prior year, respectively. These increases reflect solid topline growth, cost discipline in the business, a reduction in travel expenses as a result of COVID-19 and a lower average share count. This was offset in part by a higher effective tax rate. Net cash provided by operating activities was $449 million for the quarter, up 24% from the prior year period, primarily due to increased customer collections and a reduction in travel payments as a result of COVID-19. Capital expenditures were $59 million for the quarter, up 12%. We continue to believe the CapEx will be in the range of $250 million to $280 million, reflecting our continued investment in our innovation agenda, our technological transformation, as well as the carryover of certain expenditures that were delayed in 2020 as a result of the pandemic. Related to capital expenditure, we expect fixed asset depreciation and amortization will be within the range of $200 million to $215 million. However, we now forecast intangible amortization to be approximately $180 million, reflecting the impact of recent acquisitions and changes in foreign currency rates. Both depreciation and amortization elements are subject to foreign exchange variability, the timing of purchases and the completion of projects and future M&A activity. During the first quarter, we returned $147 million in capital to shareholders through share repurchases and dividends. In addition, in May, we repaid our 5.8% senior notes in the amount of $450 million through a combination of cash from operations and proceeds from our credit facility. Our strategy to deliver long-term sustainable growth remains unchanged and we believe the stability and predictability of our subscription revenues will persist. As we approach the anniversary of the onset of the pandemic, we plan to continue to provide updates on our non-COVID and COVID-sensitive revenues to offer transparency on the recovery of our business. We remain confident the COVID impacts do not represent a structural change in our fundamental growth drivers and believe that as the underlying causal factors abate with the rollout of vaccinations and the opening of global economies, we will show strong resilience in recovery. We also have confidence in our ability to manage the cost structure effectively to protect profitability, and we would remind you that cost comparisons will be more challenging beginning in the second quarter. Taking this all together, we believe that as the COVID impacts abate, we can return to our long-term growth model of 7% organic constant currency revenue growth, with core operating leverage allowing EBITDA to grow faster than revenue, although it’s difficult to predict that timing. We hope this provides some useful context for you and we look forward to addressing your questions. We continue to appreciate all 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 one follow-up. With that, I’ll ask the Operator to open the line for questions.

Thank you. We have our first question coming from the line of Toni Kaplan from Morgan Stanley. Your line is open. Please go ahead.

Thanks a lot. I was hoping, Scott, that you could give us an update on the renewables business. I know you touched on it in the prepared remarks. But I guess how big is it now? What are the fastest growing areas within it? And what is proprietary within the renewables and energy transition? Thanks.

Right. So what we do in the renewables area, Toni, is across a very broad front. So it is everything from solar to wind to biomass. What differentiates us is a couple of things. One is we believe that we actually have unique data about really the supply side of those industries. In addition to that, we’re able to relate the developments in that part of the energy ecosystem to the rest of the energy ecosystem. And that’s really critical, because that is what all the players in the energy space want to do, including the traditional hydrocarbon-based players. They are all very, very interested in how they modify who they are in order to move into this future. And then on top of all of that, we believe that we have the best platform and analytic environment going in Lens, which permits us to put all of this wonderful content into our customers' decisioning workflows in a really easy-to-consume and we believe differentiated way.

Thank you.

You’re welcome.

Our next question comes from the line of Manav Patnaik from Barclays. Your line is open. Please go ahead.

Thank you. I was just wondering as things are opening up here and you guys get a little bit more visibility. Just longer term, I guess, I wanted to just understand, how you guys think about that 7% growth target for your entire company? I was just curious, like, if anything has changed, if you need to kind of revisit that target?

Yeah. Nothing has changed in our perspective on that, Manav. One of the things that—and I sort of referenced this in my comments upfront—is we are watching very carefully the results we’re producing in 2021, both the what we deemed the COVID-sensitive revenues, but also the non-COVID-sensitive revenues and those would relate more to the subscription products that we have. And actually we see good progress in the performance of those and actually they really have been the most steady part of our performance over the last several quarters. And we also referenced our pipelines, both renewals, as well as new product—new sales opportunities. And as I mentioned in my comments up front, we have some of the strongest pipelines we’ve ever had. And our focus is so very definitely on subscription-based solutions. So the context from my answer to your question is, that’s where we’re focused. Those are in good shape. They have been in good shape through the pandemic and we think that they will remain on that track going forward.

And Manav, it’s Lee, if I could just add to that. One thing that I think gave us confidence on the resilience of the growth rates was the overall performance of our non-COVID-sensitive revenues through this period, that we maintained stability there, and in a lot of cases, given some of the value of our data and workflow-oriented products in this more remote environment, in some ways, as we come out of this, I think it has accelerated some opportunities for us for the deployment of our data and analytics into these new environments.

Okay. Understood. And then just on the breakout area investment, we—I think you’ve talked about kind of the ROIC and metrics and so forth before, but I was just curious from what time parameters do you put when you even make those decisions, like, how much of the long-term investment or do you have certain criteria that it has to return within a couple of years, et cetera? I was just curious if you could talk a little bit about that.

Yeah. Lee, that’s kind of into our work papers on how we look at the many investment opportunities we’ve got. So maybe you want to talk to that?

Yeah. Manav, thanks for the question. And I think as you can appreciate when we look at that investment portfolio, we think of it in that regard, where we have a wide range of products with different time horizons and different levels of risk associated with them—some earlier-stage business opportunities, some later-stage. We do try to manage those naturally in the portfolio to deliver on returns clearly in excess of our cost of capital and for higher-risk, smaller projects at a level well above that at some premium reflecting that higher risk. And I would say that, on average, this of course is going to vary from project to project. But we’re generally looking to achieve those types of returns on a three-year to four-year timeframe in order to get to an acceptable return with upside beyond that. That’s the general parameters of the portfolio. And I think we also want to make it clear that that is not just internal investment or external investment in M&A, we are evaluating the utilization of capital against both of those investment opportunities. Certainly, on the internal investment, the opportunities to leverage our existing assets and our position in infrastructure substantially enable us to deliver higher returns we expect, but on lower investments. On the M&A front, they are larger investments from a scale standpoint, but we are clearly focusing on how we are adding value to those and the success that we’ve had with the FAST acquisition, with the Genscape acquisition, with an acquisition in our 3E area are all evidence of our ability to deliver value either through reduced costs or improved functionality of those businesses. So, hopefully, that gives you some context in how we look at both the internal and the external investment and some of the benchmarks that we use.

Okay. Thank you.

We have our next question coming from the line of David Togut from Evercore ISI. Your line is open. Please go ahead.

Thank you. Good morning. Bridging to Manav’s question, what are your current capital allocation priorities among acquisitions and share repurchase when you evaluate those two at current prices and valuations? And then third would be dividend growth?

Yeah. So I’m glad you added that last bit, David, because we have multiple forms for returning capital to shareholders. But even before that, I would really emphasize investment into the business to build these engines of growth. You hear us talking all the time about platforms and analytic environments. They are really the source of so many forms of value for customers and the result of them is that we have much stickier relationships, which are just that much more recurrent. So if I was to prioritize our use of capital, I would actually start with internal investment, which is a genuine focal point. We’re very happy to return capital to shareholders. We have a long track record of doing that and we feel very good about that. And with respect to M&A, Lee was already talking about kind of how we look at it. I mean, it’s not as if we’ve earmarked some number of dollars or percentage of total capital available to go into M&A. It’s more a question of whether or not the opportunity is compelling and meets our return hurdles. And we are definitely emphasizing that which in combination with who we already are, the whole becomes greater than the sum of the parts.

And David, it’s interesting that you—and it’s not uncommon for folks to make a comparison between share repurchases and M&A. I will tell you that we think of it differently in that we view M&A as more akin and evaluate it relative to our internal investment, because both of them are capital investments that we’re making to generate return for shareholders. And both of those are subject to our return thresholds that we think are necessary to create value. And then if we are unable to find return opportunities in either of those, we view share repurchases as, with dividends, an opportunity to return capital that we can’t create value from in terms of higher returns. And then, finally, with regard to dividends, as you have seen, we have established a pattern of increasing that dividend that remains subject to the Board’s view on the dividend increase. But there is a recognition that companies that have demonstrated an ability to deliver consistent growth in the dividend over time are rewarded for that discipline. We believe that it has introduced a valuable additional component to our investor base, as more yield-oriented investors that are looking for both growth and yield have been very additive to our shareholder base and so we think that that is a useful additional component in our capital return strategy.

Thanks very much. Appreciate it, Lee and Scott.

We have our next question coming from the line of George Tong from Goldman Sachs. Your line is open. Please go ahead.

Hi. Thanks. Good morning. Financial Services revenues are continuing to see the impact of contract transitions, which you know will continue for the next two quarters. Is it possible to parse out how much impact is coming from contract transitions and how much is due to core reduced spending from banks and fewer bankruptcies?

Yes. George, thanks for the question. We estimate that the impact of the contract transitions in the first quarter was approximately two-thirds of the revenue decline that we saw on a year-over-year basis. And as you know, this is something that will cycle through. We believe that those contract transitions, I would just remind folks, represented in part a rebalancing of our relationship with several of those contracts, shifting in our general strategy to move from less upfront revenues to more revenues extended over the relationship. So it reflects that. There is some upside in future periods that will balance that impact. But the short answer is, in the quarter it was about two thirds of the impact. And as you mentioned, we expect that impact to follow for the next two quarters.

Got it. Very helpful. And just to follow up, on the cost side, you mentioned that cost comparisons will be tougher in Q2. How much in expenses do you expect to come back in the coming quarters?

So, George, thanks for the question. It’s hard to quantify exactly, but I would approach it this way. Clearly we had a benefit from travel and entertainment reductions and the elimination of travel, and we have described what the impact is from a margin standpoint in this quarter. We would expect that we will see an increase in travel and entertainment expenses, but I think that’s going to be a gradual increase over time. The other element is going to be compensation, and our incentive compensation in particular, where we’re going to see a more normalized level. As we saw in 2020, the responsiveness of our compensation, particularly incentive compensation, flexed down. We are expecting a more normalized return, so we’ll see some increase in that. Plus we are also beginning to normalize headcount, as we see demand from the businesses to support their overall growth. So there are a lot of factors. But as we move through 2021, one way to think about it is in reference to 2020: in 2020 we saw the revenue impact, but we saw expenses decline more than the revenue impact, driving EBITDA growth of nearly 10% over that period. In 2021, I think, we’re going to see a recovery in revenue, but we will see higher expense growth. We still expect to be able to deliver EBITDA growth, but it will be driven by the pace of expense growth, which remains within our control. So our hope is that we will be able to manage that expense growth on travel and entertainment, on the compensation front, and in terms of headcount growth in order to continue to deliver growth, although not naturally at the same level that we were able to achieve in 2020. Another way to think of it is that we do expect that dynamic will drive some reduction in margin, but we still are expecting to be able to retain some meaningful level of the efficiencies that we achieved in 2020. I hope that gives you some direction toward your question, George.

Yes. Very helpful. Thank you, Lee.

We have our next question coming from the line of Alex Kramm from UBS. Your line is open. Please go ahead.

Yes. Hey. Good morning, everyone. Maybe just starting on the Energy business, not sure if I missed it? But clearly, trends have gotten better. You sound pretty optimistic about the Energy transition and pipeline here. Does that basically mean you think the business has bottomed or are you still cautious in terms of the next few quarters? Maybe the broader cyclical impact could still be negative?

Yeah. I’ll just go back to something that we’ve said for a long period of time, which is, for businesses in the Energy sector to perform, we just need a normal environment. We don’t need a roaring commodity price. We just need a normal kind of environment. And our view is that that’s more or less where the system has gotten to.

And I would say, Alex, I think we’re encouraged by what we are experiencing both in the sales pipeline and in the consulting pipeline. We’re also encouraged by the receptivity of our clients to the Lens platform as they are interacting with it and as they’re using it. They are clearly seeing the value that we are adding to the data and the research products that we’ve provided before. So, clearly, there is a lot of risk ahead as we manage through the pandemic. But we are seeing constructive signs based upon the level of engagement we have so far.

Okay. That’s fair. And then secondarily, a little bit more holistic question, but Lee, obviously, the Energy and the Financials businesses started reporting to you—I think it’s been now three months. Not a long time, but three months nonetheless. And I think last quarter, when asked about the business mix, Scott sounded a little bit more open to holistically review the portfolio. So just wondering, Lee and maybe Scott too, as you have maybe dug deeper into those businesses, any early findings, any areas for improvement or any things where you’re saying, hey, this is maybe not as good of a fit as we thought historically. So any updates will be helpful on that front? Thank you.

Well, why don’t I start, but Lee, I think questions kind of directed to you and your oversight. But I’ll just say that there is a playbook at Verisk, which when it is in place works very, very well. And that playbook is really centered on creating what we call platforms and analytic environments and analytic objects, which become industry-standard analyzed output. And the more that we feature those in the mix of what we do, in any part of Verisk the business becomes very sticky, very resilient, grows well, represents a lot of value for customers. And I’ll just say that, and I’m going to pick Financial Services in particular, the focus here at the moment is, first of all, make sure that we capture all the COVID-sensitive revenues as the environment changes, make sure that we capture all those revenues back into the mix. Second is the continued development of the platforms inside of Verisk Financial that will represent that same kind of Verisk model for the business. And that’s really what we’re focused on in the near term and we expect both of those things as it relates to the business.

Yeah. Alex, thanks for the question. And I would say just briefly, it is still early. I’m spending a lot of time with both the Financial Services and the Energy business and really drilling into them from a top-down financial view and a bottoms-up focus on products, clients and people to understand the underlying economics of the business. One observation that’s worth pointing out is that what’s happening at those businesses is not wholly represented in what you see within the quarter. We’ve talked about the contract transitions that, while clearly a negative impact in this quarter, represent very strong progress in the objective that we have on the management team and there has been moving very concertedly towards improving that base and I continue to work with them to evaluate what that broader opportunity is and what the sustainable growth rate for profitability and value is over the long term, as I do with the Energy business. So we’re actively engaged in it and I would just ask for everyone’s patience as we work through that and evaluate the business as a whole rather than focusing on the specific quarter’s results, but that’s what we’ve been doing.

Very good. Thanks for the color.

We have our next question coming from the line of Greg Peters from Raymond James. Your line is open. Please go ahead.

Good morning. I was wondering if you could provide some updated views on the changing competitive dynamics in the Insurance space, especially when we hear about the success of these software companies like Duck Creek and Guidewire. It seems like these companies are selling competitive services, we hear them talking about their claims management platform, their underwriting platforms, their reinsurance capabilities, it seems to be gathering some momentum in the Insurance vertical. So maybe you can provide some color around market share for Verisk versus these other companies or how you’re working with these companies.

Well, first of all, thanks for the question. I think what our customers are looking for, our Insurance customers, they are looking for an interconnected ecosystem—a way to pull information, a way to process it in a seamless way. So we are very tightly aligned with Duck Creek and Guidewire. As an example, all of our ISO loss cost renewals, meaning the way we codify rates, are inside of both Duck Creek and Guidewire. Customers are able to pull underwriting information from us through those two platforms. Claims fraud, same thing, we are integrated in a way that we are partners. So there is a way that we partner very effectively, but at the same time, the world is heading towards analytics. Duck Creek and Guidewire, as an example, are doing more analytics probably more focused on the individual insurer information and the processes of that insurer. Where we tend to focus is we have an aggregated view of the industry, so our analytics are more benchmark-focused and are rolled out to peers. Let me also remind you that as we think about software, we’re becoming more software intensive. So Sequel software has been moving into the United States, becoming more of a global player beyond the London market. So I think there is some more overlap with the two, but we continue to work together to satisfy customers. I’ll just highlight because of the nature of our industry-standard programs, we’re integrated with almost every policy and vendor. We are across the board. So we’ll continue to do that to share our content with any insurer or reinsurer that needs it.

Got it. And then my follow-up question would just be pivot back to some comments I think you made earlier regarding just sort of the long-term targets around organic revenue growth and then EBITDA—7% and then EBITDA growing a little bit faster. I was wondering if you have a similar viewpoint or the Board has a similar viewpoint around free cash flow?

Yeah. I don’t see over the long term a significant gap between the EBITDA—the revenue and EBITDA growth rates—and the free cash flow. The two should be fairly consistent, obviously lots of variables from a timing standpoint may influence that, but as core growth rates, I don’t see a substantial difference there.

Got it. Thanks for the answers.

We have our next question coming from the line of Andrew Jeffrey from Truist Securities. Your line is open. Please go ahead.

Hi. Good morning. Appreciate you taking the question. As we see the greater digitization of insurance and more lifecycle solutions, I wonder if Verisk sees an opportunity in payments as far as supporting disbursements from the carriers to the insured?

Thank you for the question. We have recently introduced VeriskPay and we do believe that in this kind of world of interconnectivity and automation, electronic payments are going to factor into that. The places where we started were places where we thought we could most easily integrate into our solutions. So think of our Xactimate solution, which is representative as repair cost estimates and payment of property damage, and also in the world of real estate where we do some similar work, and we feel that those electronic payments could facilitate operations for our customers. We’re working with a large partner and we hope to extend the use cases beyond claims and into some premium and other places like subrogation where we think that our insurance customers will benefit.

Great. I look forward to learning more.

We have our next question coming from the line of Jeff Meuler from Baird. Your line is open. Please go ahead.

Thank you. Good morning. I want to ask about Insurance and I know the growth rates kind of in the typical pretty tight range, but it decelerated, so I heard a call out on cat bond issuance. I think I also heard something about some end market consolidation. To me the cat bond issuances are just more naturally variable quarter-to-quarter, the consolidation would be something that would take longer to recover from, so just any help parsing out between those factors? And then on the growth driver side is ISO pricing this calendar year similar to prior calendar years. And I heard you on pipeline, Scott; I guess, how is pipeline conversion and bookings especially for those strategically important platforms, analytic environments and analytic objects?

Yeah. So maybe I can start at the top. Mark, you should come in on especially the first part of Jeff’s question. Thanks for the question, Jeff. I mean, most of the selling effort goes where we have the priority and the priority is on these platform and analytic environments and the analytic objects. So that is the majority of the pipeline and so all of those comments about contract length stretching out and the depth of the pipeline apply fully for that part of the product suite. So there is no real differentiation there. When you look quarter-to-quarter on cat bond issuance, Q1 2020 was a strong quarter. Q1 2021 was a strong quarter, but there is natural variability. We pay a lot of attention to that; catastrophe bond issuance has picked up since the first quarter. So we don’t see anything different in the environment, it was just really a moment in time.

I think the only thing I’ll add is our traditional ISO information is rock solid with customers. If you were to look at the way we think about this, remember we’re taking a long-term view. We would prefer to gather new sales from new solutions and customers as opposed to past artificially high price increases. So I think we remain pretty modest in the way we handle ISO pricing. And you are correct, we did highlight some industry consolidation, which can be a headwind for growth in some instances. But there is no change to our pricing algorithm itself in 2021.

Got it. And then a question on the expense management approach in Financial Services: it seems like revenue is kind of rebasing lower for a period of time and I think you said that Q2 profitability should be similar to Q1, which was fairly depressed in my view. So are you taking expenses out of the business or does it need to start growing again to start getting margins back up? Thanks.

Thanks, Jeff. Certainly understand the questions. On the revenue front, we naturally have that impact of the contract transitions. Part of that are contracts where revenue has shifted into future periods, so it’s not a complete elimination of that revenue. The other factor is some of the COVID-sensitive revenues where we have seen impact, such as bankruptcy-related work and spend-informed analytics. We are actually seeing some stronger improvement in spend-informed analytics as things open up. Hopefully if that continues, we’ll see strength there. On the expense front, yes, in the quarter we had a heavier load of expense than we typically have and looking ahead we would anticipate not as heavy an expense impact. We are looking at making adjustments from an expense management standpoint that will help us avoid or offset the margin impact that we experienced in the first quarter.

Got it. Thank you all.

We have our next question coming from the line of Andrew Steinerman from JPMorgan. Your line is open. Please go ahead.

Okay. Great. Lee, two questions: beyond the cat bond volatility and industry consolidation that you just recently mentioned, could you list any other drivers of why Verisk organic revenue growth on its non-COVID business—the 85% of revenues—decelerated to 4.9% in the first quarter versus 6.5% in the fourth quarter? And my other question is about 2021 EBITDA margins. In the last two quarters you mentioned commentary about 2021 EBITDA margins relative to 2020 and 2019. Just could you update your comments and is there any year that the margins are likely to be closer to this year?

Thanks, Andrew. I’d clarify: at the consolidated level, the primary impacts were catastrophe bond activity and some consolidation impacts. Financial Services clearly contributed to the overall growth rate decline in that regard due to the contract transitions and COVID-sensitive impacts. Energy and Specialized Markets were relatively flat quarter-over-quarter. On margin, as I answered previously, we saw the margin benefit in 2020 from reductions in expenses that exceeded revenue declines. Looking ahead to 2021, we expect revenue recovery, but we also expect some normalization of expenses. We hope to retain some of the margin benefits achieved in 2020, but not all of them. So we do expect some reduction in margin relative to 2020, though margins should remain healthy versus pre-pandemic levels as we hold on to efficiencies where appropriate.

Okay. Thank you.

We have our next question coming from the line of Hamzah Mazari from Jefferies. Your line is open. Please go ahead.

Hi. Good morning. My question is around the international business within Insurance. I think a couple of years ago, you guys had flagged that you expected that business to grow high-single digits and you expected it to double organically in five years. I think that was a couple of Analyst Days ago. Maybe you had flagged U.K., Ireland and Canada, Germany, France, India, Southeast Asia as future growth. So maybe just update us how big is international today as part of the total offering in Insurance? And then which countries are you sort of under versus over penetrated and where is the opportunity?

Thank you for the question. From a U.K. and Ireland perspective we are well ahead of that plan. I think we are doing extremely well there and we’ve highlighted some of the benefits of the Sequel acquisition and the progress that’s been made along with some of the work that we’ve done on the claims and underwriting front. As we think about other regions, we did highlight France and Germany. There it’s been a tougher environment. We were looking for a combination of organic access, as well as moving into some businesses that provide services there. From an M&A perspective, we’ve done well from a catastrophe modeling perspective, but there has been less progress in some of the other underwriting and claims fields like France and Germany. Asia-Pacific is more long-term; that’s still on the horizon. So overall, I’d grade ourselves as having made strong progress, with some regions ahead and others still opportunities for expansion.

Great. And just my follow-up question: you touched on it, Lee, a little bit on the timeframe in evaluating the non-Insurance segments, but do you have any high-level color if that Financial Services business has changed structurally? I know a while back the healthcare business had structurally changed and the government had gotten more involved. The business wasn’t as global and there were some other items. As you look at this business with new competition or other stuff, maybe diversifying away from banking customers has been slower. Do you have a sense of a timeframe—are you still looking into that or do you have a pretty good view already?

Hamzah, I think there are two perspectives. From an external standpoint, the presence of other players in the banking industry—credit bureaus and network companies—remains consistent. Verisk Financial Services has for a long time competed successfully in that environment, given the unique nature of the dataset and the relationships they have with the industry. They provide services by integrating that dataset and delivering it in a way that others aren’t able to do. I don’t believe there has been a material change externally, but we are mindful of the competitive environment. From the internal perspective, I can say unequivocally that we have changed and improved the business by shifting it to more of a sustainable focus on growth within the business with steps the management team has made. Some of those have had a challenging financial impact in the short term, but we believe the business is better positioned for the long term given those structural changes. So I’m addressing both parts of your question.

That’s great. Very helpful. Thank you.

Our next question comes from the line of Gary Bisbee from Bank of America. Your line is open. Please go ahead.

Hi. Good morning. I just wanted to go back to some earlier commentary on the Energy business. Scott, I think you said you just need a normal market environment, not necessarily a robust one, to deliver to your goals in the business. I guess I wanted to ask, what would you expect to deliver in a normal environment? In the five years you’ve owned the business it’s grown 7% once and not grown a couple of those years and so it’s just not clear to me that this business is positioned, particularly given the volatility inherent in the end market, to deliver to the long-term revenue growth targets you’ve set for the company and on a number of occasions said this business should outperform those over the long term and grow faster than some of your other assets. So what is it you’re playing for in a normal Energy market if we’re moving back into that today? Thank you.

Thank you for the question, Gary. When you get to the top of the Energy ecosystem, you’re looking at global customers that are large and facing challenging issues in terms of how they run their businesses in the future. These customers increasingly call upon data and analytics to help with very important decisions and there are only a few places they can turn to outside their own walls for the kind of data analytics they want to make commercial decisions. In addition, the range of topics in the ecosystem has expanded in light of the Energy transition. Beyond renewables, there’s great sensitivity to climate topics and emissions, and our ability to observe emissions is a distinct capability. The summation is that we see a large global market with increasing appetite for the data analytics that we provide. Over the last five years there have been two relatively unprecedented shocks to commodity pricing in a compressed period, which skewed growth patterns. Against that, we see durable demand and we expect the business to contribute at or above the company targets overall. We’re going to hold that business to that standard.

And then just one quick follow-up for Lee: a couple of years ago the company discussed a glide path lower in capital intensity, now of course I think that was in large part on the Geomni business at the time and since then you’ve stepped up technology investment considerably. I guess I’m just wondering, how are you thinking about capital intensity over the next few years as you get through more of the cloud projects? Should we expect that to moderate a couple of points lower over time or where are you at now? Thank you.

Thank you, Gary. The short answer is yes. The migration to the cloud is reducing the level of CapEx we would have typically spent on hardware and infrastructure. Offsetting that, though not completely, is an increasing level of internal software development intensity, which is a function of utilizing software to activate and deliver our datasets and provide solutions for clients. That is adding to our CapEx or investment intensity, but it’s generating good returns. We never want the CapEx intensity metric to obscure our fundamental return objectives. So we do expect to see improvement over time. It has probably been obscured by some real estate renovations that have been included in recent CapEx. But we are realizing real benefits in terms of reductions in CapEx and even OpEx related to infrastructure as a result of the cloud migration, and some of those savings are being reinvested in software development.

And there are no further questions. I’ll turn the call back over to you, Stacey.

Okay. Well, thank you everybody for joining us. Appreciate all the questions and the dialogue and we will certainly, as always, be following up with many of you following this call. So thank you for the continued interest and support. We’ll speak with you soon. Bye for today.

This concludes today’s conference call. Thank you all for participating and you may now disconnect. Have a great day.