Verisk Analytics, Inc. (VRSK) Q3 2021 Earnings Call Transcript

Good day everyone and welcome to the Verisk Third Quarter 2021 Earnings Results Conference Call. This call is being recorded. Currently 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 our opening remarks and introduction, I would like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, you may go ahead.

Thank you, Julia. And good day, everyone. We appreciate you joining us today for a discussion of our third 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 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 future performance, including, but not limited to, the potential impacts 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. Now, I will turn the call over to Scott.

Thanks, Stacey. Hello, everyone. And thank you for joining us for our Third Quarter 2021 earnings conference call. I'm pleased to share that Verisk delivered a solid third quarter results building on our deep domain expertise, innovative offerings, and strong relationships with our customers. Specifically, Verisk delivered organic constant currency revenue growth of 5.1% and organic constant currency adjusted EBITDA growth of 2.1% for the third quarter. What I find encouraging is looking at the results on a 2-year basis to adjust for the lumpiness related to the pandemic. And to that, Verisk delivered 2-year cumulative organic constant currency revenue growth of 8.7% and organic constant currency adjusted EBITDA growth of 16.8%, demonstrating strong core operating leverage and a sequential improvement from the second quarter. We will provide more details in the comprehensive financial review. Across insurance, we're seeing strong demand for our products as our customers are striving to become more digital and more automated and are turning to Verisk's solutions to help them. Engagement with our customers remains at very high levels as we continue our virtual work, and our sales force and customer service teams are doing an excellent job staying connected. In fact, we recently hosted our signature underwriting conference called Verisk Velocity, again, in a virtual format. This year's event was another success with over 600 attendees, participating across 27 different thematic sessions. This year's focus was accelerating the digital transformation and developing new ways to increase efficiency and improve underwriting outcomes to better serve their customers. Strong customer engagement within insurance is translating into strong sales, growing ACVs, longer contract terms, and very robust sales pipelines. To that end, we have been very successful penetrating the new insurtech companies as they can take advantage of the full suite of Verisk's solutions across underwriting and claims. Additionally, with our more traditional P&C customer base, we're also having success leveraging our scale and our comprehensive insurance solution offering. These are two of our competitive advantages. By bundling our solutions together, we're driving increased adoption of these solutions across many different customer segments. These bundles are proving to be quite sticky. One area of growth we are particularly excited about is our international expansion within insurance, which is predominantly in the UK today. So we see a long runway as we expand our analytic capabilities within the UK and extend our global footprint into new developed markets. Within our Sequel business in the UK, we are building out a truly integrated and digital ecosystem across carriers, syndicates, brokers, and managing general agents throughout the specialty market. And we are bringing in new customers and expanding our suite of products across existing ones. Most recently, we made a tuck-in acquisition of Ignite Software Systems, a SaaS platform that includes policy administration, rating engine, and digital engagement for brokers, managing general agents, and insurers. This acquisition expands Sequel capabilities and enables Sequel to add a modular API-driven SaaS platform for the Sequel suite of products. Within our core underwriting, we are using the time-tested playbook that has worked in the U.S. for years, using proprietary data assets to help better price and understand risk, and extending to the UK with our Data Insight Hub. Data Insight Hub is enabling the digitization of the personal and commercial lines insurance in the UK, deploying a data-forward strategy to prefill key data elements and provide predictive analytics that help customers with risk assessment and pricing. Our recent investment in HUG Hub extends these capacities upstream to support the ecosystem at the point-of-sale and distribution. Our international travel business has experienced significant declines due to pandemic related travel restrictions, but we believe we are well-positioned to take advantage of the rebound when cross-border travel returns. On the claims front and consistent with our focus on the insurance business and international expansion, we recently announced the acquisition of ActiNeo, a market leader for personal injury claims, digitalization, and medical assessment in Germany. ActiNeo will be integrated into our broader Verisk claims Europe business and should provide a strong platform to grow our footprint across Continental Europe and establish Verisk as a pan-European leader in the personal injury and medical malpractice sectors. We are encouraged by the opportunity to create incremental value by helping deploy ActiNeo technology and services across Europe and leveraging customer relationships. We also plan to introduce other claims solutions to these key European markets. And lastly, we are excited about the growth opportunity within international markets for our extreme event business. In June, we released an on-time update to our Japan Typhoon and earthquake models. These updates reflect the latest science and learnings from recent catastrophes in Japan. Our extreme event business has very strong share in the key Japanese market with both primary insurers and reinsurers as customers. Both rely on our models for the quality of the science and the local knowledge that we incorporate through our partnerships with local insurers. Within the energy segment, we're seeing a strong uptake of our new and innovative solutions, including our energy transition and chemicals research, as well as our innovative Lens platform. We are realizing double-digit growth in ACV for contracts that include Lens, as our customers recognize the value of this innovative solution. Importantly, Lens is being adopted by customers across industries, including upstream oil and gas, financial services, and power & renewables. Moreover, with roughly 10% of our customer base on Lens today, we see a long runway for growth, as we expand its use cases to include additional commodities and geographies over the next few years. You've heard me say before that at Verisk, we are moving ever closer to our customers and that we are on an exciting and successful journey delivering best-in-class customer experiences. Our collaborations with management leaders, along with a customer-first mindset, helped power this journey. Customer experience is not just the responsibility of our dedicated customer service teams, but it runs throughout the entire organization. In the third quarter, colleagues from every part of Verisk participated in Verisk's Discover CX Summit. It was a moment in time when we came together to listen, learn, and collaborate on how we can be better partners for our customers. Leaders across every area of the Company assembled to focus on learning CX best practices, and we have emerged with a robust pipeline of ideas that I believe will lead to innovative solutions and outcomes that benefit our customers and Verisk. On the personnel front, I am pleased to publicly welcome Sunita Holzer as our new Chief Human Resources Officer and Dianne Greene as our new Head of Inclusion, Diversity and Belonging. Sunita brings with her three decades of enterprise-level human resources leadership across several industries, including technology and insurance. Dianne brings a business-centric mindset to Inclusion, Diversity and Belonging from her decade-long experience as a business leader and in HR solutions. At a time when attracting and retaining diverse talent is top of mind for every business, I'm really excited about partnering with Sunita and Dianne to develop a comprehensive and differentiated human capital strategy for Verisk and to foster our diverse, inclusive, and equitable culture. Finally, we are committed to enhancing shareholder value, and as part of that commitment, to allocating capital to the highest growth and highest return opportunities. Accordingly, Verisk has been undertaking a bottoms-up review of our businesses and portfolio composition. Our review is ongoing with a focus on the most value-creating path for sustainable growth and success, and doing what's in the best interest of our shareholders and all of Verisk's stakeholders. As we've said previously, we believe that portfolio changes are probable in the next 2 to 3 quarters, subject to market conditions. With that, I will turn the call over to Lee to cover our financial results.

Thanks, Scott. First, I would like to bring everyone's attention that we've posted a quarterly earnings presentation that's available on our website. Moving to the financial results for the quarter. On a consolidated and GAAP basis, revenue grew 8% to $759 million. Net income attributable to Verisk increased 8.6% to $202 million, while diluted GAAP earnings per share attributable to Verisk increased 10.7% to $1.24. 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're very pleased with our operating results led by continued and consistent growth in our subscription revenues. In the third quarter, organic constant currency revenue grew 5.1% driven by continued strength in our insurance segment and modest growth in energy and specialized markets. This was offset in part by weakness in the financial services segment as we experienced the final quarter of impact from the contract restructurings as well as continued COVID-related impacts. Our non-COVID sensitive revenues, as we defined at the beginning of the pandemic, increased 5.6% in the third quarter, which was consistent with results reported in the second quarter of 2021, despite tougher year-over-year comparisons. As our non-COVID sensitive revenues included 7.8% in the third quarter of 2020. The stable growth in our non-COVID sensitive revenues representing approximately 85% of our total revenues reflects the durability and resilience of our primarily subscription model and the mission-critical nature of our solutions. Our COVID-sensitive revenues, which represent 15% of our consolidated revenues, increased 1.6% as compared to declines of 10% in the third quarter last year. Growth was primarily the result of improvements in consulting in our energy segment and a return to pre-pandemic growth rates in many of our products and services within insurance, particularly within the U.S. We did experience continued COVID-related weakness in our financial services segment as COVID forbearance programs are negatively impacting bankruptcy volumes. To be specific, our COVID-sensitive revenues increased 8% and 12% within the insurance and energy segments respectively, but registered declines of 28% within financial services. It's also important to note that that 28% decline also included the impact of the contract restructuring that we have described previously and which ended in the third quarter. Given that financial services is the segment with the largest percentage of COVID-sensitive transactional revenues, this had a disproportionate impact on the overall result. Organic constant currency adjusted EBITDA growth was 2.1% in the third quarter. Organic constant currency adjusted EBITDA growth was impacted by tough comparisons as we took aggressive cost actions in the third quarter of 2020 in response to the pandemic across all our segments. Total adjusted EBITDA margin which includes both organic and inorganic revenue and adjusted EBITDA was 49.9% in the quarter, down 221 basis points on a year-over-year basis, but still well above our pre-pandemic margin level of 47.4% recorded in the third quarter of 2019. Much of the decline is associated with the normalization of our costs as we anniversary the COVID benefits from last year including reduced headcount and lower incentive compensation. This level of margin also includes approximately 100 basis points of headwind from our ongoing technological transformation, including our cloud transition costs, which we absorbed into our cost structure. On that note, let's turn to our segment results on an organic constant currency basis. In the third quarter, insurance segment revenues increased 7.4%, demonstrating strong resilience and recovery. We saw healthy growth in our industry-standard insurance programs, repair cost estimating solutions, claims analytics solutions, catastrophe modeling, life insurance solutions, and international insurance software solutions. We also experienced solid growth in transactional revenues, including 8% growth in our COVID-impacted revenues as we compared against flattish results last year. We also experienced a modest benefit to growth from storm-related revenue resulting from weather events. Adjusted EBITDA grew 4.8% in the third quarter while margins declined 200 basis points to 55.9% reflecting a return to a normalized rate of headcount growth compared to the prior year and higher year-over-year short-term incentive compensation expense. Nevertheless, this quarter's margin is still 300 basis points above our pre-pandemic levels recorded in 2019, and continues to reflect accelerated investment in our breakout areas like life insurance and telematics, as well as our technology modernization, including our cloud transition. Energy and specialized markets revenue increased 2.5% in the third quarter due to recovery in our consulting and project-based revenues across energy and power. Strong growth in environmental health and safety solutions and in our breakout solutions, including energy transition and chemicals. We continue to benefit from strong adoption of our Lens platform as customers are seeing the value of our integrated cloud-based data analytical environment. And we're very pleased with their contributions to our annualized contract value progression over the course of the last two quarters. Adjusted EBITDA declined 2.6% in the third quarter while margins contracted 300 basis points, reflecting tough comparisons from last year when we enacted headcount reductions, furloughs, and compensation adjustments in reaction to the challenging operating environment in 2020. This was still well above the 33.3% margin we reported in the third quarter of 2019 before the pandemic. We remind you that some of the costs taken in the third quarter were reversed in the fourth quarter of 2020, making for easier comparisons in fourth quarter '21. Within our Energy segment, we are working to combine the proprietary data assets, skill sets, infrastructure, expertise, and deep capabilities of our Wood Mackenzie, Genscape, and PowerAdvocate businesses. Specifically, we are taking the best-of-breed from each business and combining it with a common data architecture as the backbone. This modern and flexible data architecture will enable more efficient and effective sharing of data, thus accelerating the innovation process for new solutions in key areas like supply chain, cost management, power and renewables, chemicals, hydrogen, carbon, and metals and mining. This will also empower stronger cross-sell of solutions across the various customer bases, particularly in the global power and renewable sector, as we help our global customers navigate this broader energy transition. Financial Services revenue declined 13.5% in the quarter, reflecting the final quarter of impact on the contract transitions that we undertook in 2020, as well as a lower level of bankruptcy revenue because of government support and forbearance programs. Spending analytics demonstrated strong growth as spending in advertising levels continue to improve as the economy emerges from COVID. Adjusted EBITDA declined 42% in the quarter, reflecting the negative impact of lower sales and a larger impact of corporate expense allocations on the segment's smaller base. Total adjusted EBITDA margins were 19%, still down from the prior year, but an improvement from the first half of 2021 as a result of expense discipline and lower bad debt expense. Our reported effective tax rate was 20.8% compared to 22.6% in the prior year quarter, in line with our expectations. Looking ahead, we expect our tax rate to be approximately 18% to 20% for the fourth quarter of 2021. Adjusted net income increased 7.4% to $234 million and diluted adjusted EPS increased 9% to $1.44 for the third quarter of 2021. These increases reflect organic growth in the business, contributions from acquisitions, a lower tax rate and a lower average share count. Net cash provided by operating activities was $285 million for the quarter up 38% from the prior year period. The prior year period's cash flow was negatively impacted by the timing of certain federal income tax payments and certain employer payroll taxes because of the CARES Act. Year-to-date net cash provided by operating activities was $967 million, reflecting growth of 18% versus the prior-year period. Capital expenditures were $61.4 million for the quarter down 5% versus last year, reflecting cost savings from third-party hardware and software as we move to the cloud. We continue to believe that capex for 2021 should be in the range of $250 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 capex, we expect fixed asset depreciation and amortization should be within the range of $200 to $215 million and intangible amortization to be approximately $175 million. Both depreciation and amortization elements are subject to FX variability, the timing of purchases, and the completion of projects and future M&A activity. During the third quarter, we returned $197 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 capital initiatives, but also return capital to shareholders consistently. In summary, we are not sitting still at Verisk as demonstrated by our third quarter performance and Scott's earlier comments regarding our portfolio review. Looking ahead, we have confidence in our ability to manage the cost structure, to protect profitability. We continue to believe that we have tough cost comparisons relative to the COVID impact in quarters last year. We should retain much of the margin expansion we experienced in 2020, delivering margins ahead of our 2019 pre-pandemic level of 47%. Further, we believe that as the COVID impacts continue to abate and global economies further open up, 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. 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.

We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Manav Patnaik with Barclays.

Thank you. Good morning, guys. Just the portfolio review — I think this is the first time you've put it in writing in the press release I suppose. So I was just hoping you could give us a little context. Give us a look at all the non-insurance businesses or just any color, that would be appreciated.

Our focus is on the non-P&C parts of our business. That said we're always asking questions about the utility of capital we have invested everywhere. But the depth of our analysis is non-P&C. You remember that at the beginning of the year, we asked Lee to take responsibility for those businesses, and his review has been everything from operational to organizational to the strategic questions that are in the portfolio review.

Got it, appreciate that. And then just on the international expansion — this is something you guys have been trying to go after for a while. Is it still fair to say that the opportunities are more of these tuck-in deals that get to build upon, or are there any decent-size assets out there?

Well, when we're always starting from strategy. So what is it that is logical relative to what we're doing that will be meaningful for our customers? And of course we'll filter that through questions like the size of assets that we might add. You've seen our record recently. We've been focused mostly on tuck-ins. I don't want to artificially constrain what size range we might be in, but what we're driven by is the logic of 1 plus 1 becoming 3.

Got it. Thank you very much.

Your next question comes from the line of Greg Peters with Raymond James.

Good morning, everyone. I was looking over your prepared report. Because the insurance industry is really struggling with inflationary pressures. I guess there's a frequency issue, but also a severity issue. And I'm curious if you could provide some more color about how your services are helping the industry during this time? I know the auto insurance market is probably in a period of the most distress it's been in in the last 10 or 15 years. And they are having trouble getting their rate increases approved with regulators, so some color on how your services are helping them would be helpful.

Well, maybe a couple of comments here, and Mark leads our insurance vertical, so please dive in Mark. But first of all, I think — I hope folks are familiar with the range of things that we do on behalf of insurers. So it's everything from how to select risk to how to price risk. And then when loss occurs, how to think about the value of the loss, whether the claim amount is accurate. So we're really across the entire insurance value chain. And one of the things that helps us to be so relevant for our customers is the speed with which we...

...ingest data signals which tell us what's going on in the market and then translate them into a forward view and provide that to our customers. So one of the things we do is to move as rapidly as the environment is moving. So you referenced repair cost estimating. So just to pick that one in particular. We have a very dynamic way of assessing the underlying factor costs associated with repairing a structure and the speed with which we update the data helps our customers to stay ahead of where the likely next claim is going to be with respect to cost. So the depth of the data and the speed of the data both help us to give really reliable signals to our customers. And yes, the insurance companies are looking to respond to a marketplace that has been moving around a fair amount. But that's really always the case. There are unique conditions associated with the pandemic, but that's just a particular instance of the general case. So it's speed, it's automation, it's depth of data. Those are all the things that allow us to add a lot of value for our customers.

Thank you for that answer. I guess my follow-up question — again, something I hear a lot from your customers is just the pressure around recruiting new employees and employee retention. And Lee, I heard your comments about the margin expectations going forward relative to what you did pre-pandemic. But I'm curious if you could spend a minute and talk to us about what you're doing from an employee retention standpoint, what you're doing from a recruiting standpoint, and how rising compensation costs might affect your margins.

So we add a lot of people to our organization on a consistent basis. So we have very well-established pathways for recruiting talent into the Company that can be from industry, that can be at the entry level. A lot of our focus is on hiring technical talent. Something that we've been doing for years now is to go right to the head end of data analytics and data science educational pipelines and basically to build our own programs where we bring people in. We really try to recruit people as their first encounter with the industry and then lead them through a series of development activities and deploy them into the business. We have found doing things like that to actually be more cost-constructive than simply going out and competing directly with other tech companies. We do hire people from name-brand technology companies, but we have found that our own efforts to cultivate our own team have been highly rewarding. That's not just data science; that is cloud architecture, that is software development — that applies everywhere. I think most companies have experienced a degree of the need to be extra alert to retain talent coming out on the disruptive moment that we've been in. But actually our experience has been pretty good. On trend relative to where we've been prior to the pandemic, it's not that different for us. So yeah, we're paying attention, and it's important. We have a diverse set of talent sources, and I would mention here that we operate not only in the United States, but also in other economies around the world, including a very large footprint in India, which gives us additional options for staffing our team. One thing I would add is that a lot of businesses are struggling on that front from a recruiting and retention standpoint. We would recognize that there probably are some higher costs as most companies are. But we're also experiencing some savings as we adapt to this new environment. We are working through our real estate portfolio, finding efficiencies as we are adopting more remote work. I think our belief is that the level of travel expense is going to be lower than it was previously. And so while we are experiencing some pandemic-induced recruiting and compensation inflationary pressures, we are also generating probably more net benefits from that. And then finally, I would say on the retention standpoint, there is one thing that we often have to take into account — what is the cost of attrition? You have to bring somebody else in, you have to bring them up the curve. Sometimes that creates opportunities, but often we find that you can realize some attractive efficiencies by retaining the talent upfront as opposed to allowing that talent to attrit. All of those are factors as we think about that cost element.

That's right — and we've found that cultivating and training people internally has been effective. Sometimes retaining the talent upfront is more cost-effective than hiring expensive lateral hires from other companies. We've seen that across data science, cloud architecture, and software development roles. So we're focused on retention, developing internal pipelines, and managing costs while supporting growth.

Great, thanks for your answers.

Your next question comes from the line of Alexander Kramm with UBS.

Just coming back quickly to the portfolio review. It sounds like you've been talking about this a little bit more over the last I think three quarters now. And now you're putting a timeline out there of two to three quarters where we should be expecting something when something's probable. But I guess the timeline is a little bit out of context without really knowing what's on the docket. Can you maybe help us a little bit how you think about those two to three quarters — maybe what's on what we could expect and how the timelines relate to that. I guess what I'm saying is, are there some little things that you can identify that may be coming very soon or what are the big things that you're considering that maybe take a little bit longer and that's why you're talking about this two to three quarter timeline here? Thank you.

Well, I would just say in the most general sense, Alex, that it's a comprehensive review that we're doing. As I mentioned upfront, our focus is everything which is outside of the P&C segment. I don't think it would be productive to call out specific parts of our portfolio; I just don't think it's constructive inside of the process that we're on here right now. But we are looking deeply and broadly, essentially at everything. And we're certainly aware of where we stand in the process of consideration, but I just don't think it's constructive to name individual piece parts at this moment.

I figured that's right. Thank you. And then maybe just shifting gears to the Energy business for a second. I think in your prepared remarks you mentioned Lens with specific numbers. You also talked about the energy transition as an area of upset again. Maybe can you just put some more numbers around that in terms of how big that business is today? What the growth rates are you experiencing and where you are having the most success, actually selling some of these new products into the marketplace as everybody is clearly thinking about energy transition these days? Thanks.

Yes. Thank you, Alex. Let me try and give you some context. I think the most important thing — the most important element I would draw your attention to is our ability to increase pricing and ACV where Lens is part of the solution. I want to differentiate that from the fact that within energy transition and chemicals, those are businesses that we had invested in 12 to 18 months or so ago and have already been generating double-digit growth. They are becoming a more significant component of the business. But what we are experiencing more recently, which isn't fully reflected in the revenue numbers yet, is our ability to increase pricing for Lens-delivered products. The Lens platform has enabled us to demonstrate to clients improved ability to access and interact with datasets and analytics, and we have been able to translate that into double-digit price increases for those products where Lens is a component. That is contributing directly to increases in our annualized contract values where we have seen mid-single-digit and more recently high-single-digit increases in the overall level of ACV. For those of you that follow other companies with an ACV dynamic, that immediately hits ACV but will be realized over time. Another point to emphasize is that we are only approximately 10% penetrated into our customer base with Lens today. So as we further penetrate that customer base and add more products onto the Lens platform over time, it has a multiplicative effect on the revenue opportunity. That's where I would draw your attention in terms of representing the growth opportunity and the return on the investment we've made in Lens that encourages further investment and acceleration. All of that is supported by ongoing growth and the level of focus on energy transition globally, which is driving demand for our expertise. Finally, the consulting element of the business is also experiencing cyclical uplift in the sector. So hopefully that gives you some context around what we are experiencing and how we expect that will continue to translate into improved growth performance as we look ahead.

Very good. Thank you.

Your next question comes from the line of Ashish Sabadra with Deutsche Bank.

Thanks for taking my question. I just wanted to follow up on the margin trend. The margins on this quarter were pretty robust when you look at it on a sequential basis. There was that discussion around compensation cost. But I was just wondering, how should we think about the margins going forward as some of the pandemic-related benefits come back? And as your unpopular investment — is that enough that you can bring in cost savings that can continue to maintain these margin levels? Thanks.

Yes. Thanks, Ashish. One of the challenges is that there are a lot of elements that factor into margin and I appreciate you raising the shorter-term dimension. In the third quarter there were some impacts on margin. Part of that was tough comparisons to the third quarter of 2020, particularly in energy and specialized markets because of furloughs and compensation reductions that we took in that period that normalized in this period. Some of that will reverse in the fourth quarter when we compare sequentially. In addition, we had some higher legal expenses in the third quarter across some of our businesses. That again was an acute short-term effect. There will be ongoing normalization on travel and compensation as things normalize, but I think we will still be able to hold on to some meaningful portion of the structural benefit that we've had come through during the pandemic. Hopefully that helps you dissect some of the short-term elements that impacted us more heavily in the third quarter and our expectations ahead.

That's great color, Lee. And maybe if I can ask a quick follow-up question. Would it be possible to quantify the benefit from storm-related revenue? I understand it was very small. And should we see a similar benefit going into the next quarter as well? Thanks.

Thank you, Ashish. It's not material enough where we feel that it's necessary to call that out. When it becomes a market impact or a material impact, we will call it out, but we don't think it rises to that level at this point.

That's very helpful and congrats on good results. Thanks, Lee.

Your next question comes from the line of Hamzah Mazari with Jefferies. Hamzah is unavailable and filling in for him is Mario Cortellacci.

Hi, this is Mario Cortellacci filling in for Hamzah. I know you touched on this in the past and you just mentioned when you got on the call around your ability to help insurers through automating various paths, whether that be underwriting or in the claims process. Maybe you could just talk about how much of an opportunity that may be still going forward. And then could you also just touch on new product growth and your vitality index and how that looks within insurance today?

Thanks for the question. I think I've already highlighted that the world of insurance is really focused on three things right now: data and analytics, digital engagement, and this push towards automation, which we refer to as an interconnected ecosystem. What insurers are trying to do — and you have probably experienced this if you want to go online and get an auto quote — is get a very quick and efficient quote because a lot of the information about the applicant is available. What we're trying to do is make that experience available not just for personal auto but for homeowners, small commercial, and more, enabling quoting very efficiently using data and analytics to make it cheaper, more efficient, and more accurate. It's all interconnected in a way that the digital experience the small business owner or homeowner has the ability to get a quote live. That's where the push is both on the insurtech side and the traditional insurers. I'm proud to say we've been at the forefront of helping people do that, and I think there's a lot of runway there because it reduces cost for insurers as well as creating a better experience for policyholders. I think the solutions we have are as robust and numerous as we've ever had. There's a lot going on at Verisk. That's on the claims side, underwriting side, and across verticals. There's opportunity to take some of the things we do today and focus them on insurance, but also see if there's a way to horizontally apply them in other verticals. For example, a lot of things we do with climate and climate change are relevant for corporate needs around ESG and resiliency. Those are the types of things that excite us, but we're still in the early days. So thanks for the question.

Absolutely. And then just to follow up, could you talk about how the competitive dynamic within the financial services segment has changed, if at all? You had the credit bureaus, fintech and payments all getting more aggressive on M&A and doing more internal investment around datasets. Just wondering if you've seen any real shift there and how is that being considered while you're doing your business review of that segment?

Yes, Mario. We do look at that competitive dynamic. I would start by saying that our financial services business is at the core a benchmarking service for the large credit card issuing banks. That's a unique position where the large banks trust us to provide their data so they can understand their performance against others. There is no one that collects as broad or provides as comprehensive a benchmarking service in that context, so to a degree that is a less competitive space for us. Where we do see more competition is around some of the consulting aspects of the business outside of that benchmarking. In some businesses, such as fraud detection, naturally there are a lot of smaller companies offering detection solutions. That becomes a consideration. So yes, overall we look at the level of competition, we look at other scale players in the industry and what they're doing in the space, and we evaluate our competitive strengths and merits as part of assessing our ability to create and optimize value for those businesses.

Great. Thank you very much.

Next question is from the line of Kevin McVeigh with Credit Suisse.

Great, thanks so much and thanks for all the information. Could you give us a sense in terms of where you are in the cloud transition? I guess overall across the enterprise and then maybe a little bit of detail in terms of insurance versus financial services versus energy.

Yeah. So there are multiple elements to our migration. First, every new application is being authored in the cloud at this point. We author a lot of new applications, so we're 100% with respect to that. With respect to legacy, we're substantially along the way, but we're not completely done. We are close to the moment when we will shut down some of our power data centers, but not quite there yet. A large fraction of our applications have migrated. We're still in process and making lots of good progress. As Lee referenced before, we've already seen cash flow benefits associated with this transition, and there is more to come because we will shut down data centers that aren't yet shut down. The corresponding point is because computing in the cloud is so productive, one of the things that's happening is we're doing more development in the cloud. So we've got lots of new things that we're doing that will consume cloud cycles in the future that we literally didn't do before. So there's a put and take. Volume grows in this really productive environment, the legacy stuff gets shut off, and the net effect is beneficial to cash flow and interacts with both capex and OpEx lines.

Very helpful. And then I wanted to clarify, when you folks talked about the 7% returning to that, Lee, is that as the portfolio is currently constructed or would monetizing certain parts of the business be upside to that number or is that the expectation for any strategic outcome in that 7%?

I would describe it as our expectations for the business as a whole and doesn't implicitly assume anything in terms of the portfolio restructuring. As we said before, we expect each of our businesses in a normalized environment to be able to achieve 7% organic growth. Obviously, there has been differentiated performance against that but that's the expectation for the business as currently configured.

Thank you.

Your next question comes from the line of Toni Kaplan with Morgan Stanley.

Thanks so much. Wanted to ask another question to clarify the margin expectation for next year. You mentioned that margin should be higher than 47%, but that seems like it doesn't really bake in any of the efficiencies that you talked about. And so maybe I was thinking about it as if you look at this year, you don't have the T&E, and that this year until hopefully that'll normalize next year. So is it fair to think of it as margins in 2022 will essentially be 2021 levels minus 100 basis points for T&E? If 100 basis points isn't right, feel free to correct me on that.

Toni, I appreciate the question. I think it's hard to anticipate what the impact on travel is going to be in 2022 — it will be fundamentally driven by what we think is best from a client interaction and business development standpoint. I think that's inherently unknowable at this stage. If we feel that it's in our best interest to be out there in front of clients to develop new products, that will influence our T&E spend. The environment, in terms of safety and regulation, is unknown as well. So I'm reluctant to make any forecast of what that is going to be because I think it will depend upon business circumstances and the environment at the time. I do think we've been able to realize savings, some of which are structural and which we think we will be able to retain over time in terms of real estate costs. It will probably be a lower level of travel, but in the short term looking at year-over-year comparisons, I don't think we're in a position to make an estimate of what T&E as a percent of total revenue is going to look like.

Understood. Is that the only real delta though between this year and next year? Is that the main one?

I think the other element, Toni, is our level of headcount growth. Here again, you have a tension between retention pressures and our ability to fill open positions, which influenced compensation expense in 2021. We would like to recover to where we were and to support growth of new initiatives. That is difficult to predict. Compensation is our most significant expense at about 70% of our overall operating expenses, so that will be another area of uncertainty. We have control over it, but we want to continue to grow headcount to develop these businesses, and the environment is making that more challenging from both hiring and compensation perspectives.

Got it. Then just a follow-up on energy transition: who are your main competitors there? Is it IHS Markit, or are you competing in different product areas? And also separately, is there any cannibalization from energy transition services for customers that are buying upstream, or is it completely additive?

Thank you, Toni. On the first question I think there are a range of other players. At one level you have the high-level consultants like Boston Consulting that are doing work in the energy transition space. There are publishers and data providers like Bloomberg New Energy that provide competition. Most other large energy data players are certainly looking to take advantage of demand for analytics and data in the new energy space. We feel our competitive advantage is our specific datasets across upstream, the PowerAdvocate capabilities on what companies are spending on infrastructure, and our real-time data from Genscape. That combination makes our offering additive and differentiated. Regarding cannibalization, we view much of it as additive because our datasets and platforms like Lens enable new use cases and cross-sell across customer bases. There may be some overlap, but overall we see the energy transition work as complementary to and expanding upon our traditional upstream and downstream offerings.

Thank you.

The next question comes from Andrew Nicholas with William Blair.

Thanks for taking my questions and good morning. First question for you, Scott. You mentioned in your prepared remarks about some success you've had with the international playbook, at least as it relates to Sequel. And now you've made an acquisition of ActiNeo in Germany. I'm just wondering if you could maybe spend more time on that deal — how it fits into your existing product lineup and what the playbook looks like for that asset in particular.

Yes. So ActiNeo participates in the claims process in the German market. The claims process is a very central part of what we do on behalf of insurers. When you are a data analytics company, methodologies can travel across national boundaries, but you still need local data to do analysis that is relevant locally. Fundamentally that's what ActiNeo provides. They operate in a part of the P&C world in Germany dealing with personal injury and the medical issues that arise from automobile accidents. Growth for ActiNeo will occur along a couple of dimensions: first, expanding in Central Europe where the methodology is applicable; second, integrating our other claims solutions that are applicable to the German market. We'll have a footprint and relationships with German companies that come with ActiNeo and can now present our broader solutions. We'll aggregate contributory data which will be specific and unique within customer relationships to create cumulative benefits: deeper customer connections and more forms of value because we have more kinds of data across claims and underwriting.

Great. Thank you, that's helpful. For my follow-up, I want to switch to cyber. It seems like there is a growing number of providers targeting that space, some with positive momentum. I'm wondering if you could refresh us on your positioning in that market and where you feel the biggest opportunities are for both organic or inorganic growth in helping clients underwrite cybersecurity risks specifically.

A couple of comments on cyber. One, it's an important line, but it's not very large in terms of written premiums yet; cyber cover adoption is still evolving. Our positioning is that we have a broad set of offerings in cyber — we model upfront to provide a portfolio view of cyber risk for insurers. We can diligence individual companies for cyber risk for underwriting. On the back end, through our PCS unit, insurers tell us claims experience after events and we now have a variety of insurers doing that with us in cyber. There isn't any other company that does that combination — portfolio modeling, individual diligence, and post-event claims benchmarking — across cyber. So our positioning is strong and broad. We are happy with what we're doing in a line that gets a lot of attention but isn't yet a very large premium category.

Your next question comes from Andrew Steinerman with J.P. Morgan.

Hi, it's Andrew. Two questions. First, as your team probably sells one or more of your industry-specific data and tech businesses, will Verisk likely become an information services provider that's more focused in terms of number of end markets, or is it likely that Verisk will expand into a new industry after exiting an end market or end markets? Second question follows.

So it is not inside our pattern of thought to say we need to be in more end vertical markets. That is not the way we think. We are interested in following where the power sits, which is often in insurance. We like solutions where a 'killer app' grows up in the insurance vertical and then is extensible to other customer groups. If a solution is applicable elsewhere without significant modification, that's good business and we'll pursue it. But we're not in a mode to sell assets to then go buy a new vertical. We prefer the approach of building where we have strong domain presence and expanding horizontally where it makes sense.

That makes a lot of sense. Second question: could you talk about the typical rebound ahead for Verisk energy organic revenue growth, noting that the end market now has some tailwind?

There is a cyclical element on the consulting side driving some strength in energy revenue growth. But the more material secular trend is understanding datasets for the energy transition and our structural ability to tie those datasets together through the Lens platform. That is the more significant trend — not just upstream or downstream, but building an architecture that meets those growing needs. Some cyclical short-term uplift is encouraging more adoption of these broader applications, and there is a bit of a tailwind we're beginning to experience certainly on the subscription side. As we realize revenue from those subscriptions, it should become more apparent in the overall revenue results.

And if I could add briefly: over the last seven years there have been two remarkable price shocks in oil and gas, plus Brexit and the pandemic. The environment is different now, and our exposure to commodity price volatility is more muted because of the development and diversification of our data businesses. There will still be some impact, but it's less acute than it might have been three years ago.

That's well said. Thank you.

At this time, I would like to thank everyone for joining today. This will be our last question. This concludes today's conference. You may now disconnect.

Thanks everybody for joining.

Thank you.