Verisk Analytics Inc (VRSK) 2018 Q4 法說會逐字稿

Good day, and welcome to the Verisk Fourth Quarter 2018 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Verisk's Head of Investor Relations, Stacey Brodbar. Ms. Brodbar, please go ahead.

Thank you, Grace, and good morning, everyone. We appreciate you joining us for a discussion of our fourth quarter and full year 2018 financial results. With me on the call this morning are Scott Stephenson, Chairman, President and Chief Executive Officer; Mark Anquillare, Chief Operating Officer; and Lee Shavel, Chief Financial Officer.

Following comments by Scott, Mark and Lee, highlighting some key points about our financial performance, we will open up the call for your questions. The earnings release referenced on this call as well as the associated 10-K can be found in the Investors section of our website, verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC. A replay of this call will be available for 30 days on our website and by dial-in.

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. Actual performance could differ materially from what is suggested by our comments today. That information about the factors that could affect future performance is contained in our recent SEC filings.

Now I'll turn the call over to Scott.

Thank you, Stacey, and good morning, everyone. Apologies for my voice today.

As we turn the page on 2018, I want to give you my bottom line view of the year just passed. We did well and see opportunity to improve. The single most important reflection of our vitality is our rate of organic revenue growth. And normalizing for the effects of exceptional storm-related revenues and the significant contract signing and financial services in 2017, our organic constant-currency revenue growth was 7.2% ahead of our long-term financial target of 7%.

Moreover, our growth was broadly-based across our Insurance vertical along with Wood Mackenzie in the Energy space and our core consortium data analytics in the Financial Services vertical. The heart of our position in the 3 verticals is sound and forms the basis for cross-selling these solutions in the future.

Looking more deeply into the organic revenue outcomes across the company, I see 8 contributing factors: number one, very high rates of customer retention; two, growth in the number of products consumed by existing customers; three, the introduction and adoption of new innovative solutions; four, positive pricing due to enhanced value in many solutions; five, in those places where we have head-to-head competition, share gains in most categories, including CAD modeling, remote imagery and underwriting decision support; six, effective progress in nondomestic markets, especially the U.K.; seven, a high rate of capture of business with new entrants in the Insurance vertical, including the InsurTech companies; and eight, our position as a partner to our customers who continue to entrust Verisk with their data, enabling us to build new solutions in new categories.

For example, in Insurance, we are working with our customers to repurpose some contributory policy data already used in our underwriting business to develop innovative claim solutions. One such solution will enable carriers to automate the subrogation process quickly and seamlessly. In Energy and Specialized Markets, Wood Mackenzie is leveraging the consortium model, developed by our insurance colleagues, and bringing it to the energy sector where we believe it is in a nascent stage.

We are currently finalizing an agreement to create an energy data consortium in one of the key U.S. tight oil plays. And in Financial Services, we are working with our card issuer partners in Mexico to launch a fraud consortium to help combat the transaction-based fraud plaguing their system.

An important underlying foundation to our growth is the agility of our technical infrastructure, which permits us to bring new solutions to market faster and with greater analytic content. On this front, I was pleased with the following in 2018. Our analytics community has grown substantially through our own program of cultivating data scientists along with industry hiring, and all of this supported by the naming of a new Chief Analytics Officer.

We saw a doubling of our consumption of public cloud capacity in 2018. We have made progress in advancing our data methods to support widespread tokenization, which contributes to our internal security and presents opportunities to access new datasets from equally security-minded data sources.

On the innovation front, we introduced a wide variety of unique and customer-driven solutions across our verticals. In Insurance, we launched programs to address new risk exposure, including cyber and flood. We also successfully introduced a variety of disruptive and award-winning innovations to the market, which Mark will talk to you about in more detail.

In the Energy and Specialized Markets segment, we launched Lens, a cloud-based data and analytics platform, which allows customers to access, analyze and model data in every major commodity in every market. And in our Financial Services sector, we delivered next-generation merchant analytics to retailers.

As a complement to our innovation agenda, we are very focused on driving operational efficiency. As we shared with you in detail at our Investor Day in December, we worked diligently to advance our operational excellence initiative through Lean Six Sigma. With 3,100 employees trained and 85 active projects underway, and more soon to be launched, Verisk is driving a culture of continuous improvement by measurably improving processes and meeting the critical customer needs of quality and speed.

Another leading indicator for me comes from the many conversations I have with the CEOs of our leading customers. Are they thinking of Verisk as a partner or as a vendor? A consistent message across 2018 is that we are engaging our customers around some of their highest priority initiatives for the future and they see Verisk as a distinctive and trusted partner in doing so. The result of many of my CEO visits is a request that their teams be placed in closer proximity to our innovation pipeline.

Our last comment about the year just passed regards the planning cycle we went through at the end of the year. I have never seen a higher volume of fresh ideas for new solutions and approaches for engaging our customers. We have a wonderful problem of needing to choose among a wide variety of opportunities.

Finally, I'm pleased to announce, as you've seen, that our Board of Directors has approved the initiation of a cash dividend to shareholders. This represents an important milestone in what is the 10th year of our history as a public company and demonstrates the confidence we have in our ability to drive sustainable, profitable growth, generate significant free cash flow and create long-term shareholder value through careful capital management.

I'll now turn the call over to Mark to comment specifically on our Insurance business.

Thank you, Scott. I'm pleased to share with you that 2018 was a strong year in our Insurance businesses, one marked by solid growth across most of our lines of business, fueled by leading innovation and enhanced customer engagement.

Excluding the impact of approximately $16 million of storm-related revenue in 2017, Insurance revenue on an organic constant-currency basis grew 8.3% in 2018. Our customer retention rates remain very high, and the overall portfolio of new and truly innovative solutions is more robust than ever.

As Scott mentioned earlier, we have received numerous Innovation of the Year awards for our creative solutions, including, one, LightSpeed Auto, our innovative, data-forward workflow solution that delivers a faster and more efficient experience for underwriting and buying insurance. A fully bindable online auto quote is delivered after providing only 3 pieces of key data. We've extended the LightSpeed technology and platform to address the property and small commercial insurance segments. Several customers have signed contracts and our pipeline of interest for LightSpeed is growing.

Two, Verisk Data Exchange, our IoT data consortium that collects connected car data from our GM, Honda and Hyundai partnerships on more than 4.7 million vehicles, covering more than 80 billion miles. Insurance applications range from driving behavioral scores for underwriting to instant notice-of-loss solutions for claims.

And three, EPIX, our energy and power intelligence exchange, our Insurance platform that helps energy insurance professionals research, assess and underwrite complex risks. This solution addresses a critical profitable growth need by combining Verisk's risk scoring and benchmarking insurance expertise with WoodMac's unique energy data.

A steady stream of first-to-market innovation is one of the 4 distinctives of Verisk, and it's also a key driver of our growth. It is also an important force of change within the insurance industry. On that front, InsurTech is gathering lots of mind share and meaningful capital investment, which we think creates future growth opportunities for Verisk.

In my view, InsurTech has grown in 2 distinct areas. One, startup insurers and managing general agents, or MGAs, who are underwriting and distributing insurance. This type of InsurTech startups are likely to need data analytics to effectively price and sell insurance in the competitive market. We believe these startups have the potential to become Verisk customers. And in fact, in 2018, we engaged with 67 of these startups on 182 opportunities and had 79 product wins.

Second, other InsurTech startups include service providers who are trying to improve the insurance process. These startups may be competitors of ours, but many recognize the value of our services and continue to solicit our data analytics, distribution channel or even possible investment.

The threat from InsurTech players has ignited investment by more traditional insurers who are focused on analytics, digital engagement and automation to compete with InsurTechs and to deliver a better customer experience for their policyholders.

This momentum and insurer investment have led to increased opportunities for us. A common description of InsurTech is the use of technology innovations designed to improve the insurance process by squeezing out savings and driving efficiency from the current insurance industry model. With this definition in mind, I view Verisk as the most comprehensive and trusted InsurTech provider.

As we've communicated to you over the years, international expansion is an important part of our long-term growth strategy, and in 2018, it was a solid contributor to growth. The United Kingdom provides a playbook for success in future international expansion. The global insurance market, specialty -- especially specialty lines, has hubs [around the] world, with London as a key gateway to global markets and an accelerating step on our journey to extend beyond the United States.

This vision is becoming a reality in the U.K. Our strategy is to provide a comprehensive suite of solutions across the entire insurance value chain, driving data and automation from broker to underwriter to reinsurer, and from quote to claim settlement.

During the quarter, we acquired Rulebook, an industry-leading provider of business intelligence and software solutions for the London insurance market. Rulebook, in combination with Sequel, furthers our goal of providing leading solutions to the global insurance market, including a comprehensive chain of solutions to specialty insurers for mitigating risk and optimizing total cost of operations. Our customers are recognizing the advantages of these integrated solutions, resulting in new contracts and increased sales opportunities.

With a successful 2018 behind us, we're focused on 2019 and are actively meeting with employees and customers. To kick-start each year, we hold a series of town hall meetings at our major offices to share Verisk Insurance Solutions' strategic direction.

We also held our annual insurance sales meeting in Nashville earlier this month. The first evening of the sales meeting was an awards ceremony and a celebration of a strong 2018. The meeting then serves as a forum for leadership to communicate our goals for 2019 and then for the sales teams to learn about our new innovative solutions. Our 200-person sales team experienced demos from our product experts and we're briefed in our innovation lab under us cutting-edge AI and automation technologies.

Several customers joined us and emphasized the importance of our products and thought leadership to their businesses as well as suggested enhancements to our solutions. The teams left our town hall and sales meetings with a sense of accomplishment, energy and momentum from 2018 and motivated for 2019.

With that, let me turn the call over to Lee to cover our financial results.

Thanks, Mark. First, I'd like to bring to everyone's attention that we've posted a quarterly earnings presentation that's available on our website. The presentation provides background, data trends and analysis to support our conversation today.

Moving to the financial results for the quarter. On a consolidated and GAAP basis, revenue grew 7.7% to $614 million. As a result of an income tax benefit of $89 million recorded in the fourth quarter of 2017 related to tax reform, net income decreased 28.5% to $146 million for the quarter. Diluted GAAP earnings per share were $0.87 for the fourth quarter 2018, a decrease of 28.7% compared with the same period in 2017. Equalizing the fourth quarter 2017 effective tax rate to that of the fourth quarter of 2018, adjusted net income and diluted adjusted EPS would have increased 5.6% and 6.1%, respectively.

Let's focus our quarterly discussion on our normalized organic constant-currency results for all year-over-year growth rates and to eliminate the impact of currency fluctuations, recent acquisitions for which we don't have full year-over-year comparisons, and nonrecurring items, including the impact of the storm-related revenues recorded in the fourth quarter of 2017.

On a normalized organic constant-currency basis, Verisk delivered revenue growth of 6.9% and adjusted EBITDA growth of 7.3% in the fourth quarter of 2018, reflecting strong organic growth across the Insurance and Energy and Specialized Markets segments, offset by weakness in Financial Services.

Adjusted EBITDA margin for the quarter of 47.8% was up from 47.6% on a normalized basis in the prior year period. Please bear in mind that our reported fourth quarter 2017 margin, not adjusted for the storms, includes the benefit of 100% margin on the $8 million in storm-related revenue.

For the full year of 2018, normalized for both storm-related and nonrecurring implementation revenues, we achieved 7.2% organic constant-currency revenue growth and 7.7% organic constant-currency adjusted EBITDA growth. Adjusted EBITDA margin was 48.5% in 2018, up from 48.3% in 2017. We achieved these results while also maintaining substantial investment in our business and sustaining ongoing recovery in our Energy and Specialized Markets and Financial Services sectors.

Let's now turn to our segment results on a normalized organic constant-currency basis. As you can see in the press release, Insurance segment revenue grew 8.5% and adjusted EBITDA increased 9.9%, reflecting an adjusted EBITDA margin of 53.5%, up from 52.8% in the prior year and inclusive of substantial investments in remote imagery and telematics.

Within our Underwriting & rating business, we saw solid performance with healthy growth in commercial lines, personal lines and catastrophe modeling services. Within claims, the strong growth was driven by solid performance across most of our claims businesses, partially offset by continued softness in our workers' compensation claim resolution services.

Energy and Specialized Markets delivered revenue growth of 5.1% for the quarter as the energy industry continues to recover. We experienced growth in both our core research and consulting solutions as well as strong contribution from our breakout areas, including power and renewables, chemicals and subsurface. We also had positive contributions from environmental health and safety, and weather and climate analytics revenues.

Adjusted EBITDA increased 4.6%. Adjusted EBITDA margin of 31.3% was slightly down from the prior year period of 31.4% as we continue to invest in WoodMac 2.0, or Lens as it is branded in the market place, and our chemicals, subsurface and power and renewables breakouts. These areas represent opportunities to leverage Wood Mackenzie's data and industry expertise more broadly and to deliver and develop more swiftly and efficiently.

Financial Services revenue declined 2.2% in the quarter and adjusted EBITDA decreased by 12.8%. Solid growth in portfolio management solutions and spend-informed analytics were offset by headwinds from tough comparisons with prior year implementation revenues as well as some timing differences.

As we articulated previously, we continue to make progress on our initiative to reduce the variability of revenues in this segment, particularly around project-based items. As we work through this process, we will continue to see quarterly fluctuations on revenue and growth higher than our other businesses. That said, we are encouraged by the long-term growth potential in our Financial Services segment as we set the business on a stronger foundation for future growth.

Reported interest expense was $33 million in the quarter, up 1.6% from the prior year quarter due to the funding of acquisitions over the last 12 months and our share repurchase program. Total reported debt was $2.7 billion at December 31, 2018, down from $3 billion at December 31, 2017. Our leverage at the end of the quarter was 2.3x.

We are very pleased to share that on January 30, Standard & Poor's upgraded Verisk's credit rating to BBB flat with a stable outlook from BBB- with a stable outlook and assigned a short-term rating of A2.

Our reported effective tax rate was 18.6% for the quarter. This compares to the negative 14.1% we experienced in the prior year quarter as we recorded a benefit resulting from the revaluation of our net deferred tax liabilities in connection with tax reform.

For the full year, our effective tax rate was 16.8%, which was lower than our targeted range due to significant exercises of soon-to-expire employee stock options related to our 2009 IPO that produced a favorable tax impact.

For 2019, we expect our tax rate to be between 19% and 21%. Though there will be likely some quarterly variability related to the impact of employee stock option exercises, which depends in part on the Verisk stock price and employee personnel decisions.

Adjusted net income was $174 million and diluted adjusted EPS was $1.04 for the fourth quarter, down 21.8% from the prior year. This decrease reflects the impact of a prior year $89 million tax benefit related to the 2017 tax reform.

Equalizing the fourth quarter 2017 effective tax rate to that of the fourth quarter of 2018, adjusted net income and diluted adjusted EPS would have increased 5.6% and 6.1%, respectively. Further normalizing for the elevated storm revenue in the quarter, adjusted net income and diluted adjusted EPS would have increased to 10% and 10.6%, respectively, consistent with our long-term objective for double-digit EPS growth.

Net cash provided by operating activities was $173 million for the quarter, up 14.5% from the prior year period. Capital expenditures were $77 million for the quarter, up 9.8% from the prior year period, reflecting continued investments in future growth opportunities including remote imagery, telematics and Lens, and software development to support and improve new and existing products across the organization.

Total capital expenditures for 2018 were $231 million and represented 9.6% of total revenue. As we have said previously, we expect capital expenditures to decline as a percentage of revenues in 2018 -- I'm sorry, 2019 and over the long term, and to be within a range of $220 million to $240 million in 2019.

As that translates to depreciation and amortization, we expect fixed asset depreciation and amortization to be within a range of $175 million to $185 million in comparison to the $165 million for 2018. And we expect intangible amortization to be approximately $135 million in 2019 in comparison to $131 million in 2018. Both depreciation and amortization elements are subject to FX variability and future M&A activity.

Free cash flow was $97 million for the quarter, an increase of 18.6% from the prior year period.

This quarter, we returned $156 million in capital to shareholders through the repurchase of approximately 1.3 million shares at a weighted average price of $119.55. At December 31, 2018, we had $428 million remaining under our share repurchase authorization. In addition, we initiated a new $75 million accelerated share repurchase to be executed in the first quarter of 2019.

Of course, the big news on the capital front was the initiation of a cash dividend of $0.25 per share this quarter. We are very pleased to reach this milestone in our 10th year as a public company and to deliver another source of value to our investors.

This dividend underscores the stability of our business, profitability and cash flow, as well as a diversification of our capital return discipline, balancing share repurchases and dividends. We further expect that the dividend will open new groups of potential shareholders to Verisk.

It's important to note that the dividend initiation does not reflect any diminution in our growth prospects or the opportunities to invest our capital. We will continue to have sufficient capital to support our long-term growth objectives, which remain unchanged.

We remain excited about the opportunities to invest in our business and remain focused on long-term profitable growth and solid returns on capital. We remain confident that we have the financial strength and capital structure to support investment for the long term.

We continue to appreciate all the support and interest in Verisk. (Operator Instructions) With that, I'll ask the operator to open the line for questions.

(Operator Instructions) Our first question comes from the line of Toni Kaplan of Morgan Stanley.

Scott, you mentioned that you've been meeting with the CEOs of your customers. Could you just call out what seems, maybe, on their minds that might be different from last year? Or just give us a sense of the most important priorities that they're focused on.

Yes. Thanks, Toni. Two things immediately come to mind. One is, I would say, almost every insurance company CEO believes and expects that they can find ways to make their company grow faster than their competitors, faster than the industry. I think that's really significant because it means that what they are leaning into is improved methodologies. They're not just trying to sort of hunker down and play a cost game, they are looking to grow their businesses and they realize that the world around them really has changed and continues to change because of technology. So I would say that that's really the first and the most important thing that's going on.

I would say the second thing that is also, pretty obviously, true. I would say, especially for the mid and larger companies, is they are really persuaded of the importance of accessing partnerships and supply from outside of their own companies. In other words, they realize that there are ways that their businesses can be benefited by tying in with others. And so I see a lot more partnering. I see a lot more venture investing as they try to get closer to technology. And I just see a lot more outreach to a company like ourselves that is recognized as being sort of distinctively able to help across multiple fronts. So these are very constructive meetings. They are partnership meetings.

Perfect. And then for my follow-up. I wanted to ask about margins. So in Insurance, I think we've seen investment impacting margins, same with first quarter in Energy last year. I guess, should we view 2019 as maybe a little bit -- a continuation of investing but maybe a little bit less so than '18? Or how should we directionally sort of think about it? And then outside of scale, are there any margin initiatives across the business, like efficiencies, that you're looking to drive this year?

Sure, thanks, Toni. This is Lee. So I think, it's -- I would start off by saying certainly all of our business, we think, have superb operational -- operating leverage. And so as you know, across organization, our expectation is that each of the businesses will demonstrate improvement in margin. I think it's a fair observation that, in 2018, there was a high level of investment in a variety of initiatives, Geomni, Lens, IoT and telematics, where we chose to make those investments and that those, obviously, had a negative impact on margin. But notwithstanding that, I want to reiterate, as I mentioned in my comments, that both for the fourth quarter and for the year as a whole, when you normalize for the storm activity, we had margin expansion on the year-over-year periods. And so from our perspective, recognizing that, that storm revenue and the implementation revenue for TSYS was 100% margin. And so that certainly skewed that year-over-year comparison. We believe that we delivered margin expansion as well as substantial investment in the businesses for that period.

In 2019, we won't have that storm comparison and, as Scott indicated, we still see very attractive opportunities to invest. But I think it's fair to say that, probably in 2018, from a scale standpoint, particularly around Geomni, it was a higher level. Consistent with our CapEx guidance, that was an acceleration, we expect to see that absolute level of investment decline as a percentage of revenue. So we feel good about the opportunity to strive towards our goal of margin expansion.

Our second question comes from the line of Hamzah Mazari from Macquarie Capital.

Just on the Financial Services segment. Maybe you could just touch on how you plan to reduce variability of revenues in that vertical, and maybe just timing of that initiative.

Sure. Hamzah, this is Lee. Thanks for that question. So the process is essentially in recognizing in project-related revenues. I think the tendency in the past had been to recognize more of that revenue upfront. I think as we have the flexibility in structuring those relationships as new business comes on, we are -- and this is not perspective, this is already occurring, we are structuring the relationship so that, that revenue is realized over time so that we don't have these large chunks of revenue that create that variability. So that is part of the objective. That's a structural initiative as we work with clients. But also, I think fundamentally, as we think about developing the growth of the business, our focus is on building a sustainable growth component off of the 4 constituent businesses that we've described before, so that it is more incremental growth across that base. I think both of those will contribute to a more stable, less-variable revenue and profitability over time.

Great. And just for my follow-up question. On the international business, what sort of next milestones should we be looking at in that business? I know you talked about products essentially needing to be more customized locally. So just any color on long-term international insurance strategy.

Yes, thank you. This is Mark. Just to kind of follow-up on the question. So I think what we've seen it's a bit of a build and buy scenario. So what we are now doing, which has become very powerful for the customers, is we've taken many of our solutions and we've started to integrate them in a more holistic way. So walking into a customer as opposed to buying all these point solutions, there's an attractiveness of knowing that your data is going to flow from the beginning of a process that starts at maybe a quote or an underwriting decision on through the process, so you can see it from a portfolio perspective in some of our catastrophe-modeling solutions. And all of that is information that's embodied in the solution that's Sequel.

The concept and construct here is I can do it more effectively, I can do it more efficiently, I can do it more accurately. And on top of that backbone, we've added some of, I'll refer to it, the ISO and some of the other analytics that has been so powerful here in the States. So that continues to evolve. I think we'll be able to do more and more with customers as we gain access to more data. And maybe just to take your question one step further, to maybe highlight that I think we see London as being kind of a gateway into the international community, especially with the specialty lines. So as we win these contracts, we're very doing work not just in the U.K., but with companies who are located in the U.K. but are underwriting business throughout the world. So our next step into other geographies is that much easier.

Our next question comes from the line of David Togut from Evercore ISI.

I'd like to ask about the Financial Services business, which was really weak for the second year in a row. I'm wondering if this business has the same distinctives that really characterize both your Insurance and your Energy and Specialized Markets businesses, especially since competition here seems to be increasing with a number of well-capitalized competitors like MasterCard offering more and more analytics to credit card issuers. So my question really is, does this business really still fit within Verisk, especially given the broader capital allocation framework that you've rolled out today, which seems to focus more on capital return?

David, Scott here. Yes, the business does fit. The -- I think that many of the folks on the call today are familiar with what we call our 4 distinctives, which we talk about a lot, which, just to remind everybody are: unique data assets, deep domain expertise, first-mover advantage and deep embedment in customer workflows. And what we do in Financial Services has all 4 of those qualities. So as Lee previously talked about some of the things that have sort moved through the business of late, and we talked about the -- sort of the lumpy quality of the way that some of the revenues had been recognized in the past.

But what I would go back to is that the heart of the business is built on consortium data, which is absolutely unique. And unlike the data, which is available to anyone else, including the players you mentioned, on top of which then we have very deep relationships with our customers and, really, a large data platform which is really remarkable for a company of its size. So all of the conditions are there. And then I will also say, again, echoing what Lee said, the strength of portfolio analytics plus the spend analytics that we do are the leading parts of the business, and they're actually healthy. So we expect that as these other effects sort of wash through, you'll get sort of a more clear view of those things built upon the distinctives, which really will power the business going forward.

As a quick follow-up, I'd just like to ask about dividend policy. The math shows that the LTM payout ratio is about 28%. How do you think about the payout ratio that you're using to set the dividend? And do you expect the dividend to grow in line with earnings or faster than earnings growing going forward?

Thanks, David. It's Lee, let me take that. So we -- in setting that level, we looked at the payout ratio, really, also what proportion of capital are we allocating to the dividend, and an eye on kind of yield and where yields are out there. We recognize that investors will expect and reward growth in the dividend over time, and we certainly believe that our ongoing earnings growth will provide a very strong consideration for these decisions by our board in the future. We also expect to weigh capital investment and return opportunities in the allocation decisions ahead. So all of those, I think, factor into it. But there clearly is a recognition that there'll be an expectation given our overall growth that the dividend should grow as well. And that's what we will balance looking ahead in advising the board on these decisions.

Our next question comes from the line of Manav Patnaik from Barclays.

Scott, I think at the beginning of the call, you talked about the repurposing of some of the insurance consortium data. And I was wondering if you could just expand on that, maybe taking a step back and letting us know how much of the data do you have access now to play around and innovate with, and if this is a new or ongoing opportunity.

Yes, so let me start, and Mark, you may want to amplify some of this. But when we think about data in the Insurance vertical, it's really a combination of looking for opportunities to tease additional meaning out of existing datasets and generating new datasets. So upfront, I mentioned, for example, subrogation. Subrogation is essentially bound up in the claims resolution process, and as I think most folks know, we have a lot of claims data. So finding a way to point that at the subrogation case and to think about affiliated things like clearing payment between counterparts is just interesting, and it's really a process that hasn't really been transformed yet in the insurance industry. So that would be an example of repurposing.

But, then there are other places where we're trying to generate original datasets. And one thing I would just comment on here is that, on the one hand, we're very alert to opportunities to position data to where it can be repurposed. On the other hand, we're very diligent about the reasons why our customers made the data available to us in the first place. And so we're always going to be striking a balance between what's possible and what our customer contributors would like to see us do, but there's plenty of room in there for innovation. And then there are a variety of new datasets where we're making original calls for data. And actually, even that takes a couple of forms. One is we have existing platforms like PCS, where we've started the call data related to cyber incidents and we didn't used to do that. So that's original data, but around an existing platform. We're always trying to enrich the data that comes into a platform like ClaimSearch and then we're trying to find that get new forms of claims data that we don't receive today, for example, commercial claims histories are not as developed as personal claims histories. Mark, anything you want to add to all that?

Yes, I think that was well said. I think it goes back to the earlier comments you made about partnerships and conversations with CEOs. In the world of data, obviously, our customers and many people feel their data is valuable. So we need to provide them with valuable use cases back to their businesses in order for them to let us use the data. So having the great partnerships and relationships is very important. We continue to be a trusted intermediary for that data and we feel that's a privileged position.

Got it. And just as a follow-up, Lee, just on the Energy and Specialized side, I think last year, you guys called out -- I think it was a bank and then a merger-related kind of headwind to the business. Have we lapped those comps? And does that mean, next year, the numbers should start looking better?

Thank you, Manav. The -- we will lap that in the first quarter of 2019. So we were still experiencing that headwind in the fourth quarter, but that will go away in the first quarter of 2019.

Our next question comes from the line of Andrew Steinerman from JPMorgan.

It's Andrew. I wanted to ask about WoodMac 2.0, Lens. What are some milestone and rollout that we should be looking for? And will WoodMac 2.0 help margins and revenues or just one of them? And particularly, make a comment for 2019.

Yes. So let me take it as a general level, Andrew, and maybe, Lee, if you want to add anything. It's constructive on both the revenue and the margin side because part of what Lens is getting after is the very nature of our data aggregation and it becomes more efficient on this platform that we built, but equally, there's more functionality there for customers, and so we think it'll be constructive in both ways. I don't -- I wouldn't point you so much to milestones or at least not those that will be called out in the overall performance of the business. What I'm trying -- and I'm not making a comment about the future profile of the financial performance of the business, I'm simply saying the revenue streams are all sort of -- think of it as a bowl of spaghetti and Lens works its way through things that we already do. In addition to representing modules -- new modules that we can license to customers. But as called out, specifics, basically, it'll be -- we do business with so many companies already, this will really enhance cross-selling into existing relationships. But in terms of visibility to the outside, I'm not -- I wouldn't call out any particular milestone. Just the general progress of the business, really. Lee, anything you want to add to that?

No, I think Scott covered it. I would just make the comment that Lens really represents the platform that enables us to continue the evolution of a very good research and consulting business into increasingly a data analytics business that can serve a broader customer base, can develop and integrate data products more effectively, which is beneficial both from a revenue growth standpoint as well as from a margin perspective and I would just finally add that the team there continues to work on operational efficiencies to improve the margin as well.

But Lee, might there be a time, like maybe this year, where you're running 2 infrastructures for WoodMac and it might be a drag to margins?

Well, I mean, yes, but no. So you observe something, yes, but the implication I don't think is right. So yes, we need to be running things in parallel and we have been investing, as Lee has referenced several times, to build the platform. But the actual operation of the platform -- I mean, one of the things that so constructive inside of our business is that we enjoy the gift of Moore's Law every day. And so, actually, the cost of compiling data or even processing data inside of the platform that you have built, the incremental cost is not really all that great. I'm not saying that it's zero. So you're correct about what we will do operationally, but I think the implication you were trying to reach in terms of operating expense going forward is not so accurate.

Yes. And I would go, more broadly, I think that point has some relevance with regard to our transition to cloud where we are making investments and see opportunities to find greater efficiencies, where we still have a legacy costs. I think that is -- would be a valid observation, not so much in this context. So thank you for the question.

Our next question comes from the line of Tim McHugh from William Blair & Company.

First, I wanted to ask on the Energy side of the business. In the prepared remarks, you talked about being close to signing a consortium deal. Can you talk more about that and the nature of the data, I guess, and the product, I guess, that would flow out of it?

Yes. So those of you who have followed us know that the majority, in fact, a large majority, of the data that we've had up until today has been mostly about the commercial dimensions of the oil and gas business. So observations about productivity and the cost factors associated with the assets that produce either the raw materials or the refined materials. So those are the datasets that have typically, traditionally, been a part of what we do. The datasets we're adding are what we call the subsurface datasets, and these are the ones that take into account the actual real-time operations, even in the oilfield, in combination with the nature of the rock and the nature of the fluids and the nature of the fields, so that we can complement everything we've already done -- always done with basically much more real-time optimization of the operations of our customers' assets. And this is something that we haven't done as much of, in fact, very little of, up until now. So the datasets relate to that, real-time operational optimization.

Did you say it was for a specific region or subsector of companies you would start with?

Well, the -- so whenever we talk about a consortium dataset, you're always talking about specific customers and, generally, specific product sets or specific places. So that does apply in what we're doing in building these new datasets, these subsurface datasets. And our focus right now, predominantly, is the Lower 48 in the United States, where the need -- the situation in the United States is different than the situation in most other parts of the world. Because in the United States, what the operators are doing is basically saying, "That particular rig, should I move it 2,000 feet? And I can move it and 4 days later, have a 1,000-foot well that's producing." And so that's the speed with which "Strategy" is being set and operations are being rebalanced in the United States.

Okay. Great. And then can I just -- on the Insurance side, the aerial imagery product set, can you -- I think you mentioned this, one of the growth drivers, I guess. But can you give us a more color on adoption, kind of competition for that product at this point? How it's scaling maybe relative to what the initial plan was 18 months ago or 12 months ago when you kind of made a more aggressive push into the space.

Sure. So this is Mark. I think your question is directed at Insurance, and at the same time, let me maybe extend a little beyond that. So first of all, we've been very pleased with the takeaway we've had in the market. Our market share is growing. We've won significant customers, and many of them, that has clearly contributed to some of the organic growth that we've talked about here. Beyond what is -- I'll refer to it as kind of market share, we've also continued to add products. So remember, in the world of what I view as a complete automated solution, if I was to take and use imagery in combination with some of the scoping and what we refer to as Image-to-Scope, which is the Xactimate tool behind or in front of all this imagery, we can really automate and become more accurate and more cost-effective for those claims adjusters. Literally, we think we can double the productivity of the claims adjuster field forces at our customers, saving them hundreds of millions of dollars. So we're seeing that. What I also like to highlight though is that growth is extending beyond what is traditional insurance. If you think about the world of contractors, if you think about the world of -- I'll refer to it as mapping and construction as well as roofing companies, all of those found use cases in some slimmed-down or innovative way we view some of the technology. So that is contributing to the growth across the board, even outside of insurance.

Our next question comes from the line of Bill Warmington from Wells Fargo.

So you mentioned the U.K. and model and a gateway for international expansion. So culturally, there's a lot of similarities between the U.S. and the U.K., I guess Winston Churchill would call them 2 nations divided by a common language. But as you go -- as you look to prioritize your other geographies for international expansion, what are the ones where you're going to be focusing first?

So Bill, I'm going to assume that is a continuation of the conversation we had on Insurance. We think there's a lot more to do in the U.K. So we'll continue to push there. I think what we have identified is, looking at like markets, looking at places that have a more mature insurance marketplace and a gross premium and a growing gross premium, we have really identified Europe, but more specifically Germany and France is kind of the next couple of places that are of interest. Down the road, I think everyone thinks about kind of emerging markets and emerging insurance markets like China, India. We aren't turning our back on that, we're keeping an eye on it. But we kind of think, to your point, trying to stay close to the markets that are a little more mature in Europe is probably the best next step for us.

Got it. And then for my follow-up, your thoughts on FX impact to revenue in 2019?

Yes. So Bill, I know -- the reason that we try to focus on organic constant-currency numbers is that we can't predict what's going to happen from an FX standpoint. So we're focusing on results, excluding the FX range. I do think, generally, given the very strong U.S. orientation of our business generally, the fact that WoodMac has a mix of U.S. and international revenues, we think, overall, the exposure is relatively low. So I'd say proportionately, we don't think it'll have a big impact. But our focus is always to try to eliminate that factor, which we can't completely control.

We have our next question from Jeff Meuler from Baird.

As you productize the subsurface consortium data as you were just kind of explaining, are you inventing new categories of solutions to sell to customers? I don't mean new relative to Verisk, I mean new relative to the market. Or said another way, do you have to displace solutions from the leading incumbents that have subsurface data already? Or are these, I guess, greenfield opportunities?

It's a combination of the 2, and it really hinges upon how much analytic content we get into what we do. So there are players today that will provide observations about a number of this sort of individual parameters that apply when you're trying to understand the productivity of real-time operations. So from one place, you can get data as it relates to, for example, the completion strategies that have been taken for the individual well. There are other sources where you can make sure that you have completely identified the leasing -- the lease holding and ownership structure of whatever patch of land you're talking about. And then other places, you can go for the heavy seismology work, and on and on and on like that.

So part of what we will do is to increasingly make those types of -- those kinds of data available to our customers. But then over and above that, what doesn't exist so much in the marketplace today is the -- is really the AI, machine-learned expression of all of that data in quantity across heterogeneous situations. So that in an automated fashion, you can really make predictions and drive decisioning. And there, we expect, because we're Verisk, we will be distinguished. How much those kinds of solutions generate completely original revenue streams versus how much they displace, for example, some of these bespoke datasets, I would say that remains to be seen. The primary point here is there is the opportunity for differentiation.

That's helpful. And then on the Insurance business, there's been underlying acceleration and there's a couple of years where maybe it was growing below trend a few years ago, and you called out some various moment-in-time factors at that point. But I guess, Scott, as you list out the 8 factors that are driving it, they sound largely sustainable. So just -- how are you thinking about Insurance growth at this point? Like, has bookings growth also accelerated? Is bookings growth outpacing revenue growth?

Yes. So yes, you definitely understood what I was saying upfront. All 8 of those trends apply broadly across our company, but specifically in the Insurance vertical. I mean, if you just step back and you say, okay, this environment, this insurance environment, what characterizes it? The customer set is relatively stable. There are occasionally some large merger transactions and there are some segments, like global reinsurance brokers, where there's been some of that. But by and large, the customer demography is steady. Regulation really doesn't change that much. Energy -- or excuse me, technology is a constructive factor as it relates to a company like us because back to the top, every -- virtually every one of our customers believes they can grow faster than their competitors and so everybody is trying to behave innovatively. And so that's just inherently constructive for folks like us. And then if you think about all of the many references that we've made this morning, there are just new things that we're doing and bringing to the market that don't exist. And so it's a constructive environment. I mean, the United States property and casualty insurance industry, our home market, is the granddaddy of large-scale contributory data analytics. I mean, it was invented that way practically. And so we really have this wonderful privilege of being who we are inside of that very constructive environment.

Our next question comes from the line of George Tong of Goldman Sachs.

I'd like to drill deeper into the Financial Services business. You touched on plans to reduce the variability of revenues through the restructuring of contracts. Can you elaborate on the initiatives you have to improve the overall growth of the segment? Because in the quarter, even after normalizing for the year ago implementation revenues associated with thesis, organic growth would've been pretty muted. Any color there would be helpful.

Sure. So George, this is Lee, and I'm going to a refer back to the kind of description and the organization that Lisa gave at Investor Day. And so I think it's helpful if you think about it in the 4 components. The foundation of this business is the benchmarking solutions business. And as we indicated, the growth in that part of the business remains very stable. In addition, the spend informed analytics component remains solid. The 2 areas where, in the fourth quarter, and I think represent our opportunity to make progress, is in the enterprise data management component. And that really is an emerging space. It is one where we are finding opportunities to develop new data management solutions for our customers given our scale, given our expertise. And that's something that we certainly think, based upon feedback from clients, is very positive. But that is something that we'll develop over time. We are encouraged by the initial responses. And the other element is the fraud component. And that's an area similarly where we feel very good about the contributions from our acquisition of the LCI and G2. We're in the process of developing some of the infrastructure, some of the product sets around that. And we think that, over time, that area will also be a stronger contributor to the growth overall. So that would the way I would kind of organize thinking around where we see or where we have immediate focus on improving the growth rate for that business.

Very helpful. As a follow-up, I'd like to switch over to the Energy business. You saw an incremental step-down in organic constant-currency growth there. Can you talk about trends in your nonrecurring revenue streams in Energy and how annualized contract value growth is progressing in light of some of the declines we've seen in oil prices?

Sure. So I think in that, that's principally the consulting component business that was -- it was still growing and growing at a higher rate than our subscription business. But the third quarter was particularly strong and so, I think, that contributed at one level to a slight -- and I would just view it as kind of a slight slowdown relative to the third quarter level. But overall, I think we see progress in the -- continued progress in the subscription component of the business, particularly as it relates to the new breakout initiatives that are generating strong subscription growth within that segment.

I would just add that the recent movement in the commodity is within a range that we don't consider material to the performance of our business.

Our last question comes from the line of Jeff Silber from BMO Capital Markets.

I'll be quick. Just a couple of quick numbers questions. Lee, what should we be modeling for interest expense this year? And also the tax rate guidance that you gave us for a 2019, is that something we should use longer term?

Yes. So on tax, I think based upon what we see right now, obviously, any changes in the -- in tax legislation, I think that 19% to 21% range is a good basis. On interest expense, it is not something that we give formal guidance. We -- obviously, that's going to flux based upon what happens in the business and our capital allocation decisions. So I think kind of starting with the point of just stability in overall debt levels and looking at the average rates is probably a middle of the way road to go. But I wouldn't give you any specific guidance beyond that because that will adjust based upon our capital allocation decisions over time. I would expect that we remain within this leverage range absent any other material changes.

Okay. Well, thank you all very much for your continued interest in Verisk, and we look forward to following up with a number of you as well as those who are taking a new look at Verisk based upon our new capital policy, including the dividend.

So look forward to our continuing conversations with you. Thanks. Thanks for this morning, and your attention.