Verisk Analytics Inc

NASDAQ:VRSK

Earnings Call Transcript 2017-Q4

[Operator]

Good day, everyone, and welcome to the Verisk Analytics Fourth Quarter 2017 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 Chief Financial Officer, Mr. Lee Shavel. Mr. Shavel, you may go ahead.

[Lee Shavel, EVP & CFO]

Thank you, Heidi, and good morning, everyone. We appreciate you joining us today for the discussion of our fourth quarter 2017 financial results. With me on this call this morning are Scott Stephenson, Chairman, President and Chief Executive Officer; and Mark Anquillare, Chief Operating Officer. Following comments by Scott, Mark and myself highlighting some key points about our financial performance, we will open up the call for your questions.

Unless stated otherwise, all results we discuss today will reflect continuing operations. All discussions of EBITDA reflect adjusted EBITDA, for which you can find a reconciliation in our press release. 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. Information about the factors that could affect the future performance is contained in our recent SEC filings.

Now I will turn the call over to Scott Stephenson.

[Scott Stephenson, Chairman, President & CEO]

Thank you, and good morning. It's a real pleasure to welcome Lee to his first earnings call as Verisk's new CFO. Lee's experience and insight from his time as NASDAQ CFO are already contributing to developments at Verisk. One of the first jobs he and I agreed on was for him to do a listening tour of some of our major institutional shareholders to hear your candid feedback about your likes and dislikes for owning Verisk is concerned. This has been the healthy exercise we expected, and we believe your feedback will be expressed in our evolving policies and communication practices in the coming quarters. Lee has already been able to complete an annual budget cycle with us, and so he has quickly become grounded in the rudiments of our business.

As we described in our recent Investor Day, Verisk advances by achieving strong levels of organic revenue growth, and the primary driver of high-quality organic revenue is the sale of multiyear subscriptions. A multiyear subscription is the best demonstration that our solutions have moved from nice to have to must-have. Over the last 90 days, there have been several encouraging developments, to name three, First, Argus acquired a large multiyear subscription agreement along with the associated data rights with the only major credit card issuer in the English-speaking world that was not a customer. Second, WoodMac saw good progress in the number and value of subscription agreement signed. And third, in the insurance vertical, against a backdrop of many contract signings, we had 3 companies choose to focus exclusively on our catastrophe models and saw 2 other companies make an exclusive commitment to our Geomni program of imagery capture and analysis. But perhaps most important of all, we have the chance to see the value of our industry standard solutions tested in the context of the merger of 2 carriers and are very pleased with the degree to which our value and subscription price points stood the test as we finalized that new agreement.

Subscriptions, of course, can cut both ways. When they are lost, it takes even more sales success to compensate and grow. In 2017, we had such conditions at work at Argus, where 2 government and 1 legacy subscription agreement rolled off with a reduction of about $11 million in annual revenue. As we assess our business into 2018, we observed the following across our several thousand customers, we see no material risk at this time of a lost customer relationship in the insurance and financial services verticals. And in energy, two accounts that produced subscription revenue in '17 will be combined into one as a result of a merger with relatively immaterial impacts. The substantial majority of our customer relationships are showing year-over-year increases in revenue related primarily to the adoption of more of our product suite. We are aware of only two accounts, one in financial services and one in energy, where we expect year-over-year revenues to be down materially in 2018.

In the financial services example, this is due to the phenomenon we have previously described, where first year revenue spike due to implementation, thereafter followed by a steady but lower level of high-quality subscription revenue. In the case of energy, the customer no longer exists due to merger.

Our industry-standard solutions will show growth in 2018, but at a slightly lower rate than in '17. Because of general softness in the insurance environment and to preserve our cross-sell opportunities, we deliberately moderated growth for '18 to a modest degree. However, we see hardening in the market, and we expect that in '19 we will be at or above the growth rate of '17.

WoodMac growth continues to move to the positive. In '18, the growth will primarily relate to cross-selling and expansion of exciting product sets, including subsurface analytics, renewable energy sources and chemicals. We are still minimizing price increases in '18 in support of cross-selling opportunities, but expect the '19 and beyond to make more use of pricing in our overall growth mix.

One of the best leading indicators of our organic revenue growth is the number and quality of meetings we had with senior decision makers at our customers, in which we explore new opportunities for value creation. In that context, it is encouraging that in the last 90 days, we, on 3 occasions, had company CEOs asked to bring themselves and their senior teams to our offices to observe Verisk's InsureTech and jointly develop new or bespoke solutions.

Another leading indicator that has meaning for me is our success in winning business with the newer entrants into the markets we serve. For example, the world is alive with interest in the InsureTech space. Of the 8 leading InsureTech firms founded in '16 and '17 that operate as risk-bearing or risk-managing entities, 6 of them are currently customers of Verisk. I take that as evidence of the freshness of our value proposition.

We're busy at work integrating the companies we acquired in 2017. The work of integration have 3 different flavors at this moment, first, we acquired seven regional image capture companies with the intent to merge them into one integrated national entity. Success in this endeavor is really entirely a function of integration since this is core to the value proposition. I'm pleased with our progress here. At the end of last year, with all the extreme weather events, the flexibility and integration of our operations was tested. And I was pleased to see that the quality and responsiveness of our image capture, which is driven by the integration of our platform, permitted us to image Puerto Rico following Hurricane Maria with such speed and precision that we unlocked business with mortgage lenders who were not previously customers.

At the other end of the spectrum, PowerAdvocate and Sequel are relatively mature organizations, where, in addition to financial and HR integration, the primary work is to link their platforms to those elsewhere in Verisk. Specifically, PowerAdvocate to WoodMac oil and gas analytics and Sequel to AIR's Touchstone modeling platform. Teams are well underway on this work. In fact, we've recently signed a major contract with one of the world's largest national oil companies, which involves deliverables on the part of both PowerAdvocate and WoodMac. Both teams report this sale would not have happened had the 2 companies not come together.

The third category is a series of smaller product organizations, most of them in insurance, where the immediate work is to harness the Verisk distribution channel to increase sales. We are well underway with this work.

At our recent Investor Day, I described the 5 qualities that make our company a moated business, which can produce strong organic revenue growth on a sustained basis, those being, one, vertical market expertise; two, unique datasets, ideally contributed by our customers; three, deep integration with customer workflows; four, global reach leading to an expanding customer account; and five, synergies arising from the sharing of methods and capabilities across our enterprise. I see progress on all fronts. And over the last 90 days, I'm particularly struck by our growing effectiveness in overseas markets, particularly the U.K. As a result, our organic revenue growth in the quarter was 7.6%, consistent with our longer-term goals. Our rate of organic EBITDA growth in the quarter was about 5%, lower than revenue growth and a function, particularly, of the significant investment we made in Geomni as we continue to ramp up that operation. In 2018, I expect that relationship to be reversed, meaning enterprise organic EBITDA growth greater than organic revenue growth.

I'd like to comment on the corporate tax reform that was enacted at the end of 2017. Lee will take you through the specific implications for Verisk as regards our tax rate and the after-tax cash flow and accounting implications. From a strategic perspective, we are treating this as an opportunity to reinvest in our people. And so we have taken the decision to double our training budgets in most categories and to materially increase our contributions to long-term wealth for our people in the form of greater 401(k) matching and expanded employee stock purchase programs. We have built all of these investments into our 2018 budget and still expect a strong bottom line this year. After the additional free cash, we intend to be disciplined with our investor's money, looking for the highest-return investment opportunities and looking favorably on opportunities to return capital to shareholders.

With that, I'll hand it over to Mark for some comments on the insurance business.

[Mark Anquillare, EVP & COO]

Thank you, Scott. In our insurance business, we had another strong quarter, with all insurance-facing businesses, industry standard programs, catastrophe modeling, repair cost estimating, planes analytics and remote imagery contributing to the growth.

Let me highlight a few areas that drove top line growth and update you on several initiatives to aggregate new sources of data to better position us for growth in the future. Our claims businesses, repair cost estimating and claims analytics experienced a nice uptick in growth in the second half of 2017. We have been successful expanding our insurance fraud prevention business, claims analytics, by broadening our use cases, aggregating additional information, licensing our antifraud analytic tools and extending beyond our traditional insurance customers to entities such as self-insured companies and third-party administrators. In most cases, these opportunities take the form of multiyear contracts, but in some instances, start as a paid proof of concept. We're optimistic about these extensions of our business.

We've also experienced a surge in opportunities in our workers' compensation solutions business, bringing on several major new accounts during 2017. Over the past couple of years, we've invested to provide increased automation and enhanced [indiscernible] to our customers. This investment has proven successful as we implement new customers and attract a growing sales pipeline.

During the fourth quarter, Geomni, our business that harnesses remote sensing and machine learning technologies to provide information about residential and commercial structures, deployed one of its regional hubs to proactively capture aerial imagery in response to the Southern California fires. Imagery collected helps document the areas affected, provide operational efficiencies and accelerate the damage estimation and restoration process for homes and commercial buildings, helping insurers protect people and property. As Scott mentioned in his earlier comments, we have made significant progress at Geomni, signing new customers, advancing the analytics and building geographic coverage.

We were thrilled to sign an exclusive agreement with Honda to join the Verisk Data Exchange in the quarter. Honda will provide Verisk with driving data from consenting owners of Honda's connected cars. Honda customers can access the Verisk Driving Score, a simple metric that rates the driving behavior. Insurers can use the data from the Verisk Data Exchange with their usage-based insurance programs, typically designed to reward safe drivers or use Verisk driver behavior scores that are filed and approved for use today in 43 states. With the addition of Honda, the total market share of automakers participating in the Verisk Data Exchange increased to 27% of vehicles sold in the United States. The exchange now has close to 3 million cars, with 30 billion miles of driving data. And it's growing at more than 150,000 vehicles each month. This telematics information is a key component of our broader mission to aggregate remote sensing information and find insights to help our customers. This remote sensing data includes information from mobile devices, connected homes, connected buildings. For example, with connected homes, our research using IoT data has shown opportunities for Lyft or improved underwriting results for our customers writing homeowners' insurance.

International expansion is an important part of our long-term growth plan. AIR continues to lead our international expansion efforts as PICC Reinsurance Company Limited, a leading Chinese reinsurance company, has collaborated with AIR to better assess and manage its growing portfolio of catastrophe risk reinsurance business. Another positive on the international front was our introduction of a new inland flood model for Japan, along with enhancements to our Japan typhoon model. The integration of our new international acquisitions has progressed smoothly. The newly acquired businesses have gained immediate benefit by leveraging Verisk's technology infrastructure and cloud capabilities.

Specific to Sequel, we work conjointly with clients to enable seamless data transfer from Sequel's business intelligence tools to AIR's Touchstone Solutions. In the longer term, our goal is to integrate Sequel's front-end exposure management and visualization platform with ISO's underwriting information and portfolio assessment and modeling features of AIR. This modular approach will allow product cross-sell with Sequel customers as well as existing Verisk customers. Our integration efforts at Sequel are also working in 2 directions, as evidenced by an opportunity for our claims analytics business to leverage some existing Sequel software to serve our U.S. claims analytics customers.

All in all, both qualitatively and quantitatively, we are pleased with the performance of the insurance business.

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

[Lee Shavel, EVP & CFO]

Thanks, Mark. Let me start by saying what an honor it is for me to be here and to have the opportunity to serve this great company and its shareholders and work with Scott and his management team. As Scott mentioned, I've had the opportunity in the past 2 months to meet or speak directly with 18 of our top 25 active investors, representing 50% of the active voting interest of our shareholders. We spoke about a wide variety of topics, and I've received many thoughtful perspectives, but 2 areas came up consistently, one, a desire to better understand our capital management discipline; and two, improve transparency and communication of our financial and operating performance. In both areas, I'm confident that we'll demonstrate improvements in 2018. And to that end, we'll be implementing a quarterly earnings presentation for the first quarter of 2018 that will provide a consistent structure for reviewing the company's performance across our business lines, and we are considering other enhancements based on the feedback I've received.

Moving to the financial results for the quarter. I'd like to start by focusing at a high level on the two key financial metrics that we discussed at Investor Day, organic revenue growth and organic EBITDA growth. Verisk demonstrated very solid growth performance and momentum in the fourth quarter. Organic revenue growth of 7.6%, 7.4% on a constant-currency basis, was consistent with our long-term guidance and was an increase in the comparable third quarter 2017 year-over-year growth of 6.5% or 7% on a constant-currency basis. Average quarterly organic growth on a constant-currency basis in the second half of 2017 of 7.2% compared to 3.3% for the first half, substantiating the expectation we had of acceleration in the second half.

I would note total acquired revenue in the quarter from all deals that haven't moved into organic was $26 million and revenue from the 3 August acquisitions, G2, Sequel and LCI, contributed $16 million in the quarter, with combined margins of around 36%, as expected.

For the full year, Verisk delivered organic revenue growth of 4.5% and 5.3% on a constant-currency basis, below our targeted level as the result of industry headwinds at WoodMac and the contract expirations at Argus that reduced revenues from 2016, particularly in the first half.

A quick side note on revenue accounting and as required, the company will be adopting the new revenue recognition standard, ASC 606, in the first quarter of 2018. We expect the impact to be immaterial to our financial results.

So breaking down the organic revenue growth. As you will see in Table 2 in the press release, Decision Analytics and, particularly, Decision Analytics insurance was the primary contributor to this organic growth at 12.9%, with strong growth in repair cost estimating and claims analytics solutions, with good growth in underwriting solutions also. The positive financial impact of severe weather on our business in the third quarter spilled over into the fourth quarter and contributed about $8 million in repair cost estimating and imagery-based solution revenue. Even excluding this revenue, organic insurance revenue growth was 8.2%.

Decision Analytics energy demonstrated an improvement to 5.2% organic growth in the fourth quarter, up from 0.2% in the third quarter. Given the currency impact for energy, principally WoodMac, I would note that, on a constant-currency basis, energy revenue growth was 4.7% and has increased for each of the prior 3 quarters. We are pleased to see the trends in our subscription business continuing to be positive, complemented by good consulting revenue number, which is typically a leading market indicator.

At Decision Analytics financial services, they delivered growth of 0.4% in the fourth quarter, which represented a reversal from the prior 3 quarters of year-over-year decreases as a result of contract expirations. Organic growth was driven by strength in analytical data warehousing products, share of wallet model algorithms and media effectiveness solutions. We continue to win significant new business with clients, as Scott described, in media effectiveness, analytical solutions, competitive benchmarking, decisioning algorithms and regulatory solutions. G2 and LCI continue to integrate well, with joint product roadshows underway, which have been well received by clients. Fintellix has also contributed by driving new products in the insurance sector. We believe that financial services demonstrated clear progress in the fourth quarter, and we remain confident that it will contribute to organic growth in 2018.

Risk Assessment generated 5.3% year-over-year growth for the period, also up from 4.9% in the third quarter and having steadily increased over each of the 4 quarters in 2017. Organic growth was driven by the annual effective growth in 2017 invoices as well as new solutions in industry-standard insurance programs and an increase in underwriting solutions subscription revenue.

Organic EBITDA growth was 4.9% for the quarter on a year-over-year basis compared to organic revenue growth of 7.6% and reflected organic cost of revenue and SG&A expense growth of 9.7% as the result of continued investment in several internal opportunities, including Geomni most notably. For the year, EBITDA growth was 4% over 2016 compared to organic revenue growth of 4.5% as the result of 5.2% full year growth in the cost of revenue and SG&A, also reflecting continued internal investment in several growth opportunities and organic revenue growth below targets at Argus and WoodMac relative to expense growth.

Excluding the impact of expense related to internal investment initiatives, organic EBITDA grew at a higher rate than the organic revenue growth in 2017.

Adjusted EBITDA from continuing operations margin was 49% for 2017, down slightly from 50% in 2016, primarily of -- as the result of the impact of acquisitions. On an organic basis, EBITDA margin was essentially unchanged.

Depreciation and amortization was $64 million in the quarter, up 25 -- I'm sorry, up 28% from the prior year quarter and $237 million for 2017, up 12% from 2016, reflecting the impact of acquisitions and increased capital expenditures in both periods. We expect fixed asset depreciation and amortization of about $150 million to $160 million and amortization of intangible assets of about $130 million in 2018.

Interest expense was $32 million in the quarter, up 13% from the prior year quarter, and $119 million for 2017, down 1% from 2016.

Total debt was $3 billion at December 31, 2017. Our leverage at the end of the fourth quarter was 2.7x, and we expect to bring our leverage back to our reference level of 2.5x over time. Our cash and cash equivalents were about $142 million at the end of 2017.

Our reported effective tax rate for the quarter was a negative 14.1% and a positive 19.7% for the full year of 2017. These effective rates reflect an $89 million benefit from the revaluation of our net deferred tax liabilities resulting from recently enacted tax legislation. We estimate our effective tax rate in 2018 to be between 21% and 23%.

Diluted adjusted EPS from continuing operations was $1.34 for the fourth quarter, up from $0.80 in the prior year quarter and $3.74 for 2017, up from $3.11 in 2016. The increase in both periods primarily reflects, naturally, the impact of 2017 tax reform. Excluding the tax reform benefit of $0.53 per share in the fourth quarter, diluted adjusted EPS was $0.81 for the quarter, up 1% from the prior year, and $3.21 for 2017, up 3% from 2016. The average diluted share count was 168.3 million shares for the quarter, and our diluted share count at the end of 2017 was 168.7 million shares.

Moving to cash flow. Net cash provided by operating activities from continuing operations was $744 million for 2017, up 34% from $556 million in 2016. Capital expenditures from continuing operations were $184 million in 2017, up 26% from $146 million in 2016, reflecting primarily increased investment in Geomni. We anticipate capital expenditures to be between $220 million and $230 million in 2018, including the continued investments in our aerial imagery solutions at Geomni that will peak in 2018. Subsequently, we expect CapEx as a percentage of revenues to steadily decline.

Free cash flow was $560 million for 2017, an increase of 9.8% after excluding $100 million of taxes paid related to the sale of the health care business in 2016. We repurchased 3.4 million shares in 2017 for a total return of capital to shareholders of $270 million at a weighted average price of $80.39. At December 31, 2017, we had $366 million remaining under our share repurchase authorization, and we expect to continue share repurchases in 2018.

So in summary, the results for 2017 reflected some growth challenges in the first part of the year at Wood Mackenzie, resulting from the cyclical decline in the energy sector along with FX headwinds and from certain contract expirations at Argus. Both businesses demonstrated revenue progress in the second half, with strong performance in our insurance business, helped in part by revenue generated by an exceptional level of severe weather in the third quarter. We returned to our targeted organic revenue growth in the second half of 2017. We remain confident in our long-term organic growth targets, particularly if growth continues to improve at both WoodMac and Argus as we saw in the second half. We are pleased with our 2018 plan. We're excited about the opportunities to invest, looking to drive long-term profitable growth. We remain confident that we have the financial strength and capital structure to support investments for the long term.

We continue to appreciate all the support and interest in Verisk. [Operator Instructions]. And with that, I'll ask the operator to open up the line for questions.

[Operator]

[Operator Instructions]. Your first question comes from the line of Tim McHugh from William Blair & Company.

[Timothy McHugh, William Blair & Company]

Can I ask about the comment, first, related to industry standard programs? I guess, one, just elaborate on why, I guess, take a little bit more cautious approach to, it sounded like, pricing, essentially. Because I think in the past you've talked about kind of the -- your pricing capability being somewhat separate from the kind of the environment for the insurance industry. So maybe just elaborate on what drove that. And anything about how significant that might be in terms of the [indiscernible] program?

[Scott Stephenson, Chairman, President & CEO]

Thank you, Tim. Let me start with the end. It's not a particularly significant effect, but of course, folks will be watching our year-over-year progression as we go through 2018. So we have visibility into this, so we just wanted to note it. It's not a very material effect. We're talking about basis points. And the reason that we did it was that we've just in the round have accounted for where our insurance customers were as they exited '17, there -- the state of their own businesses. And the most important thing in the growth of our insurance business by far, and I hope that's evident to everybody, is the cross-selling of our total suite of solutions. And so, essentially, we made a decision about where we're going to take our gains in 2018. And at the margin, we're leaning a little bit more towards the other parts of the suite facing our insurance customers. So we just wanted to note it for you. It's not a big effect at all. We wanted to call it out just because it's a line item that we report, but it's not highly material.

[Timothy McHugh, William Blair & Company]

Okay. And just to be clear, that's driven by -- just that you were talking about industry standard, not the broader insurance kind of including Decision Analytics and so forth?

[Scott Stephenson, Chairman, President & CEO]

That's correct. I was only talking about our industry standard line item within the overall insurance suite. The -- we feel very good about the overall insurance business.

[Operator]

And your next question comes from the line of Jeff Meuler from Baird.

[Jeffrey Meuler, Robert W. Baird & Co.]

So just on the comment about organic EBITDA margins expanding in 2018, I guess, just two related questions. So is that before the reinvestment of some of the tax savings? And if so, can you just help size up roughly the magnitude of the reinvestment? And then can you also just give us any sense of the acquisition effect on 2018 margins? There's a lot of moving pieces with acquired/deferred revenue headwinds and some prior acquisitions being anniversaried in that regard in 2017 transaction expenses. So I guess the first question is, on the organic revenue -- or organic margin outlook, does it include the reinvestment? And then if you can help us size up those two pieces, please.

[Scott Stephenson, Chairman, President & CEO]

Right, thanks, Jeff. I'll start, then I'll bump it over to Lee. So with respect to the statement about the projection of organic EBITDA exceeding that of organic revenue, that is before any tax effects whatsoever. So that is net of all the investing that we're doing in the business in total. And so hopefully, that's responsive to your question. With respect to some of the detail underneath, Lee, do you want to add anything to all that?

[Lee Shavel, EVP & CFO]

Yes. Jeff, so I think part of the question is prior to the reinvestment of the tax benefits. And so I think our expectation for the organic EBITDA growth reflects kind of the core business as we are looking at the investment in the growth initiatives. We expect that, that will contribute to margin expansion over time as we reach the fruition on those investments. But as I indicated in my comments, when you exclude those investments, we saw, in 2017, actually an expansion of organic EBITDA margin. And that's where we're really focused currently is, one, what does the -- how is the core performance? How is the core business performing? Secondly, how are the investments performing? And then with regard to acquisitions, what we had provided is the impact of acquisitions in the fourth quarter. It's difficult to predict the overall impact of the acquisitions on the margin over time.

We'd like to focus on that organic EBITDA margin because that's really what we're managing to. Naturally, as we make acquisitions, as you've seen from some of the disclosures, at their level of EBITDA margin, initially, that will have a dilutive impact, but what we're really focused on is that year-over-year improvement that we will see once those businesses come into the organic fold. So hopefully, that gives you some color on the organic EBITDA margin question.

[Jeffrey Meuler, Robert W. Baird & Co.]

That's helpful. And then on the Argus -- or financial services organic outlook, I think there was a moment at the Investor Day where there's a question about should 2018 be an outsized growth year. And I think, Scott, you said it was your expectation, that Nana was nodding his head yes. And then there was a comment today about, I think, a grow-over effect from the onetime revenue in '17 as in -- a large new client comes online. So is the expectation, even including that 2018 Argus, has an outsized organic growth year?

[Scott Stephenson, Chairman, President & CEO]

Yes, it is.

[Operator]

Yes, your next question comes from the line of Manav Patnaik from Barclays.

[Manav Patnaik, Barclays PLC]

The first question, just broadly on, I guess, organic revenue growth in '18. Scott, you answered a lot of, I guess, moving pieces and comments. And I think, in insurance, you said 2019 would be bigger than '17. I was wondering if I heard that correctly. Just in the context, Lee, you also walked through -- obviously, second half in line with the long-term organic growth, a range that you'd set out. So I guess, just trying to put those all moving pieces you laid out in front of the call, how should we think of '18 exactly?

[Scott Stephenson, Chairman, President & CEO]

Right. So again, this was Tim's question as well. My comment about moderating price increases related only to one part of what we do insurance, and that's industry-standard insurance programs. And I called it out only because it's a line item that we report separately. So you get to see it. It's a relatively immaterial impact. So hopefully, everybody is clear on that. With respect to the sum of everything that we do in insurance, which is both that as well as all the things that we do in DA insurance, we see '18 as a very positive year. And so the only thing you should add to that, with respect to my '19 comment, is there will be even a little more wind in our sails in '19 with respect to the industry standard insurance programs because of the hardening that is taking place in the premium environment in insurance. So we see '18 as a good extension of what you saw in the latter half of '17. And in '19, there's one macro factor that will actually be positive as we go forward from '18.

[Lee Shavel, EVP & CFO]

So Manav, just to address some of the comments that I was making, first, the targets that we have set out of 7% to 8% organic revenue growth and the EBITDA expansion beyond that, I think, if you look at the fourth quarter, I think the summary that we offered is that we've achieved those targets even though we continue to have progress to be made at both WoodMac and at Argus. And so that is something that we feel positive about the -- our ability to continue to deliver on those expectations in 2018. And clearly, there is continued upside for us factoring in all of the elements that we discussed.

[Manav Patnaik, Barclays PLC]

Got it. And then my second question is just more on these organic investments you are making and sort of the time of phasing in which we should expect some of the results. So obviously, Geomni sounds like you've already seen some of the fruition with the extreme weather activity. But when do we see telematics, connected home, all these other things you talk about, start giving you that return you're expecting?

[Scott Stephenson, Chairman, President & CEO]

Right. So let me start here. And Mark, if you care to add anything. Because -- and something that I'd like to just highlight here is that Geomni and telematics both represent a very important theme inside of our business, and that is new types of data that can be pulled in for new forms of decisioning. And one of the things I want to say from the outset is that both of those data types have application in the insurance vertical. They also have application outside of the insurance vertical. So as you think about how we're going to monetize the investments that we're making, I believe what you'll see is -- I believe what we will see is that they will first express themselves mostly in the insurance vertical, but then as we go forward, they will both expand inside of that vertical, but also find ways to grow in other marketplaces. So that's kind of the general story here. So now back to your question then.

Yes, we're seeing the fruits of the Geomni investments write down very exciting developments. And so that's really very realtime. We're encouraged by what we see on the IoT front, but it's going to be more of a progressive build in terms of the absolute amount of revenue dollars which are generated by IoT. There are reasons for that, I'll highlight one, Mark, maybe, you'd like to add some others. So we talked about the connected car movement. I feel very, very pleased with the leadership that we're showing in that category. We are the leader in that category. But the rate at the which connected cars grow as a percentage of the total population of cars in the United States, that is a longer-term trend. It will take a while for all of the automakers to essentially have turned over their existing fleets and for all cars to be natively connected. So that's kind of a long -- a big wave, but it's a slow wave or steady wave that is moving through the auto world.

The effect of IoT in the home, in some ways, may be a little bit faster, but in some ways a little bit slower because of the value associated with the signal that you take off of a car is, in some ways, may be greater than the value of the signal that you take off of a washing machine or a toaster. And so I think IoT -- we are seeing IoT today. It's building, but I think it's kind of a long -- it will be a longer-term sort of a build. Anything you want to add to that, Mark?

[Mark Anquillare, EVP & COO]

I think it's well said. I mean, I think the vision is that the rating paradigm will shift as to how automobiles and more importantly people are underwritten in the premiums determined. And we hope to have all that information for every vehicle and every person. At the same time, today, it's a little bit about claims, and so it's a little bit about bespoke modeling to help insurers kind of perfect their own internal behavioral scores.

[Operator]

And your next question comes from the line of Hamzah Mazari from Macquarie Capital.

[Hamzah Mazari, Macquarie Research]

My first question is just broadly on pricing. I know you mentioned the insurance piece, and it's not significant. But you also mentioned minimizing price increases on cross-selling in WoodMac with some potential in 2019 on pricing. So just broadly speaking, do you guys view pricing as an underappreciated lever for the business as we look long term? Or is it just you have very high market share and pricing is not a huge lever here because of cross-sell?

[Scott Stephenson, Chairman, President & CEO]

Yes. So let me state this in two ways. Pricing is a part of the progression of our revenue every year, including in 2018. I noted the relative degree to which we're making use of the price mechanism in 2018 in one part of what we do in insurance and in energy. But even in that part of insurance and in energy, our pricing is up year-over-year. So please be sure to note that. And then all I would add to that is, in 2019, I believe that there will be, relative to 2018, yet more opportunity where price is concerned for the reasons that I stated. The insurance environment generally hardening on the one hand and Wood Mackenzie's customers continuing to cycle to evermore strength as the commodity cycle has improved. So '18, there is a price effect. It's relatively in line with what was there in '17. I noted the differences. And in '19, I believe the price effect will be even stronger than it was in '18 -- it will be in '18.

[Hamzah Mazari, Macquarie Research]

Very helpful. And just a follow-up question, maybe for Lee on tax reform. Could you remind us -- I know you gave the book tax rate, 21% to 23%. Could you remind us what the cash tax savings impact is in 2018 from tax reform? And in relation to that, you guys are going through a heavy CapEx cycle and that comes down in 2020 or 2022, I guess. Do you pull forward CapEx because of tax reform rules? Just give us a little more detail on tax reform.

[Lee Shavel, EVP & CFO]

Sure. Thank you, Hamzah. So the answer to your question on the tax rate, so we would anticipate that the drop in our U.S. tax rate resulting from tax reform will generate approximately an incremental $90 million of additional cash flow in 2018. And with regard to whether that has any impact on our CapEx timing, I think the answer is no, that we view each of those projects as pursuing their natural life and our expectations of investing in them from a business standpoint. So no anticipated change on that front.

[Operator]

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

[George Tong, Goldman Sachs Group]

You had indicated your overall insurance growth in 2018 should run at a similar pace as the second half of 2017 organically. Given some of the strength in the second half of '17 came from weather-related catastrophe modeling, is the expectation that you'll see incremental strengthening from other areas within insurance?

[Scott Stephenson, Chairman, President & CEO]

Yes, that's right. And Mark, I don't know if you want to expand on that.

[Mark Anquillare, EVP & COO]

I think we feel pretty good across all of our businesses. Clearly, we did benefit from the severe weather. It's tough to predict severe weather in the future, so I note your point. But I think we feel like both contract signings, which were strong at the end of 2017. And most of our businesses are deeply engaged with customers and that ultimately pays benefit.

[Scott Stephenson, Chairman, President & CEO]

You'll remember that Mark started his comments commenting on the claims side of our business. So for example, there's a lot that is in that, that actually is not related to severe weather impacts. And so as we look at the portfolio of solutions across everything we do in insurance, yes, we do see broad performance on to the rate of organic revenue growth and insurance that you've seen in the second half of '17.

[George Tong, Goldman Sachs Group]

Got it. Very helpful. And then secondly, you've obviously made a number of acquisitions in 2017. Can you elaborate on your overall progress in integrating these acquisitions, particularly as it relates to realizing synergies? And when you might expect these acquisitions to be margin-neutral to the company?

[Scott Stephenson, Chairman, President & CEO]

Yes, so you're actually asking -- yes. And you're asking two very different questions. So one of them is the integrations are well in hand. You'll remember I commented on sort of the three different categories. So there's the category of integration as it relates to image capture, where we needed to create a national capability out of a set of regional businesses. That is substantially achieved. And I was earlier recounting some of the success we had in the fourth quarter of 2017 in using that capability where it was really put to the test because we had -- third and fourth quarter, where we had to move -- we had to keep our feet moving really quickly to keep up with events.

And so I think we've demonstrated that, that integration has really been achieved. At this point, the margin progression of what we do at Geomni is a function of just growing the business. It is -- it's not entirely a fixed-cost business, but substantially a fixed-cost business. So as we grow it, the margins will naturally ripen. The other question that you were asking was about the likely intermediate and longer-term progression of margins at the acquired businesses. With the more mature businesses, for example, Sequel and PowerAdvocate that we talked about before, their margin profiles are already good. They're not at the level of the rest of Verisk, but we would expect, as they grow, they will tend to move in that direction. And then there's a handful of smaller acquisitions that were more in the nature of product organizations, and we don't necessarily hold those to the test that their margins have to reach the absolute level of the rest of what we do across Verisk. But incrementally, the growth in the EBITDAs will be positive.

[Operator]

And your next question is from the line of Bill Warmington with Wells Fargo.

[William Warmington, Wells Fargo Securities]

So a question for you on underwriters and automation. There are a number of tech start-ups looking to accelerate automation in underwriting. They have some catchy names, like Pie Insurance and Lemonade. And how does Verisk interact with these start-ups? Do they collaborate, compete, wait and see?

[Lee Shavel, EVP & CFO]

So I'm happy to start there. I think, first of all, you should understand with a lot of these start-ups, from an InsureTech's perspective, there's two types, right. There's some that are risk-bearing entities. And I will tell you, in many cases, as Scott highlighted, they are customers. There's a couple instances where the amount they spend on us was actually more than they actually wrote in premiums. So those are good relationships, and they're very dependent upon us as they want to become very analytic. I think your other question is really around the InsureTech world that is kind of very blossoming now. And we talk frequently, most of the ones that have started to get a little bit of lift or actually have a customer or two are usually at our door. And I think we are very well in tune with that environment and that world. The other thing I'd like to highlight, I think a lot of our customers, and I think we believe ourselves to be kind of, in many cases, the ultimate InsureTech.

We do a lot of this. We spend a lot of time on R&D. We have a lot of cutting-edge analytic methods, some in search of application, some with ideas around application, and we share that with customers. And I think that thought leadership is something that is well respected.

[William Warmington, Wells Fargo Securities]

So for my second question, congratulations on the Honda win. You have 27% share. I guess, my question is, when do you hit the tipping point for more accelerated adoption?

[Lee Shavel, EVP & CFO]

So I'll do that again. Let me try to highlight. I think we have, for the most part, most insurers now focusing on us as a source of that information. What we need to do, and the industry is going to transition over time, is that not all cars -- as a matter of fact, smaller fraction of cars are connected today. So the way we get information about the car and the vehicle and the driving behavior is a combination of the connected car, which I think is going to be very relevant over the next 5 to 10 years, but also through devices. Your phone has a lot of pertinent information. You opt in. This is all obviously opt-in type of service. And with that information, today, insurers are looking to fine-tune and build models to underwrite. But ultimately, I believe that every pricing decision will tap a database of some form, I hope it to be ours, to understand what that driving behavior was over the past 6 months, and rates and pricing and premiums will change. I think that's the way the rating paradigm will shift for insurance, and we think we're well positioned.

[Operator]

And your next question comes from the line of Alex Kramm with UBS.

[Alex Kramm, UBS Investment Bank]

I want to come back to the margin outlook because, quite frankly, I'm still a little bit confused with all the moving pieces. So, Lee, I guess, when you put it all together, the organic expansion, but also kind of the impact of investments and the acquisitions, I mean, where roughly should we be shaking out for the margins? I mean, it sounds like margins should be down overall a little bit. Is it really just a Decision Analytics story? Or is the Risk Assessment also margin decline? So any incremental comment you can give about the magnitude would be helpful.

[Lee Shavel, EVP & CFO]

Sure. Thanks, Alex. So the way I would summarize it, Alex, and building off of Scott's comments, is that we expect, in 2018, that, on an organic basis, our EBITDA margins should expand. And that is a combination of kind of the total organic business, meaning the core business and the growth initiatives at Geomni and the chemicals and the subsurface at WoodMac and the others that we've described. And so the function of continuing to target the 7% to 8% organic revenue growth and continued improvement in WoodMac and Argus, we believe, will enable us to achieve that EBITDA growth in excess of overall revenue growth.

As it relates to the acquisition impact, obviously, that's a variable that is more difficult to anticipate, and the overall net effect will end up being a balancing of what we can achieve from an organic standpoint in terms of margin expansion, offset to some extent by the impact of the acquisitions that are coming on. And so we are trying to give more focus around that organic EBITDA margin, so that you can see meaningfully the progression that we're making in the core business. And then over time, what I would emphasize is that all of the acquisitions that we look at, similar to our business, have great operating leverage. And so that we expect that they will contribute to overall EBITDA growth in those businesses in excess of their organic revenue growth. So hopefully, that answers it. I know that probably what you're looking for is what is the net impact on the acquisitions to the whole, but that becomes that net impact between the 2. The important thing that we feel we want folks to focus on is that organic EBITDA margin, which we feel confident, will expand in 2018.

[Scott Stephenson, Chairman, President & CEO]

Right. And maybe just to add to that, I write upfront and then Lee also emphasized that we have benefited from the listening tour that Lee has engaged with our investors. And one of the messages that was very clear was that our investors, in general, would like to hear us talk with increased emphasis about organic results, organic revenue growth and organic EBITDA progression. And so you're going to hear that more as a part of our presentation. But we're very excited about the acquisitions also, which are contributing in 2018 to the overall top and bottom line of the company. And we're excited about the contributions they'll make this year and the contributions they'll make in the future. But you're hearing an emphasis on organic because that's what our investors have told us they like us to have.

[Lee Shavel, EVP & CFO]

And let me add one thing just to allay any concerns. It's not because we don't want to be focused on the financial returns or the acquisitions in -- as I've talked about with a lot of investors, the focus there has to be, "Are we generating good returns on capital for that component of the business?" Clearly, it has a financial impact overall, but I want to make certain that we build on the disclosure that we provided at Investor Day around the performance of those entities from a capital standpoint in addition to the financial performance. And so I think that will be something that you'll see in 2018, where we'll be working to enhance disclosure around those components. So just wanted to add that point.

[Alex Kramm, UBS Investment Bank]

All right. Looking forward to more disclosures then, I guess. And then secondly, maybe just shifting to WoodMac for a second. I think you gave some commentary at the beginning, Scott, but I think the fourth quarter -- and I think you highlighted it at Investor Day, again, was kind of like the last renewal cycle post kind of cyclical challenges in the energy market. So I think you said it was good renewals. But can you maybe just add a little bit more color if the worse is now behind us, how that last renewal went? And then looking forward, it tells to me like 2018 is still going to be a transition year, but 2019, maybe, we'll get to the point where this can be the fastest-growing business? Or do how you feel about WoodMac, generally speaking?

[Scott Stephenson, Chairman, President & CEO]

Yes, thank you. And you got me substantially correctly in terms of the message at Investor Day. Let me tune it for you just a little bit. So there are -- it's typically the case with WoodMac that there are a lot of renewals in the fourth quarter and the first quarter. So the quarter we just went through and the quarter we're going through right now always carry a fair amount of meaning in terms of the progression of the subscriptions year-over-year. So you've heard the report about the fourth quarter, which was a positive quarter overall. And we're in the middle of the first quarter, which feels, I would say, substantially the same. There are some larger customers whose renewals are being negotiated right now.

So we're moving through that. But you got me substantially correct from Investor Day in terms of as we round out 2017 and into 2018. And I want to emphasize that there are a lot of positive signals at Wood Mackenzie. Lee referenced one that we watch a lot, which is the progression of consulting revenues, which tend to be a leading indicator of our customers' appetite for everything that we can do. And then yes, you also heard me. I think that '19 will be even more removed from the effects of the commodity cycle that we saw in '14, '15, '16 and even into '17. '19 will just be just 1 more year removed from that. And therefore, I do believe that, in addition to all of the new product opportunities and the cross-sell opportunities, I believe that the price mechanism in '19 will be more available to us than it was certainly in the '15, '16, '17 time frame. And we're choosing to be thoughtful about how we use the price mechanism in '18 as well because we want to get these new products sold. We want to enhance the cross-sells.

[Operator]

And your next question comes from the line of Andrew Steinerman with JPMorgan.

[Andrew Steinerman, JPMorgan Chase & Co.]

I wanted to know what percentage of Verisk insurance revenues are related to reinsurance clients? And how is that segment of insurance revenues doing?

[Scott Stephenson, Chairman, President & CEO]

Mark, you want to take that one on?

[Mark Anquillare, EVP & COO]

Yes. So first of all, I think what we did experience, and we highlighted a few times in 2017, the reinsurance premiums, it was a very soft market, meaning reinsurers were under pressure. It was difficult for our customers. What that led to was some industry consolidation against -- across a couple of those more major reinsurers. And when 2 become 1, especially on our cat modeling side of the world, that did lose -- it did cause us to lose some revenue as a result of those mergers. So I'm not sure I have an exact answer for you. I would say that in the ISO, or industry-standard programs, insurers, as well as reinsurers, use it, the reinsurer piece rather modest. So I wouldn't call that material at all. But inside of our cat modeling business, that probably represents a rather substantial minority of the revenue, and that's where we experienced a little of that headwind back in 2011.

[Scott Stephenson, Chairman, President & CEO]

When you said -- can I just add, Mark? When you said it's less than 10% of everything we do across insurance.

[Mark Anquillare, EVP & COO]

Across everything, absolutely. I was trying to be a little specific.

[Operator]

And your next question comes from the line of David Ridley-Lane with Bank of America Merrill Lynch.

[David Ridley-Lane, Bank of America Merrill Lynch]

Sure. Just following up on some of the comments around WoodMac. I wondering if you could give us an update on the annual contract value trends that you saw in the fourth quarter.

[Scott Stephenson, Chairman, President & CEO]

And thanks for the question, and that really was our comment before about the progression of the business overall. There is a cumulative effect of contract signings. As you know, WoodMac signs multi-year agreements, but you're seeing the progression in the annual contract values in the reported fourth quarter result, which, as Lee pointed out, is substantially greater than the effect -- the overall outcome for all of 2017. So it has got progression over the course of 2017, and that is because of the effect of the renewals that we're signing in '17. So it's been a positive trend.

[David Ridley-Lane, Bank of America Merrill Lynch]

And then at Investor Day, you mentioned, I believe, 8 multi-year agreements signed in the Financial Services segment. You, obviously, had another win -- a credit card win in the fourth quarter. Wondering if those contracts had started to yield revenue in the fourth quarter or if that is all to come in 2018.

[Scott Stephenson, Chairman, President & CEO]

Mostly to come in '18.

[Operator]

And your next question comes from the line of Arash Soleimani from KBW.

[Arash Soleimani, KBW]

Just first question is, when you look at improvements in the resolution of satellite imagery, to what extent could that challenge Geomni's aerial imagery offering?

[Scott Stephenson, Chairman, President & CEO]

Right. We don't see any material risk of substitution at any intermediate period of time, and it's actually likely that it will never be a substitute. And the reason is that you are able to get a degree of precision in your image when you're imaging an object on the face of the earth from, say, 2,000 feet up as opposed to miles and miles up. Two of the major differences, one is geometric. So what you need to be able to do is to be able to observe three-dimensional structure in 3 dimensions. And to be able to do that, you have to image it both oblique -- orthogonally, but also obliquely. When you're miles and miles and miles away, it is very difficult to get an oblique view of anything. So that's the first point. And the second point has to deal with radiometry.

Basically, any signal that you capture, which is a function of looking through the atmosphere, is going to have different properties than if you're not looking through miles and miles and miles of the atmosphere. So now satellites do have one benefit and that is that potentially you can image the same spot on the face of the earth a couple of times a day potentially with satellites. Now it's not as easy as that because you have to actually -- you actually have to change the commands for the satellite to cause it to image something specific, if it wasn't otherwise going to do that, and that's not necessarily inexpensive, but you do have the potential benefit of frequency. So we think there is a role for satellites, in that they can sort of help you with comprehensive global kinds of general laying the foundation of a set of observations. But in terms of the precision that we need to give the answers that we're giving to our customers, we don't see satellites as a substitute.

[Mark Anquillare, EVP & COO]

And maybe just a friendly addition, our solution set includes satellite, aerial, drone, and I'll call it, ground truth, your phones and other type of images. So we are comprehensive in solution.

[Arash Soleimani, KBW]

Okay. Great. And just quick numbers question. I know you mentioned the 21% to 23% tax rate. Should we still be using something slightly different for amortization?

[Lee Shavel, EVP & CFO]

I would recommend that you use the 21% for the amortization of intangibles.

[Operator]

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

[Toni Kaplan, Morgan Stanley]

I want to ask the margin question again in a different way. So you mentioned doubling the training budgets and rewarding employees with the tax savings. That sounds to me like it rolls into OpEx, and so that would impact EBITDA. So just want to confirm that organic EBITDA includes these -- this extra spending.

[Scott Stephenson, Chairman, President & CEO]

That is correct. It does include those -- these extra categories of spending.

[Toni Kaplan, Morgan Stanley]

Okay. Great. And then I think, when you answered Hamzah's question earlier, the $90 million of savings, is that all going to be spent on this? Or are there other areas as well?

[Scott Stephenson, Chairman, President & CEO]

I'm sorry. What was it?

[Lee Shavel, EVP & CFO]

Your question is whether the full $90 million is being spent on the educational opportunities?

[Scott Stephenson, Chairman, President & CEO]

No. The way I would put it to you, Toni, is that the very vast majority of the tax benefit is available to our shareholders.

[Toni Kaplan, Morgan Stanley]

In the form of buybacks?

[Scott Stephenson, Chairman, President & CEO]

Well, we'll determine how we're going to deploy capital, but it is free cash flow that is available to invest on behalf of our shareholders, whether it's buybacks or M&A activity.

[Lee Shavel, EVP & CFO]

It will be deployed in the same process that we use for the capital we generate internally within the business, which is where do we see the best returns on -- returns for that capital across the range of internal investments, external investments and share repurchases.

[Scott Stephenson, Chairman, President & CEO]

Let me try to summarize. I realize everybody is trying to put it all together really quickly. Let me try again. Lee, keep me honest. Our rate of organic revenue growth in the second half of '17 overall was 7-plus percent. We're happy to compete with that as our benchmark for 2018 overall. Full stop. The second statement is, we expect -- and that's an organic revenue statement, that's the first statement. The second statement is, we expect our rate of organic EBITDA growth to exceed our rate of organic revenue growth, and that is with all of those educational and wealth opportunities for our employees built into what we're talking about.

[Operator]

And your next question comes from the line of Joseph Foresi with Cantor Fitzgerald.

[Joseph Foresi, Cantor Fitzgerald & Co.]

I guess what we're wondering is what do you expect the reported margins to be in 2018, up, down or flat? And it sounded like, by your comments, I guess we're wondering how to start our model and maybe any order of magnitude around those. It sounded like, by your comments, that acquisitions could depend on -- or could determine where they end up. Are we really wondering about the reported margin.

[Lee Shavel, EVP & CFO]

Yes. So Joseph, as we've indicated, we are focused on the organic margin. We expect that to expand. The impact of acquisitions is difficult to predict. We aren't making a prediction or a forward-looking statement as to what the reported impact is. We wouldn't anticipate that, that is going to have a material impact on our overall margins, but it's something that we aren't providing any expectations for 2019 on at this point.

[Joseph Foresi, Cantor Fitzgerald & Co.]

Okay. And then you talked a little bit about some contracts that are moving around, and maybe some slowness in FS and energy in the beginning. I'm wondering, could you talk about the cadence of revenues and margins throughout 2018? And do you expect it to be linear? Anything that we should be aware of from contracts rolling on and off? Anything around that nature?

[Scott Stephenson, Chairman, President & CEO]

Yes, let me come back to what I said upfront. We have thousands and thousands of subscription agreements, many of them multi-year. The report that I was providing upfront was that, as we look across all of those, virtually 100% of those relationships are remaining intact in 2018, and the vast majority of those relationships are showing year-over-year progression in growth and value. That's what's happening in our business in 2018.

[Operator]

And your next question comes from the line of David Togut with Evercore ISI.

[David Togut, Evercore ISI]

You've highlighted capital management discipline as the number one point of feedback from your top investors post your listening tour. Could you expand upon that a little bit in terms of how you expect capital allocation priorities to change going forward? Historically, they've been very focused on buyback and acquisitions. Are you going to toggle more toward buyback going forward?

[Scott Stephenson, Chairman, President & CEO]

Yes. So thank you for noting what has been our practice, which is we've always been very comfortable with return -- and we lean into returning capital to shareholders, and we've also found the program of acquisition to be very productive over time. Hopefully, everybody had a chance to see our presentation at the most recent Investor Day, where you saw that, for both the largest deals that we've done over a 10-plus-year time period but also the small and medium ones that we've done, the rate of return on both of those has been in double digits, somewhat higher for, actually, the larger deals. But that whole program has been very productive for our shareholders. So we remain alert to the opportunities.

At any given moment, we're going to take account of what are the conditions in the market. What is there that when you put it together with Verisk you actually get something special, which is different? Hopefully, you caught the reference in my remarks earlier to the fact that you put PowerAdvocate together with Wood Mackenzie, and you have a significant sale that would not have happened if we had not put those two companies together. So that's the logic behind the M&A program. But of course, we're also going to reference what are prices in the market. And we're going to be thoughtful about ultimately what is the rate of return that we expect for the capital that we invest? And so it's not -- so I think what you can expect from Verisk over long periods of time is a balanced approach, where I believe that it will be the case that it will make sense to return capital and it will make sense to deploy capital thoughtfully in the M&A program. And at any given moment, the balance will be a function of the real-time conditions. I -- hopefully, you've heard Lee say that we definitely expect to be returning capital to shareholders in 2018.

[David Togut, Evercore ISI]

Understood. As a follow-up, could you update us on your joint venture with Total System Services, Argus and TSYS? And any extent and more broadly of Argus' business in the card issuer processing market in terms of joint ventures in particular?

[Scott Stephenson, Chairman, President & CEO]

Right. So first of all, we're very pleased with where the TSYS relationship stand, and it is fully on course, exactly what we expected when the relationship was put together last year. And you're right. There are other processors out there in the world. And as you would imagine, we're in dialogue with them. And actually, we have not sort of named all the folks with whom we work even today. So that is a -- there are several companies in that category. We talked about TSYS because it was a large event. They're not the only company with whom we work today in that category. And we are definitely in pursuit of additional relationships in that category.

[Operator]

And your next question comes from the line of Gary Bisbee with RBC.

[Gary Bisbee, RBC Capital Markets]

Let me -- I hate to do this, but I need to go back to the margins. So I think we all appreciate the focus on organic, but of course, we model to all-in, including the deals. And I guess I struggle to understand why it's so difficult to project the acquisition. So if we look at the Decision Analytics, nearly 300 basis point margin decline in 2017 and a lot larger decline in Q4, specifically. Can you break out for us, looking backwards, how much of that was deal costs and short-term integration payments that maybe somewhat less likely to recur versus just dilution from bringing on revenue that had an initial lower margin attached to it that will likely persist until you annualize these? And a second part of the question is, how material -- maybe the answer is it's not, but the actual integration spending that you're doing, as you've discussed, a key to a lot of these deals is linking them into your existing systems and offering.

[Scott Stephenson, Chairman, President & CEO]

Yes. Thank you for the question. Let me take the second part of that and then bump it over to Lee. Integration costs are really not material. And this is an enduring statement about Verisk. And the reason is, if you think about the nature of the integration that needs to be achieved, back to kind of the three buckets that I gave you upfront, when you're talking about product organizations, companies that have unique products that are now a part of Verisk, there are two ways that we link them to us. One of them is getting them on our sales platform, and that integration cost is about nothing. And then the other form of integration is, if and when we integrate the solution, so we have a preexisting encoded solution and the acquired company has an encoded solution, and now you're going to find a way to blend code in order to present a new integrated solution into the marketplace. And those are moment in time.

Generally, those will be accomplished relatively quickly. And in many ways, you're leveraging the development budgets you've all ready got. It's now you're just thinking a different set of developments because you've now got this bigger code base and you have to bring it all together. So the literal integration is not so great. There's a different part of your question, and here now, I'll turn it over to Lee for his comment, but yes, there are deal costs, for sure. And so when you do deals in the moment, there's all the lawyers and et cetera that have to get paid in order to bring the thing together. So there are definitely deal costs, but the literal tying together of Verisk and the company that we just bought, in an operational sense, generally is not material.

[Lee Shavel, EVP & CFO]

And so Gary, I think the thing that factors into this is all of the integration upfront costs that we're dealing with that tend to be onetime in nature are an element of this, but there are also two other elements. One is, generally, these are earlier-stage companies, and so they have ability to predict immediately in the near term that -- their immediate performance as we're going through that integration as well as across the number of acquisitions that we have. I think it creates noise that we would suggest is not as relevant to our overall organic performance. And we'd like to focus on that as opposed to trying to predict what that relatively small impact is of those acquisitions. We -- as I indicated, we think that the overall focus should be on the capital efficiency and the returns from that business, and then what they will be able to ultimately contribute on an organic basis when they get folded into the business. So happy to talk more about that with you separately.

[Gary Bisbee, RBC Capital Markets]

Yes, I mean, I think the issue, as you probably heard in your tour, is you have a business that's so heavily subscription, people believe you should have extreme visibility relative to a lot of other companies. And the reality of it is, it's been extremely difficult to predict your quarter-to-quarter financial performance. This kind of inability to really be helpful on the forward-looking numbers, I think, it's a big reason why. But I'm sure you've heard that, and I'm sure you're thinking about ways to improve it. So I appreciate the color.

[Operator]

And your next question comes from the line of Jeff Silber with BMO Capital Markets.

[Jeffrey Silber, BMO Capital Markets]

I know it's late. I've got one quick question. What should we be modeling for interest expense in 2018?

[Lee Shavel, EVP & CFO]

Yes. So Jeff, we've specifically not provided guidance around that. I don't think it's going to move materially. But as we're thinking about debt levels and our target aside, I just didn't want to set a specific expectation. I think you can look at the balances and at the rate historically, I don't think it will vary significantly.

[Jeffrey Silber, BMO Capital Markets]

And I guess, the lever from the PowerAdvocate acquisition, that's really -- is that on the balance sheet at the end of the year? Or is that not been on the balance sheet yet?

[Lee Shavel, EVP & CFO]

No, it is on the balance sheet. We funded that substantially with debt.

[Operator]

And your final question comes from the line of Andrew Jeffrey with SunTrust.

[Andrew Jeffrey, SunTrust Robinson Humphrey]

You've talked about a lot of newer, I would say, growth drivers relative to Verisk's historical businesses. I haven't heard a mention of cyber. And I wonder how you think about cyber risk? And whether there are some organic opportunities to grow in cyber or whether M&A is something you're looking at?

[Scott Stephenson, Chairman, President & CEO]

Yes. Thanks for the question, and I'll start -- and Mark, if you want to jump in. Cyber is very definitely a part of what we do today. Those of you who are familiar with the P&C insurance industry may be aware that sort of, interestingly, the cyber line -- for all the talk about cyber risk, et cetera, in the world, the cyber line is actually not that highly expressed so far. It's actually -- it's a relatively modest line of insurance. It gets a lot more discussion than it actually gets premium dollars at the moment. We expect cyber will continue to grow as a line, and we already provide modeling of the cyber line, and we have customers for those models. So we're engaged. We're already in that. The 2 interesting questions for us, and Mark, maybe, please feel free to jump in here. Interesting question number one is, how rapidly will the cyber line grow as an insurance offering? But then number two, all the other things that we could potentially do to help operating companies with cyber exposures even beyond helping to manage the insurance policies. So I don't know. Mark, do you want to add anything to that?

[Mark Anquillare, EVP & COO]

So we have been kind of the industry standard as it relates to the coverage language in those policies. And I think we have a lot of customers we highlighted at the Investor Day, where I think the more promising future growth is going to be is inside of the models. As people try to grow, and for the most part, underwrite some of that cyber, some of the models, which we historically called cat models, are now being used for, what I'll refer to as, more of the liability side. And cyber is very prominent there. We've made some great progress in working inside of the folks in the London market as well inside of the United States insurers. And that will be a growth driver for us. I would tell you that it's probably more marginal in '18, but it will and should kick up in the future years.

[Scott Stephenson, Chairman, President & CEO]

Okay. Well, I think we're at the end of the questions. Thank you all very much for enjoying us -- joining us. And we've enjoyed the conversation, look forward to being with you again to report out the next quarter. And Lee will be doing a lot of follow-up with many, many of you. So let's continue to have a dialogue, and thank you very much for your time today.

[Lee Shavel, EVP & CFO]

Thank you very much.

[Operator]

This concludes today's conference call. You may now disconnect.