Robert Fauber
President and Chief Executive Officer at Moody's
Thanks, Shivani. Good afternoon and thanks to everybody for joining today's call. As we typically do, I'm going to touch on a few key takeaways from our second-quarter results and provide some insights into what's supporting our growth outlook. I also want to continue to highlight some of the exciting growth opportunities within the Decision Solutions line of business. And this quarter, I'm going to spotlight our insurance business. Then I'm going to talk about how we are positioning ourselves for what I tend to think of as a generational opportunity provided by generative AI and as always, Mark and I will be happy to take your questions.
We delivered strong performance across the firm this quarter. MIS achieved its first quarter of revenue growth in six quarters, amidst a steady improvement in issuance. In fact, revenue growth -- revenue grew 6%, outpacing a 3% increase in issuance. And the improvement in the issuance environment was led by a 54% increase in investment grade activity. And this combined with the ongoing gradual recovery in high-yield bonds has led us to raise MIS's revenue guidance for the full year to high single-digit growth, up from our prior guidance of low to mid single-digit growth. We continued to sustain 10% ARR growth in MA, selling into strong demand for our suite of mission-critical data analytics and workflow tools. And this quarter we're introducing some additional top line disclosures for our banking, insurance and KYC businesses so that we can provide you with more insight into the robust performance of Decision Solutions.
The stronger than expected revenue growth in MIS is driving the increase in our full-year adjusted diluted EPS guidance of $9.75 to $10.25 and we continue to balance our expense control measures while furthering our investment in the business. We're capitalizing on our unique ability to integrate proprietary datasets and advanced capabilities from across our businesses into tailored cloud-based solutions. And we're innovating and investing extensively across the Company to build further on this momentum with several key initiatives focused around generative AI technology turbo charged by our recent partnership with Microsoft.
Over the past several months, as our businesses continue to scale, we've spent considerable time talking with investors about how to think about the Moody's of today. And I want to share that with you because I think it's really useful context for understanding both our performance and our growth opportunity. And we've got several great crown jewel businesses. And anchoring those businesses, of course, is MIS, the global agency of choice for issuers and investors. But in MA, we have one of the world's premier subscription-based, fixed income and economics research businesses, a data business powered by what we believe is the world's largest database on companies and credit, and three cloud based SaaS businesses serving banking, insurance and KYC workflows.
And at a high level, these businesses come together to help banks, insurers, corporates and public sector entities really do one of three things. First, to help them commence a relationship or an exposure, so to issue, originate, select, or underwrite. Second, during the life of that relationship, help them measure, monitor, and manage risk. And third, on the back end, help them verify, account, comply, plan, and report. And to do this, we leverage a tremendous set of proprietary data analytics and domain expertise across a range of areas, credit, companies, properties, securities, people, economies, ESG, climate and more. And we think of that as our risk operating system and we thread that content through our solutions and that's what makes our customer value proposition both sticky and differentiated.
So with that backdrop, let me touch on MIS for the quarter. So the headwinds of the first quarter have largely dissipated and that has led to more constructive market conditions and a surge in investment grade issuance. In fact, May was one of the busiest months on record for investment grade activity as both corporate and infrastructure issuers came to the market opportunistically. And I've said previously that investment grade activity opens the door for issuance further down the rating scale. And that's exactly what we've seen with the ongoing recovery in high yield bonds. And we saw the strongest issuance quarter since the beginning of 2022 in high yield and that drove an almost 50% increase in our high yield revenue versus the prior-year period. And so, primarily based on this stronger than expected performance in both investment grade and high yield, we're raising our issuance and revenue guidance for MIS for the full year.
And so the backdrop to the market recovery, I would say, still remains fragile. And of our first-time mandates signed in the second quarter, only 25% or so have issued as some of those corporate treasurers and CFOs wait on the sidelines for more market certainty around the path of inflation and rates and the economy. And so muted M&A activity is also contributing to a limited supply of leveraged loans. And that has negatively impacted CLO creation since over 60% of these loans typically go on to be securitized. Within other structured finance asset classes such as CMBS and RMBS, higher all-in funding costs are restricting asset creation and that's resulting in fewer deals and leading us to take down our structured finance issuance forecast for the year.
And while we've had softer issuance markets over the past year, we've been strengthening our position in the markets of the future to reinforce MIS's position as the agency of choice. We have strategically invested in our Emerging Markets footprint for many years, and you've heard us talk about this at investor days and on earnings calls. And that's because although emerging markets account for something like 50% of global GDP, they represent less than 10% of cross-border issuance. So we recognize this opportunity for long-term growth. And our investment includes thought leadership, like our annual Emerging Markets Summit that we held in the second quarter. We attracted participants from over 90 countries to that conference. And in the second quarter, we also closed on our acquisition of SC Riesgo, a domestic credit rating agency serving Central America, further strengthening our growing Moody's local franchise all across Latin America. And as the digitization of financial markets accelerates, we're positioning MIS as a leader in assessing decentralized finance, digital bonds and asset tokenization. We've rated a number of firsts in this space, and that includes, just this month, the European Investment Bank's first ever digital green bond.
And of course, we continue to grow our sustainable finance franchise within MIS with good momentum in second party opinions. You may recall, we relaunched our methodology in the fourth quarter of 2022. We have now completed over 92nd party opinions through the first half of this year, and that includes for marquee issuers like Enel and the Government of Mexico. And we have delivered 36% growth in SPO volumes versus the same prior-year period.
Now, moving to MA, just a few minutes ago, I described Decision Solutions as primarily three cloud-based SaaS businesses serving banking, insurance and KYC workflows. And as these businesses scale, we want to offer some additional insights into their performance. So from this quarter onwards, we're going to be providing revenue and ARR metrics for each of them. And as you can see here, each of these businesses achieved double-digit revenue growth in the second quarter. And together they delivered 10% ARR growth, with KYC leading the way at nearly 20% ARR growth.
So last quarter, we provided a spotlight on our banking business within Decision Solutions, and I thought this quarter that I would touch on our insurance business. We got some good feedback from that spotlight last quarter. And our insurance business brings together the legacy MA insurance business, which mainly serves life insurers with RMS, which caters primarily to the P&C market. And collectively, our insurance business delivers workflow solutions for underwriting, risk and capital management and financial and regulatory reporting and it generates in the neighborhood of $500 million of ARR. So it makes it a very significant component of the broader MA portfolio.
And like banks, insurers are undergoing a significant period of transformation as they work to digitize and automate manual and fragmented workflows in order to be both more effective and more efficient in underwriting and risk management and capital planning. And this opens new opportunities for us to establish and expand our presence, offering new solutions and capabilities much in the same way that we have successfully done with banks.
And at the heart of our insurance offerings are our AXIS [Phonetic] and RMS risk engines. And AXIS provides the core actuarial and finance cash flow modeling that is widely used by life insurers, reinsurers and consulting firms for functions that include pricing, reserving, asset liability management, financial modeling, capital calculations and hedging. And AXIS has proven to be a significant catalyst for growth and this quarter was no exception. This quarter growth was fueled by increasing demand for our fully-automated service, which enables insurers to send their actuarial modeling jobs to a cloud-based infrastructure for very efficient processing. Also contributing to growth in the second quarter is our risk integrity offering, which seamlessly integrates with AXIS and provides a highly-automated solution for calculating financial statement information in compliance with IFRS 17 regulations.
Now, on the property and casualty side, in May, we held our most successful global insurance conference ever called Exceedance. I was there with about 500 of our customers from around the world and we made several very important new product announcements. And I have to say I left the conference feeling very optimistic about the opportunities in front of us to serve the insurance industry.
So first, our cloud based, what we call, Intelligent Risk Platform, or IRP, that is industrial strength and it is differentiated in the market. We now have well north of 100 customers on the Intelligent Risk Platform in the cloud and this allows customers to run our new, more granular, what we call, high-definition models by leveraging cloud computing power on demand. And that gives our customers a competitive advantage for those of our customers who are using this cloud solution. We also announced that we're partnering with Nasdaq, enabling our customers to seamlessly access a wide array of cap models available on the Nasdaq platform in addition to our customers' own internal models. And this collaboration significantly enhances the value and capabilities of our IRP as a broader industry workflow platform.
So with this very compelling set of capabilities and solutions across insurance now let me talk a little bit about the customer expansion opportunity. And we have over 900 insurance customers globally and there is a significant opportunity for cross selling and growing revenue per customer. We have very substantial relationships with our top 10 largest insurance customers who purchase on average about six to seven product families from across all of MA. Our next 90 largest insurers purchase on average about four to five product families and our remaining 800 customers buy an average of just one to two products. So you can really see the extent of the cross-sell opportunity. And let me give you an example of how we are growing our insurance relationships.
So, five years ago, one of the larger US insurers was spending about $15 million annually with us across products spanning, risk and capital management, finance and reporting workflow tools and also some other products including our MIS data feeds for risk management functions like risk adjusted capital calculations and portfolio construction. After the acquisition of RMS, this customer relationship grew substantially to north of $25 million. And this insurer is now a significant customer of both AXIS and RMS. And given the breadth of business activities of a large insurer, and that includes lending and investing in addition to underwriting, they also subscribe to a number of our other solutions like our CreditLens loan origination solution, our CreditView research platform and our structured finance and commercial real estate data and analytics and even our KYC tools. And that has all together allowed us to expand the relationship to an ARR of over $30 million. And KYC offers another compelling cross-sell opportunity with insurers as well as corporates. And in fact, in 2021, less than 10% of our insurance customers subscribed to a KYC product. Just two years later we're up to about 20% and we are optimistic about further potential here.
So our ability to deliver unique and innovative solutions is also being recognized across the industry. And of the awards that are listed on this slide, I have to say, I'm particularly proud of our recent recognition as the overall winner of Chartis's Inaugural Insurance 25 Award because it highlights our innovative, market-leading solutions that span climate, cat risk modeling and economic and financial analysis.
And speaking of innovation, as you heard -- hopefully heard during our recent Gen AI briefing, artificial intelligence is fundamental to many of our products and frankly, it has been for years. I want to touch on three of those and I'd start with QUIQspread, which is an AI machine learning tool that we have developed in house that digitizes and spreads financial data. And it's been integrated into a number of our products, including our CreditLens loan origination offering. And today it's used by hundreds of customers, including banks around the world. Our AI review product is really at the heart of our KYC screening solutions. It's been trained on over 12 million actual KYC analyst decisions and it's currently used by over 500 customers. And so far this year it has processed over 110 million names. And this all helps further train the artificial intelligence engine that powers these insights and it reduces the likelihood of false positives by up to 80%. And that eliminates countless hours of manual work and reduces the time to screen for our customers from hours to literally just seconds. So a huge value prop for our customers.
And finally, NewsEdge where we've been leveraging deep learning combined with natural language processing to enhance and optimize our data retrieval, enrichment and sentiment generation over our multidomain data sets, employing state of the art big data techniques. And to give you a sense of what this means in practical terms, our models are consuming, categorizing and scoring nearly 1 million news stories from over 20,000 sources each and every day.
So these are just three of our over -- I'd say over a dozen AI enabled products, which bring a global team of engineers and product specialists with distinct and deep skill sets around natural language processing and artificial intelligence. And our historical foundational AI experience uniquely positions us, I think, to capitalize on the immense opportunities presented by generative AI. And Gen AI is going to revolutionize how individuals and companies derive insights, how they participate in financial markets, and how they navigate an increasingly complex world. And that's why we partnered with Microsoft. Combining Moody's vast proprietary data analytics and research with Microsoft's industry leading Gen AI technology and Azure OpenAI Service, is going to allow us to create new offerings that provide deeper, richer insights into risk than ever before. And by applying machine learning algorithms and deep neural networks to large collections of data and insights, individuals and organizations will be able to drive greater efficiency, accuracy, insight and innovation in financial processes.
And earlier today, we published, I'd call it, a teaser demo of one of our first Gen AI innovations. We're calling it the Moody's Research Assistant. It's an interactive chat feature that looks across Moody's vast data sets and research to provide customers with multifaceted and integrated perspectives of risks that few others can provide. And the Assistant will have the ability to access data and content across multiple domains, such as firmographic data, credit indicators, economic forecast and risk and reputational profiles, and deliver results to users based on their own personalized needs. So we're beginning to preview this innovation with customers to demonstrate the really, I think, extraordinary value that it's going to bring powered by Microsoft's technology and anchored by Moody's proprietary data. So be sure to check it out on our IR website.
And importantly, I do want to acknowledge that at Moody's, Gen AI is a journey of human enablement. And we have deployed this technology to all of our 14,000 plus employees, I call them our 14,000 innovators, so that we can innovate at scale and pilot new ways to enrich our jobs with powerful new insights and improve productivity, all at our fingertips.
And before I close, I'd like to give a big shout out to our employees. During the month of June, over 3,000 Moody's teammates, and I was with them, took part in 150-plus volunteer projects across 32 countries. And their efforts delivered over 8,600 volunteer hours dedicated to making a difference in our communities. So our people are living our values and it's great stuff.
That concludes my prepared remarks. Mark and I would be very happy to take your questions. Operator?
