Verisk Analytics, Inc. (VRSK) Earnings Call Transcript & Summary

Okay. Good afternoon. Let's continue on with our afternoon schedule. I'm Greg Peters. I cover a slew of insurance industry-related companies, including companies involved in the InsurTech space and around data analytics, and that's where our next presenter falls, Verisk. I'm honored, really, to welcome them back to our conference. They've been participating in our conference for a number of years, and it's always well received from the investment community. As we look at it from our unique perspective and our coverage of the insurance industry, we see a company that has almost an effective monopoly in some of its data sets that it sells analytics services around to the insurance industry, and that gives it quite a substantial competitive advantage in the marketplace. Of course, they also have other businesses, including the Financial Services and the Energy Complex. From management today, we have Stacey, who is with us and she's servicing the IR capacity; and of course, Lee Shavel, who's the Chief Financial Officer. So I'm going to turn it over to Lee for the presentation. Thanks, Lee.

Great. Thank you, Greg, and thanks to all of you for joining us today. We really appreciate the attention, the interest in the company. Also want to note, we really appreciate the perspective that Greg and his team bring to our company. We think it's actually relatively unique where we have somebody who is deeply embedded in the insurance industry and so understands the role that we play in that ecosystem, which we take very seriously. I've shared the anecdote in a couple of the meetings this morning that Stacey and I were recently in London for an investor meeting. And we sat down and clearly was an investor that wanted to share something. And he said, "Lee, I just want to let you know, I called 6 of -- 6 insurance company CEOs who are all clients of yours. And I asked them, tell me how you feel about the Verisk relationship." And so this is the scene in the movie where the battleship kind of turns and wheels out the cannons pointed directly at you. So I was bracing for the impact. And he said, "Every one of them described you as a critical strategic partner to them, helping utilize data and technology to make their businesses better." And I said, "There's really nothing more that I have to say." I, of course, went on to say more, but that really is the essence of the unique opportunity that we sit in within the insurance industry and increasingly, the energy and the financial services industry. We have proliferating data sets. We have increasing demand for data and analytics, and most importantly, we have a network of trusted relationships where we are viewed as a partner in utilizing that data on a more efficient basis because we can do it across the entire industry set to help make their businesses more efficient. We can help them automate. We can help them analyze and improve the quality of what they're doing, and we're able to participate through our ability to add products and increased pricing over time for the value of that data. So with that as a way of introduction for -- I do want to provide just kind of a brief overview of our businesses. So we are in -- we are a data and analytics provider to 3 primary industry verticals: the insurance sector, which accounts for about 71% of our revenue; energy, 22%; and financial services, 7%. In insurance, we're utilizing data, help the insurance companies better assess and price the risk. We're improving the underwriting and the claims operations and process through automation. We are helping to substantially mitigate fraud, particularly in the personal lines business. And we model catastrophes to help insurance companies understand the risks that they face and improve the resilience of local communities based upon our analysis of the hurricane impact. In the energy sector, we help companies manage risk across the entire natural resources chains. We work with energy companies to help manage their efficiency, both from a capital and from an OpEx standpoint, and have built a really powerful and unique data set to do that. And we also work to provide environmental health and safety as well as analyzing geopolitical and humanitarian risk across the globe. Finally, in financial services, we have a really powerful and unique data set of contributed card transaction data and credit data from the banks that we use to help the credit card issuing banks analyze their competitive position across a wide range of benchmarks. We also utilize this data to provide unique insights in spend activity in both physical and social geographies. And we also work, similar to insurance, to identify fraud and abuse of cards and manage regulatory and bankruptcy risk for those entities. A couple of kind of details here at a high level. We were founded in 1971 as a utility for the insurance industry. We provided a reporting function and a data collection function for all of the state regulators. And so at our core, we were there to provide efficiencies for the insurance industry, and it's a role that we still play even though we are now a fully independent entity. We're in 30 countries, so increasingly global through our Energy business and our Financial Services business, but we also operate substantially in the U.K. within our Insurance businesses, and also globally, I should say, in our risk catastrophe modeling business, AIR, which serves a global clientele. A market cap of $27 billion. We have approximately 9,300 employees, and we host a massive amount of data, 19 petabytes of information, and increasingly leveraging the scale and the efficiency of cloud computing to manage, store and analyze that data. Okay. What really sets us apart in our business? We boil it down to 4 distinctives. We have very unique data assets that we have accumulated over a long period of time through our relationship in the insurance industry, through our work principally at Wood Mackenzie and PowerAdvocate and the data sets that they've built as well as in Financial Services in terms of what has been contributed to us from the banks. We really value deep domain expertise. So our deep understanding of the needs and the challenges in the insurance industry, the energy industry and financial services guide our ability to deploy data and activate it for the explicit commercial benefit of our industries, we think, is a distinct advantage relative to more horizontally oriented analytic players that are trying to decide -- solve a lot of different problems for a lot of different industries. Our data sets and their utilization is typically very deeply integrated into our customer workflows, particularly in the insurance industry. And from our position, we're in a unique -- have a unique opportunity to create a steady stream of first-to-market innovations as we associate new data sets, we apply new analytical techniques to the data that we have and work with our clients to better understand the challenges that they face. Growth is at the core of our financial strategy. We are, generally speaking, as you would imagine, increase our solution penetration into new customers, develop new proprietary data sets, which open up new opportunities for product development. We try to leverage our intellectual capital from a data science and data management perspective to improve the efficiency or extend the solutions that we're offering. And then we will look to invest capital, both internally within our business to develop new high-growth, market-penetrating opportunities or through acquisitions where we feel our distribution strength in our industry sectors or our technological expertise can add value by enhancing the product offering that they deliver. The megatrends that drive our business and really support the growth engines are principally increasing demand for data analytics. I'm sure all of you have witnessed and experienced the rapid growth in the number of data sets that are available to companies. Commensurate with that, we are seeing increasing demand within our industries for the utilization of that data to make better decisions and to improve the efficiency of their operating process. This is a trend that we think will continue on both sides, both on the information supply and the information analytical demand over time. Automation has been a primary factor in many of our client relationships, where through artificial intelligence or machine learning or robotic process automation, all of that is powered by data. And if you have the right data and you understand how that data is being utilized, you can very effectively tie that into automation. That's been a critical factor for a lot of the growth opportunities for us within the claims business and increasingly in the underwriting side as well. And then finally, within our Energy business, the transition from carbon-based fuel sources to alternative fuel sources has spurred a much broader perspective on how we analyze the full energy supply and energy demand equation, whereas historically, many of our analysts were focused on a particular asset class. It might be crude. It might be coal. It might be natural gas. Now as we're witnessing this transition, understanding the broad scope of those various sources of supply and how it's being utilized for power generation and that transition is taking place is creating another level of analytical opportunity as we help guide energy companies in where they're deploying their resources and their capital into this transition, how investors are deploying their capital as well as in the M&A sector, evaluating how well positioned a company may be in preparing for this transition. We've recently supplemented the very strong data sets that we have at Wood Mackenzie with the acquisition of a company called Genscape, which does -- produces and places monitors that provide a real-time streaming data on transmission of power through power lines, flow of commodities through pipelines, and we can even analyze the spectrum of exhaust from power plants to determine the core fuel base. All of this feeds into our near-term and longer-term analysis of the commercial value of individual entities. So I'm going to start on the right side of the page. Our primary target is to generate consistent and strong organic revenue growth. Our target is for organic constant currency revenue growth of between 7% to 8% on average over time and that we look to express the inherent operating leverage in our data and analytics businesses with EBITDA growth that grow 1 to 2 percentage points faster than revenue growth. Now we balance this against an ongoing desire to invest in opportunities where we can generate either incremental growth, high returns on capital as well as operating leverage. But our objective is to see an EBITDA growth that is greater than the revenue growth. And coming out of that, delivering through prudent capital management, increasing return on invested capital as well as double-digit EPS growth. To achieve that, I won't go through all of this, but our process really consists of a regular periodic review of our businesses where we focus on business strategy. We assess the ecosystem and the competitive environment that we have. We are looking for areas where we can potentially tap into new growth or new opportunities. We then plan and allocate our capital based upon those opportunities and then revise our 5-year plan to adjust to that, review that, subject it to challenge, skepticism, support from the Board and then repeat that cycle. And that's reinforced internally in the outer ring by regular quarterly business reviews to assess how the business is progressing, interspersed with a focus on human capital investment, operational excellence, strategy reviews and then ultimately culminating in the annual budget, where we collect all of the investment opportunities as well as the operating goals for the year and then allocate capital based upon where we see the best returns, balanced by growth and margin impact for the business. So it's a very disciplined and organized process. Our value creation strategy is pretty simple. We want to focus on generating operating cash flow growth principally through organic revenue growth and allowing operating leverage to express that. Expenses are -- need to be managed passionately and aggressively on a regular basis. That contributes to operating cash flow growth. And then a substantial element of value creation from our perspective is investing in the growing number of opportunities to develop data sets and analytics that have commercial value to our client set. And we have a very well-established framework for capital allocation, both from an internal standpoint on new business initiatives as well as CapEx and internal software development and certainly in evaluating also external uses of capital. This -- I won't go through this -- effectively, again, the full process is evaluating and identifying as many opportunities. Just as you want to look at a broad range of investment opportunities to identify the best, we try to identify as many opportunities to invest as possible. We evaluate what the potential returns are. We compare that to our internal cost of capital. We then look to achieve an attractive risk-adjusted return on that capital and allocate capital to those projects where that exists, balancing our growth and our margin objectives. And then wherever we have excess capital, then we are returning that now through a dividend, which we established a year ago. We recently announced an 8% increase in our dividend rate with our fourth quarter results and then supplemented by share repurchases. We do, from a leverage standpoint, seek to maintain our investment-grade rating, which generally requires us to stay within the 2 to 3x leverage ratio. We aren't looking to create substantial value through capital structure manipulation. So from a financial perspective, all of this has contributed to what hopefully you will see as a very strong record of delivering organic constant currency growth of over 7% over this past 12-year period. You can see more recently, particularly in 2016 and 2017, that we fell below that growth rate. It was principally a function of the impact of a commodity price downturn and its impact on our Wood Mackenzie subsidiary. But since then, we have recovered to a -- close to the 7%, 7.2% in 2018, 6.7% for 2019, but generally believe that the dynamics of the business that I've described continue to support that growth rate for the business. We believe we have a very high-quality revenue set, with over 80% of our revenues being subscription and long-term revenues, approximately 20% non-subscription. A lot of this is consulting-oriented business that is associated with our data and analytics. So often, working with our customers, we're able to identify solutions and uses of data sets that generate an immediate revenue, but also more importantly, allow us to develop products that may have relevance to our broader industry groups. You can see the composition of revenues that I discussed at the top. And from an international standpoint, approximately 22% to 23% of our revenue is from overseas. Our margin profile remains strong. You can see our margins on the top have generally been in the high 40s to low 50% range. These have been a little lower recently as a function of a level -- of a higher level of investment around some specific product initiatives, specifically our aerial imagery business or our Geomni business. And so when we do see what we feel are attractive returns to invest, we recognize that there may be a short-term margin impact, but that's to drive either greater growth or good returns on capital down the road. It does not mean that we are looking for businesses that don't have good operating leverage and don't support our goal of generating EBITDA growth faster than revenue growth across our business. You can see the fairly substantial level of free cash flow that we generate, which puts an emphasis on the importance of capital discipline, how are we utilizing that cash flow to support the strength of the business and to generate returns ahead. From a CapEx -- expenditures as a percentage of revenue, you can see in 2018, we peaked at nearly 10%. This again was a function of our aerial imagery investment. We were buying a lot of planes and sensors in order to develop that data set. We have recently decided to contribute those assets to a partnership with Vexcel, which eliminates the capital intensity and the OpEx associated with it while allowing us to continue to access the data sets on a very attractive economic basis. We do expect that this CapEx intensity will continue to moderate over time through cloud efficiencies that we're realizing in hardware back into the mid-single digits. Here, you can see a little bit more detail in the components of CapEx. You can see the hardware and third-party software peaking and now diminishing and also non-IT diminishing. We are seeing a higher level of software intensity. It doesn't mean that we want to be in the enterprise software business, but increasingly, the delivery data and the capture of data is done through software networks, and so in Sequel, in our U.K. initiative, in the nonstandard underwriting business. Sequel is a workflow software business, but it has been very useful in us in capturing data and developing analytics to support that marketplace. We recently acquired in the U.S. a company called FAST, which provides policy administration management to the life and annuity business in the U.S., and we are excited about the increasing number of data and analytics applications in the life industry that this platform will allow us to access both data and the means of delivering those analytics. We take our commitments to stakeholders broadly very seriously. We recently committed to the UN Global Compact, and we have been very focused on a variety of commitments to reflect our responsibility to the environment, to our customers, to our employees and to society as a whole. This is a core value for our organization as a whole. And specific to environmental responsibility, we continue to look to reduce our overall initiatives. It's not a very capital- or energy-intensive business. We are working to apply our analytics to find ways to -- for our industry to be more efficient, but this is a variety of steps that we've taken to try to reduce our overall global carbon footprint. From a governance standpoint, our short-term incentive targets are tied directly with the long-term financial objectives and specifically the organic revenue targets and the organic EBITDA targets. And from a long-term incentive, half of our equity incentives are tied to performance share units that are -- their value is determined by our relative performance to the S&P 500 as well as 1/4 from restricted stock and options. So overall, we really think it's an exceptional business with very strong position in terms of our relationships with our customers and the data sets that we have. The growth opportunities that we have in front of us that we can leverage because of these relationships remain substantial and exciting. The stability of our subscription, predominantly subscription revenue base, gives us great financial stability. The operating leverage generates attractive operating cash flow growth. And we've been very focused on making sure that we are marshaling capital in a way that we're generating attractive returns or returning that to shareholders. And organized as an entity is very focused on working with purpose to achieve not only our financial objectives but a broader set of objectives for society and for the environment. So thank you for your attention, your patience. I'm happy to take any questions that you may have either now, and we'll have a 30-minute breakout session after this.

[indiscernible] subscription base market. I know I asked this on the call, but I just want [indiscernible] the strong pricing environment where insurance companies gave in a lot of rates [indiscernible] subscription base, how does that pricing environment fall through your operating margins?

Thanks, Greg. And so it's generally supportive. So if the industry is doing well, then I think it makes them more receptive in terms of how we are approaching our pricing discussions with them on an annual basis. And I think the -- I would describe it as the onus is generally on us to make certain that our client set is receiving value out of the incremental fees or products that we are charging. And in fact, it's an explicit conversation that we have generally annually with our clients to describe where we have invested in the product, how we believe we think it has been additive to their business. We're generally looking for them to receive some multiple of what they are paying us in terms of value created within their entity. But certainly, if they're doing well, I think it encourages their willingness to invest in new products. The most important thing from our perspective is that we have that receptive client that is interested and eager to find new ways to utilize data and work with us on the analytic front. That was the point of the anecdote at the start in terms of they're viewing us as a strategic partner. We do -- when the industry is having a particularly tough year from a loss perspective, we try to be sensitive to that. It tends to mean that from a pricing standpoint, we tend to be on the lower side in order to recognize that. But generally, this environment, that has been positive. We also have seen a relatively low level of consolidation within the industry, which is also a positive for us. So a couple of the factors that within the insurance environment influence our results. But I want to end with the fact that those are influences on the margin. The primary driver within our business is that ongoing demand for data and analytics, the desire to find ways to automate and utilize data for greater efficiency, and that's what supports that 7% organic constant currency growth rate.

Can you estimate your property and casualty penetration and…

Yes. Thank you. So the question is, can you estimate our penetration of the P&C industry? And in -- practicality is our greatest competition, our clients doing their own analytics. Did I describe it correctly? So on the first one, it's pretty easy. It's approximately 100%. So as a -- and it's an absolutely understandable question. As an industry utility for many of our products, we are the only provider of a lot of those services. Now across the full range of spectrums, not all of our clients buy all of our products, and we have demonstrated an ability to sell an increasing number of products to that client set. And if you look at some of our Investor Day materials, you will see that analysis that we provide in the insurance industry. But I believe it's fair to say, substantially all U.S. P&C insurance companies are clients of ours for one product or another.

So your growth rate…

So expanding demand for data and analytics for new applications as well as increasing the penetration of the number of products that we sell to a particular client. And on your second question, which is also a very good question, is that, certainly, all of our clients will do their own analytics and make their own assessments of risk and pricing for that. But what's unique about the P&C industry is that no carrier has sufficient market share of -- no one has a majority of the loss experience. And whereas in contrast to life, which is still an opportunity for us, but historically, because really they cared about 2 factors, sex and age of the client, and you would look at a mortality table. In P&C, you have a disparate range of potential outcomes. And so while they will all come up with their own risk and pricing preferences, they want to see the full loss cost experience within a given category of risk. And that was really what we were put in place to do. And it actually works to the consumer's benefit because it's enabled a much better informed and more competitive pricing environment because everybody can see that loss data and it's made the industry more efficient. So hopefully, that answered your question. Yes, sir?

[indiscernible]

So the question is from -- in the P&C, how do we think about price increases? And so relative to our 7% organic constant currency growth, generally, what we are looking for -- and I want to describe this as kind of the value-added pricing. So I was talking before about the fact that we are investing in new products. We're adding features to them and trying to create value for the industry. But generally, we are looking for an all-in value-added pricing increase of, on average, between 3% and 5%. And so that's been something that has supported our growth for the period that I showed before, and that's kind of generally the way we think about the pricing. Yes, sir?

Can you just go through the value creation opportunity in the Energy business? You guys had a lot of [indiscernible] Wood Mackenzie…

So the question is -- thank you for the question, sir. Could you talk about the value creation opportunity within the energy sector? And the presumption is that Wood Mackenzie would be under greater pressure than it has historically. And so my answer is I think there are a couple of examples for that. So let's start with Wood Mackenzie, and then we'll broaden it more onto the energy specialization. I think that the greater focus in the energy sector, particularly with the energy transition where both energy companies, investors generally and acquirers in the business want to come to grips with what that transition means. And it has developed a new opportunity to look at data sets across individual resource classes and gauge how that -- their capital is being deployed and where the opportunities are within that. So that has been a new source of growth. The second opportunity has been, I think, if Wood Mackenzie were still in the traditional research and subscription business in isolation, that may be true. They have very high penetration. And so that business would not have the growth opportunities that we've been able to develop by taking those data sets, pulling them into a common cloud platform and allowing that client set to interact with that data directly or developing new analytics by associating those data sets. So our strategy from the outset had been to take what was a very good business, a very good brand with superb data sets and begin to move it towards more of a data analytics business, which opened up new channels of growth and improved operating leverage. The final point that I would make is as the energy sector has struggled with some of the challenges on the commodity price volatility, it has certainly brought, after the last crisis, an increasing focus on efficiency and capital management prudence. And that's where the PowerAdvocate business, which collects benchmarking data for the amount that they are spending on either a new power plant facility or generation, liquid natural gas or liquification facilities, a range of very capital-intensive investments, now that demand for analytics and discipline has created a completely new data set. And so to answer your question more generally, we believe that the energy sector is probably much less penetrated for data and analytics than some of our traditional businesses like insurance and financial services, and so we're working to identify more and more of those opportunities.

Okay. So we're right at the 30-minute mark. So we'll continue the discussion at the breakout. Thank you.

Okay. Thank you very much for your attention.