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

Hello and good morning. My name is Andrew Nicholas, and I'm the research analyst covering information services, consulting and HR technology sectors here at William Blair. Before getting started, I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I am very pleased to welcome Verisk's CEO, Scott Stephenson, to the 41st Annual William Blair Growth Stock Conference. Thank you very much for joining us this morning, Scott.

My pleasure, Andrew. Good to see you.

It's been -- we were just talking, it's been a year now since the start of the pandemic, maybe a little bit more. So I thought a good place to start would be to just walk us through how successfully your business navigated the past 12-plus months in your view, and then maybe speak to some of the major learnings or takeaways over that time frame, whether it's in terms of new product opportunities, areas of fluctuating customer demand or even on the cost side, where you think is most important to the go-forward story?

Yes. Well, there's quite a bit in that. I'll start here, the most important thing to us as we moved into the pandemic was to keep our people safe. And I feel very good about what has happened in the course of the pandemic. And we are not done with the pandemic. And we have hundreds of colleagues in India, and we are on high alert in terms of their well-being. I believe that our community in India is doing well relative to the conditions on the ground. But still, we are concerned, and we're active in securing the well-being of our people. That was our first priority, followed very closely by a second very high priority, which was to maintain continuity of service to our customers. And I was pleased, although not surprised, to see that we maintained full continuity. There were literally no interruptions. And not only that, but actually, much of what we intended in terms of progress and development in 2020 did occur. Our technical infrastructure continued to strengthen. And we found that though we were obviously impacted in terms of our ability to be with our customers face-to-face, actually the number of touch points with our customers went up in the course of 2020 and remains at a very high level in 2021. One of the things I was watching for was, even if there was an increase in the number of touch points, was there any loss of intimacy? My practice is to talk to somewhere between 30 and 40 of the CEOs of our leading customers every year. Those meetings continue to apace. And actually, some of the deepest conversations I've ever had with our customer CEOs occurred over the last 12 to 18 months. I think one of the reasons is that every company -- almost every company is trying to become a better digital version of itself. And in the verticals that we serve, CEOs are very persuaded of that. And so a company like Verisk presents as an unusual partner because we're actually helping them with the movement towards them harnessing data and analytics to make their businesses work better. And so I found that there was, if anything, even more interest in spending time with us and talking about the relationships. And I'm just really pleased that our customers clearly see us as a unique partner to help them as they go forward, and that's so important for us. In terms of things that we learned in the pandemic, one was actually that we can relate and be distant, although there are limits to that. And inside of our own company, we know that as things move forward, we will rotate back into our offices, make much more use of them than we have during the pandemic. I think another implication is that our customers felt very supported with anything that we did for them that helped them to relate to their customers in -- at distance. And so tools like ClaimXperience just made a very big difference for our customers in the moment. And I would say a third thing that is out there is I think the moment showed the inherent flexibility of our cost structure. Most of our cost structure is people. And between the natural governor on our compensation, which is related to the way that incentive compensation is structured, and the ability to, in the moment, dial down the rate at which we're adding people to our organization. At the intersection of those 2 things, the inherent flexibility of our cost structure was shown. And then one thing that has always been true of our business I think also was demonstrated in the moment, and that is that those parts of our business which are founded on a subscription revenue basis are very durable, very resilient. And those parts of our business which are more transaction-based, which can include services that we provide to our customers, are inherently more able to be dialed up or down by our customers. And when they're feeling pressure in their businesses, as they did in the pandemic moment, they may choose to dial them down for a little while. And we -- there will always be a degree of service inside of our -- inside of what it is we do for our customers. But we want it to be minimal. And I think the pandemic moment really, certainly, reinforced for me the importance of making sure that we have it in the right place inside of our business model.

Sure. Sure. That's really helpful answer and thorough, thank you very much. So kind of that as context, I was maybe hoping to move into some of the major growth drivers within the Insurance business, first and foremost, maybe starting with Life Insurance, which you spent some time on I think during your first quarter earnings call. So I was hoping you could kind of walk us through what you're doing with the FAST business you acquired, I think it was at the end of 2019, the major kind of product opportunities for that business within that market? And then maybe -- and I apologize for the multipart question, but maybe some feel for how your offering compares to other competitors in this space to the extent there are kind of sizable alternatives?

Sure. Andrew, I want to respond to that question by just putting out a bit of context first because actually, the context I think will help explain anything I say about any part of our business. So the context here is that at Verisk, we run a system. And our system has 5 steps inside of it. The first step is we look to create proprietary content in industry verticals. The second step is we look to turn that proprietary content into industry standard solutions, which has 2 benefits. One is if the solution is truly industry standard, that means it is relevant for everybody in the market, which inherently is supportive of growth. And the other thing is when it's industry standard, it has the effect that you make it once and you sell it many times, and it's very constructive where margins are concerned. The third step, and this relates to what we were just talking about in the pandemic moment, is to layer in a degree of services. And the reason we do that is to make sure that our customers are delighted with our industry-standard solutions and also to help them find their opportunities to differentiate themselves relative to their competitors, even as they're using an industry-standard solution that we're providing to everybody. It's a very important part of our business model, even though we don't want it to be a high fraction of our revenues. The fourth step is to -- around that content, that deeply analyzed content to build software solutions, which has 2 effects. One is the software carries with it value in and of itself and it also has a cementing effect. It builds us into the customers' workflows. And therefore, we tend to be just that much more integrated, that much more recurrent, et cetera. And then the fifth and final step, based on those first 4 steps, is to achieve greater scale in the vertical which keeps the flywheel turning, builds deeper relationships, puts us in a position to achieve the next unique data set and just run the cycle again and again. So almost anything that we can talk about inside of our business is in the context of that being our system. That is our system. That is the system that produced 20% returns on average over the course of the prior decade. And actually, even a decade before that when we were private, we produced actually somewhat even better results. That's our system. That's what we're doing at Verisk. So I wanted to lay out that context to say that when we take FAST as a part of the insurance ecosystem, in a sense, what FAST allowed us to do was to jump to stage 4 right away because FAST shows up as digital workflow, basically, helping insurance companies to manage the core processes of issuing policies and pricing those policies, et cetera. FAST is a very distinctive offering inside of the space. It is clearly the best and the newest technology. That was one of the things that attracted us to it. And when you look at things like Gartner Magic Quadrant, FAST is the most up into the right of all the solutions. So fundamentally, there's something about the platform which is very different. Why are we interested in life insurance? Well, for 2 reasons. One is quite a few of our customers, but I would say, especially globally, tend to cross over from P&C also into the lifelines. There are some in the United States. Actually, you see that style more in the rest of the world. And so -- and because of the inherent reproducibility of software solutions, we believe that this is really supportive of our trying to be effective globally. So the overlap with our customers. And secondly, there are -- we do have content at Verisk, which is complementary in trying to understand the dynamics of what's going on in the life insurance world. Those who follow us know, we already modeled pandemics. And so understanding the effect on human health is one part of having a good model of what's going on in the life insurance world. So we like its relationship to where we already start. We like the extensibility of the model, and it starts out as a very strong implementation.

That's helpful. Is there anything you can say about kind of the competitive dynamics in that market? Or I know you said that technology, you're kind of a leading player there. Are there other players of size that you're kind of competing with? Or is it more of a green space on the technology, the software front?

Well, there are legacy providers. And so when you look at most of the major players, they would have some form of software that they're already making use of. But this is one of those moments you see it in verticals from time to time where there's kind of a complete overhaul. And so it's very productive to be positioned with the best solution when all the customers are basically saying where we want to be.

Great. That's helpful. Another area of growth that I wanted to touch on was telematics. It seems to be growing quite rapidly in terms of use, particularly in auto insurance underwriting. I know you have the Verisk data exchange to help support customers in that particular line of business. Can you tell us a bit more about that offering, the value prop, and again, how Verisk is kind of positioned to capitalize on growth there?

Yes. So there's a couple of things that you as an insurance company, can do if you're hooked up to a platform that provides you based on a very deep data set a lot of signals about the usage of automobiles. One is you can use that if you want to move in the direction of usage-based insurance, which is still actually a pretty small fraction of the marketplace. So I view this as relevant for our customers today and the promise of a much larger commercial opportunity tomorrow. So our customers are very happy that they can work with us in order to try to mine the signals that come out of this very large data set, which accumulates literally second by second as people make use of their vehicles. And so it's kind of a coming attraction for a lot of insurance companies. Those that have these programs today for most of them, these are more sort of experimental at the moment, but there's a very strong sense of the meaning and the importance of these. And so we want to be right there as the leading partner with our customers as they move into that. And then the other applicability of the data set is to be very agile in responding to claim events. And that is also a big part of what we do in the insurance vertical. So we see this as a very long-term development. It only ripens as we go. Every OEM like Ford that comes into the data exchange, it just becomes that much richer and therefore, the value proposition for the customer just gets that much better. And it is a business which is transaction-priced. And so what I expect is that we will -- as transaction volumes mount that we will enjoy the energy that, that puts into our revenue stream on that side of the business. What tends to become typical with the passage of time is when something has emerged far enough as a new solution for customers, we then seem to get into discussions with them about actually them wanting to convert it into a subscription. And so that's -- but that's act 2. And I think that, that will be down the road always. But for us today, it is helping keeping our customers at the leading edge of new practice in the insurance vertical. And it's also embedded in everything that we do to support auto underwriters. It's just -- it's that basic. So it's very -- it keeps the flywheel of our relationship with insurers who underwrite auto policies. It keeps the flywheel turning.