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

Good morning, everybody. Welcome to Barclays' Global Financial Services Conference. Thank you for being here. Unfortunately, we are virtual again. Hopefully, we'll be in-person next year. Let's try that next year. My name is Manav Patnaik. I'm Barclays' business and information services analyst. And very, very pleased to kick off our conference this year with Verisk CFO, Lee Shavel. So Lee, thank you so much for being here with us.

Manav, thanks for having me. It's great to be here as always at the Barclays conference, and we appreciate all of your interest.

Perfect. Just for the audience, I mean, I'm going to be doing a Q&A fireside chat with Lee, of course. If you have any questions, you should see a ask a question or a Q&A box on your screen, you can throw those in there, and I'll try and squeeze them in time permitting. But otherwise, I can follow up with you afterwards.

So with that out of the way, Lee, maybe just to begin with, you've been at the company now for over 3 years. And I think when you came in, you talked a lot about capital allocation and returns and the focus you had there on building out the financial organization. So I was hoping if you could maybe just start off there and kind of tell us what all has changed and perhaps just a few examples to back those up.

Well, thanks a lot, Manav, and I appreciate you starting on a topic, obviously, that has been a focus for me. And I think I've been really happy with a lot of the changes that we've made in integrating capital management into our process. And let me describe it just from a functional standpoint of what we've done to improve that and then also kind of give you some of the concrete benefits that we've achieved from that, that I think, when you look at the numbers, you'll understand the impact. So first of all, what we did was establish a framework across the business. This is not just M&A, but we think about capital as holistically as possible in all uses, internally, externally, return of capital to the shareholders, and implement a system so that just as we manage our expenses, just as we manage our revenue targets, we're thinking about where we are and how we are managing capital within the business, with the objective of investing capital where we see the best returns, the best growth opportunities in the businesses. That enables us to look at for each of our business units and then collectively as well as for the acquisitions that they've made, how our investments in capital are performing. We also for CapEx break down all of our primary investment projects to evaluate what are the potential returns that we're generating from those investments in capital. So that's one dimension which I would refer to as the framework that is part of our financial discipline across the business. The second element is more of a tactical implementation when we are looking at acquisition targets and then executing those deals once we have closed them. From an evaluation standpoint, we look very carefully at how are we going to generate an attractive return on capital from this acquisition, and -- as opposed to thinking about, well, is this a good portfolio business for us and is it something that's additive in and of itself. We have shifted the focus to the business unit taking responsibility for that acquisition in determining how we drive value by taking costs out, adding technology or leveraging the data sets more effectively. And in that regard, I would use Genscape as an example, where we've been able to reduce some of the costs of the platform and focusing on utilizing the data sets for that business to drive value. And then as another example, on the revenue side, when we recently acquired the FAST business in the life insurance software business, the focus was really on extending through our relationships on the FAST application. And we've had great success in bringing large contracts into the business as a result of our relationships in the insurance industry as well as gathering and beginning to utilize the data that they have and the distribution that they represent for many of our life insurance analytics products, like voice analysis for smoking or attribute models. So those are things that we've done to improve that process. And we've also added a team that focuses on integration. So once we've closed that acquisition, there was a focus on: How do we achieve those cost savings? Are we adhering to plan? Are we varying from plan? And if so, how do we correct that? So all of those have produced, in terms of tangible results, deals that are generating returns much more consistently with what our original expectations are and in most cases, within 2 or 3 years, are generating returns in excess of our cost of capital, which in an environment with the valuations that we have, we think, is exceptional. The other aspect -- indirect aspect of this is because of the selectivity on value creation, I think you will see, over the past 3 years, a significant change in capital allocated to M&A versus the prior 3 years. So from 2015 to 2017, we made -- we allocated about $4.2 billion in capital to 22 transactions. In the last 3 years, from 2018 to 2020, we allocated about $1.2 billion in about 15 deals. And so you can see the scale has changed. That's partially, I think, reflecting stronger discipline around returns but also the composition of those deals have changed. 2015 to 2017, with Wood Mackenzie, PowerAdvocate, 80% of that capital was allocated to energy. And in 2018 to 2020, 2/3 of that capital was dedicated to deals in the insurance sector. So you've seen both change in scale, change in composition driven by that discipline, which I hope as investors take confidence in the value of that approach. Again, I'll reiterate, we are only looking at deals within the verticals that we exist in. We're not looking for a fourth vertical outside of what we do right now.

Got it. That's great, Lee. And I was going to head in that last comment you made. So just can you talk to us about what the acquisition pipeline looks like within your current 3 verticals? And the context of the question is just some investors feel that you guys could be more aggressive with the share buybacks just given the cash flow you generate. But just curious if you're just holding dry powder for a pipeline that you have that you track.

Yes. So thanks for the question. Manav, I will first make it very clear that we don't think of share repurchases in that context and don't -- our cash levels are fairly consistent, but we're not using or holding cash for acquisitions. And all of the cash, liquid capital that we have is, first, subject to a discipline of what are our opportunities to invest. And if there aren't opportunities to deploy that in a way that is additive to growth at a good return for our business, then we will return that capital to shareholders through the dividend, through share repurchases. And so we don't say, well, we're going to hold on to this cash for that amount. We have adequate ability to finance transactions through our funding facilities or in the capital markets to do that. So our general philosophy is, if we're generating excess capital than we need to -- we're going to return that to shareholders. I would say, from the pipeline generally, we continue to see, given where valuations are, a higher level of opportunities to look at acquisitions. But given the valuations, in the absence of an ability to really drive significant cost savings or expand that revenue set, it is a very challenging environment to generate attractive returns on deals. You've seen and I've mentioned that greater concentration on the Insurance side where we feel as though we've got greater scope to be able to leverage some of the industry strengths that we have, some of the technology and the data sets that we have. Within Energy, I think we also have a very good distribution capability. This is where the ability to take the Genscape data sets and products and integrate them into our products, distribute them more broadly to the very broad client set that Wood Mackenzie represents is where we can add value on that front as well as enhancing increasingly the energy transition demand for information analytics as that industry transforms. So continue to see a fairly active M&A environment, but valuations continue to be a challenge where we don't have an ability to directly add value to a target.

Got it. And it's been about 6 months, I think, since you took over Energy and the Financial Services as Group President. So maybe just looking for kind of your first take on the businesses and what you are looking to change in there.

Sure. So thanks, Manav. So first of all, what I've been engaged in with our management teams has been a very careful bottoms-up review of the business, the fundamental drivers of each of those businesses, where they sit in the competitive landscape that they confront, what their competitive differentiation is and evaluation of where values are within those businesses among -- for their business and for the external businesses. As most of you know, we completed our goodwill impairment analysis as of June 30. So if you saw in the 10-Q, our annual review demonstrated that we did not take any impairments on any of the acquisitions, that we still have a healthy cushion relative to value. But we are looking at each of those businesses, and my primary focus is on how do we drive value creation through extending organic growth in revenues, enhancing operating leverage and making investments within those businesses to drive growth and returns. That's the internal focus. We've had a number of examples of success, particularly with the Lens platform that many of you are aware has been under development for the past several years. And we are now beginning to see feedback from customers that reinforces our view that we are improving the speed at which they can execute analysis on this platform. We're able to refresh data. We're able to associate data sets that we couldn't as easily before. And we're seeing that translate into pricing increases for those companies that are adopting the Lens platform in the high single digits, even low double digits in cases because of the value of the investment that we've created for those clients. And we're still relatively unpenetrated within that marketplace. You have early adopters, but we have kind of a long -- a large stable of clients that are continuing to evaluate this. That's an example from my perspective of where we can continue to find ways to invest in Energy, in even the Insurance business as we evaluate opportunities there from a platform standpoint as well as in Financial Services. But I also want to emphasize we are also looking not just at value optimization within the business, but if there are opportunities for us to achieve greater value for our investors by selling a business relative to holding that, that is certainly something that we're actively considering. I think given what we see as the market environment and overall conditions within that market, I think within the 6 -- next 6 to 12 months, there is some probability that you will see a change in the portfolio reflecting that discipline and that review from an external standpoint as well as from an internal perspective.

Got it. And just on that last point, Lee, I mean, I think in the past as well, you've always talked about how if there is obviously greater value to be had, you'll look at the portfolio, et cetera. So is there something that's changed today in terms of making that comment about potentially seeing a portfolio change in the next 6 to 12 months?

Yes. I think that -- I think it's 2 things. I think it's -- one, I think it's a benefit of having a fresh perspective coming in and looking at those businesses from a financial, from an investor perspective. And I would also say the environment itself. This is a process of looking at where valuations are for companies. There are -- even today, you see a significant transaction in the financial services space that is indicative of capital that is seeking new investment opportunities. So I think both of those are contributing to part of that dynamic.

Got it. When we look at the long-term growth rates that you talked about in that 7% range, I mean, clearly, Insurance has been delivering that. But can you just talk about if you think that needs to be reset perhaps for the Energy business and if that's part of something you're looking at as -- when you took over the leadership there?

Yes. So first, we have said publicly that we expect all of our business units to deliver on that 7% organic growth target. And we understand that for a variety of environmental, not least of which is the pandemic environment, that those businesses -- several of those businesses have not achieved that, but we view that as a temporary impact, hopefully, on the overall business. We're beginning to already see rebounds in a variety of the COVID-sensitive revenues that we expected going into this. Some of that has been a little bit delayed because of the impact of the Delta variant. Part of it has been a function as with our bankruptcy-related business and Financial Services where ongoing levels of government support have held bankruptcy activity below. But I think you first have to understand that, that is an element on growth -- or a headwind to growth currently. And within Energy, the achievement of that 7% organic growth rate is really going to rely on our ability to move from a -- that traditional research and consulting business to more and more of a data and analytics business and tap into a number of the key trends in energy; most notably, the energy transition that is driving increased demand for data and analytics across the individual energy components, where, traditionally, the focus has been meeting the needs of the upstream oil and gas sector or the natural gas or the coal business. Tying those elements across full energy supply and demand spectrum and developing platforms and analytics to serve that is really the growth opportunity that we're investing in right now. Lens is the platform to do that. We've been able to demonstrate, apart from Lens, growth in a number of those subsegments, like chemicals, our energy transition practice, metals and mining and PowerAdvocate, in double-digit top line growth rates. Over time, our expectation is that we'll continue to see a shift in the composition of the business to a number of those higher-growth areas as well as a lift in the business as a whole. Those are the dynamics that I think are critical to us achieving that level of growth. And in Financial Services, we continue to see that demand for data and analytics applied to spend informed analytics, fraud detection, bankruptcy analysis probably more impacted by the pandemic because of its impact on consumer spending and other, advertising, which is tied to travel and commuting. But we do believe longer term, as we recover from that and we continue the structural transition from a more consulting-oriented business to a data business, that we'll see that underlying growth rate emerge.

Got it. And just in terms of that change, you've been talking about changing it to a more data analytics business. What is the time frame we should think about that? And at what time, given you're overseeing the asset, do you decide maybe it's not -- it's something you probably don't have the patience for?

Yes. So I think -- I understand the question. We have been engaged in that really over the past 2 years. So I don't want to create the expectation that this is something that we're waiting to achieve. We have the ability to determine is it on course, and we're simultaneously also evaluating what is the value optimization path. So there isn't a time line. There's simultaneous evaluations that we're making. We're working to make the business as valuable as possible and to move it along that path and to demonstrate that growth. And at the same time, we're evaluating what is the optimal disposition of that business from a value standpoint.

Got it. All right. That's very helpful, Lee. If we can move to Insurance. And first, maybe just a broad question on, if you were to describe Insurance to a new investor, like what would be the key product buckets within that Insurance business? I know there's a lot going on in there, but are there some key big product areas? Like I know AIR is one of them, Xactware perhaps another. But just curious how one should think about that.

Well, Manav, I found that when you're talking about Insurance within investors, there is a very discrete time limit at which point people begin to detach. So I try to keep it not too complicated. And in that regard, I would say, look, we serve -- I first start off by describing the fact that we are in a very unique and privileged position in serving as a technology partner for our insurance companies. And I don't know if you recall, but the last time we were able to travel and we were over in London, we were meeting with an investor and you were at the lunch. And he -- the individual cited that he had spoken to a number of our clients, and every one of them had described us as a critical strategic partner in helping their businesses become more efficient and more productive. And that really is the essence of the role that we play. We can gather data across the industry, invest in analytics that help them automate their business, improve their decision-making much more efficiently than if they were to do that themselves because we're leveraging this across the industry. And their demand for that data and analytics is growing. We have a unique and proprietary data set. We're trusted by that industry. And so our opportunity to invest in really moving electrons around and creating new products and new platforms that meet their needs, allow them to automate more of their function, dedicate their human resources/assets on the more complex areas is of immense value to them. And so that's really the opportunity that we pursue in both the underwriting and in the claims space. The broader growth opportunity is to take that very strong U.S. business and expand that internationally. We've been very successful with our acquisition of Sequel and other U.K. businesses in building a presence in that U.K. market. And we look to take that into other developed insurance markets. But there also is the opportunity for us to expand that beyond our traditional P&C space into the life space, which traditionally didn't utilize as much data because they relied on the actuarial life expectancy tables. Now we have much more relevant data sets: voice analysis for smokers; attribute models from social media to evaluate life peril risk; and software elements that allow us to integrate and gather data on claims that we think is immensely valuable. So the expansion opportunities continue to represent real great growth opportunities for us. And the technological transformation that we have been going through from a migration to cloud has accelerated our ability to meet those needs because we're able to improve our ability to access and process and deliver information at a much higher rate than we have in the past.

Got it. Before just asking another question on specifics on insurance, you brought up the cloud migration. I was just hoping for a quick update on perhaps where you are in that journey? And how many more years -- I know it's never complete, but how many more years before we start seeing the benefits of that?

Yes. So from a -- to an extent, the cloud will be an ongoing part of how we manage data, how we serve our customers. But I think in terms of that broad project of really migrating as many of our discrete data sets and applications into the cloud, 2021 will represent the second year of what we viewed as a 3-year process of kind of rolling those through. So as I've described before, the first year really involved a high level of investment to migrate those data sets, to take on incremental cloud capacity while retaining some of the ongoing costs of the legacy systems. 2021 represented, I think, still a net investment, but we were beginning to extract some of those savings. And 2022, we will continue to be moving data sets, but I think the balance will shift to savings that we have on the CapEx front most notably, but also on the OpEx front. And then that gives us greater flexibility to continue to invest in the business more broadly and then to shift from the structural transition, which is critical, to the functional transition of building out those platforms across some of our legacy businesses.

Got it. All right. Just moving back to insurance. So Moody's just bought RMS, which is your big player and a big competitor versus AIR. Just curious if you see any changes to your strategy or how that would impact AIR's performance today?

Yes. So we certainly have a lot of respect for Moody's. It's a great company. From our perspective, the AIR business is kind of roughly comparable size to the RMS business. And historically, I think we've been pleased at our performance in the marketplace. I think it's our perception that we have been able to gain market share within that segment as a whole. It is a very technologically and technically complex product set. We're modeling hurricanes. We're modeling flood risk, cyber risk, a variety of highly complex phenomenon. And in that regard, it isn't apparent to us that Moody's brings incremental data sets that are relevant to that very technical analysis or modeling expertise. And I'm sure there are opportunities for them to leverage that acquisition more broadly across their business, but from a functional competitive standpoint, there's no change, I think, in the operating strategy and philosophy that we have. This is a great business for us. There are areas of expansion for us, particularly in cyber risk. And with increasing wish for content in storms, the ability to integrate that with flood modeling and flow dynamics, we now are using hydrologists much more extensively than we have in the past and to reflect that increasing dimension of risk exposure. We're very excited about the prospects and believe we'll continue to be able to deliver growth and good returns from the AIR business.

Got it. That's helpful. And I think Moody's is obviously taking more of an ESG angle. And I just wanted to know, at Verisk, I mean, clearly, you have AIR. You talked about flooding, climate analytics. You've got the energy transition piece at WoodMac, et cetera. Like how -- should we think about Verisk as a notable player in the ESG space or plans for that? Any thoughts there?

Yes. So I think given that the transaction that you've described, in a variety of ways, and I'll cite a few, starting with the climate-related aspects of major storms and the ability to understand how that is -- how those environmental factors are affecting localities, losses is tied to a concern with environmental issues. And we are actively exploring ways to deliver that data, that analysis in ESG-oriented channels. We also have a business that provides risk in -- risk assessment in geographies, including environmental geographies, a business known as Maplecroft, which is focused on a lot of those ESG issues. And of course, at Wood Mackenzie, I would describe our energy transition business as effectively an environmental-oriented business. So a lot of the research that Wood Mackenzie produces in the energy transition space is directly relevant to ESG-oriented investors. So the short answer is yes. We've got great data sets, great research that we are looking to now distribute into a channel that is seeking broad information on all of those trends.

Got it. Talking about hurricanes and climate, et cetera, I mean it's been a pretty severe hurricane season, it sounds like, this year. And it reminds me a little bit of 2017 when you guys saw the benefit from the 3 big hurricanes back then. Can you just talk to us about how the contracts work? And perhaps just any guidance on what we should think about the impact from these severe hurricanes we've seen thus far?

Yes. So the short connection is that when we have these hurricanes, and we obviously always regret the property and the human loss and suffering associated with them, what we do is we allow contractors and insurance companies to estimate the cost of loss associated with the damage to residential, commercial buildings. That's what our Xactware product does. It also enables contractors to coordinate on an automated basis and a network basis with the insurance companies which improves efficiency and communication in an environment where remote operations really rely on efficient exchange of information. And in the past, in 2017, for instance, you will see there are periods where we have a large number of hurricanes where we have storm-related revenues in excess of the maximums that we typically have in that business. So we often -- there are contract overages that we achieve when those storm volumes are high. So far, while Ida has been estimated by our AIR team as generating between $17 billion to $25 billion in revenues, that's still -- it compares to Hurricane Harvey, which was $65 billion to $75 billion in 2017. And then we also had Maria at $27 billion to $48 and Irma at $20 billion to $40 billion. So it was a big storm but not at the same level of 2017. If things continue to progress where we feel as though that's a material overage in revenue as we have in the past, we'll break that out to try to provide some context for any exceptional level of storm revenue. But at this point, we're not at the point where we think that's necessary.

Got it. Lee, in the last 5 minutes, I just wanted to talk about kind of innovation and perhaps the breakout areas that you've referred to before. So in Energy, we talked about the Lens platform already. But perhaps in Insurance, what does that pipeline look like? I know we've talked about telematics before. Where are we there? Just some helpful reference there.

Yes. No, thank you, Manav. So those pipelines remain very strong and very exciting, frankly. The area that you referenced, telematics, was something that I'm sure you recall, we began talking about our investment in 3 years ago. And at the time, it felt as though as we were acquiring data sets, as we were building expertise, it wasn't clear how quickly the industry was moving towards more usage-based insurance applications. We're now in an environment where I think they are very engaged in that. We are working with them to try to develop and apply the largest telematics data set that has been accumulated in the Verisk Data Exchange and excited about helping them utilize that data to price policies, structure policies. So that continues to be an area of investment but one where I think our early investment has proven out to be a very good starting point or an advantage in that space. Similarly, life insurance was an area that we were investing in. And it gave us enough purchase in that space to then give us confidence in looking at the FAST business as a way to extend and accelerate that. So we didn't go into it with the expectation that we would necessarily make an acquisition. But as we investigated it, as we began to broaden our sense of how we could be additive, it enabled us to find an entity that was a good fit for us that we could accelerate. And so I think we are clearly creating value even outside of the original concept of what we wanted to do within life insurance. And then the final thing I would mention is cyber risk has been an area of investment for us in those solutions. That also -- of course, everyone is very much aware of -- much more aware of cyber risks and their exposures. And so the early investment that we've made in that has positioned us well to further refine and develop and commercialize the models that we've had. And finally, not to ignore Energy, but the investment in Lens was viewed as a breakout opportunity. There, clearly -- and as evidence of our capital discipline, we know that we are generating a very attractive return on the investment that we've made in developing that platform even at this early stage based upon the pricing improvements that we've gotten for many of our traditional products. So those are just a few, I think, of what we feel have been very thoughtful and good investments.

All right. And maybe just last question, Lee. A lot of our companies talk about kind of NPI targets, like new product contributions to current year revenues. That's kind of how they track the innovation pipeline. Just curious if you guys have such internal targets. Or how do you make sure that there's a steady stream of innovation-driven revenue contribution as opposed to just wait for the ultimate contribution?

Yes. So Manav, it's a great question. And I think one perspective on that is that there is a -- maybe a little bit of a conflict. Certainly, we are focused on generating more revenue from new products, but also, I think the thing that we also want to be attentive to is that that's a very flexible definition. And a lot of our focus is on the existing products. How do we invest in those existing products to make them more valuable or to integrate other data sets? And so the product definition can sometimes be problematic. And if you set that as, all right, well, we want a certain amount of revenue coming from new products each year, you create kind of an artificial bucket that may draw investment that could generate better returns and growth in existing products relative to that. So I -- we're mindful of it, but we don't set specific targets to avoid underinvestment in what we think could be better returns within the existing product. A lot of our ability to generate pricing increases and revenue growth is driven by that continued investment in the existing product where our clients see demonstrable value for them, and that's why we're so focused on that opportunity.

Got it. That makes complete sense. All right, Lee, I think we're right about on time. So thank you so much for being here. I appreciate it.

Thank you again for the support. Appreciate the time.

All right. Thank you, everybody.