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

My name is Andrew Nicholas. I'm the research analyst covering the info services, HR technology and consulting 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'm very pleased to welcome Verisk's CEO, Lee Shavel, today to the 42nd Annual Growth Stock Conference, so I'll hand it over to Lee and he'll walk you through the story. Thank you.

Great. Thank you, Andrew. It took me a while to realize I actually have a mic on so I don't have to use the podium. Good afternoon, everyone. It's a real delight to be here. It's a great conference for us. Hope for all of you as well, just a nice variety of different investors that we don't usually have a chance to see. And in light of the fact that many of you are journalists, the advice has been to -- for us to focus on providing a general overview of the Verisk business. And so for those of you in the audience that know us well, there's probably not an awful lot new that you're going to learn here, but we'll reserve some time obviously for Q&A at the end of this and then we have a breakout session afterwards. So let's see if this -- there we go. So in essence, if we had 1 slide to describe Verisk, this would be it. We are a data analytics company. So we collect data, we manage data, we analyze data, we deliver data to support 2 primary industry verticals, the insurance vertical. As you can imagine, anyone who comes from an actuarial background can appreciate that insurance companies are very data-intensive organizations. And as we'll talk about in a little bit, our legacy has been as a utility to the insurance industry. That's where we came from. As a function of that, we gathered an awful lot of data from a reporting standpoint. We didn't start out as a data company. We started out as a reporting and ratings agency for the insurance industry, particularly the property and casualty insurance industry. But we are able to gather that data and allow the insurance industry to assess and price risk with more accuracy because in the property and casualty insurance industry, you have a disparate set of outcomes, and so the industry benefits and ultimately, consumers of insurance benefit because the pricing mechanism is able to incorporate a broad range of outcomes. But our data capabilities and analytics capabilities extend beyond the underwriting original applications to claims. We utilize data to fight fraud. We model hurricanes and other extreme events to help insurers understand the risks that they're exposed to. We also help them improve, more generally, their financial performance by improving their efficiency and accuracy. We also analyze social risk and political risk globally. And so there is a broad range of value applications that we provide to essentially make the insurance industry better by utilizing their data on their behalf. Similarly, on the energy side, we are, through our Wood Mackenzie subsidiary, a leader in gathering data on a variety of elements of the Energy and Natural Resources business. Any of you that follow the energy industry will appreciate that it is in the midst of a very profound transition from carbon-based fuel sources to alternative fuel sources. And our background in gathering data on petroleum, natural gas deposits has evolved into a collection of data not just on petroleum and carbon-based elements but also metals and mining, which are increasingly important in the energy transition as we rely more on battery power to store energy on chemicals, which is the next leading utilization of petrochemicals as well as in the energy transition itself as we find new alternative data sources. We have tied these data sets together in a cloud-based platform called Lens, which facilitates our clients' utilization of that data to guide their decision, to guide the valuation of energy companies, to guide energy strategies for the business and to hopefully enable the energy transition that we're in the midst of. Now with that description, I want to step back and describe what are, from my standpoint, really incredible economics of these data businesses. The first is that we have, I like to describe it, 2 engines of growth that really drive Verisk. And they are the growing number of data sets that are relevant to these industry verticals. And you see the expansion of satellite imagery data, of geo-positioning data, of new alternative fuel and utilization data sets. In insurance, we are now seeing applications of mobility data and social media data that are having new and profound impacts on the life insurance industry, which supplement the traditional mortality tables that they might use. So all of these data sets are expanding. And the other engine is the growing demand and the facility of the industries that we serve to ingest and utilize that data. That's being facilitated by the large-scale adoption of a cloud data architecture, which ties data sets together, it centralizes them and allows them to be utilized more effectively. So both of those are generally growth engines and the Verisk plane, if you will, harnesses those 2 through an efficient scaling of that. We are able to invest in data technology and data architecture on a more efficient basis than the industry can individually. That was our original purpose. Utilities have tremendous economic value because they can do things more efficiently than the ecosystem that they support, provide. It's true in insurance and it's true in energy, and that really is the essence of the opportunity. That growth and the efficiency allows us to deliver value to the industries that we serve. Briefly, from a history standpoint, just to give you some historical context, how did we get to this point? As I mentioned, we started out as an insurance advisory rating organization in the 1970s. We just passed our 50th anniversary recently. And we were originally put together to help insurance companies handle their statutory reporting responsibilities to a state-based regulatory system much more efficiently. So we were able to gather their information, their statutory reports and then handle the distribution of those to all of the individual states. It also enabled us to provide standardization of the underwriting forms or the claims forms. If you have a particularly kind of dull Saturday night, where you're looking for something to do, pull out your homeowners' policy and you will find at the top ISO Form 9735 or something along those lines. It's a reflection of the role that ISO still plays, a bit of a legacy element. But that -- the thing I want to emphasize is that the centrality to the U.S. property and casualty insurance industry is really one of our strengths that still persists today. In 1997, we transitioned to a for-profit entity. This was also intended to achieve separation from the industry. Interestingly, the regulators recognized that there was value to consumers for us to exist and to gather that information. And so that was facilitated and our separation was achieved over that period, and then we went public in 2009. And since then, we have pursued a strategy of developing the insurance business but also looking at other verticals. Now more recently, as you -- some of you may be aware, we have decided to sell our Financial Services business and our Environmental Health and Safety business. And we have refocused our forces around the insurance and the energy business, and we are in the process of evaluating a separation of the energy business. And this is predicated on a view that from a shareholder value standpoint, we can create more value by concentrating on our strengths within the insurance industry. So that's kind of where we are today. What's really at the core of what differentiates us as a company? We have unique, proprietary and growing data sets that supports new applications as well as a strong defensive moat around the data that we have collected literally over decades on a variety of loss, claims information, underwriting information for the industry. We are able to utilize that data with very deep domain expertise within the insurance and the energy industries. We have a variety of experts and specialists that know not only how to utilize data but also know its specific applications and have an ability to apply and integrate that data. And that ability is manifested in the increasing integration of our data sets into our clients' workflows and the activation of that data in new automation techniques that is enabling them to reduce substantial costs within their industry and improve the productivity of their professionals. And finally, again, that centrality, our ability to take a new data element or analytic or a new platform and rapidly distribute that across the entire U.S. P&C insurance industry or increasingly, the life insurance industry or select ecosystems internationally is part of really, in my view, what makes us a truly unique company and a great business. I mentioned briefly the types of talent that we have within the business. It's actuaries, commodity specialists, data scientists, economists, all of these specialists that are focused on how do we gather and analyze data. About 2/3 of our workforce is based in North America, 1/3 internationally. The international side is growing quickly. We have data scientists in India, in Krakow, Poland, in the U.K., in Germany, and we are looking to utilize that expertise both from a data science as well as a software development functionality. But a lot of our industry vertical expertise is often in those specific countries, so we have a lot of our actuaries and our insurance specialists are based in the U.S. because they come from the industry. Now what this has contributed from our perspective is a very strong track record of sustainable organic growth in the 7% range. You can see that here, this goes back to 2007. You will see some areas of weakness in 2016 and 2017. The weaker growth was a function of the impact on the energy business of the commodity price downturn at that time. It was shortly after we had acquired Wood Mackenzie, our primary energy business. And in 2020 and 2021, the weaker growth here was a function of the pandemic. We do have, within our insurance business as in some of the other businesses, some transactional business that are affected by the lower rate of driving that was occurring during the pandemic, the lower rate of car purchasing that was taking place. And so with less driving, you have fewer accidents, you have fewer claims, and that had an impact on overall growth. But as you can see in 2021, we began to see some normalization. And so far in 2022, we continue to see those effects as the transactional elements continue to normalize. And we continue to believe that the 7% organic growth rate for the core business is 1 that we think is an achievable number for us over the long term. Now that growth also translates in a business that, as you can appreciate, were effectively moving a lot of electrons around, that we are able to maintain a very high level of operating leverage. You can see that generally here, that even with the 7% and even some of the lower organic growth rates when we faced some environmental pressures, has generally generated a high single digits, more often than not, low double digits type of growth rates. And that's a function across our business. Now one of the tensions that you will see in the business is that we have very, very high margins in the business. And in many of our growth areas, these are emerging businesses. And one of the challenges that we have as a business is that as a high margin, high EBITDA margin business, new businesses tend not to spring out of the ground at 50% EBITDA margins. And so we are generally trying to manage to maintain or improve our margins over time, and we have to balance our level of investment in new businesses that have good operating leverage but also enable us to maintain some margin stability. I'm very excited about the opportunity to succeed Scott Stephenson as the new CEO of Verisk Analytics. It's a tremendous responsibility. The opportunities in front of us, I think, are phenomenal. They are better than they ever have been as a function of these growing data sets of the cloud-based architecture that facilitates more data association and automation, the demand that we're seeing from the insurance industry. And I think that we probably have a better opportunity than we've had in many years to deploy capital into this business to support and improve growth and to generate very high returns from those internal investments as well as to continue to look for opportunities for promising new data analytics or platforms that we can monetize very effectively by distributing them through our central set of relationships across the U.S. and increasingly, in international insurance industry. In the near term, where I am focused, we have made -- recently made 2 public statements of a commitment to improve shareholder value by increasing the EBITDA margin for our consolidated insurance-focused business by 300 to 500 basis points by 2024. In our first quarter call, we expressed our confidence in our progress towards doing that. 2022 will be a transition year as we identify and begin to execute against those efficiencies. And we expect that you will see the impact of that in 2023 and the full realization in 2024. These are a variety of efficiencies that we embrace, that we recognize as an important discipline. It's like exercise, it's painful but it's important to be as healthy a company as we possibly can be. We are also going to be managing those against the impact of investment in new growth areas, investment in new initiatives, in modernizing some of our products and our data sets. We've also said that it's our intention to separate our energy business, as I described before. We are in the process of gathering the financials from a -- on a consolidated basis for that, on a separate basis so that we can evaluate what are the value monetization opportunities. It's important to understand that, that is subject to market conditions and most importantly, shareholder value considerations. But we are very focused on determining how we can monetize and separate that business and create value for shareholders. We're also naturally managing through a leadership transition. Fortunately, what I've described here in terms of our direction is very consistent with what we have done. It's refocusing, reorienting. In certain areas, we're going to be -- have the opportunity to evaluate some new ideas, some new approaches. There are some things that we have been doing. We may not be doing and emphasizing where we're putting our investment, but I think we all feel very good about the opportunity to take a fresh look a variety of topics. We will also, given a lot of the transition that's taking place, maintain a very sharp focus on our 2022 financial performance. And of course, in this environment, data security is always important for us, so we remain alert to the current environmental threats to data security. Longer term, when I think about the opportunity for Verisk, we have an opportunity to play an even broader role as a technology partner to the industry verticals that we have. Data and analytics has been our core, but data and software and process has become increasingly intertwined. And we're in a unique opportunity to be positioned to help the industry save billions of dollars in operating costs to improve their outcomes and to make the overall industry more efficient, which ultimately becomes a benefit to insurance consumers. Our focus, we want to continue to be on industry-wide solutions. I was recently with a name-brand property and casualty insurance company, all of you would recognize. And they said, "Lee, we need your help to fix this, but more importantly, the industry needs Verisk's help. No one is better positioned to address the process architecture and the data architecture that's necessary to achieve the efficiencies that you can and to help us on this journey to a more digitized customer experience." We're going to continue to balance growth, returns and margin. We're going to continue to focus on creating the best possible culture to attract and retain talent through a culture of inclusivity and accountability. And we will continue to be focused on our strategic information security risks. And overall, part of what I want to bring for those of you that know me, you will hear me talk consistently about capital discipline. My focus will be to continue to extend that capital discipline into operating discipline and making certain that we have accountability and that we're making relative choices in terms of where we're spending our time and our capital so that we can focus on the most additive opportunities within the industry. I'll spend a little bit of time on this. From an overall growth perspective, we certainly are always looking to expand the penetration of our existing solutions, as I described before, looking for new solutions by associating data sets or finding new data sets and applying them from the intellectual capital that we have within the industries that we serve. And we will look at strategic acquisitions where we think that we can add value. We have shifted our focus from an M&A standpoint, from a more top-down portfolio approach around data and analytics to a bottoms-up business unit-oriented approach where the business units initiate and are accountable for how they create value from acquisitions, which to me, is absolutely critical in order to create value for our shareholders and deliver growth and attractive returns. Long-term financial products, as I indicated, 7% organic revenue growth continues to be our focus. We also expect operating leverage to deliver EBITDA growth 1 to 2 points faster than revenue growth. Our intention is to increase our return on invested capital, which is approximately 13% over time. Our incremental -- if done right, our incremental returns, particularly from internal investments, can be well in excess of that. And we do expect to achieve double-digit adjusted EPS growth over the long term. Value creation for me is always going to be about operating cash flow growth and attractive returns on capital, and that guides our internal investment of capital and our external investment of capital. And as I've mentioned, I've talked about the M&A investment process, very bottoms-up, business unit-driven and where we can create value by leveraging our scale, our technology or our industry expertise. You will note that there's been a substantial shift in the nature of our acquisitions. From 2015 to 2017, we spent about $4.2 billion on 22 acquisitions, average deal size of $190 million. You can see that 80% of that capital was in the energy sector. 2018 to 2021, reflecting a shift on where are we adding value from an M&A acquisition. We only spent about $1.5 billion on 20 acquisitions, so a much smaller deal size and it has been predominantly 70% in the insurance business. That isn't to say that there aren't acquisitions, one of which, a company called Roskill in the energy business, which focuses on metals and mining expertise, which has been very valuable in the energy transition, and is an area where we have been able to add value by leveraging our distribution and data tie-ins at Wood Mackenzie. And you will notice also over that period of time that there has been a significant shift in the use of capital from M&A. We initiated a dividend. And you can see that approximately -- or more than 50% of our capital was returned to shareholders through share repurchases and dividends over the last 3 years, reflecting a higher degree of capital discipline within the business. We take corporate sustainability and governance very seriously. These are a variety of our core commitments that we have said. This is all available on the website. And we remain dedicated to corporate social responsibility. These are -- that's a little bit jumbled there. These are all the commitments that we've made and also the deliverables to demonstrate our progress against each of these initiatives. So you can find this online. It will probably be a little bit easier to read. And Andrew, that's everything that I wanted to cover. Hopefully, that provides a good overview for everyone. And if we have time, happy to take a few questions.

Sure. Thanks, Lee. I don't know if you want to sit down rather than have 1 of us doing it or not. We'll open up to Q&A in the breakout session. I want to take the next 5 minutes or so to just ask a few other high-level questions, primarily on kind of the growth opportunities. You talked about within your presentation, you being at a point in the company's trajectory of never having so many opportunities in front of you. So this being a growth conference, I'd love to kind of hit on some of those really in any order that you'd like. I know you talked quite a bit about life insurance as an opportunity, marketing within the insurance ecosystem, usage-based auto. There's a bunch of different opportunities. So maybe you could spend some time on the ones that are most attractive to you and where you think the opportunity is the largest.

Sure. Thank you, Andrew. And that's -- despite some of the near-term focus, from my point of view, growth is the foundation of our value and the foundation of how we create future value for the business. So despite some of these near-term issues on margin and the energy business, what's most important to me is how do we identify as many growth opportunities and then where we choose to dedicate our time and our capital. And I'm going to start at the core of the business. You will hear us talk about, in the underwriting business, of our core lines. And these are some of our oldest, most central businesses where we gather data on underwriting losses and provide -- have it provided historically kind of reporting around those elements. We are in the midst of creating a cloud-based environment where we are migrating those data sets and that reporting functionality into an environment that enables us to associate those data sets, deliver those data sets and that information to our clients in a way that is easier for them to access and activate and integrate into their core functions within the insurance industry. Now it is a lot of data, it's a lot of functionality. But fortunately, we have a road map because what we did with our energy business, including the Lens platform, is very analogous to what we're going to be doing with our core lines reimagined business, but in a way where I think we can really advance the functionality of how our data is utilized by the industry. So that's a key example of where we are going to be investing within the business and creating growth and value for our existing client set. Another element would be the international side. We have been able to, through a variety of acquisitions, to open up new ecosystems where we can gather data for insurance -- networks of insurance companies that we can extract the data, analyze it and then create value-add analytics that improve their efficiency or their decision-making. The best example of this is in our specialty -- our SQL business, which is the Lloyd's nonstandard environment where we provide policymaking and rating services to that nonstandard casualty market. And whereas it's very difficult to get a network of insurance companies to pull together, they are the network dimension, allowed us to tie together multiple market participants recreating, in some ways, the quality network that we have within the U.S. The other element that I would speak to is on the life insurance side. And I mentioned before, life insurance hasn't been a traditional area for us because the data set was relatively limited and it was really the mortality tables that they relied on. Now we have a wealth of data from sense data, social media data, mobility data that is giving life insurers a better ability to precisely determine peril risk. Many of you who cover the insurance industry will know, it was a bit of a surprise to me that the insurance industry -- life insurance industry has utilized credit information for a long time to determine life peril risk. And that was effective, but now we have much more precise and detailed data sets that are opening up new opportunities for us to serve that industry. One example is that if you ever apply for a life insurance policy, you'll be asked, are you now or have you ever been a smoker? Well, probably should surprise nobody in this room that not everyone is entirely truthful on answering that question. But we have a data technology that is able to take a voice sample and determine with a high degree of precision whether there is vocal cord damage that is indicative of chronic smoking. And so that's a sensed data set that is now available. And more broadly, the industry, when I talk to the insurance company CEOs that I have the good fortune of meeting and talking to, they are focused on how can we automate and reduce our costs because the number of folks that are going into the life insurance industry is beginning to diminish and so they need to automate. They're under financial pressure to become more efficient. We can help with that by leveraging data. They need help in adjusting to a more digitized customer experience. Everybody wants to shop and buy insurance. And we've been very helpful in allowing the insurance industry to accelerate that, and we'll continue to help them understand the risks. Some of the things that we are doing in evaluating the impact of global warming on the nature of loss. One quick item is, historically, a lot of it has been wind loss and the impact on buildings. But now we have hydrologists, didn't know -- didn't know it was a profession but we hire hydrologists or liquid mechanical engineers to understand the flow of liquids and the absorptions across planes because a lot of the damage with these much larger and heavy -- slower moving storms is that they're dumping a lot of water and creating a lot of flooding and damage to our buildings. So hopefully, that gives you a sense of what I described at the outset is growing data sets, growing demand from our clients for these analytics and our unique position to serve them from a position of scale and centrality and trust for the industry.

That's great. We'll have, I think, most people in the room, second-guessing lying on life insurance phone calls going forward. We're just about out of time. We are going to move to the [indiscernible] room for -- which is on the south side here on the second floor for a breakout. Appreciate everyone for coming and joining us.

Thank you.