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

We're just trying to locate some slides, but I think we'll just get going without them. I'm Jeff Meuler, Baird's information solutions analyst, pleased to introduce Verisk as the next presenting company in this room. Verisk is a leading provider of vertical data and analytics solutions, currently to the insurance and energy industries with a stated intention to move towards being a global insurance-focused information solution provider. We've always viewed Verisk Insurance as a uniquely good business. It provides truly must-have solutions, I know that can be an overused phrase, but it really does, to essentially every company in the end markets it serves. With me onstage is Mark Anquillare, who's currently the company's President. He first joined probably a predecessor organization in 1992. He's long been a member of the executive management team previously serving as CFO, COO and Group President with oversight for the Insurance business. Also with us at the conference is the Head of IR, Stacey Brodbar, in the front row over there. With that, I'll hand it over to you, Mark, if you can just make some level-setting intro comments on who Verisk Analytics is and then we'll get into Q&A.

Super. Well, thank you for being here, and it's great to join you. At the heart of what we do, we've been, over the years, aggregating and blessed with some incredibly unique data. And with that data, we found insights, always looking for causality, usually finding correlations so that we can help our customers better select risk, understand fraud and pay claims more effectively and efficiently. Inside of what we've done, it's been about trying to become very much a group of experts, understanding a problem before we found a solution for our customers. We've always looked for best-of-breed and certainly innovative solutions that we can tightly integrate into our customer workflows so that when they make a decision, they draw upon some information or from some analytic from Verisk. Just to give you a little bit of color on the -- oh, there we go, on the information that we do provide, think about from an insurance perspective, the insurance value chain. You're going out, you're looking to purchase some insurance. We, behind the scenes, are -- have access to information about you once you say it's permissioned to access it. So have you been involved in other driving violations? Have you been in any type of speeding tickets? Have you had prior losses? A little bit about who's in your family, automobiles, how many homes, that type of information. And at the heart of what we've done over the years is we've aggregated this information to understand the cost of goods sold for the insurance policy, right? Insurance is an interesting market, where you don't really know your cost of goods sold until after you've sold your policy. So what we do is we help quantify the average losses. We help you understand what the language is and what the coverage is. That policy language is typically Verisk. And as you kind of move through things we do, a lot of extreme events are impactful on the industry. Wealthy people take their most prized assets and build them on the most risk-prone areas in the United States, right? So Florida has all these very expensive homes. And people are insuring those. And they need to understand what kind of risk they're taking on. We help quantify that both for the insurer and reinsurer. And then finally, if I was to think about claims, we do two things effectively. One, we have this database of 1.6 billion claims, every claim in the industry and many other industries. And we're trying to find meritorious claims, so they can be paid quickly. But what we're also looking for is both the first party and the other parties involved, doctors, lawyers, third-party roofers, things like that, who are involved in the claim and whether there should be some further review of that claim before it's paid. We also have a tool, I just noticed who was here before, that is focused on contractors and the way the insurance does repairing of any of those losses that happen. So think about property, what we do is we help the estimate of that contractor who comes into your home, hundred million price points, building a price estimate. And we are working with the claims department and the policyholders to adjudicate claims. What we are trying to do is connect the industry in a way that we can bring efficiency, effectiveness. And through our use of technology and through a use of data and analytics, we're hoping to provide the ability to both pay claims more effectively, select risk more effectively and price it accurately. That, in large part, is Verisk. You also know we do some work on the energy side of the world. There, we are about the asset on the ground and, in large part, what it's going to cost and the value associated with that asset on the ground to the extent you're going to explore and discover from an oil and gas perspective. About 80% of our business is on the insurance side. And we've stated that as we move forward, we're looking to become primarily focused on insurance. And that is our current direction. So hopefully, that's a little bit of an overview of the things that we do.

It is.

And we've got the slides, too, which is perfect.

That's perfect slide to go through.

So just talk through the organic revenue growth target. And does it change with moving to insurance only since insurance has historically grown at a faster rate than your other businesses?

Yes. So what we've always stated is that our goal is to grow our top line at 7%. That's on an organic constant currency basis. And we're looking to grow EBITDA at a faster rate, 1 to 2 points. What you've seen over the last couple of years is we've sold off what was our payment space. That was the business that's around Verisk Financial. And we now believe that, one, energy is set to rebound after some challenging times in the market environment. And in post COVID, we've seen kind of pretty constant growth from insurance that should take to the forefront and continue well. So our targets are not changed. I think we're well positioned though to achieve and exceed these.

And to be clear, this is all inorganic revenue growth. It's not a target for subscription revenue only because there was a lot of discussion on our last call about what the non-subs headwinds currently are in the business.

That is true. This is about everything that's organic. We have a new acquisition. Until we grandfather in on the quarter, that's when it becomes organic. So this is our current business. It is a combination of what is subscription, which is about 80% of our overall revenue, and about 20% of that is transactional by nature.

So if you give us a nice description of what the company does and what the model is, Verisk Insurance, it's grown fairly remarkably in a tight range, around 7% on an annual basis outside of COVID. What are the growth contributors to get you to the 7%? And it's probably the narrowest growth band of any company that I cover. So why is it so consistent?

Yes. So let me maybe describe to you the nature of our businesses. So first of all, we have some wonderful businesses that have been around for many years, I mean, literally almost a century in some cases, where we've helped the industry understand what their loss costs are, those are the cost of goods sold I was referencing earlier, as well as fighting fraud. Those solutions are well penetrated. And what we have done is, for the most part, provide some value-added inflationary type of increases. So with those businesses, we have a typical range at the kind of lower single digits. And the very big other part of this business that is more like the insurtech, the new innovation, the new opportunity, is us extending and expanding the things we do from an underwriting perspective, from a claims perspective into ESG. Those are growing faster, right? And what we're trying to do overall is the two combined at 7%. So I think what you get with Verisk is it's a very large set of businesses that are well penetrated. And from that, we can build with this wonderful asset, this very unique data, interesting analytics that no one else can achieve just because of the sheer volume of data we have and the creativity of extending ourselves into things like life insurance, extending ourselves into the marketing space of P&C. Those are some of the growth drivers that will contribute to the growth over time.

Why is low single-digit the right growth for some of the mature businesses? We're in a higher inflation environment. Low single digits seems like you're not even keeping pace with inflation. So how do you take inflation into account? You're also adding value. You have a really good market position. Clients get a lot of value from your solutions. Why is that the right base building block?

Well, so first of all, what I was referring to is some of those core businesses. What we've done is -- what we're looking for is to make sure that these companies who've been with us a long time are paying for the value we provide. But the way we're going to grow in the long term is by selling them new solutions and new innovation. So to the extent that we can put some price and some value add for those, I think that is well received. And what it does is it keeps them very interested in the growth opportunities that is new and innovative. So that is a long-term view. It helps us with regard to how we're going to achieve our long-term growth rates. And let me also say that what I was referring to is the base product, right? We're always creating new solutions off of that base product, new analytics off of that unique claims data. So there, we're trying to monetize that data and that base solution by developing up-sells around it and for it. So if I was to kind of create a product set, you would see it growing faster than that, but I was kind of using more or less the base product there.

And you talk about breakout growth opportunities in energy. You just referred to some of the good growth opportunities in insurance. You talked about insurtechs, life, marketing. I'm guessing LightSpeed is a component of that. Which ones are most impactful to growth because they have enough scale when they're growing at a high enough rate that it's worth delving into?

So let me maybe walk around a couple of solutions. I'll stay on the insurance side first. I did hit on a few of them. So first of all, the way our insurance businesses have evolved on the underwriting side is people have historically gone and they said, "Hey, I'm going to get a quote," right? So you go online or your broker goes online, you get a quote. And then what happens is after you say, "I'm interested," they go back and actually underwrite you. They pull the reports, they find out the information. And in about 40% of the cases, they change that rate they just gave you. Well, the world of the cloud and the things that we're doing, we're bringing all that analytic upfront to point of sale. So we're doing all that analytic, and we know all about you once you give us your basically name and address. And we can understand the full dimension of the risk. So that LightSpeed offering, which is moving the data forward, leveraging the cloud, has been a fast grower. And we do that for auto. We do that for property. We do that for small commercial. That's number one. Inside of that -- and that's all about digital engagement, right? You get online, you can get a quote within seconds, maybe even sub-seconds. We said, "Let's go deeper. Let's go to the really front end of this. If we can help them pick risks, maybe we can help them pick the way they market to risks." So there's about $8 billion spent in the insurance industry. And you see it on -- every time you turn on TV, whether you like the emu or you like Flo, we can have that debate, but the reality is a lot is spent. And what we have kind of put together is this industry standard as to who is actually an active shopper, right? It's a real live lead. A lot of other people do profiling. And those are provided to the insurers. The insurers then use their CRM. They provide us with the information and they say, "These are active and they're actively shopping." And what we are able to do in that marketing is really extend to what we do. So marketing is the second item. We also found that there's a nice parallel. Although probably life insurance from a technology and analytics perspective is a little behind P&C, but that analogy is very real. And we feel we can be very influential. So whether it's doing models around pandemic, sadly, that has been very popular; two, whether it's about underwriting analytics, we can tell whether you're a smoker from your voice, whether you're involved in kind of unusually dangerous hobbies; or a software platform around making it cheaper to put up new products or maintain your existing ones. That is our FAST solution. So that software has been another very high, fast grower. Jumping over, four, I would highlight the things that we're doing inside of the ESG space, really focused on S. We have a series of about 60 social indices that help you understand a little bit about the geographic risks associated with your vendor, your supplier and others. So climate change, ESG is a theme. And maybe my last one would be we have done a lot of effective work inside of London. The London insurance market, we've put together a lot of pieces. And I refer to it as the interconnected and automated ecosystem. It is the most efficient or more efficient way to buy and sell insurance. I think we're making a difference there in piecing some of the way the London market operates together. It's the Sequel platform of solutions. Those are the five needle movers, if I can share them.

And what about insurtech? And insurtech means different things to different people. It could be actual risk-bearing insurance companies maybe with a digital wrapper. It could be competitors to Verisk. It could be vertical software to the industry. Like what are the impacts on Verisk from those forces?

That's good. So I'm going to put those insurtechs into two categories like you did. If I was thinking about someone who is an MGA, which is a managing general agent, this is somebody who are trying to find risk and share them or source them for another insurer, or an actual underwriter, someone who's going to write the risk, those are customers, right? They have the ability to move to somebody who has data and technology that would satisfy their need. They're very nimble, very agile because they don't have this technology they have to work with. And we have found them to be wonderful customers who adopt quickly and adopt the full suite of solutions. So they're in the market because they've said, "Hey, Verisk, we'll use your programs. We're in all 50 states. We're in all lines we want to be in." And they buy a lot of data from us. So that is very much a positive. The other side of insurtech which has been extremely well funded over the last several years is the service provider. And those are competitors to us, right? So they are trying to find new and unique ways to understand a risk or understand weather or understand fraud. And those are the type of things that we also do. I think we are blessed with some very unique data that they don't have. So usually, we -- they visit with us to see if they could borrow some data from us. That's usually more advantageous to them than us. I think the other thing we have is a channel, right? We have good relationships. We have a big sales force. So over time, sometimes they want to partner and see if we can leverage the channel. But clearly, there's more competition in the insurance industry today than there has in the past because of the insurtechs.

And in addition to the insurtechs, there's been a lot of change in the competitive environment ownership, so RMS getting acquired by Moody's; CoreLogic going private; CCC going public; TransUnion is going after the insurance market; RELX continues to do acquisitions. How about those competitors? Like do you see more competition from them? And then when you talk about the insurtechs, like if you go to an RFP process, are there a lot more vendors as part of the process?

So I think your -- the answer is yes. Let me kind of give you a little color around some of the comments you made. So the two primary competitors that we see would be Lexis on their underwriting side, primarily around the people and personal lines insurance, and then CoreLogic around the property side of things, which would be both homeowners and commercial. We have seen probably more aggressive pricing from a CoreLogic perspective. And Lexis continues to be a very good competitor. So those have been two competitors that have been around for a long time. I think we've competed well and taken share from them over the years. So the other place that you went was inside of -- we have a solution for catastrophe modeling that is known as Touchstone or AIR. RMS is the competitor. They're acquired by Moody's. We have been very effective over the last several years of taking customers and moving them from RMS, which used to be the bigger player, to our set of solutions. And I would say to you that Moody's made a nice acquisition. I think there's opportunities. And it's true of us as well to take some of the work that's done, whether it's around climate change and whether you've -- where you view risk and bring it not just to the insurance market but to corporates across the world. And obviously, Moody's has this great access there as you think about the impact of climate change on mortgage portfolios or bond portfolios. And that would be probably a focus they will have going forward.

So you've announced an intention to transition to be insurance-focused as an information solution company. You were recently promoted President. You have a CEO transition also that recently happened. Are there operational changes that you're planning in terms of go-to-market, the amount you're investing in innovation, acquisition opportunities that you would have looked at differently in the past? Just how should we expect the business to be operated differently as a result of the management change and portfolio change?

So I think the first thing is focus. I think what we have typically done is we tried to spread some of our investment dollars around, always focused on ROIC. But having probably more investment into insurance, I think, will help us. What we've also done is we started to reorganize and realign from a focus perspective, we had some folks at the center trying to pull together assets from the various verticals, so what energy assets or data can be used to supercharge some insurance, what can we do to bring things together at the center if we had information around payments or the Argus database. Those assets, as we separate, we had some data scientists, some technology people who are in the center, and we've now kind of moved them into the business unit to be closer to the product, to become closer to the customer. So I think that will pay dividends for us as we become more focused in that regard. And maybe, certainly not least, but certainly the other element of this is I think what we now have is some technology people in the center. What we've always found is that some of our core businesses have historically been, "Here's the information we provide you. Here's how to understand a loss cost," right? So if you're in the restaurant in New York City and you have about $2 million worth of premium -- or revenue, excuse me, at the restaurant, it's probably about $20,000 of general liability. That's the type of thing that we would calculate across thousands of different businesses across many geographies. That type of information, how can our customers better consume it? How could they take it in and affect all their rating and all their policies? We are the people behind the scenes on the insurance contract, right? You open up your homeowners' policy, you're going to see our name at the bottom. We have some customers that have 20,000 products. So we make a change to policy language, and it rattles through 20,000 different products they have in all the language that you change. How can we reimagine our core lines of insurance so that the effort and the time and the commitment that our customers have as it relates to the integrators and the software can be reduced? So we think there's an opportunity to reassess what we do and become more of a technology partner to our customers in a way that it actually saves the money with others and hopefully maybe more efficiently, they can spend with us.

Got it. As we alluded to, your insurance business grew more slowly while it was being impacted by COVID than it has historically. What were the reasons for that? Like what was impacted? And why haven't we seen kind of the reversal and the benefit of that yet? Or do you still expect it? I think some investors were thinking there'd be a catch-up from those easy comps and the return of that revenue.

Yes. So the things that we saw from a pandemic perspective, one, a lot of people weren't driving, right? So if you don't drive, there wasn't a lot of shopping. So when people go online and shop, for auto insurance, behind the scenes, those insurers are buying information and data from Verisk. So that's one example. Second, if people aren't driving, there's not a lot of auto claims. So auto claims are another driver of revenue on the claims side for us. Third thing was workers' comp insurance. Well, workers' comp claims are down 20%, 30%. And they continue to be down 20%, 30%. In large part, fewer workers' comp claims as people work from home, there's not as many slip and falls in your kitchen, I guess. But there's also some regulatory change in the industry that are introducing pretty hefty fines. So that initiative or that product line around casualty solutions, workers' comp claims, is set to probably rebound, but everyone's kind of pausing to understand what these regulatory changes are meaning. And last but not least, we have a business that's focused on insurance, travel insurance, to be specific. Obviously, travel insurance was hit pretty hard. And those are the four things. What has not yet fully come back? Some of the auto has come back. People are driving and the claims are back. But they're still not as much shopping as there once was. And the workers' comp claims seem to be very light still. So two of the four are kind of on the rebound, two are still kind of a little bit slow to return, to answer your question.

So as part of the transition to an insurance-focused information business, there's going to be some initial stranded costs after some of the divestitures. And you've also talked about some post-COVID expense normalization, things like that, to have an appropriate 50% to 51% baseline to expand margins 300 to 500 basis points from over the next few years. On the 300 to 500 basis points of margin expansion, discuss what was the process to come up with those estimates? And what are the primary categories of the expansion?

Sure. So first of all, we had to kind of create a little bit of a baseline, right? In the world of Verisk, if I was to look back to 2021, our margins overall we're kind of closer to 49%. What then has to happen though is we've done some things that we wanted to normalize for, a, let me tell you that we did two acquisitions: one inside the marketing space to augment some of the work I was describing earlier; and a second, there's kind of a very similar type of business in Canada that focuses on property underwriting. So those two businesses, as very strategic they are, they don't have the same margins. That's about 80 bps. Other thing you need to factor in is as our corporate organization is now focused solely on insurance, there was corporate-type costs, HR, IT, finance, legal, that were spread to the businesses that are no longer here. And as we try to take on those stranded costs, things like billing, if you're focused on energy or you're focused on financials, you can get rid of maybe reducing costs there. But most of it, if you do an SEC reporting, stays around. So we have about 200 bps that remain as well because of that. So from that point, that's kind of our starting point. We then have some things like, "Okay, we're going to start traveling again. I think everyone is here. It's good to see everybody," but these are type of expenses we haven't incurred in some time and will be transitioning back, as an example. So our goal is using that as a starting point, we believe that over the course of the next 3 years or through 2024, we're looking to add 300 to 500 basis points. Our focus is a combination of let's make sure we continue to focus on the top line. So it includes some investment in things like that reimagine effort and some things we need to do to make sure we grow. And the same time, we're pulling costs out, including some of the stranded costs with an overall outcome, a net outcome, of driving up the margins.

And how do you think about your workforce alignment from a best cost location perspective? And of course, that could mean offshoring. It could also mean smart shoring. You have a lot of job openings right now in Boston, London, Jersey City. Those sound like pretty high-cost of living areas. Is there an opportunity there?

Yes. So great question. As we thought about ways we can try to reduce costs, we thought about facilities. In this new world of post pandemic, people are going to be in the office less frequently. Let's see if we can reduce the footprint. Easier said than done in the short term, I think it will be done over the longer term. We've been looking at ways we can kind of be more effective with HR and with finance. And maybe there's some ERM systems, HR systems we need to put in place. But to answer your question, one of the bigger catalysts or opportunities is taking what our jobs in the U.S., open jobs, open positions, and moving to lower-cost areas, so Hyderabad, India, we have Kraków as an office, we have Malaga, Spain, even Costa Rica. So your example that you provide is a good one. That is definitely a part of our overall approach to some of this margin expansion.

Okay. And so the expectation is to get to a 53% to 56% margin in 2024, correct?

That's correct.

And does that contemplate additional acquisitions post what you've already done? Like can you absorb some acquisition margin dilution since they normally onboard below your corporate average margins and still get to that target?

So inside of our thinking, we've left some room because we felt like inflation was going to drive up some costs associated with salary, right? We left some room because of travel and what's going to come about. And to the extent that we want and we continue to need to tuck in strategic acquisitions, we've left some room there. I don't think we can absorb a very big one, but we would be fine with some smaller ones that would advance our strategy.

Okay. And then so the expectation, just to read the chart correctly, is you'll get margins to 53% to 56% on a consolidated but insurance-only business around that 2024 time frame. And then from there, you'd expect to expand margins with organic EBITDA growth growing 1 to 2 points faster than revenue growth from that point. Is that the correct interpretation of the targets?

That is true.

I think we will conclude there. Mark, thank you for all of your insights.

Well, thank you.

Really appreciate it.

I enjoyed it. Thank you. Thanks for being here, everyone.

And Mark and Stacey will be available for follow-up questions in a breakout session. The next presenting company...