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

All right. Good morning, everybody. We'll get Day 2 started here right away. Thank you for being here. For those of you who don't know me, my name is Manav Patnaik, I'm Barclays' business and information services analyst. But more importantly, we're really pleased to kick off today with Verisk Analytics and especially Lee Shavel, who's the CEO. So Lee, thank you for being here.

Thank you for having us, Manav. It's great to be here.

So Lee, maybe just a first broad kind of macro question for you. We've been -- we've obviously hosted a lot of financial lenders type of companies who've been giving us their trends. But maybe from your perspective in the P&C insurance space or in your businesses, just -- maybe just some broader thoughts on what you are seeing in the current macros because the market is obviously fearful, but just from your perspective.

Sure. So one thing I've been very fortunate, Manav, to have the opportunity to do as I've transitioned into this role is to talk to a lot of our clients, and specifically the CEOs of major property and casualty insurance companies. I probably had a dozen conversations to get their perspective, importantly, on how we're doing for them, what is top of mind for them. And in this environment, I think there are 2 kind of primary concerns. One is the recessionary impact and the other is potentially the inflationary impact. And I would say, among the insurers that I've spoken to, the inflationary dimension is the more immediate and larger concern. And I think that probably reflects that. From a recessionary perspective, insurance is a fairly economically resilient product. People, companies still need insurance. And so that usually doesn't tend to have a very significant impact. Whereas on the inflationary side, we're dealing with an environment that insurers haven't encountered in a long time. And they are very focused on utilizing our analytics to understand the impact of inflation on replacement costs, their insurance-to-value calculations and what the sustainability of that is going to be because, of course, that's critical to how they are pricing policies and the premiums that they're calculating for this business. And I think we are in a repricing cycle to reflect that. That is also causing some of them to step back and look at in light of those. And given some of the steps that they have to take for regulatory approval around premiums, what lines of business do we want to be? And I think we talked a little bit in the second quarter call where we have seen some softness in the personal auto side within particular markets. So overall inflationary impact on the business seems to be the highest priority, the biggest concern that they have, and that translates into a very clear and consistent message to us that where we can be most helpful to them is in reducing their costs, finding ways for them to be more efficient in addressing the increasing digitization of the insurance market. And so that provides a guide to us in terms of what's most important that we want to prioritize from a growth perspective.

Got it. So it sounds like almost there's almost more demand for your services with the questions they're trying to answer. But a lot of our companies have been talking about their downturn playbooks or what if things slow down, the things they can do to flex, either the cost structure or natural offset. From your perspective, how do you see the potential impact, negative, positive, to Verisk in the event of a slowdown?

Right. So I think you've characterized something quite accurately, which is the demand for what we do in a general sense is increasing. And it's driven, I think, by 3 factors. What you've described, which is a greater and more intense focus around efficiency, cost management, particularly as it relates to technology and data. When you look at the amount that a lot of the major insurance companies spend on technology and information services, it's -- the Verisk revenues are dwarfed by their aggregate spend. And that's where the economics of what Verisk does are most powerful because we can effectively invest on behalf of the industry in data sets, in analytics, in platforms that facilitate greater productivity and create value across the industry. And that's something that I've heard repeatedly in my conversation, "We recognize and appreciate the value that you provide as a utility to the industry." So that is certainly one driving factor. The other driving factor is that we continue to see an expansion of new data sets that are available to the insurance industry in areas that they would have never utilized or thought about alternative data sets before. We have a lot of social media data. We have a lot of mobility data. We have a lot more satellite data, more computer vision, data from Internet of Things. And here, again, is a perfect example where we can invest in and standardize that data because it's the comparative dimension that is so valuable to them to understand across the industry as a whole what that is -- or what they can do with that data. In life insurance, as you know, has been a great area of growth for us. We have found new applications for social media data that -- and even kind of sense to data in terms of voice data that has given them more insights on payroll risk and the risk that there -- the insured is a smoker. So those are some examples on the data side. But the third element is that the environment, the data environment, as the industry has adopted more cloud computing, has facilitated more ingestion and integration of those data sets. And so the opportunities that we have to deliver that activated data set into their function or their process is substantially greater. So I think all of those are really contributing to an increasing opportunity for us to meet their needs.

Got it. And before we go into some of the details of your businesses, firstly, congratulations on the new CEO role.

Thank you.

And a broader question, I mean, technically, I think you still have your CFO hat on, I think Elizabeth starts in a week or so. But just wanted to give you the opportunity here, as new CEO, should we -- what should we expect? Like what is your plan, are there any strategic changes? Or just any sort of broad framework that we should be looking out for right now?

Sure. So Manav, the first thing that I would say is that I want to underscore that what we said back in February in terms of our communication to shareholders that we are focused on a 300 to 500 basis point improvement in our margins where our consolidated insurance-only business continues to be a primary focus for us. So that's something that we embrace. We're pursuing that across a variety of paths, from real estate and marketing, global talent optimization, technology costs, where we're investing. So as we said in the second quarter call, we're very pleased with our progress towards achieving that goal by 2024. The second element is that, as we said, it was our intention to separate the energy business. We continue to proceed down that path. And the timing that we outlined originally continues to remain our timing of delivering a clarity around that issue with our third quarter earnings release in the first week of November. So those are the near-term objectives. That also because of all of the noise in 2022, while of course, we're looking to optimize those businesses, we have been engaged in our overall strategic planning process, where we want to be thinking about where are our channels of growth, where are we investing, how do we achieve the very strong levels of organic growth, the operating leverage within the business and high returns on capital within that. And our expectation is post our fourth quarter earnings release in the first quarter of 2023, that would be a great opportunity for us to sit down with the investment community and lay out what our plans are to deliver on those long-term goals. So that's what we're engaged in right now. It is an opportunity, I think, as you've described, for us to step back and review a range of things that we have done in the past and determine, can we improve on them. I don't want to characterize that. I don't think that you will see dramatic changes either in the way we prosecute the business internally or externally. Our M&A strategy remains the same, in that we are generally looking for small and midsized bolt-on acquisitions that we know that we can leverage through the distribution platform that we have to the insurance industry with a sharp focus on how we are generating high returns and it's additive to our overall growth rates as well as investing in areas within the business that we know we can generate good returns and are additive to growth. So all of those components remain in place. It's underpinned by kind of the strong economic model that we have of investing on behalf of the industry, creating value for them, creating value for our employees which are critical to our success, and ultimately, we're very confident that translates into a great value proposition for investors.

Got it. And not just spend too much time on Energy, but just a few quick ones. So firstly, can you just again set the stage on what are the different alternatives you're evaluating for Energy and kind of the motivation behind that?

Sure. So as we said at the outset, our focus is on whatever path we believe generates the highest value for our shareholders. And that included a potential separation through a spin-off, which is clearly an alternative. The second is a sale of the business to a private buyer. And the third is a retention of the business if market conditions and circumstances are such that we don't think that we are creating substantial value in the sale of that entity. It remains our intention to separate the energy business. But as you can appreciate, there are always uncertainties in overall market conditions that we have to allow to play out, and we're working to achieve our objective.

Got it. And just in terms of the trends in the energy business right now, just maybe a few quick points on -- because we had the -- our Energy conference last week, and it sounded like almost every company was constructive, moderately bullish even. So just curious if you're seeing that in your business trends.

Certainly. And I think at 2 levels. One, given what seems to me ongoing expansion of demand for data, not only within the specific segments of upstream, downstream, alternative energy, metals and mining, chemicals, across the board, understanding how these data sets interrelate, has been stronger than ever. Part of it is driven by a focus on climate-related issues, some of it is just the very volatile and uncertain environment that we're dealing with as a function of the invasion in Ukraine and, I think, generally strong energy prices. So all of that from an end-market standpoint remains very constructive. I think we've talked about on the call, we have more demand for our consulting services than we have supply capacity. That's some sense of how much demand there is out there. Now in addition to that, we have continued to be very pleased by the momentum that we've shown in the uptake of our Lens platform for delivering those data sets, electronically integrating them into workflows. And we've been able to capture that value in significant price increases for our clients that have used that product, seen the value, increased their productivity in their use of it. So we're excited about that end market and then ultimately, how we have been executing that with our new platform.

Got it. All right. So I guess let's just move on to the insurance segment. And maybe first starting high level, you've had this 7% kind of long-term revenue growth target or goal out there. And I was just hoping you could just help us break down how that 7% splits between pricing, innovation, volume and however you look at that.

Yes. So the way we've described it in the past, and I think this is still true, is that in the core of the business, there is generally -- and I'm kind of speaking on the -- on the underwriting and some of the claims, particularly ClaimSearch businesses, there is kind of a baseline inflationary price increase that we are able to maintain as a function of the fact that it has critical value to our clients and they understand that 70% of our operating costs are human-based costs. And so obviously, we're subject to that. And then we are generally able to add a point or 2 of incremental value from a pricing perspective because of the investments that we've made to improve those products. So think of it as we will add new features, we'll find new ways that can create value from them through that product. And so that gets us to kind of an overall mid-single-digit growth rate. And then we have other businesses that are earlier stage that are more penetration opportunities that are growing at double-digit growth rates. Our specialty business services, formerly the Sequel business is an example of that. Our Life business is an example of that. Our market tech business Jornaya and the acquisition of Infutor are examples of where there is a new analytic, a new platform that has value to the industry and we have been able to maintain a stronger growth rate as a function of that. And we'll continue to look for new opportunities of solutions that create value for our clients. I was recently out on the West Coast, had an opportunity to meet with a lot of InsureTech start-ups. It's astonishing the number of new ideas that are out there. We're not going to come up with every great idea, but there is a great opportunity for us if it has purchase in -- among our client base for us to accelerate its implementation, delivering value to it. So those are the dimensions that we think about in delivering on that 7%. And I would point out that for the 2 years prior to the pandemic, when we look at those quarterly growth rates in the insurance business, 5 of 8 of those quarters have delivered 7% plus organic constant currency growth rate. And there were a couple that were slightly before each of those years had 7% or higher growth rates from an annual basis. And if you looked in the first 2 quarters of 2022, from a subscription basis standpoint, which is a breakout that we started this year, we had over 7% growth in those -- in that dimension of the business. It's been the transactional side where, because of lower workers' comp claims, because of lower driving activity, we've not seen any normalization yet in some of them. Hopefully, that gives you some context around [ the growth ].

Yes, that's very helpful. In terms of the mid-single-digit pricing, the inflation to value-added pricing, that sounds like kind of the normal environment. Obviously, inflation is much higher in the past year. So does that mean you get that extra juice in an inflationary environment? Or does it tend to stay just more steady?

I think it gives us a little bit more scope because, as we indicated, there is clearly a recognition that inflationary pressures are a factor that we're dealing with from an employee standpoint. It also, I think, is a recognition that the insurance industry is factoring in that inflation into their pricing. And so that provides a little bit more space. We're always sensitive to the fact that we need to be delivering value to the insurance industry. But in certain of those, we have some direct ties where our revenues have some relationship to gross premiums written by the industry. Now those pricing increases tend to be lagged because they occur over time. So we get some uplift from that as well as kind of -- as well as on rate pricing.

Got it. And can you just help distinguish a little bit more the value-added pricing? Is that just upgrades of existing products versus these, I guess, new products that you're selling that you said are growing double digits?

So yes, it is on existing products, and I'll give an example. We have -- many of you are familiar with our ClaimSearch product, where if you are -- if you have a first notice of loss claim within 24 hours, if you're reporting it to your insurer, Verisk will have that information so that we can run a fraud check. We estimate we save the industry about $80 billion annually in avoided fraud because of our ability to detect that. We have recently invested in a package known as Claim Essentials that delivers to certain customers more value for how they utilize the product. And so that has provided a lift to us from a pricing and a revenue standpoint. I would also use that as an opportunity to talk about what you may have heard us describe as our core lines reimagined project. And so core lines are the loss costs, our forms business, a lot of the legacy regulatory data sets and services that we provide to the industry to improve their efficiency of regulatory filing. We're in the process of digitizing a lot of that, moving that to a platform, integrating it into their workflow that we believe will deliver significantly greater value to them, and that will be an opportunity for us to create more value and capture some of that value in our pricing.

Got it. And before we dig into some of the products you mentioned and some of the trends in insurance, how -- I think one of the questions we often get is like, "What is the mix of products within the insurance business?" So how would you at least help us appreciate what are some of the bigger line items or areas within insurance?

So the -- on the -- we provide the breakdown from a revenue standpoint among underwriting and claims. And in underwriting, the largest component is our core lines or the kind of the traditional ISO, ISO business, which would be the largest. The second largest would be our AIR or extreme events modeling business. And then also on the underwriting side, we have the former Sequel business, which is the U.K. nonstandard underwriting business. So those are kind of in order of magnitude on the underwriting side. On the claims side, we have in order of magnitude, ClaimSearch, which is the anti-fraud tool. We have the Xactware, which has lost cost estimating. And also on claims, we have Claims Partners, our workers' comp area. Now there are a lot of other smaller businesses within that, but those are the largest pieces.

Got it. So if you look at those pieces then. So ISO, firstly, I think that's probably the most resilient, steady part of that business. Anything to call out there in terms of trends or...

So I would just -- I would point to the core lines reimagine, of our opportunity to think about, our ability to provide more frequently refreshed data, more digitally delivered data on that. Within that, we also have new areas of underwriting such as the Life business would fall into that underwriting component. There, we're penetrating a new vertical, adding new data and analytics. So that would be one of those penetration opportunities, but it's within the overall underwriting businesses. And then similar to that, our marketing business, our Jornaya business that we've expanded applications in. And it's been a very good fit because we had on the rating side developed our LightSpeed products, which enabled our carriers to be able to offer bindable quotes more quickly at the point of sale. And now we've been able to pair that with a marketing technology that allows them to identify the customer that they can deliver that to more immediately. So I mentioned that to kind of show how some of those topics tie together.

Got it. So since you brought that up, let's -- I wanted to ask a question on Jornaya, Infutor, this marketing angle. You gave us a quick preview here. But maybe help us appreciate the competitive set and how these assets are differentiated. And I guess what were the insurance companies doing before?

Right. So the differentiation is that unlike a broad-based market tech business, these have been businesses that have focused specifically on activities and processes that are directly tied to the purchase of insurance. And so there is a knowledge of what types of transactions or events will signify at an earlier stage than, let's say, typically applying for -- shopping for auto insurance or homeowner's insurance. There tend to be triggering events. And so the expertise is around qualifying of those leads when they begin to actually look for some insurance product. So it's quite specific to the insurance industry.

Got it. Okay. And then you mentioned AIR as one of the bigger categories on the underwriting side. And maybe I'll loop in a few questions here, which is -- maybe the first question is, your AIR is next -- biggest competitor RMS got acquired by Moody's. So the first part of the question is, are you seeing any difference competitively after that acquisition?

We have not. And that isn't -- we respect RMS as a competitor. But our sense is that there is a lot of good in climate data and that the focus is how can they use that in other areas more so than kind of competing in a different way on the extreme events modeling side of the business. We haven't encountered anything that is concerning on that front.

Got it. That makes sense. And so the second question is around those lines. AIR should have the same capabilities, like you said, around the climate data analytics. So in this broader scope of ESG and climate demand out there, what is the journey or plan for AIR to do something similar?

Well, you've hit it right on the head, Manav. We have been thinking very carefully about what data we have that comes out of AIR. And one of the challenges is that you often have a lot of technical data that is designed for a near-term risk modeling exercise for a current underwriting season. But we've got a lot of great climate scientists and structural engineers, hydrologists that are analyzing that data. And we are working in a more focused way around what data sets and how can we apply them to the longer-term trends. We recently put together a climate-related advisory panel to try to tie in some external advice around that. But specifically on the product side, we have a business called Maplecroft. It used to be part of Wood Mackenzie, and we felt it would be better situated within our extreme events modeling business because we could tie some of the data sets and the analytics that we had on the climate side to what Maplecroft was doing in evaluating environmental risk, political risk, social risk, and that's been a very successful effort. I recently spent time with the leader of that business. And he said, there's so much to do on the insurance side as insurers are looking to understand how political risk and social risk is affecting insurance outcomes in these geographies. So that is where we've been focused on, trying to leverage those assets out of our extreme events and climate modeling.

Got it. Okay. That's helpful. So I want to turn the focus a little bit on the margin target that you alluded to in your opening remarks. So maybe first, just to set the stage again, just the starting point, the 300 to 500, just what the exact time line behind that goal is?

Yes. So the -- what we outlined was that we believed in a consolidated insurance-only entity, that we would be able to increase our EBITDA margins by 300 to 500 basis points by 2024. And that means that we believe that for the year 2024, that we would be able to be within that range. Not something that like in the last month of 2024, but that is a goal that we have set for 2024. And when we think about the kind of starting point, our estimate of that starting point, if you were to look at it today, with the overhead that we have allocated to the insurance business, we would be starting from a base of 50% to 51%. And so that would be 53% to 55% is the -- I'm sorry, 53% to 56% as the target EBITDA margin range that we're looking to achieve in 2024.

Got it. And you alluded to, I think it was real estate, marketing, talent, et cetera, some of the buckets of how you get there. Maybe just a few more details on those areas and perhaps how much each of them could be driving the margins.

Yes. So there are a lot of moving pieces, and so I can't give you a quantification of that. All of these are kind of contributing to it. But on real estate, it's been a very important opportunity for us to think about what real estate we need and how we utilize it. We're adapting to a more hybrid environment that we think is a lasting element of our business model. We have utilized some more efficient labor markets that will, I think, continue to give us an opportunity to find analytical talent, data science talent, processing talent for the business in a global -- in a more global environment. We have looked at some of the duplication of marketing costs across our organization. So we're consolidating some of those functions, looking to bring efficiencies. And similarly on the technology side, we see an opportunity to extend the savings that we've made in the migration to cloud into our businesses. And I think it's probably -- shouldn't come as a surprise that if we are operating as a more focused insurance entity, there will be more scope for us to be able to bring greater discipline and focus around that combined entity. So those will, I think, open up other opportunities. And we'll continue to have to manage margin against our growth and our return objectives. One of the challenges is that we've got great EBITDA margins, that we're going to be improving those. But as we are investing in new growth opportunities that we think generate a lot of value through that growth and returns, they tend not to spring out of the ground at 50% EBITDA margin. And so we'll constantly be looking to balance that and balance those overall objectives. But we think the most important thing is that all of those businesses have very strong operating leverage. Our ability again to make that investment and expand revenue at a substantially higher rate than our expenses remains powerful in almost all of our data and [ analytics ].

Got it. The two things I want to touch on there. One is on the new product side and then the other is the cloud. But maybe since you ended on the new products side, when you're evaluating where to invest, like what is your time line for the return calculation? Because I think there's been an impression that Verisk is an innovative company, but sometimes it's a very long term like kind of bet on something that might happen versus something that's a little bit more immediate. So how do you think about that? Does that change? Or is it more of the same?

It's a great question. And I think the way that I would address it is we have literally hundreds of products, and we have product life cycles that are going to vary for each of them. And what we try to do is develop a process where we're working on products with a variety of horizons so that we can begin to see some of the benefits of investments that we've made in products 2 or 3 years ago and so they come to fruition. So there is a ruling dynamic aspect of this. I'm looking for some examples. Telematics, our investment in connected car driving activity was something that we believed was going to be very important to the industry. We made some significant investments. We didn't see as much immediate uptake in that and so we decided to scale back on that. We then saw the industry begin to see greater demand for that data and find ways to integrate it. And so we have been increasing that. So you are modulating your level of investment depending upon where you see client investment. Core lines reimagine is a -- will be a significant enhancement that we're going to be investing in, that will probably occur probably over a 2- to 3-year period. At the same time, we have investments that we've been making in -- on the marketing side, on the life side, that are probably 2 or 3 years down the road that we'll evaluate and set specific operating hurdles to determine, "Is this making the progress that we expect?" And if not, how do we adjust our level of investment or expense against it? So I think we're just looking at a portfolio of investments. The good news, kind of like an investment manager, you want as broad a pool of investment opportunities. And one thing that I'm really reassured by is that we have a lot of areas to invest. The key is being disciplined and accountable for where you're making those investments and having the necessary discipline to say, if it isn't achieving what you want, then you're going to scale back on it and look for other areas to invest in. So hopefully, that gives you a little bit of context.

Yes. Okay. And then just to touch on the cloud. I mean, it's been kind of a slow methodological journey, it sounds like. But can you just give us an update on where we are? And for most companies, when we hear the cloud transformation, it's like a huge margin driver as well. So I mean, should we expect something similar for Verisk?

So I think that's embedded in sort of the margin -- keeping in mind that, that is one aspect of our overall margin, our level of investment, the impact of acquisitions. So the margin improvement, as we get into 2022, or we as we get through the end of 2022, we've substantially completed the migration of our data sets into a cloud environment. We've said previously that we have achieved an economic cost saving in the form of what we were spending in aggregate on CapEx relative to what we were spending for the cloud. So economics matter, that's a benefit. But I think what's often lost is the fact that you are converting a former depreciation expense into an operating expense, and so that inherently increases your costs and lowers your margins. So it is not -- I think there's probably a greater expectation and reality missing that from a financials geography perspective, you're actually increasing your expense. And as we add new data sets, while we're looking for efficiencies in our cloud expense, we do expect that expense to grow as we integrate more data sets over time.

Got it. And just to wrap up the margin section, I mean, 300 to 500 is a good number, not complaining. But would you consider that to be a conservative first starting estimate as you get into it? You said there was a lot of moving pieces. How should we think of that in terms of your targets?

Right. So it's a broad range, and we will remain focused on being in that range in the timeframe that we've described. Obviously, whether it's growth or whether it's margin, we're always working to overachieve those [indiscernible].

Got it. I wanted to end with capital allocation, but I just want to see if there's any questions in the audience in the last 5 minutes we have here. I don't know if anybody -- sure, I'll repeat it.

Can you talk more about what [indiscernible]?

Sure. Is it [ Marshall ]?

Yes.

Good to see you, [ Marshall ]. So I think the ongoing development of the international insurance markets and the increasing analytic and data sophistication of those markets remains very high. And as we've seen in the U.K., we've been able to develop multiple businesses in that, not just Sequel, but 2 or 3 others on the claims side as well. We've just acquired a claims-related business in Germany. And so in the developed markets, we have seen some of our clients, whether they're U.S. clients or European clients that may be engaged with us in our extreme events and modeling business, who are familiar with what we do, look for ways to leverage those same opportunities. Now the form in which we pursue them tends to be more network software-oriented business. And what I mean is -- I want to be very precise about this. There are software platforms, Sequel is an example of this, that are connecting workflows within that insurance process. In this case, the U.K. nonstandard of the Lloyd's Market. And so within that, you are building effectively a network or a consortium that is sharing data that you can extract, you can analyze and then you can integrate into their workflows for greater efficiency. And so I think that is a common dynamic and there is appetite for it. So we'll continue to be very active in looking for those types of international opportunities. And I would put them in the category, as evidenced by Sequel and others, as substantial penetration opportunities for us. Thanks, [ Marshall ].

Okay. Lee, let's end with capital allocation then. I mean we talked about your focus on organic investments. Leverage is not an issue. So the question is more on buybacks versus M&A, perhaps both. And the buyback question is more -- you've sold a few assets, potentially one more coming. What do you do with that excess cash? And then on the M&A front, is it just more of these tuck-in deals like in life and marketing or perhaps all these InsureTech companies that you're scouting a little bit here?

Sure. So our primary principles are that we want to make certain that we're investing the capital where we see the highest returns. And as I've described, our ability to make those investments in data and technology that can create value for the insurance industry as a whole or the energy industry are massive. If we don't have a use for that capital, we return it to shareholders. In both of the recent sales, of which I think I see one of the buyers in the back of the room, we returned all of that capital to our shareholders through share repurchases. That would be our primary intent with the energy business if we're successful in selling that business. And in terms -- and so those are dividend, or the share repurchases. And from an M&A perspective, there is one -- no intention to get into another vertical outside of insurance. The opportunity here remains exceptional. And so it will be businesses that are in that small to midsize range that we can leverage through our connectivity to the overall insurance industry.

Got it. All right. I think we'll leave it there. We're almost on time. So thank you so much, Lee, for coming here.

Thank you for having me. Look forward to talking to you guys in more detail.

Thank you, guys.