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

Good morning. I'm Alex Hess, an associate on the Business & Information Services Equity Research team led by Andrew Steinerman at JPMorgan. We are pleased to be joined now by Verisk's CEO, Lee Shavel, who was named to the CEO role in May. Previously, Mr. Shavel is Verisk's CFO and is likely familiar to many of you in the audience, highly. We're also joined today by Elizabeth Mann. Elizabeth joined Verisk in September as CFO from S&P Global, where she was previously the CEO of the Ratings and Mobility divisions. Welcome, Elizabeth. Nice to meet you.

So we want to get started with some questions for -- maybe starting with Lee. Lee, I want to start with the announced divestiture of Wood Mackenzie, which is slated to close in the first quarter of 2023, after which you will have successfully completed the portfolio transformation of Verisk back into an insurance-focused info services company. In your view, how will Verisk's newly narrowed focus on serving the insurance end market benefit the company?

Great. Alex, hello. And thanks for having us. Real pleasure to be here at the JPMorgan Ultimate Services Conference. We appreciate the opportunity and all of your time. So yes, we were thrilled to be able to announce the sale of Wood Mackenzie in I think what everyone would recognize as a particularly challenging market given volatility in the equity markets, uncertainty in the financing markets. And I think it's a testament to, I think, a very thoughtfully run process and importantly, a very high-quality business, and we're excited about how the opportunity that Veritas and Wood Mackenzie have to take this business to the next level and increase their competitive position. And in a way, that also reflects the opportunity that we have at Verisk. And I think there are 2 levels that I think about in responding to your question, Alex. One is just from a financial perspective, one way I think about businesses as capital-generating engines, and as a function of the separation of the various businesses that had a higher degree of capital intensity as we were investing in them to encourage growth and kind of develop their data and analytics. We now return to a model that generates a very high level of capital, has very strong operating leverage within that business. And effectively, the efficiency of that engine is strengthened. But I think from a cultural and from an operational perspective, a lot of our focus up into this point had been thinking about the businesses outside of insurance. And certainly, the challenges that we face in those businesses, their volatility, how we could look to expand upon them consumed a lot of management time and attention. And in fact, our ability to refocus on the core mission of Verisk as a fundamental utility to the property and casualty insurance industry in finding solutions that allow the industry to reduce their costs, to make better risk decisions, to automate and engage with a more digital customer base is an exciting opportunity for us. And while I think we've been very effective in the traditional functions on underwriting and claims, our ability to elevate that focus and find new ways to serve the industry is probably what I'm most excited about, focusing not only management's time but also our capital.

That's great. That's great. Elizabeth, just to maybe close out the Wood Mackenzie sale discussion early on. Can you speak to the financial implications of the deal and what you plan to do with the proceeds?

Yes. Let me walk through the proceeds and then a couple of comments on the financial profile. First, from the proceeds, the $3.1 billion, we don't expect any tax leakage. So we will be able to deploy that. We've said we're going to deploy it on a mixture of debt paydown and share repurchase. Debt paydown, we continue to reiterate our leverage range of 2 to 3x. We think being an investment-grade company is important for us and our customers. So we're maintaining that range. We will probably stay within -- right now, we're at 2.2x. We intend to stay probably in the near term in the bottom half of that range. So we will pay down some debt and then we can deploy the rest of it on share repurchase. So we're excited about putting that to work. And then one other question -- one other sort of consequence -- financial consequence of the divestiture is the pro forma tax rate. We said on our third quarter earnings call that we expect the Q4 tax rate to be 24% to 26%. We've had a chance to do a little bit more work since then. And so our initial assessment of the tax impact for 2023 will be in the range of 23% to 25%. That's an update on that.

Wow, that's very good to hear. So maybe staying on some Verisk post deal. Now we've got the Wood Mackenzie questions out of the way. So as you mentioned, Verisk is emerging as an insurance dedicated firm, insurance is obviously a multifaceted and dynamic end market. There's lots of opportunities. And recently, there's also been some challenges. We're thinking auto underwriting, profitability is something Verisk has spoken to some softness in marketing, recent insure exits from Florida. How are you -- how is Verisk helping clients address those specific issues? And could any sort of new enhanced solutions that come from those and solving those questions help maybe accelerate organic revenue growth?

Sure. Thanks, Alex. And actually, I think you're responding to some of the comments that we made in the third quarter call, where I think we're trying to give a little bit more context around what's happening within the insurance industry. And I would characterize these as kind of a cyclical -- natural cyclical elements that we have seen from time to time in the insurance industry. I'd underscore the insurance industry generally as a fairly recession-resistant and economically insensitive business, but you will have pockets of either high storm activity that will influence things, underwriting in particular geographies that are going to cause some cyclical changes over time. And what we described, I think, is a function of that. We want to give you a feel for what we're seeing. It can have a lot of complicated impacts. And so in Florida, we are seeing the potential liquidation of several entities that would have a negative impact. But we're also expecting that more business will flow to the state-owned insurer citizens that is a client of ours. And so there will be some upside opportunity for us. I really appreciate the broader dimension of your question, Alex, which is what are we doing? And if there is one issue that I find that our carriers are most focused on, it's understanding the impact of inflation on their loss costs, how they factored into the policy side. And so we have dedicated extra time and resources to making certain that we are not only updating the costs that we track, both from a labor and material standpoint within our property estimating services but also tracking the broader impact of inflation across the economy and specifically, the insurance industry. That's one specific example where we are trying to serve the industry by giving them a broader picture of how inflation is directly impacting their business. The other dimension, I'm kind of coming back to the cyclical element is, we've developed over the past few years an ability for a new market entrant to rapidly accelerate their setup of a new insurer in a new line or a new geography. And we think that will be an opportunity for us as we hopefully, relatively quickly, come out of some of that regional weakness or in the personal auto lines area enable new entrants that kind of see a hardening pricing environment to take advantage of it. I think that's a substantial difference over the past 5 years in getting -- in enabling those entities to respond.

That's great. That's great. I want to maybe use that as an opportunity to discuss since we're talking about new entrants. You guys are surely not one. You've been in business since the early '70s with some of your core line solutions. And I want to briefly ask about the core lines reimagined project. Can you lay out the vision, the opportunity, and the time line for that?

Yes. So let me start with the vision. And for those of you that aren't as familiar with Verisk, if you go back to our legacy organization, you will hear us occasionally refer to ISO, which was the Insurance Services Office. And it was literally the utility that serve that the P&C insurance industry. And the primary components that we would provide are rules, forms and loss costs and effectively creating standard policy language for the insurance industry to provide efficiencies so that they weren't individually creating a lot of bespoke language for their policies and also tracking loss costs. Now given that a lot of our focus was in other areas. This was a very solid business. And it's still really relied on a lot of legacy information delivery techniques, including publication of circulars, on forms. Some of those have been updated to PDF files, which are easier to transfer. But our sense and our dialogue with customers and the challenges that they face from an efficiency standpoint is that there is a meaningful opportunity for us to digitize more of that information to automate more of the workflow associated with that. So we are developing dynamic forms for policy language that will enable our customers to track their changes that they may make in their individual policies, allow those to be updated automatically and really improve the overall efficiency with which that data is managed within companies and across the industry as a whole. The ability to integrate our loss cost data is more effectively into their algorithms or their ratings engines and improve the efficiency and responsiveness of those functions. We have an estimate from our business that says for every dollar that we received or that information or our traditional products, insurance companies are spending $2 or $3 either internally or through third parties to utilize or integrate that information. And part of what we'd like to do is perhaps, move up the value chain in delivering that data or reduce the insurance company's effective cost of managing all of that information. That kind of describes the kind of the vision for it. And I think from a time line standpoint, this is a large complex business. I would say that this is probably an 18-month to 36-month project that we will be implementing across all of the data sets and functionality that we provide.

Great. Thank you for that update. That's very sort of comprehensive and thorough. I do want to sort of maybe highlight some areas of acceleration potentially for you guys. In the past, Verisk has had a stated goal of growing 7% year-on-year in organic constant currency terms, including within insurance. We haven't been there for -- on and off for a few quarters. What needs to happen for Verisk to get back on a sort of consistent 7% compounding organic revenue growth?

Thank you, Alex. This is certainly, what we feel is the critical question for us as an investment opportunity from a valuation perspective. And I want to share some data that I think provides some context around that, particular to our insurance-only business. One thing that we recently did in evaluating our growth opportunities is that we looked at our quarterly year-over-year organic growth rate in revenues for the insurance business from the first quarter of 2018 to the first quarter of 2020 before the impact of the pandemic really began to affect, driving activity and the broader economic element. And what was -- but may not surprise you is that in that -- over those 9 quarters, our average organic constant currency revenue growth rate was 7%. So and I think we've demonstrated that, that is an achievable number. And the volatility that we've had or the failure to achieve that number has been almost entirely a function of weaker-than-expected growth in the noninsurance components of the business. Now you'll have variability within that. But on average, we've delivered that. Now the next part of the analysis is that from the second quarter of 2020 to the third quarter of 2023, if we look at the average quarterly growth rate -- '22, sorry. Let's make sure -- we haven't determined what the third quarter of 2023 is yet. Therefore the third quarter of 2022, the average organic constant currency revenue growth rate was approximately 6%. Now keep in mind that this was the impact of a pandemic that dramatically reduced driving activity, workers' comp levels and the insurance industry in a profound way. But we're still -- we were still delivered 6% organic growth. And I think that the perception of that weaker growth had more to do with the volatility in the noninsurance businesses. Clearly, below target, but not dramatically below target. I'd also mention that in that first period in the pre-pandemic period that I described, EBITDA, organic constant currency, EBITDA growth was 7%. Now you might legitimately say, should be looking for more operating leverage and margin expansion, but still 7% organic growth. And in the pandemic period, we had organic constant currency EBITDA growth of over 8%, which is not a bad result, even though we were down to 6% and the dynamic of the cost element. So coming to your question with that historical context, we are seeing an improvement and a normalization in some of our transaction growth. We anticipate that, that will return and create a recovery in our business. We are describing some of the softness that we think will influence that to some extent, but probably not to the extent that the pandemic overall had on the business as a whole. And I think a return to our more normal operating activity in achieving or exceeding that 7%, we think is supported by the historical track record as well as what we feel is the opportunity to serve that industry more broadly by focusing our time, our capital on new areas that we've invested in like our marketing solutions business, our life insurance business, our international businesses, all of which have been growing at double-digit growth rates and supplementing that with new penetration opportunities for the business is what we feel will be critical to achieving and hopefully, exceeding that growth expectation.

That's fantastic. And then I want to ask one question on margins. Maybe I'll make it a compound question. Okay. So Verisk, the way you describe your margins is for plan to be up 300 to 500 basis points through 2024 off of a normalized 50% to 51%. So basic arithmetic says, you're targeting somewhere around 53% to 56%. The first question is, can you tighten that margin potentially, prospectively? And might you be biased to the upside? You've had a couple of quarters of very strong margin performance in 3Q and 2Q.

Maybe I'll take that question. You're right, there's -- over the course of '22 with 2 divestitures earlier in the year and one now coming soon, a lot of different moving pieces in that margin. And then -- so let me just back up for folks that may not be familiar with the walk, the normalized baseline of 50% to 51% started. That's for 2021 when we announced it. Starts with an insurance-only margin of 55% and then walk through a couple of headwinds that we are normalizing for coming out of '21. 200 basis points of headwinds come from stranded costs from the divestitures. And then there's some headwinds from our investment in cloud, the renormalization of T&E and then the impact of recent acquisitions. So we are working our way through those headwinds. And so those are coming in at different points in time. We've talked about -- so I'm not going to tighten that range for you today. But we are walking through the different pieces of it. I think we've now said that half of it is going to come from headcount actions, another 25% from IT savings and another 25% from third-party services, including real estate. And we've made our way. We have commitments demonstrating more than half of that -- half of the way to the target across each of those dimensions. So on the headcount side, we've consolidated the marketing function, we've done, we've been looking at spans and layers exercises and we are looking at the opportunity for deploying -- for optimizing our source of our geographic locations on capital, which is something that I have a lot of experience on coming from S&P. On the IT side, there's the ongoing -- the benefits of our transition to the cloud. And then third-party and procurement is a good example of some of the sort of operational benefits of a simpler and more streamlined kind of more focused corporate entity.

Great. Thank you so much, Elizabeth. I want to maybe ask you guys a joint question. There's been quite a bit of change at Verisk as we've just outlined. And Elizabeth, you're new to the firm, still fairly. Lee, you're not new to the firm, but you're new to the CEO role. You've also joined the Board of Directors. How do you guys think about balancing the need for fresh perspectives at Verisk with the experience of having tenured leadership? And are you refreshing the management bench below the C-suite level at all? Maybe -- we don't see?

Yes. So the -- it's a very important topic, and I think relates to the -- our strategic desire to be more engaged with the industry and that requires, I think, 2 elements of where we are sourcing talent. It's sourcing external talent with industry expertise so that we can better understand the needs and the objectives of the senior executives at an insurance company. And also the technical expertise relevant to the issues that the insurance industry is dealing with. Now within our organization, not only is Elizabeth new to the C-suite, but we have relatively -- recently brought in 18 months ago, a new Head of HR, Sunita Holzer, who brought a lot of experience in the CHRO role and has enabled us to make substantial improvements in the way that we think about how we're recruiting, how we're developing talent, how we address the value proposition for our employees. And I think that was very, very additive. Melissa Hendricks, our Chief Marketing Officer, joined us a couple of years ago, also bringing that external marketing and communications expertise that has been a part of our various refocusing effort. As we've become an insurance-focused entity, we've talked about on the marketing side, we have sought to integrate and create a more coordinated marketing and go-to-market focus for our business as a whole. And we have also brought in from the industry over a longer period of time, we recently named Maroun Mourad, our new Head of Claims. This was within the past year, and Maroun came from a long experience at a variety of insurance industries. Actually wrote a book on the insurance industry, and so brings a very strong perspective from that side. In addition, at the Board level, I know that our governance committee is very focused on finding new skill sets that are relevant to us. You've seen change at the Board level, reflecting a desire to bring in some technical expertise as well as new insurance industry expertise from a former CEO at Farmers, Jeff Dailey, who joined the Board to make certainly maintain continuity with that industry expertise, we're supplementing it with new technology perspectives and new skill sets within the senior management team. I describe it relative to, I think, a lot of senior management teams that I've had is a pretty robust level of refreshment. And bear in mind, while new to this role, I also came from the outside. And I think there's a real benefit from bringing some of those experiences. I was able to deploy my capital disciplined approach that I developed at NASDAQ into Verisk. And so it causes you to kind of take a fresh look at how we can do things. And I know Elizabeth is going to bring a lot from her experience to help us on the expense and on the capital front as well.

That's great. Elizabeth, since we're highlighting your accomplishments and your capabilities. So you joined Verisk at a time when the company is already executing on a lot of in-flight objectives, removing costs from the business, completing a portfolio of transformation, a tech transformation as well. There's more, I'm sure, that I could roll off. But where do you see the biggest opportunity for yourself to have an impact near term and then maybe looking out 6 to 12 months?

Yes, great question. Yes, you described it right. It's like -- for me, it was like a movie that opens up in the middle of the battle seat and then you go back and figure out kind of the story that got you there. So there's a lot going on. It's a perfectly exciting time to start. Kind of near-term priorities, I'd put them threefold. The first, we already talked about the margin target, but that is kind of first and foremost executing on that. That's a commitment that we've made. And so I've been taking ownership of that now and making sure we can deliver against that. So execution on that is a top priority. I think the second area is continuing to bring sort of the shareholder mindset and sort of financial discipline into the company. And now again, with sort of a tighter operational structure going deeper into the businesses. I think -- it's a lot of the frameworks that Lee put into place. We spent a lot of time discussing it kind of before I joined, and we're very philosophically aligned on capital allocation discipline. So it's really kind of continuing to execute on those frameworks and bringing them deeper in the business. And then the third part is being part of developing the strategic story and then communicating the strategic story and sharing it with shareholders. So I think this is my first conference here today, but -- and so I met some of you in group meetings and one-on-ones, and I look forward to continuing to do more of that and very much being a part of laying out and telling the story at the Investor Day that we're planning early next year.

Yes. Great. I think that's awesome. We've got a few minutes left. So I want to talk a bit about maybe shortly on ESG strategy at Verisk. Great thing with Info Services and ESG is -- it's a revenue generator for info services companies. You have this business, usually called AIRs, probably Extreme Event Solutions. You also have a business called Verisk Maplecroft. Is it fair to think about those as maybe an E business than an S and a G business. And can you frame the opportunity maybe, explain the audience a bit about that.

Yes. Alex, I think that's well defined. And I think it's a starting point for us. And one differentiating factor in our -- the ESG business and taking into account the extreme events business and Maplecroft, which is part organizationally of our Extreme Events business is that, in contrast to, I think a lot of providers that are out rating companies individually on ESG, our approach is a geolocation-oriented approach. And it's, in some ways, coincidental, but I think it reinforces the logic. Maplecroft started out by developing a focus on environmental, governance, social, political risks within geographies. So that companies could evaluate, if I'm in this country, what are the changes in the variables that are affecting the perception of that environmental or social or political risk within that. And that has been primarily served the corporate customer and the independent investor -- public investor constituency. AIR, maybe speaking from a legacy perspective, of course, was very focused on geolocation because they were modeling storms, hurricanes, floods, hailstorms. And so there was a natural kind of geo location, which is, of course, very relevant to the reinsurance industry. And so we are kind of knitting those expertise together to help corporations, investors and increasingly insurance companies understand the -- their ESG risks in that geolocation frame. Now as a specialized subset of that, modeling hurricanes, modeling extreme weather events is, of course, heavily influenced by a perception of the long-term trends from a climatological -- climate standpoint. And so we have been investing a lot of time in developing some longer-term models to understand and provide insight to the industry as a whole of where we see either increased frequency or severity and how our catastrophe models need to be updated. In addition, even within our traditional underwriting businesses, environmental risks and exposures have to be taken into account in policy languages -- policy language. And so we are factoring that into how we update a lot of that standard language within our business. And in Maplecroft, we're finding increasing appetite among our insurers to understand not only the environmental aspects in the risk exposures, but the political and social risks that can serve as magnifiers of risk. So think of Ukraine as an example, where that relative political risk is -- would contribute to a higher level of potential loss from an insurance context. And we're seeing strong appetite from our clients for that type of integration of data sets.

Great. Elizabeth, Lee, thank you so much today for your time. We really appreciate you hearing from you. And yes, enjoy the rest of your day. Bye, everyone.

Thanks so much for having us.

Thanks, Alex.