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

All right. Good afternoon, everyone. My name is Anvesh Agrawal. I cover European business services sector at Morgan Stanley. Thank you so much for taking the time out to join us for this session, where we look to discuss various analytics in much more detail. And to do that, we got a very good company of Lee Shavel, CEO of Verisk; and Elizabeth Mann, who's the CFO. Lee and Elizabeth, thank you so much for taking the time out and coming to what is freezing London right now. I'll start with some few prepared questions, but if anyone in the audience want to ask any questions, just raise your hand, and we'll get back to you.

So without any further delay, let's get straight away into that. Lee, if I can start with you. So during the past year, the business has been focused on the insurance vertical. You have divested the other parts of the business. From here on, what you can do to sort of accelerate the growth within the insurance vertical versus historical, what the run rate has been?

So thanks, Anvesh. And thanks to Morgan Stanley and NASDAQ for sponsoring the conference. It's really a great opportunity for us to meet with a wide range of European investors, and had some great meetings this morning. If we're a little punchy, it's after 7 group meetings, so we'll try to keep things coherent here. So growth is at the center of our focus. And just to remind everyone about Verisk, our long-term growth objectives are to achieve 7% organic constant currency revenue growth in our business as a whole, and that applied to insurance. Historically, we had faced some challenges, primarily in our Energy and our Financial Services business that had greater cyclicality and volatility in them that made it more difficult. However, just to kind of level set with the sale of Energy that we anticipate in the first quarter, and the sale of the other businesses, for the 2-year period approximately prior to the pandemic, really effectively 2018, 2019, the first quarter of 2020, before the impact of the pandemic was felt, we delivered, on average, quarterly year-over-year growth or organic constant currency growth of 7%. And so I think we had demonstrated that the business, as configured in its Insurance mode was consistently delivering that growth level. Now through the pandemic, of course, we had the impact of fewer people going into the office. So driving activity was down. As a function of that, there were fewer accidents. And so when there is an auto accident, we have claims volume and activity that is generated. There were fewer people in the workplace. So workers' comp claims were down. And so we had a variety of volume impacts. But to put this in context, over that pandemic period on an average basis for those kind of 2 and 3 -- or actually, by 2.5 years, our organic constant currency growth was 6%, right? So it certainly didn't experience the materiality of the impact that certainly a lot of the retail businesses, or certainly the travel businesses felt at the time. But that gives you some context for that sensitivity. Now since then, we are seeing recovery and normalization of some of those activities. There are multiple effects. Our travel Insurance business took the biggest hit, recovered the most quickly. The auto business has been more of a slow normalization. There may be some structural element where people aren't going into the offices frequently on Monday or Friday, so maybe a reduction. But that's normalizing. Workers' comp has had kind of the slowest delay because of the lag time between a workers' comp incident and then ultimately, the lag to when we get involved in adjudicating the claims. So we do think that we'll see some improvement in there. In addition, the inflationary environment because, certainly 70% of our cost base is compensation, there is an inflationary element. And the insurers factor in inflationary impacts in their premiums on the rate side because they have higher replacement costs that they have to bear. So we have a little bit more room from, I think, an inflation perspective for pricing. So having said all of that, we believe that as configured, we have delivered and expect to be able to continue to deliver on average against that 7% organic constant currency growth rate, and the essence of your question is what do we need to do to exceed that. And I think, over time, the opportunity that we see is to continue to find new solutions for the insurance industry and individual insurance companies that allows them to operate more efficiently, to improve the productivity of their employees, to adapt to a new digital environment and to upgrade their core technologies that are now adapting to a cloud-based environment. I've heard again and again in my conversations with insurance company CEOs that they would like a more strategic dialogue with Verisk, and we naturally serve as a utility to that industry, just given the very strong position that we have, the datasets that we share, their trust in us to accomplish that. I think as we prosecute that strategy over the next 2 to 3 years, that should provide supplemental growth to our core business.

I think that's very comprehensive. Maybe just linked to that, you talked about getting into the new sort of areas, new verticals, such as group life, disability. In those areas, do you have any strategic advantage? I mean, do you have any proprietary database that you hold that can help you to build out the business? Or what are the building blocks of going into some of these areas could be going forward?

Anvesh, I wanted to define a term very carefully because we have, in the past, talked about getting into new verticals by which we generally have talked about new industry verticals. There's no intention for us to go outside of insurance. So we are an insurance-focused entity that was part of the communication that we made early in 2022 about our intention to separate energy. And so I would more commonly refer to that as adjacencies where if we have data in the property estimating business, and we have an opportunity to potentially deliver that to contractors or others in the real estate -- or remodelers or real estate agents, that's something that we will look to do. And to the essence of your question, I think it's fair to say that we do have the benefit of proprietary data in our core property and casualty lines. And in some of these newer areas, we will be able to leverage some of the datasets that we have by supplementing it with other external datasets, some contributory data from clients that participate in it, but it's primarily industry expertise in understanding the role and how we can leverage data to improve either the decisioning and the underwriting function, or efficiency on the claims side that is where we add the most significant value to our clients.

That's very useful. Elizabeth, if I can come to you now. We cannot talk -- we cannot discuss some these days without talking about a potential recession these days. So in your sort of excel spreadsheet scenario analysis, what would be the bear case for Verisk if there is to be a recession in -- next year? How should we think about it?

Great question. And hi, it's great to be here and to have a dialogue with you guys here. So the good news is that the business, I think, on a relative basis is very resilient. The insurance industry, as you well know, is quite stable even in recessionary environments and operates on its own business cycle. So that's the good news. The second piece of good news, 80% of our business -- over 80% of our business, of our revenues, are subscription-based. So that gives great stability to it. And I think the product -- most of our products are seen as mission-critical by our customers. So that also adds some stability to it. I think as data points, if our long-term growth target is 7%, I think Lee gave you the historical context that during the pandemic, during sort of the global impacts that was felt there, the growth decelerated from 7% to 6%. So below the long-term targets, but still a remarkable sign of stability there. If you go back all the way back to the prior financial crisis in 2008, 2009, the business delivered 5% growth. So again, below target, but remarkably stable in a challenging environment. So we're happy about that. That's on the revenue side. And then meanwhile, on the cost side, about 70% of our costs are related to compensation. That does give us some flexibility, and there's also flexibility on the incentive compensation side kind of tied to the performance of the business. So we think we have a number of flex factors in -- throughout the economic cycle.

And it's probably just worth adding to that, that in those periods that we're talking about prepandemic, the 7% organic growth translated into 7% organic EBITDA growth. And in the pandemic period, while it decelerated from a revenue standpoint to 6%, we actually generated 8% organic EBITDA growth. So we're still, I think, delivering very solid operating cash flow growth.

And there was nothing specific to the pandemic that drove the dynamic that kind of we expect the same to happen should the growth decelerate, but the organic profit growth can still be about that profit run rate?

There are some, I think, some similar dynamics what Elizabeth spoke to, both in terms of our incentive compensation standpoint, which is kind of an automatic stabilizer, but then also our flexibility from a headcount management standpoint, as well as I think we demonstrated that in times of financial stress as we did in the pandemic, our ability to pull back on travel and entertainment costs was probably one of the biggest contributors to us being able to maintain that EBITDA growth.

If you just change the track from growth to sort of margin now, you talked about 300 to 500 basis points of margin expansion, I think, by 2024. We are almost halfway there. So what's left to be done? And then longer term, where should we -- how should we think about the margin for this business in sort of, let's say, 5 years' time?

Yes, great question. So yes, our margin targets of 300 to 500 basis points off of a 50% to 51% baseline, achieving those by 2024 is something that I am very committed to here as CFO. And we are working through that. I think we said on our last earnings call that we have delivered actions. We've actioned over 50% of that. The timing of it being realized in our P&L will happen gradually from now through to 2024. We also gave some color on the buckets, the categories of spend action that we're looking there. About half of it can be achieved by headcount-related actions that can include spans and layers and operating more efficiently. It can also include global optimization in where we hire and where we locate our talent that's both included in that 50%. Another 1/4 of it comes from IT and tech-related spend, including some savings associated with our transition to the cloud. And then the final 25% comes from third-party spend, procurement efficiencies and real estate also in that bucket. So we think we have a good road to our target there.

Cool. Anyone in the audience have any questions?

If you split up your revenue growth. You have many old insurance companies as customers. Is it primarily price increases? Or do you also have some kind of volume-based activities that increases your turnover?

Yes. So thank you for the question, and so a couple of ways to kind of -- to think about the components of that organic growth rate. I'm sorry, do you want to take this?

Sure.

It's the former CFO in me, and I'm still adapting to this.

So yes, so as we look at the kind of the 7% long-term target, what we see, and this is kind of an average through cycles, but we tend to see 3% to 4% pricing growth. About 1% to 2% from cross-sell and upsell to existing customers, and then about another 1% to 2% from new products and adjacencies into less penetrated markets still in the insurance vertical.

Any other questions from the audience? Okay. If you just start to talk about the international expansion, like, how is the progress being, which are -- do you need to make any particular acquisition in geographies that you're looking to do to expand more internationally?

Yes. So international -- our success in the international businesses, we have been very pleased with. Generally, those businesses collectively, as we've disclosed before, have been growing at generally double-digit rates. And so they've been a significant contributor. They are reflective of what we would describe as the penetration opportunities where we're able to bring some of our data sets, our expertise, our technology to address similar needs within European markets. We do that in price estimating, in anti-fraud solutions and some of the underwriting our businesses as well. And so that's a natural way for us to leverage what we have. We have several clients that are European based that participate in the U.S. markets, and so they're familiar with what we do there, and they have literally invited us to say, can you deliver some of that analytics expertise here? So that becomes a great penetration opportunity. In addition, one of the businesses, the most significant international business that we have, we've referred to as our specialty business solutions. It was formerly known as Sequel. And it provides workflow software and analytics technology to the Lloyd's nonstandard market. And as many can appreciate, this is a global and sizable market. We are one of the leading providers of this technology to facilitate efficiency in their underwriting function, policy management, claims element. And the thing that's really valuable to us about this is that in contrast to our legacy businesses in the U.S., which were consortia-driven and contributory data, it is hard to have -- to form those spontaneously in the environment. But a network software solution gives you the opportunity to collect data on behalf of that ecosystem and the participants in that ecosystem. And so it replicates in a way that contributory data model where you're extracting that data from the system and aggregating it, analyzing it and utilizing it for the benefits of the participants in that ecosystem. We are -- we have taken that data. We've added technological functionality in the form of a rating engine that now accelerates and automates a component of that portion of the underwriting business in the nonstandard surplus and access business. We've also added a component that allows them to develop and model new products more effectively and on an accelerated basis. So we are utilizing it to serve that ecosystem and provide incremental value as well as generating what is in effect to contributory dataset.

If I can ask a follow-up on that. So what would be like a barrier to entry for any sort of income, but out there to do what you're -- replicating what you're doing in that space?

Yes. So I would say the primary barrier to entry is the industry knowledge and the appreciation of the -- that insurance function, and specific to the Lloyd's market, understanding the relationship between the underwriters and the brokers and the very important dynamic and how that works. Because of our work in the reinsurance market and the catastrophe modeling business that we have in our extreme events business, and because of local knowledge generated from individuals that have been underwriters or brokers within that market, it is one that unless you have lived in that system, understand the way the business works. And importantly, how you augment or complement the participants in that market as opposed to replacing them, I think you are at a significant disadvantage.

If we move to the capital allocation, which is clearly a big focus area given the kind of environment we are in, can you just first lay down for this audience what's your capital allocation strategy? And then we probably go follow up on that.

Yes, happy to. I'll take this one. But I say this here because actually, Lee really started and formulated the allocation strategy for Verisk and as I joined, we talked and we are very consistent in terms of philosophy. So I think first of all -- first, our focus is now on the global insurance industry. We are not looking to move into new verticals. So within the insurance industry as we allocate our capital, we're looking first for organic investments and where we can build around our business. We've had a number of products that we've built up organically that have been very successful. We are looking at strict return on invested capital metrics around those internal investments. Second, we're looking inorganically at tuck-ins and acquisitions that can either be new datasets for us, or places where we can add unique value to new businesses from our customer relationships or from our existing datasets that can potentially be built into new products. So those are the types of M&A that we will look at as both organically and inorganically, those investments will be assessed on an ROIC basis. And then to the extent we have free cash flow beyond those which we expect to do and which we have been continuing to do, we will be returning capital to shareholders in the form of both dividends and share repurchases.

So you talked about the organic investment that's sort of needed for the business. But at the same time, I think one of the targets is the CapEx to come down to sort of mid-single digit over time, which has been tracking a little bit higher of late. So do you ultimately get there? Or you need that level of investment for the kind of growth you're talking about?

Yes. So good question. So first of all, with the divestitures over the past year, the divestiture of the Verisk Financial Services segment, the 3E specialized markets business and the divestiture of the Energy segment, those businesses were more capital-intensive than the core Insurance business. So you will see CapEx as a percentage of revenue come down over time. So it will continue to come down towards that mid-single-digit percent of revenue with a couple of comments. One is I would say that there is a structural change going on in the business and in the industry with the technological capabilities in the industry. There are products of ours and businesses of ours that are becoming more software-like. And so they may have more software-like characteristics, which is a higher CapEx, all internally developed software. The final point I'll make is that we do continue to assess that CapEx very strictly with a focus primarily on driving first top line growth as our first priority, margins being another one and return on invested capital.

Yes. That's clear. Any questions from the audience at this stage? Okay.

Lady there in the center.

Sure.

Apologies if it's already been explained. First -- missed the first 3 minutes. I just wonder if you could give us a quick sort of where your main competition is in the U.S.? And where your -- which sort of bucket -- who are your sort of top -- how diverse is -- where is your target sort of insurance company market?

Yes. So I got the first question. I may ask you to rearticulate the -- how much diversification we have.

I'm just wondering if you're just targeting the sort of not the top, but just sort of middle-sized insurance company? Or where were we sort of?

Okay. So thank you. So on the first question, we're very fortunate that in our -- two of our most significant businesses in our rules, forms and loss cost business, kind of that traditional ISO business that where we were an industry utility, that's deeply embedded in the industry, and there is no direct competitor of scale in that. That's where the economics of us centralizing those costs and gathering those datasets are is the most powerful. And so that's one primary area. The second is in our anti-fraud solutions. We have a leading anti-fraud tool, where if you are in an auto accident, when you notify your insurance company, we have that data within 24 hours so that we can run it against a potential fraud check. And similarly, again, the dynamics and the economics work such that you want to have a consolidated system. Now there are other players in the anti-fraud solution, but nothing that really competes at scale directly against on that business. In our property estimating services, we do face competition from another software-oriented company that's owned by another vertical software company, although they are internationally based and we still maintain a very strong market share in the U.S. and in Canada. So I would call that a duopoly. And then in our extreme events business, we face one other competitor, a company called RMS, which was recently acquired by Moody's. And I would say our view is that we have generally been gaining market share in that space. To your -- and that really encompasses a substantial majority of our business. To your second question, in our core businesses, the ones that I described at the top, we have 97%, 98% penetration of the U.S. property and casualty insurance industry, again, because of that utility dynamic. So everything from the largest insurance companies, midsized and even small insurance companies, and particularly start-up companies that need to get off of the ground, we're able to accelerate that. And that's also true in our extreme events and our property estimating services. So we believe there's very good diversification across everything from the largest insurers to the smallest in the U.S.

Any other question? Yes.

Is it safe to assume that the sale of insurtech companies and the lack of access to capital in the private market could be a tailwind for your business?

Could be terrible for the business?

Could be a tailwind.

Tailwind.

Oh, tailwind. I apologize. So the -- on the insurtech front, they have been one very valuable clients for us as they have got off the ground and they have been growing quickly, and so they have valued our services but there is an indirect benefit to it in that, they have catalyzed competitive pressure among our traditional clients so that we can find ways to advance their technology. And you will have heard in our past discussions a description of our LightSpeed product, which allowed us to accelerate the formation and the delivery of a bindable quote on a much faster basis than they would have traditionally. And so that's an example of where we've been able to serve the industry and make them more competitive in the face of that broader insurtech competitive, competitive threat. Hopefully, that addressed your question, yes.

Yes. I think we just take a couple of short ones from -- so first, you talk about the M&A and what we have seen in the fintech space, in general, the multiples have expanded historically because where the cost of capital was. Now the tide seems to be turning. So have you seen the multiples coming down and probably making M&A easier for you going forward?

Yes. We've seen it, and we're tracking it. So we will continue to take a look where -- but subject to the same discipline as our M&A strategy would entail. But to the extent valuations are down, that is only helpful.

And I'd add to that, that in a lot of the -- a lot of insurtech companies, hundreds, if not thousands of them and have interesting concepts but they don't have the industry presence that Verisk has. And we have found, if it's a good concept and there have been some initial client mandates, we have the ability to accelerate that. And some of these entities sadly just don't have enough traction and in this environment are facing some liquidity issues. So we are scanning for, and have acted on some opportunities to pick up some of those small companies, which we think we can really create a lot of value out of.

We do have a minute left, and I don't think it's a bad topic to end on. How should we think about the ESG opportunity within your business? Let's just start with that.

So start starting from the fact that in our extreme events business where we model hurricanes and natural catastrophes, it has been part of our dialogue with clients, and part of the product that we have developed to understand the broader implications of global warming and climate change. And if you have any doubts about climate change, talk to a natural catastrophe underwriter, they'll be able to kind of show you the data, which we model and share. So what's important about that starting point is that we're rooted in a geospatial analysis of particular risks, and particularly natural catastrophe risks. So we're looking at storm severity and how quickly the storms are moving and where they're likely to occur, and the spatial dynamics of fluid dynamics of soil and surface permeability. So that informs a lot of the way we think about ESG risk. Now what we've done is we're applying that by utilizing the work of one of our subsidiaries, Maplecroft, that also looks at political risk, social risk, environmental risk on a geospatial basis within countries so that now we can add layers of ESG type risk to underwriting considerations as well as integrating some of the physical and climate to corporate buyers and investor clients. And we think that's a differentiated model simply from -- in comparison to purely ESG types of rating services of the individual companies, understanding how those risks exist, not just at the corporate level, but in a geospatial space is part of what we view as our opportunity.

Well, that's very interesting. Unfortunately, we are out of the time. Lee, Elizabeth, thank you so much. This has been fantastic, and thank you, everyone, for joining us for this session.

Thank you, everyone.