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

Good morning. This is Heather Balsky, BofA's Business and Information Services Analyst. I want to welcome you all now to the fireside chat with Verisk's CFO, Elizabeth Mann. We are just on the back of Verisk's recent Investor Day. So Elizabeth, we greatly appreciate you being here.

Happy to be here.

Before we start, if anyone does have any questions, we'll pause with 15 minutes left just to check. Otherwise, I have plenty of questions. So I want to get started.

Great.

So to kick off, Elizabeth, you are celebrating 6 months at Verisk?

Yes, 6 months yesterday.

Congrats. Six months of haver. Can you talk about what attracted you to the company? And what you're most excited about?

Yes. Great question. So a couple of different areas for why I was excited to come in the 6 months. And I feel like I've already lived -- we've done a fair amount in those 6 months. So it feels like about 6 years. But sort of on the personal front, I mean -- well, personally, it was a great opportunity. So I was excited about that. But also personally, you want to particularly as the CFO, you want to be partnering with the management team and a CEO that you're kind of well aligned with in terms of ideas, goals, objectives. And so Lee was -- seemed to be that great partner. So I was excited to come and work with him and kind of help in the new vision on Verisk. The second point is related to that, but more in detail. It was clear Verisk was in a moment of transition with the final divestiture of the energy business last year and really kind of refocusing on the insurance business, which is a great underlying business. So I was excited. It's always exciting to be kind of part of a new start, it's sort of telling a new -- establishing a new strategy, telling that story as we just did on Investor Day 2 weeks ago. So it has been exactly that fun journey and a chance to kind of set a stage for what we think is going to be a new leg of growth. And then the third point was simply as a shareholder, which I am, as an employee. I thought it was a great opportunity.

Great. And so your Investor Day on Tuesday, each sector had at Verisk presented initiatives to improve organic sales growth over the next 3 years compared to a lot compared to sort of the 2018-'22 period. Bigger picture, what's the unlock to this accelerated growth? Like what's different today versus that prior period?

Yes. Good question. Let me take that in a couple of different parts, particularly on the what's different today to the prior period is maybe different for each of the 3 main businesses that gave an overview. So I'll come back to that kind of business by business. But the other main change for us, not unlike many companies, but the pandemic period hit our different businesses in a number of different ways, particularly on the transactional revenue side, on the claims side as driving activity stopped than in the kind of recovery period, but as the auto shopping industry was disrupted by the supply chain issues, there were a number of pandemic-related headwinds that we now think won't be impacting us in the same way going forward. So that is a -- that kind of cuts across, obviously, across the different businesses. But then in more detail kind of business by business by business on the underwriting side, well, one of the pieces is kind of eventually the removal of the headwinds from the auto industry, but also on the underwriting side is the impact of the Core Lines Reimagine program, which is investing in our primary -- or our largest forms, rules and loss costs business, also sometimes affectionately called Core Lines. We -- they changed the names on me. I think I've finally gotten all the different names of all the different products, old and new. But whether it forms, rules and loss costs or Core Lines, the Core Lines Reimagine sort of CapEx program -- so we have largely completed the transition, the replatforming of that product onto the cloud. That sort of enables new investment off of it, including the Core Lines Reimagine program, which is -- which will be improving mainly the delivery mechanism of the great underlying data and forms in that business, which today is delivered mainly by PDFs. There's so much more opportunity to do that in a more API focused way in a way that gets embedded into the customers' workflows. Up until this moment in time, it's not clear that our insurance industry customers were ready to receive it in that way. But I think that is the opportunity for them going forward. So that's on the underwriting side. On the claims side, a couple of different pieces. We talked about the transaction recovery but also you heard Maroun Mourad at Investor Day, he talked about the property estimating solutions business formerly to sometimes referred to as Xactware, which is the main product. So it estimates repair costs when there's been a property damage for insurers. There is both greater opportunity to penetrate the existing market through more partnerships in the ecosystem, which -- and those are particularly helpful in that claims business, about 54% of the revenues come directly from insurance carriers. So a significant portion of the revenues come from contractors, small businesses or individuals or from independent adjusters or third-party administrators. So to distribute to that customer base in an effective and a cost-effective way we think the partnership ecosystem can really help us expand there. There's also opportunities to bring the product directly into the construction market. Right now, they use it on the sort of insurance repair side when they are partnering with an insurance carrier to fix a claim. But there's no reason that a general remodeler couldn't use the same products and get a benefit from that. And that's a market that we are not tapping as much today as we could. So that's an opportunity for growth as they -- that's the sort of expand the market, improve the go-to-market and thereby expand the TAM side on the claims side. And finally, for extreme events, that product is also being the main -- the Touchstone product will be delivered by SaaS. I think that, that opens up new customer opportunities and new ease of use for it, ease of implementation, continued improvement on the model side and updating the models is a revenue generation for them. And then the ESG risk analytics business called Maplecroft in there, which we refer to, it's a fairly small product in there, but is seeing great uptake in growth. They just won an award as the best independent ESG provider, beating out S&P and a couple of others, not that I'm taking different sides there, but -- so it was a good strong growth from that product causing tailwinds.

That's helpful. Very helpful. Another key message from the Investor Day was is that Verisk is trying to make a more customer-centric approach. And you talked about wanting to be seen as a partner, not just a vendor. What is Verisk doing to better serve its customers today?

Yes. Great question. So I think our previous focus, we had -- Lee has said it as we were a great product organization. We had great products and great relationships with sort of the immediate users and the buyers of those products, but the -- primarily, call it, the Chief Underwriting Officer or the Chief Claims Officer at an insurance company. We hadn't done as much real engagement with the industry. And this is something that Lee and I have talked about, we both at different times in our careers, have background as bankers, and we're used to covering CEOs, CFOs, sort of the strategic leaders within the company. And Lee saw a real opportunity there in engaging with the industry part of it was natural as he moved into the CEO seat, but he engaged with a lot of insurance industry CEOs and customer CEOs. And I think he was struck by the fact that the dialogue, they, of course, knew us as a vendor, but they -- or they knew that they use our services but it wasn't clear that they had the deeper dialogue and understanding of what we provide for them today, but also what that means and what problems we can solve for them in the future. And so going to them with a perspective of here's what's going on in the industry. Here are the pressures that you -- that our customers are under, which broadly speaking, are in 2 main categories, cost pressures as everyone is trying to be more efficient and then modernizing their technology, digitization, which is also a way to help typically on the cost pressure side. And going to them with a perspective on those 2 problems, the products that we provide to them today can help them solve those problems. But more importantly, some of the new things and the new products that we're doing may help them solve those problems in ways that you can only start to get to if you have that dialogue of what they need and what we can do for them. So it's that engagement that I think has been helpful.

That makes sense. It's interesting. I was going to ask you a question about Core Lines Reimagined initiative. And you touched on it if there's more to elaborate on that would be really helpful. But the other thing is that you made a comment to earlier that customers hadn't been ready for kind of the way that you were providing them the information, and it sounds like now they are. I'm curious about that a little bit. And what's changed?

Yes. And it's not -- it hasn't been a binary point in time for any of our customers or for us, but it's more -- you've seen the industry -- the insurance industry is not the most tech forward. I think it's fair to say. Before I worked in strategy at Goldman and thinking about the financial services and the banking industry, realizing how much they had to catch up in terms of technology adoption and coming from a TMT background was really striking and coming here and seeing the insurance industry is just themselves at the beginning of that curve. So that's what I meant by 5 years ago before we migrated the platform to the cloud. It's not like our customers were calling us up and saying, I don't want this by PDF, I want you to send me an API. That wasn't in their vocabulary. They're starting to be at that point now. So that's -- there's more receptivity to it. Maybe to make kind of concrete on the Core Lines Reimagined and the kinds of things we're doing. The forms, rules and loss costs just to make it more -- a little more concrete for you because it can be abstract. I'm not sure I understood it before. But in your insurance policy, if you go to your homeowners policy or an auto policy, it'll probably say on it, ISO form, and then it will have a number or a code. I mean we develop and maintain, help our customers get those forms approved. Insurance is regulated at the state level. So there's 50 different regulators plus a couple of other regions. So we help them maintain those forms. But when we would send it by PDF they keep it, they may modify it. They have it in their workflow. They do their own things with it. That then kind of creates then they have -- and we give them those forms, not only just the 50 different states, but numerous lines of business, numerous products. They may modify it and then when there's been a regulatory change that gets pushed through they spend a tremendous amount of time maintaining, tracking, monitoring, all of those changes even to do something as simple as basically a version of track changes as simple as that is something that saves them a huge amount of time and cost to maintain. So just small feature and implementations like that creates a tremendous amount of value in the industry. And then there's more on top of that.

What you said when you started off about sort of they wouldn't necessarily be asking for an API 5 years ago. I mean it's fair, right? Technology has become such a big part of our lives, but there's just common theme that a lot of these sort of legacy industries just in the adoption of technology is slow. It takes time. It's hard to change, and that makes a lot of sense. I was also going to ask, there's a focus on opportunities in newer areas of insurance for the company, including life insurance, including marketing in insurance. I was hoping you could kind of touch on each of these and what Verisk's value proposition is in these new areas?

Yes. Yes. So on the life insurance side, large industry and various cohorts traditionally had its strength in the property and casualty industry. the life industry, interestingly, even though it may be sort of historically 1 of the most innovative in terms of developing actuarial tables in the 1700 hasn't evolved as much as it probably should have from a technology side after that. The SaaS product that we talked a bunch about at our Investor Day, is a software platform, a SaaS-based platform for -- it covers -- it's the policy administration life cycle. So everything from underwriting through to claims. It manages the entire life cycle for them. Brings down the total cost of ownership drastically for them in terms of -- and is mainly competing against homegrown or legacy platforms and replacing those, so we saw an opportunity to go into the life market, not in as broad a way as we do in the P&C. But with this specific software platform. It's a low code, no code solution, so it's very easy for them to implement. That business has done -- was a great business, was a great underlying product. But when we bought them in 2019, they were growing kind of mid-single digits. They were slowly working their way into the industry and bringing their products to customers. We accelerated their growth, as we bought it at the very end of '19, it's been a 28% CAGR since we bought it because we are bringing them. We bring the credibility with their customers who, again, is a conservative base -- there's also a fair amount of overlap. I think about 40% overlap between the P&C customers have a life arm or vice versa. And so they've been able to kind of drastically accelerate their uptake. I think they have a 90% RFP win rate since they've been under our umbrella. So we're really excited about the opportunity to continue bringing that sort of policy administration software through to the life market. You also asked -- I won't go as long, but Specialty Business Solutions software platform for the Lloyd's specialty market, so that is insurance for a particular set of risks is what defines the specialty market. And it's sort of anything that's kind of off the run. It is space exploration or oil rigs and sort of any new -- it also includes E&O insurance. So any kind of new insurance risk that's not as standardized as the typical P&C or life is -- can go -- it can go through the Lloyd's market or other markets, but Lloyd's is the biggest. And so this is -- that business and Stacy and I were actually in London last year and went on a tour with the guy who runs that business of Lloyds. And it is literally it's like a trading floor about 50 years ago. It was up until the pandemic. It was primarily literally brokers and underwriters sitting in tables and walking around, just like syndicating an IPO or syndicating a deal. They would syndicate a book of risk with a piece of paper and going to other desks and kind of getting people to sign up. "Yes, I'll take $100 million of this $2 billion policy." So that was happening in 2019. And it is still happening there are still people in that room today. But today, many of them are on ISO/SQL is one of the main software platforms that allows those folks to connect. And by the way, they're in that building today because there's always a value in face-to-face. They can walk over to each other. They can discuss the risk, the pros and cons. But they don't have to syndicate it on a piece of paper. They can have it automated and then automated the insurance and the broker can then have the workflow of the risk going into their system and into their book and portfolio management.

And then what about the marketing piece, was it the leg of specialties?

Sorry, that was on my mike. Yes, the marketing business, so the marketing business is an opportunity. Insurers have a large marketing spend. You see it on TV, you see it digitally. One of their most significant cost is the customer acquisition cost for their policies. What -- and there is no -- we are the only sort of vertically focused insurance data provider from a marketing side. So we help them with typical customer lead generation shopping activities. How do -- as a consumer, how do you actually find insurance? You probably Google, you do some comparison shopping online. And you're trying to get quotes from a variety of different insurers. Our marketing services business helps the insurers track those leads, monitor those leads, all in a privacy protected way and compliant with all regulations, but it helps them identify -- and then it helps them identify not just what are the leads who's shopping, but which will be the most attractive leads from an insurance perspective. The other thing, and we've talked -- you've heard us talk about in the market in '22 and continuing into '23, as carriers are potentially looking very carefully at their discretionary spend and some of them are cutting down on their marketing costs. For a lot of them, it's cutting down on the new customer acquisition costs, particularly so on the personal lines auto underwriting side, as they've had more profitability challenges and lower -- higher loss ratios on the auto side. Some of them have stopped doing -- have stopped underwriting new business. And so if you're not underwriting new business, you're not going to have marketing spend to go find new customers. But what the marketing service business does, it also helps them retain their current customers and tell -- and identify when a customer is going out shopping to switch policies so that our customers -- our insurance carrier customers can retain their own customers in this market. And so the business has still grown even in that contracting market.

And with marketing and it being part of Verisk, is the opportunity -- I mean, you talked about this with SaaS, but more relationships with the insurance industry in general at a...

Yes, yes.

Okay.

That's right. Yes. Our customer relationships have opened doors for the marketing services businesses. Just as it had on the life side. The other comment that Matt made on the -- when we were talking about his business is the -- probably one of the largest spends for that marketing business as a tech-heavy user is just their cloud cost, their AWS expense. And by being on a large enterprise platform, which most marketing services providers are not, they have just a more efficient margin.

So international has also been another area of outsized growth for you guys. It's interesting because outside the U.S., Verisk doesn't have the contributory dataset that they do in the U.S. So I'm curious, one, can you just talk about key business lines internationally and the competitive positioning there, too.

Yes. Yes, absolutely. And it's -- our international strategy has been to look for opportunities that are platform players in a particular market where we see opportunity to expand from something there. So to your point, we don't have the contributory data set. We don't have as large a business internationally as we do in the U.S. But we've been looking for what we think of our kind of great beachheads to grow from. So the SQL specialty business solution that I talked about for the Lloyds market was one such beachhead where we started with the SQL acquisition did a couple of other bolt-ons and now kind of have a much broader platform for that particular market that can benefit from the Verisk data even in the U.S. Other businesses -- so we also have a -- there's some international businesses in the underwriting side and some international businesses on the claims side. On the underwriting side, there's a business called Opta in Canada, which we acquired about just over a year ago now. And that is personal line -- that is underwriting for property. So they have a property database that is -- it is probably a leading -- the leading products just like Verisk's underwriting property businesses in the U.S. but in Canada. So that's kind of the leading property database in Canada. So that's been exciting. And then the other elements in the underwriting side, there is a life health and travel business, which is based in the U.K. So travel insurance, if you live in the U.K. or anywhere in Continental Europe, your health insurance just comes to you kind of nationally because of where you live. If you're going on vacation -- if you're in the U.K. and you go on vacation for 2 weeks to France, you're not going to be covered unless you get a one-off policy. So that business has actually been growing with the recovery of travel, call it, in '22 post-pandemic, that business had tremendous growth off of a pretty quiet levels in '20 and '21, and is expanding into Australia and the APAC region. On the claims side, so the claims business, the kind of the platform or the beachhead that we've taken has been a business called ACTINEO in Germany. It is a bodily injury claims business that is a leader in that market, and we're sort of expanding and penetrating that network starting in Germany, but other places in Europe. They have a partnership in France and just acquired a software business in Sweden.

Got it. I'm just going to pause and check just in case if anyone has a question. We're going to keep going. So new logos are expected to comprise -- well actually -- so just sitting back at your Investor Day, you had a slide and it kind of broke down towards some of the key drivers of organic growth from in terms of new customers, pricing, all that. And one of them is 50 to 150 basis points of your 6% to 8% annual sales goal comes from new logos. What's that opportunity? It's interesting. Like who are the potential customers who you aren't already serving today. And how much of that is international?

Yes. Yes. Great, great question. I mean in the U.S., we have 100 of the top 100 P&C carriers are our customers. So there's no logos in that top area. There are still smaller players that may come into market, particularly in times of disruption. We've talked about -- there may be some carrier liquidations, but then there's new formed capital that comes in to take its place. So there are just as there are some kind of carriers that die off. There's new formation in the industry at the same time. So that's a piece of it, but the larger piece of it is probably these markets that we haven't penetrated yet to your point, life, international marketing, the specialty markets are primarily the ones that are attacking new logos and new markets.

Got it. Got it. And then Lee Shavel, your CEO, he's consistently been focused on return on investment. I mean very focused. And in 2022, RRC was added -- or it was added to management compensation that trick as well. How does this returns-focused approach filter through the organization and the company's decision-making process?

Yes, great question. It's definitely -- you're absolutely right. It's something that he's been talking about, I think, ever since he got here before my time, but yes, he's been -- I think it took them a couple years to push to include that as a metric that we're measured and compensated on and we track it both -- so how does it filter through? It definitely, you can't -- the business leaders have learned by now that they can't have a discussion about M&A or about a significant CapEx program or others if they don't kind of bring to in with, well, what's the actual ROIC from this project. So it's definitely filtered down in that sense. And -- so it's tracked not just on -- so both tracked on a project basis, whether it's a CapEx program or whether it's an acquisition, we will definitely look at those metrics in the decision-making process. But it's also tracked and so that, obviously, you want to assess for each individual project, are you generating good returns on that incremental capital, but it's also tracked at a business unit level. So what is the ROIC by business unit for each of the groups. And that gives each of the leaders some accountability not just for the incremental capital that they're deploying, but for the total. And so if they're thinking about a portfolio of both their existing business and new businesses. They need to think about not just new investments, what's that doing on an incremental basis, but how does that fit into my whole. And so I think that encourages them to build a portfolio that will be value added at their business level and then also, obviously, value added for all of Verisk and encourages them to look at the base business, not just the incremental new things.

That makes sense. That's helpful. And a topic about -- the topic of balancing financial growth and investment also came up a few times. It comes up a lot with all of our companies. Where is the company prioritizing investments? And what are areas where you've scaled back?

Good question. It's hard to -- I think it may be the existential question for finance and for business leaders, right? How do you balance growth and investment? And so yes, we're trying to do both. We're trying to invest but in the ways that we think we'll generate the most immediate returns and to be efficient in the core business. And so part of it is you need to give yourself room to invest by driving efficiency in the core business. And so on our operating efficiency, we look for places to be more efficient in the core business so that we can create that room to invest. Let's see remind me.

I was asking sort of where are you where -- sort of where are you sort of investing and where you might be pulling back, yes.

And where are we prioritizing. I think what we're trying to do is while having a balance of investments, we are trying to prioritize investments that have more immediate connectivity to our existing products. And more near-term results even if the investment itself is a multiyear program. So take the Core Lines Reimagined, for example, will be a multiyear investment, but it will start to deliver the benefits of it, it's modular. So we'll get different pieces of it as we go along. Maroun mentioned -- I think he got asked a similar question. When he took over the claims business, there was a list of 20 different initiatives and priorities. And his comment was, he said, Microsoft only has 6 like we can't have 20. And so he went back to the team and sort of said, okay, but really if you were -- which are the -- which are your top 5 that really matter here. And so they came up with a more focused list and we're -- so it's better to spend the same amount of total investment dollars, but on some concentrated places where you can really drive value as opposed to underinvesting in too many ideas.

I wanted to ask about capital allocation, just in talking again this day. You have a big buyback program this year, I'll let you talk about that. But you also have proceeds from the energy sale. When you think about when you get through that sort of how you think about prioritizing your excess cash.

Yes. Great, great question. I think we will think about it. Not surprisingly, given the focus on return on invested capital, we will think about it from an ROIC perspective. But where are the places where we can actually generate value from deploying that cash. And so the first places -- the places that we can do it in the way that is the most unique to us and the most value creating will be some of those CapEx investment spends and potentially tuck-in M&A, acquisitions where kind of like the life business, we think we can take a business to a different place than where it was before. So where we see opportunities to deploy cash in those areas that are generating returns above our cost of capital. We will do that where -- as much as we can while keeping the portfolio focused and our attention focused. Like most companies -- well, maybe not like most companies, but we -- I would say we are fortunate in that we have more cash available. We generate more cash probably than actual -- that it makes sense to spend on CapEx, for example, or then we see good acquisition targets. And so we typically have had excess cash above those investment opportunities. And there, we will probably -- we will choose to return it to shareholders and generate a return that's probably equal to our cost of capital.

That's helpful. we've got a couple of more minutes. I may ask you a question on the margin side. And this is sort of what you talked about at the Investor Day, you had the target of 300 to 500 basis points improvement into 2024. You've raised the high end of that range. You're talking 400 to 500. Kind of what was -- what kind of put you in a position to raise that guidance?

Yes. Yes, we raised -- so the target was kind of 53% to 56% by 2024. We raised the low end of the range to 54% to 56%. We -- so we had put that target out about a year ago, just less than a year ago, but that was before we separated the energy business. It was before maybe around the same time as doing the other divestitures. So there was a lot of work in front of us in terms of the divestitures, there were -- there was -- with -- particularly with the energy business, there was a separation of employees, some went with the sale, some stayed with us. So there were a lot of pieces that needed to kind of have the dust settle in terms of those divestitures to be able to see what it could really look like. At the end of the day, we restated '21 and '22 on a pro forma basis as if it was just the insurance business. And so we had -- we had delivered 150 basis points of margin expansion into '22. We gave public guidance for 2023, which was for another 100 to 200 basis points of expansion. So our '23 guidance is for 53% to 54%. We were very happy to be able to hit kind of the low end of our range, a year early in 2023. And so it was pretty obvious, and we were getting questions, well, if you're already at the low end of your range, it's -- we're not going to sit here and be unambitious. So we've -- we kind of increase the lower end. So we have been looking around the company at different efficiency opportunities, different ways to improve -- to be clear and to reemphasize it again in the trade-off between growth and investments. We are doing that in finding efficiencies in the core business. There has been a bunch of opportunities on the headcount side, on the tech side, on third-party spend. So we've been trying just to streamline core processes not reduce any investment spend to get to those margin targets. So we've done that. We see the path towards there. We're comfortable with where we're at. And then we have some operating leverage from the business. So that's what makes us comfortable at the 54%.

Got it. Got it. And I think we can end here, and I want to thank you for joining us. You've had a whirlwind 6 months, not to even say the least the last few weeks with the Investor Day and coming today in your earnings. So we really appreciate it. Thank you so much.

Thank you. Thank you so much for listening.