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

Okay. We're going to get going. I'm Jeff Meuler, Baird's information solutions analyst. Pleased to introduce Verisk as the next presenting company. Verisk is the is the leading provider of data and analytics solutions and software to the insurance industry and a company that has recently undergone some pretty significant positive change on several fronts, including a move to a pure-play insurance industry solution provider. With us from the company is Elizabeth Mann, who joined Verisk as CFO last year, prior to which she was CFO of S&P's Ratings and Mobility divisions, in addition to several other roles there. Also with us at the conference is Stacey Brodbar, the Head of Investor Relations in the front row. I'll lead the Q&A. If anyone from the audience has a question, please e-mail it to [email protected], and there will also be a breakout session immediately following this. But with that, we'll just start. Elizabeth, if you can give us just a couple minute overview of Verisk to level set for the audience before we launch into the Q&A.

Thanks, Jeff. It's great to be here, and thank you guys all for joining and listening. As Jeff said, Verisk is -- we like to call ourselves a predictable growth company. We are about a year into a transition with a new CEO. I joined the company 9 months ago as CFO. And we are returning to our roots as a pure-play solutions provider to the insurance industry. We previously had some businesses in an energy segment and a financial services segment, which have now been sold. Those have fully closed as of February. So we are focused entirely on the insurance industry. We are a data and analytics provider and it is -- I'd like to call it the backbone of the U.S. P&C insurance industry. The history, it was formed -- the original ISO was formed as a consortium of the insurance P&C carriers to share data in order to better assess and process claims and measure, assess and underwrite risk. So they shared information together. Due to an antitrust case in the '90s, they were forced to separate this out as a separate business and Verisk went public in 2009. So we have a longstanding history with the U.S. P&C insurance industry. And we are very excited now to focus on the insurance industry because we think now is a unique moment in time as they face a number of challenges, challenges on the profitability side, challenges on underwriting, measuring and pricing risk and we think technology and data can be used effectively to help both of those aims, and we are the partner that can best help them do that. So that's...

Excellent. And maybe just like revenue and margins overall.

Yes. So revenue -- 2022 revenue was $2.4 billion. We report it now in one segment, which is insurance. We give 2 subsegments, which is underwriting and rating, which at $1.7 billion and claims at $700 million in 2022. The overall company margins were 52% for 2022 and target of 53% to 54% in 2023.

And you highlighted there because -- I'm sorry.

Predictable growth company, so 6% to 8% organic growth is both our medium-term target range. So annual organic constant currency revenue growth of 6% to 8% now through 2025. That is also the historical range. It's been in that range every year for the past 15 years since we went public with slight blips in 2009 and 2020 when growth was around 5%.

And what is it about the company or the financial model that allows you to grow at least 5% organic constant currency regardless of if there's a financial crisis, a pandemic, a macro downturn, a P&C insurance industry downturn?

Yes. It has to do with our relationship with our customers and the mission-critical nature of the information to them. We have conditioned the business model, the growth to our customers increases generally correlated to net written premium growth in the insurance industry. As you know, that's a very stable metric over time. Historically, over time, probably low single digits net written premium growth. Our price increases on top of that and growth with new solutions, new customers and cross-sell and upsell is what's enabled us to hit that 6% to 8% revenue growth range.

And can you maybe more formulaically recap the growth algorithm that you gave at Investor Day? And do I have it right that if I look at like pricing, net of attrition, we get over 100% for net revenue retention before layering on cross-sell and upsell and the other growth drivers?

I think so. I'm not familiar with that math. But yes, so we laid out the 6% to 8% organic revenue growth, kind of the algorithm through that, and these are sort of historical averages through the cycle, we said about 300 to 400 basis points is pricing. Sort of implicit in there actually is also kind of volume is kind of embedded in that bucket as well. We said 150 to 200 basis points each from new products and from cross-sell and upsell. And then we have kind of 50 to 150 basis points of annual growth from new customers coming on to the platform, offset by maybe 50 to 150 basis points of what we call consolidation, which can take place for us either when insurance carriers liquidate or when there is potential merger consolidation across the industry. So interestingly, that new customer bucket and that consolidation headwind essentially offset each other, which makes sense in a very stable sort of capital growing industry.

And then you said it's a unique moment in time. Q1 was the, I think, the best quarter that I've ever seen out of Verisk Insurance, about 10% organic revenue growth. That included almost 9% subscription growth. So I guess why now? What's driving the underlying acceleration?

Yes. We've talked about it and kind of in the earnings call, you can go back. I gave sort of the list of the factors, but let me try to step back and put them into a couple of different categories. One category for the strength of growth in Q1 is overall strong pricing environment in a sort of relatively hard insurance market cycle. Another category is on the transactional revenue, some recovery and some rebound from what had been softer environments in 2022. There's a couple -- a third category would be some businesses that are doing very well in Q1. So that's a good thing. And then maybe a final category, there were a couple of technical one-offs that we said added up to less than 1% contribution to the growth, but things like an extra business day in the quarter that will come out in Q3 and some billing catch-ups and stuff.

And talk about the timing lag as it relates to net written premium growth in the industry translating through to your contracting and revenue.

Yes. So the way the historical business model at Verisk developed with our kind of traditional customers was an annual evergreen contract with pricing that would reset based on the customers' net written premium growth. And so if the contract renewal cycle would be -- let's talk about 2023. This year, the renewals would happen in November-ish of last year. The net written premium growth that it would look to would be the 2021 net written premium because in late '22, those were the numbers that were physically available and filed. So there is a 2-year lag between their net written premium growth in 2021 and what's impacting our business in 2023. Now I don't want to oversimplify it. It's not a mathematical tie directly to that net written premium growth. But in general, it is an input and a starting point for what ends up being a negotiation. And maybe just to give you some stats then on what that has meant for us. So the net written premium growth, our stats for 2020, which is what was impacting our 2022, the 2020 net written premium growth was 2.6%. 2021 was 9.6%, which is what we're now experiencing in 2023. And 2022 numbers are not final. This is the insurance industry, and it's only June, but the preliminary version of the 2022 numbers are around 8%.

Which to be clear, that impacts 2024 revenue. And given that the market is hardening, 2025 net written premium is likely to be good -- or 2023 net written premium is likely to be good, what will impact your 2025 revenue?

In theory, yes. There's many moderators and factors to that as an input, but as a general dynamic.

And then maybe just bridge us with the insurance industry headlines because if people are just reading the headlines about what's going on in the Florida market or some large insurance companies, no underwriting business in California. From a headline perspective, it seems like that would be a negative for you, but it doesn't look like it's showing up in numbers. So maybe the mitigating factors against why some pockets of weakness in the insurance industry are not necessarily negative in a meaningful way for Verisk?

Yes. Look, there are some challenges out there in the industry. We are monitoring it and we are kind of close with our customers and partnering with them on it. I think one of the reasons that it hasn't impacted so much is partially that lag effect that we were talking about. It also may be that as they're experiencing challenges yet, while there have been some liquidations in Florida, there hasn't yet been kind of more widespread liquidations or more widespread consolidation in response. So those are things that we are monitoring going forward and that could have an impact. We always want our customers to be in a healthy position themselves. So yes, they are experiencing some challenges on profitability, on loss experiences, particularly Hurricane Ian was a major event in Florida last year. Wildfires are happening and have been very visible in the last couple of days in New York, if you've been seeing that. So insurers are very focused on their loss outcomes. We are trying to work with our customers. What we provide is data and analytics to help them better best price and underwrite risk.

Q1 growth is trending well ahead of the full year guidance. It's only 1 quarter. You called out some positive variance factors that inflated the Q1 growth rate. So that's one consideration. Any other risk factors or likely headwinds as we contemplate the remainder of the year?

Yes. One of the risk factors that we've called out, I mentioned a couple of times the liquidation experience or consolidation, and we mentioned on the call, we are tracking the experience in Florida. There were 6 liquidations in 2022 and 1 so far in 2023. We have felt that as an impact. Even with that as an impact, even with what we experienced so far in Q1, that has been less than a historical average of what the attrition -- the consolidation impact could be, which I think we quoted as, in general, in historical years, it's been a 50 to 150 basis point headwind on growth. So if that were to exacerbate, that's something that could be an offset for us.

Okay. And guidance is new at Verisk. Maybe if you could just address your guidance -- or your philosophy in setting guidance as well as your philosophy in like when it's appropriate to update guidance?

Yes. So we're excited to give guidance. We have -- we did some shareholder surveys. We understood that it's important for folks to have transparency on the business. We think now that we are an insurance pure-play business, and that is the more stable and predictable part of the business, we should have better visibility to be able to give you some of that transparency and guidance. And it's a new experience for it. Our philosophy, we don't -- we're not trying to be particularly aggressive or conservative on this guidance. We just kind of want to give better visibility into what we see. There could be risks to the upside. There could be risk to the downside. And then as we go through the year, somewhere in there was a question about Q1, I think we need to see certain trends develop meaningfully before we're ready to sort of declare a material change to our view.

Okay, fair. You had an Investor Day earlier this year. You talked about some growth initiatives, but a big part of this was also sustain and accelerate the core. So what does that mean? What are the big initiatives to sustain and accelerate the core?

Yes. We're really excited about sort of the technological transformation that we are doing, that we are helping our customers do. In terms of our own operations, we started 5 years ago a journey to migrate our core databases, the participatory databases to live entirely on the cloud. We just finished that. I mentioned on the Q1 call that we switched off our mainframe, which was a big moment of celebration. So our databases are living in the cloud. We are working with our customers to enable and facilitate their -- both their transitions and their usage of our products on the cloud. That's one element that's kind of on the infrastructure and platform side, I'll talk about it. On the product side itself, one of our big investments is we call it the Core Lines Reimagine project for our historical contributory database and our proprietary data. The delivery model of that was probably in need of an update for some time. If you think about the policy language and even the underlying data and risks was often delivered to our customers in e-mailed PDFs. And it would be a significant cost and expense and work for them to take that data, whether it is language that needs to be turned into an accessible version of forms that they can modify, edit and effectively track changes as regulatory changes flow through hundreds of lines of business in 50 states, that's what they need to do on the form side. On the data side, they -- instead of getting risks and loss costs and other actuarial data, again, in a PDF and having employees key that into their systems, build that into workflow and programs to assess and underwrite risk, we're working to provide it to them in API formats, in workflow usable formats, in data based rather than document-based formats.

And then can you also talk about your Extreme Event Solutions? So what do you do? It seems like there's the big macro of climate change that maybe plays into this. And then what's the historical growth and what's the future expectation?

Yes. So our Extreme Events business is a catastrophe loss modeling business. It helps insurers and reinsurers estimate what is the modeled loss cost for various weather events. There is a bunch of different modules for different types of climate risks, tropical cyclone, North Atlantic hurricane, wildfires, each of those are sort of separate modules. It's used globally with reinsurers around the world. And it's used as sort of the agreed currency for insurers and reinsurers to agree and trade some of the risks that they're trading. It's also the primary solution used in the cat bond or the ILS securitization market. That -- it has a direct competitor in RMS, which is owned by Moody's. So the 2 businesses both have kind of historical strength in that.

And that's part of the core, but it's one of the fast-growing parts of the core. And I think the -- what was communicated at Investor Day is that even though it's been a fast growth business, you actually could accelerate that business. What could drive that?

Yes. I think we think of that as a high single-digit growth business. It's had great -- good growth and good adoption. I think as both insurers and reinsurers are taking on the platform and expanding kind of the number of models, they are increasing the refresh cycle on the models because in a world of newer and more frequent events, again, as we've experienced even over this year, you need to be kind of updating the models with more data and more recent refreshes.

Okay. And let's talk about some of the other growth businesses that are, I guess, a complement to the core. Verisk historically has been more focused on the property and casualty insurance market. You've gotten into life insurance. What do the solutions do? And if you can talk about how you improve the growth rate of the acquired businesses within life?

Yes. So the life insurance -- so a couple of years ago, we asked ourselves the question. We have this tremendous presence in the property and casualty space, should we be doing anything in the life space? We're kind of looking into that. We're not rebuilding the Verisk business model in the life insurance space, to be clear. That isn't the approach. But we saw a great opportunity with a business that we acquired called FAST. We acquired it at the end of 2019. It is a policy administration software solution. So it helps a life insurer assess, underwrite, measure and then manage a policy and a portfolio of policies across their life cycle. It's a true SaaS native solution. It's Gartner upper right in its category in sort of a couple of different categories. It was growing mid-single digits when we acquired it. It's grown 28% CAGR since that acquisition. A couple of different factors. One is some industry challenges that are leading them to adopt the solution and to realize that they need a product for this. In some cases, the competition was homegrown solutions. In some cases, the competition was actually nothing at all. There wasn't much managing the policies. They were kind of in a folder somewhere. But the other point, I think, has been the Verisk name and credibility. Insurers -- the procurement cycle with insurers is -- can be long and cumbersome and they can be hesitant to work, either they're very selective in what start-ups they choose to work with. So something that is in the Verisk portfolio and has that brand and relationship has been meaningfully able to accelerate their pipeline. Even though it's in the life space where we don't traditionally play, something like 40% of our U.S. P&C carriers actually also underwrite life, so there's a direct translatability there.

And if I think about some large businesses within your core, exact were -- I think ClaimSearch, AER were once upon of time acquisitions at Verisk, and they've had this really good, sustained growth and become large businesses. Is there a similar potential in some of the current growth businesses like specialty business, which we haven't gotten into yet or life, or if you can comment on like the life insurance industry. At what stage of adoption of using data and analytics are they?

Yes. Absolutely. We have a track record of acquiring businesses. As you said, the Extreme Event solution, our cat loss modeling business was an acquisition about 20 years ago, property estimating solution. So many of these businesses that we've acquired have grown into multi-hundred million dollar businesses and core parts of the portfolio with real adjacencies and synergies to some of the other Verisk businesses. So yes, we like that model. Yes, we would love to run that playbook. At our Investor Day, we disclosed the life business about an $80 million-ish business today. Specialty business, also $80 million. We would love to see those grow to be multi-hundred million businesses and we chose them to acquire because we think there is the opportunity there. Was there something else in that question?

Just the usage of data and analytics within life.

Yes. Yes, one of the reasons that the life business has been able to grow so quickly -- people have quoted and estimated that the life industry is maybe 10 to 15 years behind the U.S. P&C industry in terms of data usage, technology adoption. The core actuarial methodology is very traditional still.

So your U.S. insurance -- the U.S. insurance industry is unique in many ways, and your business within the U.S. is uniquely good in many ways. You've also been expanding into non-U.S. markets. Is there like a natural -- naturally lower caliber in terms of the quality of the businesses outside the United States? Or how do you think about if it's as good of a use of capital?

Yes. It's a great question. It is not -- I wouldn't say it's -- they're lower caliber. They -- we cannot and we are not trying to recreate internationally the contributory data model that we have in the U.S. The insurance market in other countries is not set up in that way and doesn't have that history. So we're not trying to go out and recreate what we have in the U.S. What we have found opportunities to do and we will continue to look for them, but it's very selective, is to find places and businesses and platforms where there's an opportunity -- number one, a great business with probably more of a penetration opportunity to grow quickly and one with real synergies with the Verisk existing portfolio, whether it's usage of our U.S. data that can be applied to those businesses internationally or also use of technology or even people that we find internationally to kind of bring back to the U.S. market. And we've found directions of those going both ways. Sequel, which became the foundation for our Specialty Business Solutions, is absolutely such a platform and one that we've really built around to have, at this point, a scaled presence in the U.K. I won't call it -- it's not akin to our U.S. business, but it's a real strong and powerful business. And in Germany, we've been building together. We bought ACTINEO a couple of years ago. We recently added Krug not long ago. And Mavera is another Swedish claims business. So I'd like to think of it -- I kind of picture a network with some nodes that we're lighting up and it's starting to kind of densify and really become something that's more than the sum of the parts.

Awesome. And then just as a way to highlight organic innovation at Verisk as well, can you talk about LightSpeed? What is it? What's the revenue contribution? What's the growth rate?

Yes. So LightSpeed is a product in our auto underwriting space. So let me give a little historical anecdote, which is the auto -- as consumers bought auto insurance, the purchasing experience was not great. And some of the insurtech start-ups came into the space to really try to disrupt this. And they may have had some challenges recently, but one of the things that they really did was enable a much smoother experience for the customer. And part of that was rapid use of data to enable quick underwriting. And so the -- our -- they are customers of ours, but our -- the traditional customers found that they had to compete and enable sort of faster and better underwriting. So it used to be that when you try to apply for auto insurance, you'd get a preliminary quote, then you'd have to fill out a ton of paperwork, maybe by hand and scan it in, and then you'd get a quote back and it will be different from the initial quote and you may get frustrated or you may just give up on the forms. Our LightSpeed products combined a bunch of data that we already had in-house but built it together into a product that gave a what we call a bindable quote in real time, meaning you fill out 3 pieces of information online, your name, your date of birth and your address. And it gives you a quote that is the quote that stays with you and that they can underwrite based on our data. So that was building together a bunch of stuff that we had kind of organically. I think we called it a kind of 30% ROIC-type business investment.

Okay. And then marketing was another category within like the growth bucket at Investor Day. Maybe just place it in the context of some cyclical factors within the insurance industry and how that business could perform over time?

Yes. So insurers are very active marketers in an ordinary market. You can't turn on a TV or you can't go to a sporting event without seeing a banner. So they spend quite a bit on marketing. And this was an area of spend where, again, if you think about it in modern -- customer acquisition is very data heavy. It was one where we saw an opportunity for us to really bring some strength to our customers. We brought in -- we made 2 acquisitions, Jornaya and Infutor, which are the foundation now of our Verisk Marketing Solutions business that at the moment is challenging for insurers on the marketing side. A big portion of that marketing is towards individual consumers and on the auto underwriting side. Some auto carriers are challenged right now in terms of the profitability of their policies. So they haven't yet really gone heavily back into the marketing space to acquire new customers. But I think our presence is there with them as and when that market recovers.

Got it. You mentioned that you have a modern tech architecture. Your clients are also going through a similar transition and you have a lot of proprietary content. That seems like it should be a good combination for generative AI. So how are you approaching AI? And do you see any potential risks to the business from it?

Yes. We're definitely excited about it. Of course, there's risks that we're thinking about. First point I want to make, the generative AI part of the discussion is new. The large language models is new. But we've been using AI and machine learning in a lot of our data products as it was already. So we have a great data science program and other things. This is just kind of the next level of that. We are -- we're very focused on protecting the IP that we have and not using -- so we've banned public -- usage of the public tools internally, and we will be using kind of private license version of that. We are developing an inventory of use cases to further review, prioritize and greenlight kind of select to invest in those use cases. Some of them are internal efficiency for us. Some of them are internal efficiency for our customers. And then the third and most interesting but maybe more nascent is kind of the business use cases. Obviously, this area is new for everybody, but we think that the proprietary data is actually what makes it the most exciting as potentially over time, the generative AI itself becomes more commoditized. It's what you do with it and the data that you -- either we own or our customers own and we can partner with them on it.

And then we mentioned you joined Verisk less than a year ago. You came from S&P, another really well-regarded and well-run information solution company. As you join Verisk, what's been the positive surprise in terms of things that were even better than you realized when you viewed it from the outside? And then just anything that you bring with you from your prior experiences where you think there's opportunities for Verisk?

Yes. Love this question. I learned a lot at S&P. The team there taught me a bunch. I think one of the things that really excited me when I got to Verisk -- I think S&P gets a reputation for its great technology and great use of data, which they have. I've been very impressed with what we have here at Verisk, the innovation, the data science side of things. That's point one. The migration to the cloud is -- has been smooth and on schedule. And our usage and leverage of cloud expenses, I think, happens in a very efficient and well-managed and well-monitored kind of way. So that's been a great thing at Verisk. I think some of the things I learned at S&P was a tough approach to cost discipline, which was already underway at Verisk, but we're continuing to further that and seek opportunities for efficiency, particularly on the automating side.

Excellent. Perfect. Well, point to conclude, please join me in thanking Elizabeth for her views.

Thank you so much.