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

Hello, and welcome to the Ultimate Services Investor Conference. We are -- I'm Alex Hess with JPMorgan, and we are here today with Elizabeth Mann, the CFO of Verisk. Elizabeth's been in the role for, what, just over a year now?

That's right. 15 months.

Excellent. And we're so excited to have you.

So I want to maybe just start. Organic revenue growth has been quite strong year-to-date. And I'm under no illusions that you guys flipped the switch all of a sudden, with this 9-plus percent grower. But you know what? Maybe just a step back, what has changed?

Yes. While we'd love to take credit for it as a new management team, and say, it was all flipping a switch. As you say, that's -- it's never that easy. I think you're seeing a couple of different things manifest itself in the strong revenue growth this year. And let me start with you really see it on the transaction revenue growth, which is only about 20% of our revenue, but has been up double digits each of the quarters this year. And some of that is just a sort of generalized recovery comparing to weaker transactional revenue in 2022, which was still experiencing sort of a post-COVID downturn. But there's a couple other environmental factors that have driven particularly that transaction growth, and then I'll turn to subscription after that. On the transaction side, you've heard us talk a lot about the performance of the auto underwriting data products. And that's due to strong consumer shopping, insurance shopping behavior as the pricing on car insurance policies have increased dramatically this year. So that's been one strong sort of environmental tailwind manifesting in our transaction revenue. Also on the auto side, we've got what we call a non-rate action deal with a large national insurer. We can talk more about that in a bit, but that's sort of a unique onetime tailwind this year. The other elements have strong weather activity. While 2023 has been unique in not having a single kind of large hurricane, like Hurricane Ian was in October of '22, at the same time, the level of localized weather activity has been high, and the Verisk PCS data is tracking for the highest -- one of the highest natural catastrophe years on record in 2023. So those have been all contributors on the transaction side. And then finally on the subscription side. The pricing environment has been a constructive environment. Generalized across all industries, you've heard people talking about inflation and pricing. And specific to the insurance industry and what drives our revenues, the strong net written premium growth, particularly even going back to 2021, has been a driver on some of our contracts in '23. And then finally, despite some challenges in the environment, the actual experience year-to-date of liquidations or large mergers has been less than historical average. So that has been a benefit for us in the sense of an absence of something that's a typical headwind.

Got it. Maybe we'll ask the narrow question, then we'll go to the broad question. You cited the auto underwriting data that you have, has been sort of a big -- and I believe the biggest sort of year-on-year transactional growth piece. You've never framed the revenue contribution from auto underwriting. How much -- I'll just ask it outright. How much revenues are you earning from those underwriting solutions like LightSpeed? And how -- or much are they up year-to-date? Can you give investors some sense for how to conventionalize this?

Yes. We haven't broken it out separately. The auto piece sits inside that underwriting data products where we gave kind of the annual pie chart disclosure at our Investor Day. So it's a meaningful part of our underwriting business. We've also said in the past that revenues from the end market, from the auto insurance end market, is a ballpark of 10% of our revenues. That covers some of those data products, but also data in the anti-fraud and other forms, rules and loss cost areas.

I'll try it one other way. If we were at roughly 10% a year ago, at the end of 2022, where are we year-to-date as a percentage of total revs? That -- for those of you listening in, she shrugged. We're not getting that one today. So okay, so back to you a big picture question. We are in an environment where there have been elevated profitability pressures in parts of the P&C insurance industry, and I'll oversimplify by saying it seems to be, in part, due to higher rates of inflation as well as climate change. How does the operating strategy at Verisk evolve sales, products, client service with various stages of the P&C underwriting cycle?

Yes. It's a great question because you're right. At the end market, the insurance carriers are challenged. If you think about the inflationary environment, the cost of most claims that they might have -- on policies that they might have underwritten are coming in higher than they might have expected at the time, and that fundamentally is causing their profitability challenges. For us at Verisk, it's a -- it is, in some ways, a challenge if our customers are under some pressure, but it's also a good catalyst for them for action and for them to be thinking about Verisk as what we were originally created to do, which is to help them better use data and analytics to price and select risk appropriately, and to more efficiently process claims and identify fraud. So what does that concretely mean for us? It means that there's an opportunity for us to pivot to products that are going to help them deliver immediate returns. The non-rate action deal is a good example of that. When -- in 2022, auto carriers were challenged for the inflationary reasons we were talking about. Their claims became much more expensive than they'd seen when underwriting the policy. In order to compensate for that, they typically raised premium rates. That needs to get approved by regulators in each of the 50 states, and it took a while. We're now largely through that pricing approval cycle, but it took a while to do so. As they were trying to think about how to do that, it became a good point for a product for us, which is almost a defensive product. So a non-rate action deal is -- a non-rate action is when an insurer can find a reason -- a contractual reason that they should be getting more premium from a customer that's not actually a rate increase. And so on the auto side, the typical example is if you have a teenage driver who is now driving your vehicle at your home, you may or may not have reported that to your car insurer. On the other hand, it's public record that there was a 16-year-old who is now -- has a new driver's license. And so they can search through their book for places that are not getting enough premium. That seems like a no-brainer and immediate value delivery to the customer. There's many other examples that we have of products that are designed for that. The exact expert tool in our property estimating solutions helps them deliver and build more rules into the pricing assessment. It helps their contractor workforce and the insurance carriers, the insurance adjusters, work much more efficiently with rules-based engines that help them identify the exact right pricing for an individual claim. The Discovery Navigator, which is automated review of medical files for workers' comp, has an immediate efficiency for them in terms of the use of skilled workforce, medical professionals and lawyers that are reviewing those files. So any products that can deliver that immediate ROI are the right things at the right time. And the shift on us is to make sure that our product development is focused on products that can be used very efficiently by our customers that don't have a long implementation or investment cycle on the part of their customer. And our go-to-market should be focusing with the mind on that kind of defensive environment.

Great. Great. So look, I think for those of you who are interested, we maintain a product sheet on Verisk and you can dive in on some of these products. But really, some of these new products have truly really compelling data behind them, the non-rate action deal being a classic example. Verisk have been upgrading in their core -- in the core, like forms, rules and loss cost business, the contributory database there as well. You've been adding new contributors, increasing the quality of data. Can you give investors a sense within that core, what percentage of clients are data contributors? How has that figure evolved? What's the North Star?

Yes. We don't give a sort of percentage of customers that are data contributors, but we do have very wide contribution across the industry. One thing what we have -- the data point that we have given is that we've gotten 100 new data contributors over the past couple of years. I was pretty impressed to learn that because it can be tempting to think about the core products as very mature and established. But this to me is the data point that says that they continue to expand, that customers continue to see the value of contributing and partnering with that data set. But they're opting in more and more rather than leaning back.

Got it. So you've got 100 new contributors on the forms, rules and loss costs of core data set. You guys have also put the forms, rules and loss costs business at the whole business, I should say, in the public cloud. And we are now, taking those 2 efforts together, 1/3 of the way through what you call Core Lines Reimagine. A sort of an effort to enhance this whole business. So while a lot of back-end work has been done, can you give investors a sense for plans to update your client platforms as well, ISOnet or parallel platform? Any sort of other things they should be mindful of?

Yes. Yes. Core Lines Reimagine is sort of an umbrella name for a series of actually 20 different initiatives working on that, the heart of our forms, rules and loss cost business. Some of it is on the data side that I referenced. Some of it actually shifting that contributory database to the cloud was almost a precursor to that 5-year program. I think we said we spent 5 years kind of moving that database to the cloud, and we've just finished that part. Yes, there is a new customer platform that is built. It is sort of in beta and trial mode. So select customers are testing it out or giving feedback, are starting to shift their workflows to the new platform. And then it's going to be sort of modular, so you'll start to see more and more features shifting to that. Another element of that is we're bringing kind of more thought leadership, making that more accessible on the platform. And one of the things we're doing is creating some industry reports with the aggregated data that we have. Despite sort of having that data, we haven't necessarily focused as much on kind of reporting it, highlighting it. And for select customers now, we can do individual benchmarking reports and assessing how do they compare against the industry-wide data, which has been incredibly valuable for them and really enriched the dialogue with Verisk.

And those benchmarking reports, correct me if I'm wrong, the way you get those is by -- can be even part of the contributory database?

Yes, exactly right.

By being a data contributor essentially?

Yes. Yes.

Got it. So that's sort of a nice little flywheel. So just staying on that point. Maybe with ISOnet, a lot of clients are built on top of that. Whole insurance carriers, household names, built on top of ISOnet. Will you be running a new structure and in parallel, be maintaining ISOnet as sort of exists?

For some time, yes.

That's very helpful. I want to turn to the NPS score. One of the great ways that sort of Verisk -- I mean we talked about the environmental factors that are helping revenues in 2023, but I think you'd agree that it's not just an environmental case. It's -- there is a sort of consistent value growth you aim to deliver to your customers. Verisk last disclosed in the first quarter that their Net Promoter Score was 47. How is that score attractive over the subsequent 6 months? And maybe where is the ceiling, if there is one?

No ceiling that I know. We'll keep growing it as much as we can. We disclose it annually, I think, in our CSR report. So you'll get next year's number then. We certainly are working on it, on it being robust. What I can say anecdotally is the engagement with the industry, with the environment, we've talked on our calls about a number of conferences and industry events that we've had. I was at the Verisk Insurance Conference in London. We've done -- we did a dinner then. I was just at a dinner last night with a bunch of insurance industry CFOs. And I think there is -- again, this is anecdotal, but I think there's a welcome -- that engagement is welcomed. We're getting really positive feedback on the conferences. We had to kick people out of the happy hour at the London Conference. So we think the engagement with our customers is positive.

Okay. And I presume they were kicked out of a happy hour for overcapacity, not for anything else.

Yes, time was up, but they wanted to keep talking to us so that's all.

Great. So on your last earnings call, your CEO, Lee Shavel, for anybody who's newer to the story, cited opportunities to leverage generative AI within underwriting products and solutions. You have a new solution at Discovery Navigator that has some generative AI elements actually built into it. So stepping back, should Verisk be seen as a major gen AI beneficiary? And how should we think about the time line for future deployments?

Yes. Good question. A beneficiary of gen AI. I mean nothing is going to fall in our lap by any means but -- so we can't just sit there and wait for some magic to happen, but opportunity coming from it, definitely. And it's opportunity that kind of falls at the heart of again, what Verisk was created to do, which is to sort of invest on behalf of the industry. I talked about our industry engagement and our CIO has done a number of insurance industry CIO conversations. And he remarked the other day that 6 months ago, people were aware of gen AI, but a little cautious and unsure of what it meant for them. When he talks to them now and this month, there is very much a sense of this is real. We've got to be doing something. I'm not sure how I'm going to do that. I'm not sure with my profitability challenges exactly what I can do. But boy, if you bring me a product, I'd be pretty interested in learning about it. So it's very much an area where the appetite is there for us. In terms of what we're doing about it, we started first with the focus on sort of integrity of data, privacy, fairness. So we started very much with our general counsel, deeply involved in how we were going to engage in trial. Even the trials on the products, we are not using public versions that we don't have employees sitting there going into ChatGPT. We've now licensed fully private versions of all of the top tools. We then kind of focused on inventories of use cases and coming up with ideas. Where did people see products, ideas? I think the Discovery Navigator example sort of came out of that. And so we're now in a place, and Lee highlighted that, where we have some examples that we really think have interesting opportunities across, some in underwriting, some in life, the Discovery Navigator one is in claims. And we're sort of at the stage of, okay, now let's try to map out some POCs, let's get some customers involved, let's trial some stuff. So it's very early experimentation days. I think it's not ready to kind of -- don't know yet the time lines of products, let alone, monetization of those but we're pretty excited about it.

Got it. So on monetization, key question for us, for all, yes, the info services firms here today is thinking about will gen AI products be sold separately with their own separate pricing or bundled, and sort of maintain that and expand that price to value gap? I presume we're not going to know more today. Is that fair?

That is fair. Yes, no specific announcement. I think it's probably fair to say that may differ again, in our diversified business, and we have a couple of different products. So there may be areas where it's a separate module or an upsell. There may be areas where it ends up baked into the core product.

Got it. That's very helpful. Second question on gen AI, which is -- or third, I guess, which is the P&C insurance industry is often pretty slow to modernize. Will gen AI be different? Or do you expect this to sort of be similar?

My guess is that you're right; it will probably be similar. Many of them are still focused on migrating to the cloud. And we also need to be in a place where readiness to use the gen AI, we need to be in a place where data and data structures are structured, are accessible, are online, are organized. And so that may be some work on the part of our customers. I think, though -- and then the other area of concern with them, obviously, as carriers, they have a lot of PII data. They have a tremendous focus on reliability. So I think the obligation of proof, if you have a solution that's based on gen AI, that it is auditable, that it is fair, that is -- it is not producing any hallucinations, is going to be tremendously important for them. I think within those constraints, if you can innovate and develop a product that is -- that can kind of prove out those proof points, then I mean, in some ways, maybe it can help them leapfrog some legacy tech.

Got it. So we've talked about one specific area of prospective investment. But maybe thinking about Verisk's investment plan -- organic investment plans overall, how do you plan to balance making investments in areas like gen AI, but not exclusively gen AI, with meeting Wall Street margins' expectations for 2024 and beyond?

Yes, good question. Look, when I came on to this job, we already had some publicly stated margin targets out there. And so it was clear that we were signing up on to those. Those are an important, I think, proof point and credibility for us to The Street that we can set some efficiency targets that we can operate efficiently. And so we are fully committed to delivering within the range that we've talked about. Having said that, the margin expansion targets, we've been tracking at a pace of about 150 basis points margin expansion per year, from '21 to '24, as part of those targets. That may not be the trajectory that you should or should want to expect from us going forward from there. So there are investment opportunities. And so what is absolutely an obligation for us is to continue to operate efficiently and drive operating leverage in our core business. And then operate efficiently and scale well in our growth businesses. There's going to be a mix shift as we invest and as our higher growth but lower margin businesses become a bigger part of the portfolio. So that's going to be one of the things that we'll continue to do. And assuming we are continuing to operate efficiently and deliver again within the range and context of the margin targets that we've put out there, we think, in general, in the industry, there's more focus and there will be more value created for shareholders if we continue to focus on the long-term growth and sustainability from a revenue perspective.

So if I were to distill those comments into sort of the core point you just made, which is we're going to get to 2024. Our aim is to hit our margin targets. And from there, you're going to sort of see a healthy balance of operating leverage, with organic reinvestment into high-growth parts of the business, consistent with what you've laid out in the past. Is that fair framing?

Yes, that's a good framing.

Got it. So I do want to cite maybe since one of the ways you're getting to these higher margins are through explicit cost actions, you have a savings program out that's largely going to be done this year. But there's an aspect of sort of a bit of a tail here, which has been cited on the last earnings call, which is moving the global talent outsourcing program. What share of employees are presently in low-cost jurisdictions? And if I just think about it organically, like where could that number go as you grow, and the incremental person is maybe located outside the U.S.? And also, there's natural employee churn. So just thinking organically, where could that number -- sort of where is it and where could it go?

Yes. I think we talk about it. We've done a significant amount of global talent outsourcing. That's been part of how we have delivered the margin expansion that we've gotten to so far. I think we do continue to see opportunity. I think there is good traction. We have some offices in India, Kraków, Nepal, Málaga, Costa Rica, our main sites. Different businesses work with different teams. But I think it's been really positive for the business, very strong -- and strong positive employee engagement scores in those regions and the teams are working well together. So I think we can continue to do some of that. There will be some constraints on how much we can do based on data rules and data usage rules for our customers. There's certain cases and parts of the business where the data needs to reside in the U.S. or in certain jurisdictions. So that is somewhat of a constraint for us, but we're not close yet to hitting that cap.

Got it. That's very helpful. I didn't know you guys had an office in Nepal.

Yes.

So let's maybe shift gears with 5 minutes left to capital allocation. Verisk's pro forma insurance-only ROIC was 27% last year. I think we can agree that's a pretty high figure. But how do you sort of -- how many opportunities to deploy incremental capital are actually accretive to that number? And how do you sort of figure out what is actually accretive to such a high bar?

Yes. So one important philosophical point is that in order to be creating value, we will be making value-accretive investments as long as their incremental ROIC is higher than our cost of capital. It doesn't need to be higher than the 27% overall, which if that was our target, you're right, we might not be able to do anything at all. So we're targeting the cost of capital to exceed that, and that will create value.

Fair. But you are benchmarked on the incremental return on invested capital?

Yes, that's right.

I presume it's not -- which I presume a percentage figure, not versus the cost of capital, but just sort of an absolute percentage figure. How do you ensure alignment between you and Lee and the other named executive officers, who have that unique incremental ROIC target and the rest of the organization? It just seems it's a little hard to go out there and be like, "Hey, employee X, I got to get the 3-year return on incremental return on invested capital up, like let's do this action." That's going to be a lot of work. How do you sort of motivate people down direct?

Yes. Well, one important thing to note is that those ROIC targets being at the NEO level, those are probably the folks and the group of people that is deciding M&A or not should we buy this business or not. So that's an important kind of focus for them. But for the business as -- for the whole business, as you say, for the rank and file employees, first of all, there -- I think everybody is excited to be in a business that is working well, and I think people are responding to sort of the high energy in the business. Everyone does have financial targets based on revenue and EBITDA. And so those financial targets will naturally flow into the ROIC, even if those people aren't necessarily controlling the M&A decisions or capital allocation decisions.

Got it. And do you feel that you're going -- this whole discussion, but do you feel that employee morale is quite strong and that everybody is well aligned with the new Verisk? And there's been a lot of change.

Yes, there's been a lot of change. We're pretty happy. Employee engagement scores this year were up slightly versus last year. They were already fairly high, but it was definitely a positive direction in a year that has had a tremendous amount of change. With over 7,000 people, you're never going to get unanimous agreement on anything, but we're pretty excited that there's a lot of energy.

Elizabeth, this has been year 2 of us having you here at this conference. So we're all looking forward to year 3. But when Verisk and JPMorgan have this fireside chat again next year, what is something that isn't fully on investors' radar that will be highly impactful to the firm?

Yes, great question. Part of it -- I think part of it is the continued trajectory and opportunity of sort of digitization and better use of technology among the insurers. I think another one, and a trend that came up with a bunch of insurance CFOs last night is the trend and pressure on social inflation and high degrees of litigation around insurance has been a source of pressure for them, and one that they are wondering if there can be any regulatory impact on.

Thank you so much for your time today. Thank you, everybody, for joining us.

Thank you. Thanks.