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

Good morning, everyone. I'm Greg Peters, the analyst here covering Insurance, Insurance Technology, All Things Insurance. And I'm pleased to welcome back the management team of Verisk to the 45th Annual Raymond James Institutional Investors Conference. From management today, we have Elizabeth Mann, who is the Chief Financial Officer; and Stacey Brodbar, who is in the audience. She's Investor Relations Executive at Verisk. Just as background after the presentation breakout, follow-up questions can go directly into Stacey, she are very good at responding right away to outstanding questions. So Elizabeth. Before we begin with a dialogue and some Q&A, I thought it might be a useful time for you to just spend 5 or 10 minutes and just give us the background of Verisk. A lot has changed over the last couple of years and just bring us up to speed on where Verisk is today.

Yes. Let me just orient for those of you who are new to the Verisk story. We're thrilled to have you all here, but just a little bit of our history and where we got here and then we'll jump into Q&A. So we are the leading global data analytics and technology provider to the global insurance industry. This shows you some of the lines of business we cover and some of the products and solutions that we offer. Verisk's history goes back to the 1970s actually. We started under the brand name of ISO, Insurance Services Offices. And the history of the company, the start of the company was as a consortium of the large U.S. Property & Casualty, P&C insurers who decided that they needed to share data with each other to contribute data to a consortium to help them better price, analyze, and underwrite risk, to process claims more efficiently and to identify fraud with each other. And so they started contributing data to this consortium that had a lot of actuaries that could analyze the data and provide it back to all the companies across the industry. That was separated out as an independent company in the 1990s following an antitrust case, which said that the carriers could not themselves own this data because that could be anticompetitive to new entrants. So that was the start of Verisk as an independent company in the '90s. We grew over time since then. Have grown on significantly by acquisition on top of that core ISO data set, which is still with us today. We went public in 2009 and we are the Verisk that you see today. Also, you mentioned some of the changes in recent years. Over part of that history, we also, for some time, expanded outside of the insurance industry with a perspective that our strength in data and analytics could be leveraged into other end markets, so we acquired a number of businesses over time in other verticals. Over the last couple of years, we have decided to focus solely on the insurance industry. And so we divested a number of businesses. We returned a significant amount of capital from those proceeds to shareholders, and we are now solely focused on the insurance industry and pretty excited about the secular opportunity in that space, which I hope we can talk to a little bit. Just another couple of quick -- these are our core financial stats. You can see that over time, but very scaled revenue, strong profits, high retention rates and a key attribute of our business is the 80% recurring revenue. That gives us the stability -- we call ourselves a consistent and predictable revenue growth player. This is our history of growth since the IPO, since -- just before the IPO in 2009. Our medium-term revenue growth targets, and we report this on an organic constant currency basis, are 6% to 8%. You can see we've been in that range very consistently over the past 15 years. The only years where we have dipped below that on an annual basis have been 2009 and 2020 where our growth was only 5%, which we're pretty proud of in those global environments. And then finally, one of the things that I think people should understand about our business is that while we face the U.S. insurance industry, there is a diversification within our businesses. We have a number of different businesses within ourselves. We run it as about 11 different businesses. They're grouped here accordingly. And so some of those businesses, at different times had different trends impacting them and those can affect our growth rates. But I will stop there. Is that it? Yes. There we go.

I don't need the supplemental slides. We can look at them later. So this is going to be a fireside chat, but we certainly welcome participation from you all. If you have questions, feel free to raise your hand. We'll certainly include them. Sort of if you go back to the last pie chart slide and when I think about some of the true core franchise value that you have, one of them is the forms, rules and loss cost business. And maybe unpack that and the fraud business as being 2 of the core businesses and tell us about what's going on inside both of those businesses from '23's perspective and then the outlook.

Yes. So those 2 businesses that Greg references, those 2 add up to about 40% of our revenues in 2023. And those 2 businesses are really the ones that go back to the heart of the ISO business in the '70s. That's kind of our core. We are tremendously excited actually about the opportunity set in that core. Those businesses are very much a heart of the way the U.S. property and casualty industry runs. And those 2 businesses are really primarily U.S., primarily property and casualty within the insurance space. But the secular opportunity there is to help the insurance industry address the technological change, which I would say they are in early innings relative to many other industries about understanding how that will affect their workforce, their technology stack, their internal processes, and therefore, all of their profitability. So that's tremendously important for them. Those 2 businesses, so the core forms, rules and loss cost business, what it does, it is built on that contributory data from the carriers. It helps them assess what should be probabilistically the loss cost, the losses that they could incur when they start to underwrite a new policy by line of business, by state in a very detailed way. Insurance is regulated at the state-by-state level, not once federally. And so we help them manage some of the administration, including the forms part of that business is the language in the policy forms that needs to get approved by each regulator in each state each year. So we help them maintain that language and then estimate the loss cost.

Makes sense. And then the other piece is the fraud piece, which you started to talk about, too. So maybe update us on that, too.

Yes. So the anti-fraud database here's -- so a third-party estimate has been that 10% of all claims in the property and casualty industry have some fraud attached to them. It can be anything from minor consumer padding of an insurance claim to major criminal insurance fraud. And there are criminal bureaus in the state that look to enforce insurance fraud as a crime. The single biggest predictor of whether a claim has fraud attached to it is the prior claims history of that claimant or filer. And so the first thing you'd want to do if you are an insurance carrier and you receive an insurance claim, the first thing you want to do is check what has that claimant filed before. You want to check it not only against your own claims and losses, but industry-wide because presumably, if they're engaged in insurance fraud, they're not going to target just a single carrier. Our database has that contributory data across the industry so that when a claim is filed within 24 hours of first notice of loss, FNOL, it will show up in our database and can be found.

Excellent. So those are the, what I think about as traditional core businesses, but the platform has included a lot of other businesses. So talk about some of the other businesses and then talk about the M&A piece of it that's expanded your footprint.

Yes. So around those 2 core businesses, which started with us again in the '70s, they're evolving and growing over time. But we've grown pretty consistently through acquisition around that and maybe 3 great scale businesses. So I would say the -- that was 40% of our revenues. I would say the next 45% or so of our revenues are businesses that we've acquired over the past 2 decades that are now very well integrated and very kind of attached to that core business. First is a set of underwriting data and underwriting data and analytics, including the leading commercial property database across the U.S. and expanding now into various global areas. If you are an underwriter that is underwriting a property policy in a commercial building, there's a lot that you want to know about that building, not just valuation, address, occupancy, which would be mortgage-related data. There's a lot of insurance-related data you would want to know to understand probability of loss and estimated repair costs of the loss, including how is the roof attached? What were the building codes to which it was built? What are the fire suppression systems? How far is it from a fire station? What are the response times of that local fire station? So that's underwriting data that we have. It also helps auto carriers assess and price a personal lines auto insurance policy in real-time when a consumer is shopping online for auto insurance. So that's the underwriting data piece. Two other pieces in that category, I would highlight, the property estimating solutions business helps insurance carriers and their claims adjusters and the contractors collaborate on the workflow when there is a repair and insurance funded claim for repair to a property often in the wake of a weather-related event. They will collaborate on the workflow and agree on the pricing for that repair. So we maintain the pricing information for very detailed equipment -- the construction materials and the labor costs by region within the U.S. So that manages that workflow. And then the final business in that category I would talk about is the extreme events business, which is our catastrophe modeling business. It is a very subscription-based business used by insurers and reinsurers to model and estimate likelihood and probability and size of losses by peril. So they will have a different model for Atlantic tropical hurricane, for a Japanese earthquake, for a tsunami and other related perils.

Excellent. So that's a great perspective. And embedded in each of these businesses is technology. And so I might as well rip the band-aid off and go right at it. Generative AI, large language models, it seems like it can touch each of your businesses. So give us a perspective on how you view your data sets and how you view emerging technology and how you can use it for the company.

Yes. So we're pretty excited about the opportunity. First of all, we are data scientists at heart. We like to say we did data science before it was even a thing actually. I mean, it's going back to the '70s. But joking aside, we do have a number of -- a lot of work going on in the data. First of all, we think a key differentiator for us, as folks have talked about gen AI and tried to understand the impact across the industry, the first ingredient is you have to have the proprietary data set on which the gen AI can be trained, can use and leverage that data. So we do indeed have that in-house and we think that is a competitive strength. As to how we're experimenting with it, we are taking a sort of business approach. So each of the different businesses that I talked about are looking at ways and looking at opportunities for them and for their customers. We have -- at least we have one product in the market that is built off of gen AI that is already generating revenue for us. And actually, this product interestingly started with an in-house use case and then has been brought to the customers. This product, in particular, is called our Discovery Navigator product in our workers' comp business. What that does is it helps carriers cover workers' compensation claims that typically involves a detailed review of the medical history file done by highly trained professionals, i.e., expensive people to review a file, typically medical professionals and/or lawyers. So nurses, doctors, lawyers are reviewing a large medical file, which may or may not -- not all of which may actually relate to the claim in question. And so we have a gen AI-based executive summary of that file that can extract the key points and vastly reduce the amount of time required for that review.

When we talk to many of your customers, many -- some of whom I follow, one of the common themes we hear back from them is they're still walling off their individual data sets from providing Generative AI access to. Is that still the case inside Verisk? Or with this new product where you're allowing to pierce the veil, if you will?

So I'm not -- I can't give a single blanket answer to that because our approach is kind of business by business. But I will say we are approaching the opportunity with very much a mindset of, first and foremost, we need to protect the IP. A lot of it is our IP. Even more importantly, some of it is our customers' content and data that they give to us, and their trust in us in how we handle that data is absolutely paramount to us so we will treat that with the utmost respect. One simple form very early on, we blocked all form of public access to gen AI tools. We can't have an employee sitting there going on to ChatGPT on the Verisk systems and playing with the data. So we are not using kind of public versions of the tools. We have walled, private versions with which we're experimenting.

So one of the leverage points is if you look in within the OpEx component of the income statement of the property casualty industry, you're a very small component of what their total OpEx is. And so maybe you can frame where you are. And really, I think that's embedded the opportunity because as you point out, a lot of these carriers, legacy carriers don't have the upgraded technology that you can provide.

Yes. The stat that you're referencing from a wallet share perspective, we did this math for our Investor Day, and we took a look at across the total pie of the U.S. property and casualty insurance industry's OpEx, our revenues are only 40 basis points of that. So that's a significant room to expand. Now by no means do we aspire to that whole pie. There's a lot in there that we would not do. But let me combine that with the fact that many of our customers have told us as we engage with them, that for all they spend on Verisk, they spend quite a bit in addition to that in order to use our data more effectively to analyze it, to integrate it into their workflows and to do work off of. A lot of that can be done much more efficiently. And some of that is on us to deliver the data to them in more modern ways, more API-based ways, more ways that can integrate directly with -- we already integrate with many of the third-party providers, but ways that can be more easily consumed by our customers. That can significantly reduce the amount of time that they spend that's not value-added time to just manipulate data. And so that's a key opportunity for us that we're excited about.

Yes, makes sense. So we take all the individual businesses and we add them up and then we get what your OCC looked like for '23 and it's pretty predictable. And maybe so now that we have a breakdown of your businesses, talk about how you think about, on a consolidated basis, OCC or organic revenue growth and then think about what your -- you provided some guidance on what you expect to happen next year, et cetera.

Yes. So our -- I showed you our historical performance, which has been very much consistently in that 6% to 8% revenue range. At the Investor Day, we gave medium-term targets, which said that we predict that also for the next 3 years, not on a CAGR basis, but on an individual year basis, so 2024, '25, in that range. That's comprised of a number of different trends in different parts of the business.

Right. And inside that, there's a piece for pricing, there's a piece for new products, there's a piece. So maybe talk a little about it.

Yes. So to build to that 6% to 8%, historically, we've seen it decompose roughly on average to about 3% to 4% pricing or about half of the targets, about between 50 to 200 basis points each on new customers, new initiatives, cross-sell and upsell, those each kind of add up on top of it. And then we also see an experience and are used to what we've described as about a 50 to 150 basis point headwind from attrition. Attrition to us can mean we have very high retention rates. So that to us -- that typically happens with -- as a carrier reduces the number of lines they are writing or, in some cases, as you've seen recently, may pull out of a certain state. We've seen some headwinds in the examples of large industry mergers which has happened. Or it can mean attrition across some of our -- like the contractor workforce in that property estimating solutions business. But that's a headwind that we are used to and the growth algorithm can sustain.

So one of the features of the market you serve is that it's been in a hard market, as you know. And so breaking apart the auto sector has been in probably a once-in-a-generation trough in terms of profitability. You saw last year the reinsurance market go through really one of the hardest periods of its experience in the last 20 years. So walk us through how you help your clients out during those periods of stress and what it means to the outlook when we think about premiums going up so substantially in certain lines of business.

Yes. So when the carriers are under stress, they know that what they need to do is operate more efficiently. They need to go back and look, are they actually pricing and selecting and underwriting the best risk? And are they having fraud? Are they processing their claims efficiently? That's what Verisk was set up to do and what we will continue to help them do in hard markets. From a pricing standpoint, so historically, as we grew the historical revenue model with our customers was that we would -- our revenue from them would grow as the premium that they underwrote grew. And so there is still a historical correlation, I would say, from industry net written premium growth to our revenues with typically a 2-year lag because if it's 2024 now, the contracts were set at the end of 2023. At that point, '23 data was not final so it would look back to 2022. So that's kind of the 2-year lag that we experienced. And that was one of the contributors. You referenced our strong organic constant currency revenue growth in 2023. It was 8.7%, so above our long-term target range of 6% to 8%. Pricing was a key component of that. Another component, you referenced the challenges that auto insurance carriers were having. I mentioned that we have a product that helps them price quotes for customers in real time. That product benefited. So as they had profitability challenges typically in '22 and going on to '23, the hard market that you described, they were very focused on raising premiums to recover that profitability in that sector. You may -- I'm sure some folks in the audience have experienced this as auto insurance customers, I know I have, getting a large price increase year-over-year. The U.S. average was 17% last year. And so many consumers got that bill, got that new renewal and went online to say, wow, 17% price increase. Can I do better by shopping online? As carriers quoted that to them, that was an additional transactional revenue boost to us. That we think is and has largely worked its way through the system. The good news is that we think the customer -- the insurance carriers are returning to profitability so we should be seeing a more stable market. I will add a caution on the property side, right, where the -- some of the same inflationary expenses on property claims has impacted the U.S. property insurance. And so you saw AM Best downgrade their outlook from stable to negative for the property insurance space. That will probably have a more muted impact on our business because our property business is more subscription-based than the auto business.

That's good detail. So we only have a couple of minutes left, and we've done a thorough job of walking through the business pieces and organic revenue growth and pricing in the marketplace. So let's pivot to margins for a couple of minutes and talk to us about how the margins progressed in '22 and '23 and then your outlook for '24.

Yes. So when -- so we had a 3-year margin target that we talked about in early 2022. Our target was to expand margins from a 2021 baseline by 300 to 500 basis points by 2024. We achieved that. The good news is we achieved the low end of that a year early in 2023. So in 2022 and 2023, we expanded margins by roughly 150 basis points each year. And we're continuing on that trajectory. I think there was some -- there were plenty of efficiency opportunities across Verisk overall. The great news about our business is that it delivers a significant amount of operating leverage, and the stability of the revenue growth gives us some visibility into what we can do and plan for. So I think you can expect this business to continue to expand margins. I don't think you will see us expand margins at that fast a trajectory, over 100 basis points annually, maybe more than a steady state for us, but we can continue to deliver operating leverage.

Is it fair to say your approach is to grow your revenue faster than your expenses, you get some natural lift in the...

Absolutely.

Yes, that makes sense. Another very important piece of the puzzle would just be as you're generating this cash flow, what are you doing with the cash? And how -- so provide us in the final minute or 2 here a snapshot of your capital position, uses of capital and your framework around how you're deploying capital.

Yes. So we are very lucky. I mean, the business that we have is a very cash-flow-generative business, so we have a lot of opportunity to reinvest or choose to deploy that cash flow in different ways. We have a returns-focused approach so we benchmark ourselves on returns on invested capital and, as a management team, on returns on incremental invested capital. So what are we doing with the opportunity that we have in front of us? And we hold ourselves accountable to that. We would prioritize -- therefore, the most significant way to drive returns if you have the opportunity and can execute is by investing in the business organically and through M&A. We've also done and listened to a number of shareholder surveys. If any of you in the audience have participated in that, we thank you for your feedback. Please continue to give us your feedback. But we have consistently heard that organic investment in the business is a very high priority with our free cash flow, and we do prioritize that first. So our CapEx that we've spent, we track ourselves to very strong returns on the CapEx and we've been continuing to do that. Beyond what we might need to invest in the business, we will happily return to shareholders. So we've increased our dividend significantly this year. You've seen us be very active in share repurchase. Some of that was funded by divestitures and sale proceeds last year so we won't have that coming in again. But with our cash flow, we expect to generate and be able to return to shareholders.

And the final piece of that inside that is just the inorganic piece, and it's -- I realize it's episodic, it's very specialized. But when we look at your consolidated margins, it feels like when you do some M&A, it's going to be at a lower margin profile. So how do you measure how you're investing in that and getting -- making sure you're getting the right return?

Yes. So if you tried to only acquire businesses that would be accretive to our existing margins, we would never acquire much of anything. So yes, we recognize that businesses we acquire will typically have a lower margin, and that is a headwind to our margins. Even set aside the divestitures, we've done a number of tuck-ins throughout '21, '22, '23. And even with those tuck-ins, which were margin dilutive, we continued to achieve the targets that we highlighted. So yes, it will be a headwind that we will work against. Obviously, they've been smaller so the headwind has been smaller. If we acquire something more sizable, it may be a near-term impact on margins just based on where that business sits today. We will -- we always do and always will hold ourselves accountable to continuing to expand the businesses that we have. The principles that I talked about in operating leverage and operating efficiency applies for all parts of our business no matter whether they start out at very high margins or start at lower margins.

Excellent. Well, we're approaching the end of the 30 minutes, so that was a thorough review. So thank you very much for your time. For everyone here, we're going to go downstairs for a breakout so you can ask your own questions. And Elizabeth and Stacey, thank you for coming again to the Raymond James conference.

Thanks for having us. Thanks for listening.