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

Hello, everyone. I'm Heather Balsky, BofA's Business and Information Services Analyst. And I'm pleased to be here with Elizabeth Mann, Verisk's Chief Financial Officer. Elizabeth, thank you so much for joining us.

Thanks for having me, and thanks for joining.

So you are about 1.5 years into your role at Verisk, and Lee has been in his CEO -- or sorry, has been in his CEO seat for almost 2 years. What do you think your and the various management teams' biggest accomplishments have been over the last 1.5 years or so.

Yes. So it's been quite 1.5 years since I joined. If you can remember, when I joined in September of '22, we were still a multi-segment company, and we still had the Energy business in it. We had announced that we were intending to divest it. But we honestly didn't know how that would go in the midst of a credit crunch and selling a business. We were very happy to sell that successfully. So we executed on that sale. We closed on that. We returned the proceeds to shareholders. So then we were kind of reforming who we were as an insurance-focused company. And that's been a very exciting time. I think we worked through it, thought about the opportunity set in front of us, developed the strategy and then kind of lay it out to employees and organized our leadership team to get some momentum around it. We laid it out for investors at the Investor Day about a year ago in March. And then we've been executing on it since then. And I think 2023 was a year where we did have some environmental opportunities that contributed to the growth, but I'm very proud of the fact and how we organized as a leadership team and as a company to be able to capitalize on those opportunities that presented themselves.

So then from here, what are you most excited about over the midterm?

Yes. Over the midterm, what really excites me about our opportunity is the secular opportunity to be the partner -- the strategic partner to the insurance industry as they address the challenges that are facing them. And the biggest challenges for them, currently, are technology and how to better integrate and use technology to address their fundamental challenges, including how to better -- how to best select price and underwrite risk, to identify fraud and to operate most efficiently as well as addressing the challenges for them from a workforce standpoint, of decreasing expertise in the workforce as the population moves out.

That's interesting. And Verisk is taking a more customer-centric approach than it has in the past. You've talked about wanting to be seen as a partner, not just a vendor. Can you talk about how that goal is influencing your innovation and go-to-market strategies?

Yes. So it has changed both our innovation strategies and our go-to-market strategy. So I think we are engaging with our customers on much more of a holistic level. Yes, we talk about it as we used to be more of a product-centric organization and really talk about here is the product set that we have and engaging with our customers at the user level for those product sets. Now we're engaging in much more of a senior level dialogue. What are their strategic priorities? What are they trying to achieve? How are they trying to use technology and how can we help them with that, which is a much better way to come at the conversation than just, here's the product I have this year, do you like it? So that's changing the overall dialogue in terms of how it changes our innovation cycle. It means that our customers are much more involved upfront and at earlier stages of the product development cycle. So we've got many more customer development partners, many more joint innovation opportunities as we engage with our customers, really to get their input before we innovate as to what the industry most needs and most wants to see. And then from a go-to-market standpoint, part of it, I covered already with that more senior level strategic engagement, more generally across the sales force as we scale. I think we're thinking about ways to better bring our full sales force behind that go-to-market and behind that senior level engagement.

That's really helpful. And just -- it seems like insurance, I don't know if this is really known historically for being a technology leader. So that seems like it's a change that you're seeing right now that you're leaning into?

Yes. I think many of our customers -- I would say there is a wide range of sophistication in the industry. There are some highly sophisticated, very technology-enabled players, and there are some that are more challenged. And there are some that may be forward-leaning conceptually, but are also saddled with some tech debt and some legacy workflow or legacy systems. So we are really trying to engage with the industry kind of wherever they are at that stage of evolution and bring opportunities to them that can help them engage with it.

That's really helpful. And so you kind of touched on this, but 2023 was a very strong year for Verisk with nearly 9% organic sales growth, and your annual target is 6% to 8%. So during the year, you called out several items that you referred to as nonrecurring or onetime. Help us assess how the underlying business is growing and break down the factors that were specific to 2023?

Yes. Yes. So 6% to 8% organic constant currency revenue growth is sort of our long-term or our steady-state revenue growth and our targets through 2025, it is also the rate at which we have grown historically nearly every year going back to our IPO 15 years ago. So a lot of historical consistency around that revenue growth range. 2023 was unique for a number of different factors that were tailwinds. And really, there was a bunch of puts and takes in the different quarters. But fundamentally, there were 3 key factors that drove strength in 2023. Number one was the pricing environment for us in a hard insurance market with net written premium growth in the high single digits, so above historical average. Number two was the recovery of transactional revenue growth, which was in the low single digit -- low double digits -- sorry, low double digits for most of -- for the first 3 quarters of 2023, really showing some transactional rebound from lower levels in 2022 and in particular, driven by very active environments of auto insurance shopping, which drove our revenue on the auto side. And the third factor was very active weather patterns in 2023, even though there wasn't a single, large-scale hurricane to hit the U.S. or elsewhere globally, there was a very high level of activity of secondary, what we call severe convective storms or just very heavy thunderstorms. You may have experienced them during the year, tornadoes, ice storms and other activity that drove fairly high claims activity in the property space.

Okay. That's helpful. And so then drilling into the insurance shopping piece. If you put in perspective how meaningful the lift was to your 2023 sales, J.D. Power's data for the fourth quarter showed that it was still at fairly elevated levels. What's the dynamic going on with carriers and consumer shopping for insurance? And how much longer can this persist?

Yes. So the dynamic going on, the pricing environment in 2023 for auto insurance was fairly high, driven by losses that the carriers experienced in 2022 and early '23, all of the supply chain issues and the inflation issues impacted the claims that they had to -- that were filed. So the carriers had profitability challenges. The way you typically remedy that is by increasing the premium pricing. Clearly, the risk was more expensive than what you had originally underwritten. So they had to raise prices. It took a while. Most of those price increases needed to be approved by the regulators in each of the different states and jurisdictions. It took a while for those price increases to go through, but throughout 2023, they largely were going through. You as a customer may well probably did experience an increase in your auto insurance policy. I know I did. And so that drove consumer shopping behavior to look for, can I find a better deal on auto insurance. Our LightSpeed product helps the carriers quote prices in real-time for consumers shopping for auto insurance. And so that shopping activity drove transactional revenue for us.

And so it seems like there's still some catch-up on the pricing side, is that a tailwind for 2024? Or how are you thinking about that?

Yes. So the carriers do continue to -- that price impact is continuing to work its way through the system. But I would say it's, by and large, anniversaried the impact. It really started to be felt at the beginning of 2023. So from our perspective, from a year-over-year perspective, we've largely anniversaried that behavior. And we would expect the consumer shopping levels to go back down to a more normalized historical level.

Okay. That's helpful. And can you talk about -- you talked about this a little earlier with that written premiums last year. What's the pricing environment for 2024 relative to 2023? And it does get complicated because you have contracts that are tied to net written premiums and then there's the pricing that you take as a business. So I kind of want to talk about both separately, just to keep it easier. So let's start with the net written premium side. I think you've previously said 20% to 25% of your business is contractually tied to net written premiums in some way.

In some way, yes. So 20% to 25% of our revenues are on contracts that have some input from net written premium. It's an input to the contract. It's not a driver of the -- sole driver of the price increase.

That makes sense. And so how does that help you in 2024? What do you see? Or exited to your lag, so what did you see 2 years ago? And what does that mean for this year?

Yes. So I would say there has been strong net written premium growth in the industry really starting in 2021, which was a benefit in 2023 for us. That fairly high net written premium growth continued in 2022, which is now impacting '24 and would continue -- has continued so far at least the data would show for the first 9 months of 2023, though the numbers are not yet final. So it should be a multiyear tailwind. I've said from a long-term historical basis, our 6% to 8% revenue growth, if you look at it historically on average, probably about half of that, so about 300 to 400 basis points annual growth would roughly come from pricing. I think I've said that the 2023 pricing impact was above that long-term historical range, not necessarily by much. So I think we would expect for 2024 the pricing to be also above the long-term historical range, but not -- maybe not quite as much as it was in 2023. And then the final point is as we go into multi years of a premium cycle, fundamentally, Verisk is not looking to tie our revenues very closely to the premium growth cycle. It's -- that was a conceptual tie of our business will grow as our customers' business grows. But we view it as a long-term relationship and a steadier relationship that shouldn't have the cyclicality as much of their premium growth. So we are looking much more as we price our products to really talk about pricing to value and demonstrating for our customers, the value proposition that we're delivering for them and the costs that we're enabling them to save elsewhere.

That makes sense. And it's not -- in the net written premium side, it's not one for one. So that -- I think that's something that's important.

Yes, that's important for people to understand.

Okay. Okay. And so -- how would -- catch us up on Core Lines Reimagine. My understanding is there's many projects underway that fall under that initiative. So it's a big bucket. Maybe kind of taking us sort of the high level, what are the key goals under that strategy? And where are you along that journey?

Yes. So Core Lines Reimagine is an umbrella title that we use for a bunch of different projects. It's something like 20 different projects overall. But here's the goal of them. The Core Lines business or otherwise known as our Forms, Rules and Loss Costs business is our largest single business and the part that goes back to the historical formation of ISO as an industry consortium to share data. That's the Core Lines piece of it. The Reimagine piece of it is for us to ask ourselves, we had to reimagine, we had to challenge ourselves to what should this business look like in 2024, if you think of it as a data-first, technology-first, modern technology stack kind of business. What should the delivery mechanism look like to our customers? How should they be using our content? How can we be delivering our content in a more efficient way. So all of that is part of the Reimagine. The many different projects doesn't matter what the 21 different ones are. The themes are around fortifying the existing business, modernizing the technology stack and then growing the business. So it's around the quality and granularity and recency of our data. It's around particularly the delivery mechanism to our customers, more APIs, less PDF content and it's about the platforms under which our customers use that data and then increased industry leadership, thought leadership, benchmarking, using all of the data that we have to really drive insights. So all of that is part of the Reimagine umbrella, which we're pretty excited about in terms of driving growth in the core business in the Forms, Rules and Loss Costs business in a long-term and sustainable kind of way. You asked where are we on that journey? It was a 5-year investment kind of when we started it. We said we're about 1/3 of the way through, so just under 2 years into it. Even before we started the Core Lines Reimagine journey, I should add, there was what I call step zero, it wasn't even part of Core Lines Reimagine, but it was almost a prerequisite, which was we had to move the participatory database, which underlies that Core Lines, that Forms, Rules and Loss Costs content. We had to move that from the mainframe to the cloud. We started that 6 years ago, it was a 5-year journey. So about a year ago, we announced that we had switched off the mainframe to great rejoicing at Verisk, overall. So we migrated the database to the cloud, that then enabled a lot of this reimagining of what you can do with the data and the content. I said we're about 1/3 of the way through that 5-year investment cycle. Now, again, not counting the work that we did to shift it to the cloud. And so we're now at the point we've built a lot of the ingredients. We've built some of the underlying platforms. 2024 is going to be a year where we anticipate being able to turn on a bunch of the different new modules and different new innovations to our customers. Some of it will be initially in beta form, we can have customer partners being experimenting with us. But we've been showing them the journey and what we anticipate doing kind of along the way.

So you -- Lee talked about turning on some of the customer-facing modules in 2024. I think that -- I'm guessing that's what you just referenced there. Can you share a little more color on some of the changes your customers might see?

Yes. And you can start -- some of it, you can start to look at core.verisk.com. To the extent there is going to be sort of public-facing content, most of it, honestly, will be behind the customer paywall and for the subscription customers. But to the extent there are industry thought leadership reports, some of which are on there now looking at aggregate loss-type information by line of business across the different geographies. Also starting to bring in some of the current issues sites. So issue is everything from like PFAS and Forever Chemicals, which is a big topic of focus in the insurance industry. We've got content and thought leadership there. We've also got our legislative monitoring tool, which enables customers to assess what have been the legislative developments. Remember that insurance is regulated, not once nationally, but in each state by state. And so each state legislature can take actions that will affect the insurance industry and the policies they write in that state. Our legislative monitoring tool. We've always had the content that enables them to track that. But it was much more effort for them to read and go through, you figure out which states they're monitoring. Now we've got a much more visual reference to that, a clickable map and cross-referenced and hyperlinked content and others that significantly increases the ease of use for our customers.

Okay. And then what's -- in terms of Core Lines Reimagine, what's kind of next in the pipeline after the customer-facing modules?

It will be continuing to expand behind that. I mean, the different customer-facing modules will continue and then I think continuing to enrich the data set and then what's next after that will be a function of our increased engagement with our customers to kind of get their input.

That makes sense. And I guess what's been the feedback so far in this transformation?

It's been pretty positive. They are excited to see what we're doing with it and generally have given us pretty positive feedback on the time it will save them and the increased efficiencies that it will be able to bring them to use our content.

Okay. That's helpful. And so about a year ago, Verisk held its Investor Day and highlighted new growth vectors in life insurance, marketing and international. Can you update us on each of those opportunities and how they performed last year?

Yes. So the life insurance business. So our product there is a software-based -- SaaS-based policy administration workflow tool. It helps the life insurers manage the entire kind of life cycle of a policy as they underwrite it. Very successful product. We mentioned the fact that we accelerated the growth of the business since we acquired it from mid-single digits to very strong growth since the acquisition. That continues. And there's a lot of excitement around the opportunity of those low code, no code and microservices platform, which enables the carriers to implement it quite quickly and get the benefits pretty soon. So strong growth in that segment, continued opportunity to expand into that market pretty strong TAM opportunity there. On the marketing side, we've talked about -- that one is one that has had some industry challenges throughout 2023. We already talked about the dynamic on the personal lines, auto insurance space. The carriers had challenges in profitability. So they responded by that. Obviously, marketing is a discretionary spend. But more generally, if you are trying to achieve profitability in your book, then you're mainly focused on price increases, your -- it's exactly the opposite of the focus you would want to be marketing against your competitors to be competing for customers, they were trying to drive profitability of their existing customers. So that business had some near-term challenges in 2023. We do continue to think that the secular opportunity there is strong. You continue to see insurance carriers being strong users of advertising. Finally, on the international side, strong growth in our businesses there. And you've seen us add on, particularly in the claims space, we've added on some international acquisitions since then. We've been building out the product set, particularly in Germany and Western Europe, starting with our initial acquisition of ACTINEO, which was the leading bodily injury claims platform, and we've built on that with Krug, which has some auto claims data and then other data providers, including Rocket more recently, actually in 2024. So we're sort of building out an end-to-end claims solution set within the German market. Adding to that, our strong presence in the U.K. market, which was originally built off the Sequel acquisition many years ago, but that's now become the foundation of our specialty business solutions business that serves the Lloyd's or excess and surplus industry market, and we're pretty excited with the developments there, including the Marsh deal that we talked about on our fourth quarter call, where they are using that business as a platform to use to transact risk between them and their insurance carriers.

That's helpful. So maybe switching to margins for a bit. You narrowed your range to 54% to 55% for 2024. It's been 54% to 56%. Part of that was international M&A, investments in your sales force and investments in Gen AI. Can you just talk about broadly sort of decisions that kind of went into each of those buckets and kind of thought process around that?

Yes. So in each of those areas are ones that we saw opportunities to support long-term growth and expansion. So we were pretty excited about that. The international M&A, I think I talked about a little bit, primarily the acquisitions that we did around Germany and Western Europe and the concept of starting with one platform, but building on top of it and building some organic growth around it to create kind of an end-to-end opportunity for the customers in that market. That's the model for international expansion. And each of the tuck-in acquisitions that we make, they -- while they tend to be small, they also tend to come in at a margin headwind. So we support that and put pressure on each of our businesses to expand margin, but we'll have some mix shift headwind as we acquire businesses. That's on the international side. On the sales force side, I think I already touched on our go-to-market approach, our more senior level engagement with our customers. And so we wanted to build around that and be able to scale that dialogue and support that dialogue with some investments in our sales force to kind of have a more robust customer engagement. And some of it, we mentioned that we worked with an outside -- with a third-party consultant, with a lot of expertise in the pricing and packaging space as well as kind of the sales force composition and compensation approach. And so we took -- we listened to their input and some of the kind of industry best practices and made some adjustments to our sales force. Some of it has been expanding capacity so that folks have more bandwidth to really give the full attention due to each of their customer sets that they cover. And some of it has been targeted focus in specific areas around compensation. There may be places where either the mix of our compensation package or just the total quantum of our total compensation package we wanted to bring up to be more competitive with respect to market. We always want to be getting kind of the A players on our sales team because we think that will be driving the most growth.

That makes sense. And then on the investments, on the Gen AI side, I guess, where are you investing there?

Yes. So I kind of think of 2024 as a business development year in the Gen AI piece. First of all, we don't have a sort of central lab here at Verisk doing Gen AI projects. It is very much in the business, involved in the business and very much in dialogue with our customers. And so that business-first approach has enabled us to go to market in some cases, fairly quickly. We do have -- we have one product in the claims business, which is already in the market earning revenue, with a Gen AI-based product, which is the Discovery Navigator product, which enables a quick executive summary of a large and often handwritten medical file that comes as part of a workers' comp claim. So we already have some stuff in market. In other parts of our business, we've done some pilots or some proof of concepts. In other cases, we've worked with customers to start to hone in on what are the real use cases that can drive the most value for them. So we've been doing this very much in partnership with our customers. And that's the work that we continue to do right now. So from a cost perspective, it's really primarily the people that we have today that are working on this and engaging with our customers. There is some amount of technology cost as we actually use the tools. First of all, data integrity, data privacy and no hallucinations is all a very high priority for our customers. So we're not using public versions of the tools. So some of it has come from private licenses and the tokens or the coins or whatever the usage metric may be across the different tools. Some of that is the expense. But until we have significant amounts of usage as in we have a product that's in market and has volume going through it, the technology costs are going to be more incremental.

Okay. And I mean, when you think about the investments you need to make from a headcount perspective, or the infrastructure side of things for Gen AI. Do you think it's a multiyear journey? Or do you think you have what you need right now?

I think as we develop a more specific business case for specific opportunities, then yes, it could turn into a multiyear journey.

Okay. That's helpful. It feels like we're at very early stages of all of this.

Yes. So we're excited. There's a lot to be excited about.

And are you looking at things from an internal efficiency perspective, too, with Gen AI? Is that part of it?

That is part of it. It can increase the efficiency of our coding and development teams. So there's some of that -- there are some use cases. We're not a company with large amounts -- a large call center or a large customer service operation for which a chatbot would take out a meaningful portion of expense pool. So we continue to look at it, but it's not an immediate needle mover.

Yes. That makes sense. That makes sense. And broadly, you've talked about wanting to balance profitability with investments in growth. So how does that inform your investment decisions? And how you think about your margin expansion after 2024?

Yes. So we've -- when I joined, we've been on a margin expansion trajectory, our original margin targets that I signed on to when I joined the company was that we would expand margins by 300 to 500 basis points between 2021 and 2024. We achieved the low end of that a year early in 2023. So we achieved margin -- we expanded margins by 150 basis points in '22 and 150 in '23. And so we're continuing -- I guess, our guidance for 2024 would be 100 basis points at the midpoint. So a very healthy trajectory there of margin expansion. That's come from a specific focus on efficiency opportunities. So we've had that trajectory of expansion. On a go-forward basis, given the investments that we see strong opportunities behind, we don't expect to be expanding margins at that trajectory. We do want to reinvest some of the core operating leverage in the business for growth. But fundamentally, we believe, I believe, that each of our businesses should be delivering some operating leverage and should be expanding their margins kind of whatever their starting point is. Obviously, we have a wide range of businesses, some being more mature, some being newer and more greenfield businesses with more software-like investment profiles. So each of those will continue to drive some operating leverage over time. I think we've said -- we said at the Investor Day that we would expect 2025 to have, say, 25 to 75 basis points of margin expansion off of 2024. That seems like a healthy -- 2025 is a long way away, but that seems like a healthy range.

Yes. Yes, that's fair. And thinking about capital allocation and capital return. You've done some tuck-in M&A recently, we touched on Germany, but you also returned -- you generated a significant amount of cash and you've returned a significant amount of cash. How do you think about the priorities there?

Yes. I think we will -- so we are primarily a returns-focused company. We drive -- we are fortunate to drive very strong free cash flow and to have a very strong balance sheet. Between those, we will invest in our business where we see strong opportunities and we benchmark ourselves very strictly to the returns on invested capital, whether organic or acquired. So we will continue to look in the market for attractive M&A opportunities. They have to be a fit with our insurance-focused business and they have to have a reason to coexist inside the Verisk franchise. But assuming we see opportunities there for synergy, we will continue to be active in the M&A space. Beyond that, if there are -- if there is excess capital that we don't see strong returns for either organically or inorganically, we will continue to return that to shareholders.

And just quickly within M&A, is there a tuck-in versus larger acquisitions within insurance? Is there policy there? Or are you just looking for whatever is the best fit?

We're looking for the great businesses that can drive strong return. There isn't a particular size target.

Okay. That's really helpful. Thank you so much.

Thank you.

Thank you, everyone.