Verisk Analytics, Inc. ($VRSK)

Good afternoon, everyone. I'm Curt Nagle, the Senior Business and Information Services Analyst here at BofA. This session is Verisk. Very pleased to have CFO, Elizabeth Mann with us. This is going to be structured as a fireside. Time permitting, we can field any questions from the audience. But with that, welcome, Elizabeth. Thank you for joining us and looking forward to the conversation.

Thanks so much. Thanks for having me here, and thanks, everyone, for joining.

Great. So coming off your Investor Day last week, lots of new findings. But at least for me, I think one of the most important -- one of the biggest themes was the idea of expanding Verisk's open architecture, connecting the broader ecosystem. So if you look at the growth opportunities, let's say, over the next 3 years or so, in terms of the adjacencies or new product lines where you think you can see the most immediate opportunity or upside for Verisk? How would you describe that?

Yes. Yes. Thanks, Curt. We're particularly excited about our open ecosystem and the ecosystem opportunities that we have in a number of our products. And philosophically, this comes from the opportunity we have. We are so connected to the insurance industry, and they already rely on us for many solutions. This gives an opportunity that's really win-win for us to find and identify new value-added solutions. Obviously, we do some of this organically. But when we see great products out there that we think have a an opportunity to really bring value to the industry. We can integrate them into some of our existing solutions and participate usually by a revenue share. And this helps bring new opportunities to our customer set, which they have told us they very much rely on. And so we gave a number of examples of this at our Investor Day, but we can talk more about how we've been doing this in our property estimating solutions business. We're doing this increasingly in our anti-fraud space and elsewhere across the business.

Yes. Maybe it would be worth diving to some of these verticals with the property estimation. You walked away from potential acquisition, just given, let's call it, government friction. But maybe the playbook there and then, yes, fraud, which was a big topic at the Investor Day and lots of new interesting assets there. And yes, maybe dig into that a little bit more.

Yes. Yes, let me start with our property estimating solutions business, which as you said, we're really excited about the organic opportunity for that business, both in the products that we're creating and also in the ecosystem that we're bringing available to our customers. And our customers, the customer set for that business, it's important to remember that our property estimating solutions business is a business that has -- it serves both the insurance carriers, it also serves the contractors that are doing the work for property repair that's covered by an insurance name. And it also covers the third-party adjusters who help facilitate that workflow. We have different solutions for those different groups. It is a workflow that connects that industry and is built upon a proprietary data set, which is the pricing for -- to agree on sort of the estimate for property repair work. And so the pricing -- so if you think about how this is used, if a tree falls on your house, you call your carrier to submit a claim. There's an adjuster that reviews that and eventually kind of -- they may well go on site. They will -- they can use our software and tools to assess the damage, figure out what is the estimate that should be written and what is the cost for each of those line items. The line items can be building materials, like how many roof tiles or how many sheets of drywall. It can be the contents of the house if that was damaged. So was there a laptop? Was there a furniture that was damaged? And it's the labor involved as well. And of those -- of that pricing data set, some of it may be more transparent in the markets than others, but the -- it's the labor cost that we track in great detail across 460 jurisdictions that is not at all transparent in the market and difficult to replicate. So it's the core and the quality of the pricing data set that's at the heart of the value proposition that's agreed upon between the carriers and the contractors. So there -- it's a 2-sided market. They obviously have different -- they each want the prices to go in the opposite direction. It's kept honest by that continued agreement. And so this is fundamentally a network business. To that, we talked -- actually, we talked on our fourth quarter earnings call about the AI-driven enhancements to that process and the products there moving from Xact expert, which relied on rules-based and machine learning tools to help carriers ensure that the estimates that they're receiving are and approving are in line with their own internal guidelines in line with regulatory requirements in line with building codes. We can then move -- and we can build on GenAI for automatic photo tagging as we have done in XactAI. And eventually, we've got Xact Gen now that has generative based ability to create an estimate and then be reviewed by that.

And were traceable and -- yes.

Yes, yes. And it's traceable and auditable is important. It's also important to remember, this pricing data -- and these outcomes of claims are -- there is frequent litigation around claims outcomes. And so the reliability and defensibility of those pricing estimates is of high importance to the carrier community.

Yes. Sure. Labor point is really interesting, too. I haven't thought about that. But I mean, very opaque, I would imagine so.

Yes.

I would imagine there's a lot of value we can drive in that. Maybe the detriment of some of the services, but maybe a more honest assessment.

Yes. And just last month, I was at our elevation.

That's not a fair way to put it. More accurate, I want to say. You know what I mean. Yes.

Just last month, I was at our Elevate Conference in Utah, which brings together the different groups in this community with Verisk Conference as a central point. And they talk consistently about the value of that ecosystem and then the value of the third-party solutions that are adding value to the platform from them.

Maybe talk about fraud a little bit more. I thought some of the points you made on, I guess, I'll call it the photo repository, right, and how it's contributory and very much a not great effect. But yes, maybe track a little bit more on fraud.

Yes. So our anti-fraud business is on our claims side is a great business. We help carriers identify or flag which of their claims should be further reviewed for potential fraud. We are going to put out a study recently that -- or soon that took a look at the prevalence of fraud in the insurance industry with AI-based tools. Unfortunately, it is increasing the ease with which fraudsters can submit or can falsify claims that they are submitting in fraud. And what's -- one of the things that's shocking in some of our research in the studies is about 1 in 3 consumers view it as okay or not a problem, to alter a photo they are submitting to their insurance company to support a claim, which then can very easily lead into fraud. Our antifraud database, which has historically has always been the leading place for insurers to review fraud claims and be able to identify -- the single biggest predictor of fraud is quite simply what is the prior claims history of that climate, whether it's an individual or small business, and so we help the contributory database helps them identify that. And now -- so that was our historical strength. We are moving into the future with new technologies and AI to be able to identify the more modern fraudsters. So we have built what's called digital media forensics, which now helps them identify if there is a photo submitted with a claim. Has it been digitally manipulated or does it appear 3 years ago in a different claim and somebody is duplicating the photo. We have built up in this a data set of over 600 million images that are contributing -- contributed by the carriers. It has contributions from at least 5 of the top 10 carriers and growing by the day. And this, we think, is just a perfect encapsulation of the fact that as technology develops, carriers are seeing more value in the contributed -- in what they can get from the contributed data sets that Verisk can bring to the table. We are creating more data sets, not less and bringing more value to the industry, in this case, in identification of potential fraud.

Okay. What keeps the other 5 from not joining? It seems again, the contributory network effects. Why not be part of the ...

We're working on it.

Okay. Fair enough. So another focus for the Analyst Day was using enabled automation to lower your internal cost structure. As you're deploying whether it's agentic or generative AI, how do you been sure those efficiency gains flow through the bottom line aside from maybe being competed away? I mean, you already have very high margins. So yes.

Yes. Yes. In terms of making sure that we have efficiency gains and not competing away, fundamentally, that gets that protecting the value of the top line. We've never priced our products to cost. We've never said, well, it cost us this much and so you get a 15% markup or whatever it is. So we are focusing the pricing on what is the value delivered to customers and what is the -- what are the alternative ways at getting at the same solutions. If you think about it from an insurance carrier standpoint, for every dollar they take in, in premium, they spend on average $0.70 paid out in claims. They spend on average $0.25 of OpEx in running their underwriting and their claims departments and the -- and leaving about $0.05 of profit. And this is for the sort of operational insurance side of the house, set aside the investment side of the house for a minute. But -- so if you think about that and then Verisk's revenues, we said were, on average, 30 basis points of the industry premium. So of that dollar they're spending $0.03 on Verisk Solutions system-wide. That $0.03 is protecting the $0.70 of claims and ensuring that they price each new policy, right, that they act correctly on each claims outcome. If you think about pricing and new policy, you come in with a price that's too high and someone else is going to take the business from you, you'll get competed away. You price that policy too low and you're going to be underwater on that bucket of claims. So it's maintaining the value of that $0.03 is what's fundamental to protecting our pricing or top line and therefore, our margins.

Right. And hopefully, enhancing the profitability of your customers in ...

Yes, exactly.

Give it like a fair value.

We think there is significant opportunity for that.

Switching gears a little bit. So you're enhancing your client risk tools and analytics. Your [indiscernible] models, climate volatility is becoming a big issue, a board issue, right, for a lot of companies. In terms of a growth opportunity for Verisk, I guess how would you size this? And how does that perhaps expand beyond sort of the traditional property and casualty business?

Yes. We think there is potential opportunity there. Our catastrophe and risk models are used -- we think they are the leading models to benchmark catastrophe risk. We do have a -- the traditional usage is for insurance and reinsurance for insurers to decide how much of the risk to seed to reinsurers for both parties to agree on the pricing. It's ultimately the benchmark on which they trade. It is a sticky business in the sense that those decisions, those risk decisions have implications they drive through to the capital that's held against those risks. It has both regulatory implications for both insurers and reinsurers as well as ratings implications, which is very important to them. So those -- that's the traditional value proposition of our catastrophe risks. But you're right, as increasing climate focus becomes, as you say, a topic in the boardroom, a topic for financial institutions that have exposure to property and catastrophe risk, yes, we do see opportunity there.

Okay. Very good. So I think across the information services space, arguably one of the most -- maybe the most defensible set of data assets, right? It's a very large proportion is purely contributory, and there's obviously a lot more built around that, that's walled off and protected. As we're -- as you're pushing into, again, newer verticals or adjacent verticals, how do you incentivize, I guess, early adoption for your customers? Historically, I think it's kind of a slow-moving industry, but how should we think about them just getting the flywheel spinning quicker, I suppose?

Yes. It's a great question. I mean in terms of incentivizing new data sets, we gave -- we showed some of the stats at our Investor Day of a number of data sets contributed increasing over the last year or 2 by nearly $100 million. So when it is adjacent to our core products, I think that as we demonstrate some of the stats and some of the outcomes to our customers, for example in our core lines business, we've created more and more benchmarking reports, which can allow a carrier to compare their own outcomes or performance to industry benchmarks. As we see this as we have more senior level strategic engagement, they can get very interested in this and say, oh, that's interesting. You can benchmark for me one line of business in one line of sight in one state. We've had some of them then say to us, "Oh, can you do this for me in this other line of business." And we say, "Well, actually, you haven't historically contributed that type of data to us." And so that can incentivize the contribution. The digital media forensics is another one where we've been able to prove out the value proposition very quickly because we're already connected to the industry, we can create proof of concepts or we can prove out very quickly without them spinning up a whole new contract NDA data contribution. We can take the data that we already have in-house from them, and we can say, look, with this tool, you could identify $10 million worth of fraud in the past in your past year. Is that of interest to you? And so we can move quickly with that.

And then that gets flywheels ...

Yes, that gets flywheels spinning.

Go on from there. Yes. Okay. That makes sense. International markets and historically a smaller piece of business for you versus domestic. I guess, how critical are non-U.S. markets in terms of achieving your long-term growth targets organically?

Yes, we're --

Or through inorganic growth.

Yes. We're comfortable with the portfolio we have. We're very comfortable with our current long-term growth targets of 6% to 8%. We do have some businesses -- I mean today, international revenue is about 17% of our total quite a bit of that comes in our catastrophe and risk modeling business, which is obviously a global view of risk and has global customers. More generally, I think we've had -- we have a strong presence now in the U.K. between our Lloyd's market business and then some general insurance and claims businesses. So I think we've -- as we achieve critical mass in those markets, we continue to see opportunity to sort of densify. But this is not an environment where we need to go out and plant a flag in different countries around the world.

In Europe, is that much of an opportunity?

It is a bit of an opportunity, yes. And in the past 3-year cycle, we've acquired a couple of businesses in Germany focused on the claims side and building us to a position where we are sort of the only independent claims technology business in Europe in a market that's fairly concentrated with some high position carriers.

And I guess how do the data repositors, the data sets that the contribution models differ from the United States? Is there any -- is there a correlator there, too? Or ...

Yes. We would love to have contributory data businesses all over the world. It's a great business model. For structural reasons, it's ...

The founding of your company.

Yes. And obviously, it goes back to the foundation of our company in the U.S. in many other international markets, either there may be a nonprofit player already or look, the need for the contributory data set in the U.S. came about because of the fragmentation of state-by-state regulation, which doesn't really exist in other domestic markets and the lack of concentration in the overall insurance industry. Many of the markets in Europe have -- they don't have that state-by-state regulation phenomenon and they have more concentrated players. So what we're doing in Germany is a little bit of an alternative view to that.

Okay. So structurally different, right?

Yes.

EU doesn't mean the U.S. and okay, just -- yes.

Yes.

Okay. Understood. That makes sense. So product velocity, innovation, another, I think, pretty, pretty important focus.

Yes.

Structural changes you made internally right, to ensure your new analytical tools, I guess, come to market quicker and ultimately are adopted by our your customers?

Yes. I mean I'll start with the simple structural tool, which is that we had a bunch of businesses in other verticals, and we divested those. So the structural simplicity of being an insurance-only focused business and insurance only focused leadership team meant that all of our capital was either invested in the insurance business or return to shareholders. And so that, I think, accelerated the focus on what we could do and accelerated the resources that we were deploying on it. That's point one. And then point two, we recognize this has been gradual, but in '22, we definitely doubled down on the moment in time that we were at of the insurance industry really needing more modern digital tools which Verisk was in a unique position to provide because at the end of the day, that's why we were created to help them bring better data and analytics to the table to better select the right risk, price the right risk and combat fraud. That's why we were created in the 70s. But in the 2020s, there has been a unique opportunity to do that. That was abundantly clear throughout, but particularly even in 2022, before ChatGPT launched and every conversation started being about AI, we were already on this path of investing in the digitization and better data and analytics and tools for our customers. So I think that -- that focus is what drove the product acceleration over the last 3 years and which we think can continue. And you see it manifested in our financials and in our results, whether it's the acceleration of our subscription revenue growth to be north of 8% in the last 3 years or whether it's in that product inflection, we measure the number of products per customer as did -- depending on the size of the customer as a way of assessing our land and expand is what some people call it, that has definitively inflected upwards over the last 3 years.

So maybe looking at it from the -- and I'll use a comparison looking at from the customer side and thinking about kind of rate of change and adoption of more sophisticated technological tools. A couple of sessions ago, Steve Hasker was talking about how they've dramatically increased the number of centric tools, but they're kind of ahead of the curve in terms of rate of adoption by the customers. Maybe a corollary to the insurance agency. So -- in terms of willingness need or just kind of rate of adoption for your core P&C clients, where does that sit right now? Is there still a good amount of friction because of there's slow to change industries, I suppose. So yes, where does that stand?

Yes. I think it is a journey. And you're right, the industry is takes a cautious look. You have to keep in mind, it is a regulator very --

Highly regulated.

Highly regulated, focused on risk and required to bring auditability defensibility. Remember, insurance claims are some of the most litigated contracts in the world. So if they say your premium is x or your claim was y, and they need to be able to back that up in any potential lawsuit. So that's one element of it. I think you're seeing -- but clearly, there is an appetite for modernization and appetite for more efficient work. I think there was an adjustment period where many of them -- we led on sort of the AI governance side of things. We put out an ethical AI policy, very early on our website. We have established an AI Governance Board very early on to review for each model, for each product that we build, what are the potential risks? How is our IP being protected in this? And are there any potential data risks or protection? So we -- so we review that very carefully because we view it as doing it on behalf of the industry with that trust on a solid foundation. I think our customers are interested in taking on products. They themselves then had to establish their AI governance boards and they may have their review processes. In some cases, it may mean slightly longer sales cycle as they review things. We were never -- we always have dealt with kind of long sales cycle. So it's something new for us.

And I would imagine that's a moat as well.

Yes. Okay. Yes. So that's been good. And then look, large company insurance -- the insurance industry is doing quite a bit with AI on their own. That doesn't replace what they are doing with us. If you go back to that economic model I described of the dollar they get on premium, $0.70 on claims, the $0.25 that they spend on OpEx, that's their target. The things that they do internally and operationally, the $0.03 that they spend with us for better data and analytics is not going to be their first target to replace? Or if they try to rebuild that it would cost quite a bit more than the $0.03, not just want to transition, but on a permanent and ongoing basis.

And that was sort of the next natural question. Are you seeing some of your larger clients trying to do this?

Trying to do what? Trying to use AI? Absolutely.

To internalize demand? Yes.

To replace what we are doing for them? We are not seeing that.

Okay. I guess one of the more common questions I get. Just thinking about sort of the growth arc aside from just general pricing and new product adoption is a sensitivity to either net written premiums or just overall industry profitability, which can be volatile. So I guess in terms of just answering -- I don't know if it's insulation but maybe sensitivity to those things and ultimately, pricing power. How would you answer that, I guess, that question? Yes.

Yes. So we have historically grown faster than the insurance industry, net written premium growth, but much more stable through the cycle. So if you look since 2009 because that's when we went public, so that's when we have public financials. Insurance industry net written premium growth on average was about 5% during that cycle. Our insurance business, organic constant currency revenue growth was about 7% on average. If you -- but the variability of the insurance industry ranges from negative growth in some years to tipping double digits most recently. So wider dispersion in Verisk's growth has been 6% to 8%, basically in that -- between 6% and 8%. So a much tighter band around that 7% outcome. And actually, in that time period, if you look at the years that were soft markets from an insurance industry perspective, versus hard markets. So the soft market -- during the soft market, so low premium growth, Verisk's average revenue growth was 6.8%. If you look in the hard market years, Verisk's average revenue growth was 7.3%. So a little bit of a headwind and a little bit of a differentiation between those, but it kind of still both around to 7%.

It's a band, a pretty tight one.

Yes. It's a band.

I would imagine at least a decent bit of that is just the consequence of contract pricing, right? So ...

I'm sorry?

Being on contract pricing, right?

Yes.

So longer duration contracts that kind of ride through and that gives you the stability of earnings and -- okay. That makes sense. So yes, I guess kind of maybe a similar vein, right? So Elizabeth, I think started your tenure in 2022, a lot of change. Kind of getting back to the basics, and I mean that in a very good way, pure-play company, a big market, clear need for what you do. When you're meeting with investors, and I'm sure you've spoken to a lot of them today, what do you think is still misunderstood, misunderappreciated about Verisk's market position, growth opportunities, however you want to answer it?

Yes. I think 2 things. We just touched on -- one of them is the premium, and there's a near-term bias of we're coming off 2, 3 years with a very strong premium growth. And so there's a sense of, oh, if premium growth is coming down, then your revenue is going to come down. To me, one of the charts that we had in the Investor Day shows from a longer-term historical view, this is just normalizing to an industry average, and we have sustainably been able to grow above the industry. So maybe a modest headwind, but not something that we are significantly concerned about. The second topic that we've touched on a little bit here and that clearly I've spent a lot of time talking about, obviously, is the AI question. And I think it's important for people to understand that AI can enhance what we are doing for customers. It can enhance what the customers are doing themselves, but the defensibility of our business relies on the value proposition that we're bringing to the table. The businesses that we have and that we go to market with, these are not generic workflow tools. These are not just some sort of random or analytics or piece of --

You're not a workflow platform.

Yes. We're not a workflow platform. If you look at -- we had -- there was a pie chart in our Investor Day that showed of our revenues in terms of defensibility to AI. We had 40% of the revenues come from contributory data. 20% of the revenues are built off of proprietary data. 25% are built off of proprietary IP and analytics that generally rely on that property proprietary data and then 10% from software, 5% from services. But the 85% has -- the 85% of that business maps to essentially our 5 largest businesses, which each have in their own way a distinctive value proposition for the customer set that we think will continue to prove out. Our products can be modernized with AI. And what the carriers want to do with AI independently will not replace the value of those 5 strong businesses.

Very good. Maybe I'll just pause for a second if there are any questions just from the audience, happy to take them. Otherwise, I can go on. Cool. All right. Two ones. One, just on capital allocation in the next, just do a lightning round of word association. So recently announced a large authorization, $2.5 billion, I think you are going to execute on $1.5 billion. so it seems like there is -- maybe you could say a shift in terms of where capital is going. And maybe given the valuation, I think that probably makes sense. I guess how do you weigh that, again, in terms of the accretion from that, the level of buybacks and then just weighing and being able to pounce on whatever the next big opportunity or not big opportunity, but opportunistic opportunity. Bolt-on, right?

Yes. Yes. So yes, I think, look, we're fortunate to have a cash-generative business. Yes, we will -- our capital allocation framework will look at any given moment in time, where is the opportunity to drive the greatest return. Obviously -- so at the Investor Day, we kind of gave the framework of the organic investments, the selective M&A and the return of capital to shareholders. The organic investment portfolio, we feel very good about. We're driving strong returns. We showed some of the road maps coming there. We've funded that CapEx roughly in line with where we've been spending it. So we're very happy with those opportunities. There's -- we have a lot more ideas than what we're funding. So there's more there. From an M&A standpoint, we will continue to look in the markets, particularly when there are valuation dislocations in an environment like this. Our priorities, first and foremost, we are still focused solely on the insurance industry as we have been since 2022. We look for proprietary data sets, whether acquiring new ones or enhancing our own, expanding into new insurance markets, new either customer end segments or new types of risk. And then third, bringing efficiencies and automation to our clients. It's kind of our priority set. We -- in terms of things of scale, we will continue to look at -- we will continue to be open in the markets, but there's -- we don't see a significant need from where our portfolio is right now. And so in a dislocated market, we also see the opportunity of returning capital to shareholders.

At the right valuation, core business, nothing crazy, that makes total sense. Okay. Word association. Life insurance.

Growing.

Growing. Okay. Workflow tools.

Evolving.

Evolving, okay. Product velocity.

Accelerating.

Accelerating. AI.

Opportunity.

Opportunity. And we touched on this a little bit, but M&A in one word.

Selective.

Selective. All right. Very good. Cool. Elizabeth, really appreciate it. Thank you so much for the time and ...

Thank you so much. Thanks, everyone. Appreciate it.