Verisk Analytics, Inc. (VRSK)

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Verisk Analytics Inc (VRSK)

March 07, 2013 8:30 am ET


Eva F. Huston - Senior Vice President, Head of Corporate Finance, Head of Investor Relations and Treasurer

Frank J. Coyne - Chairman, Chief Executive Officer and Chairman of Executive Committee

Stephanie Sutton

Kevin Thompson

William M. Raichle - President of Verisk Insurance Solutions - Commercial Property

Neil Spector - President of Verisk Insurance Solutions - Underwriting

Edmund Webecke

Vincent Cialdella - President of Verisk Insurance Solutions - Claims and Crime Analytics

Scott G. Stephenson - President and Chief Operating Officer

Ming Lee

Ron Isaacs - Chief Executive Officer and President

Gary Kerney

Joel Portice - President of Verisk Health

Nathan Gunn - Chief Operating Officer

Michael Heller

Nana Banerjee

Perry F. Rotella - Chief Information Officer and Senior Vice President

Mark V. Anquillare - Chief Financial Officer, Principal Accounting Officer and Executive Vice President


David Togut - Evercore Partners Inc., Research Division

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

William A. Warmington - Raymond James & Associates, Inc., Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Kevin D. McVeigh - Macquarie Research


Eva F. Huston

Good morning. If I could ask everyone to take their seats, we're going to get started in just a minute. Welcome, and thank you for joining us for our Verisk Analytics Investor Day. My name is Eva Huston, I'm the SVP of Finance, Treasurer and Head of Investor Relations. I apologize for my voice. It's a little scratchy this morning. But as is a fine Verisk tradition, we have some inclement weather. It just gives us an opportunity to talk about some of the wonderful things we do around that, and you'll hear from our panel later. We do appreciate those who made the effort to be here and also appreciate those who are on the webcast who couldn't make it in person due to travel difficulties.

Before I turn it over to our Chairman and CEO, Frank Coyne, I wanted to point out that we have 8 product demonstrations available to you in the lobby where you came in. I would encourage you to go and visit those product demonstrations during breaks. They will be available throughout the day. I think they'll really give you a good feel for the solutions we provide to our customers and why those are so valuable. As we go through the day, we will give you an opportunity to ask questions after each presentation, and I will also note that we have a number of our business leaders here who are not presenting today just due to time constraints, but feel free to find them on a break and ask them questions that you may want to ask. We will be serving a box lunch just before Mark Anquillare's presentation at 12:30 so just feel free to -- if you're getting hungry, you'll know that, that's coming. And finally, I wanted to note to you in your binder that you got when you walked in, there is a survey requesting feedback, so if you would, give us some candid input and leave it on the table as you leave, we'd appreciate that. So with that, I'm going to turn it over to the Frank Coyne, Chairman and CEO, to kick us off for an informative day.

Frank J. Coyne

Thank you. Well, good morning. Yes, there you go. So before I forget, I do want to thank Eva and all of my colleagues who participated in getting the agenda together and who are here to give presentations.

I believe we -- this is our fourth Investor Day Conference, and we have been listening to our investors, and we've been taking your questions and we take them very seriously, and we understand the areas of interest to you. And I think that you will find that this is the most informative Investor Day that we've had so far. It's a very, very good agenda that they tied together. The difficulty we have is figuring out which things to cut out because there is so much to the story. And if you are here when we had our first one, we had, I thought, was a very good introduction to us, for us, to you as investors, but there is so much more to our story today than there was in 2009 when we did our IPO. And it's just wonderful that we're going to have the opportunity to talk about some of that and give you a little deeper insight into some of the things that you know are driving value and have the potential to driving -- to drive value for us, and I think what -- when you leave here this afternoon, I think you'll conclude that the best part of our story is yet to come, and so I'm excited about that.

So I have a short presentation on who we are and where we're going, but for the most part, you know it. One of the things that we've learned in dealing with our investors is, a, we're a complicated story, we know that; and b, you do a lot of work before you do your investment and we appreciate that as well, as we do appreciate your questions that we get because it helps us focus on those areas of interest of -- that are important to you. One of the things you know what our 2012 results were and we're very pleased that we have continuous improvement in our operations. The most exciting thing for me on this slide is the last little checkmark there that we have crossed into the territories that we are now a $10 billion market cap company. And that's an important milestone, I think, for us as we pursue our journey. Somebody asked me last night, "So what's next?" And the obvious answer is $20 billion, and we're pretty confident that we'll be there in due time.

You will hear during the course and you will see and you know that there are many important parts of our value proposition, and it starts with our database, which is a unique database, and we have proprietary analytics. But what makes it all work is our 6,000 people. We have very deep domain and industry-specific expertise that works with that data and develops the analytics that really delivers the strong value proposition that we do deliver to our customers. We are proud of our story. As you know, we are a not-for-profit consortium, and we started our journey really in 1997 when we converted to a for-profit organization. And from the beginning and into the future, we simply set our North Star as creating shareholder value long before we were public and long before we even thought about doing an IPO. And we took a number of disciplined steps to get there and it has led us to the great organization that we have today, which as I say, the best of our story is yet to come. We have a strong track record of top line growth. Our playbook has been and will continue to be solid organic revenue growth, which is our main focus, a supportive -- it's a very different disciplined acquisition program that adds to our capabilities both in our data and in our analytics and in our technology, and very importantly, in the entrepreneurial capability of our enterprise. There's -- and you will hear this during the course of the day. There's a lot emphasis on innovation in various analytics. It's an internal initiative, but we add to it through our acquisitions. As you review our acquisitions over the course of the morning, you will see different slides on them. Every one of those was an acquisition of innovation, and we brought into our enterprise innovators, and then we meshed the cultures together to create what we have today. And it's a very important part of the history, and I'm confident will continue into the future.

Accomplishments in 2012, probably many of you are on our earnings call, you're familiar with them. We did have, I think, a very, very solid year of top line growth and bottom line growth as well, and with increase in our cash flow, which of course, delivers our shareholder value. We had a couple terrific acquisitions in MediConnect and Argus. MediConnect has added to our Verisk health story, and you will hear that story today and have an opportunity to do a little deeper dive. Argus is exactly down our street in terms of business and financial model, added another petabyte of data to our data set, and we have over 5 -- over 4 petabytes of data. Now you might think, well, what's a petabyte of data, and Scott can tell you in great detail what that is. It's 10 to the 15th power. I have to put in simpler terms. Think of 3 drawer file cabinets, a petabyte is equivalent to about 20 million of those. That's a lot of data, and Argus added a petabyte to our data set. Mark will talk about our capital deployment and acquisitions, and share buyback is an important part of that. If you remember, our first priority is investing in our business, then acquisitions and then share buybacks. We continued doing that in 2012, and we'll continue to do that in 2013.

And long-term value creation, as I said, we're going to continue to run the same playbook. We have a very strong position in the property, casualty industry, as you know. It's still a very, very important part of our business. We want to grow that. We've done some reorganizing. We've pulled different assets together, and you'll be hearing some of that story this morning.

We want to deepen our penetration in our new verticals, where we have a lot of growth opportunity. We'll continue to invest both internally and through the acquisitions, and all of that leading to top line, bottom line growth and our cash flow growth, which will, of course, drive our shareholder value.

Our moat, we talk about our moat all the time, and it's -- everyone has their kind of defensive moat. This is important to us because it's not just a moat. It's also a strategy. And as I've said, we've added to our data storage. We'll be talking about as we go through our various presentations, you will be hearing from our folks how they have been working to widen their moat and defend our business that we are kind of unique in all of our verticals. And with that, I'm going to turn it over to Stephanie, who will start us off in Insurance Solutions.

Stephanie Sutton

Thanks, Frank, and good morning, everyone. Over the next half hour or so, my colleagues and I will be providing you an overview of our property and casualty insurance business. All of these businesses fall under an umbrella brand that we refer to as Verisk Insurance Solutions. Within that brand, under the umbrella, we have companies like ISO, Xactware and AIR. All have very strong brand associations within our industry. Following a brief presentation, we're going to have some Q&A with my colleagues here, and we also, as Eva mentioned, have demonstrations. So please do take advantage of all of those throughout the day.

P&C market, actually the U.S. P&C market insurance, is the largest in the world with about $500 billion in annual premium. The top 100 insurance companies actually represent about 90% of that premium, and all of these customers, all of these companies are customers of Verisk. So in our world, it's policy claims or loss costs, as we call them, that represent the cost of goods sold for an insurance company. On average, these loss costs or policy claims, plus some other loss related expenses represent about 79% of this annual premium. What we do at Verisk is we help insurance carriers select their risk and also analyze their claims. These are both very vital functions for insurance companies to maintain their profitability. So we, at Verisk, are mission-critical to our customers and their business. So despite the worst insurance market since the Great Depression, at Verisk, we've been able to grow our insurance businesses by almost 7% in 2012.

So I think everyone knows Verisk is a bit unique. As Frank mentioned, we were originally formed under the brand of ISO as an industry consortium in 1971. So we are considered trusted partners to the industry, and we take this position very seriously. Building on the inherent trust we have with our insurance partners and the data that they provide to us, we've been able to develop many valuable solutions for them. And over time, we've expanded upon and added on to solutions by bringing in fraud tools, from ISO ClaimSearch, catastrophe models from AIR worldwide and loss quantification tools from Xactware, just to mention a few. In 2010, that's when we introduced the Verisk Insurance Solutions umbrella brand that I mentioned, and last year, we formed a new division called Verisk Underwriting Solutions to bring together a number of our products and units that provide solutions for underwriting purposes. And this new division has helped us to serve our insurance customers, specifically, our underwriting customers better and also provide them more value through end-to-end solutions.

Okay, deep domain experience. Perhaps due to our sort of unique heritage, we do have deep domain expertise in insurance here at Verisk. Right here, I have a subset of executives, many of whom or most of whom actually are here today. These guys alone represent 167 years of combined experience at Verisk in our heritage firm. Not to mention that many of us, including myself, actually worked in the insurance companies before joining the company. So while I've been here 9 years, I do have a lot more experience than that and too much to mention really so. I guess, the main point is we are insurance people, and because of that, we understand our customers' problems, and we're very well equipped to help them solve them.

Before I move on, I'd actually like just to take a few minutes to represent my colleagues here, who will be following me and helping me with the presentation, as well as taking some questions when we're done. So first we have Kevin Thompson. Kevin is the President of ISO Insurance Programs and Analytic Services. We also have Bill Raichle, who is the President of our Verisk Insurance Solutions Commercial Property Division; Neil Spector, he heads up the new Underwriting Division that we mentioned earlier; and last but not least, and way back at the end there is the Senior Vice President from Xactware. Edward's [ph] actually filling in for Jim Loveland today who couldn't be here due to a conflict.

So before we dive into the detail, I'd like to just take a couple of minutes just to share with you some thoughts and some of the key challenges that our insurance customers are facing today. Customers aren't [ph] able to depend on investment income right now, I think we all understand that. They are paying much closer attention to their underwriting and adjusting their pricing accordingly. They're looking to catch a value in large data sets, in sophisticated analytics and kind of getting some modest growth that way. Unfortunately, that's just not enough. They're going to take the market share from their customers that they need to -- they have to look for new and unique ways to grow. So they need to develop new products, expand their geographic footprint, acquire or even explore brand-new paradigms like telematics or pay as you go insurance. So they also had to do this while they manage through a very challenging fiscal environment, as well as the ever-changing and challenging regulatory landscape that we operate in as well. So with all the increased storm activity, the need for sophisticated catastrophe and weather analytics is greater than ever. We also have to understand things very deeply like the global supply chain and power outage and the impact and implications that these things have on the businesses that they provide insurance to.

So moving along, moving quickly because we have a lot to share, I'm going to go ahead now and hand over to Kevin Thompson, who is going to now talk about the solutions that we have at Verisk to help these customers with these issues.

Kevin Thompson

Thank you, Stephanie, and good morning, everybody. That looks familiar. Again, good morning. Verisk insurance brings value to our customers throughout the insurance chain. Our solutions address client acquisitions, helping our customers with markets, marketing and product development, risk selection and identifying target markets and target risks themselves.

Moving on, they also -- we also have solutions that provide rating and underwriting information, assisting them with the prediction of loss and the pricing of risk. When they do have a claim and some of their customers do have claims -- that's why they're in business, we have solutions that assist them with the quantification of the loss related to the claims, as well as assisting them in the detection and prevention of fraud. And then finally, moving on to what their portfolio management and the management of their business, we provide solutions that help them in areas such as catastrophe, hazard mitigation, modeling and the analysis of concentration of risk in their portfolio.

This slide shows the risk analysis framework and where Verisk Insurance Solutions provides products for our customers. The various businesses are aligned here to give you sort of an idea of what part of the risk analysis framework their products address, and starting off with -- in Risk Assessment and the prediction of loss in selection and pricing of risk, ISO's insurance programs and advisory information provide a lot of information and assistance to customers when they are actually evaluating and pricing their risk and selecting these particular risks they want to write.

Also in that same area of the prediction of loss and the selection and pricing of risk, Verisk Insurance Solutions underwriting provides products and solutions such as claims history information, motor vehicle reports, replacement cost calculation for the valuation of property. AIR Worldwide provides information to help them with man-made and natural hazards and catastrophe modeling. And Verisk Insurance Solutions commercial property provides them a wealth of information on specific properties in the commercial areas. The -- moving across the slide to the detection and prevention of fraud, as you can see, Verisk Insurance Solutions, a claims and claims analytics provides solutions such as ClaimSearch, which companies use when they are trying to ensure that, in fact, claims are valid and there's not fraud being -- occurring. And then finally, all the way on the right, the quantification of loss. Some examples there, our Xactware business provides information on the cost to repair damage to buildings once the loss has occurred, and AER provides information on information on weather analytics in the insurance space.

Turning to our industry-standard programs, an area near and dear to my heart. We have the ISO's historic advisory information. We provide this information to 26 lines property/casualty insurance, loss costs, which are advisory cost information based upon line, class, location, et cetera, it's a measure of the risk that the company is undertaking. You can think of the loss cost as the -- sort of the probably cost of goods, as Stephanie pointed out, it is the major cost of goods or the major cost that insurance company has for most lines of insurance. Upwards of 75% of their cost will be represented by the loss or the expenses needed to adjust the losses. The unique thing about insurance is that the -- that cost, that major cost is unknown at the time you sell the policy, at the time that they take the risk on, and it's only many years later that you may actually know what a claim would cost you to deliver that policy, and that's where we come in. We have provided analytics and information based upon a aggregated database representing significant part of the industry to help them in coming up with the best answer as far as what that cost will be to write that particular policy.

Next, there are rules. This is the manual, the commercial lines and personal line manuals that detail how to classify or rate a risk when the insurer is considering that. They also include information on special forms or considerations that the insurer needs to take into consideration when they are writing a particular type or class of business.

Next are forms. This is a contract between the insurer and the customer, and basically that's what is, and just as importantly, what is not covered by the policy and it also sets forth the duties of the various parties to the policies. Just as an aside, You may heard me mention this in the past, but in many cases, if you were to look at the homeowners or auto policies, you would probably see a legend on the bottom of the page that says it contains copyrighted material of ISO. That's where our policy form information is used, as the insurers are developing and constructing their individual policy forms, and that acknowledgment goes on those forms that they are using our copyrighted material.

And then finally, circulars, this is our main means of communicating to our customers about changes to our programs. And there a lot of changes that go on in the programs just from normal maintenance of the program to keep them state-of-the-art, as well as responding to various social and economic forces that are at work. Just as an example, and this is order of magnitude, in a typical year, we will have more than 10,000 bills and more enactments that we review to determine whether there are any impact on our programs of insurance. Over 1,000 regulations coming out of the various state regulators we would review for the same reason, and over 2,000 court cases are reviewed to see if they have implications. The result of that in a typical year was over 3,000 filings that we make with regulators to change our basic programs for the insurers to use. Having said that, Bill, let me turn it over to you.

William M. Raichle

Okay, Kevin and I combined form the traditional part of the insurance vertical inside Verisk. Some people look at it as ISO. We call it risk assessment for reporting purposes right now, and so I'm the other half of that. I'm -- I run a division called Commercial Property, and we are a group of about 800 staff. We are located in virtually every state in the country. We have 3 major product lines. We're the largest provider of underwriting surveys in the property/casualty industry. We provide custom surveys, and we also, every time we survey a building for a carrier, collect information and feed it into what we call our ProMetrix database. And that kind of forms the core of what we do. Prometrics is a database of about 3.5 million properties. The information collected is collected in accordance with a nationally filed schedule, filed with all department of insurance. A building that we survey in Manhattan will be surveyed the same way as a building that we would look at a similar building in Los Angeles, for example. We collect information to help the insurers develop rates so we collect loss cost type of information.

We also survey and grade every fire district in the United States, about 47,000 of them. We maintain a database of that. We look at the water infrastructure, the fire department itself and the communications infrastructure. We do the same thing for building code and building code enforcement for communities that represent about 75% of U.S. population. And for the last 20 years, under contract with FEMA, we grade several hundred communities for their ability to mitigate against flood damage, and FEMA uses that in rating under the National Flood Insurance Program.

And finally, all of the information or the data that we collect is used to create analytics that drive decision-making in the insurance industry. So I started off talking about a long-standing partnership that Kevin and I have had. That is formed primarily around the development of rating criteria such as loss costs. So a building, such as this one, with a sprinkler system, obviously, a large building will have a specific rate assigned to it, and the carrier will be able to develop a premium by taking our loss cost and adding expense factors and a profit and come up with a quote for the marketplace, and so that's kind of where we fit into the scheme of things.

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