Bill Simpson wrote an analysis of Verisk Analytics (NASDAQ:VRSK) to TradingIPOs subscribers before pricing and open. In its market debut Wednesday, October 7, the company priced 85.25 million shares at $22 a share, above its $19-$21 estimated price range.
The text of Mr. Simpson's original writeup follows:
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Verisk Analytics plans on offering 85.25 million shares in a range of $19-$21. Insiders will be selling all of the shares in this deal, VRSK will receive no monies. If over-allotments are exercised, insiders will be offering 12.75 million shares, bringing the total deal size to 98 million shares. BofA/Merrill Lynch and Morgan Stanley are leading the deal, JP Morgan, Wells Fargo, William Blair, Fox-Pitt Kelton and KBW co-managing. Post-ipo VRSK will have 180 million shares outstanding for a market cap of $3.6 billion on a pricing of $20.
Travelers Insurance (NYSE:TRV) will own 15% of VRSK post-ipo, Berhshire Hathaway (NYSE:BRK.A) 10%. A number of insurance companies own a piece of VRSK stock. In addition, VRSK's employee stock ownership plan will own 20% of VRSK post-ipo.
From the prospectus:
'We enable risk-bearing businesses to better understand and manage their risks. We provide value to our customers by supplying proprietary data that, combined with our analytic methods, creates embedded decision support solutions.'
VRSK is the largest aggregator and provider of detailed actuarial and underwriting data pertaining to U.S. property and casualty, or P&C, insurance risks. Insurers utilize VRSK to make better risk decisions and to price risk appropriately.
VRSK insurance risk management framework: 1)Prediction of Loss; 2)Selection and Pricing of Risk; 3)Detection and Prevention of Fraud, and 4)Quantification of Loss.
There are two segments: Risk Assessment and Decision Analytics.
Risk Assessment - The leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. Largest P&C insurance database includes over 14 billion records, and, in each of the past three years, VRSK updated the database with over 2 billion validated new records. VRSK uses this data to create industry standard policy language and proprietary risk classifications and to generate prospective loss cost estimates used to price insurance policies.
Decision Analytics - VRSK has a data set that includes over 600 million P&C insurance claims, historic natural catastrophe data covering more than 50 countries, data from more than 13 million applications for mortgage loans and over 312 million U.S. criminal records. Customers utilize this data, along with VRSK's proprietary algorithms, to predict potential loss events, ranging from hurricanes and earthquakes to unanticipated healthcare claims. VRSK is the leading developer of catastrophe and extreme event models.
**Not only are nearly all the major US property & casualty insurers VRSK shareholders, the company's solutions are actually embedded into their customers' critical decision processes. VRSK is pretty much the only game in town when it comes to risk management for US property and casualty insurance firms. Would be an understatement here to state barriers to entry are high.
VRSK also has a large presence outside of property and casualty:
U.S. customers included all of the top 100 P&C insurance providers, four of the 10 largest Blue Cross Blue Shield plans, four of the six leading mortgage insurers, 14 of the top 20 mortgage lenders, and the 10 largest global reinsurers. Over the past three years, VRSK has retained 98% of all customers.
97% of top 100 customers had been customers for each of the past five years. VRSK's revenue growth from these top 100 customers has averaged 12% annually the past five years.
72% of revenues are derived from annual subscriptions or long-term agreements, which are typically pre-paid. 60% of revenues are from the US P&C insurance industry.
Acquisitions - VRSK has made 9 acquisitions over the past three years, all in their Decisions Analytics segment. the acquired companies provide fraud identification and detection, loss prediction and selection solutions to the healthcare market. VRSK's fraud identification and detection business is their fastest growing niche.
This is a large, very successful insurance risk management operation embedded in the US P&C insurance sector with large proprietary databases, datasets and algorithms. The real issue here is not whether VRSK is investable, it is 100% a matter of valuation on ipo. We'll take a look at this below.
Debt - There is a bit of net debt here post-ipo, $689 million. It appears much of the debt has been taken on as a result of the 9 acquisitions over the previous three years.
VRSK has steadily grown annually over the past five years. This has been a result of organic growth coupled with acquisitions. Revenues have grown quarterly for at least 8 quarters in a row.
Gross margins and operating expense ratios have remained steady the past 4 years. The result is VRSK filtering revenue growth to the bottom line at roughly the same dollar for dollar amount over the years.
2008 - Revenues were $893 million. Gross margins were 57%. Operating expense ratio 22%. Operating margins a strong 35%, indicative of an automated/embedded type operation. Debt-servicing ate up 10% of operating profits. Plugging in taxes, net margins were 19%. Earnings per share were $0.92.
2009 - Through the first half of the year, revenues appear on track for $1.04 billion, a strong 16% increase over 2008. Gross margins look to be 56%-57%, operating expense ratio 21%. Operating margins should once again be in the 35% ballpark. Debt servicing should eat up close to 9% of operating profits. After tax, net margins should be 19.5%. Earnings per share should be approximately $1.10. On a pricing of $20, VRSK would trade 18 times 2009 revenues.
Conclusion - Blue chip ipo coming at a very attractive valuation. There are years of revenue growth, strong operating margins and extremely high barriers to entry. This is a large 98 million share deal (assuming over-allotments) with all shares coming from insiders. Because of this, VRSK may trade a bit heavy early on any opening pop. Anywhere near the $19-$21 range, however, and this is a keeper. Strong recommend here in range for mid-term.