Verisk Revisited: Wide Moat Intact In The Wake Of COVID-19

Nov. 23, 2020 2:16 PM ETVerisk Analytics, Inc. (VRSK)4 Comments

Summary

  • Verisk reported impressive revenue and bottom-line growth in 3Q, amidst the coronavirus pandemic that had severely impacted its customers in the insurance industry.
  • Verisk continues to execute and deliver results on multiple operational fronts, with M&A, R&D, and continual product penetration underpinning growth.
  • I believe the accelerating pace of changes in relevant industries, especially the IoT trend and artificial intelligence revolution, is likely tilting the competitive landscape toward Verisk's favor.
  • Interested investors desirous of an adequate margin of safety on the way in may have to wait for the next general market crash or idiosyncratic crisis.
  • Looking for more investing ideas like this one? Get them exclusively at The Natural Resources Hub. Get started today »

Verisk Analytics is a leading data analytics provider serving customers in: insurance energy and specialized markets financial services

Previously, I stated I liked Verisk Analytics (NASDAQ:VRSK) on the ground of its sustainable competitive advantage in the form of the monopoly in the property/casualty (or P/C) insurance industry, superior capital efficiency, and favorable operating model. As far as the investors are concerned, I believe Verisk is a quintessential example of a long-term compounder. So, I took the share price weakness in late 2019 in the wake of an adverse jury decision as an entry opportunity.

To be honest, I failed to foresee at that time that an even better, generational to be precise, entry opportunity was about to occur a few months later. When the coronavirus pandemic wreaked havoc all over the world, I backed up the truck with Verisk after having reiterated a call of strong buy. Looking back, within one year, the investment in Verisk has returned a handsome 63% reward, before dividends, for the members of The Natural Resources Hub at very little risk.

The P/C insurance industry, which hosts most of Verisk's customers, suffered financially during the 1H2020 "due to the compounded effects of COVID-19, catastrophes, and civil unrest" (see here and here). It is, therefore, time to look closer at how the company has fared financially and, in that light, review the investment thesis.

Operations

COVID-19 response

Verisk has implemented a series of emergent measures to help the insurance industry during the coronavirus pandemic. This is a smart move because it not only gave concrete assistance to the suffering industry but also greatly raised awareness of the products of Verisk, thus paving the road for the sales down the road. In 3Q alone, Verisk announced the following:

  • On May 28, 2020, Verisk Commerce Signals announced the COVID-19 Consumer Spending Impact Tracker, giving retailers and e-commerce companies insights into U.S. consumer online and in-store spending behavior across key retail and direct-to-consumer business categories during the critical time.
  • On May 27, 2020, Verisk offered four months of complimentary access during the pandemic to Coverage Verifier-Verification as a Service (CV-VaaS), a digital platform designed to deliver insurance information to lenders for efficient loan processing. Lenders and insurers were able to use CV-VaaS at no charge from June 1 through October 1, 2020.
  • On April 9, 2020, Verisk offered the insurance industry access to its OneXperienceä and ClaimXperience® digital engagement platforms at no charge during the height of the pandemic, to help eliminate or reduce the need for on-site visits and facilitate insurance professionals' remote collaboration with policyholders using a range of tools.

M&A

As I stated here and here, Verisk has been aggressively pursuing the expansion of its data and analytics capabilities across industries through acquisitions, leveraging its internal capability to source, evaluate, and integrate acquisitions to create value for shareholders.

  • In December 2019, Verisk spent $193.5 million on the acquisition of FAST, a software company for the life insurance and annuity industry that offers a SaaS suite of out-of-the-box components that life insurers use to quickly enhance or replace their legacy policy administration systems without a large up-front capital commitment. Verisk also expects to deliver its new analytics through the sales channel of FAST software users.
  • In January 2020, Verisk sold its Geomni imagery sourcing business to Vexcel Imaging, thus creating the world's highest-quality and most comprehensive geospatial image and data libraries. Verisk will be a minority owner in Vexcel with full access to all aerial imagery libraries of the latter.
  • In September 2020, Verisk acquired Franco Signor, a Medicare Secondary Payer service provider, for $160 million. Franco Signor will join Verisk's Claims Partners business to provide the most comprehensive suite of fully integrated Medicare compliance solutions. Due to their complementary approaches in the same space of Medicare compliance services, significant synergies are expected from the acquisition.

Organic growth initiatives

Verisk continued to deliver organic growth by developing new, proprietary data sets and predictive analytics, selling more solutions to existing customers, and expanding into adjacent markets and new customer sectors (Fig. 1).

VeriskFig. 1. Verisk's growth on the back of its core competencies. Source.

1. New products. The environment that businesses operate in is changing at an accelerated pace. Verisk responds to these changes by developing new products for its customers.

On November 12, 2020, Verisk released the world's first and only Subnational Human Rights Dataset to enable multinational organizations and financial institutions to undertake risk assessments of their global operations, supply chains, and investments in more granular detail than has been possible to date. The dataset includes risk scores for 3,600 states and administrative regions in 198 countries, with 10 human rights issues including (1) arbitrary arrest and detention; (2) child labor; (3) extrajudicial or unlawful killings; (4) forced labor; (5) freedom of assembly; (6) kidnappings; (7) migrant workers; (8) occupational health and safety; (9) security forces and human rights; (10) torture and other ill-treatment. This product release came after two years of development.

In 3Q2020, Verisk released a series of new features for clients in its insurance and financial service business segments:

2. Market penetration. Verisk continued to acquire new business in life insurance and P/C insurance in the 3Q2020.

On the life insurance front,

  • On October 14, 2020, Lincoln Heritage Life Insurance Company adopted Verisk FAST's eApp, as the first step in a multi-phase legacy transformation program.
  • On August 27, 2020, Kansas City Life Insurance Company licensed FAST software to replace its legacy platforms.
  • On August 10, 2020, Verisk launched the new EHR Triage Engine, a tool designed to help life insurers substantially fast-track applications for life insurance coverage, using consumer-authorized electronic health records (EHRs) data.
  • On April 22, 2020, Pacific Life licensed FAST software.
  • Verisk plans to integrate its life insurance solutions with WOMBA's electronic health record platform.

On the P/C insurance front,

  • On September 30, 2020, Verisk added its BuildFax solutions to Duck Creek Technologies' Duck Creek Platform, giving P/C insurers easy access to robust property condition and history data through that platform.
  • On August 25, 2020, Farm Bureau Insurance adopted Verisk's LOCATION® platform, which can deliver address-level, granular information on fire protection for insured properties.
  • On May 12, 2020, the Texas Department of Insurance adopted Verisk's Mozart Form Composer® to accelerate the regulatory review of P/C forms filed by insurers each year.

3. Internet of Things (aka, IoT) provides an enormous growth opportunity for Verisk. It has seen encouraging growth with its Verisk Data Exchange™, an IoT and telematics platform designed to help P/C insurers to harness the power of data from the connected world. Already having over 6.6 million vehicles and 175 billion miles of driving data, the Exchange continues to grow by >200,000 new vehicles every month as of October 2020, at a pace of adoption that seems to be accelerating.

  • On October 13, 2020, Ford Motor Company (F) joined the Verisk Data Exchange™, making available usage-based insurance programs to Ford and Lincoln vehicle owners so that they can choose to get personalized safe driving discounts.
  • On August 6, 2020, Honda joined the Verisk Data Exchange, making available usage-based insurance programs to Honda and Acura owners.
  • On May 19, 2020, Geotab, a specialist in IoT and connected transportation, made the Verisk Data Exchange™ Add-In available on the Geotab Marketplace, thus expanding the reach of Verisk tools in the commercial auto market.

3Q2020 financials

Verisk pulled in $703 million in consolidated revenues in the 3Q2020, up 7.66% over the same quarter one year ago. The flagship insurance business segment experienced 6.31% year-over-year growth, while the energy and specialized markets segment reported 16.75% YoY expansion thanks to the recovery in the oil industry and the bull market in the mining industry, with the financial services segment being the only laggard, whose quarterly revenue decreased by 7.14% (Table 1; see here).

The 3Q2020 revenue by business segments, as compared with the same period in 2019Table 1. The 3Q2020 revenue by business segments, as compared with the same period in 2019. Source.

  • As of the 3Q2020, Verisk has not identified any material impact stemming from COVID-19 on some 85% of its revenues, thanks to the fact these revenues are subscription-based and subject to long-term contracts. Normalizing for the impact of the injunction on the roof measurement solutions, these revenues would have grown 7.8% on an organic constant currency (i.e., OCC) basis in the quarter.
  • The remaining 15% has been identified as being negatively impacted by COVID-19. These revenues declined by about 10% on an OCC basis in the 3Q2020 as compared to the same period one year ago.

Verisk generated $186 million of net income in the 3Q2020, up 466% over the same period one year ago. Adjusted EBITDA was $366 million, up 18.4%. Diluted adjusted EPS were $1.32, up 17.9%. Free cash flow was $142 million, down 6.9% but we know it varies a lot from quarter to quarter.

A summary of the financial results of Verisk.Table 2. A summary of the financial results of Verisk. Source.

Leveraging its strong balance sheet, Verisk paid a cash dividend of 27 cents per share on September 30, 2020. A cash dividend of 27 cents per share, payable on December 31, 2020, to shareholders of record as of December 15, 2020, has been approved by the board of directors. With a payout at 24% relative to net income and 31% with regard to FCF, the dividends are extremely well covered. The company also repurchased $50 million of its shares during the 3Q2020.

Digital resources investment play

Verisk was able to deliver strong financial results in spite of the public health crisis, thanks to its business model and competitive positioning.

Verisk stands out in the industries it serves, although its business characteristics are by no means unique if viewed from a different angle. There actually exists a special group of businesses hailing from various industries, which share the following features:

  • They share a unique value proposition - by accumulating and processing big data, or enabling data-intensive operations, they generate subscription-based, recurring revenue from business or government customers. They are B2B.
  • They develop scalable solutions that are developed once and can be installed countless times, thus incurring little capital. Such low capital intensity and operating efficiency typically lead to superior profitability.
  • They are typically protected by a wide moat, either in the form of barriers to entry, monopoly, or oligarchy. The sustainable competitive advantage they command over fellow industry participants gives them resilience during industry crises and assures profitable growth in the long run.

I lump these businesses into the space of 'digital resources', to facilitate its coverage at The Natural Resources Hub (Table 3; see here). The businesses in this space differ from the natural resource extractors in that their assets are digital and intangible and that they are to a large extent insulated from the notorious cyclicity the natural resource space is known for. They differ from the generic IT companies in that they either provide a platform or own digital assets, from which they generate recurring revenue (Table 3; see here).

Table 3. The competitive landscape of the digital resources space. Source: Laurentian Research.

Viewed in the context of 'digital resources', the remarkable resilience and superior economics of Verisk are not surprising at all.

Investor takeaways

In spite of the coronavirus pandemic, which has decimated its customers in the insurance and oil industries, Verisk continued to post impressive growth in revenue and EBITDA. Profitability has also been great, with net income and FCF well within the long-established uptrend. The company continues to post excellent return-on-equity numbers (Table 4).

Table 4. Quarterly DuPont analysis of Verisk since 2016. Source: Laurentian Research.

The snowball effect that I described previously in reference to the magnification of growth rates from revenue, via operating income and net income, to EPS, is still intact. From 2011 to 3Q2020, revenue grew at a CAGR of 8.65%, operating income at 8.98%, EBITDA at 10.46%, net income at 11.22%, and EPS at 23.68% (Fig. 2). Cumulatively, Verisk converted every dollar of net income into $1.19 of FCF during that time.

The quarterly financial results of Verisk. Source: Laurentian Research based on Verisk released information.Fig. 2. The quarterly financial results of Verisk. Source: Laurentian Research based on Verisk released information.

If industry crises are the ultimate litmus test of any purported wide moat, it can safely be said Verisk withstood the COVID-19 with flying colors. Only 15% of its business were negatively impacted by the public health crisis, which speaks volumes of the resilience of Verisk's business. Some of the characteristics Verisk shares with the special group of companies that I call the 'digital resources' space enable it to withstand the unprecedented public health crisis and come out of it essentially unscratched.

Verisk continues to execute and deliver on multiple fronts, including (1) M&A, (2) the development of new, proprietary datasets and predictive analytics, (3) the penetration of existing customer base, and (4) the expansion into adjacent markets and new customer sectors. As a matter of fact, I believe the accelerating pace of changes in the relevant industries, especially the IoT trend and artificial intelligence revolution, may actually be tilting the competitive landscape toward Verisk's favor. In that regard, it may not be an overstatement the best time is yet to come for Verisk.

The strong share price performance of Verisk especially since March 2020 more or less reflects the above observation. At this point in time, the greatest risk lies in that an investor is willing to forgo an adequate margin of safety. Interested investors who do want an adequate margin of safety on the way in may have to wait for the next opportunity, which will perhaps come in the form of a general market crash or idiosyncratic crisis. History has been proven wide-moat stocks such as Verisk are worth the wait.

Verisk Analytics is just one idea in one of the four investment strategies that were actively managed by Laurentian Research. You really should see the amazing investment gains delivered by the entire portfolio to the proud members of The Natural Resources Hub.

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Disclosure: Besides myself, TNRH is fortunate enough to have multiple other contributing authors who post articles for and share their views with our thriving community. These authors include Silver Coast Research, ..., among others. I'd like to emphasize that the articles contributed by these authors are the product of their respective independent research and analysis.

Disclosure: I am/we are long VRSK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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