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Holly LaFon
Holly LaFon
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David Rolfe Comments on Verisk Analytics

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October 16, 2017 | About:
Verisk Analytics (NASDAQ:VRSK) has been in portfolios since 2011, as the Company continues to serve a critical function in the property and casualty insurance value chain, providing many of the top 100 insurance customers in the US with proprietary risk data, compliance and analytical services. We estimate the Company generates over 70% of its revenues from this industry vertical, and is organically growing these revenues at a mid to high single digit, much faster than the underlying industry growth, which clocks in at a low single digit. As Verisk is able to scale its solutions across many customers, we expect margins to continue expanding and help drive a healthy double-digit earnings growth trajectory for the Company.

While the insurance industry is far from hyper-growth, we think it nevertheless represents a stable base where Verisk can add significant incremental value as it aggressively reinvests in innovative ways for customers to get an edge. For example, the Company recently invested in a sophisticated data collection platform, Geomni, that includes remote sensing and machine learning technologies to gather, store, and process geographic and spatial information related to housing and commercial structures. After natural disasters, Verisk can rapidly deploy these assets to gather data and feed it into claims management tools, also maintained by Verisk. We think the value of innovative solutions like Geomni is amplified by Verisks suite of data and analytics services, which enable insurance customers to assess and price risk more quickly and accurately.

Further, Verisk estimates the total cost of their services and data is just 25 basis points (0.25%) of the insurance industrys total expense structure, which we think represents a compelling value, given the mission-critical nature of many of Verisks data sets. As such, over 80% of the Verisks revenues are subscriptions or long-term agreements. We expect Verisk to continue exhibiting attractive and expanding margins, particularly EBITDA margins, which clock in around 50% and are much higher than most subscription-based software as a service (SaaS) businesses. We think Verisk has a well-defined value proposition that makes the appropriate trade-offs between organic sales growth and maintaining superior profitability. While those tradeoffs sound like common sense, we think it has become troublingly unique, as large SaaS companies are often driven by rapid sales growth and rampant, protracted replacement of overhead expenses with highly dilutive, shareholder-funded equity issuance. Regardless, we think Verisk has struck a prudent balance between value creation and value capture, which we think should continue to drive excess returns, even against a difficult industry backdrop.

From David Rolfe (Trades, Portfolio)'s Wedgewood Partners 3rd quarter shareholder letter.

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Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

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