The D. E. Shaw Group has written to the Board of Directors of Verisk Analytics to highlight concerns about the long-term underperformance of the firm’s share price, and has called on Verisk to position itself as “a standalone insurance focused business.”
The letter was sent today on behalf of certain investment funds advised by D. E. Shaw & Co., L.P., a member of the D. E. Shaw Group. The funds are shareholders in Verisk with a significant economic position.
“We are seriously concerned about the long-term underperformance of the Company’s share price and have been privately engaging with you for nearly five months in an effort to help the Company focus its business, improve its operations, and enhance its Board and governance,” reads the letter.
In response to these efforts, Verisk has taken some action, including the sale of Verisk Financial Services, declassifying its Board, and the separation of the Chairman and CEO roles.
However, D. E. Shaw feels that these “belated changes” are too reactive and simply do not go far enough in reversing the company’s history of underperformance.
“If Verisk is to reach its full potential and generate significant value for all of its shareholders, further change is necessary,” says the letter.
It goes on to state that with the right set of changes, Verisk’s share price could appreciate by more than 70%, which equates to over $20 billion of value creation for shareholders.
According to D. E. Shaw, the correct changes required at Verisk include “an unequivocal commitment to positioning the Company as a standalone insurance-focused business, a commitment to organic growth acceleration and profit margin expansion within that business, and credible Board oversight.”
The letter argues that Verisk’s market-leading position means it should be able to produce significant organic revenue growth, margin expansion, and a premium valuation, but that it has failed to achieve this and ultimately not delivered on its promise.
The activist investor also accuses Verisk of compounding the underperformance situation by allocating capital to acquire numerous non-core businesses, which they say has served to both distract management and dilute the quality of Verisk’s insurance assets.
“As a result of the Company’s operational underperformance, misguided capital allocation, and suboptimal business configuration, shareholders have endured persistent share price underperformance for a decade,” continues the letter.
In fact, the letter claims that Verisk has underperformed its proxy peer set by almost 400% during the last decade.
D. E. Shaw says that while it is pleased that the company has undertaken some of the steps for which it has been advocating, it’s concerned the Board isn’t doing enough and argues that the most important changes have not been implemented.
As a result, the letter says that further change is needed at Verisk, and says that if the Board is serious about addressing the performance gap, “it must act urgently to transform Verisk into a new and improved standalone insurance data business with enhanced financial performance and credible governance and oversight.”
Ultimately, the letter notes three changes that Verisk should enact immediately: Commit publicly to becoming a pure-play insurance data company; Form an Operations Review Committee of the Board to pursue a “no stone unturned” review of Verisk’s insurance business; and enhance the Board with shareholder input.
On the first point, the letter claims that making this switch to a pure-play insurance-focused business could help restore Verisk’s premium valuation versus its peers and lead to a more than 25% rise in its valuation multiple.
At the same time, a complete review of the company’s insurance business would, according to the investors, create significant cost optimisation and organic revenue growth initiatives that could more than double the firm’s earnings per share by 2025.
On the final point, the letter notes plans by Verisk to announce the addition of new Board directors, but adds that self-refreshment is not enough to build confidence among shareholders. As a result, D. E. Shaw is calling for the addition of outside and independent candidates for the Board who have substantial insurance, information services and turnaround experience.
“We welcome the modest reforms implemented by the Board following our engagement, but the Board has not gone far enough. The Company has underperformed for a decade because of operational missteps, poor capital allocation, a misguided diversification strategy, and lack of sufficient oversight and the Board should fully embrace the value creation plan outlined in this letter to maximize value for all of Verisk’s shareholders,” concludes the letter.