Femi Ogunjumo

Return on Invested Capital Presentation Femi Ogunjumo Femi Ogunjumo Private and Confidential Executive Summary and Assumptions • Return on Invested Capital (ROIC) attempts to measure the capital efficiency of a business and can provide insight into the sources of a company’s competitive advantage based on how capital is allocated to internal and external investment opportunities. • The slide that follows shows my calculation of the ROIC for Verisk Analytics for the period ended 12/31/2017 based on publicly available information. • Please see the appendix for relevant schedules used in calculating different components of the ROIC. Below are some assumptions used in the calculation: • Operating leases are important investments in any company’s operations and were therefore capitalized and added to invested capital. − Operating income was adjusted for the corresponding income statement impacts. − Pre-tax cost of debt of 4.32% was used to calculate the present value of operating leases for both 2016 and 2017. − Estimated useful life of operating leases (2017) used in the calculation was approximately 9.5 years. • Research and Development (R&D) expenses are important investments for technology companies; as such, they were capitalized and added to invested capital. − Operating income was adjusted for the corresponding income statement impacts. − Estimated useful life of capitalized R&D assets used in the calculation was 3 years. • 100% of goodwill was included in invested capital due to the acquisitive nature of Verisk. • Estimate used for 3-month Libor Curve (as of 12/29/2017) was 1.69%. • Estimate of interest rate for short-term debt used was the midpoint of the rate range for the Revolving Credit Facility (L+1.375%). • Other common methods of estimating the cost of debt of a firm such as yield spreads over treasuries based on S&P credit ratings were not used for the purposes of this analysis. • Available-for-sale securities were included in the firm’s cash balance. • Effective tax rate used in the ROIC calculation was 19.7%; marginal tax rate used to calculate R&D tax adjustment was 21.0%. Based on assumptions above and information from financial filings, the ROIC for Verisk Analytics for the period ended 12/31/2017 was 16.9% 2 Femi Ogunjumo Private and Confidential ROIC for Verisk Analytics – Calculation For Period Ended 12/31/2017 Operating Income (Reported) + Adjustment for Operating Leases + Adjustment for R&D Adjusted Operating Income - Provision for Taxes + Tax Adjustment for R&D NOPLAT $801.2 Commentary Operating income excludes investment income, interest expense and provision for income taxes. 8.0 Adjustment adds back 2017 lease amount reduced by estimated depreciation on the capitalized asset. 12.9 Adjustment adds back 2017 R&D expense reduced by estimated depreciation of the capitalized asset. 822.1 (161.9) 2.7 $662 .8 Effective tax rate of 19.7% (2017 effective tax rate). Adjustment reflects tax benefit Verisk receives from expensing R&D vs. capitalizing R&D. (1) Net Operating Profits Less Adjusted Taxes For Period Ended 12/31/2016 Commentary Short-term Debt $106.8 Short-term debt includes $6.8M of capital lease obligations. Long-term Debt 2,280.2 Long-term debt includes $7.1M of capital lease obligations and $(4.2)M of RCF issuance costs. Capitalized Operating Leases Total Debt (including Leases) - Cash and AFS Securities Total Net Debt Capitalized R&D Expenses Equity Invested Capital Return on Invested Capital 285.3 Discount rate used is pre-tax cost of debt of 4.32% (weighted average cost for outstanding debt in 2017). 2,672.3 (138.5) Includes available-for-sale securities of $3.4M. 2,- Assumes R&D expenses of $27.4M, $20.6M, $25.6M and $21.4M in 2016, 2015, 2014 and 2013 respectively. 1,332.4 $3,-% Notes: $ in millions. (1) Marginal tax rate of 21.0% used to calculate R&D tax adjustment due to tax reform deferred rate change implemented by Verisk in 2017. Otherwise, fed statutory rate of 35.0% would have been used. Sources: Verisk Analytics’ financial filings 3 Femi Ogunjumo Appendix Private and Confidential Femi Ogunjumo Private and Confidential ROIC for Verisk Analytics – Operating Leases Schedule (2017) Year Operating Lease (Reported) 2017 $39.0 Annualized Amounts for Future Periods 2018 2019 2020 2021 2022 2023 and thereafter (1) $40.6 $41.8 $42.9 $34.6 $31.5 $173.9 40.6 41.8 42.9 34.6 31.5 38.4 Estimated Lump Sum Annuity of Future Annual Leases (For 2023 and beyond period) 155.0 Discount Periods (Years) Discount factor Present Value of Operating Leases Debt Value of Leases (FYE 2017) 1.0 2.0 3.0 4.0 5.0 5.0 0.959 0.919 0.881 0.845 0.810 0.810 $38.9 $38.4 $37.8 $29.2 $25.5 $125.5 $295.3 Adjustment to Operating Income: + Current Year's Operating Lease - Estimated Depreciation Adjusted Operating Income (2017) $39.0 31.0 $8.0 Notes: $ in millions. Pre-tax cost of debt of 4.32% used as discount rate to compute present value of leases. Estimated useful life of 9.5 years used to calculate depreciation. (1) Approximately 4.5 years of operating leases are embedded in reported lease estimate; estimated lump sum of $155.0M represents the present value of a 4.5-year annuity of annual payments of $38.4M discounted at 4.32% as of the end of 2022. Sources: Verisk Analytics’ financial filings 5 Femi Ogunjumo Private and Confidential ROIC for Verisk Analytics – Operating Leases Schedule (2016) Year Operating Lease (Reported) 2016 $39.5 Annualized Amounts for Future Periods 2017 2018 2019 2020 2021 2022 and thereafter (1) $40.5 $32.0 $33.4 $35.5 $28.9 $189.5 40.5 32.0 33.4 35.5 28.9 35.0 Estimated Lump Sum Annuity of Future Annual Leases (For 2022 and beyond period) 165.8 Discount Periods (Years) Discount factor Present Value of Operating Leases Debt Value of Leases (FYE 2017) 1.0 2.0 3.0 4.0 5.0 5.0 0.959 0.919 0.881 0.845 0.810 0.810 $38.8 $29.4 $29.4 $30.0 $23.4 $134.2 $285.3 Notes: $ in millions. Pre-tax cost of debt of 4.32% used as discount rate to compute present value of leases. (1) Approximately 5.4 years of operating leases are embedded in reported lease estimate; estimated lump sum of $165.8M represents the present value of a 5.4-year annuity of annual payments of $35.0M discounted at 4.32% as of the end of 2021. Sources: Verisk Analytics’ financial filings 6 Femi Ogunjumo Private and Confidential ROIC for Verisk Analytics – Cost of Debt Schedule Outstanding as of 12/31/2017 Short-term Debt % of Total Debt Interest rate Maturity Date $715.0 23.7% 3.065% NA Senior Notes issued 5/15/2015 890.9 29.6% 4.000% 2025 Senior Notes issued 5/15/2015 345.1 11.5% 5.500% 2045 Senior Notes issued 9/12/2012 347.1 11.5% 4.125% 2022 Senior Notes issued 12/8/2011 249.3 8.3% 4.875% 2019 Senior Notes issued 4/6/2011 448.2 14.9% 5.800% 2021 Long-term Capital Leases (1) 17.0 0.6% 5.882% NA 3,012.6 100.0% Total Debt (excluding Issuance Costs) Debt Issuance Costs for Revolving Credit Facility Total (3.8) $3,008.8 Weighted Average Cost of Debt 4.32% Memo: Short-term Interest Rate Calculation: Short-term Interest Rate Estimated Libor Rate (12/29/2017) Estimated Short-term Interest Rate L + 1.375% 1.690% 3.065% Notes: $ in millions. (1) Interest on capital leases of $1M was used to estimate corresponding interest rate. Sources: Verisk Analytics’ financial filings, S&P Capital IQ 7 Femi Ogunjumo Private and Confidential ROIC for Verisk Analytics – Research & Development Schedule Year R&D Expense Unamortized % Unamortized Amount Amortization for Current Year Capitalization of R&D (FYE- $37.4 100.0% $37.4 2016 27.4 66.7% 18.3 $9.1 2015 20.6 33.3% 6.9 6.9 2014 25.6 0.0% 0.0 8.5 Value of R&D Assets (2017) $62.5 Amortization for 2017 $24.5 Capitalization of R&D (FYE- $27.4 100.0% $27.4 2015 20.6 66.7% 13.7 $6.9 2014 25.6 33.3% 8.5 8.5 2013 21.4 0.0% 0.0 7.1 Value of R&D Assets (2016) $49.7 Adjustment to Operating Income (2017) R&D Expense - Amortization of R&D Asset Tax Adjustment (2017) $37.4 24.5 $12.9 Notes: $ in millions. Estimated useful life of capitalized R&D assets is 3 years. Sources: Verisk Analytics’ financial filings Adjustment to Operating Income $12.9 Marginal Tax Rate 21.0% Tax Effect of R&D Expensing $2.7 8