Verisk Analytics Inc (VRSK) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Verisk Analytics fourth-quarter 2010 conference call.

At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to our host, Ms. Eva Huston. Ma'am, you may begin.

Thank you Shannon and good morning everyone. We appreciate you joining us today for a discussion of our fourth-quarter and fiscal-year 2010 financial results.

With me on the call this morning are Frank Coyne, Chairman and Chief Executive Officer; Scott Stephenson, President and Chief Operating Officer; and Mark Anquillare, Chief Financial Officer. Following comments by Frank, Scott, and Mark highlighting some key points about our strategic priorities and financial performance, we'll open up the call for your questions.

The earnings release referenced on this call, as well as the associated 10-K, can be found in the Investors section of our website, Verisk.com. The earnings release has also been attached to an 8-K that we filed with the SEC. A replay of this call will be posted on our website and available by dial-in for 30 days until March 31, 2011.

Finally, as set forth in more detail in today's earnings release, I will remind everyone that today's call may include forward-looking statements about Verisk's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance is summarized at the end of our press release, as well as contained in our recent SEC filings.

With that, I will now turn the call over to Frank Coyne.

Thank you, Eva. Good morning.

2010 was a good year for Verisk and we accomplished many things. We delivered consistent revenue growth and margin expansion despite the weak market conditions for many of our customers, and also a strong bottom-line performance while continuing to invest in innovation. We continue to take leadership initiative to develop new solutions to serve our customers such as Predictive Analytics for P&C underwriting, healthcare fraud tools, GIS platforms, and mortgage and financial portfolio analytics.

We made three strategic acquisitions in 2010, including Crowe Paradis and 3E in the fourth quarter. Through our most recent acquisitions, we were able to expand our solutions for existing customers and grow our footprint in supply chain. We remain focused on using our capital in a disciplined manner.

Through our open-market and follow-on repurchases, we repurchased shares with a total value of over $400 million at an average price of about $28 per share. We executed a successful secondary offering and simultaneous share repurchase of about $800 million which closed on October 1, providing liquidity to our Class C shareholders while increasing float and affording new investors an opportunity to create a base position in our stock.

For the fiscal year 2010 financial performance, we delivered 10.8% revenue growth and organic revenue growth just shy of 10% for the year. In fourth quarter, our revenue growth was 10.6% and organic revenue growth was almost 9%.

A few notable items -- for fourth quarter, we grew our insurance-facing solutions in Decision Analytics by approximately 16%. It continued the strong growth of our loss quantification solutions as we added new customers and also sold new solutions. We sustained EBITDA margins of 44.7% for fiscal year 2010 even while investing internally and incurring the incremental expenses of being a public company.

In the fourth quarter, we grew diluted adjusted EPS by 21.9%, surpassing our previous quarterly growth rates in 2010. While we continue to focus on the long term and many of our businesses performed well, the organic growth rate in the fourth quarter was a little lower than we would like to see, partially as a result of the lower growth in our mortgage vertical versus previous periods. Mark will share some more about mortgage as he goes into the financial detail, but we are clearly focused on the market changes and how they may impact us going forward. However, our business has balance across the segments, which is why we delivered good performance in fourth quarter despite weaker performance in mortgage.

As I look forward in 2011, I see a number of opportunities as well as challenges. Our insurance solutions have performed well through one of the weakest periods in the history of the insurance industry, delivering 3.5% growth in our historical Risk Assessment segment and about 12% growth in our insurance-facing solutions in Decision Analytics for fiscal 2010. I feel optimistic about the trajectory for insurance as we continue to cross-sell existing solutions, as well as new services like those at Crowe Paradis, the company we acquired in December.

In healthcare, while we haven't seen the tipping point in the adoption of our risk and fraud solutions, we have seen some positive momentum. I am particularly pleased about the sales pipeline and recently signed contracts. We are also doing work on fraud in the medical portion of Property/Casualty workers compensation claims. This may be translated into additional revenue opportunities with our P&C customers.

In mortgage, the future will likely bring changes in the environment, presenting challenges for us as we think past 2011 to future growth. With the decline in delinquent loans and potential future changes to Fannie Mae and Freddie Mac, we will need to expand our business to include new categories of customers.

We still see opportunities to win new customers for our underwriting solutions and to create innovative products to address market changes. In supply chain, we are excited about the addition of 3E to our solution set. We are eagerly exploring opportunities to put the intellectual and financial capital of Verisk behind 3E to enhance risk solutions for the 21st Century management of supply chain.

Lastly, I would like to make a comment on the additional responsibility Scott Stephenson, our COO, has taken on. Scott will assume the additional role of President and all of our business units will now report to him. In his 10 years at Verisk, Scott has taken on increasing responsibility, and this move is consistent with that trajectory. Scott will continue to report to me, as well our CFO, Mark Anquillare, and our General Counsel, Ken Thompson. This streamlining of responsibilities will allow Scott to continue to drive our business units closer together with the goal of better serving our customers and enhancing the strategic value of our business. You'll be hearing more from Scott. Before I turn it over to Mark for the financial detail, I would like Scott to share a bit about our recent acquisitions and how they fit with our strategy.

Thanks, Frank. This is an exciting time for Verisk, and I see real opportunities in our strategy of focusing on helping our customers to manage their risks by using deep domain expertise in combination with analytics and a build it once, sell it many times approach to solutions. Sometimes we do that through internal building and sometimes through acquisition.

Crowe Paradis and 3E are both great strategic fit with Verisk, but each has a bit of a different twist. Crowe Paradis, which is in the business of helping insurance companies deal with the complexities of the Medicare Secondary Payer Act is a perfect add-on to the solutions we are already providing to our insurance clients. Because of the aging of the US population and the need for the government to raise more revenue to fill the budget deficit, Crowe Paradis' opportunity is to help insurance companies, and that opportunity is growing daily. Since acquiring the business in December, we have already created positive cross-sell momentum which we hope to capitalize on more in 2011. Crowe Paradis will be reported as part of our fraud detection solutions in Decision Analytics.

With 3E, this was an asset of scale and a new vertical for us, the supply chain. As you probably know, we have built and acquired some supply chain assets, including CargoNet, Enabl-U, and the national equipment register, as well as having analytical capabilities such as our catastrophe and climate modeling tools, which we believe we can deploy to help analyze supply-chain risk. 3E is a company with embedded solutions that help manufacturers, logistics companies, and end-users manage hazardous chemicals across complex regulatory environments, both nationally and internationally.

As you know, we grew our ISO business out of the compliance requirements of the insurance industry. We see several parallels to those in 3E's world. We are eagerly working to grow 3E's core business, as well as to develop applicability for other parts of our customer base. 3E will be reported as part of our loss prediction solutions in Decision Analytics. When we go to Q&A, I would be happy to answer any questions about these or other topics.

With that, I will turn it over to Mark Anquillare, our Chief Financial Officer.

Thanks, Scott. As Frank noted, in the fourth quarter, we delivered 10.6% revenue growth and 8.9% organic growth. Fiscal 2010 revenue growth was 10.8% and organic revenue growth was 9.8%.

For the fourth quarter, our Decision Analytics segment revenue continued to lead with 16.5% growth and 13.2% organic growth. I will note that organic growth in the quarter excludes the recent acquisitions of Enabl-u, Strategic Analytics, Crowe Paradis, and 3E. For the fiscal year 2010, Decision Analytics grew 18.5% and 16.4% organically.

Within Decision Analytics, our loss quantification solutions continued to stand out in this quarter with 30% revenue growth, all organic, and 26.2% for fiscal 2010. We continue to add customers gain traction with underwriting tools, and sell our newer solutions, such as contents estimation within loss quantification.

The revenue growth in fraud identification section slowed to 10.7% for the fourth quarter and 7.4% organic. This slowdown was a key reason for the lower growth in Decision Analytics in the quarter. We continue to see solid performance in our insurance fraud and related solutions in the quarter. And in 2011, we will add the full year of revenues from our Crowe Paradis acquisition versus two weeks in 2010.

We also saw improved growth from our health fraud solutions in the fourth quarter versus previous quarters in 2010. Growth rebounded a bit from the third quarter, and we are seeing positive momentum going into 2011.

On the mortgage side, while the revenues grew close to 30% in 2010, we slowed to just above 10% in the fourth quarter as we saw some headwinds in the forensic audit part of our business caused by reduced volumes from a large customer. These lower volumes were due to two at our customer getting files for review for mortgage servicers. We believe the lower volumes from this one customer will be offset with new revenue from other customers and new solutions in 2011, and we will build momentum beginning in 2Q and throughout the year. The headwinds will get stronger for the forensic audit businesses in the future with potential changes to Fannie and Freddie, as well as expected declines over time in the backlog of delinquent loans to be reviewed.

The mortgage market is being reshaped. We are working to address these changes by expanding our customer base and finding new ways to use our capabilities.

In loss [prevention], total growth was 19.1% for the fourth quarter and 13.8% organic. Our catastrophe modeling solutions performed well in the quarter and revenue from AER's climate risk analytic solutions continue to grow nicely, largely driven by our bill of contract.

In healthcare, we had continued growth in the fourth quarter and some good news in sales. In 2011, we will benefit from the addition of 3E for a full year, whereas we brought in only about two weeks of revenue at the end of 2010.

Turning to Risk Assessment, we grew revenues 4.5% in the quarter. Our industry-standard programs grew 5.5% in the quarter, reflecting value-added price increases resulting from continued enhancement and new sales as well as growth from high (inaudible) distribution and premium leakage solutions. Our property-specific information revenues grew 4.2%, on pace with third quarter.

EBITDA and adjusted EBITDA for fourth quarter were $131.4 million as outlined in Table 3A of our press release. Adjusted EBITDA increased 9% for the quarter and 13.6% year-to-date. Our adjusted EBITDA margin was 44.8% in the quarter, down from fourth-quarter 2009 margins of 45.5%, but up after removing the fourth-quarter 2009 effects of an insurance recovery and 401(k) savings associated with the accelerated ESOP allocation, both of which added about 1.4% to the 4Q 2009 margin.

For the full year 2010, our EBITDA margin was 44.7%. We expect this margin to be moderated by about 150 basis points in 2011 due to our new acquisitions as well as a continued investment in the business.

To delve into the segment, adjusted EBITDA margin was 39.1% for Decision Analytics and 51.3% for Risk Assessment for the fourth quarter. Overall margin benefited in part from operating leverage. It was also helped year-over-year by the reduced pension expense.

Within Risk Assessment, the margin appears to decline, but remember we had about 2.1% benefit from the 401(k) savings and insurance recovery in the fourth quarter 2009. Absent those benefits, margin would have grown 1.1%.

Our interest expense remained relatively consistent versus 2009, as our increased borrowing associated with stock repurchases and acquisitions were offset by the lower rate on our bank facilities, which was achieved through an amendment to our revolving credit facility in September of 2010.

Our reported effective tax rate was 37% for the quarter and 40.4% for the year. Excluding the impact of the Medicare Subsidy charging for the quarter, our full-year tax rate was 39.8%. We saw some benefit in the fourth quarter due to favorable audit settlements, tax credits, and other items.

For 2011, we would expect our cash rate to be about 41%. This is consistent with our historic rate.

Coming down to the net income line, we focus on adjusted net income, a non-GAAP measure which we define in the current period as net income plus acquisition-related amortization expense, less the income tax effect on that amortization. In 2009, we also added the sub-allocation expense and IPO-related costs, both of which do not occur in 2010.

Our adjusted net income increased 16.8% to $70 million for the quarter and 18.1% for the year to $261.1 million. Adjusted EPS on a fully-diluted basis was $0.39 for fourth quarter 2010, an increase of 21.9%. The average diluted share count was 179.4 million in the quarter and on December 31, 2010, our diluted share count was 177.9 million shares, reflecting the full impact of the shares repurchased in the quarter.

Turning to our balance sheet, as of year-end, our cash and cash equivalents were $55 million. Total debt, both short-term and long-term, totaled $840 million at December 31, up by $310 million versus third quarter, reflecting borrowings for share repurchases of $287 million as well as approximately $200 million in acquisitions in the quarter, partially offset by our cash flow from operations.

Our debt ratio was about 1.65 times debt to trailing 12 months EBITDA at year-end, well within our covenant levels of 3 times. Our debt capacity is about $700 million even after executing our acquisitions and repurchases in 2010, and will continue to grow with our free cash flow generation of approximately $300 million per year.

Repurchases in the quarter were 10.4 million shares for a total of $287 million, including approximately $210 million of Class B repurchases. At year end, we had $87.5 million remaining under our share repurchase authorizations. We continue to be disciplined about the prices at which we repurchase our shares and are pleased to have achieved an average purchase price of $28.09 in 2010.

Free cash flow in 2010, which we define as cash from operations, less capital expenditures, was $295.1 million, an increase of $12.4 million versus 2009. This increase was primarily due to improved profitability, offset partially by working capital increases and an increase in pension funding of $15 million in 2009. In -- excuse me, $[15] million in 2010. In 2010, capital expenditures were $3.6 million of revenue, and we continued our strong free cash flow conversion of EBITDA of approximately 58%.

As Frank summed up, this was a good quarter and a good year for Verisk as we executed on our strategic plan to put our capital to use in a prudent way, completing two reasonably sized acquisitions in the fourth quarter to generate returns for our shareholders.

With that, I'll ask the operator to open up the line for questions.

(Operator instructions). Jim Kissane, BofA Merrill Lynch.

Thanks guys and congratulations, Scott. Frank, can you comment on your ability to hit your long-term growth targets, say, in 2011, maybe 2012, given some of the challenges in the mortgage space?

Yes. Thanks for the question. Let me first hit it as -- make an observation on the mortgage space and then go specifically to the question. You know, we obviously have been aware that delinquencies and foreclosures have been at record high levels, and we have been managing our business to anticipate that eventually there would be a moderation in that segment of the business. Though delinquencies moderated somewhat in the fourth quarter of 2010, foreclosures haven't peaked yet or the indications. The pipe on foreclosures and delinquencies are very full. So though we had a 10% growth in the fourth quarter due to essentially the pipe being clogged on processors getting files to us, we had a 30% growth for the year in that category. We don't expect 30% in 2011, and we don't expect 10%. We expect somewhere in between. We expect to be north of 10% in that area. So, it is not like that mortgage has fallen out of bed, and we run our businesses in anticipation that winds change and circumstances change, and we have been investing to be prepared for that eventuality.

When we put out our targets at the time of the IPO in September 2009, we talked about 10% to 12% and that we run our business with the anticipation that we are going to organically grow at that pace. You asked specifically about 2011. We have got confidence in our business in 2011, and we have not revised our internal targets. As you know, we are not putting out guidance and we are not putting those out as guidance, but we have got a lot of confidence in our 2011, and we like the way that our business is shaping up into the future.

That's great. Totally appreciate it, Frank. Just to be clear, the weakness in the back end of mortgage in the fourth quarter, was that entirely due to the large customers' issues? It sounds like it could flow into the first quarter, but get resolved going into the second quarter. Did I hear that right?

Yes, I think you've nuanced that pretty well there. It was, you know, unanticipated slowdown and files getting to a customer which then didn't get to us. We would expect that could continue somewhat into the first quarter and do anticipate that momentum will start building in the second quarter.

Excellent. Thank you very much.

Michael Meltz, J.P. Morgan.

Hello. This is [Nadia Lamaway] for Michael Meltz. I just have a few questions. Do you expect any improved risk revenue growth in 2011 versus 2010 levels? Related to that, can you provide an update on the traction of risk analyzer?

I did pick up the first part.

The first part was related to revenue -- risk revenue growth.

Risk -- Risk Assessment you mean in this segment?

Yes.

Well, let me take the first one and then we can talk about risk analyzer second. As I think everyone knows, the softness in the P&C entry is something that does affect Risk Assessment. I think what we have talked about and what we've seen is that the actual premium growth in the industry is decelerating. It is still negative, but it is a negative at a decelerating rate which, as you think about rates of change, does moderately help us if you think about 2011. So I think we feel comfortable with everything we've been talking about with Risk Assessment. That is, as it relates to kind of the continuation of our existing business, our existing customer, our tension remains extremely high. We had some nice new sales at the end of 2009 and obviously new products contributes to growth there. So let me maybe turn it over for some conversation about risk analyzer.

Yes, on risk analyzer, as you probably recall, a very important part of what we're doing is trying to get the analytic file that improved with the states. So the update is that we are now -- we have now made filings in 38 states. We have received approvals in 24 states. This is for the risk analyzer personal auto environment module. In conversation in the past, you have heard us say that we think that the tipping point occurs somewhere around 75% of the states being filed. So, we are continuing to do the work and very hopeful that the approvals will continue to roll in, in 2011. We hope that we reach that kind of benchmark by the end -- that I mentioned a moment ago -- by the end of 2011.

Also, just one thing to know is the risk analyzer, the suite of analytics that is inside of that, we are actually exploring multiple ways of trying to monetize that analytic. An alternative to selling the analytic as a standalone is also to bill it into our industry-standard insurance programs. And so we are actually working at both ends of the equation. All of those results show up in the Risk Assessment segment but kind of get monetized in different ways.

Thank you. I just have a couple more questions. In mortgage fraud, what was the year-over-year growth in 2010 and do you expect to grow revenues in 2011?

Yes, I think Frank just --

Yes, as I said earlier, they were 30% year-over-year in 2010, and we expect good double-digit growth in 2011.

Okay, thank you. I'm sorry I missed that. Then on pension calls on the P&L, do you expect that to be relatively unchanged in 2011 versus 2010?

It's a little too early to tell because there's a lot of moving parts. The investment returns are reasonable. You know, it has to do with a little bit [at a] discount rate. The short answer is it should be generally around with -- generally around the 2010 bubbles.

Okay. Then you talked about a few acquisitions that you made last year. What's the estimated, incremental revenue contribution for 2011 for those? Should we expect maybe $35 million to $40 million range?

Are you talking about from each?

In aggregate.

Yes, you are referencing Crowe Paradis and 3E (multiple speakers)

Crowe Paradis and 3E, is that what you're referring to?

Yes, what's the estimated -- the incremental revenue contribution of those?

Yes, I think there is some public information out there that the numbers in 2010 were about $70 million that we're obviously hoping to grow from there.

I guess my question is so you would expect incremental to be about $30 million to $40 million from 2010 level?

The answer was that, in 2010, those units did about $70 million of revenue, and we would expect to grow that in 2011. Exactly.

We only had about two weeks of revenue from those two acquisitions in 2010.

Yes, they were insignificant in (multiple speakers).

Okay, okay. My last question, on the - regarding the 10-K suggests that CapEx were to be about $60 million in 2011 versus $39 million and 2010. What's behind the uptick?

Well, as we continue to grow our business, it is a combination of continued investment inside of hardware and software. We are able to capitalize on new product development, and all that is kind of marginal. Then there is some CapEx inside the new acquisitions as well. So I think it sinks pretty closely with historically our percent of revenue.

Okay. Thank you so much for answering my question. I will turn it back over.

Suzi Stein, Morgan Stanley.

I'm just curious. How are you thinking about M&A going forward? Are you looking for targets in specific verticals? Then I am also just curious about valuations between the different verticals.

Yes, let me start. Good morning. Let me start that. I would say first, in general, that our activity on M&A is still very active, and we are seeing opportunities in the three verticals that have been traditional to us. That is mortgage and P&C and healthcare. And supply chain, with the acquisition of 3E, supply chain actually adds another full page to our menu. There are a lot of opportunities in that segment as we think about it. With regard to valuations, I will turn it over to Scott.

They do vary a little bit. The highest, the highest, the highest multiples would -- as has been the case -- would generally be seen in the healthcare vertical. The other three, I don't think there is really sort of a pattern that would distinguish very much among them. It really comes down to an asset by asset sort of an valuation.

Okay, a separate question. In the past, you have broken down your revenue by vertical between P&C, mortgage, healthcare and other. Can you give us an update on this?

Sure. I think we can definitely do that. If you were to think about the world of healthcare, we were at about 5%. I will tell you that, as we think about healthcare, we've realigned some of the category characterization, and that is a pure healthcare number for 2010. We're at about 13% as you think about mortgage, and then the I will call it the P&C carrier space is about 57%. The other category, which is some P&C related, some government which is the biggest component, is the filler, the 25%.

Okay. Great. Thank you.

Kelly Flynn, Credit Suisse.

A this is [Norman Dally] in for Kelly. Thanks for taking my question. You touched on this earlier in the call. You said that acquisitions would weight on margins for fiscal year '11. Is this going to normalize in fiscal year '12 or do you see it kind of slowly, gradually building up as you guys kind of gain scale and take out costs?

Sure, well I mean I think all the businesses that we acquire have natural operating leverage in scale to them. So the businesses 3E and in Crowe Paradis, although the margins are nice, they certainly aren't up to current Verisk standards. So that is what you are experiencing when you get to full year of 2011, relative to almost nothing in 2010.

But on a go-forward basis, yes, I think we clearly understand and know how to run these types of businesses for ramping margins and that's what we would expect with any of the acquisitions we do.

So just to clarify, so it should normalize probably within a year or two, right?

No, I just got to be clear. I mean it is tough for us to make that type of lead, but I think, over time, we would seek those things naturally coming up, but I think some of the historic insurance-facing businesses have very strong margins that are sometimes a challenge to replicate in other verticals.

Both of these businesses are still in growth phase and will be for a while.

Okay. That's helpful. Thanks.

We expect, we expect investment opportunities in each one of them as well. So these I think are very exciting additions to our enterprises.

Okay. Is there any way you can give us kind of a value of the contracts or backlog for healthcare?

We typically don't describe that type of detail. It is something that we have been reassured with regard to both signed and pipeline. I think there is definitely momentum employed on both what we refer to as kind of the front end as well as the deployed back end.

Great. Just one more. Industry standard was pretty strong this quarter. Is there any way you can break that down kind of roughly percentage-wise, how much of that was new customers and how much of it was pricing and value-added products?

I'm not sure if I can do it for the quarter. I think what we'd normally tell you that it is probably a majority of that growth would have been over the course of the year from the industry standard pricing value-add. Then it is new sales of existing products to new customers and then extending, and then finally new products to be served in the quarter itself. I think the new sales may have contributed a little bit more than what we have seen in the first three quarters.

Just one last one. You may have touched on this already. You said that the pipeline for mortgage was clogged up because of just some backlog on the supply end. As that starts to clear, will it surge, or will it be more kind of an even flow of sales as it goes through?

I think that's -- well, first of all, it is just very hard to predict in many ways because the -- you've got all of the sort of all of the linkages between the originators, the servicers, and then the folks that provide credit enhancement on the back end. So -- but I would not, I would not think of it as a surge, to your question, specifically because they're just -- the behavior of all of the players in the chain is basically to try and smooth all of this out. And so I think that would be the wrong image to have in your mind.

That's great. Thanks a lot. Congratulations, Scott.

Bill Warmington, Raymond James.

Good morning. Scott, congratulations on the promotion.

Thank you.

A question for you on the EBITDA margin just to make sure I understood it. I know you mentioned that for Decision Analytics, you expected the margins there to be down 150 basis points for 2011. But is that going to be offset, do you think, in part or in total by improved margins in Risk Assessment?

Let me just clarify the question. When we were talking about 150 basis points, we were talking about 150 basis points on the corporate results, not just DA.

Okay. That answers the question for me then. Let's see, so then on -- if you could talk a little bit about the sales force compensation that you are using to help drive cross-selling and then any changes that you have made in structure or compensation in 2011 versus 2010?

So in reverse order, in 2011, we've done just a little bit of tweaking to the compensation programs, but they are substantially the same as they were before. The primary thing that we do to try to support cross-sell is we, inside of the compensation programs, we actually ask, we require the people that have account management responsibilities inside of the P&C vertical to actually take on identifiable quota for the sales of the products in the Decision Analytics segment as well as Risk Assessment and assessment of performance. It hinges upon success in selling the entire portfolio, and there is, inside of the commission structure, money which is associated with that. Also, when we recognize performance at the end of the year, we are asking questions about the -- when we look at our sales force, we ask questions about the actual performance across all the product categories.

In Risk Assessment, what level of year-over-year growth are you using in the dollar amount of invoices that were sent out in December 2010? If you could comment on the composition of the revenue growth in terms of the flat versus the variable?

Yes I think we've talked about the premium from a negative premium, still negative. It is not (inaudible) (technical difficulty) quite as quickly, which has some modest positive ramifications for us in 2011. I think we are doing what has been expected in Risk Assessment. I don't think there will be any surprises there. I'm not sure we are going to get into the details of flats and variables at this time.

Then the last question on the healthcare side, you have talked a bit about the success that you are seeing on the fraud detection side. I wanted to know if you could talk a little bit about the opportunity you are seeing there to help clients from the perspective of better managing the healthcare costs, not specifically related to fraud but basically in terms of more effective care delivery?

Well, I think you are actually asking two questions there. It's a good question.

With respect to all of the things that we do on payment integrity, it is not just about fighting fraud. It is also about making sure that claims are correctly coded and that entire spend on the claims is consistent with the design of the plan, the coverages, etc. So you are quite correct that it isn't just about fraud.

There's a whole set of things that we do that actually aren't even related to the claims flows that have to do with helping those who are going to be paying the bills get a real handle on who it is that's involved in the -- who it is that's involved in providing the care and the demography of the population that is being watched over. A lot of the action is about basically finding a way to spot high-cost cases before they even emerge and essentially to intervene. There was an article in January of this year in the New Yorker which actually was kind of a nice description of the process that we go through. So it's just sort of -- it will give you some images and some vignettes that I think really explain that whole part of our business, which really has nothing to do with fraud.

Yes. It was an eye opener of an article for sure. Right. Thank you very much.

Robert Riggs, William Blair and Company.

Just a couple of quick things. Last quarter, I think, Frank, you called out a couple of wins in the healthcare space. While they weren't really expected to contribute a lot in terms of revenue off the bat, you seemed pretty excited about the clients you were dealing with. Is there any kind of early indication that you can point to that maybe those deals are helping you get to the table with some prospects that maybe you haven't been able to get to before?

I think that is a reasonable assumption, because we clearly are seeing a lot more interest in our tools. But I have got to say that is both front end and the back end, as Scott just described the process. So, yes, I would think that has helped us.

Great and then maybe for Scott, as you think about expanding into the supply chain vertical, can you just touch on the competitive landscape there? Are there any kind of dominant players you need to overcome, or is it pretty fragmented?

That's a great question and the answer is one of the reasons we felt encouraged to get into this space. We have been making the strategic case for a couple of years. You have heard us talk about the supply chain. But when we look at the demography of the competitors, there really is not a dominant competitor out there. There are certainly companies that are playing, and one that comes to mind is IHS, but we really feel as if this is a marketplace which needs a little bit of organizing and quite a bit of leadership. We think that the 3E asset represents the leading platform that is out there. But there is a lot of work to be done which relates to a lot of growth opportunity.

Great. Thanks for the detail.

(Operator instructions). [Richard Cheever] with SunTrust.

I was hoping you could just elaborate a little bit on the Fannie and Freddie and help me understand. Does [that] roll up into the -- as you talked about the verticals, the 25% other, or is that part of the mortgage --?

That's in mortgage.

Is mortgage?

That's in mortgage.

Mortgage.

Of that component then, how -- is it directly dependent on the existence of Fannie and Freddie, or is it more indirect through the compliance in disclosure?

Well, you have to kind of -- you have to separate out a couple of things. What we do in mortgage, we do a lot of things in mortgage. We work with originators. We work with intermediaries like the [GSEs]. We work with companies on the back end. It used to be the case that the largest part of what we did in the mortgage business was with a class of companies that at the moment aren't even out there. That was -- those were the private secondary market players, the guys who would drive securitization. At the moment, that marketplace isn't even there, although we expect it to come back. So we deal with lots of different players in all parts of the marketplace.

When you talk about the very long term, there have always been multiple forms of credit enhancement in the mortgage market and probably still will be. There may be a shifting mix where the amount that is done by the GSEs may shift, the amount that is done by the private market may shift, but there will almost certainly always be credit enhancements. We have consistently found a way to work with all of those players.

So on a -- as the political winds are changing, if Fannie and Freddie let's say hypothetically go away or get unwound as -- does that I guess create -- how does that affect you in the longer term?

Well, I think that the question you have to ask after you sort of [deposit] that hypothesis, which is one of many scenarios that are out there, by the way I would just point out. But if you are thinking about that scenario, the question -- the first question you have to ask, or answer, is so what will be the alternative mechanism for providing credit enhancement inside the mortgage industry? The one thing that you can count on is that our committed intent would be to deal with that mechanism, or those mechanisms -- it will be more than one -- as thoroughly as we have in the past.

I think we've mentioned on a couple of occasions we are only dealing with one of those two organizations. So you know, if they came together, there's positive and negatives that could potentially be good and bad for us.

Nat Otis, KBW.

Good morning. Just a couple of quick questions. One, can you give any kind of color on competition that you had for those deals you did late in the year, the Crowe Paradis and the 3E, kind of M&A competition for those as well as maybe what you see competition might look like in 2011?

Yes. So, on those two transactions in particular, there was a fair amount of competition. In both cases, there are definitely private equity sponsors that are out in the marketplace looking for good kind of midsized assets. So they were part of the mix. There were strategics involved in both cases.

The one thing I would comment upon is that according to what we were told after the fact in both cases, one of the reasons that there was a preference to sell to us was our ability to make the strategic case for why these assets had particularly good opportunities kind of tied to what it is that we already have inside of the Company. We are going to continue to make acquisitions that relate to our strategy. So I would expect more of the same in that way. Frank mentioned before that we've got good opportunities in all four of the categories that we do our business in, P&C, mortgage, health, and the supply chain. It is going to be a different set of companies with whom would be competing to make acquisitions across all four of those. It will not look the same. So, there is not one -- there's not one. There's not two kinds of companies that we would come up against in this activity. Every deal tends to be pretty deal-specific.

I agree. That is actually very helpful. Then just secondly, talking about the amount of different mortgage stuff you do, just from a transactional standpoint, would you say that you are maybe more tied to purchase market or are you kind of agnostic purchase refi from a transactional standpoint?

I mean it doesn't really affect our business. Where ever the transactions are coming from in that regard, it's the same to us.

Yes, we are indifferent on those.

And you are on the (multiple speakers)

(multiple speakers)

You are on the underwriting side of our business. (multiple speakers) yes.

Right. Exactly. Fair enough. Thank you.

Thank you. I'm showing no further questions in the queue. I would now like to turn the conference back over to Mr. Frank Coyne.

Thank you. Thank you, everyone, for joining us today for our fourth-quarter results. We appreciate the questions and we appreciate your support and look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.

Thank you.