Verisk Analytics Inc (VRSK) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to Verisk Analytics second-quarter 2011 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to Eva Huston. You may begin.

Thank you, Latoya and good morning to everyone. We appreciate you joining us today for the discussion of our second-quarter 2011 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 some comments by Frank, Scott and Mark highlighting key points about our strategic priorities and financial performance, we will open the call up for your questions.

The earnings release referenced on the 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 have furnished to the SEC. A replay of this call will be posted on our website and available by dial-in for 30 days until September 3, 2011.

Finally, as set forth in more detail on 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 are summarized at the end of our press release, as well as contained in our recent SEC filings. And with that, I will turn the call over to Frank Coyne.

Thank you, Eva and good morning. In second quarter 2011, we delivered strong performance at 16.2% revenue growth and 24.2% adjusted diluted EPS growth. We performed well in many of our businesses and our recent acquisitions contributed as well. We are pleased to see risk assessment growth at 4.6% for the quarter and 4.5% year-to-date as our continued value to customers is reflected in our revenue growth.

Our insurance-facing solutions and Decision Analytics grew over 20% and 14% organically. Our healthcare solutions continue to show growth and we are working hard to implement our sold solutions for clients, which will allow recognition of contracted revenue.

Supply chain remains an area of focus and promise for us. Overall, our organic growth was 8.8%, a meaningful improvement versus first quarter 2011. We improved Decision Analytics organic growth in Q2 to almost 13%, driven by both improved growth from insurance-facing solutions, as well as a return to positive growth for our mortgage solutions.

The mortgage market continues to represent a challenge for us, as well as other companies. Mortgage insurers continue to confront difficulties achieving sufficient capital requirements resulting in a major insurer recently announcing its potential inability to write new business without receiving an extension of a capital waiver.

It is unclear at the moment how that may affect the broader mortgage market. We are clearly focused on our mortgage business and managing it through the volatile macro environment. But even with the uncertainties in the mortgage marketplace, we believe the strength and diversity of our solutions across multiple verticals will lead to strong overall performance.

I said on our first-quarter call that we expected to see improvement in total organic growth for full-year 2011 compared to first-quarter results and we delivered improvement in the second quarter. Additionally, we continue to have strong conviction around our margin and overall profitability.

Excluding the recent acquisitions, our EBITDA margins in Q2 were almost 46%. Speaking of our acquisitions, we are excited to integrate both Bloodhound Technologies and Healthcare Partners into our Verisk health solutions. We are making client calls with all these tools in hand and receiving good response.

In the quarter, we were also able to continue to drive what I believe is most important to delivering shareholder returns -- EBITDA and free cash flow. We grew our total EBITDA by almost 16% and converted a large portion to free cash flow. In the quarter, we grew our diluted adjusted EPS by about 24%. As always, we remain focused on delivering shareholder returns through growth in our businesses, disciplined acquisitions and our share repurchase program.

In the quarter, we invested $141 million in new healthcare assets and purchased over $140 million worth of shares while also adding a new $150 million authorization. This level of repurchase was higher than in previous quarters as we saw opportunity to buy shares at an attractive price bringing ourselves closer to our target capital structure.

We believe our repurchase program has been successful and like the flexibility it provides to ensure we can deploy our capital when prices are appropriate. For the rest of 2011, we will remain focused on executing on the plan I laid out at our last call. Namely growing insurance revenues through new solutions and cross-selling, further penetration in the healthcare space, managing our mortgage business in the face of a challenging macro environment and creating shareholder value.

Scott has been spending a lot of time with our new partners, Bloodhound and Health Risk Partners, who we call HRP, so I will ask them to share some perspectives on our newest addition, HRP, as well as our acquisition program and other corporate initiatives.

Thank you, Frank. As you all are aware, we have been busy on the M&A front. We are very excited to add Bloodhound Technologies and HRP to our suite of healthcare analytics solutions. I spoke about Bloodhound on our last call and we continue to see the value in its real-time claims editing solution, as well as the benchmarking tools and the in-process ROI available to their customers.

In June, we added another healthcare asset, Health Risk Partners, who provide solutions that optimize revenue, ensure compliance and improve quality of care for Medicare Advantage and Medicaid plans. Recent data state that the United States will spend about $4.6 trillion on healthcare by 2020 and about 50% of that will be paid by the United States government.

By expanding our footprint to include more payment integrity solutions and tools that help health plans operate profitably, we are positioning to help with these daunting numbers, which are obviously a challenge for our nation. We have aspirations to continue to grow HRP at a nice pace from the base of around $15 million to $20 million of 2010 revenue. Although the margins are lower than the Verisk enterprise, we expect to drive higher margins in the future due to the operating leverage, which is inherent in that business.

Talking more broadly about our acquisition program, we are pleased to see good opportunities across multiple verticals and at a variety of sizes. We are open to transactions in all the verticals, as well as the supply chain domain. We just spent a few days with all of our business leaders and innovation was a very strong topic of conversation and remains right at the top of mind for all of us. We continue to focus on making sure that our investment dollars are being spent effectively and that we are aiming at transformational innovation for our customers, as well as important incremental innovation to keep our products at the leading edge.

Let me turn it over now to Mark to talk about our financial results.

Thank you, Scott. As Frank noted, in the second quarter, we delivered 16.2% revenue growth and 8.8% organic growth. For the second quarter, our Decision Analytics segment revenue continued to lead with 26.7% growth.

The Decision Analytics organic revenue growth, which was 12.5% in the quarter, excludes the acquisition of Crowe Paradis, 3E, Bloodhound and HRP. Within Decision Analytics, our loss quantification solutions continued to stand out in this quarter with 34.7% revenue growth, all organic. We continue to benefit from our 2010 new contracts on the claims side.

Also all the storms you read about helped our (inaudible) revenue as many customers submitted higher-than-usual claim volumes. We continue to see growth in underwriting tools and newer solutions such as contents estimation within loss quantification.

The revenue growth in fraud identification and detection was 17.5% for the second quarter and 7% organic. We continue to see solid performance in our insurance fraud and related solutions in the quarter and Crowe Paradis contributed. Our healthcare fraud assets continue to perform and their growth was bolstered by the addition of Bloodhound in the quarter. We remain focused on implementing signed contracts in our healthcare fraud tools.

The mortgage business delivered about 8% growth in second quarter, a distinct improvement from first quarter. Forensic audit revenues grew in the quarter based upon increased volumes from certain customers as we told you we expected last quarter. We continue to be in constant conversation with our forensic customers and prospects about their needs for the rest of 2011.

Underwriting solutions revenue declined in the quarter as mortgage originations in the market declined about 20% versus the second quarter of 2010. Year-to-date, our total growth in mortgage was approximately 2%. Meaning it will be a challenge for us to reach the 10% plus growth rate for 2011 we discussed last quarter.

Uncertainty continues in the mortgage market with the latest news of certain mortgage insurers potentially being unable to write new business because they do not meet minimum capital requirements. However, as Frank stated upfront, we are comfortable that other parts of our business will perform in 2011, leaving us optimistic about our overall business growth and profitability. We also continue to manage the expense side of our business closely.

In loss prediction, total growth was 39.3% for the second quarter, 7.7% organic. Our catastrophe modeling solutions continued to perform solidly in the quarter and revenue from climate risk analytics solutions continued to grow nicely.

In healthcare, we had continued growth in the second quarter and we are seeing a positive response from customers for our new solutions from HRP. We remain focused on generating new sales in healthcare. In 2011, we will benefit from the addition of 3E and HRP in the grouping.

As we discuss Decision Analytics, we have attempted to be responsive to investor questions that seem focused on the vertical markets we serve. We currently show our Decision Analytics revenue in three themes -- fraud identification, loss prediction and loss quantification. In the future, we are considering ways to provide even greater visibility into our vertical-related groupings of insurance, mortgage and financial services, healthcare and specialized markets. We believe this will help our investors better understand the markets and how our customers profit from our information.

Turning to Risk Assessment, we grew revenue 4.6% in the quarter, a continuation of the growth rate we saw in first quarter. About 84% of our revenue in Risk Assessment is based upon subscriptions and long-term contracts where our renewal rates are 99% recurring and fairly predictable revenue.

Our industry-standard programs grew 5.7% in the quarter, a continued reflection of the value-based price increases from January and the moderation of premium clients at our customers, as well as customers expanding their use of industry-standard programs and ancillary solutions. Our premium leakage solutions also continued to add to the growth.

Our property specific information revenues grew 2.2%, reflecting new products, offsetting the lower volumes with certain customers we discussed in the first quarter. EBITDA for the second quarter was $143.6 million as outlined in table 3 of our press release. EBIT increased 15.7% for the quarter and our EBITDA margin was at 43.9%. Our EBITDA includes a $3.4 million benefit from the reduction of an earnout liability for two of our acquisitions -- Strategic Analytics and D2Hawkeye. The way we structure our earnouts is that they are paid for performance significantly above and beyond our internal forecast for those businesses at the time of the acquisitions.

While the acquisitions both performed well, we do not believe they will exceed our 2011 earnout targets to qualify for incremental payouts to sellers. While the earnouts caused some unusual accounting beginning with acquisitions closed in 2009, we continue to believe the benefits outweigh the negatives. The structure provides a bridge between our internal expectations for a business versus those of the seller while helping align the goals of our new management team with the Verisk corporate objectives.

Our consolidated EBITDA margin was lower in the second quarter as we told you it would be during our first-quarter call. This was in large part due to our annual salary increases and higher stock option expenses resulting primarily from accelerated vesting at age 62. Salary increases are an annual event, but if I were to adjust for the increase in the option expense, the recent acquisitions and the reduced earnout liability, the margin would have exceeded 45%.

While the salary increases are obviously ongoing, we will recruit some of the stock option expense later in the year as the accelerating vesting means that we don't have to expense those later.

In the quarter, our Risk Assessment margins were at 48.5% versus 49.3% in second quarter of 2010 and 52.8% in the first quarter. As we discussed in first quarter, we had incremental costs related to our annual salary increases beginning in second quarter, as well as some accelerated stock option expense related to employees who attained age 62. Absent those items, the margin would have been over 52%.

The margin in Decision Analytics has improved to 40.4% in the second quarter. The benefit of the earnout liability adjustment, which was all reflected in Decision Analytics was offset by increased salaries and option expense. Additionally, the margin was adversely impacted by 2.8% by the new acquisitions in the quarter. Our healthcare, loss quantification and weather analytics businesses led to improvement in the underlying margin in the quarter.

Our interest expense was up a little more than $6 million versus 2010 as we increased our borrowings to fund acquisitions and share repurchases. Also in the quarter, we closed on a new 10-year $450 million bond offering, which was at a fixed rate of 5.8%. We used the proceeds from the bond to pay down the full $295 million outstanding on our revolving bank debt, which remains available for borrowing. And the remaining cash of approximately $150 million was used to fund the Bloodhound acquisition and repay a maturing private placement. We were pleased to have tapped the market for long-term capital at historically low rates. We ended second quarter with $90 million of our $600 million revolving credit drawn.

Our reported effective tax rate was 39.9% for the quarter. For 2011, we continue to expect our tax rate will be between 40% and 41%. 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.

Our adjusted net income increased 13.4% to $70.9 million for the quarter. Adjusted EPS on a fully diluted basis was $0.41 for second quarter 2011, an increase of 24.2%. The average diluted sharecount was $174.6 million in the quarter and on June 30, 2011, our diluted sharecount was 172.8 million shares. We were active in the quarter with our repurchase program purchasing approximately 4.3 million shares.

Turning to our balance sheet, as of June 30, our cash and cash equivalents were about $52 million. Total debt, both short term and long term, totaled just north of $1 billion at June 30, up about $200 million from first quarter reflecting our acquisitions totaling approximately $141 million, as well as our share repurchases of $144 million partially offset by cash flow from operations.

Our debt-to-EBITDA ratio was about 1.89 times debt to trailing 12 months EBITDA at year-end, well within our covenant levels of 3 times and approaching or target debt leverage of about 2 times. Our debt capacity is about $500 million, even after executing our acquisitions and our 2Q share repurchases. Our capacity will continue to grow with our free cash flow generation and as we add EBITDA at the acquired companies. At quarter-end, we had $170.4 million remaining under a share repurchase authorization, including the additional $150 million authorized by the Board in July.

Free cash flow in the first half of 2011, which we define as cash from operations less capital expenditures was $152.7 million, a decrease of $3.5 million versus the first six months of 2010. Operating cash flow increased 8.1% year-to-date despite an incremental pension funding of about $3 million in the first half of 2011.

As you remember, we discussed a major upgrade to our mainframe environment related software, which increased CapEx in the first half. Our CapEx in the second quarter was lower as a percent of revenue than first quarter, about 4.8%, but still a little higher than historic levels as we are making investments reflecting increases in client volumes and next-generation software solutions. We continued our strong free cash flow conversion of EBITDA, which was 54% in the first half of 2011. With that, I will ask the operator to open up the line for questions.

(Operator Instructions). Jim Kissane, Bank of America.

Thanks and good job, guys. Was the improvement in mortgage primarily a function of resolving the bottleneck or do you see some of the stepped-up volume from the GSEs and benefits of new contracts? And maybe just following on that, what is a reasonable target for growth in mortgage this year? It sounds like you are stepping off the 10%, which is very reasonable given what is going on. But what is a reasonable target?

Scott will take the first half of that and I will take the second.

It was really two -- well, you kind of answered your own question, Jim. The GSEs have been stepping up their demand for our services and the bottleneck issue associated with the mortgage insurers also subsided and that was the affect that we were citing as kind of fourth quarter last year, first quarter this year. So those are really the two things that principally explain where we came out in the second quarter.

Yes and we are obviously pleased with the second-quarter 8% growth in the mortgage business. That is a nice turnaround from the first quarter, but it is a 2% year-to-date, so it required extraordinary performance in the second half to get to 10% for the year.

The only thing I can say about mortgage at this time with certainty is that the uncertainty has increased as opposed to decreased since last we spoke. But the value of our products is being demonstrated to our current customers and to new customers. So we like our business, but it would be I think a disservice to all of our stakeholders to try to predict what our growth is going to be for the rest of the year.

What kind of exposure do you have to these insurers that have some capital issues? Is it material?

Well, Jim, I think in the short run, in the short term, the impact of the mortgage insurers' inability to write new business, if it comes about, could be a positive to us as opposed to a negative and over time, I think the policymakers believe that mortgage insurance is important to a healthy real estate market and we know -- housing market -- and we know that is important to our economy. So it is hard to predict where that is going to turn out, but we don't expect an immediate impact.

And Frank, in the press release, you sounded a positive tone around P&C premiums. Can you take a stab at where you think growth in P&C premiums can trend over the cycle?

Well, I think, Jim, it is a continuation of what I observed last time. I think I said, at a minimum, we had bottomed out and I think what we are seeing now is that, by line, those that are in negative territory are less negative and there is more positives. So I think we're going to continue to see the trend that we are seeing in P&C, which is positive for us.

If you don't mind, if I can get one last one, just on D2Hawkeye and Strategic Analytics, it sounds like you have pretty aggressive earnout targets, but would you say that those two companies are achieving your target for 15% plus organic growth as I think about Decision Analytics?

Well, what we are seeing in those companies is that they are achieving our expectations. Our earnouts are designed to pay for extraordinary performance and within a certain timeframe. And those companies did not achieve the extraordinary performance, but we think they are on track to satisfy the predictions that we put into our model.

Thank you very much.

Robert Riggs, William Blair.

Good morning. Thanks for taking my question. You mentioned you are going through the implementation process on some of your recent wins in healthcare. I am assuming in the early stages that is a bit of a drag on profitability. About how long does it take to get to breakeven and then to a more full run rate for those healthcare wins?

Yes, the implementation phase, it varies a little bit by customer but the right range to think about there is sort of 60 to 90 days and that is once kind of all the parameters of the implementation have been described and so we are in the middle of a great deal of implementation activity right now and I think that you should expect therefore that, and your observation is right, that all the effort precedes the revenue. So you should expect that we are going to be in that mode for substantially all of 2011. There are 50 plus implementations that we are working on right now just in the payment integrity space and so that will predominate for the rest of the year, 60 to 90 days.

And just to give a little more color I mean this is a large part of the fraud side of things where we go as fast as customers want to go. In some cases, they operate by state or regions and they have rollout plans that span years because of -- they tend to kind of roll up in a disciplined way. So don't think of it as the roll-out takes that long. It's just that's how it's planned and phased by our customers, in many cases.

Okay, great. And then could you just comment on how the new business pipeline for healthcare looks maybe versus six months ago and any notable examples where having Bloodhound and HRP are bringing new deals to the table?

Absolutely. So the pipeline has definitely improved. Basically, we are just standing up even taller as a provider of a lot of the solutions that a healthcare payer would require now that we have got payment integrity, we have got quality measurement, we have got medical intelligence, we have got enterprise analytics. So when you actually look at the landscape of healthcare debt analytic vendors, we actually have a broader portfolio than many of the others. So that positioning is really helping us for are getting additional attention.

With respect to the integration, we have live examples of customers who have observed that the range of things that we can do in payment integrity all the way from pre-adjudication to the back end of the process has actually caused them to ask us to effectively integrate our solution set on their behalf and it has led to some pretty substantial expansion of some of our largest relationships inside of healthcare. So the early returns are very good on what we have done.

Great, thank you. Nice results.

Eric Boyer, Wells Fargo.

Thanks. I think, Frank, from your comments, it seems like you are still expecting margins to be up year-over-year excluding the impact of acquisitions, is that correct?

Yes.

Okay. And then is it your expectation for organic revenue growth to continue to accelerate into the back half of the year? You had a nice pickup this quarter over the first quarter that you talked -- and you called that out last quarter.

I will take that real quick. I think we talked about the organic growth accelerating from first quarter. Obviously, mortgage does factor into that, but generally we do see some acceleration in the latter part of the year adjusted for some days and things like that from a transactional perspective that do affect us.

Okay. Then within your healthcare portfolio of products, could you just give us a sense of the type of organic growth or the pace? Is it expanding, has it pretty much been stable or slowing at all?

Again, we certainly think that the profile of organic growth for our business is improving. There is a leadtime issue with respect to some of the implementations and the pipeline is getting stronger very quickly. So kind of when all of that converges to actually goose the organic revenue growth rate is a little bit hard to predict, but it definitely is moving in the right direction.

Okay, I think you just said 2011 expect implementations in 2012 I guess maybe some more revenue.

We will get the benefit from the '11 implementations that we are driving.

Okay, great. And then, Mark, is there anything in the back half of the year we should be aware of as far as modeling?

I don't think there is anything material. We think of days from an expense perspective as an example. Second quarter had an extra day from first quarter and I believe that if we were to look at the back half, we would see another day or two in the second half relative to the first. I think you are also aware of the option expense, that accelerated vesting that we did experience in the second quarter kind of dissipates a bit in the third and fourth quarter. Everything else is just kind of investment in adding bodies to kind of support growth as we progress through the year.

All right. Thanks a lot.

Michael Meltz, JPMorgan.

Thank you. A couple questions for you. Just the last guy, sorry for guy, the last analyst asked about organic revenue acceleration and Mark, just to clarify, you are expecting acceleration versus the 9 you did in Q2 or the 8 you did in the first half or what is the reference point and the answer might be both, but I just want to be clear on that.

Sure. I think what we are seeing is 6.6 in the first quarter. The 8.8 in the second, which is about 7.7 overall. We have limited visibility on mortgage from the standpoint of pinpointing. I think that number for the rest of the year, I think it feels about right. I am not sure we have greater visibility into that with regard to organic growth.

So you think that 8 is a run rate is what you're saying?

Yes, I just said I am not going to get into specifics. I think you asked -- I think the question was whether we liked the ramp, whether we saw the -- we expect organic growth to continue. We like where we are year-to-date. I mean that is the direct comment.

Okay. So you don't -- we shouldn't be expecting an acceleration from the 9 in Q2?

Not off of 2Q. I was talking about from a year-to-date perspective.

Okay, okay. And then the question about mortgage, just to be clear, I know you don't have the visibility you'd like, but you do expect it to grow for the year?

Well, we don't have the visibility we would like and I will tell you we spend a lot of time with our customers obviously, but an extraordinary amount of time with the customers trying to map out where they are going and what we have learned is they cannot predict where they are going. So it is very difficult for us to say what is going to happen there in the mortgage business and it gets to the question that you were just asking Mark. I mean the organic growth is impacted by our mortgage business, but it is 10% of our business and we have got a lot of confidence around the other 90%.

Okay. And so to your answer to Jim's question when you said the mortgage insurer that has asked for the capital wave likely won't hurt you? That is just implying that they are not a large customer of yours, is that what you are saying?

No, it really is implying that the services that we provide for them, whether they are writing new business or not, are still valuable services that will continue and may even increase.

Okay.

What we do for them, Michael, is more related to their existing book than the book that they are building at any given moment. So we are working with them on issues that are currently there inside of mortgage insurance that they originated at some point in the past.

Thanks for that clarification.

And then so your point on mortgage is that new originations are weak, they have been weak all year and that is the uncertainty rather than a new wrinkle on the mortgage insurer side?

Yes, I think that that certainly is our point currently, but the entire environment around mortgage and even the pressure on the originators and the banks on how they deal with their delinquencies has an impact on timing, etc. as to how quickly they may get turned over to us for auditing work. So there is a lot of moving parts there, but yes even though originations are down say 20%, our business for originators is not down 20%. I mean we are gaining new customers. We are writing -- we are developing new products. Our value proposition is strong. So though we are going to go through a period of time of some bumpiness, we think it is a very good business.

Okay. And then my final question, I think with recent acquisitions, your pro forma, your say roughly $100 million of healthcare revenues, can you just, given -- just talk a little bit about the mix. How do you -- I know -- I am not asking about fraud versus loss prevention, but if you think about it -- I don't know how you want to describe it -- payment integrity versus benchmarking versus fraud or -- what buckets -- how should we think about the buckets as to what your portfolio is right now?

I think we think of the front end, which is the loss prediction side of healthcare, being the combination of what has historically been our operations that operate out of Waltham. It is a Massachusetts-based business that we have had for some time. And HRP is more closely aligned with that side of the business.

Separate and apart from that, we have talked about HCI, which is our HealthCare Insight business, which is on the fraud side of things, that is being reported in fraud and fraud detection and Bloodhound, are two on the payment integrity. That claims editing business is probably more aligned with that back end and that is how we have separated inside of our themes inside of Decision Analytics.

And so front end versus back end, what would be the rough revenue split?

Yes, I think we have given you the HRP is in that, on an annual basis, is between 15 to 20. We have also said that HRP is in that -- excuse me -- Bloodhound is in that $10 million range in the back end. It is about equally rated today is the best way to describe it. Probably a little bit more on the front end I think, probably maybe 60/40.

Okay, thank you for your time.

Kelly Flynn, Credit Suisse.

Thanks. A couple questions. So I think you guys mentioned weather benefits during the quarter. Can you just give a little more detail on I guess quantifying that, if possible and also just describing what went on? And how does that relate to how you think about the organic growth rate over the next couple quarters because the capacity (inaudible) or some flattening out or slow down next quarter?

Well, let me describe where it comes in. Inside of loss quantification, specifically the Xactware business, there is a piece of the business where people exceed, for the most part, minimums on volumes or claims coming through our tools. We do charge per transaction. So there was some severe storms that hit in the quarter and did drive revenue inside of the loss quantification.

Typically storm activity takes place in that third and fourth quarter so this was, I wouldn't say unusual, but a little heavier than usual and that did help us in the quarter. It's a little difficult to estimate and predict storm activity into the future. I think third quarter, fourth quarter of 2010 were about average. I don't think there was anything out of the ordinary and it is tough to predict what will happen in 2011 going forward, but hopefully that helps you understand a little bit about the nature of those revenues.

But we are not assuming any significant climatic instability in our organic growth numbers.

Can you quantify the impact on the organic growth for the quarter?

Yes, I mean it is difficult to tell relative to last year. I do know that it was probably a couple million dollars of revenue.

Oh, okay. All right, that's helpful. And then switching gears to go back to the mortgage business, I know that you have gotten a lot of questions about organic growth expectations, but I just want to clarify -- are you seeing anything particularly related to the capital extension issue you mentioned that makes you fairly confident that the mortgage growth rate will decelerate over the next couple quarters or are you just saying so far so good, but we are just calling out the uncertainty?

It is more the latter that we are calling out. We are observing the same macro environment that you are and we are observing our own knowledge based on dealing with our customers that their plans change pretty -- depending on circumstances and so the predictability is very difficult.

Okay, fair enough. Thanks, guys.

Bill Warmington, Raymond James.

Good morning and thank you for taking my question. I wanted to ask about what you are seeing in the way of M&A opportunities and whether you plan on you think pursuing them aggressively given that you are at about 1.9 times gross debt to EBITDA, you have at about a 2 times target, although, of course, you could go up to 3 times. But what is your appetite for that now?

Very high. Mark was referencing our dry powder before, Bill and that is a fact about our business. There are assets out there that fit our aspirations in terms of where we want to take our business. Thinking particularly about the healthcare and supply chain domains. Those are likely to be the two places where the greatest amount of acquisition activity occurs and we are seeing good assets that fit where we are trying to get to. Between the dry powder and the ability to be flexible in the moment, we are very focused on the M&A agenda going forward.

Okay. And then there were some references in the opening remarks to benefits in the insurance side from cross-selling. I just want to know if I could ask you to expand on that a little bit.

Well, I mean the cross-selling is a committed agenda on our part and basically we are doing a variety of things to support the cross-sell. We take a holistic view of a customer. Our sales teams are incented to try to get our whole suite sold into the accounts. We have executive ownership of our largest accounts and basically if you take a look at that strong organic growth in the insurance part of Decision Analytics, most of that is the affect of cross-selling into the existing Risk Assessment customer base. So it is a high focus and to achieve that double-digit organic growth in Decision Analytics, that is essentially the cross-selling.

Okay. And then I wanted to ask also about Risk Analyzer and how that stands in the regulatory process and whether it is too early to start talking about revenue generation for that 2012.

It's probably a little early to talk about that, but just to note a couple of things, we are up to 28 approvals on Risk Analyzer for personal auto. Again, I think that sort of a threshold for us will be when we are up to around 40, 45 when most of the premium across the country is embraced in the analytic. We have also started to get approvals on our Risk Analyzer for homeowners where we have got -- we are now approved in two states and we actually now stand, really for the first time, having made sales of the three lines that we have modeled. We have now got sales into real customers for personal auto, for homeowners and for commercial auto. So that is a bit of a milestone in the bill.

But we are still -- our value proposition is tied strongly to the notion that our analytic is industrial strength and has been approved by the regulators and obviously, we are still in process on that. But there is a lot of interest in the marketplace and as we get more regulatory approvals, we just think the result will follow. But we can't predict how quickly the state departments of insurance will respond. That is the X factor here.

Excellent. Thank you for the insight.

You are welcome.

Suzanne Stein, Morgan Stanley.

Hi, you touched on the government impact. Can you just maybe quantify what percent of your revenues is exposed to the government and has there been notable change in this part of your business?

Yes, less than 3% of our revenue is government contract and no, there has not been any notable change. In the current contracts that we have with government, we believe, based on information, that they are fully funded so we don't really expect any short-term issues.

Okay, and then in healthcare analytics, one of -- I guess a large competitor announced its intention to exit because it doesn't think it can scale the business. Why do you think you can and have you seen any change in asset prices for healthcare acquisitions?

In reverse order, the prices for healthcare acquisitions have always been high relative to sort of what we see across all the vertical markets that we are in. I wouldn't say that there has been any change there; they have always been premium priced assets. And I think that -- I would point to two things about our position. One is we do have distinctive intellectual property operating inside of our business whether it is on the payment integrity side with the only solution that allows you to get after the claims on a pre-adjudicated basis to our grouping methodology, which stands inside of our medical intelligence analytics. The competitor that you are referencing I just don't think could make either of those claims.

And then secondly, healthcare is a place where it is actually good to be a newer competitor. The value of incumbency is high in a lot of the things we do, but it is much less so in the healthcare space because customers are not only open to, they are actually seeking new solutions. So to be kind of an old form competitor with a big embedded base and a lot of investment in sort of yesterday's methods is actually kind of a tough place to be and that is not our situation.

Great, okay, thanks for taking my questions.

Nat Otis, KBW.

Hey, good morning, thanks for taking my questions. I guess not to belabor the mortgage side of the business, but just a couple from that side. There has been some talk about consolidation in the mortgage insurance sector. Is that something -- since you guys look at the book of business, is that something that could actually provide upside for you as well if there was consolidation and some of the market players were looking at other companies from what is in their current book of business.

The most likely impact would be positive.

Okay, fair enough. I guess a simple question on the mortgage side, can you give maybe a little bit of color on what percentage of mortgage goes directly to the mortgage insurers?

I think we have always talked about front end and back end. So the front-end audit, that represents a good chunk of our business. It's probably about 67% these days.

But it is not all mortgage insurance.

It is not all mortgage insurance.

Right, right. And then I think there was mention of -- I know you were talking about from an M&A standpoint healthcare and supply chain being priorities. But I thought I heard you say that all vertical markets would be considered. Is that inclusive of mortgage?

It is, which means that the sonar is banging away in all of the markets that we serve. I would just tell you that I just don't think that there are a lot of distinctive assets that would provide the kind of reliable growth that we are looking for and actually our portfolio of solutions is relatively more complete and the things that aren't there, we would really be looking more to build than to buy. But, yes, we bang away. The sonar bangs away in all cases.

I would also tell you that part of the thought process around mortgage is that I mean fundamentally we are dealing with financial services organizations and one of the things that is in the thought process is other lines of business that our customers are engaged in and whether and how we can do business with them there. So if you are defining it as mortgage narrowly, I think we actually cover the waterfront reasonably well, but when we expand out to a financial services definition, then the M&A opportunities actually open up a bit.

Okay, great. And then just lastly I think -- I don't know if you did earlier, but maybe Frank's thoughts on the P&C pricing going forward in the back half of the year and into 2012.

Yes, I think it was probably Jim Kissane who had asked me early on. As I had observed in the past that I thought the market was bottoming out and beginning to turn in certain lines and we are now seeing that trend and the trend is coming through in various surveys and reports from various companies. And we expect to continue to see that. And it could be accelerated by various factors.

One is a continuation of climatic instability in the second half of the year, which is normally when we see it if we have an active hurricane season and if inflation ever brings its head up, then that will clearly have an impact.

Okay, very helpful. Thank you.

James Friedman, Susquehanna.

Hi, I had a couple of model-related questions. For the SG&A, it was up about 200 basis points. How much of that increase is due to the acquisition impact versus the increased compensation?

So let's talk about the piece parts. First of all, I will highlight that we talked about the stock option expenses, specifically accelerated vesting. So that -- a chunk of that does affect the SG&A side of things. From a salary increase perspective, to answer your question directly, that is more across the board. It is kind of inflationary in every place. Think of that 3.5% to 4% range and inside SG&A too, you will have some costs associated with the acquisitions.

If you think about they are in the acquisitions, but the (inaudible) costs, transaction fees that no longer are capitalized inside of the purchase accounting. So we need to expense that immediately and we saw some of that in second quarter in the SG&A side of things.

Last item, I did mention earlier there was an extra expense day in the second quarter relative to first quarter. So if you are doing a comparison not to last year, but comparison to first quarter, that is another element to it.

That's helpful. Thank you. And then also related to the model, as we go forward, what should we think about the impact of the recent acquisitions relative to the margins in the second half and into next year?

Well, I think we just tried to give a little -- let me give you some more visibility on HRP, which is probably the newer one. Scott mentioned $15 million to $20 million of revenue. You are going to see in the world of HRP, they do have the lower margins, think 20%s. Over time, we would expect that to ramp, but that will have some decrement on the margins within DA for the remainder of the year. We think it is pretty nominal, but it is something you would want to consider.

Got it. Thank you very much.

(Operator Instructions).

Is that it? All right, well, I want to thank everyone for joining us in the call this morning and for your continued interest and for the quality of your questions and look forward to visiting with you again next quarter.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.