Verisk Analytics Inc (VRSK) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to Verisk Analytics third quarter 2011 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Verisk's Treasurer and Head of Investor Relations, Ms. Eva Huston. Ms. Huston, please go ahead.

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

The earnings release referenced on this call, as well as the associated 10-Q, can be found in the Investor 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 December 2, 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 now turn the call over to Frank Coyne.

Thank you, Eva, and good morning. In third quarter 2011, we delivered strong performance of 18.4% revenue growth and 25% diluted adjusted EPS growth. We performed well in many of our businesses and our recent acquisitions contributed as well. Risk assessment grew to 2.7% for the quarter and 3.9% year-to-date as our continued value to customers is reflected in our revenue growth. Excluding the property-specific category, risk assessment growth in the third quarter was closer to 5%. We've faced some challenges in our property-specific revenue, which we will discuss on this call, and that weighed on risk-assessment growth in the quarter.

In the quarter, Decision Analytics revenue grew over 30% and our insurance-facing solutions in Decision Analytics grew almost 17% organically. Our healthcare solutions revenue grew over 25% organically, as we implemented our solutions for clients. Supply chain remains an area of focus and promise for us.

Overall, our organic revenue growth was 7.6% in the quarter and also year-to-date. Decision Analytics' organic growth in Q3 was about 12%, driven by both accelerated growth from insurance-facing solutions, as well as the strong growth in healthcare.

The mortgage market continues to represent a challenge for us, as well as other companies in the space, and our revenue declined in the quarter. We are keenly focused on our mortgage business and managing it through the volatile macro-environment, while not losing sight of the 90% of our business that has both near-term and long-term growth opportunities.

We continue to have conviction around our margin and overall profitability. We are pleased to deliver 25% growth in diluted adjusted EPS and 16% growth in EBITDA, while expanding margins, excluding recent acquisitions, to almost 46%.

As always, we remain focused on delivering shareholder returns to growth in our business, disciplined acquisitions and our share repurchase program. While no new acquisitions were announced in this quarter, we are seeing the benefit both financially and from a customer perspective of the 2Q acquisitions. We also continue to hunt for the right opportunities.

On share repurchases, we bought 123 million of shares, a lower amount than 2Q, as we continue to manage our buyback as part of our broader capital allocation plan, including acquisitions.

As we move through the final quarter of 2011, we are focused on positioning our business to perform both through challenging times as we have for the past few years, as well as into the future when we see our economy return to a better growth environment. While our strong performance in a weak environment is notable, we believe we will perform even better as our clients see better performance in their businesses.

Improvement at our customers and in the economic outlook will make it easier for them to spend incremental dollars on new solutions and on re-engineering processes that may have been delayed in a weaker environment. Our customers affirmed their interest in new solutions during our Customer Conference in October when we met with about 150 executives from leading P&C insurers.

Now, I'll turn it over to Scott to talk about the progress we are making in a number of our business areas.

Thank you, Frank. As we further our growth agenda, we remain focused on innovation as an important part of our business process. As you hear about new developments such as our claims tools for REO properties that is real estate owned by the lender through a foreclosure process, or our vehicle symbols as part of our Risk Analyzer Suite or Nucleus, which is our new delivery platform for Verisk Health fraud solutions, or our expanding insurance catastrophe modeling solutions, you should know there are many other ideas behind those that we are working to develop and eventually commercialize. It's important for us to be innovative, as none of our markets stand still. This also requires a commitment to investment, which we continue to do.

Speaking of growth, the pieces of our healthcare strategy are coming together nicely and the traction we are feeling in that business is positive. While you can see the quarterly results in our supplemental data, we're pleased with 25% organic revenue growth in the quarter. An important point to me is that we're seeing the synergy of bringing Bloodhound and Verisk Health -- excuse me -- and Health Risk Partners into the fold. We're going to market today as Verisk Health, which is being well received by our customers.

With tools for population management, performance measurement and compliance and payment integrity, there's a lot of opportunity to grow, and while a business with a run rate of over $100 million of revenue is reaching a meaningful scale for us, the size of our revenue today pales in comparison to the about $2.5 trillion of annual healthcare spend. I'm optimistic, and our team is optimistic, that we can do more.

We continue to be encouraged about 3E and our supply chain team as it develops. We're seeing many areas of crossover with solutions we provide in weather and catastrophe analytics, cargo solutions and others, and we believe that interesting acquisition targets, as well as organic growth, exist in this space.

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

Thank you, Scott. As Frank noted, in the third quarter, we delivered 18.4% revenue growth and 7.6% organic revenue growth. For the third quarter, our Decision Analytics segment revenue continued to lead with 32.5% growth.

The Decision Analytics organic revenue growth, which was 11.9% in the quarter, excludes the acquisitions of Crowe Paradis, 3E, Bloodhound and Health Risk Partners. This quarter, we have introduced supplemental revenue data within Decision Analytics segment to help you follow the changes as they relate to the vertical end market [themes]. In addition to the (inaudible) themes of fraud detection, loss prediction and loss quantification, we have not changed any of our historic financial results.

We hope this transparency helps your understanding of our historical performance and opportunities going forward. A few days ago, we provided historic supplemental data back to 2008 for your reference. That data was filed in that 8K and is also available on our Investor Relations website. The third quarter release contains the data in the same format for this quarter.

In our supplemental data, we provided you Decision Analytics (inaudible) insurance, mortgage and financial services, healthcare and specialized markets. We have grouped revenues by the primary end market of the various parts of our business.

In insurance, we have our insurance fraud solutions, including Claim Search, our catastrophe modeling solutions from AIR Worldwide and our insurance loss quantification solutions from Xactware. This grouping is the same as we have referenced in the past as insurance-facing solutions in Decision Analytics.

In mortgage and financial services, we include our Interthinx Underwriting and forensic audit tools [facing] the mortgage market, as well as Strategic Analytics business, which also serves our consumer finance markets. This grouping is the same as we referred to as mortgage on previous calls.

Healthcare includes all of our tools for Verisk Health, including DxCG, [ChairMed], D2Hawkeye, HCI, Bloodhound and Health Risk Partners.

And finally, specialized markets includes our Climate Risk Analytics, as well as three components of our supply chain risk management solutions.

I will reference some elements of this supplemental data as I dive into the segment performance.

Within Decision Analytics, our loss quantification solutions continued to stand out in this quarter with 29.8% revenue growth, all organic. We continue to benefit from our 2010 new contracts from the claims side. Also, all the storms that you read about, including Hurricane Irene, helped, as many of our customers submitted higher than usual claim volumes. We also continued to see growth in our underwriting tools and newer solutions, such as contents estimation within loss quantification.

In the quarter, we launched XactPRM, our property repair and maintenance tool, which is aimed at the REO market and we are seeing interest from potential customers.

The revenue growth in fraud identification and detection was 16% in the third quarter and 4% organic. We continue to see solid performance in our insurance fraud and related solutions in the quarter and Crowe Paradis contributed to total growth. Our healthcare fraud assets performed well with double-digit growth, as we implemented signed contracts for our healthcare fraud solutions. Healthcare fraud growth was also bolstered by the addition of Bloodhound in the quarter.

Also, within fraud, our mortgage business declined 4.9% in the quarter, in comparison to the peak quarter for mortgage revenue in third quarter of 2010, as the mortgage market remained bumpy. We were not able to fully offset the more than 20% decline in originations versus 2010 with new customers and increased usage of our origination tools. Forensic audit reviews also declined in the quarter, as increased volumes from certain customers was more than offset by declining volumes from one large customer.

We continue to be in constant conversation with our customer -- ways we can help. We've seen a good pickup from our undisclosed debt tool and continue to work on new solutions to meet customer needs. However, we expect the mortgage market will remain hard to predict for the remainder of 2011 and perhaps beyond.

In loss prediction, total growth was 69.9% for the third quarter, and 14.2% organic. Our catastrophe modeling solutions performed well in the quarter, as we continue to add customers and sell new solutions. The large catastrophe events in 2011 have caused insurers and reinsurers to reassess their modeling needs and we're seeing benefit.

In healthcare, we had double-digit growth in the third quarter and we are seeing a positive response from customers on our new solutions from Health Risk Partners, as well as our existing solutions. We remain focused on generating new sales in healthcare.

Our Climate Risk Analytics business growth slowed as we cycled through a large contract we won in late second quarter of 2010 and as the government -- US government, that is -- looks to stretch out implementations of the contracts due to budgetary constraints. In 2011, our total growth has benefited from the addition of 3E and Health Risk Partners in that grouping.

Turning to Risk Assessment, we grew revenue 2.7% in the quarter. Our industry-standard programs grew 4.8% in the quarter, a continued reflection of the value-based price increases from January and the moderation of premium declines at our customers, as well as new customers in 2011. Our premium leakage solutions also continued to add growth.

Our property-specific information revenues declined 4.1% in the quarter because of lower volumes at certain customers we have discussed previously. The reasons behind the decline in property-specific revenue are a mix of generally weak business environment, as well as some changes in processes at certain customers, driven by expense control. We have not lost any customers. About 85% of our revenue in Risk Assessment is based upon subscriptions and long-term contracts with 99% renewal rates, creating recurring and fairly predictable revenue, the vast majority of the segment.

Overall, we are comfortable our enterprise performed even in the face of some specific market issues for the mortgage markets. Excluding the mortgage business, organic growth in the quarter was over 9%. We also continue to manage the expense side of the business very closely.

EBIT for the third quarter was $151 million, as outlined in table three of our press release. EBITDA increased 16.2% for the quarter and our EBITDA margin was 44.4%, as our consolidated EBITDA margin increased in the third quarter, compared to 43.9% in the second quarter of 2011 and 42.9%, excluding the benefit of the acquisition (inaudible) now.

In the quarter, our Risk Assessment margins were 50.5% versus 48.7% in the third quarter of 2010 and 48.5% in the second quarter 2011. As we discussed in second quarter, we had some accelerated stock option expense related to employees who attained age 62, resulting in less expense in the third quarter.

We also reduced certain costs, including [that] and other costs which benefited the margins. The margin in Decision Analytics was 40.1% in the third quarter versus 38.6% in the second quarter of 2011, excluding the acquisition related liability adjustment benefit. The improvement in underlying margins for several of our businesses, as well as the mix shift to higher margin solutions, benefited us in the quarter, partially offset by the impact from the mortgage business.

Our interest expense was up a little more than $6 million versus third quarter of 2010 and about flat with second quarter of 2011. Also, just after the quarter ended, we closed on an amendment to our credit facility, which increased the facility by $100 million to a total of $700 million, while also reducing the pricing, extending maturity to October of 2016.

With the public bond we completed in second quarter, and our upsize revolving credit facility, we have significant debt capacity available to execute on our strategy. We ended third quarter with $160 million of our revolving credit facility drawn.

Our reported effective tax rate was 39.2% for the quarter, down a bit due to favorable audit settlements, adjustments for actual state filings in the quarter, the continued execution of our tax-planning strategies, and the benefits associated with R&D tax legislation.

Coming down to the net income line, we focused on adjusted net income, a non-GAAP measure which we define as -- in the current period as net income plus acquisition-related amortization expense, plus the income tax effect on that amortization. Our adjusted net income increased 14.7% to $76.3 million for the quarter. Adjusted EPS on a fully diluted basis was $0.45 for third quarter 2011, an increase of 25%. The adjusted diluted share count was $171.2 million in the quarter and on September 30, 2011, our diluted share count was 170.1 million shares.

We were active in the quarter with our share repurchase program, purchasing approximately 3.7 million shares. As of quarter end, we had a little less than 50 million left under our share repurchase authorization. As we've purchased approximately $340 million worth of shares year-to-date, I don't anticipate us going beyond the remaining authorization in 2011.

Turning to our balance sheet, as of September 30, our cash and cash equivalents were about $53 million. Total debt, both short term and long term, totaled just north of $1 billion at September 30, about flat with second quarter of 2011, as acquisitions closings were quiet and we funded share buybacks largely with cash on hand and cash from operations.

Our debt-to-EBITDA ratio was about 1.8 debt to trailing 12 months EBITDA at quarter end, well within our covenants and in the zone of our target leverage level of 2 times. Our debt capacity is about $700 million, and will continue to grow with our free cash flow generation and as we add EBITDA from acquired companies.

Free cash flow in the first nine months of 2011, which we define as cash from operations less capital expenditures, was $275.5 million, an increase of $57.9 million versus the first nine months of 2010. Free cash flow increased 27% year-to-date. We benefited from strong profitability and also a temporary deferral of a third quarter tax payment resulting from a federal disaster declaration due to Hurricane Ilene (sic) for certain counties in New Jersey, including where our corporate headquarters is located.

We subsequently made the tax payment in the [fourth] quarter, so you'll see the benefit reverse itself then. Without the tax deferral and the related impacts, our operating cash flow would have been up about 17% and free cash flow would have been up about 8%.

As you remember, we discussed a major upgrade to our mainframe environment and related software earlier this year, which increased our cap ex year-to-date. Our cap ex the third quarter was lower as a percent of revenue than second quarter, about 4.1%, but we'll finish the year at an elevated level versus 2010 due to those investments. We continued our strong free cash flow conversion of EBITDA, which was 64% for the first nine months of 2011. We are pleased with the results in the quarter.

And with that, I will ask the operator to open up the line for questions.

(Operator Instructions) Your first question comes from the line of Michael Meltz.

Thank you. I think I have two questions for you. Can you talk a little bit about the expectation going forward as you -- the organic growth rate in the third quarter, I guess, is on par with the year-to-date. How should -- what's the expectation going forward? You talked a little bit about with Analytics, mortgage remains tough and I guess they're saying AER might moderate, but what should we expect, please?

Hi, Michael. I think what we feel is strength throughout the business, so I think we continue to believe that organic growth continues to move kind of down the path that we've seen over the first nine months. The caveat to that is mortgages. It's always difficult to predict, so we don't have great visibility into that, which could be slightly lower than what we've seen for the first nine months.

Okay. And then just a follow-on question to that -- I think you had closed one, maybe two, of the acquisitions in the fourth quarter last year, so the -- there's some cycling. Can you just remind us what to expect on the inorganic side for the upcoming quarter versus a year ago?

So in the upcoming quarter, fourth quarter, we acquired both Three Crowe Paradis in the very latter stages of fourth quarter 2010. There was only a few days in December where we owned both those entities. So you wont see too much of a grow-over as you think about a fourth quarter. There's just a few days, maybe a couple of weeks, in 2010 that would have revenue associated with those two entities.

Okay. And then the other question for you, just on the property-specific rating business, the fire suppression data, can you talk a bit more about what's going on there? I understand what you're saying about certain customers. You're not -- you haven't lost contracts. That being said, I don't think you've had a down quarter of revenue there in years. So can you just give us a little bit more detail, please?

Yes, Michael, it's Frank here. It's really a mixed bag that we're seeing. Quite a bit is the economy, as less business is being written, as we've got vacancies in the some of the commercial properties. Some of it has to do with customers repositioning their portfolios and we'll see some return of that business as they work through that.

Some of it has to do with process changes within companies where they basically have cut back on their commercial writings for a period of time and we would expect to see that return once they've cycled through their process changes. And some are just redesigns of their own internal processes as a result of expense controls. So there's -- the positive is it's a whole mixed bag of things and not a trend that we're seeing in the use of our products.

Okay. All right. Thank you for your time.

Sure.

Your next question comes from the line of Bill Warmington.

Good morning, everyone.

Hi, Bill.

Good morning.

Good morning.

I wanted to see if you could comment on how you -- with the insurance premiums are trending on the commercial P&C side. You mentioned you saw some benefit there this quarter.

Yes. I think as we've observed in the past, our sense was that the market had bottomed out and we were seeing some positive trends. The surveys would indicate that that is what is happening. I think more importantly, the results that are being announced by the industry, all of which are our customers, would indicate that premiums are on the rise, and specifically with regard to our lines of business, we are certainly seeing that. So there are positive trends going forward.

And I wanted to know if you could comment on -- a little bit about what's behind the strong pickup in healthcare, if you think you've reached some sort of tipping point in terms of how companies are looking at healthcare spending?

Well, I would make a couple of observations there and maybe Scott would add, and that is that we're seeing growth in both our front end and back end, the broad solutions and the Underwriting Analytics solutions that we have there. So we're seeing positive signs on both parts of our business. Also, we had commented in the past that we had a written contract that we were in the process of implementing and we are seeing that implementation complete now, and beginning to be able to recognize that revenue.

Okay. And then the final question was you had mentioned some -- it sounded like pent-up demand and insurance companies coming out of your Customer Conference in October. When do you think that that starts to flow through for you in terms of revenue and what segments do you think benefit from that?

Well, what we specifically saw is that as we introduced our -- some of the ideas that we have around new solutions, we saw a receptivity to understanding the value of those solutions. So it is hard to tell when the purses will open back up, but clearly, as the industry's health returns -- though the results aren't bad for the industry -- but as premium writings begin to increase, we would expect to see a pickup in the new solutions that we're offering.

I would just add to that that one of the strong themes that seems to have caught the imagination of a lot of the insurance companies is the opportunity to better understand the weather and respond and prepare for it, and between our climate science and then our catastrophe modeling, we really have a very unique set of capabilities. To Frank's point, it's not a spike; it's more a moving that intellectual property into their processes, which I think will occur steadily, but I don't think it's a step function so much as just a gradual expansion of what it is we do at the company.

Right. Well, excellent. Thank you very much for the insight.

Thank you.

Your next question comes from the line of Kelly Flynn.

Thanks. A couple of questions -- just first on mortgage, I know you've said several times it's very unpredictable, but you said that last quarter and then it declined. So I'm wondering if you can just maybe give us a little bit of guidance on how you would advise us to model it? Do you think that business declines over the next couple of quarters or is it really so unpredictable that you have absolutely no idea at this point in the quarter?

Well, I would say a couple of things and certainly, my colleagues could add to it if they desire. And that is that, yes, it is unpredictable because you see what we see happening in the macro-environment, so you never know what might come out of Washington, for example. But as we look at our business, I mean, we do have some sense of customer uptake on some of our new products. We just do not know what an individual customer would say. So I'm not expecting a decline from this quarter, but it's really hard to predict.

Okay. And then just going back to the issue someone else asked a couple of questions ago about the commercial premiums, I know you said that there's a positive tone there, but the Q2 commercial premiums, they grew, but they grew at a slower rate I believe than they did in the first quarter. So I'm wondering what you make of that. I mean, do you think it's possible that this macro weakness may be causing a deterioration there, or do you just feel like that data tends to jump around and positive is good in general?

So let me first talk about as it relates to our business. I mean, the way our invoices are prepared, it's based upon really the full year, so we would -- in our 2012 invoices, we'll be looking at full year 2010 premiums and full year 2010 premiums relative to 2009, it is better news -- not great news, but better news. And to the extent you think about 2013, it relates to 2011 premiums full year and that's better news. So clearly, the trend is improving.

I think your question was more industry-specific and it was the fact that trends in the industry itself almost appear to kind of regress a bit, or digress a bit. The third quarter -- excuse me -- the second quarter premium growth was not as great as what we've seen in first quarter and I'm not sure we have great visibility into why that was.

To the extent you think about some cash base, there was some activity. That usually puts some pressure. You also kind of see hopefully a function of the competition heating up and sometimes, that helps us, but the market economy is [poor] and I think that's pulling down some of the ability of the insurers to increase premiums to their customers. I'm sure if I had more (inaudible).

Yes, and I think actually, some of these things tied together, as we had a severe cat season, as you know, and so when you have that, it in particular impacts the property business, so as we see some of our customers reacting to that -- and I mentioned the repositioning of their property portfolio. That is some of the answer behind our specific property as well.

Okay, great. I'll leave it at that. Thanks, guys.

Your next question comes from the line of Susie Stein.

Hi, just a follow-up on Michael's question on the [spy] database. Should we expect that weakness to continue in Q4 or do you have kind of a sense of timing as to when you expect a recovery there?

Yes, good morning, Susie. I would not expect a further decrease in Q4 in that business and it's hard to say when it will turn, but we've not -- we've got confidence in that business and the value proposition associated with it.

Okay. And also, when you went public, you talked about 5% to 7% as being kind of a normalized rate of growth and risk assessment. As we hopefully near the end of this cycle, do you expect that we can get to the high end of this over the next couple of years?

Well, as we transition out of the cycle, we would expect our organic growth and risk assessment to increase.

Okay. And then just a final question -- can you just talk about how the health of the mortgage insurance market impacts your back-end mortgage business?

Yes, well, it's -- that part of our business is transaction-based, as you know, so the volume of defaulted or foreclosing loans is basically what drives our revenue there. And a couple of the mortgage insurers have been somewhat constrained in their ability to source new business because of state regulation where the regulators are looking at capital adequacy. So if mortgage insurers are fundamentally suppressed in their ability to write new business, that will eventually express itself inside of our business.

Okay, got it. Okay. Thank you.

And just to follow up on the mortgage question, we observed that we had a peak in premium there in the third quarter -- revenue, not premium -- in the third quarter of 2010 and our second-highest quarter was the fourth quarter of 2010. So I want to make sure that I was clear in my earlier answer. Expectations going into the fourth quarter are a little difficult to assess. We know we're doing better than others. We know our front-end solutions are catching some traction, but it's hard to tell what mandates might come out of government that could impact any of our customers' performance. So it is very difficult to project what will happen there in the fourth quarter.

And just to clarify, I think -- I know Frank made a comment about where we would be at fourth quarter. I think he was referring to it in kind of a year-to-date or full year, not in the quarter itself with regard to growth year-over-year, so just to (inaudible) there.

Operator, do we have additional questions?

Your next question comes from the line of Eric Boyer.

You talked about some of the implementations within healthcare converting to revenue. Are there more large implementations on their way or is the lion's share of those implementations now included in the revenue?

We're midstream on all of that, Eric, so there is a lot of it still ahead of us, actually. Just to be clear for those who maybe are a little bit newer to our story, what we're referring to here is the work that we do to suppress fraud in the claims flows, and we basically have to go through a process of getting our engine, our analytic engine, hooked up to the customers' data stores and then go through an ETL process to get their data flowing.

So that's the implementation cycle that we're talking about here, and with some of the large national health plans having sold many of their regions, it's a staged implementation across their system. So that's the part of our business that we're talking about when we talk about these implementation cycles. And actually, I think relative to the 40-odd implementations we were looking at when we were reporting on this earlier in the year, we're not even quite halfway through that yet. So there's a lot more to come.

Okay, great. And then could you talk about -- I just -- I guess the positioning of the Company today compared to -- if we were to enter another recession, compared to how you were positioned entering the last recession?

Well, I think one of the strengths of our revenue stream is that it's well diversified and though we are impacted by this economy, I think we're stronger today in terms of our diversification than we were before. I think we've got assets that are not really impacted by the -- more assets that really aren't impacted by the recession, for example, in the healthcare area. And even our 3E acquisition is -- would be a strong contributor, in spite of the possible second-dip. So I think we're in a better place.

All right. Thanks a lot.

Certainly.

Your next question comes from the line of Robert Riggs.

Good morning. Thanks for taking my question. Scott, a couple of quarters ago, you had mentioned looking to, or in the implementation stage of looking to streamline some processes around the acquisition integration process. Could you just give us an update kind of on where you stand with that?

Yes, I think that we've made considerable progress. There are -- and that issue exists at multiple levels. One level is trying to harmonize technology platforms, so that the next acquisition is a little bit more plug-and-play into what we've already got, and that has been a theme particularly in the healthcare vertical, and we're very encouraged by the progress that we've made on that front. Some of you will remember that we've referenced the fact that there's a wonderful platform that came along with the Bloodhound acquisition and we're kind of repurposing that to serve other parts of our healthcare business.

Some of the other pieces of it would represent -- right now, we're well along in observing our opportunities to engage in data center consolidation across the entire enterprise. We have designated a function inside of the Company which is solely given over to post-acquisition, post-merger integration. And all these things are kind of clicking ahead.

Great. Thank you.

Your next question comes from the line of James Friedman.

Hi, good morning. First, let me say I appreciate the supplemental revenue data. It's very helpful with our analysis. I wanted to ask about in terms of the healthcare solutions in Decision Analytics, could you -- are there different margin characteristics of that business at this stage relative to the overall Decision Analytics product line?

Well, I think at this time, the answer is the -- we'll refer to it (inaudible) the front end is experiencing some better margins than the back end and I think that's really a function of just implementation, as Scott was highlighting before. On the back end, we need to make sure we're integrated with inside of our customers, so we can get -- claim this information and pass them back, potential fraud instances.

So that upfront implementation does take time and does cost us money and does weigh our margins until that customer is up and running. What I would call in steady state, I think you would see margins of both being a good-natured high, but probably not at the risk assessment-type levels.

Okay. And then with regard to some of the specialized markets, would you say the same, that you need that same infrastructure in place in order to commence and streamline processing?

To a degree, yes. So when I was talking about enterprise level data center consolidation, that definitely applies where the specialized markets concerns are concerned, but with respect to the applications that are at work there, they are distinctive. So to a degree, yes.

Great. And then the last question is with regard to the compensation increase, so that was primarily in the Q2 and seemed to have extended into Q3. Are we -- is that going to sunset for the Q4 or will that continue this quarter?

Let me clarify. For the most part, we issue equity on April 1 every year and the way the plan is written is that if you're age 62, and you were to leave, you would vest in those shares. So what that does is it causes us every year, every second quarter, to expense the costs associated with those equity awards for those people who have attained age 62. So there's always a spike in second quarter relative to first, third or fourth quarters. This year in particular, the amount in second quarter was a little bit more than even last year's second quarter and that's because of some of the people who are now age 62.

The last point I think you brought up, and I just want to highlight is, once we have that accelerated amount, the cost associated with equity does go down, and has gone down, in third quarter and will continue at that lower level into fourth quarter.

Got it. Thank you for the clarification.

Your final question comes from the line of Richard Cheever.

Hey, I'm on the line for Andrew Jeffrey. I just wanted to, I guess, first of all, reiterate my thanks for the additional disclosure. It is a really big help. Can you talk a little bit more about the -- I guess the positive mix shift in Decision Analytics and how much of that is being driven by, I guess, the increased contribution by healthcare and specialized markets? And talk maybe a little bit about the sustainability of that mix shift.

Sure. Let me just try to take that on. I think you have to understand in the underlying fundamentals, mortgage is down in the quarter. We have been effective in trying to cut costs there, but clearly, margins there are kind of weighing on the profit margins in DA, Decision Analytics, a little bit, but (inaudible) with this mix shift we're referring to as -- the healthcare business is improving and margins are improving, as we discussed. And we talked about catastrophe modeling as well as just the typical claims search business, the claims fraud business. As they grow, great scale and operating leverage to those businesses, so as we grow top line, a good chunk of that falls to the bottom and that's what we (inaudible) to see.

And I will -- obviously, it's -- kind of Scott mentioned the wonderful results in loss quantification, as the same scale characteristics. So as we add and continue to grow organically in a very significant way in loss quantification, we continue to invest behind the business, but there's not a lot of additional costs associated with those new customers and new volumes.

As those acquisitions and specifically in healthcare and the specialized markets, as they anniversary, is there some additional lift there as you get past some of the integration costs?

So I think from an integration perspective, I think that's true. Inside of Verisk Health, we are doing quite a bit, as Scott highlighted, to integrate those assets, and we're spending money to make that happen -- maybe less so than the other businesses because I don't think we've been able to, for the most part, pull some costs out as we've tried to integrate them into what is the Verisk family, but there was a lot of upfront cost there.

Were you asking specifically about the 2011 acquisitions, the two in the healthcare space?

Right, if there's some additional lift that --

Okay. I've got (inaudible).

Yes. So of those, HRP, the integration task is kind of simpler and has a shorter timeframe. Bloodhound, as I mentioned before, has technology that we are really excited to reuse, not just inside of payment integrity, but across the entirety of the healthcare vertical and that's a large project that will continue to grind forward, I think, for the better part -- and through the better part of 2012, but I mean, we're encouraged by the progress we're making. It's just a big thing to get it done.

I see. Okay. Appreciate the color.

Thank you.

Great, thank you.

There are no further questions at this time.

All right. Well, thank you, all, for joining us today and we appreciate your ongoing support and look forward to speaking with you again next quarter.

This does conclude today's conference call. You may now disconnect.