Verisk Analytics Inc (VRSK) 2012 Q2 法說會逐字稿

Good day, everyone and welcome to the Verisk Analytics second quarter 2012 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions I would now like to turn the call over to Verisk's Treasurer and Head of Investor Relations, Ms. Eva Huston. Ms. Huston, please go ahead.

Thank you, Amber. And good morning to everyone. We apologize for the slight technical delay we had in starting here.

We appreciate you joining us today for the discussion of our second quarter 2012 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 up the call for your questions.

The earnings release referenced on this call as well as the associated 10-Q can you 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 1, 2012. Finally, at 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 and information about the factors that could affect future performance is summarized at the ends of our press release, as well as contained in our recent SEC filings.

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

Thank you, Eva, and good morning.

In the second quarter 2012 we delivered very good performance of 14% total revenue growth and almost 15% diluted adjusted EPS growth. We continued to see strong performance from our healthcare business and good performance from our insurance businesses and our emerging businesses in specialized markets.

In the second quarter, our risk assessment revenue grew 4.9% after adjusting for the impact of a transfer of some revenue to decision analytics beginning in 2012. This growth is a continuation of what you saw in the first quarter, and evidence of our sticky customer relationship based on the recognizable value we bring. In decision analytics, we grew revenue almost 23%, and our insurance solutions and decision analytics grew about 9% -- a very solid rate given the lower storm activity versus last year.

Our healthcare solutions continued on the organic growth trajectory we have seen in the past few quarters, growing revenue nearly 37% organically in the quarter. Our total healthcare revenue growth was over 160%, bolstered by the contributions MediConnect has made to our second quarter performance.

In mortgage, we continue to see challenges in the market in our revenue decline due to the declining volumes of forensic review. But I would note that we continue to grow our underwriting solutions at a faster pace than the 2Q estimates for the origination market. Overall, our consolidated organic revenue growth was 6.4%, as we saw both a lighter quarter for storm activity and mortgage continued to weigh on growth. Excluding our historical mortgage business, organic revenue growth was 8.4%. Profitability remains strong with an EBITDA margin of 43.9%in the quarter.

We remain disciplined about our use of capital and are focused on delivering shareholder returns. We bought $68 million of shares in the quarter, as we manage our buyback as part of our broader capital allocation plan. We continue to be active in looking at M&A, but also continue to maintain our discipline, focusing on assets with a true strategic fit, strong financial model and appropriate value in relation to future growth.

The first half of 2012 has been solid and met expectations overall. I remain confident that behind the numbers, we are doing the right things to position our business for future growth driven by delivering quality solutions to our customers. Now I'll turn it over to Scott to give you details about our progress in healthcare and other parts of the business.

Thank you, Frank. I'm going to briefly update you on developments in several of our businesses with an emphasis on innovations aimed at our customers' emerging needs and ways in which we're becoming more integral to their operation.

First, in the healthcare vertical, three items. The unified platform initiative is proceeding in the first phase of integrating our payment integrity has been largely completed. We are one month into hosting a large customer on the platform and they and our team are pleased with the results to date. The efficacy of our real-time edits are increasing materially inside the new platform. In the next phase, we will weave our enterprise analytics solutions into the platform, as we also transition more customers to the platform. We are pleased to be meeting important milestones on time as we steam towards 2013 completion of the project.

Next, we are finding great synergy between our revenue integrity business and the MediConnect business. We have been pitching business jointly, and have been energized bit level of wins coming from the combined skill set.

And third, we are finding great synergy between our healthcare analytics and P&C world. Working with a group of P&C carriers, we have now processed $15 billion worth of work comp claims in order to suppress fraudulent and wasteful ones. We are only getting started and the early results hold great promise.

In connection with all the positive momentum, we are excited to do have recently named Joel Portice as the new president of Verisk Health. Joel had been running our payment accuracy division, which is one of our most highly performing, and where his leadership had led us to considerably higher growth and margin as well as the integration to the unified platform I mentioned earlier. We extend best wishes as Michael Coyne, our prior president, moves on to an emergent health informatics company.

In a different vertical, I want to highlight some work we've been doing with our weather analytics tools as they relate to insurers. In late 2011, we announced a solution called AER Respond, which takes our weather data and overlays it on an insurer's policy portfolio when a large weather event occurs in order to give them a better estimate of both how to deploy their resources as well as what type and volume of claims to expect. We have recently been successful in selling this solution to several top-tier insurers, and have begun to integrate these tools into our Xactimate claims estimating tools. And we're excited about this, and the general future of repurposing our weather analytics into commercial uses for insurers as well as into other domains such as supply chain. The general themes of innovation and repurposing of our intellectual property are very alive across all parts of Verisk, and will continue to be major part of our growth story going forward.

And with that, let me turn it over to Mark to cover our financial results.

Thanks, Scott. We've heard so many exciting things going on in our business and I'll share some of the numbers and the results of those efforts.

In the second quarter we delivered 14% total revenue growth and 6.4% organic revenue growth. Excluding our historic mortgage business, organic growth in the quarter was 8.4%. For the second quarter our decision analytics segment revenue continued to lead with 22.6% revenue growth, of which 7.6% was organic. Excluding the 2011 acquisitions, of Bloodhound and HRP, which is Health Risk Partners, and the 2012 acquisition of MediConnect as well as transfer of revenue for the mortgage appraisal tools. As a reminder, in 2012, we have transferred revenue relate to do the mortgage appraisal tools from risk assessment's property-specific revenue category into the decision analytics mortgage and financial services revenue category to reflect management reporting changes. We will continue providing you with visibility into the apples for apples comparisons throughout 2012.

Within decision analytics, our insurance category grew 8.8% in the second quarter, all organic. We continued strong double-digit growth in our catastrophe modeling solutions, as we continue to gain customers and also perform well on the catastrophe-related products focused on the capital markets. We have been model of record for all catastrophe bonds issued in 2012. We also experienced strong subscription revenue from loss quantification solutions, but more moderate growth due to the decreased transactional revenue resulting from decreased storm activity in second quarter of 2012 versus the same period in 2011. Claim solutions delivered respectable growth. I'll note that our acquisition of Aspect Loss Prevention in July of 2012 is under the leadership of our claims and crime analytics group and will be reported in the insurance revenue category within decision analytics.

The revenue in mortgage and financial services declined 1%, as reported in the second quarter and declined 9.9% after adjusting for the transfer of the mortgage appraisal tool from risk assessment into this revenue category. Underwriting tools grew nicely in the quarter, and continued to outpace growth in the origination market. Revenue from forensic solutions declined in the quarter, as expected, offsetting that growth. Our outlook for 2012 for mortgage remains negative, as the mortgage market continues to make difficult predict near term trends for the majority of our solutions. But we remain confident in the long term value and the relationships with the financial institutions to buy our tools.

Healthcare continues strong growth -- 160.7% for the second quarter and 36.7% organically. In healthcare, organic growth year to date has been 34.8%. Our total growth continues to benefit from the addition of Bloodhound and Health Risk Partners as well as the addition of MediConnect in the second quarter. Just as a reminder for those of you looking at sequential revenue dollars -- Q1 and Q2 are seasonally lower revenue and margin quarters for revenue integrity business, and MediConnect follows a similar seasonal pattern. Additionally, starting in the third quarter of 2012, both the acquisitions of Bloodhound and Health Risk Partners will become part of our calculation of organic growth.

Our specialized markets grew 8.7% in the second quarter, with growth from both our supply chain solutions as well as weather analytics. Both of these areas are delivering solid growth today and we're optimistic about the opportunities to broaden their reach. Scott gave you an example of traction we are getting with insurers on our weather analytics, and we're actively taking our 3E assets in addition to our extreme event modeling assets and developing broader strategies around them to serve supply chain.

Coming to risk assessment, we reported revenue growth of 2.6% in the quarter and 4.9% after adjusting for the impact of the transfer we discussed earlier. Our industry standard program rose 6.1% for the quarter reflecting our 2012 invoices, and strong growth in our premium leakage solutions. If you're looking at sequential revenue growth, please note remember $1 million of license revenue was called out in the first quarter that was nonrecurring. Our property-specific revenue reported a decline of 7.3%, but excluding the transfer grew 1.8%, as new sales and higher volumes from certain customers offset declines from others and the appraisal solutions group recorded growth also.

EBITDA for the second quarter was $163.8 million as outlined in table three of our press release. EBIT increased 14% for the quarter and our EBITDA margin was 43.9%, remaining consistent with our margins for second quarter of 2011, although actually up if you take into account the ($3 million) benefit of the earnout liability reduction in 2011 and the greater impact on margin of a full quarter acquisition that was seasonally lower in the second quarter of 2012. Ex acquisition, the second quarter of 2012 margin would have been 44.9%. As reported, we are down slightly from the 45.9% in the first quarter of 2012 due primarily to our annual salary increases from April 1, and the incremental costs related to the April 2012 equity awards and associated accelerated vesting on payment by eligible retirement age by some employees.

In the quarter, our risk assessment margins were 52.8% versus 48.6% in the second quarter 2011. We benefited by about 2% on the margin due to lower pension costs related to the freeze of the plan in February. Also, in April we funded $72 million into the pension, bringing it closer to fully funded. Our business continues to show scale to profitability, but we also to continue to invest in developing new solutions.

The margin in decision analytics was 38.3% in the second quarter 2012 versus 40.4% in second quarter 2011, and 39.3% first quarter 2012. In second quarter 2011 we have had the benefit to the margin for reduction in the earnout liability of $3.4 million. Excluding the benefit of that reduction the margin in that period was 38.6%. In the second quarter 2012, ex acquisitions, EBITDA margin will exceed see 39%.

Our interest expense was up $2.5 million versus second quarter 2011, based on higher debt balances related to our acquisitions. We ended the second quarter with total debt of $1.3 billion, including the $150 million draw under our $725 million revolver. Our pro forma debt to EBITDA ratio as of June 30 was 1.9 times.

Our reported effective tax rate was 39.5% for the quarter, which we expect to continue for the rest of 2012.

Coming down to the net income line, we focused 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 13.7% to $80.6 million for the quarter, and adjusted EPS on a fully diluted basis was $0.47, an increase of 14.6%. The average diluted share count was 171.9 million shares in the quarter and on June 30, 2012 our diluted share count was 171.3 million shares.

In the quarter, we purchased approximately 1.4 million shares for about $68 million. At quarter end, we had about $200 million left under our authorization. Our approach to share purchases remain focused on limiting dilution and only going beyond that when we believe the share repurchase will deliver appropriate internal rates of return and not crowd out acquisitions. Our share repurchase program has been success to date, with generalized annual IRRs of over 25%.

Turning to the balance sheet -- as of June 30, our cash and cash equivalents were about $97 million. Total debt both short term and long term totaled $1.3 billion at June 30, reflecting debt borrowed to fund the MediConnect acquisition, which closed on March 30, and after our pension funding of $72 million in April. Post-MediConnect and pension funding, our debt capacity is about $650 million and will continue to grow with our EBITDA and free cash flow. As we stated before we are willing to temporarily go beyond our long term target of two times debt to EBITDA to take advantage of unique opportunities particularly on the acquisition side. With that debt capacity available, we continue to look for the right opportunities.

Free cash in the first half of 2012, which we defined as cash from operations less capital expenditures, was $149.4 million, a decrease of about $3.3, million or 2.2%, versus the first half of 2011. This decline was principally due to the funding of our pension, which we had mentioned earlier. Excluding the impact of our pension funding, net of tax benefit, and timing interest other items, our free cash flow was about 18% to the positive. Our capital expenditures were 5.3% of revenue for the six months ended June 30, 2012. Free cash flow represented 46.2% of EBITDA in the first six months of 2012, reflecting a reduced conversion rate due to the $72 million pension funding partially offset by the tax benefit associated with that. Overall, our business is performing well and we have a nice mix of growth from multiple verticals, and we continue to invest for the future.

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

(Operator Instructions). Your first question comes from Kelly Flynn with Credit Suisse.

Great. Thanks for taking my questions first. My questions relate to MediConnect and also Bloodhound and HRP. Can you give us a more specific sense of what revenue MediConnect contributed to the business in the second quarter? And then also it would be helpful if you could tell us what the year over year growth rates were for both MediConnect as well as the Bloodhound and HRP businesses in the second quarter, so we could sort of figure out hopefully what impact HRP and Bloodhound might have when they roll into organic. Thanks.

Well, I think what we've seen is nice solid growth from the standpoint of all of our healthcare acquisitions. We grew in double digits across the board in the first half of 2012, and MediConnect showed strength. As we described at the time of the call on MediConnect. There is a second half seasonal aspect to MediConnect similar to our Health Risk Partners business in that anywhere from 60% for HRP and maybe as much as 70%from MediConnect is more weighted towards the second half. Hopefully that gives you a little bit more visibility into where we are.

I guess -- the thing is I mean the healthcare business is growing over 30% organically. So I mean when you say double-digit, that could be anywhere from 10% to 30% for these acquisitions. So, I mean, could you give any more help on that? You know, are we talking -- do you think basically when HRP and Bloodhound roll into the organic base, is it likely to have a significant positive impact on the organic growth, or should we think about their growth rates as being closer to the corporate organic rate at this point?

Sure. Let me try to give a little bit more back. I think there's two things you need to consider and just remember that if I was to look back from the standpoint of healthcare, third quarter we did about $30 million last year and then we had a big step into fourth quarter we did about $38 million. So there's a tougher comp there but we feel very good about the continuation of strong organic growth and I think as those come into the corporate growth rate, they are growing faster than the corporate organic growth rate and that should provide some lift.

Okay. Thank you.

Your next question comes from Rayna Kumar with Evercore Partners.

Good morning. I'm calling in for David Togut. Can you please talk about the specific factors that drove the deterioration of mortgage results in the second quarter, and if you expect these factors to persist during the next 18 months?

Yes. This is Scott I'll take that. I mean as Mark said before, when you think about the different parts of our business, the tools that we sell for purposes of supporting originations were up strongly. And so the difference in results is a function of the forensic analysis we do of the loans that have gone bad. And we -- what we're seeing is a variety of movement inside the customer base where there's some customers that have ramped up their volumes but there have been others that have actually ramped down their volumes substantially, particularly in the mortgage insurance world. And that's just a function of market conditions in that world. So that's a trend that we think will continue to work its way out in 2012.

And just a follow-up to the previous question -- do you think high 30% organic revenue growth in the healthcare vertical is sustainable? And, if so, why?

I think I tried to answer that before. I mean I think we feel very good about healthcare. The comps become more challenging as we get towards the end of the year, but we still feel very good about strong double-digit growth. And to the extent we get a little more refined there, I think we've been winning customers but I don't know if we have a very specific view on dollar and percent growth.

Okay. Thank you.

Your next question is from Eric Boyer with Wells Fargo.

Hi. Thank you. How much of an impact does the lower storm activity have with growth rate within decision analytics in the quarter?

It's a little bit difficult to parse because what happens inside of our contracts is this -- if we have a customer who has exceeded their minimums and we start to basically charge on a transactional basis, in very large part, they will come to us and we'll renegotiate a higher minimum. So it's tough to do a direct comparison. But let me just at least give you this. It was definitely a drag to the tune of about 20 bps in the second quarter on overall growth. I think that's the one way we kind of think about it. So I hope that gives you some clarity. And what we're seeing, which is obviously maybe fleeting, but we have seen storm activity in July start to return to normal, which I think bodes well. I mean like any insurance cycle and insurance trend I mean things are up and down and I think we saw very high activity in 2011. We've seen unusually low activity in the first half of 2012, and you would think things would start to return to normal

So how should we think about that insurance piece of the decision analytics business going forward? Is that like a high single digit revenue grower with upside to that due to whatever happening with the storm activity?

I just need to clarify are you talking about insurance as whole or are you talking about the insurance aspect of decision analytics?

Within decision analytics.

I think we continue to feel very strong growth there. It's possible. I mean I would tell you that from the standpoint of insurance inside of DA, we do look at and I will just quickly digress -- when we think about insurance, I mean we are servicing a broad set of customers it's a combination of those customers from a risk assessment perspective, and we're trying to cross-sell it to decision analytics. So across the board I think we do feel that that combined is a higher single digit growth but we do have a view that decision analytics is where most of that growth's going to be. And we continue to feel strong about the opportunities there both in the second half of the year as well as into the future.

All right. Thanks a lot.

Your next question is from Bill Warmington with Raymond James.

Good morning, everyone.

Good morning.

Okay. Thank you. I wanted to ask on the mortgage business when you thought the crossover point was going to come when the originations business begins to outgrow the forensic piece, and also if you could remind us again what the mix is between the two businesses.

Well, we remain cautious about the mortgage for the full year. I think we had said that if we exclude that, that revenue transfer we talked about, we're down about 7%. I think we mentioned early on in the year that that has been and continues to be our forecast for the full year. The -- there is a customer that we described that for the most part starts to normalize in fourth quarter. But just given the uncertainty inside that market and also the movement and originations which have been strong in the second quarter and we'll have to see what the future is, we need to become a little bit cautious about giving too much optimism inside of mortgage for the remainder of the year.

Okay. How about the mix? I seem to recall it was 2/3 forensic, 1/3 origination but that may be dated now.

It's now about 55% on the back end. So it's a little bit greater than 50% from the year to date perspective and that's obviously down from what it was. The forensic has been dropping and the front end has been increasing.

Okay. Then I wanted to ask also if you could give some additional color on how you're integrating MediConnect into revenue integrity and also for the HEDIS with enterprise analytics.

Yes. So the HEDIS part of our business actually formally reports into the MediConnect structure so and we actually did that almost contemporaneous with acquisition because the overlaps are just so obvious and so great. And that's really working very well.

Good.

And then the connection of that set of capabilities, so chart retrieval and abstraction plus HEDIS, there is a very tight working relationship really at the level of the account, because when we're selling into the individual account, you actually need to present the chart retrieval and abstraction solution at the same time as you present the HCC analytics and the five star analytics if that's what -- all of that is part of the bundle that many customers are buying. So we actually need to line all of that up on a customer by customer basis when we're actually going to market. And so we're well along on that also.

And really conceptually, all of that, everything you just asked about, Bill, is in our minds one integrated business and we just continue more and more to move in the direction of operating exactly in that way.

Okay. And the last question, I just want to do ask about how exactly -- doing on a standalone basis with the XactContents module and any thoughts on the European expansion.

XactContents continues to grow well and it is -- its growth rate is outpacing the growth rate of the market. It's one of the more highly growing parts of the Xactware portfolio. We feel as if the market is coming in the direction of our solution. There's -- just for a little color, there's a lot of working on contents, which is very labor intense and that's not our method. We're doing it the Verisk way, build it once and sell it many, many times. And the market seems to be coming to that.

And in Europe we continue to make very steady progress. We have actually, with one customer, leaped across the English Channel into mainland Europe and we're very happy about that. And we just continue to expect more and more growth throughout Europe. And we're actually looking at other geographies as well. It's a tool which is extensible and what paces that primarily actually is the availability of and enough local data in order to have relatively good cost factors inside the models.

Thank you very much for the insight.

You bet.

Your next question is with Andrew Steinerman with JPMorgan.

Hello there. I want to ask about the P&C insurance industry. Obviously, premiums were rising in 2011 to help the year 2013 risk assessment growth. I wanted to go further to say when the P&C insurance industry is doing better, shouldn't this lift your decision analytics piece through cross-selling other products, and if so what would be the timing of any DA lift that you get from the insurance industry?

I mean yes, you're generally on the right path but I guess what I want to just emphasize is the degree of one to one coupling of those two factors. There's a lot that goes on inside of our customers' consideration of our solutions. And the primary point is that every one of our DA solutions is going to get highly, highly scrutinized before it's purchased. I mean our customers are very sober minded, risk bearing entities. And they usually we go through proofs of concept. So at the end of the day, their decision to buy decision analytics solution is really based upon the value of that solution.

It is true that if their results overall are stronger at the margin, I would say their willingness to think about purchasing a new solution set, probably goes up somewhat. But I really want to caution against you thinking it's a one for one correspondence because it just doesn't work that way. The sales cycles are long and the considerations are very technical when they look at buying our product. But, yes, on balance, it is actually helpful.

I was asking about given the sales cycles that you just talked about which are probably shorter when the P&C industry is doing better, when and how long do you think it will take to see benefit in your DA insurance segment for just the factor that the P&C insurance industry has been doing better for over a year now?

Well, again, I don't actually think the decision -- your premise is one that we actually don't share so I don't think that is coupling is as tight as maybe you're suggesting in your question. But I would say that there are long smooth cycles inside of the insurance industry. And I think the industry itself sort of observes changing behavior relatively slowly. So you should think in terms of, sort of a cycle playing out. It's over a couple of years, basically. And I -- again, the decision analytics decision making cycle is not really going to respond all that strongly or all that quickly to what's going on inside of the industry overall. We're still very optimistic about getting our solutions sold.

How long is a typical sales cycle to cross-sell a new DA solution to an insurance company?

18 months would probably be a good midpoint.

Okay. That is helpful. Thank you so much.

Your next question is from Suzi Stein with Morgan Stanley.

Hi. Thank you. Have you disclosed the cost of the new healthcare platform? And can you just talk about how significant this could be from the cost side? In terms of future margins.

Sure. Suzi, I think what we described is that we were talking about two -- we called it two major initiatives that were taking place specifically around 2012 and it was a combination of the unified platform, which is the healthcare platform, in combination with our next generation platform which is the catastrophe modeling platform. What we said was that the two combined for 2012 were targeting towards about $10 million.

Now, I think your question, as heard it, was really more focused on the impact on margin. So when we talked about the $10 million, a majority of that is programming time, so as a result that's capitalized and becomes a part of CapEx. As a part of the overall initiative, clearly there's a lot of costs associated with modelers and scientists to help with the catastrophe modeling science. But a good chunk of our investment in 2012 is going to be CapEx. And I would tell you that as we think about 2013, it maybe becomes a little bit more period cost but not that dramatic. I don't think it's going to affect margins too negatively in a material way.

Okay. I guess that was very helpful. The question is also should that drive margin improvement longer term? I mean is that for -- is that for cost efficiency over the long run?

I'm going to go back and forth with Scott. The answer is I think the opportunity there is to create a more robust platform. And on the healthcare side, it could become more efficient. But the reality is we're doing this to drive top line growth. I mean it is the ability to bring solutions together to make it easier for customers to buy and make the user experience more pleasing and that has been kind of a lot of the focus of these two initiatives.

Okay, great and a quick one on share buybacks. You've done a great job of returning capital to shareholders. Do you think this will continue at a similar pace going forward?

Well, as I think we've always said, I mean we have a view that we're really trying to create shareholder returns. Our first and primary focus to invest in the business. So to the extent that we have opportunities on the acquisition front, that would be our primary, first use of capital. And then we continue to do buybacks to limit dilution.

Extending beyond dilution and returning additional capital beyond that is really a balancing act. We try to take a look a little bit at the pipeline -- we want to make sure we have enough capacity to continue to execute in that growth strategy. I think what we've seen in a couple quarters a little bit of a dialing back because of the acquisition activity that we've had.

Okay. Great. Thank you.

Your next question is from Manav Patnaik with Barclays.

Hey good morning everybody. Just a quick question on the international aspect. Could you tell what you say the mix now is for international and I think Scott mentioned you were seeing some pretty growth -- I understand coming off a small base but are we talking about high double digits or what sort of growth are we seeing there?

You have got to bear in mind the base is very small. We have really only two businesses at the moment that have material international footprints. So inside of our revenue overall, nondomestic might be about 5% or something like that. So the rates of growth are good but you're coming off of a very small base.

Okay. Thanks.

This is the long march for Verisk.

Yes, okay, fair enough. And then just from a strategic standpoint I guess in the mortgage division, is the -- obviously you have strong set of underwriting tools, and you have I guess a customer issue on the forensic side. But is the strategy there to sort of just stick with the tools and ride out the storm, per se, or is that part of the opportunity around acquiring volume and market share and maybe bulking up that unit a bit?

That is not where our thinking goes at this time. So acquiring and bulking up. We do remain very interested in other forms of solution inside of the commercial banking industry. That is definitely in mind. But when you look at the mortgage vertical itself, we have a very complete set of solutions. And we're continuing to try to make them better and we do believe that in normalized market conditions, we would have a very nice business.

So I guess to follow that, could you give us an idea I guess of the other solutions you just refer to do in the commercial banking industry, and would that be sort of innovation coming from internally or would you need to acquire something?

Well, we're not really talking about our plan specifically in that area. And as always, we remain open to developing things internally and building our platform through acquisition.

Thank you. Fair enough and last question just for Mark in terms of the Aspect Loss acquisition, and I know it's really small, should we see or should we be modeling any sort of contribution benefit from that deal?

I just want to describe to you that it is really very much a tuck-in acquisition to a business that is small but growing inside of Verisk as a whole. It is just not going to hit the dial or make any dramatic impact on revenue that you need to consider.

Fair enough. Thank you guys.

Your next question is from James Friedman with SIG.

Hi. Thank you for taking my questions.

I wasn't sure if it was Mark or Scott who was speaking, but with regard to the healthcare client that you mentioned that's coming on board in the second half, how does the revenue recognition work on that?

Do you want to take that, Mark?

Yes. Just appreciate what we're talking about is we're moving one large customer, who is a pretty broad-based customer, we're moving from our existing solution to our new unified platform, that is kinds of a test customer. So from a revenue recognition perspective, we're providing the same set of solutions, same set of services. We are continuing to rollout maybe some additional analytics because of the new platform, but the reality the revenue recognition does not change. It's the same customer and we're providing maybe a more complete set but the same set of our solutions.

I was trying to figure out had there been any expenses that weren't offset by revenue at this stage in the customer's adoption?

I think there has been cost to the overall unified platform but as I said, most of that has been capitalized. So I don't think you're going to see a blip in any margin calculation. I think I tried to highlight that to Suzi, so --

and then in addition, Mark, you had mentioned there was 20 bps, which is really helpful, of impact in the decision -- in the insurance decision. I just want to make sure I got the denominator right. Is that 20 bps on the insurance decision analytics, or was that on the decision analytics, or was that on the company overall?

Sure. So it is on the company overall and, you know, it's about 20 to 30 bps, yes.

Got you. yes. That's a helpful number. And then lastly, it seemed like the repurchase, though substantial, was slightly less than the -- let me get my language, the KSOP. So you actually had a slight increase in the share count. Is there anything to read into that or is that just a function of when the shares come on?

Let me just remind everybody about the KSOP.

The KSOP, a majority of the expense, was accelerated at the time of the IPO. So we probably went into too much depth for some investors, but that's in large part behind us. I'll come back to it in a minute but all you are seeing right now is, as it relates to the KSOP, is the 401(k) match component. So really the only thing you should be seeing is maybe MediConnect coming in there because it's a 401(k) match for those employees. But the reality is it should be pretty consistent and consistent with kind of how we match our employees' contribution to that program.

The other thing I will just highlight is the way that ESOP is handled is we need to take all those shares and pass them along to participants by the end of 2013. So dependent upon what the value of the shares are and how many shares are left, there could be as we always talked about, some, you know, 2013 event that would be a noncash one-time type of item to end the ESOP plan.

If you're looking broadly at our share count and I'm just trying to interpret some of your question, there were and continue to be option exercises associated with our long term incentive plans. And maybe the option exercises, the number of shares coming out exceeded the buybacks we did in the quarter, so there was maybe some dilution. We try to handle that over the long term not quarter by quarter.

Got it. Thank you very much.

Your next question is from Jennifer Huang with UBS.

Hi. Thanks for taking the question. So you guys had talked about the sales implementation cycle being around I guess 18 months on the insurance side. Can you talk about that on the healthcare side? And in terms of the revenue growth that we're seeing in healthcare, it seems like a lot of those revenues are from products that were sold -- products and services that were sold several quarters ago. So can you just talk about the pipeline in terms of sales and implementations currently and how that compares to maybe a year ago.

Yes. Well, the pipeline is -- the pipeline is stronger than it was a year ago, if for no other reason than we have more solutions. And so when we actually grid it out where we look at each customer and we look at which parts of our suite they buy and they don't buy, and relative to last year there's actually more white space on that grid because the solution sets are expanded even though there are -- we have filled in some of the customers on that same grid. So definitely, the tense of opportunity in the market is greater.

The sales cycles vary in healthcare depending which part of the solution mix we're talking about. So when we talk about revenue integrity, those solutions tend to be on somewhat faster sales cycles. They're also, I would say, among the things that we do, they have some of the most easily quantified value propositions. There's such a great urgency about getting the revenue integrity calculations right because reimbursement from Medicare, for example, literally hinges upon it, and it all occurs within the calendar year. So there is actually a genuine push on the part of the customers to get into those solutions. And I would embrace the MediConnect solution inside of that.

At the other end of the spectrum would probably be the medical intelligence analytics that we sell which are very useful for getting things like actuarial calculations correct and reserving rights, etc., but those tend to be slightly less urgently felt needs. So I would say that the sales cycles are longest there and probably in the 18 month plus range. And then somewhere in the middle would be our payment accuracy solution, where the value proposition is strong and quantifiable but the amount of integration that's required is a little bit greater and so it just tends to pace things a little bit more.

Okay. That's very helpful. And then I know there's still a lot of uncertainties out there around the healthcare reform but as it stands today how do you think that impacts the healthcare business?

It really doesn't have a lot of impact. I mean, you really have to go back to the basic fact that most of our business is with payers. And the net effect of the healthcare reform would be to have more people inside of the formal insurance system, which on balance, would just expand the size of that. So it's sort of a moderate -- it's benign to moderately positive, basically.

I'd also say I think that the that there's also inside of the overall reform the government is putting a little bit more emphasis on using data analytics and emphasizing things like matching cost and quality outcomes. And those are all good for us. Because anybody who just gets more thoughtful about how to run healthcare is going to naturally be more interested in the kinds of things that we do.

Okay. Great. Thank you.

You're welcome.

Your next question is from Bill Clark with KBW.

Good morning. I just want to go back to the expense side. Sequentially I think you had the impact of the equity awards this quarter. Year over year you still have the comp increases and I think also this quarter you have impact from the pension freeze. I'm just trying to get a sense of where 2Q is from a run rate perspective and where you can expect the second half of the year to kind of shake out.

So I mean let me just kind of reiterate I think what you said. If I was to look at the second quarter and look at it solely, the salary increases that were in will remain for the year I don't think you would adjust for anything there. The items that I'll call out are inside the margins, we have the long term incentive with the equity compensation because of the way plan participants who are age 62 vest. We do have an acceleration in the second quarter. That's about $4 million to $4.5 million that affected the quarter and that will kind of normalize out for the remainder of the year. So that's something you should probably think about.

Pension, I think you would probably expect that to just continue with what you saw the first half. And we did also mention that the acquisitions are a little bit seasonal. So the margins in the first half of the year are a little bit lighter than what we'll see in the seconds half. So that's a bit of a positive in the second half when you think about margins overall.

Okay. Thank you.

Sure.

And we have a follow-up question from Kelly Flynn with Credit Suisse.

Thanks. Just a couple of quick follow-ups.

First on the mortgage business, I know you said you expect it to be weak through this year. But I was hoping you could help us work through how we should think about it the tougher comps that the business had in this quarter and kind of should that lead to an improvement in the growth rate, all else equal in the third and fourth quarter? Why was the comp tough if you could remind us, and what impact does that have on the back growth rate?

I think we said right from the beginning of the year we were targeting somewhere around 7% decline for the full year. And I think what we view right now is we don't think we have enough information to change that view.

From a comp perspective, we talked about a customer that has been kind of moving back to a more normalized level of forensic review that I think we saw more or less normalizing in the fourth quarter of this year. And the other thing that I highlighted was that what helped us in the first half was kind of a pretty rich mortgage origination environment it was positive and I'm not sure if the MBA and others expect that to continue for the second half and that works against us.

So those are the things that factor into some of our thinking. Obviously, I talked about the macro factors. At the same time I think we have a view that we're still winning customers and we're making progress both on the front end and we made a whole lot on the back end. So all that bodes well for the future but I want to be cautious about where we are today.

Okay. But it grew -- I think it grew 8% in the second quarter of 2011 and I understand you had a customer kind of rolling off. But that was a much better growth rate than any other quarter in the year. Was there anything else going on there that made for that especially strong growth rate in the second quarter of 2011?

I do know in the second quarter of 2011, we were talking about that one customer, they did a lot of volume with us in that quarter.

Okay. So it was that one customer. Okay. Got it. And then just another question on the insurance part of decision analytics. I think clearly you guys have called out Xactware and some of the weather comps there. But could you give us a little more detail on the other businesses, and would I ask it this way -- which businesses are seeing accelerating growth in that line item and which ones are decelerating aside from Xactware?

Do you want to talk a little bit about catastrophe modeling?

I think you know we had a -- first of all, don't overlook the fact that inside of Xactware, there's actually a variety of things that get done. And some of them are related to claims and some of them are related to underwriting. Some of them are domestic and some of them are overseas. And so you even have to pick Xactware apart. And the growth rate associated with that bundle of things would have been materially different if the storm activity had been equivalent in 2012 to what it was in 2011 -- so just as background.

But other things that are going on inside of the insurance DA mix, two things I would particularly highlight. One would be catastrophe modeling. Mark talked about us literally sweeping the board in terms of all the cap-ons issued in 2012. Which we actually think of as the purest test of the quality of the science inside of the models. And so we find that a really encouraging result. But basically, there are still a lot of peril/country combinations to be modeled. And we find that the market is very open to our solutions. And all of that just compounds inside of the work we're doing to create a new platform for serving up the model to get them even more in line with the customer's work flows. That would be one thing that I would point out.

Another thing I would point out is underwriting. As you know, we create ad underwriting unit at the beginning of this year, and its growth rate is very strong. It's greater than the growth rate of decision analytics overall. And as we assess where we sit in the P&C world, strengthening our underwriting solutions and our position is one of our biggest opportunities, actually. We're so strong in claims. We're so strong in catastrophe modeling, we're so strong in rating, but underwriting is something where -- underwriting, not rating, is a place where we still can definitely gain altitude. And so far in 2012 the results have been good.

Okay. Thanks a lot. I appreciate it.

And your next question comes from Tim McHugh with William Blair.

Yes, thanks. Just following up on the previous question. I want to ask a similar question about healthcare if you could just talk about the different service lines or product lines. They all seem to be doing well but is there any one of them that's doing particularly better or worse relative to the others?

I mean basically, so just to kind of clarify what we do, first of all, you can really put it -- we put it into four buckets. There's what we call enterprise analytics, which is the variety of medical intelligence products aimed at things like risk adjusting and risk scoring individual members of the population. We've also got our enterprise intelligence, which is basically the OLAP platform through which a plan can consume the analytics and apply them to their decisioning.

Then we have payment accuracy which is combing through claims flows in order to basically cleanse those claims flows, find the ones, the claims that are suspicious, and then take them through some clinical review in order to present a very clean view of the claim. And we've supplemented that with what we did -- what we are now doing with our colleagues at Bloodhound where in addition to that sort of retrospective or -- I shouldn't say retrospective but later in the process analysis, we can also deal with the claims even before they're adjudicated inside the claims system. That's the second thing.

The third thing is what we call revenue integrity, which is essentially helping our customers with their own reimbursement. So I mentioned before HCC analytics for Medicare Advantage reimbursement and more generally five star kinds of analytics that also relate to Medicare reimbursement. So that's revenue integrity.

And then the fourth thing we do is under the banner of MediConnect and its chart retrieval and extraction. It's getting the clinical data so that you can analyze it. The first order use of that data is actually inside of things like HEDIS calculations as well as the revenue integrity work that I just described.

So those are the four big buckets. And at the moment -- they're all doing well, actually. And I think that's really the message here. But I would say that probably the -- at the moment at least we're getting a little bit more growth from chart retrieval extraction and the revenue integrity set of things. But that's detail underneath the general banner of, you know, we're well-positioned to kind of -- everywhere, really.

Okay. And the workers' comp opportunity that you're seeing in terms of the synergy between the P&C and MediConnect

Right.

Is that in the healthcare business or are you coming at that from the insurance side more?

the revenue gets recognized in the payment accuracy part of the healthcare business with a busy big assess from our P&C colleagues. We're working on claims on the P&C side.

Okay. Great. Thank you.

Thank you I would now like to turn the call over to Frank Coyne for any closing remarks.

Yes. Thank you very much for joining us on the second quarter results, and thank you for your interest and your questions, and we look forward to speaking with you again next quarter. Have a good day.

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