Verisk Analytics Inc (VRSK) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Verisk Analytics Second Quarter 2013 Earnings Results Conference Call.

This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Verisk's Senior Vice President, Treasurer, Corporate Finance and Head of Investor Relations, Ms. Eva Huston.

Ms. Huston, please go ahead.

Thank you, April, and good morning to everyone.

We appreciate your joining us today for a discussion of our second quarter 2013 financial results. With me on the call this morning are Scott Stephenson, President and Chief Executive Officer and Mark Anquillare, Chief Financial Officer. Following comments by 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 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 available for 30 days until August 30, 2013, on our website and by dial-in.

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 the performance is summarized at the end of our press release, as well as contained in our recent SEC filings.

Now, I will turn the call over to Scott Stephenson.

Thank you, Eva, and good morning, everyone.

We have a lot of exciting initiatives underway and we are energetically pursuing our data analytics agenda. Before I get to the future, I'd like to talk a little bit about our results in the quarter, with which I'm pleased. In second-quarter 2013, we delivered strong overall performance with total revenue growth of approximately 13% and diluted adjusted EPS growth of 17%.

Our consolidated organic revenue growth in the second quarter was approximately 8%. Organic revenue growth was 9.5% in the quarter excluding our mortgage analytics business with its macro challenges. Profitability was strong with an EBITDA margin of over 44% in the quarter, even while we continued to invest in innovations, as discussed previously.

Year-to-date free cash flow growth adjusted for last year's voluntary pension payment and the timing of a tax benefit in the first quarter of this year was about 8%, as we continued to generate strong operating cash flow while we also elected to invest some of it into capital expenditures related to our investment initiatives. We are focused on delivering value to our shareholders and we remain disciplined in our use of capital.

We also remain active in looking at M&A. There have been a few sizable assets on the market recently, which you no doubt are aware of, but none of these met our criteria, so we declined to pursue them. We continue to focus on assets with a strategic fit, a strong financial model, and an appropriate valuation in relation to future growth prospects. In the quarter, we returned capital to our shareholders through repurchases of $116 million. We also refreshed our buyback authorization in the quarter by $300 million.

We will continue to use our authorization consistent with our capital allocation strategy, as we've previously outlined. As we look to the future, we need to continue to be thought leaders in analytics. As we've discussed, we are making significant investments in certain areas this year, including Touchstone, which is our catastrophe modeling platform, the unified platform in healthcare, aerial imagery, and supply chain analytics. All of these are going well and are in various stages of development and rollouts.

The first two, Touchstone and the unified platform, are active with our clients. We're getting a great response on Touchstone and we're seeing incremental value in our contracts with customers who have moved to the new platform. The unified platform in healthcare is also leading us to better results for customers in payment accuracy where we have completed that phase of implementation.

Aerial imagery is a wonderful initiative. It involves gathering images, but much more importantly, using those images to generate data that can be analyzed by computer vision. Initial customer feedback from pilots and evaluations have been very positive. We're very excited about the imagery initiative and we may choose to pull some of the intended 2014 investment forward into the second half of 2013 and the 2015 investments into next year.

In addition, the supply chain platform is progressing well with very good conversations with customers on the functionality as they're looking for it. We also are putting a lot of energy into leveraging the value of our data and analytics across our enterprise. Everyday, we're discovering new ways in which different parts of our organization can collaborate for the benefit of our customers.

We're able to do this effectively with our current leadership and I've recently asked some of our leaders to bridge to added responsibilities that logically relate to their current responsibilities. For example, we're looking to do more work related to climate science across our AIR and AER businesses. We're also increasing our efforts to drive growth in Risk Assessment across the various categories and we're adding to our leadership teams in the supply chain and corporate marketing areas.

In this way, we have the best chance of remaining in touch with our markets and our customers while expanding our collective ability to see and pursue our joint opportunities. Leadership is a key principle of the Verisk way, which you've heard me talk about before. This is a natural way to ensure the development of our people.

With that, let me turn it over to Mark to cover our financial results in more detail.

Thank you, Scott.

We're pleased with our performance in the second quarter, in which we delivered both revenue growth and increased profitability while also investing for the future. In the second quarter, total revenue grew 12.9% and organic revenue grew 7.8%. The results reflected continued excellent revenue performance in healthcare, accelerating revenue growth in insurance solutions, and another strong quarter of contribution from Argus. Mortgage revenue growth remained a headwind to overall growth. Excluding our historical Mortgage business, revenue growth organically grew at 9.5%. For the second quarter, our Decision Analytics segment delivered 16.6% revenue growth; of which, 8.3% was organic, excluding the acquisitions of Argus and Aspect.

Beginning in the quarter, MediConnect is a part of the organic revenue growth in the healthcare category. Within Decision Analytics, our insurance category grew 9.5% in the second quarter and 8.9% organically, excluding the acquisition of Aspect. We had discussed our expectation of accelerating growth in the combined insurance this year and are pleased to see ourselves headed in that direction with 7.9% organic revenue growth, including Risk Assessment.

Our underwriting solutions delivered strong growth and we saw continued double-digit growth in our Catastrophe Modeling Solutions in the quarter. Our claims solutions also contributed to the growth. In financial services, which includes both Argus and the Mortgage Analytics business, revenue grew 43.1% in the quarter. Argus is an excellent business, performing very well since the acquisition in third quarter of 2012.

You will recall that Argus is a very ISO-like business, serving as a trusted neutral intermediary using a contributory data model to help create analytics, which are deeply embedded in our customers' processes. The growth outlook at Argus remains positive, including through international expansion and partnering opportunities, as well as additional penetration of existing customers. We have seen growth of over 20% year-to-date at Argus on a pro forma basis and feel good about delivering or exceeding our estimate of mid-teens growth in 2013.

The mortgage portion of financial services revenue declined 8.9% in the second quarter. Our origination revenue continues to grow, while our overall mortgage revenue declined, due to the ongoing normalization of the forensic piece of the business. We're glad to see the decline in forensic slow this quarter. In addition, while early stage, we are seeing strong growth in some product sets that are an extension of the type of work we do in the forensic side, but aimed at the underwriting market. As we've said previously, we continue to believe the full year 2013 results may be similar to the revenue decline of about 11% we saw in 2012.

Healthcare continued to deliver excellent revenue growth of 21.3% for the second quarter, all organic. We are especially pleased with the growth in our RQI division, which reflects the combination of our Revenue Integrity and HEDIS reporting businesses, as well as MediConnect, which is now organic. We continue to find traction with our solutions in the market. Our sales efforts in the quarter were strong, as we continue to add new customers and expand our relationships with existing customers.

In the quarter, of the new contracts we signed, half were with new customers. We are winning sizable contracts, even larger than we have won historically, with important new and existing customers, which we expect will benefit us in 2014 and forward. We continue to be excited about the opportunity in the healthcare space and we expect growth to remain well above corporate average rate. As we've noted previously, the growth percentages naturally will be impacted as we grow off of a larger base.

We are coming off of some tough comparisons from third quarter and fourth quarter of 2012. There has also been some opportunity for us to trade-off between near-term pricing for higher long-term committed volumes. These are all very good customers where we see these arrangements as win-win for our long-term relationships. To provide you with some additional visibility as you think about your models, we expect full-year organic growth in healthcare to be about 20%. Given the current pipeline, we expect growth in 2014 to continue in the same range, even while our business has more than doubled in size since 2001.

Our specialized markets revenue grew 2.4% in the second quarter, growth in weather and climate analytics was affected by lower growth in government contracts. We are pleased to see continuing traction in our efforts to repurpose our intellectual property to meet strong demand from our [P&C] industry customers. Growth in the environmental health and safety solutions was driven by ongoing customer agreements moderated by lower volumes in some customer implementation projects. We think about AER and 3E as long-term options on the growing use of analytics around climate and supply chain and see them as longer-term elements of our growth strategy.

Turning to Risk Assessment, for the second quarter, reported revenue growth was 7%, indicating the value to our long-standing insurance customers. Our industry-standard insurance programs grew 5% in the quarter, reflecting our 2013 invoices, which were effective January 1. The acceleration from this year's first quarter reflected the one-time revenue in the first quarter of 2012, which we've talked about before.

Our property-specific information revenue grew 13.9% in the quarter. This increase was from new sales and higher volumes from certain customers as they commit to expanded, long-term contracts as well as incremental revenue contributions, due to the expiration of a revenue-sharing agreement with a technology provider in the fourth quarter of 2012.

EBITDA for the second quarter was $185.6 million, as outlined in table 3 of our press release. EBITDA increased 13.3% for the quarter and our EBITDA margin was 44.1%, even as we invested in our business. Acquisitions did not have a material effect on the consolidated EBITDA margin in the quarter. As we discussed with you last quarter, we have an ESOP in place, which was approaching its final distribution date in December of 2013. In May, we extended the allocation of remaining unreleased shares through 2016.

As a result, we will not incur a non-cash charge, as there is no termination distribution in 2013, in excess of our usual 401(k) match. The DA, or Decision Analytics margins, were 37.2% in second quarter 2013 versus 38.3% in the second quarter of 2012, as well. The margin in the quarter reflects investments we have previously outlined. We remain very comfortable with the margin and the modest near-term impact as we see opportunity to drive faster and sustainable top line growth into the future.

In the quarter, our Risk Assessment margins were 56%; versus 52.8% in second quarter of 2012. Our margins were helped in the quarter, partly as a result of higher levels of compensation in 2012, related to stock compensation invested for employees over the age of 62.

We told you, at the beginning of the year, that we expected our 2013 EBITDA margins to be flat to modestly down compared to 2012. That is still our expectation. We will continue to invest in our business to be prepared to support our important contract wins in the first half of the year, even in advance of the 2014 revenue.

Additionally, we have been discussing some of the investment opportunities, including data acquisition for aerial imagery, which flows through our P&L. We expect these investments to help contribute to future top line growth and cash flow, as customer demand is supportive of our initiatives. Based upon the positive customer response, we are considering pulling forward some investments from 2014 into this year and investments from 2015 into next.

The net-net is that we feel very confident that will be able to hit the high end of our 43% to 45% EBITDA margin range in 2013 and we will continue to drive EBITDA and free cash flow growth. We can expect that in 2014 and forward, as we to continue to invest in new initiatives accelerate them as appropriate, which will keep our margins in this current range.

Our interest expense was up $2.3 million in the second quarter versus the respective period in 2012. This increase was due to the higher debt balances taken on during 2012 related to our acquisitions. We ended second quarter with total debt of about $1.4 billion and no outstanding revolver borrowings. The debt balance reflects the repayment in the quarter of about $45 million of outstanding long-term private placement debt that matured in April of 2013.

Our reported effective tax rate was 36.2% in the quarter. As we've discussed with you previously, we've been actively working on our tax planning strategies and were rewarded by the benefits resulting from this effort again in the quarter, as well as some small, one-time benefits. We now expect the full year tax rate to be between 37% and 38% for the full year 2013. We expect the normalized rate to be about 38% in 2014 and forward.

Coming down to the net income line, we focus on adjusted net income and non-GAAP measure, which we defined 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 17.6% to $94.9 million for the quarter. Adjusted EPS on a fully diluted basis was $0.55 for the quarter, an increase of 17%. The average diluted share count was 172.5 million shares in the quarter.

On June 30, 2013, our diluted share count was 171.7 million shares. In the quarter, we purchased 1.9 million shares for $116.1 million. At quarter end, we had about $306.6 million left under our authorization. Our share repurchase program has been successful to date, generating annualized rates of return of over 25%. For 2013, we will continue to anticipate, at a minimum, buying shares to offset dilution.

Turning to our balance sheet, as of June 30, our cash and cash equivalents were about $172.6 million. Total debt, both long-term and short-term, totaled $1.4 billion. As I mentioned before, the debt balance reflects repayment in the quarter of about $45 million of our outstanding long-term private placement debt that matured April 2013. We have another $100 million in private placement debt maturing in August, which we expect to respect to repay from cash on hand or other debt.

Today, our incremental debt capacity is over $900 million and will grow with our EBITDA and free cash flow. Our debt to pro forma EBITDA for June 30 was 1.9 times, a little below our steady state target. As you know, we're willing to temporarily go above our long-term target of two times debt to EBITDA to take advantage of unique opportunities because we feel our free cash flow is strong and allows us to delever quickly. In the first half of 2013, free cash flow, which we define as cash from operations less capital expenditures, was $182.6 million, an increase of about $33.2 million or 22.2% versus the first half of 2012.

Free cash flow year-to-date, adjusted for the timing of excess tax benefits and the prior-year voluntary contribution to our pension was $218.7 million, reflecting growth of 7.8% compared to the first half of 2012. Our capital expenditures were 7.8% of revenue in the first half of 2013, consistent with the incremental investments we discussed last quarter. Free cash flow represented 50% of EBITDA in first half of 2013.

Adjusted for the timing of items we mentioned previously, free cash flow represented 59.9% of EBITDA. As we think about capital spending for 2013, we are still expecting $115 million for the full year, including the $20 million of investment initiative spending. As you think about your models for the full year 2013, we anticipate amortization of intangibles of about $64 million, fixed asset depreciation and amortization of about $74 million and now, a tax rate between 37% and 38%. We aim to keep share count flat through our repurchase program. At our current debt balances, our current quarterly interest expense is $19 million.

Overall, our business is performing very well. We had 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 the line for questions.

(Operator Instructions)

Manav Patnaik, Barclays.

Thanks for the details and some of the line item guidance, we appreciate that. My first question was just on the comments you made on the aerial imagery investments, pulling that forward. Maybe just a little more color on what those planned investments were that you're pulling forward and would there be any associated revenue through those initiatives that will come along with that? Or is it just more investment for the future?

Yes, this is Scott, Manav. Thanks for the question. The investments we're making in aerial imagery, they really fall into two different categories. One is, we're actually acquiring a lot of aerial images, so we have to pay for that and we pay for that in two different ways. We work with third parties who have already sourced images, but much more importantly, we're sourcing our own images, which are much more granular and precise than what generally tends to be available. Our sweet spot is an image where a pixel is about an inch to an 1.5 inches, whereas most of what you see, for example, if you look at Google Earth, when you're looking at a building on Google Earth, a pixel is about six inches and not adequate for the kind of automated analysis of the image that we want to engage in.

I mentioned computer vision before, that's the field of science and technology that is related to automatically extracting data from a photographic image. A, we have to acquire the images and B, we're building the capability to both house the images and the technology associated with their automated rendering, so that's the investment program. The part of it which becomes more significant where the P&L is concerned that becomes more period expense is the acquisition of the images. Yes, we definitely expect that there will be a revenue response to the images that we're acquiring. What we are working on right now is at what rate we need to acquire the images in order to respond to what we see as the growing demand for the category?

This all relates very strongly to what we do with Xactware in the repair cost estimating category. To date, we actually do relate aerial images to all of the repair costs estimating we do in Xactware, but it's not at the level of analysis or granular detail that we're moving to. It's an extension of the business that we're already in. We do generate a little bit of revenue from aerial imagery today, but we see it as a very, very substantial opportunity. Yes, we do definitely expect that revenue will follow, but since it's a relatively new category for us that's where the investment, particularly the acquisition of the images, may need to lead the revenue to some degree.

Okay. You guys maintained the full year CapEx, so does that mean that this will substitute some other investments or is that subject to change once you guys do decide that you're going to pull forward these investments?

Yes, let me just take this. This is Mark. There are parts of this initiative and many others where there's actual programming time that can be capitalized and put on our balance sheet. However, when you purchase data, it is required to be expensed. When we talked about the CapEx numbers being relatively unchanged, I think that's consistent with what we said in the past. This, that we're calling out, actually has direct effect on the P&L because we are expensing the aggregation of images.

Do let me just clarify on one thing, Mark talked about purchasing data. In the case of aerial imagery, most of what we're doing -- we're not buying it from someone else, we're actually generating the data ourselves. But it is, as Mark says, a period expense.

Got it. Mark, could you remind us of -- in the past you've talked about the seasonality on the healthcare side with a more weighting in a second half. Any changes to that mix or sequentially anything that you can help us model it?

Yes, historically, healthcare as a whole has been a 40/60 type of seasonal split, so 40 in the first half, 60 on the second. We continue to try to bring that more in line over the course of year, but that is just the nature of the business right now.

All right. Thanks a lot, guys.

Andrew Steinerman, JPMorgan.

When talking about the 20% growth in healthcare, and thank you for clarifying your goals in that segment, is that a organic growth initiative; meaning, is that the organic goal? Additionally, since you said 20% this year 20% next year, I just wanted to ask, isn't that kind of a lumpy business with new customer implementations and so we probably could expect some volatility quarter to quarter, right?

Andrew, it's Scott. First of all, yes, we are talking organic growth rates when we're talking about the view for 2013 and the view for 2014. I'm not sure I would say lumpy, exactly, but one thing that is going on in the business is because of our growing presence in the healthcare field, one of the things that we're finding is that the size of the contracts that we're able to sign, in some cases, are becoming substantially larger than the average contracts size that has, to-date, applied in the business. I'm talking about sales that we have secured and sales that we're very close to securing; neither of which have actually worked their way into the P&L yet. I'm not sure I would use the phrase lumpy when talking about it in that way, but I do think that we're finding that the scale of the opportunities that we're in front of is getting bigger.

Okay. Also, when you speak about new customers, are we mostly talking about Medicare Advantage plans being add or are new customers a lot broader now?

More broad than that. It's still the case that the lion's share of our business is with the health plans, but we've actually seen some very encouraging things happen with respect to the EA suite moving into the provider world.

Perfect. Thank you.

Tim McHugh, William Blair & Company.

First, just wanted to ask on that most recent comment about seeing bigger contracts, is that a reflection of seeing broader solutions being adopted kind of all at once by the clients or is it that they're taking on a bigger chunk of the claims activity or some other factor? What's driving the bigger contracts?

It is both. Although I would say that the primary effect in the contracts that I had in mind with the prior comment is a deeper penetration inside of, in one case, an existing customer and in another case, an entity that was not a customer previously.

Okay.

With an existing solutions set.

Okay. As we think about organic growth for healthcare, what impact is MediConnect being rolled into that overall organic growth rate have? I don't think it was growing quite as fast as rest of the healthcare channel?

MediConnect's organic growth rate is very healthy and the fact that it has moved into the organic category is not having any downward effect on the overall organic growth rate of the group.

Okay. Then just one follow-up on mortgage, the lessening or the smaller pace of decline, you talked about some newer solutions you see growing there. But did you see -- is the smaller pace of decline related to those newer solutions or is it that the fraud piece is declining by a smaller amount or did the origination side tick up?

It's really both effects. It's how big was the forensic piece and now, as we move towards absolutely smaller numbers and a smaller fraction of what we do, any further shrinkage in the amount of business that we're doing there, just proportionally is less impactful on the (inaudible) case. On the other side of it, yes, these new solutions are finding their place in the market and definitely having an effect on the overall outcome.

Okay. Mark, the 11% decline, was that for the year? Does that factor in that Argus gets dropped into organic in Q4?

Let me just describe the 11%. I was talking specifically about the mortgage analytics business. What we did last year, that would be 2012 full year, the mortgage analytics business was down about 11%. What we've been saying is that the full year 2013, we think it will also be down about 11%. Obviously, we'd be down more than that in first quarter and hopefully, we start to see some stabilization and some growth as we progress towards the end of this year for mortgage only.

Okay. Not that overall practice, if you will? Just that piece of it? Okay.

Correct. Maybe it's 11% for both years for mortgage only.

Thank you.

Bear in mind, again, as Mark reported, financial services overall grew more than 40% in the quarter.

Okay.

David Togut, Evercore Partners.

Rayna Kumar for David Togut. Could you talk about the specific factors that drove that deceleration of your healthcare segment from 39% revenue growth in the first quarter to 21% in second quarter? Maybe if you can just give us an update on business trends and the growth rate of each of your three major businesses within healthcare?

Let me start off there and then, Mark may want to add something there. Let me go back to second quarter of 2012 in order to give you some perspective on the organic growth rates that healthcare has been turning in overall. You'll remember that in April of 2012, we acquired MediConnect. There's a suite of services that we provide, which are inside of the RQID division of healthcare and essentially, what we're trying to do is to help health plans understand the quality with which they do what they do and to relate that to the cost that it requires them to do what they do. We do that so that companies can be viable inside of the private insurance world, so that they can be viable with respect to Medicare Advantage, but that's the essence of what we're doing over there.

There was pent-up demand for those services and one of the things that we need to do to deliver the service is to access Medical records. We had methods, actually, for doing that prior to the acquisition of MediConnect, but there was pent-up demand for those set of services. When we acquired MediConnect, and we talked about this at length, what we created was the ability to actually process faster because of the integration of the two businesses. So we began to respond to that pent-up demand as we moved into the third and the fourth quarter and even into the first quarter of 2013. If you look at our growth rates inside of health, part of what was going on was that response to the pent-up demand. I think what you're seeing when you compare, for example, first quarter to second quarter is that, that line of business is still healthy, it's still growing very nicely.

But there was a particular reaction, which we expected, based upon our increased capacity by virtue of bringing in MediConnect and that was working very powerfully last half of last year and even into the first quarter of this year. Again, it's not that the effect has gone away, it's just there was so much demand behind the dam. We don't really talk about, specifically, about the three divisions, but I'll just say that they're all important to the performance of Verisk Health. We're looking to all of them to grow. Just two weeks ago, we diligenced the pipelines for each of the three divisions; they're all looking very healthy. We have high expectations for all of them going forward.

Great, thank you.

Suzi Stein, Morgan Stanley.

About risk assessment growth, how sustainable is the growth in the property-specific and underwriting piece of the business? Do you anticipate staying at the high end of that 5% to 7% range that you have talked about in the past?

Suzi, let me just highlight to you -- I think some of the things that we've seen that have been reassuring inside of the property-specific is that we've been able to transition many customers from what are transactional type of purchases to longer-term contracts with higher committed volumes. That has been a positive. I think we found some stabilization even inside of some of the transaction volumes that were causing some ebbs and flows over the last several years. So that's sustainable, that's positive.

At the same time, I think one of the things that we've called out is that we did have a contract, a 20-year old contract with a technology provider that came to an end in 2012. As result of that rearrangement or change in arrangement, we had benefited from a new arrangement where there's more revenue for us and we've taken over the top partners of technology because we felt it's kind of (inaudible) the service. That, in 2013, will be here, will continue into the future, but we do get some benefit from the growth over what was a different arrangement in '12. I think a good portion of the growth continues, a portion of the growth is one-time and will continue into the future, I don't want to say one-time, but it's more of a one-time growth.

On specialized markets, I guess that's been running in the low single-digits, is there any reason to think that should start to pick up?

I think that in the near-term, we are still working to essentially transform the categories that those face, meaning the supply chain domain and the commercialization of climate science and so in the near-term, no. In the long-term, we think of them as options against really building new categories that don't exist today. We'll certainly work hard to keep you informed as we feel, but we've reached those moments where we've actually, we've created something substantially new and different and we're working very hard at that.

To emphasize, I appreciate the question about risk assessment, I'd just like to continue to reinforce the fact that we think of some of the way we go to market for both the Decision Analytics and Risk Assessment customers, they're the same customers. We're trying to sell a suite and I think we continue to be effective there with some accelerating organic growth across the two categories.

Okay, thank you.

Andrew Jeffrey, SunTrust.

Good to see the uptick in your insurance business within Decision Analytics. Could you talk a little bit about some of these newer solutions, whether it's Touchstone -- it sounds like you're in the market with that and aerial imaging, which maybe is more of '14 event? Do we get back to double-digit organic revenue growth within that business this year or is that still the longer-term expectation? Or are we at what you think is steady-state for the insurance part of the business today?

I would put it this way, we are excited about a number of opportunities to bring more value to our insurance customers. We are at a moment in the P&C industry where there is as much or more openness to technology-driven innovation in insurance as I think there's ever been. I think that there's a very settled understanding now that data analytics is going to play a very important role in all of that. We really appreciate the relationship we have with our P&C customers and it's, in many ways, a good moment to be a partner to them given how their world and therefore, our world with them is moving. Some of the things that we're talking about, for example, aerial imagery just to, again, go back to that one for moment. When it fully emerges, it is potentially a very large category. It remains to be seen whether or not we're able to put the solutions together in such a way that they become so compelling that the full market opportunity is realized, but there's a great sense of promise there.

Over on the Catastrophe Modeling side, to just pick another one, the business is becoming much more richly featured than it used to be. Basically, our customers used to be primarily interested in the stochastic models, now equally they are interested in the decision-support software and the ability to try to pull a lot of observations together, derived from the CAT modeling world and apply them even at the level of the individual risk. That kind of movement, we think naturally creates the opportunity to bring substantially more value to the customers than has been there in the past. We haven't really rifle shot a number in terms of what the organic growth rate is that all of that implies, but the kinds of things that I was just talking about become material, relative to the book of business that we are already have. We're optimistic. We're leaning into the opportunities in the P&C space.

Okay. As far as the investment pull forward, I know you've made some comments about EBITDA margin. This year, Mark, would the magnitude of the investment pull forwards have the same sort of impact on your out year EBITDA margin whereby we might see revenue growth acceleration, but perhaps flat to down margin next year? Are you pulling forward that much spend, for example?

I think what we would probably need to do is really think about this in terms of we're building a product today and we want to make sure we have a robust product coming to market because we have had customers that are excited about it. As we think about the pull forward that we've just talked about, a little of that has to do with now customer reaction and customer response. I think the answer to your question is we have some pretty big CapEx expense that we're bringing through in the first half. We would probably continue, as we described and what we hinted towards, in the second half.

As I get into 2014, it's a little bit tough to marry up the revenue and the expense around those categories. I would see that the investment would be large. I'm not sure if it's going to be materially larger than what we see in '13. From a relative margin perspective, I don't have great visibility quite yet. But I wouldn't put margin erosion on it, I would just say we should probably maintain something that looks a little flatter.

Okay, that's helpful color. One more, if I may, when you look at you unified healthcare platform, do think that's an offering that can start to really move the needle for you next year or are we talking about a multi-year effort as far as incremental revenue?

I think you should think of it as multi-year, but I do believe the effects -- actually, we've already we've seen the effects. Just to kind of recap for you, we have already implemented the unified platform for large customers in the payment accuracy division. Next up is the enterprise analytics and that's a '14 deliverable and then we move into RQID in '15. There are already effects and we will see more effect in '14 then we have in '13, but it's a multi-year march.

It's kind of both, really. We will begin to see more and more benefit. I think that it's really when the entire suite has been enabled that the promise of being able to go to the customer and say would you like us to turn this on for you, I think that's when we're really there. The third of the three divisions is a 2015 deliverable on that plan.

Okay. Thanks, appreciate it.

Paul Ginocchio, Deutsche Bank.

Earlier, you said about some of the contracts in healthcare aren't fully up to speed yet. You've just signed them and you've got -- they're larger. As you look at your comment, as we go back to your comments about the 20% growth this year and next, could you just maybe give us some of the assumptions behind that? How much is some of those new contracts you've won? Just coming up to speed? How much of the contracts you've won scaling up? What's new contracts or new clients? Thanks.

Sure. I think one of the things we tried to highlight is that it has been very good new sales year for the first half of '13, but the way customers adopt and implement, it's not always that they can go right away. We may pick up a little bit in '13, but a lot of these things are actually priming for and looking towards 2014. In large part, because of the nature of the 40/60 revenue split, a lot of it does actually hang on the latter part of the second half of '14.

The other thing that we've tried to at least mention a little bit. We've had some of these contracts where customers have come to us and they've said, let's have a conversation about us giving you bigger volumes and longer-term commitments. Is there a way to marry up some price with these longer commitments? We're willing to do that for the right customers and for the right type of volumes. All of that plays out in a way that probably helps us in '14 and it certainly impacts the way we think about into the future beyond.

If I heard correctly, you're just communicating that your visibility's better based on some of these changes you're talking about?

Agreed. I just can't get into the details of contracts except that we're feeling very good about the pipeline and it's more of a '14 type of new sales win where we see revenue.

Thanks very much.

Jeff Silber, BMO Capital Markets.

On the insurance portion of the business, can you just clarify what impact any changes in insurance premium growth has on your business and when that would occur?

Let me talk about it generally and then maybe Mark would like to talk about where we are in the premium environment right now. But the thing that we'd like you to understand is that there is nothing even close to a one-to-one relationship between what's happening in the world of insurance premiums and our revenue picture. That's true for a couple of reasons. First of all, something like 40% of our insurance revenue references, in some way, what's happening with respect to premiums; meaning inside of our pricing algorithm is some reference made to premium volumes. Only about 40% of our revenue is priced in that way and of that 40%, there are three terms in the pricing algorithm; so there's the premium, there's a mill rate that we attach to the premium, and then there's a flat fee. We are annually assessing the two terms in that equation that we are responsible for, which is the mill rate and the flat and the flat fee. We're very thoughtful about what we're doing with both of those.

It's not the case that there's a linear relationship, even in that 40%, between where did the premium move year-over-year and where did our revenues move year-over-year. There were actually several years where there was negative premium -- recently several years where there was negative premium growth in the industry and yet, our revenues actually grew. On top of all of that, I would go back to the point that Mark made a couple minutes ago which is, we think of everything that we do in insurance as a relatively integrated whole. So when we think about setting the terms in that pricing algorithm, we have it very much in mind that we want to preserve and extend the opportunity to sell the other parts of our suite, which are not priced that way. What I really want to strongly move you away from is a sense that the premium environment is strongly, or I would say even modestly, affecting what our business is doing. Mark, do you want to comment on where we are right at the moment?

As an example, I know there's been some better news with regard to premium growth inside of 2012 relative to 2011. The way we operate, this is a loose affiliation, '12 premiums would relate to some of our invoicing in 2014, but I will reemphasize Scott's point. What we're trying to do is make sure that there's value to customers and the customers are looking at the bottom line how much the invoice is and we want to make sure that's fair. We want to make sure that is well thought of so that we can sell other services and other solutions, typically from the DA suite to them, and that's the long-term relationship building and the best way for us to win in the long-term.

Okay, I appreciate the clarity. On a different path, I know you don't do a lot of government business, but if you can just remind us roughly what your exposure is to government business and did you see any impact from sequestration last quarter?

Sure. Government business is rather modest, it sits inside the specialized -- inside of '13. It probably hurt us to the tune of $2 million to $3 million in '13 or will hurt us.

All right, great. Thanks so much.

(Operator Instructions)

Jamie Friedman, Susquehanna.

First, Scott, I was just wondering, financial service obviously had a good trend. I was wondering if you had any comments on the upselling characteristics going on within financial service now? Mark, if you could comment about the Risk Assessment margin and your updated guidance was helpful, but specific to Risk Assessment, how we should think about the contribution margin, if you will, longer-term? First on financial service, then on Risk Assessment margin. Thank you.

Yes, the deeper penetration of existing customer relationships is a very important theme inside of what's going on in financial services. If I look at the business we do with the retail banks around the credit card line and demand deposits, essentially, upselling is a very major part of what's happening in that business. It continues to move through three levels. The first level is the thing that we just love to do at Verisk and that is build the contributory data set and create an industry level set of analytics around that contributory data set. That's how the whole business got started. The next level, then, is to take the analytics derived from that and to find ways to apply them more precisely on a customer-by-customer basis. That's the first level of upsell that goes on.

What we found is, even beyond that, we have created such a good analytic environment for retail banking analysis that at the third level, we actually have a growing number customers that actually, in addition to purchasing level one and level two, they also actually want to purchase the analytic environment. They want to license the analytic environment from us, which is in no sense cannibalizing of what we were doing at the other levels. That really is the story of what's going on with respect to those products that's inside of retail banking and it continues to be a very important part of the growth that is occurring there. In fact, we are acquiring new customers, partly because that part of our business is actually finding it's mark in overseas markets, but if you look at, for example, the United States market, a fair fraction of our growth is moving up that cross sell ladder from the first stage to the second stage to the third stage and that continues.

Let me jump over to the Risk Assessment. I think what we continue to find promising is Risk Assessment does churn very nice and stable growth. To the extent that growth is kind of above the cost of generally people, we (inaudible) have some very high incremental margins on that business. The operating leverage is strong and I think we feel very good about that. But the one thing I want to just highlight, though, is when we talk about investment, it is across the entire enterprise.

We have high expectations in Risk Assessment around trying to find new opportunities in markets, too and inside that, they have investment initiatives that should certainly be a part of all this and be considered in. What you saw in second quarter was some strength, remember a bit of it was the result of the way we recognize expense around options. If you compared second quarter of '13 to '12, that piece is a one-time effect. I just want to caution you to just remember that, as you do comparisons from '13 to '12, there is a bit of a one-time amount in there. Hopefully, Jamie, that was responsive to your questions.

That was great, thank you very much.

There are no further questions at this time. I will now turn the call back over to Scott Stephenson.

Thank you very much and I'd just like to thank everybody for joining us for our second quarter earnings call here today. We appreciate your interest and your support and we look forward to speaking to you again at the conclusion of the next quarter. Thanks very much and enjoy your day.

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