Verisk Analytics Inc (VRSK) 2013 Q4 法說會逐字稿

Good day, everyone and welcome to Verisk Analytics' fourth-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, Chief Knowledge Officer, Ms. Eva Huston. Ma'am, please go ahead.

Thank you, Shantay and good morning to everyone. We appreciate you joining us today for a discussion of our fourth-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 the call up for your questions.

All numbers we discuss today, unless otherwise stated, will reflect continuing operations and exclude the results from Interthinx, our mortgage services business, which we announced in February we are selling. Interthinx is classified as discontinued operations. In our 10-K filings, revenue is reported from continuing operations only, but EBITDA is shown including Interthinx, per the SEC requirement. In our press release, we report EBITDA from continuing operations to assist you in your analysis.

We have also included in the back of our press release a reconciliation of continuing operations to the total, as well as the quarterly detail for 2012 and 2013 excluding Interthinx. The earnings release referenced on this call, as well as the associated 10-K, can be found in the Investors section of our website at 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 March 26 on our website and by dial-in.

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

Thank you, Eva and good morning, everyone. The results we reported last night were in line with the expectations we discussed with you last quarter. We are confident our long-term prospects remain excellent and we continue to run the business with that time horizon in mind. Our view on this has been and will remain consistent. Our long-term management of the business and our determination to innovate are very well aligned given that innovation works in long cycles. We are eager to continue to invest in our innovation agenda, which we expect to drive both top line and free cash flow growth over time. We remain focused on our twin goals of organic growth through innovation and operating with efficiency and scalability.

As you know, we made several strategic moves over the past several months announcing the acquisition of EagleView Technologies Corporation, or EVT, and the sale of our mortgage services business, Interthinx. We continue to focus on being good stewards of our capital. On January 14, we announced the signing of an agreement to acquire EVT for a purchase price of $650 million. EVT is the parent company of both Pictometry International, a recognized leader in imagery, and EagleView, which is well-known in the insurance industry. EVT is a leader in imagery analytics, offering solutions in the property and casualty, contractor government and commercial spaces. While the nascent imagery business today is fragmented and populated by some large companies, we believe our expertise and experience offer an opportunity to differentiate ourselves in the use of imagery and solutions that enhance the efficiency of our customers' businesses.

EVT has over 1 million square miles of images in the United States covering 85% of the population and 90% of our structures, a very valuable asset with over 20 petabytes of data that has taken years to build. As a reminder, we see the natural development of the solutions as moving from a catastrophe focus today to include non-cat claims, underwriting customers and commercial property risks. By combining EVT's claims solutions built on their comprehensive library of images with our own extensive insurance customer base and our industry knowledge, we can enhance the selling of these claims solutions in the insurance market, as well as move to develop automated underwriting solutions, which do not exist today. Customer reaction to our pending combination has been positive.

As we discussed last month on the call regarding the acquisition, EVT will be integrated into our Xactware division under the leadership of Jim Loveland. The regulatory and shareholder approval processes are underway and we expect the integration to begin as soon as the transaction closes. As we've stated, our strategy is to allocate capital to the highest return opportunities for shareholders and EVT is one of these opportunities. The business has grown strongly, leveraging the foundation of the government and municipal businesses into new markets in insurance and other commercial segments. And we have significant opportunity to continue to grow the business both in the United States and we believe, over time, internationally. We remain consistent in our approach to acquisitions and we are focused on the strategic importance of the business to Verisk as the key driver in our decision to acquire EVT. We remain focused on our core principle of creating shareholder value through innovation, discipline and execution.

Earlier this month, we signed a definitive agreement to sell our mortgage services business, Interthinx, to First American Financial Corporation for a price of $155 million cash subject to typical adjustments for, among other things, the working capital of the business. We are currently awaiting regulatory approval and expect to close by March 31. Our IRR on our mortgage services business, based on the sale price of $155 million, was greater than our typical 15% hurdle and similar to our return experience for our overall acquisition portfolio, which has IRRs of over 20% using our conservative 10 times EBITDA terminal value.

The sale of Interthinx will allow us to focus on businesses most closely aligned with our strategy of providing proprietary data analytics into our key verticals. The Interthinx leadership team headed by Jeff Moyer has done an excellent job responding to changes in the mortgage market and we wish them continued success as part of First American.

In yesterday's press release, we provided pro forma historical financial results excluding Interthinx, which should help you in thinking about the shape of our businesses and our financial profile going forward. Also, last quarter, at Verisk Health, we put a new leadership team in place led by Nadine Hays, which occurred after our update on our financial outlook. I am pleased to tell you that our team was 100% focused on execution during Verisk Health's busiest time of year, which concluded on February 14. We satisfied our customers' volume expectations in the quarter.

To put this in perspective, Verisk Health's volume in its Medicare Advantage business increased nicely in 2013 and this within a market that is fast-growing in light of the baby boomer population's progression toward Medicare eligibility. This is the time of year when Medicare Advantage plans work to meet a deadline related to submitting documentation to substantiate the health status of their patients. This documentation directly drives the revenue yield our customers realize in connection with the illness burden of the patient populations they manage. As you know, helping our customers drive their own revenue growth within Medicare Advantage is an important part of our business.

A positive result of Verisk Health's focus was that it allowed us to deliver revenue for the quarter just above the high end of our forecast. Ensuring a quality outcome on a tight timetable for our customers did require a somewhat higher than planned expense level. But Nadine and her team are working very hard on demand planning with our customers to ensure that in 2014 we stand ready to meet our customers' volume requirements while improving profitability.

We have more work to do at Verisk Health and we remain confident in the long-term opportunity. We also believe that we are on the right track to ensure the business as a whole is built for the scale necessary to meet the healthcare opportunity. We continue to manage the business to mid-teens growth in 2014 as we discussed with you last quarter. You will have a chance to hear about the business from Nadine directly at our upcoming Investor Day.

On the topic of investing for the future, we were very excited as we went through the 2014 budget cycle to see the number of ideas coming from our business units for creating new solutions and enhancing existing ones. We are fortunate to be able to greenlight many of these initiatives with the expectation of also maintaining strong margins. In the fourth quarter of 2013, we delivered results which were in line with our expectations with total revenue growth of 7%, all organic, and a decline in diluted adjusted EPS of about 11%, largely due to tax benefits seen in the prior period, which did not recur in the current period. Full-year revenue and diluted adjusted EPS grew about 13% and 9% respectively.

Our consolidated organic revenue growth for the full year was about 9%. Profitability was strong with an EBITDA margin, excluding Interthinx, of 45.4% in the quarter and 46.7% for the full year. The margins were down versus the prior year as a result of investments we have been discussing with you and increased spending to meet customer demand at Verisk Health.

In the quarter, we returned capital to our shareholders through stock repurchases of about $117 million. We are focused on delivering value to our shareholders and we remain disciplined in our use of capital. Even with the acquisition of EVT, we remain active in looking at M&A. We continue to focus on assets with a strategic fit, a strong financial model and an appropriate valuation in relation to future growth prospects. And with that, let me turn it over to Mark to cover our financial results in more detail.

Thanks, Scott. For the fourth quarter, we again delivered both revenue and EBITDA growth while also investing in the future. Revenue grew 7.3% for the quarter ended December 31, 2013, all organic and 13.3% for the fiscal year 2013. Excluding the effect of 2012 acquisitions, revenue grew 8.5% for fiscal year 2013. Within the Decision Analytics segment, revenue grew 7.6% in the fourth quarter of 2013, all organic. Growth in the quarter was driven by strong performance in financial services, primarily contributions from Argus, which is now all organic. For the full year, Decision Analytics revenue grew 18% and 9.8% on an organic basis.

Within Decision Analytics, our insurance category grew 7.3% for the fourth quarter of 2013, all organic. The increase was driven by strong growth in catastrophe modeling and insurance fraud claims solutions. Loss quantification solutions also added to the revenue growth. Overall growth was driven by the increased adoption of existing and new solutions and annual invoice increases for certain solutions. We are pleased to have delivered an acceleration in combined insurance revenue growth in 2013 consistent with our comment at the beginning of the year. Full-year 2013 combined RA and DA insurance revenue growth was 7.8%, all organic.

In the Financial Services category, revenue grew 25.4% in fourth quarter 2013, all organic and after classifying Interthinx as a discontinued operation. We sold both the automated and the forensic pieces of the mortgage business. We did retain a small business focused on portfolio analytics in the consumer loan space, which is aligned with and now will be a part of Argus. The revenue increase was driven by demand for our analytic solutions and services. For the full year 2013, on a pro forma basis, Financial Services revenue from continuing operations, which is Argus and the retained Strategic Analytics business, grew 26.3%. Argus is a very ISO-like business and serves 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. However, we are mindful of the larger base against which Argus will be growing in 2014.

In the healthcare vertical, revenue in the fourth quarter grew 6.9%, all organic, driven by growth across all divisions led by Medicare Advantage-related services. Results were a little better than expected as we were able to meet customer demand. This came at a cost with negative impact on fourth-quarter DA margins, although margins in healthcare remain healthy and scaling. As Scott mentioned, we are working with the Verisk Health team to better prepare for future demand for our solutions. We continue to be excited about the opportunity in the healthcare space and we expect growth to remain well above the corporate average. We continue to manage towards mid-teens growth in 2014 and are working with our customers to jointly improve demand planning.

In the specialized markets category, revenue declined 3.1% for the fourth quarter of 2013, but grew 0.3% for the full year. Good growth in the quarter in EH&S and commercial weather and climate analytics were more than offset by low activity related to government contract customers. The quarter came in better than we expected due to unanticipated project revenue in the environmental health and safety space. We are pleased to see continuing traction in our efforts to repurpose our intellectual property to meet strong demand from P&C customers and think our formation of Verisk Climate will enhance our ability to capitalize on that. We think about AER and 3E as 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 fourth quarter, we reported revenue growth of 6.7%, all organic, indicating the value to our long-standing insurance customers. The overall increase within the segment was due in part to 4.5% revenue growth in industry-related insurance programs resulting primarily from the continued annual effect of growth in 2013 invoices effective January 1. Property-specific rating and underwriting information revenue increased 14.7% in fourth quarter. Growth was a result of new sales with higher committed volumes and incremental revenue contributions due to the expiring revenue-sharing agreement with a technology provider in fourth quarter of 2012.

Full-year risk assessment grew 6.7% driven by 4.5% growth in industry standard insurance programs and 14.2% in property-specific rating and underwriting information. For the fourth quarter of 2013, EBITDA, excluding Interthinx, grew 1.4% to $189.3 million with an EBITDA margin, excluding Interthinx, of 45.4%. For fiscal year 2013, EBITDA, excluding Interthinx, grew 11% to $744.8 million with an EBITDA margin, excluding Interthinx, of 46.7%.

There are some moving parts in 4Q related to our expectations. Our spending on aerial imagery in the quarter was a little lower than planned as we deferred some image capture. However, as I mentioned earlier, we spent more than planned at Verisk Health in support of customer demand to meet deadlines. We have talked recently about the transactional nature of some of the Verisk Health business and that played a role. In addition, the new leadership team at Verisk Health recognized that we needed some operational adjustments to support variable customer demand and to move certain functions towards greater automation. We still have work to do, but the team understands what needs to be done and is executing against that plan.

Decision Analytics EBITDA, excluding Interthinx, declined 5% in fourth quarter 2013 and risk assessment EBITDA grew 9.7% versus the same period in the prior year. Fiscal year 2013 EBITDA for DA, excluding Interthinx, grew 12.1% and risk assessment EBITDA grew 9.7%. The fourth-quarter 2013 EBITDA margin, excluding Interthinx for Decision Analytics, decreased 38.5% from 43.6% in fourth quarter 2012 because of higher cost to meet transactional demand. The fiscal year 2013 EBITDA margin, excluding Interthinx in Decision Analytics, was 40.7% versus 42.8% in fiscal year 2012.

The fourth-quarter 2013 EBITDA margin in risk assessment increased to 57% from 55.4% in fourth quarter of 2012 as a result of the previously discussed revenue growth and good expense management. For fiscal year 2013, EBITDA margin in risk assessment was 56.1% versus 54.6% in fiscal year 2012.

As you know, following our divestiture of Interthinx, our margins are higher than they used to be. As we look forward, we are still comfortable with 2014, our EBITDA margins will be flattish versus 2013 EBITDA margins from continuing operations. Over the long term, we believe a reasonable range for EBITDA margins is 45% to 47%. We expect the middle of this range will be our reference point as we think about investing opportunities in the future.

Our interest expense was down $3 million in the fourth quarter versus the respective period in 2012. This decrease was due to the repayment with cash from operations of $180 million of private placement debt that matured during 2013. We ended the fourth quarter with total debt about $1.3 billion and no outstanding revolver borrowings. As we discussed, we anticipate using our revolver and cash on hand, as well as proceeds from the sale of Interthinx to fund the purchase of EVT. We estimate that the after-tax proceeds from the sale of Interthinx will be approximately $125 million.

Our effective tax rate was 37.3% for the quarter, which was higher than the fourth quarter of 2012 due to the one-time tax planning benefits in the prior period. As discussed over the past several quarters, we have been actively working on our tax planning strategy and realized benefits in both 2012 and 2013 from them. Consequently, our full-year 2013 effective tax rate was the same as the 2012 rate of 36.5%. In 2014, without the one-time benefits, we anticipate the rate to normalize around 38.5%.

Adjusted net income declined 11.5% for the fourth quarter of 2013 and increased 9.5% for the fiscal year 2013. The decline in the fourth quarter was largely due to tax benefits seen in the prior period, which did not recur in the current period. The average diluted share count was 171.7 million shares in the quarter. On December 31, 2013, our diluted share count was 171.1 million shares. In the quarter, we repurchased about 1.8 million shares for about $116.9 million. At quarter-end, we had about $165.3 million left under our authorization. Our share repurchase program has been successful to date generating IRRs of over 25%. For 2014, we continue to anticipate at a minimum buying shares to offset dilution.

Turning to our balance sheet, as of December 31, 2013, our cash and cash equivalents were about $165.8 million. Total debt, both short-term and long-term, totaled about $1.3 billion. Today, our incremental debt capacity is over $1 billion and will grow with our EBITDA and free cash flow. Our debt to pro forma EBITDA at December 31 was 1.7 times below our steady-state target. With the acquisition of EVT and sale of Interthinx, we anticipate our leverage will rise to about 2.3 times. We will delever back to our target over four to five quarters after the close of EVT. As you know, we are willing to temporarily go above our long-term target of 2 times debt to EBITDA to take advantage of unique opportunities because our free cash flow is strong and allows us to delever quickly.

In 2013, free cash flow, which we define as cash from operations less capital expenditures, was $349.4 million, a decrease of about 10% versus 2013. Free cash flow for 2013 adjusted for the timing of excess tax benefits and prior-year voluntary pension contribution was $394.6 million, reflecting a decline of 2.7% compared to the prior year. Our capital expenditures were $157.5 million in 2013 consistent with what we discussed last quarter. Free cash flow represented 46% of EBITDA in 2013, well within our historic average of 55% to 60% due to the increased CapEx.

As you will see in our 10-K, our expectation for CapEx for 2014 is $147 million, down meaningfully from the $158 million in 2013. This is consistent with our comments during 2013 that the elevated CapEx was temporary, although we continue to expect a greater use of capitalized software related to new solutions will modestly raise the capital intensity of our business when compared to historic trends. We continue to aim to grow free cash flow at or above the full level of our EBITDA growth.

As you think about your models for full year 2014, we anticipate amortization of intangibles of about $57 million, fixed asset D&A of about $75 million to $80 million and a tax rate around 38.5%. We aim to keep share count flat through our repurchase program and at current debt balances, our quarterly interest rate expense is about $17 million to $18 million. As we said on the EVT call in January, you can model the debt costs associated with the acquisition at about 5.5%. Net of the Interthinx sale, we anticipate borrowing about $475 million, although that number can change based on time of the close. After the close of the EVT transaction, we will update you.

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'd like to ask the operator to open up the line for questions.

(Operator Instructions). Tim McHugh, William Blair.

-- insurance vertical as a whole. I know you talked about it accelerated this year on a full-year basis, but it was a little slower in the fourth quarter. So I guess two parts of the question. One is what was a little slower in the fourth quarter versus what you saw in the third quarter, which was very strong and as you look forward here to 2014, is the growth rate you saw in 2013 something that accelerated pace, something you can sustain or would we see a stepback towards more I guess the growth trends you've seen in the last couple years?

Hi, this is Mark. Good morning. First of all, I think we feel very good about insurance. We delivered this year on some strong organic growth. I think we feel well-positioned for 2014. As you were to think about the quarter relative to third quarter, we did highlight the fact that there was some one-time work that was done in third quarter that would probably make a little bit of an inconsistency between third and fourth.

Going back to 2012, there is a lot of pluses and minuses there. I think the general trend is one that we look to across the year and it was a positive one. There is nothing that is systematic that would cause you to be concerned that the quarter was below what was a year ago.

Okay. And is the underwriting group -- I didn't -- usually you have mentioned -- highlighted that as a source of strength for the last few quarters, but it wasn't mentioned.

I think the answer to your question is that we continue to see good growth in underwriting in the quarter just wasn't quite up to what we had seen in the first three quarters of the year and a little bit to the point I made just a moment ago.

Okay. And then just on healthcare, can you help me understand what type of cost you needed to add? I guess maybe I overestimated how automated of a business it was, but I guess where was the extra cost that you needed to put to bear and I guess a little more color on the operational changes you described. The new management (multiple speakers).

Yes, Tim, it's Scott here. There's a couple things, but particularly with respect to the Medicare Advantage business, which is the part which is very transaction-oriented. There are activities related to chart retrieval and then coding in order to abstract the data out of the chart. And those are the things which have to flex up as the unit volumes go up and that is what we had to put more time and energy into. And that is one of the aspects of the business, as Mark was mentioning before, that we are working to achieve the highest possible level of automation.

Okay. And is that something if you knew earlier you would have been able to spread the cost out? Is that the comment that I guess if you planned ahead?

Yes, well, we do plan ahead.

Well, if the client had planned ahead and told you I guess.

It's more that. That's right. I mean there is an aspect of the actual volume that we work, which is in reaction to our customers. We want to be supportive of them because their own business result hinges upon what we do. So when they have a greater volume, it is our desire to respond to it. We don't always know from them exactly what those volumes are going to be. So we try to remain a little bit nimble and able to flex with them.

Okay. And just to finalize that, was your comment that the margins, they were still scaling? So can I take that for the full year the margins still improved in the healthcare business?

That's right.

Yes.

Okay, thank you.

You bet.

Manav Patnaik, Barclays.

Hey, good morning, guys. Just on the health, one more thing. I mean you guys -- I guess you mentioned in there that the busiest period I guess ended February 14. I was wondering if you could elaborate on that and I guess with that in context, any commentary on how first quarter should shape up sequentially?

Yes, so let me kick off here. As we've mentioned in the past, there is a seasonality to the work that we do and in fact, different aspects of what we do in Verisk Health have different seasonal cycles. But there is a back-half quality to what it is that we do in the healthcare space overall and we would expect that to continue to be the case this year.

I guess so this busy period you talked about though, that was just specific to one area then? I was just trying to understand why that was the busiest time.

Well, in the Medicare Advantage space, there is a process by which the Medicare Advantage plans have to make their submissions to CMS in order to drive their revenue outcome and all of that times out on February -- this year, it timed out on February 14 and so there is a lot of activity through the end of Q4 and even a little bit into the first quarter to try to respond to that deadline and that is what we were referring to.

Okay, all right. And then just on Argus, I mean obviously it continues to perform really well. I guess you have a little bit tougher comps, so you maintain mid-teens. But can you just help us understand some of those -- some of the I guess the drivers near term that have been leading that solid growth?

Well, there are a multitude of ways in which the Argus business grows, which is one of the reasons why it is such a wonderful business in addition to the extremely proprietary nature of the data they have got. But the business consists of multiple sets of solutions that are provided to retail banks, which include basically the contributory data studies, analytic solutions and a suite of services, which are built around the analytics solutions, as well as actually licensing the analytic platform that we have built back to some of our customers. And all of that in the context of the opportunity to grow the business globally.

In addition to all of that, we are increasingly finding ways to try to repurpose the data to tie in what is happening in the retail banking channel with what is happening in other vertical markets, specifically into the world of trying to observe patterns of consumer spending and how they respond to promotion and advertising, whether it is broadcast or online. And all of those are part of the Argus story and will continue to be as we go forward.

All right. Thanks, guys.

Bill Warmington, Wells Fargo.

Good morning, everyone.

Good morning.

Hi, Bill.

With healthcare coming in as strong as it did and Argus as well, do you think it would be -- as we look out to organic growth for the rest of the year, do you think we've come to a point where we've basically troughed and for total Company organic growth, we will see some gradual improvement over the year?

We are feeling good about the business, Bill, and we are very focused on organic growth. And one of the things I would just say is that our case is built on a very broad base. There are -- I mean we basically do not accept that any part of our business is mature. And so even within the longest-standing solution sets we've got, we are asking for innovation and new forms of value for our customers. So we are looking at a case which is built very broadly across the entire Company.

Okay. And I also wanted to ask for an update on the pooled data initiative, just how many organizations are participating and how effective it has been at reducing fraud in healthcare and is it generating any revenue or when do you have plans for it to do that?

Right. So we are still in the early stages. The last time we talked about it, we reported that we had two companies participating. That is still where we are at, but we do have a couple of name-brand companies that are deep into conversation with us and this is very definitely one of those network effect businesses. So as we can get more companies into the process, the value is going to grow not arithmetically, but more geometrically. Even so, even with the first two, we are very encouraged by the amount of value that we have been able to point to for our first two beta customers in a relatively short period of time. So we are very encouraged.

Got it. And a couple of quick housekeeping questions. One was just the share count exiting the fourth quarter and the other was I didn't know if I caught what you thought the kind of ongoing organic growth rate for Argus next one, two years would be. Sort of mid-teens, is that the way to think about it or --?

So let me take on a couple of your questions. The share count and you asked specifically where the share count was at the end of the year. That was 171.1 million.

That's fully diluted?

Highlighted that we would try to buy back shares to minimize any dilution at a minimum (inaudible) --

Got it.

-- at the end of year. I think we continue to feel very good about Argus. We highlighted that. We continue to feel that there is multiple ways that they can expand both internationally into some new customer sets, as well as into some new verticals, as Scott highlighted, on a bigger base. So we are cautiously optimistic and I think we continue to kind of live by the mid-teens that we had always talked about.

Got it. Okay. Thank you very much.

You are welcome.

Andrew Steinerman, JPMorgan.

Hi, it's Andrew. I wanted to ask about the trajectory of Verisk Health as we go throughout 2014, kind of starting with the 7% in fourth quarter 2013. Do we feel like it is going to be a progressive, rather smooth acceleration through the year to make mid-teens for the full year? And then my second part of the question is does Verisk Health need additional healthcare wins to get there or is this really just ramping existing contracts?

So let me take the second question first and then I will turn it over to Mark for the first one about the profile. But the way that we have built our view of 2014 is by looking at all the customer relationships in place by the end of 2013 and having I think a good view of how those are going to perform in 2014 and then taking a risk-adjusted view of what we believe that the sales pipeline is going to yield in 2014 and the very large majority of the 2014 case is built upon the performance of business that is already in place as we have rounded the corner out of 2013 and into 2014. So that is how we came up with our view of where we are at and Mark, if you want to talk about sort of the profile in 2014.

Sure. I wish I could tell you it's a nice smooth ramp. I think it will continue to be a little bit of an up and down. Let me describe a little bit why. First of all, I think we already highlighted that because of these sweeps this focus on satisfying our customers' demands around submitting these reimbursements, everything happens or a lot happens in the second half of the year. That has typically been around that 55% to 60%. So continue to think -- keep that in mind. And what we are doing this year in 2014 is trying to demand capacity plan hopefully a little more effectively with our customers, which would even out some of the volumes there between third and fourth quarter. So I wish I could give you pointed information, but I would continue to think about a bias towards second half of the year with regards to overall revenue and third and fourth quarter, hopefully, we have a little bit more capacity planning, which would drive a little more revenue third quarter, a little less in the fourth.

Right. And this is all about RQI, I mean the comments you just made really fit RQI's profile, right?

That is the variable aspect of the healthcare business. That is true.

Okay, thank you.

Andrew Jeffrey, SunTrust.

Hi, good morning. I hate to kind of pepper you with more healthcare questions, but I'm doing it anyway I guess. With regard to the transactional versus subscription nature of the business, you made some moves I think in the -- you talked about in the third quarter to transition the business or to push it in the direction of recurring subscription revenue. It sounds like perhaps in 2014 we are not going to see much of an impact of those initiatives. I guess that would be the first part of the question. And then the second is it sounds like to the extent you had some volume ramp delays that affected the third quarter, you feel pretty confident that those are behind you at this point?

So let me take that on. First of all, I don't want to overcharacterize sort of in any given period the degree to which we can actually shift the revenue mix from transactional to subscription. So you may be thinking about comments we've made where we would always have that in mind as a goal and over longer periods of time, our experience has been that, in data analytics businesses, you do tend to move with time from transactional to subscription partly because our customers would like to have relatively greater certainty about what it is that they are going to be paying us through time. So that is a general view that we have on the business and a general ambition that we would have for the business. But we would not want to overcharacterize our ability in any given period to move the market in that way because, particularly with something like Medicare Advantage where you've had such substantial expansion in transaction volumes, the customers -- our customers would not really know exactly how to project where individually they are headed and therefore, they wouldn't really know how to write a subscription contract around that. So you may have heard us express that as a preference, but I don't want to give you the impression that that is something that we feel can be moved around particularly strongly at any given moment in time.

And with respect to what went on in the business in the fourth quarter, when we were talking about third quarter, we had talked about four accounts in particular and we can report that actually the cumulative effect of those four accounts in the fourth quarter was actually slightly above what we had expected.

And maybe I can just add real quickly to the characterization. What we tried to put in place was long-term contracts that had committed volume minimums. So those minimums are there; that gives us comfort. It also gives us a long-term relationship, but inside those committed minimums, they are full-year minimums. So just trying to get from our customer that capacity, it's not smooth over the year. It still continues to be -- they give it to us as they think (multiple speakers).

In addition to which our ambition is to outperform the minimums, in some cases substantially.

And Scott, if you just take a sort of high-level view of the healthcare business given all the moving pieces, would you kind of characterize 2014 as a transition year or work in progress year because it sounds like there are some ongoing investments or adjustments that you are making at the same time that your revenue growth continues to be pretty robust? And do we think about the business perhaps evolving and maybe even taking on a more -- a different complexion, a more mature complexion from a margin standpoint as we get into 2015? Is that kind of directionally the way to think about it?

I think that we are and will remain an evolving organization for some time. Just by way of reference and I think most of you know this, but, in 2013, our healthcare business was five times larger than it was three years prior in 2010. So there has been a great deal of growth. And obviously, we are intending to continue to grow the business and growth implies that we are going to be creating new solutions, that we are going to be improving the processes and the products that we already have out in the marketplace and on top of which the really important contextual point here is we have a business that is material now inside of Verisk and yet, at the same time, when you look at the healthcare space overall, we are still a small to midsize because there are several companies which are in the data analytics space who are larger than we are. And so we still have a long way to go I guess is the way that I would put it and lots of opportunities to try to continue to improve the way we do what it is we do, whether it is acquiring yet more proprietary data or enhancing the automation inside of what it is that we do.

And as our colleagues inside of our healthcare business know, every time we are together and we are together a lot talking about the business, it is basically about how can we continue to reinvent this business through data analytics and enhance processes. And I think there will continue to be opportunity to do that over longer periods of time. It is still an evolving and dynamic business and that is -- in that is where the growth opportunity exists.

Suzanne Stein, Morgan Stanley.

Hi, can you go back to the insurance piece of Decision Analytics and the organic growth rate there? It dipped down in fourth quarter from a kind of 8% to 9% normalized range that it has been in the nine months prior. How are you thinking about 2014? Are you looking for a further deceleration in that segment or are there trends in the P&C end market that give you confidence it could trend higher?

Hi, Suzi, this is Mark. I think I will just try to highlight that we continue to feel very good about the opportunities in insurance and that is not just in what I will call the DA businesses. That goes across into risk assessment and I think we continue to think about the opportunity being across the full spectrum of insurance customers. We have optimism for the quarter. From your point, I agree it was down a bit in fourth quarter. I don't think there is anything systematic there. It was really a little bit inside of underwriting as we described and we didn't have quite the growth there that we had in the past.

We would continue to believe that all of those businesses, including risk assessment, have an opportunity to expand. I will highlight one thing, though, as you think about risk assessment. We did have that service provider, that contract that expired in fourth quarter of 2012. It's about $12 million. That will continue to be in our 2014 numbers, but 2013, we did experience some one-time growth because of that contract expiration.

Okay. And then on the buyback activity, it was bigger I think than it has been since 2011. Was there anything specific that drove that? And I guess given where your leverage is now, should we expect it to remain at an elevated level, just I guess assuming the stock remains in the range it is now?

So in fourth quarter we kind of used our capital to the best way possible. We felt like it was as good a time, a good buying opportunity, which we did do. At the same time we have now deployed some capital through the use of acquisitions, EVT specifically, and at a minimum we are going to buy back shares to limit dilution into 2014. That is our plan, and we have just basically consistent targets that we continue to work through.

And then maybe just one more on specialized markets. You mentioned that some of the better performance this quarter was project-related. Are you expecting this to continue in 2014, or was that more of an unusual fourth-quarter item?

So I think what I will highlight is that, you know, sometimes those special projects do kind of move revenue into a quarter and it's good news. But the fact that the projects are there usually leads to more opportunity, more intense relationship. So although they are a little bit one-time, I think it kind of has some promising aspects to it. And I feel that both EH&S and from a commercial perspective the world of climate, I think, provides us some upside into 2014.

Okay, great. Thank you.

David Togut, Evercore.

Thank you and good morning.

Good morning.

Just piecing together your comments, Scott, and yours, Mark, as well with respect to margins; I think, Mark, you signaled that EBITDA margin would be flattish in 2014. And, Scott, you highlighted the focus on maximizing organic growth but also the operating leverage in the business. So as we look beyond 2014, would you anticipate that EBITDA margins would begin to expand again, or would you hold margins flat and max investment to continue to drive organic growth?

Yes, thanks for the question. So first of all, going back to what Mark had mentioned before, when you look at continuing ops what we said is we think 2014 will be flattish relative to what they were in 2013, for continuing ops. So that is kind of the near-term horizon.

The long-term horizon is Mark did talk about the range being 45% to 47%, and that we are kind of oriented around the midpoint. And the way we think about that is we are very determined to make sure that we keep the top line growing organically while at the same time making sure that EBITDA and free cash are also advancing in line, and that free cash flow is more than keeping up with EBITDA growth. So that is kind of the equation we are working on.

And sort of the good news about where we sit is that as we ask for more innovation from the organization, we are actually getting it. So we are in kind of an opportunity-rich environment, is what it feels like. And so we are leaning into the opportunity to invest. The one thing to bear in mind is that we are a business-to-business data analytics company. Our customers are sober-minded businesses who will diligence products and expect proof-of-concept before they buy into them, and they should because they are trying to run their businesses with a steadiness.

And so the effect of all of that is a great new solution can take a while to find its way to market. So the balancing point then is we are investing today, and innovation tends to commercialize over longish periods of time in an environment like ours. And so those are all the things that we will be playing with as we try to advance the business top and bottom line.

So does that mean EBITDA margins would likely be flattish in 2015 as well, as you continue to drive higher investment to innovate?

Well, you know, we are still communicating the range that we talked about there. So we did talk 45% to 47%, and we did talk about the midpoint being a reference for us. And we are going to actually take account of real-time conditions on the ground, basically, as we move into 2015, and a lot of that has to do with just how innovative is our organization being.

That makes good sense. I guess just drilling down into 2014 a little bit, it looks like you are getting very nice operating leverage on the risk assessment side, and a lot of the investment is going into DA. Would you expect that to be the trend as well in 2014, where you get lift on the RA margin, and DA margin continues to be down as you drive a lot of investment in that business?

Well, we really -- one of the things that we talk about frequently is that we really see all of what we do in insurance as an integrated whole. When we sit down with our customers, our largest customers, we don't really tend to have -- when we are having our relationship discussions, they tend not to be focused on individual product sets whether they are RA or DA. It tends to really be the totality of the relationship.

And so in that context then, what we are looking for is the overall result, the overall organic result, and therefore the -- we are certainly paying attention to what is happening with each of the product lines, but we are really looking for the overall result.

All of that said, I think that, in DA, I believe that the margins will be firm in 2014 relative to 2013. Firm plus, but the exact outcome -- again, we are kind of -- we are adjusting as we go inside the context of customer relationships.

Understood. A quick final question, Mark, on tax rate. What is your expectation for 2014?

About 38.5%. A lot of the good news one-time tax planning items are behind us and that is the new normalized lower rate going forward.

Understood. Thank you very much.

You are welcome.

Andre Benjamin, Goldman Sachs.

Hi, good morning. My first question, I was wondering if you could potentially provide an update on some of your previously discussed moves in the healthcare business to offer contracts with some lower prices in exchange for longer-term commitments. Is this something that you are continuing to pursue more widely across the business and are you finding it successful in locking in more customers?

So I did comment earlier about four customer situations from the third quarter and for the way that that generally played out in the fourth quarter. But more generally, we are really led by where the customers are and there are some customers that are going to be more concerned about knowing that they have capacity to flex if they find that their own volumes are moving and there are others that want to try to cut it more closely in terms of sort of not really laying in capacity, but rather sort of, in essence, taking the risk that their needs can be met even if they haven't signaled them with great precision beforehand. And so, in that sense, we are just responding to what it is that the customers need and want. And I can't say that I am aware of any sort of major trend in that area one way or the other.

Our preference always, as I said before, would be to have the certainty that is associated with a license agreement and a subscription, but that being our preference doesn't mean that we can necessarily make that happen in the marketplace. Where it can be done that would be our preference, but we are following our customers around in this regard.

Thank you. And with regard to the two existing customers in the pooling business, was there any expansion of those customers into additional geographies as I think you previously indicated that they were only doing business in certain regions? And are there any more specific anecdotes that you would be willing to provide on some of the types of savings and benefits that you've been able to provide, as you said, that the early read is that those relationships are going well?

At Investor Day, we are going to actually talk a little bit more about what is going inside of the pooled data initiative and I think you will benefit from hearing about that directly from our people in the business.

Thank you.

Paul Ginocchio, Deutsche Bank.

Thanks. Just another question about healthcare margins. You said you'd put -- the Decision Analytics margins. You said you pushed out some of the investment in aerial. How much was that pushout? And basically it sounds from the last question that we should expect DA margins maybe to be down in the first half and up in the second half and then maybe flattish to slightly positive year on year overall. Is that the right way to think about it?

I'm not sure where you drew those conclusions. So let me just kind of go back. We did spend a little less on aerial imagery as we kind of got towards the end of the year, whether it is flying conditions or flight plans. There is an opportunity to not gather as much information as we had anticipated. That did push off and will push off into 2014. That is a fact. As far as the margins into 2014, I'm not sure we are going to start commenting by quarter. I think we tried to give you a little bit of color for 2014. We have a view that it should be generally flattish. Scott highlighted that, from a DA perspective, we do see some scale there. So he talked about flattish plus and from an RA perspective, I think what we do kind of expect and see a little bit is some ramping investment in RA. So probably won't see the same type of scale in RA in 2014 that you probably saw in 2013. That was I think the overall characterization.

Great, thanks for that. And then just on that aerial pushout, does that mean it is coming in the first quarter or any way to size that just so we can try to model it?

Yes, I am not sure we exactly know the timing of that right now. It will certainly be in the first half of 2014, yes.

Great. And then, finally, the 45% to 47%, I think that's a new target. Is that also going to be -- I think your old bonus target was 43% to 45%. Is 45% to 47% the new bonus target?

I mean we are always taking into account all the moving parts in the business. So we will be working on that with our Board and the comp committee, etc. to determine where the target should be put. But generally we want the targets to reflect the reality of where the business is.

Great, thanks.

We'll definitely spend time on that.

Jeff Silber, BMO Capital.

Thanks. Just wanted to quickly circle back to your comments about the pricing environment and the fact that you respond to what your customers want. Was that a comment just for the healthcare business or is that something you are seeing in terms of maybe potential changes across your other verticals as well?

So there's actually I think two questions in there, Jeff. So let me try and grab them both. The first thing I would say is our preference, which again would be we like to be in a subscription relationship and generally our experience has been over time that is where our customers would like to be once they get a handle on sort of their transaction volumes so that they, with confidence, could know, in essence, what they are signing up for when they sign a subscription agreement because if you are going to enter into an all you can drink kind of a relationship, you'd like to know how much you are likely to drink and what the alternative would look like if you could get it on a per-drink basis. So that's the preference.

When we actually look at our business, I would say that there are puts and takes. The healthcare business has -- of late, it has grown more on the transactional side. On the other hand, when we look at say diversified financial services, there have been some gains there with respect to subscriptions and I think that, in the insurance space, I think it's highly committed and stable actually and actually we've made some gains in say the commercial property part of our business. So there is puts and takes, but I think at the margin I would say outside of healthcare we are probably becoming slightly more subscription-oriented.

Okay, great, that's helpful. And can you just remind us when you think the EVT transaction will be closing?

Well, what we've put out there is by the end of the second quarter and we've mentioned that we are paced by two things. One is regulatory approval and the other is just working through with the shareholders who are the current owners of EVT, but that is the track that we think that we are on. July, kind of early July would actually be the very specific target.

All right, fantastic. Thanks so much.

You are welcome.

Hamzah Mazari, Credit Suisse.

This is [Ang Singh] dialing in for Hamzah Mazari. Just a couple quick questions. Could you provide any color on pricing increases that you saw in the quarter and for 2014 versus how they've fared in the past?

You mean across the entire business?

Sure, yes.

Let me take a first crack at it. I mean I think that many of our businesses don't really institute price increases as I think about healthcare as an example. What you are maybe focusing a little bit on is inside of our P&C business some of our traditional industry-standard programs. We have kind of a January 1 invoice that comes out. I think what we've tried to do, as we have highlighted time and time again, is that we think of insurance customers as selling and buying a large group of products from us and those invoices around industry standard programs, we've tried to keep the approach consistent. We haven't done anything that would cause them to have to really think too hard about those invoices. We want them to be thinking about new products and extension of solutions across the full suite of the enterprise in Verisk. So business as usual I would say on the risk assessment side of pricing and that would be true of also our what I will call the claims search invoices that's inside of our Decision Analytics set of solutions for insurance.

Okay, thank you. And the next question that I had is just post the EagleView deal, how should we think about the acquisition pipeline and which areas you might be most looking to augment going forward?

So first of all, we remain very focused on that part of the agenda. We believe that it has been very value-adding for our investors over a long period of time and as long as we continue to operate strategically inside of that agenda, we think it will continue to be value-creating for our shareholders. We see opportunities across all the vertical markets to try to support and amplify what it is that we are doing on the acquisition front. So I wouldn't really buttonhole it anywhere. As we've said in the past, because of where we sit in the healthcare space today, there are certainly a very large number of companies out there that would logically be on our radar screen and at Investor Day, we will talk a little bit more also about the way that we partner in order to relate to that world. And so partnering is also sort of an early step in the M&A agenda. But we see it as a very broad-based kind of an activity.

If I was to point at any trend, I suppose it would be, and you can just see this in what we have done, the size of the deals has gotten somewhat larger and I think that that's likely to remain the case. That is not to say that we won't do smaller tuck-ins, but our deal size has gotten somewhat bigger and I think it's likely to continue to be that way.

Okay, that's super helpful. Thank you.

William Clark, KBW.

Good morning. Scott, I think you have kind of touched on this, but just wanted to make sure I was clear. So the three customers that were slow to switch over in the Medicare Advantage business in third quarter, they all switched over in the fourth quarter and you saw no additional issues in terms of the timing of bringing new customers on board? Is that the right way to think about it?

What I said very specifically was we talked about four customer situations on our third-quarter call. Three of them were about the timing of getting started and one of them was about volume responding to pricing and the comment that I made was the net effect of all four of those was to be performing somewhat higher than we actually expected going into the fourth quarter.

Okay. And then given the February date you mentioned, a lot of the CMS activity has to be done by, now that we are past that date, is this a time when you generally see more or less activity in terms of customers thinking about changing or switching providers?

I don't really think of it as being bound up exactly in that way. If you are talking about existing product sets to existing customers, I feel like, in essence, that we are constantly being diligenced by the marketplace and there is such a strong relationship, and this is going to really be highlighted when we are with you on Investor Day by our healthcare team. There is such a strong relationship between the quality of our execution and our growth opportunity. And so our customers are perpetually able to observe how we are executing and delivering for them. And I think they are kind of constantly taking that into account as they think about how much work they want to do with us.

And we've talked before about the fact that we've got a wide range of solutions and a big part of our opportunity is to cross-sell those solutions. And so, again, I'm just back to, if we execute and I think our execution is very evident to our customers, then that is supportive of our opportunity to introduce new products. So I don't think of it as bound up at any given moment in time.

Okay, thank you.

You are welcome.

Joseph Foresi, Janney Scott Montgomery.

Hi. I was wondering if you could just talk a little bit -- I know you made the changes at the management level in healthcare. Can you talk about any processes and/or functions with the new manager in place there that they are looking at and there might be some changes in?

Well, we are paying a lot of attention to the way that the business actually operates. Our growth opportunity is not a function of some clever resegmentation of the market that we haven't seen before or some new concept, even though we are introducing new solutions all the time, but some fundamentally different view of what we are doing. Our growth opportunity is very tightly related to the quality with which we deliver on the things that we currently do. And so essentially the very first job for our new leadership, which, by the way, was a part of the business so it's not sort of this completely from the outside sort of a perspective, but what we really asked Nadine and team to do was to just intensify the focus on the quality of our operation and the nature of our operation and that is really a stem to stern statement. So that applies to all the different lines of business we do, all the different solutions and all the different customer sets that we serve.

But what we have really tried to emphasize is we must do high-quality work at these very highly elevated volumes that we've achieved over the last couple of years. And that everything else follows that. Our growth follows that. Everything is dependent upon that. And I've been very happy with the amount of attention that the entire team has given to all of that. I mean it is everything -- if I was to try to give it to you functionally, the categories are the same as everything that we do. We have got to extract, transform and load data. We have to interpret data. We have to then analyze data. We then have to create platforms by which we deliver data and analytics back to our customers.

And one of the things on top of that that we have the opportunity to do in the healthcare space particularly is to normalize the data that comes in for different reasons to normalize it so that we have one common set of data definitions and we have achieved that. But it's the all of that. It is not as if there is just one thing where if you pull on the lever, all of a sudden it works the way that it is supposed to. It is a very complicated business and it is a very complicated set of steps to get the result that our customers want. So it's a big agenda. We have got a good team that is very actively on that.

Got it. And on the insurance front, you talked about there being some stability and maybe third quarter had a little bit more business than maybe the fourth quarter and that is why the run rate moderated a little bit. How should we think about that business going forward? It looks like it had tweaked down a little bit, but should we be looking more at the historical run rates or should we be looking at exit 2013 run rates for that business?

This is Mark again. I think I will go back to -- I will highlight one 2013 item that we mentioned. There is about a $12 million item that came into 2013. It will continue into 2014, but there won't be any growth. That item was related to a service provider that expired, a contract that expired in 2013 -- in 2012 -- excuse me. We feel across the insurance operations very strong, so we feel good. The fourth quarter was a couple items, primarily inside of I will call it in underwriting, but the DA insurance business performed -- it's performing well. It was -- 4Q is higher than 1Q. It's on the right ramp, it's on the right trend and I would just highlight to you that there is nothing systematic in what you see there. It is -- over the long term, over the year, I think we will continue to deliver in insurance. I think we are getting into the right type of conversations with our customers, walking in at the very senior levels, having conversations about climate, about their book of business, around profitability. That puts us in a great position to really talk about the suites of solutions that we have to help them really profit. So I think we are making progress.

Got it. And very last question. Any lessons learned from the divestiture that you are carrying forward for future acquisitions?

Well, I think that what we did there certainly relates to the principles that we run the business by and I would say always have run the business by. We want to be very differentiated with respect to our intellectual property and have proprietary data and analytics. And we would like to be facing markets that are inherently healthy, relatively non-cyclical. We are very focused on competitive advantage and so essentially our view of who we are as a business has not changed at all. What moved was just the underlying market being served by our mortgage business. I think we've talked in the past about the fact that transaction volumes in the mortgage market as recently as 2006 were about 4 times as large as they are today. And so we just needed to take account of that as we thought about our allocation of capital and put that in the context of all the other ways that we can deploy capital and just drew the conclusion that we had a greater number of opportunities given who we are in other marketplaces.

But, fundamentally, I am very impressed with our management team and everything and I think that First American will be a very logical home for the business. So just all of that was a part of our sort of decisioning. And so I am not sure that I could really point to any lessons that we learned from that. I feel like it's the logical extension of what we've always been doing, which is trying to behave strategically and to be very thoughtful about where our capital is deployed.

Thank you.

At this time, we have no further questions. I will now turn the call over to Mr. Scott Stephenson for closing remarks.

Well, thank you and thanks to everybody for joining us today. We appreciate your ongoing interest in our Company and support. And I just want to say that I hope that all of you can be with us at our upcoming Investor Day on March 6. We will be, as we have in the past, we will be highlighting several of our solutions giving you a chance to really touch them and see how they operate, as well as having a wide panel of our senior leadership with us to discuss the various parts of our business. And so we are looking forward to that event on March 6 and hope to see all of you there. And thanks for your time today.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.