Verisk Analytics Inc (VRSK) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to Verisk Analytics second-quarter 2014 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 and Chief Knowledge Officer, Ms. Eva Huston. Ms. Huston, please go ahead.

Thank you, Lisa, and good morning to everyone. We appreciate you joining us today for a discussion of our second quarter 2014 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, 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 Investors Section of our website Verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC. A replay of this call will be available for 30 days until August 30, 2014, on our website and by dial-in. And finally, as set forth in more detail in yesterday's earnings release, I will remind everyone that today's call may include forward-looking statements about Verisk's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance is summarized at the end of our Press Release, as well as contained in our recent SEC filings.

And now I will turn the call over to Scott.

Thank you, Eva, and good morning, all. Our second-quarter revenue growth was good, again driven by very strong performance in our insurance units. We remain focused on our efforts to continue to innovate and deliver predictive analytics for our customers which will, in turn, lead to solid organic growth and shareholder returns over time. As we have discussed with you, we consider our organic growth rate to be the single best measure of our vitality as an organization. I believe our asset mix is the best it's been in my years with the Company, and we believe our assets will allow us to deliver the kind of organic growth you've come to expect from Verisk.

I want to share with you a couple of recent highlights across some of our key themes. A wonderful example on the innovation and investment agenda is the launch of Touchstone 2.0, which is the next version of our next generation Cat modeling platform released earlier this month. As you know, we have invested in Touchstone and are very pleased with the customer adoption we have seen in the course of 2013 and 2014. With this second release, we are introducing many new capabilities including support for non-Cat risks such as fire, lightning, explosion, and vandalism. Having this information in a single platform by leveraging other parts of the Verisk Insurance Solutions group provides a more comprehensive view of risk, thereby expanding the value to our insurance customers by giving them a more holistic view of their portfolio.

Second, we're focused on the large and long-term opportunity related to international expansion. We are in the very early innings with international comprising a small piece of our revenue today. Our units with an existing presence outside the US are working to expand. We generate revenue outside the US today from analytics related to Catastrophe Modeling, Environmental Health and Safety, Payments, and Insurance Claims.

Our other units with solutions in analytics which are applicable or adaptable to international markets are exploring the best ways to enter those markets. A recent example of our international efforts is the Risk Symposium we held in London in June. We were pleased with the quality of the attendees and the strong interest in our solutions from the insurance industry. As we have discussed in the past, our international efforts will reflect a mix of both organic growth and acquisitions where they make strategic and financial sense.

M&A remains high on our agenda and our team is actively evaluating opportunities while we remain focused on our core principle of creating shareholder value through innovation, discipline and execution. We have meaningful capacity for additional acquisitions that meet our strategic agenda, both through our significant free cash flow as well as our borrowing capacity. We also have continued to repurchase our stock, a sign of confidence in our future. We continue to work through the FTC approval process in connection with our announced acquisition of EagleView Technologies and still expect to close the acquisition in the third quarter of 2014, likely towards the end of September.

In the second quarter of 2014, we delivered good overall performance with total organic revenue growth of about 9% and diluted adjusted EPS growth of about 8%. EBITDA margin in the quarter was about 46%. We are focused on delivering value to our shareholders and we remain disciplined in our use of capital. In the quarter we returned capital to our shareholders through stock repurchases of about $30 million. Our remaining authorization at the end of the quarter was about $346 million. We will continue to use our authorization consistent with our capital allocation strategy, as we previously outlined.

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

Thanks, Scott, and good morning. In the second-quarter total revenue grew 8.5%. For the second quarter, our Decision Analytics segment delivered 10.8% revenue growth. Growth in the quarter was driven by strong performance in insurance. Our Decision Analytics insurance revenue grew 14.2% in the second quarter. The increase was driven by strong growth in loss quantification and Catastrophe Modeling Solutions. Underwriting growth in the quarter was good and Claims Solutions also contributed. Overall revenue growth was driven by the increased adoption of existing and new solutions as well as a strong quarter for catastrophe bonds, although even without that benefit, our Decision Analytics insurance growth was double digits. Because of the cat bond revenue, which is based upon market transactions, I would expect growth will moderate a bit in the coming quarters but will be strong for the year.

In addition, we have seen the benefit of new contracts and adoption of new solutions in our repair cost estimating business. These began in 2013 and will come full cycle in the second half of this year. In Financial services, revenue growth of 11.6% in the quarter was in line with our expectations. Second quarter growth was below our first quarter growth rate due to larger than usual project revenue in the second quarter of 2013. However, overall this is a highly recurring revenue business which offers us a very good visibility. We are confident that the growth outlook at Argus remains strong. This includes opportunities related to international expansion, additional penetration of existing customers, and partnering opportunities, in particular related to advertising effectiveness with traditional and new media companies. We remain confident that Financial services will grow at least mid-teens in 2014.

In the Healthcare vertical, revenue in the second quarter grew 6.6% led by growth in revenue and quality solutions. We are focused on the Medicare Advantage busy season which will run through early 2015. We have much better visibility into our customer volumes for this year than we did last year at this time. We've improved our operations in support of the business and we have achieved over 50% more records in the second quarter of 2014 than in the second quarter of 2013. Pulling the work of the busy season forward and staffing ahead in this way is precisely where we thought we'd be and exactly where we need to be in order to deliver the mid-teens growth for the full year 2014.

In the Specialized markets category revenue increased 0.8% in the second quarter. We saw good growth in the quarter in Environmental Health and Safety Solutions and Weather and Climate Analytics to the commercial market. Growth in the government space was offset by the shift of the GOES-R contract from development to maintenance mode.

Turning to Risk Assessment. For the second quarter we reported revenue growth 5%, indicating the value to our long-standing insurance customers. Our industry standard insurance programs grew revenue 5% in the quarter. This reflects our 2014 invoices, which were effective January 1. In addition, we saw a contribution to growth from newly adopted solutions, such as predictive modeling, electronic rating content and workers' compensation solutions. We're putting a lot of effort into our long-standing solutions and building our culture to continue our strong position into the future.

Our property-specific rating and underwriting information increased 4.8% in the quarter. This increase was from new sales including those resulting in higher committed volumes.

EBITDA from continuing operations for the second quarter increased 8%, to $194.2 million and our EBITDA margin was 45.9%.

The margins in Decision Analytics were 39.4% in the second quarter of 2014, versus 39.6% in the second quarter of 2013. After the dip in margin in the first quarter of 2014 related to increased costs in our Healthcare business, as well as investments to support our innovation agenda, we're pleased to see the margins close to where we were last year in the second quarter. Our preparation for the Verisk Health busy season has included earlier hiring to ensure appropriate staffing levels. So this is a good result, even with the frontloading of these expenses. You will recall that as revenue picks up in the Healthcare business some portion of these expenses will as well. These variable costs are something you may want to keep in mind as you look at DA margins for the rest of the year.

In the quarter, our Risk Assessment margins were 56.3% versus 56.0% in the second quarter of 2013. Our margins were advanced in the quarter by revenue growth, good expense management and lower pension costs. Our interest expense was down $2.2 million in the second quarter, versus the respective period in 2013 due to lower debt balances as a result of repayments made in 2013. As we discussed last quarter, we anticipate using our revolver and cash on hand including the proceeds from the sale of Interthinx to fund the purchase of EagleView Technologies.

Our reported tax rate was 37.9% for the quarter. Adjusted net income increased 5.1% to $96.9 million in the quarter, adjusted EPS on a fully diluted basis was $0.57 for the quarter, an increase of 7.5%. The average diluted share count was 169.5 million shares in the quarter. On June 30, 2014, our diluted share count was 169.5 million shares. In the quarter we purchased about 0.5 million shares for $30.4 million. At quarter end we had $346 million left under our authorization. Our share repurchase program has been successful to date, generating annualized IRRs of about 20%. For 2014, we continue to anticipate, at a minimum, buying shares to offset dilution.

Turning to our balance sheet, as of June 30, 2014, our cash and cash equivalents were $419.4 million. Total debt, both long-term and short-term was about $1.3 billion. Today our incremental debt capacity is about $1 billion and will grow with our EBITDA and free cash flow. Our debt to pro forma EBITDA from continuing operations as of June 30 was 1.7 times, below our steady state target. With the acquisition of EagleView Technologies using, in part, cash on hand, we anticipate our leverage will be about 2 times at the close of the transaction.

Free cash flow adjusted for two items discussed below grew 4% compared to the prior period to $228.1 million. This represented over 60% of EBITDA from continuing operations in the first six months of 2014. As a reminder, we have defined free cash flow as cash provided by operating activities less capital expenditures. To facilitate comparability to the prior period, we adjusted free cash flow for the timing of excess tax benefits from exercised stock options in the first quarter of 2013 and for the sale of our mortgage services business this year.

Cash provided by operating activities as reported increased $40.1 million. This increase was the result of a $20.6 million increase generated by improved profitability of the business, a $5 million decrease in interest paid due to lower debt balances, and a decrease of $46.2 million in taxes. This was partially offset by a $10 million use of cash for working capital and other balance sheet changes and other outflows of $21.2 million. Our capital expenditures were 9% of revenue year-to-date in 2014. We continue to expect about $147 million in CapEx for the full year. A greater use of capitalized software related to new solutions will modestly raise the capital intensity of our business when compared to historic levels. We aim to grow free cash flow at or above the level of our EBITDA growth.

As you think about your models for the full-year 2014, we expect flattish margins for the full year excluding Interthinx. As we remain focused on our innovation agenda, we are maintaining our long-term view of margins in the 45% to 47% range. Amortization of intangibles is expected to be about $57 million, fixed asset depreciation amortization of about $85 million, and an effective tax rate between 37% and 38%. We aim to keep our share count flat through our repurchase program and at current debt levels, our quarterly interest expense is about $18 million.

Based upon the strength of our cash flow generation and current GAAP to cash balances, we anticipate borrowing about $300 million or less for the acquisition of EagleView, depending upon the timing of the close and other events. We're expecting to incur $4 million to $5 million of higher legal and professional services fees related to the transaction, most of which will fall in the third quarter. After the close of the EagleView transaction, we will update you.

Overall, we are pleased to report that our business is performing well. We have a nice mix of growth from multiple verticals. We are executing on our operational plans and we continue to invest with discipline for the future and to continue our strong organic growth.

I will turn it back to Eve for comment before Q&A.

Thanks, Mark. We appreciate all the interest in Verisk. Given the large number of analysts that we have covering us, we ask that you limit questions to one and one follow-up. This will give more people an opportunity to ask a question. And with that, I'll ask the operator to open the line for questions.

(Operator Instructions)

Manav Patnaik, Barclays Capital.

The first question is just around the Cat bond business. I was wondering if you could help us understand the size of that business because clearly it's been a nice driver for the DA insurance for some time. And also if you could maybe help understand -- I think you pointed out a little bit, but just the one-time impact from the issuance levels versus the subscription base that moved up?

Sure. So let me first describe a little bit about the way we think of Cat bonds. There is a very big function inside the opportunity where there is a modeler that is used for any type of insurance-linked transaction.

We believe that the science is very important there. It's probably the purest sense of the quality of the solution and in a very significant majority of the Cat bonds, AIR has won that business. But unfortunately it's a little bit more difficult to predict. It gets up and down, year in, year out.

Generally, though, the trend in insurance-linked transactions and Cat bonds has been growing over time so we think that is a positive trend broadly. I think the best way to describe the impact is it is not a material part of the cat modeling business, but it becomes increasingly more important. The overall growth that I wanted to describe inside of Decision Analytics Insurance as a whole, even without that, would have grown about 10%, in excess of 10%, actually, in the quarter.

Then maybe just around in the financial services piece, you refer to the opportunity in the advertising effectiveness with media companies. I was wondering if you could help us or elaborate just a little bit more on what exactly that means.

Yes. This is Scott. Basically through the work that Argus does, we have a very comprehensive view of spending patterns by individuals and households. And the world of those who are trying to promote to individuals and households is interested in understanding what the reaction is when there is some form of media campaign.

It could be traditional media, it could be new-media. Argus data are useful in understanding what the reaction is in terms of consumer spending patterns. That is the linkage.

Okay. Fair enough. I'll get back in the queue. Thanks.

Tim McHugh, William Blair and Company.

Thank you. First I wanted to follow-up on the Catastrophe business a little bit. Besides, obviously, the bonds, can you talk about what's driving the strength there? If we look at the biggest competitor there, they seem to be growing more like mid-single digits. And then, I guess, can you touch on -- I guess, maybe Touchstone 2.0 versus -- I know they're in the process of trying to roll out their own kind of new technology platform. Just competitively, how do you think about that there?

Tim, your second question is actually the answer to your first. A lot of the growth that's going on now is innovation around the software platform that is used for not only delivering the Cat models but actually integrating the Cat models into work flows.

This is a change in the Cat modeling business. It used to be more about the basic model which is essentially around a stochastic view of the probability of disasters and their impacts on damage and then the damage impact upon insurance outcomes. Those are the core models.

The software, which is really -- and this business has become much more software intense, I would say, over the last year or two. The software is basically about grabbing those models and helping our customers to interpret them into their own decisions, whether it's at the portfolio level or at the individual risk level. You know, the market is responding very positively essentially to all of the things I just described.

Our models are seen as being very distinct, very grounded and really good science, and our software is industry-leading at this point. There's really been just kind of an across the board very strong reaction by the market.

When I say the market, there are a lot of different customer segments here. There is global reinsurers, there's insurers, there's reinsurance brokers and all of the segments are responding strongly and positively to what we do.

Does that mean that you're displacing the competitors there because they don't have a new platform out there and -- or is it grabbing new share? And associated with that, do you -- I guess if you're displacing the competitor, what's the risk as they roll out their own technology platform that it will stall from the pace of growth here, I guess, that you're saying?

We are really quite sure that we are taking share, but it's also the case that the size and scope of the relationships with our existing customers are also growing. So both of those are contributing to our growth.

We expect that RMS will eventually come out with their own solution and this will be a perpetual journey for us in terms of always upgrading the value of our solution. That's not really anything different from where the business has been in the past.

Okay. Great. Thank you.

You're welcome.

James Friedman, Sesquehanna.

I guess I'll ask mine upfront, but the -- I just want to clarify, Mark, with regard to the expectations that it would imply that the second half Healthcare growth is at or in excess of 20%? And also at the same time that you had said you were mid teens growth for financial services?

Your math is correct. Correct. Yes. We are expecting both of those. We are doing the right things with regard to Healthcare and positioned to deliver. And at the same time I just want to emphasize how strong a business the Argus business is and I think we feel that we're making great progress along a lot of fronts.

Great. I appreciate the clarification. Thank you.

Jeff Meuler with Baird.

Follow-up first on the Healthcare outlook. I think it sounded like part of what gives you confidence is that you are better prepared for the busy season and maybe you're going to be pulling some revenue forward. Is that the primary factor that gives you the confidence in the reacceleration in the Healthcare growth?

Asking that from the standpoint that if there's this one-time catch-up benefit, is the longer-term outlet for that business still similarly kind of mid-teens plus?

Let me take your questions kind of in the order they were placed. Our confidence about the back half of the year is really a product of two things. One is we have had the benefit now of the first two quarters and the way that we've operated the business, and Mark referenced the fact that in the second-quarter, the quarter we just completed, we retrieved more than 50% -- more records than we did in the prior period, second quarter 2013.

So we have a strong sense of the arc of the volume of the business based upon the fact that we've already moved a good number of transactions into the pipeline. And as I think most of you know, we move from retrieving the records to coding the records onto the answer that our customers need by way of risk adjustment. We've observed how we've actually operated in the first two quarters.

That's one part of our confidence. And the other is we know where we are with the customers in terms of what they've asked us to do in terms of volumes for the full year 2014.

With respect to the longer term, of course our business is made up of many different things. We serve the Medicare Advantage space. We serve commercial payers, we have a variety of solutions and our view of all of those is that we're still a relatively small player in the Healthcare data analytics space and essentially our view on that has not changed.

Okay. And then there was talked at the Analyst Day about Telematics. There was talk on this call about expanding internationally. I believe there was a Telematics International acquisition that got transacted in the quarter. Can you just maybe recap us on what exactly you're looking for in the Telematics space and whether it's likely to be a build or a buy?

Yes. So we did announce an acquisition. It wasn't in this quarter, it was actually a while ago, and it's a very, very small acquisition. What we acquired was really technology. But our view on Telematics overall is it is likely that with time our customers are going to be interested in how they rate auto insurance policies.

And that at some point, which is very difficult to determine, actually, very difficult to predict, data derived via telemetry from vehicles can probably play some role in all of that. Our first and most important goal here is to remain relevant in terms of how auto policies get priced.

So we feel the need to be very familiar with the kind of data that are coming off of the installed devices that you see today, the aftermarket devices, the mining of data from the OBD ports on the vehicles, and -- but also actually there's more interest now in seeing whether we can use our Smartphones to also communicate some of the dynamics of the operation of the vehicle.

We're really interested in it because we have a relatively large business today in the mechanics of rating the personal auto policies and commercial auto policies and we see Telematics first and foremost as our ability to stay current with respect to what's happening there. So some of what we do in Telematics will express itself as sort of new factors which are incorporated into our rating programs and won't necessarily emerge as separate revenue line items.

It's also the case that we think that as we continue to do work in the Telematics space, we're open to also finding ways to license some of the methodology to others that are also interested in mining telemetry data.

Okay, thank you.

You're welcome.

Andrew Steinerman, JPMorgan Securities Inc.

Hello, gentlemen. Mark, I wanted to ask you about some of the advanced hiring in Verisk Health. Obviously, is an optimistic side about revenues? I want to talk to you about margins.

My question is has Verisk Health created better efficiencies going into this busy season, because I'm still remembering from last busy season, which was fourth-quarter of 2013 and first quarter 2014, that it was kind of a headcount intensive process, for Verisk's part. I was wondering as we go into this busy season, while we always will additional head, will it be more efficient?

Thank you, Andrew. It's a good question and let me just describe a little bit about the plan that we have and how we've rolled this out. Because of the -- a little bit kind of seasonal nature of the business, I think what we are doing right now is we're getting enough people in place to satisfy what I'll call the busy season, which is the July through typically into January, sometimes mid-February, Medicare Advantage sweeps.

What we've also done is we've kind of worked with some partners to handle overflow business. We have that both onshore and offshore to the extent that we need it. The expectation is because, A, we are hired and ramped up significantly more than last year. So that's why I reference the additional costs in the quarter that we probably didn't see in the past.

We should be better ready, better equipped to provide, A, a higher quality service; B, the productivity should be there. It is difficult sometimes to try to manage all these new hires and that kind of sales staff and somebody who we have had some tenure with will be better equipped to be able to be efficient, be more productive.

We've also worked -- we talk about a lot of effectiveness and efficiency. We've also worked on internal processes. We have metrics, we have workflow solutions, all of those should contribute to higher quality, more effective process in the latter half of this season but the latter half of what will be 2014. That's what gives us some of the confidence as we talk about going forward.

A lot of these volumes. This is about interacting with customers, making sure we know how many they're going to give to us, when they're going to give it to us, so we can deliver on our promises and deliver results for them.

So there should be some operating leverage as the revenue growth picks up, right?

We clearly incurred some costs both in fourth quarter of last year and first quarter of this year, I mean, in 2014 to handle the volumes and to satisfy customers. Those, I'll call them, excess costs, we would not expect to continue, correct.

Perfect. Thank you.

Andrew Jeffrey, SunTrust.

Good morning. Thanks for taking the question. I just wanted to clarify and understand a little better in the Healthcare business. I think the reference was to having collected more than 50%, more volume or increased volume versus the first half of last year.

I'm just curious as to how that ultimately translates into revenue. I know there have been some pricing incentives to drive volume. You're clearly looking for an acceleration in that business in the back half, but can you describe the dynamic between record volume and maybe price per and how that informs the revenue growth in the business?

Yes. You had a couple questions in there. So just first of all to clarify the factual statement. What we were communicating is that the number of records that we retrieved in the second quarter 2014 was more than 50% greater than the number of records we retrieved in the second quarter of 2013.

Okay. So Q over Q.

Q over Q.

Got it.

And the way that we get paid is we actually have to work through not only the retrieval of the record but actually through the coding of the content which is really onto the interpretation of the content and deliver all of that to the customer. That is the point at which we get paid.

So, in a sense, you can see what we did in second quarter of 2014 and the growth relative to 2013 as essentially part of the priming of the pump where we will then sort of work through the completion of each of these units as the second half of the year moves ahead and that's when we will recognize the revenue.

You should not understand a relationship overall between increasing volumes and price point. Last year we referenced the fact that there were a couple -- there was one case in particular where we made that tradeoff, but that's not fundamentally an explanation for why our volumes are growing.

Okay. Revenue, all else being equal in that business, should more or less track volume growth? Is that the right way to think about it?

Yes.

Okay, and if I may, I.

I apologize. Just one quick one for you. Exactly what Scott said, yes, but it's also illustration that we've accelerated the program and we're trying to move some of these work volumes forward too. I'm trying to describe to you a combination.

So timing in the year versus last year as well.

As well as volumes, correct.

Okay, great. And if you could elaborate, Mark, a little bit on the nature of the project revenue at Argus. Is that business that comes on and off in some sort of predictable way? In other words, could there be another quarter in the future where we see a big jump in growth because of projects or is it much more episodic than that?

A very large percentage of the Argus business is long-term contracts. We recognize it ratably over the year. Very high visibility; very high re-occurring revenue. Around those benchmarks studies, the beauty of the Argus business is they get very deep and very close to the customers who then need some special projects done.

In many cases, that work or that project work tends to flow a little bit more heavily into the fourth-quarter. It represents a smallish fraction. Between 10% and 20% for the business and it's pretty regular but there is some timing elements as to when. There was a pretty major project that took place in third quarter of 2013.

I would tell you that it wasn't anything we would call out because it is just kind of a part of the business. It happens all the time, so I would tell you -- we are not concerned by anything that you see, kind of slower growth here in the second quarter around the Argus business. I think we feel good about where we're going to be.

In fact, one of the nice things going on in Argus is that we're continuing to find a home in non-domestic markets for our method, which is a real source of encouragement for us.

So that business could be a little bit volatile quarter to quarter is what you're saying?

Just on this small fraction of the revenue. We typically do not view it as all that volatile and I respect the comment.

Okay. Thanks a lot.

Bill Warmington, Wells Fargo.

A question for you on EagleView. I wanted to check and see if the Company was still on the same trajectory as what we had talked about earlier in the year when it had first been announced, and we have been looking for revenue of about $140 million in 2014, EBITDA about $45 million and then growing at, let's say, 10% to 2015 to about $154 million in revenue with $5 million to $7 million in cost synergies getting to around $54 million in EBITDA. I wanted to see if the Company was still on that trajectory?

We see the Company as fundamentally the same Company that we've always thought it was. We're not actually updating EagleView financials right now, Bill. We will do that once we have closed on the transaction, we'll come back to you, but we're not updating at the moment.

It's the same Company competitively positioned and enjoying good success in its market.

And then on the Healthcare side, I wanted to ask about if there was anything new to talk about on the pooled data initiative.

Not really. There is one company that is very large and it's very interested in coming in and the building of a contributory data set is --this is how it works. It's just three yards and a cloud of dust, but every so often you sort of break through. And so we're hopeful that the one that I am referencing here where we actually have contract papers in their hands will happen sooner rather than later.

Thank you very much.

You're welcome.

Joseph Foresi, Janney Montgomery.

I was wondering, could you just tell us how dependent your Healthcare business is on macro factors like the amount of MA enrollment and the reimbursement in the Medicare Advantage group or Medicare Advantage in general? How should we think about that in relation to the trajectory of that business in any given year?

Yes. There is definitely a relationship. I think your word dependent is a little bit strong, because as is true of almost everything that we do in Healthcare, part of our opportunity is defined by the fact that we are a relative newcomer and so we haven't really become the category leader in, I would say, almost anything that we do in. And so part of our opportunity is based upon taking our position inside of these markets.

Yes, one of the confidence points for us on Medicare Advantage, the part of our business which faces Medicare Advantage is that on balance we think that the long-term trends are good. If you just look at demography in the United States, and you look at the continued relative popularity of Medicare Advantage, we think those are positive factors as it relates to the long term for our Healthcare business.

Okay. And what percentage of Healthcare now is Medicare Advantage for the work you do there? And then, just as an adjacent to that, you said your visibility has improved. Can we assume that visibility in that business will always pick up mid-year going forward. How should we think about that in general?

We put out in the past that our Medicare Advantage business is more than 50% of our total mix of business in the Healthcare space today.

And then just on the visibility side of things, should we always expect that midyear it will dramatically increase or how should -- just from a seasonal pattern, how should we think about that?

There definitely is seasonality, particularly as it relates to the Medicare Advantage business. We are -- and something that we put out in the past is that overall our total Healthcare business is about 40% in the first half, 60% in the second half, as a rough general guideline.

Without question, our visibility with respect to the part of the business that is seasonal increases as we move through the year but part of what we've been trying to stress in this call is that, because of the substantial ramp in the overall volumes we have in the part of our business which is transactional, which is especially the Medicare Advantage business. We have been very diligent in the first half of 2014 in trying to tune operations, anticipate the second half surge, if I can call it that, and to observe on where we need to be.

Yes, there is more visibility, but the other part of the equation is preparedness and our team -- I'm very proud of our team. They've worked very hard to get prepared for -- to deliver against the successful selling that they've been doing and so we feel good.

Okay. Thank you.

Hamzah Mazari, Credit Suisse.

This is Anj Singh dialing in for Hamzah Mazari. I wonder if we can get an update on your joint planning discussions with your Healthcare customers and what progress you might have made there during the quarter?

That's really what we have been reporting on throughout here. Our ability to, as we mentioned a few minutes ago -- the ability to retrieve over 50% more volumes than the same time prior period is directly a function of the coordinating that we have been doing with our customers, as well as our strong sense of what the volumes will be in the second half.

That's all a product of the demand planning. I was actually speaking with the head of our Healthcare unit yesterday and she was in touch with one of our important customers. They are all important to us, but one of our large customers. And it was just more of the same dialogue that we're in with our customers in terms of where they're at, what they need.

Believe me, there are a lot of operational metrics that get shared back and forth on a very consistent basis and it is that tied-in quality, us to them and them to us that really characterizes the way we're going about this business.

Got it. And then as we look at your international growth initiatives, I am wondering what other milestones we should be looking for and as we think about M&A internationally, are there verticals that you'd prefer to grow organically versus on an acquisitive basis, or will you just be opportunistic and pursue whichever strategy makes more sense?

It's definitely -- our M&A agenda is definitely not characterized primarily by opportunism. We have thought very hard about which verticals we're in and our first preference always would be to build out from the verticals that we've already established. The reference earlier to international markets, that's exactly what that is about. It's trying to find ways to take our existing capabilities and to make them relevant and other markets.

And just a comment -- which I know many of you have heard us say before, but I think our methods, if you think of it as the algorithms and the methods by which we operate the algorithms, I think they're completely applicable, by and large, in other markets. The issue is that other economies don't have the same tradition of data aggregation that we have in the United States and so a lot of what actually governs the rate at which we can move out is our ability to begin to cause data sets to flow.

We're very open to using our M&A dollars in international markets but I think you were putting two things together that don't go together in our minds. We will use M&A dollars for international expansion and that's definitely a part of our thinking but that doesn't necessarily imply that we're moving into new verticals. I think that our view generally would be that, by and large, the set of verticals we're already serving is a very adequate playing field for us.

There is -- I don't want to say too much about it, but there is one vertical which is sort of adjacent to the ones we are already in and there may be a linkage there at some point. I really wouldn't want to disclose too much about what we're thinking there right at the moment, because I wouldn't -- I'm mentioning this because I wouldn't want anybody to be surprised if it were the case in the future that we did open up another vertical.

We've -- for a long time now we have said that we are not looking to sort of add verticals without constraint. We're very thoughtful about what verticals we're in and I think we have a good set of verticals.

Very helpful, thank you.

You're welcome.

Denny Galindo, Morgan Stanley.

Thanks for taking my question. I wanted to delve into expenses a little bit. They didn't jump as much quarter over quarter this year as they have in the past, especially on the SG&A line. And in looking at the Q, I noticed that some of the salaries actually went down in the quarter there.

Maybe you could just give a little color on your expense control in SG&A. Is it something where maybe the bonuses were a little bit lower? Were there layoffs? Is there anything else going on there?

Or maybe you are dialing back on the sales force and focusing more on improving the operational efficiency of the firm. Any kind of color on the expense growth would be helpful.

Let me -- I'll let Mark answer that, but I'll just say that there have been absolutely no layoffs. We are in hiring mode in a number of parts of our business, so that's sort of the furthest thing from the reality of our business. But, Mark, if you want to take on the SG&A account.

Sure. I think there's a couple things that we continue to do as we try to fine-tune all of our compensation plans. And in April we give out our equity awards. One of the things that typically affects us is obviously you have an increase in equity. That was a normal increase.

I think what you will also find, though, is in our program if you're age 62 or older you automatically vest. And I think we have fewer people in that bracket or in that kind of category for 2014. I don't think we had this accelerated vest and this accelerated vest that would have historically taken place in the April timeframe. So that may contribute a little bit to the SG&A item that you referred to.

The only other thing that does come to mind as we think about overall the compensation plans, I think we at Verisk broadly have been a little bit more focused in 2014 on variable comp, that would be in the form of our short-term cash programs, as well as a long-term equity programs, and probably had a little bit less in the form of salary increases. So maybe a repositioning, although the overall comp increases were at least as good as in the past, but the way we went about it is probably slightly different this year.

One more on the CapEx. Historically you were below 5% and now you're kind of moving more towards this 9% of revenues number and you mentioned that you were spending more on capitalizing software.

Right.

Is there anything one-time in this number or is it just for the next few years or is this 9% number really where you guys are going to be over the next few years. Maybe you're turning more into a software company than you were in the past or how should we think about the CapEx over time?

Yes. So, we don't think of 9% as the benchmark. We expect that number to come down as we move into 2015 and beyond. There -- it is also true that, in general, relative to, let's say, five years ago, just to pick a reference point, the software intensity of the business has gone up.

I referenced, for example, earlier Touchstone which is a very major movement inside of the whole Cat modeling world. And that is just a category of spending which tended to be much lower in the past. I would also say that because of the desire to bring out new solutions in general across many of our businesses, we find ourselves spending somewhat more on the internal development of solutions which we capitalize.

There have been a couple of things which I think have been a little bit more one-time. We basically have been consolidating down to two data centers and all of that has required some special attention at a moment in time. And we built a major new facility out in Salt Lake City and we're cycling through that in 2014.

Some of those things are going to kind of naturally come down anyway and then I think as our businesses scale, I think we will naturally find that ratio moderates as well. So 9% is not the benchmark but it is also the case, actually, that our business -- if you want to be solutions oriented and if you want to be growth oriented, as we do, I think a natural implication is that you become somewhat more capital intense and we have.

Okay. That's helpful. And lastly, just a quick one on going back to the insurance, you mentioned that the transactional revenue and you kind of indicated that the Cat modeling was a big part of that with the results in this particular quarter, but I think you said something about it would've been 11% without the Cat impact?

Number one, is that right? And number two, just so we can kind of be aware of this in future quarters. With this Cat transactional revenue, is it tied to the number of deals, maybe the face value on the deals or the number of firms looking at the deals? Maybe a little color on how to think about predicting when a particular quarter might have higher or lower Cat?

Yes. That's a little ( Laughter ). Your question sort of ended in a funny place because prediction is a little bit difficult. And I know you're using shorthand when you're saying Cat, but just to remind you, it's Cat bonds. So it's investors anticipating that there is something in the market that would allow them to make a return based upon, in essence, getting on the frequency and the depth of Catastrophe activity, but we're talking about the investing in the bonds.

The bond volumes tend to be a function of a couple of things. One is probably some very general sense of the intensity of Catastrophe activity in the economy globally, but also a sense of different ways that you can lay off Catastrophe risks. So how active is the reinsurance market with respect to insuring against Cat risk, et cetera.

So there are a number of factors that are actually in there. The market over time has tended to grow but it also has tended to cycle around a little bit. And I -- Mark, I don't really don't have a predictive metric in mind. I don't know if you do.

No. I just will reiterate what I said. The growth in DA insurance is greater than 10% excluding the Cat bonds and the way those Cat bonds are priced. The exact is that it's about the size of the deal and obviously the number of deals that happen.

Okay. That's helpful. I guess my question was more about how the revenue hits -- not necessarily the size of the Cat bond market but how the revenue actually hits your insurance line? So I guess your answer to that is that if we're looking at Cat bond issuance in a particular quarter, we would want to focus on the number of deals and the size of the deal, and then it could create a 3% impact of growth if it's a good quarter versus a bad quarter.

Denny, it's Eva. Thank you very much. I think you got four questions in instead of two, so we're going to need to move on.

Okay, thanks.

Operator, next question, please.

Paul Ginocchio, Deutsche Bank.

Thanks for the confidence around Healthcare and talking about the revenues pull forward or the inquiries you pulled forward. It sounds like it's more than 50% of your business. Could you just talk about the remaining parts of your business in Healthcare and how -- the kind of visibility you have there and how you feel about that going to the third quarter?

Anything you can give us kind of help us feel more confident in that back-end growth rate would be helpful. Thank you.

Yes. I think most folks know that -- so as we've been talking about Medicare Advantage, that is really about our RQID division. We have two others, one is Enterprise Analytics and the other is Payment Accuracy. Payment Accuracy is about diligence in claims to get fraud waste and abuse out of them, and Enterprise Analytics is essentially about risk adjusting and including applications of risk adjusting into categories like population health management.

Those other businesses are very important in the mix of what it is that we do and we're looking for, really, growth across the board in the business. I would say that kind of recently Payment Accuracy has had some nice wind in its sails in terms of growth. Payment Accuracy tends to have more of a transactional nature to it.

It's related essentially -- our revenue is related to the amount of money that we save for our customers. Enterprise Analytics tends to be very subscription oriented.

And were those -- I don't know if you'll give us any, but were those division, or those divisions within Healthcare growing -- growing at sort of the divisional average in the second quarter or was all the tools given by Medicare Advantage?

I'm not going to get into specifics, but they're all growing, yes.

Great. Is there any -- obviously those are a little more transactional bases. Is Enterprise Analytics more subscription?

Yes. That's what I said.

Right. Great. Thank you.

Jeff Silber, BMO Capital Markets.

Thanks so much. Just wanted to go back to the EVT transaction. I think initially you had expected the deal to close in July, then mid 3Q, now it's the end of 3Q. Are there any specific reasons for the delay?

It's the government's process. I mean, we are answering questions and, you know -- we respect our government and they're going to run their process the way they're going to run it.

Okay. And as just a follow-up, just going back to some of, I guess, the front-loading cost in Verisk Health, would that have been in the cost of services line as opposed to the SG&A line?

Yes.

Okay, great. Thanks so much.

Our next question comes from Andre Benjamin with Goldman Sachs.

Good morning. First I want to know, understanding that a lot of the business is subscription based, I was wondering if you're seeing any changes to demand trends in Argus's services from a push by some of the banks to get more aggressive lending to some less optimal or quote, unquote, sub-prime lenders as the recovery matures in the consumer.

No. I don't see that as a factor.

Great. And on the Healthcare side, I'm wondering in terms of how to think about the size of the addressable market and growth. I know these things don't change that much quarter to quarter, but if you had any thoughts on how the size of the market is relative to the $4 billion that you discussed at the Analyst Day, how the three markets are growing and are there any key capabilities that come up in your conversations with clients that you think will help you better attack those buckets relative to what you are capable of today?

Right. So our view of the opportunity really has not changed as you kind of implied in your question. Healthcare continues to be a very large part of the American economy. And, in general, it's an environment that is characterized by, I would say, an increasing interest in the use of data analytics to make decisions.

Supported, I would say, in a background kind of a way by our government's seeming interested in pulling more data analytic into the part of the cost act that the government is responsible for and by making data sets from CMS a little bit more available. The overall, overall sense of the market is that it remains as opportunist as it has.

One of the big sort of issues on the horizon is will the providers become more risk bearing? And there's a lot more talk about that than there is actually progress to date. It's not that there's been none and there are more accountable care organizations than there used to be. But when you look at the fraction of the risk which is being borne by the providers, it's still relatively low.

Another movement in the space is that you've got the rise of the exchanges. There are the public exchanges, there are also the private exchanges, and we've actually had some nice progress in terms of becoming the analytic inside of some of the exchanges. We actually see the exchanges as another customer segment in the same way the commercial payers are a customer segment and the way that State Medicaid's are a customer segment, et cetera.

You have those kinds of developments in the market, but the overall story is the effective reform is to have more people be insured and since the majority of our business is with insurers today, on balance that's a relatively positive trend.

Operator, last question, please?

Our last question will come from the line of David Togut, Evercore.

Thank you for squeezing me in. Just a quick final question, if I could, Scott and Mark. I'm trying to piece together your comments, Mark, that you saw over 50% growth in records retrieved in the RQI business and that you're expecting 20% plus growth in healthcare in the back half.

Can you sort of quarterly records retrieved with revenue growth? It doesn't really seem to be one-to-one. Is there a ratio we should be thinking of?

One thing you should bear in mind -- I know Mark's going to jump in at a slightly more technical revel. But bear in mind that the record retrieval that we're talking about relates to only part of our business. So that characterization of a much greater rate of record retrieval is very accurate and augers for growth in the third and the fourth quarter.

You can't do it one-for-one in terms of the growth of our overall Healthcare business because those records and that retrieval relates to the part of our business which is Medicare Advantage, which, as we said, is greater than 50%, but it's well, well, well, well shy of 100% of our whole mix. So don't -- you can't correlate those two.

David, I'll just kind of reiterate what I was trying to describe earlier, kind of as a follow-on. I think we feel good about the increased volumes. I think it's indicative of a combination of, A, our customers and working with our customers to get things sooner.

Also it's partially indicative of the fact that we do have greater volumes, apples to apples, compared to last year. So I can't tell you there's a direct correlation to revenue there, but it's certainly a partial correlation. And I think it's a good set of -- good example of the type of things that we're doing to make sure that we deliver on the results in the second half.

Is Medicare Advantage all of the RQI business?

Not all of it, but most of it.

So, in other words, the RQI business should show growth well in excess of 20% in the back half?

Not sure we said that, David.

Okay, that's just my interpretation (laughter). Thank you so much. I appreciate it.

At this time, there are no further questions. Ms. Huston, do you have any closing remarks?

It's Scott here, and I just would like to thank everybody for joining us for this earnings call and for your continued interest in our Company. And we look forward to -- I know that Eva and team will be following up with several of you and we look forward to speaking with you next quarter. Thanks for your time.

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