Verisk Analytics Inc (VRSK) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the Verisk Analytics third-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, Kim, and good morning to everyone. We appreciate you joining us today for a discussion of our third-quarter 2014 financial results. With me today 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.

The earnings release referenced on this call, as well as the associated 10-Q, can be found in the investor section of our website, Verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC. A replay of this call will be available for 30 days, until November 29, 2014, on our website and a dial-in.

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 Stephenson.

Thanks, Eva, and good morning, everyone. Our third-quarter revenue growth of about 9% is slightly stronger than what we've delivered throughout 2014 to date. This is solid organic growth and a strong statement about the value our solutions provide to our customers. We remain highly profitable, with EBITDA margin in the quarter slightly above 47% and adjusted EPS of $0.64, up about 5% over the prior year.

We'll talk more about the detailed performance later in the call, but I'd like to highlight the good progress we're making in healthcare toward our annual goals through solid execution. This is important for us as we continue to position ourselves as a trusted partner for our customers.

We recently completed our annual strategy sessions with our business units. During these exercises, we thought forward over many years to envision the solutions which will provide the greatest benefit to our customers and the markets we serve. I'm excited about the effort and energy our teams have brought to the longer-term vision.

In terms of current developments, we've continued to roll out solutions for underwriters. In particular, we're using the weather-related intellectual property from our Verisk Climate business to offer valuable data-driven insights for our insurance customers.

Our A-Plus property claims database has an underlying data set with 9 million residential property hail claims reported to us from 2000 through 2013. Some of the high-level analysis based on the data indicates that the number of claims are both increasing and becoming more costly. This information creates opportunities for us to help our customers with the challenges they face.

By combining A-Plus data with Verisk Climate's benchmark hail database, our teams identified that approximately 25% of hail claims from 2009 to 2013 had no evidence of hail activity on the reported date of loss. This indicates inaccuracies in the reported claim information that affect the association of a claim to a causative weather event, be it catastrophe or otherwise. Helping our customers identify those claims benefits their bottom lines in a very direct way.

We also announced that Verisk Underwriting solutions' 360Value now includes property slope and site access data for residential and commercial properties in the United States. 360Value is a web-based replacement cost estimator for residential, commercial, and agricultural properties.

New data compiled by Verisk Climate is now available in 360Value Property Prefill, streamlining the replacement cost estimation process and increasing the reliability of results. Property Pre-fill automatically populates key building information, including as many as 21 building characteristics, to generate replacement cost estimates.

Because of required modifications to the foundation and challenges in construction, properties built on steep slopes can cost an average of 12% more to replace than a property built on land with no discernible slope. Verisk Climate terrain data-based analytics allow for a high degree of resolution when estimating property slope. The extra expense involved with harder-to-access sites can increase reconstruction costs by an average of 16% compared with properties these built in more accessible areas.

Verisk Climate technology captures site access using multiple data sources, including road network data that calculates distance and accounts for impediments to easy access. Those capabilities save our customers time, offering them a competitive advantage and an opportunity for higher levels of customer service.

In addition to delivering organic growth, M&A remains high on our agenda, and our team is actively evaluating opportunities. We remain disciplined in our approach, focusing both on strategic fit and sensible valuations. We intend to continue to be excellent stewards of our shareholders' capital and we're prepared to be patient in our pursuit of acquisitions.

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 our ongoing confidence in our future.

As we communicated in late September, we continue to work with the FTC towards receiving clearance for our announced acquisition of the EagleView Technology's Corporation, or EVT. As we also disclosed, we extended our purchase agreement with EVT through December 31. We continue to work through the clearance process, and we'll report back when we have updates we can share.

We're 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 $66 million. Our remaining authorization at the end of the quarter was about $280 million. We will continue to use our authorization consistent with our capital allocation strategy, as we've previously outlined.

Earlier this month, we marked the fifth anniversary of our IPO. Our vision is to be the world's most effective and responsible data analytics Company, in pursuit of our customers' most strategic opportunities. We've made great strides executing on our vision based on the dedication and teamwork of our people. The service to our customers through the efforts of our team have delivered outstanding results and returns for our shareholders.

One of the ways we've celebrated the anniversary was to hold our first-ever Verisk Community Service week across 28 offices, representing cities and towns throughout North America and the world. Our Verisk colleagues volunteered to help over 50 different organizations, and I'm very proud of our collective interest in serving not just our customers but our communities as well. With that, let me turn it over to Mark to cover our financial results in more detail.

Thanks, Scott. In the third quarter, total revenue grew 8.9%, ahead of previous quarters in 2014. The mix of areas of growth was slightly different than previous quarters, and it's our diversity of revenue streams and subscription businesses that allow us to create consistent overall growth.

The decision analytics segment grew and delivered 11.8% revenue growth in the quarter. This growth is driven by strong performances in financial services and healthcare, resulting from the execution of plans we discussed with you previously. Our decision analytics insurance revenue grew 6.2% in the third quarter. The increase was driven by strong growth in loss quantification solutions and additional contributions from claims, underwriting, and catastrophe modeling solutions. While their growth was slower than previous quarters, we are confident that our solutions remains vital to our customers and will drive our long-term growth.

There were a number of items that were pushed out of the third quarter based upon implementation timelines and several contract signings which came in late in the quarter. Overall, demand remains strong and we were pleased with the sales and implementation pipelines. Finally, as we indicated to you last quarter, cat bond revenue can be a bit lumpy, and there was no property bond issuances in the market this quarter.

In financial services, strong revenue growth of 18.1% reinforces our confidence of being able to deliver at least mid-teens growth in 2014. Growth was driven by our traditional solutions, including our syndicated studies, as well as by newer media effectiveness solutions.

In the healthcare vertical, revenue in the third quarter grew 24.8%, led by strong growth in RQI and payment accuracy solutions. Enterprise analytics also contributed to growth in the quarter. We are pleased with the progress the Verisk health team is making in its execution and toward our full-year goal. We are continuing to work hard to meet our customers' needs during this busy season, which is underway now. And we remain on track to deliver mid-teens growth for the full-year 2014.

In the specialized markets category, revenue decreased 2.6% in the third quarter. We saw good growth in the quarter in environmental health and safety solutions, and weather and climate analytics to the commercial markets. Growth in the government space was again offset by the ongoing shift of the GOES-R contract from development to maintenance mode.

Turning to risk assessment, for the third quarter, we reported revenue growth of 4.1%, indicating the value to our long-term standing insurance customers. Our industry standard insurance programs grew revenue 3.9% in the quarter; this reflects our 2014 invoices, which were effective January 1 and continued contribution for newer solutions. This was partially offset in the quarter by a decrease in some of our reinsurance product revenue, as we shift to a more annualized revenue model with our customers. Another encouraging data point for industry standard programs is that the contract sizes in the pipeline are up versus last year.

Our property-specific rating and underwriting information revenue grew 4.9% in the quarter. This increase was from new sales, including those resulting from higher committed volumes.

EBITDA from continuing operations for the third quarter increased 6.2% to $211.3 million and our EBITDA margin was 47.1%. Excluding professional services fees related to EVT, EBITDA margins were 47.7%.

The margins in decision analytics were 41.3% in the third-quarter 2014 versus 44.2% in the third quarter of 2013. The decrease in margins is partially due to about $3 million in professional services fees related to EVT, which we had mentioned to you last quarter. In addition, growing revenues in the healthcare businesses, where margins are still scaling, contributed to the year-over-year difference.

Our risk assessment margins were 57.5% versus 55.1% in the third quarter of 2013. Our margins were advanced in the quarter by revenue growth, good expense management, and lower pension costs. We continue to expect flattish EBITDA margins for the full year, excluding Interthinx and professional service fees related to EVT. In our plan for 2014, we've contemplated Verisk Health margin expansion balancing investments in our insurance businesses.

While we continue to expect to meet our mid-teens growth at Verisk Health, we could see a mix that has a somewhat lower margin due to shifts between types of assessments and categories of coding work. We continue to be actively managing the more labor-intensive parts of our business, while building on our more analytic pieces. This mix shift is a source of possible risk to our margin view.

Our interest expense was down $1.2 million in the third 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 newly amended and extended revolver and cash on hand to purchase EVT. Our reported effective tax rate was 37.2% for the quarter.

Adjusted net income increased 3.3% to $107.8 million in the quarter. Adjusted EPS on a fully diluted basis was $0.64 in the quarter, an increase of 4.9%. The average diluted share count was 169.5 million shares in the quarter. On September 30, 2014, our diluted share count was 168.7 million shares. In the quarter, we purchased about 1 million shares for $65.9 million. At quarter end, we had $280.3 million left under our authorization. Our share repurchase program has been successful to date, generating strong annualized IRRs.

Turning to our balance sheet, as of September 30, 2014, our cash and cash equivalents were $432.5 million. Total debt, both short-term and long-term, was about $1.3 billion. Today, our incremental debt capacity is about $1 billion and will grow over time with our EBITDA and free cash flow. Our debt to pro forma EBITDA from continuing operations as of September 30 was 1.7 times, below our steady state target. We also recently amended our bank facility to extend the maturity to October of 2019, while also increasing the size of the facility to $990 million, providing us with sufficient flexibility for our M&A agenda.

Free cash flow, adjusted for two items discussed below, declined 6% compared to the prior period to $262.5 million. This represented about 45% of EBITDA from continuing operations in the first nine months of 2014. As a reminder, we define 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, decreased $7.8 million. This decrease was primarily due to a temporary use around $75 million of working capital in the quarter. This higher-than-normal working capital relates to timing of invoices and customer payments, which will swing back over the next quarter or two. We continue to be confident in our ability to generate free cash flow and it remains a strength of our business model.

Our capital expenditures were 8% of revenue year-to-date in 2014, below the 8.5% level we were at in 2013. We continue to expect about $147 million in CapEx for the full year. The greater use of capitalized software related to new solutions will moderately raise our capital intensity over the course of the next few years, relative to historic levels. We aim to grow free cash flow at or above the level of our EBITDA growth.

As you think about the models for the full-year 2014, we expect flattish margins for the full year, excluding Interthinx and professional service fees related to EVT. Amortization of intangibles should be about $57 million, fixed asset depreciation amortization of about $85 million, and a full-year effective tax rate between 37% and 38%. The aim of our repurchase program is to keep share count flat and retain flexibility to buy more shares, as appropriate.

At our current debt levels, our quarterly interest expense is about $18 million. Based upon the strength of our cash-flow generation and current cash balances, we anticipate borrowing about $300 million or less for the acquisition of EagleView, depending on timing of the close and other events. We incurred about $3 million of professional service fees related to the EVT transaction in the third quarter and about $5 million year-to-date. We expect an additional cost of about $3 million in the fourth quarter.

Overall, we are pleased to report that our business is performing well. We are seeing growth from multiple verticals, and we are executing on our operational plans. With that, I'll turn it back to Eva for some comments before Q&A.

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

[Manev Kanik] Barclays.

Congratulations on the healthcare number.

I was just wondering, given that you mentioned you had your long-term strategic discussion and so forth, is mid-teens the right number to view healthcare's potential over a much longer period of time as well?

Yes, we haven't tried to describe our healthcare ambitions in that way. What I would say is that we are counting on a broad-based approach to growing our healthcare business. Meaning, as I think many of you know, we have actually a pretty broad portfolio of solutions. And that we consider to be part of our strength inside of the healthcare space.

I would also say that, as I think again many of you know, there's a good fraction of our mix, which relates to the world of Medicare Advantage. One of the things that's true about that world is that there is just a very nice demographic trend inside of that world where -- as America continues to age, one, and two, aging Americans seem to really like Medicare Advantage as an option -- that's actually a nice tailwind inside of our business.

Just as a follow up on the DA insurance side, you talked about the items being pushed out as the rate -- lead contract timings. Is there any way to quantify how much that impacted your business? And should we see, basically all of that come in the fourth quarter then?

Thanks for the question.

I think what we have continued to say is we think the business is incredibly strong. We are well-positioned. We do not see anything that would be of concern; there are no contracts that left, there are no customers that left.

There is a bit of a, quote/unquote, push from third to fourth result, so some cases where it's just pushed off. So I would expect a return to normalcy. I would not expect any surge in fourth quarter as you would think about numbers. It's a subscription business. And I just want to say that it's tough to have surges, if you will.

Tim McHugh, William Blair.

Thank you.

I wanted to clarify. You talked about, in the risk assessment space, the reinsurance business and the shift to annualized contracts. I didn't fully understand what you meant by that and the impact of that.

Related to that, I think there are some who have questioned whether a softer insurance pricing environment would eventually have an impact on that business. Can you comment on that and relative to what the results were?

Tim, this is Scott. Let me take the second part of your question. And then I will ask Mark to speak specifically to the reinsurance piece.

The way to understand the P&C space and our role in it, generally, I would say a couple of things. One is, I think some of the folks that are involved with us maybe have a little bit less history perhaps with the Company. But there was a period back in the mid to latter first decade of the 21st Century, beginning around 2008, where you had several consecutive years of softness, actually negative premium growth. And during that period of time, our insurance business always grew.

I just want to make that point as a general statement about the value of what it is that we do and the fact that we actually tend not to cycle around all that much with what's going on in the insurance cycle. I don't mean to say that there's absolutely zero effect. But generally, we've shown our ability to continue to add value and to work through that.

More generally, the real tone that I would want you to understand is that almost regardless of where we are in the insurance cycle right at this moment, insurance companies really are going through a quiet revolution. Where, I think more than ever, they are really embracing data analytics as a way of running their businesses. We find that this is a very opportune time to engage deeply with our customers and to try to understand what their emerging decisioning needs are and to speak to that. We really feel that our opportunity is primarily on us. It is really a function of how intimate are we with our customers, and how quickly are we moving to help them solve their emerging issues.

In a very general sense, we certainly understand that folks want to be watching what's going on in the insurance cycle. But our view is that that's not really what determines our outcome. And our history has tended to actually reinforce that point of view. But there are certain things that go on -- cat bonds or events. And Mark talked about the way that we actually put our reinsurance products out there.

Mark, maybe you can come back now and clarify on that particular point.

Sure.

One of the things that we're pretty excited about is inside of a lot of the various businesses, there's quite a bit of teamwork and collaboration. So what we have done inside of a touchstone module that's an AIR module, we've tried to combine the best parts of Verisk insurance. We have the cat risks; we have the non-CAT risks; and what we've also done is we've brought in our reinsurance products into that. So these would be big size-of-loss type problems.

We've bundled that for both reference and access through touchstone, as well as through what we refer to as our typical industry standard programs. That kind of contract, the way we're interacting with customers, is a much more holistic approach. It's more annualized contract with customers. That's a part of the transition, as we think about better ways we can leverage all the great parts of Verisk.

The comment on the margins for healthcare and overall margins in terms of the mix of work, just to clarify that as well. Is the comment you're seeing more records collection or record retention type of work than the analytics side for the RQI business? Or maybe just elaborate. And how big of a potential impact, as we think about the overall Company's results, could you see from that?

Really, all we're trying to acknowledge there is that healthcare margins are where they are. And actually, when we look at where we stand relative to other, say, publicly-reported healthcare data analytics companies, we feel good about where we are. But there is a mix effect, even inside of what we do in healthcare. And so that is really what Mark was referencing in his comments, and that is really all he was referencing in his comments.

The RQI business is a little bit more labor-intensive than some of the payment accuracy and enterprise analytics businesses. And that's an element of how we have to manage.

Jeff Meuler, Baird.

A follow-up on that last point. You talked about margins a couple of different times, and I just want to make sure I am pulling them together correctly. Are you saying you're still expecting margins to be flat year over year for the business, excluding $8 million of professional fees, but they are at increased risk because what is going on in healthcare?

Yes, you heard us correctly; we're saying that we expect our margins to be flattish year over year. We do want to call out extraordinary one-time expenses associated with closing the EagleView acquisition. And, as we drive forward on the revenue front, the mix of what we do in healthcare will interact with the margin outcome. But you heard us correctly in terms of our net on all of that.

Okay. And then, Scott, last quarter you talked very briefly about some newly-adopted solutions in the risk assessment segment -- predictive modeling and electronic rating content and workers' comp solutions. I think the general perception of investors is that's not a segment where there is a lot of innovation going on. But could you just talk more broadly about what you are doing to innovate and create new solutions in that segment?

Yes, this is one of the really exciting things to me because as I think many of you know, when we talk about risk assessment, these are the most legacy parts of what it is that we do at Verisk. We're really of the mind that there's nothing that we do that is a mature business because we are always asking the question -- What do our customers need and where is it going?

Just to make sure everybody understands a couple of the things we are doing. Electronic rating content is really the digital instantiation of our intellectual property inside of our industry standard programs. And I guess the easiest way to understand it is, we put out that IP. And in the past, there's been a fair amount of both interpretation. And I don't want to call it coding exactly, but digitization of our content, in order to get it into our customers' platforms, into their policy admin platforms, so that they can actually take our content and drive a rate, a price, for an insurance policy.

So what we have done in electronic rating content is we have made our content much more consumable than it was previously. That's what that is. By the way, I'm not sure if I heard you quite correctly. But I don't mean to say that all of these are just brand new. These are things we've been working on for a while.

Another thing which is really big is that I think that our -- I know that our customers now really get it, that predictive modeling for purposes of rating and underwriting, actually, that's almost a requirement now in the insurance industry. And basically because of the depth of our data sets, we have some real advantages in terms of building some really good, really sensitive, predictive models. So that's definitely a part of what we are doing.

In risk assessment also, we are actually trying to take the capabilities that we've got, as it relates to creating an engineering view of a commercial building, and use them in other ways. In particular, we're exploring opportunities and finding some interest in using that same engineering view of a building to help in a commercial real estate lending situation. So that's some work we're doing.

Mark already mentioned in the excess and surplus markets -- and this can also relate to the reinsurance markets -- finding a way to take non-catastrophe observations about properties and use them. And put them alongside of the catastrophe kinds of observations that we are already making.

Those are a few examples of the sorts of things that we are doing. It's all around -- just as everything we do is -- it's basically all around trying to help our customers make better, more precise decisions in a more efficient way. And I'm really pleased and proud of our teams for the way that they are really aspiring to get to the next level of value.

Suzanne Stein, Morgan Stanley.

This is Denny Galindo on for Suzanne Stein.

I had a question on transactional revenue. If I looked at your 10-Q and you breakout transactional verse subscription, it looks like the Decision Analytics segment had a lot higher transactional volume than it usually does. Where was this coming from in terms of which industry vertical? And should this level of transaction volume continue?

Thanks Denny, it's a good question. This is Mark.

The transactional volume you're alluding to is driven really by the second-half ramp-up in RQI. So that's the revenue integrity business that we've talked about with Medicare Advantage. That's the transactional uptake that you see, and you'll see that in third and probably fourth. Notionally, healthcare is a 40% first half of the year/60% second half of the year story; and you're seeing some of that.

Okay. And then secondly, I'm not sure how much you can say on this. But given it's been a long time since we talked about EVT when you first had your press conference, I was wondering if you can give us an update on how it is doing this year. And also if the relaxation of resolution restrictions that occurred this summer might impact the growth rate and that as it competes versus satellite versus traditional aerial imagery providers.

I think you anticipated the answer in your question. There's really no comment that we are going to make on this, given that the process is ongoing.

With respect to your second question, which is the government enabling commercial providers of satellite-based imagery to increase the resolution of what they are selling, that is a trend that we're very closely following. And in fact, we ourselves make use of satellite imagery to a fairly substantial degree inside of Verisk today. So that whole world is very important to us.

But I believe what your question is trying to get at is, is there any substitution effect from that more increased level of satellite imagery versus the aerial imagery we're talking about. And the answer is a definitive no.

(Operator Instructions)

Andrew Jeffrey, Contrast.

Good morning. It is still SunTrust. (Laughter) I want to make sure; I've been here a while.

I wanted to go back to healthcare a little bit, recognizing that RQI is such an important part of the business. And also recognizing that you've done a really nice job of clearly meeting your customers' capacity needs. Is there anything structurally that informs the long-term scalability of that business, recognizing that it does have a little more labor-intensive aspect to it and perhaps more of a front-end loaded expense characteristic?

In other words, in the absence of more diversification -- it actually sounds like that business is getting a little more diverse -- is it less scalable than you might have thought about it a couple of years ago, healthcare overall?

I think there are two things that are going to apply. If we're talking specifically about the RQI revenue streams, I think there are two things that will apply that relate to scalability.

One is, if and as the US healthcare world becomes significantly more oriented towards electronic medical records, there will be an efficiency in terms of the retrieval of some of the data. I would also say that there is just a mounting ability in the world, generally, to take unstructured and semi-structured data and to turn it into usable information. Both of those things, I think, will put some wind into the sales of the efficiency with which the process can be managed.

An overlay on all of that is, I'm sure many of you know that the schema for describing what's going on in the healthcare world with respect to the diagnostic side of things is going to become significantly more complex as we move from ICD-9 to ICD-10. So there will be a moment in time effect of just everybody having to respond to that basically. I just observe that as an overlay to those otherwise two trends that I was just talking about.

Our goal remains exactly what it always was, which is to create analytically differentiated businesses. And we continue to want to work on that. I think that it's a long march, as it relates to healthcare generally. And I think particularly as it relates to the RQI kind of business because these trends that I'm describing are not the kinds of trends that are going to flip overnight. That's the landscape here; and I think it will be a progressive agenda, but a long-term agenda.

So some factors are in your control and others aren't, it sounds like.

And then with regard to the mix, helpful to call out enterprise. Is there the possibility for the acceleration of perhaps some higher-margin business within healthcare, or is it premature to think about that?

We're very motivated to see the analytically differentiated highest margin parts of what we do grow. And actually, in the third quarter, we actually had some very nice encouraging news on that front. I would say particularly as it relates to payment accuracy.

Anj Singh, Credit Suisse.

I know last quarter you had cited a growth rate for record retrieval. I'm wondering if you can give us a sense of what that record retrieval growth looked like in the third quarter. I realize that the RQI business is weighted towards the back half. But if you could offer some insight about how to think about the cadence of the growth in the first half of 2015 versus what we've seen so far in 2014.

Thank you for the question. This is Mark.

What we were trying to do last quarter was we were trying to illustrate that we were ahead of last year's pace. And we had volumes that were ramping, and we were doing the work to execute and show and demonstrate that execution. I think we are at the point now where, basically, the volumes have trued up, if you will. So we didn't point to that metric anymore because I think you can see those volumes in the execution and the revenue growth.

So I'm not sure I'm answering your question because I don't know the specific answers of the records that have actually retrieved. But we know that to the retrieval volumes have more naturally synched with the rev rec and what you're seeing in the numbers.

And then on Argus, I know in the past you've had a little bit more skew towards project work in the fourth quarter. I'm wondering if that will hold true again for this year, or if any of that may have been pulled into Q3?

That effect is not a part of what we see and what we are anticipating in Q4 versus Q3. And when you say project work, I just want to quibble with the word a little bit. What we do on the services side of that business is take our analytic products, those that we've already, in a sense built, and find ways to apply them very specifically for individual customers.

The point I'm trying to make here is that even our services work feeds off of the intellectual property that we accumulate and aggregate in the form of products. And that's part of why that business is also so appealing to us. In addition to the fact that it really helps us to be very hands-on with our customers and very intimate.

But mix shift inside of what Argus does is not really a substantial part of the story there. It's a very balanced set of three different ways that the business is growing, and they are all very healthy.

Paul Ginocchio, Deutsche Bank.

Healthcare, you had a great growth in the quarter. You're still guiding to mid-teens. Did you pull forward revenue, or does that mean there's going to be fourth-quarter deceleration? Or is that just a reiteration in guidance, and we shouldn't read too much into that and the cadence of the year-on-year revenue growth?

It was not a pull-forward. There's a rhythm to the business. It's what we've been talking about for quarters and quarters. And we're experiencing that rhythm right now.

Great, and so with you sticking with your mid-teens guidance, does that mean we should expect somewhat of a slowdown in the fourth quarter from what we just saw?

I'm sorry, go ahead.

I think the math would suggest that, but I would not read too much into that. I think we are on a good pace right now, and we can expect to continue.

Joseph Foresi, Janney Montgomery Scott.

Hello. I was wondering if you could talk a little bit about the pricing in the healthcare business. If I remember correctly, and I could be wrong, there were some price discounts given at some point in time. How much does that feed into or affect the margin profile?

That was a moment in time that was with very specific accounts, and it almost feels like ancient history at this point because things move so quickly. But we need to make sure that the value is where the customers need it to be. And there was a moment in time where we were willing to trade off a little bit of price for volume. But I would not, in any sense, encourage you to think that that is some major effect inside of the business.

Got it. That's helpful.

And then on the seasonality of the business, I'm not sure if you've given percentages around what part of revenues typically fall in the first half of the year versus second half of the year. But I think you could probably see where I'm going with that.

Yes, I think we've normally said that the healthcare business is a 60% second-half story.

Right, and we are sticking with that as we go forward as well, correct?

It is going to be about 60%, correct.

Bill Warmington, Wells Fargo.

Good morning, everyone.

A question for you on healthcare. Now that we are three-quarters of the way through this year, and we've seen some relatively large swings in terms of the growth rates. But as we head into 2015, we have then anniversaried that; and we should be then into a first half, 40%/second half, 60%. And as you lap that, what are you thinking about in terms of what a normalized growth rate against that already seasonal level would be?

I think that we were trying to get at that maybe with one of the earlier questions, which is, what we are really focused on are the fundamental drivers underneath. And in all three of the divisions inside of our healthcare unit, we feel that substantially our opportunity hinges upon the amount of value that we bring into the market. And then the overlay of that is that there is a definite tailwind associated with the demography of the Medicare Advantage world. And it's really at the intersection of all of that. But I think it's substantially how well do we do our own work that will determine our growth rate going forward.

Is that intersection at double-end digits?

We just haven't really put that out, Bill.

The thing I want to keep emphasizing on healthcare is that we are on a journey. And we know what an excellent, differentiated data analytics business looks like because we run several of them. And we're not in any sense trying to represent that that is what we have gotten to with healthcare yet. And yet, that's our aspiration.

For my follow-up, I was going to ask a variation on that question for financial services in Argus, which again, has seen -- it's smaller revenue base but it has seen some variation in terms of the growth rates. In terms of what we should be thinking about that going forward as we normalize against some of the ups and downs on that growth rate.

Well, the thing I would say about the Argus business particularly is that the business was really birthed with some very differentiated data assets. And we continue to try to build differentiated data assets. And achieving additional differentiated data assets and economies around the world is a very important part of the strategy at Argus and is an agenda that we definitely, definitely lean into.

I would say in addition to that, the other thing that is really going to apply with respect to the growth rate of Argus is the ability to transform the data assets into analytic output that really makes a difference for customers. And one of the things that will be really important inside of all of that is customers, in addition to our traditional base with our banking customers.

We have a lot of focus on that. And it's very exciting that that creates essentially greenfield streams of revenue, which we are pursuing pretty strongly. And that is an agenda which, I think, has real legs and will stretch over a considerable period of time. And when I am saying all of that, what I'm really referring to is the advertising promotional effectiveness dimension of what it is that Argus does.

(Operator Instructions)

David Togut, Evercore.

Thank you.

Good morning.

Scott, in your remarks, you referenced a five-year horizon for innovation and growth. I'm wondering if you could maybe look out beyond this year and give us some insight about how you think about operating leverage. Do you think Verisk is a Company that over time should be able to generate margin expansion, let's say, as we look out over a two-year time horizon?

A couple things about that. One is, I think the burden of proof is on us in anything that we do where we have already established the foundation of the business. Meaning we are already sourcing the data; we've already platformed the solution. Any business which is like that, I think the burden of proof is on us that we can't improve the efficiency of what is being done there in a way that the margins we're going to advance. That is actually the way we think about it. Anything that we are already doing, our leaning and bias is: How do we make that more efficient, and therefore, how do we make the margins of that go up?

Now, I will say that with some of the -- for example, Mark laid out there where our RA margins are. Those are very high margins. At some point, your all-in margin begins to look a lot like your gross margin because the below-the-line costs are relatively a small enough fraction. So just the math tends to say that there's some natural upper limit on it. But still, the point I just made does apply. That's the way we think about it.

The counterbalance is that we want to be on the move with our customers, and so we want to be always developing new things. And there are definitely adoption curves as it relates to any innovation inside of any of our markets. And you do have to upfront investment in order to get position to be there with that solution. And you are developing not only the technology, you are also developing the marketplace.

So that is just by way of saying that we are going to remain investment-minded. And the net of all of that, to our way of thinking, a very healthy place to be in all of that is the long-term view that we've shared with you, which is we're in that 45% to 47% range. I think those are just by almost any standard of comparison to the market, extremely high margins. And we think that represents a balanced place where we will continue to push for efficiency on the one hand but investment undergrowth on the other hand.

So in other words, you are reinvesting cost savings from efficiency. Should we expect you to reinvest 100% of cost savings from efficiency, or is there a little bit of room for margin expansion over time?

I just want to keep pointing you towards that range. And you can see, actually we popped through the top of the range this quarter. But that's the way that we think about it over long periods of time.

I also want to say that, yes, we've had the model in mind for sure. But at the same time, it's not as if we say -- We've got this much money to spend -- because that then gets us in the margin range we are looking for. We're actually thinking hard about on a project-by-project basis, does this deserve funding? Does that deserve funding? And that is really how we get to the outcomes.

Understood. Just a quick final question for Mark on capital allocation.

Can you update us on the acquisition pipeline, where you are driving in terms of certain verticals or adjacencies that might be interesting to you?

Yes, sure. I think we continue to think about acquisition as a part of how we best and most effectively deploy capital. So we are on a constant search. As a matter of fact, as a part of a multi-year plan that we are on, we made it explicit -- everybody's a part of the M&A team. So I think what we have seen is an influx of ideas and opportunities that we are chasing.

And I think the most natural places to go, I think we've talked about we'd always love to find a good insurance asset. But even one that has a little bit of an international flavor, I think that is interesting. We continue to think about healthcare frequently. And I think inside of what else we can do with banks and marketing effectiveness is on our agenda.

And finally, supply chain. There's more and more interest in what we can do for not just insurers, as you think about business interruption in supply chain, but for manufacturers and chemical companies and the like. I think there are a couple things we can do to fill out.

So we are moving in all of the more natural verticals trying to dig deeper and wider. And I think we feel good about the opportunities that are out there. We have to now find price and more specifics.

Kevin McVeigh, Macquarie.

Hello. Nice job in terms of buyback in the quarter.

Was there at any point you were prohibited from being in the market because (inaudible), or was it pretty consistent in terms of the capital deployment in the quarter?

I'm sorry, you were a little scratchy there. Could you repeat the question please?

Sure, Scott.

In terms of the buyback in the quarter, were you out of the market at any point? Were you able to buy relatively consistently over the course of the quarter?

Oh, no, not at all. There was no interaction between those two agendas.

Got it. I didn't know from a (inaudible) perspective, there might have been some restriction.

Just real quick, could you talk a little bit about the savings on the pension expense? And was that one-time in nature? Should we expect that going forward? And was that contemplated in the guidance as well, as we think about the flat margins year on year?

From a pension perspective, a couple of things occurred. We did freeze our pension a few years ago; I think it was 2012. And more recently, shortly thereafter, we actually funded pension. We were underfunded; we funded the pension.

What you are seeing now is obviously the last couple of years, I'll call it the benefit associated with that. Also, in large part because the liabilities are generally unchanged, what is changing is the asset returns. The market has done well. So you are seeing the net of that inside of what expenses we recognize inside our P&L. And that's what's been disclosed.

Got it. So that would be the type of thing (inaudible) as the market continues to perform or underperform (inaudible) reflected in the income statement. Is that right?

I apologize, I'm having a little problem hearing you. But I'll try to give you the answer I think you're questioning.

For the most part, the liability base is generally going to be unchanged because we've frozen the pension plan. Now it relates a lot to how the assets perform in the market itself. So think of the fixed income portfolio, bond portfolio, as well as equities. And that affects the expense you recognize each year. It shouldn't vary too much, but those are the variables.

Andrew Steinerman, JPMorgan.

Good morning all.

Mark, sometimes when a segment like DA insurance is more volatile, your prospective commentary gets a little more specific. So in that spirit, I'm going to ask you about your fourth-quarter DA insurance commentary that the growth will return to more normal growth in the fourth quarter. And I look backwards, and I'm asking you -- When you say more normal growth for DA insurance, do you mean approximately 10%?

I think what I would like to do is break it down in a little bit more detail without a very specific answer to you, Andrew. As you can see, the way we kind of organized things, it is inside of the loss quantification -- that's the Xactware business -- continues to be strong. I think we would continue to see consistency there.

Our AIR catastrophe modeling business, I would tell you that just from a sequencing perspective, that was down a little bit in third quarter. I think we would expect that to come back a little bit in fourth quarter. And then claims business has been pretty consistent all year.

So when I think about the return, it's really more around one-third of it. And I think we would get back to a run rate, as you think about the full year, year to date, we should get back to kind of a, quote/unquote, normalized level.

I don't think, which is a heart of the answer here, we have not lost any customers. The market position remain strong. We feel real good where we are with customers. And I just want to make sure I share that with those who are listening.

And when you said there were some push-outs in the third quarter, was there any reason for the push-outs?

I think we have some implementation items and maybe a couple of contract signings that I can specifically remember.

Okay, we thank all of you for your time this morning and for your interest in our Company, and appreciate the opportunity to talk about the third quarter. And we look forward to speaking with you at the completion of the next quarter. Thanks very much for your time.

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