Verisk Analytics' CEO Hosts Investor Day (Transcript)

| About: Verisk Analytics (VRSK)

Verisk Analytics Inc (NASDAQ:VRSK)

March 07, 2013 8:30 am ET


Eva F. Huston - Senior Vice President, Head of Corporate Finance, Head of Investor Relations and Treasurer

Frank J. Coyne - Chairman, Chief Executive Officer and Chairman of Executive Committee

Stephanie Sutton

Kevin Thompson

William M. Raichle - President of Verisk Insurance Solutions - Commercial Property

Neil Spector - President of Verisk Insurance Solutions - Underwriting

Edmund Webecke

Vincent Cialdella - President of Verisk Insurance Solutions - Claims and Crime Analytics

Scott G. Stephenson - President and Chief Operating Officer

Ming Lee

Ron Isaacs - Chief Executive Officer and President

Gary Kerney

Joel Portice - President of Verisk Health

Nathan Gunn - Chief Operating Officer

Michael Heller

Nana Banerjee

Perry F. Rotella - Chief Information Officer and Senior Vice President

Mark V. Anquillare - Chief Financial Officer, Principal Accounting Officer and Executive Vice President


David Togut - Evercore Partners Inc., Research Division

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

William A. Warmington - Raymond James & Associates, Inc., Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Kevin D. McVeigh - Macquarie Research

Eva F. Huston

Good morning. If I could ask everyone to take their seats, we're going to get started in just a minute. Welcome, and thank you for joining us for our Verisk Analytics Investor Day. My name is Eva Huston, I'm the SVP of Finance, Treasurer and Head of Investor Relations. I apologize for my voice. It's a little scratchy this morning. But as is a fine Verisk tradition, we have some inclement weather. It just gives us an opportunity to talk about some of the wonderful things we do around that, and you'll hear from our panel later. We do appreciate those who made the effort to be here and also appreciate those who are on the webcast who couldn't make it in person due to travel difficulties.

Before I turn it over to our Chairman and CEO, Frank Coyne, I wanted to point out that we have 8 product demonstrations available to you in the lobby where you came in. I would encourage you to go and visit those product demonstrations during breaks. They will be available throughout the day. I think they'll really give you a good feel for the solutions we provide to our customers and why those are so valuable. As we go through the day, we will give you an opportunity to ask questions after each presentation, and I will also note that we have a number of our business leaders here who are not presenting today just due to time constraints, but feel free to find them on a break and ask them questions that you may want to ask. We will be serving a box lunch just before Mark Anquillare's presentation at 12:30 so just feel free to -- if you're getting hungry, you'll know that, that's coming. And finally, I wanted to note to you in your binder that you got when you walked in, there is a survey requesting feedback, so if you would, give us some candid input and leave it on the table as you leave, we'd appreciate that. So with that, I'm going to turn it over to the Frank Coyne, Chairman and CEO, to kick us off for an informative day.

Frank J. Coyne

Thank you. Well, good morning. Yes, there you go. So before I forget, I do want to thank Eva and all of my colleagues who participated in getting the agenda together and who are here to give presentations.

I believe we -- this is our fourth Investor Day Conference, and we have been listening to our investors, and we've been taking your questions and we take them very seriously, and we understand the areas of interest to you. And I think that you will find that this is the most informative Investor Day that we've had so far. It's a very, very good agenda that they tied together. The difficulty we have is figuring out which things to cut out because there is so much to the story. And if you are here when we had our first one, we had, I thought, was a very good introduction to us, for us, to you as investors, but there is so much more to our story today than there was in 2009 when we did our IPO. And it's just wonderful that we're going to have the opportunity to talk about some of that and give you a little deeper insight into some of the things that you know are driving value and have the potential to driving -- to drive value for us, and I think what -- when you leave here this afternoon, I think you'll conclude that the best part of our story is yet to come, and so I'm excited about that.

So I have a short presentation on who we are and where we're going, but for the most part, you know it. One of the things that we've learned in dealing with our investors is, a, we're a complicated story, we know that; and b, you do a lot of work before you do your investment and we appreciate that as well, as we do appreciate your questions that we get because it helps us focus on those areas of interest of -- that are important to you. One of the things you know what our 2012 results were and we're very pleased that we have continuous improvement in our operations. The most exciting thing for me on this slide is the last little checkmark there that we have crossed into the territories that we are now a $10 billion market cap company. And that's an important milestone, I think, for us as we pursue our journey. Somebody asked me last night, "So what's next?" And the obvious answer is $20 billion, and we're pretty confident that we'll be there in due time.

You will hear during the course and you will see and you know that there are many important parts of our value proposition, and it starts with our database, which is a unique database, and we have proprietary analytics. But what makes it all work is our 6,000 people. We have very deep domain and industry-specific expertise that works with that data and develops the analytics that really delivers the strong value proposition that we do deliver to our customers. We are proud of our story. As you know, we are a not-for-profit consortium, and we started our journey really in 1997 when we converted to a for-profit organization. And from the beginning and into the future, we simply set our North Star as creating shareholder value long before we were public and long before we even thought about doing an IPO. And we took a number of disciplined steps to get there and it has led us to the great organization that we have today, which as I say, the best of our story is yet to come. We have a strong track record of top line growth. Our playbook has been and will continue to be solid organic revenue growth, which is our main focus, a supportive -- it's a very different disciplined acquisition program that adds to our capabilities both in our data and in our analytics and in our technology, and very importantly, in the entrepreneurial capability of our enterprise. There's -- and you will hear this during the course of the day. There's a lot emphasis on innovation in various analytics. It's an internal initiative, but we add to it through our acquisitions. As you review our acquisitions over the course of the morning, you will see different slides on them. Every one of those was an acquisition of innovation, and we brought into our enterprise innovators, and then we meshed the cultures together to create what we have today. And it's a very important part of the history, and I'm confident will continue into the future.

Accomplishments in 2012, probably many of you are on our earnings call, you're familiar with them. We did have, I think, a very, very solid year of top line growth and bottom line growth as well, and with increase in our cash flow, which of course, delivers our shareholder value. We had a couple terrific acquisitions in MediConnect and Argus. MediConnect has added to our Verisk health story, and you will hear that story today and have an opportunity to do a little deeper dive. Argus is exactly down our street in terms of business and financial model, added another petabyte of data to our data set, and we have over 5 -- over 4 petabytes of data. Now you might think, well, what's a petabyte of data, and Scott can tell you in great detail what that is. It's 10 to the 15th power. I have to put in simpler terms. Think of 3 drawer file cabinets, a petabyte is equivalent to about 20 million of those. That's a lot of data, and Argus added a petabyte to our data set. Mark will talk about our capital deployment and acquisitions, and share buyback is an important part of that. If you remember, our first priority is investing in our business, then acquisitions and then share buybacks. We continued doing that in 2012, and we'll continue to do that in 2013.

And long-term value creation, as I said, we're going to continue to run the same playbook. We have a very strong position in the property, casualty industry, as you know. It's still a very, very important part of our business. We want to grow that. We've done some reorganizing. We've pulled different assets together, and you'll be hearing some of that story this morning.

We want to deepen our penetration in our new verticals, where we have a lot of growth opportunity. We'll continue to invest both internally and through the acquisitions, and all of that leading to top line, bottom line growth and our cash flow growth, which will, of course, drive our shareholder value.

Our moat, we talk about our moat all the time, and it's -- everyone has their kind of defensive moat. This is important to us because it's not just a moat. It's also a strategy. And as I've said, we've added to our data storage. We'll be talking about as we go through our various presentations, you will be hearing from our folks how they have been working to widen their moat and defend our business that we are kind of unique in all of our verticals. And with that, I'm going to turn it over to Stephanie, who will start us off in Insurance Solutions.

Stephanie Sutton

Thanks, Frank, and good morning, everyone. Over the next half hour or so, my colleagues and I will be providing you an overview of our property and casualty insurance business. All of these businesses fall under an umbrella brand that we refer to as Verisk Insurance Solutions. Within that brand, under the umbrella, we have companies like ISO, Xactware and AIR. All have very strong brand associations within our industry. Following a brief presentation, we're going to have some Q&A with my colleagues here, and we also, as Eva mentioned, have demonstrations. So please do take advantage of all of those throughout the day.

P&C market, actually the U.S. P&C market insurance, is the largest in the world with about $500 billion in annual premium. The top 100 insurance companies actually represent about 90% of that premium, and all of these customers, all of these companies are customers of Verisk. So in our world, it's policy claims or loss costs, as we call them, that represent the cost of goods sold for an insurance company. On average, these loss costs or policy claims, plus some other loss related expenses represent about 79% of this annual premium. What we do at Verisk is we help insurance carriers select their risk and also analyze their claims. These are both very vital functions for insurance companies to maintain their profitability. So we, at Verisk, are mission-critical to our customers and their business. So despite the worst insurance market since the Great Depression, at Verisk, we've been able to grow our insurance businesses by almost 7% in 2012.

So I think everyone knows Verisk is a bit unique. As Frank mentioned, we were originally formed under the brand of ISO as an industry consortium in 1971. So we are considered trusted partners to the industry, and we take this position very seriously. Building on the inherent trust we have with our insurance partners and the data that they provide to us, we've been able to develop many valuable solutions for them. And over time, we've expanded upon and added on to solutions by bringing in fraud tools, from ISO ClaimSearch, catastrophe models from AIR worldwide and loss quantification tools from Xactware, just to mention a few. In 2010, that's when we introduced the Verisk Insurance Solutions umbrella brand that I mentioned, and last year, we formed a new division called Verisk Underwriting Solutions to bring together a number of our products and units that provide solutions for underwriting purposes. And this new division has helped us to serve our insurance customers, specifically, our underwriting customers better and also provide them more value through end-to-end solutions.

Okay, deep domain experience. Perhaps due to our sort of unique heritage, we do have deep domain expertise in insurance here at Verisk. Right here, I have a subset of executives, many of whom or most of whom actually are here today. These guys alone represent 167 years of combined experience at Verisk in our heritage firm. Not to mention that many of us, including myself, actually worked in the insurance companies before joining the company. So while I've been here 9 years, I do have a lot more experience than that and too much to mention really so. I guess, the main point is we are insurance people, and because of that, we understand our customers' problems, and we're very well equipped to help them solve them.

Before I move on, I'd actually like just to take a few minutes to represent my colleagues here, who will be following me and helping me with the presentation, as well as taking some questions when we're done. So first we have Kevin Thompson. Kevin is the President of ISO Insurance Programs and Analytic Services. We also have Bill Raichle, who is the President of our Verisk Insurance Solutions Commercial Property Division; Neil Spector, he heads up the new Underwriting Division that we mentioned earlier; and last but not least, and way back at the end there is the Senior Vice President from Xactware. Edward's [ph] actually filling in for Jim Loveland today who couldn't be here due to a conflict.

So before we dive into the detail, I'd like to just take a couple of minutes just to share with you some thoughts and some of the key challenges that our insurance customers are facing today. Customers aren't [ph] able to depend on investment income right now, I think we all understand that. They are paying much closer attention to their underwriting and adjusting their pricing accordingly. They're looking to catch a value in large data sets, in sophisticated analytics and kind of getting some modest growth that way. Unfortunately, that's just not enough. They're going to take the market share from their customers that they need to -- they have to look for new and unique ways to grow. So they need to develop new products, expand their geographic footprint, acquire or even explore brand-new paradigms like telematics or pay as you go insurance. So they also had to do this while they manage through a very challenging fiscal environment, as well as the ever-changing and challenging regulatory landscape that we operate in as well. So with all the increased storm activity, the need for sophisticated catastrophe and weather analytics is greater than ever. We also have to understand things very deeply like the global supply chain and power outage and the impact and implications that these things have on the businesses that they provide insurance to.

So moving along, moving quickly because we have a lot to share, I'm going to go ahead now and hand over to Kevin Thompson, who is going to now talk about the solutions that we have at Verisk to help these customers with these issues.

Kevin Thompson

Thank you, Stephanie, and good morning, everybody. That looks familiar. Again, good morning. Verisk insurance brings value to our customers throughout the insurance chain. Our solutions address client acquisitions, helping our customers with markets, marketing and product development, risk selection and identifying target markets and target risks themselves.

Moving on, they also -- we also have solutions that provide rating and underwriting information, assisting them with the prediction of loss and the pricing of risk. When they do have a claim and some of their customers do have claims -- that's why they're in business, we have solutions that assist them with the quantification of the loss related to the claims, as well as assisting them in the detection and prevention of fraud. And then finally, moving on to what their portfolio management and the management of their business, we provide solutions that help them in areas such as catastrophe, hazard mitigation, modeling and the analysis of concentration of risk in their portfolio.

This slide shows the risk analysis framework and where Verisk Insurance Solutions provides products for our customers. The various businesses are aligned here to give you sort of an idea of what part of the risk analysis framework their products address, and starting off with -- in Risk Assessment and the prediction of loss in selection and pricing of risk, ISO's insurance programs and advisory information provide a lot of information and assistance to customers when they are actually evaluating and pricing their risk and selecting these particular risks they want to write.

Also in that same area of the prediction of loss and the selection and pricing of risk, Verisk Insurance Solutions underwriting provides products and solutions such as claims history information, motor vehicle reports, replacement cost calculation for the valuation of property. AIR Worldwide provides information to help them with man-made and natural hazards and catastrophe modeling. And Verisk Insurance Solutions commercial property provides them a wealth of information on specific properties in the commercial areas. The -- moving across the slide to the detection and prevention of fraud, as you can see, Verisk Insurance Solutions, a claims and claims analytics provides solutions such as ClaimSearch, which companies use when they are trying to ensure that, in fact, claims are valid and there's not fraud being -- occurring. And then finally, all the way on the right, the quantification of loss. Some examples there, our Xactware business provides information on the cost to repair damage to buildings once the loss has occurred, and AER provides information on information on weather analytics in the insurance space.

Turning to our industry-standard programs, an area near and dear to my heart. We have the ISO's historic advisory information. We provide this information to 26 lines property/casualty insurance, loss costs, which are advisory cost information based upon line, class, location, et cetera, it's a measure of the risk that the company is undertaking. You can think of the loss cost as the -- sort of the probably cost of goods, as Stephanie pointed out, it is the major cost of goods or the major cost that insurance company has for most lines of insurance. Upwards of 75% of their cost will be represented by the loss or the expenses needed to adjust the losses. The unique thing about insurance is that the -- that cost, that major cost is unknown at the time you sell the policy, at the time that they take the risk on, and it's only many years later that you may actually know what a claim would cost you to deliver that policy, and that's where we come in. We have provided analytics and information based upon a aggregated database representing significant part of the industry to help them in coming up with the best answer as far as what that cost will be to write that particular policy.

Next, there are rules. This is the manual, the commercial lines and personal line manuals that detail how to classify or rate a risk when the insurer is considering that. They also include information on special forms or considerations that the insurer needs to take into consideration when they are writing a particular type or class of business.

Next are forms. This is a contract between the insurer and the customer, and basically that's what is, and just as importantly, what is not covered by the policy and it also sets forth the duties of the various parties to the policies. Just as an aside, You may heard me mention this in the past, but in many cases, if you were to look at the homeowners or auto policies, you would probably see a legend on the bottom of the page that says it contains copyrighted material of ISO. That's where our policy form information is used, as the insurers are developing and constructing their individual policy forms, and that acknowledgment goes on those forms that they are using our copyrighted material.

And then finally, circulars, this is our main means of communicating to our customers about changes to our programs. And there a lot of changes that go on in the programs just from normal maintenance of the program to keep them state-of-the-art, as well as responding to various social and economic forces that are at work. Just as an example, and this is order of magnitude, in a typical year, we will have more than 10,000 bills and more enactments that we review to determine whether there are any impact on our programs of insurance. Over 1,000 regulations coming out of the various state regulators we would review for the same reason, and over 2,000 court cases are reviewed to see if they have implications. The result of that in a typical year was over 3,000 filings that we make with regulators to change our basic programs for the insurers to use. Having said that, Bill, let me turn it over to you.

William M. Raichle

Okay, Kevin and I combined form the traditional part of the insurance vertical inside Verisk. Some people look at it as ISO. We call it risk assessment for reporting purposes right now, and so I'm the other half of that. I'm -- I run a division called Commercial Property, and we are a group of about 800 staff. We are located in virtually every state in the country. We have 3 major product lines. We're the largest provider of underwriting surveys in the property/casualty industry. We provide custom surveys, and we also, every time we survey a building for a carrier, collect information and feed it into what we call our ProMetrix database. And that kind of forms the core of what we do. Prometrics is a database of about 3.5 million properties. The information collected is collected in accordance with a nationally filed schedule, filed with all department of insurance. A building that we survey in Manhattan will be surveyed the same way as a building that we would look at a similar building in Los Angeles, for example. We collect information to help the insurers develop rates so we collect loss cost type of information.

We also survey and grade every fire district in the United States, about 47,000 of them. We maintain a database of that. We look at the water infrastructure, the fire department itself and the communications infrastructure. We do the same thing for building code and building code enforcement for communities that represent about 75% of U.S. population. And for the last 20 years, under contract with FEMA, we grade several hundred communities for their ability to mitigate against flood damage, and FEMA uses that in rating under the National Flood Insurance Program.

And finally, all of the information or the data that we collect is used to create analytics that drive decision-making in the insurance industry. So I started off talking about a long-standing partnership that Kevin and I have had. That is formed primarily around the development of rating criteria such as loss costs. So a building, such as this one, with a sprinkler system, obviously, a large building will have a specific rate assigned to it, and the carrier will be able to develop a premium by taking our loss cost and adding expense factors and a profit and come up with a quote for the marketplace, and so that's kind of where we fit into the scheme of things.

We have obviously, like everybody up here, we have a growth strategy. We are deeply penetrated insurers that write about 85% of the Commercial Property business, license our services right now, but they don't license everything. And so we have room to grow just within our regular market. Up until several years ago, we charged for everything on a transactional basis. We are now licensing our products so carriers are buying it on every risk they write. Every quote that comes in, they're using our information, and so we're starting to grow that way. We're also bundling our survey information or survey products with our database. That helps us grow. And then finally, we're looking into other markets such as real estate and municipalities.

Okay, and that takes care of Risk Assessment. So I'll just briefly describe Decision Analytics. Kevin gave some color into it. I'll do a little bit more of a deeper dive for you. There are several businesses that form what we call under a reporting segment Decision Analytics. And the first is under insurance solutions, claims in crime analytics. The claims database is an industry staple, okay? It is -- we have about 93% of all of the claims in the industry housed there. Carriers use it daily. It sits on the bottom of their computer terminals in the claims department. And we like to think of it as being used for fraud detection. But another way to look at it is, it helps drive the claims business because when you're in that business, you need to assign resources on a priority basis. You cannot investigate every claim that comes in, and this database helps companies assign resources to investigate claims that deserve it, and so that's the tie-in to fraud.

Move over a little bit and talk about Xactware. Xactware, in terms of their core products, they start off with a very, very unique database of costs. And they have cost of building materials throughout the United States, zip code level detail, constantly updated and a similar adjacent database of labor costs. And they take those databases and they face 2 parts of the insurance market in it.

On the claims side, they literally sit between the contractor and the adjuster in coming up with a price to repair or replace a building. And they've got more than 75% market share right there. And then they take the exact same database used and they focus the front end of the insurance. So if I'm writing a property, one the most important things I need to know is what is the replacement cost of that property, and again, you need to have the labor cost and the materials cost in order to come up with that. So that same dual database is used to focus the front and back.

AIR Worldwide, as the name implies, they are international, they write in about 90 countries. Wherever there is an insurable built environment, you will find it AIR services, they focus on catastrophe management.

And then finally, Neil will talk a little bit more about this, we have our underwriting vertical. And this is our most recent division formed. It's about 15 months old at this point in time. And it was formed by taking point solutions, different products that resided in multiple areas around the country -- our company. And they all faced the underwriter. And what we said to ourselves was even though those products kind of grew out of just natural evolution of different business strategies and creativity that exists in different areas, because they all faced the same function and insurance company, they belonged to be put together. And that allows us from the sales effort very efficient, you don't have multiple people to one underwriting representative. But also allows us to deliver the information in a consistent way and then to enhance and develop new products around a consistent function and a consistent vertical. Neil will talk some more about that.

And this is more of a concept slide, I'll let you just take a look at that. I think Frank mentioned that it was -- had 3 petabytes worth of data. I'll give you just a little flavor from my perspective on it. In our business and especially in the last decade, most of our customers and almost all of our competitors are involved in analytics. And -- but at some point in time, without proprietary data, solid data, analysts run into a wall, because you can't analyze the same thing again and again and come up with something new. And so what really makes us unique is the fact that we have a variety of sets of unique databases. So in Kevin's area, 500 terabytes of premium and loss data, helping to develop loss costs for the future.

I mentioned in my area, 3.5 million buildings, with detailed information on your build construction, number of stories, the sprinkler systems, can the sprinkler systems handle the hazards of occupancy in those buildings. On the claims side, 800 million claims, 93% market share of the industry inside that database. And then again, 47,000 communities, detailed information collected on their fire protection capability. So it's this kind of detailed proprietary data that propels us.

And then finally, again, a concept slide here. What we're looking at here is our market penetration by customer segment. So look at the top 10 customers in 2011, we sold them an average of 12 out of 39 possible product solutions -- I'm sorry 2011. In 2012, we grew that to 13, so we are moving in the right direction. We do a lot better on the larger companies. The smaller companies are a little bit more of a challenge because of the nature of those companies and the kind of business they write. But the point here is that even though we have deep penetration for some of our major products, even within this score industry of insurance, plenty of room for growth.

Turn that over to Neil.

Neil Spector

So several of my colleagues have shared with you a little bit about the underwriting division being put together, so I thought I just give you a high level what we do. We focus on 2 lines of business: the auto and the property lines of business, primarily in personal insurance, although some of our products are used by commercial insurers. And as Bill mentioned, we very much had a focus, a point solution focus where we solve little pieces of the underwriting challenge, but we didn't really put it all together. So after the -- over the last 15 months, what we've be working on is a single go-to-market strategy, a single -- a face to our customer. We brought sales teams together, we've got a centralized marketing message, and we really are much more cohesive approach on working with customers.

And that's been well received by our customers because in the past, they've been called on by various groups within Verisk and really weren't working well altogether. We also have taken more of an integrated view of product development. So we're trying to integrate our products more to really solve a problem. And so when you think about what is the underwriting challenge for these insurers, it really starts out in what we call the point of sale or point where someone wants to get an insurance quote. And it really is helping that insurer determine the right price and what they want to -- whether they want to write the risk or not. And in today's competitive market, especially in personal insurance, doing that very quickly. So some of you had an opportunity -- if you haven't, I encourage you to look at our QuickFill demonstration when the sessions are over. What we do is, we allow data to be prefilled right into the point of sale quickly. An insurer can get a quote in someone's hand realtime and hopefully, write the business.

The challenge for them is they need to understand the risk. And in order to understand the risk, they need data about the risk. They need to understand in auto who the drivers are and what kind of mileage they're going to be driven, and are there prior losses and what's the credit of the person looking for insurance is. So all that data is expensive. And so helping an insurer manage when they need the data and at the right time is an important part of what we do and why we have optimized their data spend is a key focus for us.

The other issue that the industry is dealing with right now is fraud. Over 10% of claims are fraudulent. And we have a lot of solutions in the back end that help insurers once the claim is generated to detect that fraud, but it -- really what they're looking for now is solutions on the front end to help avoid the risk before it's written. We have a lot of data and analytics that we help on the front end identify fraudulent risks at the point of sale.

So really, our -- we're working with insurers at that point of sale. And once the policy is balanced, the insurer has to monitor that policy over time because there are changes, there are new drivers who have violations on their vehicle. Their house condition or their home changes overtime. There's foreclosures in their current environment. All these things need to be monitored over time to help insurer deal with changes that will affect the policy's price. And all of this gets around really, what, the term that we call premium leakage, which is where the insurer doesn't have the right price for the risk based on not understanding the characteristics for that risk.

And there's the renewal. So when the renewal comes up, making sure that they improve retention, identify the characteristics of the renewal and price it properly. All this really needs to be done as a process. So really, we're looking for the -- to work from the insurer, from the point that they are looking to bring a risk on through the policy life cycle. And ultimately, insurers are managing a portfolio of risks, so they need to look at the entire portfolio and make decisions on underwriting. So these are all areas that we help customers with.

In addition, we provide compliance reporting solutions to our customers. There's a lot of state regulations with insurance. There's a lot of compliance reporting. There's lien holder notifications for auto loans and mortgages. So a lot of that back-end processing we can out-source on behalf of our customers.

Lastly, there's several new technologies that we're focused on that we feel are either disruptive or really going to change the way insurance is written over time. Some of those will be talked about later like an area we'll be talking. Edmund, my colleague, will be talking about remote sensing data. And another area, telematics, is the ability to understand where a person drives and how the vehicle is being used. But really, all of these things are things that we're working on going forward.

So when we talk with our customers now, the conversation has changed a lot. In prior years, we were going out and selling solutions. We were selling product. This product solved this problem, this product solved that problem. Now we're really going in and having a different conversation, which is, we need to help reduce premium leakage in your book. We know that you're not getting the rating characteristics right. We know that you're writing a fraudulent risks, and that is causing degradation to your financial results. And so those are the conversations we're having now. We're having conversations about how do we improve retention, how do we improve their conversion ratio, which is the ratio of quotes to -- the number of quotes they put out to the number of people that actually bind insurance with them.

And so really, we're focused in on our ROI metrics that are really important to our customers. And then as we start to get in, we very -- consult with our customers on their specific situation because every insurer is different as far as what they need, as far as help in these areas.

Lastly, I just want to highlight on the weather front. Our friends at AER, which are -- they'll be talking later today, have really worked across the insurance vertical to help determine how weather analytics can help insurers. And I just want to give you a couple of examples of how that will work. On the underwriting side, if you think about property, the insurer needs to understand that property, everything from the replacement cost to the hazards around that property. And traditionally, we've provided that information, as well as information about catastrophe, whether you're in catastrophe prone area, how far you are from a body of water, with the fire protection. Bill talked a lot about fire protection in his presentation. More recently, hail has become a very big problem for insurers and now working with our folks at AER, we can actually provide individual specific property weather history so you can see at a property level, has there been wind damage and hail at this location in the last couple of years? And it really can help an insurer determine whether they need to go out and inspect the risk before writing it to determine that they're not going to get a claim when they take on this new policy.

And on the claims side, the information is used to help insurers place claims staff during an event. So if you think about a big cat that might be happening or you think about a hail event that might be happening, specifically with hail, it will provide realtime alert information to the insurers so they can place their claims staff strategically to deal with their customers after the aftermath. And lastly, the weather data is also being integrated into some of our fraud tools to help adjusters determine, is it likely that this claim might be fraudulent because it's a hail claim and there's -- according to our information, there's no hail in the area at the time the claim is submitted. So these are just examples of how weather is used across our business areas.

I'm going to turn it over now to my colleague, Edmund, who will talk a little bit about our remote-sensing capabilities.

Edmund Webecke

One of the most exciting areas, in my view, in our space is looking again for better ways to help our customers understand their risks, going back to what Frank mentioned earlier with respect to the name Verisk is the truth in risk, helping our customers understand what they're writing, what their risks are that they're adding to their books. And one of those is the area of remote sensing, which is the ability to take data in a mass scale from a variety of different places. Satellite is a great example, information you can collect from the ground, and so on, taking all of this information and processing it in a way that can create some intelligence on those risks.

A good example that we're utilizing today is the AER data coming off of the satellites that they provide information about power losses and debris removal and things that help again the customers understand their risk. And we can piece that together with the aerial imagery and again, the information collected from the ground to create tremendous value for our customers.

We also have some proprietary platforms that we deliver products through our customers on -- in the international space and obviously here, domestically to -- that we can leverage this information to help them use this data in their workflows rather efficiently.

And then change detection. A great example of the uses of this was in the aftermath of the Superstorm Sandy and being able to detect where the power outages actually occurred. Obviously, hail, that we've talked about a little bit and will provide some more information on as well. But just being able to detect where the damage occurs and helping our customers in that respect.

One other area I did want to drill down on to specifically was the ISO ClaimSearch database. Our customers have a challenge of being able to take and understand fraud. As Neil mentioned, there are a high percentage of claims that are fraudulent. And going back to our roots, as a consortium created by the insurance companies, one of the key ways that we are helping or we helped the insurance companies originally was to share information. And the problem that the insurers needed to solve was to be able to understand, to see across different companies where claims were happening and how they were being filed. And the solution was putting together this information as -- coming together as an industry and pooling the information in a way that all of the carriers can draw upon this claims history. And so that's what ISO ClaimSearch provides, and it's been used by 90% of the P&C insurers today, and it is a great way for us to help our customers mitigate fraud.

Just quickly moving on to the concept of widening our moat. We're in a great position in our market today with Verisk Insurance Solutions. We have a very large market share and we enjoy strong relationships with our customers. But we are not standing still. We recognize that our goal of growth has to come from a lot of different aspects, and we are continuing to widen our moat with upsell opportunities, cross-selling between the various products. A great example of that is taking some of the AER hail reports that we've talked about and integrating them into the Xactware platform. We're continuing to innovate, pushing the envelope with the technology that we use and creating ways to analyze the imagery that we just talked about in new and advanced ways to create additional intelligence.

And from those platforms and that new technology that we're developing, we're also getting additional unique data sets and creating derivative data from the data that we have to create more power behind the great analytics that we have. And all of this continues to provide defenses for us and create barriers to entry for our competitors.

And this strategy has given us a lot of success over the years. As you can see here on the slide, our top line growth has been very solid over the years, with the strong organic growth, as well as some acquisitions. And this growth is protected in good times and bad through a great mix of transactions and subscription revenue. Obviously, the subscription revenue helps when the claim volumes are down, and then we still have the great upside through the transaction models that we're using as well. And this does lead to a scalable and strong profitability and predictability in our revenue streams.

So as with all great companies, we have a very solid strategy for growth in the future. We're excited about the opportunities that we have. We continue to capture additional market share and grow our businesses. We've mentioned a couple of ways that we're doing that with innovation, focusing on helping our customers by understanding their problems and then applying the proprietary databases that we have to their specific needs. And we're looking at several other strategies as well that you can see there on the slide with bundling and cross-selling and benchmarking information that comes from the insurance industry itself and in effect, selling it back to them in a value-added way. And finally, as we again enjoy a great position in our markets with our customers, we recognize that in a lot of cases, we have to redefine our market. And as we get a high percentage market share, that really just tells us that we have to redefine the market to find -- to continue to grow and that's where we are today.

Eva F. Huston

Thanks, guys. I have a couple of slides at the end here about our sales strategy, but in the interest of time, so that we do have time for your questions, I'll just make a couple of quick points on those. Basically, in sales organization for Verisk Insurance Solutions, very much focused and structured around how our customers buy. So you can take a look for yourselves, we set ourselves up as a sales organization to fit the complex processes that they make and the enterprise solutions that they're looking to buy from us from time-to-time. Also, moving forward, we also segment our customer base in the way that they buy as well. So take a look at these, I'm going to move on quickly because I do want to get to questions and we are running behind the clock. So why don't we just kick in, the final one actually is just showing our breadth of solutions. And we do have competitors in areas for our similar point solutions. But no one can offer the breadth that we do for our insurance customers here at Verisk.

So questions, please?

Question-and-Answer Session

Unknown Attendee

That was an interesting figure, about 10% of insurance claims being fraudulent, can you compare that to what it's been historically and if you have any product and services that can then address fraud once it's suspected or found?

Eva F. Huston

Absolutely. I'm going to ask Vinnie Cialdella, who's found not on the panel, he's upfront here. He's the President of our Claims and Crime Analytics Division. So Vinnie, can help us out with that?

Vincent Cialdella

Yes, sure. I think the back end of the question, you said something about after the 10%, what was the rest of it?

Unknown Attendee


Vincent Cialdella

Yes, absolutely. So addressing the 10%. I mean, that's kind of a number that the National Insurance Crime Bureau would use as a kind of an average. We suspect that insurance fraud is some part of a claim -- about 10% of the claims have some particular fraud [ph]. So it could be from the very small, what we call -- you've actually have it -- if something's stolen in your house and you pad the claim by adding a few other things to it to what we call organized fraud. If you look back in the demonstration, see one of the products that we have that helps them on the back end of it is called NetMap for claims. And what this is it looks at a series of a lot of insurance claims and information around that and other data sets and does a great job of visually describing for the analyst, the SIU analyst, special investigator, to look at that to see if there is organized fraud associated with a set of claims. We have a claims scoring product, called Claim Director, that on intake, just looking at characteristics of the claim and the histories of the matching claims in the database that will provide a directional score for the insurer to quickly assess what might be going on there and help them triage the claims, as was mentioned by the panel. The ability to direct the claim to a senior adjuster, if it's got some propensity for fraud, gives them an ability to work more quickly with that and also funnel the meritorious claims, which there are 90% of those are meritorious, to be able to direct those and move them more quickly through the process. So it helps both of those.

Eva F. Huston

Yes. [indiscernible]

David Togut - Evercore Partners Inc., Research Division

David Togut with Evercore Partners. A question for Kevin Thompson. Kevin, you mentioned there are over 1,000 new regulations for the P&C industry every year. Are there any game changers that you see in the pipeline that could lead to new products for Verisk or could force the industry to change the way they do business?

Kevin Thompson

I mean, the regulatory landscape in a historic -- I mean, there always are changes going on with the regulations from the states. I mean, if I had to say one thing in the regulatory area, certainly the industry is keeping a close eye on is the Federal Insurance Office and how active is the Federal Insurance Office going to be. Traditionally, property casualty has been regulated at the state level. It continues to be regulated the state level. The states do a very good job of it. But we do now have a Federal Insurance Office and they're very late on coming out with some things that the legislation ask them to come out with. There are 4 different reports that are due already and have been due for many months that they haven't even issued yet. But I think that's one thing that the industry is keeping a close eye on is how active will the Federal Insurance Office be.

Eva F. Huston

Thank you.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

It's Andrew Steinerman of JPMorgan. My question is, it's for Neil. Could you talk a little bit about the A-PLUS product? Obviously, this is a competitive situation. This is not a typical situation where Verisk gives up low market share. How has the product done? And is this a needle mover within your underwriting solution?

Neil Spector

That's a good question. So absolutely, there's a lot of opportunity for us with the A-PLUS product. We are bundling that into our point-of-sale solutions. So we expect that strategy to be very successful for us, and we launched over the last year what we call A-PLUS 2.0 for auto, which essentially we partnered with TransUnion, which is a credit bureau. They have a householding methodology for identifying claims. And what it allows us to do is identify more claims. So using their search algorithms versus traditional algorithm, you can find claims that maybe there were changed in the household, people moved, they got divorced, children left the house. So the claims aren't easily found. So that has really been an approval for us. We also created what we call an alert product with that, which will tell the insurer when they need a loss -- to order a loss history. If you think about losses, most insurers just order on them on every risk. Most of us don't have losses. They are ordering all these reports and they only need them on some subset of the -- so the way our product works, it actually looks and give them an indicator if there's activity in the file. Both of these have -- we think, are game changers and have been well received in our discussions with customers. They're both relatively new.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

And is it significant to the revenue of your unit, is it moving the needle?

Neil Spector

So we think there's a lot of opportunity for growth in the revenue of our unit. To close to your point, we're not the market leader. So because a lot of our products that we talked about are highly penetrated. We're not highly penetrated in that area, so it is a big focus for us and an opportunity.

William A. Warmington - Raymond James & Associates, Inc., Research Division

Bill Warmington with Raymond James. A question for Bill. On the core metrics database, if you could just talk about the similarities and differences between that database and CoStar Group's commercial real estate database?

William M. Raichle

Database, I know about them in general. I would say that ProMetrix is a descriptive and a negative database, the best way to kind of describe it. CoStar is going to be obviously a descriptive and a positive database. So if a broker is looking to help a building owner lease space, they're highlighting the building in its most favorable light. ER doing a very detailed inspection of the building to try to point out what the hazards are, this is from insurer's perspective now. We look at the occupancies, we look at the hazard of occupancies, there are prevalent fire hazards and there's a sprinter system, we grade the sprinkler system in accordance with the national schedule. And we tell the carrier whether or not that system can handle a specific hazard of occupancy in the building at that particular time. So we look at it from the perspective of the carrier, so that is clearly different from Costar. Insurance customers would have a hard time kind of relying upon Costar, and I think Costar's brokers would have real hard time relying on us at this point in time, 2 different views.

Eva F. Huston

Well, thank you very much. I appreciate your time being here today. And if you do have more questions -- sorry, if you do have more questions, these guys will be around. So track them down. Thank you.

Scott G. Stephenson

[indiscernible] Stephenson. And as my colleagues are joining me up here, we are going to spend a few minutes talking with you about the weather. And if one lives or operates in this part of the country of late, it's been rather difficult to not talk about the weather. Where our company is concerned, we actually, in the days following the Sandy event, actually had to work energetically to continuously operate a data center we've got, which sits within 1,000 yards of the Hudson River. And happily, we were able to do that. And actually, I'll even note that cotenants in the same building were not able to continuously operate. So we're, I'd say, we're really proud of that, actually.

But beyond that, if you're a company like us that has in its customer set, insurance companies, you can't help but notice that most earnings calls why insurance companies within the first 2 or 3 paragraphs, generally, some reference is being made to the weather, what has occurred over the last 90 to 120 days and relating that to the results that the insurance company has actually experienced. So it's very definitely a part of our world. And yet it's also the case that doing the kind of stochastic analytics that we do in order to bring observations about the weather into the products and services that we provide to our customers is not a simple thing.

And understanding the weather is not a simple thing. So just by way of example, the Sandy event was the third most damaging event from an insurable loss perspective in the reported history of the United States, following only 9/11 and Katrina. And yet when one looks at the weather phenomenon itself, it's interesting to observe that the wind field associated with Sandy, if you saw any of the satellite images, was enormous, but the peak wind speeds actually weren't all that high, and -- so where did all of the damage come from? Well, the damage mostly came, actually, from water. And that has to do less with, in isolation, what was happening in the atmosphere and a lot to do with the nature of the exposures that exist in the greater New York area and along the East Coast and the topography. And so it is not a simple matter to get one's hands fully around the weather.

And we all think we're experts in the weather, because we experience it all the time. These 3 gentlemen actually are experts in the weather. And so what I'd like to do is just open with each of my colleagues, just briefly introducing their part of our organization and how -- and what the nature of the solutions are that are provided and then how what you do relates to the weather.

Ming, let's start with you.

Ming Lee

Sure. AIR Worldwide performs catastrophe modeling. We develop models that the insurers and the insurance community uses. The role of the model is to help clients assess our catastrophe risk. What you've heard on the previous discussion relating to the traditional risk that insurers have such as auto or fire, those types of risks can be anticipated through actuarial and statistical methods. However, catastrophes just don't happen all that often, so there isn't that much data. And when they do happen, whatever data there are, typically, because there are a few of them, and they happen historically, because exposures are continually growing in catastrophe-prone areas, a use of that historic data alone is insufficient for understanding what could happen in the future.

The role of catastrophe model is to provide a sense of what could happen in the future, and very importantly, what the likelihood is of those occurrences. Now the types of things that cause catastrophes, obviously, earthquake too, but many of the other phenomenon are really atmospheric phenomena or weather phenomena. And that's the reason why understanding the weather is important for us.

The way we go about to doing this is we build models. The models are based on 2 things. One is data, so we collect data about historical events that have happened and the damages and the wind speed, et cetera. But then we also need to affix the data to physics of what occurs. So our staff consists of atmospheric scientists, climate scientists, meteorologists and other -- and wind engineers to construct these models.

The actual events when they occur then are actually used as validation of the models. And what you -- what has occurred over time as the models mature is really increasing comfort and confidence in these models as more events occur and you can compare what has happened as to what the models would say. I should say that the issue is global. The models now exist for over 90 countries, because the -- because the types of things that we're talking about happen globally.

Scott G. Stephenson

Great. Thanks, Ming. So Ron, could you just say a couple of words about what AER does? AER is an acronym that stands for Atmospheric and Environmental Research.

Ron Isaacs

Thank you, Scott. Well, what we do, it does transcend these days to the words Atmospheric and Environmental Research. We help businesses and government understand the potential impacts of environmental issues on their businesses, and in particular, on their other operations and provide means to not only quantify those impacts but decision aids in order to help them mitigate losses and enhance their operation.

What we do in a practical sense is kind of work very closely with a number of different customer bases. And they're quite distinct and different in order to accomplish that. Our business is based on a foundation, first of all, of what I would call profound basic and applied research. This was the genesis of our company, actually, working research areas primarily funded by the government, Department of Defense, NASA, Department of Energy, Environmental Protection Agency, so forth and so forth, basic research areas associated with any of the disciplines that Ming mentioned, atmospheric scientists, oceanographers, hydrologists, meteorologists, base weather experts. And then more recently, as we've transitioned more into the practical impact on operations side, domain experts in particular areas, which are associated with our customer base.

So based upon those pillars, we're now able to transition some of the basis of our research, the research to operations area, I would call it. And apply the expertise we have in environmental impacts to those practical problems in the areas such as the insurance verticals that we've heard a few moments ago.

Here are the slides that were presented. One, an example of the use of weather information, particularly hail information and adjudicating property and casualty claims associated with hail, as well as the image which you saw from Hurricane Sandy, which was a way of monitoring from a space-borne platform, actually, where power was out. Those are the kinds of things we can do. But as well, transferring those kinds of capabilities into other areas, for example, impacts on communication, transportation, the energy sector and so forth. So we're looking at both weather impacts and climate impacts in those areas.

Scott G. Stephenson

Great, Ron, thanks. And Gary, could you just give us a little bit of overview of what it is that PCS does?

Gary Kerney

Yes. PCS -- first of all, I must say that Ming and Ron are the scientists, I'm a claims person. And I look at catastrophes as being claims events. PCS identifies and declares catastrophes on behalf of the insurance industry. We use a 2-part threshold. The first is if the event has caused more than $25 million of insured property damage, and the second part is that it must also affect a significant number of policyholders and insurance companies.

We're looking -- really, we're looking for thousands of claims to come out of an event. Once we determine that, that has occurred, we declare it a catastrophe, we assign it a separate serial number, we define it in terms of the dates on which it occurred, the states that it affected and the perils that caused the insured property damage. With that, we then proceed to estimate on behalf of the industry what the insured -- the total insured property damage is, involving all insurance companies writing business in all the states named in our definition.

I believe we have 3 audiences that we address. The first is on the claims side. The claims people in insurance companies are responsible for helping senior management set reserves, mobilize resources to handle the claims and from us, they get a big overview as to how bad this particular event is. They can couple that with the information they have with respect to their own individual losses as insurance companies.

We aggregate our data over time, so that people who are interested in, for example, what is the catastrophe history of Louisiana, we can go back and look at the state of Louisiana. They can look at a particular year. They can look at a particular storm family, as we call them, storm family being severe weather or hurricane or earthquake or wildland fire.

And then thirdly, we -- in the last 20 years, we've been involved in -- we have -- to some extent, we have been involved in -- a lot of folks are using information from PCS with respect to the insurance-linked securities market or cat bonds, insurance loss warranties and other financial products. So that's basically the service that we provide from PCS to the insurance industry.

Scott G. Stephenson

So thanks, Gary. Let's s spend a couple of minutes talking about the Sandy event and maybe Gary we'll just start with you. What was your experience? What was our experience in attempting to aggregate information about that event? Put it in historical context for us, if you would, and if there's anything that related to the special circumstances of that particular event?

Gary Kerney

Well, I still refer to it as Hurricane Sandy. I don't go with Frankenstorm or Superstorm or anything else, it was a hurricane. What's interesting, and Scott touched on it before, even though our estimate currently for Hurricane Sandy is $18.75 billion and puts it third on the list of the top 10 in terms of actual dollar loss in the years of occurrence, I think that Sandy was probably the most devastating event anybody -- in the insurance industry certainly, but for the folks that live in New York and New Jersey in particular, it was a very devastating event.

But when there were issues in the beginning that we had with trying to gather this information and to assess what the insured loss costs were going to be, there were issues, for example, like access. There are a whole lot of access issues down the Jersey Shore, but even across the river in Hoboken. The police operated a checkpoint on one road that they allowed -- they kept open. And when people pulled up to that checkpoint, they were told, if you live in Hoboken, you can come in to Hoboken. If you work in Hoboken or you have a business in Hoboken, you can't come in. And that included insurance adjusters. We were weeks before we were able to get into many of the hardest-hit areas and begin to assess what the insured loss is going to be, because we have a lot of coverage issues, wind versus water, for one.

So those kinds of things had to be taken care of. And they were very difficult, and in a lot of areas, one area in particular, down the Jersey Shore, only opened up a week ago last Friday, almost 6 months or 5.5 months after the hurricane. So those kind of issues precluded us from operating as quickly as we would've liked.

Scott G. Stephenson

Just by the way, it does relate also to something Edmund was talking about before, which is the ability to make observations about damaged areas from a distance deals, at least at some level, with the issue of accessibility, physical -- literal accessibility in the immediate wake of the storm. Mon, what was your team doing in the days leading up to Sandy and the days following Sandy?

Edmund Webecke

Well, certainly, the obvious thing that we were doing first was looking at the forecast situation and actually what was going to happen. Our people are very involved on a daily basis working with NOAA and with the National Weather Service and also with people within the Department of Defense, whether Enterprise, the Air Force Weather Agency.

One of the things that we're very curious about, and it relates to the point you mentioned, Scott, is what would we able to learn from remote-sensing data from satellite sensors as the event unfolded, and also post-event, what could we learn from images of what had taken place, and in particular, the ability with satellite-borne sensors to look at an area and, by using a variety of data analysis techniques, algorithms operating on those data, understands what occurred in terms of loss.

It wasn't only looking at "a picture" of what the loss situation was in a particular area. A few moments ago, there was an image, which showed an area, which was delineated as burn -- the burn area at Sandy Hook, for example. But it was being able to access through a variety of different technologies, the loss-related meteorological parameters, as you alluded to, Scott. The wind, what might happen with the wind as it acted upon the sea, in terms of creating surge; extremes of rain and/or hail.

There were precipitation extremes during Sandy. Fortunately, we don't have the kind of terrain, where this is going to build up into a flood situation or a flash flood or a run-off situation. And in fact, luckily, all of that very, very heavy rain, actually, fell over the ocean. But the ability to characterize the situation, perhaps on a regional basis is something that, I think, in the future will be even more useful as we apply it in the context of an insurance situation.

Scott G. Stephenson

Folks might be interested to know, Mon, the state-of-the-art in terms of the resolution of a satellite based image at this point?

Edmund Webecke

Yes, these days, the most recent imagers are on the order of 1/3 of a meter. And let me just, for 60 seconds, distinguish a few kinds of satellite sensors. We deal very much with meteorological sensors, which are actually used to initialize numerical weather prediction models. Now let me run up the flag and say that AER is very involved in the science of numerical weather prediction, as well as the engineering of doing design trait studies and specifying sensors for satellite platforms. We work with the aerospace industry in doing that.

In fact, we're working today on the next-generation of geosynchronous satellite called the GOES-R. It is a major program that, at least, until a moment ago is not being affected by sequestration. Actually, the Republicans in the House just filed a continuing resolution bill. It was passed yesterday, which includes $800 million to keep that satellite system supported. So at least today, I'm very happy. It needs to be passed by the rest of the House in the Senate.

Anyway, the environmental remote sensing satellites have colleagues up there. They are land remote sensing satellites. Those are the ones we're talking about when we talk about high-resolution images, where we're able to see things happening on a partial level. The NEAR [ph] is trusted agent, with the agencies that fly those things. We work very closely with the USGS. We work very closely with the commercial vendors, such as DigitalGlobe and others that supply the high-resolution imagery that's used by the intelligence community. And this is an area, where we are very excited about growth, because changes in technology are making it possible to fly satellites that are not Battlestar Galactica class satellites but are much smaller going down to a microsat kind of configuration.

The projections are that in the next 10 years, there'll be approximately 300 new land remote sensing satellites. Many of them will be flown by developing nations -- 30% of them will be flown by developing nations. What they will need is they will need people who understand how to bring the data down, analyze it and turn it into value-added information. I think that's a real growth area.

Scott G. Stephenson

Ming, still on the topic of Sandy, how would you assess the performance of our cat models in anticipating Sandy, dimensioning Sandy? And what did we learn from that event, which will find its way into future generations of our platform?

Ming Lee

I should say that the primary purpose of cat models is to anticipate losses that can occur before these events actually happen. And then the output, of course, is used as a currency for transferring risk from insurer to reinsurer and from reinsurer to, for example, the capital markets.

However, I think the audience here probably sees a lot of -- much of what you see of AIR, probably, is in the loss estimates that come at a time of an event like Sandy. And what we do there is gather information about the storm from various agencies, as well as AER and put different scenarios of that specific storm into the models to see what potentially could happen. This information is useful to the companies, because when an event occurs, CEO and board members all want to know, is this a big one, how big and so forth.

What we've learned from this storm is -- well, some things that we -- that -- well, I guess, we learned it because it confirmed that with the low wind speeds that we saw, even though the wind field was very large, that the damage from wind was actually not the major news in Sandy but, really, was the water and the flood and the surge event. There were uncertainties in modeling of this, because the track was uncertain. How the deductibles will be applied was actually very important. Officials declared that this was not a hurricane, therefore, hurricane deductibles couldn't be applied. And that actually had a very big impact on not only our loss estimate but also what the actual claims that companies are paying.

I think the largest -- the biggest lesson that will go into the models in the future, really, will be the impact of the storm surge, and the extent of a surge, where areas are flooded. FEMA maps, for example, are not as accurate as they could be for understanding which properties are going to get flooded and not flooded. So reliance on single sources of data is not a good practice going forward. So there'll be a large number of lessons really relating to the actual storm -- the flood damage caused by storm surge.

Scott G. Stephenson

In the extreme dog-leg left that Sandy made when it -- essentially, when it made landfall, was that storm track -- was that anticipated inside of the catalog of scenarios that are part of the model?

Ming Lee

Yes, absolutely. The U.S. East -- the East and Gulf Coast U.S. hurricane model actually has about 18,000 simulated hurricanes in it, affecting the 2 coasts. And of those, there are, in fact, are dozens of stimulated storms that do make that left turn, so that is represented in the model.

Scott G. Stephenson

One of the things we're very proud of is that of the cat bonds that were issued in 2012, over 90% of them are analyzed using AIR methodology. And quite a few of them were referencing the PCS index. Ming, do you see anything happening in terms of -- when you think about the different parties that can hold or lay off risk as it relates to catastrophes, whether it's a primary carriers, reinsurers to capital markets, et cetera -- do you see anything happening in terms of where the risk is being borne or relative appetite to hold that risk? Or any differences in terms of how folks are attempting to assess the risk?

Ming Lee

Sure. I should say that it's the cat models that really enable there to actually be cat bonds because investors -- debt investors use the model output to assess the risk and also understand where it fits within their portfolio of the bonds that they hold.

What we do see is an increasing trend. I mean, the cat bond market has been growing steadily since its inception in 1996. And we do see that, that market will continue to grow. Companies are finding a good flexibility to get coverage exactly in the layers that they need coverage. To answer your question more directly, what we do find is companies generally takes more retention, more of the lower level, higher frequency with themselves. However, they are offloading those less frequent, but really catastrophic losses at the upper levels to the capital market.

Scott G. Stephenson

Ron, maybe kind of a simple little question for you. Is the climate changing? Is the frequency and severity of storm activity changing?

Ron Isaacs

Scott, I kind of knew you were going to set me up when you called me a meteorologist a few moments ago. The climate is definitely changing. When I was a graduate student, and it was not in the Cenozoic era, the abundance of CO2 in the atmosphere was about 330 parts per million, it's up near 400 now. We know it's greenhouse gas, we know it's doing something. Temperature globally is increasing. It's not a mystery. In fact, people have understood that for a long time.

Actually, since the early days of the American weather forecasting with some simple primitive models. And the numbers that they got then are exactly the same numbers at the IPCC recent assessment report, before it came out, within 1 degree centigrade. So yes, there is global change.

What we're experiencing today we call weather, what we experienced 10 years ago, we call -- we will today call the climate of 10 years ago. The weather of 10 years from now is what we're calling climate of 10 years hence, so it's actually all a continuum. There isn't whether, there isn't climate. It is a continuum of the characteristics of the earth's atmosphere and ocean system. It too sounds philosophical, but...

Scott G. Stephenson

One thing you didn't mention, by the way, what's the temperature of the surface of the sea.

Ron Isaacs

Temperature of the surface of sea -- of the sea is increasing. We know that sea surface height is increasing. These are numbers that are measured, actually. Measured by, for example, sea surface height, which is the called the geoid, is measured by satellites using radar altimeters, and its a very precise number. So these are not coming out of models, they're actual measurements.

Scott G. Stephenson

Maybe one last question for our panel, to any of you. What phenomena and outcomes related to the weather do you think are least well understood by our customers, and most in need of additional treatment and inclusion in our solutions on a go-forward basis?

Ming Lee

I think we get questions like this each time, there's a cluster of events. For example, in 2011, after a large number of tornadoes, is this a trend or is this a blip? And the same happened in 2004, 2005, after the large number of hurricanes. I think the responses -- in response to your question, I think one of the things that executives -- insurance company executives need to probably understand is that when something happens over a period of -- over a -- over one season, you can't project the future from that one season. But you do need to understand that is -- that there is a simply natural volatility associated with these phenomena. And that there's a lot of uncertainty out there, and you need to run your business accounting for the fact that there is a lot of uncertainty in the weather.

Ron Isaacs

Scott, I would just add one thought, and that is that we find that there is a tendency to consider different weather phenomenon to be completely independent. So one might think, well, we've had a rash of severe thunderstorms. We've had, as different from what happens if there is a similar outbreak of tornadoes. And in fact, because all of these things are coupled within the atmosphere, they actually are related. For example, if you have a severe drought and the land surface is very dry and it's heated by the sun and the sun heating the surface of the earth, the earth gets very hot. If it's not moist and you tend to have hot air rising, and hot air rising creates convection, convection creates thunderstorms. I won't go on, because it will go on for days. But these things are all related, and the relationship of weather phenomenon creates patterns.

Scott G. Stephenson

Well, one of your colleagues has become somewhat famous for observing on the relationship between the shrinking size of the Siberian snowfield and atmospheric based on...

Ron Isaacs

I was hoping no one would bring up Siberian snow today, and why it caused what's outside.

Scott G. Stephenson

Gary? Do you have...

Gary Kerney

We haven't seen any trends in catastrophes that I have recognized. What I think is interesting is that the first $1 billion catastrophe we had was Hurricane Hugo in 1989. The next $1 billion hurricane didn't occur until Andrew, 4 years later. Today, in 2011, we had 5 events over $1 billion. In 2012, we had 7 events over $1 billion, in terms of insured property damage. But I don't know if that's a trend or just a function of the fact that assets are becoming more valuable, people are choosing to live in areas that are more prone to catastrophe occurrences, particularly hurricanes, which we have seen can cause some real devastation when they get rolling. But I don't know if that's a trend per say.

Scott G. Stephenson

Well, it's got to be a mixture of all of that, right? If we get closures [ph] , where they're located, and what's going on with respect to the events. And the complexity of all of that, again, is why the kind of work that our colleagues do is still very valuable to our customers.

Ming Lee

Yes, just to that last point that Gary made, we performed a study a few years ago, if you will, at the stage from Texas to Maine along the coast, roughly about 15% of the value of the properties in those states are in counties that are along the coast. And the average rate of growth -- average annual rate of growth, the property value is about 7%, give or take, just a doubling every 10 years, so that any given event that causes a lot of -- $10 billion this year will cause $20 billion next year -- I mean, 10 years in.

Unknown Executive

Okay, well, great. So thank you very much. And for our guests, we're just going to keep rolling with the program now that the schedule calls for a break. But since we're running behind, so please take your breaks individually, as you feel the need to. But with that, let me call up our health care colleagues for the next part of our program.

Joel Portice

Okay. Good morning, everyone. Thank you for being here. You all know the history and the DNA of Verisk Analytics, and you know that we got into this market of health care as a logical and adjacent move from that core business of ours. And that we wanted to be able to expand into a large industry. It is quite frankly, not fully optimized analytics in the way that other parts of the industry -- or other parts of the economy have. If you're going to build a leading independent health care informatics and analytics company, what would you do? I suggest that you would want to find best-of-breed businesses, that you could bring together that provide quality, compelling elegant solutions to be able to leverage those in a way that aligns with the market demands and the market challenges, and be able to extend on those assets, improvements around their operations, around their value proposition and opportunities to cross-sell their customer base.

I'd suggest that you'd want to arm that company with very talented individuals and nurture a culture of customer emphasis, one of continuous innovation and one of continuous improvement. And that's what we did, and that's Verisk Health. And that's who we are.

So our company has grown fivefold over the last several years. And this is a result of us executing on our strategy, and we're going to continue to do that. We probably serve nearly 450 customers. Our reach is very broad and it's very deep. Our client base represents over 100 million covered lives. And within that, our services and our tools are used in a way that impacts nearly 1 in every 3 Americans. We have lots of data. We receive lots of data. And so with this data, it gives us access to trends and to analyze other issues that are confronting our customers and moreover, we've got a wonderfully talented group of individuals that are experts in their field both around technology, analytics and clinicians.

This reach and this scope makes us one of the top 10 players in the U.S. health care data analytics market. And with this reach and with this scope, we believe that we're well-positioned to address the issues that are confronting the market. And so specifically, there's a large opportunity that is evolving due to health care reform. We are aligned to deal with that market based on our services and solutions and our client base that we have today. So we see ourselves being in the right place at the right time. We fully expect to take advantage of our position and on our behalf, as well as on behalf of our customers.

So when we think about the market, we typically think about it in 3 main segments: providers, payers and employers. And each of these segments are being confronted right now with tremendous market changes and specifically, the payment reform that is occurring in the marketplace is a shift from traditional fee-for-service to value-based reimbursement and quality reimbursement, and there's a shift of risk and shared risk from payers and providers.

Secondly, there's unsustainable health care costs that as a result of different inefficiencies in the system and a cost [ph] By misaligned incentives, uncoordinated care, and fraud, waste and abuse. And finally, there is an increasing role in the government, both in terms of the regulation and in the funding of health care. But as a result of this, there's this convergence that's occurring with these main market segments. And incidentally, there's also a convergence in the solutions that these industries need and the segments need in order to deal with these problems.

So when we think about the main segments that we support today and we think about the pressure that they have in the industry today, it aligns very nicely with our core foundational solutions of cost containment, population health management, quality measurement and improvement and revenue optimization.

So what I'd like to do is acquaint you with the way we're organized and spend some time on each of these divisions and the services that they provide and why that's valuable to the market. So we have 3 divisions within Verisk Health: our Payment Accuracy Division; Revenue and Quality Intelligence; and Enterprise Analytics. They operate as divisions with their teams, but we also have consolidated several key functions -- reach across the enterprise.

We've brought together our sales and marketing focus so that we have a unified sales team that's looking across all of our customers to understand how we can provide our solutions and sales opportunities in that client base, have a consistent brand and user experience across our customer base, a unified technology platform that we're going to talk about later in this presentation. We have a single view of human capital and culture in order to provide clarity and consistency in those areas. We have an enterprise strategy that looks across all of the emerging trends in the market and how that applies to our business.

The first division I want to talk about is our Payment Accuracy business. So this is the business that deals with fraud, waste and abuse in our market. And this business is really the integration of the health care insight and Bloodhound businesses. And this provides a very elegant, highly sophisticated technology that's differentiated in the marketplace, and it applies our analytics and our rules and our indicators of fraud, waste and abuse. And then we have a team of clinicians, investigators, statisticians that are helping us to build the models, continue to improve the models.

We have a strong market position in payment accuracy. There are 108 payers that are sending us claims data on a daily basis. Our services are used in 27 states in their Medicaid programs, whether it's through the state Medicaid programs directly or whether it's through commercial Medicaid MCOs. And the reach of that is -- the result of that is 1 in every 5 Medicaid patients or enrollees in this country is being affected by our solution.

We have a wonderful market expansion opportunity with our colleagues in the property and casualty side, through a relationship with the National Insurance Crime Bureau, and we have a slide dedicated to that, that we'll speak about later.

This is a market-leading solution that's very differentiated, simply because of the sophistication. So for example, this solution allows the consumption of 250 claims a second. It's against 17 million rules and edits and indicators of fraud, waste or abuse in our models that identify those things and looks against 3 years of history on that individual. And so to be able to provide this near-realtime solution is something that differentiates us from our competitors in this space.

So I want to give you an illustration of where this is in play. And I just happen to be out at this customer's location yesterday, meeting with this exact customer. Commercial health plan, they've sent us 34 million claims a year. We run it through our system, and with high degree of accuracy and precision, we are able to reduce their annual claim spend by 1.6%, which resulted in $151 million in real savings, real reduction of claim spend that they had from the previous year.

Now what's even more compelling for me is that we put this program in place last year with them. And with a year of maturation and with the expansion of models and the growth of those models and just the models getting better, we were able to see an 18.8% year-over-year growth for that customer. I was out there yesterday and when we're looking at the trends and how it's looking for 2013, and I'm proud to say that the trends are extremely positive. And we expect to see this type of growth in savings for that customer.

The problem was that because they have multiple systems, because they have multiple claims, and they have multiple member groups, they needed to be able to look at these claims and be able to stop these claims that are fraudulent and do it onetime and do it right. So it was the application of our system that was able to provide those types of savings, and we've been able to now expand in this particular customer. We've actually expanded other services, and we're going to talk about one of our key initiatives. And we talk about organic growth, is our ability to cross-sell within our existing client base, and this is one of these customers that has been on the forefront of helping us do that.

The second business that I want to speak to is the Revenue and Quality Intelligence business, and this is a group that focuses on the Medicare Advantage and risk adjustment space. And for those of you who may not be familiar with Medicare Advantage, what that is, is that it's a program that commercial carriers administer Medicare services, and they're reimbursed by the government.

So it's very important for them -- and the services that they provide are primarily the Medicare Part A and Part B, which really represents the physician services, labs, hospital services, home health care services, things like that, a lot of the services, and it's very important that these commercial plans run their businesses very efficiently.

So what we did with the Revenue and Quality Intelligence business is we brought together the MediConnect Global and the Health Risk Partners businesses. We brought them together so that we could provide this elegant, broad, comprehensive, end-to-end solution that dealt with everything from medical records, chart retrieval, to the risk advantage and revenue optimization service that need [ph] Us in quality improvement component.

In addition, we were NCQA-certified. We also applied, by bringing these businesses together, the ability to include our analytics and our data aggregation. And that's important because as these plans are processing these claims and managing these services, it's critical that they can target the right type of patients, and the only way that they can identify that is through the medical -- understanding the medical history of these patients, using the analytics to target those patients that have chronic conditions, and then be able to apply the right types of tools to maximize the revenue reimbursement from the government.

We have a strong position in this space. We have 85 HEDIS customers, and we talk a lot about cross-selling. In this case, we understand which of these HEDIS customers are Medicare Advantage plans, which are not. And which of those that are Medicare Advantage plans are our customers and which of those are not. We're going to target those that are not.

We have 25 Medicare Advantage plans that we provide these services for, represent 7.3 million members and in a population of 15 million members -- 15 million Medicare Advantage members, it gives us a strong position in that space. And it allows us then to start growing into more services on behalf of those 7.3 million members that we have.

Now why is it important that we did this and that we brought this together? It was important for a couple of reasons. One is it allows us to go upmarket and sell broader services to larger carriers. And we've been able to do that very successfully and we'll continue to execute that strategy.

But there's also this convergence that's occurring in the buying decisions within these plans. So what was once a fragmented buying process is now one in which these plans are making decisions together. So quality in revenue, for example, are being made in the same -- by the same group.

So it was important for us to be in a position where we could provide that end-to-end offering, and there are very few, there are only a couple of other companies, frankly, that can compete with us in that broad level.

And finally, as -- and we're going to talk in another slide about the expansion opportunity in the government space, and as Medicaid expands and it is expanding, as health information exchanges continue to grow and flourish, the capabilities that we have in this division transfer nicely into those areas.

So we talked about why it's important and it's important because there's a lot of revenue at stake. And so there's the 2% -- potential 2% cut in the reimbursement to the plans from the government on a per-member basis. But the problem is that the plans get paid based on an algorithm that identifies the risk of a patient and it uses lots of different factors to calculate that risk score. If you don't have access to all that information, if you don't have the medical charts, if you don't have the medical history, if you don't have the proper technology in order to identify those individuals, it's going to be difficult to maximize the revenue reimbursement opportunities.

And you can see from the slide here, that if you identify a patient who is diabetic only, you know what your payment amount is going to be. However by understanding the history, understanding all the other conditions associated with the codes based on the claims from this individual, in this case, we were able to nearly triple the reimbursement for that plan, for that person on a per-month basis. How do we do it? We did it through this end-to-end offering that we talked about, which is, again, this integration of these businesses, and allows us to retrieve the charts, allows us to provide a better coding, more effective coding for our customers to analyze the claims and the clinical data and to be able to provide other types of risk adjustments and encounter data information.

So our third business I want to talk about is our Enterprise Analytics. And this is a space -- this is a business that deals with our population analytics, benchmarking, risk stratification, predictive modeling. Again, we use lots of data. We have market-leading analytics. In fact, the actuarial science behind our DxCG technology is the foundation for Medicare risk-adjustment reimbursement methodology.

This area of our business is also driving our expansion into the provider space, and we have a slide on that as a market opportunity. But the reason it's driving that business for us is that the same type of understanding of risk associated with populations that the payers have, providers now have to have. And they don't have the access. And so I'm going to give you 2 slides here. One example of how this applies to employers, one, how this applies to the providers. They don't have the insight into the patient history in order to make the right type of risk assessment. So we can provide that.

And in addition, as this shifts, as the government gets more involved with this, identification of high-risk members with multiple chronic conditions and diseases is going to be important to be able to proactively manage that care. And we need to be able to use our analytics on behalf of the providers, as well as our core business with payers and employers, to really help them understand what the factors are that are driving their costs.

Well, as this applies to an employer. An example here is the -- an average midsized financial services company with 2,000 employees pays $20 million a year in health care. Within that segment of their population, they have a subset of folks that have either diabetes or other comorbid conditions that increase the cost of this spending, 21% or greater, on a year-over-year basis.

What they need to be able to identify, with that subset of that population, is what are the gaps in the care in the diabetics, so that they can provide the proper care protocol for that individual. Where is the overutilization, the inefficient utilization of that individual? And then, how can we create and deploy care management programs to benefit that? And we understand that by simply identifying those individuals, that we can transfer from generic -- or from brand to generic drugs, for example, we can save that employer plan $1 million a year. And by profiling patients accurately, we can help reduce their overall expenses by 40%. How do we do it? We do it through the application of our business intelligence technology, our clinical and claim analytics, our risk adjustment, our predictive modeling capabilities and our benchmarking and quality standard.

How this applies to the providers, it's very fascinating because there's a lot of talk about Accountable Care Organizations. And we know that in Q1 of 2011, there were 10 ACOs in the marketplace. Today, there's 428 that have been certified or in the process of getting certified. 88% of those providers are, frankly, not properly prepared to be able to assume the financial risk in managing that care.

The problem is, they don't have the insight into the risk indicators for the business. So they don't understand what's driving the costs and where the utilization costs are for this population group. They don't have risk profiles of all the members within their care. How do they really understand the best ways to, in terms of the efficiency of care, that can be delivered to each patient.

And we know that we can help them reduce their costs by $3.3 million by simply helping them identify the risks more effectively. And we know that we can find those members who are being treated by providers, that are perhaps not as efficient in their practices. And we can reduce those expenses by 14% in a year-over-year basis.

How do we to this? Why this is important is through the application of the provider profiling and the risk adjustment for the patients and their population, it's going to help them identify which ones to keep in the network, ensure that they are keeping provider -- patients in the network, how to improve the efficiency across that population group and how to negotiate the right types of contracts now that they're going to be assuming more of that risk.

I want to talk about the distribution of our revenue across the health care market. 92% of our revenue comes from the payor space. And this is a number that is -- 92% is a little higher than last year, and that's -- the main reason for that is that we brought on the MediConnect Global business, all of their health care customers were payers. So that's what's driven this. We're seeing nice growth in the employer segment, and we see tremendous upside in this provider area as we continue to focus and we continue to grow. We've established 2 very key strategic partnerships that we're going to talk about in a future slide. And we see that as a tremendous upside growth opportunity for us.

There's often talk that the health care spend we know in this country is $2.7 trillion. The area that we feel that we can directly influence and impact is $900 billion of that spend, and it's really resolving [ph] around the inefficiencies and the complexities within the system. And we categorize them really into 6 different categories. It has to do with inefficient practice, inefficient delivery, inefficient care, fraud, waste, abuse, just general inefficiencies across the system. This is an area that we've targeted on, this is an area that we expect to continue to expand our reach, and this is an area that we've seen great success in so far.

I wanted to show this slide to just show you -- it's a very complex system. And $2.7 trillion flows through a lot of different constituents and groups in the industry. And this is intended to demonstrate how the cash is flowing from the payers to the providers, from the members and the employees to the payers and to the providers. And you can see it's -- there's a lot of moving parts, a very complex system. And even though health care spending is really spread among several different groups, fact is private business and the government still bear the largest burden of health care spending in our country.

When we think about the competitive landscape of our industry, we continue to take market share, from some of our largest competitors.

And I think we do it for, really, a couple of different reasons. One is we have differentiated solutions, which is a clear advantage to us. Secondly, we don't -- our customers, particularly the large ones and there are some customers of our -- competitors of ours that have broad offering and deep customer penetration, but they don't appear to be aligned in the same way that we are in terms of being close to the competitors, they seem to rely on legacy systems, antiquated sales operations. And so we have consciously aligned ourselves the way our customers want to interact with us, allows us to be nimble, allows us to be entrepreneurial and allows us to be well positioned against these competitors.

And then the differentiation component that we have, we categorize into really 4 areas: data, which we are very good at receiving data; understanding that data, managing that data, applying our sophisticated analytics to that data in order to create greater insight for our customers through our benchmarking, through our modeling, through the rules and edits that we have, and then to be able to deploy that in a consistent way with our technology across all of our Verisk Health customers, are 3 areas that are clear differentiators for us and are clear advantages to us. And then the core of all that, and Frank mentioned earlier today, the core and the importance of our employees, and that, certainly, applies to Verisk Health as well.

The expertise and just the talent that we have within our team is another distinction that we have, along with the relationship that we have with our customers.

And our customers really like doing business with us. And we value that, and we appreciate that. And the unified platform is really an extension of that philosophy that we have because the unified platform -- there's a lot of material on here and I can synthesize this into 5 points for you. And number one is an extension from the point I was just making, the unified platform really grew from our desire and our need to make it easier to do business with us for our customers. So that's point number two, and really with that, it's -- or point number one, excuse me, the data coming in, the single data feed provide multiple opportunities to extend value to these customers, which gets me to point number two, and that is to create a or process and a method for efficient upsell opportunities, in which with that data, we can demonstrate other capabilities that we have that can show additional value to the customer, and that allows us to accelerate the speed of value on behalf of that those customers.

The third point -- and the third point behind the rationale behind our platform was we wanted to have a very consistent user experience across all of Verisk Health, the enterprise of Verisk Health. And the fourth reason is that this is a very scalable and sticky opportunity for us. And finally, as we look at other assets in the industry that we want to bring into Verisk Health at some point, this will help us to accelerate the integration of those assets and to be able to realize the value across the enterprise more expediently.

So I want to spend a couple of minutes talking about some other initiatives and expansion areas that we have. The aggregate medical database is something that we have been -- has been in works with our colleagues on the property and casualty side. And what this is, is it's the aggregation of property and casualty claims data, and we currently have 21 carriers participating in this program. And we pooled this data together, 2 of the top 5 workers comp claims data; the top 10 auto carriers are using this. We pooled this and we look -- we apply our models and indicators of fraud, waste, abuse; and the P&C space across all of the carriers. So as opposed to just kind of a silo effect, we're looking at it across all of the industry.

We started this in 2011, but it really went into operation and in production in 2012. And it was a continuous rollout of data loading throughout the year. And so we feel very optimistic about this for a couple of reasons. One is in that kind of a partial year model production, our customers have come back to us, and they've identified nearly $200 million in savings and exposure that they've realized through this pooled approach. Secondly, nobody in the market is looking at similarities of fraud, waste and abuse in 2 large industries simultaneously, we are. And with our large collection of health care carriers and the data we have with them and the large collection that we've established here with the property and casualty industry, we are now in this unique position to be able to see and check trends of fraud, waste and abuse, with the idea being that if a provider is problematic in health care and is committing fraud in health care, it's probably doing it in the workers' comp side, too, it's probably doing it on medical claims that come as a result of an automobile accident.

So as we think about how do we create barriers in the industry, we look at this path to growth really through these 4 different areas. And we kind of see this unified approach of data and this core capability that we have of being able to aggregate the data, apply our technology and our analytics to that data, to identify and address those trends, provide insights for our customers and then ultimately, to translate that into actionable results that our customers can use to improve their operations.

And so -- and then be able to transfer that to market expansions.

And we see that through -- it becomes realized and it's translated in how we retain our customers, we help them optimize their revenue, contain their costs, ensure that quality is adhered to, compliance is adhered to and claims are paid properly.

So our revenue model within our business is predominantly split between transaction and subscriptions. And so you could see here, 70% of our revenues is transaction-based, 30% is subscription-based. But I would classify this as healthy, recurring revenue on multiyear contracts with large institutions, and it's very sticky. It's a large market. We know there's $4 billion spent in health care, U.S. health care analytics market. We believe that we are well positioned with our payer, employer and provider area.

This slide right here, we talk a lot about how do we cross-sell across the organization. As we look at, really, 5 general product categories, we see that there's opportunities to cross-pollinate these solutions across the different areas. And we can even dive deeper into that and see other areas of even micro cross-pollination. And this is real. This works, right? So we understand that this is a $400 million year opportunity for us, just by the cross-selling within our existing client base, and we went down this path of making this an initiative. And it's worked, and you can see in 2011, we had 86% of our clients had 1 solution. Today, there's 70%. Now put that in perspective. In 2012, we signed 150 contracts from Verisk Health, 90 of them were new names, companies that we didn't have the previous year. 60 of them came from selling solutions into existing clients. And so with a larger client base, only 70% of our customers today have one solution. We see that as a lot of upside and you can see how it's all just kind of trended downward from the 70% for 1 solution, to down to 2011, none of our clients had more than 4 solutions. Today, over 4% of them have more than -- or 4 -- at least 4 solutions.

The 3 main catalysts affecting the market: payment reform, expansion of coverage and the containment of costs. And we certainly see that we are in a very important area with our existing core tools and the innovation that we have currently underway to be able to address this. So I'm going spend 2 slides -- last 2 slides on market expansion opportunities.

The first one is in the provider market, which we talked a little bit -- previously about. Health care reform is definitely transforming the way health care is funded in this country. And so as a result, the need to improve clinical outcomes, reduce unnecessary costs and link quality of care with reimbursement is real. So providers now need similar capabilities that payers need. And we are positioned well to do that. And so as we look at 2 of these partners that we have up here, Phytel has 150 provider customers and we are jointly working with them to sell our solutions into those 150. Premier is an association that has 2,000 hospitals within the association, 100 of them are ACOs. We're jointly working with Premier in order to penetrate that market as well.

Final market expansion for us is on the government side, and we know that 20 million new members are going to be coming into the market as a result of the Affordable Care Act. This is going to impact hundreds of payers across the country. Our core capabilities of helping them manage their risk, understanding their quality, helping them manage their costs and identifying problems, plays right into this space. And we see this as a tremendous opportunity for us and are well positioned to do that.

And moreover, we see that this actually unlocks the different assets that we have across all of Verisk Health and the different business units. So finally, before I conclude, now I just -- the way we think, we expect to influence the way health care is administered in this country. That's simply the way we approach our jobs, and we want to be simply seen as the most relevant and important health care analytics company in the industry, and we're going to let that relevance and importance be defined by our customers.

So my colleague, Dr. Nathan Gunn, he's here, and I know we're going to spend some time on some Q&A. And so with that, I will stop.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

It's Andrew Steinerman of JPMorgan. Could you talk a little bit more of how you charge for your services? You said, 70-30 in terms of transactions versus subscriptions, and obviously, historically, and probably prospectively, Verisk is much more of a subscription model. Do you have plans on moving towards subscription? And are there anything that particularly you could highlight that drives more transactions?

Joel Portice

Yes. So the revenue model is based on per member, per month pricing and then in some cases, per employee, per month pricing. And so what drives that are a couple of factors. One is as these plans get bigger, as they bring on more members, then that increases members. We are actually -- as I mentioned, the Medicaid space, what we see as a growth opportunity there, the fact that we have 1 in 5 Medicaid enrollees being touched by us, as those customers and particularly, the commercial Medicaid MCOs see their roles expand as they will, as the expansion -- because the definition of Medicaid has changed, then we will see those -- that PMPM pricing increase for them. And then just more -- we have a small set of customers where we have some contingency-based. We certainly see that as opportunities to increase more savings and more value to them. But I think it's really about the expansion of the population and then of course, being able to negotiate the right type of pricing arrangement with those customers, based on the value that we're providing.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

And do you think you can move into more subs? Or is this more a transaction market?

Joel Portice

Sorry, I didn't hear the last...

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

My other question was do you think over time, you can move to a more subscription-based model? Or is this model inherently a transaction market?

Joel Portice

No. I think subscription based is definitely something that we prefer, and we see that happening.

Unknown Analyst

I have 2 questions. First is, kind of given your position in Payment Accuracy and having the payer as your customer, as you move down the line to having the provider also as your customer and the potential for sitting on both sides of an adjudication with Claim, for example, that's a big problem that Optum runs into. And there's a lot of resistance from providers to having Optum as their provider, given their position with United. How do you think about that bright lines in terms of how you navigate that in terms of that relationship? And then I have a follow-up question on population health.

Joel Portice

Yes. So the payers -- and I don't see the payers as paying -- I'm sorry, the providers moving into a role where they're going to be paying the claims. And so in that case, we're going to continue to help them to manage their risk and understand their population. And I think where Optum -- their issue, too, is we're very independent, right? So we're not attached to a large HMO or managed care organization. So I think that, that helps us in terms of establishing the independence and that credibility. So I think that as the payers continue to analyze their data from a payment accuracy perspective, it really is all about identifying, is that the right claim? Is that claim being paid properly? Is there fraud involved? And so we haven't seen any dispute or any conflicts with that approach. Nathan, anything you want to add?

Nathan Gunn

Yes. [indiscernible] All right. So certainly, Optum is a challenge, right? Because they are owned by a health plan and if you're a provider, that's not the most natural thing to do in terms of where you would send your business. But the notion of being a trusted neutral intermediary is something that started with ISO and Verisk Analytics and I think applies to us as well. For example, in the employer market, we've often been in positions where we are serving an employer, a health plan and sometimes a vendor to that employer, for example, disease manager. In some cases, even a broker, so you can almost envision 4 different parties perhaps with outcomes that they desire that are not necessarily aligned where we serve all of them simultaneously. So it's -- with our philosophy as being neutral intermediary, providing information that's fact based, I think that it's something that we'll be able to navigate well. And certainly, there is a business opportunity there to expand the claims processing and adjudication on the payer side into the provider side. Because if you're a physician or a provider system, you don't want to have your claims rejected. So there's definitely a business development and innovation opportunity from there.

Joel Portice

And several of our large payer customers have a very close relationships with hospital systems. And so it hasn't been a conflict.

Unknown Analyst

And just on the population health side, so clearly, a big trend from HIMS [ph] this year was population health, and the different spenders are trying go after it and they come from different approaches, whether it's Verisk or Cerner or it could be the HealthCare Partners or Optum. And they're all aggregating lots of data, whether it's from claims data or from clinical data. But the more difficult part, it seems, like -- the insights of Grandma needs to take her meds so she doesn't get diabetes, are the more -- are the easier, maybe more commoditized part of it, and the harder part is how do you have the decision support, the situational awareness at the point of the interactions. How does Verisk think about kind of factoring value from the data analytic side and how that's translated into the more difficult kind of interaction part of it?

Nathan Gunn

Yes. So our focus really is on data and analytics as opposed to getting people into workflow systems. So we -- our typical approach is, again, to be neutral and to be -- to not pick horses in terms of which EMR vendor you interact with or which sort of hospital system you interact with but to really develop the data and the analytics and then make those available to the systems that really do characterize the workflow at the point -- at the point of care. And you do have to be careful with workflow from a provider perspective because the physicians are so busy if you're going to be injecting decision support, information analytics, populational analytics -- if you disturb the workflow that's there or if you make it take 5 minutes longer per patient visit, if you do those types of things, you won't get very far. So our general approach is focus on the data and the analytics and the proprietary value that we add there. And then hopefully take a partnership approach with those documentation and workflow systems that interact with providers at the point of care.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Timothy McHugh from William Blair. Two questions. One is, firstly, you mentioned about providers as a significant area of growth. What else do you need to really accelerate that? And is it in terms of a product set or data that you need to develop over time? And then secondly, at a kind of a higher level. Everyone thinks the traditional ISO business as having an unrivaled kind of data set that's core to the kind of value proposition. I guess, I think of payment accuracy and revenue integrity as more so you're analyzing data coming to you from the health plan. How far are you away from developing really a core unique data asset that is far better than the competition in the health care set?

Joel Portice

So let's take the first question, which -- where are our gaps in that area. I would say that, again, our core capabilities transfer nicely into that space, and we're seeing that already. Its realizing -- seeing that business growing year-over-year. We're -- it's going to be an important part of our future. And so I think it's this continuous improvement that we have in terms of understanding what data is available, and the application of our analytics. So we're never going to -- I would never say that we'll ever stop looking at that, and so I think it's an ongoing evolutionary process for us. And so in terms of glaring gaps, we don't see any. We feel like we've got all the right types of tools, and it's really a matter of executing on that and taking it to the market. And so the second piece being around the data set and what we have. So yes, we do analyze a lot of data on behalf of our customers. We derive some intelligence, and some findings from that are unique and proprietary to us. Certainly, what we've done on the AMD and how we look about -- how we look at that model in health care is something that we see as a creative opportunity for us. And so I think that we'll continue to be this type of company that focuses on data analytics, but it is our analytic and the results in the objects that come out of those analytics that is a distinction for us. And there's a lot of unique things that we do today that are emerging, things that we're strategically working on right now that we see as extremely different and unique in the marketplace.

Nathan Gunn

And I'd add one thing then on the -- or a couple of things on the accelerating sales to providers thing. With providers, they manage risk. A lot of what providers needs are exactly what payers have used over time to manage risk. It's provider profiling, it's population health management, it's network management, it's under the contract management. And so probably, 80% of the tools that providers and ACOs will need to thrive in the new world are in fact tools that payers use today. And so we're well positioned to serve providers because we serve payers very effectively today. So leveraging the technologies and the analytics that would bring the payer space into providers is a lot of what winning this market will be about. The other thing that we're really focused on is using both the direct sales approach as well as a channel approach. So it's the Premier, which is an enormous GPO and has a really trusted relationship base in the provider market is a partner of ours, and so we believe that the real sales accelerant there is through those types of partnerships and actually coproduct developments with folks that are in the provider market, have been there a long time, and are really a trusted brand in that market.

David Togut - Evercore Partners Inc., Research Division

David Togut with Evercore Partners. Joel, you cited an example where you saved a commercial health plan last year $151 million. How did you get paid for delivering that savings? Can you quantify your revenue in that situation?

Joel Portice

Yes. So we get paid on a per member per month basis for that plan. But in addition, we've got, in that particular case, we have a blended payment, where there's also some contingencies associated with that based on performance. So as a said, I was in -- I was at their site just yesterday meeting with them. Extremely happy, extremely pleased and as we start -- as we looking already, we've got great visibility into the trend for 2013. It remains very strong.

David Togut - Evercore Partners Inc., Research Division

Can you help us understand how large that contingency might have been? Do you get 1%, 2% of savings you deliver?

Joel Portice

No. It's typically -- no, it's typically closer to 20%.

David Togut - Evercore Partners Inc., Research Division

20% of the $151 million?

Joel Portice

No, it's a blend. It's a blend based on certain benchmarks that we hit with that. So I don't know if -- are you asking how much do we get paid for that client because I don't know that I can -- yes. So it's a blend, right? So we get paid per member per month for that client. And then based on other types of performance that we have with that client, there is a contingency base on top of that. So it's not 20% of the $150 million. It's really 20% of the blended rate. Okay?

Eva F. Huston

I think we're going to have wrap up right now just to kind of keep ourselves not too far behind our schedule, which we are already because we have so many great things to talk about. So next up, we're going to ask Michael Heller and Nana Banerjee from Argus to come up.

Michael Heller

I'm Michael Heller, the President of Argus. And again, I wanted to thank Verisk for inviting me up here. We're sort of the new kids. So we have to start with the slide of who is Argus. And I'm just going to give you a sense for who we are, who we serve. We are the leading provider of analytics, information and solutions to consumer banks and their regulators. We do have a core focus on the payments industry.

We maintain and have amassed the most complete direct observation database for the payments industry. That database is depersonalized. We'll talk about that a little bit more. We have also built proprietary capabilities to manage and analyze all of this information. We work with our clients to enable them to leverage these data sets and their own information to help them better allocate resources, to manage risk and to really understand trending financial -- interperiod financial implications for them.

We have our core capabilities. And some of our core attributes really revolve around our turnkey, repeatable, scalable solutions, the data models we've built, how we organize and manage the information that we receive. And we really have become the trusted intermediary and conduit between banks amongst themselves or in the consortia sense, between banks and their regulators and between banks and merchants. And so I'll describe that a little bit to you.

Just to back up a little bit, the payments industry is very important to the overall economy, one we just laid out here on the slide. GDP is about $15 trillion. Consumer payments are about 70% of that. And payments that take place on a piece of plastic, a debit card, a credit card, a private label card, that really accounts for about 1/3 of those consumer payments. On the right side here, we showed both debit and credit card payments. And you could see that while debit card has been increasing over time at a very fast pace, credit card is still increasing and still outpaces debit card. And so we serve in both of those domains, debit cards and credit cards. And we just see the growth to be very opportunistic for us.

What's interesting about the payments infrastructure is that there are many constituents. It's not transparent at all. And Argus serves as sort of right in the middle of the flow of information across all of these constituents. And nearly all of these constituents have proprietary information that they are trying to protect. And Argus really is in the middle of all of these different constituents.

We focus on helping banks and their regulators leverage information to achieve their core objectives. So some of the big objectives that we help banks with relate to compliance. That's dealing with their regulators, dealing with the regulation, understanding the implications of both proposed and the new regulations they have to comply with.

Optimization. That's a very big one for us. Making sure that banks can design the right products, can target and offer the right products to the right people, that will be used in a constructive and profitable way. Pricing. We work with banks to help better align pricing to risks, credit line allocation, promotions, making sure banks can optimize all of the marketing resources that they allocate to those, as well as their margins.

Mitigation. Certainly, on the risk side, we work with banks to help manage their credit default risk, fraud, optimize their collections, resources. We help banks deal with new technologies, data analytics and emerging payments, as well as share of wallet, which are core to their strategies in the coming years.

So let me talk about our lines of business. We have 3 lines of business. And really, those span across the continuum of needs that banks have in the payment space. First is to give the banks some external view relative to how they're performing. And that line of business for us, syndicated studies, really, it's a subscription-based benchmarking service that we offer to banks, as well as their regulators. Typically, the consumers of this information are the business heads, the risk heads, the marketing heads, as well as their regulators.

Another line of business for us, product solutions. Takes 2 forms. One form is taking operational information or operational data and organizing it in a way that banks' analysts can access that and really using state-of-the-art business intelligence tools. We do that for ourselves, and we organize this and offer this to the banks in a licensed way.

Our fastest-growing line of business really, however, is models. So these are wallet share and targeting models helping banks effectively predict who is going to take what product, understand off-us [ph] Behaviors. And so that's -- I'm going to describe that in a couple of pages, very powerful.

Third line of business is analytic services. Really, it takes 2 forms. One is retainer-based services that we offer to banks, where we have teams of individuals that act as really another intelligence arm for the banks' own analytic capabilities. And another service that we offer from analytics is just project-based, helping banks tackle very discrete issues, how we charge for that in one-off project-based ways. We also, very importantly, act as the intermediary between banks as a group and their regulators. So when banks are asked to respond, to proposed regulations or to come down and talk to a group of regulators as a group, chances are, we're involved in that either supporting or leading that effort.

So let me talk about syndicated studies just a couple of slides here. We are the leader in benchmarking for credit cards. In the U.S., the U.K. and Canada, we work with the large banks, contribute transaction level, account level information to us, it's depersonalized and it's longitudinal. That means it just runs across time.

Let me describe a little bit about the data we're getting. We are receiving every single transaction on a credit card, every posted monetary event. So a transaction could be somebody, on a certain date, spent $150 at Amazon. They made a payment to their credit card. They were charged a fee. They were charged an interest rate.

We also have the attributes of the credit card. So the real value proposition is, is it a card that's cobranded with a certain airline, with a retailer. Is it a card that offers cash back? So we have all of those attributes, we know the credit lines, we know risk scores, we know the date it was opened. So we know a lot about those credit cards. We just don't know the names, the addresses, the account numbers, or any personal information.

We have really built a factory in a sense to take these disparate data sets in from all of the banks and organize them in a way that banks can leverage that information in a customized way. So we do custom benchmarks, we work with each bank individually to define the reports and the metrics they would like to see and how those reports are organized. And then we provide each bank, each month a series of reports using the metrics they are used to seeing but to give them the comparisons of their own performance versus a relevant external view.

So for instance, if a bank has a cash back card, they only want to see that cash back card compared against other cash back cards. Any other comparison really won't be very helpful.

Confidentiality, we take very seriously, which is why the banks share information with us the way they do. We -- any metric we produce, any benchmark we create has to have at least 5 other banks in it. And no one bank can be more than 25% of that benchmark, very helpful.

And we also act in this regard as a conduit between the banks and their regulators. So think of the OCC, the CFPB and the Federal Reserve, all require this information from the banks. We support the banks in their -- in complying with giving that information to the regulators. We also provide white papers and reports back to the banks as part of this service.

We are also the leader in benchmarking of checking, debit, money market accounts. So very similar to the credit card side, we receive account and transaction information on the checking account. So we think of every monetary inflow and outflow, and we make sense of that information. Or if it's an inflow and direct deposit of your payroll from your employer, if it's a government benefit, inflow, if it's a payment, again, did you use your debit card to buy something, we'll, that's sort of the nuance. With checking accounts, channel is very important to us. We want to know, was it an ATM or a teller? Where was that transaction taking place? Did you use a mobile device? Did you transact over the Internet? So what was the driver of that transaction?

We also capture some key nonmonetary attributes, such as the type of account. Are there any rewards on the account? And was there any marketing campaign associated with that? Very similar to credit cards, we take this time series data, we work with the banks, organize it and provide back relevant benchmarks of performance compared to their own internal view.

This is I think where it gets very exciting. We take this information, and we connect it together into a wallet. And so again, we're able to take the credit cards, the private-label cards that we have in our data sets, as well as the checking accounts and the debit cards and link those together so we can produce a customer-level view of payments. We can see what a wallet looks like and every single payment mechanism in that wallet, understanding the value propositions associated with all of those different payment mechanisms. You can see the choices that are being made, the trade-offs, share of wallet that any one of those payment mechanisms is getting. We have that data organized, so we can actually share with the banks their performance relative to all the other payment mechanisms in a wallet, extremely powerful. And again, this is the only source of this type of information.

We have taken that, and we partnered with other data providers, such as credit bureaus and companies that track media and web consumption. And we've been able to link up bureau variables, as well as media and web consumptions to the payments that are taking place at a wallet level. We can understand when people do something on the web or when they consume media. And we can see the resulting transactional behavior or choices that are being made within that wallet, extremely powerful.

Banks have been participating with us in this service for about 16 years now. The reason they continue to participate on this subscription service is because they continue to find value. This page, this has some examples of being able to allocate fees and fee waivers. Or appropriately, to reduce losses, increase spend, to increase balances, banks continue to find that this information isn't just interesting but very actionable.

I'll talk for a couple of pages on our products. And what's nice is the white-box product, or we call Argus toolkit, we have a demo of that out in the lobby, so you could see that. We also have some of the deliverables we provide back on syndicated sites in the lobby as well, you can see those.

And we're providing back in the white-box solution capability to take operational data, so data that was never meant to be used for analytical purposes -- really, the purpose of the operational data was to make sure that the general ledger was accurate as everything was reconciled at the end of the day. And we can take data, transform it to a relevant analytical data model, validate that, overlay business intelligence tools and then serve that back to the banks.

Banks struggle quite a bit organizing their own information for analytical purposes. This is a solution that is fairly turnkey that we can offer to the banks.

Another one of our product solutions is our targeting model. And what's really powerful -- these are next-generation models, nobody can build a model as accurate as we can build from a targeting standpoint. We're combining Argus information, we're combining bureau of information and the banks' own internal informations. We're taking best-in-class techniques and our expertise at building these models, and we're able to produce very accurate wallet-share models, spending product preferences, fraud mitigations, transaction targeting at a very detailed level. Again, very powerful. And we can talk more about those at the product demo.

The competitive advantages that we have, really our platform, it's very scalable. So we have a lot of data. Every month, we are getting over 5 billion transactions and organizing those and making sense of all of those. Our data is highly connected, and it's very secure and extremely redundant.

We have -- I think this is really our core competency. We have very sophisticated operations to take disparate data sets. Try to imagine about 7,500 transmissions each month from all different types of platforms and normalize those and validate them and organize them in a way that we can action all of these services against those data sets.

From a barrier standpoint, there are some legal privacy regulatory, security issues that we feel give us an advantage. One, we are a safe zone. We maintain neutrality, and we create a very secure environment to promote collaboration amongst the banks. And something they need, especially now with all the regulators and regulations out there, they do need to have a safe zone, and we are that.

We've built a reputation over the years for being a trusted intermediary, being good stewards of the data that's being entrusted to us. We have an emphasis on confidentiality, data protection, antitrust issues, as well as privacy.

And really, the banks know we are the most credible source for detailed pricing, product and risk information and understanding how those dynamics influence behavior at a customer level.

Financial model is quite attractive. We have about 85% of our revenue as recurring. And we have very high customer retention rates at 98%. We have 5 studies in the U.S. focused on consumer credit cards, small business credit card, risk, private label and deposit. We also have a series of studies quite similar to those in Canada and the U.K. We see that there are opportunities for geographic and vertical market expansion. And so we're very excited about the model we have built.

I want to talk a little bit about what makes us unique, what makes us different and what makes our data assets really quite relevant in this space. There are, what we would call, perceived competitors. I have listed the bureaus, the payment networks, the processors and just banks' own in-house information. What's interesting is we partner with all of these. We find that they're great partners to link data sets with. We're quite different from each of those. When you think of the bureaus, we have transactions data. We have value propositions associated with the products. Most importantly, we have the price, we have the payment information and also, the product features.

When you think of the payment networks, what's nice is -- well, they have lots of transactions. They have it just for the payment network, Visa or MasterCard. We have, all across all payment networks, we're quite network agnostic. We also have deposit information, all the inflows and outflows, we have the value propositions again, the price being the most important. We have the risk dynamics.

From a processor standpoint, we're processor agnostic. We take data across all processors, even in-house process platforms. We also have that full customer-wallet view. And of course, when you take a look at just survey-based information, it's not going to be as rich as the data we have, which is all full file information across all of these different geographies.

What's interesting about the markets that we serve, very large but also growing. And so in the U.S., last year, we've had 3% market growth in payments; U.K. and Canada, 5%; and in external markets, we're looking at about 10% and more market growth.

Argus grew over 20% last year. And so the fact that we can grow as fast as we are, really concentrated on the markets we're already serving, is that we have a lot of runway left just in the core markets we serve. And as we plant those seeds in external markets, we're very excited about our ability to enhance our growth.

And in terms of the different growth opportunities, we find broadening our data sets, so adding data to make our data really N+1 richer; that we can provide value back to the clients is one area we're going to focus on; geographic expansion, such as Brazil, Australia, Turkey, lots of exciting markets out there that really are ripe for the services we can offer; new clients; enhanced solutions, so the scoring models, which by far is our fastest-growing line of business; as well as platform capabilities, data hosting and outsourced analytics.

And so I want to thank you for that and keeping you all on time and not stealing your break.

Michael Heller

Yes, sir. I've got Nana Banerjee here who's going to help me with all of these questions.

William A. Warmington - Raymond James & Associates, Inc., Research Division

Bill Warmington with Raymond James. So a question for you on your revenue model in terms of how much you've charged and you've been able to deliver very impressive revenue growth. I just wanted to ask a little detail on the components. How much of it is coming through price increase? How much is coming through new product introductions? Rate of penetration in terms of numbers of seats in the clients? I want to understand a little bit of that.

Michael Heller

Yes. So not a lot is coming through price increase. Little bit that some escalators built into contracts. Most of the growth is coming through deeper penetration with the clients we serve, so offering the full suite of services, as well as expansion into new products and the models being the bigger one and new market.

Kevin D. McVeigh - Macquarie Research

Kevin McVeigh. How many clients do you currently serve, number one? And then number two, do you see a transition towards a higher use of PIN debit, signature debit? How do you leverage that opportunity against kind of the current credit markets?

Michael Heller

All right. Could you repeat?

Kevin D. McVeigh - Macquarie Research

Sure. The first question was how many clients do you currently serve?

Michael Heller

We have about 50.

Nana Banerjee

It's 50, 55 [indiscernible] clients.

Michael Heller

55 clients.

Kevin D. McVeigh - Macquarie Research

Primarily at the banks at this point?

Michael Heller

Yes, but...

Nana Banerjee

Banks, financial institutions and regulators.

Michael Heller

And there are some regulators. The 3 big that I mentioned.

Kevin D. McVeigh - Macquarie Research

And then are you seeing any change in kind of the banks' behavior, given just higher usage of PIN debit, which is -- has a lower yield relative to traditional credit? And any change in what they're leveraging you for as a result of that transition?

Michael Heller

Absolutely, which is one the reasons we remain relevant to the bank. As these new regulations come into effect, like Durbin, there's quite a bit of focus on how banks could manage payments more holistically, and how they can leverage the data assets we have to understand who should be targeted with a debit product versus a credit product and how they can start migrating lower profit transactions, like PIN base debit to higher-margin transactions.

Unknown Analyst

To what degree are emerging payment mechanisms, like PayPal or Stored-Value Cards relative to what Argus does? And what are your capabilities, vis-à-vis, tracking them?

Michael Heller

So we are working with banks to help them, first, measure and track penetration of things, like -- I'm not going to pick on any one, but all those emerging payment technologies, whether it's mobile or a third party. But again, those are quite small now but growing fast. And so banks are -- they're all placing their bets. And our data is uniquely positioned to help them both support the business cases that they're building, as well as the tracking of those emerging payments. But we're not really helping the banks lead the charge, not picking any one horse in that race to bet on.

Nana Banerjee

And just to add to that, what the data does include -- what our data does include is the settlement associated with a PayPal account or a Google wallet account. Because invariably, each of these accounts are being paid. The eventual transaction is being settled through some bank instruments. We do see that. So we're in a great position to observe the starting and the ending and what's trending and what's not. And then of course, everything else that Michael said.

Unknown Analyst

Maybe I missed this, but can you talk about how being a part of Verisk, more broadly, helps you expand the durability of your growth? Or help to accelerate your growth path?

Michael Heller

So being part of Verisk, one, very exciting to us because while what we've built is scalable, we're able to leverage a lot of the infrastructure here. That really is going to take us to the next level. So we built our data infrastructure. It's holding together probably close to 2 petabytes of information. And the ability to work with the core IT team, that can really help us scale what we have. That's usually important. Two, just the fact that we taken our own information, we've added bureaus, the media, the web usage information and lots of opportunities come from that. We know that by taking the vast data resources and information at Verisk and adding those to the Argus data set -- just the opportunities, I think, are going to be astronomical. We're very excited about that.

Break time.

Eva F. Huston

Thank you, Michael and Nana. We're going to take a 10-minute break now. So we'll start back around 11:30. Feel free to get a cup of coffee, check out some of the product demos, and we'll be back in 10.


Perry F. Rotella

Good morning. My name is Perry Rotella and I am the CIO here at Verisk Analytics. And what I'd like to do this morning is to spend a few minutes to share with you some insights on our IT strategy.

Okay. We are more than just a data analytics company. We're just as much as a technology company as we are a data company. And I have the privilege to lead a large group of IT professionals in helping us deliver solutions for our clients. We have more than 1,200 people in technology that hit a broad range of technology areas of expertise. We've got a couple enterprise-class data centers that we use to deliver our analytics to our customers, as well as building out some new capability in the EU and U.K. But we -- as a technology company, we deliver our analytics through software and through our infrastructure directly to our clients. We're all about data. Frank talked earlier about the size of our databases. At the end of last year, I think we had about 4 petabytes of data. That -- and we're growing that everyday. I think right now, in frank terms, we probably have 100 million of those 4-cabinet file -- form drawer file cabinets. It's a tremendous amount of data. And to give some perspective, when we moved into our new headquarters in Jersey City, a day before I joined, I think we had about 3 terabytes of data and that was about 12 years ago. Today, this year, we will easily have 6 petabytes. And we could, towards the end of the year, be closer to 10 petabytes in our data growth.

Our data sets are large, it's tremendously large, but most importantly, they're proprietary. So the -- it's the proprietary data that we drive our analytics from.

When I think about our operating model as we manage all of this data, I talk a lot about data refinery. And if we think about the process from exploration to -- the pipeline to bring the data into our environment, turning that data into IP and analytics and software solutions, storing that data and then shipping it out to our customers via our website, it's very analogous to an oil refinery and enterprise data management is a very key aspect of our company in managing every piece of that pipeline, helping us explore and find new data assets, combine data assets, to be more efficient and consistent in the data that we bring into our environment. So helping us manage the storage of the data, helping our businesses to understand how we can combine data sets. So the enterprise data management is something that really is vital in all aspects of our business.

You've probably heard a lot of talk lately about data is the new oil. I would tend to agree with that. The only difference is data is a reusable asset. But at the end of this process, if it was an oil company, the oil gets burned. What we do is we have a continuous cycle where we bring it back in to create new insights, new products, new capabilities.

When I joined Verisk about 3.5 years ago, my challenge was -- as we were becoming a public company, our revenues were $1 billion a year, my challenge was to look at -- find synergies in a business model that is very decentralized. We run, as you've heard -- a lot of our operating heads talked -- our businesses really drive our company and my challenge was to support those businesses in what they do, but also to find synergy. When you become a $1 billion company, you have economies of scale that you can leverage. So I talk about finding that balance between responsiveness, which is running our businesses locally, which is where things are -- that's where the action is, through efficiencies where we have economies of scale that we can leverage to optimize our business. So this is a constant challenge that I find, which is one of my main responsibilities. And I did some research with a professor from IMD business school in Switzerland who talked about how to balance that decentralization and centralization and he coined the term "anchored agility." And what we talk about is being local and global at the same time.

So we believe that we can provide some of that, some of those efficiencies while enabling our business heads to run their businesses the way they need to grow them. And we've done it with our organizational model in IT. We have set it up, so that we are really supporting those local businesses. If you look at this chart, the applications area, there's multiple tiers of that. Every business unit develops their product, supports their products, builds their applications for their business. And we, just last year, had moved -- we had some central development which we moved out into the business areas to put it right next to our businesses. So we do provide some central capability, to provide a development factory that a lot of times helps our businesses to build new products. If you have an infrastructure that we're moving towards -- which we can house our products in a more efficient way while enabling the businesses to do what they need to do.

And then across the blue areas is really the central IT organization that provides the R&D and technology research that provides the program management tool to more efficiently run our projects and to coordinate between the application areas and things like central infrastructure. So we really have aligned ourselves to supporting the operating model that we work in.

And what I'd like to do now is take a few minutes to talk about the 5 components of our IT strategy and they're very much aligned with how we run our business: driving revenue through innovation, creating new technology capabilities that support our business, optimizing our businesses, mitigating enterprise risks, and for me, running IT as a business. Having our IT folks running IT as a service organization so that we are really treating everyone that we support within our company and then our paying customers as true clients. And I did some of the highlights on this.

When you house 4, 5, 6 petabytes of data, that's a lot of data to protect. And we take information security and privacy very seriously. And when we look at our information security program, I would say we have a very sound program, but we're never satisfied. We have a continual improvement process that we look at every year from planning, building out, operating our information security environment until the next year when we look at it again. And right now, we're actually doing some benchmarks on our information security maturity so we can continue to improve on and make sure that our assets are as protected as possible.

We are really a trusted steward of our customer's data. So this is something that is extremely important to us. And we use the continuous cycle of improvement to make sure that we're staying on point and not missing a beat.

When I joined, we laid out a vision for our IT organization and sort of where we want to strive to get to down the road and we're well on our way toward that vision. The vision was to enable the global unified delivery cutting edge analytics solutions. And we have been building out unified platform for our various businesses, as well as our support organization. You heard Joel talk earlier about the unified healthcare platform, which has been operational since last year and we continue to build on that.

We rolled out last year an Enterprise CRM solution, which shut down multiple systems that we had to track, our customer contact, but we're now moving toward more global solutions which allow us to look at our customers in a consistent way.

And finally, collaboration and project execution platforms. I said we're a technology company, we deliver our analytic products through technology. It's all project based. We need to have a robust project execution environment and we're building one and have been using one that allows all of our companies to have consistency across our projects to use best practices across the enterprise.

When you're a $10 billion market cap company, I mentioned, we have synergies. We have scale. And one of the areas where we want to leverage that scale is through our data center rationalization effort. We've talked about this several times, but I thought it's worth mentioning the deliberate effort that we've been going through over the past 1.5 years and continue to go through to consolidate our infrastructure and gain some of those economies of scale.

We start at the facilities level. We have 2 enterprise data centers here in the U.S. and I mentioned 2 others in Europe. We want to move our infrastructure to those centers. And then as we go up the maturity scale, standardizing our procurement hardware and software would be the next step where we can achieve economies of scale. And then finally, eliminating the redundancy in our environment by providing shared services within those linked centers that we have.

Financial benefits aren't the only piece of this though. There are other benefits in terms of being able to provide new customer capability. If we consolidate databases into centers, we can do more with those for customers. We can, by focusing our infrastructure group on supporting the environment, free up our operating units to focus on building their businesses as opposed to running infrastructure. So there are other benefits. When I met with the board after -- to talk about Sandy, I gave them a briefing on Sandy and one of the things I said to them is there's not a lot of initiative that save you money, reduce your risk and provide business opportunities. Data center rationalization effort is one of those initiatives that is giving us broad benefits.

I talked to -- one of our components of our strategies is to build new capabilities. One of the areas is rolling [ph] agile out as a process to deliver solutions. And I have a case study here that is related to a health care client who came to us at the end of May last year and they had a new -- solutions that needed to put in place for January 1 for the new benefit year. And we had 7 months to put this together from the first conversation to being operational. We're able to leverage the unified platform -- again, that Joel had talked about earlier, but we were also able to leverage our agile methodology. We were able to build incrementally solution on top of the unified platform. We have a tool set that we put in place in the project management platform that allowed us to go from initial conversation to production in less than 7 months. The non-trivial task we had -- a large customer -- very large customer, as well as several health care payers involved in the whole effort and we were able to pull it off because of the capability that we're creating at the center.

The other thing we're trying to do, again, through unified platform, through rationalizing our infrastructure is reducing our Lights On expense so that we can reinvest that into more revenue producing efforts. Now, I'd like to hit one in particular where we're investing. We do a very good job at collaborating across our different business areas, but what we want to do is create a more systematic process and environment to enable that collaboration and I'm calling it the Analytics Sandbox. But what we're building is a place where our data analysts can go to combine data sets, to do experimentation, try things out, do joint development on new products that cut across business lines. So where we are doing it today, this gives us an environment and encourages us to -- and makes it easier for analysts to combine data sets and to create new products.

It wouldn't be a technology presentation if I didn't talked about some external benchmarks. Gartner every year surveys CIOs for the top technologies and I'm happy to report that Analytics is #1 for the second year in a row. And that's good for our business. We like that trend. It actually took a couple of years off. Cloud computing -- and I guess its hype -- made it to #1 in 2011. The virtualization was the big deal when everyone was working to cut costs and create a data center environment that were more efficient. But the other couple that ranked high, which I think are very applicable to our business, mobile technologies. In our underwriting area, we're building solutions that allow people with smartphones to take pictures of a new vehicle, send in data into our databases that we can combine and help underwrite those solutions. We're doing similar mobile solutions in our -- in 3E company around environmental health and safety where you can look online right from your phone to understand some of the issues around a particular product or the composition of a product.

Xactware also listed [ph] , our claims process, is also using mobile technology very much. Our cloud computing, yet still is up there. Way before companies we're talking about cloud, ISO was delivering data from our infrastructure to insurance companies. We've been doing cloud for about 30 years even before the Internet was fully -- as operational as it is today.

We're well positioned in terms of supporting the technologies that are important to our customers. One of the areas that I think is really critical in our business is looking at emerging technologies and you don't have to see the details here. I'll drill down into them, but we track, starting with over 1,000 technologies that Gartner has on their radar. We take those and then we pull out the 100 or so that we believe are most relevant to our business. We've mapped them on a scale that shows their adoption rates. We want to be looking at technologies that are in the 2- to 5-year sort of range and think about how we incorporate those into our products. So it might help us in process innovation, improving how efficient we are. Others might help us expand our existing product base. But then there's other ones that are more disruptive that we believe can enable us to do more invention. And we heard some things said earlier today around climate analytics, around remote imagery, but these are the technologies that would really -- we believe can help us develop new products, new solutions, new markets.

And I'll take one as an example, which is Big Data. Yes, you wouldn't talk to a data analytics company without hearing about Big Data. There's a number of initiatives that we used around the radar to help us prepare our company. We do a number of executive seminars related to the technologies. We did one in data streaming last year. We had implemented data computing appliances that have allowed us to cut the cycle time of analysis from weeks to hours. We were looking at realtime analytics. We've incorporated social media into some of our claims broad offerings. And that's from some of the emerging technology work that we've been doing.

This year, we're looking at implementing Hadoop clusters that allow us to look at data across a bunch of distributed environments. And in terms of our storage, in-memory storage, solid state storage are some things that we're using today, and we're looking to see how that -- we can incorporate those into our very large environment.

The point is that emerging technologies are our key and they help us define the possibility. And that's where they especially play into our innovation process and creating new inventions. So, I'll summarize what I believe some of my key challenges are and what takes up a lot of my time, maintaining the balance between local responsiveness and centralized efficiencies to maximize value.

Growing our international capability that's ahead of our business, so that we -- our business expansion, so that we're prepared to deliver what we need to as we expand our businesses internationally. Securing our data assets through our multilayered approach, through risk mitigation approach, and through benchmarking. Expanding our agile techniques that allow us to speed time to market as we saw in the one example I gave. Enabling realtime analytics on very large data sets. So petabyte-sized data sets that we can run realtime analytics on. Operating a data analytics sandbox that facilitates new product creation. And finally, driving an invention through the incorporation and the education and piloting and proof-of-concept on new emerging technology. That's technology. Thank you.

Unknown Attendee

Just talking a little bit about -- now, there's a lot of technologies and you guys picked Big Data, in terms of analyzing massive quantities of data, arguably less structured or less defined. How important do you see that from a business perspective and how do you deal with integrating some of that information with more structured information that's within your proprietary data?

Perry F. Rotella

So the question is how do we see some of the more unstructured data and how to incorporate that into our environment. And when you actually think about the size of these data sets, the structured data accounts for people, say, like 20% of the total. So most of the data out there is unstructured. We do deal today with a lot of unstructured data in the claims area, in the P&C side. Claims are not -- is not very well structured information. So we want to take those experiences, but we believe text mining, we believe things like speech analytics, video analytics are critical to what's going to be coming up tomorrow. That's what exactly what we are trying to get ahead of and I think it's going to be important, using Hadoop to look at data, particularly unstructured data across many nodes, that's something that's really important for us. That is a very important focus. Thank you very much.

Unknown Executive

We don't ask Perry a lot of questions either.

So what I'd like to do is take a few minutes and maybe strike a few high level themes, particularly try to decode a little bit of our DNA that really kind of explains sort of deep in the muscle memory the way that we behave and how we make the decisions that we make. At the highest thematic level -- what I'd like to just open with is, say, that Verisk Analytics, in our view, is a company that is very well positioned for the 21st century for at least 3 reasons. First one is the raw material of our business being data, as you've heard us talk about throughout the day so far. We live in a world in which the technology, which is used to assemble and to analyze the data the unit cost of the technology just inevitably comes down and down and down. And that is supportive of the margin, that is supportive of investment. We're not that capital intense and it really -- the -- what's incumbent upon us in investment mode, isn't so much to control dollars, although we think about that very carefully, but to make sure that we're on good ideas. And as long as we have good ideas, costs of funding our imagination is just really not that great because of the way that information technology worked and improved and the costs associated with that.

The second is the world is increasingly persuaded that decisions ought to be supported by really good precise data analytics, particularly still among the company's that are core of our customer base. So we deal with sophisticated risk-bearing entities, that's where our customers are. They are increasingly persuaded that the right way for them to secure their most mission-critical decisions, whether it's at kind of portfolio level decision-making or individual transactions or both, is with proved, precise data analytics. So what we do just naturally is sort of thematically accruing [ph] To the companies that are our customers.

The third thing about Verisk Analytics is I believe we're very well positioned for the 21st century and a little bit maybe counterintuitive relative to what the risk be at least may be in the broad popular [indiscernible] is that our company is really underneath it all, very vertical in the way that we think and in the way that we behave. I mean it's not an accident that we've talked to you about healthcare, that we've talked to you about being big. We you talk to you about financial services and thereafter, we talked about things like technology. And it was in what Perry said, but let me just pull it out for emphasis. A lot of what he does is not build a horizontal technology platform kingdom in the center of the company, what he's really doing is helping to improve technology into the vertical markets. And that's the way that we think about it. And that's important because there will be other forms of Big Data competitors, the Big Data companies out there in the world, the Amazon Web Services and those who would be selling Analytics as a service. And that's a legitimate category of business. No question about it. But, there's a big difference between -- I am the platform through which you put your data in order to do an analysis -- and particularly an analysis in which you're discovering what you're experience means for you on characterizing sort of third party Big Data, Amazon Web Services kinds of players -- versus what we do is, first of all, we take possession of the data. That's not a small thing to get somebody to agree that you have rights in the data even if the data are moving through the platform. And then there's all the value-added around that and particularly driving through to what are the decisions that our customers are trying to make.

It requires an intimacy with the customer in order to see where they are today and where they need to be with respect to their decisioning. So it can all sound like Big Data. These other guys, they're going to sort of harness Hadoop and have a data schema and traffic a lot of data. I mean, as I say, I think it's a very legitimate category. Their marketing sounded a lot like what we do. But I believe that one of our primary sources of competitive advantage is that underneath the covers, we're actually extremely vertical in the way that we work. We harnessed technology. We make it work across the enterprise where we can. But part of the secret sauce is that we really look like insurance to insurance, and we really look like banking to banking. And we really look like healthcare to healthcare. And if you look at other forms of horizontal technology, other categories, kind of ERP systems is one that comes to mind immediately. There will be a lot of talk by those companies, and I admire them. I'm not being critical, but they will talk a lot about being vertical. So it takes a lot more to really be deeply in a vertical market than to hire a couple of folks who are going to presumably take with powerful horizontal technology and try to apply it. I mean, we are born for this [indiscernible]. That's also a distinction between us and some of the other data-oriented kinds of business information companies that are out there. When we just sit in our offices and look out the world, we're seeing market and companies and customers, and that's really the way that we think. I think that's actually an advantage in the world of Big Data that we're moving in. So just a little bit kind of a high schematic level there for you.

All right. There are only a couple more buttons on this thing. So kind of decoding the DNA a little bit, there are a few things that really sort of stand out in the way that we think about the business and the way that we try to operate. And the first one is, obviously, analytics is in our name, but it's really about the predictive analytics. It's about being able to make forward-looking statements based upon an understanding of experience so that future decision-making is driven. There's a very long spectrum which starts on one end with a well-crafted report and, on the other end, finishes with a stochastically driven forward statement about what is likely to occur in the future. You can think that it's all the same thing, but it really isn't. And our experience is that when we actually make those forward-looking, predictively based statements to our customers on behalf of our customers, that's where the value meter really, really goes up. And we're very focused on that.

Second is, you've heard it throughout the day, cross-selling. You're not going to be able to cross-sell if you don't have a strong relationship with your customer, and you're probably not going to have a strong relationship with your customer unless you really inhabit the world that they're in.

So, again, that vertical focus, which is the third point. So when we began sort of the journey post the change in the governance structure of the company, circa 1997, we were in 1 vertical market, and we weren't even really in that vertical market completely. We were in the P&C market, but almost entirely with the primary carriers, as you heard today talked about. Reinsurers and the insurance-linked securities markets, so there's -- we expanded there, but we moved in to a number of other vertical markets. And we felt that we can do that because we could take our intellectual property and repurpose it with these other marketplaces. But the thing we want to emphasize here is we're not running that part of the playbook without constraints because for 2 reasons. One is, it is important that we'd be deep in the places where we are. And secondly, we actually feel there's a good business to run inside the verticals that we are already serving. So 5 years from now, 10 years from now, would we be describing a Verisk business in more vertical markets? We might. But the emphasis for us is to fully serve in the places we already are. And, again, I would say I think that's a little bit of a distinction. Maybe some of the other companies that are business information, data-centric, that would be a little bit more in the mode of -- we'll cast our bread, our data bread, on the water and it will go wherever it goes. And that will tell us what our end use markets are. We're 180 degrees from that. It's basically which markets are we committed to and let's do our work. Repurposing of intellectual property assets, that's the single highest return on investment thing that we can do and really was the foundation of moving into other vertical markets.

And lastly, as I think many of you know, we've had an active program of acquisites. And I think we've done in order of magnitude 40 in the last 10 years, and it has been value adding, we think. And I'll come back and talk about that more. But there's a real commitment also to building solutions inside of the company, and we see those really as just 2 sides of the same record. We can accelerate and use capital dollars, that's the acquisitions, or we can maybe take a little bit longer but make it native to our environment by building it ourselves. And we're very open to doing both of those.

So a really big part of being leaders for our customer and, therefore, a really big part of being a leader inside of Verisk Analytics is to have what we call the data analytics mindset. And there are a couple of things that really characterize that. If you actually try to trace out, if you look at emerging categories of data analytics, think of them as emerging data analytics businesses. Some of them we can observe from within our own experience, some of them looking on the outside. There are actually some pretty reliable patterns you can see, like it takes around 10 years -- 10 -- maybe even a little bit more than 10 years to have reached sort of category leader status in whatever you're doing. And when you do that, typically, you're about at a $20 million split in terms of revenue. And if you've actually established category leadership, then in the next 5 to 8 years thereafter, you can probably go from $20 million to $100 million or something like that. That's just kind of a pattern that we see in the growth of data analytics businesses. You can also see that there's actually a set of ideas that work inside of this company and those situations, and that's what we try to describe here. So what are they? First of all, in N+1 data mentality -- and what we mean by that is N is the definition of the amount of data we have today or N is the definition of the amount of data that our customer has today or N is the definition of the amount of data that our competitor has today. What we need to be working on today is the data schema which is N+1, because there's always the opportunity to add the next layer. It could be externally sourced data, it could be mining the existing data set more deeply. But unless you're actually visualizing N+1 schema, you're going to be slow in getting there, whereas if you turn in that corner quickly, you're just that much more valuable to your customer.

And the second is analytic differentiation which is another way of saying, you got to have the absolutely best, most powerful, most current method. There was a question about unstructured data, that would be one example, not the only one, but one example of being analytically differentiated.

Third would be, we really have seen that we do very well when a leading player in the market we're serving collaborates with us as a development partner. So right at the outset, trying to develop new things, we ask the question, is there somebody that's really signed up, working through this with us?

The fourth is you have to be really good at extracting, transforming and loading data because the amount of energy that has to go into that for you and your customer defines how long it takes them to get implemented, it defines something about their switching thoughts that they happen to have a similar solution that they're using from somebody else. But if you can drive the time and the cost of extracting trans load -- transforming loading data down to 0, taking switching costs down to 0. And you're just increasing the ROI for your customer. Consumability and -- at which relates strongly to the ability to visualize content, the more that we do that for our customers, the more value they get out of what we do.

And the last, which is sort of subtle and illusive and really important, is the demonstration of the value of the solutions that we're providing in you, to the customer. So they use them, they experience them, they know that it's embedded deeply in their decisioning. But do they actually realize and quantify the way the values they're getting out of using what it is that we provided for them? And what we need to push ourselves to do, is to actually create applications within use. So you are in our environment using our application, you're actually seeing the value associated with what it is that you're getting from us.

We can bring those 6 things to bear every time we try to do something -- well, all the things we do today and anything that we try to do newly -- we are going to be a lot closer to having a very high -- we'll be more like a fielding percentage than a batting average as it relates to the success of what it is we do. So we preach this and, basically, with people that are leading businesses for us, have to be equally persuaded that they need to think this way and they need to be building their business in this way in order to get us to the future that we want.

So an interesting observation about being on the data analytics journey is that in order to be excellent at analysis, we don't necessarily need all that many people. So an interesting thing about our company is, as we move towards 6,500 citizens inside of Verisk and $10 billion of market cap, is, critically, we actually need to continue to think and behave like a relatively small business, and therefore, we have to be -- we have to actually be a number of very agile teams that are moving around in data analytics space, observing and reorienting. What you're looking at here is some research that we've done by some guys in the U.K. where they looked at different technical disciplines. And basically, the vertical axis is the measure of the quality of the research being done, and the horizontal axis is the number of people engaged on the research team. And what you should take away from this is that the curve meets [ph] At relatively small numbers of people. It actually fits my own experience and intuition. I actually was a research engineer before I went on more of a business track, But, in fact, this is kind of consistent with my own experience also. These needs -- these curves are meeting at like 15 or 20 people. What these researchers have found, which we tend to agree with, is you can be doing world-class research with a 20-person team, and I think that, that's substantially true. So the data -- this analytics is really the guts of what it is that we do, and it's going to be a lot of selections of 10 and 15 and 20 people that are going actually enable us to be as analytically gifted and agile as we need to be to move into the future. And so it's kind of the global-local, think-act duality that's kind of a popular sort of thing that we talked about a lot. But in our case, it's really true. There's some things in our business that will respond very strongly to our getting bigger, like our technology that Perry was just talking about; our brand should become more powerful as we get bigger. So everywhere that scale can first advantage on what we do, we need to take advantage -- we need to do that. But at the same time, the core of what we do is creating solutions for our customers, and that's going to occur inside a relatively small scheme. And so somehow, we have to keep all of that going as the business grows. Well, that's what we've been doing for some time. So just to reassure you, that's -- I actually think that's the secret sauce inside of Verisk Analytics is the ability to balance out the scale with the observation about where does innovation come from and at what scale does this occur. And if you do all of it right, we basically end up with a differentiated business model that produces, among other things, margins. And we are extremely alert, and Mark is going to talk about this, we're extremely alert to how we invest our capital capacity. But just suffice it to say that you can really get into this very positive loop where you've taken advantage of scale, you've remained agile with respect to the core of the data analytic agenda and it creates surplus and you keep reinvesting surplus inside of that process. That's the journey that we're on here.

The innovation is inside of all of that, and basically, it's something that we spend a great deal of time talking about and trying to nurture and to protect our ability to get to the future in good shape. And this is a panel that was actually -- you may have seen this because it's in the Journal maybe a month ago. What I really like about this, and I hope you can see it, but I'm in the lower right part of the panel where -- and this was some survey work that we've done across a broad spectrum of companies. The bottom of this is basically addressing a point that we think is right, which is that culture has a great deal to do with whether or not we're actually innovative. And the panel on the lower right is a question, which elements do you think constitute a culture of innovation? And you've got statements like 84% saying openness to other ideas, to change, to exchange, 74% innovation considered a core value of the company, 69% sharing information, ideas and results. There's a lot in there about do people actually collaborate with one another? And do they collaborate kind of naturally and willingly? And so one of the things that we're speaking is in environment in which people will have 2 ideas in their mind at the same time. One is, I'm totally accountable, give that to me, measure me on that, I will be responsible for that through the P&L or whatever. And at the same time, I genuinely want to collaborate with my colleagues. I actually want to give and I want to get. I want to feed and be fed by the people around me. And we have to work for a culture like that actually because most people are -- actually would prefer to be at one end of that spectrum or the other. I'm happy to go to meetings endlessly and collaborate [indiscernible] accountable or give it to me and get out of my way. We're trying to find people that are extremely confident and very humble at the same time who will actually comfortably engage in both of those modes. And so we're just agreeing with this point of view, which is that culture is extremely important as it relates to innovation.

A couple of the things that we have found we need to remain focused on. First is to be kind of no fooling about identifying and resourcing the innovators, with extremely seductive and kind of a real blind alley. If you think that you're going to put a man year against -- or a person year against development activity by taking 10% of the time from 10 people, that's basically going to get you nothing as far as we're concerned. But to actually be no fooling about we're engaged in this, we're building this and to sort of in a way invite people to sail to the new world and burn their ships. And their careers now are really based upon getting this innovation into the marketplace. We're always asking how do we reimagine and expand the footprint of the market that we're serving? Well, somebody -- I think it was Kevin that referenced this earlier. So if today our view is that the market is $100 million and our solutions represent $90 million of the $100 million, there will be a temptation for the discussion inside the company to be, well, I'm a mature business. So look to me for cash generation, but don't look for me for growth. Our message back to our leaders is, "Wait a minute, you need to define your available market of seeing $500 million from [indiscernible] and now you're 20% of your margin and [indiscernible]." And we just cannot accept in a business like ours, which has as many pronged positions in the market as we do, that there's such a thing as a mature business. It will interfere with our growth. We need to be very good in terms of delivering a strong value proposition to our customers. We find that something magic happens, when the ROI, the demonstrable ROI is around 10 to 1, that's when the sales -- the rate of sales tends to inflect. And I mentioned before, we really want our -- we want powerful customers of ours to be decently engaged with us on developments.

The acquisition side, I mentioned that before, is also, as we've seen and Frank said this upfront, is also part of our innovation agenda. And we have felt encouraged that even if you use some, we think, relatively conservative measures of performance, the acquisition program has been very value-creating for our shareholders. And so it will remain a committed part of our prospect going forward.

And I was talking about Verisk and being aligned with the 21st century. Perry had kind of a Gartner view. This is some -- this is -- on the X PRIZE Foundation, I think they do some nice work, but they talk about 8 explosive technologies. We naturally relate to several of these, including innovations and computational systems, network and sensing. Ron Isaacs was talking about remote sensing. Edmund was talking about remote sensing. And then medicine, the whole healthcare business that we had a chance to share with you there a few minutes ago.

So we're trying to build on our strengths. I think you've heard most of this before, but just to summarize again, cardinal competitive advantages or proprietary data assets and being the first mover. And I really appreciated the question, I think it was over here some -- on this side of the room, about are your data assets in healthcare quite as proprietary? No, they're not today, but we know that, that's where we need to get to. And we're working on that. The quality of the relationships that we have with our customers, we could not cross-sell if we did not have the relationships that we have with our customers. We now -- there's something foundational about who we are at this point. There's not that much of our business which is really exposed to the economic cycle, mortgages. But beyond that, really not a whole lot. And for that matter, there isn't even really that much seasonality in our business. And lastly and hopefully, what you've gotten a sense of today is the quality of our team. One of the ways that Frank and we would sort of describe it is we're kind of like a quarterback dropping back and having like 8 seconds in the pocket before having to make the throw. We have the ability to look down field and think about longer-term things because the team around us -- our entire team is executing very, very well against who we are and what we're trying to do.

I don't think we've shared this with you before, and this is more internal than it is really external. But we've actually tried to summarize a lot of these DNA-like statements into something that we call The Verisk Way. And you can see across the top that the 5 categories that we're thinking about here are to do what we do with quality; to be very innovative; to have some qualities that citizens inside of our company; to expect a certain set of things from our leaders and to have a set of behaviors which relate strongly to shareholder value. We just try to live this every day, basically. And, again, if you really buy that culture has a lot to do with being innovative then it's actually sort of sticking close to these kinds of things that ultimately sells the difference between achieving everything that we would like to and being a little bit short of it. But I'll just note that it's not an accident that the innovation column has more statements in it than any other because we really get that what our organization needs to do is to grow in order to fulfill all of our objectives in front of all of our constituents, including, very importantly, our shareholders. Our margins are in the top 5% of the S&P 500 as it is. So we're certainly working to be more efficient, but as a planning assumption, we think that most of the value creation is going to come by us expanding the enterprise which is where a lot of our time and energy goes to at this point.

So just a few thoughts about who we are and kind of instincts underneath the product expressions that you've been hearing throughout the day. And so thank you for your time. I think what we're going to do now is just take a couple of minutes to grab a boxed lunch, and then I think we'd like you all to just come right back, if you don't mind. And we'll go over to Mark Anquillare, our CFO.


Mark V. Anquillare

Welcome back. Let me spend a few minutes. I want to give you a bit of an overview. You've had an opportunity today to hear from our business leaders, understand the businesses that we're in, understand a little bit about how we interact with our customers and kind of at the end of that, what's still appealing is, the financial model, financial results. I'll have a little bit of overview of how we use that capital and deploy it effectively.

So as you've heard throughout most of the day, we've had great success both in selling new solutions, building new solutions. And because the solutions that we have, have these long-term type of contracts, long-term commitments, real high retention rates, we have been able to achieve some nice, stable growth that's 14.5% over the time frame here from 2008 to 2012. And because of the operating leverage that's inside the business, honestly, to the extent that we add a new customer, in many cases, there's very little cost to service or maintain that customer. So as new top line is added, a very large part kind of adds to our bank account. You can see that with the margins over 45% this past year. In addition to those high margins, CapEx, the percent of revenue is very low. Not a lot of brick and mortar around Verisk. Talking about hardware, software, internally developed software as primary elements of capital expenditure. And the combination of, one, the very high margin; two, relatively low CapEx, what it does is to drive some very significant cash flow. And in 2012, we reported last week, we're at $388 million, and that is after we made a very sizable contribution to prefund some of pension liabilities. So a good year, a strong year and reflective of a very powerful solution that you've heard about throughout the day.

So let's just talk and kind of recap some of the business models. 67% of our revenue is either in the form of contract, that's long term, typically 3 years. So we had Ming Lee and his -- the AER catastrophe model, as an example. And Edmund Webecke was here to talk about Xactware. Those are contracts that are typically 3 years. We get paid a full year in advance so we're -- we have very positive, very good cash flows from those types of businesses. And then we also have these wonderful subscription models. So as we described, some of the historic ISO businesses, those loss costs, the rules and forms, where our customers have our information equally both [indiscernible] in the form of a contract language, a policy form, or they're using our information to really understand their cost of goods sold. That's a subscription happening every year, and there are very, very high retention rates.

Once again, these long-term contracts, usually a year or a quarter, prepaid in advance, and these long relationships really help us bring new products to market because we have the ability to do -- to really get in and talk to any customer. Stephanie was up here earlier, and I always make note of one thing that she says. You probably get inundated with all kinds of emails, calls from various salespeople. And in large part, if you're like me, unfortunately, a lot of those, you're trying to do your job and you're going to delete them or move past them. Stephanie's comment to me, which I always take home and make note of, is that those emails, people always call me back. And that is true of a lot of our sales force, and that is meaningful. And I just always understand and really appreciate the type of relationships that we've cultivated over the years.

Into the margins. Scott talked a little bit about the Verisk way and the way we've been living this for a long time is, we have a view unlike, I guess, more of a consulting view, although we think there's some elements of consulting that help you improve your business and product [indiscernible]. If you build a product once, aggregate information from many and build your analytic upon the information of many, one, we think we'll have a better model in that consultant that's just going to do it for you and not [ph] based upon your data. An industry model, we think, is very important. And two, natural ramp and scale to that model is very powerful because you built it once and then you're on to selling it many times and it has great ramp. I already talked about the very little incremental costs to service that new customer or implement that new customer. And as we think about the customer set that's very diverse set of customers, with about the largest 3% of revenue, if I think about those top 10 customers representing only 20% of revenue. And one of those customers, those large ones, is a healthcare customer, so diversity, too, as we continue. One of the things, I think, we appreciate is as we continue to grow, we become more important across both large and small customers. And Joel described it in healthcare, and I think the insurance group also hit on it. When we're selling customers, we're getting more wallet, as well as adding new customers, and that's healthy. It's a healthier business model, and we're very pleased with that.

Inside of the revenue streams we have, inside the, kind of the 2 categories there the bottom here, Risk Assessment, that is Insurance, that's at 37%, and you have Decision Analytics, where we hail [ph] also serve the Insurance industry, and those are in the markets we serve. So if you take those 2 amounts of, about 68%, you'll note that we continue to grow outside of the P&C vertical. It's one of the things that we always try to highlight, and I think we take very seriously, is, we had a goal, back in 2001, 2002, and our view was, boy, our P&C carriers and customers are wonderful customers. But we need to continue to diversify our revenue stream. At that time, like 95%, 96% of our revenue was from P&C carriers. And back then, we made some bold thoughts, we started to kind of direct the ship, to try to diversify from the P&C carrier of revenue streams. And today, as we continue to evolve, those P&C carriers represent only about 48% of the revenue from 2012. And this is back in 2002, where we made kind of this, this bold directional play that we wanted to move, to try to get our revenue stream to 50% from outside of the carriers. Kind of a noteworthy year for us, and I highlight this for you. As we grow, what we have found is, we've had growth across all of our vertical, all of our various businesses. So the way you read this chart is, this isn't growth year-over-year or the business itself, it is growth contributing to the overall Verisk Enterprise. So as an example, from an organic perspective, which is on the left-hand side of the chart, Insurance contributes 5.2%, the total's 7.3% growth. Organically, Healthcare contributed 2.7% growth of that 7.3%, and then over on the right-hand side, because of the MediConnect acquisition, as an example, another 6.2% of non-organic growth was added because of the MediConnect purchase that happened around midyear. And finally, as you kind of look the organic, I think what we've, we noticed that the mortgage business and the mortgage market in general, has been very difficult. And you have -- we're down about 1.1% from a growth perspective as it relates to mortgage. But we find that we have redefined our business, to have a more diverse set of products, a new set, and more diverse set of customers, and as we rebuild and continue to focus on that business, we're setting the stage to grow and continue into the future after we've been moved through what has been this default cycle that continues to run out on it, where we had a run-up in use, now kind of that decline is back to more normalized levels. 2012 performance. Strong growth, 15.2% on the top line, with 23% about from Decision Analytics, about 5% from Risk Assessment. Remember, we have a set of appraisal tools that we have reported historically on Risk Assessment and moved over to the Decision Analytics in 2012, we're adjusting for that besides those numbers, a remarkably strong growth end-margins across the board. So as you put down 24% growth, with 40% margins, NDA. Risk Assessment, about 10% bottom line in EBITDA growth with margin approaching 55%. So we were describing a little bit about the legacy ISO business, which is Risk Assessment. That's, that information utility where, back in the day, and continue to today, insurers were providing this data for regulatory purposes, the -- for the most part file their programs. And what we did was, besides doing that for regulatory compliance, we said, why don't you provide us some -- with some additional information, because the P&C industry is the one -- it's a little bit odd in that you're actually selling your product and pricing or product before you really know what your cost of goods are. We helped them with that. And you could see the growth at about 5% over the course of 2012, and about 4.1%, if I was to look back over this timeframe in 2008 to 2012, that's 4.1% annually with extremely strong market. Remember, in 2012, we did benefit from a freeze in our pension, and that did impact a little more so the DA, the Risk Assessment margins. Inside the Decision Analytics, this would be the insurance space, where we've talked about the products there, both ClaimSearch or our claims fraud for insurance, catastrophe models from an insurance perspective, repair cost estimating, as well as healthcare or mortgage, some of our specialty, like the climate risk and supply chain. Here, strong growth of about 25% CAGR over the course of '08 to '12, and from a margin perspective, kind of an up-and-down, this is kind of noteworthy because, what we've tried to highlight is that, the margins in Decision Analytics are a little bit a function of product mix. Some of our insurance products, some of our legacy, more mature insurance products inside of Decision Analytics, actually have margins as high or higher than Risk Assessment. So as an example, as health care grows, although the margins are very strong there, very positive, they just haven't reached the same level as some of those more [ph] mature insurance businesses inside of Decision Analytics. You see a little bit of the up-and-down, inside of the margins from a Decision Analytics perspective. What we continue to focus on, besides kind of a cross sell and opportunity, these things, you should know on this slide. One, over the years, revenue we receive from the P&C market, relative to which is usually [ph] Premium, continues to grow, a very positive sign, right? We're building product, we're selling more product into that space. But at the same time, I'll also note that, as you think about simply 20 bps, in absolute terms, dollar amount is not all that significant to insure. A small fraction of the cost that we really believe we're delivering value and they're able to profit from that information. The other opportunity that I think you heard about today, when Joel was up here, is that little sliver of darker blue at the bottom right-hand corner. And I think we see an opportunity, we have a vision [ph] to continue to grow that small sliver, which represents Healthcare. Remember, Healthcare spend is about $2.7 trillion compared to about a $0.5 trillion inside of P&C. So market spends bigger, the opportunity's bigger, there's more competitors, yes. But we look forward to continue to try to drive that dark blue portion of the slide up.

I hope you hear this as you talk to our business leaders, or have a chance to speak with them by the product demos. There's a lot of discipline, there's a lot of focus throughout Verisk Analytics and we have some great leaders. I think we're very much the type of people that would prefer to talk about what we've done after it happens. We like to talk about execution, discipline, as opposed to a lot of the future stuff that maybe more, patting us on the back. We prefer to kind of talk to the way we perform and making sure we do what we said we were going to do. So from the discipline perspective, I think you'll see that in the way we allocate capital. I think you'll see that in the way we think about new investment, and I think, as we continue to grow, we continue to have this view of operations and businesses that have their own cultural and local cultures. And at the same time, we want to understand them. So one of the things that I just trying to go through, I was thinking about execution. Because we spend a lot of time, literally we have growth and strategy type sessions on a quarterly basis. And we try to get out. We want to be in the offices. We want to meet those couple tiers down managers who are building product and really executing on that business strategy. And on a quarterly basis, we do somewhere in the neighborhood of what, 17, 18 meetings. We're out there. We're doing it. We have some growth opportunities. You know that, we think need probably a little bit more focus than -- we think they're big ideas so there's another 5 or 6 that we do on a monthly basis. And what you see here is probably an easier way to kind of talk to you. There's a couple of big groupings of Insurance products, catastrophe models, ClaimSearch as an example. But we monitor things at a very low level of detail. We're looking at the portfolio. We have 450 revenue accounts. So think of it as products, even they're a special group. Even, I think it was yesterday, we had a business case, right? This is about execution. We were -- I was just taken aback, but we had some really talented people in the room, that knew the market, knew the competitors, wrote a 30-page business plan with financials. And you walk away saying, now I'm ready to invest behind that. I feel good about that team. And that's how we manage our business. I just want to give you a little flavor, because we can put a checked box and a bulls eye up here, but we live this. And I just wanted to try to emphasize to make that point. And that type of execution and that discipline kind of relates to capital allocation. What we want to do is we want to grow our business. It really is about focusing on internal investments it's about where we could grow and when we talk about investment, I do want to highlight the fact that we're very focused on expansion. We really believe that if you run the business, and you have an existing product, we want margin expansion on those existing products, and we expect that. And if we're not getting it as we think about the portfolio, we start to shift and reallocate. At the same time, we're very invested minded, we're looking to find ways to grow internal investments is first place, acquisition continues to be where we want to place those dollars, and finally, we talked about share repurchase and that continues to be a part of our strategy, we would do at least sufficient enough to -- sufficient number to insure no dilution, but if cash builds up, clearly that's an opportunity. We've targeted and talked about 2x debt-to-EBITDA, and we have always said that for the right type of acquisition, we'd go beyond. When we bought Argus earlier this summer -- during [ph] This summer, we actually got up to 2.35. And since that time, we kind of took a little bit of a back step, and no more [indiscernible] but we said, let's hold off a little bit, or slow down a little bit on some acquisitions and repurchases. And today, go ahead, what we tell the market for a 2x debt to EBIT again. We've -- for the most part, executed against what we tell everybody at a faster clip than what we said. And at the same time, as think about capital allocation, we have a lot of capacity we have [indiscernible] the debt market, $850 million facility and private placement. So from an investment perspective, I just want to highlight that what we've usually defined as investment, is anything that is newly being developed, or come to market over the last 3 years. Because takes us a while to build product, because you need to source new information, you need to apply Analytics to it, so our run rate has typically been about $90 million. In 2013, I think what we have seen is an increased opportunity to invest behind some ideas. The message, the kind to the article in the Wall Street Journal, I think we've been continuing to search out for opportunities and we've seen it. So we're excited by those opportunities, and they've kind of -- going in a lot of different areas from remote imagery, and if by platform, we've talked about catastrophe modeling and the next gen, which is called Touchtone. We have some retail and supply chain initiatives, along with some data initiatives and that's going to add some CapEx, and more importantly, it's going to add some P&L cost to our first and second quarter type of results. It's probably to the tune -- in the neighborhood of $10 million to $15 million, which is what we described last week. Probably that $10 million to $15 million is a little more weighted towards first quarter than the second quarter, but all of these are positive, because what we're doing is, we're looking for long-term, sustainable growth and this contributes to that.

We're back a few seconds there. I think you heard from Joel, the MediConnect acquisition that took place back in March has performed extremely well, paid about $350 million, we got some tax benefit from it. What it did was, it provided us access to information, it brought together a need that our customers had, and we able to take and put the MediConnect solution with our Revenue Integrity solution, and really make a comprehensive set of solutions that our customers are willing and wanted to buy. It created the ability to go faster, and provide them more services where we were a little bit slowed by using other third parties. So a great integrated opportunity, access to new information records and performing well.

But also, we're pleased to say and we certainly had a wonderful overview today of Argus. Once again, focus on the payments and financial services space, we bought it for about $425 million. There was some asset deal in part, so we got some tax benefits associated with it, but I hope you had the opportunity to hear a lot of the same type of attributes Argus brings to the table to their customers, certainly have or are analogous to the ISO business, the historic, we're a data steward, we have some very unique information, and by aggregating that information, we can make you more profitable. We can help you understand and price your products in light of the risk that you're undertaking. So 2 substantial or more substantial acquisitions in 2012 that are performing well, that fit the strategy, helped Healthcare go faster and make comprehensive solutions. And I think the M&A strategy we've had, the M&A program we've had, has created value for shareholders. What we've done, and I think we showed this several times is, over the years, we've had both a combination of purchase price and earnouts and the total there is about $1.2 billion. And at the bottom, if you just took, and we're not trying to be conservative, what we've taken what with in essence, EBITDA on 10x multiple. On top of that, if you were to look at that IRR and the analyzed return of 22%, we what cash flow it's generated for that business. So we believe that we've had returns of about 22% annually from the acquisitions we've done from 2002-2011. It's a planned [ph] approach, looking for the right type of strategic acquisition at the right price.

At the same time, what we've done is, we've done a quite a few share repurchases over the same timeframe. Once again, disciplined approach, trying to understand what our opportunity is, our cash flows are, and in trying to really from a sensitivity perspective, really deliver value by buying shares at the right price, given our future and long-term prospects. So 2012, we did about 3.5 million shares totaling about $163 million. And the average cost of those shares is about $46.57 and obviously, the stock price has done nicely, and that has also helped from [indiscernible] return, but if I was to look back over time, both on using the term relative to at borrowing rates, [indiscernible] about a 26% return, if I was still looking at the return on excess of our cost of capital, 22% strong returns trying to deploy capital effectively for shareholders, and I think we've been successful to date. Over the years, we generated a lot of cash, been thoughtful about how and where we deploy it, and you can see the combination of acquisitions and at the purchase price, as well as earnouts and share repurchases. We are almost 50-50 over this timeframe, with 2012 clearly being more heavily weighted toward acquisitions as MediConnect and Argus were a little more substantial than what you've seen here prior. We stand at this point, at a very solid position, right? We have seen some great businesses and great opportunities, and very strong capital structure to support the growth that we want to do. Just to give you a little recap, and to remind you, we have about $180 million due between April and August of 2013. We used to ladder the private placements, and we have about $171 million in '15, and about $50 million in 2016. The hollow bar there is really the capacity we have under our revolver, about $850 million, and then over to the right around the blue those are the public bonds that we [indiscernible] took place to over the last few years. So a lot of capacity and set up and ready to continue to execute on the plan and the strategy. The last point, I'll make and just kind of echo some of the things that Scott said. What we are very much interested in, is continuing to run the business as we have. Our view is, if that we can find the right type of top line growth and be innovative that adds natural ramp and scale, and that ultimately flows into margins. So on the top line, it's really about just constantly asking and thinking about ways to, kind of find analytical solutions or analytical [indiscernible] models, that can be really a differentiator, things that can help our customer. Looking for data, preferably proprietary data, that would be a competitive advantage into which we can ply that analytic solution. We're invested behind platforms. We have found a customer need and want a more comprehensive solution and you can see across the enterprise, by putting many of our products or what we call point solutions into a platform. We have become more successful because we can sell the suite and that has accelerated the sales cycle and is a better way to talk to customers, a more effective way to be responsive to their needs. And finally, cross-sell. Making sure that we are all working together, because I think there's an opportunity to take and really lever the positions we have with our customers, to sell the same products as well as new products [indiscernible] suite.

Last point, you saw a lot of the different products and solutions that Verisk offers. The wonderful part about the team is, they continue to work together and across the various verticals, as well as among kind of the group. Joel was highlighting, work with the aggregated medical database. That is a wonderful capability healthcare has, but the reason that came to fruition in large part, was because of the relationship that we have inside of our historic ClaimSearch type of business, with the relationship inside those Insurance Product divisions. Just an example of how, now, we can be more powerful, is the example of N+1, even within our own enterprise and our organization. So I thank you very much for being here. I appreciate you sitting here throughout the day. I hope it was informative and we're going to turn it over to Frank Coyne for our Q&A session.

Frank J. Coyne

Thank you, Mark, and thank you for, all the presenters. I do apologize for not giving breaks or lunch, but you have to understand that at Verisk, we don't take breaks, nor do we take lunch. We've kind of mastered the art of chewing and talking at the same time. So as I think you probably all know, this will be my last Investor Day, as I will be turning over the leadership of Verisk on May 1, and I've always thought that the last test of leadership is that when you leave, you leave folks behind with the will and capability of carrying on. And in that regard, I give myself an A+. In Scott Stephenson, you have a man of exceptional talent, and more importantly, exceptional character. But I think it only appropriate, for the Q&A, that Scott and Mark lead that.

Frank J. Coyne

[indiscernible] He's been coming for over 10 years. So he's been very much a part of the journey from ISO to Verisk in '11 [ph].

Scott G. Stephenson

Come on, David.

David Togut - Evercore Partners Inc., Research Division

David Togut with Evercore Partners. Perry Rotella highlighted international expansion of the IT infrastructure as a key priority. Can you elaborate on that, in terms of what businesses you want to move or expand in overseas, and do you anticipate doing that organically or via acquisitions?

Scott G. Stephenson

So in reverse order, we would see it as a combination. Perry put the emphasis well when he said, we want to sort of prepare a beachhead by having a technology infrastructure that our solutions can grow into. We're not so impressed with ourselves that we think that we can just sort of leap into these markets, and I'm thinking particularly of the emerging markets. Without some serious form of local representation. It could be a partner or it could be a little bit of a platform acquisition. Mike talked about discipline in acquisition program, and I think that whatever level of discipline we brought to acquisitions, there needs to be time free when we're talking about acquisitions in these other markets. But some platforms, with strong local leadership would really help us. Parts of our business that we have found that travel best across national boundaries tend to fall into 2 categories: There are those businesses where you are inherently looking at what is happening globally. And that would be our Catastrophe Modeling business, the global reinsurer is -- that's interested in flood loss in Europe as they are in the United States. So Catastrophe Modeling and then our Environmental Health and Safety business where the vendor who wants to be sell -- wants to be manufacturing in Asia, but selling in the United States, needs to be in increasingly, needs to be interested in that. Beyond that, what we have found is, that the part of our mix, which tends to travel better across boundaries are the claims-oriented solutions. Because it's more the case that a claim is a claim, whereas there's something a little more idiosyncratic about the data, and the analytic method as it relates to -- trying to understand risk from the front end of a prospects. So we're going to try to naturally follow sort of what's available to us, and that's actually been the layout -- I mean, we're not, it's not that we're -- we don't do anything which is other than domestic, which is that's it's a relatively small fraction. Things that we do in other markets today, actually tend to fall into that category, I think where claims [indiscernible], with the 2 exceptions that I noted.

David Togut - Evercore Partners Inc., Research Division

In the claims-oriented businesses, what does the competitive environment look like? You highlighted claims-oriented business, as possible expansion opportunities. So as you look internationally, both developed and developing market, what does the competitive environment look like, prospectively, as you expand overseas?

Scott G. Stephenson

Yes, I mean, I think our opportunity is really bound by our ability to demonstrate value. I mean, you find a couple of examples of similar business models but they're not really -- there aren't that many, and they're not that well-established, so it's really on us to create value and demonstrate value and that's the constraint on our opportunity nods will [indiscernible]

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

It's Andrew Steinerman, JPMorgan. This one's for Mark. I obviously caught your comment when you said margins historically had bounced around, based on mix. So I want to ask you, how much differential is there today between the DCP [ph] Healthcare margins and their overall 40% DA margin, are you trying to suggest that this year, we'll have so much growth in Healthcare, that the mix of margins will be down overall?

Mark V. Anquillare

So to answer your question, as I said, some of the health care assets and they have very good, strong margins. I want to start there, that good margins, more than you would say, it's just -- if you think about some of those insurance businesses inside of [indiscernible], some margins are very strong. [indiscernible] We continue to see nice growth in Healthcare, and as you have more of that lower margin, not low margin, lower margin business...

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

We say less awesome --

Mark V. Anquillare

Less awesome, I like that.

It is something -- it's just something we need to just keep in mind, because we just kind of do the quick math and the DA grows faster than RA, as an example. You have this mix that we just try to keep track of. The businesses, in and of themselves, have all the same fundamental elements. They have scale, and [indiscernible] them, and we would expect them, individually to continue to grow from a margin perspective. It's that shift around the mix. Offset by some of the mortgage that we talked about. That could kind of [indiscernible] .

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

So when you put it all together, the leverage in the more mature business, the faster growth of these less awesome margins, but still great margins businesses, is 2013, a year where margins will be down or relatively steady?

Mark V. Anquillare

Well we'd -- I'm not sure we're going to give a very specific answer to that, but I think what we feel is there's a kind of an offset of product mix shift that could slow [ph] Down the margin and investment, especially in one or two that can draw off. And then, over time, I think there's some uptick actually with this leveraging scale, and by the end of the year, I would probably feel pretty consistent [indiscernible] .

Timothy McHugh - William Blair & Company L.L.C., Research Division

Just at a higher level of -- I'm sorry, Tim McHugh with William Blair. The vision for kind of the health care platform seems to be coming together more and more as you pull together. Where are you at with the financial services vertical as a whole, as you think about where you want to go with that at this point? I mean, Argus and mortgage are still somewhat distinct approaches to the marketplace. What's the vision that you're trying to pull together in that vertical?

Scott G. Stephenson

Well we -- I would just describe us as being earlier in the journey, generally, even though we've in mortgage about as long as we've been in the health care space. But the sort of the collection of assets that we've put together in health care is, I don't want to say entirely complete, but it's a very nice opportunity to serve in an integrated way, customers that we're with. Whereas I think what you've heard in, what Michael presented today, but that there are a lot of hooks from what it is with Argus does into environments, including environments outside of the banking industry. So the first part of the answer your question, is that we -- we're trying to think pretty holistically what does that collection of data and services represent, and that the tie in, for example, with how would an institution think about accessing media, trying to promote? And all the segmentation associated with that. I don't think of that as strictly stopping at the account limit of what you might call banking. And so that's actually a lot of the thinking. Anything that is synergistic between Argus-like analytics and Interthinx-like analytics, we're they're interested in trying to pursue that. But my overall answer to the question would be, we're just earlier in the journey. So I think that there should be opportunity for building solutions, which should be opportunity, actually for integrating in other assets from the outside.

Kevin D. McVeigh - Macquarie Research

Scott Kevin McVeigh from Macquarie. Obviously, you're following Frank who's done just a wonderful job with the organization. Do you think about your strategy in the near and longer-term? Anything that would focus on, do a little bit differently as opposed to what Frank has done historically? I mean I know the company's at a different phase in its life cycle, but how do you think about, kind of, near-term priorities as opposed to, transition from Frank?

Scott G. Stephenson

Well, I'd like to start in responding to that by saying just what a magnificent job he's done, truly, and I would say that if he wasn't sitting here, and we've all benefited from his leadership in so many ways, and Frank talked about character, I mean, character on a stick, and that has really just been so important inside of just keeping our company on the rails, headed in the right direction. I think he had a job, when and he got started in 1999, that has been completed to the point, well, you're never done, but substantially completed to the point that we can focus on other parts of the agenda with more intensity, is the way that I would put it. Part of the job that Frank had was, he had to teach organization how to make money. Because, if you think about the shift in governance and Frank came in shortly thereafter, we'd made very little money. Now we've got Argents [ph] that are the envy of the world. That was, that there was a disciplined approach to how we spend money, how we invest money, we're never going to lose those disciplines, but I think that it's actually worked its way into the fabric of who we are very, very deeply. So you never want to take it for granted, but I think we can almost assume that kind of discipline. At the margin, when you say okay, we've already got 45% EBITDA margins, we really want to create value for shareholders there's both, yet more need and probably more opportunity, because of the disciplines that Frank has put in place to emphasize even more the innovation side of the agenda, which hopefully will yield organic growth and expansion of the enterprise which was kind of the horizon that we see out there. But it's not a setting aside of anything. And we've certainly been trying to behave innovatively for, throughout, and I think we have actually, but maybe at the margins, a little more emphasis on that, and maybe just trying to tuneup what our methods are, in terms of behaving creatively and innovatively. It's kind of that it's the agile 15 person team inside of a 5,500-person and growing organization, and how we do we do that? Well, I think that's a little more front and center now than it was.

Unknown Analyst

I had two questions. First for Mark. This mountain chart that you showed us, of the relative spend for the revenues of insurance and health care, versus the relative spend was fairly provocative. If you kind of extrapolate it out, and if Healthcare were to become what insurance is today, as in a $5 billion to $5.5 billion business over time which should be very impressive, that's probably a little too enthusiastic at the moment. What would be the puts and takes, in terms of understanding what that slice of Healthcare could be, over time?

Mark V. Anquillare

Well, I think we have great ambition, but I think we have to just kind of moderate how long that runway is. This is a view, and I'm happy to -- pick one of the other slides that Joel showed, was that, we're focusing on what is probably a $900 billion problem in [indiscernible] kind of used, as well as an administrative stuff that's inefficient side of health care. I think that creates an awfully large sandbox, and I believe that where health care is today, relative to where [indiscernible] insurance is, there's a lot of different parties, a lot of complexity, I think there's a lot of opportunities. So I think the opportunity's much larger. I would also tell you though, I think there's going to be a lot more, and there are [indiscernible] of well-capitalized, very big players, scientists, playback, and we are in a very strong position, but we're certainly not alone in that strong position, and we don't have, kind of the very differentiated debt assets that we have to [indiscernible]. So I think we have to be much more effective managing that, but I certainly would hope that along down the pipe, Healthcare, health plan providers need information [indiscernible] To the extent, if not greater, than the extent that P&C carriers do.

Unknown Analyst

My second question is for Scott. Your focus is on risk, obviously, but you think about Big Data and the biggest Big Data problems out there, it doesn't make sense for you to expand your scope beyond risk at overuse over time. I mean, if I think about the biggest Big Data problem, I think its merchants with goods and services that are the trying to get to know their customers' buying habits, et cetera. I think about the data that Argus is collecting, that seem to be kind of right down that line, they're scoped to expand out and start to help people with that.

Scott G. Stephenson

Yes, that's a great point. And actually I mean that I think the Argus acquisition is representative of exactly that. What Argus is about, is an end-to-end optimization of the outcome for the customer. Our prior definition of risk has been the potential for loss. That's always been a good place to be, and always will be a good place to be, because the most quantifiable value proposition of all is, I can prevent you from losing money. That's very measurable, whereas I can optimize your business outcome, it's a little harder to demonstrate, we've done that. And yet, it is complicated, it requires Big Data, and so, within our -- the scope of our capabilities, is the [indiscernible] , actually, and we would then -- so yes, it is a part, and I actually think it will probably become a growing part, the way that we can see with what we do. Our corporate head of business development, Vince McCarthy, is fond of pointing out that the word risk actually doesn't mean potential for loss, it has a broader fit in its root, it actually has a broader definition. And I think that's right. We got one back there.

Unknown Analyst

If I look at your value proposition to your P&C customers, where you're providing insight into a 90%, 95% of the policies written and claims made, where they may be writing a small majority or a small component of that, in terms of what they're writing, and they're losing, maybe $80 out of $100 worth of gross premium. Or maybe, as 1 of the presenters said, $8 that might be fraud. I mean I might think that if I took a fresh look at it, I might think well, maybe you charge $1 or $1.50, relative to the $100 of the gross written premium, but you charge $.20. Could you maybe explain to us how you arrived at $.20, because it just seems like an incredible bargain, and why you're not, perhaps getting more value, particularly given the fact that there's no one who's even close to you in terms of the ability to provide that data and those analytical tools?

Scott G. Stephenson

Well, I'll start, and you -- we actually talk about this a lot. I mean, first of all, a lot of the relationships that we have with the customers have been built up over a very long period of time, so we're very interested in thinking long-term about where we are, in everything that we do, including P&C. So I'm thinking that was highly discontinuous at a moment of time would definitely cause our customers to say, well, what just happened? What just happened to that very reliable partner I had, in Verisk Analytics. And we really would like to not think that way. We would like to be a very dependable partner of theirs. So I think you're going to just find us steady in the way that we go about what it is that we do it. Is it highly -- is it high-value for the customers? It is high value for the customer, that it absolutely is. One thing I would say is that, it's just kind of a subtlety inside of all of that, particularly as it relates to what Kevin Thompson was talking about, which are the industry standard insurance programs, is when you're providing support of the just sort of a core development of the insurance product, including the way that you're going to price it, the value proposition of that is very evident, but harder to quantify, than things like claims, because I was -- as I was describing before. So if we were to go in and try to sort of strongly readjust our pricing on that, I think we would introduce a series of discussions that I think we could do very well in, but we don't really feel the need to have those discussions. We're often asked, if we doubled our prices, this year, how much of our business would I -- would we lose, and I am addressing the legacy parts of the business. In the year, I think we'd lose very little of it, and if we doubled our prices. Very little of it in the year, but what the companies would start -- what our customers would start to do would be to say, it's not really can I recreate what it is that Verisk does, because we're built on, as you point out, these Big Data aggregates that aren't available to any of the -- to any one company. What they would do is, they would start to ask how do I live without that? And we just -- we want to be must-have information. We don't even want them to ask that question. So I think you're going to find us steady with regard to how we price, rather than something discontinuous.

Mark V. Anquillare

But I think with any other --

Unknown Analyst

Perhaps steady meaning slightly higher rate than in the past?

Scott G. Stephenson

Pardon me?

Unknown Analyst

Steady meaning maybe perhaps a slightly higher rate of increase than in the past?

Scott G. Stephenson

Well, I mean, one thing that I would point out is, that we actually got price increases when the industry was in deep trouble in the 2007 to 2010 time period. So we're really thinking across insurance cycles. And there should be a little reaction to where we are in the cycle, but, Mark pointed out that we're trying to -- we think of what we sell in Insurance as a whole. So there's all the DA solutions as well as the -- some are legacy solutions, but we really think about how is that whole bundle doing?

Unknown Analyst

Particularly to the extent that you do see opportunities outside of sort of the core risk analysis and so forth, I mean a lot of the competition, you're going to be running into when you seems likely are running, probably a lot more Analytics on less proprietary, maybe less relevant data sets, but they're running very high level of Analytics off that. But what extent do you see value in you doing that and integrating it with your proprietary data, what extent are you investing in some of those solutions?

Scott G. Stephenson

Absolutely. I mean, what, if you, again, sort of going back to the remarks that Frank has had us on, so the first one was, we had learn how to make money. As it related to kind of the scope of what we do, I think the 2 things that most have characterized, the last 10-plus years have been moving into a additional vertical markets, which we did, based on the confidence that we knew some things, we've had intellectual property that should transfer our costs or about [ph] value. It's really quite a privilege to be a data analytics company coming from a deep position in the P&C stage. Because you observe so much of the economy through the insurance mechanism. So one of the things we did was to move to an additional vertical markets, and other was to upgrade our Analytics a lot. I mean, we've really worked very hard at upscaling, with respect to Analytics. So more of that would just naturally make sense and that is what we hear about.

Unknown Analyst

This vision you've laid out in health care, in terms of being very broad, relative to your competition, particularly in the Enterprise area, it's a newer approach, trying to get people to think differently, respectively. Does the health care reform legislation help accelerate that, or does it just cause too much confusion as other people are looking at other parts of their business, prioritizing differently? Does it -- how do you handicap that?

Scott G. Stephenson

The reform is mildly positive for us as a company. Basically, the 2 things that it does is, one, is it causes more people to be insured, and our, as Joel pointed out, primarily, we deal with insurers. So their business is growing, at least in terms of headcount, naturally in that way. And the other thing is, the federal government has shown some interest in using data analytics more precisely, as it tries to risk adjust things like Medicare Advantage and reimbursement rates. So it kind of conditions markets to be a little more open to those kinds of analytics, so mildly positive. It's not -- I don't think it really changes our case, one way or the other. I would make a different point, and actually what I thought you were going to ask is, it is interesting that we have a very broad suite, and yet are smaller than some of the -- in terms of revenue than some of the legacy players in the marketplace. And what I'd like to say about that is, while I would not want to be compete with Verisk Analytics, for example, as the incumbent in the P&C market, because incumbency has a lot of the value in P&C, it's actually a pretty good place to be the attacker, inside of health care, and the reason is, that the legacy method, so far, has really sort of not looked all that good, in terms of producing the combination of quality outcome at cost, that those industry players would probably hope for. So between being neutral, as Joel pointed out, and bringing new solutions to the market, that's actually a pretty strong pace to be. It's much more, that Clayton Christiansen [ph] , an innovator's dilemma solution opportunity without discounting, by the way, I'd hasten to point that out, that the competition is not primarily on price. It's actually good to an attacker in health care space. So because if you just told me, you've got a broader portfolio and you're smaller than the other guy, I'd say, I don't know about that. But actually in health care, it holds together. It's a good place to be.

Mark V. Anquillare

I think the only other one [indiscernible] I'd mention about health care -- not reform -- but about the shifting landscapes that Joel highlighted was that I think you're seeing more risk being shifted to providers. So that creates -- not that we're very active there, but I think it's an opportunity for us and others.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Mark, would it be fair to ask that how MediConnect grew in the fourth quarter? Obviously, that's going to come into organic growth in the second quarter of next year, I mean this year, and do you feel like MediConnect will grow higher than the other health care pieces, or similar to the other health care pieces?

Mark V. Anquillare

So as we kind of go-to-market now, we've kind of combined both our revenue integrity solutions with MediConnect. So we're selling a broader solution that includes the medical report of it. So we feel good about that business. I think Joel highlighted, there is definitely nice momentum. We think it will continue. We saw some very strong growth as you can probably see from the public filings before and after. As MediConnect becomes bigger, it's just tough to continue to grow at the same percentage, but we think there is great opportunity in MediConnect, but more broadly, it's about that revenue integrity/revenue intelligence opportunity that we have going [indiscernible] .

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

And just one follow-up on it. One of the segments they -- I think you speak less about, when talking about contributor's growth of Enterprise Analytics. I think out of the 3 segments, it probably is the lower, or less awesome, grower of the 3. Is that accurate, and could that change?

Mark V. Anquillare

So I'm not going to get into very specifics. I think what we have seen is on back-end, as was described was some very strong growth, and what we've grown across-the-board organically, very well, the back end has been leading and growing faster than what was the front end Enterprise Analytics that we described. So yes, in a broad sense, I think if you actually looked at the market, try to take, kind of how big the market is, we threw a number up there, there's probably, biggest market, the biggest portion of the market is on [indiscernible] it is inside Enterprise Analytics. I'll use Verisk as an example, as a health care self-insured. Our health care costs continue to grow up. [indiscernible] We use some of the solutions, but it is an ongoing problem. It's not sustainable. So I think there's going to be, and continue to more inertia, around both health plans, but more importantly, pushed by employers that need to understand to get a control on cost. So I think it is a big opportunity in [indiscernible] .

Scott G. Stephenson

Well, check me on this, but in the fourth quarter of 2012, the strongest sales performance was Enterprise Analytics, wasn't it? Just in absolute sales dollars?

Mark V. Anquillare

It was in terms of the total contract value of sales. Yes, absolutely. And we still see it as a major contributor to our [indiscernible] . Expect to see that grow.

Unknown Analyst

Just a follow-up to that question on the 3 buckets of Healthcare. I know that you didn't want to talk about the different growth rates, but competitively speaking, do you think that 1 of the 3 really stands out as being better than the competitors? It sounded like in your comments about Enterprise Analytics, that, that's actually a very big end market, and given a small share, to me it sounded like, to me, that was a more competitive market, so just trying to get a sense of, and I think it's, what is it, revenue integrity enterprise...?

Mark V. Anquillare

Revenue quality.

Unknown Analyst

Revenue quality, and there's a third one,which I've forgotten.

Scott G. Stephenson

Joel do you want to -- and Kevin and team, do you guys want to talk about it? Nathan?

Joel Portice

Like every good father, I love all my children equally. So I think that from perspective of being competitive, I think each one of our areas has its own unique value proposition. And it's -- they're going to continue to work in the marketplace and in those core functions that they provide. It's the compelling story is when we bring this all together. And the compelling story is when we're able to really start cross-selling to our client base is somewhat their immediate needs are. And then, be able to keep those relationships sure, and keep those relationships flourishing by providing these additional services. So I again, I look at each one them, very competitive in the market place on their own. The real story is, how we're able to leverage them across all of clients.

Unknown Analyst

Just as a follow-up to that, is the idea that there may be 1 or 2 products there that are really terrific, kind of gateway products to Verisk Health, and are there any products where there's so much kind of back-end integration in terms of workflow management, in other words, it's not just, kind of a website that you go to, to run some analytics, that you've given a lot of data you get out of a lot of data, so, A, switching costs are very high, and then it's just to so much easier to take the next product from you guys than swapping everything out or just going with someone else?

Frank J. Coyne

So I think again, the whole rationale behind the initiative of the unified platform is just that, right? So the ability to be able to bring in data in a single format that we can use in multiple ways was part of the rationale in creating the unified platform. And then as we are able to then take that data, identify where there might be a gap for customers, and we're actively doing this today, where we have a client, that, for example, is using solutions in the Enterprise Analytics area. We analyze that data against our rules and our broad indicators, and come back to them, with their permission, of course, and come back to them and say, by the way we can provide some additional value here, and here's what it looks like. And the ability to turn that on in the shortness of the implementation, helps with that story. Now if there's something that they are -- they're using a competitor, it gives us also a really nice benchmark to say, here's the difference that we can provide on top of what you're already doing. So we've seen that to be a very successful tactic for us. So if there is a gateway, it is the data flow that comes with the unified platform.

Kevin Thompson

And one other comment on that, I think that's all the point solutions are distinctive in their own right, and competitive. I mean, typically only do an acquisition we're buying a best of breed company, at the point of acquisition, so there will be, we'll always be competitive, even a sort of single point of sales. I don't think anyone of them is any less good as a point of entry. Typically will get one product and there in that becomes the basis for a cross-sell going forward, but it could be something like DXDG, it could be something where these claims adjudication engine that came from Bloodhound, it's the initial four-way, or it could be 5 star, up in the Medicare Advantage, and all these things are intimately linked to one another, which where you could the system points that Joel has, that they're all -- it could be any of these are great tip of the spear and they're all competitive in their own right, and once you're in there, you do have a stickiness that's associated with people using your product. We'd like to think that sell the next product, not because of the first one, it's so hard to rip out, but because the experience with first one is so good, and because they are so well integrated, that works with the unified platform.

Scott G. Stephenson

All right. Well, why don't we tie it off there. Thank you very much for being here today. Thank you for your interest in Verisk. And the kiosks with the product demos will be open until 2:30 today, so I certainly encourage you to have some time there and thank you, again, for being with us.

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