Verisk Analytics' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Verisk Analytics (VRSK)

Verisk Analytics, Inc (NASDAQ:VRSK)

Q4 2013 Earnings Conference Call

February 26, 2014 08:30 ET

Executives

Eva Huston - SVP, Treasurer and Chief Knowledge Officer

Scott Stephenson - President & CEO

Mark Anquillare - CFO

Analysts

Tim McHugh - William Blair & Co

Manav Patnaik - Barclays Capital

Bill Warmington - Wells Fargo Securities

Andrew Steinerman - JPMorgan Chase

Andrew Jeffrey - SunTrust Robinson Humphrey

Suzanne Stein - Morgan Stanley

David Togut - Evercore Partners

Andre Benjamin - Goldman Sachs

Paul Ginocchio - Deutsche Bank

Jeff Silber - BMO Capital Markets

William Clark - KBW

Joseph Foresi - Janney Montgomery Scott

Operator

Good day, everyone, and welcome to the Verisk Analytics Fourth Quarter 2013 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Verisk's Senior Vice President, Treasurer and Chief Knowledge Officer, Ms. Eva Huston. Ma'am, please go ahead.

Eva Huston

Thank you Chantey. Good morning to everyone. We appreciate you joining us today for a discussion of our fourth quarter 2013 financial results. With me on the call this morning are Scott Stephenson, President and Chief Executive Officer; and Mark Anquillare, Chief Financial Officer. Following comments by Scott and Mark highlighting some key points about our strategic priorities and financial performance, we will open the call up for your questions.

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

We have also included in the back of our press release a reconciliation of continuing operations for the total as well as the quarterly detail for 2012 and 2013 excluding Interthinx.

The earnings release referenced on this call, as well as the associated 10-K, can be found in the Investors section of our website, at verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC. A replay of this call will be available for 30 days until March 26 on our website and by dial-in.

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

And now I will turn the call over to Scott Stephenson.

Scott Stephenson

Thank you Eva. Good morning everyone. The results we reported last night were in line with the expectations we discussed with you last quarter. We’re confident our long term prospects remain excellent and we continue to run the business with that time horizon in mind. Our view on this has been and will remain consistent. Our long term management of the business and our determination to innovate are very well aligned given that innovation works in long cycles. We’re eager to continue to invest in our innovation agenda which we expect to drive both top line and free cash flow growth overtime. We remain focused on our twin goals of organic growth through innovation and operating with efficiency and scalability. As you know we made several strategic moves over the past several months announcing the acquisition of EagleView Technologies Corporation or EVT and the sale of our mortgage services business Interthinx.

We continue to focus on being good stewards of our capital. On January 14, we announced the signing of an agreement to acquire EVT for a purchase price of $650 million. EVT is the parent company of both Pictometry International, a recognized leader in imagery, and EagleView which is well-known in the insurance industry. EVT is a leader in imagery analytics offering solutions in the property and casualty, contractor governance and commercial spaces.

While the nascent imagery business today is fragmented and populated by some large companies. We believe our expertise and experience offer an opportunity to differentiate ourselves in the use of imagery and solutions that enhance the efficiency of our customers’ businesses.

EVT has over 1 million square miles of images in the United States, covering 85% of the population and 90% of our structures, a very valuable asset with over 20 petabytes of data that has taken years to build.

As a reminder we see the natural development of the solution is moving from a catastrophe focus today to include non-cat claims, underwriting customers and commercial property risks. By combining EVTs claims solutions built on their comprehensive library of images with our own extensive insurance customer base and our industry knowledge, we can enhance the selling of these claims solutions in the insurance market, as well as move to develop automated underwriting solutions which do not exist today.

Customer reactions to our pending combination has been positive. As we discussed last month on the call regarding the acquisition EVT will be integrated into our Xactware division under the leadership of Jim Loveland. The regulatory and shareholder approval processes are underway, and we expect integration to begin soon as the transaction closes. As we have stated our strategy is to allocate capital to the highest return opportunities for shareholders and EVT is one of these opportunities.

The business has grown strongly leveraging the foundation of the government and municipal businesses into new markets in insurance and other commercial segments and we have significant opportunity to continue to grow the business, both in the United States and we believe over time, internationally. We remain consistent in our approach to acquisitions and we are focused on the strategic importance of the business to Verisk as the key driver in our decision to require EVT.

We remain focused on our core principle of creating shareholder value through innovation, discipline and execution. Earlier this month we signed a definitive agreement to sell our mortgage services business Interthinx to First American Financial Corporation for a price of $155 million cash subject to typical adjustments for among other things, the working capital of the business. We are currently awaiting regulatory approval, and expect to close by March 31.

Our IRR on our mortgage services business based on sale price of $155 million was greater than our typical 15% hurdle and similar to our return experience for our overall acquisition portfolio, which has IRR's of over 20% using our conservative, 10 times EBITDA terminal value. The sale of Interthinx will allow us to focus on businesses most closely aligned with our strategy of providing proprietary data analytics into our key verticals. The Interthinx's leadership team, headed by Jeff Moyer has done an excellent job responding to changes in the mortgage market and we wish them continued success as part of First American.

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

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

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

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

On a topic of investing for the future, we were very excited as we went through the 2014 budget cycle to see the number of ideas coming from our business units for creating new solutions and enhancing existing ones. We are fortunate to be able to green light many of these initiatives with the expectation of also maintaining strong margins.

In the fourth quarter of 2013 we delivered results which were in line with our expectations with total revenue growth of 7% all organic and a decline in diluted adjusted EPS of about 11% largely due to tax benefits seen in the prior period which did not recur in the current period. Full-year revenue and diluted adjusted EPS grew about 13% and 9% respectively. Our consolidated organic revenue growth for the full year was about 9%. Profitability was strong with an EBITDA margin, excluding Interthinx of 45.4% in the quarter and 46.7% for the full year. The margins were down versus the prior year as a result of investments we have been discussing with you and increased spending to meet customer demand at Verisk Health.

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

Mark Anquillare

Thanks Scott. For the fourth quarter we again delivered both revenue and EBITDA growth, we’re also investing in the future. Revenue grew 7.3% for the quarter ended December 31, 2013 all organic in 13.3% for the fiscal year 2013. Excluding the effect of 2012 acquisitions revenue grew 8.5% from fiscal year 2013.

Within the Decision Analytics segment, revenue grew 7.6% in the fourth quarter of 2013 all organic. Growth in the quarter was driven by strong performance in financial services primarily contributions from our Argus, which is now all organic. For the full year Decision Analytics revenue grew 18% and 9.8% on an organic basis. Within Decision Analytics our insurance category grew 7.3% for the fourth quarter of 2013 all organic, the increase was driven by strong growth in catastrophe modeling and insurance fraud claims solutions, whilst quantification solutions also added to the revenue growth. Overall growth was driven by the increased adoption of existing and new solutions and annual invoice increases for certain solutions.

We’re pleased we’re delivering acceleration in combined insurance revenue growth in 2013 consistent with our comment at the beginning of the year. Full year 2013 combined all RA and DA insurance revenue growth while 7.8% all organic.

In the financial services category, revenue grew 25.4% in the fourth quarter of 2013 for all organic and after classifying Interthinx as a discontinued operation. We sold both the automated and the forensic pieces of the mortgage business. We did retain a small business focus on portfolio analytics in the consumer loan space which is aligned with and will now be part of Argus.

Revenue increases were driven by demand of our analytic solutions and services. For the full year 2013 on a pro forma basis financial service revenue from continuing operations which is Argus and retain strategic analytics business grew 26.3%, Argus is a very ISO like business and serves as a trusted neutral intermediary using a contributory data model to upgrade analytics which are deeply embedded in our customer’s processes. The growth outlook at Argus remains positive. Including through international expansion and partnering opportunities as well as additional penetration of the existing customers. However we’re mindful of the larger base against which Argus will be growing in 2014.

In the healthcare vertical, revenue in the fourth quarter grew 6.9% all organic driven by growth across all the divisions led by Medicare Advantage related services. The results were a little better than expected as we’re able to meet customer demand. This came across with negative impact on fourth quarter DA margins although margins in healthcare remained healthy and scaling. As Scott mentioned we’re working with Verisk Health team to better prepare for future demand of our solutions. We continue to be excited about the opportunity in healthcare space and we expect growth to remain well above the corporate average.

We continue to manage towards mid-teens growth in 2014 and are working with our customers to jointly improve demand planning. In the specialized markets category, revenue declined 3.1% for the fourth quarter 2013 but grew 0.3% from full year. Good growth in the quarter EH&S and commercial weather in climate analytics were more than offset by lower activity related to government contract customers. The quarter came in better than we expected due to unanticipated project revenue in the environmental health and safety space. We’re pleased to see continuing traction in our efforts to repurpose our intellectual property to meet strong demand from P&C customers and think our formation of Verisk Climate will enhance our ability to capitalize on that. We think about AER and 3E’s options on the growing list of analytics on climate and supply chain and see them as longer term elements of our growth strategy.

Turning to risk assessment, for the fourth quarter we reported revenue growth of 6.7% all organic indicating the value to our long standing insurance customers. The overall increase within the segment is due in part to 4.5% revenue growth in industry-related insurance programs result in primarily from the continued annual effective growth in 2013 invoices effective January 1.

Property-specific rating and underwriting information revenue increased 14.7% in fourth quarter, growth as a result of new sales at higher committed volumes and incremental revenue contributions due to the expiring revenue sharing agreement with the technology provider in fourth quarter of 2012. Full year, risk assessment grew 6.7% driven by a 4.5% growth in industry standard insurance programs and 14.2% in property specific rating and underwriting information.

For the fourth quarter 2013 EBITDA excluding Interthinx grew 1.4% to a 189.3 million with an EBITDA margin excluding Interthinx at 45.4%. For fiscal year 2013 EBITDA excluding Interthinx grew 11% to 744.8 million. The EBITDA margin excluding Interthinx of 46.7%

There are some moving parts in 4Q related to our expectations. Our spending on aerial imagery in the quarter was below lower than planned as we deferred some image capture. However as I mentioned earlier we spent more than planned at Verisk Health in support of customer demand to meet deadlines. We have talked recently about the transaction nature of some of the Verisk Health business and that played a role. In addition the new leadership team at Verisk Health recognized the need for some operational adjustments to support variable customer demand and to move certain functions towards greater automation.

We still have work to do but the team only stands what needs to be done in executing against that plan. Decision Analytics EBITDA excluding Interthinx declined 5% in fourth quarter of 2013 and risk assessment EBITDA grew 9.7% versus same period in the prior year. Fiscal year 2013 EBITDA for DA excluding Interthinx grew 12.1% and risk assessment EBITDA grew 9.7%.

The fourth quarter of 2013 EBITDA margin excluding Interthinx for Decision Analytics decreased 38.5% from 43.6% in fourth quarter 2012 because of higher cost to meet transactional demand. The fiscal year 2013 EBITDA margin excluding Interthinx in Decision Analytics was 40.7% versus 42.8% in fiscal year in 2012.

The fourth quarter 2013 EBITDA margin in risk assessment increased 57% from 55.5% in the fourth quarter of 2012 as a result of the previously discussed revenue growth and good expense management. For fiscal year 2013 EBITDA margin risk assessment was 56.1% versus 54.6% in fiscal year 2012.

As you know following our divesture of Interthinx our margins are higher than they used to be. As we look forward we’re still comfortable with 2014 our EBITDA margins will be flattish versus 2013 EBITDA margins from continuing operations.

Over the long term we believe reasonable range for EBITDA margins is 45% to 47%. We expect the middle of this range would be our reference point as we think about investing opportunities in the future.

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

We estimated the after tax proceeds from the sale of Interthinx will be approximately a 125 million. Our effective tax rate was 37.3% for the quarter which was higher than the fourth quarter of 2012 due to a onetime tax planning benefits in the prior period. As discussed over the past several quarters we have been actively working on our tax planning strategy and realized benefits in both 2012 and 2013 from them. Consequently our full year 2013 effective tax rate was the same as 2012 rate of 36.5%.

In 2014 without the one-time benefits, we anticipate the rates to normalize around 38.5%. Adjusted net income decline 11.5% for the fourth quarter 2013 and increased 9.5% for the fiscal year 2013, declining the fourth quarter was largely due to tax benefits seen in the prior period which did not recur in the current period.

The average diluted share count was a 171.7 million shares in the quarter. On December 31, 2013 our diluted share count was 171.1 million shares. In the quarter we repurchased about 1.8 million shares for about a $116.9 million. At quarter end we had about a 165.3 million left under our authorization. Our share repurchase program has been successful to-date generating IRRs of over 25%.

For 2014 we continue to anticipate at a minimum buying shares offset dilution.

Turning to our balance sheet, as of December 31, 2013 our cash and cash equivalents were about 165.8 million, total debt both short term and long term totaled about 1.3 billion. Today our incremental tax capacity is over a $1 billion and it will grow with our EBITDA and free cash flow. Our debt to pro forma EBITDA at December 31 was 1.7 times below our steady-state target. With the acquisition of EVT and sale of Interthinx we anticipate our leverage to rise to about 2.3 times.

We will delever back to our target of 4 to 5 quarters after the close of EVT. As you know we’re willing to temporarily go above our long term target of 2 times debt to EBITDA to take advantage of unique opportunities because of our free cash is strong and allows us to delever quickly.

In 2013 free cash flow which we define as cash from operations of capital expenditures was 349.4 million and decrease of about 10% versus 2013. Free cash flow for 2013 is adjusted to the timing of excess tax benefits and prior year voluntary pension contribution was 394.6 million reflecting it's climb to 2.7% compared to prior year.

Our capital expenditures were a 107.5 million in 2013 consistent with what we discussed last quarter. Free cash flow represented 46% of EBITDA in 2013 lower than our historic average of 65% to 60% due to the increased CapEx.

As you will see in our 10K, our expectation for CapEx for 2014 is a 147 million down meaningfully from a 158 million in 2013. This is consistent with our comments during 2013 at but the elevated CapEx was temporary. Although we continue to expect a greater use of capitalized software related to new solutions will modestly raise the capital intensity of our business when compared to historic trends.

We continue to aim to grow free cash flow at or above for level of our EBITDA growth. As you think about your models for full year 2014 we anticipate amortization and tangibles was about $57 million. Fixed asset D&A of about $75 million to $80 million, the tax rate around 38.5%.

We aim to keep share count flat through our repurchase program. In a current debt balances our quarterly interest rate expense is about $17 million to $18 million. As we said on the EVT call in January you can model the debt cost associated with the acquisition of about 5.5%, net of the Interthinx sale we anticipate borrowing about $475 million although that number can change based on time of the close. After the close of EVT transaction we will update you.

Overall our business is performing well and we have a nice mix of growth from multiple verticals and we continue to invest for the future. With that I would like to ask the operator to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of Tim McHugh from William Blair.

Tim McHugh - William Blair & Co

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

Mark Anquillare

First of all I think we feel very good about insurance, we delivered this year on kind of some strong organic growth, I think we feel well positioned for 2014, as you were to think about the quarter relative to third quarter we did highlight the fact that there was some onetime lurk that was done in third quarter that we probably make a little bit of an consistency between third and four [ph]. Going back to 2012 there is a lot of pluses and minuses there, I think the general trend is one that we look to across the year and it was a positive one. There is nothing that is systematic that would cause you to be a concern that this quarter was below what it was a year ago.

Tim McHugh - William Blair & Co

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

Mark Anquillare

I think the answer to your question we continue to see improved growth in underwriting in the quarter just quite up to what we had seen in the first three quarters of the year in a little bit to the point I made just a moment ago.

Tim McHugh - William Blair & Co

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

Scott Stephenson

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

Tim McHugh - William Blair & Co

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

Scott Stephenson

Well we do plan ahead.

Tim McHugh - William Blair & Co

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

Scott Stephenson

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

Tim McHugh - William Blair & Co

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

Scott Stephenson

Right.

Operator

Your next question is from the line of Manav Patnaik with Barclays.

Manav Patnaik - Barclays Capital

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

Scott Stephenson

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

Manav Patnaik - Barclays Capital

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

Scott Stephenson

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

Manav Patnaik - Barclays Capital

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

Scott Stephenson

Well there are multitude of ways in which the Argus business grows which is one of the reasons why it's such a wonderful business in addition to the extremely propriety nature of the data they have got but the business consists of multiple sets of solutions that are provided to retail banks which include the basically the contributory data studies analytic solutions and a suite of services which are built around the analytics solutions as well as actually licensing the analytic platform that we have built back to some of our customers and all of that in the context of the opportunity to grow the business globally. In addition to all of that we’re increasingly finding ways to try to repurpose the data to tie in what’s happening in the retail banking channel with what’s happening in other vertical markets to specifically into the world of trying to observe patterns of consumer spending and how they respond to promotion and advertising whether it's broadcast or online.

And all of those are part of the Argus story and will continue to be as we go forward.

Operator

Your next question is from the line of Bill Warmington of Wells Fargo.

Bill Warmington - Wells Fargo Securities

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

Scott Stephenson

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

Bill Warmington - Wells Fargo Securities

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

Scott Stephenson

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

Bill Warmington - Wells Fargo Securities

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

Mark Anquillare

So let me take on a couple of questions, the share count and you asked specifically where the share count was at the end of the year that was 171.1.

Bill Warmington - Wells Fargo Securities

That's fully diluted?

Mark Anquillare

Highlighted that we would try to buy back shares to minimize any dilution at a minimum…

Bill Warmington - Wells Fargo Securities

Got it.

Mark Anquillare

In the year. I think we continue to feel very good about Argus, we highlighted that, we continue to feel that. There is multiple ways that they can expand both internationally into some new customer set as well as some new verticals as Scott highlighted. On a bigger base so we’re cautiously optimistic and I think we continue and kind of live by the mid-teens that we talked about.

Operator

Your next question is from the line of Andrew Steinerman with JPMorgan.

Andrew Steinerman - JPMorgan Chase

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

Scott Stephenson

Let me take the second question first and then I will turn it over to Mark for the first one about the profile but the way that we have built our view of 2014 is by looking at all of the customer relationships in place by the end of 2013 and having a I think a good view of how those are going to perform in 2014 and then taking a risk adjusted view of what we believe that sales pipeline is going to yield in 2014 and the very large majority upto 2014 case is built on the performance of business is already in place as we rounded the corner out of ’13 and into ’14. So that’s how we came up with our view of where we’re at and Mark if you want to talk about sort of the profile in ’14?

Mark Anquillare

Sure. I wish I can tell you it's a smooth ramp, I think it will continue to be a little bit of an up and down. Let me describe it a little bit why, first of all I think we already highlighted this because of the sweeps is focused on satisfying our customers’ demands around submitting the reimbursement, everything happens or a lot happens in the second half of the year. That is typically being around that 55% to 60% so continue to keep that in mind and what we’re doing this year in ’14 is trying to demand capacity plans hopefully little more effectively with our customers which would even out some of the volumes there between third and fourth quarter.

So I wish I could give you pointed information but I would continue to think about bias towards second half of the year with regards to overall revenue and third and fourth quarter hopefully we have a little bit more capacity planning which would drive a little more revenue in the third quarter, a little less in the fourth.

Andrew Steinerman - JPMorgan Chase

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

Mark Anquillare

That is the variable aspect of the healthcare business, that’s true.

Operator

Your next question is from the line of Andrew Jeffrey with SunTrust.

Andrew Jeffrey - SunTrust Robinson Humphrey

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

Scott Stephenson

So let me take that on, first of all I don’t want to over characterize in sort of any given period the degree to which we can actually shift the revenue mix from transactional to subscription. So you may be thinking about comments we have made where we would always have that in mind as a goal and over longer periods of time our experience has been that in data analytics business you do tend to move with time from transactional to subscription, partly because our customers would like to have relatively greater certainty about what it is that they are going to be paying us through time.

So that is a general view that we have on the business and a general ambition that we would have for the business, but we would not want to over characterize our ability in any given period to move the market in that way because particularly with something like Medicare Advantage where you have had such substantial expansion in transaction volumes, our customers would not really know exactly how to project where individually they're headed and therefore they wouldn't really know how to write subscription contract around that. So you may have heard us express that as a preference but I don't want to give you the impression that that's something that we feel can be moved around, you know, particularly strongly at any given moment in time.

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

Mark Anquillare

Maybe I can just add to real quickly to the characterization, what we tried to put in place was long term contracts that had committed volume minimums. So those minimums there that gives us comfort it also gives us a long term relationship but inside those committed minimums they are full year minimums so just trying to get from our customers that capacity it's smooth over the year, it still continues to be they give it to us as they think…

Scott Stephenson

In addition to which our ambition is to outperform the minimums and in some cases substantial.

Andrew Jeffrey - SunTrust Robinson Humphrey

And Scott, if you just take a sort of high-level view of the healthcare business given all the moving pieces, would you kind of characterize 2014 as a transition year or work in progress year because it sounds like there are some ongoing investments or adjustments that you are making at the same time that your revenue growth continues to be pretty robust? And do we think about the business perhaps evolving and maybe even taking on a more a different complexion, a more mature complexion from a margin standpoint as we get into ‘15? Is that kind of directionally the way to think about it?

Scott Stephenson

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

It's still an evolving and dynamic business and that’s in that is where the growth opportunity exists.

Operator

Your next question is from the line of Suzanne Stein of Morgan Stanley.

Suzanne Stein - Morgan Stanley

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

Mark Anquillare

I think I will just try to highlight that we continue to feel very good about the opportunities insurance and that’s not just in well I call the DA businesses that goes across into risk assessment and we I think we continue to think about the opportunity being across a full spectrum of the insurance customers. We have optimism fourth quarter from your point it was down a bit in fourth quarter. I don’t think there is anything systematic there, it was really a little bit inside of underwriting as we described and we have quite the growth there that we had in past. We continue to believe that all of those businesses including risk assessment have an opportunity to expand and grow. I will highlight one thing though as you think about risk assessment. We did have that service provider, that contract that expired in fourth quarter of 2012, it's about $12 million that will continue to be in our ’14 numbers but ’13 did experience a onetime growth because of that contract expiration.

Suzanne Stein - Morgan Stanley

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

Mark Anquillare

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

Suzanne Stein - Morgan Stanley

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

Mark Anquillare

So I think what I will highlight is that sometimes those special projects do kind of move revenue into a quarter and it's good news but the fact that projects are there usually leads to more opportunity, more intense relationship. So although they are a little bit one time I think it kind of has some promising aspects to it and I feel that both EH&S and from a commercial perspective the world of climate, I think, provides us some upside into ’14.

Operator

Your next question is from the line of David Togut from Evercore.

David Togut - Evercore Partners

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

Scott Stephenson

So first of all going back to what Mark had mentioned before when you look at continuing ops what we said is we think that 2014 will be flattish relative to what they were in ’13 for continuing ops. So that’s kind of the near term horizon, the long term horizon is Mark did talk about the range being 45 to 47 and that we’re kind of oriented around the midpoint. And the way we think about that is we are very determined to make sure that we see the top line growing organically while at the same time making sure that EBITDA and free cash are also advancing in-line and that free cash flow it's more than keeping up with EBITDA growth. So that’s kind of the equation we’re working and the sort of the good news about where we said is that as we ask for more innovation from the organization we’re actually getting it and so we’re in kind of in opportunity rich environment is what it feels like.

And so we’re leaning into the opportunities to invest. The one thing to bear in mind is that we are a business-to-business data analytics company. Our customers are sober minded, businesses who will diligence process and expect proof of concept before they buy into them and they should because they're trying to run their businesses with the steadiness and so the effect of all of that is that a great new solution can take a while to find it's way to market and so the balancing point then is we’re investing today and innovation tends to commercialize over longish periods of time in an environment like ours and so those are all the things that we will be playing with as we try to advance the business top and bottom line.

David Togut - Evercore Partners

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

Scott Stephenson

Well we’re still communicating the range that we talked about there, so we did talk 45 to 47 and we did talk about the midpoint being a reference for us and we’re going to actually take a count of real-time conditions on the ground basically as we move into ’15 and a lot of that has to do with just how innovative is our organization being.

David Togut - Evercore Partners

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

Scott Stephenson

So we really, one of the things that we talk about as frequently is that we really see the all of what we’re doing insurance as an as an integrated whole. When we sit down with our customers, our largest customers. We don't really tend to have when we’re having our relationship discussions they tend not to be focused on individual products whether they are RA or DA, it tends to really be the totality of relationship and so in that context what we’re looking for is the overall result, the overall organic results and therefore the, we’re certainly paying attention to what’s happening with each of the products line but we’re really looking for the overall result.

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

David Togut - Evercore Partners

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

Mark Anquillare

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

Operator

Your next question is from the line of Andre Benjamin of Goldman Sachs.

Andre Benjamin - Goldman Sachs

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

Scott Stephenson

So I did comment earlier about for customer situations from the third quarter and for the way that that generally is played out in the fourth quarter. But we’re generally, we’re really led by where the customers are and there are some customers that are going to be more concerned about knowing that they have capacity to flex if they find that their own volumes are moving and there are others who want to try to cut it more closely in terms of sort of not really laying in capacity but rather sort of in essence taking the risk that their needs can be met even if they haven't signaled them with great precision beforehand and so in that sense we’re just responding to what it is that the customers need and want, and I can’t say that I’m aware of any sort of major trends in that area one way or the other. Our preference always as I said before would be to have the certainty that it is associated with a license agreement and a subscription but that being our preference doesn’t mean that we can necessarily make that happen in the marketplace where it can be done, that would be our preference but we’re following our customers around in this regard.

Andre Benjamin - Goldman Sachs

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

Scott Stephenson

At Investor Day we’re going to actually talk a little bit more about what’s going on inside of the pool data initiative and I think you will benefit from hearing about that directly from our people in the business.

Operator

Your next question is from the line of Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank

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

Mark Anquillare

I’m not sure we do those conclusions, let me just kind of go back at, we did spend a little less on aerial imagery as we kind of got towards the end of the year whether it's flying conditions or flight plans. There is an opportunity you know to not gather as much information as we had anticipated that they push off and we will push off into 2014 that is a fact. As far as the margins into 2014 I’m not sure we’re going to start commenting by quarter I think we tried to give you a little bit of color for ’14, we have a view that this should be generally flattish. Scott highlighted that from a DA perspective we will see some scale there so he has talked about flattish plus and from an RA perspective I think we do kind of expect and see a little bit of some ramping investment in RA. So probably you won't see the same type of scale in RA in ’14 that probably saw on ’13 that was overall characterization.

Paul Ginocchio - Deutsche Bank

And then just on that aerial push out, does that mean it is coming in the first quarter or any way to size that just so we can try to model it?

Mark Anquillare

Yeah I’m not sure we exactly know the timing of that right now, it's certainly in the first half of ’14, yes.

Paul Ginocchio - Deutsche Bank

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

Scott Stephenson

We’re always taking into account all the moving parts in the business. So we will be working on that with our Board and the comp [ph] committee et cetera to determine where the target should be put but generally we want the targets to reflect the reality of where the business is. We will definitely spend time on that.

Operator

Your next question is from the line of Jeff Silber with BMO Capital.

Jeff Silber - BMO Capital Markets

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

Scott Stephenson

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

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

Jeff Silber - BMO Capital Markets

And can you just remind us when you think the EVT transaction will be closing?

Scott Stephenson

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

Operator

Your next question is from the line of Hamzah Mazari of Credit Suisse

Unidentified Analyst

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

Scott Stephenson

You mean across the entire business?

Unidentified Analyst

Yes.

Mark Anquillare

Let me take the first, I think that many of our businesses don’t really institute price increases as I think about healthcare as an example. Maybe focus in a little bit on is inside of our P&C business, some of our traditional industry standard programs we have kind of a January one invoice that comes out. I think what we have tried to do is we have highlighted time and time again and said we think of insurance customers are selling and buying a large group of products from us and those invoices around industry standard programs, we've tried to keep the approach consistent.

We haven't done anything that would cause them, you have to really think too hard about those invoices, we want them to think about new products in extension of solution across the full suite of the enterprise in Verisk. So business as usual I would say on the risk assessment side of pricing and that would be true of also our what I call claims search invoices that's inside of our Decision Analytics set of solutions for insurance.

Unidentified Analyst

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

Scott Stephenson

So first of all we remain very focused on that part of the agenda. We believe that it's been very value adding for our investors over a long period of time and as long as we continue to operate strategically inside of that agenda. We think it will continue to be a value creating for our shareholders. We see opportunities across all the vertical markets to try to support and amplify what it is that we’re doing on the acquisition front.

So I wouldn’t really buttonhole it anywhere. As we have said in the past because of where we fit in the healthcare space today there are certainly a very large number of companies out there that would logically be on our radar screen and at Investor Day we will talk a little bit more also about the way that we partner in order to relate to that world. And so partnering is also sort of an early step in the M&A agenda. But we see it as a very broad based, a very broad based kind of activity. If I was to point at any trends I suppose there would be and you can just see this in what we have done the size of the deals have gotten somewhat larger and I think that’s likely to remain the case, that’s not to say that we won't do smaller tuck-ins but our deal size has gotten somewhat bigger and I think it's likely to continue to be that way.

Operator

Your next question is from the line of William Clark with KBW.

William Clark - KBW

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

Scott Stephenson

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

William Clark - KBW

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

Scott Stephenson

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

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

Operator

Your final question comes from the line of Joseph Foresi of Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

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

Scott Stephenson

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

So that applies to all the different lines of business we do, all the different solutions and all the different customers that we serve but what we have really tried to emphasize is we must do high quality work at these very highly elevated volumes that we have achieved over the last couple of years and that everything else follows that, our growth follows that everything is dependent upon that and I have been very happy with the amount of attention that the entire team has given to all of that.

I mean it's everything, if I was to try to give it to you functionally, the categories are the same as everything that we do. We have got to extract, transform and load data, we have to interpret data, have to then analyze data. We then have to create platforms by which we deliver data and analytic back to our customers. And one of the things on top of that that we have the opportunity to do in the healthcare space particularly it's normalized the data that comes in for different reasons but to normalize so that we have one common set of data definitions and we have achieved that. But it's the all of that, it's not as if there is just one thing where if you pull on the lever all of a sudden it works the way that it's supposed to. It's a very complicated business and it's a very complicated set of steps to get the results that our customers want.

So it's a big agenda, we have got a good team that’s very actively on that.

Joseph Foresi - Janney Montgomery Scott

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

Mark Anquillare

I think I will go back to I will highlight one 2013 items that we mentioned this about $12 million item that came into ’13 it will continue into ’14 but there won't be any growth. That item was related to a service provider that expired the contract that expired in ’12. We feel across the insurance operations, very strong. So we feel good. The fourth quarter was a couple of items, primarily inside of I will call it underwriting but the DA insurance business is performing well. It was, you know 4Q is higher than 1Q it's on the right ramp it's on the right trend and I would just highlight you that there is nothing systematic in what you see there. It is over the long term, over the year. I think we will continue to deliver in insurance, I think we’re getting into the right type of conversations with our customers you know walking at the very senior levels having conversations about climate, about their book of business, around profitability. That puts us in a great position to really talk about the suites of solutions that we have to help them really profit.

So I think we’re making progress.

Joseph Foresi - Janney Montgomery Scott

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

Scott Stephenson

Well I think that what we did there certainly relates to the principles that we run the business by and I would say always have run the business by. We want to be very differentiated with respect to our intellectual property and our proprietary data and analytics and we would like to be facing markets that are inherently healthy, relatively non-cyclical. We’re very focused on competitive advantage and, so essentially our view of who we are as a business has not changed at all.

What moved was just the underlying market being served by our mortgage business. I think we have talked in the past about the fact that transaction volumes in the mortgage market as recently as 2006 were about four times as large as they are today. And so we just needed to take account of that as we thought about our allocation of capital and put that in the context of all the other ways that we can deploy capital and just drew the conclusion that we had a greater number of opportunities given who we’re in other marketplaces, but fundamentally I'm very impressed with our management team and everything and I think that First American will be a very logical home for the business.

So now just all of that was a part of our sort of decisioning and so I'm not sure that I could really point to any lessons that we have learned from that. I feel like it's the logical extension of what we've always been doing which is trying to behave strategically and to be very thoughtful about where our capital is deployed.

Operator

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

Scott Stephenson

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

Operator

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

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