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Verisk Analytics, Inc. (NASDAQ:VRSK)

Q2 2011 Earnings Conference Call

August 3, 2011 8:30 AM EST

Executives

Eva Huston – Treasurer and Head of IR

Frank Coyne – Chairman and CEO

Scott Stephenson – President and COO

Mark Anquillare – CFO

Analysts

Jim Kissane – Bank of America

Robert Riggs – William Blair

Eric Boyer – Wells Fargo

Michael Meltz – J.P. Morgan

Kelly Flynn – Credit Suisse

Bill Warmington – Raymond James

Suzanne Stein – Morgan Stanley

Matt Otis – KBW

James Friedman – Susquehanna

Operator

Good day, ladies and gentlemen, and welcome to Verisk Analytics Second Quarter 2011

Earnings Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Eva Huston, you may begin.

Eva Huston

Thank you, Latoya, and good morning to everyone. We appreciate you joining us today for the discussion of our second quarter 2011 financial results.

With me on the call this morning are Frank Coyne, Chairman and Chief Executive Officer; Scott Stephenson, President and Chief Operating Officer; and Mark Anquillare, Chief Financial Officer. Following some comments by Frank, Scott and Mark highlighting key points about our strategic priorities and financial performance, we will open the call up for your questions.

The earnings release referenced on the call as well as the associated 10-K can be found in the Investor 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 posted on our website and available by dial-in for 30 days until September 3rd, 2011.

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

And, with that, I will turn the call over to Frank Coyne.

Frank Coyne

Thank you, Eva, and good morning. In second quarter 2011, we delivered strong performance at 16.2% revenue growth and 24.2% adjusted diluted EPS growth. We performed well in many of our businesses and our recent acquisitions contributed as well. We were pleased to see Risk Assessment growth at 4.6% for the quarter and 4.5% year-to-date, as our continued value to customers is reflected in our revenue growth. Our insurance-facing solutions in Decision Analytics grew over 20% and 14% organically. Our healthcare solutions continued to show growth and we are working hard to implement our sold solutions for clients which will allow recognition of contracted revenue. Supply chain remains an area of focus and promise for us.

Overall, our organic growth was 8.8%, a meaningful improvement versus first quarter 2011. We improved Decision Analytics organic growth in Q2 to almost 13%, driven by both improved growth from insurance-facing solutions as well as a return to positive growth for our mortgage solutions. The mortgage market continues to represent a challenge for us as well as other companies. Mortgage insurers continue to confront difficulties achieving sufficient capital requirements, resulting in a major insurer recently announcing its potential inability to write new business without receiving an extension of a capital waiver. It is unclear at the moment how that may affect the broader mortgage market.

We are clearly focused on our mortgage business and managing it through the volatile macro environment. But even with the uncertainties in the mortgage marketplace, we believe the strength and diversity of our solutions across multiple verticals will lead to strong overall performance.

I said on our first quarter call that we expected to see improvement in total organic growth for full-year 2011 compared to first quarter results and we delivered improvement in the second quarter. Additionally, we continued to have strong conviction around our margin and overall profitability.

Excluding the recent acquisitions, our EBITDA margins in Q2 were almost 46%. Speaking of our acquisitions, we were excited to integrate both Bloodhound Technologies and Healthcare Partners into our various health solutions. We were making client calls with all these tools in hand and receiving good response.

In the quarter, we were also able to continue to drive what I believe is most important to delivering shareholder returns, EBITDA and free cash flow. We grew our total EBITDA by almost 16% and converted a large portion to free cash flow. In the quarter, we grew our diluted adjusted EPS by about 24%. As always, we’ve remained focus on delivering shareholder returns through growth in our businesses, disciplined acquisitions and our share repurchase program.

In the quarter, we invested a $141 million in new healthcare assets and purchased over a $140 million worth of shares, while also adding a new $150 million authorization. This level of repurchase was higher than in previous quarters as we saw opportunity to buy shares at an attractive price, bringing ourselves closer to our target capital structure. We believe our repurchase program has been successful and liked the flexibility it provides to ensure we can deploy our capital when prices are appropriate.

For the rest of 2011, we will remain focus on executing on the plan I laid out at our last call, namely growing insurance revenues through new solutions and cross-selling, further penetration in the healthcare space, managing our mortgage business in the face of a challenging macro environment, and creating shareholder value.

Scott has been spending a lot of time with our new partners Bloodhound and Health Risk Partners, who we call HRP. So I’ll ask him to share some perspectives on our newest addition HRP as well as our acquisition program and other corporate initiatives.

Scott Stephenson

Thank you, Frank. As you all are aware we’ve been busy on the M&A front, we’re very excited to add Bloodhound Technologies and HRP to our suite of healthcare analytic solutions. I spoke about Bloodhound on our last call and we continued to see the value in its real-time claims editing solution as well as the benchmarking tools and the end-process ROI available to their customers.

In June, we added another healthcare asset, Heath Risk Partners, who provide solutions that optimize revenue, ensure compliance and improve quality of care for Medicare Advantage and Medicaid plans. Recent data states that the United States will spend about $4.6 trillion on healthcare by 2020 and about 50% of that will be paid by the United States Government. By expanding our footprint to include more payment integrity solutions and tools that help health plans operate profitably, we are positioning to help with these daunting numbers which are obviously a challenge for our nation.

We have aspirations to continue to grow HRP at a nice pace from the base of around $15 million to $20 million of 2010 revenue. Although the margins are lower than the Verisk enterprise, we expect to drive higher margins in the future due to the operating leverage which is inherent in that business.

Talking more broadly about our acquisition program, we’re pleased to see good opportunities across multiple verticals and at a variety of sizes. We are open to transactions in all the verticals as well as the supply chain domain.

We’ve just spent a few days with all of our business leaders and innovation was a very strong topic of conversation and remains right at the top of mind for all of us. We continue to focus on making sure our investment dollars are being spent effectively and that we are aiming at transformational innovation for our customers as well as important incremental innovation to keep our products at the leading edge.

Let me turn it over now to Mark to talk about our financial results.

Mark Anquillare

Thank you, Scott. As Frank noted, in the second quarter, we delivered 16.2% revenue growth and 8.8% organic growth.

For the second quarter, our Decision Analytics segment revenue continued to lead with

26.7% growth. Decision Analytics organic revenue growth, which was 12.5% in the quarter, excludes the acquisition of Crowe Paradis, 3E, Bloodhound, and HRP.

Within Decision Analytics, our loss quantification solutions continue to stand out in this quarter with 34.7% revenue growth, all organic. We continued to benefit from our 2010 new contracts on the claims side. Also all the storms you read about helped our Xactware revenue as many customers submitted higher than usual claim volumes. We continued to see growth in underwriting tools and numerous solutions such as content estimation within loss quantification.

The revenue growth in fraud identification and detection was 17.5% for the second quarter and 7% organic. We continued to see solid performance in our insurance fraud and related solutions in the quarter and Crowe Paradis contributed. Our healthcare fraud assets continued to perform and their growth was bolstered by the addition of Bloodhound in the quarter. We remained focus on implementing signed contracts in our healthcare fraud tools.

The mortgage business delivered about 8% growth in the second quarter; a distinct improvement from the first quarter. Forensic audit revenues grew in the quarter based upon increased volumes from certain customers as we told you we expected last quarter. We continue to be in constant conversation with our forensic customers and prospects about their needs for the rest of 2011.

Underwriting solutions revenue declined in the quarter as mortgage originations in the market declined about 20% versus the second quarter of 2010. Year-to-date our total growth in mortgage was approximately 2%. Meaning, it will be a challenge for us to reach the 10% plus growth rate for 2011 we discussed last quarter. Uncertainty continues in the mortgage market with the latest news of certain mortgage insurers potentially being unable to write new business, because they do not meet minimum capital requirements. However, as Frank stated upfront, we are comfortable with other parts of our business will perform in 2011, leaving us optimistic about our overall business growth and profitability. We also continue to manage the expense side of our business closely.

In loss prediction, total growth was 39.3% for the second quarter and 7.7% organic. Our catastrophe modeling solutions continued to perform extremely well in the quarter and revenue from climate risk analytic solutions continued to grow nicely.

In healthcare, we had continued growth in the second quarter and we are seeing a positive response from customers under new solutions from HRP. We remain focused on generating new sales in healthcare. In 2011, we will benefit from the addition of 3E and HRP in the grouping.

As we discuss Decision Analytics, we have attempted to be responsive to investor questions that seemed focused on the vertical markets we serve. We currently show our Decision Analytics revenue in three themes, fraud identification, loss prediction, and loss quantification. In the future we are considering ways to provide even greater visibility into our vertical related groupings of insurance, mortgage and financial services, healthcare and specialized markets. We believe this will help our investors better understand the markets and how our customers profit from our information.

Turning to Risk Assessment, we grew revenue 4.6% in the quarter, a continuation of the growth we saw in the first quarter. About 84% of our revenue in Risk Assessment is based on subscriptions and long-term contracts, where our renewal rates are 99% recurring in fairly predictable revenue.

Our industry standard programs grew 5.7% in the quarter, a continued reflection of the value based price increases from January, and the moderation of premium declines at our customers, as well as customers expanding their use of industry standard programs in ancillary solutions. Our premium linkage solutions also continued to add to the growth. Our property specific information revenues grew 2.2%, reflecting new products, offsetting the lower volumes of certain customers we discussed in the first quarter.

EBITDA for the second quarter was $143.6 million as outlined in Table 3 of our press release. EBITDA increased 15.7% for the quarter and our EBITDA margin was at 43.9%. Our EBITDA includes a $3.4 million benefit from the reduction and earn-out liability for two of our acquisitions, Strategic Analytics and D2Hawkeye. The way we structure our announce is that they are paid for performance significantly above and beyond our internal forecast for those businesses at the time of the acquisitions. While the acquisitions both performed well, we do not believe they will exceed our 2011 earn-out targets to qualify for incremental payouts to sellers. While the year now has caused some unusual accounting beginning with acquisitions closed in 2009, we continue to believe that benefits out waive the negatives. The structure provides a bridge between our internal expectation for a business versus those of the seller, while helping align the goals of our new management team with the Verisk corporate objectives.

Our consolidated EBITDA margin was lower in the second quarter as we told it would be during our first quarter call. This is in large part due to our annual salary increases and higher stock option expenses resulting primarily from accelerate investing at age 62. Salary increases are an annual event, but I were to adjust for the increase in the option expense, the recent acquisitions and the reduced earn-out liability, the margin would have exceeded 45%. While the salary increases are obviously ongoing we will recruit some of the stock option expense later in the year as the accelerate investing means that we don’t have to expense those later.

In the quarter, our Risk Assessment margins were at 48.5% versus 49.3% in second quarter of 2010, and 52.8% in the first quarter. As we discussed in first quarter, we had incremental cost related to our annual salary increases beginning in second quarter as well as some accelerated stock option expense related to employees who attained age 62. Absent those items, the margin would have been over 52%. And margin in Decision Analytics has improved to 40.4% in the second quarter. The benefit of the earn-out liability adjustment which was all reflected in Decision Analytics was offset by increased salaries and option expense. Additionally, the margin was adversely impacted by 2.8% by the new acquisition in the second quarter.

Our healthcare, loss quantification and weather analytics businesses led to improvement in the underlying margin in the quarter.

Our interest expense was up a little more than $6 million versus 2010, as we increased our borrowings to fund acquisitions and share repurchases. Also, in the quarter, we closed on a new 10-year $450 million bond offering, which was at a fixed rate of 5.8%. We used the proceeds from the bond to pay down the full $295 million outstanding on our revolving bank debt, which remains available for re-borrowing, and the remaining cash of approximately $150 million was used to fund the Bloodhound acquisition, and we pay a maturing private placement. We’re very pleased to have tapped the market for long-term capital at historically low rates. We ended second quarter with $90 million of our $600 million revolving credit drawn.

Our reported effective tax rate was 39.9% for the quarter. For 2011, we continue to expect our tax rate will be between 40% and 41%.

Coming down to the net income line, we focus on adjusted net income line, a non-GAAP measure, which we define in the current period as net income plus acquisition-related amortization expense less the income tax effect on that amortization.

Our adjusted net income increased 13.4% to $70.9 million for the quarter. Adjusted EPS on a fully diluted basis was $0.41 for second quarter 2011, an increase of 24.2%. The average diluted share count was a 174.6 million in the quarter; and on June 30, 2011 our diluted share count was 172.8 million shares. We were active in the quarter with our repurchase program, purchasing approximately 4.3 million shares.

Turning to our balance sheet, as of June 30, our cash and cash equivalents were about $52 million. Total debt, both short-term and long-term, totaled just north of $1 billion at June 30, up about $200 million from the first quarter, reflecting our acquisitions totaling approximately $141 million as well as our share repurchases of a $144 million, partially offset by cash flow from operations

Our debt-to-EBITDA ratio was about 1.89 times debt to trailing 12 months EBITDA at year-end, well within our covenant levels of 3 times in approaching our target debt leverage of about 2 times. Our debt capacity is about $500 million even after executing our acquisitions and our 2Q share repurchases. Our capacity will continue to grow with our free cash flow generation and as we add EBITDA of the acquired companies.

At quarter-end, we had a 170.4 million remaining under a share repurchase authorization including the additional $150 million authorized by the Board in July.

Free cash flow in the first half of 2011, which we define as cash from operations less capital expenditures, was a $152.7 million, a decrease of $3.5 million versus six months of 2010. Operating cash flow increased 8.1% year-to-date despite an incremental pension funding of about $3 million in the first half of 2011.

As you remember, we discussed a major upgrade to our mainframe environment and related to software which increased CapEx in the first half. Our CapEx in the second quarter was lower as a percent of revenues than in the first quarter about 4.8%, but still a little higher than our historic levels as we’re making new investments from slight increases in client volumes and next-generation software solutions.

We continued our strong free cash flow conversion of EBITDA which was 54% in the first half of 2011.

With that, I’ll ask the operator to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from Jim Kissane of Bank of America. Your line is open.

Jim Kissane – Bank of America

Thanks and good job, guys. Was the improvement in mortgage primarily a function of resolving the bottleneck or do you see some of the stepped up volume from the GSEs and benefits of new contracts? And, maybe, just following on that, what’s a reasonable target for growth in mortgage this year? It sounds like you’re stepping off the 10% which very reasonable given what’s going on. But what’s the reasonable target?

Frank Coyne

Scott will take the first half of that and I’ll take the second.

Scott Stephenson

It was really two – well, you kind of answered your own question, Jim. The GSEs have been stepping their demand for our services and the bottleneck issue associated with the mortgage insurers also subsided, and that was the effect that we’re reciting as you know kind of fourth quarter last year, first quarter this year. So those are really the two things that principally explained where we came out in the second quarter.

Frank Coyne

Yes. And we’re obviously pleased with the second quarter 8% growth in the mortgage business, that’s a nice turnaround from the first quarter. But it is a 2% year-to-date, so it required an extraordinary performance in the second half to get to 10% for the year. The only thing I can say about mortgage at this time with certainty is that the uncertainty has increased as opposed to decrease since last we had spoke. But the value of our products is being demonstrated to our current customers and to new customers, so we like our business. But it would be I think a disservice to all of our stakeholders to try to predict what our growth is going to be for the rest of the year.

Jim Kissane – Bank of America

And then what kind of exposure do you have to these insurers to have some capital issues, is it material?

Frank Coyne

Jim, I think in the short run – in the short-term, the impact of the mortgage insurers’ inability to write new business if it comes about could be a positive to us as opposed to a negative. And, over time, I think all – the policymakers believe that mortgage insurance is important to a healthy real estate market and we know a housing market and we know that’s important to our economy. So it’s hard to predict where that’s going to turnout, but we don’t expect an immediate impact.

Jim Kissane – Bank of America

And, Frank, in the press release, you sounded a positive tone around P&C premiums.

Frank Coyne

Right.

Jim Kissane – Bank of America

Can you take a stab of where you think growth in P&C premiums can trend over the cycle?

Frank Coyne

Well I think Jim; I think it’s a continuation of what I observed last time. I think I said that we – at a minimum we had bottomed out. And I think what we’re seeing now is, is that by a line those that are in negative territory are less negative and there is more positive. So I think we’re going to continue to see the trends that we’re seeing in P&C which is positive for us.

Jim Kissane – Bank of America

Okay. If you don’t mind if I can get one last one. Just on D2 – D2Hawkeye and Strategic Analytics, it sounds like you have pretty aggressive earn-out targets, but would you say that those two companies are achieving your, let’s say, target for a 15% organic growth as I think about Decision Analytics?

Frank Coyne

What we’re seeing in those companies is they’re achieving our expectations. Our earn-outs are designed to pay for extraordinary performance and within a certain timeframe. And those companies did not achieve the extraordinary performance, but we think they are in track to satisfy the predictions that we put into our model.

Jim Kissane – Bank of America

Okay. Thank you very much.

Frank Coyne

Yes sir.

Operator

Thank you. Our next question is from Robert Riggs of William Blair. Your line is open.

Robert Riggs – William Blair

Good morning. Thanks for taking my question. You mentioned you are going through the implementation process on some of your recent wins in healthcare. I’m assuming in the early straight stages that’s a bit of a drag on profitability. About how long does it take to get to breakeven and to a more full run rate for those healthcare wins?

Mark Anquillare

Yes, the implementation phase it varies little bit by customer. But the right range to think about there is sort of 60 days to 90 days and that’s once kind of all the parameters of the implementation have been described, and so we are in the middle of a great deal of implementation activity right now, and I think that you should expect therefore that. And your observation is right that the – all the effort proceeds the revenue. So you should expect that we’re going to be in that mode for substantially all of 2011. There are 50 plus implementations that we’re working on right now just in the payment and integrity space. And so that will predominate for the rest of the year. 60 days to 90 days.

Scott Stephenson

And just to give a little more color. I mean this is in a large part of the fraud side of things where we go as fast as customers want to go. In some cases they operate by state or regions and they have rollout plans that span years because of – they intend to kind of rollout in a disciplined way. So don’t think of it is the rollout takes that long, it’s just that’s how it’s planned and phased by our customers in many cases.

Robert Riggs – William Blair

Okay, great. And then could you just comment on how the new business pipeline for healthcare looks maybe versus six months ago? And any notable examples where having Bloodhound and HRP are bringing new deals to the table?

Frank Coyne

Absolutely. Yes so the pipeline has definitely improved. Basically we’re just standing up even taller as a provider of a lot of the solutions that a healthcare payer would require now that we have got payment integrity, we have got medical intelligence, we have got enterprise analytics. So when you actually look at the landscape of healthcare data analytic vendors, we actually have a broader portfolio than many of – many of the others. So that positioning is helping us for getting additional attention.

With respect to the integration, we have live examples of customers who have observed that the range of things that we can do in payment and integrity all the way from pre-adjudication to the backend of the process has actually caused them to ask us to effectively integrate our solutions that on their behalf and it has led to some pretty substantial expansion of some of our largest relationships inside a healthcare. So the early returns are very good on what we have done.

Robert Riggs – William Blair

Great, thank you. Nice results.

Frank Coyne

Thank you.

Operator

Thank you. Our next question is from Eric Boyer of Wells Fargo. Your line is open.

Eric Boyer – Wells Fargo

Hi, thanks. I think Frank from your comments, it seems like you’re still expecting margins to be up year-over-year excluding the impact of acquisitions. Is that correct?

Frank Coyne

Yes.

Eric Boyer – Wells Fargo

And then, is it your expectation for organic revenue growth to continue to accelerate into the back half of the year, yet a nice pickup this quarter over the first quarter that you talked and you called that out last quarter?

Mark Anquillare

I’ll take that real quick. I think we talked about the organic growth accelerating from first quarter. Obviously mortgage does factor into that. But generally we do see some acceleration in the latter part of the year adjusted for some days and things like that from a transactional perspective that do affect us.

Eric Boyer – Wells Fargo

Okay. Then, within your healthcare portfolio products, could you just give us a sense of the type of organic growth or the pace of it expanding is it pretty much been stabled or slowing at all?

Frank Coyne

Yes. It’s – again we certainly think that the profile of organic growth for our business is improving. There is a lead time issue with respect to some of the implementations and the pipeline is getting stronger very quickly. So kind of when all of that – when all of that converges to actually goose the organic revenue growth rate is a little bit hard to predict, but it definitely is moving in the right direction.

Eric Boyer – Wells Fargo

Okay. I think you just said 2011 expect you have an implementations in 2012, I guess maybe something more a revenue.

Frank Coyne

We’ll get the benefit from the ’11 implementations that we’re driving.

Eric Boyer – Wells Fargo

Okay, great. And then, Mark, is there anything in the back half of the year we should be aware of as far as modeling?

Mark Anquillare

I don’t think there is anything material. I think – we think of days from an expense perspective as an example. Second quarter had an extra day from first quarter. And I believe that if were to look at the back half, we would see another day or two in the second half relative to the first. I think you’re also aware of the option expense that accelerate investing that we did experience in the second quarter, kind of dissipates a bit in the third and fourth quarter. Everything else is just kind of investment in adding any – adding bodies to kind of support growth as we progress through the year.

Eric Boyer – Wells Fargo

All right, thanks a lot.

Operator

Thank you. Our next question is from Michael Meltz of J.P. Morgan. Your line is open.

Michael Meltz – J.P. Morgan

Thank you. A couple of questions for you. Just the last guy – sorry for guy – the last analyst asked about an organic revenue acceleration. Mark do you – just to clarify your expecting acceleration versus the nine you did in Q2 or the eight you did in the first half, what’s the reference point, and the answer might be both, but I just want to be clear on that.

Mark Anquillare

Sure. I think what we are seeing is 6.6 in the first quarter, the 8.8 in the second which is about 7.7 overall. That – we have limited visibility on mortgage from the standpoint of pinpoint. I think that number for the rest of the year I think it feels about right. That’s – I’m not sure we have a greater visibility with regard to organic growth.

Michael Meltz – J.P. Morgan

So you think that 8 is a run rate is what you’re saying.

Mark Anquillare

Yes, as I said, I’m not going to get into the specifics. I think you asked – I think the question was whether we like to ramp whether we saw the expect – we expect organic growth to continue, we like where we are year-to-date. I mean that’s the direct comment.

Michael Meltz – J.P. Morgan

So you don’t – we shouldn’t be expecting an acceleration from the 9 in Q2.

Mark Anquillare

Not off the 2Q. I think we were – we were talking – I was talking about from a year-to-date perspective.

Michael Meltz – J.P. Morgan

Okay, okay. And then the question about mortgage, your – just to be clear, I know you don’t have the visibility you’d like, but you do expected to grow for the year.

Frank Coyne

Well, we don’t have the visibility we’d like, but – and I’ll tell you we spend a lot of time with our customers obviously, but an extraordinary amount of time whether the customers are trying to map out where they’re going. And what we’ve learned is they cannot predict where they’re going. So it’s very difficult for us to say what’s going to happen there in the mortgage business and that’s – it gets to the question that you were just asking Mark, the organic growth is impacted by our mortgage business. But it is 10% of our business and we’ve got a lot of confidence around the other 90%.

Michael Meltz – J.P. Morgan

Okay. And so to your question to Jim’s – or your answer to Jim’s question where you said the mortgage insurer that’s asked for the capital waive likely won’t hurt you. Is that – that’s just implying that they are not a large customer of yours, is that what you’re saying?

Mark Anquillare

No. What it really is implying that the services that we provide for them right whether they’re writing new business or not or still a valuable services that will continue and may even increase.

Michael Meltz – J.P. Morgan

Okay.

Frank Coyne

What we do for them Michael is more related to their existing book than the book that they’re building at any given moment. So we’re worked – we are working with them on issues that are currently there inside of mortgage insurance that they originated some point in the past. Yes, thanks for that clarification.

Michael Meltz – J.P. Morgan

Yes. And then – and so your point on mortgage that new originations are weak, they’ve been weak all year and that’s the uncertainty rather than a new wrinkle on the mortgage insurers side.

Frank Coyne

Yes. I think that certainly is our point currently, but the entire environment around mortgage and even the pressure on the originators and the banks on how they deal with their delinquencies is – it has an impact on timing, et cetera as to how quickly they may get turned over for – to us for auditing works. So there is a lot of moving parts there. But, yes, even though originations are down say 20%, our business is not – our business for originators is not down 20%. I mean we’re gaining new – we’re gaining new customers, we’re writing – we’re developing new products, our value proposition is strong. So though we’re going to go through a period of time with some bumpiness, we think it’s a very good business.

Michael Meltz – J.P. Morgan

Okay. And then my final question, I think with the recent acquisitions your pro forma, say roughly $100 million of healthcare revenues, can you just – given the – just talk a little bit about the mix. I mean how do you – I know – I’m not asking about fraud versus loss prevention, but if you think about it, I don’t know how you want to describe it, payment integrity versus benchmarking versus fraud or – or what buckets, how should we think about the buckets as to what your portfolio is right now?

Scott Stephenson

I think we – we just think of the frontend which is the loss protection side of healthcare being the combination of what has historically have been our operations that operate out of Waltham, it’s a Massachusetts based business that we’ve had for sometime, and HRP is more closely aligned with that side of the business. Separate and apart from that, we’ve talked about HCI which is our healthcare insights business which is on the fraud side of things, that’s being reporting fraud and fraud protection. And Bloodhound are too on the payment and integrity that claims editing business is probably more aligned with that backend and that [inaudible] inside of our themes, inside of Decision Analytics.

Michael Meltz – J.P. Morgan

And so frontend versus backend, what would be the rough revenue split?

Mark Anquillare

Yes. I think we’ve given you the HRP is in that – on an annual basis is between 20 –

Frank Coyne

15.

Mark Anquillare

15 and 20. We’ve also said that HRP is in that – excuse me, Bloodhound is in that $10 million range from backend. It’s about equally rated today and that’s the best way to describe it. Probably a little bit more on the frontend I think. Probably maybe 60/40.

Michael Meltz – J.P. Morgan

Okay. Okay, thank you for your time.

Mark Anquillare

Sure.

Operator

Thank you. Our next question is from Kelly Flynn of Credit Suisse. Your line is open.

Kelly Flynn – Credit Suisse

Thanks. A couple of questions. Well, I think you guys mentioned weather benefits during the quarter. Can you just give a little more detail on I guess quantifying that as possible and also just describing what went on and then how does that relate to how you think about the organic growth rate over the next couple of quarters, because exactly you’re using for flattening out or slowdown next quarter?

Mark Anquillare

Well, let me describe where it comes in. Inside loss quantifications, specifically the Xactware business is a piece of the business where people exceed in the most part minimums on volumes or claims coming through our tools. We do charge per transaction. So there was some severe storms that hit in the quarter and did drive revenue inside of the loss quantification.

Typically, storm activity takes place in that third and fourth quarter, so this was I wouldn’t say unusual but were heavier than usual, and that that did help us in the quarter. It’s a little difficult to estimate and predict storm activity into the future. I think third quarter and fourth quarter of 2010 were about average, I don’t think there was anything out of the ordinary so. And it’s tough to predict what will happen in 2011 going forward. But, hopefully, I think that helps you understand little bit about the nature of those revenues.

Frank Coyne

But we’re not assuming any significant climatic instability in our organic growth numbers.

Mark Anquillare

Right.

Kelly Flynn – Credit Suisse

Can you probably – can you quantify the impact on the organic growth for the quarter?

Mark Anquillare

Yes. I mean it’s difficult to tell relative to last year. You know that it was probably a couple million dollars of revenue.

Kelly Flynn – Credit Suisse

Okay. All right, that’s helpful. And then, again switching gears to go back to the mortgage business, I know that you’ve gotten a lot of questions about organic growth expectations. But I just – I want to clarify the – are you seeing anything and particularly related to the capital extension issue you mentioned that makes you fairly confident that the mortgage growth rate will decelerate over the next couple of quarters or are you just saying so far so good, but we are just calling out the uncertainty?

Frank Coyne

It’s more the latter that we’re calling out, which is, we’re observing the same macro environment that you are and we’re observing our own knowledge based on dealing with our customers that their plans change on – pretty depending on circumstances and so the predictability is very difficult.

Kelly Flynn – Credit Suisse

Okay, fair enough. Thanks guys.

Frank Coyne

You’re welcome.

Mark Anquillare

Sure.

Operator

Thank you. Our next question is from Bill Warmington of Raymond James. Your line is open.

Bill Warmington – Raymond James

Good morning and thank you for taking my question. I wanted to ask about what you are seeing in the way of M&A opportunities and whether you plan on you think pursuing them aggressively given that you read about 1.9 times gross debt to EBITDA, you have about 2 times target, although of course you could go up to 3 times. But what is your appetite for that now?

Frank Coyne

Very high. Mark was referencing our dry powder before, Bill, and that is a fact about our business. There are assets out there that fit our aspirations in terms of where we want to take our business thinking particularly about the healthcare and supply chain domains, those are likely to be the two places where the greatest amount of acquisition activity occurs, and we’re seeing good assets to fit where we’re trying to get to. Between the dry power and the ability to be flexible in the moment, we are very focused on the M&A agenda going forward.

Bill Warmington – Raymond James

Okay. And then, there were some references in the opening remarks to benefits in the insurance side from cross-selling. Just want to know if I could ask you to expand on that a little bit.

Frank Coyne

Well, I mean the cross-selling is a committed agenda on our part. And, basically, we are doing a variety of things to support the cross-sell. We take a holistic view of a customer, our sales teams are incentivized to try to get our whole suite sold into the accounts. We have executive ownership of our largest accounts. And, basically, if you take a look at that strong organic growth in the insurance part of Decision Analytics, most of that is the effect of cross-selling into the existing Risk Assessment customer base. So it’s a high focus, and to achieve that double-digit organic growth in Decision Analytics, that’s essentially the cross-selling.

Bill Warmington – Raymond James

Okay. And then, I wanted to ask also about risk analyzer and how that stands in the regulatory process and whether it’s too early to start talking about revenue generation for that in 2012?

Frank Coyne

It’s probably a little early to talk about that, but just to note a couple of things, we’re up to 28 approvals on risk analyzer for personal auto. Again, I think that’s kind of a – sort of a threshold for us will be when we are up to around 40, 45. Most of the premium across the country is embraced in the analytic. We’ve also started to get approvals on our risk analyzer for homeowners when where we’ve got – we’ve – we’re moved in two states, and we actually now stand really for the first time having made sales of the three lines that we have modeled.

We’ve now made – we’ve now got sales into lot – real customers for written for personal auto, for homeowners, and for commercial auto. So that’s a bit of a milestone in the build. But we’re still a bit – our value provision is tied strongly to the notion that our analytic is industrial strength and has been approved by the regulators. And, obviously, we are still in process on that. But there is a lot of interest in the marketplace. And as we get more regulatory approvals, we just think that the result will follow. But it’s – we can’t predict how quickly the state departments of insurance will respond, that’s the X factor here.

Bill Warmington – Raymond James

Excellent. And thank you for the insight.

Frank Coyne

You’re welcome.

Operator

Thank you. Our next question is from Suzanne Stein of Morgan Stanley. Your line is open.

Suzanne Stein – Morgan Stanley

Hi. You touched on the government’s impact. Can you just maybe quantify what percent of your revenues is exposed to the government and has there been notable change in this part of your business?

Frank Coyne

Yes. Less than 3% of our revenue is government contracts. And, no, there has not been any notable in the current contracts that we have with government. We believe based on information that they’re fully funded and so we don’t really expect any short-term issues.

Suzanne Stein – Morgan Stanley

Okay. And then in healthcare analytics, one of the – I guess a large competitor announced its intention to exit because it doesn’t think it can scale the business. Why do you think you can and have you seen any change in asset prices helped your acquisitions?

Frank Coyne

In reverse order, the prices for healthcare acquisitions have always been high relative to sort of what we see across all the vertical markets that we’re in. I wouldn’t say that there has been any change there, but they’ve always been premium priced assets. And I think that – I would point to two things about our position.

One is we do have a distinctive intellectual property operating inside of our business whether it’s on the payment integrity side with the only solution that allows you to get after the claims on a pre-adjudicated basis to our grouping methodology which stands inside of our medical intelligence analytics, the competitor that you’re referencing I just don’t think could make either of those claims.

And then, secondly, the healthcare is a place where it’s actually good to be a newer competitor. The value of incumbency is high in a lot of the things we do, but it’s much less so in the healthcare space, because customers are not only opened to, they’re actually seeking new solutions. So to be kind of an old form competitor with a big embedded base and a lot of investment in sort of yesterday’s methods is actually kind of a tough place to be. And that’s not our situation.

Suzanne Stein – Morgan Stanley

Great, okay. Thanks for taking my questions.

Frank Coyne

You bet.

Operator

Thank you. Our next question is from Matt Otis of KBW. Your line is open.

Matt Otis – KBW

Yes, good morning. Thanks for taking my questions. I guess not to believe the mortgage side of the business, but just a couple from that side. There has been some talking about consolidation in the mortgage insurance sector. Is that something since you guys look at the book of business, is that something that it could actually provide upside for you as well as if there was consolidation and some of the market players were looking at other companies from what’s in their current book of business?

Frank Coyne

The most likely impact would be positive.

Matt Otis – KBW

Okay, fair enough. I guess, simple question on the mortgage side. Can you give maybe a little bit of color on what percentage of mortgage goes directly to the mortgage insurers?

Mark Anquillare

I think we’ve always talked about frontend and backend. So the frontend audit, that presents good chunk of our business, it’s probably about 67% these days.

Matt Otis – KBW

Okay.

Frank Coyne

That is not all mortgage insurers.

Mark Anquillare

That is not all mortgage insurers, yes, in place.

Matt Otis – KBW

Right, right. And then, I think there was mention of, I know you were talking about from an M&A standpoint healthcare and supply chain being priorities, but I thought I heard you say that all vertical markets would be considered. Is that inclusive of mortgage?

Frank Coyne

It is, although, which means that the Sonar is banging away in all of the markets that we serve. I would just tell you that I just don’t think that there are a lot of distinctive assets that would provides the kind of reliable growth that we’re looking for so. And actually our portfolio of solutions is relatively more complete and the things that aren’t there, Matt, we would really be looking more to build than to buy. But, yes, we bang away, the Sonar bangs away in all cases.

I would also tell you that part of the thought process around mortgage is that I mean fundamentally we’re dealing with financial services organizations, and one of the things that is in the thought process is other lines of business that our customers are engaged in, and whether and how we could do business with them there. So if you’re defining it as mortgage narrowly, I think we actually cover the waterfront reasonably well. But when we extend out to a financial services definition, then the M&A opportunities actually open up a bit.

Matt Otis – KBW

Okay, great. And then, just lastly, I think I don’t know if you did earlier, but maybe Frank starts on the PMC pricing going forward in the back half of the year and into 2012.

Frank Coyne

Yes. I think it was probably Jim Kissane who had asked me early on. As I had observed in the past that I thought the market was bottoming out and beginning to turn in certain lines and we’re now seeing that trend, the trend is coming through in various survey and reports from various companies and we expect to continue to see that. And it could be accelerated by various factors. One is a continuation of climatic instability in the second half of the year which is normally when we see it if we have an active hurricane season and if inflation brings its head up then that will clearly have an impact.

Matt Otis – KBW

Okay. Very helpful. Thank you.

Frank Coyne

Yes sir.

Operator

Thank you. Our next question is from James Friedman of Susquehanna. Your line is open.

James Friedman – Susquehanna

Hi. I had a couple of model related questions. For the SG&A, it was up about 200 basis points. How much of that increase is due to the acquisition impact versus the increased compensation?

Mark Anquillare

So the – let’s talk about the piece parts. First of all I will highlight that we talked about the stock option expenses specifically accelerate investing, so that – a chunk of that does affect the SG&A side of things.

From a salary increase perspective to answer your question directly, that’s more across the board. It’s kind of inflationary in every place. I think of that 3.5% to 4.5% range. And inside SG&A to yield, you’ll have some cost associated with the acquisitions if you think about they’re in the acquisitions but I believe cost transaction fees that no longer are capitalized inside of the purchase accounting. So we need to expense that immediately and we saw some of that in the second quarter in the SG&A side of things.

Last item, I did mention earlier there was an extra expensed day in the second quarter relative to the first quarter. So if you’re doing a comparison not to last year but a comparison first quarter that is another element of it.

James Friedman – Susquehanna

That’s helpful, thank you. And then also related to the model as we go forward, what should we think about the impact to the recent acquisitions relative to the margins in the – the margins in the second half and into next year?

Mark Anquillare

Well, I think we – just trying to give you a little – let me give you some more visibility on HRP which is probably the number one [ph], Scott mentioned the $15 million to $20 million of revenue. You are going to see in the world of HRP they do have the lower margins think of 20s. Over time, we would expect that to ramp. But that will have some decrement on the margins within DA for the remainder of the year. We think it’s pretty nominal, but it’s something you would want to consider.

James Friedman – Susquehanna

Got it. Thank you very much.

Frank Coyne

Yes sir.

Operator

Thank you. (Operator Instructions).

Frank Coyne

All right, well, I want to thank everyone for joining us in the call of this morning and for your continued interest and for the quality of your questions, and looking forward to visiting with you again next quarter.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day.

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