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Verisk Analytics, Inc. (Insurance Services Office, Inc.) 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2009. The filing reflects the financial position of Insurance Services Office, Inc. ("ISO") prior to its reorganization into Verisk Analytics, Inc. ("Verisk") and its Initial Public Offering (IPO) completed on October 9, 2009. Verisk serves as the parent holding company, providing proprietary data and analytic solutions for risk management in the U.S. property and casualty insurance, mortgage, and healthcare industries. The company operates through two segments: Risk Assessment and Decision Analytics.

Key Financial Metrics

Note: All share and per share data has been adjusted to reflect a 50-for-1 stock split.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 15.1% year-over-year for the nine months ended September 30, 2009. The Decision Analytics segment drove this growth with a 30.2% increase, while Risk Assessment grew 3.8%.
• Acquisitions: The company acquired D2 Hawkeye (January 2009) and TierMed Systems (July 2009), contributing approximately $24.6 million to nine-month revenues. These acquisitions expanded capabilities in healthcare analytics and fraud detection.
• Profitability: Net income increased 9.3% to $133.1 million. However, the effective tax rate rose to 43.0% (from 42.6%) due to revisions in estimated state tax liabilities.
• Expense Increases: Cost of revenues rose 16.9% and SG&A expenses rose 21.3%, driven by salary increases, pension costs (impacted by the 2008 economic downturn), and costs associated with new acquisitions.
• Debt Structure: The company entered a new $300 million syndicated revolving credit facility (later expanded to $420 million) and settled $100 million in Prudential Series D senior notes by issuing new Series J notes.

Guidance, Outlook, and Risks

• Post-IPO Adjustments: Following the October 2009 IPO, the company expects a non-recurring non-cash charge of approximately $57.7 million in Q4 2009 related to the accelerated allocation of shares to the ESOP. This will substantially reduce future non-cash ESOP allocation expenses.
• Market Trends: Revenue in the Decision Analytics segment is tied to mortgage application volumes, which have been volatile. However, increased scrutiny in the mortgage industry has boosted demand for fraud detection solutions. The Risk Assessment segment is sensitive to P&C insurance premium growth, which has slowed.
• Liquidity: The company maintains a working capital deficit due to the prepayment nature of its subscription model. Management believes cash from operations and available credit facilities ($295 million remaining capacity) are sufficient to meet needs.
• Legal Proceedings: The company is involved in several class-action lawsuits (e.g., Claims Outcome Advisor, Xactware, iiX) regarding software usage and data privacy. While management believes it has strong defenses, outcomes remain uncertain and could materially impact results.

Key Facts for Investor Verification

• ESOP Impact: Verify the timing and tax implications of the $57.7 million non-cash ESOP charge expected in Q4 2009.
• Acquisition Integration: Monitor the revenue contribution and integration costs of the D2 and TierMed acquisitions.
• Debt Covenants: Review compliance with financial covenants, specifically the interest coverage ratio (minimum 3.0:1) and leverage ratio (maximum 3.0:1) under the new syndicated credit facility.
• Legal Exposure: Track the status of the Hensley, Schafer, Mornay, and Taylor litigation matters for potential settlement costs or judgments.
• Pension Costs: Assess the ongoing impact of the 2008 market downturn on pension plan assets and the resulting increase in periodic benefit costs.