UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31,
2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission file number
001-34480
VERISK ANALYTICS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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26-2994223
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification
No.)
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545 Washington Boulevard Jersey City, NJ
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07310-1686
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(Address of principal executive
offices)
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(Zip Code)
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(201) 469-2000
(Registrants telephone
number, including area code)
Securities registered pursuant to
Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A common stock $.001 par value
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NASDAQ Global Select Market
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Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check One):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of June 30, 2010, the last business day of the
registrants most recently completed second fiscal quarter,
the aggregate market value of the registrants common stock
held by non-affiliates of the registrant was $4,604,935,568
based on the closing price reported on the NASDAQ Global Select
Market on such date.
The number of shares outstanding of each of the
registrants classes of common stock, as of
February 25, 2011 was:
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Class
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Shares Outstanding
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Class A common stock $.001 par value
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143,107,036
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Class B (Series 1) common stock $.001 par
value
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12,225,480
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Class B (Series 2) common stock $.001 par
value
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14,771,340
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DOCUMENTS
INCORPORATED BY REFERENCE
Certain information required by Part III of this annual
report on
Form 10-K
is incorporated by reference to our definitive Proxy Statement
for our 2011 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission not later than
120 days after December 31, 2010.
Unless
the context otherwise indicates or requires, as used in this
annual report on
Form 10-K,
references to we, us, our or
the Company refer to Verisk Analytics, Inc. and its
subsidiaries.
In
this annual report on
Form 10-K,
all dollar amounts are expressed in thousands, unless indicated
otherwise.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Verisk Analytics, Inc., or Verisk, has made statements under the
captions Business, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and in other sections
of this annual report on
Form 10-K
that are forward-looking statements. In some cases, you can
identify these statements by forward-looking words such as
may, might, will,
should, expects, plans,
anticipates, believes,
estimates, predicts,
potential, or continue, the negative of
these terms and other comparable terminology. These
forward-looking statements, which are subject to risks,
uncertainties and assumptions about us, may include projections
of our future financial performance, our anticipated growth
strategies and anticipated trends in our business. These
statements are only predictions based on our current
expectations and projections about future events. There are
important factors that could cause our actual results, level of
activity, performance or achievements to differ materially from
the results, level of activity, performance or achievements
expressed or implied by the forward-looking statements,
including those factors discussed under the caption entitled
Risk Factors. You should specifically consider the
numerous risks outlined under Risk Factors.
Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of any of these
forward-looking statements. We are under no duty to update any
of these forward-looking statements after the date of this
annual report on
Form 10-K
to conform our prior statements to actual results or revised
expectations.
PART I
Our
Company
Verisk Analytics, Inc. enables risk-bearing businesses to better
understand and manage their risks. We provide value to our
customers by supplying proprietary data that, combined with our
analytic methods, creates embedded decision support solutions.
We are the largest aggregator and provider of detailed actuarial
and underwriting data pertaining to United States, or U.S.,
property and casualty, or P&C, insurance risks. We offer
solutions for detecting fraud in the U.S. P&C
insurance, healthcare and mortgage industries, and sophisticated
methods to predict and quantify loss in diverse contexts ranging
from natural catastrophes to health insurance.
Our customers use our solutions to make better risk decisions
with greater efficiency and discipline. We refer to these
products and services as solutions due to the
integration among our services and the flexibility that enables
our customers to purchase components or the comprehensive
package. These solutions take various forms,
including data, statistical models or tailored analytics, all
designed to allow our clients to make more logical decisions. We
believe our solutions for analyzing risk positively impact our
customers revenues and help them better manage their
costs. In 2010, our U.S. customers included all of the top
100 P&C insurance providers, numerous health plans and
third-party administrators, five of the six leading mortgage
insurers, and 16 of the top 20 mortgage lenders. We believe that
our commitment to our customers and the embedded nature of our
solutions serve to strengthen and extend our relationships.
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We help those businesses address what we believe are the four
primary decision making processes essential for managing risk as
set forth below in the Verisk Risk Analysis Framework:
The
Verisk Risk Analysis Framework
These four processes correspond to various functional areas
inside our customers operations:
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our loss prediction solutions are typically used by P&C
insurance and healthcare actuaries, advanced analytics groups
and loss control groups to help drive their own assessments of
future losses;
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our risk selection and pricing solutions are typically used by
underwriters as they manage their books of business;
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our fraud detection and prevention tools are used by P&C
insurance, healthcare and mortgage underwriters to root out
fraud prospectively and by claims departments to speed claims
and find fraud retroactively; and
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our tools to quantify loss are primarily used by claims
departments, independent adjustors and contractors.
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We add value by linking our solutions across these four key
processes; for example, we use the same modeling methods to
support the pricing of homeowners insurance policies and
to quantify the actual losses when damage occurs to insured
homes.
We offer our solutions and services primarily through annual
subscriptions or long-term agreements, which are typically
pre-paid and represented approximately 70.0% of our revenues in
2010. For the year ended December 31, 2010, we had revenues
of $1,138.3 million and net income of $242.6 million.
For the five year period ended December 31, 2010, our
revenues and net income grew at a Compound Annual Growth Rate,
or CAGR, of 11.7% and 14.9%, respectively.
Our
History
We trace our history to 1971, when Insurance Services Office,
Inc., or ISO, started operations as a
not-for-profit
advisory and rating organization providing services for the
U.S. P&C insurance industry. ISO was formed as an
association of insurance companies to gather statistical data
and other information from insurers and report to regulators, as
required by law. ISOs original functions also included
developing programs to help insurers define and manage insurance
products and providing information to help insurers determine
their own independent premium rates. Insurers used and continue
to use our offerings primarily in their product development,
underwriting and rating functions. Today, those businesses form
the core of our Risk Assessment segment.
Over the past decade, we have transformed our business beyond
its original functions by deepening and broadening our data
assets, developing a set of integrated risk management solutions
and services and addressing new markets through our Decision
Analytics segment.
Our expansion into analytics began when we acquired the American
Insurance Services Group, or AISG, and certain operations and
assets of the National Insurance Crime Bureau in 1997 and 1998,
respectively. Those organizations brought to the company large
databases of insurance claims, as well as expertise in detecting
and preventing claims fraud. To further expand our Decision
Analytics segment, we acquired AIR Worldwide, or AIR, in 2002,
the technological leader in catastrophe modeling. In 2004, we
entered the healthcare space by acquiring several businesses
that now offer web-based analytical and reporting systems for
health insurers, provider organizations and self-insured
employers. In 2005 we entered the mortgage sector, acquiring the
first of several businesses that now provide automated fraud
detection,
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compliance and decision support solutions for the
U.S. mortgage industry. In 2006, to bolster our position in
the claims field we acquired Xactware, a leading supplier of
estimating software for professionals involved in building
repair and reconstruction. In 2010, we acquired 3E Company,
creating a scale presence in supply chain and environmental
health and safety.
These acquisitions have added scale, geographic reach, highly
skilled workforces, and a wide array of new capabilities to our
Decision Analytics segment. They have helped to make us a
leading provider of information and decision analytics for
customers involved in the business of risk in the U.S. and
selectively around the world.
Our senior management operating team, which includes our chief
executive officer, chief financial officer, chief operating
officer, general counsel, and three senior officers who lead our
business units, have been with us for an average of almost
twenty years. This team has led our transformation to a
successful for-profit entity, focused on growth with our
U.S. P&C insurer customers and expansion into a
variety of new markets.
On May 23, 2008, in contemplation of our initial public
offering, or IPO, ISO formed Verisk Analytics, Inc., or Verisk,
a Delaware corporation, to be the holding company for our
business. Verisk was initially formed as a wholly-owned
subsidiary of ISO. On October 6, 2009, in connection with
our IPO, the company effected a reorganization whereby ISO
became a wholly-owned subsidiary of Verisk. Verisk Class A
common stock began trading on the NASDAQ Global Select Market on
October 7, 2009 under the symbol VRSK.
Segments
We organize our business in two segments: Risk Assessment and
Decision Analytics.
Risk
Assessment Segment
Our Risk Assessment segment serves our P&C insurance
customers and focuses on the first two decision making processes
in our Risk Analysis Framework: loss prediction and selection
and pricing of risk. Within this segment, we also provide
solutions to help our insurance customers comply with their
reporting requirements in each U.S. state in which they
operate. Our customers include most of the P&C insurance
providers in the U.S.
Industry-Standard
Insurance Programs
We are the recognized leader in the U.S. for
industry-standard insurance programs that help P&C insurers
define coverages and issue policies. Our policy language,
prospective loss cost information and policy writing rules can
serve as integrated turnkey insurance programs for our
customers. Insurance companies need to ensure that their policy
language, rules, and rates comply with all applicable legal and
regulatory requirements. Insurers must also make sure their
policies remain competitive by promptly changing coverages in
response to changes in statutes or case law. To meet their
needs, we process and interface with state regulators on average
over 4,000 filings each year, ensuring smooth implementation of
our rules and forms. When insurers choose to develop their own
alternative programs, our industry-standard insurance programs
also help regulators make sure that such insurers policies
meet basic coverage requirements.
Standardized coverage language, which has been tested in
litigation and tailored to reflect judicial interpretation,
helps to ensure consistent treatment of claimants. As a result,
our industry-standard language also simplifies claim settlements
and can reduce the occurrence of costly litigation, because our
language causes the meaning of coverage terminology to become
established and known. Our policy language includes standard
coverage language, endorsements and policy writing support
language that assist our customers in understanding the risks
they assume and the coverages they are offering. With these
policy programs, insurers also benefit from economies of scale.
We have over 200 specialized lawyers and insurance experts
reviewing changes in each states insurance rules and
regulations, including on average over 11,200 legislative bills,
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1,100 regulatory actions and 2,000 court cases per year, to make
any required changes to our policy language and rating
information.
To cover the wide variety of risks in the marketplace, we offer
a broad range of policy programs. For example, in the
homeowners line of insurance, we maintain policy language
and rules for six basic coverages, 178 national endorsements,
and 495 state-specific endorsements. Overall, we provide
policy language, prospective loss costs, policy writing rules,
and a variety of other solutions for 25 lines of insurance.
Property-Specific
Rating and Underwriting Information
We gather information on individual properties and communities
so that insurers can use our information to evaluate and price
personal and commercial property insurance, as well as
commercial liability insurance. Our property-specific rating and
underwriting information allow our customers to understand,
quantify, underwrite, mitigate, and avoid potential loss for
residential and commercial properties. Our database contains
loss costs and other vital information on approximately
3.0 million commercial buildings in the United States and
also holds information on approximately 5.8 million
individual businesses occupying those buildings. We have a staff
of approximately 600 field representatives strategically located
around the United States who observe and report on conditions at
commercial and residential properties, evaluate community
fire-protection capabilities and assess the effectiveness of
municipal building-code enforcement. Each year, our field staff
visits over 350,000 commercial properties to collect information
on new buildings and verify building attributes.
We also provide proprietary analytic measures of the ability of
individual communities to mitigate losses from important perils.
Nearly every property insurer in the U.S. uses our
evaluations of community firefighting capabilities to help
determine premiums for fire insurance throughout the country. We
provide field-verified and validated data on the fire protection
services for more than 46,000 fire response jurisdictions. We
also offer services to evaluate the effectiveness of community
enforcement of building codes and the efforts of communities to
mitigate damage from flooding. Further, we provide information
on the insurance rating territories, premium taxes, crime risk,
and hazards of windstorm, earthquake, wildfire, and other
perils. To supplement our data on specific commercial properties
and individual communities, we have assembled, from a variety of
internal and third-party sources, information on hazards related
to geographic locations representing every postal address in the
U.S. Insurers use this information not only for policy
quoting but also for analyzing risk concentration in
geographical areas.
Statistical
Agent and Data Services
The P&C insurance industry is heavily regulated in the
U.S. P&C insurers are required to collect statistical
data about their premiums and losses and to report that data to
regulators in every state in which they operate. Our statistical
agent services have enabled P&C insurers to meet these
regulatory requirements for over 30 years. We aggregate the
data and, as a licensed statistical agent in all
50 states, Puerto Rico and the District of Columbia, we
report these statistics to insurance regulators. We are able to
capture significant economies of scale given the level of
penetration of this service within the U.S. P&C
insurance industry.
To provide our customers and the regulators the information they
require, we maintain one of the largest private databases in the
world. Over the past four decades, we have developed core
expertise in acquiring, processing, managing, and operating
large and comprehensive databases that are the foundation of our
Risk Assessment segment. We use our proprietary technology to
assemble, organize and update vast amounts of detailed
information submitted by our customers. We supplement this data
with publicly available information.
Each year, P&C insurers send us approximately
2.8 billion detailed individual records of insurance
transactions, such as insurance premiums collected or losses
incurred. We maintain a database of over 15.8 billion
statistical records, including approximately 5.9 billion
commercial lines records and approximately 9.9 billion
personal lines records. We collect unit-transaction detail of
each premium and loss record, which enhances the validity,
reliability and accuracy of our data sets and our actuarial
analyses. Our proprietary quality process includes almost 2,500
separate checks to ensure that data meet our high standards of
quality.
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Actuarial
Services
We provide actuarial services to help our customers price their
risks as they underwrite. We project future losses and loss
expenses utilizing a broad set of data. These projections tend
to be more reliable than if our customers used solely their own
data. We provide loss costs by coverage, class, territory, and
many other categories. Our customers can use our estimates of
future loss costs in making independent decisions about the
prices charged for their policies. For most P&C insurers,
in most lines of business, we believe our loss costs are an
essential input to rating decisions. We make a number of
actuarial adjustments, including loss development and loss
adjustment expenses before the data is used to estimate future
loss costs. Our actuarial services are also used to create the
analytics underlying our industry-standard insurance programs
described below.
Using our large database of premium and loss data, our actuaries
are able to perform sophisticated analyses using our predictive
models and analytic methods to help our P&C insurance
customers with pricing, loss reserving, and marketing. We
distribute a number of actuarial products and offer flexible
services to meet our customers needs. In addition, our
actuarial consultants provide customized services for our
clients that include assisting them with the development of
independent insurance programs, analysis of their own
underwriting experience, development of classification systems
and rating plans, and a wide variety of other business
decisions. We also supply information to a wide variety of
customers in other markets including reinsurance, government
agencies and real estate.
Decision
Analytics Segment
In the Decision Analytics segment, we support all four phases of
our Risk Analysis Framework. We develop predictive models to
forecast scenarios and produce both standard and customized
analytics that help our customers better predict loss, select
and price risk, detect fraud before and after a loss event, and
quantify losses.
As we develop our models to quantify loss and detect fraud, we
improve our ability to predict the loss and prevent the fraud
from happening. We believe this provides us with a significant
competitive advantage over firms that do not offer solutions
which operate both before and after loss events.
Fraud
Identification and Detection Solutions
P&C
Insurance
We are a leading provider of fraud-detection tools for the
P&C insurance industry. Our fraud solutions improve our
customers profitability by both predicting the likelihood
that fraud is occurring and detecting suspicious activity after
it has occurred. When a claim is submitted, our system searches
our database and returns information about other claims filed by
the same individuals or businesses (either as
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claimants or insurers) that help our customers determine if
fraud has occurred. The system searches for matches in
identifying information fields, such as name, address, Social
Security number, vehicle identification number, drivers
license number, tax identification number, or other parties to
the loss. Our system also includes advanced name and address
searching to perform intelligent searches and improve the
overall quality of the matches. Information from match reports
speeds payment of meritorious claims while providing a defense
against fraud and can lead to denial of a claim, negotiation of
a reduced award or further investigation by the insurer or law
enforcement.
We have a comprehensive system used by claims adjusters and
investigations professionals to process claims and fight fraud.
Claims databases are one of the key tools in the fight against
insurance fraud. The benefits of a single all-claims database
include improved efficiency in reporting data and searching for
information, enhanced capabilities for detecting suspicious
claims and superior information for investigating fraudulent
claims, suspicious individuals and possible fraud rings. Our
database contains information on more than 700 million
claims and is the worlds largest database of claims
information. Insurers and other participants submit new claim
reports, more than 239,000 a day on average, across all
categories of the U.S. P&C insurance industry.
We also provide a service allowing insurers to report thefts of
automobiles and property, improving the chances of recovering
those items; a service that helps owners and insurers recover
stolen heavy construction and agricultural equipment; an expert
scoring system that helps distinguish between suspicious and
meritorious claims; and products that use link-analysis
technology to help visualize and fight insurance fraud.
Mortgage
We are a leading provider of automated fraud detection,
compliance and decision-support tools for the mortgage industry.
Utilizing our own loan level application database combined with
actual mortgage loan performance data, we have established a
risk scoring system which increases our customers ability
to detect fraud. We provide solutions that detect fraud through
each step of the mortgage lifecycle and provide regulatory
compliance solutions that perform instant compliance reviews of
each mortgage application. Our fraud solutions can improve our
customers profitability by predicting the likelihood that
a customer account is experiencing fraud. Our solution analyzes
customer transactions in real time and generates recommendations
for immediate action which are critical to stopping fraud and
abuse. These applications can also detect some organized fraud
schemes that are too complex and well-hidden to be identified by
other methods.
Effective fraud detection relies on pattern identification,
which in turn requires us to identify, isolate and track
mortgage applications through time. Histories of multiple loans,
both valid and fraudulent, are required to compare a submitted
loan both to actual data and heuristic analyses. For this
reason, unless fraud detection solutions are fueled by
comprehensive data, their practicality is limited. Our
proprietary database contains more than 18 million current
and historical loan applications collected over the past ten
years. This database contains data from loan applications as
well as supplementary third-party data.
Our technology employs sophisticated models to identify patterns
in the data. Our solution provides a score, which predicts
whether the information provided by a mortgage applicant is
correct. Working with data obtained through our partnership with
a credit bureau, we have demonstrated a strong correlation
between fraudulent information in the application and the
likelihood of both foreclosure and early payment default on
loans. We believe our solution is based upon a more
comprehensive set of loan level information than any other
provider in the mortgage industry.
We also provide forensic audit services for the mortgage
origination and mortgage insurance industries. Our predictive
screening tools predict which defaulted loans are the most
likely candidates for full audits for the purpose of detecting
fraud. We then generate detailed audit reports on defaulted
mortgage loans. Those reports serve as a key component of the
loss mitigation strategies of mortgage loan insurers. The recent
turmoil in the mortgage industry has created an opportunity for
growth in demand for our services, as we believe most mortgage
insurers do not have the in-house capacity to respond to and
properly review all of their defaulted loans for evidence of
fraud.
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Healthcare
We offer solutions that help healthcare claims payors detect
fraud, abuse and overpayment. Our approach combines
computer-based modeling and profiling of claims with analysis
performed by clinical experts. We run our customers claims
through our proprietary analytic system to identify potential
fraud, abuse and overpayment, and then a registered nurse,
physician or other clinical specialist skilled in coding and
reimbursement decisions reviews all suspect claims and billing
patterns. This combination of system and human review is unique
in the industry and we believe offers improved accuracy for
paying claims.
We analyze the patterns of claims produced by individual
physicians, physicians practices, hospitals, dentists, and
pharmacies to locate the sources of fraud. After a suspicious
source of claims is identified, our real-time analytic solutions
investigate each claim individually for particular violations,
including upcoding, multiple billings, services claimed but not
rendered, and billing by unlicensed providers. By finding the
individual claims with the most cost-recovery potential and also
minimizing the number of false-positive indications of fraud, we
enable the special investigation units of healthcare payors to
efficiently control their claims costs while maintaining high
levels of customer service to their insurers.
We also offer web-based reporting tools that let payors take
definitive action to prevent overpayments or payment of
fraudulent claims. The tools provide the documentation that
helps to identify, investigate and prevent abusive and
fraudulent activity by providers.
Loss
Prediction
P&C
Insurance
We pioneered the field of probabilistic catastrophe modeling
used by insurers, reinsurers and financial institutions to
manage their catastrophe risk. Our models of global natural
hazards, which form the basis of our solutions, enable companies
to identify, quantify and plan for the financial consequences of
catastrophic events. We have developed models, covering natural
hazards, including hurricanes, earthquakes, winter storms,
tornadoes, hailstorms, and flood, for potential loss events in
more than 50 countries. We have also developed and introduced a
probabilistic terrorism model capable of quantifying the risk in
the U.S. from this emerging threat, which supports pricing
and underwriting decisions down to the level of an individual
policy.
Healthcare
We are a leading provider of healthcare business intelligence
and predictive modeling. We provide analytical and reporting
systems to health insurers, provider organizations and
self-insured employers. Those organizations use our solutions to
review their healthcare data, including information on claims,
membership, providers and utilization, and provide cost trends,
forecasts and actuarial, financial and utilization analyses.
For example, our solutions allow our customers to predict
medical costs and improve the financing and organization of
health services. Our predictive models help our customers
identify high-cost cases for care- and disease-management
intervention, compare providers adjusting for differences in
health, predict resource use for individuals and populations,
establish health-based and performance-based payments, negotiate
payments and incentives, negotiate premium rates, and measure
return on investment.
We also provide our customers healthcare consulting services
using complex clinical analyses to uncover reasons behind cost
and utilization increases. Physicians and hospitals are adopting
and acquiring new technologies, drugs and devices more rapidly
than ever before. We provide financial and actuarial consulting,
clinical consulting, technical and implementation services and
training services to help our customers manage costs and risks
to their practices.
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Loss
Quantification
P&C
Insurance
We provide data, analytic and networking products for
professionals involved in estimating all phases of building
repair and reconstruction. We provide solutions for every phase
of a buildings life, including:
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estimating replacement costs during the insurance underwriting
process;
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quantifying the ultimate cost of repair or reconstruction of
damaged or destroyed buildings;
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aiding in the settlement of insurance claims; and
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tracking the process of repair or reconstruction and
facilitating communication among insurers, adjusters,
contractors and policyholders.
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To help our customers estimate repair costs, we also provide a
solution that assists contractors and insurance adjusters to
estimate repairs using a patented plan-sketching program. The
program allows our customers to sketch floor plans, roof plans
and wall-framing plans and automatically calculates material and
labor quantities for the construction of walls, floors, footings
and roofs.
We also offer our customers access to wholesale and retail price
lists, which include structural repair and restoration pricing
for 467 separate economic areas in North America. We revise this
information monthly and, in the aftermath of a major disaster,
we can update the price lists as often as weekly to reflect
rapid price changes. Our structural repair and cleaning database
contains more than 13,000 unit-cost line items. For each
line item such as smoke cleaning, water extraction and hazardous
cleanup, we provide time and material pricing, including labor,
labor productivity rates (for new construction and restoration),
labor burden and overhead, material costs, and equipment costs.
We improve our pricing data by analyzing the actual claims
experience of our customers to verify our estimates. We estimate
that more than 75.0% of all homeowners claims settled in
the U.S. annually use our solution. Such a large percentage
of the industrys claims leads to accurate pricing
information, which we believe is unmatched in the industry.
Our estimates allow our customers to set loss reserves, deploy
field adjusters and verify internal company estimates. Our
estimates also keep insurers, their customers, regulators, and
other interested parties informed about the total costs of
disasters. We also provide our customers access to daily reports
on severe weather and catastrophes and we maintain a database of
information on catastrophe losses in the U.S. since 1950.
Our
Growth Strategy
Over the past five years, we have grown our revenues at a CAGR
of 11.7% through the successful execution of our business plan.
These results reflect strong organic revenue growth, new product
development and selected acquisitions. We have made, and
continue to make, investments in people, data sets, analytic
solutions, technology, and complementary businesses. The key
components of our strategy include:
Increase Sales to Insurance
Customers. We expect to expand the
application of our solutions in insurance customers
internal risk and underwriting processes. Building on our deep
knowledge of, and embedded position in, the insurance industry,
we expect to sell more solutions to existing customers tailored
to individual insurance segments. By increasing the breadth and
relevance of our offerings, we believe we can strengthen our
relationships with customers and increase our value to their
decision making in critical ways.
Develop New, Proprietary Data Sets and Predictive
Analytics. We work with our customers to
understand their evolving needs. We plan to create new solutions
by enriching our mix of proprietary data sets, analytic
solutions and effective decision support across the markets we
serve. We constantly seek to add new data sets that can further
leverage our analytic methods, technology platforms and
intellectual capital.
10
Leverage Our Intellectual Capital to Expand into Adjacent
Markets and New Customer Sectors. Our
organization is built on nearly four decades of intellectual
property in risk management. We believe we can continue to
profitably expand the use of our intellectual capital and apply
our analytic methods in new markets, where significant
opportunities for long-term growth exist. We have already
demonstrated the effectiveness of this strategy with our
expansion into healthcare and non-insurance financial services.
We also continue to pursue growth through targeted international
expansion.
Pursue Strategic Acquisitions that Complement Our
Leadership Positions. We will continue to
expand our data and analytics capabilities across industries.
While we expect this will occur primarily through organic
growth, we have and will continue to acquire assets and
businesses that strengthen our value proposition to customers.
We have developed an internal capability to source, evaluate and
integrate acquisitions that have created value for shareholders.
Our
Customers
Risk
Assessment Customers
The customers in our Risk Assessment segment include the top 100
P&C insurance providers in the United States. Our
statistical agent services are used by a substantial majority of
P&C insurance providers in the U.S. to report to
regulators. Our actuarial services and industry-standard
insurance programs are used by the majority of insurers and
reinsurers in the U.S. In addition, certain agencies of the
federal government, as well as county and state governmental
agencies and organizations, use our solutions to help satisfy
government needs for risk assessment and emergency response
information. In 2010 our largest Risk Assessment customer
accounted for 4.8% of segment revenues and our top ten customers
accounted for 26.9% of segment revenues. See Item 13.
Certain Relationships and Related Transactions, and
Director Independence Customer Relationships
for more information on our relationship with our principal
stockholders.
Decision
Analytics Customers
In the Decision Analytics segment, we provide our P&C
insurance solutions to the majority of the P&C insurers in
the U.S. Specifically, our claims database serves thousands
of customers, representing nearly 93.0% of the P&C
insurance industry by premium volume, 26 state
workers compensation insurance funds, 607 self-insurers,
455 third-party administrators, several state fraud bureaus, and
many law-enforcement agencies involved in investigation and
prosecution of insurance fraud. Also, P&C insurance
companies using our building and repair solutions represent over
75.0% of the property market in the U.S. We estimate that
more than 80.0% of insurance repair contractors and service
providers in the U.S. and Canada with computerized
estimating systems use our building and repair pricing data.
In the U.S. healthcare industry, our customers include
numerous health plans and third party administrators. In the
U.S. mortgage industry, we have more than 900 customers. We
provide our solutions to 16 of the top 20 mortgage lenders and
five of the top six mortgage insurers. We have been providing
services to mortgage insurers for over 20 years. In 2010,
our largest customer in the Decision Analytics segment accounted
for 9.0% of segment revenues and our top ten Decision Analytics
customers accounted for 29.6% of segment revenues.
Our
Competitors
We believe no single competitor currently offers the same scope
of services and market coverage we provide. The breadth of
markets we serve exposes us to a broad range of competitors.
Risk
Assessment Competitors
Our Risk Assessment segment operates primarily in the
U.S. P&C insurance industry, where we enjoy a leading
market presence. We have a number of competitors in specific
lines or services.
11
We encounter competition from a number of sources, including
insurers who develop internal technology and actuarial methods
for proprietary insurance programs. Competitors also include
other statistical agents, including the National Independent
Statistical Service, the Independent Statistical Service and
other advisory organizations, providing underwriting rules,
prospective loss costs and coverage language such as the
American Association of Insurance Services and Mutual Services
Organization, although we believe none of our competitors has
the breadth or depth of data we have.
Competitors for our property-specific rating and underwriting
information are primarily limited to a number of regional
providers of commercial property inspections and surveys,
including Overland Solutions, Inc. and Regional Reporting, Inc.
We also compete with a variety of organizations that offer
consulting services, primarily specialty technology and
consulting firms. In addition, a customer may use its own
internal resources rather than engage an outside firm for these
services. Our competitors also include information technology
product and services vendors including CDS, Inc., management and
strategy consulting firms including Deloitte Consulting LLP, and
smaller specialized information technology firms and analytical
services firms including Pinnacle Consulting and EMB.
Decision
Analytics Competitors
In the P&C insurance claims market and catastrophe modeling
market, certain products are offered by a number of companies,
including Risk Management Solutions (catastrophe modeling),
LexisNexis/ChoicePoint (loss histories and motor vehicle records
for personal lines underwriting), MSB (property value and claims
estimator), and Explore Information Services (personal
automobile underwriting). We believe that our P&C insurance
industry expertise, combined with our ability to offer multiple
applications, services and integrated solutions to individual
customers, enhances our competitiveness against these
competitors with more limited offerings. In the healthcare
market, certain products are offered by a number of companies,
including Computer Sciences Corporation (evaluation of bodily
injury and workers compensation claims), Fair Isaac
Corporation (workers compensation and healthcare claims
cost containment) and Ingenix, McKesson and Medstat (healthcare
predictive modeling and business intelligence). Competitive
factors include application features and functions, ease of
delivery and integration, ability of the provider to maintain,
enhance and support the applications or services and price. In
the mortgage analytics solutions market, our competitors include
CoreLogic and DataVerify Corporation (mortgage lending fraud
identification). We believe that none of our competitors in the
mortgage analytics market offers the same combination of
expertise in fraud detection analytics and forensic audit
capabilities.
Development
of New Solutions
We take a market-focused team approach to developing our
solutions. Our operating units are responsible for developing,
reviewing and enhancing our various products and services. Our
data management and production team designs and manages our
processes and systems for market data procurement, proprietary
data production and quality control. Our Enterprise Data
Management, or EDM, team supports our efforts to create new
information and products from available data and explores new
methods of collecting data. EDM is focused on understanding and
documenting
business-unit
and corporate data assets and data issues; sharing and combining
data assets across the enterprise; creating an enterprise data
strategy; facilitating research and product development; and
promoting cross-enterprise communication. Our ISO Innovative
Analytics, or IIA, team is a center of excellence inside the
corporation for developing analytical methods in applying
modeling techniques to predict risk outcomes.
Our software development team builds the technology used in many
of our solutions. As part of our product-development process, we
continually solicit feedback from our customers on the value of
our products and services and the markets needs. We have
established an extensive system of customer advisory panels,
which meet regularly throughout the year to help us respond
effectively to the needs of our markets. In addition, we use
frequent sales calls, executive visits, user group meetings, and
other industry forums to gather information to match the needs
of the market with our product development efforts. We also use
a variety of market research techniques to enhance our
understanding of our clients and the markets in which they
operate.
12
We also add to our offerings through an active acquisition
program. Since 2006, we have acquired 15 businesses, which have
allowed us to enter new markets, offer new products and enhance
the value of existing products with additional proprietary
sources of data.
When we find it advantageous, we augment our proprietary data
sources and systems by forming alliances with other leading
information providers and technology companies and integrating
their product offerings into our offerings. This approach gives
our customers the opportunity to obtain the information they
need from a single source and more easily integrate the
information into their workflows.
Sales,
Marketing and Customer Support
We sell our products and services primarily through direct
interaction with our clients. We employ a three-tier sales
structure that includes salespeople, product specialists and
sales support. As of December 31, 2010, we had a sales
force of 268 people. Within the company, several areas have
sales teams that specialize in specific products and services.
These specialized sales teams sell specific, highly technical
product sets to targeted markets.
To provide account management to our largest customers, we
segment the insurance carrier market into three groups.
Tier One or National Accounts constitutes our
largest customers, Tier Two or Strategic
Accounts represents both larger carrier groups and middle-market
carriers. Tier Three are the small insurance companies that
may represent one line of business
and/or
regional writers for a few states. A Sales Generalist is
assigned to every insurer account and is responsible for our
overall relationship with these insurance companies. Our senior
executives are also involved with the senior management of our
customers.
Salespeople participate in both customer-service and sales
activities. They provide direct support, interacting frequently
with assigned customers to assure a positive experience using
our services. Salespeople primarily seek out new sales
opportunities and work with the various sales teams to
coordinate sales activity and provide the best solutions for our
customers. We believe our salespeoples product knowledge
and local presence differentiates us from our competition.
Product specialists are subject-matter experts and work with
salespeople on specific opportunities for their assigned
products. Both salespeople and product specialists have
responsibility for identifying new sales opportunities. A team
approach and a common customer relationship management system
allow for effective coordination between the two groups.
Sources
of our Data
The data we use to perform our analytics and power our solutions
are sourced through six different kinds of data arrangements.
First, we gather data from our customers within agreements that
also permit our customers to use the solutions created upon
their data. These agreements remain in effect unless the data
contributor chooses to opt out and represent our primary method
of data gathering. It is very rare that contributors elect not
to continue providing us data. Second, we have agreements with
data contributors in which we specify the particular uses of
their data and provide to the data contributors their required
levels of privacy, protection of data and where necessary
de-identification of data. These agreements represent no cost to
us and generally feature a specified period of time for the data
contributions and require renewal. Third, we mine
data found inside the transactions supported by our solutions;
as an example, we utilize the claims settlement data generated
inside our repair cost estimating solution to improve the cost
factors used in our models. Again, these arrangements represent
no cost to us and we obtain the consent of our customers to make
use of their data in this way. Fourth, we source data generally
at no cost from public sources including federal, state and
local governments. Fifth, we gather data about the physical
characteristics of commercial properties through the direct
observation of our field staff that also perform property
surveys at the request of, and facilitated by, property
insurers. Lastly, we purchase data from data aggregators under
contracts that reflect prevailing market pricing for the data
elements purchased, including county tax assessor records,
descriptions of hazards such as flood plains and professional
licenses. In all our modes of data collection, we are the owners
of whatever derivative solutions we create using the data. Our
costs of data received from our customers were 1.7% and 1.9% of
revenues for the years ended December 31, 2010 and 2009,
respectively.
13
Information
Technology
Technology
Our information technology systems are fundamental to our
success. They are used for the storage, processing, access and
delivery of the data which forms the foundation of our business
and the development and delivery of our solutions provided to
our clients. Much of the technology we use and provide to our
customers is developed, maintained and supported by
approximately 1,050 employees. We generally own or have
secured ongoing rights to use for the purposes of our business
all the customer-facing applications which are material to our
operations. We support and implement a mix of technologies,
focused on implementing the most efficient technology for any
given business requirement or task.
Data
Centers
We have two primary data centers in Jersey City, New Jersey and
Orem, Utah. In addition, we have data centers dedicated to
certain business units, including AIR and Verisk Health in
Boston and AISG Claimsearch in Israel. In addition to these key
data centers, we also have a number of smaller data centers
located in other states.
Disaster
Recovery
We are committed to a framework for business continuity
management and carry out annual reviews of the state of
preparedness of each business unit. All of our critical
databases, systems and contracted client services are also
regularly recovered. We also have documented disaster recovery
plans in place for each of our major data centers and each of
our solutions. Our primary data center recovery site is in New
York State, approximately 50 miles northwest of Jersey
City, New Jersey.
Security
We have adopted a wide range of measures to ensure the security
of our IT infrastructure and data. Security measures generally
cover the following key areas: physical security; logical
security of the perimeter; network security such as firewalls;
logical access to the operating systems; deployment of virus
detection software; and appropriate policies and procedures
relating to removable media such as laptops. All laptops are
encrypted and media leaving our premises that is sent to a
third-party storage facility is also encrypted. This commitment
has led us to achieve certification from CyberTrust (an industry
leader in information security certification) since 2002.
Intellectual
Property
We own a significant number of intellectual property rights,
including copyrights, trademarks, trade secrets and patents.
Specifically, our policy language, insurance manuals, software
and databases are protected by both registered and common law
copyrights, and the licensing of those materials to our
customers for their use represents a large portion of our
revenue. We also own in excess of 500 trademarks in the
U.S. and foreign countries, including the names of our
products and services and our logos and tag lines, many of which
are registered. We believe many of our trademarks, trade names,
service marks and logos to be of material importance to our
business as they assist our customers in identifying our
products and services and the quality that stands behind them.
We consider our intellectual property to be proprietary, and we
rely on a combination of statutory (e.g., copyright, trademark,
trade secret and patent) and contractual safeguards in a
comprehensive intellectual property enforcement program to
protect them wherever they are used.
We also own several software method and processing patents and
have several pending patent applications in the U.S. that
complement our products. The patents and patent applications
include claims which pertain to technology, including a patent
for our Claims Outcome Advisor software, and for our Xactware
Sketch product. We believe the protection of our proprietary
technology is important to our success and we will continue to
seek to protect those intellectual property assets for which we
have expended substantial research and development capital and
which are material to our business.
14
In order to maintain control of our intellectual property, we
enter into license agreements with our customers, granting each
customer a license to use our products and services, including
our software and databases. This helps to maintain the integrity
of our proprietary intellectual property and to protect the
embedded information and technology contained in our solutions.
As a general practice, employees, contractors and other parties
with access to our proprietary information sign agreements that
prohibit the unauthorized use or disclosure of our proprietary
rights, information and technology.
Employees
As of December 31, 2010, we employed 4,706 full-time
and 184 part-time employees. None of our employees are
represented by unions. We consider our relationship with our
employees to be good and have not experienced interruptions of
operations due to labor disagreements.
Our employees include over 200 actuarial professionals,
including 43 Fellows and 27 Associates of the Casualty Actuarial
Society, as well as 143 Chartered Property Casualty
Underwriters, 17 Certified and 22 Associate Insurance Data
Managers, and over 565 professionals with advanced degrees,
including PhDs in mathematics and statistical modeling who
review both the data and the models.
Regulation
Because our business involves the distribution of certain
personal, public and non-public data to businesses and
governmental entities that make eligibility, service and
marketing decisions based on such data, certain of our solutions
and services are subject to regulation under federal, state and
local laws in the United States and, to a lesser extent,
foreign countries. Examples of such regulation include the Fair
Credit Reporting Act, which regulates the use of consumer credit
report information; the Gramm-Leach-Bliley Act, which regulates
the use of non-public personal financial information held by
financial institutions and applies indirectly to companies that
provide services to financial institutions; the Health Insurance
Portability and Accountability Act, which restricts the public
disclosure of patient information and applies indirectly to
companies that provide services to healthcare businesses; the
Drivers Privacy Protection Act, which prohibits the public
disclosure, use or resale by any states department of
motor vehicles of personal information about an individual that
was obtained by the department in connection with a motor
vehicle record, except for a permissible purpose and
various other federal, state and local laws and regulations.
These laws generally restrict the use and disclosure of personal
information and provide consumers certain rights to know the
manner in which their personal information is being used, to
challenge the accuracy of such information
and/or to
prevent the use and disclosure of such information. In certain
instances, these laws also impose requirements for safeguarding
personal information through the issuance of data security
standards or guidelines. Certain state laws impose similar
privacy obligations, as well as obligations to provide
notification of security breaches in certain circumstances.
We are also licensed as a rating, rate service, advisory or
statistical organization under state insurance codes in all
fifty states, Puerto Rico, Guam, the Virgin Islands and the
District of Columbia. As such an advisory organization, we
provide statistical, actuarial, policy language development and
related products and services to property/casualty insurers,
including advisory prospective loss costs, other prospective
cost information, manual rules and policy language. We also
serve as an officially designated statistical agent of state
insurance regulators to collect policy-writing and loss
statistics of individual insurers and compile that information
into reports used by the regulators.
Many of our products, services and operations as well as insurer
use of our services are subject to state rather than federal
regulation by virtue of the McCarran-Ferguson Act. As a result,
many of our operations and products are subject to review
and/or
approval by state regulators. Furthermore, our operations
involving licensed advisory organization activities are subject
to periodic examinations conducted by state regulators and our
operations and products are subject to state antitrust and trade
practice statutes within or outside state insurance codes, which
are typically enforced by state attorneys general
and/or
insurance regulators.
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Available
Information
We maintain an Investor Relations website on the Internet at
investor.verisk.com. We make available free of charge, on
or through this website, our annual, quarterly, and current
reports and any amendments to those reports as soon as
reasonably practicable following the time they are
electronically filed with or furnished to the SEC. To access
these, click on the Financial
Information SEC Filings link found
on our Investor Relations homepage. Verisk trades on the NASDAQ
Global Select Market under the ticker symbol VRSK.
Our stock was first publicly traded on October 7, 2009.
You should carefully consider the following risks and all of
the other information set forth in this annual report on
Form 10-K
before deciding to invest in shares of our Class A common
stock. If any of the following risks actually occurs, our
business, financial condition or results of operations would
likely suffer. In such case, the trading price of our
Class A common stock could decline due to any of these
risks, and you may lose all or part of your investment.
We
could lose our access to data from external sources which could
prevent us from providing our solutions.
We depend upon data from external sources, including data
received from customers and various government and public record
services, for information used in our databases. In general, we
do not own the information in these databases, and the
participating organizations could discontinue contributing
information to the databases. Our data sources could withdraw or
increase the price for their data for a variety of reasons, and
we could also become subject to legislative or judicial
restrictions on the use of such data, in particular if such data
is not collected by the third parties in a way which allows us
to legally use
and/or
process the data. In addition, some of our customers are
significant stockholders of our company. Specifically, all of
our outstanding Class B common stock is owned by insurers
who are also our customers and provide us with a significant
percentage of our data. If our customers percentage of
ownership of our common stock decreases in the future, there can
be no assurance that our customers will continue to provide data
to the same extent or on the same terms. If a substantial number
of data sources, or certain key sources, were to withdraw or be
unable to provide their data, or if we were to lose access to
data due to government regulation or if the collection of data
became uneconomical, our ability to provide solutions to our
customers could be impacted, which could materially adversely
affect our business, reputation, financial condition, operating
results and cash flows.
Agreements with our data suppliers are short-term agreements.
Some suppliers are also competitors, which may make us
vulnerable to unpredictable price increases and may cause some
suppliers not to renew certain agreements. Our competitors could
also enter into exclusive contracts with our data sources. If
our competitors enter into such exclusive contracts, we may be
precluded from receiving certain data from these suppliers or
restricted in our use of such data, which would give our
competitors an advantage. Such a termination or exclusive
contracts could have a material adverse effect on our business,
financial position, and operating results if we were unable to
arrange for substitute sources.
We
derive a substantial portion of our revenues from U.S. P&C
primary insurers. If the downturn in the U.S. insurance industry
continues or that industry does not continue to accept our
solutions, our revenues will decline.
Revenues derived from solutions we provide to U.S. P&C
primary insurers account for a substantial portion of our total
revenues. During the year ended December 31, 2010,
approximately 57% of our revenue was derived from solutions
provided to U.S. P&C primary insurers. Also, sales of
certain of our solutions are tied to premiums in the
U.S. P&C insurance market, which may rise or fall in
any given year due to loss experience and capital capacity and
other factors in the insurance industry beyond our control. In
addition, our
16
revenues will decline if the insurance industry does not
continue to accept our solutions. Factors that might affect the
acceptance of these solutions by P&C primary insurers
include the following:
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changes in the business analytics industry;
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changes in technology;
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our inability to obtain or use state fee schedule or claims data
in our insurance solutions;
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saturation of market demand;
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loss of key customers;
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industry consolidation; and
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failure to execute our customer-focused selling approach.
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A continued downturn in the insurance industry or lower
acceptance of our solutions by the insurance industry could
result in a decline in revenues from that industry and have a
material adverse effect on our financial condition, results of
operations and cash flows.
Our
revenue from customers in the mortgage vertical is largely
transactional and subject to changing conditions of the U.S.
mortgage market.
Revenue derived from solutions we provide the U.S. mortgage
and mortgage-related industries accounted for approximately 13%
of our total revenue in the year ended December 31, 2010.
Our forensic audit business and business with
government-sponsored entities in the mortgage business accounted
for approximately 65% of our total mortgage and mortgage-related
revenue in 2010. Because our business relies on transaction
volumes based on both new mortgage applications and forensic
audit of funded loans, reductions in either the volume of
mortgage loans originated or the number or quality of funded
loans could reduce our revenue. Mortgage origination volumes in
2010 declined versus 2009 and may continue to decline based on
the changes in the mortgage market related to the
U.S. mortgage crisis.
Recently there have been proposals to restructure or eliminate
the roles of Fannie Mae and Freddie Mac. The restructuring or
elimination of either Fannie Mae or Freddie Mac could have a
negative effect on the U. S. mortgage market and on our revenue
derived from the solutions we provide to the mortgage industry.
If origination volumes and applications for mortgages decline,
our revenue in this part of the business may decline if we are
unable to increase the percentage of mortgages examined for
existing customers or add new customers. Our forensic audit
business has benefited from the high amount of bad loans to be
examined by mortgage insurers and other parties as a result of
the U.S. mortgage crisis. Two customers represent the
majority of our mortgage revenue in 2010 and if their volumes
decline and we are not able to replace them with new customers,
our revenue may decline.
There
may be consolidation in our end customer market, which would
reduce the use of our services.
Mergers or consolidations among our customers could reduce the
number of our customers and potential customers. This could
adversely affect our revenues even if these events do not reduce
the aggregate number of customers or the activities of the
consolidated entities. If our customers merge with or are
acquired by other entities that are not our customers, or that
use fewer of our services, they may discontinue or reduce their
use of our services. The adverse effects of consolidation will
be greater in sectors that we are particularly dependent upon,
for example, in the P&C insurance services sector. Any of
these developments could materially and adversely affect our
business, financial condition, operating results and cash flows.
If we
are unable to develop successful new solutions or if we
experience defects, failures and delays associated with the
introduction of new solutions, our business could suffer serious
harm.
Our growth and success depends upon our ability to develop and
sell new solutions. If we are unable to develop new solutions,
or if we are not successful in introducing
and/or
obtaining regulatory approval or acceptance for new solutions,
we may not be able to grow our business, or growth may occur
more slowly
17
than we anticipate. In addition, significant undetected errors
or delays in new solutions may affect market acceptance of our
solutions and could harm our business, financial condition or
results of operations. In the past, we have experienced delays
while developing and introducing new solutions, primarily due to
difficulties in developing models, acquiring data and adapting
to particular operating environments. Errors or defects in our
solutions that are significant, or are perceived to be
significant, could result in rejection of our solutions, damage
to our reputation, loss of revenues, diversion of development
resources, an increase in product liability claims, and
increases in service and support costs and warranty claims.
We
will continue to rely upon proprietary technology rights, and if
we are unable to protect them, our business could be
harmed.
Our success depends, in part, upon our intellectual property
rights. To date, we have relied primarily on a combination of
copyright, patent, trade secret, and trademark laws and
nondisclosure and other contractual restrictions on copying and
distribution to protect our proprietary technology. This
protection of our proprietary technology is limited, and our
proprietary technology could be used by others without our
consent. In addition, patents may not be issued with respect to
our pending or future patent applications, and our patents may
not be upheld as valid or may not prevent the development of
competitive products. Any disclosure, loss, invalidity of, or
failure to protect our intellectual property could negatively
impact our competitive position, and ultimately, our business.
Our protection of our intellectual property rights in the United
States or abroad may not be adequate and others, including our
competitors, may use our proprietary technology without our
consent. Furthermore, litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets, or
to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and
diversion of resources and could harm our business, financial
condition, results of operations and cash flows.
We
could face claims for intellectual property infringement, which
if successful could restrict us from using and providing our
technologies and solutions to our customers.
There has been substantial litigation and other proceedings,
particularly in the United States, regarding patent and other
intellectual property rights in the information technology
industry. There is a risk that we are infringing, or may in the
future infringe, the intellectual property rights of third
parties. We monitor third-party patents and patent applications
that may be relevant to our technologies and solutions and we
carry out freedom to operate analysis where we deem appropriate.
However, such monitoring and analysis has not been, and is
unlikely in the future to be, comprehensive, and it may not be
possible to detect all potentially relevant patents and patent
applications. Since the patent application process can take
several years to complete, there may be currently pending
applications, unknown to us, that may later result in issued
patents that cover our products and technologies. As a result,
we may infringe existing and future third-party patents of which
we are not aware. As we expand our operations there is a higher
risk that such activity could infringe the intellectual property
rights of third parties.
Third-party intellectual property infringement claims and any
resultant litigation against us or our technology partners or
providers, could subject us to liability for damages, restrict
us from using and providing our technologies and solutions or
operating our business generally, or require changes to be made
to our technologies and solutions. Even if we prevail,
litigation is time consuming and expensive to defend and would
result in the diversion of managements time and attention.
If a successful claim of infringement is brought against us and
we fail to develop non-infringing technologies and solutions or
to obtain licenses on a timely and cost effective basis this
could materially and adversely affect our business, reputation,
financial condition, operating results and cash flows.
Regulatory
developments could negatively impact our business.
Because personal, public and non-public information is stored in
some of our databases, we are vulnerable to government
regulation and adverse publicity concerning the use of our data.
We provide many types of data and services that already are
subject to regulation under the Fair Credit Reporting Act,
Gramm-Leach-Bliley Act, Drivers Privacy Protection Act,
Health Insurance Portability and Accountability Act, the
18
European Unions Data Protection Directive and to a lesser
extent, various other federal, state, and local laws and
regulations. These laws and regulations are designed to protect
the privacy of the public and to prevent the misuse of personal
information in the marketplace. However, many consumer
advocates, privacy advocates, and government regulators believe
that the existing laws and regulations do not adequately protect
privacy. They have become increasingly concerned with the use of
personal information, particularly social security numbers,
department of motor vehicle data and dates of birth. As a
result, they are lobbying for further restrictions on the
dissemination or commercial use of personal information to the
public and private sectors. Similar initiatives are under way in
other countries in which we do business or from which we source
data. The following legal and regulatory developments also could
have a material adverse affect on our business, financial
position, results of operations or cash flows:
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amendment, enactment, or interpretation of laws and regulations
which restrict the access and use of personal information and
reduce the supply of data available to customers;
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changes in cultural and consumer attitudes to favor further
restrictions on information collection and sharing, which may
lead to regulations that prevent full utilization of our
solutions;
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failure of our solutions to comply with current laws and
regulations; and
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failure of our solutions to adapt to changes in the regulatory
environment in an efficient, cost-effective manner.
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Fraudulent
data access and other security breaches may negatively impact
our business and harm our reputation.
Security breaches in our facilities, computer networks, and
databases may cause harm to our business and reputation and
result in a loss of customers. Our systems may be vulnerable to
physical break-ins, computer viruses, attacks by hackers and
similar disruptive problems. Third-party contractors also may
experience security breaches involving the storage and
transmission of proprietary information. If users gain improper
access to our databases, they may be able to steal, publish,
delete or modify confidential third-party information that is
stored or transmitted on our networks.
In addition, customers misuse of our information services
could cause harm to our business and reputation and result in
loss of customers. Any such misappropriation
and/or
misuse of our information could result in us, among other
things, being in breach of certain data protection and related
legislation.
A security or privacy breach may affect us in the following ways:
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deterring customers from using our solutions;
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deterring data suppliers from supplying data to us;
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harming our reputation;
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exposing us to liability;
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increasing operating expenses to correct problems caused by the
breach;
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affecting our ability to meet customers
expectations; or
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causing inquiry from governmental authorities.
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We may detect incidents in which consumer data has been
fraudulently or improperly acquired. The number of potentially
affected consumers identified by any future incidents is
obviously unknown. Any such incident could materially and
adversely affect our business, reputation, financial condition,
operating results and cash flows.
19
We
typically face a long selling cycle to secure new contracts that
requires significant resource commitments, which result in a
long lead time before we receive revenues from new
relationships.
We typically face a long selling cycle to secure a new contract
and there is generally a long preparation period in order to
commence providing the services. We typically incur significant
business development expenses during the selling cycle and we
may not succeed in winning a new customers business, in
which case we receive no revenues and may receive no
reimbursement for such expenses. Even if we succeed in
developing a relationship with a potential new customer, we may
not be successful in obtaining contractual commitments after the
selling cycle or in maintaining contractual commitments after
the implementation cycle, which may have a material adverse
effect on our business, results of operations and financial
condition.
We may
lose key business assets, including loss of data center capacity
or the interruption of telecommunications links, the internet,
or power sources, which could significantly impede our ability
to do business.
Our operations depend on our ability, as well as that of
third-party service providers to whom we have outsourced several
critical functions, to protect data centers and related
technology against damage from hardware failure, fire, power
loss, telecommunications failure, impacts of terrorism, breaches
in security (such as the actions of computer hackers), natural
disasters, or other disasters. The on-line services we provide
are dependent on links to telecommunications providers. In
addition, we generate a significant amount of our revenues
through telesales centers and websites that we utilize in the
acquisition of new customers, fulfillment of solutions and
services and responding to customer inquiries. We may not have
sufficient redundant operations to cover a loss or failure in
all of these areas in a timely manner. Certain of our customer
contracts provide that our on-line servers may not be
unavailable for specified periods of time. Any damage to our
data centers, failure of our telecommunications links or
inability to access these telesales centers or websites could
cause interruptions in operations that materially adversely
affect our ability to meet customers requirements,
resulting in decreased revenue, operating income and earnings
per share.
We are
subject to competition in many of the markets in which we
operate and we may not be able to compete
effectively.
Some markets in which we operate or which we believe may provide
growth opportunities for us are highly competitive, and are
expected to remain highly competitive. We compete on the basis
of quality, customer service, product and service selection and
price. Our competitive position in various market segments
depends upon the relative strength of competitors in the segment
and the resources devoted to competing in that segment. Due to
their size, certain competitors may be able to allocate greater
resources to a particular market segment than we can. As a
result, these competitors may be in a better position to
anticipate and respond to changing customer preferences,
emerging technologies and market trends. In addition, new
competitors and alliances may emerge to take market share away.
We may be unable to maintain our competitive position in our
market segments, especially against larger competitors. We may
also invest further to upgrade our systems in order to compete.
If we fail to successfully compete, our business, financial
position and results of operations may be adversely affected.
Acquisitions
could result in operating difficulties, dilution and other
harmful consequences.
Our long-term business strategy includes growth through
acquisitions. Future acquisitions may not be completed on
acceptable terms and acquired assets, data or businesses may not
be successfully integrated into our operations. Any acquisitions
or investments will be accompanied by the risks commonly
encountered in acquisitions of businesses. Such risks include,
among other things:
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failing to implement or remediate controls, procedures and
policies appropriate for a larger public company at acquired
companies that prior to the acquisition lacked such controls,
procedures and policies;
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paying more than fair market value for an acquired company or
assets;
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failing to integrate the operations and personnel of the
acquired businesses in an efficient, timely manner;
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assuming potential liabilities of an acquired company;
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managing the potential disruption to our ongoing business;
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distracting management focus from our core businesses;
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difficulty in acquiring suitable businesses;
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impairing relationships with employees, customers, and strategic
partners;
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incurring expenses associated with the amortization of
intangible assets;
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incurring expenses associated with an impairment of all or a
portion of goodwill and other intangible assets due to changes
in market conditions, weak economies in certain competitive
markets, or the failure of certain acquisitions to realize
expected benefits; and
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diluting the share value and voting power of existing
stockholders.
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The anticipated benefits of many of our acquisitions may not
materialize. Future acquisitions or dispositions could result in
the incurrence of debt, contingent liabilities or amortization
expenses, or write-offs of goodwill and other intangible assets,
any of which could harm our financial condition.
We typically fund our acquisitions through our debt facilities.
Although we have capacity under our uncommitted facilities,
lenders are not required to loan us any funds under such
facilities. Therefore, future acquisitions may require us to
obtain additional financing, which may not be available on
favorable terms or at all.
To the
extent the availability of free or relatively inexpensive
information increases, the demand for some of our solutions may
decrease.
Public sources of free or relatively inexpensive information
have become increasingly available recently, particularly
through the internet, and this trend is expected to continue.
Governmental agencies in particular have increased the amount of
information to which they provide free public access. Public
sources of free or relatively inexpensive information may reduce
demand for our solutions. To the extent that customers choose
not to obtain solutions from us and instead rely on information
obtained at little or no cost from these public sources, our
business and results of operations may be adversely affected.
Our
senior leadership team is critical to our continued success and
the loss of such personnel could harm our
business.
Our future success substantially depends on the continued
service and performance of the members of our senior leadership
team. These personnel possess business and technical
capabilities that are difficult to replace. Members of our
senior management operating team have been with us for an
average of almost twenty years. However, with the exception of
Frank J. Coyne, our Chairman and Chief Executive Officer, we do
not have employee contracts with the members of our senior
management operating team. If we lose key members of our senior
management operating team, we may not be able to effectively
manage our current operations or meet ongoing and future
business challenges, and this may have a material adverse effect
on our business, results of operations and financial condition.
We may
fail to attract and retain enough qualified employees to support
our operations, which could have an adverse effect on our
ability to expand our business and service our
customers.
Our business relies on large numbers of skilled employees and
our success depends on our ability to attract, train and retain
a sufficient number of qualified employees. If our attrition
rate increases, our operating efficiency and productivity may
decrease. We compete for employees not only with other companies
in our industry but also with companies in other industries,
such as software services, engineering services and
21
financial services companies, and there is a limited pool of
employees who have the skills and training needed to do our
work. If our business continues to grow, the number of people we
will need to hire will increase. We will also need to increase
our hiring if we are not able to maintain our attrition rate
through our current recruiting and retention policies. Increased
competition for employees could have an adverse effect on our
ability to expand our business and service our customers, as
well as cause us to incur greater personnel expenses and
training costs.
We are
subject to antitrust and other litigation, and may in the future
become subject to further such litigation; an adverse outcome in
such litigation could have a material adverse effect on our
financial condition, revenues and profitability.
We participate in businesses (particularly insurance-related
businesses and services) that are subject to substantial
litigation, including antitrust litigation. We are subject to
the provisions of a 1995 settlement agreement in an antitrust
lawsuit brought by various state Attorneys General and private
plaintiffs which imposes certain constraints with respect to
insurer involvement in our governance and business. We currently
are defending against putative class action lawsuits in which it
is alleged that certain of our subsidiaries unlawfully have
conspired with insurers with respect to their payment of
insurance claims. See Item 3. Legal
Proceedings. Our failure to successfully defend or settle
such litigation could result in liability that, to the extent
not covered by our insurance, could have a material adverse
effect on our financial condition, revenues and profitability.
Given the nature of our business, we may be subject to similar
litigation in the future. Even if the direct financial impact of
such litigation is not material, settlements or judgments
arising out of such litigation could include further
restrictions on our ability to conduct business, including
potentially the elimination of entire lines of business, which
could increase our cost of doing business and limit our
prospects for future growth.
Our
liquidity, financial position and profitability could be
adversely affected by further deterioration in U.S. and
international credit markets and economic
conditions.
Deterioration in the global capital markets has caused financial
institutions to seek additional capital, merge with larger
financial institutions and, in some cases, fail. These
conditions have led to concerns by market participants about the
stability of financial markets generally and the strength of
counterparties, resulting in a contraction of available credit,
even for the most credit-worthy borrowers. Due to recent market
events, our liquidity and our ability to obtain financing may be
negatively impacted if one of our lenders under our revolving
credit facilities or existing shelf arrangements fails to meet
its funding obligations. In such an event, we may not be able to
draw on all, or a substantial portion, of our uncommitted credit
facilities, which would adversely affect our liquidity. Also, if
we attempt to obtain future financing in addition to, or
replacement of, our existing credit facilities to finance our
continued growth through acquisitions or otherwise, the credit
market turmoil could negatively impact our ability to obtain
such financing.
General
economic, political and market forces and dislocations beyond
our control could reduce demand for our solutions and harm our
business.
The demand for our solutions may be impacted by domestic and
international factors that are beyond our control, including
macroeconomic, political and market conditions, the availability
of short-term and long-term funding and capital, the level and
volatility of interest rates, currency exchange rates and
inflation. The United States economy recently experienced
periods of contraction and both the future domestic and global
economic environments may continue to be less favorable than
those of prior years. Any one or more of these factors may
contribute to reduced activity and prices in the securities
markets generally and could result in a reduction in demand for
our solutions, which could have an adverse effect on our results
of operations and financial condition. A significant additional
decline in the value of assets for which risk is transferred in
market transactions could have an adverse impact on the demand
for our solutions. In addition, the decline of the credit
markets has reduced the number of mortgage originators, and
therefore, the immediate demand for our related mortgage
solutions. Specifically, certain of our fraud identification and
detection solutions are directed at the mortgage market. This
decline in asset value and originations and an increase in
foreclosure
22
levels has also created greater regulatory scrutiny of mortgage
originations and securitizations. Any new regulatory regime may
change the utility of our solutions for mortgage lenders and
other participants in the mortgage lending industry and related
derivative markets or increase our costs as we adapt our
solutions to new regulation.
If
there are substantial sales of our common stock, our stock price
could decline.
The market price of our common stock could decline as a result
of sales of a large number of shares of common stock in the
market, or the perception that these sales could occur. These
sales, or the possibility that these sales may occur, also might
make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem attractive.
As of December 31, 2010, our stockholders, who owned our
shares prior to the IPO and follow-on offering, continue to
beneficially own in the aggregate approximately
24,577,690 shares of our Class A common stock,
primarily owned by our ESOP, 12,225,480 shares of our
Class B (Series 1), or
Class B-1,
common stock and 14,771,340 shares of our Class B
(Series 2), or
Class B-2,
common stock, representing in aggregate approximately 30.33% of
our outstanding common stock. Such stockholders will be able to
sell their common stock in the public market from time to time
without registration, and subject to limitations on the timing,
amount and method of those sales imposed by securities laws. If
any of these stockholders were to sell a large number of their
common stock, the market price of our common stock could decline
significantly. In addition, the perception in the public markets
that sales by them might occur could also adversely affect the
market price of our common stock.
Certain members of our management are subject to
lock-up
agreements with us whereby they are not be permitted to sell any
of their common stock, subject to certain conditions, for a
period of time. Restrictions under these
lock-up
agreements expire in part on April 6, 2011 and expire
completely on October 6, 2011. Also, pursuant to our
amended and restated certificate of incorporation, our
Class B stockholders are not able to sell any of their
common stock, subject to certain conditions, to the public for a
period of time. Each share of
Class B-1
common stock shall convert automatically, without any action by
the holder, into one share of Class A common stock on
April 6, 2011. Each share of
Class B-2
common stock shall convert automatically, without any action by
the holder, into one share of Class A common stock on
October 6, 2011.
Our board of directors may approve exceptions to the limitation
on transfers of our Class B common stock in their sole
discretion, in connection with the sale of such Class B
common stock in a public offering registered with the Securities
and Exchange Commission or in such other limited circumstances
as our board of directors may determine. Any Class B common
stock sold to the public will first be converted to Class A
common stock. Such further resale of our common stock could
cause the price of our common stock to decline.
Pursuant to our equity incentive plans, options to purchase
approximately 23,018,745 shares of Class A common
stock were outstanding as of February 25, 2011. We filed a
registration statement under the Securities Act, which covers
the shares available for issuance under our equity incentive
plans (including for such outstanding options) as well as shares
held for resale by our existing stockholders that were
previously issued under our equity incentive plans. Such further
issuance and resale of our common stock could cause the price of
our common stock to decline.
Also, in the future, we may issue our securities in connection
with investments and acquisitions. The amount of our common
stock issued in connection with an investment or acquisition
could constitute a material portion of our then outstanding
common stock.
The
holders of our Class B common stock have the right to elect
up to three out of eleven of our directors and their interests
in our business may be different than yours.
Until no Class B common stock remains outstanding, the
holders of our Class B common stock will have the right to
elect up to three of our directors. Stockholders of the
Class B common stock may not have the same incentive to
approve a corporate action that may be favorable for the holders
of Class A common
23
stock, or their interests may otherwise conflict with those of
Class A stockholders. For example, holders of our
Class B common stock may seek to cause us to take courses
of action that, in their judgment, could enhance their
investment in us or the use of our solutions, but which might
involve risks to holders of our Class A common stock,
including a potential decrease in the price of our Class A
common stock.
Our
capital structure, level of indebtedness and the terms of
anti-takeover provisions under Delaware law and in our amended
and restated certificate of incorporation and bylaws could
diminish the value of our common stock and could make a merger,
tender offer or proxy contest difficult or could impede an
attempt to replace or remove our directors.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change of control would be beneficial to
our existing stockholders. In addition, our certificate of
incorporation and bylaws may discourage, delay or prevent a
change in our management or control over us that stockholders
may consider favorable or make it more difficult for
stockholders to replace directors even if stockholders consider
it beneficial to do so. Our certificate of incorporation and
bylaws:
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authorize the issuance of blank check preferred
stock that could be issued by our board of directors to increase
the number of outstanding shares to thwart a takeover attempt;
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prohibit cumulative voting in the election of directors, which
would otherwise allow holders of less than a majority of the
stock to elect some directors;
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require that vacancies on the board of directors, including
newly-created directorships, be filled only by a majority vote
of directors then in office;
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limit who may call special meetings of stockholders;
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authorize the issuance of authorized but unissued shares of
common stock and preferred stock without stockholder approval,
subject to the rules and regulations of the NASDAQ Global Select
Market;
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prohibit stockholder action by written consent, requiring all
stockholder actions to be taken at a meeting of the
stockholders; and
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establish advance notice requirements for nominating candidates
for election to the board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings.
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In addition, Section 203 of the Delaware General
Corporation Law may inhibit potential acquisition bids for us.
As a public company, we are subject to Section 203, which
regulates corporate acquisitions and limits the ability of a
holder of 15.0% or more of our stock from acquiring the rest of
our stock. Under Delaware law a corporation may opt out of the
anti-takeover provisions, but we do not intend to do so.
These provisions may prevent a stockholder from receiving the
benefit from any premium over the market price of our common
stock offered by a bidder in a potential takeover. Even in the
absence of an attempt to effect a change in management or a
takeover attempt, these provisions may adversely affect the
prevailing market price of our common stock if they are viewed
as discouraging takeover attempts in the future.
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Item 1B.
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Unresolved
Staff Comments
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Not Applicable.
24
Our headquarters are in Jersey City, New Jersey. As of
December 31, 2010, our principal offices consisted of the
following properties:
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Location
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Square Feet
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Lease Expiration Date
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Jersey City, New Jersey
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390,991
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May 21, 2021
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Orem, Utah
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68,343
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December 31, 2017
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Boston, Massachusetts
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59,154
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November 30, 2020
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South Jordan, Utah
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42,849
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June 30, 2014
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North Reading, Massachusetts
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41,200
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June 30, 2015
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Agoura Hills, California
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28,666
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October 30, 2011
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We also lease offices in 22 states in the United States and
the District of Columbia, and offices outside the United States
to support our international operations in Canada, China,
Denmark, England, Germany, India, Israel, Japan, and Nepal.
We believe that our properties are in good operating condition
and adequately serve our current business operations. We also
anticipate that suitable additional or alternative space,
including those under lease options, will be available at
commercially reasonable terms for future expansion.
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Item 3.
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Legal
Proceedings
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We are party to legal proceedings with respect to a variety of
matters in the ordinary course of business, including those
matters described below. We are unable, at the present time, to
determine the ultimate resolution of or provide a reasonable
estimate of the range of possible loss attributable to these
matters or the impact they may have on our results of
operations, financial position or cash flows. This is primarily
because many of these cases remain in their early stages and
only limited discovery has taken place. Although we believe we
have strong defenses and intend to vigorously defend the
litigation proceedings described below, we could in the future
incur judgments or enter into settlements of claims that could
have a material adverse effect on our results of operations,
financial position or cash flows.
Claims
Outcome Advisor Litigation
Hensley, et al. v. Computer Sciences Corporation et al.
was a putative nationwide class action complaint, filed in
February 2005, in Miller County, Arkansas state court.
Defendants include numerous insurance companies and providers of
software products used by insurers in paying claims. We are
among the named defendants. Plaintiffs allege that certain
software products, including our Claims Outcome Advisor product
and a competing software product sold by Computer Sciences
Corporation, improperly estimated the amount to be paid by
insurers to their policyholders in connection with claims for
bodily injuries.
We entered into settlement agreements with plaintiffs asserting
claims relating to the use of Claims Outcome Advisor by
defendants Hanover Insurance Group, Progressive Car Insurance
and Liberty Mutual Insurance Group. Each of these settlements
was granted final approval by the court and together the
settlements resolve the claims asserted in this case against us
with respect to the above insurance companies, who settled the
claims against them as well. A provision was made in 2006 for
this proceeding and the total amount we paid in 2008 with
respect to these settlements was less than $2.0 million. A
fourth defendant, The Automobile Club of California, which is
alleged to have used Claims Outcome Advisor, was dismissed from
the action. On August 18, 2008, pursuant to the agreement
of the parties the Court ordered that the claims against us be
dismissed with prejudice.
Subsequently, Hanover Insurance Group made a demand for
reimbursement, pursuant to an indemnification provision
contained in a December 30, 2004 License Agreement between
Hanover and the Company, of its settlement and defense costs in
the Hensley class action. Specifically, Hanover demanded
$2.5 million including $0.6 million in attorneys
fees and expenses. We dispute that Hanover is entitled to any
reimbursement pursuant to the License Agreement. In July 2010,
the Company and Hanover were unable to
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resolve the dispute in mediation, Hanover served a summons and
complaint seeking indemnity and contribution from us. At this
time, it is not possible to determine the ultimate resolution of
or estimate the liability related to this matter.
Xactware
Litigation
The following two lawsuits have been filed by or on behalf of
groups of Louisiana insurance policyholders who claim, among
other things, that certain insurers who used products and price
information supplied by our Xactware subsidiary (and those of
another provider) did not fully compensate policyholders for
property damage covered under their insurance policies. The
plaintiffs seek to recover compensation for their damages in an
amount equal to the difference between the amount paid by the
defendants and the fair market repair/restoration costs of their
damaged property.
Schafer v. State Farm Fire & Cas. Co.,
et al. was a putative class action pending against us and
State Farm Fire & Casualty Company filed in March 2007
in the Eastern District of Louisiana. The complaint alleged
antitrust violations, breach of contract, negligence, bad faith,
and fraud. The court dismissed the antitrust claim as to both
defendants and dismissed all claims against us other than fraud,
which will proceed to the discovery phase along with the
remaining claims against State Farm. Judge Duval denied
plaintiffs motion to certify a class with respect to the
fraud and breach of contract claims on August 3, 2009 and
the time to appeal that decision has expired. The matter now a
single action was reassigned to Judge Africk. The plaintiffs
agreed to settle the matter with the Company and State Farm and
a Settlement Agreement and a Release was executed by all parties
in June 2010.
Mornay v. Travelers Ins. Co., et al. is a
putative class action pending against us and Travelers Insurance
Company filed in November 2007 in the Eastern District of
Louisiana. The complaint alleged antitrust violations, breach of
contract, negligence, bad faith, and fraud. As in Schafer, the
court dismissed the antitrust claim as to both defendants and
dismissed all claims against us other than fraud. Judge Duval
stayed all proceedings in the case pending an appraisal of the
lead plaintiffs insurance claim. The matter has been
re-assigned to Judge Barbier, who on September 11, 2009
issued an order administratively closing the matter pending
completion of the appraisal process. At this time, it is not
possible to determine the ultimate resolution of or estimate the
liability related to this matter.
iiX
Litigation
In March 2007, our subsidiary, Insurance Information Exchange,
or iiX, as well as other information providers and insurers in
the State of Texas, were served with a summons and class action
complaint filed in the United States District Court for the
Eastern District of Texas alleging violations of the Driver
Privacy Protection Act, or the DPPA, entitled Sharon Taylor,
et al. v. Acxiom Corporation, et al. Plaintiffs brought
the action on their own behalf and on behalf of all similarly
situated individuals whose personal information is contained in
any motor vehicle record maintained by the State of Texas and
who have not provided express consent to the State of Texas for
the distribution of their personal information for purposes not
enumerated by the DPPA and whose personal information has been
knowingly obtained and used by the defendants. The class
complaint alleges that the defendants knowingly obtained
personal information for a purpose not authorized by the DPPA
and seeks liquidated damages in the amount of two thousand five
hundred dollars for each instance of a violation of the DPPA,
punitive damages and the destruction of any illegally obtained
personal information. The Court granted iiXs motion to
dismiss the complaint based on failure to state a claim and for
lack of standing. Oral arguments on the plaintiffs appeal
of that dismissal were held on November 4, 2009. The Court
of Appeals for the Fifth Circuit Court affirmed the District
Courts dismissal of the complaint on July 14, 2010.
Plaintiffs filed a petition for a Writ of Certiorari with the
United States Supreme Court on October 12, 2010, which was
denied on January 10, 2011.
Similarly, in April 2010, our subsidiary, iiX, as well as other
information providers in the State of Missouri were served with
a summons and class action complaint filed in the United States
District Court for the Western District of Missouri alleging
violations of the DPPA entitled Janice Cook, et al. v.
ACS State & Local Solutions, et al. Plaintiffs
brought the action on their own behalf and on behalf of all
similarly situated
26
individuals whose personal information is contained in any motor
vehicle record maintained by the State of Missouri and who have
not provided express consent to the State of Missouri for the
distribution of their personal information for purposes not
enumerated by the DPPA and whose personal information has been
knowingly obtained and used by the defendants. The class
complaint alleges that the defendants knowingly obtained
personal information for a purpose not authorized by the DPPA
and seeks liquidated damages in the amount of two thousand five
hundred dollars for each instance of a violation of the DDPA,
punitive damages and the destruction of any illegally obtained
personal information. The court granted iiXs motion to
dismiss the complaint based on a failure to state a claim on
November 19, 2010. Plaintiffs filed a notice of appeal on
December 17, 2010. At this time, it is not possible to
determine the ultimate resolution of or estimate the liability
related to these matters.
Interthinx
Litigation
In September 2009, our subsidiary, Interthinx, Inc., or
Interthinx, was served with a putative class action entitled
Renata Gluzman v. Interthinx, Inc. The plaintiff, a
former Interthinx employee, filed the class action on
August 13, 2009 in the Superior Court of the State of
California, County of Los Angeles on behalf of all Interthinx
information technology employees for unpaid overtime and missed
meals and rest breaks, as well as various related claims
claiming that the information technology employees were
misclassified as exempt employees and, as a result, were denied
certain wages and benefits that would have been received if they
were properly classified as non-exempt employees. The pleadings
include, among other things, a violation of Business and
Professions Code 17200 for unfair business practices, which
allows plaintiffs to include as class members all information
technology employees employed at Interthinx for four years prior
to the date of filing the complaint. The complaint seeks
compensatory damages, penalties that are associated with the
various statutes, restitution, interest costs, and attorney
fees. On June 2, 2010, plaintiffs agreed to settle their
claims with Interthinx. The court granted preliminary approval
to the settlement on November 10, 2010 and scheduled the
final approval hearing for February 23, 2011. Although no
assurance can be given concerning the outcome of this matter, in
the opinion of management the lawsuit is not expected to have a
material adverse effect on our financial condition or results of
operations.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Verisk trades under the ticker symbol VRSK on the
NASDAQ Global Select Market. Our common stock was first publicly
traded on October 7, 2009. As of February 25, 2011,
the closing price of our Class A common stock was $32.49
per share, as reported by the NASDAQ Global Select Market. There
is no established public trading market for our Class B
common stock. As of February 25, 2011 there were
approximately 17 Class A and 39 Class B stockholders
of record. We believe the number of beneficial owners is
substantially greater than the number of record holders for
Class A common stock, because a large portion of
Class A common stock is held in street name by
brokers.
We have not paid or declared any cash dividends on our
Class A,
Class B-1,
or
Class B-2
common stock during the two most recent fiscal years and we
currently do not intend to pay dividends on our Class A,
Class B-1,
or
Class B-2
common stock. We do have a publicly announced share repurchase
plan and have repurchased 15,069,452 shares since our IPO.
As of December 31, 2010, we had 372,107,352 shares of
treasury stock.
27
The following table shows the quarterly range of the closing
high and low per share sales prices for our common stock as
reported by the NASDAQ Global Select Market for the periods
indicated.
|
|
|
|
|
|
|
|
|
Year Ending December 31, 2010
|
|
High
|
|
Low
|
|
Fourth Quarter
|
|
$
|
34.60
|
|
|
$
|
27.64
|
|
Third Quarter
|
|
$
|
30.20
|
|
|
$
|
27.25
|
|
Second Quarter
|
|
$
|
30.93
|
|
|
$
|
27.65
|
|
First Quarter
|
|
$
|
30.44
|
|
|
$
|
27.24
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31, 2009
|
|
High
|
|
Low
|
|
Fourth Quarter
|
|
$
|
31.00
|
|
|
$
|
26.25
|
|
Performance
Graph
The graph below compares the cumulative total stockholder return
on $100 invested in our common stock, with the cumulative total
return (assuming reinvestment of dividends) on $100 invested in
each of the NASDAQ Composite Index, S&P 500 Index and an
aggregate of peer issuers in the information industry since
October 7, 2009, the date our Class A common stock was
first publicly traded. The peer issuers used for this graph are
Dun & Bradstreet Corporation, Equifax Inc., Factset
Research Systems Inc., Fair Isaac Corporation, Morningstar,
Inc., MSCI Inc., and Solera Holdings, Inc. Each peer issuer was
weighted according to its respective market capitalization on
October 7, 2009.
COMPARISON
OF CUMULATIVE TOTAL RETURN
Assumes $100 Invested on Oct. 07, 2009
Assumes Dividend Reinvested
Fiscal Year Ending Dec. 31, 2010
Recent
Sales of Unregistered Securities
There were no unregistered sales of equity securities by the
Company during the period covered by this report.
Issuer
Purchases of Equity Securities
On April 29, 2010, our board of directors authorized a
$150.0 million share repurchase program, or the Repurchase
Program, of our common stock. On October 19, 2010, our
board of directors authorized an
28
additional $150.0 million for the Repurchase Program for a
total of $300.0 million. Under the Repurchase Program, we
may repurchase stock in the open market or as otherwise
determined by us. These authorizations have no expiration dates,
although they may be suspended or terminated at any time. Our
shares repurchased for the quarter ended December 31, 2010
is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Dollar
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Value of Shares that
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
May Yet Be
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased(1)
|
|
|
per Share(2)
|
|
|
or Programs
|
|
|
Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
October 1, 2010 through October 31, 2010
|
|
|
7,714,700
|
|
|
$
|
28.16
|
|
|
|
414,700
|
|
|
$
|
152,753
|
|
November 1, 2010 through November 30, 2010
|
|
|
1,041,507
|
|
|
$
|
30.45
|
|
|
|
1,041,507
|
|
|
$
|
121,039
|
|
December 1, 2010 through December 31, 2010
|
|
|
1,668,839
|
|
|
$
|
33.20
|
|
|
|
1,010,589
|
|
|
$
|
87,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,425,046
|
|
|
$
|
31.19
|
|
|
|
2,466,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 7,583,532 and 374,718 Verisk
Class B-1
and
Class B-2 shares,
respectively, repurchased in connection with our follow-on
offering, which was not a part of the Repurchase Program. |
|
(2) |
|
Average price paid in the stock repurchases above excludes the
shares mentioned in note (1). |
|
|
Item 6.
|
Selected
Financial Data
|
The following selected historical financial data should be read
in conjunction with, and are qualified by reference to,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto included
elsewhere in this annual report on
Form 10-K.
The consolidated statement of operations data for the years
ended December 31, 2010, 2009 and 2008 and the consolidated
balance sheet data as of December 31, 2010 and 2009 are
derived from the audited consolidated financial statements
included elsewhere in this annual report on
Form 10-K.
The consolidated statement of operations data for the years
ended December 31, 2007 and 2006 and the consolidated
balance sheet data as of December 31, 2008 and 2007 are
derived from audited consolidated financial statements that are
not included in this annual report on
Form 10-K.
The consolidated balance sheet data as of December 31, 2006
is derived from unaudited consolidated financial statements that
are not included in this annual report on
Form 10-K.
Results for the year ended December 31, 2010 are not
necessarily indicative of results that may be expected in any
other future period.
Between January 1, 2006 and December 31, 2010 we
acquired 15 businesses, which may affect the comparability of
our consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment revenues
|
|
$
|
542,138
|
|
|
$
|
523,976
|
|
|
$
|
504,391
|
|
|
$
|
485,160
|
|
|
$
|
472,634
|
|
Decision Analytics revenues
|
|
|
596,205
|
|
|
|
503,128
|
|
|
|
389,159
|
|
|
|
317,035
|
|
|
|
257,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
1,138,343
|
|
|
|
1,027,104
|
|
|
|
893,550
|
|
|
|
802,195
|
|
|
|
730,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
463,473
|
|
|
|
491,294
|
|
|
|
386,897
|
|
|
|
357,191
|
|
|
|
331,804
|
|
Selling, general and administrative
|
|
|
166,374
|
|
|
|
162,604
|
|
|
|
131,239
|
|
|
|
107,576
|
|
|
|
100,124
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Depreciation and amortization of fixed assets
|
|
|
40,728
|
|
|
|
38,578
|
|
|
|
35,317
|
|
|
|
31,745
|
|
|
|
28,007
|
|
Amortization of intangible assets
|
|
|
27,398
|
|
|
|
32,621
|
|
|
|
29,555
|
|
|
|
33,916
|
|
|
|
26,854
|
|
Acquisition related liabilties adjustment(1)
|
|
|
(544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
697,429
|
|
|
|
725,097
|
|
|
|
583,008
|
|
|
|
530,428
|
|
|
|
486,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
440,914
|
|
|
|
302,007
|
|
|
|
310,542
|
|
|
|
271,767
|
|
|
|
243,344
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
305
|
|
|
|
195
|
|
|
|
2,184
|
|
|
|
8,451
|
|
|
|
6,476
|
|
Realized gains/(losses) on securities, net
|
|
|
95
|
|
|
|
(2,332
|
)
|
|
|
(2,511
|
)
|
|
|
857
|
|
|
|
(375
|
)
|
Interest expense
|
|
|
(34,664
|
)
|
|
|
(35,265
|
)
|
|
|
(31,316
|
)
|
|
|
(22,928
|
)
|
|
|
(16,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(34,264
|
)
|
|
|
(37,402
|
)
|
|
|
(31,643
|
)
|
|
|
(13,620
|
)
|
|
|
(10,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
406,650
|
|
|
|
264,605
|
|
|
|
278,899
|
|
|
|
258,147
|
|
|
|
232,777
|
|
Provision for income taxes
|
|
|
(164,098
|
)
|
|
|
(137,991
|
)
|
|
|
(120,671
|
)
|
|
|
(103,184
|
)
|
|
|
(91,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
242,552
|
|
|
|
126,614
|
|
|
|
158,228
|
|
|
|
154,963
|
|
|
|
140,785
|
|
Loss from discontinued operations, net of tax(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,589
|
)
|
|
|
(1,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
242,552
|
|
|
$
|
126,614
|
|
|
$
|
158,228
|
|
|
$
|
150,374
|
|
|
$
|
138,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income/(loss) per share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.36
|
|
|
$
|
0.72
|
|
|
$
|
0.87
|
|
|
$
|
0.77
|
|
|
$
|
0.68
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
1.36
|
|
|
$
|
0.72
|
|
|
$
|
0.87
|
|
|
$
|
0.75
|
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income/(loss) per share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.30
|
|
|
$
|
0.70
|
|
|
$
|
0.83
|
|
|
$
|
0.74
|
|
|
$
|
0.65
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
1.30
|
|
|
$
|
0.70
|
|
|
$
|
0.83
|
|
|
$
|
0.72
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
177,733,503
|
|
|
|
174,767,795
|
|
|
|
182,885,700
|
|
|
|
200,846,400
|
|
|
|
206,548,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
186,394,962
|
|
|
|
182,165,661
|
|
|
|
190,231,700
|
|
|
|
209,257,550
|
|
|
|
215,143,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
The financial operating data below sets forth the information
we believe is useful for investors in evaluating our overall
financial performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment EBITDA
|
|
$
|
268,417
|
|
|
$
|
210,928
|
|
|
$
|
222,706
|
|
|
$
|
212,780
|
|
|
$
|
202,872
|
|
Decision Analytics EBITDA
|
|
|
240,079
|
|
|
|
162,278
|
|
|
|
152,708
|
|
|
|
124,648
|
|
|
|
95,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
508,496
|
|
|
$
|
373,206
|
|
|
$
|
375,414
|
|
|
$
|
337,428
|
|
|
$
|
298,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of income from continuing
operations to EBITDA:
|
Income from continuing operations
|
|
$
|
242,552
|
|
|
$
|
126,614
|
|
|
$
|
158,228
|
|
|
$
|
154,963
|
|
|
$
|
140,785
|
|
Depreciation and amortization of fixed and intangible assets
|
|
|
68,126
|
|
|
|
71,199
|
|
|
|
64,872
|
|
|
|
65,661
|
|
|
|
54,861
|
|
Acquisition related liabilities adjustment(1)
|
|
|
(544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income and realized (gains)/losses on securities, net
|
|
|
(400
|
)
|
|
|
2,137
|
|
|
|
327
|
|
|
|
(9,308
|
)
|
|
|
(6,101
|
)
|
Interest expense
|
|
|
34,664
|
|
|
|
35,265
|
|
|
|
31,316
|
|
|
|
22,928
|
|
|
|
16,668
|
|
Provision for income taxes
|
|
|
164,098
|
|
|
|
137,991
|
|
|
|
120,671
|
|
|
|
103,184
|
|
|
|
91,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
508,496
|
|
|
$
|
373,206
|
|
|
$
|
375,414
|
|
|
$
|
337,428
|
|
|
$
|
298,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our consolidated balance sheet
data as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,974
|
|
|
$
|
71,527
|
|
|
$
|
33,185
|
|
|
$
|
24,049
|
|
|
$
|
99,152
|
|
Total assets
|
|
$
|
1,217,090
|
|
|
$
|
996,953
|
|
|
$
|
928,877
|
|
|
$
|
830,041
|
|
|
$
|
739,282
|
|
Total debt(5)
|
|
$
|
839,543
|
|
|
$
|
594,169
|
|
|
$
|
669,754
|
|
|
$
|
438,330
|
|
|
$
|
448,698
|
|
Redeemable common stock(6)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
749,539
|
|
|
$
|
1,171,188
|
|
|
$
|
1,125,933
|
|
Stockholders deficit(7)
|
|
$
|
(114,442
|
)
|
|
$
|
(34,949
|
)
|
|
$
|
(1,009,823
|
)
|
|
$
|
(1,203,348
|
)
|
|
$
|
(1,123,977
|
)
|
|
|
|
(1) |
|
During the third quarter of 2010, we reevaluated the probability
of TierMed achieving the specified predetermined EBITDA and
revenue targets and reversed its contingent consideration
related to this acquisition. |
|
(2) |
|
As of December 31, 2007, we discontinued operations of our
claim consulting business located in New Hope, Pennsylvania and
the United Kingdom. There was no impact of discontinued
operations on the results of operations for the years ended
December 31, 2010, 2009 and 2008. |
|
(3) |
|
In conjunction with the IPO, the stock of Insurance Services
Office, Inc. converted to stock of Verisk Analytics, Inc, which
effected a
fifty-for-one
stock split of its common stock. The numbers in the above table
reflect this stock split. |
|
(4) |
|
Although EBITDA is a non-GAAP financial measure, EBITDA is
frequently used by securities analysts, lenders and others in
their evaluation of companies. EBITDA has limitations as an
analytical tool, and should not be considered in isolation, or
as a substitute for an analysis of our results of operations or
cash flow from operating activities reported under GAAP.
Management uses EBITDA in conjunction with traditional GAAP
operating performance measures as part of its overall assessment
of company performance. Some of these limitations are: |
|
|
|
EBITDA does not reflect our cash expenditures, or
future requirements for capital expenditures or contractual
commitments;
|
31
|
|
|
|
|
EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
Although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized often will
have to be replaced in the future and EBITDA does not reflect
any cash requirements for such replacements; and
|
|
|
|
Other companies in our industry may calculate EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
|
|
(5) |
|
Includes capital lease obligations. |
|
(6) |
|
Prior to our corporate reorganization, we were required to
record our Class A common stock and vested options at
redemption value at each balance sheet date as the redemption of
these securities was not solely within our control, due to our
contractual obligations to redeem these shares. We classified
this redemption value as redeemable common stock. After our IPO,
we were no longer obligated to redeem these shares and therefore
we reversed the redeemable common stock balance. See
Note 14 to our consolidated financial statements included
in this annual report on
Form 10-K
for further information. |
|
(7) |
|
Subsequent to our corporate reorganization, share repurchases
are recorded as treasury stock within stockholders
deficit, as we intend to reissue shares from treasury stock in
the future. For the year ended December 31, 2010, we
repurchased $422.3 million of treasury stock. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
our historical financial statements and the related notes
included elsewhere in this annual report on
Form 10-K,
as well as the discussion under Selected Consolidated
Financial Data. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those discussed in or implied
by any of the forward-looking statements as a result of various
factors, including but not limited to those listed under
Risk Factors and Special Note Regarding
Forward-Looking Statements.
We enable risk-bearing businesses to better understand and
manage their risks. We provide value to our customers by
supplying proprietary data that, combined with our analytic
methods, creates embedded decision support solutions. We are the
largest aggregator and provider of data pertaining to
U.S. property and casualty, or P&C, insurance risks.
We offer solutions for detecting fraud in the U.S. P&C
insurance, mortgage and healthcare industries and sophisticated
methods to predict and quantify loss in diverse contexts ranging
from natural catastrophes to health insurance.
Our customers use our solutions to make better risk decisions
with greater efficiency and discipline. We refer to these
products and services as solutions due to the
integration among our products and the flexibility that enables
our customers to purchase components or the comprehensive
package of products. These solutions take various forms,
including data, statistical models or tailored analytics, all
designed to allow our clients to make more logical decisions. We
believe our solutions for analyzing risk positively impact our
customers revenues and help them better manage their costs.
On May 23, 2008, in contemplation of our IPO, Insurance
Service Office, Inc., or ISO, formed Verisk Analytics, Inc., or
Verisk, a Delaware corporation, to be the holding company for
our business. Verisk was initially formed as a wholly-owned
subsidiary of ISO. On October 6, 2009 in connection with
our IPO, we effected a reorganization whereby ISO became a
wholly-owned subsidiary of Verisk. We did not receive any
proceeds from the sale of common stock in the offering.
On October 1, 2010, we completed a follow-on public
offering of 21,885,092 shares of Class A common stock
sold by selling stockholders. We did not receive any proceeds
from the sale of common stock in the offering. The primary
purpose of the offering was to manage and organize the sale by
Class B insurance company shareholders while providing
incremental public float. Concurrently with the closing of the
follow-on public offering, we repurchased 7.3 million
shares of Class B common stock, for an aggregate purchase
price of $192.5 million.
We organize our business in two segments: Risk Assessment and
Decision Analytics. Our Risk Assessment segment provides
statistical, actuarial and underwriting data for the
U.S. P&C insurance industry.
32
Our Risk Assessment segment revenues represented approximately
47.6% and 51.0% of our revenues for the years ended
December 31, 2010 and 2009, respectively. Our Decision
Analytics segment provides solutions our customers use to
analyze the processes of the Verisk Risk Analysis Framework:
Loss Prediction, Fraud Identification and Detection, and Loss
Quantification. Our Decision Analytics segment revenues
represented approximately 52.4% and 49.0% of our revenues for
the years ended December 31, 2010 and 2009, respectively.
Executive
Summary
Key
Performance Metrics
We believe our businesss ability to generate recurring
revenue and positive cash flow is the key indicator of the
successful execution of our business strategy. We use year over
year revenue growth and EBITDA margin as metrics to measure our
performance. EBITDA and EBITDA margin are non-GAAP financial
measures, see Note 4 within Item 6. Selected Financial
Data included in this annual report on
Form 10-K.
Revenue growth. We use year over year revenue
growth as a key performance metric. We assess revenue growth
based on our ability to generate increased revenue through
increased sales to existing customers, sales to new customers,
sales of new or expanded solutions to existing and new customers
and strategic acquisitions of new businesses.
EBITDA margin. We use EBITDA margin as a
metric to assess segment performance and scalability of our
business. We assess EBITDA margin based on our ability to
increase revenues while controlling expense growth.
Revenues
We earn revenues through subscriptions, long-term agreements and
on a transactional basis. Subscriptions for our solutions are
generally paid in advance of rendering services either quarterly
or in full upon commencement of the subscription period, which
is usually for one year and automatically renewed each year. As
a result, the timing of our cash flows generally precedes our
recognition of revenues and income and our cash flow from
operations tends to be higher in the first quarter as we receive
subscription payments. Examples of these arrangements include
subscriptions that allow our customers to access our
standardized coverage language, our claims fraud solution or our
actuarial services throughout the subscription period. In
general, we experience minimal revenue seasonality within the
business. Our long-term agreements are generally for periods of
three to seven years. We recognize revenue from subscriptions
ratably over the term of the subscription and most long-term
agreements are recognized ratably over the term of the agreement.
Certain of our solutions are also paid for by our customers on a
transactional basis. For example, we have solutions that allow
our customers to access fraud detection tools in the context of
an individual mortgage application or loan, obtain
property-specific rating and underwriting information to price a
policy on a commercial building, or compare a P&C
insurance, medical or workers compensation claim with
information in our databases. For the years ended
December 31, 2010 and 2009, 30.2% and 29.0% of our
revenues, respectively, were derived from providing
transactional solutions. We earn transactional revenues as our
solutions are delivered or services performed. In general,
transactions are billed monthly at the end of each month.
Approximately 84.0% and 83.8% of the revenues in our Risk
Assessment segment for the years ended December 31, 2010
and 2009, respectively, were derived from subscriptions and
long-term agreements for our solutions. Our customers in this
segment include most of the P&C insurance providers in the
United States. Approximately 56.8% and 57.7% of the revenues in
our Decision Analytics segment, for the years ended
December 31, 2010 and 2009, respectively, were derived from
subscriptions and long-term agreements for our solutions.
33
Principal
Operating Costs and Expenses
Personnel expenses are the major component of both our cost of
revenues and selling, general and administrative expenses.
Personnel expenses include salaries, benefits, incentive
compensation, equity compensation costs (described under
Equity Compensation Costs below), sales commissions,
employment taxes, recruiting costs, and outsourced temporary
agency costs, which represented 65.4% and 67.6% of our total
expenses for the years ended December 31, 2010 and 2009,
respectively. The higher percentage of personnel expenses in
2009 is primarily related to the accelerated ESOP allocation
that occurred prior to our initial IPO. The accelerated ESOP
allocation resulted in a one time, non-cash charge of
$57.7 million. Excluding this accelerated ESOP allocation,
personnel expenses represented 64.8% of our total expenses for
the year ended December 31, 2009.
We allocate personnel expenses between two categories, cost of
revenues and selling, general and administrative costs, based on
the actual costs associated with each employee. We categorize
employees who maintain our solutions as cost of revenues, and
all other personnel, including executive managers, sales people,
marketing, business development, finance, legal, human
resources, and administrative services, as selling, general and
administrative expenses. A significant portion of our other
operating costs, such as facilities and communications, are also
either captured within cost of revenues or selling, general and
administrative expense based on the nature of the work being
performed.
While we expect to grow our headcount over time to take
advantage of our market opportunities, we believe that the
economies of scale in our operating model will allow us to grow
our personnel expenses at a lower rate than revenues.
Historically, our EBITDA margin has improved because we have
been able to increase revenues without a proportionate
corresponding increase in expenses.
Cost of Revenues. Our cost of revenues
consists primarily of personnel expenses. Cost of revenues also
includes the expenses associated with the acquisition and
verification of data, the maintenance of our existing solutions
and the development and enhancement of our next-generation
solutions. Our cost of revenues excludes depreciation and
amortization.
Selling, General and Administrative
Expense. Our selling, general and administrative
expense also consists primarily of personnel costs. A portion of
the other operating costs such as facilities, insurance and
communications are also allocated to selling, general and
administrative costs based on the nature of the work being
performed by the employee. Our selling, general and
administrative expenses excludes depreciation and amortization.
Description
of Acquisitions
We have acquired six businesses since January 1, 2009. As a
result of these acquisitions, our consolidated results of
operations may not be comparable between periods. The
acquisitions noted below are all integrated within our Decision
Analytics segment.
On December 16, 2010, we acquired 100% of the common stock
of 3E Company, or 3E, a global source for a comprehensive suite
of environmental health and safety compliance solutions for a
net cash purchase price of approximately $107.3 million, of
which $7.7 million was used to fund indemnity escrows. We
are still evaluating the allocation of purchase price. Within
our Decision Analytics segment, 3E overlaps the customer sets
served by our other supply chain risk management solutions and
helps our customers across a variety of vertical markets address
their environmental health and safety issues. See Note 10
to our consolidated financial statements included in this annual
report on
Form 10-K
for the preliminary purchase allocation.
On December 14, 2010, we acquired 100% of the common stock
of Crowe Paradis Services Corporation, or CP, a leading provider
of claims analysis and compliance solutions for the
property/casualty insurance industry, for a net cash purchase
price of approximately $90.3 million, of which
$6.8 million was used to fund indemnity escrows. We are
still evaluating the allocation of purchase price. Within our
Decision Analytics segment, CP offers solutions for complying
with the Medicare Secondary Payer (MSP) Act, provides services
to many of the largest workers compensation insurers,
third-party administrators (TPAs),
34
and self-insured companies which enhances solutions we currently
offer. See Note 10 to our consolidated financial statements
included in this annual report on
Form 10-K
for the preliminary purchase allocation.
On February 26, 2010, we acquired 100% of the common stock
of Strategic Analytics, Inc., or SA, a privately owned provider
of credit risk and capital management solutions to consumer and
mortgage lenders, for a net cash purchase price of
$7.9 million of which $1.5 million was used to fund
indemnity escrows. Within our Decision Analytics segment,
SAs solutions and application set will allow our customers
to take advantage of
state-of-the-art
loss forecasting, stress testing, and economic capital
requirement tools to better understand and forecast the risk
associated within their credit portfolios. See Note 10 to
our consolidated financial statements included in this annual
report on
Form 10-K
for the purchase allocation.
On October 30, 2009, we acquired the net assets of Enabl-u
Technology Corporation, Inc, or Enabl-u, a privately owned
provider of data management, training and communication
solutions to companies with regional, national or global work
forces. We believe this acquisition will enhance our ability to
provide solutions for customers to measure loss prevention and
improve asset management through the use of software and
software services.
On July 24, 2009, we acquired the net assets of TierMed
Systems, LLC, or TierMed, a privately owned provider of
Healthcare Effectiveness Data and Information Set, or HEDIS,
solutions to healthcare organizations that have HEDIS or
quality-reporting needs. We believe this acquisition will
enhance our ability to provide solutions for customers to
measure and improve healthcare quality and financial performance
through the use of software and software services.
On January 14, 2009, we acquired 100% of the stock of D2
Hawkeye, Inc., or D2, a privately-owned provider of data mining,
decision support, clinical quality analysis, and risk analysis
tools for the healthcare industry. We believe this acquisition
will enhance our position in the healthcare analytics and
predictive modeling market by providing new market, cross-sell,
and diversification opportunities for the Companys
expanding healthcare solutions.
Equity
Compensation Costs
We have a leveraged ESOP, funded with intercompany debt that
includes 401(k), ESOP and profit sharing components to provide
employees with equity participation. We make quarterly cash
contributions to the plan equal to the debt service
requirements. As the debt is repaid, shares are released to the
ESOP to fund 401(k) matching and profit sharing
contributions and the remainder is allocated annually to active
employees in proportion to their eligible compensation in
relation to total participants eligible compensation.
We accrue compensation expense over the reporting period equal
to the fair value of the shares to be released to the ESOP.
Depending on the number of shares released to the plan during
the quarter and the fluctuation in the fair value of the shares,
a corresponding increase or decrease in compensation expense
will
35
occur. The amount of our equity compensation costs recognized
for the years ended December 31, 2010, 2009 and 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
ESOP costs by contribution type:
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) matching contribution expense
|
|
$
|
9,932
|
|
|
$
|
7,604
|
|
|
$
|
8,570
|
|
Profit sharing contribution expense
|
|
|
1,641
|
|
|
|
1,139
|
|
|
|
1,141
|
|
ESOP allocation expense
|
|
|
|
|
|
|
67,322
|
|
|
|
12,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP cost
|
|
$
|
11,573
|
|
|
$
|
76,065
|
|
|
$
|
22,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP costs by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment ESOP costs
|
|
$
|
6,861
|
|
|
$
|
43,641
|
|
|
$
|
14,055
|
|
Decision Analytics ESOP costs
|
|
|
4,712
|
|
|
|
32,424
|
|
|
|
8,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP cost
|
|
$
|
11,573
|
|
|
$
|
76,065
|
|
|
$
|
22,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with our IPO, on October 6, 2009, we
accelerated our future ESOP allocation contribution through the
end of the ESOP in 2013, to all participants eligible for a
contribution in 2009. This resulted in a non-recurring non-cash
charge of approximately $57.7 million in the fourth quarter
of 2009. As a result, subsequent to the offering, the non-cash
ESOP allocation expense was substantially reduced for future
periods. Excluding the ESOP allocation, expense relating
specifically to our 401(k) and profit sharing plans were
$11.6 million, $8.7 million and $9.7 million for
the years ended December 31, 2010, 2009 and 2008,
respectively.
In addition, the portion of the ESOP allocation expense related
to the appreciation of the value of the shares in the ESOP above
the value of those shares when the ESOP was first established is
not tax deductible.
Prior to our IPO, we granted to key employees nonqualified stock
options covered under the Insurance Services Office, Inc. 1996
Incentive Plan, or the Option Plan. Subsequent to the IPO,
nonqualified stock options granted to key employees are covered
under the Verisk Analytics, Inc. 2009 Equity Incentive Plan, the
Incentive Plan. All of the Companys outstanding stock
options are covered under the Incentive Plan or the Option Plan.
See Stock-Based Compensation section within our Critical
Accounting Policies and Estimates and Note 16 in our
consolidated financial statements included in this annual report
on
Form 10-K.
Prior to our IPO, our Class A stock and vested stock
options were recorded within redeemable common stock at full
redemption value at each balance sheet date, as the redemption
of these securities was not solely within the control of the
Company. Effective with the corporate reorganization that
occurred on October 6, 2009, we are no longer obligated to
redeem Class A stock and therefore are not required to
present our Class A stock and vested stock options at
redemption value. Our financial results for the fourth quarter
of 2009 reflect a reversal of the redeemable common stock. The
reversal of the redeemable common stock of $1,064.9 million
on October 6, 2009 resulted in the elimination of
accumulated deficit of $440.6 million, an increase of
$0.1 million to Class A common stock at par value, an
increase of $624.3 million to additional
paid-in-capital,
and a reclassification of the ISO Class A unearned common
stock shares balance within the ISO 401(k) Savings and Employee
Stock Ownership Plan, or KSOP, of $1.3 million to unearned
KSOP contributions. See Note 14 in our consolidated
financial statements included in this annual report on
Form 10-K.
Public
Company Expenses
Beginning in 2008, our selling, general and administrative costs
increased as we prepared for our IPO. These costs were
$7.0 million and $6.5 million for the year ended
December 31, 2009 and 2008 and negatively affected our
EBITDA margins by 0.7% for each of the year ended
December 31, 2009 and 2008. Following our IPO, we incurred
additional selling, general and administrative expenses related
to operating as a public company, such as increased legal and
accounting expenses, the cost of an investor relations function,
36
costs related to Section 404 of the Sarbanes-Oxley Act of
2002, and increased director and officer insurance premiums.
Results
of Operations
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009
Consolidated
Results of Operations
Revenues
Revenues were $1,138.3 million for the year ended
December 31, 2010 compared to $1,027.1 million for the
year ended December 31, 2009, an increase of
$111.2 million or 10.8%. In 2010 and the latter half of
2009, we acquired five companies, TierMed, Enabl-u, Strategic
Analytics, CP, and 3E, collectively referred to as recent
acquisitions, which we define as acquisitions not owned for a
significant portion of both the current period
and/or prior
period and would therefore impact the comparability of the
financial results. Recent acquisitions provided an increase of
$10.5 million in revenues for the year ended
December 31, 2010. Excluding recent acquisitions, revenues
increased $100.7 million, which included an increase in our
Risk Assessment segment of $18.1 million and an increase in
our Decision Analytics segment of $82.6 million. Refer to
the Results of Operations by Segment within this section for
further information regarding our revenues.
Cost of
Revenues
Cost of revenues was $463.5 million for the year ended
December 31, 2010 compared to $491.3 million for the
year ended December 31, 2009, a decrease of
$27.8 million or 5.7%. This decrease was primarily due to
the accelerated ESOP allocation that occurred in 2009, which
resulted in the elimination of substantially all future ESOP
allocation expense. In 2010 and 2009, our ESOP allocation
expense for the year was $0.0 million and
$51.9 million, respectively. The reduction in our cost of
revenues was offset by recent acquisitions, which provided an
increase of $6.4 million in cost for the year ended
December 31, 2010. Excluding the impact of the accelerated
ESOP allocation in 2009 and the cost associated with our recent
acquisitions, our cost of revenues increased $17.7 million
or 4.0%. The increase was primarily due to increases in salaries
and employee benefits cost of $16.9 million;
$4.1 million of data and consultants costs incurred in
connection with the growth in our
property-specific
rating and underwriting information, and fraud identification
and detection solutions; and other general expenses of
$0.3 million. These increases in costs were partially
offset by a $2.7 million increase in state employment tax
credit and a reduction in office maintenance expense of
$0.9 million.
The increase in salaries and employee benefits of
$16.9 million includes an increase of $24.6 million in
annual salaries and employee benefits such as medical costs and
long-term incentive plan, and was partially offset by a decrease
of $7.7 million in pension costs. The increase in salaries
and benefit costs is related to a modest increase in employee
headcount, primarily in Decision Analytics. The pension cost
decreased $7.7 million primarily due to the partial
recovery in 2009 of the fair value of our pension investments.
Selling,
General and Administrative
Selling, general and administrative expenses, or SGA, were
$166.4 million for the year ended December 31, 2010
compared to $162.6 million for the year ended
December 31, 2009, an increase of $3.8 million or
2.3%. Excluding the impact of the accelerated ESOP allocation in
2009 of $15.4 million and costs associated with our recent
acquisitions of $4.8 million, SGA increased
$14.4 million or 9.8%. The increase was primarily due to an
increase in salaries and employee benefits of
$14.4 million, which includes annual salary increases,
medical costs, commissions, and long-term incentive plan. Other
increases were costs related to advertising and marketing of
$2.5 million and other general expenses of
$2.1 million. These increases were partially offset by a
decrease in legal costs primarily related to our IPO in 2009 of
$2.8 million and a reduction in pension cost of
$1.8 million.
37
Depreciation
and Amortization of Fixed Assets
Depreciation and amortization of fixed assets was
$40.7 million for the year ended December 31, 2010
compared to $38.6 million for the year ended
December 31, 2009, an increase of $2.1 million or
5.6%. Depreciation and amortization of fixed assets includes
depreciation of furniture and equipment, software, computer
hardware, and related equipment. The majority of the increase
relates to software and hardware costs to support data capacity
expansion and revenue growth.
Amortization
of Intangible Assets
Amortization of intangible assets was $27.4 million for the
year ended December 31, 2010 compared to $32.6 million
for the year ended December 31, 2009, a decrease of
$5.2 million or 16.0%. This decrease was primarily related
to a decrease of $6.3 million of amortization of intangible
assets associated with prior acquisitions that have been fully
amortized; partially offset by $1.1 million of amortization
of intangible assets associated with recent acquisitions.
Acquisition
Related Liabilities Adjustment
Acquisition related liabilities adjustment was a benefit of
$0.5 million for the year ended December 31, 2010;
there was no such adjustment in 2009. This benefit was as a
result of a reduction of $0.5 million to contingent
consideration due to the reduced probability of TierMed, a
recent acquisition, achieving the EBITDA and revenue earnout
targets set at the time of the acquisition.
Investment
Income and Realized Gains/(Losses) on Securities, Net
Investment income and realized gains/(losses) on securities,
net, was a gain of $0.4 million for the year ended
December 31, 2010 as compared to a loss of
$2.1 million for the year ended December 31, 2009, an
increase of $2.5 million.
Interest
Expense
Interest expense was $34.7 million for the year ended
December 31, 2010 compared to $35.3 million for the
year ended December 31, 2009, a decrease of
$0.6 million or 1.7%. This decrease was primarily due to
reduced interest costs as a result of a decrease in average debt
outstanding of approximately $605 million in 2010 compared
to approximately $650 million in 2009, coupled with a
decrease in our interest rate on borrowings from our syndicated
revolving credit facility from LIBOR plus 2.50% to LIBOR plus
1.75%. The decrease in borrowing rate was the result of an
amendment to the facility on September 10, 2010. These
reductions were partially offset by an increase in the
amortization of debt issuance costs related to the syndicated
credit facility, which had been entered into in July of 2009.
Provision
for Income Taxes
The provision for income taxes was $164.1 million for the
year ended December 31, 2010 compared to
$138.0 million for the year ended December 31, 2009,
an increase of $26.1 million or 18.9%. The effective tax
rate was 40.4% for the year ended December 31, 2010
compared to 52.2% for the year ended December 31, 2009. The
effective rate for the year ended December 31, 2010 was
lower due to a decrease in nondeductible expenses in 2010 versus
2009 related to the KSOP.
EBITDA
Margin
The EBITDA margin for our consolidated results was 44.7% for the
year ended December 31, 2010 compared to 36.3% for the year
ended December 31, 2009. Our EBITDA margin does not reflect
any ESOP allocation expense in 2010 due to the accelerated ESOP
allocation that occurred in 2009. The ESOP allocation expense of
$67.3 million in 2009 negatively impacted our 2009 EBITDA
margin by approximately 6.6%. Also included in the calculation
of our 2009 EBITDA margin are costs of $7.0 million
associated with the preparation of our IPO for the year ended
December 31, 2009, which also negatively impacted our
margin by
38
0.7%. For our 2010 EBITDA margin, a decrease in pension costs of
$9.5 million positively impacted our margin by
approximately 0.8%.
Results
of Operations by Segment
Risk
Assessment
Revenues
Revenues were $542.1 million for the year ended
December 31, 2010 as compared to $524.0 million for
the year ended December 31, 2009, an increase of
$18.1 million or 3.5%. The overall increase within this
segment primarily resulted from an increase in prices derived
from continued enhancements to the content of our
industry-standard insurance programs solutions and the
addition of new customers. The increase of $5.0 million or
3.8% within property-specific rating and underwriting
information revenues is due partially to growth in property
appraisal solutions and community rating services.
Our revenue by category for the periods presented is set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Industry-standard insurance programs
|
|
$
|
353,501
|
|
|
$
|
341,079
|
|
|
|
3.6
|
%
|
Property-specific rating and underwriting information
|
|
|
137,071
|
|
|
|
132,027
|
|
|
|
3.8
|
%
|
Statistical agency and data services
|
|
|
29,357
|
|
|
|
28,619
|
|
|
|
2.6
|
%
|
Actuarial services
|
|
|
22,209
|
|
|
|
22,251
|
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Assessment
|
|
$
|
542,138
|
|
|
$
|
523,976
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Revenues
Cost of revenues for our Risk Assessment segment was
$194.7 million for the year ended December 31, 2010
compared to $230.5 million for the year ended
December 31, 2009, a decrease of $35.8 million or
15.5%. Excluding the impact of the accelerated ESOP allocation
in 2009 of $29.7 million, our cost of revenues decreased by
$6.1 million or 3.0%. This decrease was primarily due to
decrease in salaries and employee benefits costs of
$3.1 million, a $2.2 million increase in state
employment tax credit, office maintenance expense of
$1.1 million and $0.7 million of other general
expenses. These decreases were partially offset by an increase
in data and consultant costs of $1.0 million incurred
primarily in connection with the revenues from our
property-specific rating and underwriting information solutions.
The decrease in salaries and employee benefits of
$3.1 million includes $6.5 million reduction in
pension costs and was partially offset by an increase of
$3.4 million in salary and employee benefit costs, which
include annual salary increases and long-term incentive plans
across a relatively constant employee headcount.
Selling,
General and Administrative
Selling, general and administrative expenses for our Risk
Assessment segment were $79.0 million for the year ended
December 31, 2010 compared to $82.5 million for the
year ended December 31, 2009, a decrease of
$3.5 million or 4.3%. Excluding the impact of the
accelerated ESOP allocation in 2009 of $8.7 million, SGA
increased $5.2 million or 7.0%. The increase was primarily
due to an increase in salaries and employee benefits of
$6.1 million, which includes annual salary increases,
medical costs, commissions, and long-term incentive plan expense
and an increase in other general expenses of $1.4 million.
These increases were partially offset by a decrease in pension
cost of $1.4 million and decrease in legal costs primarily
related to our IPO in 2009 of $0.9 million.
39
EBITDA
Margin
The EBITDA margin for our Risk Assessment segment was 49.5% for
the year ended December 31, 2010 compared to 40.3% for the
year ended December 31, 2009. The impact of the accelerated
ESOP allocation of $38.4 million in 2009 negatively
affected our margin by approximately 7.3%. In addition, included
in our 2009 EBITDA margin are costs of $4.0 million
associated with the preparation of our IPO for the year ended
December 31, 2009, which negatively impacted our margin of
0.8%. For our 2010 EBITDA margin, decreased pension costs of
$7.9 million positively impacted our margin by
approximately 1.5%.
Decision
Analytics
Revenues
Revenues for our Decision Analytics segment were
$596.2 million for the year ended December 31, 2010
compared to $503.1 million for the year ended
December 31, 2009, an increase of $93.1 million or
18.5%. Recent acquisitions accounted for an increase of
$10.5 million in revenues for the year ended
December 31, 2010. Our fraud identification and detection
solutions revenue increased $47.7 million or 17.5%.
Excluding the recent acquisitions, our fraud identification and
detection solutions revenue increased $42.5 million
primarily due to an increase in services sold in our fraud
detection and forensic audit services for the mortgage lenders
and mortgage insurance industries. Revenue increased in our loss
prediction solutions of $21.1 million or 15.4%. Excluding
the recent acquisitions, our loss prediction solutions increased
$15.8 million primarily due to new customers and increased
penetration of our existing customers. Our loss quantification
solution revenues increased $24.3 million or 26.2%, as a
result of new customer contracts and new solutions.
Our revenue by category for the periods presented is set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Fraud identification and detection solutions
|
|
$
|
320,781
|
|
|
$
|
273,103
|
|
|
|
17.5
|
%
|
Loss prediction solutions
|
|
|
158,406
|
|
|
|
137,328
|
|
|
|
15.4
|
%
|
Loss quantification solutions
|
|
|
117,018
|
|
|
|
92,697
|
|
|
|
26.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Decision Analytics
|
|
$
|
596,205
|
|
|
$
|
503,128
|
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Revenues
Cost of revenues for our Decision Analytics segment was
$268.8 million for the year ended December 31, 2010
compared to $260.8 million for the year ended
December 31, 2009, an increase of $8.0 million or
3.0%. Excluding the impact of the accelerated ESOP allocation in
2009 of $22.2 million and costs associated with recent
acquisitions of $6.4 million, our cost of revenues
increased by $23.8 million or 10.0%. This increase is
primarily due to an increase in salary and employee benefits of
$20.0 million; data and consultant costs of
$3.1 million incurred primarily related to the revenue
growth in our fraud identification and detection solutions;
other general expenses of $1.0 million; and office
maintenance expense of $0.2 million offset by a
$0.5 million increase in state employment tax credit.
The increase in salaries and employee benefits of
$20.0 million includes $21.2 million increase in
salaries and employee benefit costs, medical expense, and
long-term incentive plans, including the IPO stock option grant;
and is partially offset by decreases in pension of
$1.2 million. The increase in salaries and benefit costs is
related to a modest increase in employee headcount relative to
the 18.5% revenue growth in our Decision Analytic revenues.
40
Selling,
General and Administrative
Selling, general and administrative expenses for our Decision
Analytics segment were $87.4 million for the year ended
December 31, 2010 compared to $80.1 million for the
year ended December 31, 2009, an increase of
$7.3 million or 9.2%. Excluding the impact of the
accelerated ESOP allocation in 2009 of $6.7 million and
cost associated with recent acquisitions of $4.8 million,
SGA increased $9.2 million or 12.5%. The increase was
primarily due to an increase in salaries and employee benefits
of $8.3 million, which includes annual salary increases,
medical costs, commissions, and long-term incentive plan. Other
increases were costs related to advertising and marketing of
$2.4 million and an increase in other general expenses of
$0.8 million. These increases were partially offset by a
decrease in legal costs primarily related to our IPO of
$1.9 million and decreased pension cost of
$0.4 million.
EBITDA
Margin
The EBITDA margin for our Decision Analytics segment was 40.3%
for the year ended December 31, 2010 compared to 32.3% for
the year ended December 31, 2009. The impact of the
accelerated ESOP allocation of $28.9 million in 2009
negatively affected our margin by approximately 5.8%. In
addition, included in our 2009 EBITDA margin are IPO related
costs of $3.0 million, which negatively impacted our margin
by 0.6%.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Consolidated
Results of Operations
Between January 1, 2008 and December 31, 2009 we
acquired five businesses, which may affect the comparability of
our financial statements.
Revenues
Revenues were $1,027.1 million for the year ended
December 31, 2009 compared to $893.6 million for the
year ended December 31, 2008, an increase of
$133.5 million or 14.9%. The acquisitions in the second
half of 2008 and the three acquisitions in 2009 accounted for an
increase of $33.2 million in revenues for the year ended
December 31, 2009. Excluding these acquisitions, revenues
increased $100.3 million, which included an increase in our
Risk Assessment segment of $19.6 million and an increase in
our Decision Analytics segment of $80.7 million.
Cost of
Revenues
Cost of revenues was $491.3 million for the year ended
December 31, 2009 compared to $386.9 million for the
year ended December 31, 2008, an increase of
$104.4 million or 27.0%. The increase was primarily due to
the accelerated ESOP allocation, which resulted in a
non-recurring non-cash charge of $44.4 million prior to our
IPO and costs related to the newly acquired companies of
$17.7 million. Excluding the accelerated ESOP allocation
and the effect of the newly acquired companies, our cost of
revenues increased $42.3 million or 10.9%. The increase was
primarily due to costs related to an increase in salaries and
employee benefits costs of $32.2 million, which include
annual salary increases, medical costs, and pension cost.
Pension cost represents $15.0 million of the salaries and
employee benefit costs increase due to the decline in the market
values of pension investments as a result of the global economic
downturn in 2008. Other increases include third party data costs
of $10.5 million primarily in our Decision Analytics
segment and office maintenance fees of $1.4 million. These
increases were partially offset by a decrease in other operating
expenses of $1.8 million, which include travel and auto
related costs.
Selling,
General and Administrative
Selling, general and administrative expenses were
$162.6 million for the year ended December 31, 2009
compared to $131.2 million for the year ended
December 31, 2008, an increase of $31.4 million or
23.9%. The increase was primarily due to the accelerated ESOP
allocation, which resulted in a non-recurring
41
non-cash charge of $13.3 million prior to our IPO and costs
related to the newly acquired companies of $12.7 million.
Excluding the accelerated ESOP allocation and the effect of the
newly acquired companies, our selling, general and
administrative expenses increased $5.4 million or 4.1%. The
increase was primarily due to an increase in salaries and
employee benefits costs of $10.3 million, which include
annual salary increases, medical costs, commissions and pension
costs across a relatively constant employee headcount. Pension
costs represent $3.1 million of the increases in salaries
and employee benefit costs due to the decline in the market
values of pension investments as a result of the global economic
downturn in 2008. Other increases were attributed to other
general expenses of $0.9 million. These increases were
partially offset by a decrease in legal costs of
$3.8 million and an insurance cost recovery of
$2.0 million.
Depreciation
and Amortization of Fixed Assets
Depreciation and amortization of fixed assets was
$38.6 million for the year ended December 31, 2009
compared to $35.3 million for the year ended
December 31, 2008, an increase of $3.3 million or
9.2%. Depreciation and amortization of fixed assets includes
depreciation of furniture and equipment, software, computer
hardware, and related equipment.
Amortization
of Intangible Assets
Amortization of intangible assets was $32.6 million for the
year ended December 31, 2009 compared to $29.6 million
for the year ended December 31, 2008, an increase of
$3.0 million or 10.4%. The increase is the result of the
amortization of intangibles from our new acquisitions, partially
offset by certain intangible assets having been fully amortized
in 2008. We amortize intangible assets obtained through
acquisitions over the periods that we expect to derive benefit
from such assets.
Investment
Income and Realized (Losses)/Gains on Securities, Net
Investment income and realized (losses)/gains on securities, net
was $(2.1) million for the year ended December 31,
2009 compared to $(0.3) million for the year ended
December 31, 2008, an increased loss of $1.8 million.
Investment income for the year ended December 31, 2009
includes $0.3 million of investment income, partially
offset by $2.4 million of other-than temporary impairment
primarily related to a cost basis private equity investment in a
telematics business. Investment income for the year ended
December 31, 2008 consisted of $2.2 million of
investment income, partially offset by a $(2.5) million
realized loss on sale of securities. The decrease in investment
income was primarily the result of the termination of the
shareholder loan program in 2008.
Interest
Expense
Interest expense was $35.3 million for the year ended
December 31, 2009 compared to $31.3 million for the
year ended December 31, 2008, an increase of
$4.0 million or 12.6%. This increase is primarily due to an
increase in the weighted average interest rate on our
outstanding borrowings during the year ended December 31,
2009.
Provision
for Income Taxes
The provision for income taxes was $138.0 million for the
year ended December 31, 2009 compared to
$120.7 million for the year ended December 31, 2008,
an increase of $17.3 million or 14.4%. The effective tax
rate was 52.2% for the year ended December 31, 2009
compared to 43.3% for the year ended December 31, 2008. The
2009 rate is higher due to the non-recurring, non-cash costs
associated with the accelerated ESOP allocation and certain IPO
related costs that are not tax deductible.
EBITDA
Margin
The EBITDA margin for our consolidated results was 36.3% for the
year ended December 31, 2009 compared to 42.0% for the year
ended December 31, 2008. Included in the calculation of our
EBITDA margin for the year ended December 31, 2009 are
non-recurring, non-cash costs of $57.7 million associated
with the
42
accelerated ESOP allocation prior to our IPO, representing a
5.6% negative impact in EBITDA margin, and increased pension
costs of $18.1 million, representing a 1.8% negative impact
on our EBITDA margin. Also included in the calculation of our
EBITDA margin are costs of $7.0 million and
$6.5 million associated with the preparation for our IPO
for the years ended December 31, 2009 and 2008,
respectively, which represents a 0.7% negative impact in EBITDA
margin for each period.
Results
of Operations by Segment
Risk
Assessment
Revenues
Revenues for our Risk Assessment segment were
$524.0 million for the year ended December 31, 2009
compared to $504.4 million for the year ended
December 31, 2008, an increase of $19.6 million or
3.9%. The increase was primarily due to an increase in the sales
of our industry-standard insurance programs and
property-specific rating and underwriting information. The
increase in our industry-standard insurance programs primarily
resulted from an increase in prices derived from continued
enhancements to the content of our solutions and the addition of
new customers. The increase in our property-specific rating and
underwriting information is particularly due to sales of our
rate making and policy administration solutions. Our revenue by
category for the periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Industry-standard
insurance programs
|
|
$
|
341,079
|
|
|
$
|
329,858
|
|
|
|
3.4
|
%
|
Property-specific rating and underwriting information
|
|
|
132,027
|
|
|
|
125,835
|
|
|
|
4.9
|
%
|
Statistical agency and data services
|
|
|
28,619
|
|
|
|
27,451
|
|
|
|
4.3
|
%
|
Actuarial services
|
|
|
22,251
|
|
|
|
21,247
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Assessment
|
|
$
|
523,976
|
|
|
$
|
504,391
|
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Revenues
Cost of revenues for our Risk Assessment segment was
$230.5 million for the year ended December 31, 2009
compared to $199.9 million for the year ended
December 31, 2008, an increase of $30.6 million or
15.3%. The increase was primarily due to the accelerated ESOP
allocation, which resulted in a non-recurring non-cash charge of
$25.4 million prior to our IPO. Excluding the accelerated
ESOP allocation, our cost of revenues increased
$5.2 million or 2.6%. The increase was primarily due to an
increase in salaries and employee benefits costs of
$10.1 million, primarily related to pension costs of
$12.7 million resulting from the global economic downturn
experienced in 2008, partially offset by a decrease in salaries
due to a slight reduction in headcount. There was also an
increase in office maintenance fees of $0.3 million. The
increase was partially offset by a decrease in other operating
expenses of $3.8 million, which include decreases in travel
and auto related costs, and a decrease in data and consultant
costs of $1.4 million.
Selling,
General and Administrative
Selling, general and administrative expenses for our Risk
Assessment segment were $82.5 million for the year ended
December 31, 2009 compared to $81.8 million for the
year ended December 31, 2008, an increase of
$0.7 million or 0.9%. Included within the increase in SGA
is the accelerated ESOP allocation, which resulted in a
non-recurring non-cash charge of $7.5 million. Excluding
this accelerated ESOP charge, our SGA decreased
$6.8 million or 8.2%. The decrease was primarily due to
lower legal costs of $4.1 million primarily associated with
the preparation for our IPO in 2008, an insurance cost recovery
of $1.7 million and other general expenses of
$1.4 million. These decreases was partially offset by an
increase in salaries and employee benefit costs of
$0.4 million, which include increased pension costs of
$2.4 million offset by a decrease in salaries and other
employee benefits.
43
EBITDA
Margin
The EBITDA margin for our Risk Assessment segment was 40.3% for
the year ended December 31, 2009 compared to 44.2% for the
year ended December 31, 2008. Included in the calculation
of our EBITDA margin for the year ended December 31, 2009,
are non-recurring, non-cash costs of $32.9 million
associated with the accelerated ESOP allocation prior to our
IPO, representing a 6.3% negative impact in EBITDA margin, and
increased pension costs of $15.1 million, representing a
2.8% negative impact on our EBITDA margin. Also included in the
calculation of our EBITDA margin are costs of $4.1 and
$5.8 million associated with the preparation for our IPO
for the year ended December 31, 2009 and December 31,
2008, respectively, representing a 0.8% and 1.1% negative
impact, respectively, in EBITDA margin for each period.
Decision
Analytics
Revenues
Revenues for our Decision Analytics segment were
$503.1 million for the year ended December 31, 2009
compared to $389.2 million for the year ended
December 31, 2008, an increase of $113.9 million or
29.3%. In 2008 and 2009, we acquired two companies and three
companies, respectively. These acquisitions accounted for
$1.3 million and $34.5 million of additional revenues
for the years ended December 31, 2008 and 2009,
respectively. The increase in revenue relating to the
acquisitions was $33.2 million, of which $33.1 million
relates to the loss prediction category and $0.1 million
relates to the fraud and detection solutions category. Excluding
the impact of these acquisitions, revenues increased
$80.7 million for the year ended December 31, 2009.
Our fraud and detection solutions revenue increased
$59.1 million primarily in our fraud detection and forensic
audit services for the home mortgage and mortgage insurance
industries as well as in response to the increased scrutiny and
refinancing within the mortgage industry. Increased revenue in
our loss prediction solutions primarily resulted from our
acquisitions and increased penetration of our existing
customers. Our loss quantification revenues increased as a
result of new customer contracts and volume increases associated
with natural disasters experienced in the United States. Our
revenue by category for the periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Fraud identification and detection solutions
|
|
$
|
273,103
|
|
|
$
|
213,994
|
|
|
|
27.6
|
%
|
Loss prediction solutions
|
|
|
137,328
|
|
|
|
95,128
|
|
|
|
44.4
|
%
|
Loss quantification solutions
|
|
|
92,697
|
|
|
|
80,037
|
|
|
|
15.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Decision Analytics
|
|
$
|
503,128
|
|
|
$
|
389,159
|
|
|
|
29.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Revenues
Cost of revenues for our Decision Analytics segment was
$260.8 million for the year ended December 31, 2009
compared to $187.0 million for the year ended
December 31, 2008, an increase of $73.8 million or
39.5%. The increase was primarily due to the accelerated ESOP
allocation, which resulted in a non-cash non-recurring charge of
$19.0 million prior to our IPO and costs related to the
newly acquired companies of $17.7 million. Excluding the
accelerated ESOP allocation and the effect of the newly acquired
companies, our cost of revenues increased $37.1 million or
19.8%. The increase is primarily due to an increase in salaries
and employee benefits of $22.1 million, which includes
annual salary increases, medical costs and equity compensation
and pension costs. This increase in salaries and employee
benefit costs is related to a modest increase in employee
headcount relative to the 27.6% revenue growth in our fraud
identification and detection solutions and to an increase
pension cost of $2.3 million due to the global economic
downturn experienced in 2008. Other increases include third
party data costs of $11.9 million, an increase in other
operating expenses of $2.0 million, which include
technology costs, and an increase in office maintenance costs of
$1.1 million.
44
Selling,
General and Administrative
Selling, general and administrative expenses were
$80.1 million for the year ended December 31, 2009
compared to $49.4 million for the year ended
December 31, 2008, an increase of $30.7 million or
62.2%. The increase is primarily due to the accelerated ESOP
allocation, which resulted in a non-cash non-recurring charge of
$5.8 million prior to our IPO and costs related to the
newly acquired companies of $12.7 million. Excluding the
accelerated ESOP allocation and the effect of the newly acquired
companies, our SGA increased $12.2 million or 24.7%. The
increase was primarily due to an increase in salaries and
employee benefits costs of $9.9 million, which include
annual salary increases, medical costs and pension cost of
$0.7 million. Other increases include an increase in legal
costs of $0.3 million, and other general expenses of
$2.3 million, partially offset by an insurance cost
recovery of $0.3 million.
EBITDA
Margin
The EBITDA margin for our Decision Analytics segment was 32.3%
for the year ended December 31, 2009 compared to 39.2% for
the year ended December 31, 2008. Included in the
calculation of our EBITDA margin for the year ended
December 31, 2009 are non-recurring non-cash costs of
$24.8 million associated with the accelerated ESOP
allocation prior to our IPO, representing a 4.9% negative impact
in EBITDA margin, and increased pension costs of
$3.0 million, representing a 0.6% negative impact on our
EBITDA margin. Also included in the calculation of our EBITDA
margin are costs of $2.9 and $0.7 million associated with
the preparation for our IPO for the years ended
December 31, 2009 and December 31, 2008 representing a
0.6% and 0.2% negative impact, respectively, in EBITDA margin.
Quarterly
Results of Operations
The following table sets forth our quarterly unaudited
consolidated statement of operations data for each of the eight
quarters in the period ended December 31, 2010. In
managements opinion, the data has been prepared on the
same basis as the audited consolidated financial statements
included in this annual report on
Form 10-K,
and reflects all necessary adjustments for a fair presentation
of this data. The results of historical periods are not
necessarily indicative of the results of operations for a full
year or any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Full Year
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Full Year
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
Statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
276,154
|
|
|
$
|
281,677
|
|
|
$
|
287,354
|
|
|
$
|
293,158
|
|
|
$
|
1,138,343
|
|
|
$
|
245,751
|
|
|
$
|
257,916
|
|
|
$
|
258,311
|
|
|
$
|
265,126
|
|
|
$
|
1,027,104
|
|
Operating income
|
|
$
|
106,414
|
|
|
$
|
107,075
|
|
|
$
|
113,718
|
|
|
$
|
113,707
|
|
|
$
|
440,914
|
|
|
$
|
87,203
|
|
|
$
|
87,851
|
|
|
$
|
84,795
|
|
|
$
|
42,158
|
|
|
$
|
302,007
|
|
Net income/(loss)
|
|
$
|
55,375
|
|
|
$
|
58,404
|
|
|
$
|
62,880
|
|
|
$
|
65,893
|
|
|
$
|
242,552
|
|
|
$
|
44,915
|
|
|
$
|
45,939
|
|
|
$
|
42,205
|
|
|
$
|
(6,445
|
)
|
|
$
|
126,614
|
|
Basic net income/(loss) per share:
|
|
$
|
0.31
|
|
|
$
|
0.32
|
|
|
$
|
0.35
|
|
|
$
|
0.38
|
|
|
$
|
1.36
|
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
0.24
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.72
|
|
Diluted net income/(loss) per share:
|
|
$
|
0.29
|
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
$
|
0.37
|
|
|
$
|
1.30
|
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
0.23
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.70
|
|
Liquidity
and Capital Resources
As of December 31, 2010 and 2009 we had cash and cash
equivalents and
available-for-sale
securities of $60.6 million and $77.0 million,
respectively. Subscriptions for our solutions are billed and
generally paid in advance of rendering services either quarterly
or in full upon commencement of the subscription period, which
is usually for one year. Subscriptions are automatically renewed
at the beginning of each calendar year. We have historically
generated significant cash flows from operations. As a result of
this factor, as well as the availability of funds under our
syndicated revolving credit facility, we believe we will have
sufficient cash to meet our working capital and capital
expenditure needs, including acquisition contingent payments,
and to fuel our future growth plans.
We have historically managed the business with a working capital
deficit due to the fact that, as described above, we offer our
solutions and services primarily through annual subscriptions or
long-term contracts, which are generally prepaid quarterly or
annually in advance of the services being rendered. When cash is
received for prepayment of invoices, we record an asset (cash
and cash equivalents) on our balance
45
sheet with the offset recorded as a current liability (fees
received in advance). This current liability is deferred revenue
that does not require a direct cash outflow since our customers
have prepaid and are obligated to purchase the services. In most
businesses, growth in revenue typically leads to an increase in
the accounts receivable balance causing a use of cash as a
company grows. Unlike these businesses, our cash position is
favorably affected by revenue growth, which results in a source
of cash due to our customers prepaying for most of our services.
Our capital expenditures, which include non-cash purchases of
fixed assets and capital lease obligations, as a percentage of
revenues for the years ended December 31, 2010, 2009, and
2008 were 3.6%, 4.3%, and 3.7%, respectively. We estimate our
capital expenditures for 2011 will be approximately
$60.0 million, which primarily include expenditures on our
technology infrastructure and our continuing investments in
developing and enhancing our solutions. Expenditures related to
developing and enhancing our solutions are predominately related
to internal use software and are capitalized in accordance with
ASC 350-40,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. The amounts capitalized in
accordance with
ASC 985-20,
Software to be Sold, Leased or Otherwise
Marketed, are not significant to the financial
statements.
We have also historically used a portion of our cash for
repurchases of our common stock from our stockholders. For the
years ended December 31, 2010, 2009, and 2008 we
repurchased and redeemed $422.3 million, $46.7 million
and $392.6 million, respectively, of our common stock.
Included in the 2010 share repurchases are repurchases of
$209.8 million of Class B, including
$199.9 million and $9.9 million of Verisk
Class B-1
and
Class B-2,
respectively, which were not a part of the Repurchase Program. A
substantial portion of the share redemption included in the
total above was completed pursuant to the terms of the Insurance
Service Office, Inc. 1996 Incentive Plan, or the Option Plan.
We provide pension and postretirement benefits to certain
qualifying active employees and retirees. Based on the pension
funding policy, we expect to contribute approximately
$25.8 million to the pension plan in 2011. Under the
postretirement plan, we provide certain healthcare and life
insurance benefits to qualifying participants; however,
participants are required to pay a stated percentage of the
premium coverage. We expect to contribute approximately
$4.2 million to the postretirement plan in 2011. See
Note 17 to our consolidated financial statements included
in this annual report on
Form 10-K.
Financing
and Financing Capacity
We had total debt, excluding capital lease and other
obligations, of $835.0 million and $585.0 million at
December 31, 2010 and 2009, respectively. The debt at
December 31, 2010 was held under long-term loan facilities
drawn to finance our stock repurchases and acquisitions.
As of December 31, 2010, our $575 million Syndicated
Revolving Credit Facility due September 2014, or credit
facility, is a committed facility, where as all of our long-term
loan facilities are uncommitted facilities. We have financed and
expect to finance our short-term working capital needs, stock
repurchases and acquisition contingent payments through cash
from operations and borrowings from a combination of our
long-term facilities and our credit facility.
On January 19, 2010 and January 25, 2010, we repaid
$10.0 million and $50.0 million, respectively, of our
outstanding borrowings from the credit facility. On
September 10, 2010, we amended our credit facility to
increase the capacity by $155.0 million to
$575.0 million, to extend the maturity of the credit
facility to September 10, 2014 and to modify certain
restrictions. We paid a one-time fee of $1.8 million,
reduced our ongoing unused facility fees from 0.375% to 0.200%
and reduced our borrowing rate from LIBOR plus 2.50% to LIBOR
plus 1.75%. The one-time fee will be amortized over a four-year
period, which is consistent with the remaining life of the
credit facility. We had borrowings of $310.0 million and
$60.0 million from our credit facility outstanding as of
December 31, 2010 and 2009, respectively. We had available
capacity of $263.0 million from our credit facility at
December 31, 2010. Upon completion of our follow-on
offering on October 1, 2010, we funded a portion of our
share repurchase with proceeds from borrowings of
$160.0 million under our credit facility of which we have
repaid $105.0 million as of December 31, 2010. We also
funded the acquisitions of 100% of the common stock of 3E
Company and Crowe Paradis Services Corporation on
46
December 16, 2010 and December 14, 2010, respectively,
with a portion of the proceeds from borrowings from our credit
facility of $255.0 million.
The $575 million credit facility contains certain customary
financial and other covenants that, among other things, impose
certain restrictions on indebtedness, liens, investments, and
capital expenditures. These covenants also place restrictions on
mergers, asset sales, sale and leaseback transactions, payments
between us and our subsidiaries, cross defaults, and certain
transactions with affiliates. The financial covenants require
that, at the end of any fiscal quarter, we have a consolidated
interest coverage ratio of at least 3.0 to 1.0 and that during
any period of four fiscal quarters we maintain a consolidated
funded debt leverage ratio of below 3.0 to 1.0. We were in
compliance with all debt covenants under the credit facility as
of December 31, 2010.
We also have long-term loan facilities under uncommitted master
shelf agreements with Aviva Investors North America, or Aviva,
New York Life and Prudential Capital Group, or Prudential, with
capacities at December 31, 2010 in the amounts of
$20.0 million, $30.0 million and $115.0 million,
respectively. We can borrow under the Aviva Master Shelf
Agreement until December 10, 2011. On March 16, 2010,
we amended the New York Life Master Shelf Agreement to increase
the authorization of additional senior promissory notes from
$100.0 million to $115.0 million, and to extend the
maturity of the agreement through March 16, 2013. On
August 30, 2010, we amended the Prudential Master Shelf
Agreement to extend the maturity of the agreement through
August 30, 2013.
On June 15, 2009, we repaid our $100.0 million
Prudential Series D senior notes. In order to pay the
Prudential Series D senior notes, we issued Series J
senior promissory notes under the uncommitted master shelf
agreement with Prudential in the aggregate principal amount of
$50.0 million due June 15, 2016 and borrowed
$50.0 million from our revolving credit facility with Bank
of America N.A. Interest on the Prudential Series J senior
notes is payable quarterly at a fixed rate of 6.85% on the
senior promissory notes.
On April 27, 2009, we issued a senior promissory note under
an uncommitted master shelf agreement with Aviva in the
aggregate principal amount of $30.0 million due
April 27, 2013. Interest is payable quarterly at a fixed
rate of 6.46%.
The notes outstanding under these facilities mature over the
next six years. Individual borrowings are made at a fixed rate
of interest determined at the time of the borrowing and interest
is payable quarterly. The weighted average rate of interest with
respect to our outstanding borrowings under these facilities was
6.07% and 6.11% for the years ended December 31, 2010 and
2009, respectively. The uncommitted master shelf agreements
contain certain covenants that limit our ability to create
liens, enter into sale and leaseback transactions and
consolidate, merge or sell assets to another company. The Aviva
and New York Life Master Shelf Agreements also contain financial
covenants that require us to maintain a fixed charge coverage
ratio of no less than 275% during any period of four fiscal
quarters and a leverage ratio of no more than 300% at the end of
any fiscal quarter. The Prudential Master Shelf Agreement also
contains financial covenants that require that, at the end of
any fiscal quarter, we have a consolidated interest coverage
ratio of at least 3.0 to 1.0 and a leverage ratio of no more
than 300% at the end of any fiscal quarter. We were in
compliance with all debt covenants under our master shelf
agreements as of December 31, 2010.
.
Cash
Flow
The following table summarizes our cash flow data for the years
ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
336,032
|
|
|
$
|
326,401
|
|
|
$
|
247,906
|
|
Net cash used in investing activities
|
|
$
|
(243,689
|
)
|
|
$
|
(185,340
|
)
|
|
$
|
(130,466
|
)
|
Net cash used in financing activities
|
|
$
|
(108,787
|
)
|
|
$
|
(102,809
|
)
|
|
$
|
(107,376
|
)
|
47
Operating
Activities
Net cash provided by operating activities increased to
$336.0 million for the year ended December 31, 2010
compared to $326.4 million for the year ended
December 31, 2009. The increase in operating activities was
primarily due to an increase in cash receipts from customers and
a reduction in interest payments, partially offset by an
increase in operating expense and tax payments during the year
ended December 31, 2010. Increased pension contributions of
$15.0 million in 2010, as well as the timing of certain
annual bonus payments, mitigated the growth in our operating
cash flow during the year ended December 31, 2010.
Net cash provided by operating activities increased to
$326.4 million for the year ended December 31, 2009
compared to $247.9 million for the year ended
December 31, 2008. The increase in net cash provided by
operating activities was principally due to an increase in cash
receipts of $141.5 million, a decrease in excess tax
benefit from exercised stock options of $6.1 million, a
decrease in payments of acquisition related liabilities of
$1.9 million, and a decrease in salary and employee related
payments of $10.2 million due to an additional pay-cycle
that occurred in 2008. Our payroll is processed on a bi-weekly
basis thereby requiring an additional pay-cycle once every ten
years. This increase in net cash provided by operating
activities was partially offset by an increase in operating
expense related payments of $63.6 million, an increase in
tax payments of $12.1 million and an increase in interest
payments of $5.2 million.
Investing
Activities
Net cash used in investing activities was $243.7 million
for the year ended December 31, 2010 and
$185.3 million for the year ended December 31, 2009.
The increase in cash used in investing activities was primarily
due to an increase in acquisitions, including escrow funding, of
$136.6 million partially offset by a decrease in earnout
payments of $78.1 million.
Net cash used in investing activities was $185.3 million
for the year ended December 31, 2009 and
$130.5 million for the year ended December 31, 2008.
The increase in net cash used in investing activities was
principally due to increased cash paid for acquisitions,
including escrow funding, of $48.5 million and an increase
in purchases of fixed assets of $8.0 million.
Financing
Activities
Net cash used in financing activities was $108.8 million
for the year ended December 31, 2010 and
$102.8 million for the year ended December 31, 2009.
The increase in net cash used in financing activities can be
attributed to an increase in share repurchases of
$388.4 million primarily through our Repurchase Program and
the shares repurchased as part of our follow-on public offering
on October 1, 2010. The increase was partially offset by
net debt receipts of $325.6 million and cash inflows from
stock option exercises of $56.8 million.
Net cash used in financing activities was $102.8 million
for the year ended December 31, 2009 and
$107.4 million for the year ended December 31, 2008.
The decrease in net cash used in financing activities was
principally due to a decrease in the repurchases of stock of
$345.8 million, partially offset by a decrease in net
proceeds from the issuance of long-term and short-term debt of
$312.5 million, a decrease in proceeds from stock options
exercised of $22.6 million and a decrease in excess tax
benefit from stock options exercised of $6.1 million.
48
Contractual
Obligations
The following table summarizes our contractual obligations and
commercial commitments at December 31, 2010 and the future
periods in which such obligations are expected to be settled in
cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Contractual obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
934,461
|
|
|
$
|
465,464
|
|
|
$
|
225,611
|
|
|
$
|
191,838
|
|
|
$
|
51,548
|
|
Capital lease obligations
|
|
|
4,162
|
|
|
|
2,511
|
|
|
|
1,547
|
|
|
|
104
|
|
|
|
|
|
Operating leases
|
|
|
207,009
|
|
|
|
26,226
|
|
|
|
49,459
|
|
|
|
41,780
|
|
|
|
89,544
|
|
Earnout and contingent payments
|
|
|
7,893
|
|
|
|
3,500
|
|
|
|
4,393
|
|
|
|
|
|
|
|
|
|
Pension and postretirement plans(1)
|
|
|
204,179
|
|
|
|
30,392
|
|
|
|
67,949
|
|
|
|
64,496
|
|
|
|
41,342
|
|
Other long-term liabilities(2)
|
|
|
12,843
|
|
|
|
740
|
|
|
|
748
|
|
|
|
8,086
|
|
|
|
3,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
$
|
1,370,547
|
|
|
$
|
528,833
|
|
|
$
|
349,707
|
|
|
$
|
306,304
|
|
|
$
|
185,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our funding policy is to contribute at least equal to the
minimum legal funding requirement. |
|
(2) |
|
Other long-term liabilities consist of our ESOP contributions
and employee-related deferred compensation plan. We also have a
deferred compensation plan for our Board of Directors; however,
based on past performance and the uncertainty of the dollar
amounts to be paid, if any, we have excluded such amounts from
the above table. |
|
(3) |
|
Unrecognized tax benefits of approximately $23.0 million
have been recorded as liabilities in accordance with
ASC 740, which have been omitted from the table above, as
we are uncertain as to if or when such amounts may be settled,
with the exception of those amounts subject to a statute of
limitation. Related to the unrecognized tax benefits, we also
have recorded a liability for potential penalties and interest
of $7.8 million. |
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
Our managements discussion and analysis of financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
require management to make estimates and judgments that affect
reported amounts of assets and liabilities and related
disclosures of contingent assets and liabilities at the dates of
the financial statements and revenue and expenses during the
reporting periods. These estimates are based on historical
experience and on other assumptions that are believed to be
reasonable under the circumstances. On an ongoing basis,
management evaluates its estimates, including those related to
revenue recognition, goodwill and intangible assets, pension and
other post retirement benefits, stock-based compensation, and
income taxes. Actual results may differ from these assumptions
or conditions.
Revenue
Recognition
The Companys revenues are primarily derived from sales of
services and revenue is recognized as services are performed and
information is delivered to our customers. Revenue is recognized
when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, fees
and/or price
are fixed or determinable and collectability is reasonably
assured. Revenues for subscription services are recognized
ratably over the subscription term, usually one year. Revenues
from transaction-based fees are recognized as information is
delivered to customers, assuming all other revenue recognition
criteria are met.
49
The Company also has term based software licenses where the only
remaining undelivered element is post-contract customer support
or PCS, including unspecified upgrade rights on a when and if
available basis. The Company recognizes revenue for these
licenses ratably over the duration of the license term. The
Company also provides hosting or software solutions that provide
continuous access to information and include PCS and recognizes
revenue ratably over the duration of the license term. In
addition, the determination of certain of our services revenues
requires the use of estimates, principally related to
transaction volumes in instances where these volumes are
reported to us by our clients on a monthly basis in arrears. In
these instances, we estimate transaction volumes based on
average actual volumes reported by our customers in the past.
Differences between our estimates and actual final volumes
reported are recorded in the period in which actual volumes are
reported. We have not experienced significant variances between
our estimates of these services revenues reported to us by our
customers and actual reported volumes in the past.
We invoice our customers in annual, quarterly, or monthly
installments. Amounts billed and collected in advance are
recorded as fees received in advance on the balance sheet and
are recognized as the services are performed and revenue
recognition criteria are met.
Stock-Based
Compensation
On January 1, 2005, we adopted the new accounting standard
for Share Based Payment using a prospective approach,
which required us to record compensation expense for all awards
granted after the date of adoption based on the grant date fair
value. As the majority of annual grants have a four year vesting
term, the compensation expense for 2005 through 2007 is not
comparable in subsequent periods, as there is no compensation
expense recorded for the vesting of awards granted from 2002
through 2004. The following table illustrates the amount of
annual compensation expense resulting from the implementation of
this standard using the prospective approach for the years ended
December 31, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
2005 grants
|
|
$
|
|
|
|
$
|
757
|
|
|
$
|
2,209
|
|
2006 grants
|
|
|
395
|
|
|
|
1,730
|
|
|
|
1,870
|
|
2007 grants
|
|
|
2,300
|
|
|
|
2,056
|
|
|
|
2,561
|
|
2008 grants
|
|
|
2,542
|
|
|
|
2,669
|
|
|
|
3,241
|
|
2009 grants
|
|
|
9,131
|
|
|
|
5,532
|
|
|
|
|
|
2010 grants
|
|
|
6,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
21,298
|
|
|
$
|
12,744
|
|
|
$
|
9,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of equity awards is measured on the date of grant
using a Black-Scholes option-pricing model, which requires the
use of several estimates, including expected term, expected
risk-free interest rate, expected volatility and expected
dividend yield.
Stock-based compensation cost is measured at the grant date,
based on the fair value of the awards granted, and is recognized
as expense over the requisite service period. Option grants are
expensed ratably over the four-year vesting period. We follow
the substantive vesting period approach for awards granted after
January 1, 2005, which requires that stock-based
compensation expense be recognized over the period from the date
of grant to the date when the award is no longer contingent on
the employee providing additional service.
We estimate expected forfeitures of equity awards at the date of
grant and recognize compensation expense only for those awards
expected to vest. The forfeiture assumption is ultimately
adjusted to the actual forfeiture rate.
Prior to our IPO, the fair value of the common stock underlying
the stock-based compensation was determined quarterly on or
about the final day of the quarter. The valuation methodology
was based on a variety of qualitative and quantitative factors
including the nature of the business and history of the
enterprise,
50
the economic outlook in general, the condition of the specific
industries in which we operate, the financial condition of the
business, our ability to generate free cash flow, and goodwill
or other intangible asset value.
The fair value of our common stock was determined using
generally accepted valuation methodologies, including the use of
the guideline company method. This determination of fair market
value employs both a comparable company analysis, which examines
the valuation multiples of public companies deemed comparable,
in whole or in part, to us and a discounted cash flow analysis
that determines a present value of the projected future cash
flows of the business. The comparable companies are comprised of
a combination of public companies in the financial services
information and technology businesses. These methodologies have
been consistently applied since 1997. We regularly assess the
underlying assumptions used in the valuation methodologies,
including the comparable companies to be used in the analysis,
the future forecasts of revenue and earnings, and the impact of
market conditions on factors such as the weighted average cost
of capital. These assumptions are reviewed quarterly, with a
more comprehensive evaluation performed annually. For the
comparable company analysis, the share price and financial
performance of these comparables were updated quarterly based on
the most recent public information. Our stock price was also
impacted by the number of shares outstanding. As the number of
shares outstanding has declined over time, our share price has
increased. The determination of the fair value of our common
stock required us to make judgments that were complex and
inherently subjective. If different assumptions are used in
future periods, stock-based compensation expense could be
materially impacted in the future.
Goodwill
and Intangibles
Goodwill represents the excess of acquisition costs over the
fair value of tangible net assets and identifiable intangible
assets of the businesses acquired. Goodwill and intangible
assets deemed to have indefinite lives are not amortized.
Intangible assets determined to have definite lives are
amortized over their useful lives. Goodwill and intangible
assets with indefinite lives are subject to impairment testing
annually as of June 30, or whenever events or changes in
circumstances indicate that the carrying amount may not be fully
recoverable, using the guidance and criteria described in the
accounting standard for Goodwill and Other Intangible
Assets. This testing compares carrying values to fair values
and, when appropriate, the carrying value of these assets is
reduced to fair value.
As of December 31, 2010, we had goodwill and net intangible
assets of $832.9 million, which represents 68.4% of our
total assets. During fiscal year 2010, we performed an
impairment test as of June 30, 2010 and confirmed that no
impairment charge was necessary. There are many assumptions and
estimates used that directly impact the results of impairment
testing, including an estimate of future expected revenues,
earnings and cash flows, useful lives and discount rates applied
to such expected cash flows in order to estimate fair value. We
have the ability to influence the outcome and ultimate results
based on the assumptions and estimates we choose for determining
the fair value of our reporting units. To mitigate undue
influence, we set criteria and benchmarks that are reviewed and
approved by various levels of management and reviewed by other
independent parties. The determination of whether or not
goodwill or indefinite-lived acquired intangible assets have
become impaired involves a significant level of judgment in the
assumptions and estimates underlying the approach used to
determine the value of our reporting units. Changes in our
strategy or market conditions could significantly impact these
judgments and require adjustments to recorded amounts of
intangible assets and goodwill. Neither our initial valuation
nor our subsequent analysis have indicated any impairment of our
goodwill asset of $632.7 million as of December 31,
2010.
Pension
and Postretirement
We account for our pension and postretirement benefit plans in
accordance with the accounting standard for Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans. This standard requires that employers recognize on a
prospective basis the funded status of their defined benefit
pension and other postretirement benefit plans on their
consolidated balance sheets and recognize as a component of
other comprehensive income/(loss), net of tax, the gains or
losses and prior service costs or credits that arise during the
period but are not recognized as components of net periodic
benefit cost.
51
Additional minimum pension liabilities and related intangible
assets are also derecognized upon adoption of the new standard.
As of December 31, 2009, we adopted the new disclosure
requirements that require disclosures about pension plan assets
including how investment allocation decisions are made;
including the factors that are pertinent to an understanding of
investment policies and strategies, the major categories of plan
assets, the inputs and valuation techniques used to measure the
fair value of plan assets, the effect of fair value measurements
using significant unobservable inputs (Level 3) on
changes in plan assets for the period and significant
concentrations of risk within the plan assets. See Note 17
to our consolidated financial statements included in this annual
report on
Form 10-K.
Certain assumptions are used in the determination of our annual
net period benefit cost and the disclosure of the funded status
of these plans. The principal assumptions concern the discount
rate used to measure the projected benefit obligation, the
expected return on plan assets and the expected rate of future
compensation increases. We revise these assumptions based on an
annual evaluation of long-term trends and market conditions that
may have an impact on the cost of providing retirement benefits.
In determining the discount rate, we utilize quoted rates from
long-term bond indices, and changes in long-term bond rates over
the past year, cash flow models and other data sources we
consider reasonable based upon the profile of the remaining
service life of eligible employees. As part of our evaluation,
we calculate the approximate average yields on securities that
were selected to match our separate projected cash flows for
both the pension and postretirement plans. Our separate benefit
plan cash flows are input into actuarial models that include
data for corporate bonds rated AA or better at the measurement
date. The output from the actuarial models are assessed against
the prior years discount rate and quoted rates for
long-term bond indices. For our pension plan at
December 31, 2010, we determined this rate to be 5.49%, a
decrease of 0.25% from the 5.74% rate used at December 31,
2009. Our postretirement rate is 4.00% at December 31,
2010, a decrease of 0.50% from the 4.50% used at
December 31, 2009.
The expected return on plan assets of 8.25% as of
December 31, 2010 is determined by taking into
consideration our analysis of our actual historical investment
returns to a broader long-term forecast adjusted based on our
target investment allocation, and the current economic
environment. Our investment guidelines target an investment
portfolio allocation of 40.0% debt securities and 60.0% equity
securities. As of December 31, 2010, the plan assets were
allocated 42.0% debt, 56.0% equity securities, and 2.0% to other
investments. We have used our target investment allocation to
derive the expected return as we believe this allocation will be
retained on an ongoing basis that will be commensurate with the
projected cash flows of the plan. The expected return for each
investment category within our target investment allocation is
developed using average historical rates of return for each
targeted investment category, considering the projected cash
flow of the pension plan. The difference between this expected
return and the actual return on plan assets is generally
deferred and recognized over subsequent periods through future
net periodic benefit costs. We believe these considerations
provide the basis for reasonable assumptions with respect to the
expected long-term rate of return on plan assets.
The rate of compensation increase is based on our long-term
plans for such increases. The measurement date used to determine
the benefit obligation and plan assets is December 31. The
future benefit payments for the postretirement plan are net of
the federal medical subsidy. As a result of the Patient
Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act of 2010, the tax treatment of
federal subsidies paid to sponsors of retiree health benefit
plans that provide prescription drug benefits that are at least
actuarially equivalent to the corresponding benefits provided
under Medicare Part D was effectively changed. This
legislative change reduces future tax benefits of the coverage
we provided to participants in the Postretirement Plan. We are
required to account for this change in the period during which
the law is enacted. As a result, we recorded a non-cash tax
charge to the provision for income taxes of $2.4 million
for the year ended December 31, 2010.
52
A one percent change in discount rate, future rate of return on
plan assets and the rate of future compensation would have the
following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
1% Decrease
|
|
|
1% Increase
|
|
|
1% Decrease
|
|
|
1% Increase
|
|
|
|
|
|
|
Projected
|
|
|
|
|
|
Projected
|
|
|
|
|
|
Projected
|
|
|
|
|
|
Projected
|
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Benefit
|
|
|
|
Cost
|
|
|
Obligation
|
|
|
Cost
|
|
|
Obligation
|
|
|
Cost
|
|
|
Obligation
|
|
|
Cost
|
|
|
Obligation
|
|
|
|
(In thousands)
|
|
|
Discount rate
|
|
$
|
2,410
|
|
|
$
|
42,580
|
|
|
$
|
(1,913
|
)
|
|
$
|
(34,026
|
)
|
|
$
|
(106
|
)
|
|
$
|
1,465
|
|
|
$
|
95
|
|
|
$
|
(1,327
|
)
|
Expected return on asset
|
|
$
|
2,745
|
|
|
$
|
|
|
|
$
|
(2,745
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Rate of compensation
|
|
$
|
(455
|
)
|
|
$
|
(2,226
|
)
|
|
$
|
503
|
|
|
$
|
2,440
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Income
Taxes
In projecting future taxable income, we develop assumptions
including the amount of future state, federal and foreign pretax
operating income, the reversal of temporary differences, and the
implementation of feasible and prudent tax planning strategies.
These assumptions require significant judgment about the
forecasts of future taxable income and are consistent with the
plans and estimates we use to manage the underlying businesses.
The calculation of our tax liabilities also involves dealing
with uncertainties in the application and evolution of complex
tax laws and regulations in other jurisdictions.
We follow
ASC 740-10
guidance for accounting for income taxes, which addresses the
determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial
statements. Under this interpretation, we may recognize the tax
benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained upon
examination by the taxing authorities, based on the technical
merits of the position. As a result of the implementation of
this interpretation, we recognized an increase in the liability
for unrecognized tax benefits of approximately
$10.3 million, which was accounted for as an increase to
the January 1, 2007 balance of retained
earnings/(accumulated deficit).
We recognize and adjust our liabilities when our judgment
changes as a result of the evaluation of new information not
previously available. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment
that is materially different from our current estimate of the
tax liabilities. These differences will be reflected as
increases or decreases to income tax expense in the period in
which they are determined.
As of December 31, 2010 we have federal and state income
tax net operating loss carryforwards of $60.8 million,
which will expire at various dates from 2011 through 2030. Such
net operating loss carryforwards expire as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2011 - 2018
|
|
$
|
44,973
|
|
2019 - 2023
|
|
|
436
|
|
2024 - 2030
|
|
|
15,396
|
|
|
|
|
|
|
|
|
$
|
60,805
|
|
|
|
|
|
|
The significant majority of the state net operating loss
carryforwards were generated by a subsidiary that employs our
internal staff as a result of favorable tax deductions from the
exercise of employee stock options for the years ended
December 31, 2006 and 2005. This subsidiarys state
net operating loss carryforwards are expected to be fully
utilized as the subsidiary generates sufficient taxable income
to utilize losses.
We estimate unrecognized tax positions of $4.9 million that
may be recognized by December 31, 2011, due to expiration
of statutes of limitations and resolution of audits with taxing
authorities, net of additional uncertain tax positions.
53
Recent
Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to
Note 2(r) to the audited consolidated financial statements
included elsewhere in this annual report on
Form 10-K.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Risk
We are exposed to market risk from fluctuations in interest
rates. At December 31, 2010, we had borrowings outstanding
under our syndicated revolving credit facility of
$310.0 million, which bear interest at variable rates based
on LIBOR plus 1.75%. A change in interest rates on this variable
rate debt impacts our pre-tax income and cash flows, but does
not impact the fair value of the instruments. Based on our
overall interest rate exposure at December 31, 2010, a one
percent change in interest rates would result in a change in
annual pretax interest expense of approximately
$3.1 million based on our current level of borrowings.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The information required by this Item is set forth on pages 56
through 110 of this annual report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures
(as that term is defined in
Rules 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) that are designed to ensure that
information required to be disclosed in our reports under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosures. Any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Our management, with the participation of the Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of the Companys disclosure controls and
procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
as of the end of the period covered by this annual report on
Form 10-K.
Based upon the foregoing assessments, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of
December 31, 2010, our disclosure controls and procedures
were effective.
Managements
Report on Internal Control Over Financial Reporting.
Managements Report on Internal Control Over Financial
Reporting as of December 31, 2010 is set forth in
Item 8. Financial Statements and Supplementary Data.
Attestation
Report of the Registered Public Accounting Firm.
The Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial
Reporting as of December 31, 2010 is set forth in
Item 8. Financial Statements and Supplementary
Data.
54
Changes
in Internal Control Over Financial Reporting
There have been no changes in our internal control over
financial reporting identified in connection with the evaluation
of such internal control that occurred during the fourth quarter
of fiscal year 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required to be furnished by this Item 10.
is incorporated herein by reference to our Notice of Annual
Meeting of Stockholders and Proxy Statement to be filed within
120 days of December 31, 2010 (the Proxy
Statement).
|
|
Item 11.
|
Executive
Compensation
|
The information required to be furnished by this Item 11.
is incorporated herein by reference to our Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required to be furnished by this Item 12.
is incorporated herein by reference to our Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required to be furnished by this Item 13.
is incorporated herein by reference to our Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required to be furnished by this Item 14.
is incorporated herein by reference to our Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
|
|
(a)
|
The following of documents are filed as part of this report.
|
|
|
|
|
(1)
|
Financial Statements. See Index to Financial Statements and
Schedules in Part II, Item 8. on this
Form 10-K.
|
|
|
(2)
|
Financial Statement Schedules. See Schedule II. Valuation
and Qualifying Accounts and Reserves.
|
|
|
|
|
(b)
|
Exhibits. See Index to Exhibits in this annual report on
Form 10-K.
|
55
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
Index to
Consolidated Financial Statements and Schedules
|
|
|
|
|
Verisk Analytics, Inc. Consolidated Financial Statements as
of December 31, 2010 and 2009 and for the Years Ended
December 31, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
65
|
|
Financial Statements Schedule
|
|
|
|
|
|
|
|
110
|
|
56
MANAGEMENTS
REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. Our internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles. Because of its inherent limitations, a system of
internal control over financial reporting can provide only
reasonable assurance and may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
internal controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework set forth in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that our internal
control over financial reporting was effective at
December 31, 2010.
Management excluded from its assessment the internal control
over financial reporting at Crowe Paradis Services Corporation
(CP) and 3E Company (3E), which were
acquired on December 14, 2010 and December 16, 2010,
respectively. The combined excluded financial statements of
these two acquisitions constitute approximately 1.5% of total
assets, less than 1.0% of total revenues, and less than 1.0% of
net income included within our consolidated financial statement
amounts as of and for the year ended December 31, 2010. Due
to the timing of the acquisitions, management did not assess the
effectiveness of internal control over financial reporting for
CP and 3E.
Deloitte & Touche LLP, the independent registered public
accounting firm that audited the consolidated financial
statements included in this annual report on
Form 10-K
has also audited the effectiveness of our internal control over
financial reporting as of December 31, 2010, as stated in
their report which is included herein.
57
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Verisk Analytics, Inc.
Jersey City, New Jersey
We have audited the accompanying consolidated balance sheets of
Verisk Analytics, Inc. and subsidiaries (the
Company) as of December 31, 2010 and 2009, and
the related consolidated statements of operations, changes in
stockholders deficit, and cash flows for each of the three
years in the period ended December 31, 2010. Our audits
also included the financial statement schedule listed in the
Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Verisk Analytics, Inc. and subsidiaries as of December 31,
2010 and 2009, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 28, 2011 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 28, 2011
58
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROLS OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
Verisk Analytics, Inc.
Jersey City, New Jersey
We have audited the internal control over financial reporting of
Verisk Analytics, Inc. and subsidiaries (the
Company) as of December 31, 2010, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in
Managements Report on Internal Control over Financial
Reporting, management excluded from its assessment the internal
control over financial reporting at Crowe Paradis Services
Corporation (CP) and 3E Company (3E),
which were acquired on December 14, 2010 and
December 16, 2010, respectively, and whose combined
financial statements constitute approximately 1.5% of total
assets, less than 1.0% of total revenues and less than 1.0% of
net income of the consolidated financial statement amounts as of
and for the year ended December 31, 2010. Accordingly, our
audit did not include the internal control over financial
reporting at CP and 3E. The Companys management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2010 of
the Company and our report dated February 28, 2011
expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 28, 2011
59
VERISK
ANALYTICS, INC.
As of
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,974
|
|
|
$
|
71,527
|
|
Available-for-sale
securities
|
|
|
5,653
|
|
|
|
5,445
|
|
Accounts receivable, net of allowance for doubtful accounts of
$4,028 and $3,844, respectively (including amounts from related
parties of $515 and $1,353) in 2010 and 2009, respectively(1)
|
|
|
126,564
|
|
|
|
89,436
|
|
Prepaid expenses
|
|
|
17,791
|
|
|
|
16,155
|
|
Deferred income taxes, net
|
|
|
3,681
|
|
|
|
4,405
|
|
Federal and foreign income taxes receivable
|
|
|
15,783
|
|
|
|
16,721
|
|
State and local income taxes receivable
|
|
|
8,923
|
|
|
|
|
|
Other current assets
|
|
|
7,066
|
|
|
|
21,656
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
240,435
|
|
|
|
225,345
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
93,409
|
|
|
|
89,165
|
|
Intangible assets, net
|
|
|
200,229
|
|
|
|
108,526
|
|
Goodwill
|
|
|
632,668
|
|
|
|
490,829
|
|
Deferred income taxes, net
|
|
|
21,879
|
|
|
|
66,257
|
|
State income taxes receivable
|
|
|
1,773
|
|
|
|
6,536
|
|
Other assets
|
|
|
26,697
|
|
|
|
10,295
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,217,090
|
|
|
$
|
996,953
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
111,995
|
|
|
$
|
101,401
|
|
Acquisition related liabilities
|
|
|
3,500
|
|
|
|
|
|
Short-term debt and current portion of long-term debt
|
|
|
437,717
|
|
|
|
66,660
|
|
Pension and postretirement benefits, current
|
|
|
4,663
|
|
|
|
5,284
|
|
Fees received in advance (including amounts from related parties
of $1,231 and $439, respectively)(1)
|
|
|
163,007
|
|
|
|
125,520
|
|
State and local income taxes payable
|
|
|
|
|
|
|
1,414
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
720,882
|
|
|
|
300,279
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
401,826
|
|
|
|
527,509
|
|
Pension benefits
|
|
|
95,528
|
|
|
|
102,046
|
|
Postretirement benefits
|
|
|
23,083
|
|
|
|
25,108
|
|
Other liabilities
|
|
|
90,213
|
|
|
|
76,960
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,331,532
|
|
|
|
1,031,902
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity/(deficit):
|
|
|
|
|
|
|
|
|
Verisk Class A common stock, $.001 par value;
1,200,000,000 shares authorized; 150,179,126 and
125,815,600 shares issued and 143,067,924 and 125,815,600
outstanding as of December 31, 2010 and 2009, respectively
|
|
|
39
|
|
|
|
30
|
|
Verisk Class B (Series 1) common stock,
$.001 par value; 400,000,000 shares authorized;
198,327,962 and 205,637,925 shares issued and 12,225,480
and 27,118,975 outstanding as of December 31, 2010 and
2009, respectively
|
|
|
47
|
|
|
|
50
|
|
Verisk Class B (Series 2) common stock,
$.001 par value; 400,000,000 shares authorized;
193,665,008 and 205,637,925 shares issued and 14,771,340
and 27,118,975 outstanding as of December 31, 2010 and
2009, respectively
|
|
|
49
|
|
|
|
50
|
|
Unearned KSOP contributions
|
|
|
(988
|
)
|
|
|
(1,305
|
)
|
Additional paid-in capital
|
|
|
754,708
|
|
|
|
652,573
|
|
Treasury stock, at cost, 372,107,352 and 357,037,900 shares
as of December 31, 2010 and 2009, respectively
|
|
|
(1,106,321
|
)
|
|
|
(683,994
|
)
|
Retained earnings
|
|
|
293,827
|
|
|
|
51,275
|
|
Accumulated other comprehensive loss
|
|
|
(55,803
|
)
|
|
|
(53,628
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(114,442
|
)
|
|
|
(34,949
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
1,217,090
|
|
|
$
|
996,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 19. Related Parties for further information. |
The accompanying notes are an integral part of these
consolidated financial statements.
60
VERISK
ANALYTICS, INC.
For The
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Revenues (including amounts from related parties of $49,788,
$60,192 and $90,227 for the years ended December 31, 2010,
2009 and 2008, respectively)(1)
|
|
$
|
1,138,343
|
|
|
$
|
1,027,104
|
|
|
$
|
893,550
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown separately below)
|
|
|
463,473
|
|
|
|
491,294
|
|
|
|
386,897
|
|
Selling, general and administrative
|
|
|
166,374
|
|
|
|
162,604
|
|
|
|
131,239
|
|
Depreciation and amortization of fixed assets
|
|
|
40,728
|
|
|
|
38,578
|
|
|
|
35,317
|
|
Amortization of intangible assets
|
|
|
27,398
|
|
|
|
32,621
|
|
|
|
29,555
|
|
Acquisition related liabilities adjustment
|
|
|
(544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
697,429
|
|
|
|
725,097
|
|
|
|
583,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
440,914
|
|
|
|
302,007
|
|
|
|
310,542
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
305
|
|
|
|
195
|
|
|
|
2,184
|
|
Realized gains/(losses) on securities, net
|
|
|
95
|
|
|
|
(2,332
|
)
|
|
|
(2,511
|
)
|
Interest expense
|
|
|
(34,664
|
)
|
|
|
(35,265
|
)
|
|
|
(31,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(34,264
|
)
|
|
|
(37,402
|
)
|
|
|
(31,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
406,650
|
|
|
|
264,605
|
|
|
|
278,899
|
|
Provision for income taxes
|
|
|
(164,098
|
)
|
|
|
(137,991
|
)
|
|
|
(120,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
242,552
|
|
|
|
126,614
|
|
|
|
158,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share of Class A and Class B(2):
|
|
$
|
1.36
|
|
|
$
|
0.72
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share of Class A and Class B(2):
|
|
$
|
1.30
|
|
|
$
|
0.70
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(2)
|
|
|
177,733,503
|
|
|
|
174,767,795
|
|
|
|
182,885,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted(2)
|
|
|
186,394,962
|
|
|
|
182,165,661
|
|
|
|
190,231,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 19. Related Parties for further information. |
|
(2) |
|
All share and per share data throughout this report has been
adjusted to reflect a
fifty-for-one
stock split. See Note 1 for further information. |
The accompanying notes are an integral part of these
consolidated financial statements.
61
VERISK
ANALYTICS, INC.
For
The Years Ended December 31, 2008, 2009 and
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Verisk
|
|
|
Verisk
|
|
|
|
|
|
Unearned
|
|
|
Additional
|
|
|
|
|
|
Deficit)/
|
|
|
Other
|
|
|
Stockholders
|
|
|
|
Verisk
|
|
|
ISO
|
|
|
Class B
|
|
|
Class B
|
|
|
Par
|
|
|
KSOP
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
(Deficit)/
|
|
|
|
Class A
|
|
|
Class B
|
|
|
(Series 1)
|
|
|
(Series 2)
|
|
|
Value
|
|
|
Contributions
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
|
(In thousands, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008
|
|
|
|
|
|
|
500,225,000
|
|
|
|
|
|
|
|
|
|
|
$
|
100
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(678,993
|
)
|
|
$
|
(515,756
|
)
|
|
$
|
(8,699
|
)
|
|
$
|
(1,203,348
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,228
|
|
|
|
|
|
|
|
158,228
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,735
|
)
|
|
|
(73,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,493
|
|
Treasury stock acquired - ISO Class B common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,001
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,001
|
)
|
Decrease in redemption value of ISO Class A common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,033
|
|
|
|
|
|
|
|
114,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
|
|
|
|
500,225,000
|
|
|
|
|
|
|
|
|
|
|
$
|
100
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(683,994
|
)
|
|
$
|
(243,495
|
)
|
|
$
|
(82,434
|
)
|
|
$
|
(1,009,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,614
|
|
|
|
|
|
|
|
126,614
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,806
|
|
|
|
28,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,420
|
|
Increase in redemption value of ISO Class A common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(272,428
|
)
|
|
|
|
|
|
|
(272,428
|
)
|
Conversion of ISO Class B common stock upon corporate
reorganization (Note 14)
|
|
|
88,949,150
|
|
|
|
(500,225,000
|
)
|
|
|
205,637,925
|
|
|
|
205,637,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of ISO Class A redeemable common stock upon
corporate reorganization (Note 14)
|
|
|
34,768,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
(1,305
|
)
|
|
|
624,282
|
|
|
|
|
|
|
|
440,584
|
|
|
|
|
|
|
|
1,063,591
|
|
KSOP shares earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725
|
|
Stock options exercised (including tax benefit of $18,253)
|
|
|
2,097,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,348
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
125,815,600
|
|
|
|
|
|
|
|
205,637,925
|
|
|
|
205,637,925
|
|
|
$
|
130
|
|
|
$
|
(1,305
|
)
|
|
$
|
652,573
|
|
|
$
|
(683,994
|
)
|
|
$
|
51,275
|
|
|
$
|
(53,628
|
)
|
|
$
|
(34,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,552
|
|
|
|
|
|
|
|
242,552
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,175
|
)
|
|
|
(2,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,377
|
|
Conversion of
Class B-1
common stock upon follow-on public offering (Note 1)
|
|
|
7,309,963
|
|
|
|
|
|
|
|
(7,309,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
Class B-2
common stock upon follow-on public offering (Note 1)
|
|
|
11,972,917
|
|
|
|
|
|
|
|
|
|
|
|
(11,972,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired - Class A (7,111,202 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212,512
|
)
|
|
|
|
|
|
|
|
|
|
|
(212,512
|
)
|
Treasury stock acquired -
Class B-1
(7,583,532 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199,936
|
)
|
|
|
|
|
|
|
|
|
|
|
(199,936
|
)
|
Treasury stock acquired -
Class B-2
(374,718 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,879
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,879
|
)
|
KSOP shares earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317
|
|
|
|
11,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,573
|
|
Stock options exercised (including tax benefit of $49,015)
|
|
|
5,579,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
84,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,497
|
|
Net share settlement of taxes upon exercise of stock options
|
|
|
(503,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,051
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,298
|
|
Other stock issuances
|
|
|
4,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
150,179,126
|
|
|
|
|
|
|
|
198,327,962
|
|
|
|
193,665,008
|
|
|
$
|
135
|
|
|
$
|
(988
|
)
|
|
$
|
754,708
|
|
|
$
|
(1,106,321
|
)
|
|
$
|
293,827
|
|
|
$
|
(55,803
|
)
|
|
$
|
(114,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
VERISK
ANALYTICS, INC.
For
The Years Ended December 31, 2010, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
242,552
|
|
|
$
|
126,614
|
|
|
$
|
158,228
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of fixed assets
|
|
|
40,728
|
|
|
|
38,578
|
|
|
|
35,317
|
|
Amortization of intangible assets
|
|
|
27,398
|
|
|
|
32,621
|
|
|
|
29,555
|
|
Amortization of debt issuance costs
|
|
|
1,463
|
|
|
|
785
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
648
|
|
|
|
916
|
|
|
|
1,536
|
|
KSOP compensation expense
|
|
|
11,573
|
|
|
|
76,065
|
|
|
|
22,274
|
|
Acquisition related compensation expense
|
|
|
|
|
|
|
|
|
|
|
300
|
|
Stock-based compensation
|
|
|
21,298
|
|
|
|
12,744
|
|
|
|
9,881
|
|
Non-cash charges/(credits) associated with performance based
appreciation awards
|
|
|
789
|
|
|
|
4,039
|
|
|
|
(91
|
)
|
Interest income on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
(1,050
|
)
|
Proceeds from repayment of interest on notes receivable from
stockholders
|
|
|
|
|
|
|
|
|
|
|
2,318
|
|
Acquisition related liabilities adjustment
|
|
|
(544
|
)
|
|
|
|
|
|
|
|
|
Realized (gains)/losses on securities, net
|
|
|
(95
|
)
|
|
|
2,332
|
|
|
|
2,511
|
|
Deferred income taxes
|
|
|
10,294
|
|
|
|
12,190
|
|
|
|
19,895
|
|
Other operating
|
|
|
198
|
|
|
|
222
|
|
|
|
284
|
|
Loss on disposal of assets
|
|
|
239
|
|
|
|
810
|
|
|
|
1,082
|
|
Non-cash charges associated with lease termination
|
|
|
|
|
|
|
196
|
|
|
|
|
|
Excess tax benefits from exercised stock options
|
|
|
(49,015
|
)
|
|
|
(19,976
|
)
|
|
|
(26,099
|
)
|
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(24,559
|
)
|
|
|
(1,990
|
)
|
|
|
3,609
|
|
Prepaid expenses and other assets
|
|
|
899
|
|
|
|
(1,839
|
)
|
|
|
(6,486
|
)
|
Federal and foreign income taxes
|
|
|
50,232
|
|
|
|
13,662
|
|
|
|
5,969
|
|
State and local income taxes
|
|
|
(5,679
|
)
|
|
|
5,710
|
|
|
|
(5,977
|
)
|
Accounts payable and accrued liabilities
|
|
|
4,340
|
|
|
|
2,986
|
|
|
|
3,075
|
|
Acquisition related liabilities
|
|
|
|
|
|
|
(300
|
)
|
|
|
(2,200
|
)
|
Fees received in advance
|
|
|
20,984
|
|
|
|
10,460
|
|
|
|
(1,042
|
)
|
Other liabilities
|
|
|
(17,711
|
)
|
|
|
9,576
|
|
|
|
(4,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
336,032
|
|
|
|
326,401
|
|
|
|
247,906
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired of $10,524, $9,477 and $365,
respectively
|
|
|
(189,578
|
)
|
|
|
(61,350
|
)
|
|
|
(18,951
|
)
|
Purchase of noncontrolling interest in non-public companies
|
|
|
|
|
|
|
|
|
|
|
(5,800
|
)
|
Earnout payments
|
|
|
|
|
|
|
(78,100
|
)
|
|
|
(98,100
|
)
|
Proceeds from release of acquisition related escrows
|
|
|
283
|
|
|
|
129
|
|
|
|
558
|
|
Escrow funding associated with acquisitions
|
|
|
(15,980
|
)
|
|
|
(7,636
|
)
|
|
|
(1,500
|
)
|
Purchases of
available-for-sale
securities
|
|
|
(516
|
)
|
|
|
(575
|
)
|
|
|
(361
|
)
|
Proceeds from sales and maturities of
available-for-sale
securities
|
|
|
743
|
|
|
|
886
|
|
|
|
21,724
|
|
Purchases of fixed assets
|
|
|
(38,641
|
)
|
|
|
(38,694
|
)
|
|
|
(30,652
|
)
|
Proceeds from repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
3,863
|
|
Issuance of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
(1,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(243,689
|
)
|
|
|
(185,340
|
)
|
|
|
(130,466
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
.
63
VERISK
ANALYTICS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
For The
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
80,000
|
|
|
|
150,000
|
|
Proceeds from issuance of short-term debt with original
maturities of three months or greater
|
|
|
215,000
|
|
|
|
|
|
|
|
114,000
|
|
Proceeds/(repayments) of short-term debt, net
|
|
|
35,000
|
|
|
|
(59,244
|
)
|
|
|
(35,287
|
)
|
Redemption of ISO Class A common stock
|
|
|
|
|
|
|
(46,740
|
)
|
|
|
(387,561
|
)
|
Repurchase of ISO Class B common stock
|
|
|
|
|
|
|
|
|
|
|
(5,001
|
)
|
Repurchase of Verisk Class A common stock
|
|
|
(210,246
|
)
|
|
|
|
|
|
|
|
|
Repurchase of Verisk
Class B-1
common stock
|
|
|
(199,936
|
)
|
|
|
|
|
|
|
|
|
Repurchase of Verisk
Class B-2
common stock
|
|
|
(9,879
|
)
|
|
|
|
|
|
|
|
|
Net share settlement of taxes upon exercise of stock options
|
|
|
(15,051
|
)
|
|
|
|
|
|
|
|
|
Repayment of current portion of long-term debt
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
|
|
Payment of debt issuance cost
|
|
|
(1,781
|
)
|
|
|
(4,510
|
)
|
|
|
|
|
Excess tax benefits from exercised stock options
|
|
|
49,015
|
|
|
|
19,976
|
|
|
|
26,099
|
|
Proceeds from repayment of exercise price loans classified as a
component of redeemable common stock
|
|
|
|
|
|
|
|
|
|
|
29,482
|
|
Proceeds from stock options exercised
|
|
|
35,482
|
|
|
|
7,709
|
|
|
|
892
|
|
Other financing
|
|
|
(6,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(108,787
|
)
|
|
|
(102,809
|
)
|
|
|
(107,376
|
)
|
Effect of exchange rate changes
|
|
|
(109
|
)
|
|
|
90
|
|
|
|
(928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents
|
|
|
(16,553
|
)
|
|
|
38,342
|
|
|
|
9,136
|
|
Cash and cash equivalents, beginning of period
|
|
|
71,527
|
|
|
|
33,185
|
|
|
|
24,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
54,974
|
|
|
$
|
71,527
|
|
|
$
|
33,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
113,609
|
|
|
$
|
111,458
|
|
|
$
|
99,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
32,989
|
|
|
$
|
34,201
|
|
|
$
|
28,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans made to directors and officers in connection with the
exercise of stock options
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(20,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Verisk Class A common stock included in
accounts payable and accrued liabilities
|
|
$
|
2,266
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of ISO Class A common stock used to repay
maturities of notes receivable from stockholders
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of ISO Class A common stock used to fund the
exercise of stock options
|
|
$
|
|
|
|
$
|
2,326
|
|
|
$
|
4,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities established as a result of acquisitions
|
|
$
|
(36,537
|
)
|
|
$
|
(5,728
|
)
|
|
$
|
(2,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
1,554
|
|
|
$
|
3,659
|
|
|
$
|
2,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued
liabilities
|
|
$
|
2,138
|
|
|
$
|
1,388
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in goodwill due to finalization of acquisition related
liabilities
|
|
$
|
|
|
|
$
|
(4,300
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in goodwill due to acquisition related escrow
distributions
|
|
$
|
6,996
|
|
|
$
|
181
|
|
|
$
|
4,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in goodwill due to accrual of acquisition related
liabilities
|
|
$
|
3,500
|
|
|
$
|
|
|
|
$
|
82,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
VERISK
ANALYTICS, INC.
(Amounts in thousands, except for share and per share
data, unless otherwise stated)
Verisk Analytics, Inc. and its consolidated subsidiaries
(Verisk or the Company) enable
risk-bearing businesses to better understand and manage their
risks. The Company provides its customers proprietary data that,
combined with analytic methods, create embedded decision support
solutions. The Company is one of the largest aggregators and
providers of data pertaining to property and casualty
(P&C) insurance risks in the United States of
America (U.S.). The Company offers solutions for
detecting fraud in the U.S. P&C insurance, mortgage
and healthcare industries and sophisticated methods to predict
and quantify loss in diverse contexts ranging from natural
catastrophes to health insurance. The Company provides
solutions, including data, statistical models or tailored
analytics, all designed to allow clients to make more logical
decisions.
Verisk was established on May 23, 2008 to serve as the
parent holding company of Insurance Services Office, Inc.
(ISO) upon completion of the initial public offering
(IPO). ISO was formed in 1971 as an advisory and
rating organization for the P&C insurance industry to
provide statistical and actuarial services, to develop insurance
programs and to assist insurance companies in meeting state
regulatory requirements. Over the past decade, the Company has
broadened its data assets, entered new markets, placed a greater
emphasis on analytics, and pursued strategic acquisitions. On
October 6, 2009, ISO effected a corporate reorganization
whereby the Class A and Class B common stock of ISO
were exchanged by the current stockholders for the common stock
of Verisk on a
one-for-one
basis. Verisk immediately thereafter effected a
fifty-for-one
stock split of its Class A and Class B common stock
and equally
sub-divided
the Class B common stock into two new series of stock,
Verisk Class B (Series 1)
(Class B-1)
and Verisk Class B (Series 2)
(Class B-2).
All share and per share information in the consolidated
financial statements gives effect to the
fifty-for-one
stock split that occurred immediately after the reorganization.
On October 9, 2009, the Company completed its IPO. Upon
completion of the IPO, the selling stockholders sold
97,995,750 shares of Class A common stock of Verisk,
which included the 12,745,750 over-allotment option, at the IPO
price of $22.00 per share. The Company did not receive any
proceeds from the sales of common stock in the offering. Verisk
trades under the ticker symbol VRSK on the NASDAQ
Global Select Market.
On October 1, 2010, the Company completed a follow-on
public offering. Upon completion of this offering, the selling
stockholders sold 2,602,212, 7,309,963 and
11,972,917 shares of Class A,
Class B-1
and
Class B-2
common stock of Verisk, respectively, at the public offering
price of $27.25 per share.
Class B-1
and
Class B-2
common stock sold into this offering were automatically
converted into Class A common stock. The Company did not
receive any proceeds from the sale of common stock in the
offering. Concurrent with the closing of this offering, the
Company also repurchased 7,254,407 and 45,593 shares of
Class B-1
and
Class B-2
common stock, respectively, at $26.3644 per share, which
represents the net proceeds per share the selling stockholders
received in the public offering. The Company funded a portion of
this repurchase with proceeds from borrowings of $160,000 under
its syndicated revolving credit facility.
Class B-1
and
Class B-2 shares
will automatically convert to Class A common stock on
April 6, 2011 and October 6, 2011, respectively.
|
|
2.
|
Basis of
Presentation and Summary of Significant Accounting
Policies:
|
The accompanying consolidated financial statements have been
prepared on the basis of accounting principles generally
accepted in the United States of America
(U.S. GAAP). The preparation of financial
statements in conformity with these accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Significant estimates
include acquisition purchase price allocations, the fair value
of goodwill, the realization of deferred tax assets, acquisition
related liabilities, fair value of stock based
65
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation, liabilities for pension and postretirement
benefits, fair value of the Companys redeemable common
stock, and the estimate for the allowance for doubtful accounts.
Actual results may ultimately differ from those estimates.
Significant accounting policies include the following:
|
|
|
|
(a)
|
Intercompany Accounts and Transactions
|
The consolidated financial statements include the accounts of
Verisk. All intercompany accounts and transactions have been
eliminated.
The following describes the Companys primary types of
revenues and the applicable revenue recognition policies. The
Companys revenues are primarily derived from sales of
services and revenue is recognized as services are performed and
information is delivered to our customers. Revenue is recognized
when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, fees
and/or price
is fixed or determinable, and collectability is reasonably
assured. Revenue is recognized net of applicable sales tax
withholdings.
Industry-Standard Insurance Programs, Statistical Agent and Data
Services and Actuarial Services
Industry-standard insurance programs, statistical agent and data
services and actuarial services are sold to participating
insurance company customers under annual agreements covering a
calendar year where the price is determined at the inception of
the agreement. In accordance with Accounting Standards
Codification (ASC) 605, Revenue Recognition,
the Company recognizes revenue ratably over the term of
these annual agreements, as services are performed and
continuous access to information is provided over the entire
term of the agreements.
Property-Specific Rating and Underwriting Information
The Company provides property-specific rating information
through reports issued for specific commercial properties, for
which revenue is recognized when the report is delivered to the
customer, provided that all other revenue recognition criteria
are met.
In addition, the Company provides hosting or software solutions
that provide continuous access to information about the
properties being insured and underwriting information in the
form of standard policy forms to be used by customers. As the
customer has a contractual right to take possession of the
software without significant penalty, revenues from these
arrangements are recognized ratably over the contract period
from the time when the customer had access to the solution in
accordance with
ASC 985-605,
Software Revenue Recognition (ASC
985-605).
The Company recognizes software license revenue when the
arrangement does not require significant production,
customization or modification of the software and the following
criteria are met: persuasive evidence of an agreement exists,
delivery has occurred, fees are fixed or determinable, and
collections are probable. These software arrangements include
post-contract customer support (PCS). The Company
recognizes software license revenue ratably over the duration of
the annual license term as vendor specific objective evidence
(VSOE) of PCS, the only remaining undelivered
element, cannot be established in accordance with
ASC 985-605.
Fraud Identification and Detection Solutions
Fraud identification and detection solutions are comprised of
transaction-based fees recognized as information is delivered to
customers, provided that all other revenue recognition criteria
have been met.
Loss Prediction
Loss prediction solutions consist of term-based software
licenses. These software arrangements include PCS, which
includes unspecified upgrades on a
when-and-if
available basis.
66
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recognizes software license revenue ratably over the
duration of the annual license term as VSOE of PCS, the only
remaining undelivered element, cannot be established in
accordance with
ASC 985-605.
The Company also provides software hosting arrangements to
customers whereby the customer does not have the right to take
possession of the software. As these arrangements include PCS
throughout the hosting term, revenues from these multiple
element arrangements are recognized in accordance with
ASC 605-25,
Revenue Recognition Multiple Element Arrangements
(ASC
605-25).
The Company recognizes revenue ratably over the duration of the
license term, which ranges from one to five years, since the
contractual elements do not have stand alone value.
The Company services long-term contract arrangements with
certain customers. For these arrangements, revenue is recognized
in accordance with
ASC 605-35,
Revenue Recognition Construction Type and Certain
Production-Type Contracts (ASC
605-35),
using the
percentage-of-completion
method, which requires the use of estimates. In such instances,
management is required to estimate the input measures, based on
hours incurred to date compared to total estimated hours of the
project, with consideration also given to output measures, such
as contract milestones, when applicable. Adjustments to
estimates are made in the period in which the facts requiring
such revisions become known. Accordingly, recognized revenues
and profits are subject to revisions as the contract progresses
to completion. The Company considers the contract substantially
complete when there is compliance with all performance
specifications and there are no remaining costs or potential
risk.
Loss Quantification
Loss quantification solutions consist of term-based software
subscription licenses and revenues are recognized in accordance
with
ASC 985-605.
These software arrangements include PCS, which includes
unspecified upgrades on a
when-and-if
available basis. Customers are billed for access on a monthly
basis and the Company recognizes revenue accordingly.
With respect to an insignificant percentage of revenues, the
Company uses contract accounting, as required by
ASC 985-605,
when the arrangement with the customer includes significant
customization, modification or production of software. For these
elements, revenue is recognized in accordance with
ASC 605-35,
using the
percentage-of-completion
method as noted above.
|
|
|
|
(c)
|
Fees Received in Advance
|
The Company invoices its customers in annual, quarterly,
monthly, or milestone installments. Amounts billed and collected
in advance of contract terms are recorded as Fees received
in advance in the accompanying consolidated balance sheets
and are recognized as the services are performed and the
applicable revenue recognition criteria are met.
|
|
|
|
(d)
|
Fixed Assets and Finite-lived Intangible Assets
|
Property and equipment, internal-use software and finite-lived
intangibles are stated at cost less accumulated depreciation and
amortization, which are computed on a straight-line basis over
their estimated useful lives. Leasehold improvements are
amortized over the shorter of the useful life of the asset or
the lease term.
The Companys internal software development costs primarily
relate to internal-use software. Such costs are capitalized in
the application development stage in accordance with
ASC 350-40,
Internal-use Software. Software development costs are
amortized on a straight-line basis over a three year period,
which management believes represents the useful life of these
capitalized costs.
67
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with ASC 360, Property, Plant &
Equipment, whenever events or changes in circumstances
indicate that the carrying amount of long-lived assets and
finite-lived intangible assets may not be recoverable, the
Company reviews its long-lived assets and finite-lived
intangible assets for impairment by first comparing the carrying
value of the assets to the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the
assets. If the carrying value exceeds the sum of the
assets undiscounted cash flows, the Company estimates an
impairment loss by taking the difference between the carrying
value and fair value of the assets.
|
|
|
|
(e)
|
Capital and Operating Leases
|
The Company leases various property, plant and equipment. Leased
property is accounted for under ASC 840, Leases
(ASC 840). Accordingly, leased property that
meets certain criteria is capitalized and the present value of
the related lease payments is recorded as a liability.
Amortization of assets accounted for as capital leases is
computed utilizing the straight-line method over the shorter of
the remaining lease term or the estimated useful life
(principally 3 to 4 years for computer equipment and
automobiles).
All other leases are accounted for as operating leases. Rent
expense for operating leases, which may have rent escalation
provisions or rent holidays, are recorded on a straight-line
basis over the non-cancelable bases lease period in accordance
with ASC 840. The initial lease term generally includes the
build-out period, where no rent payments are typically due under
the terms of the lease. The difference between rent expense and
rent paid is recorded as deferred rent. Construction allowances
received from landlords are recorded as a deferred rent credit
and amortized to rent expense over the term of the lease.
The Companys investments at December 31, 2010 and
2009 includes registered investment companies and equity
investments in non-public companies. The Company accounts for
short-term investments in accordance with ASC 320,
Investments-Debt and Equity Securities (ASC
320).
There are no investments classified as trading securities at
December 31, 2010 or 2009. All investments with readily
determinable market values are classified as
available-for-sale.
While these investments are not held with the specific intention
to sell them, they may be sold to support the Companys
investment strategies. All
available-for-sale
investments are carried at fair value. The cost of all
available-for-sale
investments sold is based on the specific identification method,
with the exception of mutual fund-based investments, which is
based on the weighted average cost method. Dividend income is
accrued on the ex-dividend date.
The Company performs periodic reviews of its investment
portfolio when individual holdings have experienced a decline in
fair value below their respective cost. The Company considers a
number of factors in the evaluation of whether a decline in
value is
other-than-temporary
including: (a) the financial condition and near term
prospects of the issuer; (b) the Companys ability and
intent to retain the investment for a period of time sufficient
to allow for an anticipated recovery in value; and (c) the
period and degree to which the market value has been below cost.
Where the decline is deemed to be
other-than-temporary,
a charge is recorded to Realized gains/(losses) on
securities, net in the accompanying consolidated
statements of operations, and a new cost basis is established
for the investment.
The Companys equity investments in non-public companies
are included in Other assets in the accompanying
consolidated balance sheets. Those securities are carried at
cost, as the Company owns less than 20% of the stock and does
not otherwise have the ability to exercise significant
influence. These securities are written down to their estimated
realizable value when
68
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
management considers there is an
other-than-temporary
decline in value based on financial information received and the
business prospects of the entity.
|
|
|
|
(g)
|
Fair Value of Financial Instruments
|
The Company follows the provisions of
ASC 820-10,
Fair Value Measurements (ASC
820-10),
which defines fair value, establishes a framework for measuring
fair value under U.S. GAAP and expands fair value
measurement disclosures. The Company follows the provisions of
ASC 820-10
for its financial assets and liabilities recognized or disclosed
at fair value on a recurring basis. The Company follows the
provisions of
ASC 820-10
for its non-financial assets and liabilities recognized or
disclosed at fair value.
|
|
|
|
(h)
|
Accounts Receivable and Allowance for Doubtful Accounts
|
Accounts receivable is generally recorded at the invoiced
amount. The allowance for doubtful accounts is estimated based
on an analysis of the aging of the accounts receivable,
historical write-offs, customer payment patterns, individual
customer creditworthiness, current economic trends,
and/or
establishment of specific reserves for customers in adverse
financial condition. The Company reassesses the adequacy of the
allowance for doubtful accounts on a quarterly basis.
The Company has determined local currencies are the functional
currencies of the foreign operations. The assets and liabilities
of foreign subsidiaries are translated at the period-end rate of
exchange and statement of operations items are translated at the
average rates prevailing during the year. The resulting
translation adjustment is recorded as a component of
Accumulated other comprehensive loss in the
accompanying consolidated statements of changes in
stockholders deficit.
|
|
|
|
(j)
|
Stock Based Compensation
|
The Company follows ASC 718, Stock Compensation
(ASC 718). Under ASC 718, stock-based
compensation cost is measured at the grant date, based on the
fair value of the options granted, and is recognized as expense
over the requisite service period. On January 1, 2005, the
Company adopted ASC 718 using a prospective approach, as
required under ASC 718. Under this application, the Company
is required to record compensation expense for all awards
granted after the date of adoption.
Prior to January 1, 2008, the expected term (estimated
period of time outstanding) was estimated using the simplified
method as defined in ASC 718, in which the expected term
equals the average of graded vesting term and the contractual
term. Subsequent to January 1, 2008, the expected term was
primarily estimated based on studies of historical experience
and projected exercise behavior. However, certain awards
granted, for which no historical exercise patterns exist, the
expected term was estimated using the simplified method. The
risk-free interest rate is based on the yield of
U.S. Treasury zero coupon securities with a maturity equal
to the expected term of the equity award. Expected volatility
for awards prior to January 1, 2008 was based on the
Companys historical volatility for a period equal to the
stock options expected term, ending on the day of grant,
and calculated on a quarterly basis for purposes of the ISO
401(k) Savings and Employee Stock Ownership Plan
(KSOP). For awards granted after January 1,
2008, the volatility factor was based on an average of the
historical stock prices of a group of the Companys peers
over the most recent period commensurate with the expected term
of the stock option award. Prior to 2008, the expected dividend
yield was not included in the fair value calculation as the
Company did not pay dividends. For awards granted after
January 1, 2008, the expected dividends yield was based on
the Companys expected annual dividend rate on the date of
grant.
69
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company estimates expected forfeitures of equity awards at
the date of grant and recognizes compensation expense only for
those awards expected to vest. The forfeiture assumption is
ultimately adjusted to the actual forfeiture rate. Changes in
the forfeiture assumptions may impact the total amount of
expense ultimately recognized over the requisite service period,
and may impact the timing of expense recognized over the
requisite service period.
|
|
|
|
(k)
|
Research and Development Costs
|
Research and development costs, which primarily relate to the
personnel and related overhead costs incurred in developing new
services for our customers, are expensed as incurred. Such costs
were $14,870, $14,109 and $11,054 for the years ended December
31, 2010, 2009 and 2008, respectively, and were included in
Selling, general and administrative expenses in the
accompanying consolidated statements of operations.
The Company accounts for income taxes under the asset and
liability method under ASC 740, Income Taxes
(ASC 740), which requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial statements and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
Deferred tax assets are recorded to the extent these assets are
more likely than not to be realized. In making such
determination, the Company considers all available positive and
negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable income,
tax planning strategies and recent financial operations.
Valuation allowances are recognized to reduce deferred tax
assets if it is determined to be more likely than not that all
or some of the potential deferred tax assets will not be
realized.
The Company follows
ASC 740-10,
Income Taxes (ASC
740-10),
which clarifies the accounting for uncertainty in income
taxes recognized in the financial statements.
ASC 740-10
provides that a tax benefit from an uncertain tax position may
be recognized based on the technical merits when it is more
likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or
litigation processes. Income tax positions must meet a more
likely than not recognition threshold at the effective date to
be recognized upon the adoption of
ASC 740-10
and in subsequent periods. This interpretation also provides
guidance on measurement, derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition.
The Company recognizes interest and penalties related to
unrecognized tax benefits within the income tax expense line in
the accompanying consolidated statements of operations. Accrued
interest and penalties are included within Other
liabilities on the accompanying consolidated balance
sheets.
Basic and diluted earnings per share (EPS) are
determined in accordance with ASC 260, Earnings per
Share, which specifies the computation, presentation and
disclosure requirements for EPS. Basic EPS excludes all dilutive
common stock equivalents. It is based upon the weighted average
number of common shares outstanding during the period. Diluted
EPS, as calculated using the treasury stock method, reflects the
potential dilution that would occur if the Companys
dilutive
70
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outstanding stock options were exercised. For purposes of
calculating EPS, Class A,
Class B-1
and
Class B-2
common shares are combined since all classes have identical
rights to earnings.
|
|
|
|
(n)
|
Pension and Postretirement Benefits
|
The Company accounts for its pension and postretirement benefits
under ASC 715, Compensation Retirement
Benefits (ASC 715). ASC 715 requires the
recognition of the funded status of a benefit plan in the
balance sheet, the recognition in other comprehensive income of
gains or losses and prior service costs or credits arising
during the period, but which are not included as components of
periodic benefit cost, and the measurement of defined benefit
plan assets and obligations as of the balance sheet date. The
Company utilizes a valuation date of December 31.
|
|
|
|
(o)
|
Product Warranty Obligations
|
The Company provides warranty coverage for certain of its
products. The Company recognizes a product warranty obligation
when claims are probable and can be reasonably estimated. As of
December 31, 2010 and 2009, product warranty obligations
were not significant.
In the ordinary course of business, the Company enters into
numerous agreements that contain standard indemnities whereby
the Company indemnifies another party for breaches of
confidentiality, infringement of intellectual property or gross
negligence. Such indemnifications are primarily granted under
licensing of computer software. Most agreements contain
provisions to limit the maximum potential amount of future
payments that the Company could be required to make under these
indemnifications, however, the Company is not able to develop an
estimate of the maximum potential amount of future payments to
be made under these indemnifications as the triggering events
are not subject to predictability.
The Company accrues for costs relating to litigation, claims and
other contingent matters when such liabilities become probable
and reasonably estimable. Such estimates are based on
managements judgment. Actual amounts paid may differ from
amounts estimated, and such differences will be charged to
operations in the period in which the final determination of the
liability is made.
Goodwill represents the excess of acquisition costs over the
fair value of tangible net assets and identifiable intangible
assets of the businesses acquired. Goodwill and intangible
assets deemed to have indefinite lives are not amortized.
Intangible assets determined to have finite lives are amortized
over their useful lives. Goodwill and intangible assets with
indefinite lives are subject to impairment testing annually as
of June 30 or whenever events or changes in circumstances
indicate that the carrying amount may not be fully recoverable.
The Company completed the required annual impairment test as of
June 30, 2010, which resulted in no impairment of goodwill
in 2010. This test compares the carrying value of each reporting
unit to its fair value. If the fair value of the reporting unit
exceeds the carrying value of the net assets, including goodwill
assigned to that reporting unit, goodwill is not impaired. If
the carrying value of the reporting units net assets,
including goodwill, exceeds the fair value of the reporting
unit, then the Company will determine the implied fair value of
the reporting units goodwill. If the carrying value of a
reporting units goodwill exceeds its implied fair value,
then an impairment loss is recorded for the difference between
the carrying amount and the implied fair value of the goodwill.
|
|
|
|
(r)
|
Recent Accounting Pronouncements
|
In December 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
No. 2010-28,
When to Perform Step 2 of the Goodwill Impairment Test for
71
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reporting Units with Zero or Negative Carrying Amounts
(ASU
No. 2010-28).
ASU
No. 2010-28
modifies Step 1 of the goodwill impairment test for reporting
units with zero or negative carrying amounts. For those
reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a
goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, an entity
should consider whether there are any adverse qualitative
factors indicating that an impairment may exist. ASU
No. 2010-28
is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2010. Early adoption is
not permitted. The adoption of ASU
No. 2010-28
will not have any impact on the Companys consolidated
financial statements, and the Company will incorporate the
provisions of this guidance as part of their Step 1 testing for
goodwill impairment in 2011.
In April 2010, the FASB ASU
No. 2010-17,
Revenue Recognition Milestone Method
(ASU
No. 2010-17).
ASU
No. 2010-17
provides guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue
recognition for research or development transactions. ASU
2010-17 is
effective on a prospective basis for milestones achieved in
fiscal years, and interim periods within those years, beginning
on or after June 15, 2010. Based on the Companys
current agreements, ASU
No. 2010-17
will not have a material impact on the Companys
consolidated financial statements as the Company does not
typically perform research or development transactions.
In January 2010, the FASB issued ASU
No. 2010-06,
Fair Value Measurements and Disclosures (ASU
No. 2010-06).
ASU
No. 2010-06
provides guidance on improving disclosures on fair value
measurements, such as the transfers between Level 1,
Level 2 and Level 3 inputs and the disaggregated
activity in the rollforward for Level 3 fair value
measurements. ASU
No. 2010-06
is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
the disaggregated activity in the rollforward for Level 3
fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010 and for
interim periods within those fiscal periods. The adoption of the
portion of ASU
No. 2010-06
that discusses the transfers between Level 1, Level 2
and Level 3 inputs, effective January 1, 2010, did not
have a material impact on the Companys consolidated
financial statements. As the Company currently disaggregates the
activity in the rollforward for Level 3 fair value
measurements, they do not expect ASU
No. 2010-06
to have any impact on its consolidated financial statements.
In October 2009, the FASB issued ASU
No. 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU
No. 2009-13).
ASU
No. 2009-13
establishes the accounting and reporting guidance for
arrangements under which the vendor will perform multiple
revenue-generating activities. Specifically, ASU
No. 2009-13
addresses how to separate deliverables and how to measure and
allocate arrangement consideration to one or more units of
accounting. ASU
No. 2009-13
is effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption is permitted. The Company has
elected not to early adopt. ASU
No. 2009-13
is not expected to have a material impact on the Companys
consolidated financial statements as our Companys multiple
deliverables arrangements are comprised primarily of software
licenses and services, rather than hardware. Currently, a
majority of our deliverables do not have stand alone value,
which would preclude the separation and allocation of the
arrangement. Therefore, the Company will continue to recognize
revenue over the duration of the license term.
72
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Concentration
of Credit Risk:
|
Financial instruments that potentially expose the Company to
credit risk consist primarily of cash and cash equivalents,
available for sale securities and accounts receivable, which are
generally not collateralized. The Company maintains, in cash and
cash equivalents, higher credit quality financial institutions
in order to limit the amount of credit exposure. The total cash
balances are insured by the Federal Deposit Insurance
Corporation (FDIC) to a maximum amount of $250 per
bank at December 31, 2010 and 2009. At December 31,
2010 and 2009, the Company had cash balances on deposit that
exceeded the balance insured by the FDIC limit by approximately
$35,514 and $54,339 with six banks, respectively. At
December 31, 2010 and 2009, the Company also had cash on
deposit with foreign banks of approximately $18,198 and $16,130,
respectively.
The Company considers the concentration of credit risk
associated with its trade accounts receivable to be commercially
reasonable and believes that such concentration does not result
in the significant risk of near-term severe adverse impacts. The
Companys top fifty customers represent approximately 45%
of revenues, for all periods presented, with no individual
customer accounting for more than 5%, 4% and 4% of revenues
during the years ended December 31, 2010, 2009 and 2008,
respectively. No individual customer comprised more than 10% of
accounts receivable at December 31, 2010 or 2009.
|
|
4.
|
Cash and
Cash Equivalents:
|
Cash and cash equivalents consist of cash in banks, commercial
paper, money-market funds, and other liquid instruments with
original maturities of 90 days or less at the time of
purchase.
Accounts Receivable consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Billed receivables
|
|
$
|
122,874
|
|
|
$
|
88,048
|
|
Unbilled receivables
|
|
|
7,718
|
|
|
|
5,232
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
130,592
|
|
|
|
93,280
|
|
Less allowance for doubtful accounts
|
|
|
(4,028
|
)
|
|
|
(3,844
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
126,564
|
|
|
$
|
89,436
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
$
|
4,398
|
|
|
$
|
1,248
|
|
|
$
|
|
|
|
$
|
5,646
|
|
Equity securities
|
|
|
14
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
4,412
|
|
|
$
|
1,248
|
|
|
$
|
(7
|
)
|
|
$
|
5,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
$
|
4,530
|
|
|
$
|
905
|
|
|
$
|
|
|
|
$
|
5,435
|
|
Equity securities
|
|
|
14
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
4,544
|
|
|
$
|
905
|
|
|
$
|
(4
|
)
|
|
$
|
5,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition to the
available-for-sale
securities above, the Company has equity investments in
non-public companies in which the Company acquired
non-controlling interests and for which no readily determinable
market value exists. These securities were accounted for under
the cost method in accordance with
ASC 323-10-25,
The Equity Method of Accounting for Investments in Common
Stock (ASC
323-10-25).
At December 31, 2010 and 2009, the carrying value of such
securities was $3,642 and $3,841 for each period and has been
included in Other assets in the accompanying
consolidated balance sheets.
Realized gains/(losses) on securities, net, including write
downs related to
other-than-temporary
impairments of
available-for-sale
securities and other assets, were as follows for the years ended
December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Gross realized gains/(losses) on sale of registered investment
securities
|
|
$
|
95
|
|
|
$
|
66
|
|
|
$
|
(1,306
|
)
|
Other-than-temporary
impairment of registered investment securities
|
|
|
|
|
|
|
(386
|
)
|
|
|
(1,205
|
)
|
Other-than-temporary
impairment of noncontrolling interest in non-public companies
|
|
|
|
|
|
|
(2,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains/(losses) on securities, net
|
|
$
|
95
|
|
|
$
|
(2,332
|
)
|
|
$
|
(2,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Fair
Value Measurements
|
Certain assets and liabilities of the Company are reported at
fair value in the accompanying consolidated balance sheets. Such
assets and liabilities include amounts for both financial and
non-financial instruments. To increase consistency and
comparability of assets and liabilities recorded at fair value,
ASC 820-10
establishes a three-level fair value hierarchy to prioritize the
inputs to valuation techniques used to measure fair value.
ASC 820-10
requires disclosures detailing the extent to which
companies measure assets and liabilities at fair value,
the methods and assumptions used to measure fair value and the
effect of fair value measurements on earnings. In accordance
with
ASC 820-10,
the Company applied the following fair value hierarchy:
|
|
|
|
Level 1
|
Assets or liabilities for which the identical item is traded on
an active exchange, such as publicly-traded instruments.
|
|
|
Level 2
|
Assets and liabilities valued based on observable market data
for similar instruments.
|
|
|
Level 3
|
Assets or liabilities for which significant valuation
assumptions are not readily observable in the market;
instruments valued based on the best available data, some of
which is internally-developed, and considers risk premiums that
a market participant would require.
|
The following tables provide information for such assets and
liabilities as of December 31, 2010 and 2009. The fair
values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, acquisition related
liabilities prior to the adoption of ASC 805, Business
Combinations (ASC 805), short-term debt, and
short-term debt expected to be refinanced approximate their
carrying amounts because of the short-term nature of these
instruments. The fair value of the Companys long-term debt
was estimated at $584,361 and $578,804 as of December 31,
2010 and 2009, respectively, and is based on an estimate of
interest rates available to the Company for debt with similar
features, the Companys current credit
74
VERISK
ANALYTICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)