As filed with the Securities and Exchange Commission on September 29, 2009

Registration No. 333-152973

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 7
to

Form S-1

REGISTRATION STATEMENT

 

545 Washington Boulevard

Jersey City, NJ 07310-1686

(201) 469-2000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

 

Kenneth E. Thompson

Senior Vice President, General Counsel and Corporate Secretary

Verisk Analytics, Inc.

545 Washington Boulevard

Jersey City, NJ 07310-1686

(201) 469-2000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   o

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o                  

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o                  

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   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 12b2 of the Exchange Act.

 

                                       (Do not check if a smaller reporting company)

 

 

 

 

 

 

      The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

You should rely only on the information contained in this prospectus. We and the selling stockholders have not authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

 

Prior to the completion of this offering, we will have effected an internal reorganization whereby our predecessor, Insurance Services Office, Inc., or ISO, will become a wholly-owned subsidiary of the Company and all outstanding shares of ISO common stock will be replaced with common stock of the Company. We will immediately thereafter effect a fifty-for-one split of our common stock.

 

Except as the context otherwise requires, all share and per share information in this prospectus gives effect to the fifty-for-one stock split that will occur immediately after the reorganization.

 

Unless otherwise stated herein or the context otherwise requires, the terms “Verisk,” the “Company,” “we,” “us,” and “our” refer to Verisk Analytics, Inc. and its consolidated subsidiaries after giving effect to the reorganization described above, and prior to such reorganization these terms refer to ISO and its consolidated subsidiaries through which we are currently conducting our operations.

 

Until          , 2009, 25 days after the commencement of this offering, all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

We expect to deliver the shares against payment therefor on or about the date specified in the last paragraph of the cover page of this prospectus, which will be the third business day following the date of the pricing of the shares.

 

PROSPECTUS SUMMARY

	•	the total value of exposures in risk transactions is increasing;
	•	the number of participants in risk transactions is often large and the asymmetry of information among participants is often substantial; and
	•	the failure to understand risk can lead to large and rapid declines in financial performance.

	•	Our Solutions are Embedded In Our Customers’ Critical Decision Processes.   Our customers use our solutions to make better risk decisions and to price risk appropriately. In the U.S. P&C insurance industry, our solutions for prospective loss costs, policy language, rating/underwriting rules and regulatory filing services are the industry standard. In the U.S. healthcare and mortgage industries, our predictive models, loss estimation tools and fraud identification applications are the primary solutions that allow customers to understand their risk exposures and proactively manage them. Over the last three years, we have retained 98% of our customers across all of our businesses, which we believe reflects our customers’ recognition of the value they derive from our solutions.
	•	Extensive and Differentiated Data Assets and Analytic Methods.   We maintain what we believe are some of the largest, most accurate, and most complete databases in the markets we serve. Much of the information we provide is not available from any other source and would be difficult and costly for another party to replicate. As a result, our accumulated experience and years of significant investment have given us a competitive advantage in serving our customers.
	•	Culture of Continuous Improvement.   Our intellectual capital and focus on continuous improvement have allowed us to develop proprietary algorithms and solutions that assist our customers in making informed risk decisions. Our team includes approximately 578 individuals with advanced degrees, certifications and professional designations in such fields as actuarial science, data management, mathematics, statistics, economics, soil mechanics, meteorology and various engineering disciplines. Our compensation and benefit plans are pay-for-performance-

		oriented, including incentive compensation plans and substantial equity participation by employees. As of June 30, 2009, our employees owned approximately 25% of the company.

	•	Attractive Operating Model.   We believe we have an attractive operating model due to the recurring nature of our revenues, the scalability of our solutions and the low capital intensity of our business.

	•	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.
	•	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 also continue to pursue growth through targeted international expansion. We have already demonstrated the effectiveness of this strategy with our expansion into healthcare and non-insurance financial services.
	•	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. As of June 30, 2009, we have acquired 15 businesses in the past five years, which in the aggregate have increased their revenue with a weighted average CAGR of 31% over the same period.

Risk Factors

 

Investing in our common stock involves substantial risk. Please read “Risk Factors” beginning on page 11 for a discussion of certain factors you should consider in evaluating an investment in our common stock.

THE OFFERING

 

Class A common stock offered by the selling stockholders		85,250,000 shares

 

Class A common stock outstanding after the offering		113,076,100 shares (125,821,850 shares if the underwriters exercise their over-allotment option in full)

Over-allotment option		12,745,750 shares of Class A common stock from certain of the selling stockholders

Class B common stock outstanding after the offering		66,983,700 shares (54,237,950 shares if the underwriters exercise their over-allotment option in full)

 

Sale and transfer restrictions on Class B common stock		The Class B (Series 1) common stock is not transferable until 18 months after the date of this prospectus and the Class B (Series 2) common stock is not transferable until 24 months after the date of this prospectus.
		These transfer restrictions are subject to limited exceptions, including transfers to another holder of Class B common stock. See “Description of Capital Stock — Common Stock — Transfer Restrictions.”
Conversion of Class B common stock		After termination of the restrictions on transfer described above for each series of Class B common stock, such series of Class B common stock will be automatically converted into Class A common stock. No later than 24 months after the date of this prospectus, there will be no outstanding shares of Class B common stock.
		In the event that Class B common stock is transferred and converts into Class A common stock, it will have the effect of diluting the voting power of our existing holders of Class A common stock. See “Description of Capital Stock — Common Stock — Conversion.”
Use of proceeds		The Company will not receive any proceeds from the sale of common stock in the offering.

Dividend policy		We currently do not intend to pay dividends on our Class A common stock or Class B common stock.

Voting rights		The holders of Class A common stock and Class B common stock generally have identical voting rights, except that only holders of Class A common stock are entitled to vote on the election of Class A directors and only holders of Class B common stock are entitled to vote on the election of Class B directors. From the consummation of this offering of our Class A common stock until the earlier of (a) the 24-month anniversary of the date of this prospectus or (b) the date on which there are no shares of Class B common stock issued and outstanding, the amendment of certain of the provisions in our amended and restated certificate of incorporation will require the affirmative vote of at least two-thirds of the votes cast thereon by the outstanding shares of each of the Class A common stock and the Class B common stock, voting separately as a class. See “Description of Capital Stock —

		Common Stock.” See also “Risk Factors — Risks Related to the Offering — The holders of our Class B common stock have the right to elect up to three out of twelve of our directors and their interests in our business may be different than yours.”

Stock symbol		“VRSK”

	•	23,898,150 shares of Class A common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $9.38 per share; and

	•	an aggregate of 13,750,000 shares of Class A common stock that will be reserved for future issuances under our 2009 Equity Incentive Plan, including up to 3,177,650 shares of Class A common stock available for issuance to our directors, executive officers and employees in connection with grants of options upon the closing of this offering with an exercise price equal to the price of the shares sold in this offering.

														Six Months
		Year Ended December 31,												Ended June 30,
		2006				2007				2008				2008				2009
		(In thousands, except for share and per share data)
Statement of income data:
Revenues:
Risk Assessment revenues		$	472,634			$	485,160			$	504,391			$	253,356			$	262,873
Decision Analytics revenues			257,499				317,035				389,159				184,334				240,794
Revenues			730,133				802,195				893,550				437,690				503,667
Expenses:
Cost of revenues			331,804				357,191				386,897				190,678				220,501
Selling, general and administrative			100,124				107,576				131,239				59,028				72,225
Depreciation and amortization of fixed assets			28,007				31,745				35,317				16,424				18,913
Amortization of intangible assets			26,854				33,916				29,555				14,937				16,974
Total expenses			486,789				530,428				583,008				281,067				328,613
Operating income			243,344				271,767				310,542				156,623				175,054
Other income/(expense):
Investment income and realized gains (losses) on securities, net			6,101				9,308				(327	)			317				(273	)
Interest expense			(16,668	)			(22,928	)			(31,316	)			(14,173	)			(16,677	)
Total other expense, net			(10,567	)			(13,620	)			(31,643	)			(13,856	)			(16,950	)
Income from continuing operations before income taxes			232,777				258,147				278,899				142,767				158,104
Provision for income taxes			(91,992	)			(103,184	)			(120,671	)			(61,818	)			(67,250	)
Income from continuing operations			140,785				154,963				158,228				80,949				90,854

														Six Months
		Year Ended December 31,												Ended June 30,
		2006				2007				2008				2008				2009
		(In thousands, except for share and per share data)
Loss from discontinued operations, net of tax(1)			(1,805	)			(4,589	)			—				—				—
Net income		$	138,980			$	150,374			$	158,228			$	80,949			$	90,854
Basic income/(loss) per share (2) :
Income from continuing operations		$	34.08			$	38.58			$	43.26			$	21.73			$	26.20
Loss from discontinued operations			(0.44	)			(1.14	)			—				—				—
Net income per share		$	33.64			$	37.44			$	43.26			$	21.73			$	26.20
Diluted income/(loss) per share (2) :
Income from continuing operations		$	32.72			$	37.03			$	41.59			$	20.87			$	25.21
Loss from discontinued operations			(0.42	)			(1.10	)			—				—				—
Net income per share		$	32.30			$	35.93			$	41.59			$	20.87			$	25.21
Weighted average shares outstanding:
Basic			4,130,962				4,016,928				3,657,714				3,724,876				3,468,196
Diluted			4,302,867				4,185,151				3,804,634				3,877,906				3,604,086
Other data:
EBITDA(3):
Risk Assessment EBITDA		$	202,872			$	212,780			$	222,706			$	113,500			$	121,197
Decision Analytics EBITDA			95,333				124,648				152,708				74,484				89,744
EBITDA		$	298,205			$	337,428			$	375,414			$	187,984			$	210,941
Purchases of fixed assets		$	(25,742	)		$	(32,941	)		$	(30,652	)		$	(17,810	)		$	(16,195	)
Net cash provided by operating activities			223,499				248,521				247,906				141,929				184,529
Net cash used in investing activities			(243,452	)			(110,831	)			(130,466	)			(98,402	)			(152,683	)
Net cash provided by/(used in) financing activities			75,907				(212,591	)			(107,376	)			(16,759	)			(19,157	)

 

		As of December 31,												As of June 30,
		2006				2007				2008				2008				2009
		(In thousands)
Balance Sheet Data:
Cash and cash equivalents		$	99,152			$	24,049			$	33,185			$	50,835			$	45,962
Total assets			739,282				830,041				928,877				867,128				1,009,335
Total debt(4)			448,698				438,330				669,754				642,182				689,066
Redeemable common stock(5)			1,125,933				1,171,188				749,539				1,006,287				842,117
Stockholders’ deficit			(1,123,977	)			(1,203,348	)			(1,009,823	)			(1,186,569	)			(1,028,489	)

(1)		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 periods subsequent to December 31, 2007.

(2)		In conjunction with the initial public offering, the stock of Insurance Services Office, Inc. will convert to stock of Verisk Analytics, Inc., which plans to effect a stock split of its common stock. The numbers in the above table do not reflect this stock split. Giving effect to the fifty-for-one stock split that will have occurred prior to the completion of this offering, pro forma basic and diluted income/(loss) per share from continuing operations and discontinued operations would have been as follows:

		Year Ended December 31,												Six Months Ended June 30,
		2006				2007				2008				2008				2009
Basic
Income from continuing operations		$	0.68			$	0.77			$	0.87			$	0.43			$	0.52
Loss from discontinued operations			(0.01	)			(0.02	)			—				—				—
Net Income per share		$	0.67			$	0.75			$	0.87			$	0.43			$	0.52
Weighted average shares			206,548,100				200,846,400				182,885,700				186,243,800				173,409,800
Diluted
Income from continuing operations		$	0.65			$	0.74			$	0.83			$	0.42			$	0.50
Loss from discontinued operations			(0.01	)			(0.02	)			—				—				—
Net Income per share		$	0.64			$	0.72			$	0.83			$	0.42			$	0.50
Weighted average shares			215,143,350				209,257,550				190,231,700				193,895,300				180,204,300

(3)		EBITDA is the financial measure which management uses to evaluate the performance of our segments. “EBITDA” is defined as income from continuing operations before investment income and interest expense, income taxes, depreciation and amortization. See note 19 to our audited consolidated financial statements and note 15 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.
		Although 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 U.S. 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;
	•	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.

														Six Months
		Year Ended December 31,												Ended June 30,
		2006				2007				2008				2008				2009
		(In thousands)
Income from continuing operations		$	140,785			$	154,963			$	158,228			$	80,949			$	90,854
Depreciation and amortization of fixed and intangible assets			54,861				65,661				64,872				31,361				35,887
Investment income and realized (gains)/losses on securities, net			(6,101	)			(9,308	)			327				(317	)			273
Interest expense			16,668				22,928				31,316				14,173				16,677
Provision for income taxes			91,992				103,184				120,671				61,818				67,250
EBITDA		$	298,205			$	337,428			$	375,414			$	187,984			$	210,941

(5)		Prior to this offering, we are 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 is not solely within our control, due to our contractual obligations to redeem these shares. We classify this redemption value as redeemable common stock. Subsequent to this offering, we will no longer be obligated to redeem these shares and therefore we will not be required to record any redeemable common stock.

 

You should carefully consider the following risks and all of the other information set forth in this prospectus 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.

 

Risks Related to Our Business

 

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, many of our customers are significant stockholders of our company. Specifically, all of our 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, including as a result of this offering, 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 the U.S. P&C insurance industry. 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 the U.S. P&C insurance industry account for a substantial portion of our total revenues. During the year ended December 31, 2008 and the six months ended June 30, 2009, approximately 65% and 60%, respectively, of our revenue was derived from solutions provided to the U.S. P&C insurance industry. 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 revenues will decline if the insurance industry does not continue to accept these solutions. Factors that might affect the acceptance of these solutions by P&C insurers include the following:

 

 

 

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.

 

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 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 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 analyses 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 management’s 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, Driver’s Privacy Protection Act, Health Insurance Portability and Accountability Act, the European Union’s 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:

 

 

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:

 

 

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.

 

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 customer’s 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:

 

 

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 facilities that are uncommitted. Although we have capacity under our uncommitted facilities, lenders are not required to loan us any funds under such facilities. The current disruptions in the capital markets have caused banks and other credit providers to restrict availability of borrowing and new credit 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 expect to have employee contracts with the members of our senior management operating team following this offering. 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 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 several 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 “Business — 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 is currently in a recession and both the future domestic and global economic environments may continue to be less favorable than those of recent 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. The current volatility in of the credit markets, and its effect on the economy, may continue to negatively impact financial institutions. 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 detection and prevention solutions are directed at the mortgage market. This decline in asset value and originations and an increase in foreclosure 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.

 

Risks Related to the Offering

 

There is no prior public market for our common stock and therefore an active trading market or any specific price for our common stock may not be established.

 

Currently, there is no public trading market for our common stock. We expect that our Class A common stock will be listed on The NASDAQ Global Select Market under the symbol “VRSK.” The initial public offering price per share was determined by agreement among us, the selling stockholders and the representatives of the underwriters and may not be indicative of the market price of our common stock after our initial public offering. An active trading market for our common stock may not develop and continue upon the completion of this offering and the market price of our common stock may decline below the initial public offering price.

 

The market price for our common stock may be volatile.

 

The market price for our common stock is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:

 

 

 

In addition, securities markets generally and from time to time experience significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may have a material adverse effect on the market price of our common stock.

 

We plan to issue a number of options to purchase Class A common stock to our directors and employees that could dilute your interest in us.

 

Upon the closing of this offering we will have an aggregate of 13,750,000 shares of Class A common stock reserved for future issuances under our 2009 Equity Incentive Plan, including up to 3,177,650 shares of Class A common stock available for issuance to our directors, executive officers and employees in connection with grants of options to purchase Class A common stock under our employee benefits arrangements. Issuances of Class A common stock to our directors, executive officers and employees pursuant to the exercise of stock options under our employee benefits arrangements will dilute your interest in us.

 

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 after this offering 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. Upon consummation of this offering, we will have 113,076,100 shares of Class A common stock outstanding. Of these shares, the 85,250,000 shares of Class A common stock offered hereby will be freely tradable without restriction in the public market, unless purchased by our affiliates.

 

Following this offering, our existing stockholders will beneficially own in the aggregate approximately 27,826,100 shares of our Class A common stock and 66,983,700 shares of our Class B common stock, representing in aggregate approximately 52.7% of our outstanding common stock assuming the over-allotment option is not exercised. Such stockholders will be able to sell their common stock in the public market from time to time without registration, subject to the lock-up periods described below, 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.

 

In connection with this offering, we, our selling stockholders, our directors and certain members of our management have each agreed to enter into a lock-up agreement and thereby be subject to a lock-up period, meaning that they and their permitted transferees will not be permitted to sell any of their common stock without the prior consent of the underwriters for 180 days after the date of this prospectus, subject to certain exceptions. Although we have been advised that there is no present intention to do so, the underwriters may, in their sole discretion and without notice, release all or any portion of the common stock from the restrictions in any of the lock-up agreements described above. In addition, certain members of our management will be subject to lock-up agreements with us whereby they will not be permitted to sell any of their common stock, subject to certain conditions, for a longer period of time after the pricing of this initial public offering. See “Certain Relationships and Related Transactions — Letter Agreements.”

 

Also, pursuant to our amended and restated certificate of incorporation, our Class B stockholders will not be able to sell any of their common stock, subject to certain conditions, to the public for a period of time after the pricing of this initial public offering. Each share of Class B (Series 1) common stock shall convert automatically, without any action by the holder, into one share of Class A common stock 18 months after the date of this prospectus. Each share of Class B (Series 2) common stock shall convert automatically, without any action by the holder, into one share of Class A common stock 24 months after the date of this prospectus.

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. See “Description of Capital Stock — Common Stock — Conversion.”

 

Pursuant to our equity incentive plans, options to purchase approximately 23,898,150 shares of Class A common stock will be outstanding upon consummation of this offering. Following this offering, we intend to file a registration statement under the Securities Act which will cover 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 twelve 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 stock, or their interests may otherwise conflict with yours. 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. See “Description of Capital Stock — Common Stock — Voting Rights.”

 

Following this offering, changes in our capital structure and 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:

 

 

 

In addition, Section 203 of the Delaware General Corporation Law may inhibit potential acquisition bids for us. Upon completion of this offering, we will be subject to Section 203, which regulates corporate acquisitions and limits the ability of a holder of 15% 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.

 

We will incur increased costs as a result of being a public company.

 

As a privately held company, we have not been responsible for the corporate governance and financial reporting practices and policies required of a public company. Following the completion of this offering, we will be a publicly traded company. Once we become a public company, we will incur significant legal, accounting, investor relations and other expenses that we do not currently incur. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the Securities and Exchange Commission, the applicable listing rules and rules implemented by the applicable foreign regulatory agencies, may require changes in corporate governance practices of public companies. We expect such rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly.

 

We have made statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus 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 prospectus to conform our prior statements to actual results or revised expectations.

 

Market data and certain industry data and forecasts used throughout this prospectus were obtained from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications and surveys. We believe the data from third-party sources to be reliable based upon our management’s knowledge of the industry, but have not independently verified such data. Certain data and forecasts used in this prospectus predate the current economic downturn. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus.

 

On May 23, 2008, in contemplation of our initial public offering, we formed Verisk Analytics, Inc., a Delaware corporation, to be the new holding company for our business. It was initially formed as a wholly-owned subsidiary of Insurance Services Office, Inc. Prior to the completion of this offering, we will have effected an internal reorganization whereby ISO will become a wholly-owned subsidiary of Verisk and all outstanding shares of ISO common stock will be replaced with common stock of Verisk.

 

This transaction will occur by the stockholders of ISO exchanging their Class A common stock and Class B common stock in ISO for Class A common stock and Class B common stock in Verisk, respectively, on a one-for-one basis. The Class B common stock of Verisk is sub-divided equally into two series of Class B common stock, Class B (Series 1) common stock and Class B (Series 2) common stock, as described in this prospectus. As part of this reorganization, our existing equity based compensation plans will be assigned to Verisk. As a result, all outstanding options issued under our existing equity based compensation plans will become options to acquire common stock of Verisk.

 

Immediately after the reorganization we will effect a fifty-for-one split of our common stock in order to have a price per share equal to the mid-point of the range set forth on the cover page of this prospectus.

USE OF PROCEEDS

 

The selling stockholders are selling all of the shares of common stock in this offering and we will not receive any proceeds from the sale of the shares.

DIVIDEND POLICY

 

Our board of directors does not anticipate authorizing the payment of cash dividends on our Class A common stock or Class B common stock in the foreseeable future. Any determination to pay dividends to holders of our Class A common stock or Class B common stock in the future will be at the discretion of our board of directors and will depend on many factors, including our financial condition, results of operations, general business conditions, contractual restrictions, capital requirements, business prospects, restrictions on the payment of dividends under Delaware Law, and any other factors our board of directors deems relevant.

 

The following table sets forth our capitalization as of June 30, 2009:

 

 

This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the unaudited condensed consolidated interim financial statements, and the consolidated financial statements and notes thereto appearing elsewhere in this prospectus.

 

 

 

 

 

The following selected historical financial data should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 2006, 2007 and 2008 and the consolidated balance sheet data as of December 31, 2007 and 2008 are derived from the audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 2004 and 2005 and the consolidated balance sheet data as of December 31, 2004, 2005 and 2006 are derived from unaudited consolidated financial statements that are not included in this prospectus. The condensed consolidated statement of operations data for the six-month periods ended June 30, 2008 and 2009 and the condensed consolidated balance sheet data as of June 30, 2009 are derived from unaudited condensed financial statements that are included in this prospectus. The condensed consolidated balance sheet data as of June 30, 2008 is derived from unaudited condensed financial statements that are not included in this prospectus. The unaudited condensed consolidated financial statements, in our opinion, have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. Results for the six-month period ended June 30, 2009 are not necessarily indicative of results that may be expected for the fiscal year ended December 31, 2009 or any other future period.

 

From January 1, 2004 to June 30, 2009 we have acquired 15 businesses, which may affect the comparability of our financial statements.

 

 

 

 

 

MANAGEMENT’S 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 prospectus, 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.

 

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. Our Risk Assessment segment revenues represented approximately 56% and 52% of our revenues for the year ended December 31, 2008 and the six months ended June 30, 2009, respectively. Our Decision Analytics segment provides solutions our customers use to analyze the four processes of the Verisk Risk Analysis Framework: Prediction of Loss, Selection and Pricing of Risk, Detection and Prevention of Fraud, and Quantification of Loss. Our Decision Analytics segment revenues represented approximately 44% and 48% of our revenues for the year ended December 31, 2008 and the six months ended June 30, 2009, respectively.

 

Executive Summary

 

 

Key Performance Metrics

 

We believe our business’s ability to generate recurring revenue and positive cash flow is the key indicator of the successful execution of our business strategy. We use revenue growth and EBITDA margin as metrics to measure our performance.

 

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 of new or expanded solutions to existing customers, sales to 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 are 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 or our actuarial services throughout the subscription period. In general, we experience minimal 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, 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 year ended December 31, 2008 and the six months ended June 30, 2009, 24% and 28% 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.

 

More than 82% and 84% of the revenues in our Risk Assessment segment for the year ended December 31, 2008 and the six months ended June 30, 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, and we have retained approximately 99% of our P&C insurance customer base in each of the last five years. Within our Risk Assessment segment, much of our revenues are based on the data we receive from our customers. The costs for such revenue for the year ended December 31, 2008 and the six months ended June 30, 2009, were $15.8 million and $9.7 million, respectively, and have increased as a percentage of revenue from 3.3% to 3.7% of our Risk Assessment segment revenues from December 31, 2006 to June 30, 2009. More than 68% and 59% of the revenues in our Decision Analytics segment, for the years ended December 31, 2008 and the six months ended June 30, 2009, respectively, were derived from subscriptions and long-term agreements for our solutions.

 

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 63% and 65% of our total expenses for the year ended December 31, 2008 and the six months ended June 30, 2009, respectively.

 

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.

 

EBITDA Margin

 

Our EBITDA margins for the years ended December 31, 2007 and December 31, 2008, were 42.1% and 42.0%, respectively. Historically, our EBITDA margin has improved because we have been able to increase revenues without a proportionate corresponding increase in expenses. Included within the decrease in our EBITDA margin for the year ended December 31, 2008 are costs of $6.5 million associated with the preparation of our initial public offering, representing a 0.7% negative impact on our EBITDA margin. Our EBITDA margins for the six months ended June 30, 2008 and June 30, 2009 were 42.9% and 41.9%, respectively. Included within the decrease of our EBITDA margin for the six months ended June 30, 2009 are increased pension costs of $9.1 million, representing a 1.8% negative impact on our EBITDA margin, due to the effect of the global economic downturn on our pension investments in 2008, as further discussed within “Critical Accounting Policies and Estimates, Pension and Postretirement” section.

 

Description of Acquisitions

 

As part of our growth strategy, we intend to continue to selectively acquire companies primarily to augment our Decision Analytics offerings. We have acquired 10 businesses from January 2006 to June 2009, nine of which are included in our Decision Analytics segment. Specifically, these companies provide fraud identification and detection, loss prediction and selection solutions to the healthcare market. Included in the above was Xactware, Inc., or Xactware, acquired in 2006, which provides loss quantification solutions for all phases of building repair and reconstruction. As a result of these acquisitions, our consolidated results of operations may not be comparable between periods.

 

In 2008, we acquired two entities for an aggregate cash purchase price of approximately $19.3 million and funded indemnity escrows totaling $1.5 million. One entity is subject to additional contingent payments ranging from $0 to a maximum of $4.5 million potentially payable in 2011 and 2012, based on achievement of certain predetermined financial results. In 2007, we acquired three companies for an aggregate cash purchase price of approximately $50.1 million and funded indemnity and contingent payment escrows of $3.3 million and $1.0 million, respectively. As of December 31, 2008, an entity acquired in 2007 achieved certain financial results, whereby an additional contingent payment of $15.2 million was paid in May 2009. In 2006, we acquired four companies for an aggregate cash purchase price of approximately $202.1 million, of which $188.0 million relates to Xactware, and funded indemnity and contingent payment escrows of $11.1 million and $3.5 million, respectively. Xactware achieved certain financial results, whereby additional contingent payments of $98.1 million and $62.9 million were paid in April 2008 and May 2009, respectively.

 

On January 14, 2009, we acquired D2Hawkeye or D2, a privately-owned provider of information and analytic solutions for the healthcare industry, for a net cash purchase price of $58.6 million of which

$7.0 million was used to fund the indemnity escrow. D2 is entitled to receive additional contingent consideration ranging from $0 to $65.7 million based on achievement of certain predetermined EBITDA targets for the fiscal year 2011 and potentially payable in 2012. We have recorded $2.8 million of contingent consideration from this range, which was estimated as of the acquisition date by using a weighted average probability of achieving the specific predetermined EBITDA targets. As of June 30, 2009, no change in the estimated contingent consideration was required. Subsequent changes in the estimated fair value of contingent consideration is recorded in the statement of operations.

 

As of June 30, 2009, our indemnity escrows totaled $21.2 million and are classified as current assets. A portion of the escrows and other potential acquisition contingent payments are linked to performance targets. When tied to continued employment, these contingent payments must be expensed as compensation. Compensation expense related to these acquisition contingent payments for the years ended December 31, 2006, 2007 and 2008 were $9.0 million, $3.6 million and $0.3 million respectively, and for the six months ended June 30, 2008 and 2009 were $0.3 million and $0, respectively.

 

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, software solutions to healthcare organizations that have HEDIS or quality-reporting needs, for a net cash purchase price of $7.6 million of which $0.4 million was used to fund the indemnity escrows. The preliminary allocation of the purchase price resulted in tangible assets of $0.4 million, and we are still evaluating the allocation of the purchase price related to intangible assets and goodwill. TierMed, located in Chanhassen, Minnesota, complements and is integrated within our Decision Analytics segment.

 

Equity Compensation Costs

 

We have a leveraged employee stock ownership plan, or 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 occur. The amount of our equity compensation costs recognized for the years ended December 31, 2006, 2007 and 2008 and the six months ended June 30, 2008 and 2009 are as follows: