VRSK-2013.09.30-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     
Commission File Number: 001-34480
___________________________________
VERISK ANALYTICS, INC.
(Exact name of registrant as specified in its charter)
 ___________________________________
Delaware
 
26-2994223
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
545 Washington Boulevard
Jersey City, NJ
 
07310-1686
(Address of principal executive offices)
 
(Zip Code)
(201) 469-2000
(Registrant’s telephone number, including area code)
 ___________________________________
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  ý    No  ¨

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  ý    No  ¨

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
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

As of November 1, 2013, there was the following number of shares outstanding of each of the issuer’s classes of common stock:
 
Class
 
Shares Outstanding
Class A common stock $.001 par value
 
168,231,917
 

Table of Contents

Verisk Analytics, Inc.
Index to Form 10-Q
Table of Contents
 
 
Page Number
 
 
PART I — FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 31.1
 
 
 
Exhibit 31.2
 
 
 
Exhibit 32.1
 

Table of Contents


Item 1. Financial Statements

VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2013 and December 31, 2012
 
2013
 
2012
 
(unaudited)
 
 
(In thousands, except for
share and per share data)
ASSETS
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
180,203

 
$
89,819

Available-for-sale securities
 
4,514

 
 
4,883

Accounts receivable, net of allowance for doubtful accounts of $5,389 and $4,753, respectively
 
167,767

 
 
178,430

Prepaid expenses
 
25,986

 
 
21,946

Deferred income taxes, net
 
11,960

 
 
10,397

Income taxes receivable
 
42,191

 
 
45,975

Other current assets
 
28,709

 
 
39,109

Total current assets
 
461,330

 
 
390,559

Noncurrent assets:
 
 
 
 
 
Fixed assets, net
 
219,116

 
 
154,084

Intangible assets, net
 
471,139

 
 
520,935

Goodwill
 
1,250,888

 
 
1,247,459

Other assets
 
27,399

 
 
47,299

Total assets
$
2,429,872

 
$
2,360,336

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
Accounts payable and accrued liabilities
$
171,285

 
$
187,648

Short-term debt and current portion of long-term debt
 
39,459

 
 
195,263

Pension and postretirement benefits, current
 
1,734

 
 
1,734

Fees received in advance
 
244,160

 
 
200,705

Total current liabilities
 
456,638

 
 
585,350

Noncurrent liabilities:
 
 
 
 
 
Long-term debt
 
1,271,170

 
 
1,266,162

Pension benefits
 
28,534

 
 
38,655

Postretirement benefits
 
1,922

 
 
2,627

Deferred income taxes, net
 
143,432

 
 
133,761

Other liabilities
 
45,174

 
 
78,190

Total liabilities
 
1,946,870

 
 
2,104,745

Commitments and contingencies
 

 
 

Stockholders’ equity:
 
 
 
 
 
Class A common stock, $.001 par value; 1,200,000,000 shares authorized; 544,003,038 shares issued
and 168,220,591 and 167,727,073 outstanding, respectively
 
137

 
 
137

Unearned KSOP contributions
 
(371
)
 
 
(483
)
Additional paid-in capital
 
1,156,175

 
 
1,044,746

Treasury stock, at cost, 375,782,447 and 376,275,965 shares, respectively
 
(1,753,231
)
 
 
(1,605,376
)
Retained earnings
 
1,166,884

 
 
905,727

Accumulated other comprehensive losses
 
(86,592
)
 
 
(89,160
)
Total stockholders’ equity
 
483,002

 
 
255,591

Total liabilities and stockholders’ equity
$
2,429,872

 
$
2,360,336

The accompanying notes are an integral part of these condensed consolidated financial statements.

1
Table of Contents

VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For The Three and Nine Months Ended September 30, 2013 and 2012
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except for share and per share data)
Revenues
$
438,597

 
$
398,863

 
$
1,263,240

 
$
1,118,590

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues (exclusive of items
   shown separately below)
 
176,580

 
 
156,749

 
 
515,692

 
 
437,153

Selling, general and administrative
 
59,330

 
 
58,707

 
 
179,510

 
 
175,159

Depreciation and amortization of fixed
   assets
 
17,704

 
 
12,714

 
 
49,729

 
 
37,448

Amortization of intangible assets
 
15,393

 
 
15,442

 
 
49,796

 
 
36,216

Total expenses
 
269,007

 
 
243,612

 
 
794,727

 
 
685,976

Operating income
 
169,590

 
 
155,251

 
 
468,513

 
 
432,614

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(18,692
)
 
 
(18,133
)
 
 
(58,486
)
 
 
(51,895
)
Investment income
 
227

 
 
136

 
 
315

 
 
397

Realized gain (loss) on available-for-sale
   securities, net
 
1

 
 
(638
)
 
 
(99
)
 
 
(338
)
Total other expense, net
 
(18,464
)
 
 
(18,635
)
 
 
(58,270
)
 
 
(51,836
)
Income before income taxes
 
151,126

 
 
136,616

 
 
410,243

 
 
380,778

Provision for income taxes
 
(54,685
)
 
 
(53,705
)
 
 
(149,086
)
 
 
(149,935
)
Net income
$
96,441

 
$
82,911

 
$
261,157

 
$
230,843

Basic net income per share
$
0.57

 
$
0.50

 
$
1.55

 
$
1.39

Diluted net income per share
$
0.56

 
$
0.48

 
$
1.51

 
$
1.34

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
168,044,100

 
 
165,978,080

 
 
168,089,919

 
 
165,587,027

Diluted
 
172,154,553

 
 
171,660,543

 
 
172,460,960

 
 
171,637,571

The accompanying notes are an integral part of these condensed consolidated financial statements.


2
Table of Contents

VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For The Three and Nine Months Ended September 30, 2013 and 2012
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Net income
$
96,441

 
$
82,911

 
$
261,157

 
$
230,843

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
Unrealized foreign currency gain (loss)
 
275

 
 
4

 
 
(406
)
 
 
(130
)
Unrealized holding gain (loss)
   on available-for-sale securities
 
139

 
 
96

 
 
(175
)
 
 
(217
)
Pension and postretirement
   unfunded liability adjustment
 
1,332

 
 
401

 
 
3,149

 
 
1,781

Total other comprehensive income
 
1,746

 
 
501

 
 
2,568

 
 
1,434

Comprehensive income
$
98,187

 
$
83,412

 
$
263,725

 
$
232,277

The accompanying notes are an integral part of these condensed consolidated financial statements.

3
Table of Contents

VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
For The Year Ended December 31, 2012 and The Nine Months Ended September 30, 2013
 
 
Class A
Common 
Stock
 
 
Par 
Value
 
 
Unearned
KSOP
Contributions
 
 
Additional
Paid-in
Capital
 
 
Treasury
Stock
 
 
Retained
Earnings
 
 
Accumulated
Other
Comprehensive
Losses
 
 
Total
Stockholders’
Equity 
(Deficit)
 
(In thousands, except for share data)
Balance, December 31, 2011
544,003,038

 
$
137

 
$
(691
)
 
$
874,808

 
$
(1,471,042
)
 
$
576,585

 
$
(78,287
)
 
$
(98,490
)
Net income
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
329,142

 
 
—

 
 
329,142

Other comprehensive
   loss
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
(10,873
)
 
 
(10,873
)
Treasury stock acquired
   (3,491,591 shares)
—

 
 
—

 
 
—

 
 
—

 
 
(162,586
)
 
 
—

 
 
—

 
 
(162,586
)
KSOP shares earned
—

 
 
—

 
 
208

 
 
12,903

 
 
—

 
 
—

 
 
—

 
 
13,111

Stock options exercised,
   including tax benefit of
   $88,185 (6,880,678
   shares reissued from
   treasury stock)
—

 
 
—

 
 
—

 
 
131,824

 
 
28,039

 
 
—

 
 
—

 
 
159,863

Restricted stock lapsed,
   including tax benefit of
   $202 (41,908 shares
   reissued from
   treasury stock)
—

 
 
—

 
 
—

 
 
34

 
 
167

 
 
—

 
 
—

 
 
201

Employee stock purchase
   plan (6,074 shares
   reissued from treasury
   stock)
—

 
 
—

 
 
—

 
 
268

 
 
26

 
 
—

 
 
—

 
 
294

Stock based
   compensation
—

 
 
—

 
 
—

 
 
24,696

 
 
—

 
 
—

 
 
—

 
 
24,696

Other stock issuances
   (4,777 shares
   reissued from
   treasury stock)
—

 
 
—

 
 
—

 
 
213

 
 
20

 
 
—

 
 
—

 
 
233

Balance, December 31, 2012
544,003,038

 
 
137

 
 
(483
)
 
 
1,044,746

 
 
(1,605,376
)
 
 
905,727

 
 
(89,160
)
 
 
255,591

Net income
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
261,157

 
 
—

 
 
261,157

Other comprehensive
   income
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
—

 
 
2,568

 
 
2,568

Treasury stock acquired
   (2,707,562 shares)
—

 
 
—

 
 
—

 
 
—

 
 
(162,081
)
 
 
—

 
 
—

 
 
(162,081
)
KSOP shares earned
—

 
 
—

 
 
112

 
 
11,062

 
 
—

 
 
—

 
 
—

 
 
11,174

Stock options exercised,
   including tax benefit of
   $43,825 (3,028,040
   shares reissued from
   treasury stock)
—

 
 
—

 
 
—

 
 
81,684

 
 
13,467

 
 
—

 
 
—

 
 
95,151

Restricted stock lapsed,
   including tax benefit of
   $974 (143,367 shares
   reissued from treasury
   stock)
—

 
 
—

 
 
—

 
 
350

 
 
624

 
 
—

 
 
—

 
 
974

Employee stock purchase
   plan (21,564 shares
   reissued from treasury
   stock)
—

 
 
—

 
 
—

 
 
1,170

 
 
98

 
 
—

 
 
—

 
 
1,268

Stock based
   compensation
—

 
 
—

 
 
—

 
 
16,745

 
 
—

 
 
—

 
 
—

 
 
16,745

Other stock issuances
   (8,109 shares
   reissued from
   treasury stock)
—

 
 
—

 
 
—

 
 
418

 
 
37

 
 
—

 
 
—

 
 
455

Balance, September 30, 2013
544,003,038

 
$
137

 
$
(371
)
 
$
1,156,175

 
$
(1,753,231
)
 
$
1,166,884

 
$
(86,592
)
 
$
483,002

The accompanying notes are an integral part of these condensed consolidated financial statements.

4
Table of Contents

VERISK ANALYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For The Nine Months Ended September 30, 2013 and 2012
 
2013
 
2012
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Net income
$
261,157

 
$
230,843

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization of fixed assets
 
49,729

 
 
37,448

Amortization of intangible assets
 
49,796

 
 
36,216

Amortization of debt issuance costs and original issue discount
 
2,048

 
 
1,649

Allowance for doubtful accounts
 
1,188

 
 
576

KSOP compensation expense
 
11,174

 
 
9,481

Stock based compensation
 
16,745

 
 
19,303

Realized loss on available-for-sale securities, net
 
99

 
 
338

Deferred income taxes
 
5,888

 
 
(526
)
Loss on disposal of fixed assets
 
476

 
 
88

Excess tax benefits from exercised stock options
 
(81,689
)
 
 
(55,056
)
Other operating activities, net
 
448

 
 
215

Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
 
 
Accounts receivable
 
9,475

 
 
(3,026
)
Prepaid expenses and other assets
 
(4,727
)
 
 
7,126

Income taxes
 
48,554

 
 
99,508

Accounts payable and accrued liabilities
 
12,267

 
 
3,168

Fees received in advance
 
43,372

 
 
39,588

Pension and postretirement benefits
 
(6,532
)
 
 
(97,809
)
Other liabilities
 
(33,016
)
 
 
(8,133
)
Net cash provided by operating activities
 
386,452

 
 
320,997

Cash flows from investing activities:
 
 
 
 
 
Acquisitions, net of cash acquired of $0 and $36,113, respectively
 
(983
)
 
 
(743,091
)
Purchase of non-controlling interest in non-public companies
 
—

 
 
(2,000
)
Earnout payments
 
—

 
 
(250
)
Proceeds from release of acquisition related escrows
 
280

 
 
—

Escrow funding associated with acquisitions
 
—

 
 
(37,800
)
Purchases of fixed assets
 
(107,915
)
 
 
(55,724
)
Purchases of available-for-sale securities
 
(5,003
)
 
 
(1,317
)
Proceeds from sales and maturities of available-for-sale securities
 
5,825

 
 
1,478

Other investing activities, net
 
439

 
 
—

Net cash used in investing activities
 
(107,357
)
 
 
(838,704
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from issuance of long-term debt, net of original issue discount
 
—

 
 
347,224

Repayment of current portion of long-term debt
 
(145,000
)
 
 
—

Repayment of short-term debt refinanced on a long-term basis
 
—

 
 
(347,224
)
(Repayment) proceeds of short-term debt, net
 
(10,000
)
 
 
462,224

Payment of debt issuance costs
 
—

 
 
(3,623
)
Excess tax benefits from exercised stock options
 
81,689

 
 
55,056

Repurchase of common stock
 
(160,970
)
 
 
(128,073
)
Proceeds from stock options exercised
 
51,326

 
 
43,571

Other financing activities, net
 
(5,350
)
 
 
(5,151
)
Net cash (used in) provided by financing activities
 
(188,305
)
 
 
424,004

Effect of exchange rate changes
 
(406
)
 
 
(130
)
Increase (decrease) in cash and cash equivalents
 
90,384

 
 
(93,833
)
Cash and cash equivalents, beginning of period
 
89,819

 
 
191,603

Cash and cash equivalents, end of period
$
180,203

 
$
97,770

Supplemental disclosures:
 
 
 
 
 
Taxes paid
$
102,203

 
$
51,017

Interest paid
$
58,018

 
$
41,431

Noncash investing and financing activities:
 
 
 
 
 
Repurchase of common stock included in accounts payable and accrued liabilities
$
2,622

 
$
953

Deferred tax liability established on date of acquisition
$
(1,187
)
 
$
(78,832
)
Capital lease obligations
$
9,014

 
$
3,544

Capital expenditures included in accounts payable and accrued liabilities
$
2,890

 
$
998

Increase in goodwill due to acquisition related escrow distributions
$
—

 
$
4,128

The accompanying notes are an integral part of these condensed consolidated financial statements.

5
Table of Contents

VERISK ANALYTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except for share and per share data, unless otherwise stated)
1. Organization:
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, financial services, and healthcare industries and sophisticated methods to predict and quantify loss in diverse contexts ranging from natural catastrophes to supply chain 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 to serve as the parent holding company of Insurance Services Office, Inc. (“ISO”). 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. Verisk’s common stock trades under the ticker symbol “VRSK” on the NASDAQ Global Select Market.
2. Basis of Presentation and Summary of Significant Accounting Policies:
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the U.S. (“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, fair value of stock based compensation, liabilities for pension and postretirement benefits, and the estimate for the allowance for doubtful accounts. Actual results may ultimately differ from those estimates. Certain combinations have been made related to federal and state income taxes and to the segment reporting within revenue categories in the condensed consolidated financial statements and the notes to conform to the respective 2013 presentation.
The condensed consolidated financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012, in the opinion of management, include all adjustments, consisting of normal recurring accruals, to present fairly the Company’s financial position, results of operations and cash flows. The operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2013 have been prepared on the same basis as and should be read in conjunction with the annual report on Form 10-K for the year ended December 31, 2012. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules of the Securities and Exchange Commission (“SEC”). The Company believes the disclosures made are adequate to keep the information presented from being misleading.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU No. 2013-02”). Under ASU No. 2013-02, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income by component, either on the face of the financial statement where net income is presented or in the notes thereto. ASU No. 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. ASU 2013-02 was adopted by the Company on January 1, 2013. The Company elected to present the information as a separate disclosure in the notes to the condensed consolidated financial statements. Refer to Note 9 for further discussion.
In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU No. 2013-04”). Under ASU No. 2013-04, an entity is required to measure and disclose the amounts and nature of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. ASU No. 2013-04 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company has elected not to early adopt this standard. The adoption of ASU 2013-04 will not have a material impact on the Company’s condensed consolidated financial statements as the long-term debt resulting from joint and several liability arrangements

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has been measured on a gross basis and disclosed in Note 8. Other obligations resulting from joint and several liability arrangements, such as contingencies, retirement benefits and income taxes, are excluded from the scope of this ASU.
In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU No. 2013-05”). Under ASU No. 2013-05, an entity is required to release any related cumulative translation adjustment into net income upon cessation to have a controlling financial interest in a subsidiary or group of assets within a foreign entity. ASU 2013-05 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company has elected not to early adopt this standard. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s condensed consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU No. 2013-11”).  Under ASU No. 2013-11, an unrecognized tax benefit should be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with the exception that these unrecognized tax benefits are not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or the tax law.  An additional exception applies when the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability and should not be combined with deferred tax assets.  ASU No. 2013-11 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013.  Early adoption is permitted.  The Company has elected not to early adopt this standard. The Company is currently assessing the potential impact of ASU No. 2013-11 on its financial statements.
3. Investments:
Available-for-sale securities consisted of the following: 
 
Adjusted
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Registered investment companies
$
4,748

 
$
—

 
$
(234
)
 
$
4,514

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Registered investment companies
$
4,830

 
$
53

 
$
—

 
$
4,883

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 Accounting Standards Codification (“ASC”) 323-10-25, The Equity Method of Accounting for Investments in Common Stock. At September 30, 2013 and December 31, 2012, the carrying value of such securities was $3,737 and $5,015, respectively, and has been included in “Other assets” in the accompanying condensed consolidated balance sheets.

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4. Fair Value Measurements:
Certain assets and liabilities of the Company are reported at fair value on a recurring basis in the accompanying condensed 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, Fair Value Measurements (“ASC 820-10”), established 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 are internally-developed, and considers
   risk premiums that market participant would require.
The following table provides information for assets reported at fair value as of September 30, 2013 and December 31, 2012. The fair values of cash and cash equivalents (other than money-market funds, which are recorded on a reported net asset value basis disclosed below), accounts receivable, accounts payable and accrued liabilities, and short-term debt approximate their carrying amounts because of the short-term nature of these instruments. 
 
Total
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs (Level 2)
September 30, 2013
 
 
 
 
 
 
 
 
Cash equivalents - money-market funds
$
547

 
$
—

 
$
547

Registered investment companies (1)
$
4,514

 
$
4,514

 
$
—

December 31, 2012
 
 
 
 
 
 
 
 
Cash equivalents - money-market funds
$
760

 
$
—

 
$
760

Registered investment companies (1)
$
4,883

 
$
4,883

 
$
—

______________________
(1)
Registered investment companies are classified as available-for-sale securities and are valued using quoted prices in active markets multiplied by the number of shares owned.
The Company has not elected to carry its long-term debt at fair value. The carrying value of the long-term debt represents amortized cost. The Company assesses the fair value of its long-term debt based on quoted market prices if available, and if not, an estimate of interest rates available to the Company for debt with similar features, the Company’s current credit rating and spreads applicable to the Company. The fair value of the long-term debt would be a Level 2 liability if the long-term debt was measured at fair value on the condensed consolidated balance sheets. The following table summarizes the carrying value and estimated fair value of the long-term debt as of September 30, 2013 and December 31, 2012 respectively: 
 
2013
 
2012
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial instrument not carried at fair value:
 
 
 
 
 
 
 
 
 
 
 
Long-term debt excluding capitalized
leases
$
1,299,949

 
$
1,387,337

 
$
1,454,409

 
$
1,575,950


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Table of Contents

5. Acquisitions:
2012 Acquisitions
On December 20, 2012, the Company acquired the net assets of Insurance Risk Management Solutions (“IRMS”). IRMS provided integrated property risk assessment technology underlying one of the Company’s geographic information system (“GIS”) underwriting solutions. At the end of 2012, the long-term contract with IRMS was expiring and precipitated a change in the business relationship. Instead of continuing forward with a new service agreement, the Company acquired IRMS as this will enable the Company to better manage, enhance and continue to use the solutions as part of its Risk Assessment segment. The Company paid a net cash purchase price of $26,422 and funded $1,000 of indemnity escrows.
On August 31, 2012, the Company acquired Argus Information & Advisory Services, LLC (“Argus”), a provider of information, competitive benchmarking, scoring solutions, analytics, and customized services to financial institutions and regulators in North America, Latin America, and Europe, for a net cash purchase price of approximately $404,995 and funded $20,000 of indemnity escrows. Argus leverages its comprehensive payment data sets and provides proprietary solutions to a client base that includes credit and debit card issuers, retail banks and other consumer financial services providers, payment processors, insurance companies, and other industry stakeholders. Within the Company’s Decision Analytics segment, this acquisition enhances the Company’s position as a provider of data, analytics, and decision-support solutions to financial institutions globally.
On July 2, 2012, the Company acquired the net assets of Aspect Loss Prevention, LLC (“ALP”), a provider of loss prevention and analytic solutions to the retail, entertainment, and food industries, for a net cash purchase price of approximately $6,917 and funded $800 of indemnity escrows. Within the Company’s Decision Analytics segment, ALP further advances the Company’s position as a provider of data, crime analytics, and decision-support solutions.
On March 30, 2012, the Company acquired 100% of the stock of MediConnect Global, Inc. (“MediConnect”), a service provider of medical record retrieval, digitization, coding, extraction, and analysis, for a net cash purchase price of approximately $331,405 and funded $17,000 of indemnity escrows. Within the Company’s Decision Analytics segment, MediConnect further supports the Company’s objective as the leading provider of data, analytics, and decision-support solutions to the healthcare and property casualty industry.
The preliminary allocations of the purchase prices for IRMS as disclosed as of December 31, 2012 is subject to revisions as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The revisions may have an impact on the condensed consolidated financial statements. The allocations of the purchase price will be finalized once all information is obtained, but not to exceed one year from the acquisition date.
Supplemental information on an unaudited pro forma basis is presented below as if the acquisitions of MediConnect and Argus occurred at the beginning of the year 2012. The pro forma information for the nine months ended September 30, 2012 presented below is based on estimates and assumptions, which the Company believes are reasonable and not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had these acquisitions been completed at the beginning of 2012. The unaudited pro forma information includes intangible asset amortization charges and incremental borrowing costs as a result of the acquisitions, net of related tax, estimated using the Company’s effective tax rate for continuing operations for the nine months ended September 30: 
 
2012
 
(unaudited)
Pro forma revenues
$
1,173,420

Pro forma net income
$
222,840

Pro forma basic income per share
$
1.35

Pro forma diluted income per share
$
1.30


Acquisition Escrows
Pursuant to the related acquisition agreements, the Company has funded various escrow accounts to satisfy pre-acquisition indemnity and tax claims arising subsequent to the acquisition dates, as well as a portion of the contingent payments. At September 30, 2013 and December 31, 2012, the current portion of the escrows amounted to $22,985 and $29,277, and the noncurrent portion of the escrow amounted to $5,000 and $26,803, respectively. The current and noncurrent portions of the escrows have been included in “Other current assets” and “Other assets” in the accompanying condensed consolidated balance sheets, respectively.

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Table of Contents

6. Goodwill and Intangible Assets:
The following is a summary of the change in goodwill from December 31, 2012 through September 30, 2013, both in total and as allocated to the Company’s operating segments:
 
Risk
Assessment
 
Decision
Analytics
 
Total
Goodwill at December 31, 2012 (1)
$
55,555

 
$
1,191,904

 
$
1,247,459

Current year acquisition
 
—

 
 
705

 
 
705

Purchase accounting reclassifications
 
—

 
 
2,724

 
 
2,724

Goodwill at September 30, 2013 (1)
$
55,555

 
$
1,195,333

 
$
1,250,888

______________________
(1)
These balances are net of accumulated impairment charges of $3,244 that occurred prior to December 31, 2012.
The Company finalized the purchase accounting for the acquisitions of MediConnect, ALP and Argus during the nine months ended September 30, 2013. The impact of the finalization of the purchase accounting for these acquisitions was not material to the condensed consolidated statements of operations for the three and nine months ended September 30, 2013.
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. Goodwill impairment testing 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 unit’s net assets including goodwill exceeds the fair value of the reporting unit, then the Company will determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s 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 goodwill. The Company completed the required annual impairment test as of June 30, 2013, which resulted in no impairment of goodwill. There were no goodwill impairment indicators after the date of the last annual impairment test.


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Table of Contents

The Company’s intangible assets and related accumulated amortization consisted of the following: 
 
Weighted
Average
Useful Life
 
Cost
 
Accumulated
Amortization
 
Net
September 30, 2013
 
 
 
 
 
 
 
 
 
 
Technology-based
8 years
 
$
313,590

 
$
(195,481
)
 
$
118,109

Marketing-related
5 years
 
 
79,101

 
 
(49,514
)
 
 
29,587

Contract-based
6 years
 
 
6,555

 
 
(6,555
)
 
 
—

Customer-related
13 years
 
 
413,043

 
 
(89,600
)
 
 
323,443

Total intangible assets
 
 
$
812,289

 
$
(341,150
)
 
$
471,139

December 31, 2012
 
 
 
 
 
 
 
 
 
 
Technology-based
8 years
 
$
313,590

 
$
(177,929
)
 
$
135,661

Marketing-related
5 years
 
 
79,101

 
 
(41,079
)
 
 
38,022

Contract-based
6 years
 
 
6,555

 
 
(6,555
)
 
 
—

Customer-related
13 years
 
 
413,043

 
 
(65,791
)
 
 
347,252

Total intangible assets
 
 
$
812,289

 
$
(291,354
)
 
$
520,935

Amortization expense related to intangible assets for the three months ended September 30, 2013 and 2012 was $15,393 and $15,442, respectively. Amortization expense related to intangible assets for the nine months ended September 30, 2013 and 2012 was $49,796 and $36,216, respectively. Estimated amortization expense in future periods through 2018 and thereafter for intangible assets subject to amortization is as follows:
Year
Amount
2013
$
14,510

2014
 
57,168

2015
 
51,252

2016
 
49,421

2017
 
48,518

2018 and Thereafter
 
250,270

 
$
471,139

7. Income Taxes:
The Company’s effective tax rate for the three and nine months ended September 30, 2013 was 36.19%, and 36.34%, respectively, compared to the effective tax rate for the three and nine months ended September 30, 2012 of 39.31% and 39.38%, respectively. The effective tax rate for the three and nine months ended September 30, 2013 is lower than the September 30, 2012 effective tax rate primarily due to the continued execution of tax planning strategies and favorable settlements and resolution of uncertain tax positions. The difference between statutory tax rates and the Company’s effective tax rate is primarily attributable to state taxes and nondeductible share appreciation from the ISO 401(k) Savings and Employee Stock Ownership Plan (“KSOP”).

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Table of Contents

8. Debt:
The following table presents short-term and long-term debt by issuance as of September 30, 2013 and December 31, 2012: 
 
Issuance
Date
 
Maturity
Date
 
2013
 
2012
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Syndicated revolving credit facility
Various
 
Various
 
$
—

 
$
10,000

Aviva Investors senior notes:
 
 
 
 
 
 
 
 
 
6.46% Series A senior notes
4/27/2009
 
4/27/2013
 
 
—

 
 
30,000

New York Life senior notes:
 
 
 
 
 
 
 
 
 
5.87% Series A senior notes
10/26/2007
 
10/26/2013
 
 
17,500

 
 
17,500

Principal senior notes:
 
 
 
 
 
 
 
 
 
6.16% Series B senior notes
8/8/2006
 
8/8/2013
 
 
—

 
 
25,000

Prudential senior notes:
 
 
 
 
 
 
 
 
 
6.13% Series G senior notes
8/8/2006
 
8/8/2013
 
 
—

 
 
75,000

5.84% Series H senior notes
10/26/2007
 
10/26/2013
 
 
17,500

 
 
17,500

6.28% Series I senior notes
4/29/2008
 
4/29/2013
 
 
—

 
 
15,000

Capital lease obligations
Various
 
Various
 
 
4,459

 
 
5,263

Short-term debt and current portion of long-term
debt
 
 
 
 
 
39,459

 
 
195,263

Long-term debt:
 
 
 
 
 
 
 
 
 
Verisk senior notes:
 
 
 
 
 
 
 
 
 
5.800% senior notes, less unamortized discount
of $784 and $862, respectively
4/6/2011
 
5/1/2021
 
 
449,216

 
 
449,138

4.875% senior notes, less unamortized discount
of $1,783 and $2,037, respectively
12/8/2011
 
1/15/2019
 
 
248,217

 
 
247,963

4.125% senior notes, less unamortized discount
of $2,484 and $2,692, respectively
9/12/2012
 
9/12/2022
 
 
347,516

 
 
347,308

New York Life senior notes:
 
 
 
 
 

 
 
 
5.87% Series A senior notes
10/26/2007
 
10/26/2015
 
 
17,500

 
 
17,500

6.35% Series B senior notes
4/29/2008
 
4/29/2015
 
 
50,000

 
 
50,000

Prudential senior notes:
 
 
 
 
 

 
 
 
5.84% Series H senior notes
10/26/2007
 
10/26/2015
 
 
17,500

 
 
17,500

6.28% Series I senior notes
4/29/2008
 
4/29/2015
 
 
85,000

 
 
85,000

6.85% Series J senior notes
6/15/2009
 
6/15/2016
 
 
50,000

 
 
50,000

Capital lease obligations
Various
 
Various
 
 
6,221

 
 
1,753

Long-term debt
 
 
 
 
 
1,271,170

 
 
1,266,162

Total debt
 
 
 
 
$
1,310,629

 
$
1,461,425

As of September 30, 2013, the Company had an $850,000 committed senior unsecured Syndicated Revolving Credit Facility (the “Credit Facility”) with Bank of America N.A., JPMorgan Chase Bank N.A., and a syndicate of banks. Borrowings may be used for general corporate purposes, including working capital needs and capital expenditures, acquisitions and the share repurchase program (the “Repurchase Program”). As of September 30, 2013 and December 31, 2012, the Company had $0 and $10,000, respectively, outstanding under the Credit Facility.
In October 2013, the Company amended its Credit Facility to increase the borrowing capacity from $850,000 to $975,000 and extend the maturity date from October 24, 2017 to October 24, 2018.  The Company amortizes all one-time fees and third party costs associated with the execution and amendment of this Credit Facility through the maturity date.



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Table of Contents

9. Stockholders’ Equity:
The Company has 1,200,000,000 shares of authorized Class A common stock. The common shares have rights to any dividend declared by the board of directors, subject to any preferential or other rights of any outstanding preferred stock, and voting rights to elect all twelve members of the board of directors.

Share Repurchase Program
The Company has authorized repurchases up to $1,200,000 of its common stock through its Repurchase Program, including the additional $300,000 authorized by the board of directors in June 2013. As of September 30, 2013, the Company had $282,111 available to repurchase shares. The Company has no obligation to repurchase stock under this program and intends to use this authorization as a means of offsetting dilution from the issuance of shares under the KSOP, the Verisk 2013 Equity Incentive Plan (the “2013 Incentive Plan”), the Verisk 2009 Equity Incentive Plan (the “2009 Incentive Plan”), and the ISO 1996 Incentive Plan (the “1996 Incentive Plan”), while providing flexibility to repurchase additional shares if warranted. This authorization has no expiration date and may be increased, reduced, suspended, or terminated at any time. Repurchased shares will be recorded as treasury stock and will be available for future issuance as part of the Repurchase Program.
During the nine months ended September 30, 2013, the Company repurchased 2,707,562 shares of common stock as part of this program at a weighted average price of $59.86 per share. The Company utilized cash from operations to fund these repurchases. As treasury stock purchases are recorded based on trade date, the Company has included $2,622 in “Accounts payable and accrued liabilities” in the accompanying condensed consolidated balance sheets for those purchases that have not settled as of September 30, 2013.
Treasury Stock
As of September 30, 2013, the Company’s treasury stock consisted of 375,782,447 shares of common stock. During the nine months ended September 30, 2013, the Company reissued 3,201,080 shares of common stock from the treasury shares at a weighted average price of $4.44 per share.
Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding, using the treasury stock method, if the dilutive potential common shares, including stock options, nonvested restricted stock, and nonvested deferred stock units, had been issued.

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Table of Contents

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2013 and 2012:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Numerator used in basic and diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
96,441

 
$
82,911

 
$
261,157

 
$
230,843

Denominator:
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common
shares used in basic EPS
 
168,044,100

 
 
165,978,080

 
 
168,089,919

 
 
165,587,027

Effect of dilutive shares:
 
 
 
 
 
 
 
 
 
 
 
Potential common shares issuable
from stock options and stock
awards
 
4,110,453

 
 
5,682,463

 
 
4,371,041

 
 
6,050,544

Weighted average number of
common shares and dilutive
potential common shares
used in diluted EPS
 
172,154,553

 
 
171,660,543

 
 
172,460,960

 
 
171,637,571

Basic net income per share
$
0.57

 
$
0.50

 
$
1.55

 
$
1.39

Diluted net income per share
$
0.56

 
$
0.48

 
$
1.51

 
$
1.34

The potential shares of common stock that were excluded from diluted EPS were 844,413 and 932,045 for the nine months ended September 30, 2013 and 2012, respectively, because the effect of including these potential shares was anti-dilutive.


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Table of Contents

Accumulated Other Comprehensive Losses
The following is a summary of accumulated other comprehensive losses as of September 30, 2013 and December 31, 2012:
 
2013

2012
Unrealized foreign currency losses
$
(1,366
)
 
$
(960
)
Unrealized (losses) gains on available-for-sale securities, net of tax
 
(103
)
 
 
72

Pension and postretirement unfunded liability adjustment, net of tax
 
(85,123
)
 
 
(88,272
)
Accumulated other comprehensive losses
$
(86,592
)
 
$
(89,160
)
The before tax and after tax amounts of other comprehensive income for the nine months ended September 30, 2013 and 2012 are summarized below:
 
Before Tax
 
Tax Benefit 
(Expense)
 
After Tax
September 30, 2013
 
 
 
 
 
 
 
 
Unrealized foreign currency loss
$
(406
)
 
$
—

 
$
(406
)
Unrealized loss on available-for-sale securities before
reclassifications
 
(1,027
)
 
 
397

 
 
(630
)
Amount reclassified from accumulated other comprehensive
losses (1)
 
740

 
 
(285
)
 
 
455

Unrealized loss on available-for-sale securities
 
(287
)
 
 
112

 
 
(175
)
Pension and postretirement unfunded liability adjustment before
reclassifications
 
8,588

 
 
(2,799
)
 
 
5,789

Amortization of prior service credit reclassified from
accumulated other comprehensive losses (2)
 
109

 
 
(42
)
 
 
67

Amortization of net actuarial loss reclassified from
accumulated other comprehensive losses (2)
 
(4,403
)
 
 
1,696

 
 
(2,707
)
Pension and postretirement unfunded liability adjustment
 
4,294

 
 
(1,145
)
 
 
3,149

Total other comprehensive income
$
3,601

 
$
(1,033
)
 
$
2,568

September 30, 2012
 
 
 
 
 
 
 
 
Unrealized foreign currency loss
$
(130
)
 
$
—

 
$
(130
)
Unrealized loss on available-for-sale securities before
reclassifications
 
(691
)
 
 
264

 
 
(427
)
Amount reclassified from accumulated other comprehensive
losses (1)
 
340

 
 
(130
)
 
 
210

Unrealized loss on available-for-sale securities
 
(351
)
 
 
134

 
 
(217
)
Pension and postretirement unfunded liability adjustment before
reclassifications
 
6,299

 
 
(2,570
)
 
 
3,729

Amortization of prior service credit reclassified from
accumulated other comprehensive losses (2)
 
246

 
 
(94
)
 
 
152

Amortization of net actuarial loss reclassified from
accumulated other comprehensive losses (2)
 
(3,396
)
 
 
1,296

 
 
(2,100
)
Pension and postretirement unfunded liability adjustment
 
3,149

 
 
(1,368
)
 
 
1,781

Total other comprehensive income
$
2,668

 
$
(1,234
)
 
$
1,434

______________________
(1)
This accumulated other comprehensive loss component, before tax, is included under “Realized gain (loss) on available-for-sale securities, net” in the accompanying condensed consolidated statements of operations.
(2)
These accumulated other comprehensive loss components, before tax, are included under “Cost of revenues” and “Selling, general and administrative” in the accompanying condensed consolidated statements of operations. These components are also included in the computation of net periodic (benefit) cost (see Note. 11 Pension and Postretirement Benefits for additional details).


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Table of Contents

10. Equity Compensation Plans:
All of the Company’s outstanding equity awards, including stock options and restricted stock, are covered under the 2013 Incentive Plan, 2009 Incentive Plan or 1996 Incentive Plan. Awards under the 2013 Incentive Plan may include one or more of the following types: (i) stock options (both nonqualified and incentive stock options), (ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units, (v) performance awards (including cash), and (vi) other share based awards. Employees, directors and consultants are eligible for awards under the 2013 Incentive Plan. The Company issued common stock under these plans from the Company’s treasury shares. On May 15, 2013, the Company’s shareholders approved the 2013 Incentive Plan effective March 15, 2013. There are 15,700,000 shares of common stock available for issuance under the 2013 Incentive Plan. Shares subject to awards granted subsequent to March 15, 2013, whether under the 2013 Incentive Plan or the 2009 Incentive Plan, with certain exceptions, will reduce the number of shares available for issuance under the 2013 Incentive Plan. As of September 30, 2013, there were 14,306,681 shares of common stock reserved and available for future issuance under the 2013 Incentive Plan. Cash received from stock option exercises for the nine months ended September 30, 2013 and 2012 was $51,326 and $43,571, respectively.
On April 1, 2013, the Company granted 804,726 nonqualified stock options and 208,881 shares of restricted stock to key employees, as well as 20,445 deferred stock units to the directors of the Company. The nonqualified stock options have an exercise price equal to the closing price of the Company’s common stock on the grant date, with a ten-year contractual term and a service vesting period of four years. The restricted stock is valued at the closing price of the Company’s common stock on the grant date and has a service vesting period of four years. The Company recognizes the expense of the restricted stock ratably over the vesting period. The restricted stock is not assignable or transferable until it becomes vested. The deferred stock units are valued at the closing price of the Company’s common stock on the grant date, have a one-year vesting period, and will be distributed to the directors upon retirement or other separation from the board of directors.
On July 1, 2013, the Company granted 7,535 shares of common stock, 27,494 nonqualified stock options that were immediately vested, 54,032 nonqualified stock options with a one-year service vesting period, and 11,319 deferred stock units to the directors of the Company. The nonqualified stock options have an exercise price equal to the closing price of the Company’s common stock at the grant date and a ten-year contractual term.
The fair value of the stock options granted during the nine months ended September 30, 2013 and 2012 was estimated using a Black-Scholes valuation model that uses the weighted average assumptions noted in the following table:
 
2013

2012
Option pricing model
 
Black-Scholes

 
 
Black-Scholes

Expected volatility
 
29.27
%
 
 
32.25
%
Risk-free interest rate
 
0.70
%
 
 
0.90
%
Expected term in years
 
4.5

 
 
4.6

Dividend yield
 
0.00
%
 
 
0.00
%
Weighted average grant date fair value per stock option
$
15.58

 
$
13.59

The expected term for a majority of the stock options granted was estimated based on studies of historical experience and projected exercise behavior. However, for certain stock options granted, for which no historical exercise pattern exists, 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. The volatility factor was based on the average volatility of the Company’s peers, calculated using historical daily closing prices over the most recent period that is commensurate with the expected term of the stock option award. The expected dividend yield was based on the Company’s expected annual dividend rate on the date of grant.

16
Table of Contents

A summary of the stock options outstanding as of December 31, 2012 and September 30, 2013 and changes during the interim period are presented below:
 
Number
of Options
 
Weighted
Average
Exercise Price
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2012
12,573,298

 
$
22.21

 
$
361,653

Granted
888,038

 
$
61.10

 
 

Exercised
(3,028,040
)
 
$
16.95

 
$
128,897

Cancelled or expired
(108,806
)
 
$
41.79

 
 


Outstanding at September 30, 2013
10,324,490

 
$
26.89

 
$
393,086

Options exercisable at September 30, 2013
7,812,250

 
$
21.84

 
$
336,868

Options exercisable at December 31, 2012
8,796,996

 
$
18.37

 
$
286,806

Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of the Company’s common stock as of the reporting date. In accordance with ASC 718, Stock Compensation, excess tax benefit from exercised stock options is recorded as an increase to additional paid-in capital and a corresponding reduction in income taxes payable. This tax benefit is calculated as the excess of the intrinsic value of options exercised in excess of compensation recognized for financial reporting purposes. The amount of the tax benefit that has been realized, as a result of those excess tax benefits, is presented as a financing cash inflow within the accompanying condensed consolidated statements of cash flows. For the nine months ended September 30, 2013 and 2012, the Company recorded excess tax benefit from stock options exercised of $44,799 and $63,461, respectively. The Company realized $81,689 and $55,056 of tax benefit within the Company’s quarterly tax payments through September 30, 2013 and 2012, respectively.
The Company estimates expected forfeitures of equity awards at the date of grant and recognizes compensation expense only for those awards that the Company expects 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.
A summary of the status of the restricted stock awarded as of December 31, 2012 and September 30, 2013 and changes during the interim period is presented below: 
 
Number
of Shares
 
Weighted Average Grant
Date Fair Value Per Share
Outstanding at December 31, 2012
331,013

 
$
42.78

Granted
209,292

 
$
61.14

Vested
(133,146
)
 
$
42.04

Forfeited
(17,809
)
 
$
52.77

Outstanding at September 30, 2013
389,350

 
$
52.45

As of September 30, 2013, there was $45,394 of total unrecognized compensation costs, exclusive of the impact of vesting upon retirement eligibility, related to nonvested share-based compensation arrangements granted under the 2009 and 2013 Incentive Plans. That cost is expected to be recognized over a weighted average period of 2.66 years. As of September 30, 2013, there were 2,512,240 and 389,350 nonvested stock options and restricted stock, respectively, of which 2,070,908 and 312,823 are expected to vest. The total grant date fair value of options vested during the nine months ended September 30, 2013 and 2012 was $13,177 and $15,559, respectively. The total grant date fair value of restricted stock vested during the nine months ended September 30, 2013 and 2012 was $5,063 and $2,227, respectively.
The Company’s employee stock purchase plan (“ESPP”) commenced on October 1, 2012 and offers eligible employees the opportunity to authorize payroll deductions of up to 20.00% of their regular base salary and up to 50.00% of their short-term incentive compensation, both of which in total may not exceed $25 in any calendar year, to purchase shares of the Company’s common stock at a 5.00% discount of its fair market value at the time of purchase. In accordance with ASC 718, the ESPP is noncompensatory as the purchase discount is 5.00% or less from the fair market value, substantially all employees that meet limited employment qualifications may participate, and it incorporates no option features. During the nine months ended September 30, 2013, the Company issued 21,564 shares of common stock at a weighted discounted price of $58.79.
On April 20, 2013, the employee stock ownership plan (“ESOP”) refinanced its intercompany loan between the Company and the KSOP, thereby extending the allocation of the remaining unreleased shares through 2016. As a part of this new loan

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agreement, the Company is required to contribute an additional $9,000, plus interest, of cash or shares to the ESOP by 2016. Earlier contribution is at the Company’s discretion.
11. Pension and Postretirement Benefits:
The Company maintained a qualified defined benefit pension plan for certain of its employees through membership in the Pension Plan for Insurance Organizations (the “Pension Plan”), a multiple-employer trust. The Company has applied a cash balance formula to determine future benefits. Under the cash balance formula, each participant has an account, which is credited annually based on salary rates determined by years of service, as well as the interest earned on the previous year-end cash balance. The Company also has a non-qualified supplemental cash balance plan (“SERP”) for certain employees. The SERP is funded from the general assets of the Company. Effective February 29, 2012, the Company instituted a hard freeze, which eliminated all future compensation and service credits, to all participants in the Pension Plan and SERP.
The Company also provides healthcare and life insurance benefits to certain qualifying active and retired employees. The Postretirement Health and Life Insurance Plan (the “Postretirement Plan”), which has been frozen, is contributory, requiring participants to pay a stated percentage of the premium for coverage.
The components of net periodic (benefit) cost for the three and nine months ended September 30, are summarized below: 
 
Pension Plan and SERP
 
Postretirement Plan
 
Three Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Service cost
$
—

 
$
—

 
$
—

 
$
—

Interest cost
 
4,462

 
 
4,903

 
 
156

 
 
175

Expected return on plan assets
 
(7,620
)
 
 
(7,277
)
 
 
(264
)
 
 
(120
)
Amortization of prior service credit
 
—

 
 
—

 
 
(35
)
 
 
(38
)
Amortization of net actuarial loss
 
1,276

 
 
632

 
 
276

 
 
138

Net periodic (benefit) cost
$
(1,882
)
 
$
(1,742
)
 
$
133

 
$
155

Employer contributions
$
445

 
$
104

 
$
238

 
$
5,913

 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Service cost
$
—

 
$
282

 
$
—

 
$
—

Interest cost
 
13,385

 
 
14,940

 
 
456

 
 
525

Expected return on plan assets
 
(22,860
)
 
 
(21,624
)
 
 
(689
)
 
 
(240
)
Curtailment gain
 
—

 
 
(779
)
 
 
—

 
 
—

Amortization of prior service credit
 
—

 
 
(133
)
 
 
(109
)
 
 
(113
)
Amortization of net actuarial loss
 
3,828

 
 
2,983

 
 
575

 
 
413

Net periodic (benefit) cost
$
(5,647
)
 
$
(4,331
)
 
$
233

 
$
585

Employer contributions
$
646

 
$
79,459

 
$
473

 
$
15,565

The expected contributions to the Pension Plan, SERP and Postretirement Plan for the year ending December 31, 2013 are consistent with the amounts previously disclosed as of December 31, 2012.
12. Segment Reporting:
ASC 280-10, Disclosures About Segments of an Enterprise and Related Information (“ASC 280-10”), establishes standards for reporting information about operating segments. ASC 280-10 requires that a public business enterprise report financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer and President is identified as the CODM as defined by ASC 280-10. To align with the internal management of the Company’s business operations based on service offerings, the Company is organized into the following two operating segments, which are also the Company’s reportable segments:
Decision Analytics: The Company develops solutions that its customers use to analyze the three key processes in managing risk: ‘prediction of loss’, ‘detection and prevention of fraud’ and ‘quantification of loss’. The Company’s combination of algorithms and analytic methods incorporates its proprietary data to generate solutions in each of these three categories. In

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most cases, the Company’s customers integrate the solutions into their models, formulas or underwriting criteria in order to predict potential loss events, ranging from hurricanes and earthquakes to unanticipated healthcare claims. The Company develops catastrophe and extreme event models and offers solutions covering natural and man-made risks, including acts of terrorism. The Company also develops solutions that allow customers to quantify costs after loss events occur. Fraud solutions include data on claim histories, analysis of mortgage applications to identify misinformation, analysis of claims to find emerging patterns of fraud, and identification of suspicious claims in the insurance, mortgage and healthcare sectors. The Company discloses revenue within this segment based on the industry vertical groupings of insurance, financial services, healthcare and specialized markets.
Risk Assessment: The Company is the leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. The Company’s databases include cleansed and standardized records describing premiums and losses in insurance transactions, casualty and property risk attributes for commercial buildings and their occupants and fire suppression capabilities of municipalities. The Company uses this data to create policy language and proprietary risk classifications that are industry standards and to generate prospective loss cost estimates used to price insurance policies. Effective December 31, 2012, the Company combined the statistical agency and data services and actuarial services into industry-standard insurance programs within the Risk Assessment segment. There have been no changes in reportable segments in accordance with ASC 280-10.
The two aforementioned operating segments represent the segments for which separate discrete financial information is available and upon which operating results are regularly evaluated by the CODM in order to assess performance and allocate resources. The Company uses EBITDA as the profitability measure for making decisions regarding ongoing operations. EBITDA is net income before interest expense, provision for income taxes, depreciation and amortization of fixed and intangible assets. EBITDA is the measure of operating results used to assess corporate performance and optimal utilization of debt and acquisitions. Operating expenses consist of direct and indirect costs principally related to personnel, facilities, software license fees, consulting, travel, and third-party information services. Indirect costs are generally allocated to the segments using fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. The Company does not allocate interest expense and provision for income taxes, since these items are not considered in evaluating the segment’s overall operating performance. The CODM does not evaluate the financial performance of each segment based on assets. On a geographic basis, no individual country outside of the U.S. accounted for 1.00% or more of the Company’s consolidated revenue for the three and nine months ended September 30, 2013 or 2012. No individual country outside of the U.S. accounted for 1.00% or more of total consolidated long-term assets as of September 30, 2013 or December 31, 2012.

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The following table provides the Company’s revenue and operating income by reportable segment for the three and nine months ended September 30, 2013 and 2012, as well as reconciliations to income before income taxes for all periods presented in the accompanying condensed consolidated statements of operations: 
 
Three Months Ended
 
Three Months Ended
 
September 30, 2013
 
September 30, 2012
 
Decision
Analytics
 
Risk
Assessment
 
Total
 
Decision
Analytics
 
Risk
Assessment
 
Total
Revenues
$
283,542

 
$
155,055

 
$
438,597

 
$
254,996

 
$
143,867

 
$
398,863

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues (exclusive of
items shown separately
below)
 
126,346

 
 
50,234

 
 
176,580

 
 
111,709

 
 
45,040

 
 
156,749

Selling, general and
administrative
 
39,698

 
 
19,632

 
 
59,330

 
 
38,971

 
 
19,736

 
 
58,707

Investment income and
realized (gain) loss on
available-for-sale securities,
net
 
—

 
 
(228
)
 
 
(228
)
 
 
—

 
 
502

 
 
502

EBITDA
 
117,498

 
 
85,417

 
 
202,915

 
 
104,316

 
 
78,589