The following discussion should be read in conjunction with our historical financial statements and the related notes included within our Prospectus dated October 6, 2009 and filed with the Securities and Exchange Commission on October 7, 2009 and incorporated by reference herein. 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.
We enable risk-bearing businesses to better understand and manage their risks. We provide value to our customers by supplying proprietary data that, combined with our analytic methods, creates embedded decision support solutions. We are the largest aggregator and provider of data pertaining to U.S. property and casualty, or P&C, insurance risks. We offer solutions for detecting fraud in the U.S. P&C insurance, mortgage and healthcare industries and sophisticated methods to predict and quantify loss in diverse contexts ranging from natural catastrophes to health insurance.
Our customers use our solutions to make better risk decisions with greater efficiency and discipline. We refer to these products and services as 'solutions' due to the integration among our products and the flexibility that enables our customers to purchase components or the comprehensive package of products. These solutions take various forms, including data, statistical models or tailored analytics, all designed to allow our clients to make more logical decisions. We believe our solutions for analyzing risk positively impact our customers' revenues and help them better manage their costs.
On May 23, 2008, in contemplation of our initial public offering, we formed Verisk Analytics, Inc., ("Verisk") a Delaware corporation, to be the holding company for our business. Verisk was initially formed as a wholly-owned subsidiary of Insurance Services Office, Inc. ("ISO"). On October 6, 2009 in connection with our initial public offering, we effected a reorganization whereby ISO became a wholly-owned subsidiary of Verisk. The results of operations for the nine months and three months ended September 30, 2009 and 2008 reflect the results of ISO, as the period is prior to the completion of the initial public offering on October 9, 2009. Verisk had no operations prior to the initial public offering.
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 52% and 57% of our revenues for the nine months ended September 30, 2009 and September 30, 2008, 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 48% and 43% of our revenues for the nine months ended September 30, 2009 and September 30, 2008, 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 year over year revenue growth and EBITDA margin as metrics to measure our performance. EBITDA and EBITDA margin are non-GAAP financial measures within the meaning of Regulation G under the Securities Exchange Act of 1934 (See footnote 2 within the Condensed Consolidated Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations).
Revenue growth. We use year over year revenue growth as a key performance metric. We assess revenue growth based on our ability to generate increased revenue through increased sales to existing customers, sales to new customers, sales of new or expanded solutions to existing and new customers and strategic acquisitions of new businesses.
EBITDA margin. We use EBITDA margin as a metric to assess segment performance and scalability of our business. We assess EBITDA margin based on our ability to increase revenues while controlling expense growth. Revenues
We earn revenues through subscriptions, long-term agreements and on a transactional basis. Subscriptions for our solutions are generally paid in advance of rendering services either quarterly or in full upon commencement of the subscription period, which is usually for one year and automatically renewed each year. As a result, the timing of our cash flows generally precedes our recognition of revenues and income and our cash flow from operations tends to be higher in the first quarter as we receive subscription payments. Examples of these arrangements include subscriptions that allow our customers to access our standardized coverage language 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 each of the nine months ended September 30, 2009 and September 30, 2008, 28% of our revenues 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 84% and 82% of the revenues in our Risk Assessment segment for the nine months ended September 30, 2009 and September 30, 2008, 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 nine months ended September 30, 2009 and September 30, 2008, were $14.6 million and $11.8 million, respectively, and have decreased as a percentage of revenue to 1.9% from 3.3% of our Risk Assessment segment revenues at September 30, 2009 from December 31, 2006. More than 58% and 59% of the revenues in our Decision Analytics segment, for the nine months ended September 30, 2009 and September 30, 2008, 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 65% and 64% of our total expenses for the nine months ended September 30, 2009 and September 30, 2008, 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. Our selling, general and administrative expenses excludes depreciation and amortization. Description of Acquisitions
Since January 1, 2008, we acquired four businesses. As a result of these acquisitions, our consolidated results of operations may not be comparable between periods.
On July 24, 2009, we acquired the net assets of TierMed Systems, LLC ("TierMed"), a privately owned provider of Healthcare Effectiveness Data and Information Set ("HEDIS") solutions to healthcare organizations that have HEDIS or quality-reporting needs. We believe this acquisition will enhance our ability to provide solutions for customers to measure and improve healthcare quality and financial performance through the use of software and software services. On January 14, 2009, we acquired 100% of the stock of D2 Hawkeye, a privately-owned provider of data mining, decision support, clinical quality analysis, and risk analysis tools for the healthcare industry. We believe this acquisition will enhance our position in the healthcare analytics and predictive modeling market by providing new market, cross-sell, and diversification opportunities for the Company's expanding healthcare solutions.

On November 20, 2008, we acquired 100% of the stock of Atmospheric and Environmental Research Inc. ("AER"). AER provides research and consulting services to further understanding of the global environment and to enable better decision making in response to weather and climate risk. The purchase includes a contingent payment provision subject to the achievement of certain predetermined financial results for the years ended 2010 and 2011. We believe the acquisition of AER further enhances our environmental and scientific research and predictive modeling.
On November 14, 2008, we acquired the net assets of ZAIO's two divisions, United Systems Software Company and Day One Technology. The assets associated with this acquisition further enhance the capability of our appraisal software offerings within our Risk Assessment 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 nine and three months ended September 30, 2009 and 2008 are as follows:

                                           Three Months Ended              Nine Months Ended
                                             September 30,                   September 30,
                                          2009            2008            2009           2008
                                                            (In thousands)
401(k) matching contribution
expense:
Risk Assessment                        $    1,458       $   1,427      $    3,917      $   4,087
Decision Analytics                          1,256             845           3,050          2,387

Total 401(k) matching contribution
expense                                     2,714           2,272           6,967          6,474
Profit sharing contribution
expense:
Risk Assessment                               278             174             866            544
Decision Analytics                             68             103             185            318

Total profit sharing contribution
expense                                       346             277           1,051            862
ESOP allocation expense:
Risk Assessment                             2,298           2,035           5,459          6,324
Decision Analytics                          1,524           1,205           4,143          3,693

Total ESOP allocation expense               3,822           3,240           9,602         10,017

Total ESOP costs                       $    6,882       $   5,789      $   17,620      $  17,353

Prior to the completion of our initial public offering, we accelerated the allocation of a portion of the shares to the ESOP, which will result in a non-recurring non-cash charge of approximately $57.7 million in the fourth quarter of 2009. As a result, subsequent to the offering, the non-cash ESOP allocation expense will be substantially reduced. Non-cash contribution expense relating specifically to our 401(k) and profit sharing were $8.0 million and $7.3 million for the nine months ended September 30, 2009 and 2008, respectively.
In addition, the portion of the ESOP allocation expense related to the appreciation of the value of the shares in the ESOP above the value of those shares when the ESOP was first established is not tax deductible. Therefore, we believe the accelerated ESOP allocation in the fourth quarter of 2009 will result in a reduction of approximately 1.5% to our effective tax rate in years subsequent to the completion of our initial public offering.
On January 1, 2005, we adopted ASC 718-10, Share-Based Payment, or ASC 718-10, using a prospective approach, which required us to record compensation expense for all awards granted after the date of adoption. Therefore, since January 1, 2005 the expense associated with the number of options granted has increased every year. For example, for the year ended December 31, 2005, we expensed the option grants that vested in 2005, but for the year ended December 31, 2006, we expensed the portion of the 2005 and 2006 option grants that vested in 2006. Since our options generally have a four year vesting term, our expense for the year ending December 31, 2009 and subsequent periods will consist of the vested components of the prior four years of option grants.
Upon the completion of our initial public offering in the fourth quarter 2009, we granted options to purchase 2,875,871 shares of our Verisk Class A common stock to our directors, officers and employees. Assuming that all of the conditions are met, we expect the related expense will be approximately $1.5 million, $6.2 million, $6.2 million, $5.6 million, and $2.8 million for 2009, 2010, 2011, 2012, and 2013, respectively.
Prior to our initial public offering, our Class A stock and vested stock options were recorded within redeemable common stock at full redemption value at each balance sheet date, as the redemption of these securities was not solely within the control of the Company (see Note 9 of our condensed consolidated financial statements). Effective with the internal reorganization that occurred on October 6, 2009, we are no longer obligated to redeem Class A shares and therefore are not required to present our Class A stock and vested stock options at redemption value. Our financial results for the fourth quarter of 2009 will reflect a reversal of the redeemable common stock balance against accumulated deficit; once accumulated deficit is depleted, then to additional paid-in-capital up to the amount equal to the additional paid-in-capital of the Company as if the requirements of redeemable common stock were not required to be adopted by the Company. Any remaining balance will be credited to retained earnings. The reversal of our redeemable common stock balance is expected to result in the restoration of approximately $624.2 million of our Class A additional paid-in-capital and a $440.7 million reduction in our retained deficit during the fourth quarter of 2009. Public Company Expenses
Beginning in 2008, our selling, general and administrative costs increased as we prepared for our initial public offering. These costs were $4.0 million and $3.5 million for the nine months ended September 30, 2009 and September 30, 2008 and were $3.2 million and $1.2 million for the three months ended September 30, 2009 and September 30, 2008, respectively. These costs negatively affected our EBITDA margins by 0.5% for each of the nine months ended September 30, 2009 and September 30, 2008 and 1.2% and 0.5% for the three months ended September 30, 2009 and September 30, 2008, respectively. Following our initial public offering, we will incur additional selling, general and administrative expenses related to operating as a public company, such as increased legal and accounting expenses, the cost of an investor relations function, costs related to
Section 404 of the Sarbanes-Oxley Act of 2002, and increased director and officer insurance premiums.
Trends Affecting Our Business
A portion of our revenues is related to changes in historical insurance premiums; therefore, our revenues could be positively or negatively affected by growth or declines in premiums for the lines of insurance for which we perform services. The pricing of these solutions is based on an individual customer's premiums in a prior period, so the pricing is fixed at the inception of each calendar year. The impact of insurance premiums has a more significant impact on the Risk Assessment segment than it does on the Decision Analytics segment. Since 2005, premium growth in the P&C insurance industry has slowed and we expect little or no growth for most insurance lines during 2009. A significant portion of our revenues is from insurance companies. Although business and new sales from these companies have generally remained strong, the current economic environment could negatively impact buying demand for our solutions. In addition, since 2007, the softening of the automobile insurance market negatively impacted our auto premium leakage identification solutions. We do not expect this trend to have a material impact on our liquidity or capital resources.
A portion of our revenues in the Decision Analytics segment is tied to the volume of applications for new mortgages or refinancing of existing mortgages. Turmoil in the mortgage market since 2007 has adversely affected revenue in this segment of our business. This trend began to reverse in late 2008 spurred by lower mortgage interest rates. As a result of the rise in foreclosures and early pay defaults, we have seen and expect to see in the future an increase in revenues from our solutions that help our customers focus on improved underwriting quality of mortgage loans. These solutions help to ensure the application data is accurate and identify and rapidly settle bad loans, which may have been originated based upon fraudulent information. Recent events within the United States economy have resulted in further tightening in credit availability, which has resulted in higher interest rates for corporate 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 syndicated revolving credit facility or another financial institution fails to meet its funding obligations. Borrowings under our long-term debt facilities are at fixed interest rates. While we expect future borrowings will be at higher interest rates, which will translate into higher interest expense in the future, we do not expect this to have a material impact on our business in the near-term. We will continue to explore financing alternatives in order to fund future growth opportunities.

Condensed Consolidated Results of Operations From January 1, 2008 to September 30, 2009 we have acquired four businesses, which may affect the comparability of our financial statements.