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Edited Transcript of NSP earnings conference call or presentation 4-Nov-19 2:00pm GMT

Q3 2019 Insperity Inc Earnings Call

KINGWOOD Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Insperity Inc earnings conference call or presentation Monday, November 4, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas S. Sharp

Insperity, Inc. - Senior VP of Finance, CFO & Treasurer

* Paul J. Sarvadi

Insperity, Inc. - Co-Founder, Chairman & CEO

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Conference Call Participants

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* James Robert MacDonald

First Analysis Securities Corporation, Research Division - MD

* Jasper James Bibb

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Jeffrey Michael Martin

Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst

* Mark Steven Marcon

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Marcella, and I will be your conference operator today. I would like to welcome everyone to the Insperity Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

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Douglas S. Sharp, Insperity, Inc. - Senior VP of Finance, CFO & Treasurer [2]

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Thank you. We appreciate you joining us this morning. Let me begin by outlining our plan for this morning's call. First, Paul is going to discuss our third quarter results and how we are positioned for growth as we head into 2020. I will then discuss further details behind Q3 results and, in particular, focus on our health care costs. I will also provide our updated full year 2019 guidance and provide high-level comments on our gross profit outlook for 2020. We will then end the call with a question-and-answer session.

Before we begin, I would like to remind you that Mr. Sarvadi or myself may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures.

For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website.

Now at this time, I'd like to turn the call over to Paul.

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [3]

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Thanks, Doug, and thank you all for joining us. Our reported results today include a year-to-date increase in revenues up 13%, net income up 18%, and EPS up 21% over 2018. These numbers would be considered solid for most companies, however, they're not commensurate with our outstanding performance over the last 5 years. These results include third quarter performance below our expectations, driven primarily by a second consecutive quarter with elevated large claims in our medical plan and to a small degree by lower growth than expected in paid worksite employees. Doug and I will explain exactly what happened and what this means to our going-forward plan.

The bottom line conclusion from our analysis of the drivers of our recent results indicate our growth plan remains solid, and we expect to maintain our industry-leading double-digit unit growth into 2020. And we believe we do not have a systemic issue in our medical plan that would compound into next year.

I'll begin with a discussion of our growth drivers and how we arrive at our expectations going forward. I'll also highlight results from our recent client survey and the traction we're gaining on our traditional employment solutions bundle, Workforce Acceleration. Doug will follow with comments about the recent quarter, including specifics regarding our medical plan and provide updated guidance for the year.

We began 2019 with an expectation for growth in paid worksite employees of 15% based upon our starting point in January and our budget for each of the 3 growth drivers including new sales, client retention and growth in the client base. We now expect to end the year at 13% growth in paid worksite employees. Approximately half of this shortfall is due to lower growth from the net change in our client base and the other half due to fewer worksite employees paid from new sales from what we've budgeted and forecasted as the year played out. Client retention has been and is expected to be substantially on plan, continuing near historic highs.

In the second and third quarters, we were surprised by the lower-than-expected net change in existing employees within the client base in the last month of each quarter. As we mentioned last quarter, we had substantially fewer seasonal full-time employees added in June compared to previous years. Since we had substantially fewer adds in June, we expected substantially fewer departures in September. Although we were correct, conceptually, we were off in magnitude and experienced a shortfall from our forecast in September.

In the bigger picture, our client base remains optimistic about their businesses and our continuing efforts to hire accordingly. The tight labor market has made it more difficult to find employees making net gains in the client base less predictable. However, in this environment, our HR services become even more valuable to clients and prospects, which is a plus for retention and sales.

Our paid worksite employee number from new sales explains the other half of the shortfall. Although we were substantially on plan in this metric for 2 quarters, the last 2 months of Q3 fell behind. The primary cause leading to fewer paid worksite employees from sales in Q3 is we simply had too few trained BPAs early this year and did not offset that with mid-market sales. Both of these issues have rebounded and now point toward strong performance in the fall campaign and as we look ahead to 2020.

Historically, our unit growth follows the growth rate in the number of trained business performance advisers with an approximately 2-quarter lag as new trained sales personnel gain efficiency. Mid-market results either add or subtracts from that core growth rate. We ended the third quarter with a 13% increase in trained BPAs, up from 10% in Q1 and our fall campaign sales activity reflects this momentum. Sales for the first month of the campaign were 103% of budget, and the number of business profiles or opportunities to bid our Workforce Optimization services is up 23% over last year.

Our success in mid-market sales last year indicated we could see continuing leverage in sales in 2019 allowing for unit growth at a faster rate than our growth in our BPA team. This year, we have nearly the same number of accounts sold year-to-date in our mid-market segment and a substantially larger pipeline for 2020. However, the biggest difference from last year in mid-market sales is the lower average size of accounts sold and the fact that we did not close a large enterprise account like we did last year.

Last year, on July 1, we enrolled our largest account ever. This added 160 basis points to our unit growth rate last fall. Since we did not repeat that large sale or increase the number of mid-market sales year-over-year comparisons beginning in July this year are difficult. This is exaggerating the quarterly slowdown in unit growth over this year from mid-double digits to low double digits.

As we look ahead to 2020, the number of trained BPAs will drive our unit growth and mid-market sales will supplement that growth. In retrospect, I believe I was too optimistic in expecting mid-market sales to offset a lower growth rate in BPAs at this stage. With this plan in place, we should see quarterly growth acceleration over 2020, especially as we move past the difficult comparisons related to the large mid-market account.

One other initiative we took when the third quarter ended was a comprehensive survey of our client base to analyze recent client business and hiring activity and determine their outlook for 2020. We designed this survey to provide further insight in our budgeting and forecasting. We generally found the health of this small business community strong and the outlook for 2020 to be better than 2019. Keep in mind, small business owners are an optimistic lot, but we also found this to be consistent with the economic indicators we monitor in our client base. Over time, as a percentage of base pay was over 11%, average pay up over 4% and commissions paid to the sales staff of our clients up over 8%.

The survey, which will be released tomorrow, also found the ability to hire and retain employees and driving revenue to be the #1 or 2 concern for all segments, except our largest clients, we're controlling operating cost edged out hiring and retaining employees.

I would also like to mention the excellent progress we made in Q3 gaining traction in our traditional employment strategy, selling our Workforce Acceleration bundle, which is a critical success factor in our current 5-year plan. Our goal for this year has been to extend adoption of this strategy across our BPA team throughout the country. This strategy includes introducing both co-employment and traditional employment bundled HR solutions early in the sales process. We typically sell 1 out of 10 of our small to medium-sized business prospects on our flagship Workforce Optimization co-employment bundle. Our traditional employment strategy is to ultimately convert some percentage of the 9 out of 10 that either don't qualify or not ready for Workforce Optimization to our Workforce Acceleration option. This quarter, we gained significant traction coming in at 123% of our budget and reaching 5,000 employees sold, a traditional employment solution.

Success in this traditional employment bundled HR solution has a tremendous effect on our business model. These sales represent a value to Insperity of about 1/3 compared to Workforce Optimization clients without the benefit plan risk and contribute to improving gross profit. These clients also represent an opportunity to upsell to the full co-employment service at a later date, improving overall sales efficiency.

So in summary, we have been on a tremendous run the last 5 years with a double-digit growth rate in paid worksite employees within our targeted range of 10% to 15%, driven by growth in the number of BPAs, plus or minus, mid-market account effects. We expect to continue this growth plan into 2020 and enhance our business model with improving Workforce Acceleration results.

At this time, I'd like to pass the call back to Doug.

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Douglas S. Sharp, Insperity, Inc. - Senior VP of Finance, CFO & Treasurer [4]

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Thanks, Paul. Now let me begin by discussing further details of our third quarter results. Average paid worksite employees increased 12% over Q3 of 2018 with a sequential increase of 4% over Q2 of this year. Higher-than-expected benefit costs resulted in just a 3% increase in gross profit over the third quarter of 2018. These higher benefit costs of approximately $18 million were slightly offset by favorable results in other areas of gross profit and operating costs, but drove the decline in adjusted EBITDA to $51 million and adjusted EPS to $0.75.

Now upon receipt of our third quarter health care claims data in October and our subsequent analysis of this data, we determined that these higher benefit costs were primarily driven by elevated large claim activity, which declined from Q2, but did not return to historical levels. Two consecutive quarters of large health care claim payments at these elevated levels is a historical anomaly for us. Additionally, we have historically had a strong track record in predicting our total claim costs on an annual basis. It appears that 2019 will be an exception due to this recent spike in large claims.

In light of this, we have spent an extensive amount of time drilling into the details of claims data with the assistance of our insurance carrier in order to determine the root cause of the elevated claims and whether anything systemic has changed in our plan. Based upon our review of the detailed data, we have determined the following: first, it's clear that only a relatively small number of claimants rather than something pervasive over our entire participant base negatively impacted our health care costs in Q2 and Q3. An analysis of large claims over the past 2 years indicated a recent spike in activity related to participant with claims exceeding $250,000 a year. These jumbo claims from a very small number of participants were the primary driver behind our claim dollars exceeding expectations by approximately $27 million over the past 2 quarters.

As a second finding, our insurance carrier confirmed that there is an element of randomness in the recent elevated large claim activity, and there is an expectation that it will revert back to a normal level. The recent increase in the frequency of claimants with jumbo claims is above the level of our insurance carriers fully insured book of business, whereas prior to this activity, we have historically been in line or below their book.

Thirdly, an analysis of claims over $100,000 over the course of the 2 quarters shows that the claims were largely from different participants as opposed to ongoing claims from the same group of participants. The fact that the 2 consecutive quarters of large claim activity were driven by 2 largely different groups of participants further points to the randomness of these 2 isolated events.

Fourthly, a review of the clients associated with these large claims did not indicate a concentration associated with new clients and therefore, would indicate that this was not driven by adverse client selection.

And finally, our comprehensive review of overall planned participant demographics, such as age, gender, geographic mix, overall inpatient hospital stays and plan migration continues to point to favorable trends of our health plan as a whole.

Accordingly, based upon our detailed review, our best estimate is that the spike in large claim activity during 2019 is a historical anomaly, and we expect the large claim activity to normalize.

Now even though the claims data doesn't appear to point to an ongoing issue with our health plan, we believe it is prudent to take a more conservative approach to estimating benefit costs for the fourth quarter by not assuming a further reduction in large claim levels for the remainder of 2019.

And when taking a look at the full year, you may recall that we began 2019 estimating an expected benefit/cost trend of 2% to 3% over 2018. Year-to-date results, combined with our revised Q4 forecast, yields a cost trend of approximately 3.7%, which is still favorable to trends seen in the marketplace. The elevated large claim activity fully accounts for the incremental trend over the midpoint of our initial budget.

As we look forward to 2020 and enter a new plan year, our detailed claims data does not indicate the level of large claim activity will compound by increasing over the recent elevated rate. Under this scenario, we would expect 2020 to return to a more normalized benefit cost trend over 2019 costs, and we are pricing our new and renewing business accordingly.

Considerable pricing strength throughout 2019 and other areas of gross profit, combined with favorable cost trends in our other direct cost areas and the traction we are gaining in Workforce Acceleration, contributes to our outlook for gross profit improvement in 2020. And any reversion of large claim activity back to our lower levels would reduce our 2020 benefit/cost trend and further improve our gross profit.

Now shifting to our balance sheet and cash flow. We ended the second quarter with $131 million of adjusted cash and $239 million of debt outstanding on our recently expanded $500 million credit line. We have now repurchased 1.5 million shares in 2019, including 1.2 million shares in Q3. When combined with dividend payments totaling $37 million, we have returned just over $190 million to shareholders thus far in 2019, as we continue to invest in the long-term growth of the business.

Now before we open up the call for questions, I'd like to provide an update to our full year 2019 forecast. As Paul just mentioned, we are now forecasting 13% growth in average paid worksite employees for the full year 2019. Our updated 2019 earnings guidance takes into account this revised growth forecast, the recent elevated large claim activity and our conservative approach to estimating Q4 benefit costs.

With this in mind, we are now forecasting full year 2019 adjusted EPS in a range of $4.08 to $4.20 and adjusted EBITDA in a range of $247 million to $253 million.

While we are obviously disappointed in the effect of elevated health care costs in our 2019 results, we still plan on completing the year with both an industry-leading worksite employee growth rate and profitability per worksite employee. We're currently going through our normal budgeting process for 2020, and we'll provide our detailed guidance on our next earnings call.

Based upon our current outlook, including our earlier comments in the areas of worksite employee growth and gross profit, we expect 2020 earnings growth to be improved and nonindicative of the latter half of 2019.

Now at this time, I'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Tobey Sommer from SunTrust.

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Jasper James Bibb, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [2]

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This is Jasper Bibb on for Tobey today. With respect to the guide for WSE growth, could you quantify how much of that comes from additional hiring within the existing customer base? And are there any trends you're seeing on that then?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [3]

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Yes. I mean we've taken a conservative look at the net gain from employees based on kind of what's going on in the last couple of quarters. But like I said about the survey we conducted, there's still a lot of optimism out there. People have generally met their business plans for the year and are looking at improved sales for next year. And so we expect the need for employees within our client base to continue and, to the degree, that you can find the qualified people that will continue and just see growth in the client base. But we're kind of being conservative about that going forward.

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Jasper James Bibb, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [4]

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Okay. Perfect. I was wondering if you could elaborate on those changes to your health care pricing after seeing those outsized claims in the past 2 quarters?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [5]

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Yes. So on the pricing side, we have an ongoing process where we are pricing every new and renewing customer every month based on the most recent information that we have. So we've been continuing to move pricing up accordingly. Of course, at the year-end, we also have our year-end transition where you have the highest number of new clients coming in from new sales, and you have the highest churn from the turnover of clients at year-end as well because a high percentage are on the annual contracts that line up with the year-end. But we feel very good. Pricing has been strong throughout the year and has even come in ahead of our expectations as the year went along. So we feel good about how we have things price going forward even in spite of this anomaly, we've had on these large claims.

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Jasper James Bibb, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [6]

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Okay. Great. Last question for me. I was curious if you could update us on people analytics? And how important that is to how you think about mid-market growth heading into 2020?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [7]

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Yes. I've considered putting that in my prepared remarks, but we wanted to get to the point of some of the bigger things that were happening, but we're really excited about the analytics engine that we've built into Insperity Premier. And we're now, I believe, over half of our mid-market clients have had an in-depth discussion about the analytics engine and how it -- in the data and information, the instant insights that it provides. And we really believe that this allows us -- this tool allows us to really emphasize, what I call, our software with a service differentiation. The advantage we bring to the table by not only bringing in some infrastructure but now instant insights. And as soon as you have an insight, you want to know what to do about it. So the fact that Insperity comes not only with the technology but with the professionals that are able to help to advise a game plan to take that insight and turn it into results for our client. That makes what we do for our customers very unique. And I especially think it's going to be very prominent in our mid-market space.

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Operator [8]

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Your next question comes from the line of Jim MacDonald from First Analysis.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [9]

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You haven't talked about how your -- how you came to your guidance for worksite employees for Q4, which also seems way below what we would have expected? I mean you had pretty strong commission activity in Q3. So what's causing the big drop in worksite employee guidance for -- I mean it's basically doubling the miss from this quarter?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [10]

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Well, Jim, you can -- as you know, the sales that you make at this time of the year generally come in, in January, and we took out all kind of most of the net gain from existing. You don't have a lot of clients terming or you're -- from the retention side, we expect it to be the same. But we just want to be really conservative about it. And at this point, frankly, that fourth quarter doesn't really matter. We're all focused on the January starting point for the year. And so what we're really focused on is our fall campaign activity. And we've got our nice increase in trained rep count back up where it belongs, 13%. We've got our key indicator for sales activity, which is the number of opportunities to bid, running really strong over the -- even over the growth rate at 123% for the beginning of the campaign. So we think we're off to a really good start. We know we're off to a really good start. And as we maintain that, then we'll get into next year and see a more normalized pattern for growth. So we're in that period where you have this year-over-year growth on top of this significant increase in the -- with the large customer we had last year. And with that comparable, along with having a lower-trained BPA count early in the year, that's just the way it's come out at this point, and we're focused on turning that around.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [11]

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Okay. Can you give us the current or end of quarter trained BPA level?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [12]

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Yes, let's see here. It is -- just a second here. Right at 5% -- just at 5.48%.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [13]

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5.48%. At the end of quarter?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [14]

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Right.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [15]

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Okay. And over to health care. So I hear your survey results and things. But what if employees were thinking -- I don't know if you surveyed employees or the employers, but if employees are worried about their jobs for some reason, would this kind of -- with this kind of health care activity would that be more normal, if everyone was sort of worried about their jobs or thinking about leaving their jobs or worried about being fired?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [16]

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Not really, Jim. I mean I wouldn't see any connection between -- first of all, if there were worry about their employment, which the labor market is so strong, I don't see that right now. But if they were, I don't see how that would drive a large claim, that -- which was the core issue here. These jumbo claims above $250,000. We just had a significant increase in the incident rate. And we've been sitting down with our insurance carrier and going through -- you can't believe how much data we went through looking at it every 6 ways from Sunday. And the answer is the same every time. And it's these random large claims in our history. We've had large claims in the quarter. All of our investors usually know that. That happens once in a while, usually. We have even seen it happen more than once in a year like that. And that's why it kind of evened out over the course of the year. This is 2 quarters in a row, it's more the luck of the draw, and it's very disappointing, but it's what happened. And there's nothing systemic in the plan, and I really don't see it being driven by employee-related activity.

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Douglas S. Sharp, Insperity, Inc. - Senior VP of Finance, CFO & Treasurer [17]

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Yes. And Jim, it's Doug. We also looked at the nature of the large claim activity. And the 2 big drivers to it were heart conditions, heart attacks, issues like that and cancer treatments, which clearly then point to your earlier question there and to some lesser extent, accidents, even though within the participant base. So it gives you a little bit of flavor there as to the drivers and gives you -- hopefully helps you out there also on your question.

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [18]

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Yes. None of those are, what you'd call, chronic in terms of -- the treatment period is a specific thing and then you go down the road.

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Operator [19]

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Your next question comes from the line of Jeff Martin from Roth Capital.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [20]

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I wanted to get a sense on how you feel that the higher benefits cost could affect your year-end transition in terms of retention?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [21]

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Really, no connection there because our pricing strategy really didn't -- this didn't call for any change in pricing. Remember, the total cost trend of 3.7% that we even have in this year is really favorable against the market at large as it is. Our normal pricing strategy would actually have us pricing at a higher number than that in our normal pricing. However, that number gets offset by people making plan design changes or choosing a lower cost plan or making other changes where it's not -- we can't really determine today what percentage increase will we have in benefits pricing in January. But it -- but we know we've built in a higher number than the 3.7%. It will come out something lower than that. But it will be within the range. And we don't have -- what -- a cost price mismatch, we don't have to go back and hurry up and increase prices on customers. That's not what's going on from this situation.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [22]

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Okay. And then is this the first time that you've really seen claims come in above your fully insured book of business? I know you mentioned, historically, it's in line or below. But is this really the first time you've seen that trend?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [23]

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I would say, without having the benefit of going back and looking every quarter historically. But certainly -- and we don't know of a time -- I mean our whole book of business constantly runs better than United's book. They tell us that on an ongoing basis. The comments in our script related to these large claims, which, for this period, for the first time, ran above their level. And it's historically been below. We don't have any reason why we're sitting here today to think they're not going to turn back to at least the normalized levels. And frankly, I don't have any reason to think we're -- based on how we run the plan, we did a complete deep dive on the demographics to see if there's anything driving this, any source of new business, any age, gender differences, any selection that could possibly be driving this. And it's just not there. In fact, demographic, we view that's a 50-something page analysis actually shows our book of business measured in terms of the health of the book and how it changes. Actually, it was a little positive. So that's -- again, confirmed nothing there driving these 2 odd quarters we had.

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Operator [24]

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(Operator Instructions) Your next question comes from the line of Mark Marcon from Baird.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25]

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When did you -- you bought back a lot of stock this quarter, when did you buy it back?

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Douglas S. Sharp, Insperity, Inc. - Senior VP of Finance, CFO & Treasurer [26]

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Let's see here, Mark. I mean it was throughout the quarter...

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [27]

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I mean we followed our normal pattern, which is to buy in the open market when we can and then put in a 10b5-1 plan when we are going into the quiet period.

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Douglas S. Sharp, Insperity, Inc. - Senior VP of Finance, CFO & Treasurer [28]

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Yes, but it was really -- yes, throughout the entire quarter.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

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And when did you discover that the health care costs were running at an elevated level?

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Douglas S. Sharp, Insperity, Inc. - Senior VP of Finance, CFO & Treasurer [30]

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Mark, I've mentioned in my prepared remarks, as with every quarter, we get the claims from -- data from United Healthcare and that's not following the end of the quarter. And so it was -- in October, first, we get the initial claims data from them and then -- which further -- takes time to further analyze that data, and particularly in a quarter like this where you can keep going into a deeper analysis of that. But that's very -- that's typical with every quarter over the course of our history. So you don't know your health care claims data on an incurred basis until after the quarter is over with.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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Is there the possibility of getting more frequent updates?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [32]

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It's actually not a matter of frequent updates. We meet with United every month. And even through the September meeting, there wasn't an indication because you don't have the quarterly report, which has the fully -- full claims as on an incurred basis, put back to where they initiated and things were looking reasonable through the 2 months. It went until the claim reports for the quarter that came in after that we were faced with some numbers that were quite disappointing.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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Yes. The point is, I'm assuming you wouldn't have bought 1.2 million shares if you had known that this was going to transpire?

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Douglas S. Sharp, Insperity, Inc. - Senior VP of Finance, CFO & Treasurer [34]

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That's exactly correct.

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [35]

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It's a safe assumption.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

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Yes. So I guess the question is, is there a way to get an earlier warning system? Any sort of rolling system or anything like that?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [37]

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So what we've done because of this large claim activity, we did work with our carrier to provide various looks and various cuts of these sizes and looking at some projection of ongoing cost. At this point, we have some things that we will probably work with them on to try to get better insight, but now that it's kind of new information, it's not something we're going to be able to say right away this will help us project that. So we're going to continue to work with them and try to get more information earlier, but it will take a little time to see if there's really anything in there that can do that.

The problem is on these jumbo type claims, the carrier gets them when they finally get filed. And sometimes, it's -- I mean it can run through a process. They're monitoring conditions and know things are happening, and we know -- you always have some number of them. You just -- when are you going to have an increase like this? This is really outside the norm to have this high of an incident rate of those jumbo claims in such -- in a short period of time. And that's the bottom line.

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Operator [38]

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Your next question comes from the line of Jim MacDonald from First Analysis.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [39]

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Yes. I just wanted a follow-up on what you're seeing in the market in terms of rate increases we've been hearing of some -- for health care? We've been hearing some pretty high numbers out there actually this year.

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [40]

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Yes. As far as within the marketplace at large, I think from our carrier's perspective, I think you're looking at high single digits basically. So like I say, we're not unhappy with where we are in the bigger picture on how our plan is trending even with the large claim activity this recent period.

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Operator [41]

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Your next question comes from the line of Mark Marcon from Baird.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [42]

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Just a couple of quick follow-ups. One, your existing clients, when did they receive the notification for what their rates are going to be for next year?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [43]

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Well, as you know or you may be aware of, Mark, we are renewing clients every month of the year. Now there is a trend to that because we sell clients and they have an annual contract, we're selling every month. So people are renewing every month. Now the year-end, we have about 40% to 40 -- a little over 40% of our book of business renews in this January to February time period. And those -- we're well into renewing those accounts already and -- or actually a little ahead on that. But those -- those -- the pricing on those accounts goes out in October, typically, the bulk of it. And so we're already out there renewing those accounts.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [44]

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And are you renewing at roughly a 3.7% price increase for the -- for health care? Or how are you -- how would you price that?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [45]

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Yes. This is what I was saying a little bit earlier. Let me try to be a little more clear with that. We actually are building in price increases that would be greater than that 3.7%. And that's on an individual account basis, you're -- we're looking at their specific experience in the total PEO relationship, not just the health care side. But within the allocation that we build in for the benefits, there would be an allocation increase above the $3.7 million. But what happens then is customers also have options to change the plan they selected or change the contributions they're making so forth between the client and the employees. So there's other decisions that are made. And once we get on any renewal period, whether it's a month or the year-end, once we enroll or reenroll and pay everybody or we renew them and pay them under the new system, their total increase in benefit allocation can't be less than that number that we built in because they may have made a change in their plan. So we would anticipate -- our best guess would be around a 3% increase that came from pricing. But then, of course, you have to realize that would have been driven by going to lower-cost plans that would offset the trend that we're talking about that occurred this year, the 3.7%. So all in, like I say, our pricing compared to our all-in cost is still well intact, not an issue there that has driven a big change in pricing strategy. Does that help any?

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [46]

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It does. I was just wondering, how does that compare, like if a client has been with you for, say, 3 years, the price increase that they're looking at for this year for like-for-like insurance plan, how does that compare to like the price increase that they would have seen last year?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [47]

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Yes, that's a good question. It wouldn't be -- it'd be a little bit higher, maybe 1% higher than they would have seen a year ago because we would have been -- as this year has gone on, we've been moderately raising pricing to reflect what's been happening in the underlying plan, not so much related to the large claims. But just to the normal trend that you look at, for example, pharmacy trend has been a little elevated over the course of the year. So those kind of things get factored in. But the thing to remember is that the longer a client is with us, the more they've had multiple years of lower-than-market increases in benefit plans and the better this deal gets for our clients. That's the reality of it.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [48]

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And what's the typical client churn that you would expect during this core time period?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [49]

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I'm sorry, typical what trend?

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [50]

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Client churn that you would typically end up seeing in this time of the year?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [51]

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Client churn?

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [52]

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Yes.

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [53]

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Okay, yes. So our annual attrition in clients has typically last 5 years now been around 15%, 14% to 16%. So let's call it 15%. And the way that has played out over the last 5 years, it's more like a 6% to 8% that go away in January because you have such a high percentage of customers renewing and then you have less than -- you probably have a 2% to 3% for February, and then you have a 0.5% to 0.7% every month thereafter. So that's kind of your trend that -- I mean that's your pattern of how you get to about a 15%.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [54]

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Okay. And then the BPA productivity typically around this time of the year?

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [55]

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Well, this is when it really bumps up. This is when you've really worked hard to have as many BPAs trained as possible and running at a good efficiency level and get them as many qualified leads as possible. So we usually -- in our fall campaign, we typically have nearly doubled about maybe 1.7% or 1.8% over what you had in the first and second quarter, for example. So it's -- this is making hay while the sun is shine.

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Operator [56]

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There are no further questions at this time. I'd now like to turn the call back over to your presenters.

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Paul J. Sarvadi, Insperity, Inc. - Co-Founder, Chairman & CEO [57]

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Well, once again, thank you all for joining today. We appreciate your interest, and we look forward to having better news for us next quarter, and we're going to finish off this year strong with a good fall campaign, and look forward to a strong 2020. Thank you for joining us.

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Operator [58]

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This concludes today's conference call. You may now disconnect.