Insperity's Q3 2025: Contradictions Emerge on Benefits Cost Trends, Pricing Strategy, HR Scale Investment, and AI's Impact on Employment

Date of Call: None provided

Financials Results

• EPS: Q3 adjusted EPS: -$0.20; Q4 adjusted EPS guidance: -$0.79 to -$0.16; Full-year adjusted EPS guidance: $0.84 - $1.47
• Gross Margin: Gross profit per worksite employee $208/month in Q3 2025, down from $247/month in Q3 2024 (driven primarily by $20M higher benefits costs)
• Operating Margin: Adjusted EBITDA Q3 $10M (below forecast); Full-year adjusted EBITDA guidance $119M - $153M; Q4 adjusted EBITDA guidance -$25M to $9M; Operating expenses decreased 4% YOY and are expected ~3% below 2024

Guidance:

• Average paid worksite employees Q4 2025 expected 313,000–315,000 (+1.3%–1.9% vs Q4 2024); full-year average paid worksite employee growth ~1%.
• Full-year adjusted EPS guidance $0.84–$1.47 and adjusted EBITDA $119M–$153M.
• Q4 adjusted EPS guidance -$0.79 to -$0.16; Q4 adjusted EBITDA guidance -$25M to $9M.
• Full-year benefits cost trend expected to remain elevated (~9%); pricing actions and UHC contract expected to materially reduce costs in 2026.
• Full-year operating expenses expected ~3% below 2024; 2025 Workday/HR Scale investment ~ $58M (approx. $48M in OpEx).

Business Commentary:

* Benefits Cost Increase: - The benefits cost trend increased to 9.1% for Q3 2025, significantly impacting financial performance. - The rise was attributed to higher-than-expected outpatient and inpatient utilization, pharmacy costs, and large claim activity, affecting both sequential and year-over-year trends.

• Health Insurance Industry Challenges:
• The health insurance industry reported an unexpected rise in healthcare costs and loss ratios, which affected Insperity's claims.

• Factors contributing to this trend include increased utilization of prescription drugs and outpatient procedures, prevalence of high-cost conditions, and introduction of new treatments, along with the use of AI tools in healthcare.

• Unit Growth and Client Retention:

• Average paid worksite employees increased by 1.2% to 312,842 in Q3 2025, and client retention remained strong at 99% per month.

• The slight increase in unit growth was despite seasonal employee departures and a challenging hiring environment, while strong retention suggests stable client relationships.

• Operating Expenses and Cost Management:

• Operating expenses decreased by 4% year-over-year in Q3 2025, with significant reductions in salaries and G&A costs.

• Effective cost management and strategic investments, such as achieving software development milestones with the HR Scale platform, contributed to these savings.

• UnitedHealthcare Contract and Cost Reduction:

• A new contract with UnitedHealthcare is projected to reduce Insperity's claim costs and mitigate risks, with expected benefits of 2% of gross benefits costs.
• This agreement includes financial terms and plan design modifications to address higher trend costs and lower pooling levels, enhancing financial impact and alignment for future growth.

Sentiment Analysis:

Overall Tone: Neutral

• Management highlighted a significant 2025 earnings shortfall driven almost entirely by elevated healthcare claims (benefits cost trend ~9% Y/Y) while simultaneously announcing a UHC contract and rolling out HR Scale as catalysts for a 2026 rebound; commentary balances material near-term headwinds with concrete remediation steps and growth initiatives.

Q&A:

• Question from Andrew Nicholas (William Blair): When you say an opportunity to recover the majority of the earnings shortfall in 2026, is that relative to your initial 2025 guidance or to 2024 results?
  Response: Management: Refers to the shortfall versus the company's initial 2025 expectations (which are similar to 2024) and they expect to recover a majority of that shortfall in 2026.

• Question from Andrew Nicholas (William Blair): Could repricing and higher benefits costs materially hurt new sales or cause a step-down in net paid worksite employees in Q1 2026?
  Response: Management: Do not expect repricing to materially damage new sales—Q3 sales were strong, retention remained ~99%, and a larger January pipeline should offset attrition from re-pricing.

• Question from Jeff Martin (Roth Capital Partners): What are you hearing from the joint Insperity/Workday pod in the field—are they finding the messaging and process effective and how is the pipeline developing?
  Response: Management: Pod feedback is very positive; team energized, messaging resonating, pipeline is ahead of internal expectations and demos are driving prospect interest.

• Question from Jeff Martin (Roth Capital Partners): Have you had to adjust the benefit repricing executed earlier in the year and is pricing now a dynamic, month-to-month process?
  Response: Management: Pricing is dynamic on a rolling monthly basis; they have progressively increased pricing through the year and expect pricing going into 2026 to exceed the current elevated trend.

• Question from Mark Marcon (Baird): On an apples-to-apples basis (same plan design), what benefit cost trend should we expect for next year—~9% or higher/lower?
  Response: Management: Expect an apples-to-apples average increase in the low double-digits (i.e., roughly around or above 10%).

• Question from Mark Marcon (Baird): You mentioned exiting lower-profitability clients and lowering pooling from $1M to $500K—what are the implications?
  Response: Management: Exits will likely be concentrated in lower-profit clients; the UHC contract plus lowering pooling to $500K are expected to materially reduce large-claim exposure and yield immediate cost relief (contract actions ~2% favorable impact on gross benefits costs).

• Question from Toby Somer (Truist): How should we think about HR Scale pricing and its ability to offset additional operating/service costs for the new platform?
  Response: Management: HR Scale list prices carry a material uplift vs HR 360; early-adopter discounts will be offered but even discounted pricing is higher than comparable HR 360 pricing, and the two-tier offering should be complementary.

• Question from Toby Somer (Truist): Can HR Scale drive double-digit worksite-employee growth even if SMB job growth remains flat?
  Response: Management: Yes — targeting mid-market accounts (hundreds to thousands of employees) with HR Scale could enable double-digit WSE growth despite a sluggish SMB labor market.

• Question from Andrew Polkowitz (JPMorgan): Is the original $150M aggregate investment framework for HR Scale still the right way to think about go-live costs?
  Response: Management: The $150M framework remains the backdrop, but ongoing investment drops materially after go-live; they expect a much lower long-term run-rate (~$10M/year of incremental investment) while some operating expenses will persist during ramp/stabilization.

Contradiction Point 1

Benefits Cost Trend and Pricing Strategy

It involves the expected benefits cost trend and pricing strategy, which directly impacts financial forecasts and investor expectations.

Will benefits cost trends be in the low double digits next year? - Mark Marcon(Baird)

2025Q3: The average increase is expected to be in the low double digits, with options for clients to mitigate increases. - Paul Sarvadi(CEO)

What healthcare cost trend outcomes are included in your 3Q and 2025 outlook? - Andrew Polkowitz(JPMorgan)

2025Q2: Our forecasted range of benefits cost per covered employee is being raised by 75 to 100 basis points for the full year. - James Allison(CFO)

Contradiction Point 2

Impact of HR Scale Investment

It involves the impact of the HR Scale investment on financial statements and market growth expectations.

Is the $150 million investment for HR Scale still appropriate? - Andrew Polkowitz(JPMorgan)

2025Q3: The $150 million investment includes ongoing operating expenses with a revenue offset, not fully capitalizable costs. - James Allison(CFO)

Is the original $150 million investment in Workday still the right number? - Toby Somer(Truist)

2025Q2: Yes, the $150 million expense includes costs to go live and impact the income statement. - James Allison(CFO)

Contradiction Point 3

Impact of AI on Employment

It reflects differing perspectives on the impact of AI on employment and business strategy, which could influence long-term planning and resource allocation.

How do you view AI's impact on employment in the medium term compared to your three-year plan? - Andrew Polkowitz (JPMorgan)

2025Q3: AI has not yet resulted in significant job replacement in the hiring front. The focus is on preparing for potential changes, leveraging AI for efficiency, and recognizing the potential for new business creation to offset employment efficiency. - Paul Sarvadi(CEO)

What actions by Washington could positively impact customer sentiment, sales, and retention? - Toby Somer (Truist)

2025Q1: Government actions like locking down the tax system or establishing regulatory certainty can significantly influence customer confidence. - Paul Sarvadi(CEO)

Contradiction Point 4

Benefits Cost Trend Expectations

It involves expectations regarding benefits cost trends, which directly impact pricing strategy and profitability, affecting investor expectations and strategic decisions.

Is the benefits cost trend expected to remain in the low double digits next year? - Mark Marcon (Baird)

2025Q3: The average increase is expected to be in the low double digits, with options for clients to mitigate increases. - Paul Sarvadi(CEO)

Can you provide more details on benefits costs and the premium pricing environment? - Andrew Polkowitz (JPMorgan)

2024Q4: We now expect benefits cost trend to increase by 8% to 10% for 2025 while maintaining a competitive premium pricing strategy. - Jim Allison(CFO)

Contradiction Point 5

Pricing Strategy and Competitiveness

It involves differing statements on pricing strategy and competitiveness, which directly impacts revenue growth and market positioning.

Have you adjusted the initial benefits repricing? - Jeff Martin (Roth Capital Partners)

2025Q3: Pricing adjustments are ongoing, with changes made on a monthly basis. The pricing strategy aims to balance the higher trend rates anticipated for next year with the need to remain competitive. - Jim Allison(CFO)

Can you explain how the premium pricing is validated through the Workday partnership? - Andrew Nicholas (William Blair)

2024Q4: Research and client feedback support a premium pricing strategy, aligned with lower upfront costs and reduced staffing needs for clients. This strategy is expected to enhance margins. - Paul Sarvadi(CEO)