Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the Insperity Third Quarter 2025 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 Jim Allison, Executive Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Jim Allison. Mr. Allison, please go ahead.

Thank you. We appreciate you joining us today. Let me begin by outlining our plan for today's call. First, I'm going to discuss the details behind our third quarter 2025 financial results and provide an update on our financial guidance for the remainder of the year. Paul will then comment on our ongoing efforts to accelerate growth and improve profitability in 2026, including the rollout of our new HRScale solution. I will return to outline some initial thoughts regarding expected drivers of financial performance for 2026. We will then end the call with a question-and-answer session. Before we begin, I would like to remind you that Paul or I 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 such forward-looking statements and reconciliations of non-GAAP financial measures to their comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website. Our unit growth for Q3 2025 was within our forecasted range with the average number of paid worksite employees increasing by 1.2% over Q3 2024 to 312,842. New client sales results were encouraging. While worksite employees paid from new clients in Q3 fell just short of the Q3 2024 level, our Q3 booked sales efficiency and the resulting number of accounts that are in the queue for first payroll over the next few months have increased significantly from a year ago. Client retention remains strong, averaging 99% per month and in line with prior year results. Similar to last year, the departure of seasonal summer employees caused net hiring within the client base…

Thank you, Jim, and thank you all for joining our call. Today, my comments will focus on 4 important topics to frame the financial performance rebound and growth acceleration we expect in 2026 and beyond. First, I'll discuss the decisive and assertive actions we are taking to navigate the significant and unexpected step-up in health care claims we have experienced this year. Second, I'll present an update and perspective regarding the official rollout of HRScale this quarter, our joint solution with Workday that's designed to effectively enhance our PEO solution set for mid-market companies ranging from 150 to 5,000 employees. We believe the addition of this offering will position Insperity uniquely within the marketplace and serve as a new driver for large client sales and retention, advancing our growth model. Third, I'll provide an overview of our recent strong book sales performance and the momentum driving our flagship PEO solution, HR360, which is a key contributor to our growth and integral to our upcoming year-end transition. I'll conclude my remarks with some thoughts about the next 3 years and the plan we are working through that we believe will allow us to return to historical key metrics in our business model. The most urgent issue that we continue to address is the health insurance claim cost escalation. This issue has occurred across the marketplace and industry and has impacted Insperity in a severe manner over the last 3 quarters. We have seen 2 significant negative developments in the health insurance marketplace. First, the claim trend for the industry at large for 2025 is now expected to be 200 to 400 basis points higher than industry estimates at the beginning of the year. This unexpected increase that emerged during the year is significantly higher than a typical year. Analysis of our…

Thanks, Paul. As this year has progressed, we have worked diligently to create and execute plans aimed at generating a significant profitability rebound in 2026. In the benefits area, we expect the elevated benefits cost trend to persist in 2026 based on input from our carriers, outside advisers and industry benchmarks. As a result, our response must remain swift and steadfast, and our focus is both on right pricing our book of business and reducing planned costs. On the pricing side, we continue to strategically implement higher pricing targets for both new and renewing business using AI tools and revised methodologies. Our focus is to attract and retain the right clients at the right price that can produce sustainable forward-looking profitability at our normal historical levels. This process began earlier this year, is progressing according to plan and will continue throughout 2026, consistent with what we're hearing in the broader market. Through a combination of higher pricing and the exit of lower profitability clients, we believe that we are on pace to exceed the projected benefits cost trends. Regarding our plan costs, I'm happy to report that we have successfully completed our contract negotiation with UHC and have extended our contract through 2028. The combination of cost savings from this contract and other plan design changes, both of which will be effective in January, are expected to have a favorable impact of about 2% of our gross benefits costs. In addition, we plan to reduce our health care claims risk in 2026 by lowering our pooling level from $1 million per member per year down to $500,000. For clarification, the pooling level represents the maximum annual amount of claims exposure we have for any individual plan participant, which provides a measure of protection against the severity of large claims. Taken…

[Operator Instructions] Our first question comes from Andrew Nicholas with William Blair.

I wanted to first ask for some clarification, Jim, on that last comment you made about an opportunity to recover the majority of earnings shortfall. Is that related to 2024 as the base? Is that specific to the shortfall relative to your initial guidance? Just trying to think -- I think you're trying to guide us a little bit in terms of what next year looks like. I know there are a lot of moving pieces. Just trying to make sure I understand what you're specifically referencing in terms of the shortfall.

Yes. Thanks for the question, Andrew. Our initial guidance for 2025 and our actual results for 2024 were relatively similar. So what I'm referencing is pretty well aligned with both of those.

I think the best way to look at it...

Go ahead, Paul.

I'm sorry, yes. So I think what we're describing there is relatively straightforward in that we had an expectation at the beginning of the year, and you can see from our guidance today what -- where this year is forecasted to end up. And nearly all of the shortfall that occurred this year is from this one issue. And we expect, as Jim commented, to see a rebound from these 3 major elements of at least the majority of that shortfall in 2026.

Understood. And then for my second question, in terms of 2026 kind of worksite employee growth, I understand that the macro hasn't been super supportive in terms of change in existing or net client hiring. But do you have -- to what extent should we be concerned with kind of these cost trends and the repricing on attrition? Do you expect it to have any impact? Or to what extent do you expect it to impact new sales heading into next year? Just want to understand if we should expect a decent kind of sequential step down in the first quarter tied to some of this repricing activity.

Yes. Thanks for that question. No, we actually, again, are -- we have strong sales effort continuing. And we don't see the pricing changes that we're making to be far out of sorts with what's happening in the marketplace at large. So even I mentioned in my remarks that the most recent results in the third quarter, not only were sales 45% ahead of last year, but also the renewing business that came on, our renewal rates were still at the 99% level for the quarter. So we have not seen that dynamic causing a reduction. We are also going into this stage of the year with a significantly higher number of worksite employees scheduled to be paid in January. And I think in my remarks, I was kind of putting that out there just to make sure we understood that even though we may -- because of the priority to have some margin recovery, we probably will have some more go away, but I don't expect that to be -- I expect that to be offset by the degree to which we're ahead in new sales.

Our next question comes from Jeff Martin with ROTH Capital Partners.

I wanted to dive into kind of some initial anecdotal responses from your -- from this new pod that's jointly marketing the joint solution. What are you hearing from them? Are they finding this as a relatively smooth process? Anything they've learned along the way? And how encouraged are you by the initial results?

Yes. It's hard to hold it all back because it's been very exciting. We even had a 3-day retreat meeting with the full pod just a week or 2 ago. And what's really exciting is that they are now seeing the full picture of this unique solution that we have developed that is the full HRScale. It is the full scalable solution of both service and technology in one comprehensive solution. And they've worked through how to help customers understand even a cost comparison to other options they have. They started to understand better how we have gone through the research to understand how to price this for the client. And the energy level is really impressive, and we are already beginning to fill the pipeline. And we're ahead of where I thought we'd be. Remember, we put this in place on July 1, gone through a lot of effort just to make all that work at this point. But now we're already out there calling on customers. We've got the messaging down, and we're getting great reaction from the prospects.

Great. And then my other question is on the benefits repricing. Have you had to make adjustments from the initial repricing that you did in the first quarter? If so, could you provide some details around that? And -- is that a dynamic thing on a quarterly basis? Or how are you looking at that going forward as we are very close to starting 2026 here?

Yes, that's always been a part of our whole operation where we are literally month-to-month on a rolling basis, we're looking at what pricing is necessary for the trend rate. In this case, of course, we've seen the trend escalate. And so where we were at the end of the first quarter, we started processing some pricing changes. But as the year progressed, we were continuing to raise the level of price increase up to and through and including everything we sent out for January 1. So we believe we're in good shape on that front. As Jim mentioned in his remarks, we expect our pricing going into next year to actually be exceeding this continuing higher rate that we've seen. So we're on a good track to balance that out in the appropriate timetable.

Our next question comes from Mark Marcon with Baird.

Just on the health care pricing, Paul and Jim, is it your expectation that on an apples-for-apples basis, same plan design, we're basically looking at a benefit cost trend that would be somewhere in the 9% range for next year? Or would it be higher or lower?

So apples-to-apples, same client, same people, same plan design. We would expect the average increase to be in the low double digits range.

And what typically happens there, of course, is you quote the increase. And then we have tools and ways we can help the client mitigate the increase, other plans to choose from and other aspects of what we can do to help them manage that increase. And that's what's happening all over. When we look at the quotes that are coming in and the competitive situations, our increased level and our ability to help them manage that puts us in a very competitive position. And that's what I think we've demonstrated even up to this point in the process.

I appreciate that. And then the second question is basically along the lines of you mentioned potentially managing out some of the lower profitability clients. I was wondering if you could give us a sense for the magnitude of that level of the client base. And one other thing, Paul, if I can squeeze one in. You and I, along with a lot of investors, we used to talk about the risk mitigation and whether it makes sense to be at $1 million versus $500,000. We had lots of discussions even back in 2019. Now that you're going down to $500,000, how would you -- it's obvious what the benefits are. What are the costs or what are the things that we should take into account in terms of thinking about that?

Well, just to put it in historical perspective, we have looked at that for a long time. And of course, there was a time when we didn't have the $1 million limit. in our world. But what's happened over the years is the number of ways that someone can have a claim of a significant size like that, the number of ways has increased. But also, I think it's important to note that this contract that we have just signed with UHC is -- this is what we mean by better alignment in how we're looking at the entire game plan for our program. And in this particular case, the agreement to be able to look at the various levels every year and have them, I'm going to say, priced in a way that makes it fit our program. and for the whole program to be designed to have growth incentives and things of that nature. So I'm just telling you the elements, the terms of the agreement really line up to have the best program we can have for our people and have a higher level of consistency and predictability in the model. So being able to have a significant immediate cost reduction right now where we get a majority of even the shortfall we had this year back as we go into next year and be able to put a lower cooling level that's the $500,000 level, that's really good timing, obviously, against the backdrop of a sudden elevated claim level.

Mark and on your question, I was going to answer the question about pricing and a little bit more focus on unprofitable clients. I think generally speaking, as we're increasing our pricing, the curve is a little bit higher than it was. So you're not just raising the pricing equally across the board. We're taking actions to make sure that we're doing everything we can to retain our profitable clients. And so we think that the ones that do terminate are likely to be lower profitability than the ones that stay.

Our next question comes from Tobey Sommer with Truist.

I was hoping if you could provide a little bit more detail on the pricing. On the prior earnings call, you said you've done some work and we're really encouraged by the opportunity being more significant than you had mentioned. And I just want to understand that to also provide color in a better grasp on how you can offset the incremental operating and service expenses associated with the new platform.

Thanks for the question, Tobey. Clarifying for anybody who's listening, you're referring to HRScale pricing. And yes. So if you think about what we are offering, obviously, we've got a lot of services that are similar to what we offer today. There are some new services that get unlocked or made more advanced because of new functionality available in the Workday platform and the opportunity for strategic services around those things as well as keeping the platform up to date and current. So we've taken all those things into consideration in our pricing. There's a significant uplift in what I would call the base price, if you will, or the list price of the product. And what we expect to be happening over this first 6 to 12 months, we're thinking about the pricing in terms of kind of 3 stages, if you will. So there's -- from a new client perspective, there's a beta stage and then there's an early adopter stage and then we'll be into the pure growth stage. And so we do plan to give some fairly significant discounts to the first customers that are willing to sign a contract and come on to the platform. And then we will reduce those discounts as we go through time and get to a growth stage. We still anticipate that even at those significant discounts, it's higher than what we historically have charged in HR360 for similar-sized clients. But I think one thing that's important to point out that I think Paul was alluding to in his script, having the 2 price points for these 2 products is really beneficial and actually supports the pricing of HR360 from what we're seeing over the course of our discussions and sales in 2025. So we see these as being complementary and supportive of each other at the different price points.

You mentioned being able to hit your target growth and profit metrics even if the SMB labor market is kind of sluggish. Like do you think you can hit the historical double-digit worksite employee growth even if SME job growth is flat versus, I think the long trend within your -- long-term trend within your customer base is around 5% per annum.

Yes, Tobey, that is exactly what I said in my script. And I'm just reflecting what I see going on when you have a new offering where you've got over 40,000 businesses that have over 25 million employees. And when you sell them, the average size is 400 to 700 employees instead of your average size client being 25 to 30 or 30 employees. This is a significant catalyst for growth. And I think the timing of it is particularly exciting because of what we've seen in the small business -- small- to medium-sized business labor market. And we've seen now this is third year in a row with very low single-digit net gain within the client base. I would have never dreamt that. And we're on the front end of AI. So I see us being in a unique position in our space by having such a rifle-shot target, perfect-fit solution for this highly underserved and highly desirable client, being able to walk in the door with 2 of the leading companies in the HR space coming to the table, having made an incredible commitment and investment to make a hand-in-glove fit solution for these target accounts. And when you look at the whole pricing picture, where you're bringing so many different elements together and able for them to do this at a price that's never been able to do before, both upfront cost and ongoing cost, it is an engine for growth, and we're very excited about it. It's not time yet to convert that into the sales per salesperson per month and how the size, all that kind of stuff. But we're on that way now. We're on the way of keeping track of everything we're doing on every call and how it goes and what -- over this next year or so, I think we're going to see some exciting things where we can give you some better picture of the future.

Our next question comes from Andrew Polkowitz with JPMorgan.

Congrats again on the launch of HRScale. I appreciate the color that you guys gave on the investment over year 1 and year 2. You also mentioned that you expect something to be effective, call it, low $30 million in investment in 2026. So that gets us pretty close to the aggregate $150 million you called out at the start of the process. I was just curious now that we're kind of in the early days of go-live, is that $150 million aggregate investment still the right framework? Or is there a different way we should be thinking about the cost of the go-live?

Andrew, thanks for the question. I would like to clarify one thing. When we talk about the operating expense impact of HRScale for next year, we're including ongoing operating expenses that have revenue offsetting them a little bit of probably some inefficiencies in the first year. But obviously, I would consider those to be operating expenses and not necessarily investment. The level of investment is down significantly lower than that. And I think you have to think about, as Paul alluded to -- we still have some months to go before we get to the first go-live and the stabilization period. So our investment kind of continues through that period, and then it's going to fall off relatively significantly and just have kind of a normal product road map associated with it. Now is that number -- we don't have a better number right now than $10 million a year going forward. Obviously, what we're looking at when we think about the product road map is the available resources across a lot of different projects and ideas, things that people want to do with HR360, things that people want to do with AI and other potential projects that are out there. And so this is a resource allocation decision that gets made there. So as we're thinking about the 3-year plan, as we're thinking about the budget for 2026, we'll be making some decisions in that regard. But obviously, a little bit fluid when we're trying to capture the opportunity, but also balance the level of investment with needs in other parts of the company.

Got it. That clarification is super helpful. Just for my quick follow-up, Paul, you mentioned that you guys consider for your midterm framework uncertainty about AI and employment. And just understanding that at this stage, no one really knows the full impact, I'm curious how you just think about that over the midterm relative to your kind of prior 3-year plan that you called out in the past.

Sure. It's interesting because we haven't seen any of it yet where the malaise, so to speak, in the hiring front is rooted in specific AI job replacement. We haven't seen that yet. So everything we've seen so far is really more about the big picture of where things have been and some of the uncertainty and -- et cetera, that has caused a delay in decision-making, that type of thing. But I believe as we go forward, we want to be at least prepared for that. And that's why I think it makes sense that everybody should be looking at other growth engines. I just think the timing of ours being in place right now is really sweet.

If I can add to that a little bit, I would say -- when you think about what's going on in the small business environment today, to the extent that they're using AI tools, it's more likely to make them more effective right now as compared to more efficient. Efficiency could come certainly at some point in the future. But the other thing -- other point is as larger companies have potential efficiency gains and potentially reduce headcount, historically, that has led to a lot of entrepreneurship, people that are really smart. And I think about whether it's the dot-com boom or other times in the past that people leaving large companies decide to start small companies. And so I do think there's a possibility as we go through time that new business creation could provide some level of buffer against the employment efficiency.

We have reached the end of the question-and-answer session. And I will now turn the call over to Mr. Sarvadi for closing remarks.

Well, once again, I want to thank everyone for participating today, and we are really excited about both the UnitedHealthcare contract and the rebound that we're expecting in 2026 and also the exciting news about HRScale and how we're off to the races on that front. So thanks for participating today, and we look forward to further discussion with each of you. Thank you.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.