Q3 2024 TriNet Group Inc Earnings Call
Good morning, and welcome to the Tri net third quarter 2024 earnings Conference call.
Speaker Change: All participants will be listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press.
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Speaker Change: Please note. This event is being recorded I would now like to turn the conference over to Alex Bauer head of Investor Relations. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Thank you operator, good morning, My name is Alex Bauer and I'm trying to its head of Investor Relations. Thank you for joining us and welcome to try and it's 2024 third quarter conference call.
I'm joined today by our President and CEO, Mike Simonds, and our CFO Kelly Tim Minnelli.
Speaker Change: Before we begin I would like to address our use of forward looking statements and non-GAAP financial measures.
Speaker Change: Please note that today's discussion will include our 'twenty 'twenty four fourth quarter and full year financial outlook and other statements that are not historical in nature are predictive in nature or depend upon or refer to future events or conditions, such as our expectations estimates predictions strategies beliefs or other statements that might be.
Speaker Change: <unk> forward looking.
Speaker Change: These forward looking statements are based on management's current expectations and assumptions and are inherently subject to risks uncertainties and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future.
Speaker Change: Except as may be required by law, we do not undertake to update any of these statements in light of new information future events or otherwise.
We encourage you to review our most recent public filings with the S. E C, including our 10-K and 10-Q filings for a more detailed discussion of the risks uncertainties and changes in circumstances that may affect our future results or the market price for stock.
Speaker Change: In addition, our discussion today will include non-GAAP financial measures, including our forward looking guidance for adjusted net income per diluted share.
Speaker Change: For reconciliations of our non-GAAP financial measures to our GAAP financial results. Please see our earnings release, 10-Q filings or 10-K filing which are available on our website or through the SEC website with that I'll turn the call over to Mike.
Mike: Good morning, Thank you Alex and my Thanks to all of you for joining us on today's call.
Mike: Well there are a number of very positive things happening across our business increases in health care costs adversely impacted our overall financial performance this quarter and so I'd like to start my comments there.
Mike: As context throughout 'twenty 'twenty four the market has experienced a significant and broad based increase in health care costs.
Mike: And looking at our own experience.
Similar to what many in the market are reporting the overall number of claims is largely consistent with our expectations. However, the average cost per claim and driven by severity and overall inflation is higher than what we assumed in our pricing.
Mike: Over the last several months, we've taken a number of actions to both improve our results in the short term and importantly, enhance our capabilities moving forward.
Mike: First earlier this year, we broke out the insurance services group into a singularly focused team reporting to me and brought in a strong and experienced leader in Tim Nimmer to headed up.
Mike: Tim's background includes chief actuary and head of pricing and underwriting roles at two of the largest global firms and healthcare are ready Tim has strengthened our insurance services team with the addition of new actuarial talent.
Mike: Second we consolidated our data and analytics from around trying to get into a single team to ensure our performance data is strong and consistent throughout the customer lifecycle and that our new business and renewal pricing processes are disciplined and supported by data that is high quality.
And visible.
Mike: Third with strong talent improve data and a more disciplined process in place, we thoughtfully increased our health care pricing over the past several months, assuming a continued elevated trend in 2020 five.
Mike: Utilizing our new rate level, we released our October 1st renewals for the largest cohort of our customers approximately 39% of our annualized health care fees.
Mike: With strong execution across our insurance services customer relationship and service delivery teams I'm pleased to say that the renewal went very well.
Mike: We achieved the targeted double digit increases with strong retention of our customers.
Mike: In fact, we are now forecasting record customer retention for full year 'twenty 'twenty four.
Mike: We are currently engaged on our January 1st renewals, which represent another 29% of our health care fees.
Mike: Again pricing here will reflect current elevated health care costs with no relief assumed in 'twenty twenty-five to trend.
Mike: Given the fact, we will have repriced more than two thirds of our health care fee based by the start of next year and assuming 20 twenty-five health care costs continued to grow at the current elevated rate, we expect our 'twenty twenty-five insurance cost ratio to stabilize at or near our.
Current full year 'twenty 'twenty four outlook.
Mike: Looking out to the mid and long term I believe our accelerated investment in risk management talent tools and processes will reduce the volatility of our insurance cost ratio, while maximizing profitable growth.
Mike: We believe the earnings power of our business with a stable annual insurance cost ratio in our long term range of 87% to 90% is considerable and this management team is committed to achieving it even if it means trading off customer and ws he growth in the short term.
Mike: Turning now to a discussion of results outside of our ICR.
Mike: We should start with the broader environment for F N B's in the verticals we target.
Mike: Slower economic growth higher interest rates and a generally cautious outlook resulted in a third quarter of no net hiring amongst our customer base.
Mike: While the headline jobs reports have been generally positive from the B L. S over the last year, our experience has differed materially.
Mike: Growth in several sectors, including government construction in health care are fueling aggregate headlines, while our core verticals of technology life Sciences financial services and other professional services have been muted.
It's worth noting that the long term average cie in our targeted verticals is 8% to 12% versus flat here and three Q.
Given that Cie growth comes with very low acquisition and incremental service costs. The impact of historically low C. I E is meaningful to both top and bottom line.
Mike: <unk>.
Mike: Like with a stable I see are in our targeted range, even a partial reversion overtime to our historical C. I E represents significant earnings upside in future periods and is another reason we believe our business is such a good one.
Mike: However, given we find ourselves in this low growth environment, we are exercising particular discipline with respect to our expenditures.
Mike: Expenses declined 1% in the quarter as we focused on process and technology improvements.
Mike: I'm quite encouraged by the momentum we're building on these fronts, making investments that drive efficiency, while improving the customer experience and.
Mike: And frankly, we have much more potential to improve creating value for our customers colleagues and shareholders.
Recognizing this potential will require making clear and disciplined choices and our team continues to work through these methodically.
Mike: And while there is more we will share with fourth quarter results. A few things are clear first our core PEO business operates in a very attractive market uniquely blending services and strong technology to deliver exceptional value to F. N. B's you can expect us to sharpen our focus on.
Mike: Our core business, playing only where we believe we can win a leading share of our customers.
Mike: Second.
Mike: The current health care environment is a short term headwind, but we firmly believe that the growing cost and complexity of employee benefits only strengthens demand for what we do.
Mike: Look for us to bet on benefits investing to extend our risk management offering and customer experience.
Mike: I firmly believe we can deliver greater predictability in ICR, while creating separation from PEO competitors, who see insurance as simply a pass through.
Mike: Benefits as our targeted S. M b customers number one concern and we will address it in a differentiated way.
Mike: Finally, we have the opportunity to accelerate our investment in technology and talent to improve our platform and service delivery, while growing overall expenses at a considerably slower rate than revenue.
Like I said, there's considerable work still to do but I'm excited by the engagement of our broader leadership team and look forward to updating you on the outcome of our work on our four Q earnings call.
Mike: In summary.
Mike: We are taking the challenge of health care cost trend head on.
Mike: Both through our pricing and risk management actions.
Mike: We're managing our expenses aggressively in the current low growth environment within our customer base.
Mike: And importantly, we have our eyes on the future and the steps we will take to create a more focused more differentiated more efficient company capable of sustainable profitable growth.
Ken: With that I'll pass the call to Kelly for her financial review Ken.
Mike: <unk>.
Kelly: Thank you, Mike our third quarter results reflect a continuation of many of the trends we've experienced in 'twenty 'twenty four.
Speaker Change: We've accelerated actions across our business in response to this challenging environment and doing so we're leveraging the strength of our business model, we adjusted pricing over the last several months and delivered sales roughly in line with our prior year, which were up 40% over the levels achieved in Q3 2022.
We pass through this revised pricing to the largest cohort of our customer base on October 1st and even so we're now forecasting record retention.
Unfortunately, we saw no meaningful contribution from customer hiring and yet we delivered revenue in line with the lower end of our guidance range.
Speaker Change: We are operating in one of the most challenging health cost environments in years as provider costs claims severity and pharmaceutical costs all accelerated versus recent trends.
Speaker Change: And our historical experience, which outpaced our 2023 in early 'twenty 'twenty four pricing.
As a result of these trends our insurance cost ratio for the third quarter was towards the higher end of our ICR range and our full year forecast was also adjusted to reflect continuing higher cost.
Speaker Change: Given our pricing actions our initial view on 2025 reflects a stabilizing insurance cost ratio similar to our current full year expectation for 'twenty 'twenty four.
Speaker Change: We will refine this estimate as we get through our peak selling and renewal season.
Speaker Change: We exercise prudent expense management, and SAR expenses decline year over year.
Speaker Change: We are actively managing our resources across the business balancing cost savings with reinvestment in key areas.
We retain the flexibility to reinvest in our business and return capital to shareholders.
Speaker Change: To sum up the quarter, we took expedient action to address elevated help cost trends and are successfully passing through appropriate rate increases and are still on track for record retention for the year.
Speaker Change: Now, let's turn to our third quarter financial performance in more detail.
Speaker Change: In the quarter total revenues grew 1%.
Speaker Change: We finished the third quarter with approximately 356000 worksite employees.
Speaker Change: Up 6% year over year, and approximately 334000 co employed that'd be lessees down 1% year over year.
In the quarter client retention was strong and outperformed our forecast as our investments in customer service continued to pay off.
Tension is now on pace to exceed our best historical annual retention rate.
Speaker Change: I'm, particularly pleased with tests, given higher benefit renewals being passed through to help offset the higher claims experience.
Speaker Change: Consistent with last quarter sales were again flat compared to the prior year.
Speaker Change: This was a positive outcome and reflected a significant increase over 2022 levels.
Speaker Change: Finally, see I E or customer hiring was just barely positive in the quarter.
Speaker Change: The modest positive C. I E experienced in July and August was almost completely offset by workforce reductions in September with each of our verticals declining during the month of September.
Speaker Change: Now, let's drill down a little.
Speaker Change: Our professional service revenue was flat to prior year.
Speaker Change: Last year, we benefited from a one time item related to a payment acceleration and cessation of broker relationship on our <unk> platform.
Speaker Change: Without that item our growth would have been 2%.
Speaker Change: Insurance revenue grew 2% year over year, consistent with our first half trends health care participation rates within our complaint at USC base were slightly lower and were partially offset by annual inflationary rate increases.
Speaker Change: Insurance costs grew 9% year over year insurance cost growth again reflected higher health care and pharmacy costs.
Speaker Change: Taken all together this brought our insurance cost ratio to 90% in line with the bottom half of third quarter guidance range.
Speaker Change: Now, let's turn to operating expenses in the area, we've been very focused on and quite a bright spot for our company.
Speaker Change: We continued managing the business in a prudent and disciplined fashion, resulting in a 1% year over year decline in operating expenses, we are proactively reducing our back office cost, while making targeted investments in growth and automation.
Speaker Change: We believe robust expense management, and prioritization will be critical to free up resources to reinvest in our business, while delivering strong margins and attractive cash flows interest income on operating cash and investments offset our third quarter interest expense in the quarter, our average cash balance.
Speaker Change: Costs were lower year over year in part due to our cumulative stock repurchase as well as dividend payments.
Speaker Change: Taking this all together, we reported 89 cents and GAAP earnings per diluted share and $1 17 of adjusted net income per diluted share both within but below the midpoint of our guidance ranges.
Speaker Change: Regarding cash and capital we had another solid quarter of cash generation to support our business and capital allocation.
Speaker Change: In the quarter, we delivered $109 million at the adjusted EBITDA. We also generated $213 million of corporate operating cash flows year to date through the end of the quarter.
Speaker Change: By the end of next week, we will have returned $191 million to investors. So far this year.
Speaker Change: In the third quarter, we repurchased 200000 shares for a year to date total of approximately 1.5 million shares and by the end of October we expect to have paid $37 million in dividends.
Speaker Change: Our capital return priorities remain unchanged as we generate cash throughout the year, we will continue to deliver value to our shareholders by investing in our business for growth and using our cash flows to fund dividends and share repurchases in line with our financial policy.
Speaker Change: Now, let's turn to our fourth quarter and full year outlook.
Speaker Change: For the fourth quarter, we expect total revenues to be down 1% to up 2% and professional service revenues to be down 8% to down 5%.
Speaker Change: Our underlying assumptions in support of our revenue guidance include our expectation for modest decline in new sales.
Speaker Change: Continued strong customer retention and a limited contribution from C. I E.
Speaker Change: Turning to our insurance cost ratio or ICR for the fourth quarter. We are forecasting an ICR of 96, 5% to 93.5% our fourth quarter ICR performance is our seasonally highest quarter each year historically, we see a sequential Q3 to Q4 step up.
Speaker Change: And ICR of anywhere from two to five points.
Speaker Change: One key driver behind the step up is the annual reset of our pooling limit deductibles, which occurred on October 1st.
Effective 10, one are pooling coverage resets for claims that had previously hit the 500000 dollar per member cap for enrolled population.
Speaker Change: In the fourth quarter, we are back on risk for any of those claims that are continuing.
Speaker Change: This results in a forecasted GAAP net income per diluted share in the range of negative <unk> 19 cents to positive 31 cents and an adjusted net income per diluted share in the range of six cents to 57 sets turning to our full year guidance, given our third quarter actual performance and our forecasted.
Speaker Change: Fourth quarter performance, we are lowering and tightening our full year guidance.
For revenues given our current and projected volumes are range reflects growth of 1% to 2% for total revenues and flat to up 1% for professional service revenues.
Speaker Change: Given our fourth quarter forecast for insurance cost performance, we are tightening and raising our insurance cost ratio forecast to 90.3% to 89, 6%.
Speaker Change: With respect to our earnings guidance, we are bracketing, our full year guidance around the previous bottom end of our range, reflecting the impact from our revised insurance cost ratio forecast.
Speaker Change: Offset by the expense efficiencies, we have been focusing on we now expect GAAP net income per diluted share in the range of $3 70 to $4.20.
Speaker Change: And adjusted net income per diluted share in the range of $4.95 to $5.45.
Speaker Change: So in summary, we are operating in a difficult health cost environment and are reacting quickly.
Speaker Change: By leveraging our team and improved processes, we are pricing new business and our renewals to appropriately reflect the current unexpected health cost environment.
Speaker Change: As a result of the actions, we're taking and have already taken our initial view on our 'twenty twenty-five ICR is similar to 'twenty 'twenty four.
Importantly, even as we pass through pricing reflective of the current environment, our customers are choosing to stay with us in record numbers.
Speaker Change: We remain prudent managers of our shareholder capital keeping expense growth low while investing in our business and returning capital to shareholders with that let's open up the call for questions operator.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you'd like to withdraw. Your question. Please press Star then two.
Speaker Change: Once again it is star then one to ask a question.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from <unk>.
Andrew <unk>: Andrew <unk> with JP Morgan. Please go ahead.
Andrew <unk>: Hey, good morning, everyone.
Andrew <unk>: I wanted to ask a question Mike you made a comment in the call about commitment to achieving the 87% to 98% long term ICR range and you're committed to that even if you have to trade off some ws do you agree with I just wanted to start by asking can you speak to like how material you see that being or like how much of the book potential.
Andrew <unk>: What has to be cleaned up to achieve that.
Mike: Yes, Thanks, Andrew I really appreciate the question and.
Mike: Certainly our first and best data point that we have is the October 1st renewals and.
Mike: If you take a step back we have made a pretty significant set of changes and investments in our risk management capability.
Mike: The insurance services group.
Mike: Operating income.
He's got a great background, particularly around health care, he's already made some ads on the actuarial side Joe.
Joe: Yes, I'd say, we've got a material.
Joe: Sort of improvement in our risk management.
Joe: The ability to understand what we're seeing in the data.
We look forward and our view I would say is that the elevated <unk>.
Joe: Trend, we're seeing today isn't going to abate and 25 and so we built those double digit increases in October 1st renewals and it's Kelly went through.
Joe: We encourage with the retention of that cohort.
Our CRM.
Joe: CRM team and our service delivery teams are doing a very very good job. We've got our eye on January one similar to probably slightly higher renewals coming down so.
Joe: I think it is one of these really good parts of the business model is that while benefits is really important in health care is important inside of benefits what we do for customers is much broader.
Joe: And that service proposition I think lends itself to a much stickier situation. So I think that's what the physicians as well our early read here is that it's actually quite good, particularly for our existing customer base, they've experienced tri net and that puts us in good stead.
Joe: The new business front.
Joe: Made the same adjustments on our perspective of pricing.
Joe: We like the pipeline, but demand for the product I think we are seeing a bit of pressure on conversion rates and I think thats a little bit the environment.
Joe: Our F&B prospects are a little cautious on hiring and they're a little cautious to make major changes to their HR.
Joe: Benefits setups as well.
Joe: So thats, probably the more sensitive area as new sales growth I feel really good and confident about the existing base.
Speaker Change: Okay. That's super helpful. I appreciate those comments I just add one quick follow up I know you guys are growing over pretty.
Speaker Change: Again sales growth from last year, so the 40% on top of that for Ya keeps on it too.
Speaker Change: It seems really strong just I'm curious as you're looking to next year I know you talked about making investments in distribution last quarter. I was curious if you can give any more color just on those investments and multichannel distribution.
Sure Yeah. Thanks.
Speaker Change: And like I mentioned the pipeline if you look at the top.
Speaker Change: Pipeline for January one same day year over year, we've got nice growth double digits, 20% was in terms of volume that's really encouraging to us we've grown.
Speaker Change: Both total and tenured reps five.
About 14% year over year, which is encouraging I would say one of our big focus areas.
To that.
Speaker Change: We brought a new chief revenue officer in shade Treadway.
And in a couple of months deep deep experience in building strong sales culture.
Speaker Change: There's wallet multichannel distribution and employee benefits brokers. So he and the team are working hard on the steps we can take.
Speaker Change: Drive productivity through this bigger sales force a bit.
Speaker Change: Part of that will be driving retention and ultimately higher.
Sales levels on those more experienced more capable reps. The second piece of that is the brokerage channel, which has actually been a good add to our sales here in 2024, but as we sort of look out into the SMB market.
Speaker Change: Right.
Speaker Change: All of Smbs that offer health care, which is a little bit north of 70% under 100 employees about 90% of them get benefits through employee benefits brokers and so building a sustainable approach to that channel is something we're pretty.
Speaker Change: Pretty excited about.
Speaker Change: Alright, Thank you very much I appreciate the color.
Speaker Change: Thanks, Andrew.
Speaker Change: The next question comes from Kyle Peterson with Needham. Please go ahead.
Kyle Peterson: Okay great.
Kyle Peterson: Good morning, guys and thanks for taking the questions.
Kyle Peterson: And wanted to start off.
The <unk> guide for <unk>.
Speaker Change: Special servicer.
<unk> I guess, that's calling for a pretty decent sized step down both.
Year on year and sequentially. So if you guys could provide any more color on.
Speaker Change: How much of that is maybe due to some of these workforce reductions in subjects where clients had in September.
Speaker Change: Reverse any like.
Whether it's just macro or other drags or just any more color.
Speaker Change: Some of those headwinds in the services segment would be very helpful.
Yeah, Tayo, it's Kelly good morning, all.
Speaker Change: I'll be happy to take that one when it.
Speaker Change: First and foremost point that you need to remember last year, we had a little bit more of a one timer we.
We had about $8 million or so.
Speaker Change: So revenue recognition that we got in the fourth quarter that just does not work.
Speaker Change: Year.
Speaker Change: Secondly, we are.
Speaker Change: Assuming slower hiring.
Speaker Change: We're looking at our WMC pipeline, we're just assuming that we're not really going to get an uptick in hiring in 'twenty 'twenty four is going to look a lot like 2023 from that perspective.
Speaker Change: So it's really just those two things.
Speaker Change: Sequential perspective.
Speaker Change: It's just down down a couple of items.
Speaker Change: And about flat with last year.
Speaker Change: Okay.
Speaker Change: That is helpful and then.
Speaker Change: Just on timing.
Speaker Change: With your.
Speaker Change: In your introductory pricing I think you guys said that you guys have more than two thirds of the book re priced now.
Speaker Change: Could you just I guess remind us.
Speaker Change: What timeframe, we should think about.
Speaker Change: How does the roughly last third is is that you know over.
Speaker Change: Over the next one to two quarters.
Speaker Change: How should we think about when.
Speaker Change: The rest of the book is expected to get repriced based on renewal cycles.
Speaker Change: Yes.
Speaker Change: Just just to clarify part of your intro there by January one we'll have a little over two thirds of the book priced so the other renewals of the smaller cohorts are at Q1.
Speaker Change: The fourth quarter for one renewal and then July July July is the smallest april's a little bit larger.
Speaker Change: Okay.
Speaker Change: Sounds good.
Speaker Change: So I guess you guys didn't reprice, so July would still need to reprice that even though it's small it hasn't it didn't reprice this past year.
Speaker Change: Alright, Okay from a cycle perspective, we have to release, our pricing to our customers about 90 days in advance and so when you think back to <unk> earlier this year.
Speaker Change: We did make some modest changes to orange life pricing as we were looking at and implementing it but given that change healthcare reach and.
As of March the data was still a little bit murky, then and so we did take some pricing on the margin as we were evaluating data that's coming in in January and February.
Speaker Change: It really more of just aided by that.
But we will have to price it at an appropriate level just given the trends that we're seeing for severity perspective.
Speaker Change: Yeah.
Speaker Change: Okay. Thank you very much for taking my questions.
Speaker Change: Thanks Carl.
Speaker Change: The next question comes from Kevin Mcveigh with UBS. Please go ahead.
Kevin Mcveigh: Thank you so much and good morning.
Kevin Mcveigh: Hey.
Kevin Mcveigh: Any sense I mean, it seems like particularly the kind of.
Kevin Mcveigh: He seems somewhat abrupt just given the fact that kind of where we are in that just given I guess the percentage is.
Kevin Mcveigh: Is that right or is there anything I mean, I know certain verticals have been kind of weak, but they've been weak for.
Kevin Mcveigh: A while just any thoughts Mike as to what kind of.
Kevin Mcveigh: Was it the costs that really drove it just you know.
Kevin Mcveigh: Any thoughts because it's obviously a pretty decent deceleration.
Speaker Change: Yeah No I.
Kevin Mcveigh: I appreciate that.
Speaker Change: The question and good morning, Kevin.
Speaker Change: I guess I'll take one step back and say.
Speaker Change: In general really do like the verticals that we target and if you take a very broad 10, 12 15 year perspective.
Speaker Change: Verticals.
Speaker Change: Even an average growth rate it sort of 8% to 12%.
Speaker Change: And so I think your question is a very good one about like whats happening in year, and then you take one guy.
Speaker Change: Step back from that and it's like compared to a historical average.
Speaker Change: Pretty sizable impact.
Speaker Change: And for reasons you understand Cie comes in very low acquisition cost and had pretty low incremental servicing cost so the impact of the.
Speaker Change: Flat Cie like we're experiencing today versus the historical norm of 8% to 12% a pretty material impact on top line bottom line.
As well and like we talked about in the air.
Speaker Change: Eric.
Speaker Change: Remarks sort of seems like.
Speaker Change: The U S economy is actually.
Speaker Change: Pretty robust permanent appointment.
Speaker Change: But when you go down one click youre seeing things like manufacturing.
Speaker Change: Government health care.
Speaker Change: Certainly the costs are coming from somewhere and part of that is the provider system staffing backup.
Speaker Change: Our targeted verticals, we're just not seeing.
That growth.
Speaker Change: Although we did a micro question of what we saw even in the quarter.
Speaker Change: A little bit of net hiring in the first couple of months in the quarter and then in the last month actually saw it kind of gave that all back some.
Speaker Change: Some seasonal hiring in terms that are in over the summer temporary somehow.
Speaker Change: A little bit of a bigger impact prior or so.
Speaker Change: We think it's prudent to have a conservative assumption going forward in the short term on Cie, but again like the verticals.
Speaker Change: Sort of earnings power in the customer base, even with a partial reversion back to historical margins.
Speaker Change: It's pretty marks.
Speaker Change: Got it so it wasn't any client loss or anything like that right I mean that wouldn't be factored into this was just kind of purely employee driven.
Speaker Change: Yeah, you got it exactly I mean at the client level.
Speaker Change: As far back as we were able to pull the data this is going to be a record client retention year for us.
Speaker Change: Tibet <unk>.
Speaker Change: But yes, just within the client base.
Speaker Change: And actually to be honest, but the lay off levels are pretty good.
Speaker Change: Not too too far off from what we would have seen a couple of years ago. It's just that the new hires are just not coming in at the pace that we would like to see I think a lot of our high growth verticals there.
Speaker Change: We tilted the balance here, a little bit towards margin expansion and a lower rate of growth and so they're being cautious on the new hires right.
Speaker Change: That's helpful. Thank you.
Speaker Change: Thanks, Kevin.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: The next question comes from Andrew Nicholas with William Blair. Please go ahead.
Andrew Nicholas: Hi, Good morning, Thank you for taking my questions.
Andrew Nicholas: I wanted to circle back to the commentary regarding kind of balancing Wi Fi growth.
Andrew Nicholas: In ICR and pair that with.
Andrew Nicholas: The preliminary 2025 outlook on ICR, I guess I'm trying to understand.
Andrew Nicholas: Given our renewals seem to have gone quite well in terms of getting your targeted price increases retention is good.
Andrew Nicholas: Why is it then that you wouldn't see an uptick.
In the ICR.
Andrew Nicholas: <unk> is it a function of the fact that.
Third of the book will not have been repriced to start the year is it maybe you didn't you weren't as aggressive with price increases.
Andrew Nicholas:
Andrew Nicholas: Of late to keep retention high I'm, just trying to understand what the different dynamics, there because I would think if you're able to raise price and.
Andrew Nicholas: Maintain clients on the book that maybe you see a bit better outlook next year compared to the 90% that youre looking at in 'twenty four.
Speaker Change: Sure maybe I'll start and then Kelly please.
Speaker Change: Ben Thanks for the question Andrew.
Speaker Change: No you hit on it.
Speaker Change: So a little bit, but just again I think it's worth pausing for a second.
Speaker Change: It's an industry wide phenomenon that were experiencing most players that have exposure to help really one shot a year.
Speaker Change: Particularly in the F&B market to make adjustments.
Speaker Change: This cohort by cohort.
Speaker Change: Broach is a really attractive elements of the way we get to market.
Speaker Change: I tried that and Youre.
Speaker Change: Right in terms of Okay. Why why wouldn't you have snap all the way to your long term ICR targets for full year 2020.
Speaker Change: The reality is like very much what you are saying you would have add to that.
Speaker Change: On January one the entire customer base prices to the level that we were anticipating.
Speaker Change: Claim trends.
Speaker Change: And so it will take a bit of time to work through that other.
Speaker Change: Third of the book.
Speaker Change: In the year as sort of a key contributor and then theres a little bit in the ICR around a worker's comp line is in there as well favorable, particularly favorable this year with some one time.
Speaker Change: Reserve adjustments.
Speaker Change: Won't recur next year. So there's a couple of moving pieces, but again as we worked through fourth quarter as we see experience here in the first quarter. That's all great data that we can put in and actually put into pricing what Kelly said 90 days later.
Speaker Change: Kelly anything to you that I think he got the bulk of it there and good job on the reminder, on workers' comp too because we're not planning on that recurring next year.
Speaker Change: That's very helpful. Thank you and maybe as a follow up to that discussion.
Speaker Change: Understanding that the macro is incredibly difficult to predict and in health care utilization over any short term time frame can be lumpy I mean, how do you feel about it.
Speaker Change: The conservatism of.
Speaker Change: Your outlook for the fourth quarter.
Speaker Change:
Speaker Change: What are you assuming or what do we need.
Speaker Change: To have happened or change from kind of year to date levels on the claims front too to be outside or above that range just any thoughts on the conservatism of the outlook you've provided thank you.
Speaker Change: Yeah, Andrew I'll be happy to start and then I'll try it Mike if he has any other thoughts as we're looking at the fourth quarter.
Speaker Change: That's really our best estimate on the range.
Our fourth quarter has our pulling resets Mitch one of the reasons for the experienced this year really dealt with severity and number of high cost claims is materially up year over year, and so with that Paul and reset it does create a little bit more pressure in the fourth quarter then.
Speaker Change: We would see from normal seasonality are so.
Speaker Change: What would have to be right for it to not.
Speaker Change: What would we have to see different.
Speaker Change: <unk>.
Speaker Change: It's a pretty wide range at three points, it's really what I would say.
Speaker Change: Yeah.
Speaker Change: Got it.
Okay. That's good thanks, Andrew.
Speaker Change: The next question comes from Jared Levine with TD Cowen. Please go ahead.
Yeah.
Thank you.
Jared Levine: Double click in terms of the sales head count growth previously you were talking about 20% growth for this fall selling season, but can you just discuss kind of what.
And youre not getting to about 20% growth target an updated thoughts on sales headcount growth here over the near term.
Speaker Change: Yes, Thanks, Jared we definitely talked about that 20% I don't think theres, a theres a lot of magic that sort of being in the.
Jared Levine: Percent range other than to say there's really.
Jared Levine: I'm pleased with the quality of the folks that we brought on I think actually we've talked about this.
Jared Levine: Productivity lever for us is becoming increasingly important I feel like the pipeline is robust.
Jared Levine: <unk> the market reasonably well.
Jared Levine: More tenured.
Jared Levine: More experienced.
Jared Levine: Sales reps in place to take advantage of that prospect pipeline as it comes through and drive a better conversion rate is I would say increasingly our focus going forward.
Speaker Change: Got it and then in terms of the bookings you did call out some impact in terms of the pipeline conversion. There what would you primarily attribute to that is that macro uncertainty is the elevated health costs are pricing that we're seeing there just any color there would be helpful. If I could sneak it more and more hereafter.
Speaker Change: Yeah sure.
Speaker Change: Just like you said I mean, the demand for what we do is very high again like very much 20% plus same day year over year as we look through championship season here for us and by the way and we've talked about this as well, but a lot of the short term pain of health care.
Speaker Change: <unk> is a long term tailwind for our business model and so we've got real work to do here to re price the book.
Speaker Change: But at the end of the day, the kinds of cost and the kinds of complexities facing small businesses as they are trying to offer.
Speaker Change: Competitive benefits is only getting tougher, which only drives the demand for what we do I think it is the cautionary decisioning lengthening the sales cycle is a key driver for us and the other piece you talked a little bit about this but we have actually made some pretty material changes.
Speaker Change: By breaking out the insurance services group, adding some considerable talent centralizing data and putting in more discipline I would say process.
Speaker Change: And at renewal.
Speaker Change: And so I think we're getting.
Speaker Change: Better at our risk management, we are going to price the risk and so yes, you heard it a little bit in my prepared remarks.
Speaker Change: Does every player adjust.
Speaker Change: As quickly and bring the same.
Speaker Change: Sort of level of risk management expertise I can't really speak to that but for us it's kind of prudent to assume there's going to be a little bit of a conversion rate pressure for that region.
Speaker Change: And then just lastly here real quickly in terms of the <unk> discussions around health enrollment in terms of those pricing discussions is it do you feel like it's setting up pretty similar here to how it's going and <unk>, where youre, maintaining so really healthy retention or any kind of differences that you're seeing in terms of these <unk> health enrollment discussions.
Speaker Change: Nothing that's emerging different at this point.
Speaker Change: We do expect pretty closely the major health.
Speaker Change: Carriers as they are sort of talking about the results and what they are seeing very much in line with what we're seeing.
A number of folks out.
Speaker Change: Would be competing within the market are working with carriers that are again seeing very seeing mix that we're seeing so it gets.
Speaker Change: Because it's a market wide phenomenon that gives us a little bit of extra confidence that the prices that we're seeing are not outsize relative to the market and we're not an outlier and Jeremy the thing I would add to that too is we do a price every individual customer to its risks.
Speaker Change: As best we see it based on a number of factors.
Speaker Change: So the dispersion of price increases does vary on a customer by customer basis, just depending on the risk. We usually do provide some pretty detailed claims information and so they understand the basis for the renewal.
Speaker Change: And really try to engage with our customers on anything that atg was well even in Italy to make sure that they can control their claims costs. So.
Speaker Change: That is part of the value that we bring to our customers to really help them manage what you know.
Speaker Change: Outside of salary one of the biggest cost.
Speaker Change: Miss.
Speaker Change: Got it thank you.
Speaker Change: Thanks, guys. The next.
Speaker Change: The next question comes from David Grossman with Stifel. Please go ahead.
Speaker Change: Thank you good morning.
David Grossman: I'm wondering if you could maybe help us understand.
David Grossman: What's the competitive dynamic.
David Grossman: Looks like in an environment like this particularly given.
David Grossman: How are the at risk PEO.
David Grossman: Kind of can perform relative to the PEO. So don't take risk is it.
David Grossman: In an environment that would.
David Grossman: Would typically puts you at a disadvantage would've put you at a disadvantage or do you think it really doesn't have much impact.
Given that.
David Grossman: A couple of your larger competitors are largely.
Passing through health care.
David Grossman: Yeah. Good morning, David It's Mike Thanks for the question.
David Grossman: At this point.
David Grossman: Yes, I don't know that Theres, a huge difference and where we are I would say on balance we do like the flexibility that being on risk.
David Grossman: Allows us Kelly just sort of highlighted the process that we go through that renewal similar approach is taken and evaluating prospects.
David Grossman: I am actually though excited about the potential here and try that over time, we've talked a little bit about the investments that we've made and insurance services and risk management.
David Grossman: Were materially better than we were at the start of the year I see a similar level of improvement that we can put in place over the coming quarters and I think the better we get at.
David Grossman: Understanding the risk that we're taking on being more consultative with our clients. Once we are on risk with them to help them manage that cost providing differentiated experience.
David Grossman: I do think over time, that's a capability that we can.
Ill and exploit for the benefit of our customers.
David Grossman: Kind of our ability to grow in a sustainable profitable way I don't have the datasets in front of me David today.
To be able to quantify for you.
David Grossman: Thanks, Mike.
David Grossman: But as I look out I'm pretty encouraged about the potential there.
David Grossman: Right.
David Grossman: Kelly I thought you said if I heard you right that you released your pricing.
David Grossman: 90 days in advance.
David Grossman: If I heard that correctly.
David Grossman: Does that imply that the pricing for the October 1st renewals.
Would have gone out.
David Grossman: Prior to the uptick in utilization.
David Grossman: <unk>.
David Grossman: I just wanted to make sure that I understood that comment in the <unk>.
David Grossman: Pact that may have.
Speaker Change: Yeah, no happy to answer that David Felipe.
Speaker Change: We had you know when I answered.
Speaker Change: Question.
Speaker Change: You know I mentioned sort of the <unk> from the change healthcare and we were getting more and more data as we were about to release those prices kind of at that.
Speaker Change: At the beginning of July.
Speaker Change: As we as we evaluated it we did see trends starting to elevate and so did quite true inappropriate double digit price increase.
Speaker Change: And we do think 2020 hindsight, that's adequate just based on the risk at the end of its well clients within that renewal cohort.
Speaker Change: And so does that imply that you would have a similar increase on January 1st cohort then as well.
Speaker Change: Uh huh.
Speaker Change: It is our expectation is similar and.
Speaker Change: And we are watching and having conversations with clients right now just.
Speaker Change: The realized level may come in slightly different because we assume like for like plans and there may be buy ups or write downs that could change that percentage, but it is in the ballpark of the same area.
Speaker Change: Right.
Speaker Change: And I'm.
Speaker Change: I'm, sorry, I missed.
Speaker Change: Some of your commentary about the fourth quarter professional services revenue I thought you said limited CIB contribution is there anything else that's impacting the year over year growth.
Speaker Change: Yeah do you have anyone David that I that I mentioned ways last year, we had.
Speaker Change: Somewhat of a one timer or $8 million of revenue recognition associated with <unk>.
Speaker Change: Certain seventies.
Speaker Change: And that's not recurring this year.
Speaker Change: Okay, I'm, sorry, I thought that was in the third quarter got it.
Speaker Change: Just lastly, I know workers' comp is the tailwind is diminishing throughout the industry can you give us a rough sense of how much of a margin headwind workers' comp will be in 2025.
Speaker Change: Well I was trying to call out some of the unusual items since they've come through.
Speaker Change: Go back and look at our disclosures just to make sure that.
Speaker Change: We can gather that up for you just based on what we've said publicly.
Speaker Change: Got it okay guys. Good luck, thanks very much.
Great. Thank you David.
Speaker Change: This.
Speaker Change: <unk> our question and answer session I would like to turn the conference back over to Michael Simons for any closing remarks.
Michael Simons: Thank you drew and I just want to quickly.
Michael Simons: Say to our shareholders that the best days.
We're trying to are ahead of us.
Michael Simons: You've heard it throughout our prepared remarks, and Q&A effective risk management is really important to me, we have and will continue to make the investments in this capability and even as we're tackling the challenges of health care head on.
We are taking necessary steps on the future to create a more focused more differentiated more efficient trying to one that I am really excited about and one that I think is very much capable of sustainable and profitable growth. So I appreciate the question but.
Michael Simons: I appreciate everyone that took the time to join US on the call today I look forward to engaging with many of you and Kelly and I do over the coming weeks and months and with that drew we can conclude today's call.
Speaker Change: Yes, Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
[music].
Speaker Change: Sure.
Speaker Change: [music].