Executive Summary / Key Takeaways

• Insperity is undergoing a strategic transformation, leveraging its new Workday-powered HRScale solution to target the underserved mid-market and drive future growth, with expectations to significantly increase mid-market sales and enhance client retention.
• The company is actively addressing elevated healthcare costs, a primary drag on recent profitability, through aggressive pricing adjustments, strategic plan design changes, and a new contract with UnitedHealthcare , including a reduced claims pooling level, aiming for a substantial earnings rebound in 2026.
• Despite a challenging macroeconomic environment and persistent high healthcare cost trends in 2025, Insperity's core PEO business (HR 360) demonstrated strong booked sales, increasing 45% in Q3 2025 year-over-year, and maintaining high client retention.
• Insperity's investment in AI tools, such as its proprietary Compass tool, is expected to drive operating efficiencies and improve service delivery, contributing to future operating leverage and margin expansion.
• The company anticipates recovering a majority of its 2025 earnings shortfall in 2026, driven by the combined impact of cost management, strategic pricing, and the rollout of HRScale, positioning it for a return to historical double-digit growth and profitability metrics.

The Evolution of HR Solutions: Insperity's Strategic Pivot

Insperity, Inc., founded in 1986 as Administaff, has long been a prominent provider of human resources (HR) and business solutions, primarily through its professional employer organization (PEO) services. The company's core offerings, now branded as Insperity HR 360 and Insperity HR 360 Select Edition, provide comprehensive HR functions, including payroll, benefits, workers' compensation, and compliance, supported by the cloud-based Insperity Premier™ platform. This foundational business has historically served small to medium-sized businesses, establishing Insperity as a key player in the HR outsourcing landscape.

The HR industry is currently experiencing significant shifts, including persistent labor market challenges for SMBs and the transformative impact of artificial intelligence. These broad trends necessitate innovation and strategic adaptation. Insperity's overarching strategy is to enhance its service portfolio and technological capabilities to meet evolving client needs and expand its total addressable market. This strategic evolution is particularly evident in its recent initiatives to optimize sales and service, and crucially, its landmark partnership with Workday .

Competitive Positioning and Market Dynamics

Insperity operates in a competitive HR outsourcing market, facing both direct and indirect rivals. Direct competitors include industry giants like Automatic Data Processing (ADP), Paychex (PAYX), and TriNet Group (TNET). Insperity differentiates itself through a highly personalized, service-oriented approach, emphasizing comprehensive HR support and compliance expertise tailored for SMBs. While ADP offers a broader range of solutions across enterprise sizes with advanced analytics, and Paychex excels in streamlined payroll and basic HR tools, Insperity's PEO model provides a unique value proposition for businesses seeking integrated, holistic HR management. TriNet, a direct PEO rival, also focuses on SMBs with technology-driven platforms.

Insperity's market positioning, particularly with its HR 360 solution, has fostered strong customer loyalty and retention. However, its smaller scale compared to ADP can lead to higher operational costs and potentially slower technological agility in certain areas. The company's strategic response to this competitive landscape involves leveraging its deep HR expertise and investing in differentiated technology to create a stronger competitive moat.

Technological Differentiation and Innovation: The HRScale Catalyst

Insperity's core technological differentiation lies in its cloud-based Insperity Premier™ platform, which underpins its comprehensive HR service offerings. This platform provides clients with integrated HR management, enhancing efficiency in tasks such as payroll, benefits administration, and performance tracking. The tangible benefits include streamlined administrative burdens, improved compliance, and direct access to HR expertise, allowing business leaders to focus on strategic priorities.

The most significant technological advancement and differentiator for Insperity is its strategic partnership with Workday , Inc., which has culminated in the development of Insperity HRScale. This joint solution combines Workday's Human Capital Management (HCM) technology with Insperity's extensive HR services, creating a uniquely comprehensive offering for the mid-market. HRScale targets companies with 150 to 5,000 employees, a segment that is often underserved by existing solutions. The stated goals of HRScale are to provide greater speed-to-value, lower upfront capital cost, reduced ongoing expense, and decreased complexity and implementation time compared to traditional alternatives. Management believes this solution has the potential to be competitively disruptive.

The development of HRScale has involved significant R&D, with Insperity committing an estimated $150 million investment, heavily weighted towards the first two years. Key milestones in 2025 included the successful launch of Insperity's corporate Workday platform in mid-March, described as "nearly flawless," which is foundational for the client instance. By October 1, 2025, the client tenant was completed for beta clients, and a target go-live date for beta clients is set for early 2026, with the first payroll expected in April 2026. This rapid development, achieved within the initial $120 million estimated investment for the first two years, demonstrates strong execution and cultural alignment between Insperity and Workday .

For investors, HRScale represents a critical growth catalyst. It is expected to significantly enhance Insperity's competitive moat by addressing a large, underserved market with a premium, scalable product. Market research has affirmed HRScale's "premium pricing potential compared to historical HR360 pricing for mid-market accounts," including upfront deployment and enablement fees, and ongoing monthly service and technology support fees that exceed initial expectations. This premium pricing, coupled with the ability to attract larger clients, is anticipated to contribute positively to future margins. Management projects that HRScale could potentially double Insperity's annual mid-market sales production and double the size of its mid-market business over a reasonable period, driving a substantial return on investment and enhancing client retention by offering a solution that scales with client growth.

Beyond HRScale, Insperity is also investing in AI initiatives to drive operational efficiencies. The company launched a proprietary AI tool called "Compass" for its service providers in 2025 and is developing AI capabilities for predictive analytics and prospect scoring. These initiatives aim to improve the efficiency, value, productivity, and quality of Insperity's services, ultimately contributing to greater operating leverage.

Financial Performance and Operational Details

Insperity's financial performance in 2025 has been significantly impacted by an unexpected surge in healthcare costs, despite solid underlying operational execution. For the third quarter ended September 30, 2025, revenues increased by 4% to $1.62 billion, driven by a 1% rise in average worksite employees (WSEEs) paid and a 3% increase in revenues per WSEE per month. However, gross profit for Q3 2025 decreased by 15% to $195 million, with gross profit per WSEE per month falling 39% to $208. This decline was primarily due to higher direct costs, specifically a 9.10% increase in benefits costs per covered employee, or $60 per WSEE per month, attributed to elevated inpatient, outpatient, and pharmacy trends, and increased large claim activity.

Year-to-date through September 30, 2025, revenues grew 4% to $5.14 billion, with average WSEEs paid increasing 1% and revenues per WSEE per month up 3%. Gross profit for the nine-month period decreased 13% to $728 million, and gross profit per WSEE per month declined 41% to $261. Benefits costs year-to-date increased 9% on a cost per covered employee basis. Operating expenses, however, showed disciplined management, decreasing 4% in Q3 2025 to $220 million and 1% year-to-date to $692 million. General and administrative expenses notably decreased by 15% in Q3 2025 and 8% year-to-date, partially offsetting the direct cost pressures.

The unexpected rise in healthcare claims costs, which management attributes to broader industry trends including increased utilization, pharmacy costs (like GLP-1s), and even the emerging use of AI tools by healthcare providers, has been the primary driver of an earnings shortfall in 2025. This issue is not unique to Insperity, with the industry-wide claim trend for 2025 expected to be 200 to 400 basis points higher than initial estimates.

Liquidity and Capital Resources

Insperity maintains a solid liquidity position. As of September 30, 2025, working capital stood at $172 million, an increase from $155 million at December 31, 2024. The company ended Q3 2025 with $120 million of adjusted cash and $280 million available under its $650 million revolving credit facility, which matures on June 30, 2027. Net cash used in operating activities for the first nine months of 2025 was $533 million, significantly impacted by the timing of client payments for payroll taxes and the distribution of $440 million in client employee retention tax credits received in Q4 2024. Despite these outflows, management believes current liquidity sources are adequate to meet both short-term and long-term capital needs.

Strategic Initiatives and Outlook

Insperity is executing a robust plan to address current challenges and capitalize on future opportunities, particularly aiming for a significant profitability rebound in 2026.

Addressing Healthcare Costs

The company has responded decisively to the elevated healthcare cost trends. It has strategically implemented higher pricing targets for both new and renewing business, a process that began earlier in 2025 and will continue into 2026. This pricing strategy is designed to attract and retain profitable clients and align with market trends. Furthermore, Insperity announced a new contract extension with UnitedHealthcare through 2028. This agreement includes financial terms, plan design modifications, and risk transfer alternatives projected to significantly reduce Insperity's claim costs and mitigate expected trends for 2026. A key component of this is the reduction of the health care claims pooling level from $1 million to $500,000 per member per year, effective January 2026, which will lower the company's exposure to large claims. These combined initiatives are expected to have a favorable impact of about 2% of gross benefits costs.

Growth Acceleration through HRScale

The rollout of Insperity HRScale is a central pillar of the company's growth strategy. Co-marketing and co-selling efforts are actively underway, targeting mid-market companies. The successful sale of Insperity's largest account in history in Q3 2025, which is slated to upgrade to HRScale, underscores the solution's appeal to larger clients. Management anticipates that HRScale will incrementally impact WSEE growth and revenue throughout 2026. The investment in the Workday strategic partnership is expected to total approximately $58 million in 2025, with operating expenses associated with HRScale projected to be about $15 million lower in 2026 than the $48 million estimated for 2025.

2025 and 2026 Guidance

For the full year 2025, Insperity forecasts average paid WSEE growth of 1% over 2024. Adjusted EPS is projected to be in the range of $0.84 to $1.47, and adjusted EBITDA in the range of $119 million to $153 million. This reflects the impact of the elevated full-year benefits cost trend, which is expected to remain high. Operating expenses for the full year 2025 are anticipated to be approximately 3% below 2024 levels.

Looking ahead to 2026, management believes there is an opportunity to recover a majority of the earnings shortfall experienced in 2025. This rebound is expected from the combined effects of the new UnitedHealthcare contract, strategic pricing, and the increasing contribution from HRScale. The company's three-year plan aims to return to historical key metrics, including double-digit unit revenue and gross profit growth, and annual adjusted EBITDA growth rates exceeding 20%.

Risks and Challenges

Despite the optimistic outlook, Insperity faces several risks. The persistence of elevated healthcare cost trends in 2026, as indicated by industry views, remains a significant concern. While mitigation strategies are in place, unforeseen changes in claims utilization or pharmacy costs could impact profitability. Macroeconomic uncertainties, including labor shortages and evolving employee expectations, continue to pose challenges to WSEE growth and client hiring. Furthermore, the successful adoption and scaling of the new HRScale solution, while promising, carries execution risks related to client traction and integration. The competitive environment, particularly with larger, technologically advanced players, requires continuous innovation and effective differentiation.

Conclusion

Insperity stands at a pivotal juncture, transforming its business model to address both immediate profitability pressures and long-term growth opportunities. The company's decisive actions to manage escalating healthcare costs through strategic pricing, a renewed UnitedHealthcare (UNH) contract, and a reduced claims pooling level are foundational to its anticipated profitability rebound in 2026. Concurrently, the Workday (WDAY) strategic partnership and the rollout of Insperity HRScale represent a significant technological leap, positioning the company to capture a larger share of the underserved mid-market. This innovative solution, coupled with ongoing investments in AI for operational efficiency, is expected to be a powerful catalyst for renewed double-digit growth and enhanced margins. While macroeconomic headwinds and the inherent volatility of healthcare costs present ongoing challenges, Insperity's strategic initiatives and technological leadership are poised to drive a substantial recovery and elevate its long-term trajectory, offering a compelling investment thesis for discerning investors.