---

---

---

---

(1)	Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows:

---

---

---

---

1.	Basis of Presentation

Insperity, Inc., a Delaware corporation (“Insperity,” “we,” “our,” and “us”), provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Our most comprehensive HR services offerings are provided through our professional employer organization (“PEO”) services, known as Workforce Optimization^® and Workforce Synchronization^TM solutions (together, our “PEO HR Outsourcing solutions”), which encompass a broad range of HR functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services, along with our cloud-based human capital management solution, the Insperity Premier^TM platform.

In addition to our PEO HR Outsourcing solutions, we also offer a comprehensive traditional payroll and human capital management solution, known as Workforce Acceleration. We also offer a number of other business performance solutions, including Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Expense Management Services, Retirement Services and Insurance Services, many of which are offered as a cloud-based software solution. These other products or services are offered separately or with our other solutions.

The Consolidated Financial Statements include the accounts of Insperity, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The accompanying Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements at and for the year ended December 31, 2019. Our Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by GAAP for complete financial statements. Our Condensed Consolidated Balance Sheet at March 31, 2020 and our Consolidated Statements of Operations for the three month periods ended March 31, 2020 and 2019, our Consolidated Statements of Cash Flows for the three month periods ended March 31, 2020 and 2019 and our Consolidated Statements of Stockholders’ Equity for the three month periods ended March 31, 2020 and 2019, have been prepared by us without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows, have been made.

The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations.

2.	Accounting Policies

Health Insurance Costs

We provide group health insurance coverage to our WSEEs in our PEO HR Outsourcing solutions through a national network of carriers, including UnitedHealthcare (“United”), UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii, and Tufts, all of which provide fully insured policies or service contracts.

The policy with United provides approximately 87% of our health insurance coverage. While the policy with United is a fully-insured plan, as a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Effective January 1, 2020, under the amended agreement with United, we no longer have financial responsibilities for a participant’s annual claim costs that exceeds $1 million. Accordingly, we record the costs of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”) as benefits expense, which is a component of direct costs, in our Consolidated Statements of Operations. The estimated incurred claims are based upon: (1) the level of claims processed during the quarter; (2) estimated completion rates based upon recent claim development patterns under the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting

---

period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs, which requires a significant level of judgment.

Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Condensed Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Condensed Consolidated Balance Sheets. The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance. In addition, United requires a deposit equal to approximately one day of claims funding activity, which was $6.5 million at March 31, 2020, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of March 31, 2020, Plan Costs were less than the net premiums paid and owed to United by $36.8 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $27.8 million difference is included in prepaid insurance, a current asset, in our Condensed Consolidated Balance Sheets. The premiums, including the additional quarterly premiums, owed to United at March 31, 2020 were $40.7 million, which is included in accrued health insurance costs, a current liability in our Condensed Consolidated Balance Sheets. Our benefits costs incurred in the first three months of 2020 included a reduction of $1.5 million for changes in estimated run-off related to prior periods. Our benefits costs incurred in the first three months of 2019 included a reduction of $0.3 million for changes in estimated run-off related to prior periods.

Workers’ Compensation Costs

Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing solutions has been provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program for claims incurred on or before September 30, 2019, we have financial responsibility to Chubb for the first $1 million layer of claims per occurrence and, for claims over $1 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1 million. Chubb bears the financial responsibility for all claims in excess of these levels. Effective for claims incurred on or after October 1, 2019, we have financial responsibility to Chubb for the first $1.5 million layer of claims per occurrence and, for claims over $1.5 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1.5 million.

Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment.

We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the three months ended March 31, 2020 and 2019, we reduced accrued workers’ compensation costs by $10.1 million and $7.8 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in the 2020 period was 1.0% and in the 2019 period was 2.5%) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.

---

The following table provides the activity and balances related to incurred but not paid workers’ compensation claims:

	Three Months Ended March 31,
(in thousands)	2020				2019
Beginning balance, January 1,	$	242,904			$	229,639
Accrued claims	14,339				15,787
Present value discount	(200		)		(1,689		)
Paid claims	(11,121		)		(12,409		)
Ending balance	$	245,922			$	231,328
Current portion of accrued claims	$	48,289			$	44,704
Long-term portion of accrued claims	197,633				186,624
Total accrued claims	$	245,922			$	231,328

The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at March 31, 2020 includes $4.0 million of workers’ compensation administrative fees.

As of March 31, 2020 and 2019, the undiscounted accrued workers’ compensation costs were $265.6 million and $250.2 million, respectively.

At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated WSEE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits – workers’ compensation, a long-term asset in our Condensed Consolidated Balance Sheets. At March 31, 2020, we had restricted cash of $48.3 million and deposits – workers’ compensation of $188.5 million.

Our estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on our Condensed Consolidated Balance Sheets.

Revenue and Direct Cost Recognition

We enter into contracts with our customers for human resources services based on a stated rate and price in the contract. Our contracts generally have a term of 12 months, but are cancellable at any time by either party with 30-days’ notice. Our performance obligations are satisfied as services are rendered each month. The term between invoicing and when our performance obligations are satisfied is not significant. Payment terms are typically due concurrently with the invoicing of our PEO services. We do not have significant financing components or significant payment terms.

Our revenue is generally recognized ratably over the payroll period as WSEEs perform their service at the client worksite. Customers are invoiced concurrently with each periodic payroll of its WSEEs. Revenues that have been recognized but unbilled of $509.3 million and $448.1 million at March 31, 2020 and December 31, 2019, respectively, are included in accounts receivable, net on our Condensed Consolidated Balance Sheets.

Pursuant to the “practical expedients” provided under Accounting Standards Update (“ASU”) No 2014-09, we expense sales commissions when incurred because the terms of our contracts generally are cancellable by either party with a 30-day notice. These costs are recorded in commissions in our Consolidated Statements of Operations.

---

Our revenue for our PEO HR Outsourcing solutions by geographic region and for our other products and services offerings are as follows:

	Three Months Ended March 31,
(in thousands)	2020			2019			% Change
Northeast	$	344,086		$	310,945		10.7	%
Southeast	140,678			129,906			8.3	%
Central	211,302			195,753			7.9	%
Southwest	272,130			269,832			0.9	%
West	246,853			233,204			5.9	%
	1,215,049			1,139,640			6.6	%
Other revenue	14,434			13,370			8.0	%
Total revenue	$	1,229,483		$	1,153,010		6.6	%

Recently Adopted Accounting Standards

We adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) effective January 1, 2020 with no material impact. Under this standard, we estimate our reserves using information about past events, current conditions and risk characteristics of our customer when assessing risk associated with the collectability of accounts receivables, including unbilled accounts receivables. We require clients to pay invoices for service fees not later than the same day as the applicable payroll date.As such, we generally do not require collateral. As of March 31, 2020, allowance for bad debts was immaterial.

3.	Cash, Cash Equivalents and Marketable Securities

The following table summarizes our cash and investments in cash equivalents and marketable securities held by investment managers and overnight investments:

	March 31, 2020										December 31, 2019
(in thousands)	Cash & Cash Equivalents			Marketable Securities			Total				Cash & Cash Equivalents			Marketable Securities			Total
Overnight holdings	$	372,469		$	—		$	372,469			$	349,857		$	—		$	349,857
Investment holdings	19,494			19,508			39,002				13,218			34,728			47,946
Cash in demand accounts	26,266			—			26,266				36,521			—			36,521
Outstanding checks	(13,501		)	—			(13,501		)		(32,254		)	—			(32,254		)
Total	$	404,728		$	19,508		$	424,236			$	367,342		$	34,728		$	402,070

Our cash and overnight holdings fluctuate based on the timing of clients’ payroll processing cycles. Our cash, cash equivalents and marketable securities at March 31, 2020 and December 31, 2019 included $235.2 million and $234.6 million, respectively, of funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as $22.1 million and $59.6 million, respectively, in client prepayments.

4.	Fair Value Measurements

We account for our financial assets in accordance with Accounting Standard Codification 820, Fair Value Measurement. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors:

•	Level 1 - quoted prices in active markets using identical assets

•	Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities,

---

quoted prices in markets that are not active, or other observable inputs

•	Level 3 - significant unobservable inputs

Fair Value of Instruments Measured and Recognized at Fair Value

The following table summarizes the levels of fair value measurements of our financial assets:

	March 31, 2020										December 31, 2019
(in thousands)	Total			Level 1			Level 2				Total			Level 1			Level 2
Money market funds	$	387,263		$	387,263		$	—			$	363,075		$	363,075		$	—
U.S. Treasury bills	18,060			18,060			—				34,728			34,728			—
Municipal bonds	6,148			—			6,148				—			—			—
Total	$	411,471		$	405,323		$	6,148			$	397,803		$	397,803		$	—

The municipal bond securities valued as Level 2 are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third-party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs.

The following is a summary of our available-for-sale marketable securities:

(in thousands)	Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
March 31, 2020
U.S. Treasury bills	$	13,290		$	70		$	—		$	13,360
Municipal bonds	6,122			26			—			6,148
Total	$	19,412		$	96		$	—		$	19,508
December 31, 2019
U.S. Treasury bills	$	34,716		$	13		$	(1	)	$	34,728
Total	$	34,716		$	13		$	(1	)	$	34,728

As of March 31, 2020, the contractual maturities of our marketable securities were as follows:

(in thousands)	Amortized Cost			Estimated Fair Value
Less than one year	$	19,412		$	19,508
One to five years	—			—
Total	$	19,412		$	19,508

Fair Value of Other Financial Instruments

The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, deposits and accounts payable approximate their fair values due to the short-term maturities of these instruments.

As of March 31, 2020, the carrying value of borrowings under our revolving credit facility approximates fair value and was classified as Level 2 in the fair value hierarchy. Please read Note 5, “Long-Term Debt,” for additional information.

---

5.	Long-Term Debt

We have a revolving credit facility (the “Facility”) with borrowing capacity of up to $500 million. The Facility may be further increased to $550 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (the “Credit Agreement”). The Facility is available for working capital and general corporate purposes, including acquisitions, stock repurchases and issuances of letters of credit. Our obligations under the Facility are secured by 65% of the stock of our captive insurance subsidiary and are guaranteed by all of our domestic subsidiaries. At March 31, 2020, our outstanding balance on the Facility was $369.4 million, and we had an outstanding $1.0 million letter of credit issued under the Facility, resulting in an available borrowing capacity of $129.6 million.

The Facility matures on September 13, 2024. Borrowings under the Facility bear interest at an alternate base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (1) in the case of LIBOR loans, from 1.50% to 2.25% and (2) in the case of alternate base rate loans, from 0.00% to 0.50%. The alternate base rate is the highest of (1) the prime rate most recently published in The Wall Street Journal, (2) the federal funds rate plus 0.50% and (3) the 30-day LIBOR rate plus 2.00%. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25%. The average interest rate for the period ended March 31, 2020 was 3.29%. Interest expense and unused commitment fees are recorded in other income (expense). Upon the discontinuation of LIBOR, the Facility provides that we and the agent will negotiate in good faith to amend the agreement to address such discontinuation and to place the parties in substantially the same economic position.

The Facility contains both affirmative and negative covenants that we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio and maximum leverage ratio. We were in compliance with all financial covenants under the Credit Agreement at March 31, 2020.

6.	Stockholders' Equity (Deficit)

During the first three months of 2020, we repurchased or withheld an aggregate of 878,305 shares of our common stock, as described below.

Repurchase Program

Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”). The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions and other factors. In February 2020, the Board authorized an increase of 1,000,000 shares that may be repurchased under the Repurchase Program. During the three months ended March 31, 2020, 728,000 shares were repurchased under the Repurchase Program. As of March 31, 2020, we were authorized to repurchase an additional 685,833 shares under the Repurchase Program.

Withheld Shares

During the three months ended March 31, 2020, we withheld 150,305 shares to satisfy tax withholding obligations for the vesting of long-term incentive and restricted stock awards.

Dividends

The Board declared quarterly dividends as follows:

(amounts per share)	2020				2019
First quarter	$	0.40			$	0.30

During the three months ended March 31, 2020 and 2019, we paid dividends totaling $15.6 million and $12.4 million, respectively.

---

7.	Incentive Plans

The Insperity, Inc. 2001 Incentive Plan, as amended, and the 2012 Incentive Plan, as amended (collectively, the “Incentive Plans”) provide for options and other stock-based awards that have been and may be granted to our eligible employees and non-employee directors. The 2012 Incentive Plan is currently the only plan under which new stock-based awards may be granted. Beginning with stock-based awards granted in 2020, employees who attain a minimum of age 62 and have provided 15 years or more of continuous service may continue to vest in awards following a qualifying retirement as defined under the 2012 Incentive Plan, as though he or she were still an employee, provided the grant date of the award is six-months or more before the employees last day of employment. For a termination following a qualifying retirement, time-vested awards will continue to vest in the normal course. For a termination following a qualifying retirement, performance-based awards with completed or in-process performance periods are adjusted for achievement of the performance criteria, prorated through the date of termination and paid in the normal course, while performance-based awards for performance periods that have not started are forfeited. Stock-based compensation expense related to time-vested and performance-based awards is accelerated for employees who meet the requirements for continued vesting.

8.	Net Income Per Share

We utilize the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which includes unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options.

The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations:

	Three Months Ended   March 31,
(in thousands)	2020			2019
Net income	$	62,092		$	76,289
Less distributed and undistributed earnings allocated to participating securities	(462		)	(1,031		)
Net income allocated to common shares	$	61,630		$	75,258
Weighted average common shares outstanding	38,802			40,508
Incremental shares from assumed time-vested and performance-based RSU awards and conversions of common stock options	266			142
Adjusted weighted average common shares outstanding	39,068			40,650

---

9.	Commitments and Contingencies

Worksite Employee 401(k) Retirement Plan Class Action Litigation

In December 2015, a class action lawsuit was filed against us and a third-party who served as the discretionary trustee of the Insperity 401(k) retirement plan that is available to eligible worksite employees (the “Plan”) in the United States District Court for the Northern District of Georgia, Atlanta Division, on behalf of Plan participants. The suit generally alleges the third-party discretionary trustee of the Plan and Insperity breached their fiduciary duties to plan participants by selecting an Insperity subsidiary to serve as the recordkeeper for the Plan, by causing participants in the Plan to pay excessive recordkeeping fees to the Insperity subsidiary, by failing to monitor other fiduciaries, and by making imprudent investment choices. The court certified a class defined as “all participants and beneficiaries of the Insperity 401(k) Plan from December 22, 2009 through September 30, 2017.” The court dismissed the breach of fiduciary duty claims relating to the selection of an Insperity subsidiary to serve as the recordkeeper of the Plan. On March 28, 2019, the court partially granted Insperity’s motion for summary judgment, resulting in the dismissal of the claims concerning allegations of excessive recordkeeping fees. The court denied plaintiffs’ request for a jury trial and set a bench trial, which was held from March 2, 2020 to March 13, 2020. The court has asked the parties to submit proposed findings of fact and conclusions of law by June 15, 2020, after which the court is expected to render its judgment. At trial, plaintiffs alleged damages up to approximately $146 million against all defendants. We believe we presented meritorious defenses, and we intend to continue to vigorously defend this litigation in the post-trial proceedings. As a result of uncertainty regarding the outcome of this matter, no provision has been made in the accompanying Consolidated Financial Statements.

Other Litigation

We are a defendant in various other lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.

---

•	Average number of WSEEs paid per month increased 5.5%

•	Net income and diluted earnings per share (“diluted EPS”) decreased 18.6% and 14.6%, to $62.1 million and $1.58, respectively

---

•	Adjusted EPS decreased 14.1% to $1.70

•	Adjusted EBITDA decreased 0.2% to $101.3 million

(1)	Please read “Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP.

(2)	Revenues per WSEE per month are comprised of gross billings per WSEE per month less WSEE payroll costs per WSEE per month as follows:

---

•	WSEE

•	Adjusted EBITDA

•	Adjusted EPS

•	During the first quarter of 2020 (“Q1 2020”), the number of WSEEs paid from new client sales increased over the first quarter of 2019 (“Q1 2019”). However, net gains in our client base and client retention declined during Q1 2020 compared to Q1 2019.

---

---

•	Average WSEEs paid increased 5.5%.

•	Revenues per WSEE per month increased 1.1%, or $18.

---

---

•	The cost of group health insurance and related employee benefits increased $32 per WSEE per month and increased 5.8% on a cost per covered employee basis due primarily to an increase in the number of large individual healthcare claimants in Q1 2020 over the low level in Q1 2019, in addition to our historical healthcare trends.

•	The percentage of WSEEs covered under our health insurance plans was 66.9% in Q1 2020 compared to 67.4% in Q1 2019.

---

•	Reported results include changes in estimated claims run-off related to prior periods which was a decrease in costs of $1.5 million, or $2 per WSEE per month, in Q1 2020 compared to a decrease in costs of $0.3 million, or flat on per WSEE per month basis, in Q1 2019.

•	Workers’ compensation costs increased 2.1%, but decreased $1 on a per WSEE per month basis, in Q1 2020 compared to Q1 2019.

•	As a percentage of non-bonus payroll cost, workers’ compensation costs in Q1 2020 were 0.39% compared to 0.42% in Q1 2019.

•	As a result of closing out claims at lower than expected costs, we recorded a reduction in workers’ compensation costs of $10.1 million, or 0.20% of non-bonus payroll costs, in Q1 2020 compared to a reduction of $7.8 million, or 0.17% of non-bonus payroll costs, in Q1 2019.

•	Payroll taxes increased 4.5% on an 8.5% increase in payroll costs, but decreased $7 on a per WSEE per month basis primarily due to lower FICA as a result of Internal Revenue Service self-employed owner tax reporting changes for PEOs and lower unemployment tax rates in 2020.

•	Payroll taxes as a percentage of payroll costs were 7.8% in Q1 2020 and 8.1% in Q1 2019.

•	Salaries, wages and payroll taxes — Salaries, wages and payroll taxes (“Salaries”) are primarily a function of the number of corporate employees, their associated average pay and any additional incentive compensation.

•	Stock-based compensation — Our stock-based compensation relates to the recognition of non-cash compensation expense over the requisite service period of time-vested and performance-based awards.

•	Commissions — Commissions expense consists primarily of amounts paid to sales managers and business performance advisors (“BPAs”) as well as channel referral fees. Commissions are based on new accounts sold and a percentage of revenue generated by such personnel.

•	Advertising — Advertising expense primarily consists of media advertising and other business promotions in our current and anticipated sales markets.

•	General and administrative expenses — Our general and administrative expenses primarily include:

•	rent expenses related to our service centers and sales offices

•	outside professional service fees related to legal, consulting and accounting services

•	administrative costs, such as postage, printing and supplies

•	employee travel and training expenses

•	technology and facility repairs and maintenance costs

---

•	Depreciation and amortization — Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices and technology infrastructure.

•	Salaries of corporate and sales staff for Q1 2020 increased 3.7% to $86.5 million, but decreased $2 on a per WSEE per month basis, compared to Q1 2019. This increase was primarily due to a 6.7% increase in corporate headcount, including an 11.2% increase in total BPAs in Q1 2020 compared to Q1 2019, partially offset by lower incentive compensation expense in Q1 2020.

•

Stock based compensation expense for Q1 2020 increased 8.5% to $6.6 million, but remained flat on a per WSEE per month basis, compared to Q1 2019. The increase was primarily due to awards issued under our incentive plan and the acceleration of expense for employees who meet the requirements for continued vesting. Please read Note 7 to the Consolidated Financial Statements, “Incentive Plans,” for additional information.

•

Commissions expense for Q1 2020 increased 21.7% to $8.5 million, or $2 per WSEE per month, compared to Q1 2019. The increase was primarily due to commissions associated with growth in our PEO HR Outsourcing solutions, including an increase in the amount of sales channel referral fees paid during Q1 2020. Additionally, as a result of the extension of our fall campaign into Q1 2020, the bonuses paid to sales managers increased in Q1 2020 compared to Q1 2019.

•	Advertising expense for Q1 2020 decreased 3.9% to $4.8 million, but remained flat on a per WSEE per month basis, compared to Q1 2019. The decrease was primarily due to decreases in sponsorships and television advertising, which was partially offset by an increase in internet advertising.

•

General and administrative expenses for Q1 2020 increased 5.1% to $34.9 million, but decreased $2 on a per WSEE per month basis, compared to Q1 2019. The increase was primarily due to increased rent, technology licensing costs, printing and professional services. Travel and training costs were essentially flat compared to prior year due to our decision to restrict travel across the organization in the second half of March in response to the COVID-19 pandemic. We expect a reduction in travel and training costs for the remainder of 2020.

•	Depreciation and amortization expense for Q1 2020 increased 13.6% to $7.6 million, or $1 per WSEE per month, compared to Q1 2019. The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.

---

---

---

•

Timing of client payments / payroll taxes – We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients at least one day prior to the payment of WSEE payrolls and associated payroll taxes. Therefore, the last business day of a reporting period has a substantial impact on our reporting of operating cash flows. For example, many WSEEs are paid on Fridays; therefore, operating cash flows decrease in the reporting periods that end on a Friday or a Monday. In the period ended March 31, 2020, the last business day of the reporting period was a Tuesday, client prepayments were $22.1 million and employment taxes and other deductions were $235.2 million. In the period ended March 31, 2019, the last business day of the reporting period was a Friday, client prepayments were $32.4 million and employment taxes and other deductions were $279.6 million.

---

•

Medical plan funding – Our health care contract with United establishes participant cash funding rates 90 days in advance of the beginning of a reporting quarter. Therefore, changes in the participation level of the United plan have a direct impact on our operating cash flows. In addition, changes to the funding rates, which are solely determined by United based primarily upon recent claim history and anticipated cost trends, also have a significant impact on our operating cash flows. As of March 31, 2020, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $36.8 million surplus, $27.8 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Condensed Consolidated Balance Sheets. The premiums, including an additional quarterly premium, owed to United at March 31, 2020, were $40.7 million, which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheets.

•	Operating results – Our net income has a significant impact on our operating cash flows. Our adjusted net income decreased 18.0% to $66.9 million in the first three months ended March 31, 2020, compared to $81.6 million in the first three months ended March 31, 2019. Please read “Results of Operations – First Quarter 2020 Compared to First Quarter 2019.”

---

---

•	adverse economic conditions;

•	impact of the COVID-19 pandemic, or other future pandemics, including the scope, severity and duration of the pandemic; government responses; regulatory developments; and the related disruptions and economic impact to our business and the small and medium-sized businesses that we serve;

•	regulatory and tax developments and possible adverse application of various federal, state and local regulations;

•	the ability to secure competitive replacement contracts for health insurance and workers’ compensation insurance at expiration of current contracts;

•	cancellation of client contracts on short notice, or the inability to renew client contracts or attract new clients;

•	vulnerability to regional economic factors because of our geographic market concentration;

•	increases in health insurance costs and workers’ compensation rates and underlying claims trends, health care reform, financial solvency of workers’ compensation carriers, other insurers or financial institutions, state unemployment tax rates, liabilities for employee and client actions or payroll-related claims;

•	failure to manage growth of our operations and the effectiveness of our sales and marketing efforts;

•	the impact of the competitive environment and other developments in the human resources services industry, including the PEO industry, on our growth and/or profitability;

•	our liability for worksite employee payroll, payroll taxes and benefits costs;

•	our liability for disclosure of sensitive or private information;

•	our ability to integrate or realize expected returns on our acquisitions;

•	failure of our information technology systems;

---

•	an adverse final judgment or settlement of claims against Insperity; and

•	disruptions to our business resulting from the actions of certain stockholders.

•	scope, severity and duration of the pandemic;

•	varying impact that the pandemic has within each locality;

•	actions taken by government authorities to contain the outbreak or address its impact;

•	development of safe and effective treatments or vaccines for COVID-19;

•	direct and indirect economic effects of the pandemic and containment measures;

•	scope, significant and duration of business disruptions on small and medium-sized businesses, including any reduction in employment levels, compensation levels and employee benefit levels;

•	magnitude and extent of business failures among the small and medium-sized businesses that we serve;

•	ability of our clients to pay for the outsourced HR services and solutions we provide; and

•	any resulting impact on the demand for our outsourced HR services and solutions.

---

---

(1)

During the three months ended March 31, 2020, 150,305 shares of stock were withheld to satisfy tax-withholding obligations arising in conjunction with the vesting of restricted stock and long term incentive compensation awards. The required withholding is calculated using the closing sales price reported by the New York Stock Exchange on the date prior to the applicable vesting date. These shares are not subject to the repurchase program.

(2)

Our Board of Directors (the “Board”) has approved a program to repurchase shares of our outstanding common stock, including an additional 1,000,000 shares authorized for repurchase in February 2020. As of March 31, 2020, we were authorized to repurchase an additional 685,833 shares under the program. Unless terminated earlier by resolution of the Board, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the repurchase program.

---

---